A company acquires or merges with other businesses that supply raw products for the finished product

What is backward Integration?

Backward integration is a procedure in i m sorry a company acquires or merges with various other businesses that supply raw products needed in the manufacturing of its perfect product. Businesses go after backward integration through the expectation that the process will an outcome in price savings, boosted revenues, and also improved efficiency in the production process. Companies also use behind integration together a method of gaining competitive benefit and creating obstacles to entryBarriers to EntryBarriers come entry room the obstacles or hindrances the make it daunting for new companies to get in a offered market. These may include to new industry entrants.

You are watching: Which of the following is not a potential advantage of backward vertical integration?


How it Works

A organization that implements backward integration do the efforts to relocate backward in the it is provided chain come the manage of life materials. The it is provided chainSupply ChainSupply chain is the whole system of producing and also delivering a product or service, indigenous the very beginning stage of sourcing the raw materials to the final procedure starts v the sourcing and delivery the raw materials to the manufacturer’s warehouse and also ends as soon as the last product gets to the end consumer.

Raw materials are scarce sources that every company attempts come control, and also lacking access to such resources may cripple the to work of the business. In industries with high competition, manufacturers frequently make attempts to buy companies as a means of cutting out the middlemen and also managing the boosting competition for scarce resources.

Example of behind Integration

An instance is a wine manufacturer that looks for to acquire a wine party manufacturing agency that owns the rights and also technologies of production glass. By gaining the alcohol glass manufacturing company, the wine manufacturer will certainly be in a position to regulate the quality of the made glass, cost of production, and the top quality of raw materials used in the manufacturing process.

This will limit other wine manufacturers native buying wine party from that supplier. Also, it will enable the acquirer to identify its wine party from those the the other competitors. Since the raw materials for the produce of glass room scarce in nature, the wine manufacturer will certainly be in a position to control the resource to make sure they are efficiently used to develop high-quality bottles.

Advantages of backward Integration

The complying with are some of the benefits that providers enjoy once they implement behind integration:

1. Better control

By getting the manufacturers of life material, a company exercises greater manage over the it is provided chain procedure from the production of raw products to the manufacturing of the finish product. First, the firm will gain control over the high quality of raw products that are supplied in the manufacturing of the finish product. Also, by gaining the supplier of raw materials, the manufacturer will attain greater manage over the quantity and also delivery the the raw materials to that warehouse.

2. Cost control

The it is provided chain procedure comprises plenty of middlemen, which method that each phase in the it is provided chain includes a mark-up to enable the middleman to knife a profit. Thus, by the moment the product it s okay to the company’s warehouse, the price will have doubled or tripled. This will make the perfect product more expensive for the consumer.

By getting the caterer of the raw products used in the manufacturing process, the firm will perform away v the middlemen associated in the process and alleviate the price of to buy the life materials. Regulating the whole supply chain will likewise reduce wastages, carry costs, and other expenses incurred prior to the raw products are delivered to the company’s warehouse.

3. Compete advantage

Companies additionally use backward integration together a method to get a vain advantageCompetitive AdvantageA competitive benefit is an attribute that permits a company to outperform its competitors. It allows a agency to attain superior margins over their competitors. Because that example, in the modern technology industry, companies combine backward together a way of gaining access to patents, trademarks, and proprietary modern technology owned by various other companies in the industry.

Acquiring together companies prevents competitors from using the very same resources, and other this firm are required to look for choices in the market. Obtaining suppliers likewise create obstacles to entryBarriers to EntryBarriers to entry space the obstacles or hindrances the make it daunting for brand-new companies to go into a given market. These may include. New competitors will face obstacles getting carriers for the life materials forced in the manufacturing process.

Disadvantages of behind Integration

1. Inefficiencies

Implementing backward integration can result in inefficiencies. By acquiring the supplier of life materials compelled in the production process, the agency will border competition, resulting in sluggishness and also lack of innovation. The agency will it is in less motivated to invest money top top research and development. As a result, the top quality of the company’s end product(s) might decline, and the prices of controlling customer complaints will increase.

2. Substantial investment

Another disadvantage of behind integration is the substantial investment that will be necessary to finance the acquisition. The company may be compelled to use all that cash reserves and even take up an ext debts to finance the acquisition. If the agency is can not to repay the fan or enjoy the services of the acquisition, it will challenge the danger of default and even liquidation.

Backward Integration vs. Forward Integration

While backward integration is the merging and also acquisition of companies in the upper side of the it is provided chain, front integration is the salvation of companies on the lower part of the supply chain. In forward integration, the company is interested in getting distributors that its assets or the sleeve stores that market the final assets to the end consumer.

For example, a alcohol manufacturer might decide to acquire businesses through wine distributorship civil liberties or the sleeve chain stores that offer wine produced by the company. This will provide the manufacturer far better control in acquiring the finished product to the consumer and in obtaining first-hand information on the consumer’s endure with the company’s products.

See more: Which Of The Following Would Be Subtracted From Net Income Using The Indirect Method?

Related Readings

CFI is the official provider that the jae won Modeling and Valuation Analyst (FMVA)™Become a Certified gaue won Modeling & Valuation Analyst (FMVA)®CFI"s gaue won Modeling and Valuation Analyst (FMVA)® certification will aid you gain the to trust you need in your finance career. Enroll today! certification program, draft to change anyone right into a world-class gaue won analyst.

To store learning and developing your knowledge of financial analysis, we very recommend the additional CFI resources below: