Differentiate between Backward Integration and Forward Integration.
Answers
Forward and backward integrations are two integration strategies which are adopted by organizations to gain competitive advantages in the market and to gain control over the value chain of the industry under which they are operating. These strategies are one of the major considerations when developing future plans for an organization. Together these two strategies are known as vertical integration.
Vertical integration describes when an organization purchases or starts a company that it either buys from or sells to and integrates this new business into its own. In case of forward integration the organization integrates its businesses toward the end customer while in case of backward integration the organization integrates its activities in the direction away from the customer. Backward integration can be a part of the organizational strategy due to the competitive benefits it provides.
Organizations which governs the entire value chain are, however, very rare. Some organizations choose to adopt for forward integration while other organizations opt for backward integration. Also some other organizations continue to operate disintegrated depending on the environment under which these organizations are operating and also depending upon the future strategic planning which these organizations have done for their future operations.
Forward integration extends organizational reach in the market and helps the organization in tightening its grip on the demand side. On the other side, backward integration stretches the organization’s operations towards the source of raw materials, strengthening its control on the supply side.
Integration strategies of forward and backward integrations help the organization in eliminating the adverse effect of double marginalization. Forward integration enables the organization to respond to changes in demand more effectively, while the backward integration allows the organization to seize a stronger control over its quality of raw material supply and, thereby, its quality of final products.