Islamia College University Peshawar

Department of Management Sciences

Program: BBA (Hons)

Course Title: Strategic Management

Submitted By:
Name: Umair Habib Dawar
Roll no: 191591
Semester: 6th
Section: (B)
Submitted To:
Mam Maimona Saleem

Date of Submission: 25 July 2022

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 Forward Integration

Forward integration is a business strategy that’s like downstream vertical

integration, in which an organization owns and manages commercial activities
that are ahead of its industry’s value chain, such as direct distribution or supply
of the organization’s products.
Forward integration is carried out by a corporation as it moves up the supply
chain.
A business uses a forward integration strategy for lowering manufacturing costs
and increasing efficiency by acquiring suppliers, thereby replacing third-party
channels and consolidating activities.
By eliminating intermediaries, the organization gains ownership of the
distribution operations and gets more control over the product flow.
The organization usually goes the mergers-and-acquisitions strategy route while
entering into forward integration because it’s the most convenient way.
This way, forward integration meaning has a lot of variety attached to it.

Forward Integration Advantages And

Disadvantages
Forward integration has both advantages and disadvantages.

Advantages:
Forward integration strategy is a boon for an organization because it helps save
costs, making it easy for a business to channel funds toward growth activities.
With forward integration comes ownership and the ability to manage the
demand for products.

Some advantages of forward integration are:

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  Low Costs As A Result Of The Absence Of Market Transaction
Expenses
 Transportation Costs Are Reduced
 Coordination Of Supply Chain As Supply And Demand Are
Synchronized
 Increased Market Share
 Independency In Terms Of Strategy
 Better Investment Growth Potential
 Creates A Barrier To Entry For Potential Competitors
 Now, we move on to the drawbacks.

Disadvantages:
It’s not necessary that a forward integration strategy will always work for a
business. An organization needs to do a proper analysis before rolling out a
forward integration strategy because it comes with costs, such as:

 If Additional Activities Aren’t Managed Appropriately, They Will Result

In Increased Costs
 Due To A Lack Of Competition, Product Quality And Efficiency May
Suffer
 Increased Bureaucracy And Large Investments May Limit Flexibility
 Inability To Offer Product Variety Due To A Lack Of In-House
Efficiency And Skill Sets
 Monopoly Possibilities Emerge
 Due To The Inadequacies Of Such Implementations, The Organizational
Structure May Become Rigid.

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 Backward Integration

Backward integration occurs when an organization enters into an alliance with a

manufacturer or supplier through an acquisition or merger. Sometimes
organizations can establish their own subsidiary and complete backward
integration. A backward integration example could be a bakery purchasing a
grain processor. Another backward integration example could be an automobile
organization owning a tire organization, a glass organization and a metal
organization. This strategy attempts to move organizations backward in the
supply chain so that they have control over the raw materials. Organizations
typically use backward integration to gain control over their supply chains.
Some organizations use a backward integration strategy when they feel a
supplier has too much power over them. Backward integration isn’t just limited
to the manufacturing sector but has also been used in other industries, too.

Advantages and disadvantages Of

Backward Integration

The benefits of backward integration are understood if we look closely at the

production levels and technologies behind them. The production process is
divided into three stages—assembly, sub-assembly and component stage.

Advantages:

 Better Control: An Advantage Of Backward Integration Is That By

Integrating With Suppliers, Organizations Can Control Their Supply
Chain From The Production Stage. They Can Control The Quality Of
Raw Materials Supplied To Them And Can Have A Constant Supply Of
Materials Whenever Required.
 Cost Advantage: Supply Chains Consist Of Middlemen. So, By The Time
A Product Reaches The Organization’s Warehouse, Prices Would Have
Increased. This Makes The Final Product More Expensive For The

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 Consumer. With Backward Integration, Organizations Remove The
Middlemen And Save On Transportation, Mark-Up And Other Costs.
 Differentiation: Organizations Integrate Backward To Get A
Differentiation-Based Competitive Advantage. An Organization Can
Gain Access To Production Units And Distribution Chains And Can Thus
Market Itself Differently From Its Competitors.
 Innovation: Businesses And Organizations That Are Vertically
Integrated, Especially Backward, Are Best Equipped To Innovate
Because They Participate In Many Of The Production And Distribution
Activities In Which Change Can Occur.
 Competitive Advantage: The Final Advantage Of Background Integration
Is That Organizations Use Backward Integration For Gaining An Edge
Over Their Competitors. For Example, A Technology Organization Can
Integrate Backwards And Gain Access To Patents, Trademarks And So
On, Which Are Owned By Its Competitors. A Raw Materials
Manufacturer Who Also Sells A Final Product May Create An Entry
Barrier For Businesses Trying To Sell Their Final Product.

Disadvantages:

Although backward integration has a number of benefits, it also has some

drawbacks such as the following:

 It builds up excess upstream capacity to ensure that downstream has an

adequate supply even when the demand is heavy. This involves increased
investment.
 The process leads to lack of supplier competition that will lead to low
efficiency resulting in potentially higher costs.
 In due course, there are high chances that the flexibility will get reduced
owing to previous investments upstream and also downstream.
 In case there is a need for substantial in-house requirements, then it will
diminish the capability of producing the product variety.
 At certain times, existing competencies need to be sacrificed in order to
develop fresh core competencies.

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