What exactly is forward integration?
Forward integration is a type of downstream vertical integration in which a company owns and runs operations earlier in its industry’s value chain, like direct product supply or distribution. A corporation may engage in vertical integration by progressing up the supply chain.
Forward integration occurs when a farmer sells his products directly to a grocery shop rather than a distribution facility that distributes them to supermarkets. Or a clothing label that sells directly to clients in its boutiques instead of department stores.
How Forward Integration Works
A corporation uses advanced integration, sometimes known as “cutting out the middleman,” to gain market dominance by controlling its suppliers, manufacturers, and distributors. A corporation must own former customers to integrate successfully. This technique varies from backward integration, when corporations attempt to acquire ownership of former suppliers. Forward integration techniques let a corporation control its industry’s value chain, maximize economies of scope, and improve its cost structure to increase market share and profitability.
The internet has made integration more accessible and prevalent in company planning. Manufacturers may offer their items online via digital marketing. Before, it used retail and marketing businesses to sell items.
Forward integration helps a corporation gain industry ownership by moving up the supply chain. The supply chain for standard industries has five steps: raw materials, intermediate goods, production, marketing and sales, and after-sales support. Forward integration requires a corporation to move up the chain while preserving control of its activities.
Special Forward Integration Considerations
Companies should understand future integration costs and scope. They should only use this method if it saves money and doesn’t weaken their primary capabilities. Companies may benefit from leveraging other vendors’ knowledge and economies of scale rather than expanding alone.
Example
For instance, Intel provides CPUs to Dell for use in their systems. To advance in the supply chain, Intel may combine with or acquire Dell to control the manufacturing sector.
Dell might participate in forward integration by acquiring a marketing firm previously hired to sell its end product. However, Dell cannot develop Intel to integrate ahead. Backward integration is required for supply chain advancement.
Conclusion
- Integration includes direct product distribution.
- People call forward integration “cutting out the middleman.”
- Forward integration can strengthen a company’s product and profit control, but it can also dilute its core competencies and business.
