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Are you running a business or plan to own one? There’s no way you can escape planning about the supply chain to make your product available to customers and minimize cost. Supply chain integration is necessary for every business to smoothen the product lifecycle from design to delivery.
It’s said that if a business follows a smooth supply chain, half of its problems are solved!
Forward Integration comes when a business wants to own the process of delivering the final product. If you think owning the supply chain will save your costs, then forward integration should definitely be on your radar.
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Forward Integration Meaning
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Forward Integration Example
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Need For Forward Integration
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Forward Integration Advantages And Disadvantages
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Growth: The Ultimate Goal of Business
Forward Integration Meaning
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 Example
You can find many examples of businesses using a forward integration strategy to gain market share in the industry and save on costs. Some forward integration examples include:
- A fast-moving consumer goods organization such as Dabur develops its own distribution network, including regional warehouses, to sell directly to retailers rather than through wholesalers
- E-commerce platform Myntra launched its own logistics service, Myntra Logistics, to cut costs, improve turnaround time and ensure that its customers receive their orders on time
- A farmer directly selling their produce in the market and not going via intermediaries
These aren’t all. Let’s see some more instances of forward integration.
Another forward integration example includes Amazon forward integration. E-commerce giant Amazon acquired grocery brand Whole Foods to venture into the brick-and-mortar business so that customers could buy the products from the outlets. This is a perfect example of forward integration strategy.
Amazon was already a participant in the food sector before its acquisition, but with the purchase of Whole Foods, it acquired a bigger chunk of the market.
Amazon forward integration can also be seen in a variety of other businesses that the organization operates.
Amazon both publishes books and serves as a publishing platform for independent authors. It also has its own transportation and distribution company Amazon Transportation Services, which is both forward and backward integrated.
It’s backward integrated toward suppliers and forward integrated toward end-users.
Apart from Amazon, there are many other forward integration examples.
Need For Forward Integration
A forward integration strategy is required when a business becomes capable of managing the supply chain on its own or analyzes that managing the supply chain with third-party intermediaries is coming at a cost.
Other scenarios where a business would need forward integration include:
- When traditional distributors and retailers are very expensive and unable to meet the organization’s distribution demands
- Lack of reputable distributors in the market, which allows the organization to obtain a competitive advantage over its competitors
- Availability of sufficient manpower as well as financial resources with the organization to cover the costs of the distribution channel
- With minimum costs, the price of products will be reduced that will increase the sales of the organization
Now, let’s review some pros and cons.
Forward Integration Advantages And Disadvantages
Like two sides of a coin, forward integration has both advantages and disadvantages.
Advantages Of Forward Integration
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 include:
- 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 Of Forward Integration
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
In a nutshell, the above are forward integration advantages and disadvantages.
Growth: The Ultimate Goal of Business
Profits are essential for a business to survive and that can only be achieved if a business keeps a hold on its growth path. Often, the leadership of an organization makes wrong decisions or gets stuck midway to decide the path ahead for the business.
The leadership in an organization needs sound strategic planning to grow organically and steadily. Harappa’s Select a Strategy pathway is meant to instill exactly that in decision-makers in organizations. Learn more about forward integration and how it’s different from backward integration or how vertical and horizontal integration should be a part of your organization’s growth plan. Sign up for more now!
