A form of vertical integration, 澳洲幸运5官方开奖结果体彩网:backward integration allows businesses to obtain control over suppliers and impr💎ove supply chain efficiency. Businesses merge with and acquire their suppliers to gain strategic advantages over competitors and lower costs.

In some markets, this may create 澳洲幸运5官方开奖结果体彩网:monopolies and violate 澳洲幸运5官方开奖结果体彩网:antitrust laws. This strategy has many advantages for most businesses, but companies should be aware of potential problems with backward integration.

Backward Integration

Backward integration occurs when a business decides to fulfill the roles done by its suppliers. This occurs when a business acquires a company that supplies it with either 澳洲幸运5官方开奖结果体彩网:raw materials, products, or services. For example, a com🦹pany that makes sweaters and purchases its wool from a sheep farm would backward i🎃ntegrate if it purchased that sheep farm.

Businesses backward integrate to achieve complete control over 澳洲幸运5官方开奖结果体彩网:supply chain areas wไith the goal of reducing inefficiencies and costs. In the business's opinion, it would lower cos𒅌ts, improve margins, distribute faster, and grow its customer base if it controlled certain aspects of its supply chain rather than relying on outsiders of which it has no control.

Advantages and Disꦓadvantages of Backward Integr🎶ation

Advantages

The primary advantage of backw⛎ard integration is complete control. Depending on the suppliers purchased, a🅺 company will have complete control from the period of obtaining raw materials to selling the final good. In this aspect, a company has control over the quality of the raw materials, the speed at which they are converted into the final product, and how fast they are distributed to customers.

Another advantage is lower costs. If a company is paying suppliers then it is paying a markup. Suppliers need to cover their costs and make a profit. By owning its suppliers, a company no longer has to pay the markup fee but can operate at cost. This allows a company to either have higher 澳洲幸运5官方开奖结果体彩网:profit margins or charge less to their consumers, which has the likelihood of increasing demand for its product and taking 澳洲幸运5官方开奖结果体彩网:market share away from competitors.

Backward integration also provides a competitive advantage. If a supplier is supplying to more thanඣ 𓃲one company, a company that purchases the supplier has now improved its advantage over its competitor as that competitor will now need to find a new supplier.

Disadvantages

Backward integration has several potential challenges and risks. Companies that are unable to effectively manage their supply chain after 澳洲幸运5官方开奖结果体彩网:acquiring their suppliers may lose pro♔fits and produce lower-quality products. The costs of managing the suppliers may not be in the best interests of the business, or the company may not have the best expertise to manufacture products.

Furthermore, the competitive advantage gained by purchasing suppliers may lead ♉to a lack of competition, which typically results in a lack of innovation. In addition, acquiring a supplier means integrating its workforce, which may prove diffic☂ult if there is a clash of cultures or unintended bureaucracy.

For smaller and midsized companies, obtaining affordable products may become more expensive, and the merger may not be worthwhile if 澳洲幸运5官方开奖结果体彩网:economies of scale cannot be created to reduce costs. If a cheaper supplier enters the market, the compa♑ny owning its own supply chain may no longer be able to take advantage of the new lower prices created in the market by supply and demand.

Many midsized companies do not have sufficient capital to invest in their own business and their suppliers. By acquiring suppliers, the business may be at risk of reduced 澳洲幸运5官方开奖结果体彩网:cash flows and weaker operations.

Real-World Example

One of the best and more recent examples of backward integration iꦗs Netflix. Netflix started out as a DVD rental company over the Internet, whereby customers would log into their accounts, select movies, and receive them via mail.

澳洲幸运5官方开奖结果体彩网:Netflix then switched to offering movies and shows via a streaming platform as the Internet grew and streaming video capabilities im♔proved. To offer these movies and shows, Netflix struck licensing deals with the companies that owned the media👍.

Eventually, Netflix backward integrated by producing its own original content where it could make greater profits. This removed its reliance on other creators and catered to the demand of its customers that were interested in more original content. Over time, Netflix's original content has become the main draw for its subscribers rather than the licensed content.

The Bottom Line

Businesses should carefully consider the risks and benefits of a backward integration strategy as part of their business plan. Midsized businesses may not be ready for the added risk of acquiring suppliers and should be cautious. If, however, controlling suppliers allows for better profit mar𝐆gins and secures the availability of supplies for production, backward integration may be beneficial🧸.