Backward Integration – Strategic Advantages
Essay Preview: Backward Integration – Strategic Advantages
Report this essay
*Backward integration
-where the firm produces its own inputs
-Backward integration may be beneficial if it helps secure a reliable source of supplies. It will be harmful if it leads to increased monopoly power and new competitors have difficulty accessing raw materials.
Example
Here is a great example for the revision notes on business growth.
PepsiCo which also includes the Tropicana and Gatorade brands within its business has made a $6bn cash and stock offer for the Pepsi Bottling Group and PepsiAmericas.
Pepsi already owns sizeable equity stakes in both of these huge bottling businesses – but it has taken advantage of the low stock market and a handy cash mountain to make a takeover bid.
It is a classic case of backward vertical integration and a report in the Financial Times says that PepsiCo expects the integration to cut costs by about $200m annually.
Britvic is PepsiCos bottler in the UK. Keep an eye out for Britvic making a move on smaller bottling companies elsewhere in the European Union.
Strategic Advantages of Backward Integration
* Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers
– Potential to reduce costs exists when
– Suppliers have sizable profit margins
– Item supplied is a major cost component
* Resource requirements are easily met
* Can produce a differentiation-based competitive advantage when it results in a better quality part
* Reduces risk of depending on suppliers of crucial raw materials / parts / components
Strategic Advantages of Forward Integration
* To gain better access to end users and better market visibility
* To compensate for undependable distribution channels which undermine steady operations
* To offset the lack of a broad product line, a firm may sell directly to end users
* To bypass regular distribution channels in favor of direct sales and Internet retailing which may
– Lower distribution costs
– Produce a relative cost advantage over rivals
– Enable lower selling prices to end users
Strategic Disadvantages of Vertical Integration
* Boosts resource requirements
* Locks firm deeper into same industry
* Results in fixed sources of supply and less flexibility in accommodating buyer demands for product variety
* Poses all types of