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Backward Integration | Definition | Merits & Demerits - YouTube
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video backward integration or watch the
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the backward integration as you can see
the Rallis India a subsidiary of tata
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chemical they plans the investments in
backward integration due to lower
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chemical supply from the China and East
pressure on the profit margin well we
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will start first with what is the
backward integration what does this
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process all about see backward
integration is a form of the vertical
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integration okay by which the company
integrates its operations with the
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supplier or the supply side of the
business so the company gains control
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over the so called raw material and you
know supplier by integrating them with
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the ongoing business for the company
goes to maintain a competitive advantage
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in the business and they increase the
the barrier the entry barrier so the
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company can cut its costs by merging
with the suppliers and maintain very
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quality standard for standards now we
will start with the example part here
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the examples see example number one
suppose let's say there is a car company
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called XYZ which gets a lot of raw
material like iron and steel for making
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Car's rubber for seats pistons engine and so on and so forth from various
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supplier if these cars company they
let's say they merge or they acquire the
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supplier of iron and steel it will be
called as the backward integration
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example number two let's say another
backward integration example would be
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like of tomato ketchup manufacturer who
is purchasing a tomato firm you know
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rather than just buying it tomatoes from
the farmers so that is again the
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backward integration
what are the advantages of this what are
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the advantages of backward integration
okay the first one is the increased
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control see by integrating backward and
merging with a supplier company can
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control their supply chain in a most
efficient manner
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so they will control the production of
the call as raw material right to the
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production of the end product so by
these they will have a large control on
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the quality of the products of the raw
material that is to be used in the
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production and also the company can
secure itself with the so called supply
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of material and it will ensure that the
company receives the adequate supply of
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material it will ensure the company
receives a request supplies and you know
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when required without worrying about the
raw material being sold to the
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competitors or not being produced or
manufactured by the suppliers okay the
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second is called the process of
cost-cutting now generally the backward
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integration is done to cut the costs now
in a supply chain there is always what
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we call as mark up when a goods are sold
from one party to another for supply
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chain involves various suppliers
distributors middleman so by integrating
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the business with the producer of
material the company can remove the
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middleman in the process from the supply
chain and cuts the market costs
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transportations and other necessary cost
that are involved in the whole process
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third is called the efficiency now while
the company will cut the costs a
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backward integration also provides a
better efficiency in the whole
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manufacturing process so with the
control over the supply side of the
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chain the company can control when which
material to produce okay and at the same
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time with control over the supply side
of the chain the company can control
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when in which material to produce and
how much to produce
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so with improved efficiency the company
can save its costs on the material and
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material side which gets unnecessary
wasted due to over purchases that
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happens
the fourth reason is that the
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competitive advantage and creating
barriers to the entry so sometimes
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companies to keep the competitions out
with market it can acquire the supplier
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so consider a scenario where you know
and there there are major supplies and
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and supply materials to two companies
but one of them purchases the supplies
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so it can stop the supplies or the goods
to the competitors so by this way the
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company is trying that the existing
competitor they exist from the business
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or look for another supplier and
creating entry barriers for the new
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competitors so also sometimes the
company may integrate what we call as
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backward to gain access and control of
the technology patents and other
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important resources which will only help
for supplying the firm the fifth one is
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the what we call as the differentiation
now company you know integrate backward
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to maintain the differentiation in the
product that is there's something
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in different in the case from its
competitors it will gain in excess to
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the production and that happens in the
in the due course and it will gain
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access to production of the units
distribution chain and as you know it
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can have the marker itself differently
from its competitor integrating backward
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and will enhance the company's
ability to meet the customers demand and
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may also help in providing customized
products now it holds the production and
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capacity internally then sourcing it
from the market on the disadvantaged
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side it has first you know it has huge
investment integrating and merging or
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acquiring the manufacturing will require
a huge investment it will be an extra
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burden on the company balance sheet and
it may be in the firm of debt or
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reduction in the cash or the cash in
cash equivalents the next is the cost it
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is not always that the cost would be
reduced in the backward integration the
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lack of supplier competition can reduce
the efficiency in those results in you
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know higher cost now further it will be
an extra burden for the company and it
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could not be achievable for the
economies of scale so that the supplier
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can
you individually and they produce it
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goods at a very lower skill the third is
the quality so lack of competition can
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lead to less innovations and thus the
low quality products if there is no or
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less competition in the market the
company can become less effective or
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less motivated in terms of innovations
research develop and in it also it is
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known as impact on the quality products
so further if the company wants to
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develop a different variety of good it
may be having a significant cost for
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in-house development or it may incur
high cost for switching to the other
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suppliers so that is possible the next
is the fourth reason is the competencies
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that comes into pictures the company may
have to adopt new competencies over the
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old ones and there may be a clash
between the old and the new competitive
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competencies that causes the
inefficiency within the company the
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fifth is the high bureaucracy that comes
into picture now high bureaucracy is you
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know acquiring the supply will mean
acquiring the workforce of the supplier
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as well so these will increase the size
of the company
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those bringing in new policies for the
employees and leading to a bureaucratic
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culture in the company so on the
conclusion note backward integration
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strategy is a business strategy whereby
the company acquires or merges itself
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with the suppliers and manufacturer of
the raw materials to control the
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supplies in the production costs in the
process so as we have discussed
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integrating backward has its fair share
of the advantage and disadvantage the
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company needs to perform a due diligence
before integrating backward and it
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should look at various other fact that
comes into picture you know and the
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company needs to perform due diligence
before integrating backward it should
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look at various factors such as like you
know will investment cost or the finance
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costs will be lower then the we call a
source so as the long term benefits and
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it will have acquiring suppliers so the
company should be diligently checked the
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equipment process work force patents of
the supplier manufacturer and if such
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acquisition will help then that will
help better
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also the efficient what we call as the
supply chain so that's it for this
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