Sunday 15 October 2017

Investopedia: What is 'Backward Integration'?

Investopedia

Backward Integration

What is 'Backward Integration'

Backward integration is a form of vertical integration that involves the purchase of, or merger with, suppliers up the supply chain. Companies pursue backward integration when it is expected to result in improved efficiency and cost savings. For example, this type of integration might cut transportation costs, improve profit margins and make the firm more competitive.
VIDEO
Loading the player...
BREAKING DOWN 'Backward Integration'
Vertical integration is the integration of two or more companies at different places on the supply chain. A supply chain is the summation of individuals, organizations, resources, activities and technologies involved in the manufacturing and sale of a product. The supply chain starts with the delivery of raw materials from a supplier to a manufacturer, and ends with the sale of a final product to an end-consumer. Backward integration occurs when a company initiates a vertical integration by moving backward in its industry's chain.

A general example of backward integration is when a bakery business moves up the supply chain to purchase a wheat processor and/or a wheat farm. In this scenario, a retail supplier is purchasing one of its manufacturers.
Difference Between Backward Integration and Forward Integration

By way of contrast, forward integration is a type of vertical integration that involves the purchase or control of distributors. An example of forward integration is if the bakery sold its goods directly to consumers at local farmers markets, or if it owned a chain of retail stores through which it could sell its goods. If the bakery did not own a wheat farm, a wheat processor or a retail outlet, it would not be vertically integrated at all.
Potential Issues With Backward Integration

Vertical integration is not inherently good. For many firms, it is more efficient and cost effective to rely on independent distributors and suppliers. For example, backward integration would be undesirable if a supplier could achieve greater economies of scale and provide inputs at a lower cost as an independent business, rather than if the manufacturer were also the supplier.
A Real World Example of Backward Integration

Many large companies and conglomerates conduct backward integration. Amazon.com, for example, became vertically integrated backward when it expanded its business to become both a book retailer and a book publisher. Previous to acting as a publisher, Amazon.com was the first online retailer of books, and it made purchases from traditional publishers for a fee. Once it decided to print and market its own books as a publisher, it reduced the costs of producing or procuring the books.

Further, it was able to differentiate itself from other competitors by choosing where its published books are distributed. By keeping its published authors exclusive to its platform, it can regulates the sale of its books.
Next Up Backwardation

    Backward Integration
    Backwardation
    Vertical Merger
    Horizontal Integration
    Roll Yield
    Convergence
    Contango
    Supply Chain Management - SCM
    Vertical Market
    Integrated Pension Plan

Backwardation
Share
Video Definition

Backwardation is a theory developed in respect to the price of a futures contract and the contract's time to expire. As the contract approaches expiration, the futures contract trades at a higher price compared to when the contract was further away from expiration. This is said to occur due to the convenience yield being higher than the prevailing risk-free rate.
BREAKING DOWN 'Backwardation'
When backwardation occurs in a futures market, it has been suggested an individual in the short position benefits the most by delivering as late as possible. Backwardation in futures contracts was called "normal backwardation" by economist John Maynard Keynes. He believed a price movement like the one suggested by backwardation was not random but consistent with the prevailing market conditions.

Difference Between Backwardation and Contango

Backwardation is the opposite of contango. Contrary to backwardation, contango is the situation in which a commodity's or underlying security's futures price is above the expected future spot price. Consequently, contango indicates that futures prices are falling over time to converge to the future spot price. For example, if futures contracts on West Texas Intermediate (WTI) crude oil for delivery in six months are trading at $50 while the spot price on the commodity is trading at $40 per barrel, the market is said to be "in contango." Therefore, the WTI crude oil futures curve is upward sloping.
Read More +

    Work With Investopedia
    About Us Advertise With Us Write For Us Contact Us Careers

© 2017, Investopedia, LLC. Feedback All Rights Reserved Terms Of Use Privacy Policy

No comments: