Backward Vertical Integration Examples
Backward vertical integration is a strategy that involves a business owning and controlling the business activities that are upstream of its supply chain; that is, the business merges with or acquires its inventory or raw material supplier. In this article, we will discuss some real-life backward vertical integration examples and explain how these prominent businesses have used this strategy for the benefit of their brand.
Related: Telstra’s Vertical Integration Strategy and Examples
What is backward vertical integration?
A company can integrate backward by either acquiring or merging with subsidiaries that were once its suppliers. The company can also choose to establish its own subsidiary to carry out the task of the supplier. For instance, an automobile company may acquire a metal company, a glass company, and a tire company; acquiring and owning these three companies can create a stable supply of inputs for the automobile company and ensure consistent quality in its manufactured vehicles.
There are so many companies around the globe that are typical backward vertical integration examples such as Tesla, Amazon, Netflix, and many others. By making use of this strategy, these companies make the barriers to entry into their industry more difficult. They control the supply of the inventory or raw materials needed in their company’s production process, therefore, having the power to refuse competitors and new entrants from getting access to resources. They strengthen their position in their respective industries by having the ability to cut off the chain of supply for competing buyers.
Vertical integration has its benefits; integrating backward can improve a company’s efficiency, save costs, make it more competitive, and improve its profit margins. By making use of a backward integration strategy, a company gains direct access to the materials that it needs, thus, increasing its efficiency. Also, production costs can be significantly controlled and the company can have more control over its supply chain.
However, integrating backward can be capital intensive and a company may resort to taking on large amounts of debt in order to purchase a supplier or production facility. The disadvantage of this is that the cost of the debt incurred might end up reducing any cost savings that may have been realized from using the strategy. Also, an incurred debt on a company’s statement of financial position might prevent the company in the future from getting approved for additional credit facilities from its bank.
See also: Disadvantages of Vertical Integration
Backward vertical integration examples
- Amazon
- McDonald’s
- Tesla
- Netflix
- Apple
- Walmart
- IKEA
There are several well-known companies using vertical integration strategies; some integrate backward and some integrate forward. The companies that use forward integration tries to own or gain more control over their distributors or retailer in order to increase their market power, whereas companies that use backward integration tries to gain more control or ownership over companies that were once their suppliers. Here are real-life backward vertical integration examples of companies:
Amazon’s example of backward vertical integration
Amazon is one of the companies that pass as one of the backward vertical integration examples. In 1995, Amazon began as an online book retailer that procured books from publishers (suppliers). However, in 2009, it integrated backward by opening its own dedicated publishing division. Amazon is an example of vertical integration because it used a backward integration strategy to expand its business by becoming both a book publisher and a book retailer. That is, Amazon became a backward vertically integrated company by turning into a publisher and integrating the role of its suppliers into its business.
The company now sells books that it publishes and by doing so reduces its costs and increases profits. This strategy is cost-effective because Amazon only prints and ships the books it publishes when a customer makes an order and pays for it. This is better compared to when the company was buying books from publishers with the expectation that customers will find them interesting and buy them. This backward vertical integration strategy has, therefore, enabled Amazon to boost its profit by attracting customers to its own products and has also given the company leverage over other publishing houses. It has also helped to control distribution on Amazon’s Kindle platform.
Backward vertical integration examples in Mcdonald’s
Mcdonald’s is one of the prominent backward vertical integration examples. This fast food company has been the source of its products through the effective use of backward vertical integration. It processes the meat it uses itself, grows its own potatoes, and transports its own materials. Through partnerships with contracted suppliers, Mcdonald’s has integrated the procurement of its raw material into its business operations.
Also, this fast food company set up its own manufacturing plants to procure the raw materials that it uses for the preparation of its eatables. It is known to have taken ownership of certain processes of its supply chain, even all the way back to the agricultural production that supplies the ingredients for its eateries. McDonald’s grows its own agricultural products to maintain the quality of its eatable. This approach has ensured that it offers the same quality of eatables to its customers across the globe.
McDonald’s has ensured a successful backward integration, and as a result, has achieved an overall lower cost for its restaurants. As a matter of fact, the use of backward integration is the main reason why the company is one of the fast food companies with the most affordable eatables in the world. By using this strategy, the company has achieved the goal of being a globally successful food chain brand known to deliver value for money to its loyal customer base across the globe.
Tesla’s backward vertical integration example
Backward vertical integration was the main business approach of several car companies in the 1920s. In order to minimize costs, these automobile companies integrated into their operational activities the production of the car parts used in the manufacture of their vehicles. Tesla is one example of an automobile manufacturer that is vertically integrated.
Tesla integrates backward by producing the batteries it uses for its electric cars, manufacturing its own electric motors, creating its own software and firmware, and having its own supercharger networks to charge the car batteries; instead of using external contractors. That is, Tesla uses backward vertical integration by manufacturing some of the basic electric components of its car. This has given the company good control over the quality, cost, and timeliness of its production processes.
Tesla is one of the prominent backward vertical integration examples because this strategy has put it ahead of other automakers. Take the global shortage of semiconductor chips, for instance, which has caused so many automakers to face disruptions in their supply chains and has halted their production process. The pandemic in 2020 affected the manufacture of semiconductors in Taiwan and South Korea. This has caused a shortage of semiconductor chips, with constrained supply impacting the automotive industry.
Amidst the chip shortage, Tesla was able to continue production and was not affected because it was able to rewrite its software and found alternatives to the chips. This backward vertical integration strategy has, therefore, given Tesla an edge over its competitors.
Related: Nike’s Supply Chain Issues and Management
Backward vertical integration example of Netflix
Netflix is one of the backward vertical integration examples. This company was a platform that distributed TV shows and films created by others; it started as a DVD rental company. However, over the years, the company decided to integrate backward by creating its own original content. Hence, Netflix now streams more original content, thereby reducing its dependence on film studios and their licensing. This type of Netflix’s vertical integration strategy has helped boost the continuing success of Netflix.
By creating its own movies and shows, this video-streaming company increases its profit margin by reducing the amount of money spent on streaming rights. Examples of some of the TV shows and movies created and produced by Netflix include Heart of Stone, Wednesday, Stranger Things, Hunger, Tall Girl, Black Crab, Grace & Frankie, etc.
Apple, as an example of backward vertical integration
Another backward vertical integration example is the well-known technology company, Apple, which is famous for its technology products like iPhones, iPads, and Macbooks. This tech company controls some aspects of its product development process through its use of a backward vertical integration strategy. In the past couple of years, Apple has gradually become less dependent on chip makers and manufacturers of their product components.
Apple develops its own operating system instead of depending on another company for an operating system. It also designs hardware components like the high-resolution screen that it assembles into its finished products. Another prominent example of backward vertical integration is Apple’s decision to build its own proprietary chips, M1, in-house instead of relying on Intel.
In 2020, the CEO of Apple announced that the company will transition toward using its own custom-built ARM processors in its desktops and laptops and will be parting ways with Intel. All these backward integration strategies have allowed Apple to maintain tight quality control measures and ensure that each component used for their technology products works as desired.
The first Mac with an Apple Silicon chip was released in late 2020, and in the fall of 2022, it was reported that Apple had removed the last remaining traces of Intel Silicon from its Mac product line. According to the statements made by Apple, the Apple Silicon chips would facilitate more powerful Macs, and developing their own advanced chips would extend battery life, and increase performance speed.
Walmart, as a backward vertical integration example
Walmart is an American multinational retail corporation that owns and operates a chain of supercenters, grocery stores, and discount department stores. Its supercenters offer a one-stop shopping experience by selling groceries, fresh produce, bakery products, electronics, toys, home furnishings, and deli and dairy products. However, this retail company integrates backward in 2018 by purchasing land to build its own milk processing plant.
This is a typical example of backward vertical integration because the company reduced several of the overheads involved in bringing milk to its refrigerators by shipping its own produced milk to over 500 Walmart retailers. That is, by producing its own milk, the company was able to undercut several suppliers of the same commodity.
IKEA’s example of backward vertical integration
IKEA, the Swedish furniture and home accessories giant, is one of the backward vertical integration examples. This furniture organization needs wood to manufacture furniture and decided to acquire a wood supplier (integrating backward) by purchasing 83,000 Hectares of forests in Romania in order to supply its timber requirements. This is a good example of backward vertical integration.
Furthermore, the basis of all IKEA furniture became the multi-purpose particle board. Hence, the company became one of the largest consumers of wood across the globe. It built a plant capable of pulverizing wood into dust and manufactured many multi-purpose particle boards at one time. This backward integration strategy allowed IKEA to minimize the package dimensions of its furniture, and reduce its shipping costs, and inventory space. Hence, by using backward vertical integration, IKEA is able to create a product that its customers could bring home in their cars and assemble themselves.
