Forward integration refers to strategic processes that companies use to improve their business and increase their profits. By implementing forward integration, each company will have more control over their products and the way they are delivered to consumers.
Forward integration is a method by which companies can control the distribution of their goods. This is considered as downward vertical integration. In vertical integration, companies start a new phase by acquiring an existing company or expanding their business to cover a new phase in the production process. When vertical integration is applied in the initial production process, it is called upstream integration, but integration at the final stage of production, closer to the final consumer, is called downstream integration.
Production Process Steps
1. Raw Material
In this stage, companies prepare raw materials to make a product. For example, the sawmill company puts the lumber in the mill to make a wooden swing set and then makes the pieces of wood used to make the set.
At this stage, raw materials are combined to produce more products and sell them. For example, the manufacturer cuts, paints, and arranges wood pieces to make a swing set, and then packs the wood pieces in a box to produce swing sets.
At this stage, the distribution company sells the final product from the manufacturer to the retailer suppliers. The shipping company receives the set packages from the pallet manufacturer and delivers them to the retail stores.
Consumers at this stage can buy the finished product from the retail store. Any store that receives a shipment of swing sets can sell them at a higher price; It means to price the package more than the price he paid.
5. After Sales Service
Providing additional services such as installation, repair, maintenance and warranty makes more money from a product. The retail store by selling the swing set makes an offer and creates added value based on that at a higher cost, like a store representative who makes the set for consumers.
Any firm using the production process at each stage can practice forward integration by taking control of a lower stage. For example, a retailer using after-sales service or a material manufacturer that starts manufacturing with raw materials use forward integration.
The Difference between Upstream and Downstream Integration
Upstream and downstream integration is one of the best ways to gain control over the company’s production process. In downstream integration, companies are responsible for the final stage of production, distribution and sales. Upstream integration is when companies take over control of an early stage, such as the production of materials. By using this integration, companies can improve their business and increase their profitability.
Reasons for Businesses to Use Forward Integration
In the above stages, businesses have the option to have double control over the production process. By reducing the number of partners, forward integration is the best way to reduce costs in the organization and increase the company’s bottom line. For example, the production company takes over the distribution network and transportation operations. In this case, they can expand their businesses more easily; Because they can increase the budget of the distribution department without having a distribution partner.
Advantages of Forward Integration
1. Maximum Savings
Companies reduce costs by reducing the middleman between themselves and their customers. It provides the possibility of increasing profits for yourself and reducing prices for the development of sales and increases the company’s interests.
2. Independent Distribution
Companies increase their independence by having more control over the production process. They can gain the power to adjust the necessary actions according to their needs and boost the overall process.
3. Block Competition
Companies reduce competition by controlling the final stage of production and by using the purchase of other companies. This is considered an advantage because competitors are forced to use resources to find more opportunities and produce the product themselves.
4. Reduced Volatility
Companies depend on the performance of others in cooperation with external companies to produce their products. Companies reduce the risk of instability by reducing the amount of outsourcing.
Disadvantages of Forward Integration
1. Increase in Costs
Controlling the production process means that a company that incurs higher costs may face greater risk due to its investment. If we intend to integrate forward, it is important to pay attention to the financial pressures that involve buying from the company.
2. Increased Responsibility
Controlling the company or production processes increases accountability. Every company is responsible for the error committed during production, distribution and is responsible for the success of its company.
3. Integration Problems
Adding a company with new responsibilities presents many challenges during the transition. Before moving forward with our commitment to the integration plan, we must evaluate the risks and benefits of production control.
4. Difficult Work Load
Accepting responsibilities that were outsourced means making new and necessary decisions. If a company does not have the necessary manpower or ability according to the high workload, the efficiency of the company will decrease.
Up to Sum
In this article, we mentioned the advantages and disadvantages of forward integration. Forward integration is a method by which companies can improve their business and increase their profits. This merger is considered as an upstream merger.