What is Forward Integration?
Definition: Forward integration is a business strategy that involves expanding a business operation to take control of products distribution. Instead of a business contracting distributors to distribute its products, it can opt to deal with retailers and consumers directly.
Understanding Forward Integration
Often referred to as vertical integration, forward integration is common with businesses and companies with a robust supply chain networks. By deploying this business strategy, a business would be able to get rid of intermediaries in the supply chain process. The strategy also allows a business to increase control over suppliers, manufacturers, and distributors.
Businesses and companies undertake vertical integration by acquiring or merging with businesses that were its distributors. The acquisition essentially brings the distribution network in-house. Similarly, a business may decide to build its distribution network from scratch.
Forward integration is a business strategy that can only succeed upon a business gaining ownership of customers. The business would, in this case, have to assure a given customer or retail base that it would be able to ensure a constant supply of products at the normal price. In some instances, businesses offer discounts in a bid to give loyal customers a reason to continue using the products at hand.
Internet proliferation, as well as an increased mobile device use, has made it possible for businesses and manufacturers to engage in forward integration. By setting up online stores, businesses are increasingly dealing with customers directly, consequently shunning distribution networks that, at times, can be costly.
Similarly, forward integration has made it possible for companies and businesses to strengthen their supply chains. The result has been an increase in the overall ownership of the industry in terms of market share.
Forward Integration Example
Consider a farmer who is engaged in mango farming. The farmer can ink deals with distributors to get his produce to consumers. However, upon weighing the benefits of forward integration, the farmer can decide to sell his produce to customers directly.
Benefits of Forward Integration
Forward integration can help a business or company increase its market share by eliminating the various costs involved in the transportation of goods to the final consumers. By bringing distribution in-house, a business would be able to offer discounts, ideal for enhancing sales and growing market share. Forward integration is, therefore, an ideal tool for lowering product sales.
Control Distribution Channels
Vertical integrations can help a business gain control over distribution channels in an industry. Control is especially important in an industry void of qualified distributors. By gaining control, a business can gain much-needed independence from third parties.
Competitive Edge
By bringing distribution in-house, a company can be able to gain a competitive edge in a highly competitive industry. The acquisition of a large distribution company can help a company create barriers to potential competitor’s ideal for gaining a competitive edge.
Forward Integration Cons
Inefficiencies
The acquisition of a large distribution company as part of a forward integration strategy can lead to bureaucracy inefficiencies, given the expanded nature of the business. Integration may also not be swift consequently making it impossible for a business to achieve desired benefits.
Higher Costs
Costs incurred in the implementation of an effective forward integration strategy could take a toll on a company of business bottom line. For that reason, a business needs to ensure that benefits supersede the costs.
Summary
Forward Integration is an effective strategy for gaining full control of the entire supply chain. By doing away with middlemen, the business strategy allows businesses to maintain and build tight relationships with customers and retailers.
However, businesses and companies should only engage in forward integration if there are cost benefits. The strategy should also enhance operational efficiency while keeping costs low. Similarly, it is more effective to rely on established supply chains, be it from third parties rather than expanding internally.