Backward Vertical Integration Definition

Acquiring Earlier Stage Suppliers

Backward vertical integration is a strategic move in which a business takes over or merges with a company at an earlier stage in the production process, typically involving its suppliers or sources of goods and materials.

Example: When a jam manufacturer acquires a fruit farm, it exemplifies backward vertical integration since the manufacturer now owns a critical source of raw materials for its jam production.

Ensuring Input Availability and Quality

Input Control:

The primary objective of backward vertical integration is to ensure control over the availability and quality of essential inputs or raw materials required for the production process.

Example: An automobile manufacturer acquires a rubber plantation to guarantee a consistent supply of high-quality rubber for tire production.

Supplier Integration:

Backward integration may involve the acquisition of suppliers such as car electrics manufacturers or glassmakers by a major automobile manufacturer.

Example: Ford Motor Company could pursue backward vertical integration by merging with or buying out its key suppliers to secure the supply of critical components like car electronics or glass.

In summary, backward vertical integration is a strategic move where a business acquires or merges with a company at an earlier stage in the production process, typically its suppliers or sources of goods and materials. The primary goal is to ensure control over input availability and quality, reducing dependency on external suppliers and enhancing production efficiency.