Another potential way to grow is through vertical integration – moving up and down your supply chain. You can integrate forward by setting up operations closer to your customer, such as a clothing company opening up retail stores. Or you can integrate backward, moving closer to your raw material source such as the clothing company opening a manufacturing plant. Although these strategies are less common than the others, they do have some benefits:
- Direct access to supply and demand: Eliminating the middleman in both directions is forward and backward integration. Getting direct access to your vendors and customers can be a huge benefit for many businesses.
For example, many of the auto manufacturers moved forward by investing in the big car rental firms. Many companies seek backward integration because there is no source for a component they need. For example, when refrigerated warehouses were needed by meat packers, they built them.
- Better control over the quality or availability of the product or service. Many times, manufacturers need specialized raw material that is a key component in the end product. To gain better quality control and eliminate the risk of not being able to acquire the product, the company buys the vendor. This is backward integration.
So Sony could guarantee content for its products, the company purchased Columbia Pictures, Tri-Star Pictures, and CBS Records.
- Entry into a potentially attractive business area. Manufacturers continually fight margin pressures. The best way to get control is to go directly to customers instead of through retailers, also known as forward integration.
Companies like Nike have been successful in this area, whereas a company such as Universal Pictures hasn’t.