What is Backward Integration?
Backward integration is a type of vertical integration that involves expanding a company’s role to encompass the tasks previously performed by the entities above it in the supply chain. In other words, backward integration happens when a company acquires another company that supplies the necessary products or services for its production operations. Companies pursue backward integration to improve efficiency, reduce costs, and gain competitive advantage.
What are the benefits of the Backward Integration?
Cost Reduction: Companies can lower their overall costs by eliminating the necessity to purchase raw materials or components from external suppliers.
Quality Improvement: Companies can enhance the quality of their finished goods by exerting more control over the quality of inputs in their production processes.
Efficiency Boost: Backward integration can enhance production efficiency by eliminating the complexities of coordination and communication with multiple suppliers.
Secure Supply: By controlling their own supply of raw materials or components, companies can ensure a dependable source of inputs, particularly valuable in industries with volatile supply chains.
Increased Market Influence: Companies can wield greater market power by overseeing a larger portion of the supply chain. This increased influence enables them to command higher prices or negotiate more favorable terms with suppliers.
Examples of Backward Integration
Reliance Industries Limited (RIL), a leading Indian conglomerate, is a prime example of a company that has successfully implemented backward integration across various segments of its business. One notable example is its foray into the telecommunications industry through its subsidiary, Jio Platforms.
Backward Integration into Telecom:
Spectrum Acquisition: In 2010, Reliance acquired a pan-India 4G spectrum license, laying the groundwork for its aggressive entry into the telecom space. This spectrum acquisition was crucial for providing high-speed mobile internet services.
Fiber Optic Network: Recognizing the importance of robust infrastructure, Reliance embarked on a massive project to build a nationwide fiber optic network. This network became the backbone for Jio's high-speed internet offerings, providing a significant advantage over competitors.
Manufacturing: To further strengthen its control over the supply chain and reduce reliance on external vendors, Reliance established its own mobile phone manufacturing facility. This allowed for the cost-effective production of Jio-branded smartphones, further enhancing its competitive edge.
Content Acquisition: To create a compelling value proposition for customers and drive mobile data usage, Reliance invested heavily in acquiring digital content rights. This included sports broadcasting rights, music streaming services, and partnerships with various media and entertainment companies.