Backward integration is a form of vertical integration that occurs when a business expands its role to fulfill tasks formerly completed by businesses up the supply chain. The purpose of backward integration is to create a more efficient production process, achieve better control, reduce costs, and gain a competitive advantage over other companies. It usually involves taking control over part of the supply chain, and is often carried out by buying or merging with other companies that supply the business’s products.

Backward integration can create further opportunities for companies, such as increased control of product quality. This is due to the added control that firms have over the production process, which allows them to ensure that their products are made according to the preferred specifications. Furthermore, backward integration can be beneficial for companies that have good research and development capabilities, as they have the potential to develop their own products. Finally, backward integration presents firms with more opportunities for innovation and development, as they can create unique products that can’t be easily found through other suppliers.

Despite its potential benefits, backward integration can be very capital intensive, meaning that companies may need to spend large sums of money to purchase part of the supply chain. Companies that choose to pursue backward integration must often submit very costly and lengthy regulatory applications if the deal involves merging with other companies. In addition, companies need to weigh the potential cost savings of backward integration against the cost of completing the process (e.g., legal fees, office setup, etc.).

Ultimately, backward integration is a strategic decision that must be carefully evaluated on an individual basis. Companies must weigh the potential competitive advantages and cost savings of backward integration against the challenges of achieving it. As such, it’s important for companies to conduct extensive research and develop a sensible plan prior to pursuing backward integration.