There are many things that a business can do to grow and increase profits. Not only can they increase their customer base, but they can also expand their business. This could involve purchasing other businesses or just increasing their own operations. One type of business expansion that can be very successful is backward integration. This involves buying businesses that were previously suppliers. Owning such operations can have many benefits and we will consider these later in the article.
The Benefits of Backward Integration
The decision to choose backward integration is huge decision for any business. They need to be sure that such a maneuver is going to lead to increased profit. If they were to buy a supplier or vendor that wasn’t viable it could easily end up destroying both companies. The business then that is considering such a move will need to decide how it will be profitable. If it is one of their main suppliers then it may lead to huge savings in regards to these supplies. If the supplier has a good customer base then it may already be a good purchase because of the likelihood of continued profits.
If a supplier is charging too much for their products it can be another reason to choose backward integration. This is particular useful when the supplier has some type of monopoly over the supply in question — maybe they are the only business providing this product in a certain location. Rather than paying so much money for supplies the business may decide to buy the company. This way in future they can be sure of getting these supplies at a much more reasonable cost. Of course the company in question will need to agree to such an acquisition.
In some situations backward integration may involve a number of different businesses. This can occur when a supplier is struggling to stay in business and there is a risk that they could go bankrupt. If there are businesses that depend on this supplier then it may mean trouble for them should this supplier fail. It may not be feasible for one of these businesses to take over the supplier so instead a group of business may come together to acquire the supplier. That way they will all be sure of continued supplies without taking all the risk of buying the failing business. This type of backward integration can work out very well for everyone involved in it. The supplier will be able to make it through the tough period and those businesses that have acquired it will in future be able to get their supplies for a cheaper rate.
Some Final Thoughts on Backward Integration
There are many good reasons for why a business may decide to join forces with their suppliers or vendors. In many cases such backward integration will prove successful but there is always going to be at least some risk involved. This is especially true when a failing company is acquired unless the situation that is causing the poor performance is resolved.
