Backward Integration - Strategic Advantages

*Backward integration

-where the firm produces its own inputs

-Backward integration may be beneficial if it helps secure a reliable source of supplies. It will be harmful if it leads to increased monopoly power and new competitors have difficulty accessing raw materials.

Example

Here is a great example for the revision notes on business growth.

PepsiCo which also includes the Tropicana and Gatorade brands within its business has made a $6bn cash and stock offer for the Pepsi Bottling Group and PepsiAmericas.

Pepsi already owns sizeable equity stakes in both of these huge bottling businesses - but it has taken advantage of the low stock market and a handy cash mountain to make a takeover bid.

It is a classic case of backward vertical integration and a report in the Financial Times says that PepsiCo expects the integration to cut costs by about $200m annually.

Britvic is PepsiCo's bottler in the UK. Keep an eye out for Britvic making a move on smaller bottling companies elsewhere in the European Union.

Strategic Advantages of Backward Integration

* Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers

- Potential to reduce costs exists when

- Suppliers have sizable profit margins

- Item supplied is a major cost component

* Resource requirements are easily met

* Can produce a differentiation-based competitive advantage when it results in a better quality part

* Reduces risk of depending on suppliers of crucial raw materials / parts / components

Strategic Advantages of Forward Integration

* To gain better access to end users and better market visibility

* To compensate for undependable distribution channels which undermine steady operations

* To offset the lack of a broad product line, a firm may sell directly to end users

* To bypass regular distribution channels in favor of direct sales and Internet retailing which may

- Lower distribution costs

- Produce a relative cost advantage over rivals

- Enable lower selling prices to end users

Strategic Disadvantages of Vertical Integration

* Boosts resource requirements

* Locks firm deeper into same industry

* Results in fixed sources of supply and less flexibility in accommodating buyer demands for product variety

* Poses all types of