Legal Definitions - backward integration

Backward integration is a business strategy where a company acquires or merges with another company that operates earlier in its supply chain. This means taking ownership of a supplier or a producer of raw materials, components, or services that the company previously purchased from an external vendor. The primary goal is often to gain greater control over costs, quality, and the reliability of supply for essential inputs.

Here are some examples illustrating backward integration:

• Imagine a large coffee shop chain that previously bought all its coffee beans from various independent farms and distributors. If this chain decides to purchase and operate its own coffee plantations in South America, it would be engaging in backward integration. By owning the source of its primary ingredient, the chain gains direct control over the quality of the beans, ensures a consistent supply, and potentially reduces costs by cutting out intermediaries.

• Consider a major smartphone manufacturer that relies heavily on a specific type of advanced microchip produced by a third-party company. If the smartphone manufacturer acquires this microchip production company, it is performing backward integration. This move allows the manufacturer to secure its supply of a critical component, potentially customize the chips for its specific needs, and prevent competitors from monopolizing the supply of those chips.

• A popular online streaming service that hosts all its content on servers owned by a large cloud computing provider might decide to build and manage its own data centers and server infrastructure. This would be an example of backward integration. By bringing server management and data storage in-house, the streaming service can potentially optimize performance, reduce long-term hosting costs, and enhance data security, rather than relying on an external service provider.