Backward Integration

Backward integration refers to a situation when a company controls subsidiaries which produce a few of the inputs used in the production of its goods. In other words, backward (upstream) vertical integration is a situation where a consumer of raw materials acquires its suppliers, or establishes its own facilities to guarantee a more reliable or cost-effective supply of inputs. Backward integration means the company is integrating in the direction away from the customer. For instance, a company producing cars may own a tire company, a glass company, and a metal company. Another example is of a coffee retailer which merges with coffee growers thus controlling supply of coffee beans.

Short Note on Vertical Integration

The term vertical integration means coordinating the various stages of an industry chain when bilateral trading is just not beneficial. Vertically integrated businesses in a supply chain are united by way of a common owner. Generally each member of the supply chain generates a different product or service. Vertical integration is a dangerous, complicated, expensive, and difficult to reverse strategy. Vertical integration is an approach to prevent the hold-up problem.