Understanding forward integration
Companies that utilize forward integration secure control over business activities that are downstream of the supply chain.
This normally extends from the point at which goods are produced until the point they are sold to consumers.
Forward integration is the opposite of backward integration, where a company takes control of upstream business activities such as raw material sourcing.
However, it’s important to note that forward and backward integration are types of vertical integration that allow a company to control aspects of the supply chain to streamline operations.
Successful forward integration relies on the company acquiring other companies that were once its customers.
The odds of success have been increased by the internet, with countless manufacturers now able to reduce their costs by bypassing traditional retailers and selling their products online.
The strategy comes with several benefits. The most obvious is that forward integration enables some companies to interact with the customer directly.
For other companies, it affords economies of scope and more optimal cost structures that increase profitability and market share.
Forward integration examples
In this section, we’ll mention some forward integration examples and describe how the strategy has been beneficial for the company concerned.
Amazon’s purchase of Whole Foods Market for $13.7 billion enabled the company to sell food to consumers via bricks-and-mortar stores and not just online.
Amazon Transportation Services (ATS), which controls the transport and distribution of eCommerce items to the end user, is another example of forward integration.
ATS enables Amazon to identify the fastest and most convenient way to deliver packages around the world and save money in the process.
Today, consumers take Apple Stores for granted and assume they’ve always been a part of the company’s success.
Before 2001, however, Apple sold its products via third-party retailers and many of these partnerships were detrimental to its bottom line.
Johnson initially wondered how he would fill the vast retail space of an Apple Store with the company’s sparse product range.
But in the end, he decided to focus on the experience of using an Apple product and the problems they solved for consumers.
Forward integration enabled Apple to establish a relationship with customers that involved expert customer support, repairs, and maintenance.
In 2011, Nike announced a forward integration strategy named Consumer Direct Acceleration to increase its direct-to-consumer (DTC) sales.
This was seen as the primary reason Nike stepped away from selling its products on Amazon, with a company spokesperson noting that “As part of Nike’s focus on elevating consumer experiences through more direct, personal relationships, we have made the decision to complete our current pilot with Amazon Retail.”
By selling more products direct to the consumer, Nike was able to grow its DTC revenue from 16% of total revenue in 2011 to 35% of total revenue by 2020.
In recent years, Nike’s forward integration strategy has been helped by enhanced online sizing technology and the increased popularity of eCommerce during COVID-19.
- Forward integration is a form of vertical integration that occurs when a company secures more downstream control over its supply chain.
- Forward integration is the opposite of backward integration, where a company takes control of upstream business activities such as raw material sourcing.
- Companies that have used forward integration to great effect include Nike, Amazon, and Apple. Nike used the strategy to increase DTC sales while Apple established its now famous Apple Store to increase the number of customer touchpoints.
Read Next: Vertical Integration.
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