forward-integration

Forward Integration

Forward integration is a form of vertical integration that occurs when a company secures more control over the distribution of its products or services.

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

amazon-business-model
Amazon has a diversified business model. In 2021 Amazon posted over $469 billion in revenues and over $33 billion in net profits. Online stores contributed to over 47% of Amazon revenues, Third-party Seller Services,  Amazon AWS, Subscription Services, Advertising revenues and Physical Stores.

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.

Apple

apple-business-model
Apple has a business model that is broken down between products and services. Apple generated over $365 billion in revenues in 2021, of which $191.9 came from the iPhone sales, $35.2 came from Mac sales, $38.3 came from accessories and wearables (AirPods, Apple TV, Apple Watch, Beats products, HomePod, iPod touch, and accessories), $31.86 billion came from iPad sales, and $68.4 billion came from services.

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.

Apple hired former Target marketing executive Ron Johnson in 2000 to mastermind its forward integration strategy.

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.

Under the traditional retail model it had employed before 2001, the purchase of an Apple product marked the end of the company’s interaction with customers.

Nike

nike-vision-statement-mission-statement
Nike vision is “to bring inspiration and innovation to every athlete in the world.” While its mission statement is to “do everything possible to expand human potential. We do that by creating groundbreaking sport innovations, by making our products more sustainably, by building a creative and diverse global team and by making a positive impact in communities where we live and work.”

In 2011, Nike announced a forward integration strategy named Consumer Direct Acceleration to increase its direct-to-consumer (DTC) sales. 

While DTC sales are more profitable, the strategy also allowed Nike to exercise more control over how its brand was presented to consumers.

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.

Key takeaways:

  • 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.

Connected Business Concepts

Vertical Integration

vertical-integration
In business, vertical integration means a whole supply chain of the company is controlled and owned by the organization. Thus, making it possible to control each step through customers. in the digital world, vertical integration happens when a company can control the primary access points to acquire data from consumers.

Backward Chaining

backward-chaining
Backward chaining, also called backward integration, describes a process where a company expands to fulfill roles previously held by other businesses further up the supply chain. It is a form of vertical integration where a company owns or controls its suppliers, distributors, or retail locations.

Supply Chain

supply-chain
The supply chain is the set of steps between the sourcing, manufacturing, distribution of a product up to the steps it takes to reach the final customer. It’s the set of step it takes to bring a product from raw material (for physical products) to final customers and how companies manage those processes.

Data Supply Chains

data-supply-chain
A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distribution to final customers. A data supply chain moves in the opposite direction. The raw data is “sourced” from the customer/user. As it moves downstream, it gets processed and refined by proprietary algorithms and stored in data centers.

Horizontal vs. Vertical Integration

horizontal-vs-vertical-integration
Horizontal integration refers to the process of increasing market shares or expanding by integrating at the same level of the supply chain, and within the same industry. Vertical integration happens when a company takes control of more parts of the supply chain, thus covering more parts of it.

Decoupling

decoupling
According to the book, Unlocking The Value Chain, Harvard professor Thales Teixeira identified three waves of disruption (unbundling, disintermediation, and decoupling). Decoupling is the third wave (2006-still ongoing) where companies break apart the customer value chain to deliver part of the value, without bearing the costs to sustain the whole value chain.

Entry Strategies

entry-strategies-startups
When entering the market, as a startup you can use different approaches. Some of them can be based on the product, distribution, or value. A product approach takes existing alternatives and it offers only the most valuable part of that product. A distribution approach cuts out intermediaries from the market. A value approach offers only the most valuable part of the experience.

Disintermediation

disintermediation
Disintermediation is the process in which intermediaries are removed from the supply chain, so that the middlemen who get cut out, make the market overall more accessible and transparent to the final customers. Therefore, in theory, the supply chain gets more efficient and, all in all, can produce products that customers want.

Reintermediation

reintermediation
Reintermediation consists in the process of introducing again an intermediary that had previously been cut out from the supply chain. Or perhaps by creating a new intermediary that once didn’t exist. Usually, as a market is redefined, old players get cut out, and new players within the supply chain are born as a result.

Scientific Management

scientific-management
Scientific Management Theory was created by Frederick Winslow Taylor in 1911 as a means of encouraging industrial companies to switch to mass production. With a background in mechanical engineering, he applied engineering principles to workplace productivity on the factory floor. Scientific Management Theory seeks to find the most efficient way of performing a job in the workplace.

Poka-Yoke

poka-yoke
Poka-yoke is a Japanese quality control technique developed by former Toyota engineer Shigeo Shingo. Translated as “mistake-proofing”, poka-yoke aims to prevent defects in the manufacturing process that are the result of human error. Poka-yoke is a lean manufacturing technique that ensures that the right conditions exist before a step in the process is executed. This makes it a preventative form of quality control since errors are detected and then rectified before they occur.

Gemba Walk

gemba-walk
A Gemba Walk is a fundamental component of lean management. It describes the personal observation of work to learn more about it. Gemba is a Japanese word that loosely translates as “the real place”, or in business, “the place where value is created”. The Gemba Walk as a concept was created by Taiichi Ohno, the father of the Toyota Production System of lean manufacturing. Ohno wanted to encourage management executives to leave their offices and see where the real work happened. This, he hoped, would build relationships between employees with vastly different skillsets and build trust.

Dual Track Agile

dual-track-agile
Product discovery is a critical part of agile methodologies, as its aim is to ensure that products customers love are built. Product discovery involves learning through a raft of methods, including design thinking, lean start-up, and A/B testing to name a few. Dual Track Agile is an agile methodology containing two separate tracks: the “discovery” track and the “delivery” track.

Scaled Agile

scaled-agile-lean-development
Scaled Agile Lean Development (ScALeD) helps businesses discover a balanced approach to agile transition and scaling questions. The ScALed approach helps businesses successfully respond to change. Inspired by a combination of lean and agile values, ScALed is practitioner-based and can be completed through various agile frameworks and practices.

Kanban Framework

kanban
Kanban is a lean manufacturing framework first developed by Toyota in the late 1940s. The Kanban framework is a means of visualizing work as it moves through identifying potential bottlenecks. It does that through a process called just-in-time (JIT) manufacturing to optimize engineering processes, speed up manufacturing products, and improve the go-to-market strategy.

Toyota Production System

toyota-production-system
The Toyota Production System (TPS) is an early form of lean manufacturing created by auto-manufacturer Toyota. Created by the Toyota Motor Corporation in the 1940s and 50s, the Toyota Production System seeks to manufacture vehicles ordered by customers most quickly and efficiently possible.

Six Sigma

six-sigma
Six Sigma is a data-driven approach and methodology for eliminating errors or defects in a product, service, or process. Six Sigma was developed by Motorola as a management approach based on quality fundamentals in the early 1980s. A decade later, it was popularized by General Electric who estimated that the methodology saved them $12 billion in the first five years of operation.

Read Also: Vertical Integration, Horizontal Integration, Supply Chain, Backward Chaining, Horizontal Market.

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