Forward Integration

Business / By Gennaro Cuofano / January 30, 2023 January 31, 2023

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 typically 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 vs. backward integration

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.

Whereas with forward integration, a company takes control of upstream (meaning moving up in the supply chain or getting closer to the final customer) business activities.

In backward integration, the company moves by getting closer to the input, raw version of the product.

Companies that have mastered vertical integration have learned to move both forward and backward.

Depending on where the core asset is, a company usually moves upward, downward, or vice-versa.

Take the case of luxury manufacturers like Gucci, which in the 1950-60s started to build their industrial basis, thus vertically integrating their supply chain and building close ties with artisans in Tuscany.

Thus the company started vertically integrating backward by controlling more and more of the manufacturing process to ensure quality.

On the other hand, once Gucci had secured the manufacturing and industrial side, it was time to build demand and distribution.

Thus, throughout the 1970-the 80s, it expanded globally by opening and operating new stores, thus moving forward in the supply chain.

Today the opposite process is shaping up the business world.

As the web has lowered the barriers to entry for many, entrepreneurs could start building their audiences from scratch by tapping into digital channels.

Many of these new entrants tended to master first the demand side (move forward) and only later started to build the supply side (move backward).

Take the case of MrBeast, and how it started first to build a massive audience via YouTube, and then it started to build products on top of that brand.

Today MrBeast moved beyond media, opening up also a burger restaurant chain!

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 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 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 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.

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About The Author

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.