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As you can see IKEA use this technique for better consumer visualisation. The supercharge 3d visualisation will impact on the overall business. Because it will give the consumer the best experience. When the customer will be satisfied with their services, IKEA will be more profitable.

So now you can understand what is the advantage of this method.

1.Backward Integration

Forward means move forward, as the supply system has two parts one is backwards and another one is forward. Right now IKEA uses both of them to capture the overall market. Secondly, the company uses this technique for a better supply system. Undoubtedly, sales and distribution channels are the key factors of any business. So definitely a company wants to enhance its distribution channel to all over the world so they can reach more and more customers. Thirdly, when the firm acquires the distribution channels then they have all control of the overall system. Such as they can build up their own distribution network and also control by their own.

Apple has its own selling distribution channel. As well as it has its own manufacturing process. In this case, Apple uses both the backwards and forwards integration strategies. Apple has its own software, hardware and retail stores. Also, have their own services company. Apple is the only company who uses all techniques and we can say that it is vertically integrated into everything. Still, now, you already understand the concept of integration. Then you also realise that if a company uses both strategies for developing and expanding its business then the company is called vertically integrated into both.

However, not all companies use those techniques because larger is not always nicer. Because both techniques have some advantages and disadvantages as I already indicated above. Amazon is the biggest e-commerce business in the world right now.

What is Diversification Strategy? (Definition and Examples)

But did you ever ask yourself how Amazon became this big? Of course, maybe you have answers or maybe not. Amazon became big because of its smart techniques. While Amazon has its own selling system and it also has its own distribution channel. In this case, it enhances its business by forward vertical integration. Similarly, it has its own manufacturing process where Amazon provides its own branded products. Now, this time it is integrated backwards. In this situation, where it monitors both the strategies similarly, it expands the overall market and captures the whole world.

It is also well known for its vertically integrated into both sides. Undoubtedly, the forward and backwards strategy. Netflix started as a DVD rental organization but now it started its own movie or series making production house. Who started creating Netflix original content series.

Advantages of Vertical Integration

In this case, it is also vertically integrated by both sides. On the other hand, they vertically integrated into the distribution system. So it can capture the overall market and industry. Similarly, we all know that Ford is an automotive company who once started making their own engine. Later on, they started their own manufacturing to all distribution and sales channels so they can control and take the power of everything.

But, this equal integration technique does not benefit them. Because I already told you earlier that when a company becomes too big, it is always not helpful. You can also check how geographical expansion affects the business expansion, for better analysis. In conclusion, I must say that you have clear information about all. Although, take a quick look at everything in shortly.

So backwards integration and forward integration are two types of vertical integration strategies. On one hand, backwards use for better resources and on the other hand forwards control the overall distribution systems.

Horizontal vs Vertical Integration

Different companies use those techniques for global expansion. Also, some companies use both techniques for capturing the overall industry and overall industry. So you can choose on your own if you realize you need to expand your business by both sides. As I already discussed above that integration has two types, one is Vertical and another one is Horizontal. Also, vertical integration divided by forward and backwards integration. It can be a bakery who collects wheat and other raw materials from farmers.


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Or can be the juice distributors who collect fruits from farmers or can acquire fruit supply companies. Or a fabric company who collects cotton yarn from farmers. It can be a mobile company who acquires an advanced technology group for better consumer experience. Or can acquire retail channels so they can do better supply.

McDonald's Diversification Strategy

Similarly, Disney acquires lots of retail stores so that they can sell its Disney character. It is also a forward vertical integration. Yes nestle is vertically integrated.


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This company uses both backwards and forwards integration for better productivity. Backward integration means one company acquires the supply chain process companies for better supplies. Refineries are tailored to process their own bauxite, with its unique chemical and physical properties; switching suppliers or customers is either impossible or prohibitively expensive technical specificity.

Consequently, mine-refinery pairs are locked together economically. These bilateral monopolies exist despite the apparent presence of dozens of buyers and sellers. In fact, the pre-investment phase of the transaction relationship between a mine and a refinery does not suffer from bilateral monopoly. A number of bauxite miners and alumina refiners around the world line up and bid whenever a greenfield mine and refinery are in the offing.

However, the market quickly becomes a bilateral monopoly in the post-investment phase. The miner and the refiner who exploit the greenfield opportunity are locked together economically by asset specificity. Because industry participants realize the perils of VMF, the mine and the refinery usually end up under common ownership. Around 90 percent of bauxite transactions occur under vertical integration or quasi-vertical arrangements, such as joint ventures.

Auto assemblers and their component suppliers can also be locked together, as when a component is specific to a particular make and model.

Vertical Integration Definition

Either side is vulnerable to opportunistic recontracting, especially if, for example, the model is a surprising success or failure. To avoid the dangers of bilateral monopolies and oligopolies in such cases, auto assemblers tend to backward integrate or, following the example of the Japanese, enter into close-knit contractual arrangements with carefully chosen suppliers—where the strength of relationships and contracts prevents risks of opportunistic exploitation inherent in arm's length sales between "compatible" parties.

Post-investment phase bilateral monopolies and oligopolies caused by asset specificity are the most frequent cause of VMF. The effect of asset specificity is magnified when the assets are also capital intensive and durable and when they give rise to high fixed-cost structures. While the existence of a bilateral oligopoly increases the risk of supply or outlet disruption, high capital intensity and high fixed costs increase the costs of any production disruption because of the magnitude of both cash and opportunity costs incurred during the interruption.

Asset durability increases the time horizon over which the risks and costs are relevant. Taken together, high asset specificity, intensity, and durability often cause high switching costs for both suppliers and customers. Their presence is one of the most important contributing factors to decisions to vertically integrate across a wide range of industries. Transaction frequency. High transaction frequency is another factor that will promote VMF, when it is accompanied by bilateral oligopolies and high asset specificity. Frequent transactions raise costs for the simple reason that haggling and negotiating occur more often and allow for frequent exploitation.

Exhibit 3 plots transaction frequency and asset characteristics on a matrix that suggests appropriate vertical coordination mechanisms. When buyers and sellers seldom need to interact, vertical integration is usually not necessary, whether asset specificity is low or high. When asset specificity is low, markets can operate effectively using standard contracts such as leases and credit sale agreements.

And when asset specificity is high, the contracts may be quite complicated but integration is still not necessary. An example would be major public construction projects.