strategic-management

140 PART 2 • STRATEGY FORMULATION
• When an organization has both the capital and human resources needed to manage
the new business of distributing its own products.
• When the advantages of stable production are particularly high; this is a consideration
because an organization can increase the predictability of the demand for its
output through forward integration.
• When present distributors or retailers have high profit margins; this situation
suggests that a company profitably could distribute its own products and price them
more competitively by integrating forward.
Backward Integration
Both manufacturers and retailers purchase needed materials from suppliers. Backward
integration is a strategy of seeking ownership or increased control of a firm’s suppliers.
This strategy can be especially appropriate when a firm’s current suppliers are unreliable,
too costly, or cannot meet the firm’s needs.
When you buy a box of Pampers diapers at Wal-Mart, a scanner at the store’s
checkout counter instantly zaps an order to Procter & Gamble Company. In contrast, in
most hospitals, reordering supplies is a logistical nightmare. Inefficiency caused by
lack of control of suppliers in the health-care industry, however, is rapidly changing as
many giant health-care purchasers, such as the U.S. Defense Department and
Columbia/HCA Healthcare Corporation, move to require electronic bar codes on every
supply item purchased. This allows instant tracking and recording without invoices and
paperwork. Of the estimated $83 billion spent annually on hospital supplies, industry
reports indicate that $11 billion can be eliminated through more effective backward
integration.
In a major strategic shift to design its own computer chips, Apple Inc. in 2009 began a
backward integration strategy to shield Apple technology from rival firms. Apple envisions
soon to produce its own internally developed chips for its iPhone and iPod Touch devices.
Online job postings from Apple describe dozens of chip-related positions. Apple’s new
strategy also is aimed at sharing fewer details about Apple technology plans with external
chip suppliers. This new backward integration strategy marks a break from a long-term
trend among most big electronics companies to outsource the development of chips and
other components to external suppliers.
Some industries in the United States, such as the automotive and aluminum industries,
are reducing their historical pursuit of backward integration. Instead of owning their
suppliers, companies negotiate with several outside suppliers. Ford and Chrysler buy over
half of their component parts from outside suppliers such as TRW, Eaton, General
Electric, and Johnson Controls. De-integration makes sense in industries that have global
sources of supply. Companies today shop around, play one seller against another, and go
with the best deal. Global competition is also spurring firms to reduce their number of
suppliers and to demand higher levels of service and quality from those they keep.
Although traditionally relying on many suppliers to ensure uninterrupted supplies and
low prices, American firms now are following the lead of Japanese firms, which have far
fewer suppliers and closer, long-term relationships with those few. “Keeping track of so
many suppliers is onerous,” says Mark Shimelonis, formerly of Xerox.
Seven guidelines for when backward integration may be an especially effective
strategy are: 6
• When an organization’s present suppliers are especially expensive, or unreliable,
or incapable of meeting the firm’s needs for parts, components, assemblies, or raw
materials.
• When the number of suppliers is small and the number of competitors is large.
• When an organization competes in an industry that is growing rapidly; this is a factor
because integrative-type strategies (forward, backward, and horizontal) reduce an
organization’s ability to diversify in a declining industry.
• When an organization has both capital and human resources to manage the new
business of supplying its own raw materials.