What is Forward Integration?

Modern supply chains consist of many moving parts, and a lot of businesses–understandably–choose to outsource certain tasks in order to save time. However, strategies like forward integration offer a host of unique benefits and, for some, can be a more attractive option than outsourcing. So, what is forward integration, and what can it do for organizations? 

Integrating forward means that businesses expand their activities to include direct control over their distributors. It’s a type of vertical integration that allows companies to get closer to the end customer by acquiring or establishing other businesses to handle distribution, retail, or sales.  

The ultimate goals of forward integration are to increase market control and boost profit margins by eliminating intermediaries. When managed correctly, this also improves the customer experience, as customers are able to interact more directly with businesses. What is the Difference Between Forward and Backward Integration? 

Many people confuse backward integration with forward integration or think that they’re the same thing, but they’re actually two distinct types of vertical integration. With forward integration, companies move downstream in the supply chain, gaining control over distribution or sales. For instance, a manufacturer might open its own ecommerce platform to sell products directly to consumers. 

Backward integration is about moving upstream in the supply chain. It usually involves acquiring or merging with suppliers. Some businesses may even choose to create their own facilities to produce essential inputs. Backward integration allows companies to improve supply chain efficiency and oversee quality control. 

What is an Example of Forward Integration? 

One of the most well-known examples of forward integration is Apple’s expansion into retail. By opening its own stores worldwide, Apple bypassed third-party retailers and was able to sell its products straight to consumers.  

In doing so, the company could more easily control the customer experience, tailoring everything from customer service to store ambience to their liking. They aligned these elements with their brand image and became a globally recognized business. 

As of 2021, Apple operated 271 stores in the United States and several more around the world, each generating an average of $45 million annually.  

The Benefits of Integrating Forward 

Forward integration offers businesses the chance to explore untapped potential while taking greater control of their supply chain operations. Here’s a look at some of the key benefits of integrating forward. 

Better Supply Chain Control 

First and foremost, forward integration allows companies to manage their own supply chains by moving downstream and acquiring or merging with intermediaries. It’s never a good idea to become overly dependent on third-party suppliers, as you’re constantly at the mercy of fluctuating chain conditions, quality issues, and unexpected costs.  

By controlling your own distribution channel, you can get your products in the hands of customers more efficiently. While it does require more effort on your part, the peace of mind that comes with knowing you’re in control of the process is invaluable. 

Higher Profit Margins  

One of the downsides of outsourcing is that you have to share profits with intermediaries. However, by implementing forward integration, you can retain a larger portion of revenue. This increase in profit can be especially substantial in sectors where distributors and retailers apply huge markups. 

Improved Customer Relationships 

Good customer relationships are the cornerstone of any successful business. When customers receive valuable service, there is an 82% chance that they will return to your company when presented with alternatives. 

Forward integration helps foster customer loyalty by providing businesses with valuable market insights that can, in turn, be used to discover customer preferences and buying behaviors. This direct interaction allows organizations to gather real-time feedback, which can be used to improve products and services and tailor marketing strategies. 

More Barriers to Entry for the Competition 

While forward integration won’t exactly give you a market monopoly, it can create significant barriers to entry for potential customers. By establishing control over distribution channels and building strong customer relationships, you can make it harder for new entrants to gain a foothold in the market. 

The Downsides of Forward Integration 

Before getting started with forward integration, it’s important to be aware of the potential drawbacks. Though this process offers countless benefits to organizations, there are a few things to consider before diving in. 

Operational Complexity 

There’s no way around it: integrating forward can and will complicate your existing operations. Less outsourcing means more work on your plate, and managing more of the supply chain requires additional expertise and resources. This can strain your company if not handled appropriately. 

High Initial Costs 

What is forward integration without the extra costs? Acquiring or developing distribution channels, retail outlets, or other downstream operations requires significant capital. These costs can be a financial burden, particularly for smaller companies. What’s more, the integration process itself can lead to unexpected costs like legal fees and investments in new tech. 

Limited Flexibility 

Investing in forward integration means you may have to make sacrifices elsewhere. For example, when integrating forward, many businesses find that they lack capital that could otherwise be used for innovation. This reduced flexibility in strategic initiatives can make it more difficult for your company to pivot or adapt to changing market conditions. 

Outdated Software and Technological Challenges 

Forward integration can pose some tech challenges, especially for businesses working with outdated software systems. Many companies that integrate forward inherit legacy systems that are simply not designed to handle the increased scope and complexity of integrated operations. 

To manage these issues, businesses should consider migrating to the cloud. Cloud migration can improve scalability, offer real-time data access, and foster improved collaboration. This is key to remaining agile and efficient when integrating forward.  

What is Forward Integration? We Can Show You––and Help You Ace the Process 

Forward integration can open numerous doors for your company, but getting there requires some effort. If you’re struggling to align your systems with what’s needed to integrate forward, consider partnering with Cloudficient. We help companies like yours understand what forward integration is, and then migrate to the cloud successfully so that you can get started with the process. Contact us today to see what we can do for your organization.  

With unmatched next generation migration technology, Cloudficient is revolutionizing the way businesses retire legacy systems and transform their organization into the cloud. Our business constantly remains focused on client needs and creating product offerings that match them. We provide affordable services that are scalable, fast and seamless.  

If you would like to learn more about how to bring Cloudficiency to your migration project, visit our website, or contact us.