Examples of forward vertical integration
Moving from an assembler to developing and selling finished products
One example of forward vertical integration is moving from manufacturing or assembly a component on behalf of a downstream company. HTC for example started out as a contract assembler, before moving into the design and development of their own phones.
Selling goods directly to customers
Another example of forward vertical integration is moving into selling your goods directly to customers. Rather than relying on a dedicated retailer to make sales, you could for example establish your own online sales site, or potentially even dedicated physical stores.
Reasons for forward vertical integration
Reason 1: Greater control over the downstream activities
One reason for forward integrating is that it allows greater control over the downstream activities. For example, if a company is manufacturing consumer products, forward integration into direct-to-consumer sales allows greater control over the sale process than may be possible than selling via retailers.
Reason 2: Capturing greater value
Another reason for considering forward vertical integration is to move into a more profitable part of the overall supply chain. You may for example be in an industry where the downstream supplier is able to push prices down on the items that you supply – moving into their area may allow you to capture this greater proportion of the overall value created.
Reason 3: Risk reduction
A final reason why forward integration may make sense is if it reduces your overall risk – potentially because the downstream area counter-balances profits. For example, in the oil and gas industry, profitability in gas stations tends to be high when the oil price is low – a time when the upstream oil extraction industry tends to perform poorly. Being in both areas reduces these risks.
Final thoughts: Do you have resources and capabilities to expand
When considering forward integration, it is important to consider if you have the resources and capabilities to be able to successfully forward integrate (or able to develop or acquire those resources). The resources required to compete in a new area are likely to be different, and it is important to be aware of these differences and how you will develop the ability to enter the new area.
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