Particular Strategic Issues in Backward Integration

As with forward integration, there are some particular issues that must be examined in considering backward integration.

Proprietary Knowledge. By producing its needs internally, the firm can avoid sharing proprietary data with its suppliers, who need it to manufacture component parts or raw materials. Often the exact specifications for component parts reveal the key characteristics of the final product‘s design or manufacture to the supplier, or the component parts themselves are what is proprietary about the final product. If the firm cannot produce the component internally in such a situation, its suppliers will have considerable bargaining power and will pose a threat of entry. For a long time Polaroid has produced internally many of the proprietary components of its prod-ucts, contracting out the rest, for just this reason.

Differentiation. Backward integration can allow the firm to enhance differentiation, though the circumstances are somewhat dif-ferent than those of forward integration. By gaining control over the production of key inputs, the firm actually may be able to differen-tiate its product better or say credibly that it can. For example, if in-tegration allows the firm to receive inputs with particular specifica-tions, it may improve its final product or at least distinguish it from competitors. Even if Perdue chickens are indistinguishable from others, the fact that Frank Perdue raises them allows him to claim that they are treated specially. If he bought average chickens on the open market and merely processed them, the claim that Perdue chickens are different would be harder to make.

Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.

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