Wall Street Prep

Forward Integration

Guide to Understanding Forward Integration

Learn Online Now

Forward Integration

Forward Integration – Vertical Integration Strategy in Business

Forward integration represents strategic acquisitions completed in order to gain more control over the later stages of the value chain.

Forward integration, a form of vertical integration, is when a strategic acquirer moves downstream, which means that the company becomes closer to interacting directly with its end customers.

Common examples of business functions considered to be “downstream” are distribution, technical support, sales, and marketing.

  • Distribution
  • Retailers
  • Product Sales and Marketing (S&M)
  • Customer Support

Most companies must initially partner with other third parties to outsource the delivery of certain services for the sake of time, convenience, and cost savings.

But once a company has reached a certain size and determines there to be enough opportunities to derive more value in downstream activities, forward integration can be the right course of action to pursue.

In effect, the company either acquires the third parties that performed the actions that they intend to take over, or the company can decide to build the operations in-house using their own funds to essentially compete with those third parties (and those external business relationships are phased out).

Forward Integration vs. Backward Integration

The other type of vertical integration, the opposite of forward integration, is termed “backward integration.”

In contrast to forward integration, backward integration – as implied by the name – is when an acquirer moves upstream to gain control of functions further away from the end customer.

  • Forward Integration → The acquirer moves downstream, so the purchased companies enable the company to move closer to the end customer and manage those relationships more directly.
  • Backward Integration → The acquirer moves upstream, so the company in such a case is purchasing its suppliers or manufacturers of products (e.g. outsourced manufacturers).

In forward integration, the company can directly serve its end markets and establish a closer connection with its customers via active engagement.

But in backward integration, the company’s responsibilities are shifting more to serve their end markets indirectly by focusing on controlling the product, which generally tends to consist of more technical functions such as product development and manufacturing.

Forward Integration Example

Manufacturer After-Sale Support Services

Suppose a manufacturer that formerly outsourced the distribution of its products to third parties decides to acquire the distributor.

Since the manufacturer is now directly in control over the distribution of the products they create, the acquisition would be considered an example of forward integration.

The downstream movement can frequently offer more opportunities related to after-sale service support, upselling, cross-selling, and more, so manufacturers are nowadays attempting to “remove the middleman” and increase their recurring revenue through forward integration.

By virtue of becoming closer to the customer, forward integration presents more opportunities to build direct relationships with customers and offer other services, such as repairs and product support.

Formerly, the manufacturer’s priority was on the initial sale, i.e. one-time purchases by customers, meaning that their role in the value chain was to ensure product quality, maximize operating efficiency, and meet output requirements.

Similarly, acquiring or perhaps developing in-house the ability to perform the tasks done by wholesalers and retailers would also be examples of forward integration.

Step-by-Step Online Course

Everything You Need To Master Financial Modeling

Enroll in The Premium Package: Learn Financial Statement Modeling, DCF, M&A, LBO and Comps. The same training program used at top investment banks.

Enroll Today
Inline Feedbacks
View all comments

The Wall Street Prep Quicklesson Series

7 Free Financial Modeling Lessons

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.