A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it will result in improved efficiency and cost savings. For example, backward integration might cut transportation costs, improve profit margins and make the firm more competitive. There are other means to these ends: for example, derivatives can hedge changes in the price of supplies, while working closely with suppliers can deliver the other gains. “Seeking ownership or increased control of a firm’s suppliers”. EXAMPLES:
Starbucks is best known as a chain of coffee shops. As such, it has various suppliers and inputs -- it buys coffee beans to make coffee as well as customized mugs and products to sell in its stores. It backward vertically integrated when it bought a coffee farm in China, because normally it would have to buy coffee beans from a coffee bean supplier. Backward Vertical Integration as Strategy for Starbucks
Starbucks chose to buy a coffee farm in China, an area that showed tremendous growth in the number of coffee drinkers. At the same time, there was increased competition among companies selling coffee, such as McDonald's and other chains such as Costa Coffee. Adding so many new coffee drinkers to the market creates competition for high-quality beans, with every coffee shop needing to buy them. Competition for high-quality beans means that some competitors will not receive them at all and that those who do will pay a high price driven up by competition. By backward vertically integrating by buying a coffee farm, Starbucks ensures that it will have a bean supply and that it will receive it at a reasonable price. ADVANTAGES:
* Starbucks aims to work ethically with all of its suppliers. * Due to they do every process by their own so profits don't have to be share with any other partner. * They have core competence in Coffee industry so it tough for other rival to compete with. * They can cut off some unnecessary working process and ordering good make Starbuck easier to proceed. * They have a course in training their staff to be qualified in making good coffee. * It easy for them to reserve their product quality and also easy to learn and keep in touch with customer need in order to improve and satisfy them. * From all of these make customer trust and loyal in their brand. DISADVANTAGES:
* In doing every process by their own make them lose economy of scale. The price of product will be higher than rivals. * When the company is run out of raw materials, this will effect to the customer because the finished product form the process is not enough to satisfy the customer need. They should have deal with the other raw material source to solve this breaking out.
McDonald’s is the world largest chain of fast food restaurants with more than 30000 local restaurant serving 52 million customers in more than 100 countries each day. McDonald’s primarily sells hamburgers, cheeseburgers, chicken products, french-fries, breakfast items, soft drinks, milkshakes and desserts. More recently, it has begun to offer salads, wraps and fruit. Each McDonald’s restaurant is operated by franchise, an affiliate, or the corporation itself. The corporation revenues come from the rent, royalties and fees paid by the franchisees, as well as sales in company-operated restaurants. McDonald’s revenues grew 27% over the three years ending in 2007 to $22.8 billion, and 9% growth in operating income to $ 3.9 billion.
McDonalds has practiced a backward vertical integration. It includes: * Local sourcing of ingredients
* Cold chain
* Suppliers, McDonald’s purchases raw vegetables and other raw materials from its fixed, pre- defined suppliers only, therefore by increasing capital and labor, their production will increase proportionately. ADVANTAGES:
* From a supplier’s point of view, more lines meant a reduction in capacity...