What is direct integration?
Prospective integration is a business strategy that involves a form of vertical integration by which business activities are extended to include control of the distribution or direct supply of a company’s products. This type of vertical integration is led by a company moving along the supply chain.
A good example of advanced integration would be a farmer who sells his crops directly at a local grocery store rather than a distribution center that controls the placement of food in various supermarkets. Or, a clothing brand that opens its own stores, selling its creations directly to customers instead of or in addition to selling them in department stores.
How Forward Integration Works
Often referred to as “eliminating intermediaries”, advanced integration is an operational strategy implemented by a company that wishes to increase control over its suppliers, manufacturers or distributors, so that it can increase its market power. For advanced integration to be successful, a business must take ownership of other companies that were once customers. This strategy differs from the upstream integration in which a company tries to take over companies that were once its suppliers.
A company implements advanced integration strategies when it wishes to achieve economies of scale and increase its market share in the industry.
The rise of the Internet has made integration both easier and more popular in terms of business strategy. A manufacturer, for example, has the ability to set up an online store and use digital marketing to sell their products. Previously, it had to use retail and marketing companies to effectively sell the products.
The goal of forward integration is for a business to advance through the supply chain, thereby increasing its overall ownership of the industry. Standard industries are made up of five stages in the supply chain: raw materials, intermediate goods, manufacturing, marketing and sales, and after-sales service. If a company wants to do advanced integration, it has to move up the chain while retaining control of its current operations – its place of origin in the chain, so to speak.
Key points to remember
- Prospective integration is a business strategy that involves expanding a company’s activities to include the direct distribution of its products.
- Forward integration is commonly referred to as “middleman removal”.
- Although advanced integration can be a way to increase a company’s control over its products and profits, there may be a risk of diluting basic skills and activities.
Special considerations for direct integration
Businesses need to be aware of the costs and scope associated with long-term integration. They should only engage in this type of strategy if there are cost advantages and if integration does not dilute their current core skills. Sometimes it is more efficient for a business to build on the established expertise and economies of scale of other suppliers, rather than to develop on its own.
Example of direct integration
For example, Intel supplies Dell with intermediate products – its processors – that are placed in Dell hardware. If Intel wanted to move forward in the supply chain, it could merge or acquire Dell to own the manufacturing part of the industry.
In addition, if Dell wanted to engage in advanced integration, it could seek to take control of a marketing agency that the company previously used to market its final product. However, Dell cannot seek to take control of Intel if it wishes to integrate in the future. Only an upstream integration makes it possible to go up the supply chain from its housing.