How can Buyers use Backward Integration? What are some of the Examples of how Backward Integration is used by Buyers?
Backward integration is a very important aspect of contemporary organisations. The technique is also known as upstream integration. It is a situation where consumers of a given raw material acquire its supplier. For example, a business organisation dealing with the manufacture and supply of sugar products may opt to acquire the company supplying them with sugar.
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The scenario is just one example of backward integration. Another form of upstream integration involves the setting up of a subsidiary whose end products form part of the inputs for the production processes carried out by the mother company. The technique is closely related to the organisation’s supply chain management.
To this end, backward integration incorporates supply chain management into the business processes of the organisation. One way through which the incorporation is effected is by the acquisition of suppliers or vendors working with the organisation.
The buyers or consumers can engage themselves in the growing of the raw materials, manufacturing, and transportation of the same. In addition, the consumers of the raw materials can engage in the marketing of these inputs, as well as owning the retail outlets dealing with the raw materials.
From this observation, it is obvious that backward integration is intended to help the buyer establish a secure source of supplies and raw materials. After securing the supply chain, the buyer is able to focus on other emerging issues and problems that need to be solved.
The company will experience smooth business transactions from the supplies department. Moreover, the company will enjoy economies of scale by initiating purchase from the base, extracting its raw materials, or planting them. The organisation will enhance its efficiency, especially with regards to the ability of the employees to manage the supplies.
Backward integration is regarded as a strategic move by the management aimed at securing the organisation’s source of supply. One of the major advantages of this form of vertical integration is that it helps the company in creating a stable supply of inputs, in addition to ensuring that the company uses the right quality of inputs.
As a result of this, the company can assure its clients and potential customers of high quality products. Such an assurance is critical in securing the loyalty of clients in a competitive market.
By using this strategy, the company can put itself in a better position to compete with other firms operating in the same business line. Competitive positioning is achieved given that the company is able to synchronise the demand for raw materials with the demand for the outputs.
Thus, shortages as far as inputs and outputs are concerned are avoided. Demand fluctuations are tackled by forecasting market trends, where the company accumulates enough stock for production processes.
Future uncertainties with regard to the fate of the firm and the reliability of suppliers are reduced. The uncertainties are reduced through improved investment plans, both on the side of the subsidiary and on the side of the mother company.
Improved investment enhances the positive growth of the enterprise. The ability to control the entire production chain helps the organisation in reducing threats posed by powerful suppliers. Consequently, the company will effectively advance forward by focusing on cost effective measures.
Examples of Backward Integration
There are various practical examples of backward integration among contemporary organisations. The most famous backward integration in the world today is seen in Ford Rouge Centre, where Ford Motor Company is housed. The centre covers approximately 2.4 km2 of floor space. Among others, the centre houses a complete manufacturing plant. In addition, the centre has its own docks and a dredge located in Rouge River.
Furthermore, the centre has an interior railroad track extending 100 miles. It has a power plant and an iron ore processing plant, which is capable of turning raw materials into vehicles within the same complex. It also houses six Ford factories and a steel mill. Various models of Ford vehicles are manufactured in this centre, including, among others, The Ford Mustang and Ford Thunderbird.
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The centre has managed to place Ford Motors in a favourable competitive position in light of the rivalry existing between players in the motor industry. In addition, the use of backward integration has helped the giant automobile maker to reduce the transaction costs associated with placing order for ores.
Other costs that have been reduced, thanks to the model, are those associated with every order made for raw materials. In addition, the company has reduced the amount of taxes levied on such transactions.
The results are amazing considering that Ford has maintained the quality of the cars distributed in the market. Competition is effectively addressed by reducing the operation costs. Research and development is an integral part of the company’s processes, considering that Ford has extra resources to cater for this department.
Community Social Responsibility: What is the Way Forward?
The company is very active as far as corporate social responsibility (herein referred to as CSR) is concerned. As a result of its exemplary performance in this sector, the company has avoided shutting down its local factory and moving its production overseas, where labour costs are significantly lower compared to labour costs in the local market.
The reason why the company has abandoned the idea of relocating is given the fact that it recognises the harm such a move will have on the employees and the community at large. However, the CSR efforts have negatively affected the profitability of the company.
As if this is not enough, a corporate ‘raider’ is poised to take over the company. In the past, the ‘raider’ had slashed payrolls and halted all CSR activities in the companies it has acquired. Such efforts, which are aimed at improving its profitability, have harmed most of the stakeholders. What should this company do to avoid this?
The Way Forward
The company has built its reputation and its brand name from the various community projects it has initiated. The projects include, among others, providing such social amenity facilities as playgrounds, providing educational services, and promoting health awareness campaigns in the community. All these activities call for the utilisation of the company’s resources.
The resources used in implementing these projects include financial resources, human resource, and the company’s time. The desire of the company in carrying out these projects was to spur the growth of the brand name.
Such projects are associated with various disadvantages. One such disadvantage is the significant reduction in the company’s profitability. Moreover, the labour costs accrued by the company have risen significantly. The rise is brought about by fears of workers’ strikes and other forms of industrial actions taken against the company by the workers and other stakeholders.
The management has felt the need to diversify the skills of the employees to help them manage such projects. As a result, there is high level of management incompetence in the company. The current situation has attracted the attention of corporate ‘raiders’ intent on taking over the organisation. The takeover idea is fiercely disputed by the company’s shareholders.
To address the problem, analysts have recommended the company to make various changes in its operations. The aim is to avert acquisition since the company that has shown interest has vowed to slash employees’ salaries and discontinue all the CSR projects. The changes were recommended in a meeting held with key stakeholders and community representatives.
The aim of the meeting was to come up with strategies to revive the company and pull it out of the current situation. The key stakeholders include, among others, company employees, suppliers, potential investors, shareholders, suppliers, and the government.
All these stakeholders will be affected in one way or the other if the company is taken over. Some of the recommendations made are analysed in the section below. The recommendations signify the way forward as far as the company and the CSR initiatives are concerned.
First and foremost, it is recommended that the CSR department be trimmed down. The trimming down will affect the employees working in the department and the budget allocated to it. Some of the staff in the department will be shifted to other departments and assigned new duties there.
The CSR department will continue to manage some of the ongoing projects. Some of the projects initiated are expensive and capital intensive. It is recommended that such projects be paused until the company regains from the current financial turmoil.
Secondly, employees’ salaries need to be reduced to a manageable level. As a trade-off, the employees will be converted to shareholders. Such a scheme is expected to motivate employees, encouraging them to work harder to increase their wealth in the company. The payroll structure will also affect employees at the top management levels.
The company will carry out a restructuring program to ensure that the operations of the company are aligned to its goals. It is important to note that in this restructuring program, no employee will be fired. On the contrary, all employees will be accommodated in the new structure. The restructuring program will be as per the recommendations of a market research to be carried out.
In addition to this, the company will acquire credits from selected suppliers for a specified period. In case the company encounters future financial shortfalls, the government has pledged to step in as the guarantor to help the company secure additional finance. A number of commercial banks will be approached for this purpose.
The strategies outlined above will help the company to recover its competitive stature. After implementing the proposed changes, the CSR department will be streamlined to ensure that its activities do not interfere with the company’s main goals. The department will have its own budget, which will not exceed an eighth of the full year’s profits.
In addition, the department will be managed independently, where the administrators will report directly to the company’s managing director. Some of the projects that were suspended will be completed. Furthermore, future projects will be approved by delegates during the Annual General Meeting.