What it is:
Backward integration refers to a company buying or internally producing parts of its supply chain.
How it works/Example:
For example, let's assume that Company XYZ manufactures widgets. It needs 10 pounds of punched plastic to manufacture one widget. In order to control the quality of the punched plastic and "cut out the middle man," Company XYZ buys Plastic Company ABC. This backward integration allows Company XYZ to acquire punched plastic much more cheaply, and it also prevents other companies from buying punched plastic from Plastic Company ABC, thereby hindering competition.
Why it matters:
Backward integration is a popular competitive strategy. By controlling more of its supply chain, a company can not only lower costs and ensure access to key materials, but it can also indirectly manipulate competitors by affecting their access to raw materials as well. In some cases, several companies might band together to purchase and control a supplier.