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What is forward integration?

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Quick Answer

Forward integration is a form of vertical integration in which a company takes control of business activities once performed by its distribution or retail customers. A manufacturer selling goods directly to consumers as opposed to selling through wholesalers or retailers is a primary example of forward integration.

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Farmers or producers selling products in a marketplace rather than through a traditional distribution channel is another example of forward integration. A primary advantage of forward integration is increased power and authority in the marketplace. The company that integrates has more direct interaction with its end customers than a producer that sells to a reseller.

Another major benefit of forward integration is reduced costs and increased profit potential. Each company in a distribution channel marks up the cost of goods before reselling them. By eliminating steps, a producer is able to sell to end customers at a possible savings while also potentially increasing the profit margin on each sale.

A primary drawback of forward integration is that producers or distributors may spread themselves too thin by taking on new business activities. Manufacturers, wholesalers and retailers each perform distinct roles within the distribution channel. A producer may also face high upfront investment costs to start or acquire new facilities for distribution or resale functions.

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