Background integration is a type of vertical integration in which a business falling later in a supply chain integrates with a business falling earlier in a supply chain. It is when a distributor purchases a manufacturer or a manufacturer purchases a supplier.
Businesses engage in backward integration either to remove inefficiencies and increase profitability or to secure supply of a critical input and thus create competitive advantage.
For example, if Apple integrates with Intel, it will be a backward integration. Apple is a manufacturer of computers and falls at a later stage in the supply chain while Intel is a supplier of processors and falls earlier in the supply chain. From the definition we follow that acquisition of a supplier by a manufacturer is backward integration.
Written by Obaidullah Jan, ACA, CFA