The Notion of Backward Integration - Literature review Example

The paper "The Notion of Backward Integration " is an outstanding example of a management literature review. The notion of backward integration is true of paramount importance to any business that seeks to secure its source of supplies. In a competitive market, Linnemer (2003) argues that businesses tend to incorporate some of their existing suppliers into their respective chains in order to cut down on possible raw materials inefficiencies and oversharing. Numerous researches indicate that backward integration might help promote the profitability aspect. Prior research on the automotive industry sector postulates that the ability of a business to have access to competitively-priced stock is important for manufacturers in order to maintain profits within the numerous regions of operations despite possible raw materials price fluctuations. Following this line of argument, Knox (2014) provides that backward integration will then be necessary to secure lots of business opportunities; like for instance, making stringent efforts to search for low-cost feedstock options in order to ensure that they operate within a sustainable production cost framework.

In a research conducted to test the monopsony-inefficiency incentive for aspects related to backward integration, Azzam (1996) notes that at a certain phase in a given vertically-related market avails a possibility of backward integration into the immediate competitive stages. The research stipulates that by way of engaging in backward integration, a monopsonist likely seeks to internalize the overall monopsony inefficiency largely due to underemployment of the definite factors that are generated from an upstream position of a business (Azzam, 1996). The idea of backward partial integration has been used extensively in companies across the globe to formulate and sustain an equilibrium situation for vertically integrated, profit-maximizing monopsonistic entities that engage in the processing of enormous raw materials into a single competitively distributed final end-user product or service. At the equilibrium position, Davis & Duhaime (1992) provides that the entity is able to connect the overall marketing margin, which occurs from the difference between an underlying output price and the raw material process, to the entire marginal processing cost in addition to the monopsony markdown Davis & Duhaime (1992).