Terms Beginning With 'b'

Backward Integration

  • January 03, 2020
  • Team Kalkine

What is backward integration?

Backward integration is a form of vertical integration which involves companies acquiring or creating processes enabling the company to produce its own inputs. These processes are those which the company had previously assigned to other companies up the supply chain.

Complete vertical integration is achieved when a company is involved in all the stages of the production process. This can be achieved by the firm either by mergers and acquisitions with the companies in the supply chain, or by starting its own subsidiary to perform the tasks which had formerly been assigned to these companies.

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Backward integration is a form of vertical integration used to make the business more competitive.

What are some examples of vertical integration?

Vertical integration can be better understood with an example.

  • Consider an oil refining company like Marathon Petroleum Corporation that depends on another firm for providing it with crude oil. Marathon refinery purchases raw oil from other oil exploration companies and is only engaged in refining the oil and selling it. However, if Marathon were to acquire or merge with these oil exploration companies then it would be called a backward integration for Marathon.
  • Consider a restaurant engaged in the production of wheat and potato-based products. The firm usually acquires these products through long-term contracts with farmers or wholesale grocery suppliers. If the firm now decided to start its own plantation growing wheat and potatoes, then it would be a backward integration. Here the firm has chosen to create its own production process without having to merge with or acquire any other company. This gives the firm endless possibilities to change how these inputs are processed. For instance, the firm can choose to opt for organic farming, which it could then advertise to its customers.

How is backward integration different from forward integration?

A company’s supply chain refers to the different stages involved in achieving the final good. The processes lying upwards in the chain are the initial stages while the processes lying further down are the final stages including the sale of the product or service. 

Backward integration involves integrating those production processes into the company’s operation that lie on the upper side of the supply chain. Whereas forward integration involves the integration of those processes into the firm’s operation that lie on the lower end of the supply chain.

Forward integration involves companies acquiring or merging with those firms that are engaged in the distribution or in the retailing process of the product.

For example, consider a cheese processing company that sells its product to a retailer for resale. If the company decides to set up its own retail chain, or its own digital platform to sell its cheese then it would be forward integration. 

What are the advantages of backward integration?

  • Higher control: Integrating upper-level supply chain processes into a firm’s operation gives it higher level of control over how the final good turns out. This also allows companies to conduct their supply chain management more efficiently. Thus, there can be higher level of differentiation in the final goods as compared to other competitors. Additionally, the company would have a fixed supply of input when the subsidiary is engaged in raw material production.
  • Competitive Advantage and Barriers to Entry: Acquiring a company through backward integration can allow access to exclusivity of the supplier. Other companies may no longer approach the supplier once the firm acquires or merges with it. This adds a competitive advantage to the firm and creates barriers to entry for other companies.
  • Cost Cutting: When a raw material producer supplies it to companies lying lower on the supply chain, it would charge a mark-up over the actual cost of production to gain profits. However, if a firm were to become its own input supplier, then there would be no mark-up costs involved for it as it is producing for itself.

What are the challenges with backward integration?

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  • Lack of competitiveness: Removing competition by acquiring the supplier could sometimes have more adverse effects than benefits. Reduced competition could make a firm less competitive and hence less efficient. This could reduce the innovation in the firm and cause it to produce poorer quality products.
  • Financial requirement: To acquire with a full-fledged supplier, firms must have adequate capital. Thus, backward integration can be a huge investment for firms. Many companies may consider debt financing which could end up hurting their balance sheet.

What is Data Mining? Data mining is a process that facilitates the extraction of relevant information from a vast dataset. The process helps to discover a new, accurate and useful pattern in the data to derive helpful pattern in data and relevant information from the dataset for organization or individual who requires it. Key Features of data mining include: Based on the trend and behaviour analysis, data mining helps to predict pattern automatically. Predicts the possible outcome. Helps to create decision-oriented information. Focuses on large datasets and databases for analysis. Clustering based on findings and a visually documented group of facts that were earlier hidden. How does data mining work? The first step of the data mining process includes the collection of data and loading it into the data warehouse. In the next step, the data is stored and managed on cloud or in-house servers. Business analyst, data miners, IT professionals or the management team then extracts these data from the sources and accordingly access and determine the way they want to organize the data. The application software performs data sorting based on user’s result. In the last step, the user presents the data in the presentable format, which could be in the form of a graph or table.         Image Source: © Kalkine Group 2020 What is the process of data mining? Multiple processes are involved in the implementation of data mining before mining happens. These processes include: Business Research: Before we begin the process of data mining, we must have a complete understanding of the business problem, business objectives, the resources available plus the existing scenario to meet these requirements. Having a fair knowledge of these topics would help to create a detailed data mining plan that meets the goals set up by the business. Data Quality Checks: Once we have all the data collected, we must check the data so that there are no blockages in the data integration process. The quality assurance helps to detect any core irregularities in the data like missing data interpolation. Data Cleaning: A vital process, data cleaning costumes a considerable amount of time in the selection, formatting, and anonymization of data. Data Transformation: Once data cleaning completes, the next process involves data transformation. It comprises of five stages comprising, data smoothing, data summary, data generalization, data normalization and data attribute construction. Data Modelling: In this process, several mathematical models are implemented in the dataset. What are the techniques of data mining? Association: Association (or the relation technique) is the most used data mining technique. In this technique, the transaction and the relationship between the items are used to discover a pattern. Association is used for market basket analysis which is done to identify all those products which customer buy together. An example of this is a department store, where we find those goods close to each other, which the customers generally buy together, like bread, butter, jam, eggs. Clustering: Clustering technique involves the creation of a meaningful object with common characteristics. An example of this is the placement of books in the library in a way that a similar category of books is there on the same shelf. Classification: As the name suggests, the classification technique helps the user to classify and variable in the dataset into pre-defined groups and classes. It uses linear programming, statistics, decision tree and artificial neural networks. Through the classification technique, we can develop software that can be modelled so that data can be classified into different classes. Prediction: Prediction techniques help to identify the dependent and the independent variables. Based on the past sales data, a business can use this technique to identify how the business would do in the future. It can help the user to determine whether the business would make a profit or not. Sequential Pattern: In this technique, the transaction data is used and though this data, the user identifies similar trends, pattern, and events over a period. An example is the historical sales data which a department store pulls out to identify the items in the store which customer purchases together at different times of the year. Applications of data mining Data mining techniques find their applications across a broad range of industries. Some of the applications are listed below: Healthcare Education Customer Relationship Management Manufacturing Market Basket Analysis Finance and Banking Insurance Fraud Detection Monitoring Pattern Classification Data Mining Tools Data mining aims to find out the hidden, valid and all possible patterns in a large dataset. In this process, there are several tools available in the market that helps in data mining. Below is a list of ten of the most widely used data mining tools: SAS Data mining Teradata R-Programing Board Dundas Inetsoft H3O Qlik RapidMiner Oracle BI

What is Earnings Per Share? EPS is the per share profit by a business in a given period. While analysing a business financially, it serves as one of the basic tools. EPS is calculated by dividing profits by total shares outstanding for a given period. EPS is reported on the profit and loss statement of an enterprise and works as a denominator for beloved price-to-earnings ratio (P/E ratio), used not just by novice investors but also fund managers. A business is required to generate sustainable earnings in its life cycle, and earnings or profits are essentially among major intend of a promotor. To know more about P/E ratio read: Understanding Price-Earnings Ratio But reported earnings of a business will likely differ from actual cash earnings because devising profits mandate broader accounting standards and principles to provide a fair picture of an enterprise. EPS, therefore, becomes imperative for investors, market participants and other users of information. EPS estimates are circulated by sell-side analysts to market participants. Financial Modelling is applied to arrive at the EPS estimates of future financial years, semi-annual periods or quarterly, depending on the reporting adopted by the firm. Analyst estimates are then collected by market data providers like Reuters, Bloomberg, IRESS to provide a consensus view of analysts on the business and its financials, including revenue, operating expense, earnings before interest and tax, profit after tax, EPS. Market estimates enable participants to evaluate the expectations of sell-side analysts from a particular company, sector or even index. Analyst estimates also indicate the divergence between an individual’s expectations and collective expectations of analysts that are tracking the company. An individual can, therefore, determine whether the stock of the company is undervalued or overpriced by the market against hi one’s fair value estimates that are based on the expectations from the company. More on EPS read: What Do We Mean By Earnings Per Share (EPS)? How to calculate EPS? Although general formula considers total shares outstanding in the denominator, it is preferred to use weighted average shares outstanding over a period because companies issue new shares, buyback or cancel shares. Net Income is the profit reported by a business after incurring income tax. It is also called as Net Profit After Tax. Dividends on Preferred Shares are paid to preferential shareholders because they have first right over the income of a business, but preferred shares don’t have voting rights like common shareholders or ordinary shareholders. Weighted Average Shares Outstanding is calculated after incorporating changes in number of shares during a period, and using weighted average shares outstanding provides a fair financial position of a company. Basic V/S Diluted EPS Diluted EPS is calculated after adding the weighted average number of shares that would be issued after the conversion of dilutive shares to weighted average shares outstanding. Dilutions can include share rights, performance rights, convertible bonds etc. Whereas Basic EPS is calculated by taking weighted average shares outstanding that incorporate changes to number of shares outstanding such as buyback, new issues etc. What is Adjusted-EPS? In a financial period, firms may incur one-time expenses or transactions that are not usual in the normal course of business. The objective of adjusted EPS is to arrive at a fair picture of the business, especially for financial forecasting. Extraordinary items are excluding from EPS to arrive at adjusted EPS figure. These items can include gain on sale of assets, loss on sale of assets, merger costs, capital raising costs, integration expenses etc. What is Normalised EPS? Normalised EPS is calculated to arrive at an EPS figure, which embeds the fluctuations in income due to business cycles or industry cycles. It also includes adjustments made for calculation of adjusted EPS such as one-time gains or losses. Normalised EPS is a useful measure for companies that are sensitive to economic cycles or changes in the business environment. By smoothening out the fluctuations, it provides a fair picture of the business. If a company has reported high normalised earnings over periods, it is considered that the company is less sensitive to changes in business cycles because of its stable revenues and income during the periods. EPS and Price-to-earnings ratio Calculation of price-to-earnings ratio requires EPS as denominator and price of the stock as numerator. EPS therefore becomes a very important financial metric for investors. EPS and price data also allows participants to compare the historical trends of the P/E ratio with the current market scenario and P/E ratio of the stock. How can increase grow EPS? Businesses can increase EPS by focusing on increasing their revenue, by improving operational efficiencies either by deploying technology to reduce cost, or negotiate better prices with vendors, operate in tax efficient manner, etc. Businesses can also improve EPS by undertaking corporate action such as buying back of shares. Read: Pros and cons of buybacks – Story of 5 Popular Stocks including Aurizon Good read: Every Doubt You Have On Earnings Per Share- Explained Right Here!

Trading is an economic activity which involves buying and selling of goods and services in exchange for money. In the financial market, trading is the same concept; the only difference is it deals with securities, currency, commodity etc. What is the Significance of Paper Trading for Beginners? To trade successfully on a consistent basis is not everyone’s cup of tea. Often at times, new traders end up blowing up their entire capital quite early. This happens due to a lot of reasons which are difficult to rectify early on and at once. These hindrances could be lack of knowledge, lack of patience, no prior experience and inability to control the two primary emotions, fear and greed which eventually drive the market etc. To counter these issues gradually, paper trading is often recommended, especially at the very beginning stage. What Do We Mean by Paper Trading? Paper trading, as the name suggests, is a dummy form of trading in which the trades are not executed on an exchange but are written on a paper, which allows investors/traders to hone their trading skills without putting a penny at risk. These trading skills could include the timings of entries and exits, position-sizing, risk management strategies etc. There is no capital at risk as the trades are only written on paper. But the simulation of these trades is done in accordance with the actual price that is being quoted on the exchange. With all the hypothetical positions, portfolios and risk but with real price fluctuation, an aspiring trader can learn a lot of things which a mere theoretical book cannot teach. Like any other skill in life, one needs to practice trading in order to improve upon the skill. Paper-trading solves this purpose of practice without putting actual money at risk. What is the Purpose of Virtual Trading – Technology based paper trading? With the constant upgradation in technology, nowadays there is an improved version of paper trading called virtual trading. The underlying concept remains the same, to help new traders to practice and improve their trading skills in a simulated environment but with the integration of technology. In conventional paper trading, the trader continually needs to keep updating prices manually. This could be a tedious task if the frequency of trades is high, especially for intraday trading. Also, a manual log of all the trades needs to be created if the trader wants to look back at the past few trades for any analysis purposes. Another drawback shows up in the errors. While manually updating prices or another field like net P&L etc. there is a good chance of making a few errors which could lead to the false representation of the P&L. All these issues are being taken care by technology-based paper trading where all the data feeds are being updated automatically, and live prices are updated. Some of these virtual trading platforms are free while others with advanced features like graphical representation of data or calculation of some advanced metrics etc. can be paid once. What are the Advantages of Paper trading? A few of the advantages of paper trading for which it is considered to be one of the best ways to learn to trade in the beginning phase are; Testing of a strategy Before deploying a specific strategy, it is always advisable to first test it. Paper trading helps the trader to test his strategy within a simulated condition which is identical to the live market conditions. This helps to ensure whether the strategy would work or not in the live market. Also, if the strategy fails to work, then the loss will only be virtual as no real money is involved. No additional infrastructure required Virtual trading platforms are quite easily available nowadays. Even some brokers have started to offer this service to their clients. Most of the platforms are free and only requires a sign up to start doing paper trading. No legal documents are required to open a virtual trading account unlike a live trading account. No stress Stress is something which even the best of the traders goes through, especially during the period of losses. As with paper trading, no real money is involved; hence high stress is generally not there. Confidence Boost After a few months, once the trader gets the hang of his strategy, understands the shortcomings of his methodology and strengths and also gains relevant experience, he can confidently start to trade with the real money in the live market. What are the Disadvantages of Paper Trading? Despite being such a helpful and effective way to learn to trade, it has some drawbacks too, which must be taken into consideration while paper trading.   Ignores some associated cost While paper trading helps to keep track of P&L of individual positions but there are some exclusions from it like brokerage and slippages. Slippage is the difference between the bid and ask price which can reduce the P&L by a meaningful amount, especially when the market is illiquid. As different brokers charge different brokerages, it is not possible to incorporate it in a trading platform, although it can be written manually. Ignores emotions and psychology If topmost traders of the world were asked to define the single biggest factor which sets a successful trader apart from the crowd, psychology would be heard from most of them. Trading psychology alone can turn a good trading strategy or a specific analysis into a bad one, the sole cause of which is the involvement of money. Whenever money is at risk in any decision, most of the time, the emotions take over and hamper the ability to think clearly. These two emotions are Greed and Fear. As there is no money involved in paper trading, these emotions are generally muted and may go onto a completely different level while trading live with real money. This may create a humongous difference between the performance in both the scenarios. Is there any alternative to paper trading? To eliminate the drawbacks of paper trading, some traders start directly with the live trading with real money but with a very less quantity. The quantity is so small that the P&L fluctuation is almost meaningless. This is as good as paper trading but also eliminates the drawbacks of paper trading as trades are executed live on an exchange which accounts for brokerage and slippages and gives realistic P&L figures. Also, money is involved, which helps to practice emotional stability and psychological resilience.

What is Globalization? Globalization has long been supported in view of the economic, political and cultural benefits, supporting the exchange of ideas, talent, technology, culture, trade and investment. However, the trending phenomenon of Globalization is under the scanner, with increasing difficulties faced by policymakers in preventing the national economic crisis and economic depression from creating havoc across the globe. Be it 1930s Great Depression, 2008’s Global Financial Crisis or 2020’s Global Virus Crisis, Globalization has played a major role in the geographical spread of financial and economic turmoil. Globalization is defined as a phenomenon of the world becoming interconnected by the exchange of goods, services, people, trade, culture, money, ideas, technology and policies. It refers to the interdependence of human resources, corporates and governments across the world. Though it has been taking place for hundreds of years, the Globalization process has expedited over the last half-century, encompassing economic, cultural and political exchanges across the globe. How Do We Trace Back the Early Signs of Globalization? In the history books, the inter-state trade has its mention from the earliest civilizations dating back to roughly 1600s. Communities and states enlarged interdependence equations and trade, resulting in key exchange of social ideas and practices. Back in the third millennium BC, the economic trades happened between Sumer and Indus Valley Civilisation with the commercial urban centres opening between the Greek to Indians. This inter-state trade phenomenon was not only driven by Europe but also Old World centres - India, China, Japan.  Further, free-trade agreements, global political and economic discussions, and free-flow of money, people and technology promoted the evolution of Globalization in different themes. How Do We See Current Globalization Trends? Since the beginning of the 19th century, Globalization has accelerated with the breakthrough in transportation and communication technology. In the late 20th and early 21st century, Globalization has also increased for the sports and entertainment sector.  Besides, digital trade as a component of Globalization is gaining importance between the nations. Investment flows for accessing new markets in developing economies and associated investment, people and technology flows also shape the growing Globalization trends. Financial markets including commodity, debt, currency and stock markets are increasingly interconnected, with market players tapping buoyant investment opportunities across the world. On cultural exchanges, movement of students for academic purposes and learning is further supporting global interconnection trends. Although Globalization is probably serving as a bridge between countries to create more wealth, studies have shown it is not reducing the economic gap between the poorest countries and the richest. Conflicts between nations and irregular diplomacy have played a large part in the history of Globalization, and it continues to do so.   What are the Key Drivers of Globalization? Transportation: The speed, length and breadth of Globalization has increased for a number of reasons. Developments in Information Technology, transport and communication sectors have rapidly grown over the past 40 years. The internet has been transformative in closing the gap in communication with providing fast and 24/7 access world over. The containerization system where large quantity goods and commodities are shipped using intermodal containers has also enabled trade around the globe at extremely low cost.  Communications: The sharp rise in social and digital media has made the national boundaries absolutely irrelevant as any company can communicate and market its products and services in any part of the world directly connecting with its target audience. Easy access to virtual global market trade has grown substantially after the emergence of the internet. New electronic payment systems such as e-wallets, mobile banking, pre-pay have facilitated the increased global trade. For better or worse, globalised trade, supply chain, outsourcing have changed the way the world operates, and its impact on organizational operations and practices continues to grow.  Free trade: Following the collapse of communism ideology, the trade has become increasingly free with many former communist countries opening for Foreign Direct Investment (FDI) and global trade. The emergence of global players such as Google, Facebook, Apple, Microsoft, etc are by-products of Globalization. Is Globalization Changing the World for Better or Worse?   Globalization have several pros and cons attached to the international linkages between economies and markets. Current Globalization trends have largely integrated developing economies with less developed economies through Foreign Direct Investment (FDI); with the decrease in trade barriers like import quotas and tariffs as well as economic reforms like policies and regulations, and also at a large extent, immigration.  International standards have created efficiency in the trade for goods and services, and the International Organization sets these standards. Currently, the most significant free-trade area is the European Union. EU policies implement the free movement of resources (human, capital and ideas) within the European Union market. Access to broader markets means higher demand for products and services.  Though it can also lead to a lack of product diversity, like most of the world's computers, use Microsoft's Windows operating system, presenting barriers to small, local producers. Besides, global players are exerting downward pressure on wages below fair market equilibrium level.  How is Globalization Influencing Culture and Political behaviors?  At present, most of the cultures have been defused because of the internet, popular culture media and travel. As people are more exposed to other cultures, transition of ideas, values, meanings take place, which is also extended into fashion, food, languages and even religion. While Globalization’s impact on art and culture is clearly visible, but it also creates uncertainty in ideologies and disorientation in identities. Critics of Globalization argue that global connectivity poses thread to prevalent indigenous cultures.  Globalization has also interlinked state governments, intergovernmental organisations, social organisations etc. This integration between national and international levels of authority have pushed the emergent global political economy. Some countries also allow its citizens to take citizenship of other countries. Another essential aspect of Globalization is the movement of people, not only limited to immigrants but also encompassing movement for travel and business. Foreign students' revenue across different courses and learning programs add to country’s economic growth, both financially and culturally. But overdependent on these interlinkages in terms of trade, money and culture can be harmful as the system may collapse when there is a sudden downturn in the world. Novel coronavirus (COVID-19) pandemic completely halted peoples’ movement, which impacted tourism, education, hospitality industries severely. 

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