Readers of the blog know that, from time to time, I've discussed the costs and benefits of vertical integration. In many cases, vertical integration can be problematic. It can increase fixed costs, reduce flexibility in the supply chain, dull incentives, create dysfunctional political bargaining, etc. However, vertical integration does make sense in some cases (see Apple owning retail stores).
Can vertical integration make coordination more effective and actually increase speed? At times, it can. Witness Zara's fast fashion strategy, enabled by vertical integration. This week, I ran across another company that achieves speed through vertical integration. In the American Way magazine on my flight yesterday, I read about Big Monster Toys. The company invents toys, which are sold by major toy companies such as Hasbro and Mattel. They created "Polly Pockets" and "Uno Attack!". They also created Hot Wheels' Criss Cross Crash. How do they achieve remarkable success in the toy design business? Here's an excerpt from the article:
The train’s-eye view provides the best vantage point of the work floor and the key to BMT’s success: vertical integration. Every function required to make and promote a prototype is performed in-house, from plastic molding to painting, sound engineering to sewing, computer-aided design to animation. “We control everything,” Rosenwinkel says. “We don’t go outside to hire anyone; we don’t have to get on waiting lists to get work done. We are very nimble. We can immediately say, ‘We like this idea. Let’s pull a team together and work on this.’ ”
Many design forms operate this way. They have all the tools and functions required to build prototypes in house. That enables them to prototype rapidly, and to smoothly coordinate the activity of designers and builders. Moving all those functions in-house means that they can adjust and adapt rapidly.