The Value of Vertical Integration

It is firstly worth clarifying what we mean by vertical integration. A vertically integrated company is one that takes responsibility for all aspects of its delivery from sales, through design and manufacturing to all other aspects of the company’s processes. Rather than relying on others for marketing, manufacturing, sales or other important parts of the company’s processes, they are instead all done in house.

Why? Well read on and we’ll hopefully explain some of the benefits…

It was not that long ago that vertical integration was considered the norm. In the nineteenth and early twentieth century companies would frequently take responsibility for all aspects of the products or services they offered, whether it be designing, manufacturing, selling and supporting. However, in the second half (and especially the final quarter) of the 20th century things began to change with more and more firms choosing to specialise in one particular part of a supply chain and supply to very large companies who would do the final assembly.

Companies in this industry frequently use external subcontractors for programming and manufacturing and essentially run as design shops. In other instances, they may have manufacturing capacity but subcontract hardware design or firmware development to external subcontractors.

The logic of this model is that companies are able to specialise in one aspect of the process and provide greater expertise and economies of scale in this area. To a large extent this is certainly true and can work very well for certain supply chains. However, many companies feel that, taken to the extreme, this model becomes less efficient, causing delays, additional expense and crucially, reducing the amount of internal development that a company can go through. On top of this, projects often require significantly more management and project management in order to ensure that they are able to meet the deadlines required.

Hence, the return of the ‘all in one’ company or what is now apparently more widely known as a vertically integrated company – one that takes responsibility for all aspects of its provision from specifying, designing, programming, manufacturing and sales, all the way through to after sales support. Some, admittedly higher profile, exponents of this view include Tesla, Zoho and Samuel Smiths brewery (brewery that runs its own chain of pubs that sell only its products).


The beauty of this model is that, done right, it enables companies to have complete control over the entire process and to understand the needs and requirements of all stakeholders throughout the process. A company that essentially subcontracted sales via distributors or agents will not have as close a working relationship with them and hence will lose valuable insights into their needs. Of course, distributors can have these discussions and report back, but they frequently have little incentive to do so and hence, often don’t.

The relationship between design and manufacturing is another important one. Where this is subcontracted there is little incentive for the contract manufacturer to support measures to reduce costs or to increase robustness as longer processes mean higher fees and bad design can often mean likely higher volumes. This is not always the case, but it often is. However, with an integrated design and manufacturing team it is possible to have internal discussions, to work together to develop new processes and techniques and to develop new ideas from first principles. Experiments and tests can be run to determine exactly what is possible with a range of equipment and boards can be designed around existing manufacturing capability to ensure faster, more reliable manufacturing processes.

One of the major benefits of vertical integration is the development of internal knowledge. There are many people throughout engineering disciplines who have strong views on how things could be done, often based on their previous experience in a particular role. This is especially true in contracting, where financial performance is often based heavily on speed and there are no rewards for innovation or new ideas.

Whilst this is hugely beneficial in certain circumstances, it can also stifle innovation and creativity by reducing the potential for new ideas and new techniques. With a vertically integrated model, staff are freed up to work together from first principles to develop new approaches and run tests to develop new methods through which certain problems can be solved.

Mistakes are solved much faster because all staff have an inherent interest in resolving issues quickly and clearly. Where subcontractors may delay or be slow to get in touch if there are particular issues, a vertically integrated company will tend to identify issues faster and, with the right quality management and reporting system in place, they will address these issues far quicker, creating improved internal knowledge and incorporating the lessons learned into future developments.

By having an open door between sales and design, design and manufacturing, manufacturing and operations and after sales support and the customer it is possible to understand all aspects of the process in granular detail. In combination with an integrated quality management process based on accurate reporting, regular meetings and an open and inclusive internal culture, we believe that this presents a clear benefit to the business and is a strategic model that will allow the company to develop increasingly deeper understanding of how to deliver value for money to customers.

There is also a great joy in having complete oversight of the process from start to finish, in seeing a controller go from concept, through testing and programming, to being a mass produced part in an important product. Knowing exactly how something has been designed, tested, programmed and manufactured gives us incredible confidence in its ability to do what is required of it by our customers.

So in short, increased speed of delivery, improved internal knowledge, a strong awareness of customer and the wider market’s requirements and improved value for money for customers. What’s not to like?