Companies come in all different shapes and sizes. In theory, you can become a company by running a business all by yourself from your own home. Equally, there are companies in the world employing millions of people in all different countries. There are, of course, lots of companies in between those two extremes. You won't realise it yet, but we've just started thinking about how those companies are integrated, and integration comes in two parts. Today, we'll deal with the first: vertical integration. Vertical integration asks 'who is making our product?' and 'do they work at our company or do we have to ask for outside help?'
In media (as, in fact, in many industries) there are five steps to follow when making a product:
Development
Ideas for the product are generated. Usually, the aim will be to gather together lots of ideas rather than just one, gradually filtering out the ideas that don't work and taking the best bits of the ideas that do. If making a film or TV show, this is where we'd look at story treatments, perhaps an initial script (either for the first act or a pilot episode). For a videogame, we might talk about the basic plot, gameplay mechanics and features. For an advert, we'll think about who we want to reach and what we want our message to be.
Pre-production
Production
Post-production
Distribution
These steps involve a lot of people, all of who expect to be paid for their time and effort. That time and effort is usually even more expensive if that person doesn't normally work for you.
For example, you might be two friends who want to make their own videogame (you'd be surprised how many videogame companies started that way!) The development goes well as you both come up with lots of ideas. Then you realise that neither of you is very good at making music, writing code or directing the art, so you have to hire people to look after those aspects of your game. You also realise you don't have the best equipment for production but don't have the money you need quite yet, so have to hire it from another company.
When it comes to post-production, you're in luck: lots of people online want to playtest your game and are happy to do it for free to get the chance to play it early. Once it's time to get your product out in the world, you realise you have no prior relationship with Steam, Microsoft, Sony or any of the big game retailers. Another company says they'll take care of distribution for you - for a cost. They organise getting your discs made and introduce you to the companies to get the game put on their digital marketplaces. Though your first game ends up being a smash hit, lots of your profit is eaten up by paying all those other companies to help you on the way. You had weak vertical integration because at the start you were really only good at one thing: development. You had to keep asking for outside help or outsourcing.
When you make your next game, the first thing you do is ask the artist, sound designer and coder from your first game if they'll work for you full time. Now you pay them a salary spread out over the year rather than the more expensive one-off fees they were charging - and now they have a more reliable income as well. Not only that, but they can't do freelance work for your rivals any more! You buy better equipment for the office. It was expensive at first, but now it's yours and is going to last a long time. You won't have to keep paying the fees to hire it, which would have cost more in the long run. As you bring more and more of the production in-house in this way, you are showing strong vertical integration. It gives you more control over the production and you're able to see how it's going far more easily. It also means things are usually quicker, more efficient and less expensive. It also means you are keeping more of the profits within your company, rather than having to give them to other companies to help you make your product.
Can a company 'disintegrate?' Absolutely. You might be reading this and thinking that all a company has to do to be successful is integrate vertically as fast and as strongly as possible. Not so. A company can expand too quickly or it can discover that other companies can do steps of the production process better and more efficiently. Companies can especially discover through trying too early that they're too small to do a step of the process themselves. For example, I might start baking cakes and trying to personally deliver them on foot. I've integrated my production and distribution. Except there's a problem: I can only carry one cake at a time. I could be a lot more efficient, but don't have the capability by myself. So I 'disintegrate' and ask a local company to do my deliveries instead. Not only does this save me lots of time, but their delivery van can pick all of my cakes up in one trip! Relying on outside groups isn't always a weakness, especially if they can do a much better job. One of my favourite videogame companies did this. After a run of badly-reviewed Star Wars games, LucasArts handed the production over to companies who were experts in their genres but kept charge of the development and distribution. It meant that the next run of games were much higher quality.
So being vertically integrated isn't an automatic recipe for success. It all depends on who you are and what you are making - on that note, we'll look at horizontal integration next time!