There are various facets of any venture. As my business gains traction, like many entrepreneurs, I find myself at a crossroads questioning if vertical integration is the logical next step for my company.
Vertical integration is the M.B.A term for venturing into another area of your business process. Business school CliffsNotes version, vertical integrations has two categories: forward and backward integration.Forward integration is taking on a downstream activity. Say a product entrepreneur begins assembly and distribution. With backward integration, a product entrepreneur would do an upstream activity like intermediate assembly and manufacturing.
Vertical integration can be a huge play strategically, because it has the potential to significantly increase your profit margins and strengthen your businesses position.
My startup, Trendy Treat, serves as a retailer to fashion designers and also has its own clothing line, Mogul In The Making. I’ve had my eye on backward integration. The Mogul In The Making clothing line, has grown at a rate that surpasses the retail aspect of Trendy Treat’s business. If I manufacture my own apparel, I would have higher margins and more expeditious delivery--win-win all around.
So Why Haven’t I Already Gone for It?
The challenge? It’s easier said than done. I tried my hand at vertical integration before. It was a very short lived two-and-a-half week journey. I found myself sprinting back to my existing manufacturer faster than an Olympic gold medalist, with a huge backlog of orders.
Ethical manufacturing is a key component of Trendy Treat’s values. Mogul In The Making is manufactured by a network of seamstresses and small manufacturers. My conundrum arose in scale. As a new brand, I was in a peculiar place: My boutique orders were too big for sole proprietor seamstresses. Sewing multiple pieces of items in various sizes didn’t have any of them lining up around the block.
On the flip side, I was too small for the manufacturers to be a priority; the moment a corporate client placed an order, I was tossed to the side. It felt like a manufacturing version of Goldilocks, in a seemingly endless struggle to find the option that was just right.
My adventures in vertical integration fell apart with staffing. Manufacturing is an industry that I know nothing about. I quickly realized the vulnerability of being the employer who had knowledge gaps on the technicalities of employee requirements. The time it would take me to become competent--not to mention the competitive nature of manufacturing--was a seemingly gigantic opportunity cost. As most founders can attest, time is one of the most precious commodities in a startup. There just never seems to be enough of it.
The Opportunity Cost of Vertical Integration
It became an issue of efficiency. Do I spend the time to become efficient at apparel manufacturing? Or do I go back to outsourcing to a manufacturer with a more efficient process? There were downsides to both.
One of the biggest drawbacks with vertical integration is that tackling an area outside your expertise is often fraught with challenges. If your startup is considering entering another aspect of the business, be pragmatic and consider what the realities of executing will look like before making the leap.
In less than three weeks, I decided to pull the plug. Conceptually it was sheer genius. In reality, it was premature. Trendy Treat just wasn’t quite there yet at the time.
As a sole founder, the opportunity cost of my time was just too great at the time. As the business has continued to grow and the time has become more opportune, I’ve started to put plans in place to take a second bite at the apple.
The long-term benefits and potential increases in profit margins have definitely made vertical integration worth a second look. Vertical integration may propel your startup to the next level. But as with all things, the timing and ability to execute are crucial in deciding when and if it’s the right time to take that step.