Jay-Z: Vertical Integration Master or Egomaniac?

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On his latest album, Intimate Moments, comedian Aziz Ansari recounts an outrageous fish-out-of-water story about a night he spent in an L.A. club with Kanye West and Jay-Z. At one point in the night, Jay-Z ordered a bottle of vodka made by his own company.

“He signed the tab and money went back into his own pocket,” Ansari joked.

All joking aside, Ansari’s tale is good for more than just a laugh. Jay-Z has leveraged his hip-hop career to become one of the most successful entrepreneurs in America. In addition to a successful music career which has seen him sell 50 million albums worldwide, he owns the clothing company Rocawear, Roc-A-Fella Records, the 40/40 Club and the NBA’s Brooklyn Nets basketball team.

His recent acquisition of the former New Jersey Nets sets up an interesting (and totally hypothetical, implausible) opportunity for the mogul to operate the first vertically integrated basketball team in NBA history.

Before we examine the finer points of this farcical situation, it’s probably best to be clear about the meaning of vertical integration strategy.

Vertical integration refers to a situation in which every element of a supply chain has a common owner. The most commonly referenced vertically integrated companies are Standard Oil and Carnegie Steel. The latter company owned the mills where the steel was made, the mines from which the iron ore was taken, the coal mines that provided coal and the ships and trains that transported the steel.

More recently, American Apparel has made itself an example of a balanced vertically integrated company, meaning that it owns the production and distribution of its clothes.

Jay-Z first act as owner of the Brooklyn Nets was to unveil the teams’ new design. He, of course, created the design, which is based on the old Brooklyn subway signs that once hung in New York. The will eventually need uniforms, which is where Rocawear enters the picture. The company’s revenue in Q1 2012 was about $88.5 million, so they can probably afford to throw a few uniforms to the players. Through the partnership of Jay-Z’s design skill and Rocawear’s clothing, the team has all of its merchandise handled easily.

For refreshments at the Nets games, fans can sip on Z’s Armadale Vodka and snack on food from the kitchen of the nearby 40/40 Club, of which Jay-Z is a part owner. Halftime shows would be a cinch, as Z could simply pull an artist from the Roc-A-Fella Records Roster.

Jay-Z might not be interested in vertical integration, but your company could benefit from integrating some or all of your supply chain. First, the ownership of some or all of the means of production ensures quality and consistency in the finished product. Vertically integrated companies are also able to iron out at least some of the wrinkles in their supply chain, ensuring a more efficient operation, and you don’t have to be a business mogul married to Beyonce to know that a more efficient supply chain is a great thing.