James Allworth places some of the blame for Boeing's 787 Dreamliner problems on Boeing's decision to modularize its production and design so early on.

In the creation of any truly new product or product category, it is almost invariably a big advantage to start out as integrated as possible. Why? Well, put simply, the more elements of the design that are under your control, the more effectively you're able to radically change the design of a product — you give your engineers more degrees of freedom. Similarly, being integrated means you don't have to understand what all the interdependencies are going to be between the components in a product that you haven't created yet (which, obviously, is pretty hard to do). And, as a result of that, you don't need to ask suppliers to contract over interconnects that haven't been created yet, either. Instead, you can put employees together of different disciplines and tell them to solve the problems together. Many of the problems they will encounter would not have been possible to anticipate; but that's ok, because they're not under contract to build a component — they've been employed to solve a problem. Their primary focus is on what the optimal solution is, and if that means changing multiple elements of the design, then they're not fighting a whole set of organizational incentives that discourage them from doing it.

Conversely, if you're trying to modularize something — particularly if you're trying to do it across organizational boundaries — you want to be absolutely sure that you know how all the pieces optimally work together, so everyone can just focus on their piece of the puzzle. If you've done it too soon and tried to modularize parts of an unsolved puzzle across suppliers, then each time one of those unanticipated problems or interdependencies arises, you have to cross corporate boundaries to make the necessary changes — changes which could dramatically impact the P&L of a supplier. Lawyers will probably need to get involved. So too might the other suppliers, who could quite possibly be required to change the design of their component, also (chances are, you've already contracted with them, too). The whole thing snowballs.

I just returned from Asymconf, and one of the things Horace Dediu likes to say is that vertical integration is the optimal strategy up until a product is good enough. Once it's good enough, then it's more ideal to modularize, or to start outsourcing more pieces of production.

Apple would seem to be taking the reverse approach with production of the iPhone. Earlier models were assembled from parts from a variety of suppliers, but for competitive reasons, especially vis a vis Samsung, Apple has started to bring more of the parts production in-house. Allworth believes the difference is that Apple "has mastered the art of managing design as an integrated process, while still utilizing outsourcing." It's also a strategy deeply ingrained in Apple's DNA.

One other company comes to mind, one that also takes a consistent vertical integration approach to their production in an industry in which the dominant model is more one of breaking production up. It is related to Apple and also located in the Bay Area. Any guesses?

Yep: Pixar.