Question

Ford Motor Company used to own businesses that provided automobile parts to Ford s assembly lines. But the company no longer owns these parts supply businesses. What advantages and disadvantages did Ford have as a result of owning these businesses?

Answer 1

The type of example given is a vertical integration.

Definition:

When two organization which are at different level of productions merge then it is called vertical integration

In the example ford motors owned two different business:

1. Supply of parts required for assembly lines

2. Assembly lines where ford cars were made

Now the first business can provide various advantages and disadvantages for ford which are given as follows:

Advantages:

a. The cost to produce is reduced because supply parts become cheap.

b. Due to a reduction in costs, more cost control is there, which helps to manage costs of raw material properly

c. There is a guarantee of quality of parts supplied

d. It provides a more competitive advantage as vertical integration leads to less reliance on external companies

Disadvantages:

a. Upstream business is reliant more on downstream and if a downstream market is not good then upstream also suffers

b. The transaction from upstream to downstream is often not to the mark which eventually leads to the loss for either of the divisions

c. It can also make things more difficult because managing two business is often complex