Question

How did Ford implement vertical integration?

What benefits were they looking for?

What were the risks involved in the vertical integration?

Why didn't Ford in the early days set out to diversify their product offerings?

Answer 1

How did Ford implement vertical integration?

Vertical integration is the process where companies and organisations attempt to integrate all the facets of an operation in one area or spot. When manufacturers grow, they are able to take over the production of basic goods and services and some raw material that they use to manufacture their finished goods.

- Ford did exactly that. Henry Ford in the 1930s introduced vertical integration in his manufacturing plant. They did this by producing his own steel that was predominantly used in car production. Steel smelting was done in the same place where fabrication and vehicle assembly was done.

-Ford also supplied his own wood products since automobiles back in the day also used wood products. He also owned barges, ships that he used to transport his own materials and products. Mr Henry Ford integrated every stage of production and sales into his operation

What benefits were they looking for?

-Ford was looking to produce the cheapest car possible. Remember the idea of Ford breaking into automobile business was to develop a vehicle that would be affordable to the common citizen. Vertical Integration alongside line assembly were the strategies to achieve this. The company was able to roll out Model T Ford that went for as low as $200 and no competitor could come close.

-They were also aiming at cutting transportation costs for raw materials such as steel that were produced within the vicinity of vehicle assembly.

- Ford also saved on delays and beurocracies since he was able to do his own delivery for other raw materials such as wood.

- They aimed at Saving on energy and mark-ups that would be paid to delivery agents as well.

What were the risks involved in the vertical integration?

-The biggest risk was venturing into a new business that requires expertise and skill on its own. Ford motor company made vehicles and sold them. Venturing into steel smelting and transportation business was a great risk since this was not a forte for the company. They risked failing in these areas and making huge loses.

-The company also risked complacency. With vertical integration laxity and complacency comes in. People within the steel smelting for example did not put much attention to the quality of steel they produced since they felt the steel they produced was guaranteed to be used in the car manufacturing section.

-Other risks involved the massive internal and external changes that they had to make. Operations were to change with introduction of vertical integration and any major change is always a gamble.

Why didn't Ford in the early days set out to diversify their product offerings?

The company was starting up and did not want to risk trying diversification. Diversification is a huge leap and very prone to uncertainty. The risks and the rewards are extraordinary. Ford did not have a well experienced and senior management staff that would be able to handle the risks of diversification and see it through.

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