Vertical integration is an operational strategy where a firm consolidates all aspects of its production it a single place. As companies grow, they reach a point where they can afford to produce raw materials and services that they used to outsource from other companies to cut costs. Henry Ford implemented the same strategy in the company`s early years. In the 1930s, instead of buying steel from other companies, Ford began operations to produce its own steel to be used in the manufacturing of its vehicles (Perry 183). Additionally, the company also began supplying itself with wood since, at the time, some parts of cars were made of wood.
The main objective that the company hoped to achieve by implementing vertical integration was the reduction of the cost of production. The company had many facets of production, which meant that it had to solicit the services of many other companies to take care of some of them at a fee. As a result, Ford spent financial resources paying for the services hence the increased cost of production. Vertical integration relieved the company from such cost, reduced the cost of production, and ultimately enable lower prices for its vehicles hence gaining competitive advantage (Monteverde and Teece 206).
However, the strategy had within it significant risk, namely, the possible disruption of distribution channels. By taking over the transportation activities, the company risked inconveniencing itself because all the companies it had contracted to handle transportation have established distribution strategies that were critical to Ford`s ability to supply its customers with their orders in time.
Lastly, vertical integration provided Ford with the ability not to lower its prices but also to diversify its products if it chose to. However, the company opted to remain focused on the production cars in its early days to perfect the product. In doing so, Ford built a reputation or quality cars which it used to sell its other products later when it began diversifying its product offering. The strategy worked, as evidenced by Ford’s long-term thriving in the automotive industry.