Ford Automobile Vertical Analysis - Essay Example

? Ford Automobile Vertical Analysis Introduction Many people attribute the concept of vertical integration to a 19th century steeltycoon Andrew Carnegie. Subsequently, many organizations have adopted the concept with a view of improving efficiency and financial growth in their business operations. Vertical integration consists of the confinement of many value addition steps of a product or service to the same entity or company. The main purpose is to ensure that an organization maintains competitive advantage and subsequent increases its market base. Generally, it is the level at which an organization controls the main suppliers and buyers, and aims at improving marketplace supremacy (Katie, 2013). In the early 20th century, Ford Corporation built a manufacturing empire unlike any other before or after based on vertical integration. Ford had chosen to produce the components and materials for its famous Model T passenger car instead of sourcing them from independent contractors or suppliers. The company also bought glass and steel mills to produce steels and window screens for its cars. In addition, Ford acquired huge tracts of land in Asia and Brazil to grow rubber trees to meet its requirements for tyre materials. These efforts culminated in the construction of the massive Rogue plant that ensured full control of all the resources that were necessary in the production of the automobiles. The first model T cars retailed at $850 but the price fell to $440 and eventually to $290 in 1925. The approach had been able to provide better quality cars at much lower prices and thus progressively increase the company’s market share. (Lu, 2011). On the other hand, General Motors, Ford’s main business rival, adopted the multi-divisional approach later on and integrated the various independent firms that were held under the umbrella firm. This ensured that the overall financial and directional decisions were made at the corporate headquarters and the operating decisisons were left to the various divisions. The large scale vertical integration was meant to achieve various objectives. Scholars believe that this was aimed at increasing control, capturing profitability from upstream suppliers, and exerting marketing dominance. This strategy was suitable with the prevailing market environment, which seemed to have enduring demand and low prices determined the market leader. However, despite the soaring sales figures, the approach also had some weaknesses. These included rigidity in asset deployment, modification of product lines and responses to demand changes (Harrigan, 2003). Analysis The Ford Motor Corporation held the dominant position in the automobile industry during the 1910s and 1920s. It held the largest market share and even briefly went over the 50 percent mark. It also reported the highest profits due to its better manufacturing innovation and a reputable brand name. in addition, its main competitors had less superior production technologies and felt the immense pressure from Ford’s market dominance and the low prices. Henry Ford was highly motivated by the vision of producing good and low-priced motor cars for the entire public and the development of technology used to mass-manufacture the cars. His ability to provide substantially lower prices than his closest competitors gave his company the flexibility to pursue these objectives. For instance, Ford’s Model T car was retailing at US$440 while the closest competitor was a Willys-Overland vehicle that was sold for US$ 895 (Rosenbaum, 1998). The company had started with the construction of its Highland Park plant in the 1910s, which consisted of a huge capital investment. The multi-storey building became the largest in Michigan state. Its large and open floors provided room for machinery arrangement, and the huge windows provided ventilation and natural lighting. This made the plant a good model for design of factories. In addition, it combined a foundry, a machine shop and a power plant, which brought various stages of automobile manufacturing together. Besides the rubber plantations in oversea countries, the company held coal mines, iron-ore mines, a railroad and several ships. These efforts made sure that the manufacturing line did not lack necessary raw materials. This also brought about the introduction of single-purpose machinery that combined different stages of the manufacturing process (Gaspar, et al., 2006). This integration necessitated the incorporation of conveyors, elevators, trolleys and rollways to facilitate movement of the car parts to the various worker stations. In addition, Ford invested in the company’s human capital through education, training and health in order to improve their productivity. This was aligned to Ford’s belief that it was important for the workers, especially the immigrants, to learn English in order to improve knolwledge on safety concerns and work requirements. Therefore, the Ford Motor Corporation started a school where workers were taught English, safety procedures and job requirements. After the introduction of these measures, there was immediate positive impact in production numbers. For instance, these numbers doubled between 1910 and 1912 in the company’s Highland Park factory. From a total production of 19,000 units in 1910, it leaped to 34,500 units in 1911 and 78,440 units in 1912 (Hyde, 2005). However, the vertical integration approach that saw the construction of a new company, purchase of new machinery and new production methods there were still some challenges. For instance, some workers were not pleased with the monotony and danger of their work. Therefore, their morale was often quite low and many did not report to work regularly, and others quit to look for work elsewhere. These problems introduced difficulties in the smooth running of the manufacturing process. Furthermore, new workers were costly to train and required a break-in period that lowered overall productivity. Some of these workers did not stay at the company for long. Ford came up with an incentifying solution that helped maintain a productive and stable workforce. The company introduced a US$5 per workday pay-rate that was about twice as much what the competitors offered. This was complemented a reduced workday that lasted eight hours instead of the common nine hours (Megginson & Smart, 2008). This announcement resulted in a renewed interest by workers in the firm. Thousands of potential workers flocked flocked the company’s employment office from all over the world. It also led to a considerable reduction in employee turnover. Ford could also run three work shifts in a day due to the reduced work-hours. All these efforts increased the company’s productivity. Ford was motivated by the ability to mass-produce an inexpensive car, and its sales would surge if its employees were able to buy them. The introdution of the US$5-a-day pay-rate was instrumental in improving the conditions of America’s working population and led to the emergence of the middle class (Ford, 2013). The new pay-rate sent tremors throughout the industry. A majority of people, especially Ford’s shareholders, thought this was outrageous and even predicted that the firm would have gradually halted into bankruptcy. However, Henry Ford believed it was important to retain a skilled and satisfied workforce because it would help the company to lower production costs. By investing in new equipment, Ford was aiming at improving productivity. This was achieved in 1914, because 13,000 Ford workers produced 260,720 units while the rest of the industry required a combined force of 66,350 employees to produce 286,770 units. In addition, Ford Motor Corporation’s was able to double its annual profits from a figure of US$30 million in 1914 to US$60 million in 1916. Ford had also considerably improved its car production rate. For instance, when it was starting the production of its Model T, it required about twelve hours to complete one unit. After the rolling out of the Highland Park factory in 1914, it was able to complete one unit at a record-breaking rate of 93 minutes. By 1920, this rate had been reduced to a minute for every unit and eventually this speed picked up to allow the completion of a unit in 24 seconds. The production pushed sales such that, at one point, half of the automobiles on the roads were Fords (Econedlink, n.d.). Conclusion Henry Ford faced a difficult time in the early 1900s, due to shortage of raw materials as well as the inability of the small supply network to meet the industry’s demands. His company had tried holding large stocks of inventory, but this made the costs to skyrocket. Ultimately, total ownership and control of the supply chain was the only alternative. Therefore, Ford Automobiles owned glassworks, blast furnaces, sawmills, freighters, railroads, rubber plantations, timberlands, iron-ore mines and coal mines. The company’s vertical integration was very successful. However, over time the vertical integration model typified complacency, inhibition of competition and top heaviness, which pushed it out of fashion. Currently, companies have complex and international supply chains. However, the recent global recession has exposed their vulnerability to economic slumps (Economist, 2009). References Econedlink. (n.d.). Henry Ford and the model T: A case study in productivity. Retrieved from http://www.econedlink.org/lessons/index.php?lid=676&type=student Economist, T. (2009, Mar 27). Moving on up: Is the recession heralding a return to Henry Ford's model? Retrieved from http://www.economist.com/node/13173671 Ford. (2013). Henry Ford's $5-a-day Revolution. Retrieved from http://corporate.ford.com/news-center/press-releases-detail/677-5-dollar-a-day Gaspar, J. E., Bierman, L., Kolari, J. W., Hise, R. T., Smith, L. M., & Arreola-Risa, A. (2006). Introduction to business. Boston, MA: Houghton Mifflin Co. Harrigan, Kathryn Rudie;. (2003). Vertical integration, outsorcing and corporate strategy. Washington, DC: Beard Books. Hyde, C. K. (2005). The Dodge Brothers: The men, the motor cars and the legacy. Detroit, Michigan: Wayne State University Press. Katie, J. (2013). A report on horizontal and vertical business integration. Munich: GRIN Publishing, GmbH. Lu, D. (2011). Fundamentals of supply chain management. Ventus Publishing ApS. Megginson, W. L., & Smart, S. B. (2008). Introduction to corporate finance. Cengage Learning. Rosenbaum, D. (1998). Market Dominance:How firms gain, hold, or lose it and the impact on economic performance. Post Road West, Westport, CT: Praeger. Read More