Vertical Integration
Vertical integration is a business practice that involves gaining complete control over a product's production, from raw materials to final assembly.
In the age of mass production, this caused shipping and trade problems in that shipping systems were unable to transport huge volumes of finished automobiles (in Henry Ford's case) without causing damage, and also government policies imposed trade barriers on finished units.
Ford built the Ford River Rouge Complex with the idea of making the company's own iron and steel in the same factory as parts and car assembly took place. River Rouge also generated its own electricity.
Upstream vertical integration, such as to raw materials, is away from leading technology toward mature, low return industries. Most companies chose to focus on their core business rather than vertical integration. This included buying parts from outside suppliers, who could often produce them as cheaply or cheaper.
Standard Oil, the major oil company in the 19th century, was vertically integrated partly because there was no demand for unrefined crude oil, but kerosene and some other products were in great demand. The other reason was that Standard Oil monopolized the oil industry. The major oil companies were, and many still are, vertically integrated, from production to refining and with their own retail stations, although some sold off their retail operations. Some oil companies also have chemical divisions.
Lumber and paper companies at one time owned most of their timber lands and sold some finished products such as corrugated boxes. The tendency has been to divest of timber lands to raise cash and to avoid property taxes.
Today the trend is toward platform companies, where the value added is in market analysis, engineering and product design. The platform company contracts production to outside suppliers, often in low wage countries.
Read more about this topic: Mass Production
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