I think it's selling Vito short to assume he didn't foresee a potential conflict between the Family business and his aspirations for Michael.

He gives us clues to his thinking in his comments to both Sollozzo and the Commission about how the traditional Mafia businesses are perceived ("harmless vice" "something most people want") vs. the way drugs are perceived. In fact, I believe his desire for a legitimate future for Michael was one of his main reasons in resisting the drug business.

Vito felt "Senator Corleone. Governor Corleone" was possible for Michael as long as the Family's criminal enterprises staying within the boundaries Vito had set.

I'm not sure I agree with him, but I believe that was his plan.