FORD MOTOR COMPANY CASE STUDY

FORD MOTOR COMPANY: THE WAY FORWARD

Strategic Management and Leadership
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As in real life, anomalies may be found in this Case Study. Please simply state your
assumptions where necessary when answering questions. Candidates are tested on
their overall understanding of the Case and its key issues, not on minor details.

This case study will be released one month prior to the exam date.

FORD MOTOR COMPANY: THE WAY FORWARD

Towards the end of January, 2006, the Ford Motor Company confirmed plans to cut
between 25,000 and 30,000 jobs in North America. The company announced that it
would close 14 factories by 2012 to cut losses in North America, which reached $1.6bn
(£900m) in 2005. The cuts represented about 25% of staff in the region and were further
bad news for the American auto industry, which had been hit hard by foreign
competition. The Ford restructuring, named “Way Forward”, was the second large-scale
retrenchment since 2002, when 35,000 jobs were cut.

On 24 January 2006, Ford shares rose almost 9% to $8.58 in early trading on Wall Street.
As well as Ford itself, the company’s brands include North America’s Lincoln and
Mercury, British marques Jaguar and Aston Martin, Sweden’s Volvo, plus Land Rover,
bought from BMW in 2000, and Japan’s Mazda (of which it has virtual control with a
33% stake).

Essence of Ford’s Vision, Mission and Values

Ford’s vision was to become the world’s leading consumer company for automotive
products and services. In mission terms, it regarded itself as a “global family with a proud
heritage passionately committed to providing personal mobility for people around the
world” (Company Report, 2004).

The company’s values are expressed through anticipating consumer needs and delivering
outstanding products and services that improve people’s lives, driven by a customer
focus, creativity, resourcefulness, and entrepreneurial spirit. Other values comprise:
respect and value of everyone’s contribution; health and safety of employees; leadership
in environmental responsibility; positive contribution to society; superior returns to
shareholders.

Background to the Restructuring

The North American operation had been struggling against fierce competition from Asian
manufacturers, high labour and raw material costs, and consumers’ shift from high-
margin sport-utility vehicles (SUVs) as oil prices soared.

Ford’s rival, General Motors (GM), indicated in 2005 that it would cut 30,000 jobs from
its North American workforce. Waves of job cuts had devastated cities built on industry.
As a result, Detroit – Ford and GM’s home town – was regarded as the poorest big US
city.
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Bill Ford Jr, the Chief Executive, said: “These cuts are a painful last resort. In the long
run, we will create far more stable and secure jobs. We all have to change and we all have
to sacrifice.

But I believe this is the path to winning.” Ford’s global auto business lost $1bn in 2005,
the massive losses in North America outweighing gains in Europe, Asia and elsewhere.
Ford Europe and the Premier Automotive Group (PAG), which includes Jaguar, Volvo
and Land Rover, reported a combined profit of $36m in 2005, after making a loss of
$626m in 2004. “Excluding North America, our automotive operations made great
progress in 2005,” Bill Ford said (David Teather, The Guardian, 23 January 2006).

In 2005, Ford made $2bn total profit, down from $3.5bn in the previous year. Like GM,
Ford made most of its profit from its finance arm, which lends money to car buyers.
Ford’s market share in the US, its biggest market, fell for the 10th straight year in 2005 to
17.4%. The group had an 18.3% share in 2004 compared to a 24% share in 1990. US
motor vehicle sales (millions) for the period 1998 to 2004 were as follows:



Ford’s Globalisation Plan 2000 (Ford 2000)

In April 1994, Englishman Alex Trotman, the first non-American to make it to the top in
Ford, announced that the company was to become a single global entity. He stated that “if
we are going to go from second to first place, which I truly believe we can do, it will be
because of this plan ...this is designed to ensure our success in the next 20 years”
(The Times,24 April 1994).

As a first step, Ford planned to merge its North American and European vehicle
businesses into a single grouping, namely Ford Automotive Operations (FAO).



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This was designed to unify product development, manufacturing, marketing and sales
operations, each under a single executive with the aim of eliminating costly duplication
of design, engineering and development of similar cars, engines and components in
America and Europe. The plan involved the formation of five “vehicle programme
centres” to control product development. One centre, located in Europe, would cover the
Fiesta, Escort and Mondeo classes (small and medium-sized cars) and the other four
would be located in America
(see Appendix 3).

Ford’s European operations had incurred losses of $291 million in 1996, despite
increased sales in most European markets, where Ford was the best-selling single brand.
The company’s chairman, Alex Trotman, pointed to the intensely competitive European
market and the shift to cars at the lower end of the market. Company total profits rose to
$4.4 billion from $4.1 billion in 1995, in a year that included the launch of a number of
new vehicle models, among which was the successful Jaguar XK8.

There were two sets of targets in Ford 2000. The first was financial, while other targets
concerned communication and creativity. Whereas previously strict and precise financial
controls were in place, most managers had the sums they could spend on their own
authority increased fivefold. Decisions that used to mean committees deliberating for
weeks could be taken by individuals. Most importantly, the company was encouraging
designers, engineers and production people to work in teams on new product
development.

The aim was to avoid one group designing parts that could not be manufactured or
marketed by another group.

On the financial side, the company estimated that globalisation would produce savings of
around $3 billion a year. These savings would come from lower product engineering and
development costs, from the more rapid spread of best practice and from pruning the
company’s suppliers. The company hoped that, eventually, 250 firms would account for
80% of its purchases world-wide.

By mid 1998 Ford had made substantial progress on restructuring, redesigning and/or
reducing costs in certain processes, reflected in improved profitability (see Table 1). All
of the new processes that the company had adopted were seen to be driven by two critical
elements – lowering costs and creating greater value. These were aimed at making Ford
the best automotive company in the world, as defined by its employees, customers, and
shareholders. In respect of the latter, Ford paid particular attention to dividend yield and
the price of Ford shares.

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In April 1999, Ford unveiled a £1 billion agreed bid for UK-based Kwik-Fit, Europe’s
top car-repair chain. The announcement followed the company’s entry into insurance,
retailing and body shops, in addition to launching a bid for the Royal Automobile Club
(RAC) roadside recovery business. In October 1998, Ford went into insurance by forming
a joint venture with Norwich Union and it was hoped that the venture, FordInsure, would
insure 25% of the 5 million Ford vehicles on Britain’s roads by 2002. In November of
that year, Ford joined the Keswick family’s Jardine Motors Group in a joint-venture
retailing business.

These activities came close on the heels of completing a $6.45 billion acquisition of
Volvo’s car business. Jac Nasser, who succeeded Sir Alex Trotman as chief executive of
Ford at the start of 1999, was the architect of Ford’s expansion into services. He
considered that Ford could not produce the best value cars if it was not prepared to get
more involved in servicing and repairing them after their warranties expired. Ford was
conscious of what it considered to be the tremendous amount of downstream revenue and
profit opportunity that it was missing. Also, this type of business required substantially
less capital commitment than, say, building a new assembly plant. The object was to
capture more of the value chain for the whole life of the vehicle.

Ford’s main existing non-manufacturing businesses were F-Credit, traditionally the
lender of last resort to car buyers during a recession, and Hertz, its quoted rental-
company offshoot.

After taking over, Mr Nasser hired outsiders for top posts in design, manufacturing,
engineering and marketing – passing over many long serving managers. He also tied
executive compensation to share performance for the first time since Ford went public in
the 1950s. One new manager was Michael Lombardi, the former head of British
Petroleum service stations. He was charged with Ford Quality Care, a programme
designed to improve and standardise dealer repairs in America. Another new appointment
was Wolfgang Reitzle, who joined Ford after leaving German-based BMW, following a
boardroom power struggle.

Reitzle headed up Ford’s new Premier Automotive Group, which brought together the
company’s four luxury brands (Jaguar, Aston Martin, Volvo and Lincoln) into a single
organisation.


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The Picture in 2000

In 2000, Ford’s total company sales revenue established a company record of $170
billion, a 6% increase over 1999. Worldwide vehicle unit sales were up 3% from 1999
and topped 7 million units for the second time in company history, setting a new sales
record. During the year the company purchased the Land Rover business from the BMW
Group and AB Volvo’s worldwide passenger car business (Volvo Car).

In 2000, approximately 17.8 million new cars and trucks were sold in Ford’s nineteen
primary European markets, down from 18.2 million units in 1999. The company was
ranked second in the US market with a combined car and truck market share of 23.7%,
down slightly from 1999. It was also ranked fifth in the European market with a
combined car and truck market share of 10%, down slightly from 1999.

The resulting net income/(loss) from continuing operations ($millions) was as follows:



Automotive Sector “Unusual items” accounted for more than $2 billion in costs over the
period 1998–2000. These included: structuring costs in Europe; inventory-related profit
reduction for Volvo and Land Rover; write-down of assets associated with joint venture;
write-offs in Kia Motors Company; employee separation costs, lump-sum payments and
contracts; transfer of transmission plant. The yearly costs are broken down as follows:


In spite of these costs, Ford achieved an additional $500 million in total cost reductions
in worldwide Automotive operations for the Year 2000, making a total reduction of $3.7
billion in the 3-year period. Ford’s financial targets for 2001 were as follows:



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Total Company
– Total Shareholder Returns: Top quartile of US index S&P 500 over time
– Revenue: Grow $5 billion
Automotive
– North America: Achieve 4%+ return on sales
– Europe: Achieve 1%+ return on sales
Financial Services
– Ford Credit: Improve returns and grow earnings 10%

Beyond 2000
In April 2001, Ford reported a 41% slump in first-quarter profits, caused partly by
concerns in America over the safety of its Explorer “sport/utility vehicle”. The company
was forced to spend $500 million recalling some of the Firestone tyres fitted as standard
to the Explorer after they were linked to more than 170 deaths and 500 injuries in the US.

The company has not disclosed how much it has spent settling lawsuits related to the
accidents. Ford’s worldwide vehicle sales fell 6% to 1.8 million, while revenues fell 1%
to $42.4 billion. The US Company also lost market share during the first quarter
(Chris Ayres The Times, 20 April 2001).

Although Ford’s profits of $1.13 billion, or 60 cents a share, were disappointing, they
beat the forecasts of many Wall Street analysts. Ford’s poor results came despite a strong
performance in Europe. Buoyant sales of the Mondeo family car and Transit van helped
to generate European profits of $88 million, compared with a $3 million loss in the same
period the previous year. Sales for the region rose 22% to $8.7 billion.

In the same period, Ford’s major US competitor, General Motors, saw its US car market
share plunge to 28% (48% in 1978) and both companies were under pressure from
increased competition and rising unemployment. GM responded by slashing 15,000 jobs,
phasing out its Oldsmobile brand and reducing European capacity by 400,000 units a
year. Also, both companies had spun off their parts divisions, but GM’s Delphi was a
much bigger business than Ford’s Visteon.

However, Ford’s better performance over its main rival was attributed to its acquisition of
Aston Martin, Jaguar and Volvo. The addition of these companies enabled Ford to
maintain its US market share at a steady 23%, even though its native brands had been
suffering. GM’s foreign acquisitions had been in the form of minority stakes in
companies such as Fiat, Fuji Heavy Industries (maker of Subaru), Isuzu and Suzuki, so
they added nothing to GM’s sales figures
(Garth Alexander The Sunday Times, 13 May 2001).

In January 2002, Ford announced a new series of incentives in response to the move by
GM to offer $2,002 rebates on virtually all its models. The high costs of incentives was
blamed for much of GM’s loss in the fourth quarter. Ford’s response was to offer $2,500
on the top selling sport/utility vehicle, Explorer, and on most versions of the F-150
pickup, the USA’s best selling vehicle, and a $2,000 incentive on many other models.
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The company also announced that in North America the Ford Escort and Mercury Cougar
compact cars, Mercury Villager minivan and the Lincoln Continental would be phased
out by the end of 2002.

In addition, Ford was looking to sell a number of what it termed non-core assets,
eliminating some operations such as forging parts. It expected this to raise $1 billion
while other cost-cutting measures included everything from the sale of some of its
corporate jets to eliminating food and beverages at many internal company meetings.

Despite all the cuts, Ford executives insisted the cost-cutting measures were only a small
part of their turnaround plans for the company. They said that they were maintaining
investment in research and development in order to meet goals of an average of 20 new
models a year for the next several years
(Chris Isadore, Cable News Network, 11 January 2002).

In 2003, Ford, which owned one-third of Mazda, decided to base its Futura and nine other
forthcoming Ford, Mercury and Lincoln models on the Mazda 6. The Futura would be
launched in 2005 to replace the fading Taurus in Ford’s continuing effort to overtake the
Honda Accord and Toyota Camry, the leading midsize family sedans in the United
States.

Ford sales boomed in the 1990s because of its big, truck-based vehicles such as the F-150
pickups, Ford Explorer, Ford Expedition and Lincoln Navigator, but its car models
suffered. Sales of the Taurus and its sister vehicle, the Mercury Sable, peaked in 1992 but
after 18 years, despite a redesign in 2000, sales fell by 50%.

It was considered that the Ford-Mazda collaboration would help both companies become
more efficient, although the bigger benefit for Mazda would come when Ford started
using its I-4 engine. In the same way that Jaguar and Volvo retained their brand presence
although they both belong to Ford’s Premier Automotive Group, Mazda intended to
retain its separate identity through its sports cars such as the RX-8 and its well known
rotary engine.

In 2004, market shares for the Detroit 3 (GM, Ford, and the Chrysler unit of Daimler
Chrysler) fell to a new low of 58.5%, while Japanese brands reached a new high of
30.6% and Korean brands climbed to 4.1%
(US Department of Commerce, June 2005).

Manufacturers were using more novel marketing such as heavy discounting and
complimentary offers. For example, the VW Phaeton had a $10,000 rebate and Ford
offered a free computer with the purchase of some Ford Focus vehicles.

Both GM and Ford attempted to streamline their operations by closing plants and
consolidating manufacturing lines but continued to invest heavily in new assembly plants
and equipment for both manufacturing and product technology.
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GM focused on increasing its manufacturing flexibility, using new manufacturing
technology that allowed vehicles based on different platforms to be built on the same
assembly line.

In contrast, Ford invested in a Chicago-area supplier park, to provide more flexibility at
its Chicago assembly plant, which had previously produced the Ford Taurus and Mercury
Sable, but was then adapted to produce the Ford Five Hundred and Freestyle as well as
the Mercury Montego.

Europe

The European consumer expects a model that is different both in terms of design and
technical characteristics, with diesel motors being very important and accounting for 43%
of the market. In the United States light trucks represent nearly one-half of automobile
sales whereas this is less than 5% in Europe and mini-cars dominate in Japan (30%).

A rationalisation drive that was already underway began to take on a new strategic
dimension insofar as it was now guided by the search for a closer relationship to the
market, something that involved setting up new relationships with end-users (make- and
deliver-to-order approach). New vehicle profit margins having been squeezed,
manufacturers have had to build up a greater presence in customer services.

Structural changes enabled European manufacturers to consolidate their positions not
only in their local regional market (which was experiencing stagnation of Japanese
market share and financial losses by American subsidiaries) but also in other markets via
alliances or mergers (in particular the Renault-Nissan alliance and the DaimlerChrysler
merger).

Some suppliers are relatively independent from manufacturers and therefore oriented
towards a number of different clients (unlike the is true for large multinationals like
Bosch and for medium-sized family companies and small firms. Thus, the European
industry has moved towards a type of modularisation and specialisation, which is
evidence of cooperation between firms.

In this context the cooperation can be seen at assembly level, with suppliers’ parks and
suppliers’ presence on-site and on manufacturers’ assembly lines (a trend that is less
developed in the other two Triad regions); and also at the design level, with the advent of
co-design practices that associate manufacturers with suppliers or with engineering
service firms
(Groupement de Recherches Economiques et Sociales, 2004).

China
China maintained a positive but smaller growth rate over the period 2002–2004. While
sales grew at a rate of 15% in 2004, this was less than previous annual growth rates of
nearly 40%. This decline was due to several factors. The Chinese central government
followed policies that tightened credit and slowed the overall economy.
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The more restrictive consumer loans resulted in fewer auto buyers. In addition, the
market was caught in a cycle of price reductions where consumers expected the price to
be lower the longer they waited to buy.

On the supply side, Volkswagen announced plans to invest another $6 billion, GM an
additional $3 billion and DaimlerChrysler an additional $1 billion in the Chinese market.
Ford, from a relatively small base, planned to invest an additional $1.5 billion
(US Department of Commerce, June 2005).


The Global Perspective

In 2003, global sales of passenger cars and trucks were 57 million units. Sales were
concentrated in the developed markets with the USA and Europe accounting for 62%.
Global players, such as GM, Ford and DaimlerChrysler, dominated and the USA was the
largest market with sales of 17 million units in 2003.

Intense global competition together with significant excess capacity in the developed
markets has depressed the profits of the global automobile makers, compelling them to
strongly enter the emerging markets such as China and India, where economic growth is
creating huge demand. This same competition has increased consolidation in the industry
and technological alliances are increasing as companies see vehicle platform sharing as a
means of cutting time-to-market and costs. Finally, they have to face the challenges of
increased globalisation and the ever increasing emission and safety standards.

If the global economic recovery gains in strength then the automotive industry will
prosper in future years. But, if oil prices stay high then the global economy could slip into
a recession and create high uncertainty for the industry
(Global Automotive, ReportSURE, October 2004).

After several years of intense activity on the mergers and acquisitions front,
DaimlerChrysler (DC) revised its Asia strategy as its major partner, Mitsubishi,
continued to lose profit. DC’s shareholding in Mitsubishi dropped from 37% in 1999 to
19.7% in 2004.

The Renault/Nissan merger success continued with Nissan’s global sales up 9% and
global production up 15%, over the period 1999 to 2004. Nissan’s US sales increased
46% over the same period, going from 677,212 units to 985,989; while Renault’s net
income increased 529%, from 565 million Euros in 1999 to 3,551 million Euros in 2004.

Long term, the mature markets were adding no more than 1% annually to their ability to
absorb additional output. In contrast, opportunities in the developing world – especially
in Asia – were more buoyant. None the less, trade barriers existed almost everywhere and
the major manufacturers continued to seek local partners and to look for outright
acquisitions, mergers, and non-equity cooperative ventures.
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Despite these challenges, Ford planned to meet the priorities it had set in 2005 which
were:

• Continuing to deliver exciting new products.
• Improving quality and customer satisfaction.
• Holding overall costs at 2004 levels.
• Improving market share and revenue in all regions.
• Improving results at all automotive operations.

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