Ford Motor Industry Analysis

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FORD MOTOR

FORD MOTOR AND AUTO INDUSTRY ANALYSIS
FORD MOTOR CURRENT STRATEGY

STUDENT NUMBER: 21089329

1/28/2011

FORD MOTOR AND AUTO INDUSTRY ANALYSIS

Table of Contents Table of Contents……………………………………………………………………...1 1.0. 2.0. 3.0. Executive summary…………………………………………………………..3 Company background……………………………………………………….4 Introduction…………………………………………………………………..5

4.0. Analysis of Trends and Issues in the Auto Industry…………………………..5 4.1. Porter‟s Five Forces Analysis of the Auto Industry………………………………5 4.2. PESTEL Analysis of the Auto Industry…………………………………………..6 4.3. SWOT Analysis of the Auto Industry…………………………………………….7 4.4. Future issues and trends in the auto industry……………………………………..7 5.0. Critical Evaluation of Specific Strategies at Ford Motors…………………....8 5.1. Current Strategies....................................................................................................8 5.1.1. Paradox of Market vs. Resources ………………………………………………9 5.1.2. Paradox of Managed Control vs. Managed Chaos…………………………….12 5.1.3. Paradox of Globalization vs. Localization ……………………………………15 6.0. Critical evaluation of Ford recent performance……………………………..18 7.0. Conclusion………………………………………………………………………18 8.0. Strategic recommendations……………………………………………………19 9.0. References………………………………………………………………………21 10.0. List of appendices Appendix 1: Overview of the car industry…………………………………………...27 Appendix 2: Analysis of issues and trends of the auto industry……………………..28 Appendix 2.1: Porter five forces analysis……………………………………………28 Appendix 2.2: PESTEL analysis……………………………………………………..29

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Appendix 2.3: SWOT analysis of Ford………………………………………………32 Appendix 3: How Ford should turn these threats as opportunities…………………..33 Appendix 4: Evaluation of Ford Performance……………………………………….35 Appendix 4.1: Financial overview of Ford Motors………………………………….35 Appendix 4.2: Ford recent performance……………………………………………..36 List of Figures Figure 1: Summary of Porter five forces of the auto industry………………………..6 Figure 2.1: Short term recommendations……………………………………………19 Figure 2.2: Long term recommendations…………………………………………….20 Figure 3: A bouncing oval: Ford automobile……………….......................................35 Figure 4: ROA comparison FY2010…………………………………………………37 List of tables Table 1: Number of automobiles sold worldwide in 2009 in Million………………..27 Table 2: Porter five forces analysis…………………………………………………..28 Table 3: The geographical demand for vehicles……………………………………..29 Table 4: SWOT analysis of Ford Motor……………………………………………..32 Table 5: Ford key figure and ratio FY 2010…………………………………………37 Table 6: Financial status……………………………………………………………..39

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1.0.

Executive summary

Ford Motor Company (Ford) has been a leader in the auto industry, however, over the past few decades has continued to lose market share to foreign competition. The current weak U.S. economy combined with rising fuel prices and increased political pressures regarding global warming, presents several challenges to Ford Co. and the entire auto industry as we can see in appendix 2:26. These current challenges provide exciting opportunities for the auto company who must reduce cost, get fresh capital, and quickly develop and produce, new efficient, economic autos, and alternative fuelled vehicles. The global auto industry will continue to grow with 80% of the global auto industry‟s growth from now until 2013 is expected to come from emerging markets. However, for Ford to succeed will need to address several internal issues regarding legacy costs, unions in USA, and the development of a wide range of new vehicles that consumers consider the new “must have” vehicles instead of the large trucks and SUVs. Looking to the future Ford will have a global presence in these critical emerging markets like China and India, and have the knowledge and expertise in efficient and alternative vehicle technologies required to move the company forward. For Ford to achieve the vision of being synonymous with alternative vehicles (low fuel consumption, fuel celled hybrid, ethanol, and electric / battery). When consumers think of the innovative technology in the auto industry they will think of Ford for this to happen Ford can no longer be a quick follower, but must be an industry leader in technological advances in the auto industry. Ford must offer a variety of alternative vehicles that meet consumer demands and government regulations. Ford has significant fixed costs and large capital investments are needed. Cash flow is the lifeblood of any business and should be considered in every decision which could 3

impact the company expenses. By 2009, Ford expects to reduce structural cost as a percent of revenue by 40%, and by 2012 by 80%; these would be considered benchmark levels of cost. The reduction will be invested in new plants in growing markets; fund the research required, development, and production of alternative vehicles. The global auto industry market is growing, and the opportunity for Ford to recapture market share lost in the past few decades is there for the taking. Ford can win, and to do so needs to expedite change to meet the challenges and seize opportunities. Ford needs a sense of urgency regarding revising a strategic plan that incorporates the next generation of vehicles, reduces cost, and expands in the world growing markets. In today‟s global economy and highly competitive auto industry Ford has no time to procrastinate. Ford has just too much at risk in not planning a new strategy and become an industry leader in alternative fuel technology. Its present strategies can be summarized as; more resource driven than market driven, managed control, more global than local. Centralized strategic leadership and decentralized policy implementation (Ford, 2009).

2.0.

Company Background

Ford Motor Company was founded by Henry Ford In 1903 and become a corporation in 1919, is a global company (110 manufacturing plants in 23 countries, with 345000 employees) with two core businesses: Automotive and Financial Services. Ford Corporation includes Ford North America, Ford South America, Ford Europe, Premier Automotive Group, Ford Asia Pacific and Africa/Mazda segments. Volvo, Mercury and Lincoln motors. Ford has been focusing on cutting costs to increase margins more than its competitors. It has used reverse engineering in the development of their products (Ford 2009).

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3.0.

Introduction The automotive industry is the industry elaborate in the development,

marketing, design, manufacture, and sale of motor vehicles (Autodata 2011). In 2009, about 52 million motor vehicles (refer to appendix 1:27), including commercial and cars vehicles were manufactured worldwide (worldometers.info, 2010). The aims and objectives of this paper are to examine current and future key issues and trend, competitive forces affecting the market of the auto industry as well as, critically analyse of Ford Motor strategy making chosen such as the Paradox of Market vs. Resources, the Paradox of Managed Control vs. Managed Chaos Ford and the Paradox of Globalization vs. Localization. Furthermore, critically evaluate Ford recent performance follow by a conclusion.

4.0.

Analysis of the Trends and Issues in the auto Industry 4.1. Porter’s five forces analysis

Figure 1 summarise the finding of fives forces analysis (refer to appendix 2.1:28) of the automobile industry.

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Forces

Threat to profit

Internal Rivalry

Strong

Entry

Weak

Substitute and Complement

Weak to moderate

Buyer power

Weak

Figure 1: Porter five-forces of the auto industry (design by student) Adopted from Porter in De Wit and Meyer (2010).

4.2.

PESTEL analysis of the auto industry

Politics of a country influences the laws and legislations by which car manufacturers operate in. Politics is influenced by consumer demand of environmental concerns or safer cars (Lee et al 2009). Moreover, the car industry is a major contributor to the economy with high usage of computer chips, vinyl, copper, steel, and aluminum with the industry contributing to 4 per cent of the US GDP (Gale 2004). The socio-cultural environment affects the type of car people purchase and the efficiency of vehicles in terms of the environment and mileage (Guilford 2004). Lastly, the technology affects business environment for cars. A study by Power and Associates (2002) shows that more than 60 per cent of potential buyers conduct research online, with 80 per cent of 6

those visiting the websites of the car manufacturers before a test drive at the showroom. The environmental effects such the global warming has also changed the ways of thinking in automakers today, with the shift towards alternative fuel vehicles favoured (Greenber 2008). (Additional information on PESTEL is provided in appendix 2.2:29 as well as how Ford should turn these threats as opportunities is provided in appendix 3:33.

4.3.

SWOT Analysis of Ford

SWOT which stand for Strengths, Weaknesses, Opportunities and Threats. Strengths: One Ford‟s most potent strength is that they are one of the world‟s best known brands. As they have been in the business for 100 years. Weaknesses: Ford‟s organisational structure has become inefficient as the company became more complex. Opportunities: Ford has the distinct opportunity to have cleaner engine emissions, alignment with their corporate responsibilities. Threats: As Ford competitor in the industry, Ford faces very tight competitive rivalry in the auto market, which is escalating with the threat of new entrants continuously flowing into the market from South Korea, China and new plants in Eastern Europe.

4.4.

Future key issues and trends in the auto industry

More so then ever, the auto industry will be going through a major transformation in the very near future. The change will be due in part to rising oil costs and the world needing to become more environmentally concerned against global warning. There will be other trends and forces, but alternative fuelled vehicles will be a driving force in the industry. Ford must continue to look at these trends and threats, as new 7

strengths and opportunities. Thus, the design of business strategies is based on the conviction that a firm able to anticipate future business conditions will improve its performance and profitability (De Wit and Meyer 2010). Despite the uncertainty and dynamic nature of the business environment, an assessment process that narrows, even if it does not precisely define, a future expectation is of substantial value to strategic managers. (Pearce−Robinson, 2004: 107) In other words, Ford must develop and implement strategic plans that best position Ford to address trends and forces within the auto industry. The current issues are many, however, with those issues comes tremendous opportunities (refer to appendix 3:33). Eventually there just will not be enough fuel to meet the global demand especially once these emerging markets like China and India are in full swing. The global predictions regarding fuel consumption are gloom, however, Ford should look at this as an opportunity to expand market share and once again be the automotive leader.

5.0.

Critical Evaluation of Specific Strategies Employed by Ford 5.1. Current Strategies

Ford is a symbolic brand in the American automotive industry. However, the troubles of the company, coupled with huge debts and losses caused it to be on the brink of a bankruptcy in 2005 (BBCnews.co.uk 2011). Therefore, in order to withstand the competitive and regulatory forces in the market, the company had to devise vigorous strategies to overcome not only these factors but also the financial crisis of 2007/8 and the recession afterward. The company in 2010 posted $2.7 billion in profits, the first since 2005 (Plunkett 2010). Hence, this section will seek to explicate how the company managed to record such high profits through the

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implementation of strategy planning; a colossal restructuring initiative that caused such an effective turnaround to the automobile giant.

5.1.1. The Paradox of Market vs. Resources The innovations of new products, aggressive campaigns on television, and marketing to a global audience required the company to rethink its capital structure (Miller et al. in De wit and Meyer, 2010:275) by implementing this approach of the inside out strategy; Ford discover the asymmetries that underlie that edge by recognising resource are more advantage. The paradox of the market vs. the resources however saw the company mortgage its entire asset portfolio, including the brand name to fund its operations (Simpson & Sillince 2010). Beginning 2000, the company adopted a low cost strategy (dubbed FORD 2000 Total Cost Management) aimed at reducing cost of production by cutting all excess costs in all segments of its operations (Ford 2009). As a step to realize this strategy, Ford apply the concepts of Miller et al; in De Wit and Meyer (2010:281) ‘imaginative re-framings of the value of different resources’ , by reducing 30% of personnel in the engineering department and massive expenditure has been cut from raw material costs (Ford 2009). According to Miller et al. in De Wit and Meyer (2010:276) within the inside search, the most basic capability of a firm ‘……Is an ability to convert production processes quickly and cheaply enough to take advantage of industry prices changes’. Ford under this strategy adopted a one line manufacturing process where cars are developed entirely in one process rather than having different engineering sections concentrating on different segments of the production process. The management sees 9

such efforts as helping reduce costs by helping the company become leaner yet maintaining quality (Ford 2009). At the other hand Porter in De Wit and Meyer (2010:268), suggests that this strategy aims at establishing cost advantage where the company produces at relatively lower cost hence giving it some market advantage over the competitors. Hence the plan adopted by Ford can be summarized as; reduction of production costs, focus on products and right sizing the business. In rightsizing the business, the plan hoped to reduce production to manageable units, from 5.7 million to 4.8 million. It also included closure of five plants and elimination of low margin cars (Ford 2006). This strategy is in the same line as Day in De Wit and Meyer (2010:284) who claims that transition required both an inside-out capability to produce the low cost. Thus Ford strategy was both from the inside out and was driven by emergent market wants. Nonetheless, the selling of Land rover to Tata Motors, jaguar and Volvo in 2009 (Ford 2008), ensured the operations were not only lean and effective, but also global. Thus, in 2009 during the recession when the automotive industry crashed, Ford had ample liquidity to continue with its strategies (Pailwar 2009). The company is also in plans to restructure more of its debt to have a more balanced balance sheet (Fowler 2010). Ford restructured its operations in 2006 and embraced new technologies in the design of new cars that are not only fuel efficient, but they are also environmentally friendly. This innovativeness has seen the company recover from two shaky brushes with bankruptcy and a recession, to amass a profit before tax of $8 billion and emerge as one of the most profitable companies of 2010 (BBCNEWS, 2011). „..The cost leader earns above average returns‟. (Porter in De Wit &Meyer, 2010:269)

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However, only innovative companies can sustain such huge margins in a business that is so competitive, (Porter in De Wit &Meyer, 2010) as such, the company has developed future strategies in order to maintain its clientele and profit margins. Ford‟s plans for the future are in line with its current developments of innovations in many forms of alternative models. Ford Motor plans to build engines locally for some models that it will introduce in the next few years, as the Company seeks to keep vehicle costs low in a bid to capture a greater share of Indian auto market. However, to meet demand, Ford plans to expand its engine portfolio to consolidate its position in automobile markets (Reuters.com, 2011). The future is green, and businesses have to embrace this notion not just for survival in the current market conditions, but also for the future. Thus, Ford has in place a long-term science based strategy in order to reduce greenhouse emissions from and to corporate both the public and private sector to seek long-term solutions. The programs in new technology to be embraced in the development of future more efficient cars include a future in electrification. However, the company will not embark on one mode of technology in the future (Puma 2009). This strategy will comprise of three forms of electric automobiles: the all-electric vehicle, hybrid electric and the plug in electric vehicle. The goal is to conserve the environment whilst upholding the driving experience (Gates 2010) which is a form of ‘continual and intimate connection with the market environment’ vital to the inside approach (Miller et al; in De Wit and Meyer, 2010). From this analysis we can conclude that Ford is more resource driven than market driven at present time.

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5.1.2. The Paradox of Managed Control vs. Managed Chaos Ford Motor Company has faced many challenges since its incorporation that required decisive management and capable leadership. Successful leadership should have the capacity to impact over changes to the organizational itself (De Wit and Meyer 2010:487). It is this power that managers need to be able to steer the growth of their organisation. For effective leadership, the leader should control „The allocations of the attention focus of the participants in the organisation so that their attention is allocated to the areas that the leader considers important’ (Cyert in De Wit and Meyer 2010). At the other hand Stacey in De Wit and Meyer (2010:499) claims that „Top managers cannot, and should not even try, to control the organisation and its strategy’. The new leadership at Ford did not try or test strategies before landing on the winner; instead, they employed effective strategic control through the strategic leadership of Alan Mulally, at the peak of its crisis in 2006 (Murray 2010). The strategy he brought to Ford was termed as „one Ford‟, whereby his leadership style apart from demonstrating managed control, created a vision, led change and enthusiasm amongst the employees. Therefore the paradox of managed control aids in provision of purposeful direction to a company as states by Cyert in De Wit and Meyer (2010). This strategy was aimed at providing the team for one Ford with sharp focus via joint decision-making and specialization of skills, in order to be competitive in the automotive industry again (Right 2010). This strategy is still in use currently owing to the success it achieved. The one Ford strategy is comprised of three important components: one team, one plan and one goal. Mulally‟s leadership forged the importance of the employees 12

at Ford working as a lean global enterprise in order to achieve automotive leadership as measured by the dealers, the customers, the employees themselves, the investors, community and the union council (Cable 2011). The one plan element is centered on four elements: first, the company seeks to restructure its operations as state above on (Paradox of market vs. resource driven) in order to operate profitably at the existing stipulations; Ford has done a good job in recent years in reducing structural costs, and working on the ever increasing healthcare costs. Ford will need to continue to find ways to target cost reductions that can be used to fuel the research and development of alternative fuelled vehicles whilst changing the model mix; the plan also seeks to accelerate the pace of development of new products and innovations that the clients want and value (Valcourt 2007). The new products on demand in the market include energy efficient automobiles owing to the escalating gas prices, and environmentally friendly vehicles with low carbon emissions. Third, the company has adequately financed the plan, because the project would be invalid without finances (Dale 2010); and the last strategy envisaged proper teamwork and commitment, meaning extra hours and devotion (Gardner 2011). The last vision, it spelled out was the company‟s goal of delivering profitable growth not only for the company, but also for their customers. This strategy was aimed at developing customer emotional attachment to the brand (Phaal et al 2011). Additionally, the profits would increase with the strategies aim of distributing many cars worldwide, than the previous strategy of selling cars to few core platforms. In addition to the above factors, the current success of Ford was also developed by the behaviour exemplified by the leadership through managed control. According to Cyert in De Wit and Meyer (2010), this leadership style focus on modifying the lower management and in turn the employee‟s behaviours, while this

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conception of leadership might strike some as making the leader a manipulative person however if leader have genuine belief and honest dedication to the people in the organisation as Mulally‟s in Ford, exerting this type of leadership is justified, as they were critical to the company‟s success. Mulally‟s therefore set on developing key behaviours of the company to be modelled by employees at various levels. The set of behaviours comprised: fostering technical and functional excellence, individual working schedules and time, and delivering of results. Moreover, communication was stressed as it was the channel of effecting success through good relationships with the, manufacturers, dealers, suppliers, and clients (Collins 2010). The company‟s decision making is done by the top management (Cyert in De Wit and Meyer 2010). This strategy was basically adopted to give Ford the ability to consider broad range of market opportunities locally and internationally and would also allow the top management to engage more on product development in order to satisfy their customer‟s expectations in multiple markets (Porter, 1986). By adopting a decentralized implementation approach, Ford‟s aim is to take advantage of centralized decisions being flexibly and rapidly implemented by their smaller companies (Liebeskind, 1996). Ford adoption of this strategy was to eliminate layers of management in order to improve communication (Ford, 2009). At the other hand, the Paradox of Managed Chaos is suggestive that a company is able to learn from its environment either accidentally or via spontaneously emergent forces (Stacey in De Wit and Meyer 2010). In the yesteryears, Ford‟s was synonymous with development of SUVs because the market trends suggested it was what the consumers wanted. However, this strategy proved inefficient due to environmental concerns, cash constraints and escalating gas prices (Lee et al 2009). Large trucks and SUVs were no longer fashionably tasty, and were substituted by

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small cars. Ford‟s reluctance to catch and cash on the trend caused them to lag behind car manufactures like Toyota and Honda both in repute and cash profitability (Parry & Day 2010). The company‟s realization that focusing on customer needs, thereby developing the specific trucks and cars that customers sought, as opposed to developing one or two key products was crucial in its success is what has brought its current success (Taylor 2008). As such, Ford invested in the innovation of many products for customer satisfaction, instead of inventing limited products that would test if the Ford would be a success story or not. Additionally, the CEO inspired the creation of product brands of quality, class, efficiency in terms of fuel, performance, value and safety (Mckinlay & Starkey 2008). From this analysis we can conclude that inside Ford Motor, the aim for management is to empower rather than control those under them.

5.1.3. The Paradox of Globalization vs. Localization Ford has realized the importance of focusing on the creation of new markets, and the necessity of developing these markets offshore from the very beginning to sustain competitive advantage in the future (Canis 2011). Thus, the company has situated its operations offshore where in the management team maintains corporate jurisdiction. For example, European countries conduct businesses in their own liking but the general supervision comes from the head office (Bartlett and Ghoshal in De Wit and Meyer 2010). Maintenance of the international brands utilizes the laissez faire economic policy because the free market is apparent (Clayford & Mulally 2010). Although Ford Motors has been global since its inception, supplying vehicles to parts of Africa, Asia, and Europe, its focus has been mainly on the American Market and 15

Europe (Hoffman & Ford 2010). For example, its development of SUVs in the early 2000s was targeted mainly on the American market. Levitt in De Wit and Meyer (2010:563) claims that global markets ‘….strategy is better is not a matter of opinion but of necessity’. „Global Corporation operates with resolute constancy…’ Ford follows a global strategy in order to expand and has since become the world‟s largest producer of trucks and the second largest producer of cars. However, by developing alternative brands for the global market demonstrate that Ford has showed lack evidence of homogenization (Douglas and Wind in De Wit and Meyer 2010) due to competition from other automakers which has forced in this direction. Ford has employed scientists and engineers from countries such as China, Middle East, India, South America and Korea. Additionally, advancement in communication technology has enabled Ford easy access through advertising and marketing strategies to reach a global audience, enabling the company to accrue economic of scale which is in line with Levitt in De Wit and Meyer (2010:565) states that: ‘…. economies of scale in production and marketing are an irreversible force driving globalisation‟. At the other hand Douglas and Wind in De Wit and Meyer (2010) believe that Levitt is mistaken in arguing the statement above. Major features of the global market encompass free flow of goods, the development of trade blocs such as the EU, regulations that favour direct investments and ecommerce (Canis 2011). Nevertheless, Ford Motor Company has focused on localization of products at a global platter whereby they keep their parts supply chain centralized and assemble cars as per the local requirements of a region after studying the needs. This has

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resulted in them able to deliver different variants of cars as per the requirements of different countries using the same spares supplied by their centralized supply chain vendor (Ford 2009). Hence, the internal learning and growth of Ford Motors has been very comprehensive with localized knowledge captured from various countries and the benefits of global knowledge and experience effectively mixed with the localized knowledge. Future technologies in vehicles are expected to reach North American markets by 2012, and Europe by 2013. The hybrid electric vehicle works by using electric power to only start or slow the vehicle, with internal combustion powering the drive (Craig 2009). The all-electric vehicle as the name suggest does utilize fuel. It uses high voltage electric motors that derive their energy from rechargeable batteries. The charging of the all vehicle hybrid lasts up to 100 miles (Fuhs 2009). Lastly, the plug in hybrid has blended the charging system of the all electric vehicle, with hybrid electric technology, it is economical for the customer as the charge deplete diminishes after approximately 30 miles, with very few trips to the gas station in between(Silberglitt et al 2009). Moreover, the hybrids will comply with the set environmental standards by emitting partial to zero emissions (DeBettencourt 2000), with the battery developed from Lithium-ion. The all-electric hybrid will be ideal for short trips of about a hundred miles a day, with the rest more flexible (Schwaller 2005). Apart from the electric transmission, Ford also intends to release vehicles that run on multiple fuels such as ethanol and gasoline, known as Flex-Fuel vehicles (Cocks 2009). The other hybrid in the future will be cars that run on more than one fuel tank, for example a combination of gasoline and propane (Perry & Day 2010). According to Callery (2009), the automobile giants have also announced plans to

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move into biodiesel by mid-2011, with the F-series trucks running on bio-diesel (Tertzakian 2007). Technology for producing clean diesel vehicles is quite expensive (Anderson 2008); hence, Ford intends to offer this for the larger automobiles like the Expedition and F-150 by 2020 (Ford 2009). The production of alternative vehicles is strategically aimed at diversifying consumer usage away from gasoline and to the new technologies, which would be readily at their disposal (Clayford & Mulally 2010). From this analysis we can conclude that Ford Motor is more global than local. 6.0. 7.0. Evaluation of Ford recent performance (refer to appendix 4:35) Conclusion The PESTEL, Porter five forces and SWOT analysis seek to explicate the effect of competitive forces and the macro-environment in the automotive industry (Wit & Meyer 2010). It is critical for the strategies used not only effect change for customers and environmentalists, but also effect positive changes in the profitability of the business (Ahlstrom & Bruton 2009). Ford has fail to balance the three paradoxes: market vs. resources in financing its operations, Ford is more resource driven than market driven; leadership style with managed control, exemplified by its CEO; and the paradox of globalization and localization, Ford is more global than local by developing brands fit for America and the world to address competition. These analytical methods have been used to evaluate the position of Ford automakers in the US and International markets. In spite of Ford being on a brink to bankruptcy, it embraced new management in the leadership of its CEO Alan Mulally who devised new strategies that inspired the ONE Ford campaign, resonating the message of team spirit among the employees, suppliers, dealers, and customers; which in turn forging their loyalty. In addition, he inspired a leadership style that inspired 18

success of the automobile giant, innovation, synergy, and product differentiation for the overseas market. The company has been under financial distress for quite some time as it has faced huge bottom line losses in the past. Moreover, the automobile sector doesn‟t seem to be promising as has been detailed in the current and future issues. Hence, in such circumstances, the investors in equity have lost their interest in the company equities. Moreover, the company has not paid cash dividends in 2007, 2008 and 2009 as reported by CNN Money. Hence, the company had to bend towards debt financing to run their operating expenses. In fact, the sale of Jaguar and Land Rover again has been used to generate cash to run operations. The company has not invested in new ventures for a long time and has been busy closing manufacturing units and firing people. Hence, the company will not be stuck with large amount of mortgaged assets as such. Hence, overall by choice or by circumstances, the company has been bent towards debt financing. Consequently, the company accrued profits, which has enabled them to gain competitive advantage in the industry.

8.0.

Strategic recommendations Minimise excess capital, try to reduce debts, Short term cut inventories and reduce days of sales receivables.

Sell off unperforming assets to increase cash while weathering storm

Figure 2.1: Short term strategic recommendations 19

Long term

Continue to improve factory flexibility. Continued investment in hybrid technology R & D will position Ford better to compete with close competitor such as Honda and Toyota.

Adopt more aggressive version to current restructuring and cost improvement.

Continue high level of product development into alternative fuel technology. Emerging markets purchasing synergies.

Figure 2.2: Long term strategic recommendations

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9.0.

References

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10.0. List of Appendices Appendices 1: Overview of the car manufacturer industry In 2009, a total of 71.9 million new automobiles were sold worldwide.

Table 1: Number of automobiles sold worldwide in 2009 in Million Continent Europe Asia Pacific USA and Canada Latin America Middle East Africa Number of automobiles sold in Million 22.9 21.4 19.4 4.4 2.4 1.4

Source: The New York Times.com (2011). The markets in Japan and North America were immobile, whereas those in Asia and South America grew strongly. The main markets, Brazil, Russia and China saw the greatest fast growth. In 2008, with the fast rising oil prices, manufacturing such as the automotive industry, are facing a combination of pricing pressures from changes in consumer buying habits and raw material costs. The industry is also challenging the increase of external competition from the public transport sector, due to the fact that consumers re-evaluate the usage of their private vehicle (Bradford, 2004a).

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Appendix 2: Analysis of issues and trends of the auto industry

Appendix 2.1. Table 2: Porter’s Five Forces analysis of the auto industry

The threat from new entrants to the profitability of the car industry is minimal. According to Miller (2007), this threat is low because of the many impediments to market entry such as high capital requirements, government policies and legislation (Porter's Five Forces Analysis of the Automobile Industry, 2010). Buyers bargaining power also affects the car industry‟s attractiveness and profitability. A favourable situation for the industry would be if buyers had low bargaining power, (Rothaermel 2009). The threat from alternative products is valid in the car industry. The threat is high when the buyers have low switching costs. Hence, players in the industry have to differentiate their cars from their competitors to retain clients (Hill & Rothaermel 2003). The supplier bargaining force is tricky to evaluate because in the US for example, they may yield tremendous power on one hand and sometimes the power may be weak especially when they have one automaker as their only client Schlie and Yip (2000). However, this notion is discounted by Hohn (2002) who argues that the supplier bargaining power in the auto industry is low because of the many suppliers in the market. Rivalry between companies is strong. All the major car dealers face such competition in the world, with the exception of state owned manufactures such as Malaysia‟s Proton (McNamara et al 2003).

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Appendix 2.2. PESTEL analysis of the of the auto industry

Political factor Laws and government regulations have affected this industry since the 1960s. Almost all of the regulations come from consumers increasing concerns for the environment and the concern for safer automobiles.

Economic factor The automotive industries growth only comes with the addition of new markets such as China, India, and Brazil (refer to table 3 below). Some of the top short-term environmental issues for Ford and the rest of vehicles manufacturers include high gasoline prices, increased volatility of material prices, and the record number of new vehicle offerings. Due to the uncertainty in Iraq, and the increased demand from the emerging economies of India and China, high gasoline prices will continue to be an issue for Ford and the industry as a whole. Inflation adjusted crude oil prices have raised steadily since 2002, from $20 per barrel to almost $140 per barrel in June 15, 2008. High gasoline prices can affect such metrics as consumer confidence, material prices, and vehicle segments with low fuel economy. Table 3: The geography of demand for vehicles Region North America Western Europe Asia Pacific Central and Eastern Europe 29 12.4 2.5 18.5 3.0 21.7 4.5 27.0 6.0 2001 19.6 16.6 2005 21.5 15.0 2010 23.0 13.0 2020 25.0 13.0

South America Middle East Africa Total

2.4 1.3 0.8 55.6

3.0 2.0 1.0 64.0

4.0 3.0 5.0 74.2

7.0 3.0 10.0 91.0

Adopted from Nieuwenhuis and Well‟s (2003).

Social factor Nowadays society judges people on the category of car you drive. Society might not admit to this but this is very true. Manufacturers recognize this occurs and targets their markets by these thoughts. However, anyone who drives a nice vehicle is thought to be wealthy (scribd.com, n.d). Customers also just feel better while they are driving a new or nice car, which makes them feel better about themselves.

Technological factor Technical improvements has made the modern car lighter, safer, faster and more fuel efficiency than even its close predecessor. Gears, engines, suspension, fuel, gears, brakes, bodies, tyres, motors components, exhaust, etc.., have all been renovated by innovation, new technology that is frequently includes in new design soon after it is verified to work (scribd.com, n.d). For instance, car manufacturer need this new innovation technology as a selling fact to endorse the benefits of their schemes over those of their competitors which soon imitate any successful innovation (Fitzgerald, 2004). Electronic systems, electronic controls, and new materials have been at the core of technical improvement in motor vehicle designs. Cleaner engine conservative and eccentric fuels, such as liquid propane gas (LPG), are now being promoted to give better engine performance and to reduce emissions.

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Paradoxically, the cars now being made are much better, long lasting and stronger than previous models that they are replacing. However, at the same time, as the functioning life of these cars is being extended, their producers would have a preference to see cars changed more often within shot time Span. To benefit from economies of scale, car production needs a high volume of sales to gain the maximum logically the values should drop to safeguard a high turnover. Cars that have developed a poor standing for longevity are, therefore, ignored by potential buyers, as this information ruins their resale worth all the way down the buying chain. Another aspect of the technological factors is the internet which has affected just approximately every industry in the world and has as well had an enormous impact on the automobile industry (Businessweek.com, 2011). Moreover, from BMW to Honda, from Chrysler to Volkswagen, the industry is rushing to make vehicles that use less gasoline or don‟t rely on it at all (New York Times, 2011).

Environmental Factor Global warming is quite a critical issue facing the auto industry which have to produce more environmentally friendly car. Legal Factor Legal system too plays a very significant role in the international business. In order to launch a well-functioned market economy, worldwide government has emphasized on sketch up laws (scribd.com, n.d). In European countries including Spain and Greece Government inducements intervened and budget cuts discouraged prospective customers from buying a new car last year (Europe.autonews.com, 2011).

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Appendix 2.3. SWOT Analysis and Impact on Ford’s Strategy Making The SWOT analysis (refer to table 3 below) of Ford Motor Company have focused on prioritization of developing competencies and taken aggressive steps for the same in anticipation of developing opportunities. Table 4: SWOT analysis of Ford Motors Strengths  Liquidity advantage. In terms of liquidity, Ford is the best positioned among the Detroit Big Three; No federal aid. The only Big Three company that doesn‟t seek government aid; Hybrid technology. Ford holds his own hybrid patent technology. Weaknesses  Poor financial results. Registered a loss of $14.6bn in 2006, the worst annual result in 105 years; High volatility of raw materials – increased costs of innovations. Data loss. Low protection against data loss; Increase level of layoffs or decreasing trend of employees‟ wages may cause a sharper decline of consumer spending.

  





Opportunities  High interest in innovation. Focus on development of new innovative features; Fuel efficient technology. Concentrate R&D activity on fuel-efficient and electric cars; Increase portfolio diversity. Extend small and medium lineup to better fulfill consumer demands

Threats to Ford Motor    Stringent Emission norms in Europe, UK and the US Data loss. Low protection against data loss; Increase level of layoffs or decreasing trend of employees‟ wages may cause a sharper decline of consumer spending. Japanese competitors are very aggressive in the western markets resulting in reduced grip of Ford Motor on the US car markets







Source: Visionwise.com (2009).

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Appendix 3: How Ford Motor should turn these threats state in appendix 2 as opportunities Ford and the entire auto industry are currently challenged with the “perfect storm.” The auto industry is being hit by a weak US and global economy, rising fuel prices, and social and political environmental concerns and issues. In order to overcome these potential threat, Ford should consider mass producing a range of alternative fuelled vehicles (diesel, fuel cell, electric, and hybrid). As emerging markets develop they will increase their use of oil products creating even greater demand and increased prices. Couple this issue with social and political concerns regarding global warming, and the ever increasing state regulations regarding emissions, will create a potential huge customer demand for these alternative vehicles. Potential opportunities identified for Ford are related to the future demand of the alternative vehicles and increased global market share potential from emerging markets. But first Ford needs to turn current internal weaknesses into strengths to achieve the external opportunities. Ford‟s internal weaknesses are the large legacy costs in equipment, facilities, and retirees, that all need to be addressed to compete with relatively speaking new companies like Toyota, and Honda. Due to these significant legacy costs, Ford has increased the cost per vehicle to incorporate the additional cost into the price of their vehicles. Another weakness for Ford is that because they are so large it takes much longer to roll out new vehicles, and in addition Ford has too many similar vehicles that need to be reduced. For example, Ford has similar products in Mercury, and Ford. Ford needs to reduce more structural and operational costs as they have started three years ago by eliminating product redundancy, labour cost, removing vehicle platforms, and making each brand unique in its own way.

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Although weak in these areas, Ford is positioned to take advantage of the identified strategic imperatives. Ford already has a global presence and is diligently working to expand in the emerging markets. The European, Latin-American, India, and Asian markets are more receptive to the smaller vehicles that Ford will need to begin to produce. By developing and producing alternative vehicles, Ford can begin to eliminate brands and platforms that are not selling. Ford can use the cost savings to further invest in the development and production of alternative vehicles. However, Ford can take advantage of opportunities that occur from the result of trends and forces that will reshape Ford. Three industry trends and forces that are most critical to Ford currently are economic, ecological, and competitive. The economic downturn then begins to feed on fear from the consumers, and self-fulfilling prophecies. Companies continue to downsize due to lack of production, and as people lose their jobs they lose their ability to purchase goods. The change to alternative vehicles will take a skilled workforce that should provide jobs, along with job creation necessary to build the required infrastructure for the alternative vehicles. Ford has an opportunity to gain new customers by providing the new Ford foreign workers with incentives to buy Ford, as Henry Ford already did with the Ford T model. A company can significantly damage its public image that greatly impact sales by doing something harmful to the environment. For the auto industry this means developing alternative fuel vehicles, like fuel cell, electric, and hybrid vehicles. Ford needs to capture the consumer momentum for alternative vehicles, and the political pressures regarding emissions to produce and market alternative vehicles.

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Appendix 4. Evaluation of Ford recent performance

By looking at Ford performance metrics, since the late 1970s, Ford has continued to lose market share. This cannot be allowed to continue, and Ford must do whatever it takes to hold market share then work towards gaining market share.

Appendix 4.1 Financial overview of Ford Motors The company registered profits of $4.7 billion in the first half of 2010, the highest since 1998 (Anderson 2010). Refer to figure 3 below. Figure 3: A bouncing oval: Ford automotive

Source: Economist.com (2011).

These dollars represented an increase of 68 cents per share, beating estimates that predicted the shares to increase to 41 cents per share (Asia Pulse 2010). The sales of the second quarter rose by 15% from $27.2 to $ 31.3 billion. According to Pepitone (2010), prediction of $29.4 billion by analysts fell short of the predictions. The share value increased as well by 63 cents a share, representing a 5.2% rise to trade at $ 35

12.72. The sales in small vehicles rose by 20 percent, surpassing the auto industry gain of 185. However, the automotive net cash position of the company dropped to $21.9 billion as of June 20, from $25.3 billion in March. The company paid down a $7 billion automotive debt in the second quarter. The company however anticipates a positive outlook in automotive net cash in 2011(Croll 2010). Furthermore, the company does not anticipate high profits in the second quarter of 2011 because the money will be recommitted to support new productions, the high cost of commodities and the minimal credit reductions at Ford Credit (Krebs 2010). Moreover, the company owes more debt than its rivals, which the CEO terms as competitive disadvantage (Naughton 2010). The debt is a result of the $23 billion loan taken by the company in 2006.

Appendix 4.2 Ford’s Recent Performance Until 2010, Ford had experienced losses in 12 consecutive quarters (Naughton 2010). However, this changed in the second quarter of 2010 where the company reported a net income of $2.6 billion, recording its most profitable quarter in more than a decade. This is due to its management of the three paradoxes combined: market vs. resources, management of control vs. chaos, and lastly globalization vs. localization. The effective management of these paradoxes has seen the company accrue high profit margins comparable to the industry margins. Fords CEO has accounted the profits to brilliant teamwork, innovations of new cars such as the Ford Fusion and Taurus, additions of extra services such as leather interiors, and electronic gadgets, and the company‟s hold on quality (Ross 2008). Ford Motor Company analysis indicate terribly bad return on equities which means that investors have a big hole to crawl out of before even reaching the current $1.80

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per share but the return on assets and invested capital have been somehow in positive (except 2006). This means that while Ford Motor Company has exhibited terribly bad performance for investors in 2007 and 2008, they have been able to cut their costs substantially to save the company from bankruptcy. The current ratio went bad in 2006 otherwise is maintained effectively. The management has been successful in maintaining more assets than liabilities thus indicating that somewhere the foundations are still very strong and the management (refer to figure 4:35) has been proactive enough to reduce their liabilities amidst the financial turmoil that they have been facing. Assets turnover 0.7% of Ford Motor Company has been disappointing because the net revenues 20.75% have been lesser than the total assets. The management has overall not been able to capitalize returns against the assets available to them. The return on assets (refer to table 5:37) have been very disappointing as such and hence it seems that Ford Motor Company has somehow survived by reducing their liabilities very aggressively – elimination of excess manufacturing capacity, closing plants, reducing workforce, etc. The sale of Jaguar and Land Rover to Tata Motors may again be viewed as aggressive attempts to reduce liabilities to keep assets more than liabilities. Table 5: Ford key figure and ratio FY 2010 Indicator Net Sales ($bn) Net income ($bn) FY 10 131.34 7.26 2.87% 23 0.7% 5.52% ROA Debt Asset turnover Profit margin

Source: Businessweek.com (2011)

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Figure 4: ROA comparison FY 2010.

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Table 6: Financial status Revenues • Results from all operations declined over previous year because of the economic recession. However, cost reductions managed to partly offset these declines; • In terms of both profit margin and growth sales, Ford is above the industry average; Income Even if it registered a loss of $14.6bn, the worst annual result in 105 years, it considers itself the healthiest company of all Detroit automakers it is the only company that will finance its operations without federal aid; • Ford managers said it will need the aid only if one of its two main competitors will go bankrupt; • It currently has more cash on hand than its competitors, but this is the result of the late 2006 financing actions - mortgage total assets, including the blue logo; • It has about $15bn cash in hand. ROA • GM‟s ROA fell dramatically below the industry average of 1.01% ; • Ford has the highest ROA of all peers, not close to the industry average. Debt: The company has a debt of $ 23bn insufficient funds to finance business plan and product investments.

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