Ford
Content
Is The Way Forward Really Ford’s Way Forward?
Sameer Kirtane Rachit Shukla Louis Wang Jimmy Zhan
Overview
• • • • Ford’s current status Industry Analysis Recent History What is the Way Forward?
– Operations, Infrastructure and Human Resources – Marketing and Sales – Technology Development
• Recommendations
Current Status
• Leadership change • Market share ↓ since 2000 from 23.7% to 15.5% in N.A. • Reported loss of $1.2B qtr ending Sept. 2006 • On its way to losing $8-9B in 2006 alone • Third restructuring effort: Way Forward
Alan Mulally
Source: http://media.ford.com
Recent History
• Ambiguous business-level strategy in last decade
– Neither successful differentiator nor cost-leader
• Lacked innovation in compact and mid-sized cars • Focus on SUV division and luxury portfolio • Rising gas prices
– Consumers fled SUV and luxury portfolio → Strategic Failure
• Costs grew disproportionately to rivals
– Estimate: Costs Ford $2500/vehicle more to produce than Foreign rivals
Industry Analysis
• N.A. Automotive Industry: Difficult to be in
– Positives
• Captive but essential suppliers • High capital costs of potential entrants • Lack of feasible substitutes
– Negatives
• Low switching cost of buyers between firms • Fierce internal rivalry due to manufacturers competing with extensive product lines
Porter’s Five Forces Model
What is the Way Forward?
Operations Infrastructure Human Res.
Way Forward
Marketing and Sales
Technology Development
Areas of Improvement
Operations, Infrastructure, and HR
• Reducing idle or non-profitable plants
– Closure of 9 Plants and 7 Assembly Plants by 2012
•
~35% reduction in manufacturing jobs
– Reduce hourly headcount by 2530K and salaried headcount by 14K by 2008
• •
Cost Analysis
Target $5B reduction in costs by 2008 → Savings of approx. $1552/vehicle in N.A. However GM’s fixed cost per vehicle is $2354 lower than Ford’s
– Further reductions in fixed costs needed to reach parity
Marketing and Sales
• • Currently lack of differentiation between Ford, Lincoln and Mercury results in cannibalization of each other’s sales Refocus on consumer through repositioning of brands
– – – Purchases driven by “perceived” value derived from brand reputation and reflection of personality and lifestyle Create an image around brand and give consumers unique reason to buy the brand vs. rivals
• • Ford positioned to target active, hardworking individuals Lincoln aimed at Americans living the American dream
Leverage strong following of F-150 and Mustang to impart the Ford spirit
Technology Development
• Introduction of innovative products and new development methods to sustain recovery
– Fresh product lineup → 70% of vehicles (by volume) new or significantly upgraded – Hybrid and alternative energy technologies
• Introduce hybrid options in existing product lines • Major investments in flexible-fuel, diesel and hydrogen powertrains – Redesign vehicles with new 6-speed transmission to improve mileage
• Leverage global infrastructure to pool design resources
– Sharing “B” and “C” small car chassis used abroad – Leads to decreased costs and capturing efficiencies of scale
Recommendations
• Adopting a clear differentiation strategy and supporting value-chain activities should improve Ford’s N.A. position • Achieve cost parity
– Continue cost cutting beyond those already specified in the plan – Focus on reduction of manufacturing costs – Additionally cut $3.2B in cost to achieve parity with Foreign rivals and $2.7B to achieve parity with GM – To compete globally with GM → $11B in overhead needs to be reduced
• Invest in unique advertising to promote differentiation strategy • Create uniquely designed vehicles with shared platforms and technologies
IS THE WAY FORWARD REALLY FORD’S WAY FORWARD? Sameer Kirtane, Rachit Shukla, Louis Wang, Jimmy Zhan November 17th, 2006
Introduction Ford’s market share in the United States has fallen from 23.7% in year 2000 1 to 15.5% in 2006 . Despite changes in Ford’s leadership, the company reported a loss of $1.2 billion over all its global operations in its most recent quarter ending in September of 2006, setting the company on its way to losing $8 to $9 billion this year alone 3 . Its dismal performance has prompted Ford to launch, in January 2006, its third restructuring effort of the past five years 4 , the Way Forward. The Way Forward is a broad initiative to address the competitiveness of its North American operations in the Ford, Lincoln, and Mercury product lines. On the heels of a $2 billion loss from the North American division in FY 2006 Q3, the Way Forward Plan has been modified and moved to an accelerated schedule. The aim is to return the North America division to profitability by 2009. In this paper, we will be discussing the efficacy of the accelerated restructuring effort in improving Ford’s competitive position vis-à-vis business level strategies. The aspects of the Way Forward we will be focusing on are the substantial reduction of manufacturing costs, the emphasis on the customer, and the introduction of innovative products and development methods a .
2
Industry However, to understand Ford’s position today requires understanding the North American automotive industry, defined as manufacturers of cars sold in North America. Porter’s Five Forces (Appendix B) shows that the industry has captive but essential suppliers, high capital costs for potential entrants, and a lack of feasible substitutes for the American commute. However, these positives are greatly outweighed by the low switching cost of buyers between firms in the industry and fierce internal rivalry, with many manufacturers competing with extensive product lines. As a whole, it is a difficult industry to be in. Ford’s Recent History This intense internal rivalry suggests that to earn profits, a company must be uniquely better than its rivals, and the way to achieve this is through coherent business-level strategies. A clear business-level strategy will help a firm maximize margins and capture market share, both key given the stagnant market size of the industry. In the last decade, Ford’s business strategy has become unclear, neither being a successful differentiator nor a cost leader. The company stopped innovating on many of its products, especially its compact and mid-sized vehicles, and instead focused attention on its truck and SUV divisions 5 and the expansion of its luxury portfolio (Premier Auto Group) via purchases of high-end brands like Land Rover and Volvo4. While one may argue that the luxury or truck strategy constitutes focus, this is an incorrect assessment given the large percentage of sales that are obtained through its other core automotive operations b . In fact, with rising gas prices, Ford’s luxury and truck strategy has all but failed as consumers have fled its high gas consumption vehicles despite substantial price discounts 6 and have switched to its competitors, especially the Japanese automakers. Over this same time period, Ford’s costs continued to grow disproportionately to rivals. Currently, it is estimated that foreign automakers may be able to produce cars at a cost of $2500 less per vehicle than Ford due
a b
The entire accelerated Way Forward plan can be found in Appendix A See Appendix E: 62% of sales by volume in the US come from trucks, 38% from traditional sedans, etc.
to lower overhead costs from wages, pensions, and benefits5. Thus, the question arises: Will the accelerated Way Forward be a successful business level strategy? The Way Forward: A Real Business-Level Strategy We believe that the Way Forward will improve Ford’s competitiveness within the industry by establishing a successful differentiation strategy. However, the full benefit of this strategy cannot be realized without achieving cost parity relative to its peers. We believe Ford’s cost reductions will fall short on this parity front, hindering its overall turnaround effort. Analysis of the Way Forward’s effect on Porter’s value chain strongly suggests this conclusion. Operations, Infrastructure, and Human Resources c To become more cost efficient, the accelerated Way Forward plan calls for 16 plant closures, of which 7 are assembly plants, by the year 2012 (infrastructure and operations reduction). Additionally, the company is offering generous buyout packages to all United Auto Worker members to reduce hourly headcount by 25,000 to 30,000 and salaried headcount by 14,000 by 2008 totaling a ~35% reduction in manufacturing jobs (HR and operations). Ford’s near term target is a $5 billion dollar reduction of North American operating costs by 2008 7 . Understandably, these attempts at cost reduction are rather severe and seem to fit the model of cost leadership, but the numbers are deceiving because Ford’s cost structure is severely bloated. For example, Appendix C shows that under last year’s sales figures, a $5 billion dollar reduction in costs would result in savings of approximately $1522 per car produced in North America. These cost savings, however, do not go far enough to achieve even cost parity with its traditional competitor, GM. On a global basis, GM’s fixed cost per vehicle is $2354 less than Ford’s 8 even though GM produced 34% more cars than Ford did in 2005 worldwide. Thus, further reductions in fixed costs by Ford seem necessary to just achieve industry parity. Marketing and Sales The second part of Ford’s plan is to refocus on the consumer through repositioning of its brands and product mix to be more consistent with customer preferences. Currently, Ford lacks product differentiation between the three brands sold by the North American division – Ford, Lincoln, and Mercury. As a result, the divisions are cannibalizing each other’s sales. As a Merrill Lynch analyst remarked: “[Mercury and Lincoln] are mostly dressed-up versions of mass-market Fords.”5 The Way Forward attempts to address these issues by carefully focusing the company’s brands on target segments (see Appendix D). For example, the Ford brand will be positioned to target active, hardworking individuals while the Lincoln segment will be aimed at Americans living the American dream. The difference between this new segmentation versus the original low-end (Ford), mid-end (Mercury), and high-end (Lincoln) segmentation is that Ford has now created a personality for their brands. By creating an image around the brand, they will give customers within each segment a unique reason to buy the brand versus rivals, allowing Ford to increase its margins and create perceived switching costs. This differentiation strategy is essential in the crowded automotive industry, where every company essentially sells cars with
c
Please note for clarity’s sake, parts of Porter’s value chain have been grouped together
the same utility value within model type d . Customers instead purchase automobiles based on “perceived” value, often a function of brand reputation and how well that brand and model reflect their personalities and lifestyles. In addition to differentiating its three North American brands, the Way Forward stipulates that Ford should emphasize development and production of several car models that presently enjoy strong reputations, including the Ford F-150 and the Ford Mustang. These two models are a position of strength for the company, with high brand loyalty among buyers. They are often used as a symbol of the Ford name and its personality, and thus their continued success will enhance the company image as a whole, again supporting a strong differentiation strategy. Technology Development The final key piece of Ford’s restructuring plan is the introduction of innovative products and new development methods. As Rich Wagoner (General Motors CEO) has said in Time Magazine, “No automotive turnaround has been successful without a steady flow of strong products.” 9 Thus, the company will need a fresh product lineup to sustain its recovery. The Way Forward takes advantage of Ford’s large R&D budget relative to its competitors8 by introducing new models, for example the new 7-passenger full size crossover vehicle. 10 Furthermore, Ford’s Way Forward emphasizes the company’s hybrid and alternative energy technologies and focuses on the growing popularity of hybrid vehicles. Way Forward’s concentration in this category should help the company close the technological gap between Ford and its Japanese rivals while leaving the other American automakers behind. Additionally, the company plans to redesign many of its existing vehicles by incorporating new technologies such as a 6-speed transmission.10 In all, by 2008, 70% of vehicles by volume should be new or significantly upgraded according to Ford’s Way Forward plan. Finally, the company hopes to leverage its global infrastructure to reduce product design times by pooling design resources and technological innovations while reducing costs by sharing car parts and car ideas.5 For example, they plan on introducing their “B” and “C” small car chassis used abroad.10 This is an example of leveraging their overseas technical expertise in certain car categories leading to better, more differentiated products while sharing components to decrease costs and to capture efficiencies of scale. Conclusion The Way Forward will, if executed properly, significantly improve Ford’s North American position in the industry by adopting a clear differentiation strategy and value-chain activities that support it. However, to achieve success in the marketplace with such a strategy, Ford must also achieve cost parity. Thus, we recommend that Ford, in order to achieve cost parity, further continue its cost cutting beyond those already specified by the Way Forward, something the new management hints may happen in the near future. As shown in Appendix F, we estimate that Ford must cut, in North American operations, approximately $3.2 billion in fixed costs to achieve parity with foreign automakers and $2.7 billion to achieve parity with GM. Globally, to achieve cost parity with GM requires Ford to make an additional $11 billion in cuts in worldwide overhead. In addition, Ford should take care only to reduce manufacturing costs, not costs associated with differentiating the brand (R&D, Marketing, etc). By reducing nond
I.e. every brand’s sedan will accomplish moving the owner from point A to point B comfortably and every light pickup truck will haul the same load weight.
manufacturing costs, Ford risks cutting exactly those resources that are needed in successfully executing its new strategy. Moreover, Ford should invest immediately in unique advertising campaigns in order to ensure the aspects of differentiation are realized by the consumer, especially upon introduction of its new vehicles. Finally, for Ford to successfully reposition its brands, Ford must make sure to uniquely design each of its vehicle’s external bodies to maintain differentiation while still sharing internal components to maximize synergies. Together with these recommendations and successful execution, Ford should be able to return to a competitive position in the marketplace and stabilize if not improve its market share and financial position.
References and Sources Ford Motor Company, Sustainability Report 2004/05, http://www.ford.com/en/company/about/sustainability/report/proData.htm; 2 Ford Q3 2006 Earnings Call Transcript, 10/23/06, SeekingAlpha, http://seekingalpha.com/article/19023 3 Ford: $6B auto loss looms, The Detroit News, 9/14/06, http://www.detnews.com/apps/pbcs.dll/article?AID=/20060914/AUTO01/609140365 4 BusinessWeek, David Kiley & David Welch, Oct 2, 2006, “Does Ford Deserve All the Street’s Heat?” Iss. 4003, pg. 36 5 Time, Daren Fonda, Sept 18th, 2006, “Ford: Just Fix the Car”, Vol. 168, Iss. 12; pg. 46 6 Newsweek, Keith Naughton, Sept 11, 2006, “Q & A ‘We Understand We’re in Trouble’; Bill Ford Jr. CEO, Ford” 7 Numbers from Ford Corporate Press Release and Conference Call, Sept 2006 and JP Morgan Analyst Research “Ford Motor Company –A Look at the Accelerated Way Forward Plan,” September 18, 2006. 8 Deutsche Bank “Can Ford be fixed? First impressions of Alan Mulally” October 24th, 2006 9 Forbes Global, “Bill Ford’s Next Act,” June 23rd, 2003 10 Ford Press Release, “Ford Accelerates Way Ford,” Sept 15, 2006
1
Appendix A: The Accelerated Way Forward Plan Taken from Sept. 15, 2006 Ford Press Release Titled “Ford Accelerates ‘Way Forward’, Accessible at http://media.ford.com/article_display.cfm?article_id=24261
A summary of the North America Way Forward actions to be implemented by the end of 2008 and resulting financial impact follows. Product-Led Turnaround
• • • • • • • • •
70 percent of Ford, Lincoln and Mercury products by volume will be new or significantly upgraded from today through the end of 2008. The new lineup builds on Ford’s strength as America’s truck leader while expanding in growth segments, such as crossovers. Ford will introduce an all-new full-size crossover based on the Ford Fairlane concept. The seven-passenger vehicle for modern families goes on sale in 2008 and will be produced at Ford’s Oakville ( Ontario, Canada) Assembly Plant. Ford will continue to lead the American truck market with a new Super Duty pickup confirmed to go on sale in early 2007 and an all-new F-150 pickup confirmed to go on sale in 2008. The vehicles boast powertrain, design and feature upgrades. Ford will continue to lead America’s sports car market with new Mustang derivatives each year. The new Lincoln MKS flagship sedan will go on sale in 2008 – packed with more technology and features than any prior Lincoln, including all-wheel drive. Current plans are to produce the vehicle at the company’s Chicago Assembly Plant. Lincoln will continue offering the Lincoln Town Car to meet ongoing demand. After assembly ends at Ford’s Wixom ( Mich.) Assembly Plant in 2007, Ford intends to move Town Car production to Ford’s St. Thomas ( Ontario, Canada) Assembly Plant. St. Thomas will be reduced to one shift of production, as previously was announced. Product development work is intensifying through 2008 on creating new small cars and even more crossovers that will go on sale in the future. These vehicles will be based on the company’s global vehicle architectures, including “B” and “C” platforms not presently used in North America. Major investments continue in new gasoline, flexible-fuel, diesel, hydrogen and hybrid powertrains, including additional E85 ethanol-powered and hybrid vehicles on the road by the end of 2008. In addition, two out of every three Ford, Lincoln and Mercury vehicles will be offered with fuel-saving 6-speed transmission technology by the end of 2008. The new products and a voluntary consolidation of the Ford and Lincoln Mercury dealer network are designed to significantly improve the dealers’ through-put and profitability by the end of 2008.
Accelerated Cost Savings, Leaner Structure, Improved Efficiency
• •
• • • •
Compared with 2005, annual operating costs will be reduced by about $5 billion by the end of 2008. Salaried-related costs will be reduced through the elimination of the equivalent of about 14,000 salaried-related positions, which represents approximately a third of Ford’s North American salaried work force. The reduction includes the equivalent of 4,000 positions eliminated in the first quarter of 2006. The additional reductions will be achieved through early retirements, voluntary separations and, if necessary, involuntary separations – with most employees expected to depart by the end of the first quarter in 2007. An agreement with the UAW will expand early retirement offers and separation packages to all Ford U.S. hourly employees, including Ford employees at the company’s ACH plants. Employees will begin receiving details by midOctober, and those accepting offers will leave the company by September 2007. Ford will accelerate by four years its previously announced goal of reducing 25,000 to 30,000 North American manufacturing employees by the end of 2012. The reductions now will be completed by the end of 2008. The sale or closure of all ACH facilities by the end of 2008 will result in additional employee reductions. Ford continues to work with the UAW to improve the competitiveness of its U.S. manufacturing facilities. As a result, new competitive operating agreements have been ratified by UAW locals in 30 different U.S. Ford and ACH facilities – and nearly $600 million in annual savings is projected to be realized.
Capacity Further Aligned with Consumer Demand
• • • •
North America manufacturing capacity is being adjusted to 3.6 million units by the end of 2008, down 26 percent versus 2005 – in line with consumer demand and as announced earlier. Nine facilities will be idled and cease production through 2008, including seven already announced. The two additional plants are the Maumee ( Ohio) Stamping Plant and the Essex ( Ontario, Canada) Engine Plant. Ford’s Norfolk ( Va.) Assembly Plant will be idled a year earlier than planned, and a shift reduction, in advance of idling the facilities, now is planned at Norfolk and Twin Cities ( Minn.) Assembly. Facilities affected by the end of 2008 include the following:
• • • • • • • • • • • •
Atlanta Assembly – to be idled in October 2006 Batavia Transmission – to be idled in 2008 Essex Engine – to cease operations in 2007 Maumee Stamping – intended to be idled in 2008 Norfolk Assembly – to be idled in 2007, a year earlier than previously planned, with a shift reduction planned in January 2007 St. Louis Assembly – already idled in March 2006 Twin Cities Assembly – to be idled in 2008, with a shift reduction planned in 2007 Windsor Casting – to be idled in 2007 Wixom Assembly – to be idled in 2007 Dearborn Truck Plant will add a third crew, beginning in 2007, for F-150 truck production. All ACH operations will be sold or closed by the end of 2008. Including Maumee Stamping and Essex Engine, Ford has announced plans to cease production at 16 North American manufacturing facilities by the end of 2012, including seven assembly plants.
Financial Impact “Though North America’s return to profitability will take longer than planned, the actions we’re taking are the right ones, and are fundamental and necessary steps to improving our business structure,” said Leclair, the company’s CFO. “The planned improvements in our auto operations, in conjunction with Ford Credit – which remains a core asset – will leave us well-positioned for the future. “We are starting from a position of strong liquidity, including our cash, credit lines and VEBA,” Leclair added. “We will continue to focus on enhancing our liquidity, building upon our decision to explore strategic alternatives for Aston Martin and the board’s intent to eliminate our quarterly dividend.” Automotive Operations
• • • • • •
Full-year pre-tax special items for 2006 are expected to be significantly increased from the $3.8 billion we estimated previously to reflect the accelerated Way Forward actions. Further details will be provided when Ford announces Third Quarter financial results next month. Full-year profitability in North American automotive operations not expected before 2009 . Ford and Lincoln Mercury U.S. market share is projected to be in the low-16 percent range at the end of 2006. A further share decline is expected as production of the Ford Taurus sedan and Mercury Monterey minivan ends in 2006 and production of the Ford Freestar minivan ends in 2007. The end of these vehicles will reduce the company’s sales to daily rental fleets. With the investment in new products and improvements in quality, Ford expects to be in the 14 to 15 percent market share range going forward – with a focus on profitable retail share. South America and Ford of Europe still are expected to be solidly profitable in 2006. However, full-year operating losses now are expected in 2006 for Asia Pacific and Africa, as well as the Premier Automotive Group – primarily reflecting lower volumes.
Liquidity
• •
Ford Motor Company’s 2006 year-end liquidity is expected to include automotive gross cash of about $20 billion, including marketable and loaned securities and the effects of $3.4 billion of VEBA. The company will continue to have committed automotive credit facilities totaling more than $6 billion . Ford Motor Company’s Board indicates that it will suspend payment of the quarterly dividend on its common and Class B Stock beginning in the fourth quarter of 2006.
Appendix B: Porter’s Five Forces
Appendix C: Cost Analysis Ford Production (in thousands) North America International Total Fixed Cost per Unit Variable Cost per Unit North America Effect Expected Cost Savings (in millions) US Car Production (in thousands) Cost Savings per Car in NA Global Effect Expected Cost Savings (in millions) Total Car Production (in thousands) Cost Savings per Car in NA 3,286 3,532 6,818 $8,411 $14,491 GM 4,828 4,319 9,147 $6,057 $11,895 Difference -1,542 -787 -2,329 $2,354 $2,596
$5,000 3,286 $1,522
$5,000 6,818 $733
Data Source: Deutsche Bank “Can Ford be fixed? First impressions of Alan Mulally” October 24th, 2006
Appendix D: Brand Positioning
Source: Ford Motor Company, North America “Way Forward” Business Review, January 23, 2006
Appendix E: Percent Sales in US by Division and Type U.S. Sales By Brand Oct 2006 Ford Mercury Lincoln Totals % (Category) Car Truck Total 64433 118755 183188 6232 4045 10277 5754 3012 8766 76419 125812 0.37788 0.62212 202231
Source: PR Newswire, Nov 1st, 2006, “Ford’s U.S. Sales Rise for the 2nd Straight Month”
Appendix F: Additional Cost Savings Fixed Cost Parity With Foreign Automakers (NA Only) Current Cost Difference Per Car Savings Per Car in NA Under $5 Bil Cost Cuts Additional Cost Cuts Needed Per Car Number of Cars Sold in NA (in thousands) Total Necessary Cost Savings (in Billions) Fixed Cost Parity With GM (NA Only) Current Cost Difference Per Car Savings Per Car in NA Under $5 Bil Cost Cuts Additional Cost Cuts Needed Per Car Number of Cars Sold in NA (in thousands) Total Necessary Cost Savings (in Billions)
2500 1522 978 3,286 3.21371
2354 1522 832 3,286 2.73395
Sources For Cost Difference/Car Previously Cited Assumption: Costs Are Evenly Spread Out Per Unit Across Global Operations
Global Cost Parity with GM Excess Fixed Costs For Ford (in Billions) Current Way Forward Reduction in Costs (in Billions) Possible Additional Cost Savings (in Billions)
16 5 11
Value For Excess Fixed Costs For Ford Taken From Deutsche Bank, Previously Cited
Sameer Kirtane Rachit Shukla Louis Wang Jimmy Zhan
Overview
• • • • Ford’s current status Industry Analysis Recent History What is the Way Forward?
– Operations, Infrastructure and Human Resources – Marketing and Sales – Technology Development
• Recommendations
Current Status
• Leadership change • Market share ↓ since 2000 from 23.7% to 15.5% in N.A. • Reported loss of $1.2B qtr ending Sept. 2006 • On its way to losing $8-9B in 2006 alone • Third restructuring effort: Way Forward
Alan Mulally
Source: http://media.ford.com
Recent History
• Ambiguous business-level strategy in last decade
– Neither successful differentiator nor cost-leader
• Lacked innovation in compact and mid-sized cars • Focus on SUV division and luxury portfolio • Rising gas prices
– Consumers fled SUV and luxury portfolio → Strategic Failure
• Costs grew disproportionately to rivals
– Estimate: Costs Ford $2500/vehicle more to produce than Foreign rivals
Industry Analysis
• N.A. Automotive Industry: Difficult to be in
– Positives
• Captive but essential suppliers • High capital costs of potential entrants • Lack of feasible substitutes
– Negatives
• Low switching cost of buyers between firms • Fierce internal rivalry due to manufacturers competing with extensive product lines
Porter’s Five Forces Model
What is the Way Forward?
Operations Infrastructure Human Res.
Way Forward
Marketing and Sales
Technology Development
Areas of Improvement
Operations, Infrastructure, and HR
• Reducing idle or non-profitable plants
– Closure of 9 Plants and 7 Assembly Plants by 2012
•
~35% reduction in manufacturing jobs
– Reduce hourly headcount by 2530K and salaried headcount by 14K by 2008
• •
Cost Analysis
Target $5B reduction in costs by 2008 → Savings of approx. $1552/vehicle in N.A. However GM’s fixed cost per vehicle is $2354 lower than Ford’s
– Further reductions in fixed costs needed to reach parity
Marketing and Sales
• • Currently lack of differentiation between Ford, Lincoln and Mercury results in cannibalization of each other’s sales Refocus on consumer through repositioning of brands
– – – Purchases driven by “perceived” value derived from brand reputation and reflection of personality and lifestyle Create an image around brand and give consumers unique reason to buy the brand vs. rivals
• • Ford positioned to target active, hardworking individuals Lincoln aimed at Americans living the American dream
Leverage strong following of F-150 and Mustang to impart the Ford spirit
Technology Development
• Introduction of innovative products and new development methods to sustain recovery
– Fresh product lineup → 70% of vehicles (by volume) new or significantly upgraded – Hybrid and alternative energy technologies
• Introduce hybrid options in existing product lines • Major investments in flexible-fuel, diesel and hydrogen powertrains – Redesign vehicles with new 6-speed transmission to improve mileage
• Leverage global infrastructure to pool design resources
– Sharing “B” and “C” small car chassis used abroad – Leads to decreased costs and capturing efficiencies of scale
Recommendations
• Adopting a clear differentiation strategy and supporting value-chain activities should improve Ford’s N.A. position • Achieve cost parity
– Continue cost cutting beyond those already specified in the plan – Focus on reduction of manufacturing costs – Additionally cut $3.2B in cost to achieve parity with Foreign rivals and $2.7B to achieve parity with GM – To compete globally with GM → $11B in overhead needs to be reduced
• Invest in unique advertising to promote differentiation strategy • Create uniquely designed vehicles with shared platforms and technologies
IS THE WAY FORWARD REALLY FORD’S WAY FORWARD? Sameer Kirtane, Rachit Shukla, Louis Wang, Jimmy Zhan November 17th, 2006
Introduction Ford’s market share in the United States has fallen from 23.7% in year 2000 1 to 15.5% in 2006 . Despite changes in Ford’s leadership, the company reported a loss of $1.2 billion over all its global operations in its most recent quarter ending in September of 2006, setting the company on its way to losing $8 to $9 billion this year alone 3 . Its dismal performance has prompted Ford to launch, in January 2006, its third restructuring effort of the past five years 4 , the Way Forward. The Way Forward is a broad initiative to address the competitiveness of its North American operations in the Ford, Lincoln, and Mercury product lines. On the heels of a $2 billion loss from the North American division in FY 2006 Q3, the Way Forward Plan has been modified and moved to an accelerated schedule. The aim is to return the North America division to profitability by 2009. In this paper, we will be discussing the efficacy of the accelerated restructuring effort in improving Ford’s competitive position vis-à-vis business level strategies. The aspects of the Way Forward we will be focusing on are the substantial reduction of manufacturing costs, the emphasis on the customer, and the introduction of innovative products and development methods a .
2
Industry However, to understand Ford’s position today requires understanding the North American automotive industry, defined as manufacturers of cars sold in North America. Porter’s Five Forces (Appendix B) shows that the industry has captive but essential suppliers, high capital costs for potential entrants, and a lack of feasible substitutes for the American commute. However, these positives are greatly outweighed by the low switching cost of buyers between firms in the industry and fierce internal rivalry, with many manufacturers competing with extensive product lines. As a whole, it is a difficult industry to be in. Ford’s Recent History This intense internal rivalry suggests that to earn profits, a company must be uniquely better than its rivals, and the way to achieve this is through coherent business-level strategies. A clear business-level strategy will help a firm maximize margins and capture market share, both key given the stagnant market size of the industry. In the last decade, Ford’s business strategy has become unclear, neither being a successful differentiator nor a cost leader. The company stopped innovating on many of its products, especially its compact and mid-sized vehicles, and instead focused attention on its truck and SUV divisions 5 and the expansion of its luxury portfolio (Premier Auto Group) via purchases of high-end brands like Land Rover and Volvo4. While one may argue that the luxury or truck strategy constitutes focus, this is an incorrect assessment given the large percentage of sales that are obtained through its other core automotive operations b . In fact, with rising gas prices, Ford’s luxury and truck strategy has all but failed as consumers have fled its high gas consumption vehicles despite substantial price discounts 6 and have switched to its competitors, especially the Japanese automakers. Over this same time period, Ford’s costs continued to grow disproportionately to rivals. Currently, it is estimated that foreign automakers may be able to produce cars at a cost of $2500 less per vehicle than Ford due
a b
The entire accelerated Way Forward plan can be found in Appendix A See Appendix E: 62% of sales by volume in the US come from trucks, 38% from traditional sedans, etc.
to lower overhead costs from wages, pensions, and benefits5. Thus, the question arises: Will the accelerated Way Forward be a successful business level strategy? The Way Forward: A Real Business-Level Strategy We believe that the Way Forward will improve Ford’s competitiveness within the industry by establishing a successful differentiation strategy. However, the full benefit of this strategy cannot be realized without achieving cost parity relative to its peers. We believe Ford’s cost reductions will fall short on this parity front, hindering its overall turnaround effort. Analysis of the Way Forward’s effect on Porter’s value chain strongly suggests this conclusion. Operations, Infrastructure, and Human Resources c To become more cost efficient, the accelerated Way Forward plan calls for 16 plant closures, of which 7 are assembly plants, by the year 2012 (infrastructure and operations reduction). Additionally, the company is offering generous buyout packages to all United Auto Worker members to reduce hourly headcount by 25,000 to 30,000 and salaried headcount by 14,000 by 2008 totaling a ~35% reduction in manufacturing jobs (HR and operations). Ford’s near term target is a $5 billion dollar reduction of North American operating costs by 2008 7 . Understandably, these attempts at cost reduction are rather severe and seem to fit the model of cost leadership, but the numbers are deceiving because Ford’s cost structure is severely bloated. For example, Appendix C shows that under last year’s sales figures, a $5 billion dollar reduction in costs would result in savings of approximately $1522 per car produced in North America. These cost savings, however, do not go far enough to achieve even cost parity with its traditional competitor, GM. On a global basis, GM’s fixed cost per vehicle is $2354 less than Ford’s 8 even though GM produced 34% more cars than Ford did in 2005 worldwide. Thus, further reductions in fixed costs by Ford seem necessary to just achieve industry parity. Marketing and Sales The second part of Ford’s plan is to refocus on the consumer through repositioning of its brands and product mix to be more consistent with customer preferences. Currently, Ford lacks product differentiation between the three brands sold by the North American division – Ford, Lincoln, and Mercury. As a result, the divisions are cannibalizing each other’s sales. As a Merrill Lynch analyst remarked: “[Mercury and Lincoln] are mostly dressed-up versions of mass-market Fords.”5 The Way Forward attempts to address these issues by carefully focusing the company’s brands on target segments (see Appendix D). For example, the Ford brand will be positioned to target active, hardworking individuals while the Lincoln segment will be aimed at Americans living the American dream. The difference between this new segmentation versus the original low-end (Ford), mid-end (Mercury), and high-end (Lincoln) segmentation is that Ford has now created a personality for their brands. By creating an image around the brand, they will give customers within each segment a unique reason to buy the brand versus rivals, allowing Ford to increase its margins and create perceived switching costs. This differentiation strategy is essential in the crowded automotive industry, where every company essentially sells cars with
c
Please note for clarity’s sake, parts of Porter’s value chain have been grouped together
the same utility value within model type d . Customers instead purchase automobiles based on “perceived” value, often a function of brand reputation and how well that brand and model reflect their personalities and lifestyles. In addition to differentiating its three North American brands, the Way Forward stipulates that Ford should emphasize development and production of several car models that presently enjoy strong reputations, including the Ford F-150 and the Ford Mustang. These two models are a position of strength for the company, with high brand loyalty among buyers. They are often used as a symbol of the Ford name and its personality, and thus their continued success will enhance the company image as a whole, again supporting a strong differentiation strategy. Technology Development The final key piece of Ford’s restructuring plan is the introduction of innovative products and new development methods. As Rich Wagoner (General Motors CEO) has said in Time Magazine, “No automotive turnaround has been successful without a steady flow of strong products.” 9 Thus, the company will need a fresh product lineup to sustain its recovery. The Way Forward takes advantage of Ford’s large R&D budget relative to its competitors8 by introducing new models, for example the new 7-passenger full size crossover vehicle. 10 Furthermore, Ford’s Way Forward emphasizes the company’s hybrid and alternative energy technologies and focuses on the growing popularity of hybrid vehicles. Way Forward’s concentration in this category should help the company close the technological gap between Ford and its Japanese rivals while leaving the other American automakers behind. Additionally, the company plans to redesign many of its existing vehicles by incorporating new technologies such as a 6-speed transmission.10 In all, by 2008, 70% of vehicles by volume should be new or significantly upgraded according to Ford’s Way Forward plan. Finally, the company hopes to leverage its global infrastructure to reduce product design times by pooling design resources and technological innovations while reducing costs by sharing car parts and car ideas.5 For example, they plan on introducing their “B” and “C” small car chassis used abroad.10 This is an example of leveraging their overseas technical expertise in certain car categories leading to better, more differentiated products while sharing components to decrease costs and to capture efficiencies of scale. Conclusion The Way Forward will, if executed properly, significantly improve Ford’s North American position in the industry by adopting a clear differentiation strategy and value-chain activities that support it. However, to achieve success in the marketplace with such a strategy, Ford must also achieve cost parity. Thus, we recommend that Ford, in order to achieve cost parity, further continue its cost cutting beyond those already specified by the Way Forward, something the new management hints may happen in the near future. As shown in Appendix F, we estimate that Ford must cut, in North American operations, approximately $3.2 billion in fixed costs to achieve parity with foreign automakers and $2.7 billion to achieve parity with GM. Globally, to achieve cost parity with GM requires Ford to make an additional $11 billion in cuts in worldwide overhead. In addition, Ford should take care only to reduce manufacturing costs, not costs associated with differentiating the brand (R&D, Marketing, etc). By reducing nond
I.e. every brand’s sedan will accomplish moving the owner from point A to point B comfortably and every light pickup truck will haul the same load weight.
manufacturing costs, Ford risks cutting exactly those resources that are needed in successfully executing its new strategy. Moreover, Ford should invest immediately in unique advertising campaigns in order to ensure the aspects of differentiation are realized by the consumer, especially upon introduction of its new vehicles. Finally, for Ford to successfully reposition its brands, Ford must make sure to uniquely design each of its vehicle’s external bodies to maintain differentiation while still sharing internal components to maximize synergies. Together with these recommendations and successful execution, Ford should be able to return to a competitive position in the marketplace and stabilize if not improve its market share and financial position.
References and Sources Ford Motor Company, Sustainability Report 2004/05, http://www.ford.com/en/company/about/sustainability/report/proData.htm; 2 Ford Q3 2006 Earnings Call Transcript, 10/23/06, SeekingAlpha, http://seekingalpha.com/article/19023 3 Ford: $6B auto loss looms, The Detroit News, 9/14/06, http://www.detnews.com/apps/pbcs.dll/article?AID=/20060914/AUTO01/609140365 4 BusinessWeek, David Kiley & David Welch, Oct 2, 2006, “Does Ford Deserve All the Street’s Heat?” Iss. 4003, pg. 36 5 Time, Daren Fonda, Sept 18th, 2006, “Ford: Just Fix the Car”, Vol. 168, Iss. 12; pg. 46 6 Newsweek, Keith Naughton, Sept 11, 2006, “Q & A ‘We Understand We’re in Trouble’; Bill Ford Jr. CEO, Ford” 7 Numbers from Ford Corporate Press Release and Conference Call, Sept 2006 and JP Morgan Analyst Research “Ford Motor Company –A Look at the Accelerated Way Forward Plan,” September 18, 2006. 8 Deutsche Bank “Can Ford be fixed? First impressions of Alan Mulally” October 24th, 2006 9 Forbes Global, “Bill Ford’s Next Act,” June 23rd, 2003 10 Ford Press Release, “Ford Accelerates Way Ford,” Sept 15, 2006
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Appendix A: The Accelerated Way Forward Plan Taken from Sept. 15, 2006 Ford Press Release Titled “Ford Accelerates ‘Way Forward’, Accessible at http://media.ford.com/article_display.cfm?article_id=24261
A summary of the North America Way Forward actions to be implemented by the end of 2008 and resulting financial impact follows. Product-Led Turnaround
• • • • • • • • •
70 percent of Ford, Lincoln and Mercury products by volume will be new or significantly upgraded from today through the end of 2008. The new lineup builds on Ford’s strength as America’s truck leader while expanding in growth segments, such as crossovers. Ford will introduce an all-new full-size crossover based on the Ford Fairlane concept. The seven-passenger vehicle for modern families goes on sale in 2008 and will be produced at Ford’s Oakville ( Ontario, Canada) Assembly Plant. Ford will continue to lead the American truck market with a new Super Duty pickup confirmed to go on sale in early 2007 and an all-new F-150 pickup confirmed to go on sale in 2008. The vehicles boast powertrain, design and feature upgrades. Ford will continue to lead America’s sports car market with new Mustang derivatives each year. The new Lincoln MKS flagship sedan will go on sale in 2008 – packed with more technology and features than any prior Lincoln, including all-wheel drive. Current plans are to produce the vehicle at the company’s Chicago Assembly Plant. Lincoln will continue offering the Lincoln Town Car to meet ongoing demand. After assembly ends at Ford’s Wixom ( Mich.) Assembly Plant in 2007, Ford intends to move Town Car production to Ford’s St. Thomas ( Ontario, Canada) Assembly Plant. St. Thomas will be reduced to one shift of production, as previously was announced. Product development work is intensifying through 2008 on creating new small cars and even more crossovers that will go on sale in the future. These vehicles will be based on the company’s global vehicle architectures, including “B” and “C” platforms not presently used in North America. Major investments continue in new gasoline, flexible-fuel, diesel, hydrogen and hybrid powertrains, including additional E85 ethanol-powered and hybrid vehicles on the road by the end of 2008. In addition, two out of every three Ford, Lincoln and Mercury vehicles will be offered with fuel-saving 6-speed transmission technology by the end of 2008. The new products and a voluntary consolidation of the Ford and Lincoln Mercury dealer network are designed to significantly improve the dealers’ through-put and profitability by the end of 2008.
Accelerated Cost Savings, Leaner Structure, Improved Efficiency
• •
• • • •
Compared with 2005, annual operating costs will be reduced by about $5 billion by the end of 2008. Salaried-related costs will be reduced through the elimination of the equivalent of about 14,000 salaried-related positions, which represents approximately a third of Ford’s North American salaried work force. The reduction includes the equivalent of 4,000 positions eliminated in the first quarter of 2006. The additional reductions will be achieved through early retirements, voluntary separations and, if necessary, involuntary separations – with most employees expected to depart by the end of the first quarter in 2007. An agreement with the UAW will expand early retirement offers and separation packages to all Ford U.S. hourly employees, including Ford employees at the company’s ACH plants. Employees will begin receiving details by midOctober, and those accepting offers will leave the company by September 2007. Ford will accelerate by four years its previously announced goal of reducing 25,000 to 30,000 North American manufacturing employees by the end of 2012. The reductions now will be completed by the end of 2008. The sale or closure of all ACH facilities by the end of 2008 will result in additional employee reductions. Ford continues to work with the UAW to improve the competitiveness of its U.S. manufacturing facilities. As a result, new competitive operating agreements have been ratified by UAW locals in 30 different U.S. Ford and ACH facilities – and nearly $600 million in annual savings is projected to be realized.
Capacity Further Aligned with Consumer Demand
• • • •
North America manufacturing capacity is being adjusted to 3.6 million units by the end of 2008, down 26 percent versus 2005 – in line with consumer demand and as announced earlier. Nine facilities will be idled and cease production through 2008, including seven already announced. The two additional plants are the Maumee ( Ohio) Stamping Plant and the Essex ( Ontario, Canada) Engine Plant. Ford’s Norfolk ( Va.) Assembly Plant will be idled a year earlier than planned, and a shift reduction, in advance of idling the facilities, now is planned at Norfolk and Twin Cities ( Minn.) Assembly. Facilities affected by the end of 2008 include the following:
• • • • • • • • • • • •
Atlanta Assembly – to be idled in October 2006 Batavia Transmission – to be idled in 2008 Essex Engine – to cease operations in 2007 Maumee Stamping – intended to be idled in 2008 Norfolk Assembly – to be idled in 2007, a year earlier than previously planned, with a shift reduction planned in January 2007 St. Louis Assembly – already idled in March 2006 Twin Cities Assembly – to be idled in 2008, with a shift reduction planned in 2007 Windsor Casting – to be idled in 2007 Wixom Assembly – to be idled in 2007 Dearborn Truck Plant will add a third crew, beginning in 2007, for F-150 truck production. All ACH operations will be sold or closed by the end of 2008. Including Maumee Stamping and Essex Engine, Ford has announced plans to cease production at 16 North American manufacturing facilities by the end of 2012, including seven assembly plants.
Financial Impact “Though North America’s return to profitability will take longer than planned, the actions we’re taking are the right ones, and are fundamental and necessary steps to improving our business structure,” said Leclair, the company’s CFO. “The planned improvements in our auto operations, in conjunction with Ford Credit – which remains a core asset – will leave us well-positioned for the future. “We are starting from a position of strong liquidity, including our cash, credit lines and VEBA,” Leclair added. “We will continue to focus on enhancing our liquidity, building upon our decision to explore strategic alternatives for Aston Martin and the board’s intent to eliminate our quarterly dividend.” Automotive Operations
• • • • • •
Full-year pre-tax special items for 2006 are expected to be significantly increased from the $3.8 billion we estimated previously to reflect the accelerated Way Forward actions. Further details will be provided when Ford announces Third Quarter financial results next month. Full-year profitability in North American automotive operations not expected before 2009 . Ford and Lincoln Mercury U.S. market share is projected to be in the low-16 percent range at the end of 2006. A further share decline is expected as production of the Ford Taurus sedan and Mercury Monterey minivan ends in 2006 and production of the Ford Freestar minivan ends in 2007. The end of these vehicles will reduce the company’s sales to daily rental fleets. With the investment in new products and improvements in quality, Ford expects to be in the 14 to 15 percent market share range going forward – with a focus on profitable retail share. South America and Ford of Europe still are expected to be solidly profitable in 2006. However, full-year operating losses now are expected in 2006 for Asia Pacific and Africa, as well as the Premier Automotive Group – primarily reflecting lower volumes.
Liquidity
• •
Ford Motor Company’s 2006 year-end liquidity is expected to include automotive gross cash of about $20 billion, including marketable and loaned securities and the effects of $3.4 billion of VEBA. The company will continue to have committed automotive credit facilities totaling more than $6 billion . Ford Motor Company’s Board indicates that it will suspend payment of the quarterly dividend on its common and Class B Stock beginning in the fourth quarter of 2006.
Appendix B: Porter’s Five Forces
Appendix C: Cost Analysis Ford Production (in thousands) North America International Total Fixed Cost per Unit Variable Cost per Unit North America Effect Expected Cost Savings (in millions) US Car Production (in thousands) Cost Savings per Car in NA Global Effect Expected Cost Savings (in millions) Total Car Production (in thousands) Cost Savings per Car in NA 3,286 3,532 6,818 $8,411 $14,491 GM 4,828 4,319 9,147 $6,057 $11,895 Difference -1,542 -787 -2,329 $2,354 $2,596
$5,000 3,286 $1,522
$5,000 6,818 $733
Data Source: Deutsche Bank “Can Ford be fixed? First impressions of Alan Mulally” October 24th, 2006
Appendix D: Brand Positioning
Source: Ford Motor Company, North America “Way Forward” Business Review, January 23, 2006
Appendix E: Percent Sales in US by Division and Type U.S. Sales By Brand Oct 2006 Ford Mercury Lincoln Totals % (Category) Car Truck Total 64433 118755 183188 6232 4045 10277 5754 3012 8766 76419 125812 0.37788 0.62212 202231
Source: PR Newswire, Nov 1st, 2006, “Ford’s U.S. Sales Rise for the 2nd Straight Month”
Appendix F: Additional Cost Savings Fixed Cost Parity With Foreign Automakers (NA Only) Current Cost Difference Per Car Savings Per Car in NA Under $5 Bil Cost Cuts Additional Cost Cuts Needed Per Car Number of Cars Sold in NA (in thousands) Total Necessary Cost Savings (in Billions) Fixed Cost Parity With GM (NA Only) Current Cost Difference Per Car Savings Per Car in NA Under $5 Bil Cost Cuts Additional Cost Cuts Needed Per Car Number of Cars Sold in NA (in thousands) Total Necessary Cost Savings (in Billions)
2500 1522 978 3,286 3.21371
2354 1522 832 3,286 2.73395
Sources For Cost Difference/Car Previously Cited Assumption: Costs Are Evenly Spread Out Per Unit Across Global Operations
Global Cost Parity with GM Excess Fixed Costs For Ford (in Billions) Current Way Forward Reduction in Costs (in Billions) Possible Additional Cost Savings (in Billions)
16 5 11
Value For Excess Fixed Costs For Ford Taken From Deutsche Bank, Previously Cited
