Business strategy report on Ford Company - Essay Example

1.STRATEGIC ANALYSIS 1.1 The European auto industry The European auto industry has been declining for the past five years since 2007 and is now at a record low in 20 years. According to Healey (2012), the main problem of the industry is that the production capability of the industry is more than the demand, which is ever decreasing. The industry has to face investors that are questioning the firms why they are operating at a level that is above the industry demand. The firms are hesitant to cut jobs and downsize because of the building pressure by the European labour union and the government. The revenues are going down every year but there is not much that the industry is doing adding to this there is no unanimous industry agreement to resolve this issue, which will eventually gulp the auto industry. The main competitors in the market are Volkswagon, Ford, Fiat, Peugeot, Renalt and GM (Vectorcity, 2012). 1.2 Ford Motor Company Ford Motor Company is a reliable name in the industry since the year 1903. It has now become a global name and has significant shares in different parts of the world. As per Healey (2012), it has 172000 employees globally and 65 plants across the world. It serves 50 markets and employees 65000 employees in Europe. The firm has two main brands Lincoln and Ford and is divided into two departments namely the auto sector and the financial services sector. Under the former it manufactures service cars, trucks, SUVs and vehicle parts. However, as per Naughton and Webb (2012), over 28% of its sales come from the European market, which is suffering for the past five years due to economic downturns. This in turn has affected the firm and it has broken off from the European industry by announcing the shut down of 3 prominent plants in the European region. According to Ramsey (2012), the firm claims that it will be running an annual loss of $ 1.5 billion in Europe. According to Castonguay (2012), though the closer of these plants will cause the elimination of 5700 jobs directly, it will save the firm $ 500 million. It will decrease the production capacity by 18% and thus cut costs also (European Commission 2012). As per Ford, the market is predicted to fall even more and it was the only feasible solution that they could come up with to curtail their costs and answer their investors. This is a bold step that the firm is planning to take as no other firm in the industry has done so as yet. However, Ford is sure that this will work for the firm as an identical model of reducing cost by cutting labour in an attempt to reduce the production capacities has worked in North America (European Commission 2012). The firm needs to take this step as a large part of its revenue depends on the European market. However, there is fierce opposition by the labour union as the firm had earlier committed to build a facility in Genk but instead is going to build one in Spain. The workers need to be compensated and the firm has to face the union before it can take this measure (Ford, 2012). 1.2.1 Purpose of Ford The mission statement of the firm is: People working together as a lean, global enterprise for automotive leadership, as measured by: Customer, Employee, Dealer, Investor, Supplier, Union/Council, and Community Satisfaction. (Ford Motor Company Mission Statement 2012) The firm also aims to restructure itself in an aggressive disposition with the aim to operate with profitability at the on going demand altering the product mix as per the needs of the market, at the same time, work as a single team with the focus on improving the balance sheet. However, currently the firm is not in line with its mission as it is operating below profit and has not been able to alter its product mix with the changing demand (4-traders, 2012). The firm’s focus is not profitability in Europe and has been pressed down by the socio political environment (Thorpe, Slade and Bender, 2009). 1.3 Pestle analysis 1.3.1 Political / legal environment The political and legal environment governing the auto industry in Europe is quite stringent. More so, the government has failed to address the auto industry’s capacity issue where many firms are working with production capacities that exceed the demand in the industry. The result is that firms are over employed and resources are lying idle adding to costs (Guenette, 2012). The government needs to step in and make a unanimous decision for the auto industry where by the excess capacity issue is resolved. According to Thorpe, Slade and Bender (2009), acomparative analysis with the American auto industry during the recession era after 2008-2009 shows that differences in government policies have made drastic impacts on the development of the industry with Ford earning profits of $2.3 billion in North America in the 3rd quarter of 2012 while in Europe the firm had a loss of $468 million. Jolly (2012) adds that similarly Chrysler earned profits of $ 381 million while its partner in Europe earned losses of $364 million in the same time frame. Similar situation is of other brands also between North America and Europe (Vlasic, 2012). The primary reason being the government intervened and resolved the capacity issue by slashing jobs and downsizing helping production facilities to operate as per the demand and not let resources lay idol. However, the European government did not do also because the labour union is very strong here and thus the issue could not be resolved resulting in an ailing automotive industry in Europe (Barr, 2012). 1.3.2 Economic environment There is economic slump in Europe for the past several years with a direct impact of the economy of the region. The disposable income is low, with a low employment rate. Coupled with that, the auto industry is suffering for the past five years as the demand is decreasing but the firms in the industry operate with below production capacity plants (Barr, 2012). Without slashing jobs and downsizing the industry is suffering due to stiff political and social resistance. Moreover, the demand in the entire automotive industry is decreasing as the competition is growing. There also exists red tapism and unfair means of competition in the automotive market of Europe. 1.3.3 Social environment There is a lack of unity in the industry, which has caused such a destruction of the automobile industry in Europe. In the North American industry, there has been a unanimous decision of closing down non-operational production units and downsizing for the better future of the industry as a whole. However, due to the lack of a strong body presence of the unanimous automobile industry in Europe different firms take different measures to deal with the same problem causing an upheaval instead of a systematic resolution of this problem. 1.3.4 Technological/ ecological environment With the demand decreasing in the automotive industry in Europe, the industry now sees a growing trend of producing fuel-efficient hybrid cars that do less harm to the environment while simultaneously being affordable and low in fuel consumption. These features of the products attract the local market and there is a growing demand for such hybrid products operating via electricity, natural gas and hydrogen. 1.4 SWOT Analysis of Ford 1.4.1 Strengths 1.4.1.1 Stable firm Established in the year 1903, the firm has been in the market for decades and it is here to stay and the consumers can rely on the name. It sells in 180 countries building its strength overtime (Barr, 2012). 1.4.1.2 Brand strength and loyal consumers Since the brand has been serving its consumers for a long time, it has been successful in building a name for itself and satisfying its consumers with the effect that the consumers are loyal to the brand. 1.4.1.3 Sales growth Though the European sales have gone down during the last five years, the global sales are now recovering after suffering a total of $ 25,000 million loss from 2007-2012. The strategy of growth globally has worked for the firm with its dynamic managerial style (Barr, 2012). 1.4.2 Weaknesses 1.4.2.1 Business saturation There is industry saturation where there is little growth prospect however; simultaneously there is an increase in competition and price competition with decreasing demand. The firm has little option but to produce products that are very competitive in price and quality that can only be done when the firm. 1.4.2.2 Vulnerability to Europe 28.3% of Ford’s revenue depends upon the European market. However, the market has a decreasing demand and thus its future trends are not very promising. This in turn means that the future of Ford doesn’t seem very bright especially because of the European market. 1.4.2.3 First mover Ford has decided to go ahead with the closure of their plants in Belgium by 2014. This was a dramatic move in the industry as no one else has done it yet although they had been wanting to. Being the first, Ford will have to face a lot of opposition and resistance from labour unions, society and the government. It is paving the way for other firms nevertheless; it will first have to bear the consequences. 1.4.2.4 Asian markets Ford has not penetrated very well into the Asian markets, which are the fastest growing markets. Ford has only 15.8% volumes coming from these markets (Barr, 2012). 1.4.3 Opportunities 1.4.3.1 Innovation The technology in the automotive sector has advanced and there are options for hybrid cars that are eco friendly which seem to be the future products. Ford has a reputation of innovative products and also has the research abilities to do so. 1.4.3.2 Emerging market segments The markets of Asia Pacific and South America are emerging and have a lot of growth potential. Though the main markets of Ford are North America and Europe, it does have essential shares in those markets so the market serves as an opportunity for Ford. 1.4.3.3 Government spending on training and technology The European government is willing to spend on the training and development of the automotive industry labour so that the industry may be able to sustain in Europe and compete in the global industry. Moreover, research and development is taking place in the industry in an attempt to create products that are price competitive, efficient and eco-friendly. 1.4.4 Threats 1.4.4.1 Intensive competition The industry has a lot of competition. Different brands are competing one another and this will eventually cause cuts in profit margins. This will only be achieved when resources are used at maximum level, which means cutting jobs and using efficient means of production. Ford faces tough competition from its closest competitor Toyota that is competing it in every realm. It has also pierced the Asian markets more than Ford, which is a future threat for Ford. 1.4.4.2 European Labour Union The European labour union is a strong body and will not easily permit the auto industry to lay off employees so easily. Instead it may even create problems for the industry and currently the industry incurring such growing losses has a lot to do with the excessive labour it has hired. The European labour union and the government are so adamant that the auto industry would rather sustain the losses. Ford on the other hand has made the brave decision of closing down 3 production units in Europe and will the first in the industry to do so. This will create serious problems for the firm and will have great opposition by the labour union. 2. STRATEGIC DEVELOPMENT 2.1 Existing strategy Ford Motor Company is going to the retrenchment strategy to cope up with the rising costs and low demand. The firm intends to lay off workers so that it can cut costs and make its production more cost efficient thereby meeting the firm’s targets. As per the balance sheet, in the second quarter of 2012, the pre tax operating profits was $(404) while the same quarter last year was$ 176 thus the firm expects an annual loss of $1.5 billion this year (Ford 2012). Compared to North America, the pre-tax operating profits was $2012 while last year it was $1908 showing retrenchment has worked for the firm there (Ford 2012). 2.2 Grand Strategy Matrix As per the Grand Strategy matrix, the firm is in the 3rd quadrant where there is slow market growth and the competitive position is weak in the industry. According to the matrix the possible strategies that the firm can adopt are as follows: 2.2.1 Retrenchment. Currently the firm has decided to implement retrenchment where it is closing its plants and laying off employees. The firm intends to lay off more than 5700 employees and cut its losses by $500 million (Ford 2012). 2.2.2 Concentric diversification. This is where the firm can diversify into closely related products, which it currently is doing on a small scale by exploring the hybrid market. There is a growing demand for product. The more important thing will be that the government is wiling to spend on the training and development of labour and the firm is willing to diversify thus the firm doesn’t have to lay off so many employees, instead it can have them trained for the production of hybrid cars and relocate them to the hybrid department. For this, the firm can build 3 hybrid plants in places where it’s shutting its plants. This way the labour will be readily available and will also be familiar with the company environment. 2.2.3 Horizontal diversification. Ford can also consider diversifying into products that are varied for its core product range. This is because the market it currently operates in is saturated and by doing so it may be able to gain some market shares. The firm can also start producing low budget, smaller cars like its latest product Fiesta, which is also the requirement of the market. When the cost of production goes down. This is plausible when the firm starts importing supplies from cheaper suppliers like China and India instead of relying on local suppliers, which are more expensive in markets like recession stricken Europe. 2.2.4 Expansion strategies The firm can also look into expansion in North America, South America and Asian Pacific countries where its penetration is comparatively lower than its core competitor Toyota. The European market is very tricky as all firms there are bearing the brunt of functioning at excess capacity when demand is low. Ford should wait for other firms to make the first move, as then the route will be simpler. In addition, going against the European labour union and the government may not be as healthy for the firm. Instead it should sustain the losses and compensate for it through expansion into growing markets. 2.2.5 Cost reduction strategy Reducing the suppliers by making the production more efficient will also enable the firm to reduce its costs and probably not cause the firm to close down its Belgium and British plants. Cutting down the number of supplies and making the chain more effective will reduce the reliability on the suppliers and thus strengthen supplier viability which will help the firm sustain in bad economic times like it faces in the European market. 2.2.6 Renegotiating with Labour suppliers Ford can renegotiate with the labour suppliers union. The largest expenses are incurred in the retirement, benefits and healthcare of the labour. If the firm a successfully decrease these costs then perhaps it has to lay off less employees or close fewer plants. When the labour costs decrease, then the firm may be able to sustain itself. Equity contributions could be replaced by cash infusions thereby helping in achieving the strategy. 2.2.7 Pursue the One Ford strategy Standardization across several regions will cause prominent cost savings and production will avail economies of scale and thus will result in cheaper versions of final products. This strategy across Europe could significantly cause efficiency and thus the firm my not have excess capacity as the demand for such products increases. There will be standard production systems, with standardised supply needs. The supplier power will break and the firm will be able to negotiate better deals. Moreover, the firm may also be able to achieve lower labour costs, as every brand of the firm would not need special labour training. Fewer employees would be required will less business units to take care of. The same managerial patterns could be adopted throughout regions and thus it would curtail labour costs. 2.2.8 Long run strategy In the long run, the firm needs to think of the benefit of the firm and not the labour or the government. The firm has to eventually face the two bodies. This is because with consistent losses over the past five years, the firm will not be able to sustain itself for long. The government has been ignoring the issue of excess capacity of the entire industry and so has the labour union. The firm has to come up with a viable solution and negotiation with the government and the European labour. The firm intends to spend $100,000 per worker that would be a target of layoff. The firm should also talk to the union for relocating some of the employees if they wish to. 2.3 Selection of strategies The methods used for the selection of the strategy for corporate, business and functional levels were ADL matrix (Coate, 1983,pp. 47-56) (see appendix). Since the market is aging and the competitive position is strong, the generic strategy extracted from it is to cut expenses, maximize profits and minimize investment in the European market. 2.3.1 Functional level strategy Ford should negotiate with the European Labour union and convince them that their blue print has worked in North America. If the firm is not allowed to do this now, the following year the firm will be incurring losses and there will be more layoffs. Thus for a better future the firm should be permitted to close down the plant. Ford can negotiate on the compensation pan of these employees and agree to retain some employees if the union renegotiates their contracts and is willing to settle for a lower medical and retirement plan. This way the firm may be able to sustain a few employees and incur fewer losses. Simultaneously Ford should work through the labour union with the help of other industry players so that they are able to voice industry issues together. 2.3.2 Business unit strategy The firm should continue with retrenchment in Europe at the same time it should also focus on reducing production in Europe and instead catering the market via imports from its Turkish manufacturers. In this way, the firm will not have to face job slashing simultaneously it will be able to cater to the market demand. Moreover the firm should also divest into hybrid cars and find new market niches in that sector. 2.3.3 Corporate level strategy At the corporate level, Ford should focus on expansion strategies outside Europe instead of focusing on the European market. This is because the European market has exhausted and is rather stagnant. The economic conditions don’t seem to get better and even if they do the demand may not increase so much to make a drastic measure. The firm will only end up functioning at a capacity more than demand and thus will have to keep shutting down its plants and face job slashing. 3. IMPLEMENTATION 3.1 Functional strategies To implement the functional strategy, Ford should target for a year within which it should talk to its competitors and together chalk out a solution where the renegotiation of labour contracts and terms is concerned. The firm should also focus on training the labour for hybrid car production and innovative means of production so that it doesn’t have to fire all of the employees and is instead able to divert them to their other SBUs. In addition, Ford should work on reducing their suppliers from 750 to a lower number which will also reduce costs, making the production efficient and lower the need for plant closer. 3.2 SBU strategies Ford targets for retrenchment in the next two years. It should focus to minimize the number of plants that it will shut. At the same time the firm should not invest in Europe anymore and instead focus on other countries. Investment should only be made for the hybrid variety cars so that it has a niche for itself. Ford should satisfy the European market with its Turkish manufacturers and suppliers so that the costs are curtailed and the labour force doesn’t suffer. As per the falling net profit’s falling graph even in the next two years, the firm should decide to retrench and not invest more in the market. Corporate Strategies Ford should give itself 5 years where it will be able to allocate the best potential markets and also be able to research the future market needs. Potential markets seems to be China, South America and Asian Pacific countries where the markets are growing and investment opportunities arise and at the same time the production is cheaper there. Gantt Chart Functional strategies May 2013 Nov 2013 2014 2016 2017 2018 1.Negotiate with Labour union 2.Train employees 3.reduce suppliers 4.Retrenchment of 1-2 plants Invest in China Invest in Soth America Invest in India References Ford Motor Company Mission Statement (2012). One Mission, One Team, One Plan, One Goal. Accessed on 30th Nov 2012. Available at: http://retailindustry.about.com/od/retailbestpractices/ig/Company-Mission-Statements/Ford-Motor-Mission-Statement.htm Barr, R. (2012). Ford cutting 1,500 UK jobs and closing another plant as losses in Europe seen exceeding $1.5B. Accessed on 28th Nov 2012. Available at: http://www.570news.com/ford 4-traders (2012). Ford Motor Company: Ford Remains Europe’s No.2 Best-Selling Vehicle Brand in Further Weakening Market. Accessed on 25th Nov 2012. Available at: http://www.4-traders.com/FORD-MOTOR-COMPANY-12542/news/Ford-Motor-Company-Ford-Remains-Europe-s-No-2-Best-Selling-Vehicle-Brand-in-Further-Weakening-Mark-15515843/ Coate, M. 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Available at: http://www.businessweek.com/news/2012-10-24/ford-to-shut-belgian-plant-in-shift-to-spain-union-says Ramsey, M. (2012). Ford Results Show Power of U.S. Operations. Accessed on 26th Nov 2012. Available at: http://online.wsj.com/article/SB10001424052970204840504578088322101842136.html Thorpe, J; Slad, B; and Bender, R. (2009). Strategic Report for Ford Motor Company. Accessed on 30th Nov. 2012. Available at: ttp://www.autonews.com/article/20090126/ANA03/901260350/1178 Vectorcity (2012) ADL Matrix. Accessed on 26th Nov 2012. Available at: http://www.vectorstudy.com/management_theories/ADL_matrix.htm Vlasic, B. (2012). Ford Motor, Citing Europe’s Woes, Says Foreign Losses to Triple in Quarter. Accessed on 24th Nov. Available at: http://www.nytimes.com/2012/06/29/business/ford-sees-overseas-losses-triple-this-quarter.html Read More