Ford and the World Automobile Industry - Essay Example

Introduction Ford Motor Company had implemented cost-reduction measures well ahead of GM and Chrysler and this restructuring process had enabled the company to escape bankruptcy during the financial crisis of 2009. However the auto maker still faced an uphill task as the world industry was experiencing rising competitive pressures. In order to respond to the competitive threat, Ford’s Chief Financial Officer had emphasized upon the longer term financial outlook. To this end Ford’s management had implemented plant closures which had resulted in reductions in fixed cost. Additionally the company had made an early switch to smaller, more fuel-efficient cars and sold loss-making Jaguar, Aston Martin and Land Rover subsidiaries (Case 4). As a result of these initiatives, Ford had improved its financial and operating performance. However if the company were to maintain its performance, then it would have to focus upon the combined forces of technology and environmental forces that were changing the industry structure and formulate strategies accordingly. Competition in the world auto industry The industry was facing rising competitive pressures due to a variety of factors. Experts had expected the industry to consolidate from the demand pressures that had resulted from the financial crisis of 2009. Instead the outcome had been one of worsening the problem of excess capacity as national governments provided financial assistance to support those companies which were suffering from the downward trend in demand. Therefore the weaker competitors had not been weeded out. Instead they increased their production, thus worsening the problem of excess capacity. This was the most important factor which contributed to the rising competitive pressures. The world auto industry was far from being static as demand shifted from mature industrial nations to the growing markets of Asia, Eastern Europe and Latin America. These dynamics had forced the auto makers to implement strategies aimed at seeking new markets as additional sources of demand. Between 1990 and 2008, the five biggest automakers were GM, Toyota, Ford, Daimler-Chrysler and Volkswagen. The evolution of market demand had been affected by the combined forces of technology and environmental concerns. For this reason Ford planned to make the switch to all-electric commercial vans and automobiles. This change in strategy had also been necessary because of the shift of market opportunities to the growing markets of Asia, Eastern Europe and Latin America. As a result the automobile producers were changing strategic focus to emphasize upon the newly industrializing countries as new sources of market opportunities. Driven by the emerging markets in BRIC countries and in the newly industrializing countries such as Korea, Thailand, Malaysia, Turkey and Argentina, the supply of cars and trucks continued to grow. However new product development costs limited automakers abilities to differentiate products. For this reason there was little differentiation between manufacturers. The industry’s key issue was excess capacity. As noted in the case, consultants at PwC had estimated that supply exceeded demand by 31 million units per year. The problem had been exacerbated by government intervention which has kept inefficient companies afloat. Applying Porter’s five forces analysis, the conclusion to draw is that the threat of new entrants would be low since supply exceeds demand. The threat of substitute products came from electric cars which would offer opportunities for new entrants. The transition to electric cars would enable companies with expertise in electrical engineering to enter the industry, thus intensifying competition. Public transportation also offered a substitute. The threat of competitive rivalry in the present state of the industry was considerable since supply exceeded demand. The bargaining power of suppliers was limited because the manufacturers were now implementing the Japanese model of building long-term relations with the suppliers, thus reducing their bargaining power. Buyers also had high bargaining power resulting from wide choice. Applying PEST analysis reveals a considerable level of political influence in terms of government support. As mentioned before, government bail-outs prevented the industry from consolidating during the financial crisis of 2009. Car making continues to be the main source of job creation for many industrial economies. For this reason, government support has emphasized upon saving the auto manufacturers from bankruptcy to preserve jobs. Political pressures are also created from environmental concerns which along with technology have influenced the industry’s evolutionary path significantly. Environmental laws and regulation are forcing automakers to make the transition from the internal combustion engine to the electric engine. For this reason several major automobile manufacturers were planning to introduce all-electric cars. Political pressures have forced the auto manufacturers to invest in R&D on emissions and electric vehicle technology. Political pressures exerted by government regulation and consumer preferences have created the potential for radical change in the industry in terms of transitioning to smaller cars and the electric motor. The current state of the economy is a major influence on the sale of cars. As indicated by the bankruptcies of GM and Chrysler, an economic crisis has a considerable impact on the profitability of the auto manufacturing companies. This is so inasmuch as the auto industry continues to be the linchpin of many industrial economies. Social analysis reveals the problem of rising urban congestion which has the potential of reducing private motoring to a considerable extent. As mentioned before, technology along with environmental concerns has dramatically changed the evolution of the auto industry. Technology alliances have been one of the major means of reducing new product development costs. The collaborative arrangements have led to shared costs so that unit costs are lowered (Ross and Perry 121). The evolution of manufacturing technology has been influenced to a considerable extent by environmental concerns as process technology is now focused upon developing smaller, more fuel-efficient engines. Technological development remains one of the key success factors. SWOT analysis of Ford Ford’s main strength is the high market share which enables it to achieve high scale economies (Teece, Pisano and Shuen 511). As one of the leading automakers in the world, Ford has access to scale economies which enable it to reduce the cost of developing new models. The auto manufacturer also has brand equity which has enabled the company to retain a profitable position (Fang and Kleiner 116). The company also implemented the strategies of cost streamlining by closing plants which were not profitable. This has enabled the company to develop a stronger operational and financial performance. Ford had also focused its process technology upon developing all-electric cars which would ensure profitability in the future as environmental concerns led to the obsolescence of the internal combustion engine. Therefore Ford had developed a product line which would ensure its future profitability (Winfield and Hay 460). Moreover, the company had built alliances with other automakers which were Chongqing Changan, Chrysler, Daimler, Fiat, First Auto Trucks, GM, Maruti, Mazda , Peugeot, Tata, Toyota and BMW. Ford lost a considerable level of net income during 2008 resulting in the elimination of stockholder’s equity. The company also needed to enhance the level of coordination with the suppliers. Given the limited demand base, the auto manufacturers need to lower their costs to the maximum extent possible. Therefore any coordination problems with suppliers would potentially delay the production process and thus increase the level of costs (Ji-yoon, Kin, Bok and Tan 11). The management would have to address this weakness. Because of the alliances with many automakers, Ford has many opportunities for global expansion. This is one of the key success factors in the external environment as demand is shifting from the mature industrial nations to the growing markets of Asia, Eastern Europe and Latin America. However such opportunities for global expansion also added to the competitive threat as the growing markets were creating their own auto industries. Therefore the threat in front of Ford was the rising level of competitive rivalry. Value chain analysis Ford has emphasized upon minimizing cost in developing its value chain. For this reason the strategic focus has been upon procurement in terms of building long-term relations with the suppliers (Hill and Jones 65). The focus upon supplier arrangements has enabled the company to lower the product development costs. If the company can create greater coordination with the suppliers, then it will minimize the level of waste and thus create a win-win situation for all the companies in the value chain. The design phase is also a key success factor in the value chain. Ford has shifted focus to developing all-electric cars. The design phase has been conducted accordingly. As technology and environmental concerns are hastening the obsolescence of the internal combustion engine, Ford is customizing its value chain to developing all-electric cars. The value chain has also been focused upon meeting quality requirements (Gottfredson and Aspinall 66). Marketing continues to be one of the key components of the value chain. Ford has to maintain the momentum of internationalization in order to access the growing markets. One of the key issues in the industry is excess capacity. Therefore the key success factor in value chain analysis is to develop a structure which enables the company to market its cars to those regions which are experiencing growing demand. In this respect marketing and sales will be crucial in responding to the competitive threat. Operations will also be one of the key value chain components. The factors which make up Ford’s operations are design, technology, safety, environment and quality (http://corporate.ford.com/about-ford). These factors will be critical in maintaining the competitiveness of the company’s global operations. Because of the costs involved in new product development, the value chain has to maximize the number of unit sales so that the product development costs can be amortized. For this reason, one of the key components in the value chain is marketing and sales enabling the company to maintain the process of globalization so as to create a wider demand base. Alternative courses of action The company should focus upon developing fuel-efficient cars. Both technology and environmental concerns are redirecting market evolution towards rising demand for this product segment. In Europe there are significant government incentives in place for scrapping old cars and purchasing new fuel efficient models. Consumers were also becoming more and more aware of the environmental repercussions and shifting from large to small cars. Therefore, in order to widen the demand base, the company should continue to focus upon developing all-electric cars. In this respect Ford had an advantage because of the technology alliances that it had established with other automakers. The technology alliances enabled the auto manufacturer to capitalize upon shared platforms in order to reduce the costs of new product development. The process of marketing evolution was still favoring the introduction of new product segments. The recommended product segment is smaller, more fuel efficient cars because of the support from both the government and the consumers. Another recommended action is to continue the process of global expansion. The company had to continuously introduce new product segments in order to widen the demand base. However, given the huge development costs, Ford had to maximize unit sales in order to amortize the new product development costs. Demand was stagnating in the mature industrial nations. Therefore the company would have to expand their value chain to the growing markets of Asia, Eastern Europe and Latin America. By setting up their production operations in these regions where demand is fast growing, Ford would be able to lower manufacturing costs and thus enhance the company’s competitiveness. There is also design convergence across countries enabling auto makers to launch global models, thus creating the benefits of standardization. Global expansion would also widen the scope for collaboration and joint ventures for sharing development costs. Shared costs lead to more cost-efficient development platforms. Ford should emphasize upon information technology in maximizing the efficiency of its value chain. The use of e-commerce technology would enable the company to improve the efficiency of supply chain management, thus reducing manufacturing costs (Gosling and Mintzberg 57). Given the problem of excess capacity in the industry, Ford would have to continuously improve the cost efficiency in its value chain. The application of information technology would enhance the efficiency of procurement activities as it would improve collaboration with the suppliers. The role of suppliers has changed to the point where they are responsible for ensuring technological development in automotive components. Therefore the auto manufacturers like Ford would have to enhance collaboration with the suppliers to facilitate the most cost-efficient process of technological development in automotive components. This would reduce new product development costs and thus the auto manufacturer would be more competitive. The application of information technology would lead to more cost-competitive supplier arrangements leading to consolidation in supply chain management. Chosen course of action The course of action involving information technology is recommended because of its importance in creating a cost-competitive value chain. The role of suppliers has changed considerably and therefore collaborative arrangements with suppliers will continue to be one of the key issues of the value chain. The application of information technology in the value chain would meet this objective. It would create an information system which would maximize efficiency in the supply chain, benefiting not only the manufacturer but the suppliers as well since inventory management in both locations is made more efficient. The application of information technology improves collaborative arrangements with the suppliers and this improvement ultimately benefits the customers since the manufacturing value chain is more customized to the nature of demand. This is more critical as the auto industry is affected by technology and environmental concerns. Action plan In implementing information technology, Ford should seek to create alliances with the suppliers in order to share the costs of implementing the IT strategy. Implementation would have to be outsourced to an IT company with a track record for working in the auto industry. Such an IT company would be familiar with the value chain and therefore would be able to bring the experience from other companies in order to optimize the information system. SAP is a global software company which has already provided technology solutions to other auto manufacturers (Kotler and Armstrong 87). Therefore they are in the best position to provide technology solutions. The SAP software platform offers features for optimizing distribution and warehousing functions. These features would improve spare parts logistics. Application of the SAP software would create a knowledge management system which would facilitate the process of benchmarking in order to develop best practices. As a result Ford can implement the best practices in enhancing the efficiency of its procurement activities. Conclusion Excess capacity has increased competitive pressures in the auto industry. In order to respond to this threat, Ford has to increase the efficiency in its value chain. To this end the application of information technology has been recommended. The role of suppliers in the value chain is increasingly being emphasized upon. Therefore collaborative arrangements between Ford and its suppliers should be the strategic focus. Application of information technology in the value chain would enhance coordination between Ford and its suppliers so that both technology development and environmental concerns can be addressed more effectively. This should be a key component of the longer term financial outlook. References About the Ford Motor Company. http://corporate.ford.com/about-ford. Case 4. Ford and the World Automobile Industry. Fang, Samsong, and Brian Kleiner. “Excellence at Toyota Motor Manufacturing in the United States.” Management Research News Sep. 2003: 116-122. Print. Gosling, Jonathan, and Henry Mintzberg. “The Five Minds of a Manager.” Harvard Business Review Nov. 2003: 54-63. Print. Gottfredson, Mark, and Keith Aspinall. “Innovation vs. Complexity.” Harvard Business Review Aug. 2007: 62-71. Print. Hill, Charles, and Gareth Jones. Strategic Management Theory: An Integrated Approach. New York: McGraw Hill/Irwin, 2007. Print. 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