Porters Five Forces of Ford and the World Automobile Industry in 2009 - Case Study Example

? Porter’s five Forces of Ford and the World Automobile Industry in 2009 By Table of Contents Bibliography 9 ExecutiveSummary Automobile industry has a higher scope compared to other industries within the global market. There is no doubt that the contemporary increase in demand for automobiles has been the driving factor for such a high scope of the industry. Today, automobiles have become part of human life hence the increased demand over the years. An automobile is a vehicle that operates on more than two wheels for different purposes. Ford and other firms experienced a downward trend in profitability since the 1960’s. Overview of the Company Ford Motor Company founded in 1903 by Henry Ford, an automotive and industrial pioneer remains today as one of the oldest firms within the industry. The automotive firm in Dearborn, Michigan and has so far grown into other nations. Ford established itself as a major player in the automotive industry in 1908 commanding close to 50% of the market share after sales of 15 million vehicles of Model T (Grant, 2010, p. 46). In 1950, Ford became a public company making it to grow significantly. Ford’s main products include cars, trucks, and SUVs with different types of brands such as Jaguar, Volvo, Ford, Mercury, Lincoln, Aston-Martin, and Land Rover amongst others. Ford also has finance division, parts and service department, and they own Hertz Corporation, being the largest car rental firm in the world. In 2003, Ford was second after a pre-tax profit of about $ 1.3 billion despite a $ 1.1 billion loss in North America. Nevertheless, the company experienced significant losses between 2000 and 2008 attributed to rising costs of commodities, ongoing and rising healthcare expenses, lagging behind of sales of vehicles, and bailing out of major parts supplier from bankruptcy such as Visteon. Ford recorded huge losses in the fiscal years 2000 to 2008 as shown in fig. 1. The following is a Porter’s Five Forces analysis explaining this trend. Figure 1: Table showing return on Equity of various Automotive Firms Courtesy of Grant (2010) Porter’s Five Forces Analysis Various models used in industry and firm analysis to develop the right managerial strategy. Strategic management is a complex due to dynamism and turbulence in business environment. Nonetheless, through Porter’s five forces model, organizations are able to identify areas requiring overhauling for effective and efficient performance (Blake, Cucuzza, Rishi, 2003, p. 11). Like many other firms, Ford’s strategic management can be enhanced through a deeper insight into five forces that has been reducing their competitive advantage from 2006 to date hence recording such huge losses. Porter described competitive advantage as significantly influenced by five forces; bargaining power of buyers, bargaining power of suppliers, intensity of competition rivalry, threats of new entrants, and threats of substitutes. These same forces led to Ford’s current economical situation (Windecker, 2004). In each of the below forces, a conclusion regarding rating in a scale of 1 to 5, 1 being very weak and 5 very strong is provided. The full scale is as follows; Bargaining Power of Buyers There is high intensity of competition coupled with increasing demand for automotive products in major markets. Hence, consumers have a variety of firms to choose from unlike during the classical time when there were limited manufacturers. United States of America and European Union consumers have a high bargaining power necessitated by availability of information regarding various products (Grant, 2010, p. 49). The buyers in automotive industry are powerful due to unavailability of grand proliferation of companies that manufacture automotives. In addition, the largest automotive manufacturers within US have approximately 90% value shipped hence additional value to the product. Another important feature of automotive industry in US is the fair standardization of parts used in assembling of products (Waraniak, 2001). Moreover, the industry is highly characterized by backward integration. All these features have led to high bargaining power of buyers as most of the products are of almost same qualities. Consumers in automotive industry have a higher bargaining power because natures of automotive commodities are fairly standardized. In addition, consumers incur low costs of switching when selecting an automotive product amongst competing brands (Waller, 2004, p. 19). Fair standardization and low switching costs are the factors that contribute to higher bargaining power of buyers in automotive industry. What’s more, the ratio of consumers to producers is very high indicating that there are many consumers and this has significantly checked on the bargaining power of buyers. Ford has been able to regulate its losses based on higher ratio between consumers and producers. Notably, automotive industry is dynamic hence, it will continue to change, evolve, and adapt (Blake, Cucuzza, Rishi, 2003, p. 13). The high consumer to producer ratio has not diluted the higher bargaining power of consumers resulting. Conclusion: Bargaining power of buyers = 4, high. Bargaining Power of Suppliers Power axis is tipped in favour of industry in the relationship between manufactures of automotive products such as Ford and their suppliers. According to Kumar and Veloso (2002, p. 85), manufacturers of automotives such as Ford decided to consolidate their relationship in order to improve their bargaining power towards suppliers. In reaction to this, suppliers were also forced to consolidate into 1st, 2nd, and 3rd tiers and this worsened the situation in the industry (Dannerberg & Kleinhans, 2004, p. 25). However, most suppliers tend to establish a good relationship with the “Big Three”, Ford being one of them hence, their (suppliers) bargaining power are controlled by such firms. Ford has taken advantage of this to enhance its productivity despite the losses made previously. On a different perspective, the other form of supplier, providers of automobile components such as navigation system, tires, fenders, and seats have fewer manufacturers hence their powers are low (Automotive Industries, 2004). Contemporary business well is highly characterized by technological development. For instance, in development of Jaguar, Ford had to employ advanced and up-to date technology. Despite the increased number of technological suppliers the number of manufacturers have remained low hence the low bargaining power of suppliers (Rubenstein, 2001, p. 98). Conclusion: Bargaining power of suppliers = 2; low. Intensity of Competition Rivalry Intensity of competition rivalry within automotive industry is the most dynamic affecting significantly operations of Ford. Automotive industry is never a playing ground for the “Big Three”, GM, Ford, and Daimler Chrysler. With entrance of Honda and Toyota in the market during 1980s, the automotive industry significantly changed its attractiveness hence causing a lot of problems to Ford and others (Business CustomWire, 2004). In addition, intensity in rivalry heightened due to rivalry in culture and related philosophies. Ford has also suffered high fixed costs and low switching costs on consumers that prevent them from moving from one manufacturer to the other (Gatech.edu, 2006). The following table illustrates competitors in the automotive industry. Figure 2: Competition in Automotive Industry (Automotive Industries, 2004) Conclusion: Intensity of competition rivalry = 5; very high Threats of New Entrants Despite the fact that Ford is amongst the top three leading manufacturers of automotive products, there are smaller companies that are coming into play. Ford commands approximately 16.8% of the market share with GM leading at 20%. Entering the automotive industry however is nearly impossible due to high initial capital required (Blake, Cucuzza, Rishi, 2003, p. 14). High initial capital required is used in offsetting high costs associated with production facilities, labour, logistics, and suppliers. Manufacturing of automotives is an expensive business that will require new entrants to have huge sums of capital outlay (Automotive Industries, 2004). Consequently, automotive industry has more mergers and acquisitions as compared to new entrants. For instance, the entrance of Toyota and Honda into the market during the 1980s required a great deal of capital. Since then there have been many mergers as opposed to new entrants. This has made the industry attractive for Ford hence taking up the opportunity to improve on its production. Conclusion: Threats of new entrants = 1; very low. Threats of Substitutes Other than selecting a different automotive product from other manufacturers, substitutes to automotive products may involve the use of airplanes, trains, and water vessels. A consumer has to make a major financial decision before purchasing a motor vehicle. Individuals make different considerations while making buying decision such as fuel consumption, maintenance costs, reliability, efficiency, and effectiveness (Business CustomWire, 2004). Other factors influencing buying decisions include marketing, branding, as well as customer loyalty (Automotive Industries, 2004). Consequently, threats of substitutes have made the market unattractive for Ford hence the high losses recorded between 2006 and 2010. Notably cars are almost same with very little differences. Conclusion: Threat of Substitute = 3, moderate Figure 3: Ford’s Porter's Five Forces Recommendations Given the above scenario, Ford may employ a number of recommendations in order to come out of the loss bracket. I. Ford being the oldest automotive firm should embark on acquiring smaller firms in the industry. Acquisition of smaller firms within the industry will be useful in reducing the intensity of competition rivalry (Rubenstein, 2001, p. 98). II. Increasing customers’ loyalty is the only sure way of reducing the high power of bargaining amongst buyers. Customer loyalty can be enhanced through providing customized products at reasonable prices (Windecker, 2004). Ford should embark on providing customized automotive product to increase customers’ loyalty thereby reducing buyer’s bargaining power effects on their firm. III. There is need for Ford to expand into emerging markets before other automotive firms do to increase its market share. Expansion into emerging markets will create avenues for more sales and profitability, which will help in offsetting the losses that the firm has been making since the year 2006. IV. Ford faces negative repercussions from some of its features that are outdated such as age and size, aging workforces and legacy, outdate production and distribution channels, as well as outdated corporate governance and strategies. Consequently, there is need to renew some of these aspects in order to enhance productivity. Bibliography Automotive Industries (2004) “Coming to America?” Automotive Industries, Sep, Vol. 184, Issue 9. Blake D., Cucuzza T., Rishi S. (2003) " Now or never: the automotive collaboration imperative ", Strategy & Leadership, Vol. 31, No. 4, pp. 9-16. Business CustomWire (2004) “Ford Reports Disappointing U.S. Sales ", Business CustomWire , 01/10. Dannenberg J. & Kleinhans C. (2004) " Industry Focus Automotive: The Coming Age of Collaboration in the Automotive Industry ", Mercer Management Journal, Vol. 17, pp. 88-95 Gatech.edu. (2006). Automotive Industry Analysis. Accessed on 19, 2011 from www.srl.gatech.edu/Members/bbradley/me6753.industryanalysis.teamA.pdf Grant, R. M., (2010) "Case 4: Ford and the World Automobile Industry in 2009" from Grant, R. M., Cases to Accompany: Contemporary Strategy Analysis pp.46-62, Chichester: John Wiley & Sons Ltd. Kumar R. & Veloso F. (2002) " The Automotive Supply Chain: Global Trends and Asian Perspectives “, Asian Development Bank, ERD Working Paper No. 3. Rubenstein J. M. (2001) Making and Selling Cars: Innovation and Change in the U.S. Automotive Industry, Baltimore, Johns Hopkins University Press. Waller B. (2004) “Market responsive manufacturing for the automotive supply chain ", Journal of Manufacturing Technology Management, Vol. 15, No. 1, pp. 10-19. Waraniak J. M. (2001) " Lean Thinking: Creating a No Fear Value Chain Based on Collaboration”, Automotive Manufacturing & Production, April. Windecker R. (2004) " Upsize and Upscale Lead the Way ", Automotive Industries, June, Vol. 184, Issue 6, p. 18. Read More