Ford Motor Company: A Decade-Long Trend toward Diminished Profitability - Essay Example

Ford Motor Company: A Decade-Long Trend toward Diminished Profitability By YOU Your Academic Organisation An Overview Ford Motor Company, one of the worlds largest automakers, is facing a considerable decline in profitability, which has been slowly eroding the firms cash position over the last decade. Sales of its light trucks, including sports-utility vehicles (SUV) and many of the companys trademark vehicles, such as the F150, are substantially down. Analysts are somewhat divided in terms of identifying the root causes behind this slip in profitability, with some experts citing gross managerial incompetence and others suggesting that many uncontrollable, external factors are directly related to the companys negative financial position today. During the 1990s, Ford experienced above-satisfactory sales of its light trucks division products, which had made the company a firm worthy of benchmarking in its overall operational and marketing strategies. However, in 2007, the company is plagued by diminished product sales, higher overhead costs, continuously rising fuel costs, and a questionable marketing strategy under new executive leadership. In addition, during the latter 1990s, the division of the company known as Ford Credit, the principal lending and financing division for its car and truck lines, experienced significant growth. Today, the financial position of Ford Credit is eroding the firms total profitability due, largely, to external business issues. This report will highlight the opportunities and problems created by the light trucks segment and the operations of Ford Credit during the last decade, while also discussing the differing executive leadership and strategies of Fords last three CEOs. The report also identifies whether Fords current cash crises are the result of managerial incompetence or whether the firms current marketing strategies are adding detriment to the firms financial position. Fords Light Trucks Segment & Ford Credit Analysts cite that Ford Credit was in terrible financial position in December 2001, however this division of Ford Motor Company experienced a significant rebound by July 2003, with total profit listed at $442 million in the first quarter of 2003 (Kerwin, 2003). Though this may appear to be an achievement worthy of heralding, this increase in Ford Credit profitability was guaranteed by a $700 million capital infusion from Ford Motor Company (its parent entity) (Kerwin, 2003: 26). Though a worthwhile investment on behalf of the parent company as a strategy to vault Ford Credit back to higher profitability, this investment represents a significant capital expenditure on behalf of Ford Motor Company, likely contributing to its future cash flow problems. Why? Ford Credit experienced explosive growths in total profitability during the early 2000s, due to a marketing push on its profitable SUV lines. However, as increasing amounts of bad consumer loans and leased vehicle returns eroded Ford Credits position, the $700 million capital investment into Ford Credit was a strategic decision to prevent Ford Credit profit slippages. (MODULE). The end result of this investment was a strong Ford Credit but a substantially weakened cash position. In 2003, Bill Ford, the previous CEO of Ford, cited that the firms cash position would allow Ford to survive no matter what the world throws at us (Grant, 2003: 31). At this period, Ford maintained a cash pile of 23 billion US dollars, down from 26 billion the previous year, indicating a continuous and rapid erosion of cash reserves year by year (McCracken & Berman, 2006; Grant, 2003). Despite Bill Fords rather lofty assumption, the companys current cash reserves are leading analysts to project significant future cash issues for the firm, which could potentially drive the firms stock to junk status and bankrupt the century-old auto manufacturer. A great deal of the firms diminished cash reserves can be attributed to negative publicity regarding vehicle rollover safety and the firms relationship to Firestone, the firms supplier of tires for its light trucks division products. In business, it is logical to assume that external factors can significantly erode a business overall reputation on the market. In 2001, the Ford Explorer was cited as being prone to rollover accidents, leading to a recall of 20 million tires which were blamed as the primary reason for the rollover incidents (MODULE). As part of the firms light truck segment, and also with the Explorer representing a significant increase in total product sales at the time, the negative publicity and well-publicised lawsuits against Ford for liability in consumer rollover crashes significantly diminished the firms ongoing sales of its light trucks. However, the firm experienced significant growth during the late 1990s in its light truck segment, as Ford experienced the majority of its profits on pickup trucks and sports-utility vehicles (Boone & Kurtz, 2007). Today, sales of SUVs have decreased by 20% since 2005, due largely to the explosive increases in fuel costs (Boone & Kurtz). The initial assumption would be for Ford to slow the production of gas-guzzling SUVs, as consumers are often cited as refusing purchase of these SUVs due to the costs incurred by fuel price increases. However, Ford had already committed considerable financial resources in sustaining the SUV production line prior to the sudden jump in fuel prices, indicating a tremendous loss of cash due to excess SUV production (Boone & Kurtz). Bill Ford was quoted in 2006 when questioned about the firms production of SUVs: "We recognize weve been too dependent upon a very few vehicles and that we couldnt count on hitting home runs in the future, even though wed love to do it. therefore, our business structure (has) to be such that all of our vehicles had profit potential…." (Boone & Kurtz). Sales of sports-utility vehicles had slumped long before Ford was quoted as recognizing the failure of the business to diversify its product line. While it would appear that other manufacturers were slowing production of SUVs, Ford remained focused on their product sales as the core of the firms profit opportunities. From virtually any perspective, this represented a significant oversight on behalf of Ford Motor Company in attempting to secure long-term profitability in a declining market. What all of this suggests, in relation to Ford Credit and the light trucks segment of the business, is that Ford continued to maintain high expectations for profitability through its aggressive marketing and production of SUVs, while failing to provide a long-term contingency plan in the event of diminished light trucks sales volumes. Though no business could adequately prepare for legalities and negative press stemming from issues of unexpected rollover and supplier safety issues, Ford clearly realized there was a significant issue in sales volume, essentially after it was too late to recapture several years of losses from the light trucks division. CEO Legacies – Nasser and Ford Jacques Nasser served as the companys CEO from 1999 until 2001, when he was eventually replaced by Bill Ford, a member of the controlling Ford family. It was during Nassers administration that the company experienced significant decreases in profitability stemming from the rollover incidents. Further, after September 11, 2001, competition began to offer rather unprecedented consumer incentives to improve sales. Ford, already in a weakened financial position, had no alternative but to offer similar incentives on its vehicles so as to compete, leading to decreased profitability during this time. Nasser was the responsible CEO for the divestment of Visteon, the companys parts division, which was developed as a portion of Nassers strategic aspirations to boost profitability. Visteons creation, though well-intended, provided Visteon workers with a divestment deal guaranteeing continuation of Fords liberal remuneration policies (MODULE). In the long-term, this strategic decision eroded the viability of Visteons continued operations, also adding further detriment to Fords payroll and compensation obligations; significantly impacting the companys profit margin. Nasser appears to have taken a global management approach to securing Fords interest, with outsourcing and unrealistic methods to secure low-cost procurement of vehicle parts as part of his strategic initiatives. The most significant erosion in the companys ROS were experienced during Nassers reign as CEO, while at the same time the company experienced a rapid decline of operating income during Nassers administration. After being replaced by Bill Ford in 2001, the company undertook a revitalisation strategy, including plant closures and expenditures in the billions of US dollars to return the firm to higher profitability. Under Fords reign as CEO, the company failed to meet its promises to secure increased dividend payout to investors and, ultimately, to achieve any notable increase in cash or quality investments. Nassers strategic vision of the firm was undercut by his poor decision-making in regards to the establishment of Visteon and in his investments in global business policies when clearly the largest issue regarding diminished sales was due to domestic issues. Bill Ford, then, maintained the arduous task of performing a radical restructure, as Nasser had failed to implement workable strategic initiatives. By the time Ford had stepped into the role of CEO, the damage caused by Nassers policies and external market conditions had brought the firm to the brink of financial ruin. Though, at first glance, it might appear as if Bill Ford had established an entirely new set of strategic policies (i.e. plant closures), both CEOs were working continuously to secure the future purchasing power and credit status of the firm. While Nasser was working with a firm that had initially maintained a stronger financial position, his strategies ultimately failed, leaving Ford with the responsibility to make significant cuts in order to reduce operating costs. This represents not a change in strategic position, rather a more desperate attempt to shed unprofitable divisions of the business as a damage control position. Incompetence versus Effective Marketing Ford currently spends over US $2 billion annually on advertising costs (Boone & Kurtz). Having previously established that Bill Ford intended to diversify its product line, which entailed reducing the amount of SUVs produced, Ford was unable to implement sound marketing strategies to build higher sales volumes. For instance, today, Ford Motor Companys new lines of automobiles aimed toward contemporary consumers is meeting with less-than-desirable financial outcomes. Ford established the "Bold Moves" campaign in late 2006, which analysts have described as "not bold at all" (Halliday, 2007: S8). In fact, in 2006, the firm experienced its most dismal financial year, with a pre-tax loss of $6.1 billion, a loss increase of $4.6 billion from 2005. Noted Jeremy Anwyl, analyst and president of Edmunds.com, "Ford needs to be less reactive and more proactive" in its marketing efforts (Halliday). The Bold Moves campaign continues at Ford Motor Company in 2007, however the firm is already experiencing a 13.2% decrease in sales this year (Halliday). This suggests that the majority of the problems with Fords cash crisis stem from ineffective marketing campaigns borne of poor product positioning, illustrating a failure by executive leadership to implement quality advertising campaigns. This represents a cause-and-effect relationship between strategic management and marketing efforts. In essence, the largest failure stems from todays executive leadership at Ford, Alan Mulally. Mulally was appointed the companys CEO in 2006, who had moved to Ford from a successful leadership position at Boeing, where his marketing initiatives had met with considerable profitability for the firm. In an attempt to appeal to contemporary consumers, Mulally has changed the focus from building the Ford brand using its more traditional positioning to include endorsements by hip-hop artists and professional athletes; taking inspiration from General Motors who is finding increasing SUV sales through their hip and trendy marketing efforts (Halliday, 2007). Today, Ford has announced, under Mulallys leadership, that the company would be abandoning the Fairlane name and renaming a new concept crossover vehicle as Flex, after the American DJ Funkmaster Flex (Halliday, 2007). Further, a new SUV named the 2008 Expedition Funkmaster Flex Edition was unveiled in New York in an attempt to boost SUV sales (Halliday, 2007). Perhaps the firm is taking the advice of other professionals in the industry which suggest that Ford dump most of its brands and focus on providing cars which appeal to their target market segments (Miller, 2006). The most interesting aspect of Fords shift from traditional marketing efforts, which focused largely on quality, the new Flex crossover SUV is being cited as targeted at the market which once dominated mini-van sales (Stoll, 2007). The incongruity with their marketing and positioning strategies is the utilisation of endorsements by Funkmaster Flex, the noted hip-hop DJ, and how this will appeal to the adult, family-oriented consumer. Does this represent a poor targeting method, leading to ineffective positioning strategies? Evidence suggests this is the case. Ford has recently unveiled the Ford Five Hundred vehicle, a sedan targeted at the older consumer (baby boomers). According to Amy Marentic, Fords marketing manager for the Five Hundred vehicle, "we know they (boomers) love sedans" (Greene, 2004: A1). Having previously established that Ford is making a significant, and costly, appeal to the contemporary, younger consumer, this appeal toward the baby boomer generation may reflect an undisciplined marketing approach with relatively undifferentiated markets as their targets. Launching several new automotive products in an attempt to appeal to different consumer markets, when profitability and long-term growth are on the line, may represent a flawed approach to building a profitable 2007. Why? Analysts suggest that it is likely that Ford will spend approximately $6 billion of its cash reserves in 2007 (McCracken & Berman, 2006). The costs of restructuring the business (under Fords revitalization plan) and massive cuts in vehicle production are cited as the primary expenditures that will erode Fords cash reserves (McCracken & Berman). Further, it is estimated that Ford will likely face expenditures in similar proportion in 2008, dropping the firm to a $10 billion cash reserve, cited as barely enough for Ford to break even (McCracken & Berman). Added to the costs of restructuring the business is Fords current marketing initiatives under Alan Mulally. Increase the $6 billion expenditure with another $2 billion in ineffective advertising without a focused target segment or positioning strategy, and the long-term outcomes to Fords future financial position are quite apparent: Crisis. In the 1980s, Fords positioning strategy focused on quality, which had boosted sales and total profitability by a significant margin. Slogans such as "Quality is Job One", which had met with marketing success, positioned Fords entire product line as the embodiment of American-made quality (Childs, 2006). Coupled with a then-strong economy and a positioning strategy building on quality and image, Ford experienced significant increases in share prices (Module Table). In 2001, after the negative publicity from rollover incidents and diminished sales volumes, the stock plunged over $100 per share in one year. Today, the stock is valued at under $10 per share. Alan Mulally is cited as the potential saving grace for the company, with Bill Ford noting that Mulally is a strong manager with substantial potential for building management unity and a teamwork philosophy for the business both domestic and global (Langley & McCracken, 2006). However, when share prices and the future cash position are being eroded by billions of dollars each year, does Ford require a management and leadership approach, or does the company require the necessity to return to its more traditional advertising roots to promote quality? With the erosion of the firms public image by rollover catastrophes and well-publicised erosion of market share, evidence tends to point to the latter. A recent Wall Street Journal article suggests that Ford intends, today, to spend millions of dollars to promote sales of hybrid SUVs (Stoll, 2006), which have already been determined to be a declining market opportunity. Under Mulallys leadership, the question as to why such a significant portion of the firms advertising budget is being projected to be allocated to SUV marketing does not make logical sense from a practical business perspective. While todays consumers likely remain focused on the negative publicity being generated about Fords position in the automotive industry, the most appropriate method to build consumer loyalty would seem to be most suited toward a positioning strategy that focuses on quality and with less emphasis on SUV sales. Further, Alan Mulally recently met with officials from Toyota to discuss potential cooperative efforts between their competitor and Ford Motor Company. Mulally has publicly illustrated his high esteem for Toyota (Simon, 2006). In fact, Mulally is actively promoting the necessity for Ford to adopt a lean production process as a benchmark against Toyotas growing competitive edge in the auto industry (Simon). This may suggest that Mulallys leadership tactics are global in nature, similar to those of Nasser, who managed to erode Fords total profitability by a significant margin in just a few years time using similar strategic initiatives. The key is for Ford to recognise which consumers make up the majority of their brand loyalty, and focus marketing research efforts to uncover what consumers currently perceive regarding Ford Motor Companys image. Mulally appears to be focused on mimicking the activities of successful automotive manufacturers, such as Toyota, rather than focusing on what is actually wrong with Fords positioning (and overall marketing) strategies, as analysts appear to be relatively unimpressed with Fords current positioning strategies. However, if Mulally is focused on these strategies, perhaps he should take a lesson from BMW, which maintains the slogan of "The Ultimate Driving Machine" with a tremendous emphasis on product quality and function (Boone & Kurtz, 2007: 303). Bringing the company back to consumer-perceived quality, it would appear, is a primary key to marketing success for the firm in relation to increasing total market share in the industry. Fords Future and Current Position An interesting article states that US $581 million of the Ford family fortune has been eliminated in just 52 years time, with a previous dividend total topping $28 million slashed to an anticipated payout of zero for 2007 (Taylor, 2007). The financial tables from the case study on Ford Motor Company clearly indicates the critical and potentially devastating financial position of the firm based on eroding cash reserves. Taylor (2007) further offers that the largest problem with Ford is that the company has failed to provide any cars that were considered a hit by both domestic and overseas consumers. Meanwhile, the value of investments into Ford for the firms shareholders was significantly high in the late 1990s until 2001, when the firms net income dropped from $6,286 million US to a loss of $4,570 million (US) in 2001. (MODULE). With the recognition that shareholders are the final recipient of funds associated with dividend payout (shareholders are paid last), this represents a significantly-reduced shareholder value for the companys investment owners. Ford faced a rapid shift from profit to loss in a one year period, which, today, based on a continual erosion of net income, represents a rather risky investment for future and existing shareholders. Rapid reduction of stock value from its $250.25 value in 2000, to its current value of under $10 per share tends to illustrate the downward trend of diminished shareholder value for todays ownership. Moreover, diminished sales volumes and increasing amounts of bad loans and losses stemming from Ford Credit clearly illustrate the Ford must take radical strategic steps to undo the damage caused by negative publicity, rising gas prices which impact consumer behaviour in relation to product purchases, and failed executive-level strategies. One author offers that Ford is currently in a position where they must wait-and-see in the hopes of discovering a miracle cure for Fords detrimental financial position (Newman, 2006: 13). However, is there a hypothetical miracle cure for a diminishing cash account and to undo over six years of negative publicity? When Ford stepped down as CEO, it granted Mulally the opportunity to implement new strategies to improve the firms financial position. However, in the short period where he has been the firms CEO, there has been no significant increase in sales volumes, while at the same time costs of advertising continue to increase. Most interesting to Mulallys position is the acknowledgement from The Wall Street Journal that the Ford family continues to control 40% of the votes, with three members of the Ford family currently sitting on the board of directors (Jenkins, 2006). The Ford family has witnessed a significant erosion of their family fortune in recent years, suggesting that Mulally will be guided and directed by a family that is working to secure their own stake in Fords future profitability. According to Jenkins (2006), Mulally will be offered little flexibility in decision-making, forced to comply with the Ford family agenda. Mulally is cited as Fords "turnaround manager" (Jenkins), with Bill Ford and the rest of the shareholders anticipating significant, positive changes in Fords current cash crisis. However, during Mulallys tenure at Boeing, the company was able to absorb risky investments and strategies without dramatically impacting Boeings operating cash (Lunsford & McCracken, 2006). In the case of Ford Motor Company, high-dollar investments into new products which do not necessarily guarantee a positive consumer reaction and large-scale advertising expenditures using what appear to be inappropriate positioning tactics are a risk that Ford cannot, currently, afford to take. For one of the companys newest brands, the Ford Edge, the product positioning efforts are based on consumer attributes with the slogan "Live on the Edge" aimed at a target market of the 20-something consumer. Based on the financial data provided by the case study, as well as dismal sales volumes already experienced in the first quarter of 2007, it seems that Ford does, in fact, like to live on the edge: Through strategic policies and marketing that is virtually ineffective for the firms long-term sales goals. Conclusion It is clearly evident that Ford maintains a significant challenge in relation to rebuilding its corporate image and overall value for its shareholders. Ford continues to maintain regular chastisement by business professionals and corporate analysts for its failure to implement sound marketing campaigns and promote strategic policies to ensure the future operating potential of the once-powerful automotive entity. Ford continues to push forward in production and marketing of SUVs, which have experienced significant sales slippages in the last several years, offering considerable scepticism from external stakeholders regarding the competency levels of the firms strategic leadership team. Further, executive leadership must adopt a proactive philosophy in relation to recognising trends in consumer behaviour and in identifying which areas are of the business are unprofitable or unproductive, and subsequently make appropriate strategic changes to secure the companys long-term future in the automotive industry. Currently, Ford is working more on crisis management, struggling to bring the firm a higher return on investment and gain subsequent increases in total product sales volumes. Ford Motor Companys current financial position represents that the firm is, at least, several years away from streamlining its internal business divisions, as today the company leadership appears to be quite uncertain whether its current strategic initiatives will bring future sustained value to the firm. Relying on sales of SUVs, a declining market opportunity, has dramatically undercut the firms future cash position. From virtually any perspective, it would appear that the main success characteristic for Ford is diversification: The production of better and more contemporary products, the creation of workable strategic policies designed to restructure under-performing divisions of the company, and ensure methods to properly market its products domestically so as to reward investors with ample dividends. Until this occurs, Ford will continue on its decade-long path toward diminished profitability. Bibliography Boone, G. & Kurtz, D. (2007). Contemporary Marketing. 13th ed. Thomson South-Western. United Kingdom: 277, 303, 527, 560. Childs, Andrea. (2006). Quality is job one! Department of Economic Security. http://www.de.state.az.us/DDD/downloads/newsletters/feb2003update.pdf. Grant, Jeremy. (2003). Ford dismisses speculation of cash problems. Financial Times. London, UK: p.31. Greene, Kelly. (2004). Golden Years - - Marketing Surprise: Older Consumers Buy Stuff Too. Wall Street Journal. New York, NY: p.A.1. Halliday, Jean. (2007). Ford hopes DJ signing cranks up cred, sales. Advertising Age. 78(14), 1-2. Halliday, Jean. (2007). Ford may have hit bottom in 06. Advertising Age. 78(16), S8. Jenkins, Holman W. (2006). Business World: Memo to Mulally. Wall Street Journal. New York, NY: p.A.19. Kerwin, Kathleen. (2003). One of Fords Engines is Humming, But can its Finance Division Keep up a Stellar Profit Recovery?. Business Week. New York: Iss. 3842, p.26. Langley, M. & McCracken, J. (2006). Designated driver Ford taps Boeing executive as CEO, Alan Mulally succeeds Bill Ford, who keeps post of Chairma; A Board swings into action. Wall Street Journal. New York, NY: p.A.1. Lunsford, J. & McCracken, J. (2006). New Company, Same Problems for Fords CEO. Wall Street Journal. New York, NY: p.B.1. McCracken, J. & Berman, D. (2006). Can Fords Current Cushion of Cash Absorb Blow of Latest Restructuring?. Wall Street Journal. New York, N.Y.: p.C1. Miller, Steve. (2006). Former Exec: Ford Should Dump Most of its Brands. Brandweek. 47(30), 10. Module. Case Study. BMAN 33000?? Newman, Richard J. (2006). Oh, for someone to fill Henrys Shoes. US News and World Report. Washington: 141(10), 12-13. Simon, Bernard. (2006). Fords Mulally signals co-operation with Toyota. Financial Times. http://www.ft.com. Stoll, John D. (2007). Ford crosses back over into the family market; After ditching Minivans, car maker looks to flex mommy mobile to counter declining sales. Wall Street Journal. New York, NY: p.A.12. Stoll, John D. (2007). Ford spends millions to push hybrid-SUV sales. Wall Street Journal. New York, NY: p. D.6. Taylor, Alex. (2007). The Fords Shop for Advice. Fortune Magazine. 155(7), 23. Appendices A: Ford Motor Company Share Prices: A Seven Year Overview Appendices B: Return on Sales – Ford Motor Company: A Four Year Overview Source: Bman33000 Case Study Table 3 Read More