Turn Around Management - Ford Motor Company - Case Study Example

Turn Around Management Ford Motor Company is an American multinational corporation and is the fourth largest automaker in the world based on worldwide vehicle sales following Toyota, General Motors and Volkswagen. The company was founded by Henry Ford in 1903 and through its long journey it went on to become one of the world’s largest and most profitable car makers. The family owned business even survived the “Greta Depression”. The Ford Motor Company is based in Michigan and the owner of the brands like Ford, Lincoln and Mercury selling worldwide including the US market. Its international ventures include Volvo in Sweden, holding in Mazda of Japan, small share in the former subsidiary Aston Martin of England. The other most famous UK subsidiaries of Ford included Jaguar and Land Rover which has been sold to Tata Motors of India in March 2008 following the downfall in Ford’s business. In 2007 Ford produced 6.553 million automobiles and employed about 245,000 employees at around 100 plants and facilities worldwide. Ford received more initial quality survey awards from J.D. Power and Associates than any other automaker, with five vehicles ranking at the top of their categories, and fourteen vehicles ranked in the top three in 2007 (Dapena, n.p.). Ford was the pioneer in introducing methods for large-scale manufacturing of cars and large-scale management of an industrial workforce, using elaborately engineered manufacturing sequences typified by moving assembly lines. The methods introduced by Henry Ford came to be known around the world as Fordism by 1914. Ford experienced its greatest sale during late 1990s in a booming American economy with soaring stock market and low fuel prices. But with the beginning of the twenty first century the situations started to change rapidly in the US as well as the world markets. Ford Motor Company faced a severe downfall in its market in recent times which made it to lose its top position as a car maker. The legacy healthcare costs, higher fuel prices, and a faltering economy led to falling market shares, declining sales, and sliding profit margins. Most of the corporate profits came from financing consumer automobile loans through Ford Motor Credit Company and not directly from automobile sales (Leggett, n.p.). The profit from Ford Credit was attributed to the higher used-car prices that lifted the value of Ford vehicles returned to the company after leases and fewer bad loans as the company retreated from lending to customers with poor credit (Hakim, n.p.). The new century began with a string of decline for the Ford Motor Company. By the end of 2004 and beginning of 2005 Ford was struggling to maintain its market share in the US market by offering huge discounts. It was rapidly losing market to Toyota, Honda, Nissan and its traditional rivals General Motors and DaimlerChrysler. In overseas markets also it struggled with its subsidiaries like Jaguar and Aston Martin. Huge price cut decreased the profit margin of the company significantly and the situation was aggravated with the high costs of its retirement and healthcare programs. The situation was so bad for the company that the credit rating analysts like Sean Egan commented that the iconic status of the company was the only quality which rescued it from going to bankruptcy by then. Despite of all its efforts the loss in the car making sector was increasing continuously. In the recent time the reports showed its worst loss ever amounting to 8.7-billion-dollar loss which was largely due to hefty charges as Ford wrote down the value of its assets and recognized losses from auto leasing. The company lost nearly 24 billion dollars between 2006 and 2008 with fall in sales of about 28% in the US market (“Ford posts worst loss…”, n.p.). Under these worsening circumstances the management headed by Bill Ford faced the need of analyzing the situation and taking actions to counteract the downfall. The major reason behind the extremely bad conditions faced by Ford was found to be a combination of several factors taking place at around the same time. Several new companies entered the US as well as the world market within the fisrt few years of the twenty first century. The companies such as Toyota, Honda, etc. along with the traditional big companies like General Motors and DaimlerChrysler claimed a huge market share leaving a little for Ford. The car sales of Ford Motor Company in the US decreased by 3% in the first quarter of 2006 (“US problems…”, n.p.). The luxury brands of Ford like Jaguar and Land Rover did not earn as much profit and market share of lucrative European luxury market as expected. Initially the sales of jaguar broke the barrier of 100000 after its acquisition by Ford in 1989 but the sales of the brand showed continuous decline during the later years. The conservative styling of the cars failed to attract younger buyers and the presence of some Ford switchgear in the X-Type was also damaging to the car’s image. The design of the car was found to misfit the images of its target buyers, the younger generation (Spinks, 1). Finally , after its twenty year stint with the Ford Motor Company, Jaguar along with Land Rover was offloaded to the Indian giant Tata Motors in March 2008. Almost at the same time the global oil market saw an upheaval in the oil price ranges. The prices rose all time high during this time breaking all earlier records and the trends have been found to continue for long. This soaring price of oil also interfered with the car business of Ford. Traditionally the Ford Motor Company was the maker of huge cars consuming more fuel. Thus the customers became concerned with the amount they had to shed on fuel while using Ford cars due to soaring oil prices. The consumer preferences shifted from the big cars using more fuel to the smaller and fuel efficient cars. The sports utility vehicles of Ford also faced lack of popularity among the consumers (“US problems…”, n.p.). With the increasing concern for the environmental safety the huge gas emitting vehicles designed by Ford have become less popular with the customers who are now more concerned to meet the regualtory needs fixed by the government to protect the enviroment. The production problems of Ford Motors from the environment point of view, came into focus making it the seventh worst corporate producer of air pollution primarily because of the manganese compounds, 1,2,4-trimethylbenzene, and glycol ethers released from its casting, truck, and assembly plants (Lydersen, n.p.). The United States Environmental protection Agency has linked Ford to 54 Superfund toxic waste sites, 12 of which have been cleaned up and deleted from the list later on. Along with the problems in US automobile market there was another situation which the company had to deal with. The retirement and health care costs of the aging workforce was a major problem taking its toll on the finance of Ford. According to the motor industry analyst Graeme Maxton, the total liabilities for healthcare were about $24 billion for Ford with an almost similar amount liable for pensions. With the business size of only $17 billion, the liabilities were found to much greater for the company (Leggett, n.p.). Unions were also a big problem with the company which was previously accused of unethically suppressing them. Thus as a whole the problems identified to be the major reasons behind the downfall of Ford Motor Company are the increased competition with new market leaders, big and less fuel efficient cars unsuitable for the changing market preferences, soaring oil price, unexpected low sale of Jaguar and Land Rover, huge health care and pension costs for aging workforce, i.e., budget problem and problem with management of workforce, i.e., the unions. As the combined effect of all these problems the Ford Motor Company experienced unprecedented loss in their business and had to counteract the situation with immediate efforts to return to the profitability. They declared to go for turn around management to improve their conditions. The corporate distress brings about a situation when a company comes at the verge of potential bankruptcy. This is the situation when the organization needs to construct events to install new systems, overhaul the existing systems and remove the redundant ones (Lenahan, 3). The turnaround strategies are considered only when the organization is thought to have enough potential to return to its previous situation. Thus before going for turnaround management strategies the companies must analyze the need for the same as in case of Ford whose management realized the need for turnaround in order to prevent potential bankruptcy which was by then prevented by only the brand reputation of the company and they expected to encash the reputation. The first step of the turnaround strategy is to identify the causes behind the crisis. The major problems faced in this case relate to the highly successful competitors like Toyota and Honda, dwindling economy caused by soaring oil price, overly optimistic sales projection for Jaguar and Land Rover, somewhat unsuccessful research and development projects which failed to target the correct customers for the traditionally designed luxury cars and also to track down the choice of the younger car users and excessive liabilities towards the workforce (“Turnaround management”, n.p.). After identifying the needs for turnaround management and the causes of the crisis the stages taken up to execute the process are: Management change, i.e., calling consultants or experts to manage the firm during turnaround. Situation analysis to measure the suitability and requirement of strategies like changing top management, divestment of certain assets, reformulation strategies, revenue increase, cost reduction, strategic acquisition, etc. Emergency action plan like eliminating departments, reducing staff, etc. to achieve cash flow. Restructuring of business through installation of new systems, overhauling the existing systems and removing the redundant systems to achieve sustained profitability. Returning to the normal situation with internalized and sustained changes to maintain the profitability (“Turnaround management”, n.p.). The major theories involved with turnaround strategies are the Adaptive Model Theory, the Constructive Model Theory and the Theory of Constraints. The Adaptive Model Theory is based on the resource dependence and it involves the management of demands in order to satisfy critical-resource providers. The Constructive Model theory is based on the constructionism. It is involved with managing meaning in order to enhance the legitimacy of the organization (Chaffee, 1). The Theory of Constraints describes each system as having at least one constraint which must be managed properly to gain the most from the system. The theory deals with the concepts of Drum-Buffer-Rope, Throughput Cost Accounting and the Thinking Process. It identifies that the attempt to maximize productivity and efficiency at each resource, i.e., local optimization, actually increases costs globally. The Drum-Buffer-Rope method identifies the slowest operation in the organization and tries to balance the flow of production through the plant with the market demand. The method identifies both production and external constraints and decides for maximum utilization of the resources. The other operations of the organization are made to support the constrained operation and the decision of the maximized utilization of resources. The final steps the method undertakes are the elevation of the capacity-constrained resource and repeatation of the entire process for any other constraint after resolving the existing one. This method is advantageous due to its applicability without much professional training. But the drawbakcs it involves are the inability of the organizations to apply it for streamlining non-constrained resources and keeping it limited to manufacturing techniques rather than apply it for various other processes (Lukesh, n.p.). Among the theories and concepts discussed above, the Theory of Constraints seems to be the most applicable one for the Ford Motor Company. While following the stages of turnaround management this theory may help them to implement the restructuring of the business. The company is not facing any problem with the critical-resource providers or the legitimacy of the company, rather they are facing production constraint of producing fuel inefficient cars and external constriant of insufficient demand for their products. Thus the Theory of Constraints may help them out of the situation through restructuring their business. While considering the turnaround strategies taken up by the Ford Motors Company, the first action which draws our attention is the change in the company management. The company appointed Alan Mulally, the expert with turnaround as seen in the case of Boeing Co., as the CEO of Ford taking over for the first time from one of the Ford family members, Bill Ford. Ford Motors expected to have expert guidance throughout their turnaround phase with this move (Lunsford and McCracken, n.p.). This was taken as a welcome change by the automobile industry which was blaming the leadership of Bill Ford for the setback of Ford. According to them the top management of the company had not given enough attention to the labor and production costs which led to the current situation (Stark, n.p.). While analyzing the situation of the company they decided to curtail the costs, reformulate certain strategies and divest certain assets. In order to curtail the costs of the company through an emergency attempt they went on to cut about 14000 jobs of salaried employees and voluntary redundancy for about 75000 hourly paid workers. The announced the closure of a total of sixteen manufacturing units by the end of 2008 and backed off from their earlier promises of reaching the margin of profitability by 2008. The company has decided to allow some more time up to 2012 for their recovery (Kundnani, n.p.). The attempt of job cut though was made in order to lower the costs of the company; it may increase the liability owing to the payment of pensions to the employees. In their drive of divestment the company sold the brands Jaguar and Land Rover to Tata Motors, India in March 2008 (Spinks, 1). This can also be counted as one of their restructuring strategy which found Jaguar and Land Rover to be the redundant systems for the company. While reformulating the business strategy they decided to deal with the unions more patiently than before and to honor the changing market preferences they declared to manufacture small and fuel efficient cars along with their strongholds of big trucks. This change was also welcomed by the industry which felt it to be good move towards meeting market demand and environment requirements. The invention of hybrid cars was also found to be good by the industry (“Executive summery”, n.p.). They also showed some good sign bringing about the compact cars from Europe to the US market. It is really a good sign that the company is trying to improve of late but they have to go a long way for complete recovery and should try to improve the product mix, fix their cost structure and focus on making profitable sales instead of trying to make sales at any cost (Lee, n.p.). Works Cited 1) Chaffee, Ellen E. “Turnaround management strategies: The adaptive model and the constructive model”. Association for the Study of Higher Education. 1983. Available at: (accessed on 05 September 2008). 2) Dapena, Peter Valdes. “Ford gets 5 top quality awards”. CNN Money.com. 2007. Available at: (accessed on 05 September 2008). 3) “Executive summery”. N.d. Available at: (accessed on 05 September 2008). 4) “Ford posts worst loss, puts turnaround plans into overdrive”. AFP. 2008. Available at: (accessed on 05 September 2008). 5) Hakim, Danny. “Ford has loss from making cars but posts a profit”. The New York Times. 2004. Available at: (accessed on 05 September 2008). 6) Kundnani, Hans. “Job cuts and sales slump could put Ford $9bn in red”. The Guardian. 2006. Available at: (accessed on 05 September 2008). 7) Lee, Markham. “How will Ford turn around after its $8.7 billion loss?” Grace Cheng. 2008. Available at: (accessed on 05 September 2008). 8) Leggett, Theo. “Ford fighting to keep its shine”. BBC News. 2005. Available at: (accessed on 05 September 2008). 9) Lenahan, Tom. Turnaround management. USA: Butterworth-Heinemann, 1999. 10) Lukesh, Richard J. “Theory of Constraints: Production management”. TMA. 1998. Available at: (accessed on 05 September 2008). 11) Lunsford, J. Lynn and Jeffrey McCracken. “New company, same problems for Ford’s CEO”. Post-gazette. 2006. Available at: (accessed on 05 September 2008). 12) Lydersen, Kari. “Activists deride Ford over fuel inefficiency, ‘Greenwashing’”. The New Standard. 2005. Available at: (Accessed on 05 September 2008). 13) Spinks, Jez. Jaguar: “Why Ford’s big cat faced extinction”. Drive. 2008. Available at: (accessed on 05 September 2008). 14) Stark, Betsy. “Ford’s latest setback hints at leadership issues”. ABC News. 2006. Available at: (accessed on 05 September 2008). 15) “Turnaround management”. Net MBA. 2007. Available at: (accessed on 05 September 2008). 16) “US problems fuel huge Ford loss”. BBC News. 2006. Available at: (accessed on 05 September 2008). Read More