Ford Motors need a Significant Improvements - Essay Example

Use "Ford" (the motor company) to discuss how ‘corporate restructuring’ transformed market, productive and financial performance Contents Contents 2 Introduction 3 Discussion 3 Demand of Automobile Industry 3 Porter’s Five Forces 4 Threat of Buyer 4 Threat of Supplier 4 Threat of New Entry 4 Threat of Substitute 5 Rivalry within existing firms 5 Restructuring of Ford Motor Company 7 Value Chain of Ford Motor 8 Sector Matrix of Motor Industry 10 Financial Performance after Restructuring 11 Conclusion 11 References 12 Introduction Companies are now facing more competitive markets, more challenging workforces and more demanding shareholders. This makes company executives ask whether it is time to restructure the company. During the past decade corporate restructuring has become a staple of management life. Numerous firms have reorganized their divisions and spun-off their divisions and streamline their operations. Like many strategic actions the common driver has been that such actions can improve company performance. Restructuring involves selling old lines of business to acquire new lines, from eliminating debt to repurchasing stock, from introducing business units to downsizing work forces. The diversity of outcomes is also to be expected because companies vary in the effectiveness of their initiatives. Well-managed enterprises are more likely than others to realize the intended results. Ford has in the last few years have restructured and revitalized their company under extremely challenging economic conditions. Ford has never lost sight of their social and environmental goals which are key elements of their business strategy throughout the global recession. Through their focus on the above goals they were able to recovery financially. They delivered cars that were safer, greener and smarter. This enhanced their competitiveness and built stronger relationships with their customers. Thus Ford has been able to improve their market, financial and productive performance through restructuring. Discussion Demand of Automobile Industry In the past few years, Car markets like Ford have been sparking headlines over disappointing demand and sales results. Companies like Ford had to cut down costs and redevelop their strategy to remain competitive in their market. Automotive industry remains one of the main contributors to the United States economy and it has began to climb back from the difficult challenges which it faced in recent past years. High oil prices and financial crisis made matters worse as car sales plummeted. The automotive market contributed around 4% of GDP of United States of America. But since last year car sales have raised by 11% and it remained stable for the next few years. The above events have changed the landscape of the automotive market and have created huge opportunities for companies like Ford to capitalize on the recent transformation of the automotive industry. Porter’s Five Forces Threat of Buyer This force is high for Ford Motor. In this case all of the manufacturers of Ford automobiles will depend on the consumers since they purchase most of the output. The maximum revenue of the company comes from buyers and thus if they are not able to keep the customers happy they will lose them to their competitors (Ahlstrom and Bruton, 2009, p. 83). Threat of Supplier This is low. There are many suppliers who have a contract with Ford Motors since there are many parts which are used while manufacturing a car. Thus presence of large number of suppliers reduces their bargaining power (Porter, 2008, p. 121). Threat of New Entry This power is low. New entrants must be able to mass produce their automobiles and achieve economies of scale to make it affordable to every consumer. Again significant amount of capital is needed to carry out research and development. Entering an established industry is difficult for any new market participant (Henry, 2011, p. 96). Threat of Substitute This power is high. There are other types of transportation available to consumers like walking, public transportation, and bike. Again for an established brand, customer loyalty is another major concern. Besides there are other options in the car industry like electric or hybrid car (Mitchell, and Mulherin, 1996, pp. 193-229). Rivalry within existing firms The strength of US auto market is often seen as an indicator for the economy at large. When the sales are bad it can be seen that the economy is usually not doing well as seen in the case of global financial crisis (Gupta, 2009, p. 1). But when the sales were doing well as in 2013 the economy was equally doing well. In 2013, total light vehicle sales increased 7.6 percent making it the best sales year in six years. But behind the rising numbers some major automakers gained its market share while some lost market share in 2013. The main competitors of Ford are General Motors, Toyota and Chrysler. The intensity of rivalry within the automobile industry is very high (Hill and Jones, 2007, p. 131). Figure 1: The US market Share of Major Automobile Companies (Source: Wall Street Journal, 2014, p. 1) The above figure shows that Ford has achieved significant market share in the US automobile space. The market share of Ford in US market has grown by most than any other major car manufacturer. It has increased its market share from 15.5 percent in 2012 to 15.9 percent in 2013. The success of the company has been due to introduction of its flagship vehicles like Fusions and F-series (Gue, 2013, p. 1). But Ford needs to manufacturer smaller and cheaper cars like Ka and Fiesta which is increasingly becoming popular among consumers all over the world. Cheaper and smaller cars will help them combat some of the price drift which pushed away the price conscious consumers both in US and other countries (Ritter, 2014, p. 1). In 2013, Ford invested heavily into their plant and machinery and in their production facilities. They undertook the most aggressive product launch which was scheduled in its entire history. It planned to roll out 23 new refreshed vehicles worldwide which is a significant increase from its average 11 new vehicle launch globally (Ingrassia, 2009, p. 1). Hence the costs associated with such massive launch are huge. They had to convert plants to produce different designs, invest into robotics, heavy machinery, new designs etc. which no doubt put additional pressure on profits and margins. But such associated with such huge product launch the stock market was speculative and the stock traded well below its expected trading levels. It brought down the operating margin of Ford (Hitt, Ireland and Hoskisson, 2008, p. 123). It also impacted the operating related cash flow. The earning per share of Ford Motor declined. There have been declining pattern of earnings per share for over the past two years. Similarly the ROE has reduced in 2009 when compared to the same for the same quarter of the previous year (Lahiff, 2013, p. 1). Restructuring of Ford Motor Company Ford was struggling against the tough competition from other Asian manufacturers, high raw material and labour costs and shift of consumer demand from sports utility vehicles as the price of oil increased. In 2005, the global business of Ford lost around $1 billion due to huge losses in North America which outweighed the gains they made in Asia, Europe and elsewhere. Thus except North America, all other automotive operations made great progress. The market share of Ford fell for ten straight years in US in 2005 to 17.4 percent. Ford Motor Company has undergone restructuring many times in its history of operations (Carapeto, 2000, pp. 101-109). The company confirmed to cut many thousands of jobs towards the end of January in 2006. The company told that by 2012, it may have to close down its 14 factories in North America. This represented around 25 % of the staff of Ford in the region losing their jobs. Ford named the restructuring as “Way Forward”. The restructuring plans of Ford Motor comprised of four main steps. They were restructuring it aggressively to operate profitably at their current demand and changing mix. They were working together for improving the balance sheet and working as global team. They were accelerating for developing new products for customers as per their need and value. They basically were operating as a team around the world with one goal and one plan. After restructuring process, the revenues of the company recorded $ 172,455 million in December 2007 which is 7.7 percent increase than 2006 (Banerjee, 2009, p. 51). Similarly in 2009, Ford Motor Company announced to reduce its $ 25.8 billion in automotive debt by around 40 percent. They did this by offering new shares and cash to creditors to reduce its financing cost at the time of declining sales and tight credit terms. Though after the announcement the share price declined by 15 percent the bonds of Ford’s finance arm increased after the launch of the tender offer (Ford, 2011, p. 1). Value Chain of Ford Motor Figure 2: Value Chain of Ford Motor (Source: Ford, 2013, p. 1) The first stage is Product Planning and Design. This stage is important as all major decisions about how the products will be made, what technologies should be developed and implemented and where will the product be made is decided. Thus innovation and R&D play a critical role to enhance the positive impact and reduce the negative impact of their products and operations. In 2012, Ford spent $ 5.5 billion on research and development and on engineering. The management of the company laid stress on low carbon strategy, electrification strategy, oil consumption and GHG emissions (McTague, 2010, p. 1). The second stage is Logistics. This stage includes the transport of parts from their suppliers to their manufacturing plants. The finished vehicles are transported from their factories to their dealerships. Ford creates value at this stage by providing jobs and business in the packaging and transportation industries. The company tries to reduce their emission and waste associated with packaging and transportation. Ford use 90 percent reusable containers in their European operations (Rippert, 2013, p. 1). The next stage is Raw Material Extraction. This stage creates value for raw material supplier and local communities though employments and other benefits. They have reduced the use of dysprosium which is a rare earth element by about 50 percent. The next stage is supplier part manufacturing. These include their direct suppliers as well as multiple levels of suppliers who provide components to their direct suppliers. As of 2012 the supplier training of Ford had impacted around 84, 710 supplier companies and 430,200 individual employees at the supplier companies (Ford, 2014, p. 1). The next stage is the manufacturing part. Here Ford creates the most important value for the customers. As of 2012, Ford employed around 171,000 people globally. Ford is expected to invest around $ 125 million in their facilities across Europe and America from 2013 to 2017. They contributed $ 3.2 billion in taxes globally in 2012 (Ford, 2013, p.1). The next stage is sales which include their communications with consumers about their products. As of 2012, Ford dealer employed 189,000 individuals globally and gave an annual payroll of around $ 7 billion (Ford, 2013, p. 1). The last stage is the service. Here the dealer network create vale which impacts through their network of vehicle service centres. As of March 2013, more than 600 dealers located in 48 states have participated in the green dealer onsite facility assessment to identify cost- and energy-saving opportunities. Core Recovery Program of Ford have saved around 120 million pounds of vehicle waste from being buried in landfills or sent to junkyards. Sector Matrix of Motor Industry Ford is vertically integrated and highly diversified. Thus it consumes a large portion of value chain. It manufactures products which are targeted at mass markets and hence their production is considered as the area of core competency. Their ability of economies of scale acts a competitive factor. Activities such as services and durable are important to strike a balance between supply and demand in the market. Value chain analysis stresses on excellence of production while Commodity Chain emphasises on creating an effective marketing network. Both these framework are integrated into Sector Matrix mode. It is centred on complementary supply interaction and demand substitution which is strategized through organisational activities and is similar to primary activities of Value Chain. Financial Performance after Restructuring Following restructuring of Ford Motor, the company has not been able to achieve significant improvement. The current liabilities of Ford Company have decreased by 44% from 20111 to 2013 while the total assets have increased by 5%. Similarly the long term debt has registered a growth of 4%. The total asset of Ford has registered a growth of 6% from 20011 to 2013. Similarly the revenue of the company has registered a growth rate of 4% while the net profit of the company has declined by 41%. Conclusion Restructuring is now a common step taken by European companies so that it can help them maintain profitability. With increasing economic stability most of the companies now goes for restructuring like reducing workforce, closing down operations in areas where they are not earning profit. Ford motors have entered into restructuring phase many times in tiers operations. For example in 2012, Ford motor announced to restructure its Europe operations to respond to structural changes in the market. It has been found that restructuring within Ford Motors has resulted in increase of revenue for the company though the net profit has decreased. Thus Ford Motors need to improve its competitive cost structure to improve its profitability along with restructuring its operations. References Ahlstrom, D. and Bruton, G. 2009. International Management: Strategy and Culture in the Emerging World. Stanford: Cengage Learning Banerjee, S.B. 2009. Corporate Social Responsibility: The Good, the Bad and the Ugly. New York: Edward Elgar Publishing Carapeto, M. 2000. “Emerging Patterns In Deviations From Absolute Priority Rules In Bankruptcy”, Journal of Restructuring Finance. Vol. 2(2), pp. 101-109 Ford. 2011. Restructuring Progress. Available at: http://corporate.ford.com/microsites/sustainability-report-2010-11/economy-restructuring-progress. [Accessed on: 11 March. 2014] Ford. 2013. Financial Health. Available at: http://corporate.ford.com/microsites/sustainability-report-2012-13/financial. [Accessed on: 11 March. 2014] Ford. 2013. Our Value Chain and Its Impacts. 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Strategic Management: Competitiveness and Globalization, Cases. Stanford: Cengage Learning Ingrassia, P. 2009. How Ford Restructured Without Federal Help. Available at: http://online.wsj.com/news/articles/SB124199912671905001. [Accessed on: 11 March. 2014] Lahiff, K.A. 2013. Why Ford (F) is Getting Crushed. Available at: http://www.thestreet.com/story/12159217/1/why-ford-f-is-getting-crushed.html. [Accessed on: 11 March. 2014] McTague, J.P. 2010. Research Restructuring and Assessment at Ford. Available at: http://www.nap.edu/openbook.php?record_id=9205&page=27. [Accessed on: 11 March. 2014] Mitchell, M.L. and Mulherin, J.H. 1996. “The impact of industry shocks on takeover and restructuring activity”, Journal of Financial Economics. Vol. 41(2), pp. 193-229 Porter, M.E. 2008. Competitive Strategy: Techniques for Analyzing Industries and Competitors. London: Simon and Schuster Rippert, U. 2013. European trade unions oversee auto industry restructuring. 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