Ford Motor Company - Essay Example

?Executive Summary This research paper will give a deep insight into the present situation of Ford. Ford has been in crisis for some years now. The reasons that have lead to this crisis are many. There are external factors as well as internal factors that lead to the present crisis situation. But it is found that the center of all the issues of Ford is the serious mismanagement which has been undergoing in the company for years. This report will give a comprehensive analysis of the external and internal factors that has lead the company to crisis. The first part of the analysis will give a summary about the company and its problems in general. From the analysis in the second part it is found that poor management and decision making is the core problem of Ford. Ford is also loosing the market edge on Hybrid and Small cars segment. A fish bone diagram is used to represent the various problems that have lead to the loss of profitability for Ford. The analysis helped to arrive at the issues which are management, competition, recession and quality. Excessive family control and poor decision making are the major management issues. Similarly, competition from Japanese car makers and other small and hybrid car makers are the major competition lead issues. Low demand and rippling effects of the recession are the recessionary issues. Finally product defects and recalls following that are the quality issues that affected ford. The analysis had also put forward various other solutions that will help the company to come back to profitability. Huge reduction of the family’s stake in the business is among the primary solution for Ford. The later part of the report will give a detailed cost benefit analysis for arriving at the right decision for the company. Ford Motor Company Position Ford Motor Company is one of the largest multinational automakers in the world. Ford Motor Company is headquartered in Dearborn in Michigan State of US. Ford was incorporated in the year 1903 by the Henry Ford one of the revolutionaries in the automobile industry. Ford is a publicly traded company listed in NYSE. The two main divisions of Ford are Ford and Lincoln brands. Apart from these two brands Ford also has non-controlling stakes in Mazda of Japan and Aston Martin of UK. Ever since its inception Ford has acquired and sold many of the big brands in the industry. Jaguar & Land Rover and Volvo are the leading ones among them. Following the crisis that hit the company and which almost lead to their failure, it has to restructure itself thoroughly. As a part of it, Ford even discontinued its Mercury brand. Ford was one of the pioneers of ‘Mass Production’ concept. Ford introduced the assembly line system in the automobile production that enabled the roll-over of large number of cars within limited time. The Model T was the first Ford model to undergo assembly line production. “When the United States became involved in World War I (April 1917), the Ford Motor Company placed its resources at the disposal of the government.” (Funding Universe, 2011) Following the retirement of Henry Ford in 1918, the company’s operations were looked after by his son Edsel Ford. Ford faced the first financial problems in 1921 when the company had $58 million in debt and the company had only $20 million with them to meet this. But the various strategic moves that involved sales of maximum automobile and only through cash, reduction of inventories by one third, and various other cost reduction techniques helped them to increase cash inflow. Within no time Ford raised around $87 million which gave them a surplus amount even after meeting all its debt obligations. “The vision of Ford Motors is to become the world’s leading consumer company for automotive products and services. The mission statement of Ford is to that they are a global family with a proud heritage passionately committed to providing personal mobility for people around the world. We anticipate consumer need and deliver outstanding products and services that improve people's lives.” (Manonamission, 2005) The very strong vision and mission statements has helped the company to be one of the leading automobile companies in the world. Ford’s extreme focus on its customers and value helped the company to be back in momentum even after it faced the biggest crisis recently. The best ever part is that it even outsold its rival GM which was something that is unthinkable. Following the 2008 recession, when Ford, GM and Chrysler faced crisis to the tip of bankruptcy, Ford was the one to revamp quickly and come back in momentum much faster than the other two. The brand story of Ford is another interesting area. In United States, Ford manufactures cars mainly under the brands Ford and Lincoln. The three discontinued brands of Ford are Edsel, Merkur and Mercury. Mercury was discontinued in 2010. Poor sales were the reason for discontinuation of all the three brands. Ford had substantial interest in the British car maker Aston Martin when it acquired the company in 1989. After carrying the brand for long years, due to low viability, the stake was sold in the year 2007. Ford bought controlling stake in Volvo cars in the year 1999. But due to low profitability from the brand, it was sold to Geely of China in 2010. Ford had to sell Volvo for a huge loss. Back in 1999, Volvo was bought at a price tag of $6.5 billion. But it was sold to Geely for $1.8 billion which is a huge loss of $4.7 billion. Ford was not in any better position for a bargain. Firstly, Volvo was a loss making unit and secondly Ford was in a crisis situation. Ford also had ownership of the most respected Jaguar & Land Rover brands. But due to low sales and profitability, the brand was sold to Tata Motors of India. This deal was also a loss for Ford compared to the price it paid for acquiring the brand years ago. The brands were sold to Tata for a price of $2.3 billion in addition to $600 million for settling the pension plans. Initially, Ford was only focused on the US markets. But now it has presence in almost all the continents. It has research and development facilities in all major countries. Ford has one of its major R&D facilities in Chennai, India. Extreme focus on the customer needs and aspirations were one of the major success factors of Ford. Even when the company was in great struggle it did not adopt revamping strategies at the cost of the customer. The company’s revamping strategy ‘The way forward’ helped them to regain the lost market share. Presently, Ford is the second largest automaker in US and fifth largest in the world. This is based on the total vehicles sales in the year 2010. Ford is also eighth ranked in the Fortune 500 list based on their total sales in 2009. The company had increased its sales in 2010 compared to that in 2009. (See Appendix 1) (Niedermeyer, 2010) Sense Though Ford is ranked as the leading auto manufacturers in the world, it has faced an array of problems ever since its inception. The problems faced by Ford include financial, marketing, product defects, low customer focus and the like. The main reason for the crisis in Ford is the large family holding which gives the controlling stake to the family. Unlike any other automobile company, majority of the decisions are taken by and in favor of the family members. The company management lacked professionalism and fresh ideas. Ford Motors faced the biggest ever financial trouble when it neared bankruptcy in the later part of 2007. Unlike other automobile companies, the Henry Ford family holds a controlling stake in the company. “Things have been going from bad to worst for the automaker that finally shareholders of Ford together with the heirs of Henry Ford are confronted with the prospect of finally relinquishing the control of the company whether they like it or not than to lose everything at the end.” (Marketoracle, 2007) The company didn’t have resources to pay for its production and expansion plans. The financial troubles were not the one that has begun just one or two years back. It was pointed out that the record debt accumulation was the result of serious mismanagement for years. It acquired many other automobile brands and scaled up to the size which was beyond management’s control. One of the serious management mistakes that Ford has been doing over years is the increased pay to their employees. Mr. Sean Eagan, one of the most regarded and influential credit rating analyst had pointed out about the financial crisis of Ford much before 2007. The company had only $11 billion shareholders equity alongside the $165 billion debt. Competition from the Japanese rivals has also a major contribution to the crisis of Ford. During the peak of crisis, Ford even faced drastic decrease in its market share to less than 20%. However, Ford successfully came out of the financial crisis through a drastic restructuring exercise. As a part of the restructuring, the company sold off its stake in Jaguar & Land Rover, Aston Martin, Volvo and Mazda. This has helped them to increase its focus on the core brands Ford and Lincoln. The company even introduced the slogan ‘The Way Forward’ as part of its restructuring. Ford also reduced the number of suppliers from 3300 in 2003 to 1600 now. Ford is even planning a further reduction in the number of suppliers. This helped them to focus on the most productive suppliers. Ford has also cut down the number of employees in the factories and also in the Ford Credit division. Such kind of restructuring exercise will continue even further. Ford was the first among the three Detroit majors to come out of the crisis situation. When Allan Mulally took over as CEO in the year 2006, the company was forecasting a record loss of $17 billion. 2006 was the year of historical losses for the company. (See Appendix 2) (Msnbc.msn.com, 2007) But through the proper revival of the management decision making modes, the company was able to turn to better position. Ford had considerably reduced its debt of $33 billion by $12 billion. It is noticeable that Ford’s made an operating profit of around $2.1 billion in the third quarter of 2010. In contrast to this, the other Detroit majors had taken safety route. GM bowed for the government under the bankruptcy cover and Chrysler ended up in the hands Italian auto major Fiat. Soon, Fiat will own controlling stake in Chrysler. Without all these, through well planned restructuring exercise Ford has turned to profits. Though the company has turned over to better position now, the crisis put forwards the question regarding long term shareholder value. It raises serious questions of corporate governance issues. A company which has been in the markets for several decades did not have enough of reserves and fund sources. This shows the serious operational mismanagement of the company for the past years. Continuous increase in the fuel prices made the situation even worse. Customers settled down for more fuel efficient cars. But Ford had most of the fuel consuming SUV’s, Trucks and Sedans among their models. This made them less competitive compared to companies like Toyota, Honda, Nissan, etc. Ford’s management lacked the foresight that the future of automobile industry lies in small and fuel efficient cars. Ford was very much patient and attentive to the customer requirements. But it failed to predict the industry requirements. Honda led the industry in the fuel efficiency revolution. “In an annual report released in July, the EPA said the industry-wide fuel economy of 2006 model-year vehicles was 21 miles per gallon. Honda led all major carmakers with an average of 24.2 mpg—and Ford Motor Co, at 19.7 miles per gallon, moved up one slot from last place a year ago.” (Hybridcars, 2006) A company which is praised as the pioneer in revolutionary assembly line production failed to meet the changing requirements of the industry. Ford had big environmental plans for them but it all failed to materialize. In fact, Ford started planning for a Hybrid only in the year 2000 when Mr. Bill Ford took over as CEO while the Japanese companies have started thinking about it decades before. Ford could materialize the hybrid dream only in 2005 when it launched the Escape Hybrid which is the first ever American hybrid car. Despite the huge cost incurred on development and marketing of Escape, the SUV was sold at a rate of only 20000 units a year. This was also the period of peak financial crisis for the company. Even after this, as a part of restructuring, Mr. Bill Ford announced that the company will build 250,000 hybrid cars a year by 2010. (See Appendix 3) (Hybridreview, 2010) But then this time Toyota led the market share followed by Honda in the second position. For better growth in the future, Ford will have to increase its focus on small cars and hybrid cars. Currently, Ford sells Fusion Hybrid and Escape Hybrid under the hybrid category. Among them, Fusion Hybrid has the highest sales. Fusion has also won several awards for best hybrid cars. It sells Transit Connect EV under the electric car segment. It is planning to introduce models Focus Electric, C-Max Energy and C-Max Hybrid. Focus Electric will be launched by the end of 2011. But C-Max is expected to hit the market only in 2013. By then the Ford should generate increased volume of its existing hybrids. The launch of these models is expected to increase the competitive position of Ford among its US as well as other country rivals. Uncover From the above analysis we have identified that declined profits and cash flow is the major problem of Ford Motors. We have also seen the various causes that have lead to this core problem. The following Fish Bone diagram will help us to have a more comprehensive look at the problems at Ford. (Appendix 5) The various issues that have lead to the low profitability of the company are clearly mentioned in the above diagram. Now we can discuss those problems and the various solutions available for Ford to improve its condition. Management: Poor decisions and excessive family control are two main management problems that have lead to poor performance of Ford. Ford has one of the largest family holdings compared to the whole automobile industry. When looked into the past of Ford management it can be seen that high performing outsiders who pose a threat to the family’s superior position in the company were either discouraged from moving up the ladder or fired from the company itself. The Ford family should considerably reduce their holding of the Class B shares which give them super voting power. Many a times the shareholders have voted in favor of this decision. But the immense influence of the Ford family did not allow the decision to be implemented. The family’s ownership represents a 40 percent voting rights. This percentage is the highest in the industry standards. Even the present younger Ford generation is of the opinion that the family holdings should be reduced. “The younger Fords don't believe the family should be so involved in managing the company since it leads to bad decisions” (Lippert and Koenig, 2007) Moreover, outsiders like Alan Mulally should be appointed at the top for driving the company forward. This is the time when all the investors are losing confidence in the management skills of the family members. The share price of the company has come down by around 74% from what it was in 1999. In the event of huge family holdings, all business decision will be centered on the family’s wealth maximization. Competition: Competition is the second major issue that led to the lower profitability for Ford. The primary competitors of Ford are the Japanese automakers Toyota, Honda, Nissan, Acura and the like. Apart from these there is also stiff competition from the German and British car makers. But since most of the models of Ford are sold in the mid segment, the Japanese car makers and its US peers GM and Chrysler are the major competitors. Quality is the factor where the Japanese car makers have an edge. They are highly capitalized on their core value of quality. Over the past many years Japanese cars are well known for better quality and durability. Nowadays they are leading on the performance front too. Moreover, cost reduction is the major strategy of Japanese automakers. They are able to provide better quality cars at reasonable and affordable prices. Ford should shift focus to cost reduction and increased quality. Compared to the peers GM and Chrysler, Ford is improving their market share. For the first time in history Ford has surpassed the GM’s sales. The second competition factor that led to low profitability is the least number of hybrid models. Compared to the Japanese, US and European peers, Ford has less number of Hybrid models. Companies like Toyota, Honda and Nissan had started developing hybrid models well in advance. This gave them an edge over the market by the time the hybrid markets flourished. Toyota has fully fledged hybrid models Prius, Camry Hybrid and Highlander Hybrid. Al these models are well accepted in the market and Prius is even an industry benchmark. Honda has hybrid models of Civic, Jazz and CR-Z. Similarly Nissan has also highly competitive hybrid cars. When it comes to Ford, the first hybrid model is the Escape Hybrid which is not well accepted in the market. The second one is the Fusion Hybrid which is just catching up the market. At present Ford does not have a small hybrid car. Ford lost the market share not only among the hybrid segment but also among the small or hatchback segment. Compared to the competitors, Ford has less number of small cars. In a declining economic situation and need for more convenience, customers are more inclined towards small cars. Ford has to invest a lot in developing small cars and also the hybrid versions of the same. Recession: Recession in the overall economy is the third factor that drove away the profits of Ford. This is a scenario that has affected the entire US automobile industry. But it worsened the situation of Ford which has already been undergoing tough situation in terms of profitability and cash flow. US auto industry was one of the hardest hit during the 2008 recession and its rippling effect. (See Appendix 4) (Icis.com, 2009) Recession has impacted Ford in two ways. Primarily, it lead to low unit sales and secondarily it washed away the investments the company has made in financial instruments. It was the rippling effects of the recession that resulted in Ford, GM and Chrysler to look for bailout in the later part of the year. Recession reduced the demand for automobiles. Even the sales of hybrid cars were drastically down during this period. People who wanted to buy cars preferred more of small and fuel efficient cars. Now this is where Ford lost the grip of the market. It had very less models to satisfy the needs of customers during the recessionary period. Quality: Though Ford has increased the quality of their products over years it was never able to surpass the Japanese counterparts in that terms. The fact that Toyota had faced with a serious product defects in the last year is a case of exception. Prior to 2008, Ford was never ranked at the top position in terms of quality. The top positions were always occupied by the Japanese car makers. But during the later parts of 2009 Ford started climbing up the ladder by recording better quality of the cars. If this pace is continued, the market share of the company can be improved considerably. "Ford has not only been performing well in 'real' quality measures, long-term durability and initial quality, but is scoring higher on the more subjective aspect of quality: perception.” (Reuters, 2011) Ford should avoid any chances of product recalls in the future. In the past, Ford has met with serious product defects and recalls which has hardly hit the brand value. Even product recalls have happened with the flagship Mustang model. Ford Pinto’s case was the biggest ever product defect happened for Ford. But it was in the late 60’s. In 2000, Ford had to recall 14 million Firestone Tires used in their models. The defective firestone tire in the models had the possibility of leading the car to crash. During that time, Firestone tire was used in various models. Around 184 people had died due to the accidents caused by defective tires. Most of these crashes happened due to the defective tires on the model Explorer. Ford had also recalled some of its Mercury models, now discontinued brand. Therefore, Ford should be very much careful while sourcing products manufactured by the outside vendors. Ford has recently faces a product defect case with its Explorer model. Ford Explorer had serious issues with its rear seat safety. Some of the rear seats of the model were not meeting the required safety standards. The rear seat was found to be less strong to avoid collapse in the event of a crash. Due to this problem, the company had to recall around 1660 models for replacing the seats. During the same period Ford has also recalled many of its F-150 trucks due to defects in their interior door handles. This was related to the models that were produced in the year 2009 and 2010. Solve This part of the report will deal about the solutions for Ford to implement the above uncovered issues. Some of the alternatives solutions available for Ford are as follows: Option 1: Invest huge in R&D Option 2: Expand the market Option 3: Develop more small cars Option 4: Gradually exit the stake from other auto companies Option 5: Invest in strategic alliances Option 6: Gradually increase the marketing expenses Option 7: Emphasize the message of quality A decision matrix has to be constructed in order to select the best possible solutions from the above alternatives. Selection of the above alternatives will be based on the impact of these alternatives on the various parameters related to the company. The various parameters that should be considered are cash flow, shareholder value, industry standard and profitability. The importance of choosing various criteria is explained below: Cash Flow: Cash Flow is one of the most important factors to be considered by Ford at present. The company is struggling hard on its cash flow front. The debts of the company are also at a high stage. Therefore, at the present conditions the decisions that are taken should lead to an increase in the cash flow of the company. Shareholder Value: As discussed before, due to the poor management decisions taken by the management in the past, the shareholders has lost faith in the company. The drastic decrease in the share price over years has lead to huge losses for the public shareholders. Unless the company takes effort to improve the shareholder value, it cannot expect the investors to stay longer with the company. Therefore, shareholder value is allocated the maximum weight in among the criteria. Industry Standard: All decisions to be taken by Ford should consider the existing industry standards. If the decisions are not as per the existing standards of the industry and the company, it will not benefit the company even in the short term. Also, the decisions taken should not harm the brand value of Ford. Therefore, this criterion is given 10% weight in the matrix. Profitability: Another equally important factor to be considered is the profitability. This is the primary criterion for any business decision. For Ford, this is an even more important factor. This is a stage where Ford is struggling to make profits. Recession and competition has drained away the market share and profits of Ford. Only through a better profitability can the company generate enough cash flow. Therefore, profitability is given a 20% weight. Criteria Weight Opt 1 Opt 2 Opt 3 Opt 4 Opt 5 Opt 6 Opt 7 Cash Flow 0.3 1 3 1 8 3 2 6 Shareholder Value 0.4 6 5 5 6 6 4 6 Industry Standard 0.1 3 3 6 5 3 4 6 Profitability 0.2 4 7 6 7 6 7 6 Sum 100% 10 = High Rank & 1 = Low Rank     Weighted Score Opt 1 Opt 2 Opt 3 Opt 4 Opt 5 Opt 6 Opt 7   0.3 0.9 0.3 2.4 0.9 0.6 1.8   2.4 2 2 2.4 2.4 1.6 2.4   0.3 0.3 0.6 0.5 0.3 0.4 0.6   0.8 1.4 1.2 1.4 1.2 1.4 1.2 Sum 3.8 4.6 4.1 6.7 4.8 4 6 From the above table we can conclude that option 4, that is, exit the stakes from other companies is the most beneficial decision. Exiting the stake will bring in more cash for Ford and this will help the company to pay off its debts. The surplus that is generated can also be used for further investments. This decision will also help Ford to focus more on the primary brands Ford and Lincoln. The next best option for Ford is to emphasize the marketing activities on the message of quality. Ford has gradually increased the quality of their models and was even ranked best in terms of quality. Ford should focus all their marketing activities on the message of quality. This will create an impact in the mind of the customers. Customers should be able to associate the brand Ford to quality. The decision to invest in strategic alliance is also a better decision for Ford. It already has strategic alliance relationship with many companies. But it should re-analyze the existing relationship and select the most profitable alliances. Implementing all these decisions will help Ford to improve their current position and lead to better profitability. Build The above analysis has shown that the solutions were arrived at after considering various parameters. Now we should look at the cost benefit analysis of the above selected alternatives to conclude whether they are really feasible for the company at the present condition. Opt.   Cost Benefits   Tangibles 1. Loss of other company holdings 1. Increased cash flow 4   2. Loss of profits from other companies     Intangibles 1. Narrowed brand presence 1. Better focus on own brands     2. Loss of leadership position 2. Better shareholder value   Tangibles 1. Cash outflow 1. Increased profitability 7     2. Increased market share   Intangibles 2. Risk of avoiding other important factors 1. Increased brand value   Tangibles 1. Huge cash outflows 1. Advantage of the partner's specialization 5   2. Time consuming     Intangibles 1. Risk of sharing the knowhow 1. Increased market presence     2. Risk of failure of alliance     Tangibles 1. Cash outflow 1. Increased profitability 2     2. Increased market share   Intangibles 1. More marketing expenses 1. Increased brand value         The above cost-benefit analysis will help to understand the real impact of the implementation of the selected alternatives. It can be noted that most of the selected decision will lead to the increase in profitability, market share and brand value. These are three important factors that Ford requires at present. When the above decisions are implemented well in advance in a timely manner, it will lead to maximization of the benefits and minimization of the costs. Achieve This is final step that should contain the involvement of every shareholder. The top executives of Ford should formulate the proper action plan for the implementation of the selected decisions. Before implementation, the plan should be properly reviewed to have valuable suggestions and ideas from the executives. This step will involve formation of various groups to analyze the feasibility of the plans. The action group plan should be broken down into various parts based on the function. Different groups of experts should be formulated for analyzing the plan on financial, marketing and HR feasibility front. The group should consist of experts in the concerned areas with the top executives heading each team. After making individual assessment of the plan the groups should make a common discussion about the plan. This discussion will help to identify any area which is of conflicting interest. Based on this common discussion the team will be able to reach a consensus by either eliminating a plan or by carrying forward a plan. Any conflict of interest should be resolved by proper discussion. Once this step is over, the plan will be ready for implementation upon approval from the CEO. Properly carrying out all these steps will help Ford to come out easily from the present crisis situation. Even with the present condition it has reached at par with GM in terms of sales and at par with Toyota in terms of quality. So, once the new plan is implemented there will be no looking back for Ford. Works Cited “Ford Motor Company.” Fundinguniverse.com. 28 May 2011. “Ford’s Mission Statement.” Manonamission.blogspot.com. 28 May 2011. “104 Years of Ford Motoring Going Down the Drain.” The Market Oracle. 29 May 2011. “Bill Ford’s Failed Hybrid Revolution.” Hybridcars.com. 29 May 2011. Lippert, John, Bill Koenig. “Ford Family Members Weigh Sale of Shares, People Say (Update 4) Bloomberg. May 30 2011. “Ford Reaches Tie With Toyota in Brand Perceptions.” Reuters. May 30 2011. “Hybrid Car Sales, February 2010.” Hybrid Review. May 30 2011. “Ford posts deepest loss in its 103-year history.” Msnbc.msn.com. June 4 2011. http://www.msnbc.msn.com/id/16804725/ns/business-personal_finance/t/ford-posts-deepest-loss-its--year-history/> Niedermeyer, Edward, 2010. “Ford “Core Brands” Up 15 Percent, Down From May.” June 4 2011. http://www.thetruthaboutcars.com/2010/07/ford-core-brands-up-15-percent-down-from-may/> “US auto sales at 1992 level.” Icis.com. June 4 2011. Appendix 1 (Niedermeyer, 2010) Appendix 2 (Msnbc.msn.com, 2007) Appendix 3 (Hybridreview, 2010) Appendix 4 (Icis.com, 2009) Appendix 5 Read More