The Acquisition of Jaguar and Land Rover - Case Study Example

Acquisition of Jaguar/Land Rover In march 2008, the Tata Motors of Mumbai, India entered into a purchase agreement with the Ford Motor Company to acquire the Jaguar/Land Rover division for a price of $2.3 billion dollars.(www.timesofindia.indiatimes.com). The Tata Motors Company is the largest auto maker in India, with revenues of $7.2 billion in 2007-7 (Pope, 2008). As a part of the acquisition by Tata Motors, the Ford Company is to contribute 600 million dollars towards the pension plans for the Company and also continue to supply the Company with vehicle components such as power trains and stampings, while also providing environmental and other technologies as well as engineering support. The Ford Company is also to provide financing options for Jaguar customers during a transitional period after the sale (www.timesofindia.indiatimes.com). Ford originally purchased the Land Rover brand from BMW for about $20 million.(Anonymous, 2007: Automotive News). The Land Rover originated in post war Britain in 1948, a simple and inventive machine made out of aluminum and combining a utilitarian quality with durability. Jaguar was a part of the Ford Company since 1989 and the Jaguar founder, William Lyons focused on building these cars with high performance engines, which had a reputation for their advanced engineering and superior performance.(www.ford.com). Ford’s acquisition of Jaguar and Land Rover was not an asset for the Company because it did not prove to be profitable. The Company introduced many new measures to revive flagging sales of the cars. One of these was the replacement of the twin track saloon car production line which was installed over 30 years ago, with a single track assembly line, to boost the quality and efficiency of the Jaguar saloon cars that were produced.(Assembly Automotive, 1994). According to Porter, a firm’s strengths can fall into one of two categories: differentiation and cost advantage, which leads to three different generic strategies: cost leadership, differentiation and focus (Porter, 1980). In the case of Jaguar, the car is a brand model and its value is perceived to be the function of its high price. Since only a few people can afford it, possession of the car is a sign of prestige and the car has had the reputation for quality and exclusivity. However, Ford has attempted to use the cost advantage strategy by producing a more mainstream, affordable X-Saloon brand called “Baby Jag”. But as pointed out in a review of two works on the Jaguar, this has produced implications in the form of perceived quality problems., especially since the new Jaguar share sits underpinnings with the down scale market Ford Mondeo car, producing a negative result in terms of sales.(Viewpoint, 2003). Since the high price of Jaguar was the single factor limiting its sales, the attempt was to reach a more competitive position with other luxury brands in terms of price, however this may not necessarily have worked in the Ford Company’s favor, since the perceived loss in quality has negatively impacted upon sales. Bowman and Faulkner’s strategy clock also analyzes a company’s competitive position in relation to what other companies are offering (Bowman and Faulkner, 1996). Based on this, they have identified six strategic options, also based upon a cost advantage strategy or a differentiation strategy. In the case of the Land Rover division, Ford’s strategy to differentiate with a price premium, defined as option number four – differentiation, as per Bowman’s clock. For example, in the year 2002, the Land Rover launched its third generation vehicle, the third redesign of the model since its inception. This restructured model was launched with several improvements such as mechanical refinement, increased comfort, power and styling (www.landrover.com), all of which contributed towards enhancing the perception of value of the car in the minds of the public, so that sales of the car slowly improved and Ford was able to turn around the once losing division to a position where it started yielding profits, just prior to the sale to Tata motors. Applying Porter’s Five forces in the case of Jaguar/Land Rover, one of the aspects that is very important is the bargaining power of buyers. With increasing globalization, car makers such as Toyota have been able to enter the American market, and offer buyers a choice in cars at a lower price than that offered by Ford. Some of the reasons for their increased competitiveness included (a) the ability to present conservative styles in their cars which appealed to larger sections of the public (b) the ability to use cheaper parts and labor, so that they were able to offer their cars at a lower price and (c) the gaining of benefits from the favorable exchange rate for the Japanese yen (Lienert, 1997). Since Toyota cars were available at a good quality for lower prices, the Toyota company was able to grab a greater market share because buyers had more choices available to them and opted to purchase more Toyota cars. The threat to substitutes, identified by Porter was thus operational in the case of Jaguar/Land Rover as well, since customers preferred to substitute Ford’s luxury car models with those offered by competitor companies. Degree of rivalry may also be seen to play a role in the fact that the Jaguar/Land Rover divisions were not functioning to profitable levels. As opposed to its competitors, Ford’s production system and maintenance of quality standards were not as high, so that the brand quality of its products were affected.(Viewpoint, 2003). One of the problems with Ford was the vast bureaucracy existing in the Company, whereas In Toyota there is a focus on solving problems immediately before they compound. In recent years, the Ford Company has adopted the same practice through the development of Plant Vehicle Teams. These are small groups of technicians who function as outside experts that are not subjected to the hierarchical stream of authority within the Company, and are thus able to independently assess and critique the vehicles. The PVTs have resulted in high levels of savings for the Ford Company. At the Atlanta plant, a water leak was discovered around a grommet that was used to seal a hole and the PVTs developed a hot metal grommet that was able to seal itself.(Lienert, 2007). This measure was also cost effective and saved the Company 2 cents on every vehicle, with the process also being used in the Jaguar and the Land Rover. This is just one of the many measures that the Ford Company has been taking up in recognition of the competition posed by its competitors in terms of quality of the final product. PESTLE ANALYSIS: One of the most significant factors that has played a role Ford’s decision to sell off the Jaguar/Land Rover division is economic factors. Globalization has increased the levels of competition in the market among car sellers. With the entry of foreign car makers such as Japanese and German car makers into the global arena, it has become increasingly difficult for Ford to compete effectively with them and yet maintain the expensive Jaguar and Land Rover divisions. These two cars are targeted at the high price market, where there is a lower volume of sales. Although the Ford Company has invested a considerable amount of time and energy into improving sales in these divisions, this has not been counterbalanced by a corresponding rise in sales. The falling exchange rate of the dollar in the global market has also provided foreign car makers with a cost advantage. Rising gasoline prices have also hit the Ford Company hard, because its sales are concentrated more in SUVs and pick ups rather than fuel efficient models (Chatterjee, 2007). In order to effectively maintain a competitive edge in the market, it became necessary for Ford to sell off its unprofitable divisions – Jaguar and Land Rover, so that it could concentrate on improving sales of its other cars. Technological factors have also played a role in Ford’s sale of Jaguar/Land Rover. There has been a rise in the extent of computer systems used in cars and as far back as 1999, five car makers had joined together to develop common technology such as wiring standards, paging systems and web hookups through standardized manufacturing processes. (Anonymous, 1999). The Jaguar was one of the first cars that incorporated Wire In Composite (WiC) technology, whereby wiring looms are enclosed in bespoke carbon fibre sleeves, thereby protecting them from damage. (www.automotoportal.com). Such technological innovations are an aid in terms of enhancing the value of the Jaguar, and a part of the Ford Company’s strategy to make it a profitable division. However, since the Company has to cope stabilize its competitive position in the market by strengthening its other divisions, it has chosen to dispose of the Jaguar and the Land Rover divisions. Social: The Ford Company’s sales have generally been higher for SUVs, pickups and minivans rather than fuel efficient models(Chatterjee, 2007). With rising gasoline prices in the United States, the markets have been dwindling for gas guzzling models such as Land Rover and Jaguar. Pension and retiree costs are also rising in the United States, further compounding the dwindling market for Ford’s less fuel efficient models. Toyota’s smaller, more fuel efficient cars are more popular and their sales have been rising, cutting into Ford’s markets. Political: In recent years, there has been an increasing level of attention that has been directed towards environmental issues. It is widely acknowledged that the lack of effective fuel efficiency standards is contributing to global warming. As opposed to Ford, Toyota has been able to market itself as the car company which supports environmental initiatives, through its development of the Prius car model. Recently, however, this position has been undermined, through Toyota’s opposition to legislation that proposes to increase fuel efficiency standards to 35 mpg by 2020. Legislation has been increasingly geared towards reducing fuel emissions, as a result, it affects all car makers who need to spend millions of dollars on redesigning cars and developing fuel efficient alternatives, such as electric or hydrogen powered cars. On the basis of the above, it may thus be noted that the Ford Company is competing in a global environment which is increasingly cost competitive. In the United States, high costs of labor mean that companies incur considerable expense in hiring and retaining American workers as compared to companies abroad, where Government regulations regarding workers may not be so restrictive. This is also the reason why many international companies in the United States and Europe are shifting their operations to companies such as India,, where the cost of labor is not so prohibitive. While on the one hand, the Ford Company is thus incurring higher costs against personnel, which reduces its profit margins, on the other hand, it is also facing a declining market for its cars. The reasons for the decline in car sales is due to the rising gasoline costs which have lowered sales figures for Ford’s models which are not as fuel efficient as other models such as those sold by Toyota. Government regulations are increasingly getting more stringent, in order to reduce the levels of global warming, which are largely caused by fuel emissions from cars. In order for the Company to maintain its competitive position, it has become essential for Ford to close up its less profitable divisions such as Jaguar and Land Rover. Although the Company has spent considerable time and expense in improving these divisions and Land Rover saw its first profit last year, the Company has nevertheless gone through with the sale in order to consolidate its position in the market with regard to its other car models. Value of acquisition: The major reason for the sale of the brand is because the Company wishes to focus upon its core Ford brands and in preparing the way for the global transformation of the Ford Company. The Jaguar and Land Rover were divisions of the Ford Motor Company. But both these divisions were struggling to compete in the market, especially the Jaguar which is a luxury model of car that was unable to successfully compete with other luxury brand sin the United States. According to report in the Economist, the Jaguar has cost Ford a sum of about 18 million dollars during a long period of 18 years, when its sales have been under a constant decline (Anonymous, 2007). The Land Rover was facing similar decline, but made a turnabout in the last year and registered a profit of about $1.5 billion in 2007. The acquisition has benefited Ford largely by allowing the Company to relieve itself for an unproductive luxury car in order to concentrate on its core brands. As pointed out by Carty (2006), Ford has poured millions of dollars into Jaguar to make the brand successful, but landed up with losses of 1.4 billion for the Company in the first quarter of 2006. The Ford Company ha snot traditionally dealt with luxury models and critics have pointed out that despite the fact that Ford has improved the quality of the car it has not sustained the model with a fresh look, but has relied on older, outdated models which has inhibited sales (Carty 2006). Ford’s sale has thus largely been triggered by the financial implications of maintenance of the Jaguar in relation to the larger productivity of the Company itself, which has been declining. According to Prahlad and Hamel (1990) any firm is likely to have only about five or six core competencies. These may be in managerial, technological or other areas. In an intensely competitive global economy, an organization is likely to secure greater productivity by focusing on its core competencies and outsourcing or otherwise diverting other competencies to different organizations. Ford took up the experiment of the luxury car Jaguar and the Land Rover and its investments were beneficial to these brands, but detrimental to overall productivity of the firm. On this basis, Ford decided to focus only on its core competencies – the SUVs and mid-range cars like the Taurus which are bringing in greater profits. Through its sale, Ford has thus benefited, through an influx of capital and a focus on its core competencies, to improve its competitive position. Tata Motors on the other hand, has also gained a significant advantage from the acquisition. As opposed to Ford which has made most of the investments into improving the quality and marketability of the brand, Tata Motors has acquired the Jaguar at a time when its market is improving. Similarly, the Land Rover has also just turned in a profit. Tata Motors also plans to develop a newer look for the Jaguar, thus addressing the liability which experts have pointed out (Carty, 2006). Tata is also benefiting in that Ford has taken on the responsibility for pension payments for Jaguar employees, and is also providing technological help and spare parts as a part of the deal, which will help Tata Motors keep up the luxury tag of the brand. As a result, this acquisition is of benefit to both parties. References: * Anonymous, 1997. “Is Ford ready to roll over Rover?” Automotive News, 82(6285):54 * Anonymous, 1999. “Five automakers agree to develop common technology standard”, Quality Progress, 32(8):22 * Anonymous, 2007. “A used-car bargain? Tata, Jaguar and Land Rover”, Economist.com/Global Agenda, May 9, 2008. * Bowman, C and Faulkner, D, 1996. “Competitive and Corporate strategy”, Irwin. * Carty, Sharon Silke, 2006. “Will Ford make the leap and sell Jaguar? Aston martin is on the block”, USA Today, August 31, 2006. Available online at: http://www.usatoday.com/money/autos/2006-08-31-jaguar-usat_x.htm; accessed May 11, 2008 * Chatterjee, Surojit, 2007. “Tata mulls Jaguar, Land Rover buy”, http://in.ibtimes.com/articles/20070719/tata-mulls-jaguar-land-rover-buy.htm; Accessed May 8, 2008 * “Corporate Toyota: Not so green,” http://www.stopcorporateabuse.org/cms/page1664.cfm; May 8, 2008 * Jaguar. http://www.ford.com/about-ford/company-information/ford-brands/ford-motor-company-vehicle-brands#tab6; accessed May 8, 2008 * “Jaguar – Just in time production line” Assembly Automotive, 14(1): 13-14 * “Jaguar C-XF first vehicle to use wire in composite”, http://www.automotoportal.com/article/jaguar-c-xf-first-vehicle-to-use-wire-in-composite; May 8, 2008 * Lienert, Anita, 1997. “Taurus 101: Ford revises its playbook”, Management Review, 86(10): 18 * Milestones. http://www.landrover.com/us/en/Company/News/Corporate_news/Milestones.htm; Accessed May 8, 2008. * Pope, Byron, 2008. “Ford pulls trigger on Jag, Land Rover sale”, Ward’s Auto World, 44(4): 6 * Porter, Michael, 1980. “Competitive strategy: Techniques for analyzing industries and competitors” * Prahlad, C.K. and Hamel, G, 1990. “The Core competence of the corporation”, Harvard Business Review, May-June 1990:79-91 * “Tata acquires Jaguar, Land Rover for $2.30 billion”, The Time sof India, March 28, 2008. Retrieved http://timesofindia.indiatimes.com/Tata_acquires_Jaguar_Land_Rover_for_23_bn/articleshow/2902216.cms; May 7, 2008 * Viewpoint, 2003. “What now for Jaguar and Skoda?” Strategic Direction, 19(8):8-11 Read More