An Economic Environment Analysis Scenario for Ford Australias Ford Performance Vehicles - Essay Example

Introduction The aim of this paper, as outlined in summary is to present an economic environment analysis scenario, for Ford Australia's Ford Performance vehicles, mainly looking into how the company is able to create, and sustain value in the context of a dynamic, global business environment, and to suggest a competitive strategy of the enterprise for future growth deliverables. For understanding the illustrated aims, we have followed an extensive case study approach in presenting a macro-, and micro-economic perspective in analysing the content. Coming to specifics, the paper starts off with a cursory glance at relevant scenario analysis of FPV, followed by a close approximation of factors that govern the creation, and sustenance of economic value, mainly researching into the input-output channel flow. Next in scheme of things lies Cost and Market analysis, which probe into questions such as the resources FPV has at its disposal, and how well it's able to use them. The key metrics identified are: differentiation of markets, closeness of substitutes, barriers to entry and modes of competition. This presentation is helpful in building a macroeconomic risk assessment module looking into the impact of factors such as inflation, CPI, interest and exchange rates, examining various risk factors, thereby understanding FPV's business development plan. At a micro-level, the analysis would entail studying of internal forces such as manpower, growing opportunities, etc. The ultimate aim of our research is to develop a competitive strategy model, which is done through Porter method. Overview of Business FPV is a force to reckon with, in Australia's segment of high performance cars, with brands such as GT, GT-P, Pursuit, Super Pursuit, F6 Typhoon, F6 Tornado and Force (FPV website, 2006). Its major competitor is Melbourne-based HSV. The current FPV range is a mix of turbocharged inline 6-cylinder and V8-powered Falcons. Each brand has its own conceptual framework and design, and the constant focus of the brand FPV, is to maintain benchmarks set by V8 racing cars. At this point, it is important to lay emphasis on the genetic makeup i.e. the internal structure of the corporate entity called FPV. Initially owned by the UK-based Prodrive company Tickford, FPV joined hands with Ford Australia, as its tuning division to develop itself into the niche category called Motorsport. The major aim of any business organisation is to create and sustain value, through profits. FPV is no different. In very simplistic terms, Value, for any economic entity is measured by a parameter called Economic Value Added, which is defined as the value of an activity that remains after subtracting from it, the cost of opportunity of investing consumed resources, and sovereign debts that accumulate (Stewart III, 1991). In the field of corporate finance, this translates into the following equation (Stewart III, 1991): Return on capital = Net operating profit after Tax / Weighted Average Cost of Capital. As of 2004, Ford Australia recovered a Net profit after tax of $136 mn (Porter, 2004) on shareholder equity of $592 million, and the corresponding return on capital was 26.1% which is a fairly high value in medium-growth automobile industry (Porter, 2004). Thus, it is clear in no uncertain terms, that Ford Performance Vehicles is an enterprising segment in the Performance Cars category, and there is enough scope for organic, and balanced growth in future as demand for faster cars escalate, and infrastructure develops to keep pace with the surge in demand for these vehicles. In upcoming sections, we will elaborate more on the economic analysis of our case study company. Dimensions of the Market FPV has won the 2006 Australian Performance Car of the Year award. For FPV, "diversity" is an essential ingredient in its zeal to retain excellence as laid out by its fraternal organization (FPV website, 2006), for the fiercely competitive Australian business environment. Diversity encompasses its mission-critical drive to transform the company's business model, fostering growth in market share and addressing the issues of innovation. This goes sync with the company's main initiative, to create value for its customers, as well as shareholders. In order to understand the company's full commitment, market dimensions provide a resourceful link. The first ingredient in Value creation is product profit, that is realized through the entity called Producer's Profit, which is the difference between Market price and Producer's costs (Baumohl, 2004): PF = MP - PF ---(i) What producers do, they have to make a judgement call on the profit they can make, from the production and sale of a product, to meet a want. Having taken into account the factors of production, and the realization of profit, they can provide a particular good or service, fulfilling a customer "want", if it is more profitable than alternatives (Baumohl, 2004). The important factor here is the logic of value creation, and sustenance. The Products segment of FPV incorporates a host of different models, as outlined in Overview. Consider just the F6 and F8 badge models, and their providing value to the consumer. The cars appeal to the consumer due to a robust appearance consisting of luxury features such as bootlid, chrome mirrors, chrome fog light surrounds, and also power features, in terms of the famed ZF automatic gearbox, better suspension, and the V8 level performance (FPV website, 2006). This positive feedback influences the overall marketshare. To talk of spatial boundaries of the market, with around 226 new FPV purchases in June, FPV has overtaken HSV by 1151 sales to this year's date, which is a 28% leap over the previous year. The industry segment most dominated by FPV, is the short wheelbase high-performance sedan segment. F6 Typhoon recorded maximum sales at 877, with an immediate lead over its competitor by 34% (FPV website, 2006). Since FPV falls under Premium category, upmarket versions of the car cost around AU $70,000. Prices are subject to rising costs for galvanised steel and mechanical equipment, but are absorbed easily thanks to the price, emerging from the popularity among those who can afford the purchase. The input parameters influencing market trends are, a host of features starting with product-level attributes such as alloy wheels, leather comfort seats, airbags, large Brembo brakes, automatic gear shifts. Other factors of production identified are (FPV website, 2006): 1. Labour: A wholeheartedly dedicated team comprising of design and mechanical engineers, fabrication staff, workshop attendants, machine shop vendors, finance, human resources and most importantly, marketing and sales units. 2. Capital and enterprise: In collaboration with finetuning arrangements with Ford Australia and a recent recruitment of 18 experienced UK-based design engineers, FPV endeavours to remain at the cutting edge of value providing, and constantly reinvents itself through innovation. 3. Machinery and equipment: As a company philosophy of providing Six Sigma standards in Quality, FPV procures best-in-class raw materials from different destinations, compromising on price if needed, but not quality. Cost analysis (Inputs) In order to lay more on cost inputs side, from the resources mentioned above, we have to consider some key verticals: 1)Production activity costs 2)Economies of scale and 3)Industry particulars (Baumohl, 2004). In a perfectly competitive economic market, neither the producer nor the consumer have a control over the price of goods being sold. It is a function of demand and supply alone. However, in a utility segment like Performance cars, where competition is from a few agencies only, FPV sustains a balance of what could be called a competitive "monopoly" in which the base price of the product, is accepted as benchmark for maximising profit. As shown in sales record earlier, the market for high performance cars is not huge in Australia, so the option of "economies of scale" which dictates that if quantity of all input costs are raised by some amount, it would affect the overall economic landscape. This basically means that more can be realised on a per unit basis, even though profits are less. For a small and tight market segment, no economy can be gained on a large scale. So, we must concentrate on production activity costs. For FPV, the primary cost factors are (FPV website, 2006): 1. Labour costs: Direct costs involved in payment of wages and salaries, and indirect costs in employer contribution to pension and other welfare funds. In order to streamline the economic impact due on defraying costs, FPV utilises a simple mechanism, of conferring agreement between the labour legislation governing wages. 2. Capital and enterprise costs: In today's competitive business environment, the only mechanism that can sustain cost problems, is Joint ventures. These costs are shared by a joint venture between UK-based Prodrive (51%) and Ford Australia (49%). The net income is, of course, income after meeting all items of cost, including the cost of capital used in production. In the case of FPV, the 'public share-holding fund is absent and so there is no need for declaring a "dividend" to the share holders. 3. Machinery and equipment costs: As above Having intricately broken down cost factors of FPV Australia, we can have a better understanding of its market structure, and competitive landscape. Of course, this would form an important part of the company's cost strategy to be discussed in the paper. Market structure analysis As discussed so far, FPV operates in a premium segment automobile industry, and faces stiff competition from same-city rival, HSV, although it exceeds HSV sales by 1151 until this year (FPV website, 2006). Although market trends are in FPV's favour, staying competitive in a slow-growth market requires enterprise, and creativity. Here we present the market structure analysis of the company, and major constituents of the market. FPV sold 53,080 units in 2005, a market leader no doubt considering that it's still a good marketshare for an Australian market of 1 million, which envisages a large consumer base for a country, whose total population is only 20 million. The market is oligopolistic. Or rather, it is a 'monopolistically competitive' market with product differentiation, our differentiation category being fast performance cars. In either case the it's a producer's market niche category, with producers/sellers have a good amount of control over the price they charge. The fundamental precepts of marketing, as applicable to analysing the market structure of FPV, runs along these lines (Kotler, 2002): It al starts with product differentiation, which is the process of modifying a product, to make it more lucrative to the target buyer. This involves differentiating it from competitors' products, as well as one's own product offerings, and also market substitutes. In idealistic setting, this leads to monopolistic like conditions (Kotler, 2002). These are the channels of distribution for FPV: 1. Differences in quality or design in output. We have looked into the unique product features of both the F6 and F8 models, mainly in external appearance. 2. Ignorance of buyers regarding the essential characteristics of cars being sold to them: FPV cashes in on this sentiment, when it tries to sell "V8 racing car performance" as its brand slogan, to lure sceptical buyers. 3. Pervasive sales promotion, through advertising: FPV can afford to spend a small fortune on this area, considering it's currently, the market "leader", as usual a fact it doesn't fail to mention upon each ad impression made to a target buyer. 4. Differentiation in location of sellers of same car, to satisfy different sort of personal needs: According to FPV website, once a buyer purchases from its showroom, he is assured of a lifetime of quality service at any of the extensive network of service stations across the country. Above 4 points, in addition to the fact that finetuning such arrangements lead to reduced price sensitivity for the consumer (for FPV segment, it is already the case as say, A$43,000 would make no significant departure from $40,000), also serves as a deterrent to competition and substitutes, which need more clarification. Next, we need discussion on modes of competition. As spelled out repeatedly in the paper, HSV with its VN/VQ, VR/VS and VP series, and Z and E series is the biggest competition faced currently by FPV. Although it's the market leader, the difference (1151) is not much to be called a "lead". Apart from having a much more diverse choice of fast performance vehicles, for the discreet buyer, HSV has made extensive forays into what can be considered traditional "strongholds" for FPV, the brand slogan V8 racing car performance, which it seeks to achieve. Moreover, unlike FPV, which caters more to the needs of Australia's indigenous market and is totally under foreign control. HSV has also made excellent strides in the overseas market, in the UK and the Middle-East, and its 2006 HSV GTS is considered the most powerful vehicle to be produced in Australia (Holden, 2006). More on FPV's counteracting mechanism vis--vis HSV, will be discussed in evaluating competitive strategy. It is important to mention threat from substitutes. FPV, and even HSV face competition from lower-priced automobiles, or from foreign luxury imports such as Mercedes, Toyota, Audi, BMW and Lexus. The threats from substitute products can stifle growth sales, especially in purchase seasons such as Christmas and New Year celebrations. Another important parameter in economics, is barrier to entry, which is defined as an obstacle in the path of a firm that wants to enter a given market (Kotler, 2002). Currently, following barriers to entry are prevalent in Australia (Austrade, 2006): 1. Cost of establishing a business office for sales and marketing is higher than using an agent/distributor. FPV has to maintain liaison offices for its dealerships throughout the country, and this translates as higher overhead costs. 2. In case of partnership alliances like Ford Australia and Prodrive, partners do not have full control over management. This leads to disagreements over market markets as partners have different opinions on expected benefits. This explains why FPV lags behind HSV in capturing overseas markets. 3. Other barriers to entry include cultural, geographical, administrative and economic distance between competing firms. Also, infrastructure, business ethics, competitors, tax policy and trade tariff barriers, and quality of local partners and local suppliers pose as barriers to entry. Having fleshed out details on different dynamics of the Australian market, we will now present a macroeconomic analysis of the case study. Macroeconomic analysis Any economic study is incomplete without an overview of the macroeconomic situation in which, a company has to operate. The purview being, to see the influence of government policy goals such as economic growth, price stability, full employment to secure attainable balance of payments solution for companies. In order to assess the impact of macroeconomic policies on FPV's business plans, different risk factors are analysed to achieve results. The first risk to be addressed is: cyclical risk which revolves around the state of health of the Australian economy. According to reliable agencies such as ANZ, the Australian economy has hit speed limits for growth, and current optimism in domestic demand is attributed to running down inventories, and imports (ANZ Economic Outlook, 2006). Despite this, household consumption remains buoyant thanks to healthy employment situation due to jobs in services, IT and Tourism sector. Correspondingly, there have been inflation risks due to rise in petrol prices, with consumer price inflation at 5%. The slowdown has affected investments slightly this year, but by mid-2007, optimism swells on a recourse, and even a growth period, which should be good news for a company like FPV. In order to measure the impact of inflation, RBA's inflation calculator is a practicable tool that gives realistic estimates for a sample figure, of A$40,000 in the period 2001-05. Figure 1: Inflation calculator results (Source: RBA) The corresponding change in our calculations comes at around A$4491, which is absorbed over a 5-year period, and should be absorbed easily for a Premium class product, such as high performance cars. The saving grace, however comes from Consumer Price Index (CPI) which gives a representation of some common basket of items, and their price changes over a 12-month period. According to RBA sources, this figure is at its lowest in 2004-05, with goods as low as 0.6% and services at 1.8% (RBA, 2006). CPI dictates another parameter called Purchasing Power Parity (PPP), which implies that a country despite having lower currency exchange rates vis--vis the US Dollar, can ensure a higher living standard for its average citizens. Clearly, the road that lies ahead for Australian economy, favours a higher PPP, and this would mean, more demand for FPV cars, as the company relies on the domestic Australian market a lot more than its rival, HSV. An important policy risk arises due to fluctuations in interest rates. A disproportionate rise in interest rates mainly impacts the construction and transport sectors in Australia, as prices are adversely affected (ANZ Economic Outlook, 2006). Inflation is already out of RBA's comfort zone, and rising interest rates, as shown below, is a cause for concern. Figure 2: RBA Fixed term interest rates SOURCE: RBA The above arguments mainly show that Australia is a robust economy. The Westpac-Melbourne Institute leading index indicates that the likely pace of economic activity three to nine months into the future is likely to rise at an annualized rate of 6.1 percent in August. Westpac chief economist Bill Evans attributes it to the index continuing to point to strong growth over the next three to nine months, consistent with the recent strength of the economy. (Bill Evans, 2006, http://www.todayonline.com/articles/149330.asp). This feature of the economy is expected to continue well into 2007 and much beyond. In the light of these considerations, we can rule out the macroeconomic risk of a short term fluctuation and a cyclical downturn. Any exchange rate risk likely to affect the country's foreign trade or foreign investment inflow will be taken care of the by the market determined floating rate of exchange of Australian dollar. As a summary, the study of above macroeconomic parameters indicate that FPV stands to benefit from the current Australian consumer optimism, but in matters of expansion policies, it has to chart out a careful course due to uncertainty in interest rates, especially when applicable to housing sector, maybe putting some ambitious expansion plans on hold till early-2007. Another grey area in macroscopic environment analysis, is study of exchange rates. Australia's largest trading partners are the US, Japan and the EU, but since FPV doesn't have much stakes in the export market, the bottomline impact due to currency rates fluctuation, can be ignored. Figure 3: Currency exchange rates (SOURCE: RBA) Driving Forces Analysis The aim of this section is to provide a brief overview of miscellaneous forces, that can impact the economic environment of FPV, and accentuate the macroscopic discussions made previously. Most discussions made here, have been followed up earlier, and our target is to combine the bits and pieces, into a competitive strategy in the last section. The main constituents of growth factors, for a company can be assessed by an eclectic combination of macroeconomic and microeconomic forces as discussed in the paper: 1. Competition: In this study, we identified HSV as the biggest competitor to FPV, in its own major segment. The strength of competition has been identified as a wider array of product offerings, attachment with overseas markets, and propensity to innovate periodically. FPV's own competitive strength has been identified as the main channels of differentiation in terms of product features, unique marketing efforts and brand awareness activities. Competition also comes from substitutes such as lower-priced car models. 2. Cost factors: The main cost factors identified are: Labour costs, capital and enterprise costs, and machinery costs. 3. Realisation of value created through economic theory 4. Macroeconomic picture: Effect of risk factors such as economic situation, inflation, interest rates and exchange rates, for which there are counteracting measures. Also, the market situation was identified as oligopolistic monopoly, as FPV is market leader in the fast performance cars segment, and prices are more or less governed at manufacturer's end. There is sufficient price elasticity in this Premium category segment, as a result of which it can be said that FPV is relatively stable in terms of macroeconomic parameters. Based on summary of results so far, it is time to devise a suitable competition strategy for FPV, in keeping with laying a consistent, and strong business plan. Competition strategy So far we studied, means and mechanisms through which FPV has been able to achieve value for its product offerings, in the context of its economic environment. Having scrutinised the same for filtering out main themes, we will try to chalk out a competitive strategy for FPV, for its growth deliverables in future. Michael Porter has described a category scheme of four general types of strategies described along two dimensions: strategic scope and strategic strength (Porter, 1985). The former is a demand-side dimension, whereas the latter is a supply-side dimension. The 4 strategies are: 1)Cost Leadership in which the company utilises economies of scale by producing high volumes of standardised products. 2)Differentiation in which the focus is to constantly innovate with new product offerings so that price elasticity of demand reduces. At a closer range, it can be broken down into a cost focus and a differentiation focus arrangement as shown in Fig. 4. Figure 4: Porter's Generic strategies model In our case study discussion, it has been clearly specified that FPV operates in a specialised niche car segment, performance vehicles where constant innovation holds the key to success, as the company has to cater to the needs of a demanding clientele that insists on high quality benchmarks. As discussed in market structure analysis, FPV has invested heavily in building differential patterns to market its new products, with aggressive sales and promotion tactics. Barriers to entry are few, and there is no real threat from cheaper substitute products. Also, the macroeconomic conditions for car sales, as outlined earlier, have an impact depending on health state of the Australian economy, which is in the midst of a growth slowdown, but is highly expected to recover by mid-2007. Thus, above points illustrate the fact that cost leadership approach won't give results for FPV. Its potential lies in constantly innovating from bottom up, and a differentiation strategy, as clearly exemplified through different car models discussed is a suitable business plan. Even HSV. the single-largest competitor to FPV, is profiting mainly from introducing new cars into the market, and has a strong presence into the overseas market. As a future competitive strategy, FPV will have to expand from its domestic environs to the lucrative overseas market, and continue on its differentiation focus approach. Summary By mid-2007, as outlined in the macroeconomic overview of the case study, the Australian economy will pick up from its period of slowdown. Also, the study showed that Australian consumer sentiment is buoyant, and this is reflected by the boom in real estate market, and new infrastructure development schemes. For an auto major like FPV, a generic differentiation strategy will pay off in the longer run as rising trends in the two parameters, reflect on more demand in its Premium cars segment. As per current conservative estimates (ANZ Economic Outlook, 2006), FPV is realising a 28% return on capital, which is a high realisation of value in premium car segments, considering that the total sales of FPV was just around 50,000 in 2005, marginally ahead of its immediate rival HSV. HSV has created a presence for itself in the overseas market of UK and the Middle East. FPV must follow suit, and start its own expansion drive to witness growth in coming years ahead. References ANZ Economic Outlook (2006). PDF Survey downloaded from ANZ homepage. Recovered 29 Oct 2006 from http://www.anz.com/aus/corporate/EcoComm.asp Austrade (2006). Barriers to entry. Austrade homepage. Retreieved 29 Oct 2006 from http://www.austrade.gov.au/australia/layout/0,,0_s2-1_4-2_-3_-4_-5_-6_-7_,00.html Baumohl, B. (2004). The secrets of economic indicators: hidden clues to future economic trends and investment opportunities. Wharton School Publishing. Bill Evans (2006). Australian rate rise tipped as growth picks up. Today Online. Recovered 29 Oct 2006 from http://www.todayonline.com/artifcles/149330.asp FPV website (2006). All FPV information furnished 29 Oct 2006 from www.fpv.com.au Holden (2006). Official webpage of HSV. Recovered 29 Oct 2006 from http://www.hsv.com.au/index_eseries.asp Kennedy E, Kennedy A and Davis T (2003), The Holden Heritage, 11th edition, Corporate Affairs Department, Holden Kotler, P. (2002). Marketing Management. Prentice Hall, NJ. Porter, I. (2004). Ford drives to $155 mn profit. The Age. Recovered 29 Oct 2006 from http://www.theage.com.au/articles/2004/04/14/1081838790662.htmlfrom=storyrhs Porter, M. (1985). Competitive Startegy. The Free Press, NY. RBA Inflation Calculator (2006). Recovered 29 Oct 2006 from http://www.rba.gov.au/calculator/calc.go RBA (2006). Measures of Consumer Price Inflation. Reserve Bank of Australia homepage. Recovered 29 Oct 2006 from http://www.rba.gov.au/Statistics/measures_of_cpi.html Stewart III, G. B. , (1991). The Quest for Value. Harper Collins, NY. Abstract Objective: This paper presents a mature economic situation case study analysis of a leading performance car manufacturer, based in Melbourne: Ford Australia's Ford Performance Vehicles FPV, looking across several different dimensions to analyse the company in its macro- and microeconomic environments, and to understand how the company is able to create, and sustain economic value through its business activities. Methodology: The factors studied are: major dimensions of market for value creation, the market structure analysis covering differentiation channels and barriers to entry, followed by a cost analysis of important constituents, a major macroeconomic analysis using inflation rates, interest rates etc. and summarizing the achivements to understand the driving forces that govern FPV's business. Result: The final accomplishment of the paper, lies in utilising research data, to chalk out a competitive strategy for FPV's future growth deliverables, using Porter's 5 Forces theory. Read More