Strategic Management - Ford and the World Automotive Industry - Essay Example

Strategic Management: Ford and the World Automotive Industry Introduction The year 2009 brought in some surprises yet expected happenings for FordMotors. It was rated the second motor vehicle manufacturer in the world according to an analysis by Standard & Poor’s. Ford went through the ups and downs of a global firm. Inside, negative forces include the rumblings of its shareholders. Environmental forces were not so favourable for Ford’s further growth. For this essay, which is mostly on critical analysis of Ford Motors’ leadership in the automobile industry, it is important to analyse and trace back some of the company’s important strategic moves that led to its present state. Henry Ford founded the company with many innovations introduced to the ways products were manufactured. One of these is the best-known model T of mass production, the moving assembly line – which is actually composed of conveyor belts – where time of work was reduced (Goh & Garg, 2008, p. 57). Ford revolutionized the car industry, paid higher wages to factory workers, and made cars affordable to anyone. (Purvis, 1997) Ford became a multinational corporation in 1970 but was predominantly operating in North America with subsidiaries in major markets in countries like Britain, Germany or Australia. These subsidiaries however have their own manufacturing plants. In Britain, the most popular Ford in the Cortina. With intense globalisation, the Ford organisation started to restructure internationally. In Europe, Ford was consolidated with further product development and designs which were originally European. Ford manufactured cars of different designs. (Grant, 2005, p. 440) In the UK, Ford is the biggest in the automobile industry with over 550 dealers across the United Kingdom and employing about 35,000 people. In its website, it says that it currently sells 440,000 vehicles annually, with Ford Focus as the car most Britons love. (Ford Motor Company, 2010) In the United States, Ford is now best known for its cars, trucks, crossovers and SUVs (Ford, 2010). In 2008, Ford was adjudged by Standard and Poor’s as the world’s second largest motor vehicle manufacturer, producing cars and trucks, including plastic and glass parts of the cars they make, and including replacement parts. Ford has a 33% stake in Mazda Motor Corp. Financial services include Ford Motor Credit (automotive financing and insurance) and American Road Insurance. Ford has a big share in the world market. It has ventured in many countries, trying to feel its presence even in China, which is the fastest growing market in the automobile industry. (Rushton & Walker, 2007, p. 32) 1.1 Organisational Knowledge Organisational learning is an interesting subject in the automobile industry. Vast literature on organisational learning and knowledge management can be discovered in the automobile industry. Knowledge management in the context of the automobile industry draws one’s attention to the philosophy of ba, a concept originally proposed by the Japanese philosopher Kitaro Nishida (cited in Nonaka and Konno, 2008, p. 40). In the context of knowledge management, ba is a shared space for emerging relationships, which can be thought of as a physical place (e.g., office, dispersed business space), virtual space (e.g. e-mail, teleconference), mental (e.g., shared experiences, ideas, ideals), or any combination of them. Knowledge management and the creation of knowledge are phases or steps very much present in organisations such as Ford Motors and other automobile companies throughout the world. Nonaka and Konno (2008, pp. 40-1) state that knowledge is embedded in ba, “where it is then acquired through one’s own experience or reflections on the experiences of others. If knowledge is separated from ba, it turns into information, which can then be communicated independently from ba.” The subject of Ford Motors and the world automobile industry is a study on knowledge management, with its concepts on tacit and explicit knowledge. 2. The World Automobile Industry Automobile industries around the world have a great part in the nation states’ gross national product (GNP), accounting for at least ten percent or more. These industries have evolved and encountered many changes over the years. (Shimokawa, 2010, p. 1) Technological advancement and continuous innovations have motivated organisations and businesses to react to changes in the global competition. Organisations have to reorganise, re-evaluate and reprogram outdated functional programs and activities, and realign them to the present trends for improvement and competition. Personnel and field people, ordinary employees, including middle-level and top management have to refocus along the line of technological innovations. External and internal environments in organisations are becoming complex; thus they are handled with a globally-oriented brand of management. Corporate management is now handling a global-scale human resource, requiring a different kind of strategy, much distinct from traditional management. Ford Motors is a knowledge-based, global firm, the world’s second in the vehicle automotive industry. It has subsidiaries worldwide. General Motors was once the world’s leader in vehicle manufacturing but with the recent global economic downturn, there are doubts now to its leadership since it needed government bailout. Data for the world automotive markets are confusing. Different companies publish their own information on sales and market shares based on some segmentation. GM, for example, defines its markets to include trucks and vehicles like buses and lorries. With these data and profiles, it is really difficult to have a comparison among the different vehicle manufacturers. Most world automotive companies are involved in the commercial and passenger markets. This is because the technology and the production systems are the same. (Lynch, 2006, p. 767) Globalisation impacted on the automobile industry. In 1990, this accelerated with the merging of many of the well known European brands such as Daimler-Benz to become DaimlerChrysler AG, the manufacturer of Mercedes-Benz. Ford acquired Jaguar, Volvo, Aston Martin and Land Rover. It also partnered with Mazda Motor Corporation. (Plunkett, 2006, p. 18) The automobile industry has been characterised by intense competition, lower market share, and there were many products coming from different competitors. Other environmental forces included high prices of gasoline and a sudden change in the demand for Ford’s pick-up trucks. Moreover, the financial services segment has been a big influence to the trend in sales and earnings. Ford lost considerable sales during the period 2008-2009. (Standard & Poor’s, 2009) The automobile industry started its beginnings in the United States. However, at present leading car manufacturers in the United States have been threatened by the Japanese car firms, forcing them to modernise their plants and cut costs of parts, or introducing new designs of vehicles. In 2003, Toyota was the second largest car producer, with seven million vehicles to boast. Ford then was tailing Toyota, having a market share of 12 percent. Ford was followed by two German firms, Volkswagen and DaimlerChrysler. Others in the competition were Fiat, PSA Peugoet Citroen and Renault of France, the Japanese Honda and Nissan, and the Korean Hyundai. (Lynch, 2006, p. 767) The rising costs of manufacturing have forced car makers to find ways and implement innovative solutions. Outsourcing of parts and car components is now a trend, and many of them have merged or have used companies in China which manufacture cheap parts. World car manufacturers have their eyes on China because of its high economic growth and low per capita car ownership rate, seen as an opportunity by world automotive manufacturers. The car industry is now a pillar in the Chinese economy. (Goh and Garg, 2008, p. 59) World automakers find their place in China, looking for partners because as government regulations would dictate, it has to be a 50-50 agreement with a local company. But foreign firms are biting the bait because of the potential large market. Some of the big car manufacturers which have penetrated China are Ford, Toyota, Volkswagen, Daimler Chrysler, Suzuki, and more. (Economist, 2006a, cited in Rushton and Walker, 2007, p. 32) Manufacture of components and spare parts are seen as a driver for exports. The growth of sale of automotive components has been at hundreds of percentages. Thus, Chinese car manufacturers have aimed to expand their global sourcing initiatives to benefit from the relative low cost of labour and materials. (Hauck and Naeve, 2005, p. 120) Supply chain is most needed in the present world of globalised business, Information Technology and the internet. An efficient supply chain is needed so that effective flow of materials, information and finances can be immediately attained. During the past decade, car manufacturers experienced problems in the macroeconomic environment. These factors include: A downturn in the worldwide demand for cars The global economic crisis. (Lynch, 2006, p. 774) 3. Competitor Analysis The Japanese car manufacturers have always been a threat to the American automobile industry. They were the last to join the developed nations and when they were in, they stirred the water. The mass production of cars was originally American; the Japanese adapted the American and European concepts of mass production, but created its own unique way of mass production. (Shimokawa, 2010, p. 2) The Toyota Production System is just an example. The phrase quality management is originally Japanese; the Americans copied it from the Japanese who were taught by an American, W. Edwards Deming, how to introduce quality management into their products. Now, the term quality and Japan are quite synonymous. The Japanese have institutionalised Deming through an awards’ body precisely to immortalise the person who taught them the art of quality management. Toyota Motors is a threat to the American car manufacturers, ever since it entered American soil. Toyota has been in the forefront of car making because of an effective strategic and operational management coupled with an efficient and competitive workforce. Toyota strategies involve innovations in production, marketing, sales and promotions, and branding. But to top it all, it has been able to handle knowledge management like it is a part of ordinary business. In the 1950s Toyota was only a small company, averaging 18,000 vehicles per year. As years passed on, management perfected the so-called Toyota Production System, the Japanese way of achieving mass production efficiencies with small volumes. (Lynch, 2008, p. 772) Toyota expanded to become export-oriented and began to open manufacturing plants in many countries including the United States, operating in the same strategy. Taiichi Ohno, the chief engineer then, started experimenting to improve production. Along with a determined workforce, he introduced the kaizen and kanban concept of production. Kaizen means “continual improvement”. Toyota engineers cut or shortened some stages of production to save time and provide flexibility. (Gourlay, 1994, p7, cited in Lynch, 2008, p. 773) The kanban was used to signal employees when to order or replenish parts or products. The process is a traditional way of using coloured cards especially designed to give notice to workers on the products’ availability. The strategy provided for a cellular layout arrangements of plant machinery rather than ‘linear layouts for production lines’ which allowed workers to operate a number of machines and let them work in teams to provide layout (Lynch, 2008, p. 773). Toyota’s research and development ventures are one of a kind. It has continually used R&D in design, production and manufacturing – it has come up with combining parts in one process rather than two or more. Some other aspects of the Toyota management: 1. Supervisors are chosen from among the employees whose role is as facilitator and mentor and not as boss. 2. The chief engineer or leader has broad expertise over a particular department. 3. Employees are better trained inside the company, and don’t get much training or expertise from outside source. (Dyer & Nobeoka, 2000, p. 345) Toyota is now a world leader in car manufacturing. It is also best known for its hybrid cars, or cars that run on petroleum and electricity. 4. Ford Motors’s Performance in the Industry Labour unions have to be dealt with squarely and provided affordable benefits. The automobile industry is one of the most labour-intensive industries in the world. Labour unrest is one challenge car manufacturers have to face. There have been more challenges in the United States of this sort. The CEO of Ford in the United States in 2008-2009 was an outsider of the automotive industry but he put in some innovations which allowed Ford to improve. Nevertheless, success has still been elusive for the company struggling from the many loopholes in management and environmental forces. First, Ford’s products were becoming less in demand; it needed successful products to be on the competition again. This is one of the most important needs for Ford. According to Standard & Poor’s, Ford lost market shares in 2008. There was a need to stabilize sales volume and restructure. In 2008-2009, Ford had trouble reaching an agreement with the labour union, UAW. It was crucial, one that involved life or death, and it still is a question whether Ford chose the former. Having an agreement with the demands of UAW was a big challenge for Ford. It was a move that changed its course in the sales growth. Because of its contract with UAW, it was expected that Ford would profit from the bargain. Did it? The agreement included unprecedented benefits and giving in to some of the demands of the union like changing some work rules. The company had also to establish the health care trust system to be managed by union people. In other words, Ford was freeing on the reins, leaving some of the responsibilities and allowing the workers to hold power. This is a question whether this strategic move put Ford into a competitive advantage or into a suicidal situation. But UAW won, and it is believed Ford got its share of successes too, in terms of providing health and other benefits for the thousands of its employees. Satisfied labourers create a wholesome atmosphere in the workplace. And satisfied workers will rebound into satisfied customers. In terms of work and life balance for the Ford employees and workers, the Ford management may have done its share of promoting the well-being of its employees and providing inspiration and motivation. The management believes that when people are motivated, they accomplish goals. Workers become productive when they feel they are a part of a team, or part-owners of the organisation. They feel this sense of belongingness and so they strive for the organisation’s improvement. They do not regard money as an objective, and work becomes a part of life. As organisations care for employees’ welfare, business will benefit that will include increased productivity, improved recruitment and retention, lower rates of absenteeism, an improved customer experience, and a more motivated, satisfied and equitable workforce (McIntosh, 2003, p. 185). Studies have found that successful managers have stronger power motives than less successful managers. The human need theory asserts that people have urges relative to the three needs which are the need for achievement, the need for affiliation, and the need for power (Firth, 2002: 86). The role of team leaders is to coach, that of the facilitator, not someone to play as superman (Armstrong, 1998, p. 8). However, the Ford management has not yet freed itself from the traditional form of management. Some members of the Board are chosen from the members of the Ford clan and decisions are biased to the side of the family rather than the organisation. 4.1 What is really needed inside Ford? Standard & Poor’s argues that Ford’s vehicles are not anymore the quality-oriented vehicles that it used to be. During 2008, revenues fell and it was not yet clear when it was going to go up. Up to 2010, there has been a weakening demand of cars in the United States and Europe. Intense competition, a lowering of the market share, gas hikes, and so on, have characterised the automobile industry in the different areas of the globe. Ford’s pride, the pickup trucks, was no longer selling. There is still a chance for Ford; management should know how to manage risks and challenges. But there are many risks ahead. What are these risks for Ford and the world automobile industry? 5. Risks of competition This is one of the many challenges in the automotive industry, which has been struggling in its existence all the way from the time it was founded many decades ago. First, during the time of Henry Ford who introduced mass production, the risk of competition was a constant problem for the automotive industry. What’s more is the problem of the labour union, the demand and supply, and production. With the recession, car and vehicle lovers wanted affordable cars, but full of quality. And that’s not enough. For instance, in India when there was a desire for cheaper cars, Tata Motors came in to the rescue, but when the world’s cheapest car was launched, nobody in India wanted to buy. Now this is the problem of the company who has some corporate social responsibility challenges answered: what to do with the Tata Nano cars. Ford Motors came in to the rescue, or, it wanted to have a share of the losses that Tata Motors was having. Ford penetrated the India market, made some acquisitions, and introduced its own small cars at a time when Tata Motors was not reaping the gains of the cheapest cars in the world. Ford announced to build a new model, the Figo. (Canis, 2011, p. 49) The Indians were laughing at the Tata Nano cars. Many commentators have said that Tata Motors’s manufacturing of the small cars was a mistake. The cheap cars flopped. (Kreindler, 2010) 6. Corporate Governance Another problem is corporate governance. Ford’s family members have more voting rights than other shareholders. This has been a problem of the Board and the rest of the company. This could be the answer to the negative show in the stockholders’ equity. Standard & Poor’s comment states: As of June 30, 2008, total stockholders’ equity was negative. The stock recently traded at a price to sales (P/S) multiple above that of GM. Based on peer comparative P/S multiples, our 12-month target price is $4.50, equal to about 0.07X projected 2009 sales per share. Ford has a reputation of high sales in new light vehicles, but Ford’s margins have been threatened by the increase in competition by Asian companies, the Tata Motors from India, and the merged companies in China. There is also a shift from the large SUV to smaller crossover utility vehicles (CUVs). In 2008, Ford has to introduce its own CUVs. In 2010, Ford has diversified some of its vehicle designs, such as the CUVs. Will this be successful? Ford has managed to reshape its business and product portfolio in order to restructure its financial standing. Ford made some mergers and acquisitions to be able to compete financially. In December 2005, Ford sold its Hertz Corporation unit for $15 billion. Ford’s finances for the future were to be diluted with this sale because according to Standard & Poor’s, Hertz contributed to Ford’s profits. Ford also acquired AB Volvo for $6.45 billion, and in 2000, Land Rover was bought from BMW for $1.9 billion. Moreover, Ford divested some of its assets by selling Jaguar and Land Rover to Tata Motors for $2.3 billion. There was sort of discrepancy in the goals of Ford because it used $600 million from the sales acquired from Tata Motors for the pension plans of Jaguar and Land Rover. (Standard & Poor’s, 2009) 7. Corporate Strategy With U.S. market share down, Ford started to restructure plans so that it could lower down the costs of production and operations. Ford made a shabby performance for its corporate strategy in that year. The reason for this is that it received some obligations out of its partnership with Visteon Corporation, the parts manufacturing firm to whom Ford had some obligations that had to be ironed out. It had to face additional expenses at a time when it was struggling to reduce costs of production and operations. Out of these transactions, Ford acquired 23 manufacturing plants from Visteon which were considered additional obligations and not real assets. Standard & Poor’s says they were money-losing plants delivered to them by Visteon Corporation. Ford had to provide financial assistance to this company in exchange for warrants for company shares of Visteon. It was not a good deal after all. In March 2005, the company agreed to relieve Visteon of the $25 million it owed Ford for the cost of hiring Ford’s employees. Instead, Ford acquired machinery and equipment for use of Visteon for the production of components. Visteon in turn agreed to supply Ford with certain components without surcharges. (Standard & Poor’s, 2009) In January 2007, the company reported nearly $10 billion in restructuring-related charges, after taxes. The costs included expenses related to the buyout of approximately 38,000 hourly U.S. as well additional employees outside the U.S. and fixed asset impairment charges in North America and at Jaguar and Land Rover. 8. Mergers and acquisitions: A strategic move? Was Ford’s continued effort of M&A a necessary strategic move? Ford acquired various companies in the different areas of the globe. According to Grubb & Lamb (2000, p. 24), mergers and acquisitions (M&A) should be properly planned and executed. In other words, there are many requirements and preparations before the actual execution of M&A; otherwise, this will fail. M&A should not be executed for the sole purpose of expanding (because this is now the age of globalisation) or to fulfil the goals of some ego-boasting managers. Careful study and preparation can minimise financial losses and prevent the flight of significant and top talents of the organisations. There are long-term benefits that a firm can attain, not just market share gains. One is the vital core competency as a “Great Acquirer” with benefits such as financial, managerial, and reputational aspects of M&A moves. Great Acquirers are approached by competing companies if they have such reputation, as “merger partner of choice”. The objective in M&A is to gain more profits through advantageous positioning in the particular industry. Firms choose to form joint ventures to enhance competitive positioning in the market (Kogut 1998, cited in Yan and Luo, 2001, p. 13). When two firms decide to merge, both their objective is to increase shareholder value. It is an effective way of creating value (Hitt, et al., 1996; Vermeulen & Barkema, 2001, cited in Zhou et al., 2008, p. 397). But there are those whose objective is to erode competitors’ strategic positions. Grubb and Lamb (2000) praised Ford Motor Company for reaping big dividends as the world automotive industry scampered to find partners in the rush for M&A. The Ford/Volvo merger was praised by The Wall Street Journal in the following comments: As the smaller auto makers look for bigger partners in the global consolidation of the auto industry, Ford has emerged as the ‘acquirer of choice,’ industry experts say. That is because the No. 2 auto-maker world-wide has a track record of treating its acquisitions well by injecting capital and expertise without diluting a brand’s character. The most visible examples are Britain’s Jaguar Cars Ltd., which Ford acquired in 1989, and Japan’s Mazda Motor Corp., in which Ford holds a controlling one-third stake.1 The acquirer’s halo effect can also have a negative effect if a firm has an unacceptable partner. Ford Motor’s success in M&As has given it some positive reputation. 9. Conclusion/Recommendations It can be seen that Ford Motors follows the present trend in global organizations, the horizontal structures of business organizations. The traditional structure uses the vertical set up where top management takes the reins of power from the top down to the low level employees. Ford Motors have subsidiaries worldwide, a characteristic of multinationals. However, these subsidiaries have their own independence. They manage and rule themselves and manufacture their own products. Mergers and acquisitions are a normal activity among global organisations. How can this be properly managed is still question. Ford should pause and think before taking another M&Q activity. Ford’s decision to build small cars in India, in reaction to the launching of the Tata Nano was not a good choice. The Tata Nano flopped in the market even if it was a tested product. And so did Ford’s small cars. The manufacture of a new product has to be afforded a serious study. Ford’s response to Tata Nano was not the result of a careful study. Ford has many problems, inside and out. Corporate governance has still to be straightened up. Ford’s family members are not playing it good in the corporate board. In the past, Ford Motors went on to acquire and divest some of its holdings. Some of the best known M&As have been executed by Ford, but some were not. Strategic decisions have to be carefully studied and planned. Mergers and acquisitions should not be rushed. References Armstrong, M. (1998). Managing people: a practical guide for line managers. London: Kogan Page Limited. Armstrong, M. (2000). Strategic human resource management: a guide to action (2nd ed). London: Kogan Page Limited. Armstrong, M. (2006). A handbook of human resource management practice. London: Kogan Page Limited. Canis, B. (2011). U.S. motor vehicle industry: confronting a new dynamic in the global economy. United States of America: Diane Publishing. De Vaus, D. (2002). Surveys in social research (5th Edition). Oxon: Taylor & Francis Group. p. 5. Dyer, J. H. & Nobeoka, K. (2000). Creating and managing a high-performance knowledge-sharing network: the Toyota case. Strategic Management Journal, 21: 345-367. CCC 0143–2095/2000/030345–23. Firth, D. (2002). Life and work express. United Kingdom: Capstone Publishing. Ford (2010). The Ford story. Retrieved from http://www.thefordstory.com/. Fong, P. et al. (2007). Dynamic knowledge creation through value management teams. Journal of Management in Engineering, Vol. 23, No. 1, January 1, 2007. DOI: 10.1061/(ASCE)0742-597X(2007)23:1(40). Ford Motor Company (2010). Ford in Britain. Retrieved from http://www.ford.co.uk/AboutFord/CompanyInformation/FordinBritain. Goh, M. & Garg, M. (2008). ChangAn Automotive Co. – making supply chains work. Asian Journal of Management Cases, 5 (2), 2008: 57:71. DOI: 10.1177/097282010800500203. Grant, R. (2005). Contemporary strategy analysis (fifth edition). Oxford, UK: Blackwell Publishing. p. 440. Grubb, T. M. & Lamb, R. B. (2000). Capitalize on merger chaos. New York: Simon & Schuster, Inc. Hauck, T. & Naeve, D. (2005). One-stop services: as the automotive industry in China grows, the demand for complex logistics solutions is increasing (from EuroBiz). In G. Earnshaw (Ed.), China business guide 2006: China Economic Review. Hong Kong: China Economic Review Publishing. Heneric, O., Licht, G., & Sofka, W. (2005). Europe’s automotive industry on the move: competitiveness in a changing world. Germany: Physica-Verlag Heidelberg. Hitt, M. A., Ireland, R., and Hoskisson, R. E. (2009). Strategic management: concepts and cases. OH, USA: South-Western Cengage Learning. Kreindler, D. (2010). Tata Nano a sales disaster in India. 14 December 2010. Retrieved from http://www.autoguide.com/auto-news/2010/12/tata-nano-a-sales-disaster-in-india.html. Lynch, R. (2006). Global Automotive Vehicle - Strategy in a Mature Market and Toyota: What is its Strategy for World Leadership. In Strategic Management, 5th edition (Financial Times/ Prentice Hall), pp. 767-775. McIntosh, S. (2003). Work-life balance: how life coaching can help. Business Information Review. SAGE Publications, London, Thousand Oaks and New Delhi., Vol. 20(4): 181–189 [0266-3821(200312)20:4; 181–189; 040732] Nonaka, I. & Konno, N. (2008). The concept of “ba”: building a foundation for knowledge creation. California Management Review, Vo. 40, No. 3, Spring 2008. Plunkett, J. (2006). Plunkett’s automobile industry almanac 2007 (e-book): automobile, truck and specialty vehicle industry. Houston, Texas: Plunkett Research, Ltd. p. 18. Purvis, T. L. (1997). "Ford, Henry." A Dictionary of American History. Blackwell Publishing, 1997. Blackwell Reference Online. 13 December 2010. Retrieved from http://www.blackwellreference.com/subscriber/tocnode?id=g9781577180999_chunk_g97815771809998_ss1-115. Robbins. S. (2005). Organizational Behavior: 11th Edition. New Jersey: Pearson Prentice-Hall. p. 45. Rodriguez, J. & de Pablos, P. O. (2002). Strategic human resource management: an organisational learning perspective. International Journal of Human Resources Development and Management, Vol. 2, Numbers 3-4/2002, pp. 249-263. Rushton, A. & Walker, S. (2007). International logistics and supply chain outsourcing: from local to global. UK: Kogan Page Ltd. Shimokawa, K. (2010). Japan and the global automotive industry. UK: Cambridge University Press. Simison, R. L. (1999). “Ford to Acquire Volvo’s auto operations,” The Wall Street Journal, January 28, 1999, p. A3. Cited in: Grubb, T. M. & Lamb, R. B. (2000). Capitalize on merger chaos, pp. 24-5. New York: Simon & Schuster, Inc. Standard & Poor’s (2009). Standard & Poor’s 500 guide 2009 edition: America’s most watched companies. United States of America: The McGraw-Hill Companies, Inc. Yan, A. & Luo, Y. (2001). International Joint Ventures: Theory and Practice. New York: M. E. Sharpe, Inc. Zhou, J., et al. (2008). Employee self-perceived creativity after mergers and acquisitions: interactive effects of threat-opportunity perception, access to resources, and support for creativity. The Journal of Applied Behavioral Science, Vol. 44 (4), December 2008, 397-421. DOI: 10.1177/0021886308328010. Read More