2.2 Current Strategy
Late in 2001, to combat the market forces which were threatening the competitive position of Ford, new CEO William C Ford, adopted the 2.5 year turnaround plan adopted by Ford Europe as “the blueprint for repairing the No. 2 carmaker's core auto operations” (Business Week, 3865, 30). The current strategy is divided into five parts, discussed in detail below:
2.2.1 Realign capacity to reflect smaller market share
In 2001, Ford had a build capacity of 2.25 million vehicles but produced just 1.7 million units. This excess capacity harmed Ford as they had to offer discounts and other attractions to maintain their market share, reducing their profit per unit of output. Capacity was cut, realigned with their current market share. For example in Europe capacity was reduced by 600,000 vehicles (Business Week, 3860) by closing down inefficient car assembly plants, including Obchuk in Belarus (European Business Review, 15(2), 77 - 86).
2.2.2 Improve efficiency of remaining production plants
Ford carried out a business review of their five major assembly plants, before implementing a reorganisation program in order to improve efficiency and flexibility within the plants. This concluded that Genk would remain the main factory for Mondeo cars, the other plants in Europe could produce B (Fiesta Size) and C (Focus size) cars but one plant would become a flex plant which would be able to switch production between models depending upon changes in demand. Ford is thus addressing the value driver cars per platform, by introducing multi-car production lines. For example the Jaguar X-400, Ford’s proposed MPV and the new Mondeo will be produced from the same CDW 132 platform (European Business Review, 2003). This will improve economies of scale; reduce fixed costs and enable Ford to respond more quickly to shifts in customer demand. Because of this implementation, Ford stated that productivity shows a 15.8% improvement from 1999 to 2002. (Business Week, 3860)
2.2.3 Reduce internal costs
Ford has carried out a drive to drastically cut fixed costs. 2000 workers were made redundant in mainland Europe, part of the aim to reduce the workforce by 10%. Several production plants have been closed and Fiesta production has been outsourced to Mazda in Spain. Plus they have looked at removing the upper and middle management’s annual bonuses to further reduce costs.
In terms of reducing variable costs the company aim to reduce raw material costs between 2001 and 2004 by 10%. (European Business Review, 15(2), 77 - 86).
2.2.4 Reduce project research and development time costs
Ford has been hit particularly hard by not addressing this problem. It takes Toyota and other Far East competitors like Nissan 2-3 years to bring a car from conception to the showroom, whereas Ford takes five years. In the past when designing a new car, Ford has reengineered large parts of the cars. There is no evolution in the new models, resulting in large R&D costs. Ford have acted to improve this by merging product development teams to speed up decision making, and have also limited needless engineering of parts. New models will also share parts with other models. For example, Ford plans to use the Mazda 6 sedan platform as the base for 10 new vehicles. This base will spawn the Ford Futura family sedan and different versions for its Lincoln and Mercury divisions, as well as some future SUVs and minivans. The cumulative effect of this is that fixed costs (R&D) have been reduced and vehicle development time is now “21 months compared to 29 months previously” (, 3867, 76).
2.2.5 Introduce new models
Ford, in an attempt to regain lost market share to its far eastern competitors, have started to introduce a series of new models mainly aimed at the family market. These include the family sedan and a series of midsize cars, the Five Hundred, Mercury Montego sedans and the Ford Freestyle tall wagon (, 3865, 30), in the hope of restoring their competitive dominance of a decade ago.
- Metrics
Internal and external metrics are an important tool in assisting the analysis of a business, particularly in the context of their industry. Various statistical tools were used to illustrate Ford’s recent problems described previously. These are detailed in full in the appendix. The metrics chosen were used because these are the most appropriate to illustrate Ford’s recent problems and that of the motor industry as a whole.
Figure 1 details the drastic drop in total shareholder return over the five year period from 1998 to 2002. The primary cause for this was the drop in share price, caused by Jacques Nasser’s diversification push. Under normal circumstances shareholders would expect higher dividends to compensate for a falling share price, however, Ford’s dividends were also cut during this period. The chart in figure 2 shows this graphically, while also indicating that despite the falling share price, sales remained fairly constant, showing the impact of increased competition in the industry.
Figures 3 and 4 show how Ford’s share price performance compares to that of their main global competitors over this period. As discussed in section 1.2, the US motor industry has suffered due to outdated working practices, inability to address the changing value driver and increased competition from abroad. This is emphasised in figure 3 where at the end of 1998 Ford and GM’s share prices were higher than that of BMW and Toyota (leading European and Japanese competition). However, by 2003 the industry had turned on its head, with BMW and Toyota’s share price soaring above Ford and GM’s. This was reflected by the slowdown in the US economy from 2000, as shown by the Dow Jones Index in figure 4.
This analysis highlights the worrying position which Ford currently faces. For a smaller company, such a severe decline in shareholder value could indicate the company is ripe for a potential takeover. However, because of the scale of Ford’s operations, it is an unlikely candidate for a potential takeover at the current time. Because of this, Ford’s number one priority must be to restore shareholder confidence, by increasing value within the company. Potential options for doing this are discussed in the following section.
- STRATEGIC OPTIONS
3.1 Options and Evaluation
The Strategic options below discuss how Ford can restore there failing share price and improve the companies’ position; each is evaluated and discussed in depth below.
- Cut Costs and Improve Efficiency
Ford is striving to cut costs, as detailed in the current business strategy. An example of an area where Ford generates huge costs is the Blue Oval Certified Program (see appendix). This scheme offers car dealers with high customer satisfaction cash bonuses and penalises dealers who have low customer satisfaction. A recent article (Truby, 2002) details that Ford has been paying out $700 million a year underneath this scheme. In addition to this some dealers are reluctant to pressure customers into buying Ford cars as they feel they may jeopardise their customer satisfaction scores. An option for Ford is to reduce the payouts on this scheme gradually. More about the scheme and reasons why it needs to be changed, including a graph of Ford’s market share under the scheme, can be seen in the appendix.
Another option is to sell a number of the four Jaguar sites that produce the four Jaguar models. The four plants have high overheads. By selling three factories for example, these overheads will be reduced and will enable higher capital for investment, debt repayment or dividend payments. Leftover funds from the sale could be invested in remaining plant. However, selling three factories may have drawbacks, for example if Jaguar’s range was to expand they may have problems manufacturing all the models in one factory; although Ford’s UK facilities could be taken advantage of. It will also cause staff cuts which may result in reduced morale.
Ford can also cut costs further by increasing outsourcing operations. This is a part of their current strategy as they have been producing cars in Mazda plants in Spain. Through research conducted it was found that Ford could outsource to places like Mexico and Turkey.
In addition to cutting costs Ford can enhance their efficiency. An option is to build more cars from the same platform. Ford has started to do this though it is recommended that it should be increased as this is one of the reasons why Japanese manufacturers can build quality cars quicker for a cheaper cost. The continuation of this strategy has some drawbacks, Ford will need highly organised production plans and be able to react to change in demands.
A further option is increase the number of models produced from one production line and adopt manufacturing processes such as Just in Time (JIT). Advantages of JIT are reduced costs, faster production process and reduced material damage. However there are disadvantages such as investments will need to be made and much more of the production process is outsourced (Susanto, 2003). A discussion of JIT referring to a pilot project with the Ka model explains how it could benefit Ford can be found in the appendix.
3.1.2 Invest/Disinvest in auto markets
Markets that Ford should continue to exploit include India and China. Ford has already invested heavily in China, the world’s fastest growing car market and has Changan Automotive as a partner. The group believes it is now or never for considerable investment in China as the bubble will eventually burst. Options for Ford in China are to invest in further companies for partnership. Other companies have partnerships with First Auto Works and Denway Motors. Increased investment could have drawbacks the initial cost being one and a potential market saturation being another. More information on investing in China can be found in the appendix.
Ford also needs to carefully consider types of cars to build and sell in China. Popular cars tend to be affordable sedans. Ford should reflect their marketing and manufacturing around this fact. The group also feels that there is scope for selling smaller cars such as the Fiesta there.
A further option for Ford is to cut their losses and sell operations in South America where major losses are being made. This may have drawbacks if it does become a good auto market. (Lienhert, 2004)
3.1.3 Car manufacturing options
Today’s consumers demand more equipment and features. Ford has started to resolve these problems by offering cars such as the Ford Focus C-max. Ford should continue this strategy to produce innovative cars that are fully featured yet not considerably more expensive. To conduct this Ford would need to continue cutting costs and improve their manufacturing efficiency. (www.forbes.com)
Ford could also begin to offer more custom based cars where customers can pick and choose the features that they want. This option will not resolve the current share price hitch; however it is seen as a necessity to provide customers with greater options and improve CRM.
As identified in the SWOT analysis (see appendix), being more environmentally safe is an area Ford can capitalise on. To improve there current fuel-cell development they could form a strategic alliance with H Power, a company looking to enhance its presence in the US.
Building safer cars is a factor that will change the public’s opinion of Ford and many industry pundits believe that the first car company to build a fully functional hydrogen fuel-cell car will significantly improve their market share and therefore increase share value considerably.
Another fact found through research was the significant loss that Ford make on the Ka model. This analysis has prompted a proposal for this model to be phased out. The spare space that would be apparent in factories after this could be used for manufacturing their new models.
3.1.4 Form a Strategic Alliance
A joint Alliance can be formed with companies in the same industry. Alliances in the motor industry are already significant because of rapid technology change, decline product life cycles and appreciable entry barriers.
A perspective company in partnership with Ford could be Hyundai. Factors of this reasoning are because of the similar goals they both posses. Ford can establish a ‘foothold’ in the Asian market and in turn Hyundai’s reputation can be enhanced world-wide. An alliance with Hyundai is seen as a good move because of the current success in their homeland market.
3.1.5 Rationalise existing operations
Ford’s recent premium acquisitions acquired over the past years have come under scrutiny. These operations have not been performing as well as Ford had hoped they would have and thus becoming a massive strain on Fords financial resources. The operations that have these significant effects on Ford are Land Rover and Jaguar. Jaguar’s operating loss of 2002 was $207 million with most of this loss recognised in the European market. Land Rover has expressed a downfall of $275 million in operating costs.
However if Ford does decide to sell either company, they will be losing highly recognised brands. Both the companies were purchased to boost Ford’s luxury line-up, therefore it would not be a good idea to sell both. Ford do already have a SUV vehicle in their range; however can not compete with the BMW 7 series or the Mercedes S Class in the luxury car market without Jaguar. Therefore the preferred option would be to sell Land Rover.
3.2 Preferred Options
With the options considered Ford should adopt the following strategies.
- Cut Costs and Improve Efficiency
- Invest/Disinvest In auto markets
- Rationalise existing operations
- Car Manufacturing options
These strategies are listed in terms of both importance and the need for there implementation to address the current financial/competitive position. These options are the most feasible because these options will address the essential need to improve the value driver and secondly increase the share price to both remove the threat of a potential take over and the threat of further total shareholder return lose, which will ultimately affect the reputation of Ford as a viable and financially sound investment if not addressed. The aim in future with the stabilising of the company with the implementation of these strategies is that the company will have created additional value which can be used to pay higher dividends or reduce the company’s debt rating.
4 LIMITATIONS
The limitations of the investigation were:
- The use of metrics can lead to a rather narrow viewpoint of the company’s position. For example, Total Shareholder Return can miss out important factors that may add to shareholder value.
- Internal metrics could not be used in the investigation, because they were not able to be applied to Ford’s business domain.
The assumptions of the investigation were:
- Sales forecasts for Ford and other competitors were unobtainable so assumptions were made on future sales performance.
- There was a lack of consistency between sources of the data, i.e. some share price information on DataStream varied from that published on FT.com, so it was decided that DataStream’s figures were more accurate so they were used as the basis for the external metric investigation.
The practical problems of the investigation were:
- News articles regarding the Ford Motor Company may contain reporting bias.
- Current strategy is derived from newspaper reports and company statements. These are bound to be misleading and will not cover every aspect of the company’s strategy, parts of which will probably be secret.
- Certain business laws and legislations would make it hard to implement some of the strategic options that are available to Ford.
All these factors have had an effect in the way that this investigation was carried out, and are responsible for the way in which the report has been documented and reported.
References
Books
Faulkner, Bowman. (1995) ‘The Essence of Competitive Strategy’, Prentice-Hall
Barker (2001) ‘Determining Value’, Prentice-Hall
Banham (2002) ‘The Ford Century’, Tehabi
Journals
‘Can Ford Fix This Flat?’, ‘Business Week’, 2003, 3860, 50
‘Detroit Tries It the Japanese Way’, Business Week, 2004, 3867, 76
‘Ford Feels the Pressure’, ‘Strategic Direction’, 2003, 19(1), 9-12
‘Big Three Car Bosses Fight for Pole Position’, ‘Strategic Direction’, 2003, 19(11), 10-13
‘Restructuring Ford Europe’, ‘European Business Review’, 2003, 15(2), 77 - 86
‘Pedal to the Medal - Enough is enough’, ‘’, , 3865, 30
Financial Resources
DataStream (Aston University Library)
Internet Resources
www.guardian.co.uk, ‘Ford goes in for refit after 100 years’
www.reuters.com, ‘Toyota overtakes Ford as No.2 car maker’
http://finance.yahoo.com/, Yahoo Finance
http://www.autointell-news.com/News-2002/January-2002/January-2002-3/January-16-02-p4.htm - Ford Motor Company Announces Revitalisation Plans
http://www.forbes.com/reuters/newswire/2004/03/02/rtr1282302.html - Ford's Scheele sees deflationary price environment
Truby (2002) - http://www.detnews.com/2002/autosinsider/0209/25/a01-596413.htm
Susanto (2003) -
Lienhert (2004) - http://www.forbes.com/2003/12/15/cx_dl_1215feat.html
