Also the failure of recent premium acquisitions in Europe (Jaguar, Land Rover and Aston Martin) to merge operations effectively has drained resources into an area in which Ford hoped would bring them considerable financial gain.
Referring back to the SWOT Analysis (appendix A) conducted on Ford, these more product-focused threats are coupled with financial issues, such as high, unfunded pension and health liabilities and high fixed costs. One such example of high fixed costs is the Jaguar manufacturing operation in the UK, where three manufacturing plants operate producing just four different car-lines.
2.2 Current Strategy
Late in 2001, to combat the market forces which were threatening the competitive position of the then 100 year old Ford Motor Company, new CEO of Ford, William C Ford, adopted the 2 ½ year turnaround plan adopted by Ford Europe as ‘the blueprint for repairing the No. 2 carmaker's core auto operations’ (Business Week, 01/12/03)
The architects of the Ford business strategy were Ford Motor's International boss David W. Thursfield and COO Nicholas V. Scheele. The current strategy is divided into five parts, discussed in detail below:
- Realigning capacity to reflect smaller market share
- Improve efficiency of remaining Ford and its subsidiaries assembly plants.
- Reduce internal fixed/variable costs in Ford and its subsidiaries.
- Reduce project research and development time.
- Introduce new models.
2.2.1. Realign capacity to reflect smaller market share
Ford, before they implemented this strategy in Europe, had a build capacity of ‘2.25 million vehicles while its sales were actually 1.7 million units’. (European Business Review 2003 Volume: 15 Number: 2 Page: 77 – 86). This excess capacity harmed Ford as they had to offer discounts and other attractions to gain customers to maintain their market share; this reduced their profit per unit of output. Therefore, it was decided to cut capacity and realign it with their current market share. For example in Europe they ‘reduced capacity by 600,000 vehicles’ (‘Business Week’, 3860, 50) by closing down inefficient car assembly plants, including ‘Dagenham in UK, Plansk in Poland and Obchuk in Belarus’ (European Business Review Year: 2003 Volume: 15 Number: 2 Page: 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 its value driver cars per platform, by introducing multi-car production lines (modelled on Toyota’s operations). 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 Year: 2003 Volume: 15 Number: 2 Page: 77 – 86). This will improve economies of scale; reduce fixed costs and enables Ford to respond more quickly to shifts in customer demand. Ford has stated that ‘its internal productivity data show a 15.8% improvement from 1999 to 2002, to 19.7 hours per vehicle’ (‘Business Week’, 3860, 50’)
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 Mazda will now produce ‘Fiesta clones at its Valencia plant in Spain’. Plus they have looked at removing the upper and middle management’s annual bonuses to further reduce fixed costs.
In terms of reducing variable costs the company aim to reduce raw material costs between 2001 and 2004 by ‘10% from their 2000 figure of $18 billion and spending on tools by $1.2 billion a year over this period’ (European Business Review Year: 2003 Volume: 15 Number: 2 Page: 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’ (. New York: . , Iss. 3867; pg. 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’ and Mercury Montego sedans and the ‘Ford Freestyle tall wagon’ (‘. New York’: . , Iss. 3865; pg. 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 extremely 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.
3 STRATEGIC OPTIONS
- Options & Evaluation of Options
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.
3.1.1 Cut Costs and Improve Efficiency
Ford has always strived to cut costs as identified in the current business strategy. An example of an area where Ford generates huge costs is the Blue Oval Certified Program. This scheme offers car dealers with high customer satisfaction cash bonuses and penalises dealers who have low customer satisfaction. In a recent article (Truby, 2002) it was discussed that Ford have 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 this results in a loss of market share. An option for Ford is to reduce the payouts on this scheme gradually so that less money is paid out. Reducing payments could have drawbacks including unhappy dealers. More about the scheme and reasons why it needs to be changed including a graph of Fords market share under the scheme can be seen in the appendix.
Another option is to sell 3 of the 4 Jaguar sites that only produce the 4 Jaguar models. The four factories at the moment produce huge overheads, by selling 3 factories these overheads will be reduced and will enable higher capital for investment or dividends. Some of the leftover funds from the sale could be put towards improving the remaining plant. Selling three factories may have drawbacks for example if Jaguars range was to expand they may have problems manufacturing all the models in one factory; however Jaguars could be produced in other factories as well. It will also cause a layoff of staff 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 with 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 have to have highly organised production plans and be able to react to change in demands.
A further option is increase the amounts of models produced on 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
Areas that Ford should continue to exploit include India and China. China is the world’s fastest growing auto market, Ford have already invested heavily in China and have Changan Automotive as a partner. Ford were late coming into this market 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 “bursting of the bubble” 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 there losses and sell operation is South America where they are losing out heavily. Money recovered from this can be used for investment elsewhere. This may have drawbacks if it does become a good auto market where Ford will lose out.
(Lienhert, 2004)
3.1.3 Car manufacturing options
Today’s consumers want a lot more equipment and features in cars for low prices. 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.
(, 2004)
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 ‘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
Fords recent premium acquisitions it has acquired over the past years have become 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.
By deciding to break links with either Land Rover or Jaguar Ford may well be reliving them-selves of a badly performing subsidiary and cashing in on the company. However if they do decide to let either go they will be losing an important and highly recognised brand. Both the companies were purchased to boost Ford’s luxury line-up, therefore would not be a good idea to let go of 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 a preferred option would be to let go of 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.
- 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
Journals
‘Can Ford Fix This Flat?’, ‘Business Week’, 3860, 50
‘Detroit Tries It the Japanese Way’, Business Week, 26/01/04, 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’ Year: 2003 Volume: 15 Number: 2 Page: 77 – 86
‘PEDAL TO THE METAL; Enough is enough -- Detroit is filling showrooms with new cars to beat back foreign rivals’ ‘. New York’: . , Iss. 3865; pg. 30
Financial Resources
DataStream (Aston University Library)
Internet Resources
www.guardian.co.uk, 16/06/03, ‘Ford goes in for refit after 100 years’
www.reuters.com, 25/01/04, ‘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.detnews.com/2002/autosinsider/0209/25/a01-596413.htm - Truby (2002), Ford Dealer Program Under Fire, Detroit News
http://www.susanto.id.au/papers/JITFORD.asp - Susanto (2003), Just In Time Ford
http://www.forbes.com/reuters/newswire/2004/03/02/rtr1282302.html - Ford's Scheele sees deflationary price environment
http://www.forbes.com/2003/12/15/cx_dl_1215feat.html - Lienhert (2004), The Rising Chinese Car Market
Other sources
Faulkner, Bowman. (1995) ‘The Essence of Competitive Strategy’, Prentice-Hall
Barker (2001) ‘Determining Value’, Prentice-Hall
Banham (2002) ‘The Ford Century’, Tehabi