2. 2
Table of Contents:
External Analysis:
Industry Overview…………………………………………………………………………………….3
General Environment………………………………………………………………………………...4
The Industry Environment……………………………………………………………………...5-6
Competitive Forces & Advantages………………………………………………………………6
Porter’s Five Forces…………………………………………………......…………………………7-9
Internal Analysis:
Financial Analysis……………………………………………………………….…..……………9-11
Core Competencies……………………………………………………………………………..…...11
Ford’s Strategies………………………………………………………………………………...11-13
Automobile Industry Problems……………………………………………………………...…13
Ford’s Strategies (Looking Forward)…………………… …………………………..……...14
SWOT Analysis………………………………………………………………………...…………14-16
Appendix……………………………………………………………………………………………………...17-18
Bibliography…………………………………………………………………………………………….......19-20
3. 3
External Analysis
Industry Overview
The automobile industry, whose companies produce automotive vehicles
that range from street performance to light truck to off road, took a huge hit, as did
many industries, after the Recession of 2008. One of the leading firms, General
Motors, declared bankruptcy and needed an $80 billion federal bailout to remain
afloat. After 2009, the auto industry saw an average ROE of 3.88%. The industry saw
a 5.038% increase in ROE in 2010, but the same statistic leveled off in 2011 to
2.472%. World unit production of vehicles reached a peak of close to 80 million
units in 2011 (Grant, 491).
4. 4
The General Environment
Socio-cultural:
As oil prices and concern for the environment increase, there is a growing
demand for products that are eco-friendly. According to SEMA, retail sales by niche
have shifted from light trucks overwhelmingly dominating to street performance
models with a focus on efficiency with compact performance vehicles being the
second most commonly bought model-type (Campbell, Steve. "SEMA).
Political/Legal:
In 2009, as a result of the hit the automotive industry took due to the
Recession of 2008, President Obama and the Federal Government took over General
Motors (GM) and Chrysler Group in the form of an $80 billion bailout. The bailout
resulted in an estimated 200,000 additional jobs and a record reported annual profit
by GM. According to CNN Money, 2011 “marked the first time since 2004 that all
three major U.S. automakers were profitable at the same time” (Isidore, Chris. "GM
Posts Record Earnings for 2011).
5. 5
The Industry Environment
Once an industry dominated by a few firms, the automobile industry has
become much more competitive and market shares in individual countries have
evened out. In the U.S., GM, Ford, and Chrysler were the only firms with a market
share of above 10% in 1988. In 2010, Toyota and Honda increased their market
share to 15.3% and 10.7%, respectively while no American company held less than
a 9.3% share (Grant, 499). This trend was noticeable in all auto-producing countries
as production capabilities became more accessible and the threat of entrants
became higher.
Similarly, as the U.S. once dominated world motor vehicle production, other
countries have broken into the market and even taken an advantage in production
percentage by country. In 2011, world motor vehicle production by country as a
percentage of world total was as evenly distributed as ever, as shown below (Grant,
490).
Problems for the industry have risen, however. The industry has found itself
to be severely over capacity. Automobile production capacity utilization in 2011
never exceeded 81% in any country (Grant, 497). Part of the issue has to deal with
the fact that vehicles are becoming more durable and longer lasting. In 2010, the
median age of passenger cars in the U.S. reached a peak of close to 10 years, which
means the consumer base is not buying (Grant, 490). Prospects that would diminish
excess capacity are limited “by, first, the resistance of national governments to plant
closures and second, continuing investment in new plants in emerging-market
countries: in China capacity utilization was forecast to fall to 66% by 2016 as new
6. 6
plants continued to be built despite slowing domestic demand” (Grant, 498). U.S.
firms seemed to notice this trend, however, as motor vehicle production dipped
from almost 12,000,000 in 2005 to just over 6,000,000 units in 2010 (Grant, 489).
Competitive Forces & Advantages
We will classify two strategic groups in the automobile industry: luxury and
economical. First, the strategy of producing luxury cars, used by firms like Porsche
and Lincoln, focus on less production and a higher quality of vehicle. The comfort
and performance of the vehicle is more important than the price. They market to
consumers who are willing to spend more money on a better quality vehicle.
Secondly, other firms are focusing on producing vehicles that are more
affordable and economical. However, trends have shown that firms like Ford are
focusing on comfort and style more while still emphasizing fuel economy and
performance, such as with the Ford Focus model. These firms that implement the
economic strategy are noticing the success and demand of luxury vehicles and are
beginning to partake in mergers and acquisitions of luxury subsidiaries to increase
their market impact. For example, in 2009, Volkswagen acquired Porsche at a 49%
stake and Lincoln is the popular luxury subsidiary of Ford (Grant, 495).
Firms in the industry do not produce all parts for their units anymore.
Automobile component companies have begun to produce a massive amount of
vehicle components. “Since 1980, the quest for lower costs and increased flexibility
has resulted in a massive outsourcing of materials, components, and services…The
Japanese model of close collaborative, long-term relationships with their first-tier
suppliers has displaced the US model of contract-based, arm’s length relationships”
(Grant, 494-495). Some component companies began to grow to as large as the
automobile companies they sold their parts to, with ROE’s in 2010-2011 reaching
over 5% across the board and peaking at 37% (Grant, 496).
7. 7
Porter’s Five Forces
Threat of New Entrants:
The automobile industry is a specialized industry that requires enormous
capital investment for factory facilities, machinery, labor, and technology. The cost
of entering into the market increases its barrier to enter and exit. If a new entrant
entered into the industry, they would have to find dealerships to sell their
automobiles, which builds pressure, increasing the difficulty to enter into the
industry. The automobile industry is so massive and mature, new entrants would
have to mass-produce their automobiles in order to reach the economies of scale of
major competitors, thus raising the stakes of entering. Government regulations
could also hinder the barriers to enter into the market. However, foreign entrants
into a new market could become a threat with strategic alliances, with help major
manufacturer brand reputation. With all being said, we evaluated the threat of new
entrants to Ford and the automobile industry to be low/low-moderate because we
are seeing smaller firms enter into new, foreign emerging markets.
Threats of Substitute Products or Services:
When looking at the industry globally, the threat of substitute products or
services is moderate. We decided to label the threat of substitute products or
services to be a moderate threat because of the importance of public transportation.
Public transportation is the biggest threat for substitute because trains and busses
are affordable to almost everyone. With all being said, customers are limited to
8. 8
where they can travel with public transportation, so it cannot be a full-time
substitute.
Bargaining Power of Suppliers:
The bargaining power of suppliers in the automobile industry is very low,
due to the fact there is an abundant amount of existing suppliers. If a supplier isn’t
able to perform adequately, the supplier will fail and be replaced.
Bargaining Power of Buyers:
We analyzed Ford and the automobile industry and evaluated that the
bargaining power of buyers is moderately-strong. There is a large amount of
customers in the automobile industry, and there is a vast amount of vehicles based
off of quality, fuel efficiency, price, and service. With that being said, customers have
the ability to leverage themselves with companies because of the information
available to customers about the company’s products. With sales expecting to grow,
and new products being manufactured, customers are going to have a bigger variety
of products to choose from, increasing their buyer power because firms are trying to
meet customers’ changing demands.
Rivalry Among Existing Firms:
Rivalry among existing firms in the automobile industry is very strong.
Rapid changing consumer demands increases competition and rivalry amongst
existing firms within the industry. Also, an increase in market growth increases
rivalry because firms will compete for market share in emerging markets. The
diversity of existing firms in the industry allow some companies to have a
competitive advantage over others, intensifying rivalry. Lastly, because the barriers
9. 9
to exit are strong, companies face intense rivalry hoping they are able to compete
and sustain profitability.
Internal Analysis
Financial Analysis
The case, Ford and the World Automobile Industry in 2012, required Bob
Shanks to review the financial forecasts for 2012-2016 prepared by Lewis Booth,
the previous Chief Financial Officer for Ford. Shanks task for reviewing the financial
forecasts is fundamental because it will help shape Ford’s future strategy, and he
was worried about its ability to sustain profitability. The automobile industry before
the financial crisis was dismal; the world’s five biggest automakers (GM, Toyota,
Ford, Daimler-Chrysler, and Volkswagen) earned on average a net margin of 1.1%
from 1990-2008, destroying billions of dollars in shareholder value because their
return on invested capital failed to cover their cost of capital. The auto industry took
a drastic hit financially when the 2007-2008 financial crisis occurred. In 2008, Ford
suffered a loss of $14.7 billion and it had planned a breakeven in 2011 after its
business plan in December 2008; however, it was able to make an astonishing
turnaround in 2011, earning a net profit of $20.2 billion (Grant, 488-89). In the case,
“Shanks attributed the turnaround to three factors: first, government measures in
North America and Europe to stimulate demand through incentives for scrapping
old cars and subsidies for purchasing new, fuel-efficient models; second, the
recovery of demand in several major markets, including China, India, Brazil, and the
10. 10
US; third, Ford’s own restructuring” (Grant, 488). In Ford’s annual report for 2011,
Ford attributes its revenue from sales between its automotive and service sectors.
The automotive sector includes the sales of vehicles, parts, and accessories. The
financial service sector generates revenue from interest on financial receivables and
operating leases (corporate.ford.com). In 2011, Ford ranked 5th in company sales
with 136 billion units, trailing companies such as Toyota, VW, GM, and Daimler-
Chrysler. The company’s profitability, (ROE), for Ford was the highest out of all
major companies within the industry in 2011 with an 819.9% ROE, mainly due to
the fact its small equity base caused an inflation in its ROE (Grant, 501). Ford’s
market share % in individual countries helps us analyze how Ford ranks among its
competitors. In the US and UK, Ford ranks among the highest in market share
percentage with 16.5% market share in the US and 15.8% in the UK. In both cases,
Ford is second in market share percentage in the US and UK trailing GM in the US
with a market share of 19.1% and trailing VW/Audi in the UK with a market share of
16% (Grant, 499). Next, we analyzed some of Ford’s profitability, liquidity, and
leverage ratios by comparing them to the automobile and parts sector, Ford’s
industry. The following information and ratios can be seen in Appendix One with
tables comparing Ford to the automobile and parts sector, the industry’s average.
Ending in 2011, Ford’s ROA was 2% higher than the industry’s average. Also, Ford’s
net profit margin was 5% higher than the industry’s average, due to its amazing
turnaround in 2011. Ford also saw a higher inventory turnover than the industry’s
average; however, Ford was under the industry’s average for its current ratio and
total asset turnover, but they were not far below the average (stock-analysis-
11. 11
on.net). Overall, Ford has done an astonishing job making such a huge turnaround
from the 2007-2008 financial crisis. In Ford’s 2011 annual report, the Executive
Chairman, William Clay Ford Jr., announced that Ford expects overall industry sales
volumes to grow worldwide, expecting global sales of 80 million vehicles
(corporate.ford.com). With the amazing recovery in 2011, Ford looks to be in a
healthy financial position and must strategize properly to compete amongst its
rivals.
Ford’s Core Competencies
Ford’s core competencies help them gain a competitive advantage over rival
competitors such as GM and other leading automobile manufacturers. Ford’s main
core competency is its strong brand recognition. Ford is one of the top leaders in its
industry, helping them strengthen their brand recognition. Another core
competency of Ford is its strong “One Ford” plan that helped it return from dismal
performances from the 2007-2008 financial crisis. Finally, Ford’s ability to build
relationships with rivalry firms helps them with strategic alliances and joint-
ventures. Strategic alliances and join-ventures help Ford integrate in emerging
markets and help meet consumer demands.
Ford’s Strategy
In 1903, when Henry Ford began production, “his vision of an affordable,
mass-produced automobile required the development of more precise machine
tools that would permit interchangeable parts” (Grant, 492). In 1913, he instituted
12. 12
his own system of production, increasing productivity gains enormously. In 1980’s-
90’s, all major car manufactures redesigned their manufacturing process to
incorporate Toyota’s lean production, reducing the importance of scale economies
in assembly (Grant, 492-93). In 2006, Ford faced a major change with the
restructuring of its company. Ford introduced the “One Ford” transformation plan:
closing plants, cutting employment, divesting Jaguar, Land Rover, and Volvo, cutting
ownership of Mazda from 33% to 3% helped integrate Ford’s global activities, and
accelerating product development with an emphasis on small, fuel-efficient cars
(Grant, 488). In Ford’s 2011 annual report, Ford expands on their “One Ford” plan
with incorporating “One Team”, “One Plan”, and “One Goal”. Ford states that its “One
Ford” plan “encourages focus, teamwork and a single global approach, aligning
employee efforts toward a common definition of success and optimizing their
collective strengths worldwide” (corporate.ford.com). The “One Team” aspect
“emphasizes the importance of working together as one team to achieve automotive
leadership, which is measured by the satisfaction of our customers, employees and
essential business partners, such as our dealers, investors, suppliers,
unions/councils and communities (corporate.ford.com). Ford’s “One Plan” is
described to “aggressively restructure to operate profitably at the current demand
and changing model mix. Accelerate development of new products our customers
want and value. Finance our plan and improve our balance sheet. [And] Work
together effectively as one team” (corporate.ford.com). By incorporating the
following parts of “One Ford”, Ford will be able to achieve its “One Goal” of creating
an exciting and viable company with profitable growth for all (corporate.ford.com).
13. 13
In order for Ford to compete against its rivals, Ford must continuously look to
innovate its vehicles with improvements in the fields of fuel efficiency, safety, smart
design and value.
Automobile Industry Problems
When taking over as the Chief Financial Officer of Ford, Bob Shanks reviewed
the forces most likely to cause problems in the world automobile industry for the
future. The leading problem Shanks faced, as well as the entire automobile industry,
was excess capacity: growth of production capacity outstripped the growth in the
demand for cars (Grant, 497). Another factor Shanks needed to evaluate was
technological advancements, especially with the introduction of all-electric cars,
which allows the possibility of newcomers to muscle in on the market domains of
major automakers because of offering of prospects for new demand. Environmental
factors Shanks needs to evaluate deals with environmental concerns/regulations
and the depleting oil reserves. New product development and the increasing
complexity of new cars raised cost of developing new models: a new mass-
production model from drawing board to production line typically costs between $2
and $6 billion. Lastly, the key problem Shanks identified was on the supply side: if
overhang of excess capacity remains, market growth would not translate into
adequate profit margins (Grant, 498-500). The following factors place future
problems on Ford and the automobile industry.
14. 14
Ford’s Strategy (Looking Forward)
Ford’s strategy moving forward should be to continue to emerge in foreign
markets and make strategic alliances and joint-ventures that would help solidify
them as a leader in the automobile industry. With the emphasis and emergence of
small, premium cars, Ford should continue to innovate and upgrade its small cars
such as the Ford Focus. Because of the potential environmental concerns,
environmental regulations, and depleting oil reserves, Ford should continue its
investment in all-electric cars and eco-friendly, hybrid vehicles because they are
becoming more prominent in consumer demands. Another strategy Ford could
undertake is to join with Apple to improve its car’s technology, which overall will
improve the luxury of the car. By doing this, we think Ford could dominate the
market because of the possibilities apple could bring with their technology.
SWOT Analysis
Strengths:
Ford’s strengths in the automobile industry is its strong brand recognition.
Ford is the fifth largest leading auto producer with a production of 5,695,000 units
in 2011. Ford also has a strong position within the US and UK markets and a
moderate position in Italy and France markets by having a 16.5%, 15.8%, 5.1%, and
9.1% of automobile market shares respectively. Ford developed a “One Ford” plan in
2006 for achieving success globally. This plan helps Ford’s sustainability within the
market. Ford’s ability to earn a net profit of $20.2 billion in 2011 strengthens its
15. 15
financial stability and proved that the automobile industry is not plummeting,
regardless of the recent crisis and poor performances.
Weaknesses:
Weaknesses of Ford’s company would be its limited involvement in foreign
markets such as rapid growing markets in China. Another weakness is excess
capacity, which is the greatest structural problem of the industry. Ford and other
firms in the industry witnessed a growth in capacity that outstripped growth of
demand. The excess capacity helped destroyed billions of dollars in shareholder’s
value.
Opportunities:
An opportunity Ford faces in the future is a strategic alliance with other firms
because there are opportunities to enter new markets with growing rivalry and
competition amongst firms that would make this move appealing. Increasing fuel
prices can afford Ford an opportunity to capitalize because of its stronger emphasis
on eco-friendly/fuel-efficient cars. With the introduction of the Ford Focus, Ford
was able to provide a car of premium quality that is fuel-efficient. Also, smaller cars
are becoming more popular, so Ford’s focus on a premium car like the Ford Focus
gains attractiveness from buyers who are willing to pay premium prices for a small
car that combined fuel economy, safety, and design. With growing markets such as
in China, Ford has the opportunity to capitalize and implement itself through
strategic alliances of joint-ventures within these emerging markets.
Threats:
16. 16
A major threat Ford may face would be a decrease in gas prices. A decrease in
gas prices could change consumer’s demand from small, fuel-efficient cars to
sport/pick-up trucks and cars. Because consumer demands are stressing on firms
producing small, premium cars that combine fuel economy, safety, and design, a rise
in gas prices could switch consumer demands away from small, premium cars,
causing a surplus and raising excess capacity. Another major threat that Ford
already is facing is the mature market of the automobile industry. There are many
competitors fiercely fighting for market share, producing a vast array of vehicles to
meet customers’ demand. Lastly, if Ford and the automobile industry faces an
increase in raw materials, then they will have to increase their prices of vehicles,
which could hinder firms’ operating profits.
17. 17
Appendix One
Ford Motor Co., ROA, long-term trends, comparison to Automobiles & Parts sector
Ford Motor Co.
Automobiles &
Parts
Dec 31, 2005 0.73% 0.73%
Dec 31, 2006 -4.35% -4.35%
Dec 31, 2007 -0.95% -0.95%
Dec 31, 2008 -6.58% -6.58%
Dec 31, 2009 1.37% 1.37%
Dec 31, 2010 3.96% 4.18%
Dec 31, 2011 11.28% 9.08%
Ford Motor Co., total asset turnover, long-term trends, comparison to Automobiles & Parts sector
Ford Motor Co.
Automobiles &
Parts
Dec 31, 2005 0.56 0.56
Dec 31, 2006 0.49 0.49
Dec 31, 2007 0.54 0.54
Dec 31, 2008 0.58 0.58
Dec 31, 2009 0.54 0.54
Dec 31, 2010 0.72 0.84
Dec 31, 2011 0.72 0.86
Ford Motor Co., net profit margin, long-term trends, comparison to Automobiles & Parts sector
Ford Motor Co.
Automobiles &
Parts
Dec 31, 2005 1.32% 1.32%
Dec 31, 2006 -8.80% -8.80%
Dec 31, 2007 -1.76% -1.76%
Dec 31, 2008 -11.36% -11.36%
Dec 31, 2009 2.57% 2.57%
Dec 31, 2010 5.50% 5.00%
Dec 31, 2011 15.77% 10.61%
18. 18
Ford Motor Co., current ratio, long-term trends, comparison to Automobiles & Parts sector
Ford Motor Co.
Automobiles &
Parts
Dec 31, 2005 0.90 0.90
Dec 31, 2006 1.02 1.02
Dec 31, 2007 1.08 1.08
Dec 31, 2008 0.69 0.69
Dec 31, 2009 1.10 1.10
Dec 31, 2010 1.00 1.07
Dec 31, 2011 1.16 1.20
Ford Motor Co., Inventory Turnover
Dec 31, 2011 Dec 31, 2010
Selected Financial Data (USD $ in millions)
Automotive cost of sales 113,345 104,451
Inventories 5,901 5,917
Ratio
Inventory turnover 19.21 17.65
Benchmarks
Inventory Turnover, Competitors
General Motors Co. 9.10 9.80
Inventory Turnover, Sector
Automobiles & Parts 12.05 –
Inventory Turnover, Industry
Consumer Goods 7.22 –
Source: Based on data from Ford Motor Co. Annual Reports
19. 19
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