* Although to be the only one remaining member which have escaped bankruptcy of the Big Three among the automobile industry by June 2009, Ford suffers $14.7 million loss of revenue and elimination of stockholders’ equity due to the record-breaking fall in demand for 2008,US. However, to understand Ford’s position today requires understanding the American automotive industry.
* General Industry analysis
* From 1900-2008, US motor vehicle production has a rapid increase to9, 000,000 from 1900 to 1967, after not, there is a graduate decrease to 3,000,000 until 2008. At the mean time, the median age of passenger car in US was Spiral upwards. Combine the two phenomenon, we can get that the automobile industry market is quite saturated and the demand fell down. Regard to the automobile manufacturing technology, despite less differentiation between manufacturers due to the converge of technologies and design, the technological progress was incremental and lead to the various segmentations in each country. Follow the two situations, there are 3 big issues were emerged. One was the deep demand of auto cars result in excess capacity. Another one issues was the high cost among the technological development. Last one issue was the lacking differentiation. However, it also offers automakers new product segmentations and market. For an insightful analysis, we need to look at more information in details.
* Porter’s Five Forces
First of all, we can get a comprehensive industry environment analysis through the Porter’s Five Forces. In terms of the threat of new entrants of the automobile industry, it requires high capital costs for potential entrants, as the manufacturers are all carry out the mass-production-scale. However, when a new entrant face with the current competitors’ scale economies, smaller manufacturers could not survive since they cannot afford the massive product development cost, which was in excess of $6 billion. And it is easy to own the cost disadvantages independent of scale. Then, the product differentiation of automobile industry is not high as other industry. The automobile industry was a global network of collaborative arrangements. As the team-based approach became models for all major manufacturers, there is no big difference in the function, model and design. They can only gain their differentiation by the firm’s service and effective advertising.
Also, There is no switching cost in the automobile industry because no cost would be incurred when customer switch to a new supplier. However, the large capital requirement is demanding, as the automobile industry needs huge amount of capital to invest in its mass-production line. Furthermore, automakers have benefited from prodigious amounts of direct funds or indirect aids from the government around the world to keep car plants open and assembly line running after the global sales collapsed, and the industry has never operated on the pure free-market principles. It proved that the government always intervened in the automobile industry that suggests the government control entry into this industry. Then, the supplier group of the industry is powerful. In order to achieve lower costs and increased flexibility, the automobile manufacturing trend has been towards outsourcing. All of the manufacturers now have long-term relationships with their suppliers.
Especially for the leading component suppliers that have the increasing responsibility for technological development, it gains a strong bargaining power. Because their goods as transmissions, braking systems, etc. are critical to buyers’ market success. Besides, it poses a credible threat to integrate forward into the automobile industry due to some suppliers like Bosch and Denso are as big as some larger automobile companies. What’s more, since a few large companies dominated the suppliers and is more concentrated than automobile industry, it is easy to get the conclusion that these suppliers are fatal and important threat to the automobile industry. Next, the bargaining power of the buyer is increasing. Although the auto buyers won’t purchase a large portion of cars in a given time since the auto is not cheap, the sales of the purchased product do not account for a significant portion of the seller’s annual revenue as well. Nevertheless, the customer could switch to another automaker at litter or even no cost since automobiles are little differentiated, then the buyers pose a credible threat if they were to integrate backward into the sellers’ industry. In addition, the threat of the substitutes also is a vital factor of the industry analysis.
As the passenger car substitutes, the public transportation like airplane, train and bus perform the same function. The technological change would offer opportunities for new entrants into the industry. For the environmental concerns, it may also result in a decline in private transportation in favor of public transportation, or short-term rental car rather than car ownership. In general, these substitutes present a strong threat to the industry especially when the customers face few switching cost as I mentioned before. Moreover, the competitive rivalry is intense in the automobile industry. Firstly, there are equally balanced competitors within the industry. It can be found from company sales of these automakers, the annual average sales are nearly the same among several major big automakers as Ford, GM, Honda and Daimler.
Industry with only a few firms of equivalent size and power tend to have strong rivalries. In another hand, as the high fixed cost and high storage cost of automobiles account for a large part of the total costs, the automakers will spread the costs across a large volume of output. However, excess capacity is created when firms try to maximize their productive capacity. And the excess capacity has become the greatest structural problem of the industry. To cut down the price is the most effective way to reduce inventories. At the mean time, this method often intensifies competition. Besides, lacking differentiation and low switching cost of the automobile industry are easy for competitors to attract buyers through pricing and service offerings. Finally, the high exit barriers intensify the automobile industry competition as well.
With the recession and unprecedented fall in demand, automakers remain in the industry because they face the high exit barriers. Specialized assets, fixed cost of exit, strategic interrelationships, emotional barriers, government and social restrictions are make up the high exit barriers. To sum, the competitive rivalry is highly intense in the automobile industry. After the discussion about the Porter’s five forces, we have a comprehensive understanding that how is the American automobile industry environment. However, for a more accurate strategic competitiveness, we need to have a further analysis through the international markets and rivalries.
* Industry analysis -Internationalization
With the increasing competition in the industry, the intensified quest for cost reduction and the excess capacity among automobile manufacturers had make contributions to the internationalization. In another side, accessing growing market, exploiting scale economies in purchasing, technology, and
new product development also mainly brought up the internationalization. In the market share part, the table shows that there is an apparent decrease in the automobile market share of local firms from 1988 to 2006.As the Big Three which held close to 85% of the US market in 1970, all of their US market share declined by an average of 6% in 2006. On the contrary, the reductive market share contributed to the increasing market share of Toyota and Honda in US. Not only the US market had an internationalization outcome as the above condition, but also many developed countries did. It illustrates that all the leading automobile manufacturers were competing in most of the countries of the world instead of dominated in focused national market as before, and the market dominance of local automobile firms was undermined.
In addition, the global distribution of production shifts a lot due to the rise of new market and the needs of low production cost. As shown in the table4.7 and 4.8, the used biggest three automobile production countries and regions (US, Western Europe, and Japan) in 1980 have been taken place by Japan, China, and Germany in 2008. The world leading motor-vehicle producers-Korea, Brazil and India, also result in a rapidly growing domestic markets and low production cost that benefit a lot from the low compensation for workers. Therefore, we can draw a conclusion that there is a big cost advantages and huge potential market for the big automobile manufacturers due to the internationalization.
Since there are a lot of leading producers with cheap labor cost and high productivity outside US, then it provide resources and factors of production in the world outside US, and it provide automobile industry a way to worldwide outsourcing, which is beneficial to the reasonable allocation of capital and products in the global flow. Besides, internationalization in the automobile industry is helpful for design and technology in the global expansion, promote the economic development of the underdeveloped areas, in turn, it stimulate the sales of automobile. Nonetheless, the fierce competition is a concern in the international market. On account of the collaborations with the industry’s development and no barriers to enter other countries, fewer differentiation and free-limit expansion lead to intensive rivalry.
* Industry attractiveness
Through the industry analysis among five forces in American market and international market, it is obvious to find the automobile industry is attractive in international market instead of in American market. Although there is a little threat of new entrants, strong bargaining power of supplier, increasing bargaining power of buyers, big threats of substitute products and intense competitive rivalry still make the domestic industry not attractive. In the international market, it is attractive as the potential market expansion and worldwide outsourcing. But with the intensive rivalry and low differentiation in the internationalization, it is necessary to be well prepared on the risk and responses.
* Fit between core competencies and opportunities
Ford was the first one to combine mass consumption with mass production, and Ford use this concept to guide the enterprise entrepreneur. What is the Ford’s core competency then? To start, it’s brand recognition in global scale. Ford does have a model in most categories. It provides a large global scale to Ford. A more strategic core competency of Ford is its global supply chain network. Its strategic alliances and supplier base is possibly one of the most favorable in the world. In addition, Ford has many opportunities. Firstly, Restructuring plan that to downsizing was launched long before GM and Chrysler, moving the manufacturing to low-cost location, worldwide outsourcing as well. These actions improve the performance, meet the location economy and cut down the cost of Ford. Secondly, Ford has a long history in production innovation. Thus, new products are very likely to be continued in the future.
Thirdly, Ford’s business is locked up in the European and North American markets, however it possess a significant share in emerging markets such as South American, which should provide enormous growth of the future as the middle class to grow and earn the money to spend on automobiles. Finally, One major sector that is full with opportunity is the electric automobile market, as the world looks for an eco-friendly alternative that operates like the original car. When we compared Ford’s opportunities with core competencies, they fit with each other. The constant production innovation that leads to continued new product and the significant share in emerging markets provide the opportunities for Ford’s brand recognition in global scale. Furthermore, the location economy and worldwide outsourcing give Ford the chance to strengthen its global supply chain network. In sum, Ford gains a very strong competitive advantage in automobile industry.
* Business-level strategy
In terms of the business-level strategy, Ford had an ambiguous business-level strategy that neither successful differentiation nor cost-leadership based on the case. On one hand, because of the high technological development cost, large excess capacity and huge capital cost, it cannot and did not maintain a cost leadership strategy. On the other hand, with the internationalization, resources and technologies sharing, collaborations among competitors, Ford do not have a strong differentiation strategy.
Type of cooperation
The cost of new product development has been the major driver if mergers and acquisition in the industry. And sharing cost also encouraged increased collaboration and joint venture. For Ford, its corporation includes joint venture, joint research, licensing, partnership, and acquisition. With these different corporation methods that to share costs, resources and risks, Ford shows a strong alliance to its supplier and partner. And Ford also obtains a significant reduction in product development time and cost. To some extent, the strong connection with other automakers and suppliers also accelerate the speed to reach the market and the potential consumer.
* How to approach market
* At present, the biggest change of automobile society is the transition from emerging market to mature market. And the most significant feature is the industry has entered the era of micro growth. Micro growth poses a big pressure to the whole industry, but it also promotes favorable industry healthy and sustainable growth. Thus, with such advantaged external opportunity and internal strength, Ford needs to approach new market to earn the market share and worldwide competitiveness. Exporting, licensing, strategic alliances, acquisition and WOS are the entry modes alternatives, but how to choose one from these?
* Since Ford already has a strong partnership with other automakers, Ford has a foundation to gain other alliances. Besides, as Ford does not have much profit margin and the initial investment of automobile industry is huge, the Exporting, WOS and Acquisition are not acceptable due to the high cost. In terms of the licensing, although it has a low cost and risk, the low return and little control are not appealing. Thus, Ford should go on with the strategic alliances to cut the entry cost and risk, and to achieve the industry integration.
* 5-year plan
To conclude all the analysis above, Ford’s strategies for the later 5 years’ development need to be changed. Firstly, a real business-level strategy is imperative. Adopting a clear differentiation strategy and supporting value-chain activities should improve Ford’s position. Besides, to Continue cost cutting beyond those already specified in the plan and focus on reduction of manufacturing costs to achieve Ford’s cost parity. Additionally, cut in cost to achieve parity with foreign rivals. Invest in unique advertising and create uniquely designed vehicles with shared platforms and technologies to promote differentiation strategy. * The second part of Ford’s plan is to refocus on the consumer through repositioning of its brand and product mix to be more consistent with customer preferences.
Currently, Ford lacks product differentiation between these brands sold by the North American division. Ford should emphasize development and production of several car models that presently enjoy strong reputations. Thus, their continued success will enhance the company image as a whole, again supporting a strong differentiation strategy. The final key piece of Ford’s restructuring plan is the constant introduction of innovative products and new development methods. It can bring up new customers. Based on the improved differentiation and efficiencies of scale, the market sales and market share will go up. Together with all these recommendations, Ford should be able to return to a competitive position in the marketplace and stabilize with improve its market share and financial position. *