This paper will discuss the most significant trends in small car industry and their possible implications for Ford Motor Company. However, before presenting the results of small car industry analysis, it is necessary to look at the general trends in automotive industry in order to carry out a further comparison of general market developments and peculiarities of small car industry. During the last two decades, the automotive sector of global market has undergone significant structural changes.
This section will highlight the main trends in the automotive sector worldwide.
First of all, the aforementioned decades were characterized by a number of strategic alliances between the major manufacturers attracting the attention of the analysts and producers alike. To name a few, the mergers of Daimler-Chrysler and Renault-Nissan were rather resonant. Major American companies, “The Big Three” (GM, Ford and Chrysler), formed strategic partnerships or merged with other European and Japanese manufacturers (Business and Economic Research Advisor, 2004).
Secondly, the companies had to encounter the pressures of international economic globalization.
In the past, automobile industry was perceived as a national industry, but with the changes brought about by the globalization it is also becoming internationalized. Globalization was happening in the following spheres of automotive business: a) product development, b) supply systems including factory locations, c) systems to purchase from the suppliers of parts, components, intermediary material and raw material, d) production systems at factories, e) automobile sales and distribution systems (Shimokawa, 1999).
The Japanese producers with their paradigm of lean manufacturing occupied the leadership position on the global market in the 1990s. However, their practices encouraged the reform in the Western automotive sector, so Western manufacturers regained their positions soon. As the results of these transformations, the major players nowadays are General Motors, Ford, Toyota, Honda, Volkswagen, and DaimlerChrylser. Another tendency worth noting is that the major players continue to invest into production plants in emerging markets in order to lower production costs.
These markets are Latin America, China, Malaysia and other markets in Southeast Asia (Business and Economic Research Advisor, 2004). Despite these investments, global automotive industry has begun to slow down because of overcapacity. Industry analysts believe that Toyota is best equipped with facing the challenge for the reasons of high quality of its offerings and innovative use of new technologies (Becker, 2006). In contrast to the overall market slowdown, the market for small cars is projected to grow. Intensifying congestions and escalating costs of fuel cause consumers to switch from larger vehicles to small cars.
Social factors have a role to play, too: ‘Higher interest rates and growing consumer debt also contribute to the trend towards small cars, which are bucking the trend of a general downturn in car sales over the last three years’ (Motortorque, 2008, para. 2). Two models can be applied to analyzing the industry, namely those of vertical and horizontal competition. In terms of vertical competition, the bargaining power of suppliers is insignificant, since automobile parts are not unique and switching is relatively easy and unproblematic.
In terms of horizontal competition, new market entries are improbable from the side of market outsiders and very likely on behalf of market leaders. Well established automotive companies have a number of advantages in the process of introducing small cars, such as brand loyalty, brand awareness, and cost advantage. Brand loyalty implies that customers with a strong preference for a particular brand will likely to buy small cars from the same brand. Strong brand identity implies that the costs of introducing new product will be considerably lower as compared with an introduction of an entirely new brand.
Cost advantage implies that well established companies are far ahead of their competitors in terms of resources, expertise, facilities, distribution channels and supplier contacts (Altwein et al. 2006). However, the threat of competition in small car industry remains substantial for the reason that this lucrative sector attracts many manufacturers. Among other factors contributing to intensifying competition is low differentiation of products: differentiators are limited to image and brand. Furthermore, heterogeneity of competitors and market oligopoly are among those factors, too.
However, one of the primary reasons for fierce competition is the exit barrier: once companies enter small car industry, they have to carry on, therefore competition will remain high in the foreseeable future (Altwein et al. 2006). Applying the PEST model of macro-level analysis, it is evident that political factors depend on the country of company’s origin. In terms of economic considerations, rising fuel prices, maintenance costs and taxes make it less and less profitable to drive a car, especially a large one. Some social factors that might affect small car industry in the future have to be taken into consideration.
For example, the inclusion of ‘green awareness’ (i. e. knowledge about how to monitor tire pressure on a regular basis, not to accelerate or brake abruptly, or not to carry unnecessary weigh in the back of a car) in the driving test has been a controversial subject. The government has introduced this measure with a clear intention to reduce emission and make the U. S. economy more sustainable. However, it is not clear what effects this policy will have on automotive industry. At one hand, this policy is likely to have a positive impact on automotive industry, since it will reduce drivers’ expenses on fuel.
Given that rising fuel prices are a major deterrent for citizens in terms of purchasing new cars, eco-driving might alleviate the perception of driving as a luxury. Thus, the demand for new cars will be stable; this, in turn, will keep automotive production rates stable. However, this also might motivate consumer to switch back to larger vehicles if fuel expenses decrease considerably. Furthermore, eco-driving is a safer driving behavior. Thus, ‘green awareness’ will eliminate another major fear associated with purchasing new cars, namely that of car accidents.
Additionally, ‘green awareness’ will promote an image of driving as a more environmentally friendly activity, attracting new customers from among die-hard environmentalists and motivating environmentally conscious citizens to switch to cars instead of other forms of transport. All these developments will ensure automotive market growth. However, eco-driving has one major disadvantage for automotive industry: driving gently slows down the process of wearing off car components, such as brakes and tires. Therefore, the demand for new cars and components is likely to decrease, and this might cause a slowdown in automotive sector.
Technologically, R&D has become the critical factor for success in automotive industry. While the profitability of driving is decreasing, technological innovations (e. g. lighter and more durable materials or greater fuel efficiency) show signs of hope. As concerns the threat of substitution, it is insignificant, yet still worth talking into account. Possible alternatives to small cars are motorbikes and public transport; however, a massive switch is unlikely unless a major economic crisis occurs (Altwein et al. 2006).
Speaking more specifically about major players in the small car industry, Japanese manufacturers have traditionally been the most successful producers of small cars. At the moments, ongoing changes to the small car market are observable. For example, Becker (2006) notes that ‘[a]t the moment the Koreans are gaining market share above all in the small car and minivan segments in Europe and the USA, because of their good price-performance ratio’ (p. 117). U. S. manufacturers have to improve the quality of small cars they are offering.
Many American car manufacturers have suffered continuously from the lack of competitive small cars (Maynard, 2004). As concerns the problems Ford is facing at the moment, many analysts believe that the future of the company is uncertain (Wallace, 2006, para. 2): ‘A trail of giant missteps — starting in late 1997 with the corporate consolidation of Ford dealerships in many major metropolitan areas and continuing with questionable acquisitions (such as the British car-repair chain Kwik Fit, not to mention Jaguar, Volvo, and Land Rover) — has left the company struggling to find direction. ’
Increased sales, which translate into increased revenue, are of critical importance for Ford Motor Company now. Perhaps they will not affect pricing strategy immediately, since a lengthy process of recovery is needed before Ford will be able to raise prices. At present, Ford’s focus is on cost-cutting and subsequent decrease in prices. Yet increase in sales would affect Ford’s position on the market. By securing stable market representation, Ford would be free to embark on new initiatives and developments. In order to move closer to a strategic turnaround, the company has to adopt a flexible approach to tackling its problems.
First of all, Ford Motor Company should go on with its cost-cutting program. Beyond the reasonable doubt, Ford needs to be more reactive to strategic market changes. The hopes for turnaround are high, and Ford has already initiated a series of reforms to make this turnaround happen. Ford should supply new, highly competitive models to the market in order to compensate for the losses and regain public and investors’ trust. However, Ford has high chances of success in the small car market. The fact that Ford Fiesta ranks among Top 10 best small cars should be perceived as an achievement.
Other cars on the list are Renault Clio, Fiat 500, Peugeot 207, Volkswagen Polo, Nissan Micra, Toyota Yaris, Vauxhall Corsa, MINI and Daihatsu Sirion (Motortorque, 2008). Another ranking (also featuring Ford Fiesta) also mentions Honda Jazz, Citroen C3, Seat Ibiza and Skoda Fabia among the best small cars and omits Nissan Micra, Fiat 500, MINI and Daihatsu Sirion (MSN Cars, 2008). With regard to prices for Ford Fiesta and Ford Focus, it is necessary to keep in mind that small car market is an oligopoly, therefore Bertrand-Nash equilibrium applies.
If the market were homogenous, prices for all products in the market would reach Pareto equilibrium at marginal cost. However, the market for cars is heterogeneous, and this feature gives manufacturers a possibility to charge prices higher than the marginal cost. In the situation of oligopoly, the best pricing strategy is collusion. While this strategy is close to illegal, many companies engage in tacit collusion (MacLeod, Norman & Thisse, 1987). Game theory suggests that cooperative strategies generally lead to better outcomes than non-cooperative strategies.
Collusion gives companies enjoying the status of oligopolies to split up the monopoly economic profits, which are greater than those of oligopoly. Therefore, Ford might consider following this pricing strategy to maximize profits. So far, Ford has been successful in charging higher prices partly because of its positive public image. If Ford’s competitors adopted Ford’s strategy of relocating to low-cost locations in the developing world, the best solution would be to compete with them on goodwill and commitment to corporate social responsibility principles.
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