Porters Five Forces analysis of Ford Motor Company

Traditionally ‘maximizing’ profits has been considered to be the objective of any company. Not any more….This criteria has now been discarded. Now companies are supposed to have multiple objectives, monetary as well as non-monetary. There are short-term objectives as well as long-term ones. Strategists are supposed to prioritize all such objectives, keep an eye on the competitors and government policies, so that there is clarity and ease of decision making in situations where there is an apparent clash of objectives.

While planning for long term objectives, the company is supposed to remain competitive.

It was in 1974 that Michael Porter, who had been working on a new sub-field of economics known as Industrial Organization (IO), prepared a ‘‘Note on the structural analysis of industries’’ which is considered to be the idea behind the five forces model of Porter in subsequent years (Karagiannopoulos et al, 2005). In 1980, he published his first book, Competitive Strategy, which owed much of its success to the ‘‘five forces’’ framework, that this paper focuses on (Porter, 1980).

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This framework has since been regarded as a strategic tool to figure out the relative strengths of a company, and decide about the possible strategic policies that a company can adopt to make way for a long term survival.

The company can acquire competitive advantage on its rivals on account of marketing efforts, brand building, value creation, innovation, operational efficiencies etc. But more important is to sustain the advantage, for which the company will have to take care and devise adequate policies for its customers, suppliers, competitors and other stake holders.

The five forces, defined by Porter include;

1. Bargaining Power of Suppliers i.e. to what extent suppliers can have an influence on the policy making of the company. Suppliers play an important part in making quality propositions for the company. The process of value creation encompasses managing quality in the entire chain of processes leading to the production of final product or service.
2. Bargaining Power of Customers i.e. to what extent the customers can affect the policy making and fortunes of the company. Customers are indeed the key ingredients for a company, but the company’s profitability depends upon to what extent customers are willing to pay for the product.

• Threat of New Entrants often limits the diversification policies of a company. Depending upon such a threat the company decides whether to go it all alone or take the route of merger and acquisition. Such a threat of new entrants often results in a sense of urgency for the company.

1. Threat of Substitute products often leads to steps like enlargement of portfolio, enhancement of quality, reduction in prices etc.
2. Competitive Rivalry between Existing Players makes an interesting copy for newspapers and mainline media, as they thrive on the competitive rivalry and the steps and counter-steps being adopted by the competing companies. The level of competition greatly affects the earning potential of the company.

In case of Ford Motors Company the Five Competitive Forces can be typically described as follows:

1. Bargaining Power of Suppliers: 'Suppliers' comprises all sources for inputs that are needed in order to provide goods or services. Ford is one of the Big Three manufacturing companies in the US with its range of automobiles selling in over 200 markets across six continents. Since the company has manufacturing facilities at more than one place, so the suppliers profile too varies from one place to another. The suppliers too can be categorized in different categories like;
   1. Metal/ Body part suppliers: Such suppliers are often not found to be too much of a threat for the company, as there is good amount of rivalry amongst such companies as well.
   2. IT/ITES suppliers: The modern cars require a range of technologically advanced features which determine the quality and other distinctive features of the car. Therefore, such companies are in need of regular research and development mode depending upon the requirements of the car manufacturer. For example Sony Corp.’s is one of the suppliers for Ford offering Sony-branded audio systems in Ford and Mercury vehicles.
   3. Engine and auto part suppliers: Such companies too hold a good amount of leverage over the car manufacturer. For example, Ford has signed an agreement with Neapco, an affiliate of China’s auto parts supplier Wanxiang Group, to sell its Automotive Components Holding unit’s propshaft operations.

In a market where speed to market is extremely vital for beating the competition, Ford’s dependency for such key components on its associate companies with whom it has long term agreements will of course help in warding off any appreciable threat from the supplier side. Ford has been able to maintain good working relations with its suppliers is evident from the statement of Alan R. Mulally, President and Chief Executive Officer of Ford during the company’s 2006 annual report when he sought to highlight the outstanding supplier, dealer and union partners (Datamonitor, 2007).

1. Bargaining Power of Customers: Customers of course have plenty of options in the market place. And the customer will weigh all his options before going in for the purchase. Therefore Ford needs to be innovative and rely more on product differentiation. Though Ford has been catering to different customer segments in different measure, but of late the customer seems to have becoming very demanding and asking to have quality product at cheapest possible prices. In fact that includes the desire of having the best mileage providing car. Other car manufactures like GM, Toyota, Rolls Royce threaten to take away its monopoly over the luxury cars with their own version of sleek cars.

• Threat of New Entrants: Though it is not easy for new entrant to enter the Car and automobile industry as it is a capital intensive business as the economies of scale (minimum size requirements for profitable operations) leaves little room for a new start up company challenging the existing market share, yet the threat emanates from the existing competitors. For example the recent acquisition of Jaguar and Land Rover by an Indian car company presents some idea of the future threat emanating from the developing world. Till now, companies from West and the developed world used to dictate the policies and used to acquire companies from the developing part of the world, but the emergence of India and China on the horizon as strong contenders appears to have tilted the balance somewhat in their favor. Tata, an Indian car manufacturing company, is in the final stages of sealing the deal with Ford.

1. Threat of Substitutes: A car’s substitute exists in the form of another car. For example a SUV can be a substitute for an MUV, a mid size car can be a substitute for a small size car etc. Therefore, the threat from substitutes exists if there are alternative products with lower prices and with better performance parameters for the same purpose. Ford faces aggressive competition in all areas of its business. The market design, manufacture, and sale of Cars and related peripheral products has become highly competitive. Moreover this market continues to be characterized by rapid technological advances in both hardware and software development, which results increasing the capabilities of existing products and software. This is resulting is the frequent introduction of new models with much reduced prices and better feature, and performance. Ford needs to keep its R&D activities in motion all the time.

1. Competitive Rivalry between Existing Players: The car industry is indeed one of the most competitive industries in modern times. With the purchasing power of the consumer on the rise thanks to the globalization and liberalization era, which has tremendously boosted the earning potential of the professionals, particularly in the field so of IT and ITES. Car manufactures have been targeting this very segment with all the resources at its command. The profile of existing players keeps varying with the kind of market that is looked at. For example in US and most of the western part big manufactures alike GM, Rolls Royce, Toyota are the brands that Ford will have to contend with, while in Asia pacific region the local players have a key role.

References:

1. Karagiannopoulos, G.D.; Georgopoulos N. and Nikolopoulos K. (2005). ‘Fathoming Porter’s five forces model in the internet era’. VOL. 7 NO. 6 2005, pp. 66-76, Emerald Group Publishing Limited, ISSN 1463-6697.
2. Porter, M.E. (1980), Competitive Strategy, Free Press, New York, NY.
3. Datamonitor (2007). Ford Motor Company-Company Profile. Datamonitor Americas, NY