Ford Motors:An Industry and Company Analysis

Todd BaileyWilliam Duncan

1

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

External Analysis

2

Industry OverviewThe 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).

The General EnvironmentSocio-cultural:

3

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).

The Industry Environment

4

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

plants continued to be built despite slowing domestic demand” (Grant, 498). U.S.

5

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 & AdvantagesWe 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).

Porter’s Five Forces

6

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

where they can travel with public transportation, so it cannot be a full-time

substitute.

Bargaining Power of Suppliers:

7

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

to exit are strong, companies face intense rivalry hoping they are able to compete

and sustain profitability.

8

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

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

9

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-

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

10

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

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

11

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).

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.

12

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.

Ford’s Strategy (Looking Forward)

13

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

financial stability and proved that the automobile industry is not plummeting,

regardless of the recent crisis and poor performances.

14

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:

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

15

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.

Appendix One

16

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 0.56Dec 31, 2006 0.49 0.49Dec 31, 2007 0.54 0.54Dec 31, 2008 0.58 0.58Dec 31, 2009 0.54 0.54Dec 31, 2010 0.72 0.84Dec 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%

17

Ford Motor Co., current ratio, long-term trends, comparison to Automobiles & Parts sector

Ford Motor Co. Automobiles & Parts

Dec 31, 2005 0.90 0.90Dec 31, 2006 1.02 1.02Dec 31, 2007 1.08 1.08Dec 31, 2008 0.69 0.69Dec 31, 2009 1.10 1.10Dec 31, 2010 1.00 1.07Dec 31, 2011 1.16 1.20

Ford Motor Co., Inventory Turnover

Dec 31, 2011 Dec 31, 2010Selected Financial Data (USD $ in millions)Automotive cost of sales 113,345 104,451Inventories 5,901 5,917RatioInventory turnover 19.21 17.65BenchmarksInventory Turnover, CompetitorsGeneral Motors Co. 9.10 9.80Inventory Turnover, SectorAutomobiles & Parts 12.05 –Inventory Turnover, IndustryConsumer Goods 7.22 –Source: Based on data from Ford Motor Co. Annual Reports

18

Works Consulted

Bowman, Zach. "UAW Finally Ratifies New Ford Contract, More Details

Revealed." Autoblog.com. N.p., 19 Oct. 2011. Web.

<http://www.autoblog.com/2011/10/19/uaw-finally-ratifies-new-ford-

contract-more-details-revealed/>.

Campbell, Steve. "SEMA." 2012 Annual Market Report Preview. SEMA, June 2012.

Web. 02 Feb. 2016. <https://www.sema.org/sema-news/2012/06/2012-

sema-annual-market-report-preview>.

"Ford Motor Co. (F)." Stock Analysis on Net. N.p., n.d. Web. 1 Feb. 2016.

<https://www.stock-analysis-on.net/NYSE/Company/Ford-Motor-Co/Profil

e>.

Ferguson, Edward. "Ford Motor Company: Five Forces Analysis (Porter's Model) -

Panmore Institute." Panmore Institute. N.p., 15 Oct. 2015. Web. 02 Feb. 2016.

<http://panmore.com/ford-motor-company-five-forces-analysis-porters-

model>.

Grant, Robert M. "Case 5." Contemporary Strategy Analysis: Text and Cases. Hoboken,

NJ: Wiley, 2012. 445-61. Print.

Isidore, Chris. "GM Posts Record Earnings for 2011." CNNMoney. Cable News

Network, 16 Feb. 2012. Web. 02 Feb. 2016.

<http://money.cnn.com/2012/02/16/news/companies/gm_earnings/index.

htm?iid=EL>.

19

Isidore, Chris. "Obama: Auto Bailouts Worked." CNNMoney. Cable News Network, 28

Feb. 2012. Web. 02 Feb. 2016.

<http://money.cnn.com/2012/02/28/news/economy/obama_auto_bailout>

"NADA Automotive Market Report: 2012 Market Analysis and 2013 Used Price

Forecast." NADA (2012): n. pag. NADA. Web.

<http://www.nada.com/b2b/Portals/0/assets/pdf/NADA_White

%20Paper_MarketReport%203.2013.pdf>.

Profitable Growth for All. Rep. Ford Motor Company, n.d. Web. 1 Feb. 2016.

<http://corporate.ford.com/content/dam/corporate/en/investors/reports-

and-filings/Annual%20Reports/2011-annual-report.pdf>.

"Profitable Growth For All." Ford Motor Company/2011 Annual Report (2012): n.

pag. Ford Motor Company, 2012. Web.

<http://corporate.ford.com/content/dam/corporate/en/investors/reports-

and-filings/Annual%20Reports/2011-annual-report.pdf>.

Tuttle, Brad. "Why Brand Loyalty Is Fading Among Car Buyers | TIME.com." Business

Money Why Brand Loyalty Is Fading Among Car Buyers Comments. N.p., 30 Oct.

2012. Web. 02 Feb. 2016. <http://business.time.com/2012/10/30/why-

brand-loyalty-is-fading-among-car-buyers/>.

20