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Ford Motors:
An Industry and Company Analysis

Todd Bailey
William Duncan
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Table of Contents:
External Analysis:
Industry
Overview
.3
General
Environment
...4
The Industry
Environment...5-6
Competitive Forces &
Advantages6
Porters Five Forces......
7-9

Internal Analysis:
Financial
Analysis...
9-11
Core
Competencies
.....11
Fords
Strategies..
.11-13
Automobile Industry
Problems...13
Fords Strategies (Looking Forward)
.....14
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SWOT
Analysis...
14-16
Appendix
...17-18
Bibliography
.......19-20

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
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2011 to 2.472%. World unit production of vehicles reached a peak of

close to 80 million units in 2011 (Grant, 491).

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).
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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

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
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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. 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).
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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 servicesThe Japanese
model of close collaborative, long-term relationships with their first-tier
suppliers has displaced the US model of contract-based, arms length
relationships (Grant, 494-495). Some component companies began to
grow to as large as the automobile companies they sold their parts to,
with ROEs in 2010-2011 reaching over 5% across the board and
peaking at 37% (Grant, 496).
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Porters 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 where
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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 isnt 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 companys 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

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others, intensifying rivalry. Lastly, because the barriers 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 Fords future strategy, and he was worried

about its ability to sustain profitability. The automobile industry before

the financial crisis was dismal; the worlds 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

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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, Fords own restructuring (Grant, 488). In

Fords 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 companys 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). Fords 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 Fords profitability, liquidity,

and leverage ratios by comparing them to the automobile and parts

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sector, Fords industry. The following information and ratios can be

seen in Appendix One with tables comparing Ford to the automobile

and parts sector, the industrys average. Ending in 2011, Fords ROA

was 2% higher than the industrys average. Also, Fords net profit

margin was 5% higher than the industrys average, due to its amazing

turnaround in 2011. Ford also saw a higher inventory turnover than the

industrys average; however, Ford was under the industrys 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 Fords 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.

Fords Core Competencies

Fords core competencies help them gain a competitive

advantage over rival competitors such as GM and other leading

automobile manufacturers. Fords 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

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Ford is its strong One Ford plan that helped it return from dismal

performances from the 2007-2008 financial crisis. Finally, Fords 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.

Fords 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 1980s-90s, all major car

manufactures redesigned their manufacturing process to incorporate

Toyotas 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 Fords global activities, and accelerating product

development with an emphasis on small, fuel-efficient cars (Grant,

488). In Fords 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

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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). Fords 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.

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

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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.

Fords Strategy (Looking Forward)

Fords 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

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demands. Another strategy Ford could undertake is to join with Apple

to improve its cars 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:
Fords 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 Fords

sustainability within the market. Fords 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.

Weaknesses:
Weaknesses of Fords 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 shareholders value.

Opportunities:
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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 Fords 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 consumers 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,

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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
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