Docstoc

Ford

Document Sample
Ford Powered By Docstoc
					Is The Way Forward Really Ford’s Way Forward?


                  Sameer Kirtane
                   Rachit Shukla
                    Louis Wang
                   Jimmy Zhan
                                         Overview

•   Ford’s current status
•   Industry Analysis
•   Recent History
•   What is the Way Forward?
    – Operations, Infrastructure and Human Resources
    – Marketing and Sales
    – Technology Development
• Recommendations
                                       Current Status
• Leadership change
• Market share ↓ since 2000 from 23.7% to
  15.5% in N.A.
• Reported loss of $1.2B qtr ending Sept. 2006
• On its way to losing $8-9B in 2006 alone
• Third restructuring effort: Way Forward

                                                 Alan Mulally
                                                 Source: http://media.ford.com
                                         Recent History

• Ambiguous business-level strategy in last decade
   – Neither successful differentiator nor cost-leader
• Lacked innovation in compact and mid-sized cars
• Focus on SUV division and luxury portfolio
• Rising gas prices
   – Consumers fled SUV and luxury portfolio → Strategic Failure
• Costs grew disproportionately to rivals
   – Estimate: Costs Ford $2500/vehicle more to produce than
     Foreign rivals
                             Industry Analysis
                             • N.A. Automotive Industry:
                               Difficult to be in
                                – Positives
                                    • Captive but essential suppliers
                                    • High capital costs of potential
                                      entrants
                                    • Lack of feasible substitutes
                                – Negatives
                                    • Low switching cost of buyers
                                      between firms
                                    • Fierce internal rivalry due to
                                      manufacturers competing
                                      with extensive product lines
Porter’s Five Forces Model
      What is the Way Forward?

                        Operations
                      Infrastructure
                       Human Res.




                      Way Forward



                                        Technology
Marketing and Sales
                                       Development




                 Areas of Improvement
Operations, Infrastructure, and HR
                     •   Reducing idle or non-profitable
                         plants
                          – Closure of 9 Plants and 7
                            Assembly Plants by 2012
                     •   ~35% reduction in manufacturing
                         jobs
                          – Reduce hourly headcount by 25-
                            30K and salaried headcount by
                            14K by 2008
                     •   Target $5B reduction in costs by
                         2008 → Savings of approx.
                         $1552/vehicle in N.A.
                     •   However GM’s fixed cost per
                         vehicle is $2354 lower than Ford’s
                          – Further reductions in fixed costs
     Cost Analysis          needed to reach parity
                                                Marketing and Sales
•   Currently lack of differentiation between Ford, Lincoln and Mercury results in
    cannibalization of each other’s sales
•   Refocus on consumer through repositioning of brands
     –   Purchases driven by “perceived” value derived from brand reputation and reflection of
         personality and lifestyle
     –   Create an image around brand and give consumers unique reason to buy the brand vs. rivals
           •   Ford positioned to target active, hardworking individuals
           •   Lincoln aimed at Americans living the American dream
     –   Leverage strong following of F-150 and Mustang to impart the Ford spirit
                    Technology Development

• Introduction of innovative products and new
  development methods to sustain recovery
   – Fresh product lineup → 70% of vehicles (by volume) new or
     significantly upgraded
   – Hybrid and alternative energy technologies
      • Introduce hybrid options in existing product lines
      • Major investments in flexible-fuel, diesel and hydrogen powertrains
   – Redesign vehicles with new 6-speed transmission to improve mileage
• Leverage global infrastructure to pool design resources
   – Sharing “B” and “C” small car chassis used abroad
   – Leads to decreased costs and capturing efficiencies of scale
                                Recommendations
• Adopting a clear differentiation strategy and supporting
  value-chain activities should improve Ford’s N.A. position
• Achieve cost parity
   – Continue cost cutting beyond those already specified in the plan
   – Focus on reduction of manufacturing costs
   – Additionally cut $3.2B in cost to achieve parity with Foreign
     rivals and $2.7B to achieve parity with GM
   – To compete globally with GM → $11B in overhead needs to be
     reduced
• Invest in unique advertising to promote differentiation
  strategy
• Create uniquely designed vehicles with shared platforms
  and technologies
IS THE WAY FORWARD REALLY FORD’S WAY FORWARD?

  Sameer Kirtane, Rachit Shukla, Louis Wang, Jimmy Zhan
                   November 17th, 2006
Introduction

         Ford’s market share in the United States has fallen from 23.7% in year 2000 1 to 15.5% in
        2
2006 . Despite changes in Ford’s leadership, the company reported a loss of $1.2 billion over all
its global operations in its most recent quarter ending in September of 2006, setting the company
on its way to losing $8 to $9 billion this year alone 3 .
         Its dismal performance has prompted Ford to launch, in January 2006, its third
restructuring effort of the past five years 4 , the Way Forward. The Way Forward is a broad
initiative to address the competitiveness of its North American operations in the Ford, Lincoln,
and Mercury product lines. On the heels of a $2 billion loss from the North American division in
FY 2006 Q3, the Way Forward Plan has been modified and moved to an accelerated schedule.
The aim is to return the North America division to profitability by 2009. In this paper, we will
be discussing the efficacy of the accelerated restructuring effort in improving Ford’s competitive
position vis-à-vis business level strategies. The aspects of the Way Forward we will be focusing
on are the substantial reduction of manufacturing costs, the emphasis on the customer, and the
introduction of innovative products and development methods a .

Industry

       However, to understand Ford’s position today requires understanding the North
American automotive industry, defined as manufacturers of cars sold in North America. Porter’s
Five Forces (Appendix B) shows that the industry has captive but essential suppliers, high capital
costs for potential entrants, and a lack of feasible substitutes for the American commute.
However, these positives are greatly outweighed by the low switching cost of buyers between
firms in the industry and fierce internal rivalry, with many manufacturers competing with
extensive product lines. As a whole, it is a difficult industry to be in.

Ford’s Recent History

        This intense internal rivalry suggests that to earn profits, a company must be uniquely
better than its rivals, and the way to achieve this is through coherent business-level strategies. A
clear business-level strategy will help a firm maximize margins and capture market share, both
key given the stagnant market size of the industry. In the last decade, Ford’s business strategy
has become unclear, neither being a successful differentiator nor a cost leader. The company
stopped innovating on many of its products, especially its compact and mid-sized vehicles, and
instead focused attention on its truck and SUV divisions 5 and the expansion of its luxury
portfolio (Premier Auto Group) via purchases of high-end brands like Land Rover and Volvo4.
While one may argue that the luxury or truck strategy constitutes focus, this is an incorrect
assessment given the large percentage of sales that are obtained through its other core automotive
operations b . In fact, with rising gas prices, Ford’s luxury and truck strategy has all but failed as
consumers have fled its high gas consumption vehicles despite substantial price discounts 6 and
have switched to its competitors, especially the Japanese automakers. Over this same time
period, Ford’s costs continued to grow disproportionately to rivals. Currently, it is estimated that
foreign automakers may be able to produce cars at a cost of $2500 less per vehicle than Ford due

a
    The entire accelerated Way Forward plan can be found in Appendix A
b
    See Appendix E: 62% of sales by volume in the US come from trucks, 38% from traditional sedans, etc.
to lower overhead costs from wages, pensions, and benefits5. Thus, the question arises: Will the
accelerated Way Forward be a successful business level strategy?

The Way Forward: A Real Business-Level Strategy

        We believe that the Way Forward will improve Ford’s competitiveness within the
industry by establishing a successful differentiation strategy. However, the full benefit of this
strategy cannot be realized without achieving cost parity relative to its peers. We believe Ford’s
cost reductions will fall short on this parity front, hindering its overall turnaround effort.
Analysis of the Way Forward’s effect on Porter’s value chain strongly suggests this conclusion.

Operations, Infrastructure, and Human Resources c

        To become more cost efficient, the accelerated Way Forward plan calls for 16 plant
closures, of which 7 are assembly plants, by the year 2012 (infrastructure and operations
reduction). Additionally, the company is offering generous buyout packages to all United Auto
Worker members to reduce hourly headcount by 25,000 to 30,000 and salaried headcount by
14,000 by 2008 totaling a ~35% reduction in manufacturing jobs (HR and operations). Ford’s
near term target is a $5 billion dollar reduction of North American operating costs by 2008 7 .
Understandably, these attempts at cost reduction are rather severe and seem to fit the model of
cost leadership, but the numbers are deceiving because Ford’s cost structure is severely bloated.
For example, Appendix C shows that under last year’s sales figures, a $5 billion dollar reduction
in costs would result in savings of approximately $1522 per car produced in North America.
These cost savings, however, do not go far enough to achieve even cost parity with its traditional
competitor, GM. On a global basis, GM’s fixed cost per vehicle is $2354 less than Ford’s 8 even
though GM produced 34% more cars than Ford did in 2005 worldwide. Thus, further reductions
in fixed costs by Ford seem necessary to just achieve industry parity.

Marketing and Sales

        The second part of Ford’s plan is to refocus on the consumer through repositioning of its
brands and product mix to be more consistent with customer preferences. Currently, Ford lacks
product differentiation between the three brands sold by the North American division – Ford,
Lincoln, and Mercury. As a result, the divisions are cannibalizing each other’s sales. As a
Merrill Lynch analyst remarked: “[Mercury and Lincoln] are mostly dressed-up versions of
mass-market Fords.”5 The Way Forward attempts to address these issues by carefully focusing
the company’s brands on target segments (see Appendix D). For example, the Ford brand will
be positioned to target active, hardworking individuals while the Lincoln segment will be aimed
at Americans living the American dream. The difference between this new segmentation versus
the original low-end (Ford), mid-end (Mercury), and high-end (Lincoln) segmentation is that
Ford has now created a personality for their brands. By creating an image around the brand, they
will give customers within each segment a unique reason to buy the brand versus rivals, allowing
Ford to increase its margins and create perceived switching costs. This differentiation strategy is
essential in the crowded automotive industry, where every company essentially sells cars with


c
    Please note for clarity’s sake, parts of Porter’s value chain have been grouped together
the same utility value within model type d . Customers instead purchase automobiles based on
“perceived” value, often a function of brand reputation and how well that brand and model
reflect their personalities and lifestyles. In addition to differentiating its three North American
brands, the Way Forward stipulates that Ford should emphasize development and production of
several car models that presently enjoy strong reputations, including the Ford F-150 and the Ford
Mustang. These two models are a position of strength for the company, with high brand loyalty
among buyers. They are often used as a symbol of the Ford name and its personality, and thus
their continued success will enhance the company image as a whole, again supporting a strong
differentiation strategy.

Technology Development

         The final key piece of Ford’s restructuring plan is the introduction of innovative products
and new development methods. As Rich Wagoner (General Motors CEO) has said in Time
Magazine, “No automotive turnaround has been successful without a steady flow of strong
products.” 9 Thus, the company will need a fresh product lineup to sustain its recovery. The Way
Forward takes advantage of Ford’s large R&D budget relative to its competitors8 by introducing
new models, for example the new 7-passenger full size crossover vehicle. 10 Furthermore, Ford’s
Way Forward emphasizes the company’s hybrid and alternative energy technologies and focuses
on the growing popularity of hybrid vehicles. Way Forward’s concentration in this category
should help the company close the technological gap between Ford and its Japanese rivals while
leaving the other American automakers behind. Additionally, the company plans to redesign
many of its existing vehicles by incorporating new technologies such as a 6-speed transmission.10
In all, by 2008, 70% of vehicles by volume should be new or significantly upgraded according to
Ford’s Way Forward plan. Finally, the company hopes to leverage its global infrastructure to
reduce product design times by pooling design resources and technological innovations while
reducing costs by sharing car parts and car ideas.5 For example, they plan on introducing their
“B” and “C” small car chassis used abroad.10 This is an example of leveraging their overseas
technical expertise in certain car categories leading to better, more differentiated products while
sharing components to decrease costs and to capture efficiencies of scale.

Conclusion

        The Way Forward will, if executed properly, significantly improve Ford’s North
American position in the industry by adopting a clear differentiation strategy and value-chain
activities that support it. However, to achieve success in the marketplace with such a strategy,
Ford must also achieve cost parity. Thus, we recommend that Ford, in order to achieve cost
parity, further continue its cost cutting beyond those already specified by the Way Forward,
something the new management hints may happen in the near future. As shown in Appendix F,
we estimate that Ford must cut, in North American operations, approximately $3.2 billion in
fixed costs to achieve parity with foreign automakers and $2.7 billion to achieve parity with GM.
Globally, to achieve cost parity with GM requires Ford to make an additional $11 billion in cuts
in worldwide overhead. In addition, Ford should take care only to reduce manufacturing costs,
not costs associated with differentiating the brand (R&D, Marketing, etc). By reducing non-

d
 I.e. every brand’s sedan will accomplish moving the owner from point A to point B comfortably and every light
pickup truck will haul the same load weight.
manufacturing costs, Ford risks cutting exactly those resources that are needed in successfully
executing its new strategy. Moreover, Ford should invest immediately in unique advertising
campaigns in order to ensure the aspects of differentiation are realized by the consumer,
especially upon introduction of its new vehicles. Finally, for Ford to successfully reposition its
brands, Ford must make sure to uniquely design each of its vehicle’s external bodies to maintain
differentiation while still sharing internal components to maximize synergies. Together with
these recommendations and successful execution, Ford should be able to return to a competitive
position in the marketplace and stabilize if not improve its market share and financial position.
                                  References and Sources
1
  Ford Motor Company, Sustainability Report 2004/05,
http://www.ford.com/en/company/about/sustainability/report/proData.htm;
2
  Ford Q3 2006 Earnings Call Transcript, 10/23/06, SeekingAlpha,
http://seekingalpha.com/article/19023
3
  Ford: $6B auto loss looms, The Detroit News, 9/14/06,
http://www.detnews.com/apps/pbcs.dll/article?AID=/20060914/AUTO01/609140365
4
  BusinessWeek, David Kiley & David Welch, Oct 2, 2006, “Does Ford Deserve All the Street’s
Heat?” Iss. 4003, pg. 36
5
  Time, Daren Fonda, Sept 18th, 2006, “Ford: Just Fix the Car”, Vol. 168, Iss. 12; pg. 46
6
  Newsweek, Keith Naughton, Sept 11, 2006, “Q & A ‘We Understand We’re in Trouble’; Bill
Ford Jr. CEO, Ford”
7
  Numbers from Ford Corporate Press Release and Conference Call, Sept 2006 and JP Morgan
Analyst Research “Ford Motor Company –A Look at the Accelerated Way Forward Plan,”
September 18, 2006.
8
  Deutsche Bank “Can Ford be fixed? First impressions of Alan Mulally” October 24th, 2006
9
  Forbes Global, “Bill Ford’s Next Act,” June 23rd, 2003
10
   Ford Press Release, “Ford Accelerates Way Ford,” Sept 15, 2006
                              Appendix A: The Accelerated Way Forward Plan

Taken from Sept. 15, 2006 Ford Press Release Titled “Ford Accelerates ‘Way Forward’,
Accessible at http://media.ford.com/article_display.cfm?article_id=24261

A summary of the North America Way Forward actions to be implemented by the end of 2008 and resulting financial impact follows.

Product-Led Turnaround


    •    70 percent of Ford, Lincoln and Mercury products by volume will be new or significantly upgraded from today through the
         end of 2008. The new lineup builds on Ford’s strength as America’s truck leader while expanding in growth segments,
         such as crossovers.
    •    Ford will introduce an all-new full-size crossover based on the Ford Fairlane concept. The seven-passenger vehicle for
         modern families goes on sale in 2008 and will be produced at Ford’s Oakville ( Ontario, Canada) Assembly Plant.
    •    Ford will continue to lead the American truck market with a new Super Duty pickup confirmed to go on sale in early 2007
         and an all-new F-150 pickup confirmed to go on sale in 2008. The vehicles boast powertrain, design and feature
         upgrades.
    •    Ford will continue to lead America’s sports car market with new Mustang derivatives each year.
    •    The new Lincoln MKS flagship sedan will go on sale in 2008 – packed with more technology and features than any prior
         Lincoln, including all-wheel drive. Current plans are to produce the vehicle at the company’s Chicago Assembly Plant.
    •    Lincoln will continue offering the Lincoln Town Car to meet ongoing demand. After assembly ends at Ford’s Wixom (
         Mich.) Assembly Plant in 2007, Ford intends to move Town Car production to Ford’s St. Thomas ( Ontario, Canada)
         Assembly Plant. St. Thomas will be reduced to one shift of production, as previously was announced.
    •    Product development work is intensifying through 2008 on creating new small cars and even more crossovers that will go
         on sale in the future. These vehicles will be based on the company’s global vehicle architectures, including “B” and “C”
         platforms not presently used in North America.
    •    Major investments continue in new gasoline, flexible-fuel, diesel, hydrogen and hybrid powertrains, including additional E-
         85 ethanol-powered and hybrid vehicles on the road by the end of 2008. In addition, two out of every three Ford, Lincoln
         and Mercury vehicles will be offered with fuel-saving 6-speed transmission technology by the end of 2008.
    •    The new products and a voluntary consolidation of the Ford and Lincoln Mercury dealer network are designed to
         significantly improve the dealers’ through-put and profitability by the end of 2008.

Accelerated Cost Savings, Leaner Structure, Improved Efficiency


    •    Compared with 2005, annual operating costs will be reduced by about $5 billion by the end of 2008.
    •    Salaried-related costs will be reduced through the elimination of the equivalent of about 14,000 salaried-related positions,
         which represents approximately a third of Ford’s North American salaried work force. The reduction includes the
         equivalent of 4,000 positions eliminated in the first quarter of 2006. The additional reductions will be achieved through
         early retirements, voluntary separations and, if necessary, involuntary separations – with most employees expected to
         depart by the end of the first quarter in 2007.
    •    An agreement with the UAW will expand early retirement offers and separation packages to all Ford U.S. hourly
         employees, including Ford employees at the company’s ACH plants. Employees will begin receiving details by mid-
         October, and those accepting offers will leave the company by September 2007.
    •    Ford will accelerate by four years its previously announced goal of reducing 25,000 to 30,000 North American
         manufacturing employees by the end of 2012. The reductions now will be completed by the end of 2008.
    •    The sale or closure of all ACH facilities by the end of 2008 will result in additional employee reductions.
    •    Ford continues to work with the UAW to improve the competitiveness of its U.S. manufacturing facilities. As a result, new
         competitive operating agreements have been ratified by UAW locals in 30 different U.S. Ford and ACH facilities – and
         nearly $600 million in annual savings is projected to be realized.

Capacity Further Aligned with Consumer Demand


    •    North America manufacturing capacity is being adjusted to 3.6 million units by the end of 2008, down 26 percent versus
         2005 – in line with consumer demand and as announced earlier.
    •    Nine facilities will be idled and cease production through 2008, including seven already announced. The two additional
         plants are the Maumee ( Ohio) Stamping Plant and the Essex ( Ontario, Canada) Engine Plant.
    •    Ford’s Norfolk ( Va.) Assembly Plant will be idled a year earlier than planned, and a shift reduction, in advance of idling
         the facilities, now is planned at Norfolk and Twin Cities ( Minn.) Assembly.
    •    Facilities affected by the end of 2008 include the following:
     •      Atlanta Assembly – to be idled in October 2006
     •      Batavia Transmission – to be idled in 2008
     •      Essex Engine – to cease operations in 2007
     •      Maumee Stamping – intended to be idled in 2008
     •      Norfolk Assembly – to be idled in 2007, a year earlier than previously planned, with a shift reduction planned in January
            2007
     •      St. Louis Assembly – already idled in March 2006
     •      Twin Cities Assembly – to be idled in 2008, with a shift reduction planned in 2007
     •      Windsor Casting – to be idled in 2007
     •      Wixom Assembly – to be idled in 2007
     •      Dearborn Truck Plant will add a third crew, beginning in 2007, for F-150 truck production.
     •      All ACH operations will be sold or closed by the end of 2008.
     •      Including Maumee Stamping and Essex Engine, Ford has announced plans to cease production at 16 North American
            manufacturing facilities by the end of 2012, including seven assembly plants.

Financial Impact

“Though North America’s return to profitability will take longer than planned, the actions we’re taking are the right ones, and are
fundamental and necessary steps to improving our business structure,” said Leclair, the company’s CFO. “The planned
improvements in our auto operations, in conjunction with Ford Credit – which remains a core asset – will leave us well-positioned for
the future.

“We are starting from a position of strong liquidity, including our cash, credit lines and VEBA,” Leclair added. “We will continue to
focus on enhancing our liquidity, building upon our decision to explore strategic alternatives for Aston Martin and the board’s intent
to eliminate our quarterly dividend.”

Automotive Operations


     •      Full-year pre-tax special items for 2006 are expected to be significantly increased from the $3.8 billion we estimated
            previously to reflect the accelerated Way Forward actions. Further details will be provided when Ford announces Third
            Quarter financial results next month.
     •      Full-year profitability in North American automotive operations not expected before 2009 .
     •      Ford and Lincoln Mercury U.S. market share is projected to be in the low-16 percent range at the end of 2006.
     •      A further share decline is expected as production of the Ford Taurus sedan and Mercury Monterey minivan ends in 2006
            and production of the Ford Freestar minivan ends in 2007. The end of these vehicles will reduce the company’s sales to
            daily rental fleets.
     •      With the investment in new products and improvements in quality, Ford expects to be in the 14 to 15 percent market share
            range going forward – with a focus on profitable retail share.
     •      South America and Ford of Europe still are expected to be solidly profitable in 2006. However, full-year operating losses
            now are expected in 2006 for Asia Pacific and Africa, as well as the Premier Automotive Group – primarily reflecting lower
            volumes.

Liquidity


     •      Ford Motor Company’s 2006 year-end liquidity is expected to include automotive gross cash of about $20 billion, including
            marketable and loaned securities and the effects of $3.4 billion of VEBA. The company will continue to have committed
            automotive credit facilities totaling more than $6 billion .
     •      Ford Motor Company’s Board indicates that it will suspend payment of the quarterly dividend on its common and Class B
            Stock beginning in the fourth quarter of 2006.
Appendix B: Porter’s Five Forces
                             Appendix C: Cost Analysis

                                             Ford            GM             Difference
Production (in thousands)
North America                                        3,286          4,828        -1,542
International                                        3,532          4,319          -787
Total                                                6,818          9,147        -2,329

Fixed Cost per Unit                               $8,411           $6,057        $2,354
Variable Cost per Unit                           $14,491          $11,895        $2,596

North America Effect
Expected Cost Savings (in millions)                 $5,000
US Car Production (in thousands)                     3,286

Cost Savings per Car in NA                          $1,522

Global Effect
Expected Cost Savings (in millions)                 $5,000
Total Car Production (in thousands)                  6,818

Cost Savings per Car in NA                           $733

Data Source: Deutsche Bank “Can Ford be fixed? First impressions of Alan Mulally”
October 24th, 2006
                            Appendix D: Brand Positioning




Source: Ford Motor Company, North America “Way Forward” Business Review, January 23,
2006
                   Appendix E: Percent Sales in US by Division and Type

               U.S. Sales By Brand Oct 2006       Car      Truck Total
               Ford                                 64433 118755 183188
               Mercury                                6232    4045  10277
               Lincoln                                5754    3012   8766

               Totals                                76419 125812       202231
               % (Category)                        0.37788 0.62212

Source: PR Newswire, Nov 1st, 2006, “Ford’s U.S. Sales Rise for the 2nd Straight Month”
                       Appendix F: Additional Cost Savings

Fixed Cost Parity With Foreign Automakers (NA Only)
Current Cost Difference Per Car                                       2500
Savings Per Car in NA Under $5 Bil Cost Cuts                          1522

Additional Cost Cuts Needed Per Car                                   978
Number of Cars Sold in NA (in thousands)                              3,286
Total Necessary Cost Savings (in Billions)                            3.21371

Fixed Cost Parity With GM (NA Only)
Current Cost Difference Per Car                                       2354
Savings Per Car in NA Under $5 Bil Cost Cuts                          1522

Additional Cost Cuts Needed Per Car                                   832
Number of Cars Sold in NA (in thousands)                              3,286
Total Necessary Cost Savings (in Billions)                            2.73395

Sources For Cost Difference/Car Previously Cited
Assumption: Costs Are Evenly Spread Out Per Unit Across Global Operations



Global Cost Parity with GM
Excess Fixed Costs For Ford (in Billions)                             16
Current Way Forward Reduction in Costs (in Billions)                  5

Possible Additional Cost Savings (in Billions)                        11

Value For Excess Fixed Costs For Ford Taken From Deutsche Bank, Previously Cited

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:62
posted:12/1/2011
language:English
pages:23