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Executive Briefing Report (Create a Title Here)
Summary/Introduction
Clearly explain your analysis using understandable terms for your selected firm; focus on
strategic elements (capabilities) of the firm and on how the strategic elements fit into the
strategic position of the company.
Internal Strengths and Weaknesses Analysis
Present your analysis so that it effectively addresses the problem; Write clearly; you may use
graphics, bullets and headings to deliver the analysis in an organized easily read format; you
may have several sub-headings to address the assessment’s scoring criteria:
•
Evaluate how the selected firm leverages its resources and capabilities to execute the
business strategy.
•
Evaluate the effectiveness of the organizational structure and management system
design.
•
Explain possible ethical dilemmas and governance issues.
Provide supporting evidence
Use at least four current, scholarly, or professional resources to support your analysis.
Conclusion
Succinctly summarize the key findings of your internal analysis for your selected firm.
1
Research Information
Review the following resources to further your understanding of a selected firm to use in your
coursework. Use additional resources from the Capella University Library, Internet, your text
case studies, or your own research, as needed, for completing the course assessments.
Ford
Ford is a complex multinational organization that has recently focused on strategic initiatives to
address production capacity, supply chain reliability, sustainability, and technological innovation
in order to remain competitive in the rapidly changing automotive industry.
•
Grant, R. M., and Jordan, J. (2012). Ford and the world automobile industry in 2012.
Hoboken,NJ: Wiley and Sons.
•
Currie, Antony., Larsen, Peter. (2011). Ambitious goals for ford. The New York Times.
Retrieved from: http://www.nytimes.com/2011/06/08/business/08views.html?_r=0
•
Daniels Fund Ethics Initiative. (n.d). Ford Motor Company Manages Ethics and
SocialResponsibility. Retrieved from: https://danielsethics.mgt.unm.edu/pdf/ford-motorcase.pdf
•
Henry, J. (2015). One Ford, Part Two; Tweaking The Master Plan. Retrieved from
Forbes. Retrieved from: http://www.forbes.com/sites/jimhenry/2015/08/30/one-ford-parttwo-tweaking-the-master-plan/#3d15b7147333
•
Miller, D. (2016, April 9). Dispelling 3 Ford Motor Company Shareholder Concerns. The
Motley Fool. Retrieved from:
http://www.fool.com/investing/general/2016/04/09/dispelling-3-ford-motorcompany-concerns.aspx
•
Currie, Antony., Larsen, Peter. (2011). Ambitious goals for ford. The New York Times.
Retrieved from: http://www.nytimes.com/2011/06/08/business/08views.html?_r=0
Procter and Gamble
This is a huge multinational firm with products you probably buy every day. This business is
interesting because the company is focusing on science and technology to help it revise many
of its business strategies and contribute to overall company goals for sustainability and
corporate social responsibility.
•
Brown, B., & Anthony, S. D. (2011). How P&G tripled its innovation success rate.
Harvard Business Review, 89(6), 64-72.
1
•
Dillon, K. (2011). I think of my failures as a gift. Harvard Business Review, 89(4), 86-89.
•
Lafley, A. G., Martin, R. L., Rivkin, J. W., & Siggelkow, N. (2012). Bringing science to the
art of strategy. Harvard Business Review, 90(9), 56-66.
•
Lafley, A. G., & Tichy, N. M. (2011). The art and science of finding the right CEO.
Harvard Business Review, 89(10), 66-74.
Virgin Group
A multinational conglomerate with more than two dozen Virgin-branded companies, Virgin
operates in at least 13 regions around the globe, in seven industries (Virgin, n.d.).
It becomes apparent that Virgin’s corporate strategies include diversification and globalization,
and some argue there are opportunities for Virgin to vertically integrate companies within certain
market segments-travel and lifestyle markets, for example. Yet, however Virgin’s corporate
strategies are labeled, the brand is the dominant resource that Richard Branson leverages to
acquire and develop new business that differentiates Virgin from the competition (Ankeny,
2012).
Branson’s philosophy toward management of Virgin companies includes keeping intact the
entrepreneurial spirit of firms acquired or merged. He defends his approach to keeping a
multitude of individual entrepreneurial companies with the Virgin brand as follows: “Often,
owning a number of individual stand-alone companies run by different people can be more
effective than having one giant company with lots of people working together” (Maxwell, 2014,
And what about making the difficult decisions concerning people heading, para. 2).
A strategic assessment of Virgin is an assessment of how well an individual Virgin company fits
the Virgin business model. Prahalad and Bettis (1986) might define the business model of Virgin
as the dominant logic that describes the rationale for Virgin’s diversification strategy.
Choose one of the following Virgin companies to conduct a comprehensive organizational
strategic assessment:
•
Virgin Atlantic.
•
Virgin Galactic.
•
Virgin Media.
•
Virgin Records.
References
Ankeny, J. (2012, June). The good sir Richard. Entrepreneur, 40(6), 30–38.
Maxwell, C. (2014). Sir Richard Branson. Retrieved from http://www.director.co.uk/sir-richardbranson/
Prahalad, C. K., & Bettis, A. (1986). The dominant logic: A new linkage between diversity and
performance. Strategic Management Journal, 7(6), 485–501.
Virgin.com. (n.d.). Retrieved from http://www.virgin.com/company
Additional Resources
2
•
Hunter, M. (2013). Typologies and sources of entrepreneurial opportunity (II).
Economics, Management &Financial Markets, 8(4), 69–141.
•
Altman, W. (2009). Branson: The global brand builder. Engineering & Technology, 4(2),
80–81.
•
Rubin, E. N. (2013). Assessing your leadership style to achieve organizational
objectives. Global Business & Organizational Excellence, 32(6), 55–66.
3
Ford and the world
automobile industry
in 2012
At the beginning of 2012, the Chief Financial Officer of Ford Motor Company, Lewis Booth,
was reviewing his financial forecasts for 2012-16. Ford’s turnaround since the crisis of
2007-8 had been remarkable. After a loss of $14.7 billion in 2008, Ford earned net profits
of $6.6 billion in 2010, and it looked as though Ford’s profit for 2011 would exceed this.
The recovery had been much more rapid than Booth had expected. Ford’s business plan of
December 2008 projected that it would not break even until 2011.1 Booth attributed the
speed of 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. The “One
Ford” transformation plan introduced in 2006 had closed plants, cut Ford’s workforce from
295 000 at the beginning of 2006 to 148 000 at the end of 2011, sold Jaguar, Land Rover
and Volvo and a large chunk of Mazda; integrated Ford’s global activities; and accelerated
product development including an increasing emphasis on smaller cars.
Despite these successes, Booth looked to the future with much trepidation. Ford’s
performance over the next five years would depend on three main factors: Ford’s ability
to continuing success with its One Ford strategy, the state of the world economy, and
developments in the global automobile industry. On the first of these, Booth had few
doubts. On the second, he realized that, for all the uncertainty, there was little that Ford
could do other than closely monitor the unfolding economic situation and be prepared
to adapt to unforeseeable events. On developments in the global automobile industry,
Booth was perplexed.
The collapse in industry profitability in 2007-9 and descent into bankruptcy of General
Motors and Chrysler was not simply a consequence of the financial crisis. It also reflected
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2
F O U N DAT I O N S O F S T R AT E G Y
the massive structural problems of the industry—most notably, too many firms with too
much capacity chasing too little demand. The catastrophic declines in industry revenues
and profits in 2008 promised a major industry restructuring. Daimler’s CEO had predicted
that 2009 would be a “Darwinian year” for the auto industry. Yet, the industry’s pre-crisis
structure survived almost intact. The Financial Times commented:
[I]nstead of natural selection, something else happened: governments around
the world, from Canada and Brazil to Russia and South Korea, stepped in with
prodigious amounts of cash to keep car plants open and assembly lines running.
All told, automakers have benefited from well in excess of $100 billion of direct
bail-out funds or indirect state aid . . . the biggest ever short-term intervention in
manufacturing . . . (T)he money has prevented a necessary shake-out in an industry
that has long had too many producers. Consultants at PwC estimate the industry
has the capacity to build 86 million units this year, almost a record—and 31 million
more than the 55 million vehicles that it will sell.2
Even before financial crisis hit, the financial performance of the industry was dire:
between 1990 and 2008 the world’s five biggest auto makers (GM, Toyota, Ford, DaimlerChrysler and Volkswagen) had earned on average a net margin of 1.1%; their return on
invested capital and together they had destroyed billions in shareholder value. However,
despite the lack of exit or consolidation by the leading auto makers, it was clear that
the structure of the industry was far from remaining static. The shifting of demand from
the mature industrial nations to the growing markets of Asia, Eastern Europe and Latin
America was accompanied by the emergence of new competitors from these same
regions. Meanwhile, new technologies and environmental concerns—including the
growing use of all-electric vehicles—wereredirecting the industry’s development path.
Understanding how these different forces would impact the overall profit potential of the
world automobile industry would be a key determinant of Ford’s financial performance
in the coming years.
Development of the world automobile industry3,4
The growth of demand and production
Vehicles powered by internal-combustion appeared in Europe during the 1880s—Gottlieb
Daimler and Karl Benz were among the first. By the end of the 19th century, hundreds of
small companies were producing automobiles both in Europe and in America.
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Figure 1 U.S. motor vehicle production, 1900–2008
14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
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F O R D A N D T H E W O R L D AU TO M O B I L E I N D U S T RY I N 2012
During the 20th century the industry followed different development paths in
different parts of the world. The U.S. auto industry grew rapidly during 1910–28 and
1946–65 before reaching market saturation (see Figure 1).The automobile industries of
Western Europe and Japan also experienced maturing of their markets with production
peaking in 1989–90. In all the advanced industrial countries the increased longevity of
cars dampened market demand (see Figure 2).
Despite declining output in the advanced industrialized countries, the world
automobile industry has continued to grow (see Figure 3). This growth has been the
2,000,000
0
Trucks and Buses
1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1967 1970 1975 1980 1985 1990 1995 2000 2005 2008
0
750 6,000 74,00 321,7 530,6 575,3 697,3 754,9 655,6 1,337 1,249 1,194 1,751 1,539 1,692 2,272 1,667 3,464 3,718 5,634 7,228 7,656 6,733
Passenger Vehicles 4,192 24,25 181,0 895,9 1,905 3,735 2,787 3,273 3,717 69,53 6,665 7,920 6,674 9,305 7,436 6,546 6,712 6,400 8,002 6,049 6,350 5,542 4,321 3,777
Passenger Vehicles
Trucks and Buses
Figure 2 Median age of passenger cars in the U.S.
Source: R. L. Polk & Co.
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Figure 3 World motor vehicle production, 1965–2008
60.0%
80
F O U N DAT I O N S O F S T R AT E G Y
70
Total (millions of units)
50.0%
60
40.0%
50
30.0%
40
30
20.0%
20
US and Canada as % of total
4
10.0%
10
0
19
6
19 5
7
19 0
7
19 5
8
19 0
8
19 5
8
19 6
8
19 7
8
19 8
8
19 9
9
19 0
9
19 1
9
19 2
9
19 3
9
19 4
95
19
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
0
20 2
03
20
0
20 4
05
20
0
20 6
0
20 7
08
0.0%
World Total
US & Canada as % of Total
result of growing output from the newly industrializing countries—notably Korea, China,
Brazil, and India. (see Table 1). As a result, the proportion of world output contributed by
the traditional production centers—the US, Western Europe, and Japan—fell from 77% in
1994 to 40% in 2010 (see Table 2).
Table 1 World motor vehicle production by countries and regions
(% of world total)1
1960
1989
1994
2000
2005
2008
2010
U.S.
52.0
23.8
24.5
22.2
20.0
18.6
12.9
Western Europe
38.0
31.7
31.2
29.9
28.4
20.7
14.6
Central and E. Europe
2.0
4.8
4.3
4.6
5.4
9.5
7.7
Japan
1.0
18.2
21.2
17.7
17.0
16.7
12.6
Korea
n.a.
1.8
4.6
5.0
5.3
5.5
5.6
China
n.a.
n.a.
2.7
3.5
5.7
13.3
24.0
12.8
49.5
50.0
57.4
66.8
69.4
76.1
World total (millions)
AU: We have
deleted
repetition of
Table 1.
Plz check.
Note:
1 Motor vehicles include automobiles, trucks and buses.
Source: A. K. Binder (ed.), Ward’s Automotive Yearbook, 2011, Wards Communications, Southfield MI, 2011.
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Table 2 Leading automobile-producing countries (thousands of cars;
excludes trucks)
5
1990
1995
2000
2005
2008
2010
China
n.a.
n.a.
356
620
3118
6341
9494
Japan
7891
9948
7664
8363
9017
9916
8307
Germany
4604
4805
4360
5132
5350
5532
5552
Brazil
789
663
1312
1348
2009
2561
2828
Korea
793
987
1893
1881
2195
2436
2793
U.S.
7099
6077
6338
5542
4321
3777
27311
India
n.a.
n.a.
394
541
999
1507
2317
Spain
1403
1679
1959
2445
2098
2014
1951
France
3052
3295
3051
2883
3113
2144
1914
Mexico
266
346
710
1130
846
1217
1386
Russia2
1329
1260
834
967
1288
1469
1208
U.K.
1143
1296
1532
1641
1596
1448
1274
Czech Rep.
n.a.
n.a.
193
428
599
933
1070
Canada
810
1072
1339
1551
1356
1195
967
Poland
301
256
260
533
527
840
799
1701
1874
1422
1442
726
659
573
Italy
F O R D A N D T H E W O R L D AU TO M O B I L E I N D U S T RY I N 2012
1987
Notes:
1 The production data for the US do not include the large volumes of pick-up trucks and SUVs produced by the
automobile companies but classed as trucks.
e
2 U.S.S.R. in 1987 and 1990.
f
Sources: Japan Automobile Manufacturers Association; Korean Automobile Manufacturers Association; A. K. Binder (Ed.),
Ward’s Automotive Yearbook, 2011, Wards Communications, Southfield MI, 2011.
The evolution of the automobile
The early years of the industry were characterized by considerable uncertainty
over the design and technology of the motorcar. The first “horseless carriages” were
precisely that—they followed design features of existing horse-drawn carriages and
buggies. Soon a bewildering variety of technologies were competing. The internalcombustion engine vied with the steam propulsion and electric motors. Transmission
systems, steering systems and brakes all displayed a remarkable range of technologies
and designs.
Over the years, technologies and designs converged. The Ford Model T with its frontmounted, water-cooled, four-cylinder engine represented the first “dominant design”
in automobiles. Convergence continued throughout the twentieth century with the
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F O U N DAT I O N S O F S T R AT E G Y
elimination of most distinctively different technologies and designs. Air-cooled engines,
such as those of the VW Beetle disappeared along with Citroen’s distinctive suspension
systems. Power trains standardized around four cylinders, in-line engines, with V-6
and V-8 configurations for larger cars. Front-wheel drive became standard on smaller
cars; suspension, steering, braking systems and body shapes became more similar.
Technological progress was incremental: new materials, new safety features, multi-valve
cylinders, and applications of electronics such as traction control systems, electronic fuel
injection, variable suspension, satellite navigation systems, and intelligent monitoring
systems.
Convergence also occurred across countries. The distinctive differences that once
distinguished American, French and Japanese cars largely disappeared—partly due
to the manufacturers’ promotion of global models. The same market segments are
present in different countries, though the sizes of these segments vary greatly across
countries.In the U.S., “mid-size” family sedans, SUVs, and pickup trucks are the largest
segments; in Europe and Asia, small family cars (“subcompacts”) formed the largest
market segment.
This trend toward design convergence and piecemeal innovation was interrupted
by the introduction of electric powered cars. This was hardly a disruptive technology:
the first electrically-powered cars and buses were in use at the beginning of the 20th
century—in 1900, 28% of all automobiles produced in the U.S. were all electric. Their
reintroduction was incremental: in 1997 both Toyota and Audi introduced massproduced hybrid cars—100 years after Ferdinand Porsche had developed the first
hybrid car in which an internal combustion engine powered an electric motor. The
launch of highway-capable, mass-produced, all-electric cars was much anticipated
but long delayed—despite the well established markets for neighborhood electric
vehicles (NEVs)—golf carts, maintenance vehicles, and site-transport vehicles. At the
beginning of 2012, all the leading vehicle manufacturers had all-electric models in
development, but the only mass-marketed all-electric, plug-in cars were the Nissan
Leaf and the Mitsubishi iMiEVs.
Changes in manufacturing technology
At the beginning of the twentieth century, car manufacture, like carriage-making, was
a craft industry. Few companies produced more than a 1000 automobiles annually.
When Henry Ford began production in 1903, he used a similar approach. His vision of
an affordable, mass-produced automobile required the development of more precise
machine tools that would permit interchangeable parts. In 1913, he instituted his new
system of production. Components were produced either in batches or continuously and
were then assembled on moving assembly lines by semi-skilled workers. The productivity
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New product development
The increasing complexity of new cars in terms of electronics, and new safety and
environmental standards caused the cost of developing new models to rise steeply.
Taking an entirely new, mass-production model from drawing board to production
line typically cost more than $2 billion. Ford’s Mondeo/Contour—its first global
model—launched in 1994 cost a total of $6 billion (including tooling). The need to
amortize huge development costs over large numbers of vehicles was the primary
driver of consolidation in the industry. Small automakers had the choice of merging
with bigger rivals or seeking niche positions. Geographically-focused manufacturers
such as Tofas of Turkey and Proton of Malaysia licensed designs from the global auto
makers. The tiny Morgan company survived by making the same hand-crafted sports
car that it had designed in the late 1930s. The quest to economize on new product
development costs also encouraged a variety of strategic alliances and joint ventures
among the auto makers.
To economize on new product development costs, a major trend in the industry
was to use a single platform for multiple models. A “platform” comprised a vehicle’s
architecture including its floorpan, suspension system and layout of powertrain and major
components. While the major car makers widened their model ranges, they increasingly
based these around a few platforms—typically between four and six. Similarly with
major components: in engines, Ford moved to three engine families: V-8/V-10, V-6 and
I-4 (four in-line cylinders). The I-4 engine had over 100 variations, an annual volume of
1.5 million,and was built at three different plants—one in North America, one in Europe
and one in Japan.
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F O R D A N D T H E W O R L D AU TO M O B I L E I N D U S T RY I N 2012
gains were enormous. In 1912 it took 23 man-hours to assemble a Model T; just 14 months
later it took just 4 hours.
Toyota’s “lean production” was the second major revolution in process technology.
Toyota developed its system in postwar Japan where shortages of key materials
encouraged extreme parsimony and avoidance of inventories and waste. Lean production
combined statistical process control, just-in-time scheduling, quality circles, teamwork
and flexible production (multiple models were manufactured on a single production
line). During the 1980s and 1990s all the world’s car manufacturers redesigned their
manufacturing processes to incorporate aspects of Toyota’s lean production.
Flexible, lean plants reduced the importance of scale economies in assembly. Minimum
efficient scale once required plants producing over 400 000 units a year. After 1990, most
new assembly plants had capacities of between 150 000 and 300 000 units per annum.
However, scale economies remained important in components and subassemblies: the
minimum efficient scale for an engine plant was around 1 million units annually.
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8
The world auto industry in 2012
F O U N DAT I O N S O F S T R AT E G Y
The manufacturers
The ranks of the leading producers were dominated by U.S., Japanese, andWestern European
companies—plus Hyundai of Korea (see Table 3). All were multinational: Toyota, GM and
Ford each produced more vehicles outside their home countries than within. Compared
with comparable industries—aircraft, motorcycles, or construction equipment—the
auto industry remained fragmented—in 2010 there were 18 manufacturers with annual
output exceeding 1 million vehicles and the 3-firm concentration ratio (measured by units
of production) was 31.5%. Despite the many mergers and acquisitions (see Table 4), the
industry’s consolidation was limited to the emergence of new competitors (from China
and India especially). The crisis of 2008–9 resulted in several divestments, but only one
major merger: between Fiat and Chrysler.
Table 3 The world’s leading auto manufacturers
1992
1996
2002
2005
2007
2010
GM
U.S.
6764
8176
8326
9200*
9350
8476
Toyota
Japan
4249
4794
6626
7974*
8534
8557
Volkswagen
Germany
3286
3977
5017
5243*
6268
7341
Ford
U.S.
5742
6611
6729
6818*
6248
4988
Daimler
Germany
605
993
4456
4829*
4635
Chrysler
U.S.
a
1940
2476
2958
1578
874
1402
2642
2534*
3987
5765
Hyundai
S. Korea
Honda
Japan
1762
2021
2988
3391*
3912
3643
Peugeot
France
2437
1975
3262
3375
3457
2605
Nissan
Japan
2963
2712
2719
3569*
3431
3982
Italy
1800
2545
2191
1708*
2679
2410
France
1929
1755
2329
2533*
2669
2716
Suzuki
Japan
888
1387
1704
2630
2596
2893
BMW
Germany
598
641
1091
1328*
1542
1481
Mitsubishi
Japan
1599
1452
1821
1381
1412
1174
Mazda
Japan
1248
984
1044
1149*
1287
1308
Daihatsu
Japan
610
691
n.a.
909
856
—c
Chang’an Automobile
China
n.a.
n.a.
n.a.
n.a.
n.a.
1103
Fiat
Renault
b
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India
n.a.
n.a.
n.a.
n.a.
588
1011
FAW
China
n.a.
n.a.
n.a.
n.a.
691
896
Geely
China
n.a
n.a
n.a
n.a
n.a
802
Fuji
Japan
648
525
542
571
585
650
Dongfen Motor
China
n.a
n.a
n.a
n.a
n.a
650
Notes:
n.a. = not available.
*Sales data.
a Including Kia.
b Including Dacia and Samsung.
c Included in Toyota
Source: Ward’s Automotive Yearbook; Wikipedia
Table 4 Mergers and acquisitions among automobile manufacturers,
1986–2011
Year
Acquirer
Target
Notes
2010
Geely (China)
Volvo (Sweden)
Sold by Ford for $1.3 bn.
Spyker Cars (Neth.)
Saab Auto (Sweden)
Sold by GM for $1bn.
Volkswagen (Germany)
Suzuki (Japan)
Acquires 20% stake
Fiat (Italy)
Chrysler (U.S.)
Acquires 35% stake, later
increased to 58%
Volkswagen
Porsche (Germany)
Acquires 49%
Beijing Auto (China)
Fujian Motor; Changfeng
Motor (China)
Tata (India)
Jaguar Cars, Land Rover (U.K.) Sold by Ford
SAIC Motor Group (China)
Nanjing Automobile (China)
2009
2008
2005
2002
2000
1999
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F O R D A N D T H E W O R L D AU TO M O B I L E I N D U S T RY I N 2012
Tata
SAIC combines MG and Rover
brands
Nanjing Automobile
Rover (U.K.)
Toyota (Japan)
Fuji Heavy Industries (Japan)
Acquired 8.7% stake from GM
GM (U.S.)
Daewoo (S. Korea)
42% of equity acquired
Renault (France)
Samsung Motors (S. Korea)
70% of equity acquired
GM
Fiat
20% of equity acquired
DaimlerChrysler (Germany)
Hyundai (S. Korea)
10% of equity acquired
DaimlerChrysler
Mitsubishi Motors (Japan)
34% of equity acquired
Renault (France)
Nissan (Japan)
38.6% of equity acquired
Ford (U.S.)
Volvo
Acquires car business only
Ford
Land Rover
Acquired from BMW
Toyota
Daihatsu
51% stake acquired
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10
1998
F O U N DAT I O N S O F S T R AT E G Y
1997
1996
Daimler Benz (Germany)
Chrysler
Biggest auto merger ever
VW (Germany)
Rolls Royce Motors (U.K.)
Acquired from Vickers plc
Hyundai (South Korea)
Kia (S. Korea)
Daewoo (South Korea)
Ssangyong Motor (South
Korea)
Daewoo (South Korea)
Samsung Motor (South
Korea)
Proton (Malaysia)
Lotus (U.K.)
BMW (Germany)
Rover (U.K.)
Daewoo (South Korea)
FSO (Poland)
Daewoo (South Korea)
FS Lublin (Poland)
Ford (U.S.)
Mazda (Japan)
1995
Fiat (Italy)
FSM (Poland)
1994
Daewoo (S. Korea)
Oltcit/Rodae (Romania)
1991
Volkswagen
Skoda (Czech Rep.)
31% stake later increased to
100%
50% of equity acquired
1990
1987
1986
GM
Saab-Scandia (Sweden)
Ford
Jaguar
Ford
Aston Martin (U.K.)
Chrysler
Lamborghini (Italy)
Volkswagen
Seat (Spain)
Increases stake from 25% to 33%
Source: Newspaper reports (various).
Outsourcing and the role of suppliers
Henry Ford’s system of mass production was supported by intensive backward
integration. At Ford’s giant River Rouge plant, iron ore entered at one end, Model
Ts emerged at the other. Ford even owned rubber plantations in the Amazon basin.
Since 1980, the quest for lower costs and increased flexibility has resulted in massive
outsourcing of materials, components, and services. At the end of the 1990s GM and Ford
both spun off their component businesses as separate companies: Delphi and Visteon,
respectively. Relationships with suppliers also changed. The Japanese model of close,
collaborative long-term relationships with their “first-tier” suppliers has displaced the U.S.
model of contract-based, arm’s-length relationships. The new system has resulted in the
component companies gaining increased responsibility for technological development—
especially for sophisticated subassemblies such as transmissions, braking systems, and
electrical and electronic equipment. The component producers have also grown in size
and global reach. Bosch, Denso, Johnson Controls and Delphi are as big as some of the
larger automobile companies (see Table 5).
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Table 5 Revenues and profitability of the biggest automotive component
suppliers
ROA (%)
ROE (%)
2010
2010
1994
2000
2008
2010
Robert Bosch (Germany)
19.6
29.1
58.5
62.6
5.0
8.6
Denso Corp. (Japan)
11
18.2
40.3
36.6
4.6
5.2
Johnson Controls (U.S.)
7.1
17.2
35.9
34.3
4.3
14.8
Aisin Seiki (Japan)
7.3
8.9
27.1
26.4
3.1
7.1
Magna International
(Canada)
n.a.
10.5
23.7
24.1
4.0
12.9
TRW Automotive
Holdings (U.S.)
n.a.
n.a.
n.a.
14.1
9.0
40.4
Delphi Automotive (U.S.)
n.a.
29.1
18.1
13.8
5.7
n.a.
Eaton (U.S.)
4.4
8.3
15.4
13.7
6.6
12.6
Valeo SA (France)
3.8
8.9
11.4
13.2
4.9
25.5
Lear Corp (U.S.)
3.1
14.1
13.6
12.0
6.6
17.8
Note:
n.a. = not available.
Sources: Financial Times, Fortune.
F O R D A N D T H E W O R L D AU TO M O B I L E I N D U S T RY I N 2012
Revenues ($ billion)
11
The quest for cost reduction
Strong competition pressured companies to seek cost reduction through several sources:
Economies of scale were critically important in research, component production,
and product development. According to Sergio Marchionne, the CEO of Fiat and
Chrysler, efficiency for a global auto producer required producing at least five
million cars a year: companies producing less would struggle to survive.4
Economies of scope. Many cost economies could be exploited across different
models. Investments in technology, dealerships, and marketing could be applied
across all models—indeed, the use of common components and platforms
meant that economies of scope were often converted into economies of scale.
By 2012, all the leading auto makers had models ranges that covered almost
every product segment from luxury cars to mini-cars—including SUVs. However,
Ford had narrowed its product range by selling its Jaguar, Land Rover, and Volvo
subsidiaries.
Worldwide outsourcing. Outsourcing has grown from individual components to
major subassemblies (such as engines and steering systems)—even to complete
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cars (including design and engineering). An important source of cost savings from
outsourcing derives from component suppliers’ lower wages and benefits compared
to the auto assemblers.
12
F O U N DAT I O N S O F S T R AT E G Y
Just-in-time scheduling, a key element of lean production, permitting radical
reductions in inventories and work-in-progress.
Off-shoring. Geographical shifts in production were partly the result of automakers
seeking lower cost manufacturing locations; Toyota moved production from Japan
to lower cost locations in Southeast Asia; Volkswagen from Germany to central and
eastern Europe.
Collaboration. Collaborative arrangements included joint-venture plants,
technology alliances, component supply agreements and joint marketing
agreements. In emerging market countries, most new auto plants were joint
ventures between local and overseas companies. These arrangements economized
on the costs of developing new technologies and new products, and accessing
overseas markets. Ford’s network of alliances (see Figure 4) are typical of linkages
among the automobile companies.
Figure 4 Ford’s alliances with other automakers
CHONGQING
CHANGAN
BMW
Supplies of parts to one
another. Ford Malaysia
assembles BMW cars.
Collaboration on
Hydrogen research
Joint venture to
assemble Ford v
Vehicles in China
CHRYSLER
Joint research into
Emissions and electric
vehicle technology
FIAT
Iveco Ford Truck Ltd
is a UK truck making
Joint venture
TOYOTA
Patent cross-licensing
FORD
TATA
FIRST AUTO WORKS
Purchase of Jaguar
& Land Rover linked to
cooperation on
technology
and components
A joint venture with Volvo to
produce engines in China
GENERAL MOTORS
Joint venture to produce
transmissions
PEUGEOT
Partnering in
diesel engines
DAIMLER
Joint research
into fuel cells
MAZDA
Equity stake cut to 13%.
Shared technology,
designs & components.
Several JVs.
MARUTI
Joint venture to
produce components
in India
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Excess capacity
The greatest structural problem of the industry was excess capacity. Ever since the early
1980s, the growth of production capacity had outstripped the growth in the demand
for cars. Import restrictions had exacerbated the problem. During the 1980s and early
1990s, North American production capacity grew substantially as a result of Japanese
companies building greenfield “transplants.” Further big additions to world production
capacity resulted from the expansion of the Korean car industry during 1992–7. Since
2000, the main additions to capacity were in Eastern Europe, Asia and Latin America
where all the world’s leading automakers rushed to build new plants to serve growing
demand. The biggest overhangs of excess capacity were in North America and Europe
(see Table 6), but even in China, where demand grew by almost 50% annually between
2002 and 2011, growth of capacity outstripped growth in demand. Looking ahead,
the prospects of reducing excess capacity were limited by, first, the resistance by
national governments to plant closures; second, continuing investment in new plants
in emerging market countries—in China capacity utilization was forecast to fall to 66%
by 2016.
13
F O R D A N D T H E W O R L D AU TO M O B I L E I N D U S T RY I N 2012
Despite constant cost-cutting, the major automakers were unable to rival low cost
producers in China, India, and elsewhere. Tata Motors’ 2009 launch of its Nano model—
four-seater, 623cc city car, with fuel cosumption of 70 miles per gallon and priced at
a mere $2200—was a major shock to the multinational automakers. However, the
subsequent difficulties that the Nano encountered in terms of production, safety and
market acceptance point to the sheer complexity of the bringing an innovative new
model to market and the challenges facing emerging market automakers in rivaling the
experience and expertise of the established giants.5
Table 6 Automobile production capacity utilization
2008
2009
2010
North America
79%
44%
65%
South America
82%
62%
75%
Europe
84%
65%
68%
Japan and Korea
86%
72%
78%
South Asia
89%
83%
81%
Source: Various press and consulting firm reports.
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14
Internationalization
F O U N DAT I O N S O F S T R AT E G Y
International expansion was driven primarily by the auto makers’ desire to access
growing markets; to exploit scale economies in purchasing, technology, and new product
development; and to seek low-cost manufacturing locations (see Table 6). Although
Ford and General Motors began their international expansion back in the 1920s, until
the 1970s the world auto industry was made up of separate national markets where
each national market was dominated by indigenous producers. The global strategies of
the Japanese automakers changed all that. After 1980, the main strategic priority of all
the world’s major auto companies was to build aglobal presence through acquisition,
alliance and joint venture. As a result of internationalization, the dominance of national
champions was undermined (see Table 7).
Table 7 Hourly compensation for motor vehicle workers (U.S.$ per hour,
including benefits)
1975
1984
1994
2004
2006
2009*
Germany
7.9
11.9
34.7
44.0
45.9
46.5
U.S.
9.6
19.0
27.0
33.9
35.1
33.5
U.K.
4.1
7.4
16.0
29.4
30.0
30.8
France
5.1
8.2
18.8
26.3
29.4
40.1
Japan
3.6
7.9
25.9
27.4
27.8
30.4
Spain
3.7
5.3
15.4
21.5
24.2
27.7
Korea
0.5
1.7
7.8
15.8
19.0
14.2
Italy
5.2
8.0
16.3
21.7
18.6
35.0
Mexico
2.9
2.6
3.0
3.5
3.7
5.4
Note: The 2009 data relates to all manufacturing industry; the data for earlier years refers to motor vehicle manufacture only.
Source: U.S. Department of Labor, Bureau of Labor Statistics.
Table 8 Automobile market shares in individual countries (%)
1988
2006
2010
U.S.*
1988
2006
2010
U.K.
GM
36.3
23.5
19.1
Ford
26.3
18.5
15.8
Ford
21.7
16.7
16.5
GM (Vauxhall)
13.7
12.7
12.8
Chrysler
11.3
8.8
9.3
Peugeot
8.7
10.0
8.8
Toyota
6.9
13.9
15.3
VW/Audi
5.9
12.9
16.0
Honda
6.2
8.8
10.7
BMW (& Rover)
15.0
4.6
6.9
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FRANCE
JAPAN
15
29.1
24.8
22.1
Toyota
43.9
40.4
34.4
Peugeot
34.2
28.2
32.4
Nissan
23.2
14.0
12.8
VW
9.2
11.6
11.0
Honda
10.8
12.2
14.2
Ford
7.1
6.0
5.1
Suzuki
12.1
11.4
ITALY
n.a.
KOREA
Fiat
59.9
28.5
30.1
Hyundai
55.9
50.0
37.6
VW/Audi
11.7
10.8
11.6
Kia
25.0
23.3
28.2
Ford
3.7
7.8
9.1
Daewoo
19.1
10.0
22.7
Peugeot
n.a.
9.6
10.3
CHINA
Renault
7.1
6.4
GERMANY
Shanghai GM
10.4
Shanghai VW
9.7
VW/Audi
28.3
27.8
35.1
FAW Volkswagen
8.9
GM (Opel)
16.1
9.7
8.9
Beijing Hyundai
6.1
Ford
10.1
8.0
6.8
Dongfeng PSA
6.0
9.2
11.3
10.6
BYD
5.5
Chery
5.1
Daimler
F O R D A N D T H E W O R L D AU TO M O B I L E I N D U S T RY I N 2012
Renault
Notes:
* The market share data is for passenger cars only with the exception of the U.S. which is for cars and light trucks.
n.a. = not available.
Sources: Japan Automobile Manufacturers Association; Korean Automobile Manufacturers Association; A. K. Binder (Ed.),
Ward’s Automotive Yearbook, 2009, Wards Communications, Southfield MI, 2009.
Outlook for the future
As he reviewed the forces likely to impact the world automobile industry during the next
five years, he found it difficult to assess their combined impact of these forces on the
overall intensity of competition in the industry.
While Ford had forecasts for demand growth in all the major markets of the world,
even if the more optimistic boundaries of these forecasts were achieved, market growth
would not translate into adequate profit margins if the chronic overhang of excess
capacity remained. In the mature industrialized countries there seemed little prospect
that either market growth or that plant closures would eliminate the overhang of excess
capacity. Indeed, the growth in alternative transport modes—included shared car
ownership—pointed to the possibility of decline in private automobile use. In the newly
industrializing countries—especially Asia and Latin America where Ford had pinned most
of its hopes—the indications were that capacity expansion would outstrip sales growth.
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16
F O U N DAT I O N S O F S T R AT E G Y
The international aspirations of leading emerging markets producers suggested that
the established auto makers would be facing more intense competition. Tata Motor’s
acquisitions of Jaguar and Land Rover, Geely’s of Volvo and SAIC’s of the MG and Rover
brands provides these firms with international platforms from which to compete.
The introduction of all-electric cars, while offering the prospects for new demand,
might also be an opportunity for newcomers to muscle-in on the market domains of
the major auto makers. Despite the tiny market share of hybrid and all-electric vehicles,
environmental concerns, environmental regulation, and depleting oil reserves pointed
to their potential to increasingly displace conventional automobiles. Despite heavy
investments by most of the leading car makers in both hybrid and all-electric autos,
leaders in electrical vehicles included Magna International, the Canadian auto parts
producer, Tesla, a Californian start-up producers of luxury electrical cars, Smiths Electrical
vehicles in electrically-powered trucks, BYD Auto the leading Chinese producer of hybrid
and electric cars, and Think Global the Norwegian producer of electric cars owned by the
Russian firm, Electric Mobility Solutions.
Despite the gloom that pervaded many experts’ outlook on the auto sector, Booth
saw several rays of light. He had noted the success—in terms of both sales and profit
margins—of several small cars, notably the BMW Mini and Fiat Cinquecento. It appeared
that customer preferences—even in the US—were shifting with a greater interest in
fuel economy, safety, and aesthetics. After a long period when different manufacturers’
mass market models had been becoming increasingly similar, the future might offer
greater potential for differentiation, including mass-customization that the car makers
had hardly begun to exploit;cars ºhad been e auto form’s belief in the superiority of the
internal combustion engine.
Underlying these opportunities were new approaches to product development—
including virtual prototyping, modular design and collaborative design and
development—which had the potential to overturn conventional relationships between
scale and cost competitiveness within the industry.
Appendix
Table 9 Company sales ($ billion)
1980–4a
1985–9a
1990–4a
1995–9a
2000-4a
2005-9 a
2010
Toyota
18
42
82
107
125
205
222
VW
16
28
48
64
96
143
168
GM
68
110
128
169
186
167
135
Ford
42
77
96
149
166
155
129
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12
34
59
71
166
153
129
Honda
8
18
35
50
62
94
104
Nissan
16
26
51
57
58
90
102
n.a.
n.a.
n.a.
18
38
70
97
5
10
21
34
45
70
80
Peugeot
13
19
28
35
58
73
74
Mitsubishi
12
14
25
32
27
43
61
Renault
15
31
31
37
44
52
52
Fiat
18
27
42
50
59
72
47
n.a.
12
21
18
19
27
27
Hyundai Motor
BMW
Mazda
a Annual average.
b Daimler Chrysler 2000–6.
n.a. = not available.
Source: Company Financial Statements; Hoovers.
Table 10 Company profitability (return on equity, %)
1980–4a
1985–9a
1990–4a
1995–9a
2000–4
2005–9
12.6
10.6
6.1
6.8
10.1
7.0
2.1
5.5
25.0
17.1
Toyota
VW
2010
1.6
6.3
(0.4)
11.1
6.8
b
GM
11.4
11.8
3.2
27.5
11.7
(10.5)
Ford
0.4
21.8
5.9
35.4
(7.7)
(10.4)
Daimler
24.3
18.3
6.9
22.1
7.7
4.8
Honda
18.1
11.8
5.3
15.1
13.2
8.0
6.6
Nissan
10.3
4.7
3.6
(0.1)
29.3
7.4
10.3
n.a.
n.a.
n.a.
4.4
10.6
12.0
20.0
BMW
14.8
10.4
9.7
(4.0)
15.4
10.8
22.1
Peugeot
(15.2)
36.7
12.5
3.0
13.4
(1.4)
9.1
Mitsubishi
10.0
7.9
4.8
(5.3)
(113.3)
(12.7)
6.5
(152.4)
51.1
9.1
11.0
14.7
14.4
18.3
10.9
18.7
6.8
7.6
(24.2)
9.9
15.2
n.a.
4.8
5.0
6.3
(34.2)
9.6
(18.4)
Hyundai
Motor
Renault
Fiat
Mazda
17
F O R D A N D T H E W O R L D AU TO M O B I L E I N D U S T RY I N 2012
Daimlerb
14.9
a Annual average.
b GM made a net loss of $2billion in 2006, $39 billion in 2007 and $31 bn. in 2008.
n.a. = not available.
n.c. = not calculable (shareholders’ equity negative).
Source: Company financial statements; Hoovers.
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18
Notes
F O U N DAT I O N S O F S T R AT E G Y
1 Ford Motor Company, Business Plan Submitted to the Senate Banking Committee,
December 2, 2008.
2 “U.S. Car Industry: Back on the Road, “ Financial Times, June 17, 2009.
3 Automobiles (passenger motor cars) used to transport people are normally
distinguished from commercial vehicles (trucks) used to transport goods. However,
in the US, sport-utility vehicles and pick-up trucks (classed as light trucks) are used
primarily for personal transportation. Ideally we would like to define the automobile
industry as comprising automobiles and light trucks (small vans, pick-up trucks, SUVs,
passenger vans), but excluding heavy trucks and large buses. However, most of the
statistics we use, “automobiles” exclude light trucks, while “motor vehicles comprise
automobiles and and all trucks and buses.
4 “Fiat’s Marchionne sees auto-industry consolidation” MarketWatch, Sept. 9, 2011.
http://www.marketwatch.com/story/fiats-marchionne-sees-auto-industryconsolidation-2011-09-09
5 “Tata’s Nano: Stuck in low gear,” The Economist, August 20, 2011.
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