Contents

Abstract.................................................................................................................................................2
Company History...................................................................................................................................2
Automotive Industry..............................................................................................................................2
Business Strategy – ONE Ford................................................................................................................3
Operations Strategy...........................................................................................................................4
Financial Strategy..............................................................................................................................4
Competitive Analysis.............................................................................................................................4
Internal Rivalry..................................................................................................................................5
Supplier Power..................................................................................................................................5
Buyer Power......................................................................................................................................6
Threat of new Entrants......................................................................................................................6
Threat of Substitutes.........................................................................................................................6
Complements....................................................................................................................................7
Challenges at ford motors.....................................................................................................................7
The Road Ahead....................................................................................................................................7
Abstract
With the success of the GM IPO, we may be tempted to forget the terrible decade the U.S. auto
industry has just completed.  Car sales steadily declined from 2000 through 2007, then collapsed in
2008 and 2009 to a level not seen since 1951.  Truck sales, which saw dramatic growth in the 1990s
and finally eclipsed car sales in 1999, saw some growth in the early 2000s, but also dramatically
retreated in the 2007-09 recession.

The “big 3” U.S. auto makers also suffered market share declines in this period, from a combined 65%
of the U.S. market in 2000, to 53% in 2006, to 44% in 2009.  It should be no surprise that GM and
Chrysler filed for bankruptcy in 2009.  The real question is: Why didn’t Ford go bankrupt?

Company History

Henry Ford, along with 11 business associates, founded Ford Motors in 1903 with just US$
28,000 in hand. Soon the company started selling its Model A. Within a few years of the
inception of the company, there were differences of opinion between Henry Ford and the
other investors when he insisted the company should focus on producing affordable cars for a
mass market. With some of the investors opting to leave, Henry Ford acquired more company
stock to increase his share to 58.5%. He became president of the company in 1906, replacing
John S. Gray, who had served as the company's first president.

Automotive Industry

In order to fully understand the case, it is important to understand the auto industry as well.
The auto industry was the world’s largest, what Peter Drucker proclaimed 2 “the industry of
industries.” It consisted of tens of thousands of firms giving employment to millions of
individuals and generating revenues from the sale of new and used vehicles, parts, and
service in excess of $1.3 trillion. Not only was it one of the oldest industries, but it was also
arguably the most fragmented. Critics said its purchasing activities had not changed much in
100 years, that its costs were excessive, and that its customers were thoroughly dissatisfied
with automobile manufacturers and dealers. The industry had undergone several fundamental
transformations since its inception in the late nineteenth century. Ford’s use of mass
production was the first, followed by the rise of the Japanese auto industry and its
commitment to lean production in the 1960s and 1970s. In the past three decades, the auto
industry has grown more competitive. Since the 1970s, the Big Three automakers (GM, Ford,
and Chrysler) have seen their home markets invaded by foreign-based auto manufacturers
(Toyota and Honda). Toyota and Honda are beginning to nip on the heels of the “Big 3” and
Toyota has already surpassed Dodge in sales. In addition, the auto industry was facing
overcapacity of an estimated 20 million vehicles. This led to decreased profit margins for
automakers as well as reduced sales. Another trend in the automobile industry, as well as
many other industries at this time, was consolidation. With increased technology and
economies of scope and scale, companies wanted to capitalize on the benefits of being a
larger company, so they frequently merged. Two notable consolidations were Chrysler
merging with Daimler-Benz in the summer of 1998 and Ford acquiring Volvo in early 1999.
So, with all of these changes going on in the automobile industry, it was no wonder that Ford
felt like it needed to make some changes within its organization to compete.
Ford’s large-scale plans for change began in 1995, with an ambitious framework called Ford
2000. The first part of this plan included merging North American, European, and
international automotive operations into a single global operation. Just like with
consolidation, this allowed for economies of scale and scope, allowing Ford to save huge
amounts of money by reengineering and globalizing corporate organizations and processes.
The major reengineering projects that were part of Ford 2000 were initiated around major
company processes like, Order to Delivery (OTD), Ford Production System (FPS), and the
Ford Retail Network (FRN). Order to Delivery is the time that it takes from a customer
placing an order to delivery of a finished product. The goal in the OTD project was to reduce
the current 45-60 days it took to deliver the finished product to the customer in only 15 days.
These manufacturing efforts were dependent on a couple of other changes that were being
made at Ford during the same period of time namely; continual forecasting of customer
demand, a minimum of 15 days of vehicles in each assembly plant, regional centers that dealt
with optimizing schedules and deliveries, and a order amendment system to replace the need
to submit new orders.

Business Strategy – ONE Ford

ONE Ford expands on the company’s four-point business plan for achieving success globally.
It encourages focus, teamwork and a single global approach, aligning employee efforts
toward a common definition of success and optimizing their collective strengths worldwide.
The elements of ONE Ford are:

 ONE Ford emphasizes the importance of working together as one team to achieve
automotive leadership, which is measured by the satisfaction of customers, employees
and other essential business partners, such as dealers, investors, suppliers,
unions/councils and communities.
 The company’s four-point plan consists of: balancing our cost structure with our
revenue and market share; accelerating development of new vehicles that customers
want and value; financing our plan and rebuilding our balance sheet; and working
together to leverage our resources around the world.
  The goal of ONE Ford is to create an exciting and viable company with profitable
growth for all.

Operations Strategy

Financial Strategy
By 2006, it was clear to the big 3 auto makers that there was a problem.   Ford’s sales and net income
had been flat for many years.  Ford, like the other auto makers, began a major restructuring to reduce
capacity, cut costs, and accelerate product development.  The key to Ford’s success, however, was in
aligning its business and financial strategies.

Ford’s financial strategy was to maintain adequate liquidity to complete the operational restructuring,
consistent with the auto industry’s high degree of cyclicality.  As a result it borrowed over $12 billion.
The bulk of the new debt, almost $9 billion, went to increase the company’s cash hoard, with the
remainder funding losses, capital expenditures, and other operating needs.  During 2006, the
company’s auto sector cash and marketable securities increased from $25 billion to almost $34
billion.  Add to that over $12 billion available under the company’s revolving credit facilities (which
were also renewed in 2006), and the company’s total liquidity going into the recession was over $46
billion.

In addition to building cash and revolver availability, Ford had a conservative strategy on debt
maturities.  At December 31, 2006, 95% of Ford’s auto sector debt was long term (i.e. maturing
beyond 1 year).  In fact, over 88% matured beyond 5 years.  While long-term debt typically costs the
issuer more than short-term debt, Ford accepted this additional cost in order to reduce the risk that it
would have to come to the financial markets to rollover debt during a downturn.

Ford was able to avoid bankruptcy in 2009 because of its operational restructuring, but also because
of a successful financial strategy.  It opportunistically borrowed money under favourable terms, built
large cash position, and kept very long maturities on the bulk of its debt.  This financial strategy gave
the operating side of the business the breathing room to complete its restructuring and survive the
recession.

Competitive Analysis

Force Strategic Significance

Internal Rivalry High
Supplier Power Neutral
Buyer Power High
Threat of New Entrants Low
Threat of Substitutes Neutral
Complements Neutral

Internal Rivalry

The automotive industry is noted for its intense rivalry, and within the United States market
Ford faces five major competitors: GM, Toyota, Chrysler, Honda, and Nissan. Toyota,
Honda, and Nissan have grown in market share largely as a result of their ability to deliver
better products at lower prices, particularly for more fuel efficient smaller vehicles. Because
of lower labor costs and greater efficiency (typically measured by the number of hours
needed to produce each vehicle), these companies have been able to turn a profit with smaller
vehicles. In the past, Ford has differentiated itself by focusing on more profitable SUV and
truck lines while often losing money on its smaller vehicles. Given changing demand, this
strategy is no longer feasible. Whereas Toyota makes approximately $922 profit per vehicle
sold, estimates show that Ford lost $1,467 per vehicle in 2008 and General Motors lost $729.
Toyota is now the undisputed lead in vehicle production worldwide. In 2008, Toyota sold
nearly nine million vehicles, compared to General Motors’ 8.3 million. In recent years Toyota
has not only been one of the most profitable producers, but also the most efficient: in 2008, it
took an industry shortest average of 30.37 hours to produce a vehicle from start to finish.

Within Europe, Ford’s main competitors are Volkswagen, PSA (Peugeot), Renault, GM, and
Fiat.
Because Ford has not received bailout money, it generally has more flexibility than GM and
Chrysler in the current market. While there is a great deal of internal rivalry, industry
upheaval appears to be imminent.

Supplier Power

Supplier power is a significant threat to auto companies and manifests itself in several different
ways. While the primary raw materials used in vehicles (metals and resins) have many suppliers
around the globe, intermediate parts pose a greater problem. Currently, Ford wields significant
buying power over its parts suppliers. Many parts suppliers rely on contracts with only one or two
automotive firms, meaning changes in production at Ford can dramatically impact the stability of its
supply chain. Ford has again been more successful than both GM and Chrysler in reducing these
costs, successfully renegotiating multiple contracts by swapping equity contributions for cash
infusions.

Buyer Power
Auto manufacturers sell their cars to a distribution network of dealerships that then sell to the
general public. Additionally, the auto manufacturers sell to fleet sales firms, such as rental car
companies. The manufacturers have to supply products which end customer wants to purchase from
dealers, which means manufacturers have to focus on the quality, design, performance and cost
desires of the general public. With explosion of information available on the internet, the end
consumers have access to more information to compare products and determine which vehicles
meet their needs. Well- informed consumers are able to shop and negotiate pricing between
dealerships, which diminishes the sales person technical advantage.

Threat of new Entrants

Within the developed world, there are significant barriers to entry for the automobile manufacturing
sector. Substantial fixed costs, the influence of brand names upon sales, and the dealership model all
hinder new entrants. The ability of an entrant to gain market access—in the form of dealership
space—is the most significant barrier within developed countries. In the United States and Western
Europe, entry at this time effectively requires the purchase of a company with existing market
access. In lesser developed countries, entry is limited by the ability to produce cars at a low enough
price point to be appropriately geared for local tastes. Ford in particular has had difficulty
penetrating the Indian and Chinese markets as a result of these factors in spite of joint ventures with
local firms.

Because of its reliance on the U.S. and European market, the entry threat to Ford in the medium run
will continue to be from manufacturers with existing access to these developed markets or those
who can afford to purchase or merge with such companies. The impact of exit, or government
coordinated bankruptcy proceedings, is of extreme importance to Ford.

Threat of Substitutes

While there are no close substitutes for automobiles as a good, recent years have demonstrated the
threat public transportation may pose as an imperfect substitute. As oil supplies dwindle and fuel
prices rise, public transportation becomes more feasible for communities. Furthermore, the
potential for widespread investment in public transportation within the U.S. as part of a stimulus
package remains a possibility. This provides an additional impetus for car manufacturers to provide
highly fuel efficient vehicles for the consumer. For long distances, air travel remains the most
popular and cost effective method of transport. This is unlikely to change in the near future. The fact
remains, however, that the convenience of a car remains unsurpassed for short range
transportation. The ability of manufacturers to adapt to increasing fuel prices will determine
demand in the long run, but the absence of an equivalent substitute in all but the most urban
environments bodes well for the future of automobiles.

Complements

The primary complements for cars are roads and fuel. Demand shifted towards lighter, more
fuel efficient vehicles. This is a significant challenge for Ford, which in recent years has
profited most from its Truck and SUV lines—making only meager profits, and often losing
money, from its line of smaller vehicles. Fuel efficiency considerations will continue to drive
auto designs and influence demand. Ford, however belatedly, is restructuring itself to adapt to
this change. Most significantly, it has begun transitioning its manufacturing plants from
SUVs and trucks to cars.

Challenges at ford motors

For Mulally, the immediate challenge at Ford Motors was to stop the company bleeding. The
company had posted a loss of US$ 12.7 billion for the year ended December 2006, the
biggest ever loss in its history. The losses were further expected to continue in the year 2007.
Ford Motors was expected to have just a 14% market share in 2008, compared with the
nearly 25% it had enjoyed during the late 1990s. On the organizational front, Mulally had to
make Ford Motors' employees snap out of their lethargic and bureaucratic style of
functioning, while depending on these very same people to understand the company's
business.

The Road Ahead

Ford Motors was expected to face a tough road ahead in 2007. Brian Johnson, an auto analyst
with Lehman Brothers, had written, "Ford will suffer the most severe market share decline
among the Big Three in 2007…We expect Ford's decade-long share loss to accelerate in
2007." There were also mixed opinions initially on whether Mulally could achieve a
successful turnaround at Ford Motors and put the company back on the profit track by 2009.
The cost-cutting moves going on and a slightly higher revenue helped Ford Motors post a
much smaller loss of US$ 282 million in the first quarter of 2007 compared to a loss of US$
1.4 billion for the same period in 2006.