Company economics Ford motor company  

Background

In 1903, the Ford Motor Company was founded by Henry Ford in a small Detroit workshop in Dearborn, Michigan. “In 1908, Henry Ford introduced the Model T Ford and was met with extraordinary commercial success. Between 1910 and 1914, the technical genius developed mass production and made the conveyor a symbol of the auto-industrial age.” (Meyer, 1981, p.1)  The establishment of operations by the Ford Motor Co. in Canada inaugurated the development of a national automotive industry there.

Gordon McGregor, together with other Canadian businessmen, founded the Ford Motor Company of Canada with $125,000, “of which fifty-one percent was to be allotted pro rata to shareholders in the parent Ford Company.” Ford of Canada was incorporated on August 10, 1904; only 1 year after the parent company was created in the United States, and became the first of Ford's foreign operations. Other auto makers established in Canada years later: in 1908, the MacLaughlin Motor Car Company, which merged with Chevrolet Motor Company of Canada to become General Motors of Canada Limited 10 years later, and Studebaker in 1910. (Studer-Noguez, 2002, p.31)

The Ford Motor Company currently operates in approximately two hundred markets across six continents.  Ford markets its products through retail dealerships, distributors and dealers in the United States, Canada, and throughout Asia and Europe.  Ford Motor Credit Company, a financial services subsidiary Ford Motor Company, offers various automotive financing products to and through automotive dealers worldwide.

The company primarily manufactures and distributes cars and trucks worldwide. In addition to manufacturing and selling, the company provides related service parts under brand names Aston Martin, Ford, Jaguar, Land Rover, Lincoln, Mazda, Mercury, and Volvo.

Ford’s ancillary market includes products to dealers for sale to fleet customers, i.e. daily rental car companies, commercial fleet customers, leasing companies, and government agencies. Ford offers retail customers with after-the-sale vehicle services and products in areas, such as maintenance and light repair, heavy repair, collision, vehicle accessories, and extended service warranty programs.  Ford Motor Credit’s primary financial products comprise of retail and wholesale financing such as making loans to dealers for working capital, improvements to dealership facilities, and the acquisition and refinancing of dealership real estate. (Finance, 2006)

Supply And Demand

Understanding supply and demand projections in the automotive industry requires the ability to recognize point estimates independent of market forces. In a normal market, without artificial restrictions that is allowed to work, an excess supply is only a temporary phenomenon. “The market force drives down the price of the product, which increases the amount demanded, and decreases the amount supplied until a new equilibrium is reached. In normal economic discourse, we think of the market as producing an equilibrium price at which the marginal valuations of consumers just equal the marginal costs of producers, and a kind of social optimum results.” (Hodgson et al, 1986, p. 147)

In addition to alterations in the conditions between supply and demand, specific factors setup practical limits a profit economy.  There is also impact on the greater consideration of the problems of consumption. Primary among these forces are the connotation of shifts in industrial costs from labor to capital and from production to distribution.

Ford Motor Company, by example of a variation of a 70+ year old formula, sets the price for its own cars by a deliberate procedure which involves a variety of factors such as production costs, the probable price range of competing cars and trucks, and the apparent trend of the demand for vehicles during the forthcoming season. “The important consideration is that the price thus arrived at is more or less rigid and, in fact, becomes the market price for Ford cars. For the Ford Motor Company produces a sufficiently large proportion of the annual output of motor cars to make its price effective.” (Wyand, 1937, p. 37)

However it is still important to identify and evaluate automobiles that compete with Ford’s automobiles.  The previous evaluation model was successful using six separate market classifications; small economy, sporty touring, mid-range standard, mid-range premium, upscale near luxury, and upscale luxury defined by Automotive News.

Of course, its impossible to predict or control the numbers of cars and trucks sold at a given price point, the formula and model sets a price for the products sold and allows flexibility in production, costs and pricing created by real demand. The important consideration is that the given price is flexible.

The automotive industry is complex and enormous therefore increasingly disrupts the competitive market for planning and resource allocation. Ford, in some markets, has amassed the private planning power to operate outside, behind, and beyond the autonomous interplay of supply and demand. Clearly this issue is illustrated by the automobile industry icons, a powerful guild dominated by three of the nation's largest industrial automotive concerns, Ford being one of them. "The size of General Motors is in the service not of monopoly or the economies of scale but of planning. And for this planning--control of supply, control of demand, provision of capital, minimization of risk--there is no clear upper limit to the desirable size." (Brock et al, 1990, p.42)

Elasticity

“A high gross margin does not, in and of itself, indicate profit maximization since the profit maximizing margin depends on the price elasticity of demand faced by a given company.” (Langlois, 1996, p. 65) There have been several conventional studies of the demand for automobiles and the price and income elasticities estimates.  To estimate the elasticity of the inventory-to-sales ratio to the price level, we look at the competitive Japanese market and their methodology.  Their formula is regressed against the logarithms at the very start of period inventories and a key numeric “variable” for the corresponding days of sale. “Price series for GM, Ford and Chrysler exhibit a significant positive time trend which is partly accounted for by inflation. In other words, as time goes by, higher nominal prices are associated to given inventory and inventory-to-sales ratio levels.” (Langlois, 1996, p. 65)

Demand Estimation

Forecasting car and truck demands, and particularly forecasting of short season goods with wide ranges of styles, colors, size, etc. has a long history being inaccurate.

Estimating the demand for particular vehicle is underlined by the fact that most buyers only purchase one vehicle.  At the consumer level, this results in a situation of zero demand for many vehicles.

The only time any certainty is introduced into a retailer or manufacturer operation is when a customer pays at the cash register via a Point of Sale (POS) entry. If a continual stream of POS data can be reviewed at frequent intervals during a season, early indications can be obtained about likely volumes demanded and the mix of required by the customer. “In simple terms this is demand estimation and re-estimation.” (Lowson, 2002, p. 103)

Forecasting, Production And Cost

Forecasting ahead, supported by the economy and expectant confident consumers prompted Ford Motor Company to announce that it has increased its forecast of U.S. auto sales to a range of 15.5 to 16 million cars and trucks. Previously, Ford said U.S. auto sales would range from 15 to 15.5 million.  (Media.Ford, 2006)

In order to somewhat gauge the selection of automobiles that would occur annually as a result of lower prices of Ford cars and trucks, statistical models were employed to predict how Ford’s cost savings and resulting lower prices would affect sales within specific market segments

Production, market realities has Ford building a flexible fuel engine plant facility. Construction of the Philippine plant began in the first quarter of 2006 with full production at the end of 2007. The plant is anticipated to have a production capacity of 100,000 engines over the next five years valued at $100 million. (Manila Bulletin, 2005)

Competition

There's also fierce competition from foreign and domestic auto manufacturers. General Motors walloped Ford this summer. In June, GM announced it would give consumers the same discount as its employees, driving vehicle sales a staggering 41% that month. Both Ford and DaimlerChrysler now offer similar deals and, as a result, sales rebounded in July.

There's no doubt Ford has seen better days. Standard & Poor's expects Ford's automotive revenues to grow a mere 1% to 2% on the introduction of new products and on greater average revenue per vehicle. S&P maintains a sell rating on Ford shares based on its eroding market share.

The healthy Euro market, (back in the late 90’s) had Ford’s class-leading Mondeo. Since then, more than half a million Mondeos have been sold - both to the company car scene as well as the private sector.  Such has been its success; the vehicle has never been out of the top three best-selling cars in Britain.   Ironically, only other Ford products, the Fiesta and Escort do better. But the Mondeo remained a vital revenue generator for Ford.  Serious rivals, Honda, Rover, Vauxhall, and Volkswagen, are all position to increase their market share in the event Ford shows any weakening.

Without a complete understanding of how these elements shape an individual firm’s strategy, Ford Motor Company, the bargaining dynamics within a host countries government could only be fully appreciated at the sales level and are delicate at most. “One example is how the structural elements, or the who-gets-what rules of an industry, limit the capacity of firms to make concessions to host country governments for the simple reason that, if they did, they could incur inefficiency costs or would simply not survive.”

(Karier, 1994) From a one-firm perspective, the uncertainty and risk associated with political and economic disruptions in different national locations is an important deterrent to the pursuit of a globally integrated system of production.

This is particularly true in strategic industries, such as the automobile industry, that exhibit heightened levels of competition and where governments tend to be concerned with large trade imbalances. From this point of view, limited regional integration and inter-regional co-ordination appear as a second-best solution to global integration. (Karier, 1994)

“The new combination can specialize production in certain plants, coordinate shipments to reduce transportation costs and benefit generally from improved planning and coordination. Where these improvements are possible, operating cost will fall and the business becomes more profitable as a whole than the sum of its parts. (It is also possible that the expansion will place additional demands on management resulting in growing inefficiencies.) As a result, potential profitability and economic power rise.” (Karier, 1994, p. 138)

Final initiatives that improve Ford's global enterprise process, are sought to exploit economies of scale and generate huge savings from reducing the number of platforms and drive trains, from having an integrated, worldwide supply base (Ford worldwide integrated purchasing system), and from using the best practices worldwide and other common systems and processes, such as a single manufacturing system (Ford's production system) and the order-to-deliver (OTD) process, across the entire organization. (Studer-Noguez, 2002, p.121)

As was touched upon, the most sweeping organizational changes maintained an international plan of a long list of global priorities and goals.  The mindset of manufacturing, purchasing, technology resources, and multi-platforms seamlessly integrated is the one vision. These initiatives face the challenge of becoming “a way of life integrating them into the fabric of how Ford does business in all plants, at central office and in the field” (Studer-Noguez, 2002, p.121)

Reference(s)

http://finance.yahoo.com/q/pr?s=f Ford Motor Co Retrieved 12.11.06

Isabel Studer-Noguez, 2002, Ford and the Global Strategies of Multinationals: The North American Auto Industry. Publisher: Routledge. Place of Publication: London. Page Number: 31, 121.

Stephen Meyer, 1981, The Five Dollar Day: Labor Management and Social Control in the Ford Motor Company, 1908-1921. Publisher: State University of New York Press. Place of Publication: Albany, NY. Page Number: 1.

Patricia Hodgson, Duncan Yaggy, 1986, How Many Doctors Do We Need?A Policy Agenda for the United States in the 1990s Based on the Tenth Private Sector Conference, 1985. Private Sector Conference, Duke University Medical Center Publisher: Duke University Press. Place of Publication: Durham, NC. Page Number: 147.

Charles S. Wyand, 1937, The Economics of Consumption. Publisher: Macmillan. Place of Publication: New York. Page Number: 37.

James W. Brock, Walter Adams, 1990, Efficiency, Corporate Power and the Bigness Journal Title: Journal of Economic Education. Volume: 21. Issue: 1. Page Number: 42.

Catherine C. Langlois, 1996, A Systems Analysis of the Pricing of Automobile Inventories. Journal Title: American Economist. Volume: 40. Issue: 2. Page Number: 65+. COPYRIGHT 1996 Omicron Delta Epsilon;

Robert H. Lowson, 2002, Strategic Operations Management: The New Competitive Advantage. Publisher: Routledge. Place of Publication: New York. Page Number: 103.

http://media.ford.com/newsroom/release_display.cfm?release=1089 Press Releases Retrieved 12.11.06

Ford to Build P1.1-B Flexible Fuel Engine Plant in the Country. Newspaper Title: Manila Bulletin. Publication Date: December 21, 2005. Page Number: NA. COPYRIGHT 2005 Manila Bulletin Publishing Corp.

Thomas Karier, 1994, Beyond Competition: The Economics of Mergers and Monopoly Power. Publisher: M. E. Sharpe. Place of Publication: Armonk, NY. Page Number: 96.