Ford Motor Company Application of Porter’s Five Forces Model

FORD MOTOR COMPANY 14

FordMotor Company: Application of Porter’s Five Forces Model

Dateof Submission:

Abstract

Anumber of models have been created to help managers assess the natureof the environment in which their organizations operate. The mostcommonly used models in external environment analysis include PESTELand four corner’s analysis. In this essay, the attractiveness ofthe automobile sector is analyzed through Porter`s five forces model.Ford Motor Company is used to facilitate this analysis, and thefindings indicate that at present, the attractiveness of theautomobile industry is mixed. Precisely, it is found that rivalryamong existing firms is strong, but the threat of new entrants islow. Similarly, buyer power, supplier power, and the threat ofsubstitution are moderate.

FordMotor Company: Application of Porter’s Five Forces Model

Forany organization to excel within a particular industry, it mustengage itself in the process of strategic planning, which involvesthe setting of clearly-defined objectives. Strategic planning relieson a careful assessment of a firm’s internal as well as externalenvironment, the latter comprising information regarding industrytrends, suppliers, and customers (Charantimath, 2012). By revealingthe opportunities along with threats existing in a given industry,industry analysis is a crucial input to successful strategic planning(Triantis, 2016). Industry analysis depicts the suitability of agiven industry, hence helping managers to decide whether to quit aparticular business or to venture a new industry (Phills, 2005). Thisessay uses Porter’s five forces framework to evaluate theattractiveness of the automobile industry, using Ford Motors Companyas a case study. Besides the industry analysis, the essay alsoanalyzes Ford’s competitive strategy with the aim of determiningthe firm’s competitive position relative to its rivals.

AnOverview of Ford Motor Company

FordMotor was founded in 1903 by a man called Henry Ford, his focus beingthe design and mass production of automobiles (Cross &amp Miller,2009). Ford brought an important revolution in the automobileindustry, particularly through the mass production technology thatlowered consumer prices. The first vehicle released by the companywas the Model T, which was rolled out in 1908 (Manjunath, 2010). Overthe years, Ford Motors has expanded its operations, becoming thesecond biggest car producer in the world. Some of the brand namesassociated with the company include Jaguar, Volvo, and Mercury (Cross&amp Miller, 2009).

Itis important to note that besides automobile manufacturing, FordMotor Company also deals in financial services. According to Reuters(2016), the company provides financing as well as leasing services invehicle-related activities. Consequently, the company has establisheda credit unit comprising leases and finance receivables. Precisely,the company leases its vehicles to individuals who require them forcommercial or personal purposes. Similarly, the company leases itsvehicles to corporate entities like rental car firms and governmentorganizations. Ford Motor also provides dealers with wholesale loansthat help in financing vehicle inventory purchase, facilityimprovement, and working capital. The company has a vast globalreach, having established sizeable markets in countries like Germany,the United Kingdom, and Canada. Despite being headquartered in theUS, Ford has expanded to other continents, reaching Africa, AsiaPacific, and Europe (Statista, 2016).

Industryanalysis

Ofthe various tools that are used in analyzing the attractiveness of agiven industry, Porter’s five forces model has been selected forthis particular case study. In brief, the model identifies fiveforces as playing a central role in shaping competition within agiven industry. These are buyer power, threat of substitution,supplier power, risk of new entrants, and intensity of competitionamong existing firms in that particular industry (Hill &amp Jones,2010). Although the five forces operate in a distinct manner, thebottom-line is that the more powerful they are, the more difficult itis for a firm to make greater profits. In other words, strongcompetitive forces present a threat to established companies, whereasweaker forces are seen to be an opportunity (Hill &amp Jones, 2010).Nonetheless, it is crucial to evaluate each of the five forces todetermine the attractiveness of the automobile industry and thecompetitive position of Ford Motor Company.

Rivalryamong existing firms

Withoutdoubt, the automotive industry in which Ford operates is a verycompetitive one. To be precise, the company faces stiff competitionfrom giant companies such as General Motors, Honda Motors, Toyota,Volkswagen, Fiat Chrysler Automobiles, and Renault-Nissan, amongothers (Reuters, 2016). The existence of a number of firms in theindustry is, in itself, a major threat to Ford Motor Company becauseit weakens the firm’s bargaining power. According to Mind Tools Ltd(2016), the presence of intense rivalry within a given industry is athreat because it means that a company must provide the best deal toits suppliers as well as buyers otherwise they will switch toanother company.

Anotherfactor that is considered under the aspect of competitive rivalry isthe capability of competitors (Mind Tools Ltd, 2016). With referenceto the automobile industry, it is evident that competitors are notonly many in number they have substantial capability. Specifically,it has been observed that Ford Motor Company faces intensecompetition from players like Nissan, Toyota, and Honda, whose marketshare has grown significantly due to their capability to offerhigh-quality products at affordable prices (Dornbach-Bender, Slade &ampThorpe, 2009). Unlike Ford, which has often made losses on smallervehicles, the three companies mentioned above have been capable ofdemonstrating greater efficiency and low labor costs on suchvehicles. This is just a single illustration showing that even thoughFord Motor Company is ranked among the top companies in theautomobile industry, competition within the industry is mounting.

Newentrants

Accordingto Michael Porter, the man who designed the five forces model,attractiveness of a given industry is also determined by the easewith which new companies can join the industry. Like the competitiverivalry factor discussed above, this factor reduces industryattractiveness because it reduces the available market share while atthe same time reducing profitability (Hill &amp Jones, 2009). Someof the factors that influence entry barriers include economies ofscale, brand loyalty, and the possession of “absolute costadvantages” (Hill &amp Jones, 2010 p. 44).

Withreference to Ford Motor Company, it may be said that the automobileindustry is quite difficult to penetrate. This is in light of thesubstantial costs that must be incurred in setting up a factory andconducting sufficient research in order to determine the kind ofproduct that will endear a new firm to customers. Considering thereport that Ford is one among several companies that have alreadycultivated a name amongst consumers, then one might be led toconclude that the barriers to entry into the automobile industry arequite high. In addition to this, a company like Ford Motors enjoyssome economies of scale due to its mass production technology. Thisimplies that any new company planning to venture in this line ofbusiness must dedicate a higher amount of capital so that it canembark on large-scale production activities (Hill &amp Jones, 2010).In other words, the threat of new entrants within the automobileindustry is weak, simply because existing players enjoy substantialeconomies of scale.

Supplierpower

Asthe name suggests, supplier power refers to the size of suppliersthat are available to supply a given firm with the inputs it requiresto undertake its business. Additionally, supplier power is determinedby the inimitability of the inputs provided by suppliers, as well asthe costs involved in switching between suppliers (Mind Tools Ltd.,2016). It follows that the more supplier choices that a company has,the weaker the suppliers’ bargaining power, hence the moreattractiveness the business is.

FordMotor Company illustrates that from the perspective of supplierpower, the automotive industry is generally attractive. According toDornbach-Bender et al. (2009), there are many suppliers of metalstogether with resins, the main raw materials that are used in themanufacture of vehicles. Subsequently, many parts suppliers haveapproached Ford, forcing the company to limit the size of suppliersit wants to work with. This is sufficient proof that Ford has theupper hand when it comes to selection of suppliers, and this hasworked to the company’s advantage, especially when it is consideredthat the firm has made close to $8.9 billion in the form of costsavings from its supplier system alone (Canzer, 2006).

Stillregarding suppliers, Ferguson (2015) reveals that most of Ford’ssuppliers do not possess control or ownership of their productdistribution as well as sales systems. On top of this, the authorasserts that Ford Motor Company runs a complex known as the FordRiver Rouge Complex, through which it produces a number of its rawmaterials. Combined, these two factors account for the weakbargaining power of suppliers in the automobile industry.

Besidessupply of raw materials, attractiveness of any business is alsodetermined by the bargaining power of labor. The five forces modeldefines suppliers as all those organizations that supply a givenindustry with inputs such as labor, materials, and services (Hill &ampJones, 2010). Regarding labor supply in the U.S. automotive industry,Dornbach-Bender et al. (2009) disclose that the United Auto WorkersUnion controls the greatest share of labor supply for Chrysler, Ford,and General Motors. This disclosure intimates that Ford has littlesay regarding the amount of wages that it should pay to its workers.Nevertheless, the company has reportedly managed to come into anagreement with the Workers Union, thus reducing the average hourlywage that should be paid to workers. From this latter report, itappears that supplier power in the automotive industry is not verystrong, meaning that the industry is attractive.

Threatof substitution

Theability of an individual player within a given industry to raiseproduct prices in an attempt to make more profits is determined by,among other things, availability of substitute products. These simplyrefer to the products that serve the same purpose as the one servedby a firm’s product (Pringle &amp Huisman, 2011). Given that thereis stiff competition amongst existing players in the automotiveindustry, and more so between Toyota and Ford in terms of smallercars, one might be tempted to think that the threat of substitutionin this particular industry is high. This is particularly so when itis considered that fuel prices have been fluctuating considerably inrecent years. Coupled with the challenge of dwindling oil supplies,it is possible that a number of communities might consider publictransportation to be a more feasible option (Dornbach-Bender et al.,2009). However, the truth is that automobiles are a good that cannotbe perfectly substituted. Inasmuch as there are alternative modes oftravel other than road, it is a fact that cars are very convenientfor people wishing to travel to short range distance. Furthermore,alternative methods of transport, such as air, are only feasible inurban environments (Dornbach-Bender et al., 2009).

Moreover,even though it is argued that public transportation can considerablysubstitute the vehicles made by Ford, the reality remains that thereare certain circumstances in which public transportation is notappropriate. On a different note, the report that a significantnumber of Ford’s consumers purchase automobiles on loans creates abarrier for them to switch from the company to another company. Thisis because it is not easy for a person to shift to another serviceprovider when he or she is still repaying a loan that he/she tookfrom the former (Ferguson, 2015). For these reasons, it can correctlybe concluded that the automobile industry remains attractive until aperfect substitute for road transport is found.

Buyerpower

Perhapsdue to the fact that road transport has no perfect substitute, thebargaining power of automobile buyers is notably narrow throughoutthe whole world (Dornbach-Bender et al., 2009). Despite the fact thatin most cases, individual purchasers negotiate with car dealers,sometimes receiving concessions on product prices, it is essential tonote that it is the dealer who caters for the costs associated withsuch concessions. In addition to this, it has been learned that FordMotor Company operates a credit business in which it grants funds todealers in order to facilitate their transactions. Viewed from adifferent perspective, this implies that the credit plans given todealers limit their bargaining power.

Accordingto Ferguson (2015), the bargaining power of buyers in the automobileindustry is moderate, precisely when viewed from the dimension ofswitching costs, substitute availability, and individual purchases.Regarding switching costs, the author argues that the costsassociated with switching between firms are moderate in the sensethat even though customers are free to buy vehicles from differentcompanies, an automobile is quite an expensive product. In short, itis not prudent to switch between manufacturers frequently due to thecosts that are involved. Even so, the presence of several competitorscould be taken to mean that customers have the option to quit Fordfor another company if they feel that they are not receiving valuefor their money. Because of this, the correct position is that buyerpower in the automobile industry is moderate, and the profitabilitythat companies derive is dependent upon the extent to which theycapitalize on customer satisfaction (Ferguson, 2015).

Summary

Theconclusion that can be drawn from the foregoing analysis is that theautomobile industry is unattractive to interested entities but highlyattractive to existing players. To be more precise, it has been foundthat even though rivalry amongst established companies is verystrong, the threat of new entrants is weak. Similarly, the Porter`sfive forces model has revealed that buyer power, threat ofsubstitution, and supplier power are moderate. For these reasons, theindustry is generally attractive to established companies, butpotential entrants face a great obstacle because of the costsinvolved in creating strong brands that can compete with existingfirms.

Ford’scompetitive strategy

Accordingto Michael Porter, a critical evaluation of industry forces is thepreamble to the selection of the strategy that will be used by a firmin order to stay ahead of competitors (Schermerhorn, 2009). Thetheorist presents three broad competitive strategies commonlyemployed by firms, and these are focus, differentiation, and costleadership. In brief, differentiation is a strategy that focuses onuniqueness firms attempt to create goods that are visibly unlikethose developed by competitors. On the other hand, cost leadership isfocused on offering lower prices than competitors. Lastly, a focusstrategy is one in which firms direct their attention towards a givenmarket segment so that they can fulfill the needs of that givensegment better than their competitors (Schermerhorn, 2009).

Thereis plenty of evidence supporting the claim that Ford’s competitivestrategy is differentiation. Dornbach-Bender et al. (2009) forinstance disclose that in response to the stiff competition posed bycompanies such as Toyota and Nissan, Ford decided to focus on trucklines and sport utility vehicles instead of dealing in smallervehicles. Supportively, Stevens, Loudon and Wrenn (2006) note that inthe 1900s when the company was launched, its strategy wasconspicuously undifferentiated, primarily in consideration of thefact that the Model T was the company’s sole/dominant brand.However, by the year 2005, Ford had developed a range of brands thatwere designed to meet the needs of different users.

Asa result of the differentiation strategy employed at Ford, it emergesthat the company has a bright future within the automobile industry.More precisely, the strategy enables the company to forecast emergingtrends together with challenges, hence being in a position to meetthe challenges that may arise in future. Whilst acknowledging thatFord currently faces intense pressure from companies like Toyota,General Motors, and Honda, the company is in a favorable competitiveposition particularly due to its strategy of designing cars thatappeal to the tastes of different customers (Dornbach-Bender et al.,2009).

Conclusion

FordMotor Company has undeniably created a strong brand in the globalautomobile market, providing a range of products that are designed tomatch the needs of individual purchasers. Through its differentiationstrategy, the company has managed to establish an enviable positionin an industry that is highly competitive. The application ofPorter’s five forces model to the Ford Motor company case hasrevealed that the automobile industry is somewhat mixed in terms ofattractiveness. For instance, factors such as supplier power, threatof substitution, and buyer power are moderate, while the threat ofnew entrants is weak. On the other hand, it has been found thatcompetitive rivalry in the automobile industry is very strong. Basedon these findings, it can be concluded that competitive rivalrystands out as the most important issue in the automobile business.Consequently, Ford Motor Company can only enjoy long-term viabilityif it gives priority to strategic solutions that will help to obtaincompetitive advantage.

References

Canzer,B. (2006). E-business:Strategic thinking and practice.Boston: Houghton Mifflin.

Charantimath,P. M. (2012). Totalquality management.Delhi: Pearson.

Cross,F. B. &amp Miller, R. L. (2009). Thelegal environment of business: texts and cases: ethical, regulatory,global, and e-commerce issues.Mason, OH: South-Western Cengage Learning.

Dornabch-Bender,R., Slade, B. &amp Thorpe, J. (2009). Strategicreport for Ford Motor Company.Retrieved from&lt&lthttp://economics-files.pomona.edu/jlikens/SeniorSeminars/oasis/reports/F.pdf&gt&gton 26thOctober, 2016.

Ferguson,E. (2015). FordMotor Company: five forces analysis (Porter’s model).Accessed via&lt&lthttp://panmore.com/ford-motor-company-five-forces-analysis-porters-model&gt&gton 26thOctober, 2016.

Hill,C. W. L., &amp Jones, G. R. (2010). Strategicmanagement theory: An integrated approach.Boston, MA: Houghton Mifflin.

Manjunath,V. S. (2010). Entrepreneurship&amp management.Pearson Education India.

MindTools Ltd. (2016). Porter’sfive forces: assessing the balance of power in a business situation.Retrieved from&lt&lthttps://www.mindtools.com/pages/article/newTMC_08.htm&gt&gton 26thOctober, 2016.

Phills,J. A. (2005). Integratingmission and strategy for nonprofit organizations.New York: Oxford University Press.

Pringle,J. &amp Huisman, J. (2011). Understanding universities in Ontario,Canada: an industry analysis using Porter’s five forces framework.CanadianJournal of Higher Education, 41(3),36-58.

Statista.(2016). Statisticsand facts about Ford.Accessed on &lt&lthttps://www.statista.com/topics/1886/ford/&gt&gton 26thOctober, 2016.

Triantis,J. (2016). Navigatingstrategic decisions: the power of sound analysis and forecasting.CRC Press.