Ford's Revitalization Strategy

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Case 4

Ford and the World Automobile Industry
Robert M. Grant
In September 2003, Bruce Blythe took up the new position as chief strategy officer at Ford Motor Company. His appointment came in the wake of a massive upheaval of Ford’’s strategy, leadership, and organization. In 2001, Ford’’s CEO Jacques Nasser had been ousted by the board after a three-year tenure. Nasser’’s goal had been to transform Ford into a flexible, customer-focused, innovative, global giant——that simultaneously paid careful attention to profitability and shareholder return. By late 2001, it was clear that the strategy was not working. Overpriced acquisitions had dissipated shareholder value, the Firestone-Ford Explorer recall severely dented Ford’’s reputation with consumers, and Ford was heading for its biggest loss ever. Company chairman, Bill Ford, assumed executive control of the company his great-grandfather had created. In January 2002, Bill Ford announced a new strategic direction for the company. Cost cutting would eliminate 35,000 jobs worldwide, close of five plants in North America, divest $1 billion of non-core assets, and take $2 billion out of operating costs in the first year. At the same time, Ford would invest heavily in new models——between 2002 and 2006, $20 billion would be spent on a new product development program that would introduce 20 new or upgraded models to the US market every year. Particular emphasis was to be placed on the Premier Automotive Group which comprised Ford’’s up market brands including Aston Martin, Jaguar, Land Rover, Lincoln, and Volvo. By the beginning of 2004, the revitalization strategy was beginning to show results. During 2003, cost reductions totaled $3.2 billion, as a result of which the company’’s net income was $495 million——after heavy losses during the previous two years. Yet, despite these clear signs of turnaround, Bruce Blythe was concerned over the outlook for the next five years. For all the improvements made in Ford’’s core automotive business, cars and trucks were still losing a lot of money——the automotive side made a pre-tax loss of $1,957 million in 2003, much bigger than the loss in 2002. Ford’’s profits derived entirely from its financial services business, which produced a pre-tax profit of $3,327 in 2003. However, Blythe’’s main concerns related to the future. During 2004, Ford’’s capital expenditure would amount to $7 billion——similar levels of capital expenditure were planned for subsequent years. Could these investments be justified by the returns that they were likely to generate? Much depended upon the state of the industry. Since the beginning of the 1990s, the performance of the world automobile industry had been dismal. During the 1990s, the industry had failed to cover its cost of capital——all the world’’s leading automobile manufacturers (with the exception of DaimlerChrysler) eared a negative Economic Value Added (see Table 4.1). And during 2000-03, industry profitability had deteriorated further. If Ford’’s heavy investments in new products and plant flexibility were to yield the returns necessary to deliver on the commitments made by Bill Ford’’s commitment to the superior shareholder returns then it was essential that the industry environment became more conducive to price stability and positive margins. As Blythe began examining the financial projections for 2004-06 made by CFO Allan Gilmour’’s staff, his thoughts focused increasingly on the future of the automobile industry.

Would demand growth take up the excess capacity that has plagued the industry for most of the past six years, would mergers and acquisitions consolidate the industry to the point that destructive price competition could b consigned to history, and would consolidation both upstream (among components suppliers) and downstream (among dealers) mean that the auto manufacturers would constantly be squeezed from both ends? [Table 4.1 about here]

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