Ford Company business model is a vast topic for discussion. We recommend digging deep intro Ford’s business model to find out its value system, objectives, and strategies. Read this analysis to find out what is behind Henry Ford’s company’s success.
Introduction
A business model can be defined as a system of activities having a purpose of creating value through building relationships with customers and business partners, using core capacities to address customer needs, and creating work structures that allow monetising the value. In general, business models help a company to develop in such a way that its products and services are loved and appreciated by different stakeholder groups, including employees and investors.
Different frameworks allow integrating values with hard operational components such as supply, distribution and production, constituting a core of business ecosystem. Often, the degree to which different stakeholder values are embedded in the methods of earning profits and matched with the environmental situation defines both the sustainability of the organisation and its ability to grow. Considering these factors, in this report, the business model of Ford Motor Company, a large US automotive manufacturer, will be analysed in the context of the ongoing North American Free Trade Agreement (NAFTA) renegotiation.
NAFTA was enacted in 1994 and since then it “eliminated tariffs, created a unified trading region, and allowed vehicle manufacturers and suppliers to remain competitive with growing global competitors” (Dziczek et al. 2018, p. 1). The updated version of NAFTA, United States-Mexico-Canada Agreement (USMCA), requires a greater percentage of vehicles to be produced in the United States and assembled by employees earning at least 16 USD per hour (Landler & Rappeport 2018).
It is argued that such changes may have a severe impact on the environment in which Ford operated for decades because the previous version allowed the forming of close and highly interconnected relationships among the auto industries in Mexico, Canada and the United States.
According to a recent company statement, Ford management supports the NAFTA revision and believes that the changes may foster development in the North American automotive business (Wagner & Ries 2018). Yet, evaluation of the enterprise’s business plan will allow identifying its weaknesses and strengths that can either support or interfere with the ability to adapt to environmental changes. The report will begin with an overview of Ford’s business model, its core components and value propositions and the ways through which the company adds value. Next, the results of an environmental risk analysis through PEST framework will be provided.
These factors will be thoroughly analysed and discussed in relation to the company’s business plan and the value propositions of the organisation. Lastly, a short section with recommendations for Ford’s management will round out the report.
Ford’s Business Model
Currently, Ford is implementing the “One Ford” business model, which is aimed at selling the same vehicle models worldwide on the global market, in contrast to the company’s previous practice where some vehicles were designed specifically for local markets. At the corporate level, the company’s management is considering this plan as having several advantages. Alhalabi, Ali and George (2016) state that “by reducing the number of brands and consolidating the number of vehicle platforms upon which various models are built,” Ford is striving to “become more efficient and more innovative” (p. 42). This means that the company’s current model is intended to upgrade existing operations through the unification of the global business and a reduction in the number of brands and vehicle platforms that Ford owns at the present time.
As for core components of Ford’s business ecosystem, distributors, contributors, and suppliers, they are currently located across the borders. A significant proportion of materials and auto parts were imported by Mexican (23.1%) and Canadian (15.7%) suppliers in 2017 (Dziczek et al. 2018). The company works with independently owned distributors across the globe and, although Ford favours long-term partnerships, their loss does not entail significant financial losses (Musendo 2018). Moreover, Ford has assembly plants and joint ventures in a number of countries, including the United States, China, Canada and Mexico.
Its main contributors across the globe, managers, designers, and engineers work together to create a unified Ford brand and products that are intrinsically global (JP Morgan 2018). Ford has recently restructured its North American operations and commenced adhering to lead operations strategy aimed to maximise customer satisfaction, increase efficacy, and reduce waste (JP Morgan 2018).
The recent restructuring reflects value propositions of the business well. In general, they are as follows: high-quality cars, environmental sustainability and accountability towards stakeholders’ interests and customer needs (Ford Motor Company 2018a). First, Ford aims to meet customer preferences by diversifying the company’s product portfolio and offering different types of vehicle models at varying prices (Barakaat Consulting n.d.).
Notably, the company is keeping prices for most of its products “artificially low” in order to make them accessible to a significant number of buyers (Alhalabi, Ali & George 2016, p. 41). In addition, Ford is generating a substantial portion of its revenues through financial lease arrangements with customers (Alhalabi, Ali & George 2016). This way of producing profit may be regarded as a crucial component in the One Ford business plan.
Technology, innovation and sustainability are also integral parts of Ford’s value chain. Not only is the company striving to increase the life cycle of cars by enhancing production practices, but it is also working with suppliers and logistics service providers that honour environmental and social standards (Ford Motor Company 2018b). To achieve this aim, the company has established long-term relationships with partners to centralise and increase the control of all operations. Thus, Ford’s sustainability strategy serves as a core component in the One Ford business model, and it creates value in accordance with the company’s long-term strategic goals: reinforcement of social, environmental and financial capital.
The increasing concern about adverse environmental impacts on the part of the automobile industry and the ever-present need for affordable cars are two main factors defining the way that different components of Ford’s business model add value.
Currently, the company is “the low-cost cost leader in manufacturing” (Alhalabi, Ali & George 2016, p. 43). A primary reason for this is that Ford has multiple manufacturing facilities in countries with a low-cost labour force and favourable export policies, such as Mexico (AT Kearney 2008). As a result, the company is becoming able to offer vehicles at a lower retail price and meet the interests of a broad group of consumers.
In terms of environmental sustainability, the global community’s growing concern regarding excess greenhouse gas emissions is driving an increasing demand for sustainable alternatives (Musendo 2018). By developing hybrid vehicles and emphasising the importance of environmental preservation in building partnerships, Ford is striving to meet the interests of environmentally conscious consumers. Nevertheless, the company’s primary risk associated with the global business model is a high level of reliance on suppliers from regions with a low-cost labour force, which is crucial for maintaining product affordability. This risk will be discussed in greater detail in the following sections.
PEST Risk Analysis
Ford’s Risk Analysis
Political
Ford operates in many countries across the globe, and thus, a plethora of factors in the extensive political environment may influence the business. However, the main risk is presently posed by the renegotiation of NAFTA, which fostered the interconnectedness of the automotive industries in the United States, Canada and Mexico. Thus, a plan to centre production activities in the United States may substantially disrupt the company’s value chain (Alanis et al. 2018).
First, this change may be detrimental to Ford’s production cost competitiveness. Increased tariffs on imported auto parts and materials under Section 232 of the TEA will inevitably result in higher production costs and may consequently encourage Ford to maintain and expand its production operations in the United States instead of Mexico. This factor could undermine Ford’s position as the low-cost leader in manufacturing and will likely lead to higher retail prices. Considering that competitive pricing is currently a primary value in Ford’s offerings, the changes that the new USMCA propositions represent will interfere with the company’s value-creating capability.
The mentioned environmental factors may suppress Ford’s revenues in international markets as well. For example, according to recent statistics, the company achieved significant growth in the Chinese market, selling over 18% of its vehicles there (Musendo 2018). However, the sales of some Ford brands (such as Lincoln) rely exclusively on imports, and in the context of the present-day trade environment, this is having a negative effect on the company’s market share in China (RBC Capital Markets 2018).
A primary reason may be the impact of tariffs on Ford’s pricing. As many of the vehicle manufacturers in Asia as well as in emerging and developing markets are producing more affordable, quality cars, Ford is likely to struggle to compete with them to achieve substantial earnings growth in those regions. Nonetheless, the best way to adapt to environmentally driven, trade-related risks is to localise manufacturing operations.
Economic and Social
Like the political risks discussed in the previous section, economic risk affects the value-creating capabilities of the enterprise by raising supply and production costs. According to the estimations made by Erken et al. (2018), the United States will experience an inflationary spike in 2019 because of stronger trade barriers and a resulting in trade price increases, which may range from $760 to $6,610 per car (Schultz et al. 2018).
This means that volatility will be the main economic factor associated with risks to Ford’s profitability. As consumers are known to be particularly sensitive to increases in prices, the US economy may face a decline in private consumption corresponding to price hikes. Since the bargaining power of customers in the industry is high and buyers can easily switch to other brands that provide cheaper options, it is pivotal for Ford to address economic risks in a timely manner.
Economic factors are closely interrelated with social aspects since both are linked to such issues as private income and employment. It was mentioned above that USMCA requires that a specific portion of vehicles should be produced by workers earning at least 16 USD an hour (Dziczek et al. 2018). Rising wages along with the creation of new manufacturing jobs may be a possible positive consequence of the NAFTA renegotiation. The expansion of domestic operations may help create more vehicle production jobs with high-level working conditions and will contribute to the development of social welfare.
Nevertheless, the improvement of work conditions including an increase in nominal wages under USMCA, as well as the inability to meet these new requirements, is associated with higher manufacturing costs and an unavoidable increase in retail prices (Erken et al. 2018; Dziczek et al. 2018). Ford’s current efforts to cut the company’s global salaried workforce as discussed by Thibodeau (2018) may be regarded as a way to increase cost-related and operational efficiency in the face of environmental changes. However, labour restructuring can offer multiple hazards to organisational culture and employee morale.
As noted in a recent report by the UBS (2018a), overall employee satisfaction at Ford is below the industry average, in contrast to the suggestion that “companies with satisfied employees tend to be more profitable” (p. 1). Therefore, the identified changes may result in increased turnover along with reduced employee motivation and productivity, which may consequently decrease the company’s output.
Considering that new vehicle dealers are core elements in Ford’s business ecosystem, it is important to discuss potential effects of USMCA on it and the relationships between the company and its distributors. According to Schultz et al. (2018) the introduction of restrictions on imports will affect the dealership industry negatively by inducing employment losses and wage cuts as employers will aim to compensate the decline in vehicle demand. This factor also increases the risk that some wholesale customers will withdraw from partnerships. However, a larger part of dealers with whom Ford works are independently owned. Therefore, since the enterprise does not depend on them substantially, by losing a few of them, it will not suffer serious adverse impacts.
Technological
Technological risks are mainly predetermined by environmental and social factors and the fact that the demand for innovation remains high in the automotive industry worldwide. For example, according to Musendo (2018), authorities in different countries are committed to increasing fuel efficiency by imposing various environmental regulations. In addition, the countries adhering to NAFTA are required to regulate trade- and industry-related environmental impacts in accordance with the NAAEC.
Along with this, a report by Kuhnert, Stürmer and Koster (2018) indicates an increasing interest in electrified, emission-free cars as well as other innovative technologies such as self-driving vehicles in the global market. To a large extent, Ford is addressing technological and environmental trends through its current R&D projects, including green and autonomous vehicles, drones, robots and so forth (Musendo 2018). Nevertheless, though environmental sustainability is a core value proposition in the One Ford business model and the company is achieving success in its realisation, the potential impacts of governmental regulations and taxation on production expenses can be profound. Thus, the company needs to find ways to compensate for the high costs that environmental policies may induce.
The rapid development of the e-commerce sector promises to provide multiple opportunities for Ford to increase the company’s earnings growth. According to Aaronson (2017), including a digital trade chapter in the existing version of NAFTA can help regulate and encourage online retail. Kuhnert, Stürmer and Koster (2018) note that a significant percentage of the automotive market is now comprised of younger, technically educated individuals who prefer alternative ways of purchasing and using cars.
Ford already plans to address the interests of this population group by collaborating with Alibaba in order to make retail experiences less stressful and promote sustainable mobility (Sit 2017). This initiative demonstrates that the enterprise is striving to use its R&D resources efficiently and prove its role as an innovator. It is possible to presume that engagement in similar projects in other markets, including the United States, can help to attract more potential consumers and, in this way, increase profits.
Ford’s Business Model Mitigation
Ford Motors can attempt to mitigate the risks to earnings growth through a number of strategic processes. First, it can be recommended that the management maintain its focus on investing in the North American market in general and in the United States in particular. This approach can help protect the business from the negative economic impacts associated with locating manufacturing in neighbouring countries.
It may also be suggested that Ford implement the necessary steps to increase sales in international markets. Statistical data demonstrates that in 2016, 65% of the enterprise’s total revenues were from North America, 20% from Europe, and 15% from the Asia Pacific and other regions (UBS 2018b).
Through more actively seeking to market its vehicles in those regions, localising production and establishing more partnerships with local enterprises, Ford can minimise the adverse consequences of US trade isolationism for the global business. In addition, a focus on locations with the lowest possible production costs along with favourable export conditions can significantly benefit the company. However, it is worth noting that the latter strategic step may assist Ford in being more competitive on a global scale in the long term while possibly decreasing its competitiveness in the United States in the short term.
References
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