Strategic Analysis: Ford Motor Company

Introduction/Overview

Ford Motor Company is a Fortune 500 automotive company founded by Henry Ford in 1903. Ford is a company that is worldwide and currently ranks 13th on the 2019 Fortune 500 list. This strategic analysis will outline the financial strategy, strengths, and capabilities of Ford and will highlight their strategic position in comparison to its competitors.

How well is the present strategy working?

To determine whether a company’s current strategy is working can be determined by:

• Whether the company is achieving its financial objectives
• If financial performance is above the industry average
• Increasing both customer base and market share

At the beginning of 2019, Ford Motors decided to take strategic action that they thought would allow them to improve their finances.

They had a strategy in place to be the leaders in autonomous and electric vehicles and create new business models for profitable growth in the emerging and emerged markets (Factset.com). In aiming towards being the leader in the autonomous vehicle segment of the automotive industry, Ford was on track throughout 2019 with aligning their annual performance with their strategy.

Since 2015, Ford’s strategy has not changed much, it just has grown to add more emphasis on autonomous vehicles and global redesign.

Financial performance is essential in determining the standing of any company. Return on assets or ROA is a great way for companies to assess if their strategy is successful. In Exhibit 1.1 we can see that Ford’s ROA decreased significantly from 2018 – 2019. It was mentioned in the earnings call from Q4 2019 that because the company was successful in implementing a more updated strategy it had a negative impact on the company financially.

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If we look at the 5-year average ROA we can see that Ford’s 5-year average was 1.98 which was almost 85% lower than the industry average which isn’t good for one of the industry’s top competitors.

When it comes to market standing, Ford’s current strategy has allowed them to maintain their competitive market standing, having the second highest market share in the global automotive industry behind General Motors. Based on what we know at this time, Ford’s current strategy could be questionable considering the fluctuation in profitability from 2015 – 2019. It may take a few more years to fully assess the effectiveness of the strategy.

What are the company’s most important resources and capabilities and can they give the company a sustainable advantage over the competition?

Ford being an automotive manufacturer, they have both tangible and intangible resources that are very important. The more important tangible resources include the company’s facilities and plants in which they produce the automobiles and the distribution channels used to deliver the end-product to the customers or those who sell the product on behalf of the company. The important intangible resources are mostly intellectual property which includes the designs and technologies used in the production of the automobiles and technologies specific to the vehicles.

Capabilities are the necessary organizational and managerial skills needed in order to implement a strategy by utilizing current resources. Through the resources that have been identified, I believe that Ford’s most important capabilities include the quality of the product produced in their facilities, R&D, the ability to have dealerships market and sell the vehicles on their behalf, and the implantation of new innovations technologies and designs.

In order to determine if Ford’s resources and capabilities can give them a sustainable competitive advantage, one must first perform the VRIN test to understand if the resources and capabilities are valuable, rare, inimitable, and non-sustainable. I feel all the resources and capabilities that have been previously identified are valuable, but I am not 100% confident in their ability to sustain Ford’s competitive advantage. I believe that Ford’s brand reputation and recognition will help its competitive advantage considering the automotive industry is a very competitive one in which all companies are always looking to “one-up” the other. Based on the finances of other company’s in the industry, Ford seems to be doing well by having the second largest market share of American automotive companies, so thus far their resources and capabilities have allowed them to sustain a competitive advantage financially.

Is the company able to seize market opportunities and overcome external threats to its future well-being?

Strengths

Weakness

•  Diversity and networks
•  Innovations/redesign
•  Competitive advantage
•  Brand recognition/reputation
•  Market position
•  Dependency on US market for sales
•  Declining in sales in markets outside the US
•  Profitability

Opportunities

Threats

•  Autonomous driving
•  Eco-friendly, fuel-efficient vehicles
•  Electric vehicles
•  Financial Improvement
•  Increased competition in a crowded industry
•  Changes in exchange rates
•  Regulatory and compliance pressures

By performing a SWOT analysis, I was able to tell a few things about Ford’s current strategy. With their current strategy, it is obvious that Ford has identified their strengths in being able to utilize their competitive advantage and brand recognition to help roll out and foster new ideas and “sub-strategies” for new innovations. They have been able to use these strengths to identify opportunities within the industry as demonstrated in their strategy to go after the autonomous driving and electric vehicle market segments. This is a great opportunity for the company to improve financially and therefore address their recent struggles with profitability.

Considering sales are declining in markets outside the US, Ford’s new innovations and opportunities should help defend against the decrease in sales and the dependency on the US market for majority of the company’s sales. By playing to their strengths and taking advantage of the opportunities, Ford should be able to prepare to protect themselves from the threats that have been identified.

Are the company’s cost structure and value proposition competitive?

In determining if a company’s cost structure and value proposition are competitive, one must evaluate the cost structure of the company in relation to its competitors and perform a value chain analysis. With the information provided through Factset, I can only go on the expenses/cost that was provided in the income statement and the 5-year average of SG&A expenses and other expenses is 19.86 billion and Ford’s SG&A / Sales ratio 5-year average was 12.79 billion. The industry and competitors section did not provide this information so I can only assume by the information given on Ford that their cost structure is somewhat favorable. Based upon their own finances, from 2015 – 2019 Ford managed to see a decrease in their expenses which means that in some way they have been able to cut costs but it seems as though it came at a cost because sales decreased from 2015 – 2019 as well.

In performing a value chain analysis, we must identify the primary activities and the support activities of the company. The general primary and support activities I feel as though are the same for every automotive manufacturer. Primary activities including areas such as supply chain, operations, and sales while support activities generally include R&D, HR, and the more support departments that are not directly related to the manufacturing of the vehicles. We know that both operations and sales impact the COGS which has decreased over the last five years. A decrease in COGS is not what any company wants, so Ford must realign their strategy and further pinpoint their key activities that will continue to give them a competitive advantage. Considering Ford has had recalls on products in the past, this means that improvements would need to be made to their primary activities to avoid these in the future. When a product is recalled, this gives the competitors the opportunity to avoid the same mistakes which could give them an advantage. Based on what is known about the primary and support activities, Ford has been able to maintain their customer value and internal processes, but this may not be enough in the future to hold off the competitors. Understanding what competitors are doing and what their current and future strategies are is critical to Ford not only maintaining but improving their competitive advantage.

On an overall basis, is the company competitively stronger or weaker than key rivals?

Looking at profitability in terms of sales growth within the last five years in comparison to its competitors, Ford has experienced a percentage growth of 8.2 % which is lower than majority of its competitors but maintains higher percent growth than the average of its top competitors of 7.1%. This could mean that Ford’s competitors have pinpointed their own strengths and their competitor’s weaknesses to find out where they are vulnerable in order to compete more competitively. Overall, I can say that overall Ford is competitively stronger than their key rivals.

What strategic issues and problems merit front-burner managerial attention?

The strategic issues and problems that require managerial attention would be the areas of the current strategy that are resulting in the inconsistencies in the finances that have been identified below. In the Q4 2019 earnings call, their current and future strategy for 2020 was discussed. The strategic issues and problems that require the most attention are the internal weaknesses that will impact their strengths and the external threats that will block the way for them being successful in exploring new opportunities that have been previously mentioned. We can tell from the information gathered that although Ford may be competing competitively overall, there are still areas of weaknesses that competitors have identified that, if acted upon, will make it more difficult for Ford to not only maintain but grow their competitive advantage.

Financial Analysis

The exhibits presented on the following pages outline the four keys areas that companies can use to assess whether they are creating financial value. The exhibits display relevant ratios which give insight into multiple aspects of Ford’s finances over the last five years. I will briefly discuss how Ford performed in comparison to its competitors over the last five years.

Exhibits 1 show two critical profitability ratios, ROA and ROE. Both the ROA and ROE since 2015 have fluctuated for Ford with no consistent increase or decrease over the years. As previously mentioned, the ROA for Ford is lower than the current industry average which, in part, could be due to a recent change in their strategy which could indicate a weakness in their current strategy. The ROE 5-year average for the company is 15.55 which is higher than the industry average of 14.34, so this means that on average, over the last five years, the company has managed to successfully generate income.

Exhibits 2 evaluate liquidity ratios which evaluate whether Ford can pay off their debts. Both the current and quick ratios decreased consistently since 2015. The current ratio analyzes the company’s ability to pay off their current assets and current liabilities. The 5-year average for current ratio is 1.32 indicating that, although there is room for significant improvement, Ford can more than likely cover the costs to pay off their short-term debts. The quick ratio is used to determine if the company has enough cash on hand to pay off current liabilities. When a quick ratio is greater than one it means that the company should be able to have enough cash to cover their debts. In Exhibit. 2.2 the 5-year average is 1.21 which is a good indication that Ford will be able to sufficiently cover their liabilities.

Exhibits 3 are efficiency ratios. Efficiency ratios measure how well companies utilize their assets to generate income (Stewart, 2020, Slide 11). Asset turnover measures how well a company can turn their assets into sales and whether the company is operating efficiently in this area depends on the industry and has decreased for Ford since 2015. Their current asset turnover ratio is .64 which is slightly lower than industry but still not bad compared to quarterly averages. Inventory turnover measures the efficiency of a company to turn inventory into sales and the current 5-year average for Ford is 13.76 which is a good indication that a company is managing inventory well although it has fluctuated up and down since 2015.

More research would need to be done to determine if this average is efficient enough for Ford’s strategy. Days sales in inventory measures the amount of time (days) it will take for Ford to sell all their current inventory. Over the last five years, it took Ford, on average, approximately 26.66 days to sell their inventory on hand, which has increased every year since 2015. I feel as though overall in the last five years they have been efficient compared to other competitors in the industry whose 5-year averages total to around 35.3 plus days but a constant increase in days sales in inventory is not a good indication of a company’s sales.

Exhibits 4 are leverage ratios that measure the overall debt load of a company and illustrates how much of the company’s assets belong to the shareholders rather than the creditors (Stewart, 2020, Slide 12). The debt ratio determines the company’s ability to leverage debts. The higher the debt ratio the more risk the company is taking. The 5-year average for Ford is 59.95 which is higher than the industry average of 55.13. Both of these averages are fair and Ford could do more to improve their debt ratio. The debt-to-equity ratio is a way to measure the financial solvency and it compares shareholder equity to debt to determines the company’s ability to pay off debts. A high debt-to-equity ratio shows that a company may not have enough cash to pay off their debts. The 5-year average for Ford is 459.53 which we can tell that over the last five years Ford has been acquiring more debt through areas such as bank loans to finance their company. This is a high risk for Ford and over the last five years, the debt-to-equity ratio has fluctuated and no consistent pattern can be identified other than the increase in this ratio comes at the time of new launches or upgrades made to the vehicles.