Chapter 11 The industry is also on the brink of technological changes

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CASE 11
Ford and the World Automobile Industry in 2015
TEACHING NOTE
SYNOPSIS
Since the financial crisis of 2008-9, when Ford was the only one of the US Big Three auto makers to
avoid bankruptcy and government-financed rescue, the company has staged a remarkable recovery. Its
“One Ford” strategy of cost efficiency, global product development, innovation, and quality enhancement
has resulted in it becoming one of the world’s most profitable volume car manufacturers.
how that profitability will be shared among the different members of the industry.
As the case shows, the problems of the automobile industry were not simply a result of the 2008-9
financial crisis and its aftermath. The downturn in demand and shortage of finance exacerbated problems
TEACHING OBJECTIVES
I use this case for two major purposes:
1. The case is useful in applying industry analysis to a global industry. It allows students to view the
structural changes that have occurred in the industry, and then to apply Porter’s Five Forces
2. Looking longer term, the case allows a deeper look into the factors driving industry evolution and
POSITION IN THE COURSE
I have used this case at two different stages of my strategy courses:
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1. Focusing upon the first of my teaching objectives (see above), I use the case in the part of the
course that addresses industry analysis. Here the case draws on the concepts and frameworks of
ASSIGNMENT QUESTIONS
1. The world automobile industry has experienced a downward trend in profitability since the 1960s.
(The appendix shows that between 1980 and 2009, the trend of ROE for the leading producers
was mostly downward.) What changes in the structure of the world auto industry have caused
competition to intensify and profitability to decline?
READING
R. M. Grant, Contemporary Strategy Analysis (9th edn.), Wiley, 2013, Chapter 8 on “Industry Evolution
and Strategic Change. Also Chapter 3 on “Analyzing Industry attractiveness” and “Applying Industry
analysis to Forecasting Industry Profitability” (pp. 66-80); and Chapter 4, on “Segmentation and Strategic
Groups (pp. 102-108).
CASE DISCUSSION AND ANALYSIS
Although the case views the industry environment from the viewpoint of Ford Motor Company, the
primary focus of the case is the automobile industry. The approach I take is first to encourage students to
analyze the past, and then to address the future
The Evolution of the Industry
I begin by asking whether the automobile industry has followed the development pattern predicted by the
industry life cycle model. The answer is yes. (Strategy Capsule 8.1, p. 210, summarizes the key features
of the industry’s early development and its transition from the introduction to the growth phase.) Some of
the characteristic features of the life cycle models evident in the auto industry include:
Rapid product innovation during the introduction phase which, in the growth phase, gives way to
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However, it is also clear that the industry has followed different development paths in different
countriesin emerging market countries the industry is still in its growth phase, whereas in the advanced
industrialized countries (North America, Western Europe and Japan) the industry is in decline.
Concentrating on the period since 1980, I ask whether this has been a good industry to be in. The
I then ask: “Why has industry profitability over the past 35 years been so poor?A range of points
typically emerges: internationalization, market saturation, rising cost of new product development, etc.
The challenge for students (and for the instructor) is to fit these various trends into the Porter Five Forces
Framework. For example:
Internationalization has reduced seller concentration in national markets the US market was
Market saturation is indicated by the declining trend of production in the US, Western Europe,
and Japan (see Tables 1 and 2). Demand has been depressed by the fact that cars are lasting
Increasing product development costs don’t necessarily reduce margins if every firm
experiences increased costs, then these costs can be passed on to the customer. The key, however,
Rising supplier power. Component producers are growing in size (see Table 5) and international
scope. They are becoming responsible for more and more of the core technology incorporated
within motor cars. As a result, their power relative to the auto assemblers has increased.
Use of the Five Forces Framework to explain falling profitability over the past few decades is shown
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competing to expand their market shares. This competition for market share encourages the vast
overhang of excess capacity that afflicts the industry (see Table 7).
Application of the ‘Five Forces analysis may encounter (lead to?) a question concerning industry
boundaries. In particular, are we looking at a single global industry or a collection of regional/national
markets? It is simpler to view this as a single global industry. However, if we identify a single global
industry, why is it that the intensity of competition has increased if the total number of auto producers has
Industry Profitability in the Future
Looking ahead to the near future, I ask students to predict whether over the next five years (i.e. 2016-
2020) the auto industry (worldwide) will be more or less profitable than it has been in recent years.
Certainly the stock market is pessimistic: the average price-earnings ratio of the main automakers was
Supplier Power
Component suppliers increasingly
concentrated
Component suppliers increasingly control
technology
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Factors tending to increase profitability:
Mergers and acquisitions: increase seller concentration and assist reduction of excess capacity
but potential for M&A seems limited (except in China)
Factors tending to reduce profitability
Continuing overhang of excess capacity: slowing demand growth in emerging markets (especially
China and Brazil), together with lack of demand growth in mature markets (as young urban
dwellers increasingly forsake automobile ownership), is likely to keep price competition intense.
Emerging market manufacturers continue to invest in new capacity (e.g. Tata-JLR).
New entrants into international markets. International expansion by domestic producers from
Choosing Attractive Segments
Following the approach shown in Strategy Capsule 4.4 of Contemporary Strategy Analysis (pp. 106), we
can segment the world automobile market by product class and geographical markets. Identifying
attractive segments then requires the application of the Five Forces Framework: some segments will have
structural features that offer greater prospects of attractive margins. Thus, during the 1980s and 1990s, the
North American markets for SUVs and pickup trucks offered an attractive marginthere were few
competitors and a shortage of capacity. But by the late 1990s every major automaker was offering an
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The industry can also be segmented vertically; using Bain & Company’s profit pool analysis it would
appear that automobile manufacturing is much less profitable than a number of downstream services
consumer and dealer financing in particular (see Contemporary Strategy Analysis, 9th edn., Chapter 4,
Strategy Capsule 4.5).
Longer-term Analysis of Industry Evolution
The emphasis of the case is on the historical development of the industry and on the description of the
The fundamental force driving all the predicted changes in the industry is technology. Key technological
changes include:
Electric carsincluding hybrid, plug-in, and fuel cell.
Digital technologies. The application of digital technologies includes both intelligent vehicles
It is interesting to ask the extent to which these technological changes are a threat to the existing
automakerseither because they are architectural innovations requiring a reconfiguration of the
product and the business system that creates it, or because they’re disruptivethey incorporate
different performance attributes and appeal to different types of customer.
It would seem that these changes involve threats to the profitability and market positions of the
established auto makersbut are not necessarily destructive in terms of other types of company
displacing existing automobile firms.
For both types of technology, the timing and the extent of the impact will depend heavily upon
government policies. In the case of electric cars, the critical determinant of the displacement of
internal combustion engines by electric cars will be government measures that encourageeven
mandateelectrical power over fossil fuels. This will depend upon government actions with regard to
global warming, pollution, and congestion.
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with social changes and business strategies to create new patterns of personal mobility and new
business models.
For example, does software customization, and customer involvement in the co-creation of cars
This takes us to scenario creationamong the many different variables that will be impacting the
industry, are these likely to converge into a distinct number of likely configurations? (Refer to pp.
224-225 on “Scenario Analysis” and Strategy Capsule 8.3 on p.226.) Possible scenarios include:
A “continuity scenario” if oil prices remain low and governments are disinclined to take urgent
measures to discourage fossil fuel use; technological change is then likely to be gradual and non-
disruptive and strategies and business systems of the automobile companies seem likely to
A “radical change scenario” is a combination of new technological opportunities and
environmental shock which results in radical changes in personal mobility. Such a scenario might
include restrictions on the use of private cars, increased development of public transport,
widespread displacement of internal combustion engine by plug-in or fuel cell vehicles, the
introduction of fully autonomous cars, and a dramatic decline in individual ownership of vehicles.
.
Key Success Factors
This is a complex industry and understanding the basis for competitive advantage within it is a challenge.
One way into this issue is to identify which companies have been the most successful in recent years, to
ask why, and then to try to generalize in order to establish KSFs. Clearly, different firms are successful
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Cost competitiveness will increasingly require manufacture at locations where input costs are low
(low labor costs in particular).
Flexible manufacturing and new approaches to product development may diminish the
importance of scale economies.

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