The Analysis of Automotive Industry

Porter’s Five Forces analysis of the automobile industry

Porter’s five forces analysis is used by managers to understand the present situation in an industry and its future trends. Companies do make this analysis as part of their business development strategies. This analysis is composed of five parts: the threat of substitute products, the threat of new competitor entry, the threat of existing rivalry, the power of buyers, and the power of suppliers. The automotive industry in the United States has been gradually ‘sinking’ in serious difficulties in the last decade. The threat of substitute products was elevated and car production companies were to be more careful because of an intense rivalry and product development. The fact that in 2006 the Chevy Trail-Blazer SUV outsold the Ford Explorer counterpart is an argument for this (Dess, Lumpkin, Eisner, 2008, p. 8). The threat of new competitors and the threat from existing rivalry is also at an elevated level. As an argument in favor of this, one can mention the entrance of Toyota in the United States market. This was true in fact for Japanese carmakers in general. The strategy of Toyota in establishing local production facilities in North America resulted successful in gaining a considerable market share (Dess, Lumpkin, Eisner, 2008, p. 8). The same company can be taken as an example to show that even existing rivalry threat is high. Toyota in 2007 was expected to surpass the General Motors Company in sales. And so, a company that once was even behind Ford in the US market now becomes the largest in the world.

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The bargaining power of both suppliers and buyers is strong for this industry. The power of suppliers is determined by the offering car-making companies do and they are all engaged in developing new and more qualitative products. But the power of buyers is even stronger than that of suppliers. This is because the automotive industry is very much linked to the general economic and financial conditions of the country. Since automobiles are durable items, in difficult times people wait before spending to replace them (Dess, Lumpkin, Eisner, 2008, p. 8). This has a tremendous effect on demand and supply. And with the current bad financial and economic conditions the demand from consumers has dropped significantly influencing directly the revenues of the car companies. All of the above-mentioned parts of the five forces analysis are considered to be external forces influencing the ‘health’ of a company.

A financial analysis of Ford’s Automotive and Financial Services businesses and the combined operation

Instead the financial analysis helps us better understand the internal forces influencing on the company’s ‘health’. There are two major sectors to be analysed inside Ford Company: the automotive sector and the financial services sector. The first thing to be checked should be the sales-to-costs ratio. This wider the difference between the sales, revenues, of a company and its total costs, the bigger will be the pre-tax profit of that company.

The sales of the automotive sector of Ford Company in 2005 increased by $6355 mln from $147,119 mln declared the previous fiscal year. That corresponds to a 4.31% increase. The same year the costs and expenses were increased by $9169 mln. That corresponds to 6.75% increase. It is clear that the costs and expenses had an increasing percentage points higher than that of the sales. Instead of stopping the next fiscal year, 2006 they increased again by $3945, or 2.72%. The picture is complete when we add the fact that the sales not only did not increase from 2005 to 2006 but they dropped by $10167 mln, or a 6.62% decrease. So, for the 2006 fiscal year compared to the previous year we have a difference of more than nine percentage points between sales and expenses, in favour of expenses. But the core problem shows itself when we see the data from the pre-tax income of the sector. For the three mentioned fiscal year this sector has operated with loss and not profits. From 2004 to 2006 these losses went up from $178 mln to a stunning $17,017 mln.

The financial services sector was even in worse circumstances. From 2004 to 2005 it had a decrease of about $1775 mln, or 7.04%, in its revenues. From 2005 to 2006 there was a further drop of $6606 mln, or 28.2%. Lastly, when we compare the pre-tax profit for this company we see that the financial sector has operated with profits, and even increased its profits. From 2004 to 2005 the sector’s profits increased by $666 mln, or 15.53% increase. Instead they dropped in 2006 by $2957 mln, or 59.7%.

Anyway, this sector has been performing better than the automotive sectors since it has never operated with losses contrary to what the automotive sector has been doing the past three fiscal years.

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Recommendations for what Ford Company should do

These recommendations can be divided into two main categories. First, Ford Motor Company has to deal with the external problems coming from what was analysed above in the Porter’s five forces scheme. Then are the internal problems related to its financial performance.

Due to its previous excellent performance during the last decade of the past century, Ford already has enjoys strong positive brand recognition among consumers. It should try not to lose such an important factor. It is this brand recognition that has helped Ford to gain the market positioning it actually enjoys. For this reason they have to anticipate competition, like Chevrolet and Toyota, in meeting customer demands and desires. The financial crisis has made life difficult for many Americans which would wait until better times to change their automobiles. In order to be congruent with the present situation a new management strategy is needed to try to meet the new economic conditions affecting customer’s life. This is a strategy that should tend toward the axiom: management for value. This new strategy can help Ford resist ‘pressure’ from competition and, at least retain the current market positioning and stop losing share. If the company passes this critical situation without losing significant share in its market position, it will have the opportunity to gain more once the bad economic situation is over. This would also serve as a basis for future expansion operations in newly emerging markets.

But this is only half of the reformation process the company should make. The other half regards its financial health. Ford is should immediately find ways to cut its costs and expenses. Especially the company has to do something about its long-term debt. For the three years analysed here it has been growing until on 31 December 2006 it was evaluated at $28,514 mln. The long-term debt can become devastating for the future liquidity of a company. This liquidity is essential for making new investments. The other thing the management of the company should consider is the liabilities. The company seems pretty bad especially in the automotive sector where liabilities have grown in a scary way. The cutting of automotive liabilities will help enhance sales. At least they will reshape positively companies financial situation.

References

Dess, Lumpkin, Eisner. (2008). Ford motor company on the edge? From: Strategic Management: Text and Cases. The McGraw-Hill Companies.

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