Ford's 21st century revolution
By Han-Li Chang, Juan Carlos Hussong, Karan Singh, Milena Flament, Rohan Ghotage and Torry Schoenfeld
During its early years, Ford earned a good reputation thanks to the T-model, the first affordable, mass-produced car in automotive history. Over time, Ford’s reputation became notorious for its emphasis on affordability at the expense of quality and innovation. The 1970 Ford Pinto is a good example of bad design and low quality. Through a series of low-quality cars, Ford’s reputation deteriorated.
As an editor of Carnews.com, a major car magazine in Taiwan, Han-Li Chang tested all of the new cars sold in the automotive market in order to present fair comments about them to aid in consumer purchasing. At that time, it was difficult to write anything good about Ford. Han-Li discovered rusty car frames and flawed transmissions on brand new Fords. While Japanese competitors were flourishing with their innovative high quality cars, Ford was still not prioritizing quality and technology.
The automobile industry is, and has been, highly competitive. The big three American automakers, General Motors, Ford and Chrysler, have for many years adopted similar strategies. They focused on delivering the American dream car: Roomy, comfortable, big engines, and lots of horsepower. In recent years the big three shifted many of their resources from small and mid-size cars to satisfy the SUV craze of the domestic market. Very few resources were allocated to innovation or R&D. Fuel efficiency and hybrid technology were largely ignored.
At the same time, the domestic automakers’ biggest foreign competitors, with Toyota leading the way, pursued a strategy that focused on products of high quality, reliability, and technology. Toyota has been on the forefront of hybrid vehicles, with the Prius revolutionizing the way Americans view cars. The manufacturing processes were streamlined and automated. Technology was on the forefront of its strategy. In time the domestic automakers earned a reputation of unreliability. As gas prices rose and consumer awareness of emissions increased, the reputation of domestic automakers further declined in the eyes of consumers.
In comparison to the foreign brands, the Blue Logo was associated with poor quality and cheap production around the world. The pervasive negative image of Ford lingered for decades. Without a decent strategy to salvage Ford’s deteriorated reputation, the company could not sustain its market share in the automotive market. It was precisely this volatility in reputation around the world that the new Ford strategy aims to overturn.
Allan Mulally from Boeing was appointed as the CEO of Ford Motors in September 2006 to fix Ford’s image. As soon as he joined the company he devised a plan identifying the long-term goals for Ford Motors along with a process to meet them. The first goal was to focus on the quality of the cars. In order to do this, Mulally realized that a huge amount of money needed to be invested in research and development to come up with quality and fuel efficient cars that are comparable to that of the competition. In order to meet this goal Mulally decided to obtain a $23.6 billion loan that pledged almost all the Ford assets, including its iconic blue logo. This gamble paid off in two ways. Firstly, the cash inflow helped Ford to invest in better and more efficient manufacturing units and overtake its competitors like Toyota in sales by repositioning itself as a quality car manufacturer. Secondly, it also served as a cash cushion during the financial crisis in 2008, making Ford the only American automobile company to reject the bailout when sales reduced drastically.
Mulally’s second goal was to focus its efforts and resources on a single Ford brand rather than a family of brands. He convinced Bill Ford, the previous CEO, to sell off brands such as Jaguar, Land Rover and Volvo Cars. Mulally aimed to compete in every market segment with carefully defined products like small, medium, and large; cars, utilities and trucks. During the period of rising fuel prices and economic slowdown, Mulally diverted the focus of Ford motors from trucks to small, fuel efficient cars. He also introduced the small European car designs in the US Market.
In addition to these measures Mulally introduced the One Ford strategy to inculcate a new corporate culture amongst his employees. The strategy outlines the four goals of the company “Expected Behaviors”. All of these strategies differentiated Ford Motors’ operations from GM and Chrysler and helped Ford increase its market share drastically thereby pumping in huge revenues.
A perfect example of Mulally’s One Ford vision is the World Car. Here, Ford executes an operation strategy called platform sharing, whereby it enhances operations by universalizing manufacturing around the world and across models. Mulally describes the new Ford Focus as a world car because 80% of its parts are shared throughout its various models, regardless of where the parts are produced.
Since, the crisis truly hurt the car industry, platform sharing is fundamental in order to cut costs, ease production, and increase flexibility. The shared platform strategy will be crucial for car companies that have the economies of scale to execute it. Along with Ford Motors, Volkswagen, Fiat, and Chrysler are also engaging in platform sharing.
Platform sharing is not a new technique, as it was practiced more than a decade ago. What has changed, however, is its rigidity. Now, thanks to current technology, it is possible for car manufacturers to produce universal parts while catering to different markets. Additionally, Ford has gained common sense. Back when it practiced platform sharing in the 90’s, the company went overboard by using Ford (an affordable car) parts for Jaguars (a luxury car). Needless to say, customers were unhappy.
Additionally, this strategy is not unique to Ford but it is difficult to imitate. All competitive car companies are adopting this platform sharing given the tough automobile market. There will be competition in this realm and Ford’s ability to milk its economies of scale will be crucial to its success. As of now, VW is seen as the leader in platform sharing because this has been their strategy for several years. Under Mulally’s leadership, however, the company is confident in its competitive strategy.
Another example of the One Ford strategy is the company’s focus on two key elements of car design, verall quality and fuel efficiency. In 2001 JD Power & Associates rated Ford as having the worst quality record of any of the major automotive manufactures.
However, in Power’s Initial Quality Study for 2010 Ford was ranked in the highest bracket for all most all categories. Ford with 93 defects per 100 vehicles was well below the industry average of 109. There were four companies ahead of Ford, of which two were strictly luxury car producers and the other two were the luxury brands from other major manufactures. This bottom to the top improvement by Ford demonstrates the company’s new commitment to producing reliable vehicles and the desire to have their brand name synonymous with quality.
With the increase in fuel costs, Ford has looked to increase the miles per gallon that their cars and trucks can achieve. The importance of this cannot be overlooked. Fuel prices do not look like they will come down. In fact, they most likely will rise. Plus, state governments are starting to put gas mileage standards in addition to stricter emission norms for new vehicles into law.
In the last two years Ford has increased the overall mpg of their entire fleet of products from 25 to 27.1. This is a trend that they hope to continue and improve.
One important brand that will be modified is the F-150. Around 40% of the company’s sales are trucks and the F-150 is the most popular. Reducing fuel consumption in this category is very important to the task of increasing mpg. Ford hopes to achieve this by installing a new V6 engine called the “Eco-boost”. This engine will maintain the power and torque rates which are best in class for the F-150 while increasing mpg to around 27 on highways. If this new engine proves to be as good as the company says Ford should gain even more of truck market share.
Ford has also been producing a new hybrid called the Fusion in an effort to sell to the greener segment of the market. Here they have run into competition primarily from Toyota’s Prius. While the Prius is still the best selling hybrid in the market the Fusion is making steady inroads. Ford has managed to achieve these marked improvements in quality and fuel efficiency through their One Ford strategy. Ford Motor Company has spent a great amount of time engineering a well-recognized turnaround.
A very important aspect of the Ford turnaround and One Ford approach, especially in regards to quality and communication efficiency, has been implementation of management practice based on a favorite saying of their CEO, Alan Mullay. The practice is known as “24 Hour Rule”.
All the planning, designing, developing, manufacturing, marketing and selling a quality car eventually come down to strategies and implementation. To assemble a car requires about 1500 to 3000 parts to come together and perform as one. A lot can go wrong during this process especially since the parts are sourced from all over the world.
The “24 Hour Rule” states that any employee has 24 Hours to take up and solve an emerging issue. If that employee is unable to resolve the issue alone, it must be brought to the notice of everyone in the company. Because of this rule, many issues are resolved quickly and broadly by applying the collective power of all the employees in the company.
Improvement in quality has helped change perception of Ford in the minds of the car buying public. This has led to Ford posting six consecutive profitable quarters generating a net income of $1.69 billion in the third quarter. According to Bloomberg, this made Ford “the world’s most profitable automaker”. The fact that Ford’s shares climbed 44% this year is another clear reflection of Ford’s reputation refinement.
There are several reasons for Ford’s quality improvement and people’s perception of its brands. Some of the reasons have been strong leadership, a dedicated workforce, a unified strategy and a very fluid communication process from bottom to the top. Ford is here to stay as one of the oldest America’s icons is back.
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This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.