It's Not Easy Being Green: Ford's Future in the New Age of Diminishing Fossil Fuels
A corporate strategy article by Thunderbird students By Anne Campeau, Elizabeth Clark, Jay Jacobsmuhlen, Kyle Scott and Chad Winters
The future of the automobile clearly does not favor the traditional combustible engine. Can Ford adjust and prosper in the new global green environment?
Josh Watson, a 35 year old accountant from Akron, Ohio is looking for a new car in the coming model year. Watson and his wife, Lori, are looking for a car with style and safety. But most important, Josh was to see the numbers, Watson wants to be sure he gets good mileage. Lori's priorities mirror Josh's but she also wants a car that will be environmentally friendly. The Watsons, lifelong Midwesterners, want to buy American if they can and Lori has a personal affinity for Ford, since her father worked for the company for over 25 years. They both have heard that Ford is working to minimize the environmental impacts of motor vehicles and they have been impressed with some new vehicles Ford has been offering. Having done some research on new cars, Josh and Lori visit a local Ford dealer, Park Ford in nearby Tallmadge, Ohio.
The History of Green Automobiles
The idea of clean, environmentally-friendly automobiles is practically as old as the auto industry itself. Steam-powered vehicles capable of carrying people and cargo appeared as early as 1770 and the Stanley Motor Carriage Company produces steam-powered vehicles in the United States between 1896-1924.v Electric cars began production in the US in the 1890s and New York used a fleet of electric vehicles as taxis in 1897. Even Henry Ford's wife, Clara, drove an electric car, the Detroit Electric Coupe, made by the Anderson Electric Car Company. The car could travel up to 80 miles on a single charge and could maintain a speed of 20 miles per hour. With Ford's introduction of mass-produced petroleum-fueled autos in 1907, electric car effectively died out. Gasoline-powered car were cheaper, more powerful, and faster. Fast forward to 1973, where the Arab Oil Crisis led to an interest in alternative fuels, like ethanol, and at least a beginning renewed interest in developing electric cars for the future. In the 1980s and 1990s, several European automakers, including BMW, Peugeot, Fiat and Citron, as well as GM in the United States continued research into electric-powered vehicles But the real catalyst for green automobiles came with Toyota's introduction of the Prius hybrid in 2007. Now, the emphasis has shifted to not just developing electric vehicles but to a range of automobiles dedicated to fuels other than fossil-based. Besides more efficient internal combustion autos and hybrids, research is now going full speed ahead to have practical, hydrogen-powered cars into production by 2050. Josh and Lori have some big decisions ahead of them. But an even bigger dilemma is being faced by Ford.
Ford's Green Market Ocean Turns Red
Market spaces are frequently described as being either "Red Ocean", with lots of competitors competing largely on price, or "Blue Ocean", where a company holds a strong, unique position, effectively allowing it to swim alone unhindered by rivals.vi
Several years ago, Harvard Business School professor Michael Porter introduced his now-famous "Five Forces" industry model which attempts to explain the competitive forces at work when companies develop their corporate strategy.vii Here is how those forces are reshaping the current state of the global auto industry and turning the market space for environmentally-friendly cars into a "Red Ocean."
Rivalry: Rivalry within the automobile industry is high for the standard automobile as there are many major competitors and price-based competition. Within the green car market, rivalry is shifting from low to high. As each major automaker produces their choice for a sustainable, green model, such as the Chevrolet Volt, the Toyota Prius, the Nissan Leaf, the rivalry in the green auto market increases. Since the Watsons do have a brand loyalty, Ford is at an advantage for these customers.
Barrier to Entry/Threat of New Entrants: The barriers to entry are high regarding the automobile industry and the growing green market. The capital involved and government regulations that must be learned and adhered to are high and large. Ford's access to foreign markets will also face strict government policies to protect the local companies. State funded automakers are becoming popular in developing countries and increase the barrier to entry for Ford into these emerging markets. A company will most likely have to enter a partnership with one of the existing large manufacturers to share overhead. For example, SMART cars are a line developed and produced by Mercedes-Benz engineers to meet the challenge of producing a small, compact car. While Josh is not in the market for a SMART car, the high barrier to entry will force Josh into choosing a vehicle from an already established company.
Power of Suppliers: With multiple suppliers of primary materials such as steel, and secondary materials such as electronic components, supplier bargaining power for commodity automobile components is low for some products and high for specialized or branded products, such as Ford's SYNC system based off Microsoft technology. This dual bargaining power of suppliers extends to the green section of the automobile industry as well with common material suppliers having a low power, while new "green" technologies will have a high bargaining power as they have an advantage in this emerging market.
Power of Buyers: The largest power for the buyer lies in the hands of a fleet purchaser who buys autos in large volumes from the manufacturer. The everyday consumer does not hold much power. Josh's power lies in his ability to select his own car dealership and financing for purchasing a car. This leads to high power of buyers from a dealer's perspective, but the threat to Ford and other large automobile manufacturing companies of the buyer's power remains low.
Availability of Substitutes: The availability of substitutes is low for the standard car US automobile market. As for the green car market, the availability is growing. As gas prices increase, the threat of alternative fuel options in "green" cars and public transportation options, train, bus, or bicycle, increases the threat to standard autos.i As for Josh's options, the public transportation substitutes are not a threat since he resides in the Midwest and is searching for an automobile.
Can Ford Swim in a Blue Ocean?
Figure 1: This is an electric Ford Focus that was used a pace car for the Nascar Spring Cup 400 in April 2012. This is one of Ford's latest entries into the green market.
Ford occupied the first blue ocean in the automobile industry when Henry Ford developed the assembly line method to manufacturing a car. He developed a way to produce an automobile efficiently; therefore, reducing the cost, in an unattractive market where the main customer was the vary rich upper class. Henry did not try to compete in the current customer market, but he created his own market for the middle-class consumer needing a low-cost replacement to a horse drawn carriage. Henry Ford used mostly existing technologies to create a new product line. The Ford Motor Company could benefit today by creating a new blue ocean in a global automobile market. Instead of copying the Chevrolet Volt and producing another electric car, or reinventing the hybrid motor, Ford needs to create a new value curve in the automobile industry to realize new gains while increasing the value for its customers, especially for the Watsons who represent a large potential market. The Watsons want a Ford that will be stylish and economical but is considered safe. Ford's newest model should reduce its reliability on the combustion engine and raise the reliability standard for "green" cars. Additionally, Ford need to offer the Watsons a car that eliminates costly trips to the gas station; thereby, creating a new vehicle with a specific value curve.
A Leader In Corporate Social Responsibility
Despite the challenging economic conditions and ferociously competitive auto market, Ford claims they had never lost sight of the environmental and social goals that are key elements of their business strategy. As customers, Josh and Lori do not only want to buy a car that has good gas mileage, but they also want to buy from a company that is working to minimize their environmental impacts.
The Watsons are also concerned with the actions the company takes toward Corporate Social Responsibility (CSR). CSR has become an increasingly important concept for social strategies, especially in the automotive industry. It is estimated that the automotive industry is responsible for roughly 15% of global carbon emissions, putting more pressure on automakers to contribute to climate change.ii
Ford executive chairman William Clay Ford, Jr. identified that sustainability was going to be a long-term strategic priority and there was clear business case for reducing resource use and developing innovative "green" products and technologies. Despite the strategic priority of Ford's executive chairman, a 'sustainable mobility' report by Journal of Business & Economic Research indicated that Asian car manufacturers including Toyota, Hyundai, Nissan, and Honda, all out-performed their North American competitors, Ford and General Motors. The study measured by dividing sustainable value by sales, eliminating difference due to size of company, and examining nine economic, environmental, and social resources. However, despite where Ford ranks compared to other automakers, Ford has continued to focus on their own sustainable strategy, and they have continued to follow a double bottom line approach. By focusing on delivering cars that are greener, safer and smarter, Ford has enhanced their competitiveness and built stronger relationship with their customers. Ford has focused on a variety of global issues. Below are some of Ford's noteworthy improvements over the years.iii
- Improvement of average fuel economy of Ford's North American vehicle lineup by approximately 20% between 2005-2010 and on track to boost fuel economy by more than 35% by 2015
- Launch of five new electric vehicles
- Reduced water use by 62% since 2000 and continue to assess their water footprint
- Commitment to being a leader in fuel economy - by launching dozens of vehicles globally that meet or beat their competitors for fuel economy
- Working with suppliers to promote environmentally sustainable practices and better understand impact in their supply chain
- Leading an industry-wide supply chain approach to ensure that all components used in Ford's products are manufactured under acceptable labor conditions
As Josh and Lory enter the showroom at Park Ford they are excited about the new 2013 lineup and making a deal on their new car. The only questions remaining are: Which one and which color?
Ford logo image: http://www.guardian.co.uk/business/2012/aug/06/new-car-sales-jump
i Strategic Report for Ford Motor Company, Oasis Consulting: Dornback-Bender, Slade & Thorpe, April 20, 2009.
vi Blue Ocean Strategy, Harvard Business Review, Kim & Mauborgne, Reprint R0410D
vii The Five Competitive Forces That Shape Strategy, Harvard Business Review, Porter, Reprint R0801E