The reason for choosing the Automobile industry lies in its current development and future potential of the industry. Various technological changes, the political and economic factors create various imperatives for supply chain architecture and business portfolio management (Nieuwenhuis & Wells, 2003).
The major focus of this study will be the analysis of the claimed decision to close the Jaguar plant in Coventry (BBC, 2004). Though this case depicts only the single dimension of the overall business situation of the company – Jaguar’s performance, the analysis will be helpful in highlighting the interrelated nature of mutual impact between a single business unit and the company.
This company was selected because of the nature of its operations and the complexity of its organisational context which shows that any strategic option is a complex decision with which creates various alternatives and the cost of certain opportunity.
The dissertation will start with the overview of the automotive industry and the way initial product is produced and delivered. This overview will highlight the key elements that shall be incorporated into the strategic process by a vehicle manufacturer in order to succeed. Besides, this discussion will help to set the basis for the analysis of the triggers that initiated Ford’s decision to close the factory and the further rationale behind this strategic move. The other major purpose of this section is to show the factors that make this industry truly global and the way various strategic decision in one field may influence the strategic content on other areas.
The chosen research philosophy is phenomenology which allows studying complex social phenomena. The paper applies case study as its research strategy as it provides understanding of the dynamic present within particular context (Yin, 1994). The reasons for use of various analytical models and the way they will be applied to meet the objectives will be discussed. In particular the methodological part will show the logical link between the use of such models as PEST, Porters’ Five Forces and SWOT as the mean of identifying various external and internal forces that determine the overall strategic environment and which might drive or impinge the implementation of chosen strategic step.
The analytical part will apply the chosen models in order to set the basis for the review of the available options and their feasibility.
Due to certain limitations, imposed by environmental and internal factors the recommendations can not be directly applied to firms from the same or other industries. Certain findings can be used as an example for further theory building in the area, relating to the issues of global strategies.
Aims and objectives
As it was mentioned, the major aim of the current research is to evaluate the rational and consequences of the strategic decision to close Jaguar plant in Coventry, UK. This aim will be met through a range of objectives:
It is important to make certain significant reservation regarding the analysis:
Supply chain as the key source of competitive advantage
According to Gunasekaran (2004) supply chain is today one of the most important issues for the automotive industry. He found its major strategic role in integrating suppliers and customers with the objective of grading up responsiveness and flexibility of manufacturing organizations, reducing costs and improving quality of the products.
The studies of various automotive industry players (Fine et, al, 2001; Waller, 2004; Yasin & Wafa, 1996) prove that the supply chain plays a role of backbone, which drives strategic advantage. The most frequent case which is used to illustrate the strategic importance of supply chain is Toyota’s approach to supply chain architecture known as lean thinking (Slack et al., 2001). Various studies (Sahay, 2003; Slack et al, 2001; Waraniak, 2001) show the way JIT has improved the organisational capability and competitiveness of the organisations of concern.
The figure 1 shows that the supply chain opens various collaboration opportunities between suppliers, OEM manufacturer and retailers.
The opportunities of synchronised production scheduling, collaborative product development, demand planning and overall tuning of distribution channels across various phases of production help to reduce the possible quality gaps between operational stages.
The diamond model (see figure 2) illustrates the way the gaps between various stages of this collaboration chain might appear. As it is seen on the model, suppliers and OEM manufacturers comprise two elements of the united supply chain. During various stages of a particular product management (new product or part development), both parties communicate their requirements to each other. During this collaboration process the various diverged bits of information is converged by one of the parties into specific statement and then diverged by the other parties into specific sets of actions.
The quality gaps might appear during the converging and diverging processes. Automakers cannot survive in the market if they ignore these gaps. The recent comparative analysis (PWC, 2004) showed that the problem of quality significantly affects cost issue and brand equity. Recent quality problems with door handles cost the company $450 million, not including reputation costs and cost of lost customers (Fitzgerald, 2004).
The present challenges to the supply chain of vehicle manufacturer According to Nieuwenhuis & Wells (2003) the present architecture of supply chain is determined by two major factors: cost and quality. They claim that this approach was initiated by Toyota in 1985, when the manufacturer switched from complete manufacturing of automobiles to R&D and assembly. According to Nieuwenhuis & Wells (2003) and Rubenstein (2001) this shift was justified by fact that the range of suppliers created greater cost flexibility of the manufacturing process.
Dannenberg & Kleinhans (2004) add the other major challenge for the supply chain architecture which is the growing customer preferences for technological advancements. This issue can not be overlooked. To meet customer requirements today, the product must provide the right combination of features and value for the money (Johnson & Scholes, 2001). When the balance of features and manufacturing considerations are overlooked in this initial process, it becomes very difficult to correct the problem downstream. Hence, a vehicle manufacturer needs to have a ” fast response ” system within its supply chain to minimize the lag of its response to market changes (Blake et al. 2003).
In this respect Dannenberg & Kleinhans (2004) suggest that vehicle manufacturers will outsource further the manufacturing of various components (see Graph1), whereas suppliers’ part in manufacturing process will increase further.
Though, the presented models and graphs outline the importance of supply chain and the current shift of vehicle manufacturers from manufacturing to assembly, the choice of location selection for operations remains unclear.
From the discussion above it becomes clear that both supply and demand part are important elements of supply chain. Provided that Ford is a high volume and full range vehicle manufacturer the essence of market expansion strategy is the producing at the highest volumes and lowest prices with a range of general purpose cars of various sizes and capabilities to appeal to the broad mass of consumers. (Nieuwenhuis & Wells, 2003) claim that unlike specialist and niche producers, this type of producer competes on the basis of cost reduction.
Porter (1989, cited in Johnson & Scholes (2001) introduced the Diamond model which uncovers different factor conditions that affect the nations’ competitive advantage (see figure 3). The model outlines four major groups of factors that determine the favourability of a particular country in terms of launching the operations or entering the market. In conjunction with Dunning’s (1993) OLE paradigm this model explains why particular market might be more attractive then the other. Dunning (1993) claims that the key locational factors determining supply chain structure and investments are market size, input costs – natural resources and labour – the riskiness of investment, both in terms of economic and political environment. The figure 3 shows the way ” location ” advantages fit into Porter’s diamond model:
The distinguishing feature of automotive industry is that it is not country-bound (Rubenstein, 2001). According to McKenzie group (2004) due to the current state of the supply chain architecture and the dynamics of competitive pressure across different markets this industry has become truly global. It means that various markets are interrelated and events that take place in one country may introduce vital strategic implications for the operations in the other country. The case of Jaguar and the overall supply chain architecture exemplifies this tendency. According to Bordenave (2003), driven by factor endowments, Ford Motor Co. has been manufacturing particular models in specific countries. Thus, from the very acquisition Jaguar models were produced in Europe though the major market for these cars was US market, since European customers have put higher preferences to small engine cars.
Thus, the choice of location is determined by two major questions:
In order to address other aspects of location factors it is important to undertake external and internal audit (Johnson & Scholes, 1999). This analysis will help to define the strategic decision (see figure 4):
The figure shows that the decision will depend on two major elements:
If the economic value added element is determined by past, present and future profitability of operations (Fine et al., 2001) and can be assessed against clear criteria, the evaluation strategic value component is more complex as it comprises:
Relationship with suppliers and distributors (Waller, 2004).
Methodology is defined by Jankowicz (1999) as ” the analysis of the rationale for the particular method or methods used in a given study in general “. It also refers to the overall approach to the research process ” from the theoretical underpinning to the collection and analysis of data ” (Zikmund, 2000). The following section covers the secondary and primary data collection process.
The purpose of this study is to identify the most adequate strategic choice. The methodology adopted for research must be more than simply descriptive in nature; it must provide an in-depth analysis and ultimately develop recommendations that would fit strategic context and content of the organisation. The study requires a systematic approach to methodological development in order to transpose business environmental factors into a measurable, tangible system for analysis.
Research philosophy and design
Research philosophy is the researcher’s belief about how to do the research, and it is crucial to decide which direction the research will go through (Buttery, 1991). Basically, deciding the research philosophy is the first step. Ghauri et al. (1995) note that the understanding of philosophical positioning of research is particular useful in helping researcher to clarify alternative designs and methods for a particular research, and identifying, which are more likely to work in practice.
At the philosophical level there are two major trends: positivism and anti-positivism.
The positivism school believes that reality is objective and measurable. In addition, positivists believe that inquirers pose no influence over the studied subjects. According to Yin (1984) the positivist paradigm states that there is an objective truth existing in the world which can be revealed through the scientific method where the focus is on measuring relationships between variables systematically and statistically.
According to Fay (1996) anti-positivists consider the world to be subjective because it is socially constructed and given meaning by people. As Buttery (1991) puts it, if positivism tends to investigate structural relationship, phenomenology centres upon the constructions of social reality of actors.
The present study will adopt phenomenological approach. The reason for choosing this methodological approach stems from the complex nature of strategic decision making, which views business environment as complex system (Wit & Meyer, 1998). The required information is based on the analysis of various secondary data sources. This type of information is both quantitative and qualitative and requires specific data gathering tools. Another reason for conducting phenomenological exploratory study is the specific business context of the company. The analysis of the global automotive industry highlighted the complex nature of Ford’s business environment and that the available strategic options are determined by environment-specific factors, which are unlikely to be replicated under different conditions.
The paper adopts inductive research approach as it strives not to test but explore the nature of the issue. The approach enables the researcher not to be detached from the subject and impels the use of interpretative techniques to describe and infer the results (Jankowicz, 1999).
According to Jankowicz (1999) research strategy is a general on plan how research is undertaken. According to the view of various authors (Saunders et al, 2003, Balnaves and Caputi, 2001, etc.), there are four research strategies such as ‘Historical Review’, ‘Case Study’, ‘Survey’, and ‘Experiment’. Each research strategy has its own specific functions to conduct research. After deliberate considerations, the single case-study was chosen as the research strategy of this paper. Case study method is a scientific tool to undertake a research, and it focuses on understanding the dynamics present within single setting (Eisenhardt, 1989). Case study is also an empirical inquiry that investigates a contemporary phenomenon in reality when the boundaries between phenomenon and context are not clearly evident (Yin, 1994).
The advantage of the case study is the richness of its detailed exploration of the reality. Meanwhile, the shortfalls are that ” it provides a limited basis for traditional scientific generalisation ” (Yin, 1994).
The previous data can be re-analyzed by other researchers, which is so called secondary data (Balnaves and Caputi, 2001). “Secondary data include both quantitative and qualitative data, and they can be used in both descriptive and explanatory research” (Saunders et al, 2003). According to Balnaves and Caputi (2001) secondary data analysis may also form part of exploratory work in a study, such as identifying the characteristics of the people the researchers are investigating from previous data. That is, useful comparison can be made if the same methodology for collecting data has been used over long periods of time. In business and management research such data are used mostly in case study and survey-type research (Saunders et al, 2003). Hence, the adoption of secondary data is extremely crucial to this study because the research strategy is a single case study, and because the research approach of this study is largely based on inductive theory building.
For the achievement of accurate research, the author reviews current empirical and theoretical findings and previous data completed by other researchers. As Saunders (et al, 2003) indicates, literature reviews assist to establish a good understanding and insight into relevant previous research and the trends that have emerged. The secondary data sources are mainly from:
This information does not require serious investments and can be easily accessed. However, the main disadvantage of these information sources is the issue of validity, reliability and relevance (Churchill, 2001). The problem is that this information addresses the past events and was collected within past environmental conditions. The change of market forces reduces the applicability of this information sources to present situation.
The major macro and micro factors that affected, affect and will affect global automobile industry;
PEST & Porter’s Five Forces
The identification of the major forces that will determine the business environment and the requirements for strategic content
What are the sources of Ford Motors competitive advantage and how they shall be leveraged;
The internal drivers that are likely to be the source if competitive advantage
What are major weaknesses that can diminish Ford Motors market success;
The internal resistance forces that are likely to undermine the successful performance
What are the costs and benefits of the UK plant closure;
The analysis of opportunity costs
The advantages and costs (direct, indirect, costs of lost opportunities) that will be incurred with this decision
What scenarios can be envisaged following this closure and how the company should respond;
The combined use of secondary analysis findings
The review of various outcomes that will affect the strategic context and the strategic options that should be considered
The review of macro forces (PEST analysis)
There are a numerous number of factors that might be included in P.E.S.T. analysis. But due to various limitations (time, word limit), the factors will be outlined, whereas the major focus will be made on several sub-factors only (according to the Pareto Principle, it is likely that about 20% of the factors will represent 80% of the potential effect on the business (Wit and Meyer, 1998)).
Political and legal factors play the role on the development of the industry. These factors shape the rules of competition, operational costs and supply chain requirements.
Special attention shall be given to Labour Unions pressure as they are one of the major stakeholders whose interests will be affected. According to Bordenave (2003) the pressure of British Labour Unions has always been the major labour cost increasing factor for Ford operations. The current decision might have serious consequences. Mackintosh (2004a) suggests the decision to close the plant will translate into the sacking of 2000 people. He claims that a possible strike initiated by Trade Unions is likely to be damaging for Ford, which runs global engine manufacturing in Dagenham as well as Jaguar and Land Rover assembly plants and a Transit van factory.
The additional threat from Labour Unions pressure may arise with recent involvement of Tony Blair (Mackintosh, 2004b), which is an exceptional case. The further aggravation of the situation might end up with high legal costs and increased tension with government that can add various indirect costs.
One of the major location choice determinants is the current and future demand conditions as they will affect the market growth potential, pricing strategy and operations margin and the potential of the return on investment.
The table 3 shows that up to 2010 US is estimated to be the largest market accounting for 23% of global sales. The role of Western Europe is still remaining high, especially after further extension of EU zone, however the current maturity of the market, excessive completion and demand trend suggests that the share of Europe will drop.
Seperate attention shall be given to the current and further potential growth of Asian Pacific market, which accounts for 2/5 of the world population. The current growth rates of China, India and ” Asian tigers ” make it very realistic that this region will account for 22% of world sales.
Today, the major theatre for fierce competition is US, EU and Asian Pacific markets. The company has to compete with other US and Japanese firms who pursue very aggressive customer-switching strategies.
As the outlook of the automotive industry highlighted, the cost factor and the capability of direct and indirect costs becomes one of the key issues in maintaining competitive advantage. According to the opinion of the industry specialists (KPMG, 2004), one of the key issues that will influence the operations location decision will be labour-specific costs. According to survey (KPMG, 2004) industry specialists put a major emphasis on the labour-specific cost saving. Moreover, 85 % of the respondents agreed that during coming five years there will be a major increase of labour specific costs (cost of pensions, health care, and legal services) in US and EU. This factor has a direct relevance for Jaguar UK operations. The comparative data provided by Mackintosh (2004c) shows that the output of three Ford’s UK plants (130000 units) is lower then the output of one BMW plant in Germany (166000 units). This example shows that UK operations lack economies of scale due to the significant underperformance of British plants.
The other key factor that has significantly affected the demand elasticity and product requirements is the rise of oil prices and fluctuations on the oil market. Current high level of oil price increases the strain on the sales of luxury and premium cars, the majority of which are equipped with large-size engines (more then two litres). Since the majority of Jaguars are equipped with the engine size, greater then 2 litres, the rise of petroleum price had alienated cost-conscious customers from Jaguars.
The other important factor is currency parity and fluctuation. The consecutive weak position of US dollar against various currencies, especially British pound, significantly reduced the price competitiveness of the products manufactured abroad on the US market. For Jaguar’s performance this issue has become very acute, since US the leading market of the brand. BBC (2004) believes that it was weak US dollar position that affected the drop of Jaguar’s sales by 20%. This tendency has a direct impact on the overall performance of Ford Group and Jaguar sales. As Porretto (2004) reports the group acknowledged that consumer purchases of smaller, more fuel-efficient vehicles could accelerate due to the cost of petroleum, what could be potentially damaging for the sales of high-profit trucks and SUVs.
The other significant tendency is the overall state of the purchase disposable income. The current business cycle on the US market decreases the current demand for cars. It means that current market size squeezes, pushing companies to price competition at the cost of lower profit margin.
The demand trends are shaped by the following major factors: demographic shifts, attitudes, beliefs, and fashion cycles.
The distinguishing feature of the global automotive industry is that demand patterns are not homogeneous, as it was once suggested by Levitt (1983, cited in Hill, 2002). Quite to the contrary, if the American consumers tend to prefer large-engine comfortable cars (Windecker, 2004b), British consumers prefer small-engine ones (Mintel, 2004). This factor determines the demand conditions of the particular country (see figure 1) and affect the overall attractiveness of a particular market.
The other influential socio-cultural force is the change of preferences and attitudes towards quality dimensions. Windecker (2004a) believes that the change of preferences towards more fashionable, sport-type, SUV equipped cars might have slashed the Jaguar’s sales as the brand was perceived as old-fashioned and lacking must-be quality features.
The current influence of social factors is strong that they reduce the influence of certain economic forces. As it was mentioned above, the fluctuations of oil price and consecutive increase of petroleum price levels should have influenced the sales of premium and luxury cars. Nevertheless, the following table shows the reverse tendency of US market.
The table shows that despite high level of oil prices, the current demand for prestige cars is surprisingly high, whereas overall demand for large engine cars have risen by 202%.
The recent increase of consumer preferences for various technological improvements created the space for the major shift in the architecture of the supply chain.
The figure provided by Dannenberg & Kleinhans (2004) shows that increasingly high importance of additional quality features across the various industries initiate further shift in the value-added chain. As it is obvious from the figure, already in 2002 the overall share of vehicle manufacturers in total value creation was equal to 35%, and is expected to reduce further to 24%.
In terms of present state of Jaguar and other group’s brands it means that the successful performance will strongly depend on the ability of the group to create relations with the right suppliers, who have sufficient R&D capacity and resources capabilities. According to Veloso & Kumar (2002) in the total value creation of the premium brands ” electrical systems and electronics already account for more than half the vehicle’s value. Automakers and suppliers alike will have to develop new strategies and capacity to drive profitable growth in this area “.
In this light Rechtin (2004) suggests that Ford shall seek to maintain its Jaguar’s presence in UK. Due to the high proximity of necessary R&D supporting clusters UK industrial environment provides the required competence of suppliers.
The additional tendency is highlighted by Nieuwenhuis & Wells (2003) and Waller (2004). They suggest that continuous development of technological solutions, especially in the area of digital and communication technologies create new operating opportunities such as new marketing mix channels, new purchase environment (e-commerce) and new market research tools (Currimbhoy (2004). But these innovations can also be viewed as threats. The introduction of new technologies, change the nature of customers expectations, creating new zones of tolerance. Today, customers expect more flexibility, speed and dependability from a car manufacturer, than before the advent of the Internet era.
Eisenstein (2003) believes that the main disadvantage of Ford’s e-business strategy, which already cost the company $1 billion is that until the present moment management ” laid more emphasis on the Internet than it did on automobiles “.
Though this very factor has little effect on current sales of Jaguar, the investment in e-business technologies becomes the source of strategic advantage (Currimbhoy, 2004) as it creates the ability of fast market response and better supply chain quality control. The development of this business side is very costly and the management have to choose between investing in Jaguar brand uplifting or investing in future development of e-business and other operational improvements.
The analysis of micro forces (Porters’ five forces)
Competitors’ bargaining power
The global automotive market is much consolidated. The major rivalry involves BMW, Daimler-Chrysler Fiat, Ford, GM, Honda, Hyundai, Mazda, Mitsubishi, PSA, Renault-Nissan Toyota, Suzuki Motors and VW.
As the table 4 shows, in 2001 the sales volume of top five vehicle manufacturers was very close. As it was mentioned before the cost advantage is one of the major competitive factors that drive the success of a particular manufacturer. The best example is Toyota, which proved that it is possible to launch a new vehicle assembly plant for less then $ 10 million (Automotive Industries, 2004).
The presence of powerful competitors with established brands creates a threat of intense price wars and poses s strong requirement for product differentiation.
The other important feature of the automotive industry is a continuous shift of competitors’ market power (Keller, 2004c; Mayne, 2004a). This notion takes place as the result of various strategic alliances and industry consolidation. At the same time, the global automotive industry is very fragmented due to various culturally led preferences (Waller, 2004). Thus, the permanent change of consumer trends and the market fragmentation creates many niche markets. That is why the other key strategic approach is differentiation through ” fast response ” approach, which implies for the fastest possible reaction of vehicle manufacturers on change in consumer preferences.
According to Bradford (2004a) ” increasing promotional costs, proliferation of models and segments, overcapacity, significant price pressure and increasingly demanding customers are all factors that make the market tough even for the best competitors “. The present competition is so tough that it is expected (Bradford, 2004a) that certain manufacturers will not outlast this pressure. The offensive strategies of incumbent manufacturers leave no space for mistake. The explicit example is Fiat and VW which can no longer rely on its home Italian and German markets.
This force has one of the major impacts on the performance of Jaguar and the group in general. As it was explained, the market is currently so saturated that the only way to increase the market share is by switching the customers from competitors. In this light, the brand has to be very profitable in order to justify the further increase of investments on promotional and R&D activities.
Buyers’ bargaining power
Due to high intensity of competition on the global scale and increasing overcapacity in the major markets, US and EU buyers experience very strong bargaining power. Currimbhoy (2004) shows that the current availability of various information channels as well as the presence of the number of service providers, has further increased the bargaining power. According to the view of the leading industry specialists surveyed by KMPG (2004) consumer loyalty to brands and dealers will continue to decline. Such the situation affects the level of pragmatism and scepticism when evaluating the profitability of a particular brand. This mood is especially acute for the assessment of market state of North American and European markets.
Suppliers’ bargaining power
Though vehicle manufactures have consolidated forming large entities it did not make a significant shift of bargaining power in OEM-suppliers relations. According to Veloso & Kumar (2002) the consolidation in the OEM sector has triggered the corresponding consolidation of different supplier groups: 1st, 2nd and 3rd tiers. The outlook of his tendency is clearly shown by the figure provided by Dannenberg & Kleinhans (2004) shows that the reduction of the number of vehicle manufacturers has immediately reflected on the number of suppliers.
With intense competition among the vehicle manufacturers that put sufficient pressure on component makers and with the market already suffering from over-capacity, the furtehr significant consolidation of components makers is very likely to take place (Veloso & Kumar, 2002).
In the context of automotive industry it is difficult to provide a clear statement in terms of bargaining power balance. The new technological requirements urge vehicle manufacturers and suppliers to resort to collaborative behaviour, rather then forcing or accommodating modes of operations (Auto Industry, 2004; Waller, 2004). Hence, in case of Jaguar the decision of locating the operations shall be driven not by the bargaining power criteria, but the ability of suppliers to collaborate. The current technological forces reinforce the argument for this approach.
The threat of Substitutes
Apart from direct competitors (public transport) cars compete with other transport services: air, rail and sea. The increasing importance of door-to-door transportation and environmental concerns decreases the current threat of other transportation means as substitutes.
Threat of New entrants
The high level of entry barriers (extremely consolidated industry, well-developed value-added chain, R&D capability, investment capability in promotions and new product development) minimises the threat of new entrants. Nevertheless, due to globalised nature of the industry the notion of new entrant is not that clear-cut, since existing players might enter new geographical markets. Keller (2004a) puts forward a clear example of such case, whereas the saturated European market recently was approached by Korean vehicle manufacturers.
Such entries are a very essential threat for the incumbent vehicle manufacturers as they compete for the same group customers.
Ford Motor is the second largest car manufacturer in the World. It holds 11% of the global market, comparing to 15% held by General Motors. The market share determines the potential of further growth of the company and facilitates the proliferation of the brand awareness in the region.
Jaguar itself was a well-established brand that serviced a growing segment of prestige and comfort conscious customers (Mintel, 2004).
Despite such support, there are various current weaknesses. Both Bordenave (2003) & Rechtin (2004) suggest that the major problem that occurred with Jaguar and the whole PAG group is in so-called identity crisis, whereas the role of the group in the overall global operations is ill-defined.
The other problem is the emerged positioning gap. AS Rechtin (2004) and Windecker (2004b) shows the desire of Jaguar designers to build a transitional gap between old, traditional-look models and new ones through incremental rather then breakthrough improve of the design have translated into significant fall of sales growth. New customers did not appreciate the old-fashioned look of new models.
The initial idea of buying Jaguar in 1989 was in the management’s belief that the demand for high-end automobiles in US will significantly rise (Windecker, 2004a). Straight after acquiring new brand the parent company invested in new product development with the particular focus on design, manufacturing costs and quality management. The heavy investment paid off with significant rise of Jaguar’s US sales, with its peak between 1998 and 2002.
As it is obvious from the graph 1, year 2002 was the peak sales’ year with 61204 units sold only in US market.
The rise of sales in 1998 persuaded the management of Ford Motor Co. in the future success of Jaguar in particular, and the whole Premier Automobiles Group (PAG), which also includes Aston Martin and Land Rover. However, since by 2004 Jaguar sales have dropped by 22%. Windecker (2004a) states that various survey found that the brand had a bad reputation regarding quality issues, ” dull and outdated ” design, lack of an SUV and too expensive.
Keller (2004b) believes that it was quality issues that affected the brand performance. Mintel (2004) and Waller (2004) suggest one of the most important issues for the automobile industry is competitiveness in cost, quality, and products. Automakers cannot survive in the market if they ignore any of these areas.
Keller (2004b) points out that Jaguar’s image as an inefficient car in terms of fuel and cost and maintenance has tremendously affected brand equity. The recent quality study of Jaguars’ performance showed that the latest models were of high quality performance (in the top five lists out of 33 models), however the customer opinion survey showed that customers ranked it in 23rd place (Fitzgerald, 2004).
Such entries are a very essential threat for the incumbent vehicle manufacturers as they compete for the same group customers.
Assessing the external and internal environmental factors, the following picture can be drawn:
Key success factors
In terms of the overall successful performance of the Group, the secondary study identified the following integral elements:
The strategic impact of the closure
According to Henderson (2004) profitability in the industry as a whole over the long term remains linked to growth in market volumes. At the same time at an individual company level the automotive industry remains one that is strongly product-driven (Nieuwenhuis & Wells, 2003) whereas an adequate product range can make all the difference extremely high sales growth with the first generation Mégane Scénic because it created a new market segment with an innovative product (Rubenstein, 2001).
The current reduction of output might reduce the Jaguar’s capacity to compete for US and global premier automobiles market share. The current growth and future projections of the demand for the luxury cars (Windecker, 2004b) makes premier brands an important part of business portfolio of such companies as GM, Nissan and Toyota.
The close of the Coventry factory and talks about the importance of financial performance over market share shows that at the moment Ford Motors Co. is going to reduce investment inflows into the development of Jaguar’s brand. The reduction of investment in Jaguar might be immediately used by GM, Nissan and Toyota.
It is important to recognise that at the present moment in order to maintain sustainable competitive advantage of the brand in its market sector. As the internal analysis showed, Jaguar has a serious brand positioning and reputation problem.
Auto analyst John Casesa believes that Jaguar ” has a long road back to health. With the right execution and sufficient investment, Jaguar … has growth potential.” (Mayne, 2004a). It means that the company will have to invest in Jaguar’s quality improvement, marketing and other initiatives without certain proofs that these investments will be returned.
The analysis of financial data for the last four years show that despite overall healthy growth of its sales up to 2002 and successful penetration on US market, the Jaguar brand had very high operation costs and unbalanced cash flows (Ford’s Annual review, 2003).
At the same time, the development of other business area, like e-business and vertical integration also require sufficient resource investment. As it was stated by Wit & Meyer (1998) the cash flow optimisation, responsiveness to business opportunities and rigid financial objectives set the basis for well balanced portfolio strategy. The corporate HQ task is to manage the allocation of the financial resources, in order to achieve the highest returns and create an acceptable level of risk.
There are three criteria for choosing the strategic option:
From this perspective, the internal analysis makes it obvious that the current development into F-series trucks, the further increase of Ford Credit operations and benefits from further vertical integration to cover the entire life cycle of the vehicle – all these investment units have higher level of return and lower market risk.
Moreover, the negative balance sheet of Jaguar performance negatively affects the market estimation of Ford Motor Co overall performance, thus reducing the share price and shareholders’ value. That is why the initiative to reduce operational costs through plant closure can also be viewed as the attempt of the senior management group to secure shareholders’ trust. However, the decision of plant closure may have serious political consequences on the company’s performance. As Bordenave (2003) claims British Labour Unions exerted sufficient pressure on the company, by organising mass protests. The PEST analysis shows that the present closure is very likely to cause harsh reaction.
The review of scenarios that can be envisaged following this closure and how the company should respond
The further deterioration of Jaguar’s performance
The outlook of various environmental threats and current weaknesses of Jaguar suggests that the further increase of shareholders’ pressure for better overall group performance, further fall of Jaguar’s sales, liquidity scarcity, sufficient problems with Labour Unions and the deterioration of the economic state in Europe in US – each of this factors might trigger the divestiture decision.
After a loss of $1.1 billion in 2003 in Europe ” Ford does not want any more unpleasant surprises ” Bradford (2004b). In other words, shareholders and senior managers will be very pragmatic in their decision-making, taking the least risky option. Recently Bill Ford portrayed this approach in the following way: ” …if we weren’t selling cars, we wouldn’t have a finance company. Where that dollar is made, to me, is completely artificial ” (Bradford, 2004b).
In the short run, this approach is completely reasonable, since the cost and margin issues are to major performance criteria for decision-making. However, in long run there can be various opportunity costs incurred by this decision. The divestiture decision might cost the group the loss of brand, important relations with distributors and suppliers and certain core competence elements – factors, which are required to compete on luxury cars’ market.
The other possible huge loss can arise from the untapped synergy potential of Jaguar within PAG group. The internal analysis showed that strategic position of PAG is currently undefined. It means that Ford’s management might overlook the mere potential of the group brands in the light of the growing demand for luxury cars.
The further rise of importance of Asian-Pacific market
The outlook of the current growth of Asian-Pacific market, the growth of the living standards in Asian-Pacific countries and corresponding incremental shift towards upscale products – these changes suggest that the demand for luxury cars will grow. According to (AFP, 2003), Chinese automotive market is booming with 50% growth rate. It is already perceived as third biggest national automotive market, and will soon surpass Japan. Bradsher (2003) believes that it was the export of luxury cars to China that enabled GM to increase the overall sales of luxury cars’ group in 2002 and 2003.
These prospects increase the importance of PAG group. The fact that China’s manufacturers’ and suppliers currently lack R&D capabilities means that current European R&D centres shall be preserved. According to Rechtin (2004) UK has an important R&D base and the required proximity of industry-related clusters. The major problem in this respect is the issue of the performance. The comparative example, given earlier, showed that there is serious underperformance of UK plants.
It shall be raised once again, that the role of PAG group shall be clearly defined in order to set the performance criteria and right level of expectations.
Seeking to explore the rationale and consequences of Ford’s decision to close Jaguar, the dissertation started with the outlook of the automotive supply chain. The review of the automotive industry supply chain requirements in relation to the maintenance of the strategic advantage outlined the importance of location factors in the invest/divest decision making of vehicle manufacturers.
From the perspective of cost factors and the impact of Jaguar performance on the overall financial state of the firm, the decision of the UK plant closure was well-sustained by the current weak brand equity, serious quality problems, brand positioning gaps and increasing UK labour cost against significant underperformance. Various economic and social factors add additional arguments for this decision: possible deterioration of economic state on leading markets, further currency risk, sharper oil price fluctuations, and high investment requirements in the development of new technological base, etc. At the same time, serious concerns aroused in relation to political factors, in particular the possible negative reaction of British Labour Unions on the plant closure and its overall negative impact of Ford on Europe operations.
Given the current concern of the Ford’s management with sound financial performance and risk-avoidance behaviour, the close of the Jaguar plants is the sign of the shift of their priority from PAG group to other brands and business areas. The analysis of the industry micro forces showed that the competitive pressure is so high, that various vehicle players face tough decisions to make in order to survive. Besides, the fast technological development and shift of social preferences set the high requirements for liquid assets availability in order to be responsive to market changes.
At the same time the prospects of the growth of the Asian-Pacific market, the overall value-added shifts in the luxury segments and the high requirements for R&D capabilities during the manufacturing process increases the importance of UK plants and country-related location factors.
The research identified two possible scenarios, which are not mutually exclusive:
Though the scenarios envisage different future of the Jaguar brand, there are common strategic recommendations:
Due to certain limitations, imposed by environmental and internal factors and the limitations inherent to secondary data analysis, the recommendations can not be directly applied to firms form the same or other industries.
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