Strategic marketing fundamentals and applications

Marketing Strategy

The key drivers in the global automotive industry are competition, fuel prices, the global economy as a whole and the economy of the U.S. And Europe in particular, and trade barriers/domestic economic policy.

Demand for automobiles is affected by fuel prices, in terms of both the amount of automobiles demanded and the types. In North America, consumers are in general dependent on automobiles in their daily lives. In physical terms, the layout of the cities and suburbs in which most people live necessitates the use of automobiles in the conduct of basic tasks. In this way, the raw demand for automobiles is relatively inelastic. However, the types of automobiles demanded tends to be dictated by fuel prices. Cars began to shrink in size in the years following the 1971 Oil Crisis, which was the first instance in which the domestic consumer was faced with a sharp increase in fuel prices. It was also the first time in which a scarcity of fuel had been registered.

The trend towards smaller cars was reversed to a significant extent in the 1990s during a prolonged dip in fuel prices. Demand for larger vehicles - trucks and SUVs - climbed upwards. Ford was one of the firms that benefited from that trend. When fuel prices increased with the turn of the millennium, the 9/11 terrorist attack and subsequent turmoil in the Middle East, demand for trucks and SUVs began to dip and Ford's fortunes also sagged.

In Europe, consumers tend towards smaller vehicles, and those with efficient diesel engines, so the demand relationship with the price of oil is less strong. Fuel prices are kept artificially high through taxation. The combination of higher population densities and shorter driving distances between major centers has lead to a permanently dampened demand for truck-based vehicles. Thus, the lower fuel prices that in the 1990s drove U.S. truck consumption did not have the same effect in the European market. The Japanese market is similar, and demand there tends towards very small vehicles.

In the developing world, fuel prices are more likely to impact the consumer's decision to drive. In particular, certain key markets have large and emerging middle classes, such as those in India and China. In these markets, the individual wealth and access to capital is not as high as it is for the middle classes in the developed world. Moreover, the physical structure of the cities is more conducive to living without a vehicle. These two factors have an impact on the decision to purchase a vehicle. A rise in fuel prices can render vehicle ownership prohibitively expensive for some potential buyers.

In terms of marketing strategy, fuel prices are often dealt with in terms of product mix. Automotive manufacturers can adjust their promotions towards product types that are best suited to the current fuel price to encourage the purchase of vehicles of a certain type. Detroit automakers had success in the 1990s in pushing SUVs, but when they continued to push them in the face of rising fuel prices, they met with hard times. In developing markets, the more appropriate strategies would be twofold - to promote the upwardly mobile status associated with automobile ownership and to offer economic incentives to negate the impact of a rise in fuel prices.

The second key driver in the global automobile industry is the state of the global economy. This driver is related in some respects with fuel price, in that fuel prices impact the state of the global economy. In North America, the economy can shift buying patterns between the primary and secondary automobile markets. It can also affect the timing of a purchase decision - in a poor economy consumers will often delay purchase of a new car until times are better. In addition, it can also have an impact similar to that fuel prices where it affects the choice of what type of vehicle will be purchased, at least in terms of market segment (ie the choice between a luxury model or a more modest one).

In the developing world, the economy affects the size of the market. The developing world is dependent on Western consumption to drive its own growth. This consumption then trickles down to developing economies in the form of jobs, and the size of the middle class in these countries grows and shrinks with this trickle-down wealth. The size of these markets is directly related to the size of the middle class, as the wealthy can still afford cars and the poor still cannot.

The marketing strategies most likely to be seen resulting from the state of the global economy include targeted rebates and discounts. The objective is often to attract buyers towards the primary market who would otherwise be debating entering the secondary market instead. Many such buyers have a preference for new cars, and only buy used because economic times are tough. Thus, they may be swayed with an economic argument. The same theory can be applied to the developing world as well.

The third key driver in the global automobile industry is competition. The industry has been consolidating since its earliest days, to the point where North America ended up with just three major automakers. From there, European and Japanese manufacturers entered the North American market and the Big Three began to explore global markets. Consolidation has continued apace, for example Daimler-Chrysler, Renault-Nissan and Ford's acquisitions of Aston Martin, Jaguar and Volvo.

As the home markets of all major global automakers have become mature, competition has intensified. Firms are competing on many levels. The first is cost-cutting. The margins on new cars have been squeezed. Mergers have been conducted not only with an eye to gaining market share but also to gaining technology that can improve operations. Several key initiatives have come into the industry recently in terms of cost reduction, including supplier's parks and increased co-ordination between the manufacturers and their suppliers.

Ford, for their part, has undertaken initiatives to gain an edge in other areas. They have pursued a closer relationship with the end users via a program of make-to-order vehicles. They have also sought to harvest a greater share of downstream revenues, as seen by their ventures in car rentals, insurance, and the Kwik-Fit purchase.

Another area where competition manifests itself is in differentiation and product specialization. Ford's focus on trucks was highly successful in the 1990s, as they carved a niche for themselves a market leader in what would ultimately be half of the North American auto market.

The fourth key driver in the global automobile industry are the trade barriers. Automobile production is a major business and nations are keen to protect what domestic industry exists, and to promote the development of domestic industry because of the potential jobs it represents. The main strategy to deal with trade barriers tends to be joint ventures and mergers with local firms, allowing for full access to the market in question.

Ford's 2000 globalisation plan began in 1994, with two sets of targets. The first was to produce $3 billion in savings per year. The second was to encourage designers, engineers and production staff to work in teams on new product development. Part of this was to streamline development and reduce the duplication of efforts in this area. This was going to contribute to the cost savings, but also contribute greater value at the same time.

Further to this, the plan had other objectives. Ford wanted to pare their supplier base to a point where just 250 firms would account for 80% of Ford's purchases. Ford empowered managers by giving them more discretionary money, the theory being to streamline decision-making. Engineering and product development costs would thus be lowered while at the same time a more creative culture would be allowed to emerge.

For evaluation purposes, the period between 1994 and 2004 can be broken into era on the basis of leadership. The Ford 2000 globalisation plan was started in 1994 by Alex Trotman. In 1999, Jac Nasser took over to propel Ford into the new millennium.

The Trotman era saw the launch of the strategy. Profitability over the period declined in the first three years of the strategy, but then in 1997 things turned around such that profitability eclipsed that even of 1994. It is natural that when such a major strategic initiative is undertaken, there will be a period where the costs are being undertaken but the advantages of the initiative have yet to be realized. This reflects these first few years. Due to the high demand for truck-based vehicles, Ford was able to increase sales over this period and maintain profitability throughout this phase of strategic shift.

When Jac Nasser took over at the beginning of 1999, he spearheaded a slight change of direction in the Ford 2000 plan, towards the service side of the business. Nasser recognized that the full value of the automotive industry included several downstream and ancillary revenue streams that Ford was not presently tapping. Nasser bought Kwik-Fit, a service center chain, and dipped into both retailing and insurance. These businesses represented potential revenue with a lower startup cost than expansions on the manufacturing side.

To this point, the strategy had been successful. Ford's development functions had improved in efficiency and profitability had increased. Cost savings in 2000 totalled $500 million, for a total of $3.7 billion over the previous three years. There was some strategic logic to the push into services, in terms of capturing downstream revenues. However, this initiative did not support the previous objectives.

In 2001, Ford fell into tougher times. Whether the service businesses could be viewed as a distraction that harmed Ford's focus on its core business is questionable, but certainly those businesses were not a major factor helping Ford through this period. The main successes that helped Ford in this period were sales in Europe, which generated significant improvements in both revenues and profit. In North America, it was again automobile manufacturing that stabilized the firm in this tough time - in this case the Volvo, Jaguar and Aston Martin lines. At this point, the initial globalization strategy appears to have been forgotten entirely. Yet, this is precisely the time when the cost savings were theoretically manifesting their fullest advantages.

Ford seemed to deviate a bit from their previous strategies at the end of this period. Cost-cutting became such a focus that they even took away food and drinks at meetings, a move that smacks of desperation. Ford at this time decided that new product development - 20 new models a year over the course of several years - would be a priority. This does not support their previous strategy of streamlining development costs.

The streamlining strategy made sense in that the bulk of Ford's business is conducted in highly competitive mature markets. Reducing costs is one of the strategies in which a firm can compete in such a market. The cost reduction strategy was yielding results, as seen in the profitability figures for 1999 and 2000. The challenges of 2001 had resulted in poor performance but at that point Ford seemed to behave in a reactionary manner. As the challenges dissipated, Ford was then left with the task of recovering its market share and profits without any strong overarching strategy to guide them. Through this period, the Finance arm was responsible for most of the profits and was a stabilizing force in the company.

Throughout the entire evaluation period, Ford rode the wave of their trucks and SUVs. Sales of their main cars, the Taurus and Mercury Sable, declined dramatically over the period. It was only in 2003, a few years after the decline in truck sales had begun, that they devised a strategy to deal with this. That strategy was to use a Mazda engine in a new car, the Futura, that would be launched to replace the Taurus as a main competitor to the Accord and the Camry. By this point, Ford's strategies are reactionary. In 1994, they were cutting costs despite economic good times, low fuel prices, and a rise in their core truck-based lines. Ten years later they were reacting to a decline in car sales that had begun several years previous. Their cost-cutting strategies had gone from the innovative restructuring under Trotman to cutting out the coffee and sandwiches at meetings. Ford was no longer an innovator.

I would make three main recommendations for the future of Ford's marketing program. The first is that the marketing function should be split in such a manner that the main geographic regions are separated. The principle behind FAO was a strong one, but there is a point at which it is no longer the best option. The cost savings on the production and development side are being realized, but on the marketing side there is little benefit, given how different the needs of the American and European markets are. One component of marketing should be retained within FAO, that being the research component, as they provide the information and market research that drives the development side. So pre-production marketing would remain under the current structure and post-production marketing would be split off from FAO. The more sales-oriented aspects, however, or any other component of the Ford marketing function that is oriented towards post-production, should be specifically tailored to the needs of each unique market.