Business Problem Proposal
Proposed Company: The Ford Motor Company
Business Related Problem
The automobile industry and in particular, the Ford must devise methods to remain competitive and increase market share. Current market analyses indicate competition is not just other automobile industry companies, but the global market for automobiles experienced an unhealthy growth over the past five years. Looking forward, while the pace of market expansion is anticipated to slow, annual growth will become more stable.
The Ford Company will maintain or improve its current industry dominance with research. By applying linear regression, the company can correlate market and financial statements, utilize multiple regression to interpret the output, and leverage the use of time series analysis and forecasting to make business decisions. Will annual revenue continue its current growth pace? The following research questions will provide a guide for this study. The motivation and purpose for this study and related research questions are also presented within the business proposal.
1) Will revenue increase with increased direct marketing efforts focused in the growth sectors of the automobile industry?
2) Will Revenue will increase by a greater proportion if the marketing efforts include a global span?
Purpose of the Study: Does Ford Motor Need to be More Competitive and Financially Stable
Revenue is the overall earnings of a company and for a large company such as Ford Motor, there are always competitive and strategic practices that are needed to increase revenue.
However, marketing activities have focused on financial solvency and how to increase the consumer base and more importantly increase revenue. The crux of the paper is to get a clear understanding of how direct marketing efforts focused on growth can increase revenue. Similarly, there is the notion that global expansion to include areas such as China or other Asian nations can increase revenue exponentially.
Motivation of the Study
Ford Motor Company is the fourth largest automaker in the United States. The company is based in Detroit Michigan and began in 1903 with founder Henry Ford. The brands of Ford now include popular cars such as Lincoln, Volvo, and Mercury. Ford has been one of the largest family-owned enterprises and was one of the few companies to survive the Great Depression in the 1930s.
Ford has established clear objectives that include:
– Grow the value of our existing brands and expand their product portfolio
– Confront ongoing market challenges that have limited the growth. These challenges ? created by changing consumer tastes and an evolving traveling environment
– Seize share of this growth by achieving our goal and creating better balance in our portfolio.
– Work with affiliates and other services to seek opportunities for new brands and products.
The mission of the Ford can be summarized within the strategic principles outlined by the company below:-
To guide this effort, Ford’s leadership team has identified three strategic priorities:
Strengthen brand portfolio by growing the value of existing brands and significantly expanding product portfolio;
Transforming the market model and improve efficiency and effectiveness;
Establish a winning, inclusive culture as Ford attracts, develops, and retains a talented and diverse workforce.
Ford Motor Financial and Strategic Analysis — Background to Ford’s Problem
The market place characteristics which make the research question suitable are:
> Stringent quality control systems in every plant
> 440,000 customers
> Consumer response mechanism in every country
> 84,000 suppliers
> Supplier Guiding Principles Program
Strategic Weaknesses and Threats
Within the automobile sector Ford Motor has outlined a strategic objective of increasing loyalty and profitability of customers by directly providing products that are useful to the organization.
The bargaining power of buyers is highlighted by the fact that Ford Motor wants to increase brand loyalty, hence the strategic marketing activities, which reinforces elements of the marketing mix and helps to alleviate the bargaining leverage of the buyer. In the automobile industry demand is highly elastic since there are many substitutes, Ford Motor minimizes the threat of the buyer power, by making demand more inelastic since they offer a wide array of products across different categories of goods and products that are different from competitors, this is unique and lessens the threat just being a similar product in a vast market and creates a unique product differentiability for Ford.
Based on the analysis of the buyer power above, it is clear that ideally the threat of substitutes exists, but Ford Motor minimizes this creating brand loyalty via their strategic business process which is the idea behind focusing on the investor only and removing the conflict of interest typical within the industry.
There are no serious barriers to entry in this market structure. This explains Ford Motor’s integration of a strategic process, so that they can maintain their profitability from new entrants. There are very few absolute cost advantages, the inputs needed are not difficult to acquire, capital requirements are minimal, and Ford Motor’s to distribution channels is easy. Ford exists in a market that has freedom of entry, hence they have to continually improve and maintain a competitive advantage.
More importantly, the analysis and research questions are grounded within the financial aspects of the company. As such there is a need to analyze the financial position of the firm to determine the motivation and purpose for the study and as well as the reason for analyzing a revenue equation.
Financial Woes of Ford
Ford Motor faces almost one-to-one current ratio; with 0.96 and 0.88 in 2009 and 2008 respectively. This is not surprising in a sector that has a lot of its assets in capital equipment and machinery — however when compared to the industry average, it seems that Ford Motor will have problems with their short-term obligations.
The accounts receivable ratio fell slightly between 2008 and 2009, even though the overall sales/revenues increased. By maintaining accounts receivable, Ford Motor can indirectly extending interest-free loans to their clients. This high ratio implies either that Ford Motor operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient.
The average collection period for Ford Motor is unfavorable since it takes customers 43 days in 2009 to pay their bills (up from 41 days in 2008), indicating the effectiveness of credit and collection policies of Ford Motor.
Inventory turnover is unfavorable. However the increase in inventory level from 2008 to 2009 may be unhealthy since it represents an investment with a rate of rerun of zero and it opens the Ford Motor up to trouble should prices begin to fall. However, the turnover statistics implies good sales and some level of effective buying.
Given that Ford Motor is in a more capital intensive industry the debt to equity ratio that is approximately 2 is unhealthy for Ford Motor. If a lot of debt is used to finance increased operations (high debt to equity), Ford Motor could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing.
Similarly, the long-term debt to total assets implies that the company’s reliance on debt for asset formation is not that risky and Ford Motor is less likely to have a repayment burden.
The times interest earned based on the trend from 2008 to 2009 is not stable, since the earnings before interest and taxes in 2009 was negative (a loss). However in 2008 the times interest earned was 2.2. This might be indicative of the fact that the creditworthiness of Ford Motor is depleting over time, especially in wake of the fact that they faced a loss in 2009.
The total margin comparison is done across industries rather than over time, given the analysis within the industry Ford Motor’s currently operates faces similar percentages.
Return on assets and return on equity is unfavorable in 2008 at 2% and 9% in 2008. However, in 2009 with a net loss for Ford Motor, then the ratios are negative and this is similar across industries, as companies engage in expansion strategies that will benefit the industry overall but affects the measure of how well the companies used reinvested earnings to generate additional earnings.
The earnings per share in 2009 was unfavorable when compared to that of its major competitors. The significant drop in the price/earnings ratio has been associated with the new product lines that have attracted investors to the company.
FINANCIAL STATEMENT ANALYSIS WORKSHEET
Comments: Ford Motor has a relatively high measure of liquidity, which indicates that the company may have some problem meeting its short-term debt. This becomes even clearer when inventories are included and the quick ration is used as a test for liquidity.
Comments: Ford shows unfavorable activity ratios, which is indicative of the fact that the company is using its assets efficiently to meet financial requirements. All measures, except ART improved over time (from 2008 to 2009).
Comments: Ford uses debt heavily to finance the growth of the company. Overall the company is servicing the debt well and is stable over time, even though the loss in 2009 has affected the capital structure formation.
Ford Motor does not have good short-term liquidity — however, this is expected, since the company has mostly long-term assets and the associated current liabilities within a heavily capitalized firm like Ford Motor will not be covered by current assets completely.
Ford is Uncompetitive and Weak When Compared to Competitors
Ford Motor is within a very competitive industry that requires the company to be innovative and continually develop products that can meet market demand and changing consumer tastes. The financial analysis shows that Ford Motor is competitive and has a strong financial outlook when compared to the industry.
Key Financial Ratios
As of 2009
Qtrly Rev Growth (yoy):
Gross Margin (ttm):
Oper Margins (ttm):
Net Income (ttm):
PEG (5 yr expected):
From the comparative table above from an industry comparison, Ford Motor is extremely competitive and stable, however when compared to its main competitor GM, then Ford Motor is outranked. More specifically, GM has almost three times Ford Motor revenue growth has an extremely higher gross margin and has more efficient and profit operations as measured by financial ratios.
However when compared with GM, then Ford Motor is considered a market leader among this group.
Dividends were not paid to the stockholders in 2009, since the company made a loss and decided to not pay-out dividends, also the financial statements were audited by Ernst & Young LLP, who act as independent auditors for Ford Motor. Also, the notes on the income statement shows that Ford Motor used the first-in-first-out (FIFO) inventory method during the accounting period examined.
Recommendations for Ford
The automobile — manufacturing industry is competitive, however there are some market leaders that continue to have high market shares because of their innovativeness, as such it is essential that Ford Motor tries to maintain its competitive edge by continually innovating products that are inline with changing consumer taste.
Ford Motor will continue to increase its market share and diversify its products as it tries to compete with dominant firms. The strategic development process and strong corporate governance makes Ford Motor one of the more financially sound and diversified firms in the market.
The overall analysis will focus on a time trend or regression framework that will utilize a profit or revenue equation to determine how revenue is affected by marketing focused on growth sectors. Similarly a variable to measure marketing within the global environment will also be used to determine the relative differences in revenue changes from both perspectives.
The analysis will utilize time series data based on the revenue and independent variables that affect the revenue of the company. The choice of the independent variables will be based on the overall literature that explains the major variables that impact revenue.
With quantitative analysis, the Ford Company will discern the dependent (total revenue) and independent variables (consumer, marketing, and competitive variables), establish a hypothesis — “as marketing increases, total revenue for Ford increases,” show the primary and secondary research sources, establish a confidence interval, and a sample size. Although Ford Motor is a domestic leading brand with a strong portfolio and revenues in excess of $24 billion, the company’s cash flow from operating activities decreased 7% in 2009 compared to 2008, and North America performance was far from robust. Annual company growth is approximately $1 billion while current quarterly income statements reflects nearly $7 billion, putting it on pace to recognize a significant annual income. However, competition from the global automobile companies grew 6.3% in 2008 and expects a 30% increase in revenue by 2010; expectations that concern Ford Motor and could affect financials.
It is also useful to test the hypothesis using regression analysis to get an idea of how different socio-economic variables, affect the prevalence revenue. The form of the regression will obtain coefficients from the least square method, so that the necessary measures can be further tested for unbiasedness and consistency. The form of the model is presented in equation 1 below.
Y =a + b1x1+ b2x2+ b3x3+ b4x4+ b5x5+ b6x6+ b7x7 +? Equation 1
Total Revenue =f (specialized marketing (growth sectors), international marketing (global marketing specialization), interest rates, GDP, inflation, and price of related goods (substitutes and/or complements)).
Based on equation 1 above, the paper will examine revenue impacts for Ford Motor using the tools of econometrics. The econometric modeling will employ ordinary least squares methodology based on the time series data, so that the study can incorporate the aspects of the companies competitive behavior via its financial model in a comprehensive way. From the literature it is clear that some variables play a key role in the overall model presented, one such variable is the gross domestic product (GDP), since it can have a highly motivating effect on revenue in the short-run and long-run. The magnitude and effects of other variables is presented below.
Marketing activities will be measured via the marketing expenditure by Ford Motor — that is, the total expenses directed to marketing. The public records from Ford Motor present the necessary information and also presents a split between global marketing expenditure and other marketing expenditure. Hence the global aspect of marketing and its effect on revenue can be measured. The a priori expectation is that marketing expenditure will increase revenue, both domestic and global initiatives. However it is expected that even though the coefficients will be positive the local expenditure on marketing activities geared towards growth sectors will have a larger effect on revenue.
Interest rates and inflation variables are expected to have a negative and significant effect on revenue changes, since it will affect other issues related to the cost of capital and other investment strategies. That is, higher interest rates (this will be done with the United States as the base market) will lessen revenue. Inflation measures the purchasing power of consumers and higher levels of inflation will imply less revenue for Ford Motor since individuals will have less purchasing power. The interaction between the interest rate and inflation variable will also be tested for endogeneity (which if present could lead to a spurious regression), since the two variables are sometimes related as they are important issues in government monetary and fiscal policy.
Gross domestic product (GDP) is a necessary variable to explain demand characteristics since higher GDP will result in higher revenue, as GDP growth is a proxy for economic growth which implies that consumers will spend more on goods and services. Hence the coefficient on GDP is expected to be positive.
Competitive variables or market forces variables are also needed to complete the revenue equation — this is especially important for Ford Motor which is a known brand, and has interactions from other market players which in turn affects revenue. As competitors (like Toyota and GM) spend more on marketing activities and strategic development it is expected that revenue for Ford Motor will decrease. The proxy for competitive behavior will be competitors expenditure o marketing which is readily available via the annual reports posted on the websites,
IV. Primary and Secondary Data Sources
It is unlikely that there will be any primary data collection. All the necessary analysis will come from secondary data, which will focus on the variables mentioned above. The secondary data sources are the crux of the analysis, since the information will be focusing on a time trend of revenue and the related components profit, (Yahoo Finance, n.d., para 3). That is, the motivating and deterrent factors that affect revenue within the modeling framework will be examined. Currently, the financial information is available for long time trends on the company’s website for the revenue (dependent variable) and for other related expenses or components for independent variables such as; marketing, advertising, and other strategic variables. The financial data is also available from other financial data warehouses such as Yahoo Financials, especially with the company being a ‘public’ entity. Hence data availability and long time trends should not be hard to gather. It is important that the paucity of data points is not an issue.
Description of Sources
Other related data sources that will outline important macroeconomic variables that affect the companies overall financial objectives will be from the department of labor and economic statistics website, which provides time series trends on business variables such as interest rates and inflation (these are important since they dictate economic activity within the industry).
Hoover financials data warehouse also provides a good data source for the related variables that will be included within the modeling mechanism. Other important data sources are direct competitors annual reports and/or audited statements that are available from the companies themselves (companies that are also public). Ford is within a very competitive industry that requires the company to be innovative and continually develop products that can meet market demand and changing consumer tastes. The financial analysis will be at a very detailed and analytical level. What the team will propose will show whether Ford is competitive and has a strong financial outlook when compared to a comparable industry.
Populations of Interest
The research population of interest is current and historical sales revenue data from Ford Company, other automobile industries, and the bottle water industry. A sample of the population will prove or disprove the hypothesis that Ford Motor will continue its industry dominance for the next 3 years. The scope will include quarterly and annual revenue earnings to illustrate market share. The overall analysis is focusing on specific marketing activities from Ford Motor to discern some important aspects of marketing and how global expansion affects the revenue of the firm. The information will also be useful for comparison across competitors.
V. Data Analysis
The data analysis will be conducted using Microsoft Excel, since it’s a regression model, also if the statistical analysis requires more comprehensive analyses some data will be inputted in the Statistical Software Package or some econometric program to extract meaningful measures that will be indicative of the nature of the relationship between the variables.
The Spearman Correlation (non-parametric testing), which is expected to have an a priori positive relationship will be indicative of the relative strength and significance of the relationship between the variables will be important to the analysis when trying to determine the impact of marketing on revenue.
Cronbach alpha gives a standardized measure of how the set of independent variables measure the necessary aspects of the revenue school dropout rate from a single one-dimensional construct. That is, given that the information from the survey structures the data so that there are many measures for the school dropout variable or measure, the Cronbach alpha presents a way to test reliability and consistency of the different aspects of how well a set of variables can jointly explain one concept. The formula is given below:
The coefficients will be determined for statistical significance for the t-test using a 5% level of significance (a t-value of approximately 2). Similarly, the overall fit of the model will be determine by the F-test statistic, taking into consideration the degrees of freedom based on the number of independent variables. The R-squared presented below will also be a useful analysis for the test.
Other post tests to be conducted includes, the Durbin Watson statistic to ensure that there is no autocorrelation of the variables, the White Test to ensure that there is no heteroscedasticity, and the Ramsey Reset test to ensure that the modeling of revenue being determined by the variables specified for Ford Motor is not a misspecificed functional form and all the variables are necessary explanatory variables within the model. The coefficients will be checked to ensure that they are efficient, unbiased, and consistent.
The model will also be useful for forecasting purposes if the revenue is explained from the econometric model with statistically significant coefficients. Before conducting a forecast, an actual, fitted, and residual graph was analyzed to see if the model was a good fit, see the example in Figure 2 below:-
Figure 2: Example of Actual, Fitted, and Residual Graph for the Model
From figure 2 above it is clear that residual values are close to zero, and the model is a good fair fit. Forecasted values based on a similar model will be presented to get an idea of how future revenue will change for Ford Motor. The methodology chosen was a dynamic forecast since it calculates multi-step forecasts starting from the first period in the forecast sample. The results will be similar to the static methodology that calculates a sequence of one-step-ahead forecasts, using actual, rather than forecasted values for lagged dependent variables
The research questions presented have a clear methodological process from the proposal above, all the necessary testing, functional forms, and hypothesis have been highlighted. There has also been a thorough analysis of the overall methodology, motivation of the study which is grounded in financial management, and the test statistic and statistical techniques to be conducted.
Bureau of Labor Statistics, (2007 July). News: Consumer Price Index June 2007. Bureau of Labor Statistics: United States Department of Labor. Retrieved May 5, 2010 from http://www.bls.gov/news.release/pdf/cpi.pdf
Cooney, S. (2007 April). China’s impact on the U.S. automotive industry. Congressional Research Service. Retrieved May 5, 2010 from http://www.fas.org/sgp/crs/misc/RL33317.pdf
Cooney, S. And Yacobucci, B. (2006 April). U.S. automotive industry: policy overview and recent history. Congressional Research Service. Retrieved May 5, 2010 from http://www.ncseonline.org/NLE/CRSreports/05apr/RL32883.pdf
Fine, C., Lafrance, J. And Hillebrand, D. (1996 December). U.S. automobile manufacturing industry. U.S. Department of Commerce: Office of Technology Policy. Retrieved on May 5, 2010 http://www.technology.gov/Reports/autos/auto.pdf
Klepper, S. (2001 November). The evolution of the U.S. manufacturing industry and Detroit as its capital. Carnegie Mellon University Working Papers. Retrieved May 5, 2010 from http://www.druid.dk/uploads/tx_picturedb/dw2002-440.pdf
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Ford Motor Company
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