Ford Motor Company Microeconomic Principles Analysis

Ford Microeconomic Analysis
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Section I: Introduction
Businesses worldwide are established with the primary purposes of maximizing returns on investments and to ensure their growth and productivity for the foreseeable future. In this regard, firms are faced with countless economic choices such as the amount of money to spend on certain projects, employee salaries and whether to expand in foreign regions or increase the products and services in their portfolio among others. Successful organizations have mastered the art of using a variety of microeconomic tools, models and concepts not only to make rational and informed choices but also in resource allocation. It is essential to note that the decisions made by people in society are very influential and tend to impact choices made by organizations. As such, using microeconomic ideologies firms manage to determine price, increase their outputs and consequently maximize their profits. It is also vital to note that these microeconomic principles are applicable in businesses in different sectors of the economy including the automotive industry. The research paper will focus on Ford Motor Company and examine how different core microeconomic principles impacts the firms sustainability and consequently offer some recommendations on actions that the company can incorporate to ensure its success in the highly competitive motor vehicle industry.
Ford Motor Company or as is commonly identified as Ford is a multinational automotive firm with headquarters in Dearborn, Michigan. It was established in 1903 by Henry Ford and has over the years overcome countless challenges and taken advantage of various opportunities to become one of the largest automakers in the world. It pioneered the large scale manufacturing of vehicles through the use of elaborately engineered manufacturing sequences in a movement that in early 20th century was referred as Fordism. The company is extensively involved in the manufacture and sell of both automobiles and commercial vehicles and their spare parts through the Ford brand. It also manufactures pickup trucks and SUVs. Ford also manufactures luxurious automobiles under the banner of the Lincoln brand. It owns the Brazilian company SUV has different stakes in Aston Martin and Jiangling Motors (Ford.com, 2020). Ford also offers automotive finance, vehicle leasing and vehicle service. Ford previously owned Jaguar and Land Rover but sold the two UK subsidiaries to Tata Motors in 2008. Volvo was also part of Ford Motor Company but was sold in 2010 in the midst of the financial crisis that saw many firms not only in the US but globally suffer and find ways of cutting costs.
Ford went public in 1956 and is currently listed on the New York Stock Exchange. Nonetheless, the Ford family managed to retain at least 40% of the voting rights. The company has grown immensely over the years despite stiff competition from General Motors, Toyota, VW and most recently from environmentally-friendly automotive companies like Tesla. Ford is a global company with a presence and operating plants in all the continents. It is estimated that Ford employs more than 190000 employees globally in different capacities and who are responsible for manufacturing around 5 million cars annually. Ford started Ford with $28000 and through sound business principles the company currently has total assets in excess of $258B and total equity of over $33B (Macrotrends.net, 2020). Ford accumulated revenue as of 2019 was $155B which was a slight decline from $160B in 2018.
Section II: Supply and Demand Conditions at Ford
Ford is the second largest auto manufacturer in the US and the fifth largest globally. As such, it has acquired quite a substantial portion of the market which it supplies with its wide range of products. It is essential to note that Ford primarily depends on selling its car models to make money. In this regard, Ford sells its vehicles to dealers and distributors worldwide. Particularly, the vast majority of its sells are in North America, Europe, Asia-Pacific, Africa and South America. The biggest market out of the above remains North America where it maintains and controls about 14% of the market share. Reports indicate that Ford sold around 2.8 million cars in North America in 2019 (Ford.com, 2020). Nonetheless, Ford’s sales across the different markets have declined in the past five years. For instance, the vehicle sales in the US have reduced by about 30% since 2015 as a result of increased competition from other players in the industry such as General Motors (Macrotrends.net, 2020). Tough economic conditions have also caused few people to purchase vehicles. These facts are further reinforced by figure 1 below that shows the sharp decrease in the number of Ford vehicles sold worldwide between 1st quarter 2019 and 1st quarter 2020.
Figure 1:
There was a 20% drop in the number of vehicles sold in the beginning of 2019 (Statista, 2020). While dealers and distributors purchased 1.43 million vehicles in 2019, they only managed 1.13 million in the 1st quarter of 2020 (Statista, 2020).
Additionally, according to figure 2 below, the number of Ford vehicles sold in January is usually low but the sales eventually pick up as the year progresses. This is because at the beginning of every year individuals usually have less money to spend after overcommitting themselves in the festivities. Individuals also often have other expenses to meet such as tuition and rental needs.
Figure 2:
The information provided above shows that the demand for Ford products is diminishing rapidly and drastically. It is vital that swift changes are instituted. For one, Ford could avoid manufacturing vehicles in January when its sales are usually the lowest. It should increase production particularly in the periods around the festivities when individuals are in spending moods. Ford also needs to invest heavily in a research and development team to identify ways to improve its products to meet the needs and demand in the market. With the corona virus pandemic bringing the globe into a stand still, the R&D team will play a crucial part in moving the company forward.
Section III: Price Elasticity of Demand of Ford’s Products
Price elasticity of demand is a microeconomic principle and concept that is used to determine and gauge the extent to which demand of certain products will change when there is a change in price. Commodities whose demand changes drastically when price increases or decreases are considered to be elastic. Martin (2019) reiterates this position and shares “If the quantity demanded of a product exhibits a large change in response to changes in its price, it is termed "elastic," that is, quantity stretched far from its prior point”. Motor vehicles are deemed as being highly elastic since an increase in the price of any of the model is usually reflected in reduced demand for the product. Similarly, the availability of a wide range of substitutes from different manufactures and modes of transport makes price elasticity of demand for Ford’s products quite high.
While there are affluent individuals who are keen on purchasing the most expensive cars, majority of prospective car owners just want vehicles that will help them move around and help them attend to their chores. As such, they want cheap but quality cars and are often swayed to engage with companies that offer low cost and durable models. Ford has over the years understood the above logic and has ensured to provide cheap quality models for customer in different segments. It also regularly reduces the prices of some of its models to fuel demand and consequently increase its revenue. Additionally, there are various factors that affect consumer responsiveness to price changes for Ford’s products. The first factor concerns the natu...