Ford Fotor Company
Ford Fotor Company
In 1974 the Northern Petrochemical Company (NPC), a subsidiary of Northern National Gas (now named Internorth), decided to get into polypropylene production. The decision was based on an analysis of NPC's production capabilities and on a forecast of future market demand.
From a production standpoint, NPC was already making propylene, which is a precursor of and building block for polypropylene. The parent company could supply many of the raw materials for the new product. From a market standpoint, NPC estimated that, since the introduction of polypropylene in the early 1960s, the compound growth rate of sales had been somewhere between 15 and 20 percent. The firm also estimated that future growth would be even more rapid because of high benzene prices and possible shortages, which would depress sales of polystyrene. In many cases polypropylene could substitute for polystyrene. The polypropylene market could be divided into two segments depending on the properties put into the product. The first, homopolymer, comprised 85 percent of the market and was used for such applications as carpet backing, packaging film, appliance moldings, and fibers; the second, copolymer, included products such as battery cases, luggage, and high-clarity bottles. The copolymer sector was of most interest to NPC because this was a newer technical area in which they could expect growth and less entrenched competition.
NPC felt that further inroads for sales were possible as continued performance and cost-effectiveness were improved. One possibility would be in automotive-component fabrication. An entry into polypropylene production would necessitate a continued commitment to R&D in order to improve both product and process technology. NPC was willing to invest over $100
million in the project but lacked the technical capabilities. To use its own R&D efforts would greatly delay market entry. It also would mean risking legal complications because already there were numerous patent-infringement cases pending: Producing companies claimed that others had copied various aspects of their technology.
The total sales for Northern Natural Gas were approximately $1 billion for 1974, of which about 20 percent were accounted for by the NPC subsidiary. About 62 percent of Northern's sales was of natural gas to customers in the United States and Canada. The NPC petrochemical subsidiary was growing faster than the rest of the company and had had successes in such products as antifreeze and LDPE resins. The technology for the resins had been licensed from another firm after NPC had identified markets for use in trash-can liners and leaf bags. A commercial success with technology developed externally therefore had been demonstrated.
NPC next set out to find a firm from which it could gain the use of polypropylene technology on acceptable terms. Of the nine producers in the United States, only three were believed to be in an advanced stage of copolymer development. The first of these was Hercules, which dominated the entire polypropylene market. Hercules was interested because some of its customers wanted a secondary supply source in case of supply problems. NPC felt that such an arrangement was incompatible with its strategy, since it would inevitably place NPC in Hercules' shadow. NPC next contacted the Rexene Division of Dart Industries. Rexene rejected outright any sharing of its technology because it did not want another competitor in the market. No agreement could be reached with Phillips Petroleum for two reasons: Phillips had not yet commercialized the aspect of production that NPC considered critical; furthermore, Phillips was not enthusiastic about creating another competitor.
Having exhausted domestic possibilities, NPC turned abroad. Identification of possible companies was more difficult because many of those companies were believed to have a bigger lag
between product development work and commercial introduction of the products. In other words, management could not depend on looking at what was currently being sold to find all the firms with a current capability. Because of market differences, some of the European and Japanese producers had been known to hold on to a development for several years before commercializing it.
After some preliminary inquiries, five firms from four countries were identified as possibilities: Tokuyama Soda and Mitsubishi Petrochemical from Japan, Solvay from Belgium, Montedison from Italy, and BASF from Germany. NPC contacted all of these companies and learned that none had fully commercialized advanced copolymer production. In order to proceed to some possible agreement, each firm had to share with NPC its R&D data and to make special plant test runs to satisfy requests for further information. Interestingly, each had a very different approach to making the same product.
If NPC were to proceed to negotiations, it must choose the company and method most likely to reach the desired end results. NPC decided that BASF offered the best potential since it was and remains one of the giants among chemical companies with 1974 sales in excess of $8 billion. About 55 percent of BASF's sales were outside of Germany; its 1973 sales in the United States were $523 million. In addition to exporting to the U.S. market, BASF had substantial U.S. investments, the most notable of which were Wyandotte Chemical, which it fully owned, and a joint venture with Dow Chemical called Dow Badische. Increases in U.S. investment had been running between $45 million and $55 million per year. This was expected to go to $90 million beginning in 1975.
The chairman of BASF, Dr. Matthias See-felder, announced that he expected no growth in the German market for 1975 because of a reluctance on the part of consumers to buy. This would make it more difficult to continue to infuse German funds into the U.S. operations,
which were saddled with uncompetitive soda ash and chlorine plants. Given the cash-flow problem, it was hard for BASF to make commitments for market development of new products. Dr. Seefelder also indicated that the company's main specialties (plastics, synthetic fibers, and dyestuffs) were encountering difficulties and that it would be necessary to give greater attention to other products that BASF had already developed. A strong German mark was making German products expensive abroad, thus jeopardizing exports.
The early stages of negotiations between the two companies left the parties in opposition as to which technology BASF would share with NPC, provided an agreement on other points could be reached. BASF was willing to sell the technology that it had developed already but was not yet willing to make a commitment to continue copolymer research, which was not now a high priority for them because of their expectation of not being able to get substantial near-term sales in Europe. Nor was BASF yet willing to commit itself to sharing the future technology if and when it was developed. NPC wanted more than the pilot plant advancements and was in a position of having to convince BASF to alter its position if an agreement were to be reached that met NPC's original expectations.
Ford is a large company by any standard. Its 1989 sales of $96.1 billion made it one of the five largest industrial firms in the United States and one of the ten largest in the world. It is also the world's second-largest automobile company, holding about 14 percent of the worldwide market in 1989. Ford is also highly involved internationally. The company began operations in 1903 and exported the sixth car it built. By 1911 the company boasted that a man could drive around the world and stop every night at a garage handling Ford parts. By 1930 Ford was manufacturing or assembling automobiles in twenty foreign countries and had sales branches in another ten. In 1989 about 41 percent of Ford's car and truck vehicles were produced and sold outside of the United States, up from 35 percent three years earlier. Yet as large and internationally involved as Ford is, it must allocate its limited financial and human resources to maintain emphasis on those markets and production locations that are most compatible with corporate expectations and objectives.
Although foreign expansion was a stated objective at Ford's first annual meeting, the company initially was passive about where the emphasis would be. Ford's first foreign sales branches and assembly operations, such as in Canada, England, and France, were established because people in those countries made proposals to Ford.
Ford also made international expansion decisions on a highly decentralized basis. Much of the European expansion was handled through the English operation and the British Commonwealth sales through the Canadian company. Where sales grew most rapidly (e.g., in Argentina, Uruguay, and Brazil) Ford established assembly operations in order to save on transportation costs by limiting the bulk of shipments. Much of Ford's early expansion, therefore, was not based on scanning the globe to choose the best locations. Instead, Ford took advantage of opportunities as they came along.
Ford's pattern of international activities also has been
influenced by policies that the company's management considered essential. One of these policies stated that Ford would not manufacture or assemble anywhere without a
controlling interest. The concept of control in Ford's case went beyond that of voting shares. In 1930, for example,
a Ford group inspected potential production sites in China and reported back to Henry Ford that the title for any Ford purchase of land in China would have to be in the name of a Chinese citizen because a foreigner can't own land in China. Henry Ford's response was simply, "No." In the 1950s and 1960s Ford extended this concept of control to the point that nothing short of 100 percent ownership was acceptable. This further influenced Ford's geographic area of emphasis, causing Ford to expend resources to buy out a minority interest in the British company. It also meant abandoning production in India and Spain in 1954 (Ford recommenced Spanish production in 1976 and no longer adheres to
the 100 percent policy) because the governments of those countries insisted on sharing ownership.
Political conditions also have helped to forge Ford's foreign investment pattern. For example, during World War II the French facility was bombed and was not replaced. Assembly facilities were seized by communist governments in Hungary and Romania in 1946. Not until 1977, however, did Ford establish a separate department to evaluate the external political environment. Changes in governmental regulations often have caused Ford to commit a high proportion of its resources to a given area during a given period. This occurred, for example, when Mexico required a higher portion of local content in vehicles, thus forcing Ford to increase its Mexican investment or lose sales there.
Despite the extended and heavy commitment to foreign operations, Ford's production and sales are highly concentrated in a few countries. Even though Ford sells in over 200 countries and territories, Fig. 16.1 shows that about 80 percent of Ford's unit car and truck sales are in just four countries. These same four countries comprise only about 49 percent of world demand. Because of the heavier commitments in some countries than in others, Ford's competitive position is much stronger in some markets than in others. In the United Kingdom and Canada, where Ford has large investments, its market share in 1989 was 27 percent and 23 percent, respectively. But in Europe outside the United Kingdom, the market share was.only 8.5 percent.
One result of Ford's international commitment is that the dependence on multiple markets and facilities has minimized year-to-year sales and profit fluctuations. This has occurred because demand and price levels may move differently in various countries. From 1981 to 1982, for example, Ford's U.S. vehicle production fell by 91.6 thousand. This was largely made up by a 64.9 thousand increase in EC output. In 1980 Ford lost over $2 billion in the United States, earned $775 million in Britain, and lost $200 million elsewhere in the world. Between 1988 and 1989 Ford's North American net income fell by $1.4 billion; whereas its net income elsewhere in the world was almost steady. This points out not only the positive effect of geographic diversification on the smoothing of earnings, but also the importance of shifting resources in order to exploit areas of greatest profit potential.
With huge amounts of fixed assets already in place, Ford cannot easily abandon countries and then pick them up again. It can, however, compare the attractiveness of each country with actual and potential Ford operations and move toward greater emphasis on those countries with the most promising outlooks. Ford does this separately for each of its major product groups because different market conditions may affect each product group differently.
One of the tools that Ford uses to aid decision makers in choosing where to emphasize their marketing efforts is a country-comparison matrix. Ford staff members rank countries on one axis in terms of how attractive the country appears for sales of a specific type of product being considered, for example, tractors, trucks, or automobiles. On the other axis the same staff members rank the countries in terms of Ford's competitive capabilities for the specific markets. The resultant plotting helps the decision makers to narrow their major focus primarily to the areas of the world that both look attractive and seem to offer the best fit with Ford's unique capabilities. This is by no means the end of the evaluation process. The exercise does, however, enable the decision makers to concentrate on more detailed analyses of a manageable list of alternatives. It also allows them to progress to interrelated decisions, such as where to locate production facilities for the chosen markets.
Ford's pattern of international expansion is typical of many firms as they become more heavily involved abroad. In the early stages, companies may lack the experience and expertise to devise strategies for sequencing countries in the most advantageous way. Instead, they respond to opportunities that become apparent to them, and many of these turn out to be highly advantageous. As they gain more international experience, however, they come to
Later expansion cannot realize that they seldom have enough resources to take advantage of all the take advantage of all op- opportunities. They see that the commitment of human, technical, and finan-portumties. c^ resources to one iocaie mav mean forgoing projects in other areas. Con-
sequently, foreign operations become an integral part of companies' decisions on how to allocate resources.
In 1974 the Northern Petrochemical Company (NPC), a subsidiary of Northern National Gas (now named Internorth), decided to get into polypropylene production. The decision was based on an analysis of NPC's production capabilities and on a forecast of future market demand.
From a production standpoint, NPC was already making propylene, which is a precursor of and building block for polypropylene. The parent company could supply many of the raw materials for the new product. From a market standpoint, NPC estimated that, since the introduction of polypropylene in the early 1960s, the compound growth rate of sales had been somewhere between 15 and 20 percent. The firm also estimated that future growth would be even more rapid because of high benzene prices and possible shortages, which would depress sales of polystyrene. In many cases polypropylene could substitute for polystyrene. The polypropylene market could be divided into two segments depending on the properties put into the product. The first, homopolymer, comprised 85 percent of the market and was used for such applications as carpet backing, packaging film, appliance moldings, and fibers; the second, copolymer, included products such as battery cases, luggage, and high-clarity bottles. The copolymer sector was of most interest to NPC because this was a newer technical area in which they could expect growth and less entrenched competition.
NPC felt that further inroads for sales were possible as continued performance and cost-effectiveness were improved. One possibility would be in automotive-component fabrication. An entry into polypropylene production would necessitate a continued commitment to R&D in order to improve both product and process technology. NPC was willing to invest over $100
million in the project but lacked the technical capabilities. To use its own R&D efforts would greatly delay market entry. It also would mean risking legal complications because already there were numerous patent-infringement cases pending: Producing companies claimed that others had copied various aspects of their technology.
The total sales for Northern Natural Gas were approximately $1 billion for 1974, of which about 20 percent were accounted for by the NPC subsidiary. About 62 percent of Northern's sales was of natural gas to customers in the United States and Canada. The NPC petrochemical subsidiary was growing faster than the rest of the company and had had successes in such products as antifreeze and LDPE resins. The technology for the resins had been licensed from another firm after NPC had identified markets for use in trash-can liners and leaf bags. A commercial success with technology developed externally therefore had been demonstrated.
NPC next set out to find a firm from which it could gain the use of polypropylene technology on acceptable terms. Of the nine producers in the United States, only three were believed to be in an advanced stage of copolymer development. The first of these was Hercules, which dominated the entire polypropylene market. Hercules was interested because some of its customers wanted a secondary supply source in case of supply problems. NPC felt that such an arrangement was incompatible with its strategy, since it would inevitably place NPC in Hercules' shadow. NPC next contacted the Rexene Division of Dart Industries. Rexene rejected outright any sharing of its technology because it did not want another competitor in the market. No agreement could be reached with Phillips Petroleum for two reasons: Phillips had not yet commercialized the aspect of production that NPC considered critical; furthermore, Phillips was not enthusiastic about creating another competitor.
Having exhausted domestic possibilities, NPC turned abroad. Identification of possible companies was more difficult because many of those companies were believed to have a bigger lag
between product development work and commercial introduction of the products. In other words, management could not depend on looking at what was currently being sold to find all the firms with a current capability. Because of market differences, some of the European and Japanese producers had been known to hold on to a development for several years before commercializing it.
After some preliminary inquiries, five firms from four countries were identified as possibilities: Tokuyama Soda and Mitsubishi Petrochemical from Japan, Solvay from Belgium, Montedison from Italy, and BASF from Germany. NPC contacted all of these companies and learned that none had fully commercialized advanced copolymer production. In order to proceed to some possible agreement, each firm had to share with NPC its R&D data and to make special plant test runs to satisfy requests for further information. Interestingly, each had a very different approach to making the same product.
If NPC were to proceed to negotiations, it must choose the company and method most likely to reach the desired end results. NPC decided that BASF offered the best potential since it was and remains one of the giants among chemical companies with 1974 sales in excess of $8 billion. About 55 percent of BASF's sales were outside of Germany; its 1973 sales in the United States were $523 million. In addition to exporting to the U.S. market, BASF had substantial U.S. investments, the most notable of which were Wyandotte Chemical, which it fully owned, and a joint venture with Dow Chemical called Dow Badische. Increases in U.S. investment had been running between $45 million and $55 million per year. This was expected to go to $90 million beginning in 1975.
The chairman of BASF, Dr. Matthias See-felder, announced that he expected no growth in the German market for 1975 because of a reluctance on the part of consumers to buy. This would make it more difficult to continue to infuse German funds into the U.S. operations,
which were saddled with uncompetitive soda ash and chlorine plants. Given the cash-flow problem, it was hard for BASF to make commitments for market development of new products. Dr. Seefelder also indicated that the company's main specialties (plastics, synthetic fibers, and dyestuffs) were encountering difficulties and that it would be necessary to give greater attention to other products that BASF had already developed. A strong German mark was making German products expensive abroad, thus jeopardizing exports.
The early stages of negotiations between the two companies left the parties in opposition as to which technology BASF would share with NPC, provided an agreement on other points could be reached. BASF was willing to sell the technology that it had developed already but was not yet willing to make a commitment to continue copolymer research, which was not now a high priority for them because of their expectation of not being able to get substantial near-term sales in Europe. Nor was BASF yet willing to commit itself to sharing the future technology if and when it was developed. NPC wanted more than the pilot plant advancements and was in a position of having to convince BASF to alter its position if an agreement were to be reached that met NPC's original expectations.
Ford is a large company by any standard. Its 1989 sales of $96.1 billion made it one of the five largest industrial firms in the United States and one of the ten largest in the world. It is also the world's second-largest automobile company, holding about 14 percent of the worldwide market in 1989. Ford is also highly involved internationally. The company began operations in 1903 and exported the sixth car it built. By 1911 the company boasted that a man could drive around the world and stop every night at a garage handling Ford parts. By 1930 Ford was manufacturing or assembling automobiles in twenty foreign countries and had sales branches in another ten. In 1989 about 41 percent of Ford's car and truck vehicles were produced and sold outside of the United States, up from 35 percent three years earlier. Yet as large and internationally involved as Ford is, it must allocate its limited financial and human resources to maintain emphasis on those markets and production locations that are most compatible with corporate expectations and objectives.
Although foreign expansion was a stated objective at Ford's first annual meeting, the company initially was passive about where the emphasis would be. Ford's first foreign sales branches and assembly operations, such as in Canada, England, and France, were established because people in those countries made proposals to Ford.
Ford also made international expansion decisions on a highly decentralized basis. Much of the European expansion was handled through the English operation and the British Commonwealth sales through the Canadian company. Where sales grew most rapidly (e.g., in Argentina, Uruguay, and Brazil) Ford established assembly operations in order to save on transportation costs by limiting the bulk of shipments. Much of Ford's early expansion, therefore, was not based on scanning the globe to choose the best locations. Instead, Ford took advantage of opportunities as they came along.
Ford's pattern of international activities also has been
influenced by policies that the company's management considered essential. One of these policies stated that Ford would not manufacture or assemble anywhere without a
controlling interest. The concept of control in Ford's case went beyond that of voting shares. In 1930, for example,
a Ford group inspected potential production sites in China and reported back to Henry Ford that the title for any Ford purchase of land in China would have to be in the name of a Chinese citizen because a foreigner can't own land in China. Henry Ford's response was simply, "No." In the 1950s and 1960s Ford extended this concept of control to the point that nothing short of 100 percent ownership was acceptable. This further influenced Ford's geographic area of emphasis, causing Ford to expend resources to buy out a minority interest in the British company. It also meant abandoning production in India and Spain in 1954 (Ford recommenced Spanish production in 1976 and no longer adheres to
the 100 percent policy) because the governments of those countries insisted on sharing ownership.
Political conditions also have helped to forge Ford's foreign investment pattern. For example, during World War II the French facility was bombed and was not replaced. Assembly facilities were seized by communist governments in Hungary and Romania in 1946. Not until 1977, however, did Ford establish a separate department to evaluate the external political environment. Changes in governmental regulations often have caused Ford to commit a high proportion of its resources to a given area during a given period. This occurred, for example, when Mexico required a higher portion of local content in vehicles, thus forcing Ford to increase its Mexican investment or lose sales there.
Despite the extended and heavy commitment to foreign operations, Ford's production and sales are highly concentrated in a few countries. Even though Ford sells in over 200 countries and territories, Fig. 16.1 shows that about 80 percent of Ford's unit car and truck sales are in just four countries. These same four countries comprise only about 49 percent of world demand. Because of the heavier commitments in some countries than in others, Ford's competitive position is much stronger in some markets than in others. In the United Kingdom and Canada, where Ford has large investments, its market share in 1989 was 27 percent and 23 percent, respectively. But in Europe outside the United Kingdom, the market share was.only 8.5 percent.
One result of Ford's international commitment is that the dependence on multiple markets and facilities has minimized year-to-year sales and profit fluctuations. This has occurred because demand and price levels may move differently in various countries. From 1981 to 1982, for example, Ford's U.S. vehicle production fell by 91.6 thousand. This was largely made up by a 64.9 thousand increase in EC output. In 1980 Ford lost over $2 billion in the United States, earned $775 million in Britain, and lost $200 million elsewhere in the world. Between 1988 and 1989 Ford's North American net income fell by $1.4 billion; whereas its net income elsewhere in the world was almost steady. This points out not only the positive effect of geographic diversification on the smoothing of earnings, but also the importance of shifting resources in order to exploit areas of greatest profit potential.
With huge amounts of fixed assets already in place, Ford cannot easily abandon countries and then pick them up again. It can, however, compare the attractiveness of each country with actual and potential Ford operations and move toward greater emphasis on those countries with the most promising outlooks. Ford does this separately for each of its major product groups because different market conditions may affect each product group differently.
One of the tools that Ford uses to aid decision makers in choosing where to emphasize their marketing efforts is a country-comparison matrix. Ford staff members rank countries on one axis in terms of how attractive the country appears for sales of a specific type of product being considered, for example, tractors, trucks, or automobiles. On the other axis the same staff members rank the countries in terms of Ford's competitive capabilities for the specific markets. The resultant plotting helps the decision makers to narrow their major focus primarily to the areas of the world that both look attractive and seem to offer the best fit with Ford's unique capabilities. This is by no means the end of the evaluation process. The exercise does, however, enable the decision makers to concentrate on more detailed analyses of a manageable list of alternatives. It also allows them to progress to interrelated decisions, such as where to locate production facilities for the chosen markets.
Ford's pattern of international expansion is typical of many firms as they become more heavily involved abroad. In the early stages, companies may lack the experience and expertise to devise strategies for sequencing countries in the most advantageous way. Instead, they respond to opportunities that become apparent to them, and many of these turn out to be highly advantageous. As they gain more international experience, however, they come to
Later expansion cannot realize that they seldom have enough resources to take advantage of all the take advantage of all op- opportunities. They see that the commitment of human, technical, and finan-portumties. c^ resources to one iocaie mav mean forgoing projects in other areas. Con-
sequently, foreign operations become an integral part of companies' decisions on how to allocate resources.
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