Challenges of expansion in the market

Running head: RESEARCH ANALYSIS

Research Analysis for Business

Vance Marshall

ECO/561

April 5, 2017

MR. John Lindvall

As a business consultant at Ford Motor Company, I have to advise the company on the various strategic directions it can take to ensure that it is successful in its current market. The Ford Motor Company operates in the automotive industry, one that is extremely dynamic in terms of product development to meet client requirements and to continually provide a good customer experience with their products (Dopfer, 2005). The company is a multinational company and it operates in the oligopoly market structure. This is because the automotive industry has a large number of potential buyers but very few sellers, the automotive products are homogenous in the sense that they cannot be significantly distinguished from the same products by other companies. This means that the products have the same qualities as products by other manufacturers and therefore the probability of substitution is high. There are also several barriers to entry into this industry and the sellers in this market structure are large while the buyers are few. The market share is a representative of the reported sales of the company’s brands, relative to the total sales in the industry. According to the company’s 2015/2016 sustainability report, it had a 14.7% market share in the United States. In the US, the company’s greatest competitors include General Motors, Nissan, Honda, Chrysler and Toyota. The other competitors globally include Volkswagen, Fiat and Peugeot among others. Most of these competitors are able to provide better models of cars at lower prices. They have taken advantage of producing smaller and fuel efficient vehicles. There are several barriers to entry into this industry which makes the threat of new entrants significantly low. One of the major barriers to entry is the high startup capital that is required to set up manufacturing plants, train employees and purchase the necessary materials to start the business and compete with the other established companies in the industry. Another barrier is the achievement of economies of scale through mass production in this industry. It may be a bit expensive to attain this in order to make the cars affordable to the clients. Also, there is another barrier that is associated with access to distribution channels in the industry. Given that dealership is limited, a new company may find it hard finding ways in which their products will be distributed in the market. With these considerable barriers to entry, it is very difficult for a new startup to get into this market successfully unless they do it through the already established brands. The strategies of Ford Motor Company should therefore focus on countering the already established competitors like Chrysler as opposed to laying focus on future startups because there is a very small chance that a new competitor will significantly impact Ford’s market in the near future.

The company is currently at the expansion stage of the business cycle which is characterized by price increase, an increase in employment, and economic growth (Dopfer, 2005). These are indicated by the current product prices of the company’s products, the employment level and the prevailing economic conditions in the country. The real gross domestic product is a macroeconomic measure of the output value of the economy that has been adjusted for price changes. In the US, real GDP increased by 1.6% in 2016, which was a deceleration from 2015. This is an indicator that the value of the total goods produced in the country increased and Ford Motor Company should positively contribute in terms of increasing production for it to generate more revenues. The unemployment rate in the United States has been ranging from 4.7% to 5% over the past year. Ford could use this information to their benefit by increasing the production capacity in the country so as to be able to employ more people into the company’s workforce. Unemployment is an indicator of the availability of labor and if the company is to use its financial strength to open new branches in other states, this labor could be harnessed to its benefit thus increasing revenues. The consumer price index on the other hand is used to measure the value of the weighted average prices of a basket of goods. This value can be used by the company to forecast demand. Since automotive products have a smaller number of buyers, it is easier to predict demand for these products relative to other goods that are necessities using the consumer price index to be able to better set up production. The federal funds rate is the rate at which banks lend to other institutions. This rate may be used by Ford Company in in deciding when the best time to borrow from financial institutions is. This corporation is however most likely to use the prime rate as this is the rate at which commercial banks lend to large corporations. The current prime rate in the US is currently 4%. This means the corporation can use this rate to borrow sufficient funds for expansion since it has been earlier established to be in the business expansion phase.

From table 1, it can be noted that Ford has the highest demand compared to the other companies also outlined in the table. This has a positive impact on the firm, in that the firm may opt to only improve on their products so that the current clients are retained.

Table 1

Source: sustainability Report, 2013/2014

The price elasticity of demand measures the responsiveness of the quantity demanded to a price change. When the price elasticity od demand is greater than 1, then the demand is elastic. If it is less than one, the price demand can be concluded as being price inelastic. Ford Motors Company can use the elasticity of demand in predicting the prices of their products in the market and formulating strategies on how well to price their products for the company to avoid missing out on sales. It is an important tool in pricing because the firm is well informed on the types of products on which to raise the price and those not to raise the price. High labor costs, research and development and raw materials are most likely to increase the level of output because these are investments into the company. In other words, they are an input in terms of increasing the capital injected into the business.

From the data presented above, I am convinced that the firm should set their prices according to the market rates and those set by the other competitors in the market. This will ensure that customers have a chance to compare brands on quality basis and not price. Future production should therefore be based on the production capacity as the expansion of the production capacity should be based on demand.

References

Bureau of Economic Analysis

https://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

(accessed on 2/4/2017)

Dopfer, K. (Ed.). (2005). The evolutionary foundations of economics. Cambridge University Press.

Sustainability Report 2013/2014 available at http://corporate.ford.com/microsites/sustainability-report-2013-14/blueprint.html