Introduction
The purpose of this paper
Microeconomics deals with the study of the behaviors of firms and the households when faced with the scarce resources to be used in satisfying the many wants. Moreover, microeconomic analysis evaluates the manner in which the market factors affect the behaviors of firms and households. Understanding the microeconomic situation of a company is a very important need since the information gained may be used by the company making decisions regarding size of output, amount of input, marketing behavior and pricing strategy.
It is important to note that there are millions of economic choices that are made daily by people. The choices include the type of good to purchase, number of employees to hire for the firm and amount of product to supply into the market. Microeconomics gives business people the tools, models and the concepts that may be applied in order to understand the individual; choices made in the marketplace properly. Moreover, through the microeconomic analysis, businesses are able to determine the way resource allocation is done at the micro level. The daily decisions that are made by households normally have effects on the market and consequently influence the behavior of the business companies.
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The purpose of this research paper is to conduct a microeconomic analysis of the Ford Motor Company. The aim of the paper is to establish the microeconomic situation of the Ford Motor Company through collecting information about the market and business factors related to this company. This research paper aims at explaining the manner in which the core microeconomic principles learned in class affect the sustainability of the Ford Motor Company. From this microeconomic analysis of the Ford Motor Company, relevant recommendations regarding the actions the firm needs to take in order to ensure success in the automobile industry will be made.
Summarize the history of the firm
The Ford Motor Company was incorporated in the year 1903 (Wilson, 2014). Henry Ford is the man who found this company. With an investment of $28,000, Ford was able to manufacture its first car model known as Model T (Wilson, 2014). Through integration of technology in its manufacturing process, Ford has been improving the speed of production over time. For instance, this company applied the integrated moving assembly line, which enabled it to reduce the duration of producing the Model T car from 12.5 to just 1.5 hours (Wilson, 2014). This move also cut down its cost of production significantly. As a result of this reduction in the cost of producing Model T, the price of the cars went low to levels affordable to even the middle class. This car model became the best-selling vehicle of all times.
As competition in the automobile industry rose, the Ford Company decided to eject Model T from the market and introduced the Model A with an aim of meeting the changed tastes and preferences of the consumers in the market (Wilson, 2014). It is vital to note that Model A came with more features meant to please the customers in the market. Despite the Great Depression that affected the United States in the 1930s, Ford was able to sell 5 million units of Model A in the same period (Wilson, 2014). Henry Ford would continue with innovations at the Ford Company making the company a market leader. He innovated the V8 engine, which became very popular for a period of over 22 years as other companies adopted it ion their vehicle models (Wilson, 2014). Ford also invented the pick-up tracks into the market.
Ford has never stopped being innovative even today. This company recently invented new models aimed at enhancing fuel efficiency. The new models are also consumer-friendly. These new models have performed well in terms of number of units sold, particularly in the year 2015. The new vehicle models include F150, Explorer, Edge and Mustang. Consumers in the market seem to have fallen in love with these innovations from the Ford Company considering the current high demand for them (Wilson, 2014). Apart from these vehicle models that were invented recently, Ford manufactures and sells other varieties of car products. It has race and rally cars like Ford C100 and the Ford GT40. This company also manufactures vans like the Ford E-Series, Ford Econoline, Ford Transit and Ford Supervan. There are also sport utility vehicles manufactured at Ford Company, which include Ford Explorer, Ford Flex and Ford Expedition. Additional popular models at this company include the Ford Taurus, Ford Focus and Ford Fusion. There are tractors and buses produced and marketed by this company.
Explore the supply and demand conditions
Industry level analysis
The automobile industry is characterized by consumers who have very different tastes and preferences. Therefore, automobile companies try to segment the market into small units so that each unit can be satisfied based on its unique taste and preferences. Firstly, the needs for purchasing vehicles are varied among the consumers in the market. There are those who need vehicles to assist them in transporting business commodities from one place to the other. There are consumers who require vehicles for public transport business. Others demand vehicles for personal transport while some consumers simply require cars for ostentation or show of luxury.
As it stands in the figure below, the vehicle sales volume has been rising steadily since the year 1990, within the automobile industry.
Sale of vehicles from 1990 to 2016
Source: Statista (2016)
This demand for the vehicles in the automobile industry is based on a number of factors. The first determinant of demand for the vehicles is the disposable income of the consumers within the market. The steady rise in demand for the vehicles since the year 1990 to 2016 as shown in the figure above is because of the expansion of the middle-income class in the United States. Apart from the level of disposable income of the consumer, the price of the complementary goods of the given vehicle also determines its demand within the automobile industry. The common complementary good that really influences the demand for particular models of cars by the consumers in the market is fuel. Consumers do pay high attention on the fuel consumption of a car before purchasing it (Shein, Shein, Bell & Bell, 2017). The fuel-guzzlers are only bought by those who want luxurious vehicles. The pricing of the vehicles also has a huge influence on the demand for vehicles in the automobile industry. It is important to note that, as time passes by, the price of cars has been falling making them more affordable to the middle class over time. This trend informs the steady increase in the demand for vehicles within the automobile industry since the year 1990 to 2016. The tastes and preferences of the customers in the market also influence demand decisions of the consumers in the automobile industry. As noted earlier, people purchase cars for different needs. These needs make them go for different models of the cars supplied by the automobile companies.
Representation of vehicle sales between 2007 and 2015
Source: Economic Policy Institute (2015)
Firm level analysis for Ford Motor Company
The demand for Ford vehicles fell sharply with the rise of competitors like Toyota and General Motors during the 1990s. However, this company has been able to make innovations that have seen its sales volume start to improve significantly in the recent past. When the new redesigned model of Ford Fusin entered the parts of the United States market like California and Florida, it was supplied within a maximum of just 16 days, unlike the normal case of 60-65 days of supply that is done by many automobile companies. For this model, Ford Company had to hire 1400 more employees and introduce double shifts in order to meet the high demand within the market and step up its supply level. In 2013, the Fusin sales increased by 30% because of their redesigned and improved nature. This redesigned model, Ford Fusin, became the fifth best selling brand in the entire United States market.
The 2015 first quarter Ford Company sales increased significantly because of the high demand for the new model vehicles of this corporation. Some models of the Ford Company, which realized increase in demand in the year 2015, include Ford Edge SUV, Ford Escape and Ford Mustang. The demand for the new 2015 Ford Edge and Ford Escape rose by 12%. In the 2015 first quarter, 62,730 units of these two new models were sold. Moreover, the sales volume of the new 2015 Mustang model increased by 82% with 13,144 units sold. The Fiesta model achieved 5,982 units, which represented a 2.7% increase in sales when compared to the amount sold in the first quarter of the year 2014. However, there was a decline in the demand for Ford Focus, C-Max, Fusion and Taurus models during the first quarter of 2015.
It must be noted that the recent quarterly report for 2015 is Ford Company’s best performance since the year 2000. In terms stock, the company had 611,000 units in total compared to the 683,000 units of 2014. The implication of these figures is that Ford Company had an overall increase in sales during the first quarter of the year 2015. Despite the reduced prices for the Ford vehicles by the dealers, the profit earned was high. It must be noted that starting from the year 2015, Ford Company increased its price on the new aluminum body, F-150. This material was sold at $26,617 for a basic model, which weighed 700lbs less than the normal one that had been marketed in the previous year. Despite this increase in the price of its material, the F-150 track became the most popular model of Ford in the year 2015. It earned Ford Company huge revenues because of its high demand in the market. Currently, it remains the best-selling light-duty track at the American dealers.
It has to be noted that during the second quarter of the year 2015, Ford Company made a profit of $2.9 billion. This profit level was a 6.4% increase when compared to that of the same period in 2014. Ford got a adjusted pretax profit of $10.8 billion in the year 2015. Its adjusted pretax profit slightly fell in the year 2016 to $10.4 billion, but this still represented a stable figure for the company. The fact that this company’s total net income attributable to Ford’s automotive business segment was the highest in the year 2015 shows that the demand for its products increased significantly.
Net income attributable to Ford (in millions)
Source: Ford Motor Company 2016 Annual Report, 10K Form
The current surge in the demand for the vehicle units of Ford is because of various factors. The first major reason for the current increase in the quantity demanded for the Ford Company products is the innovations made in terms of redesigning and imp[roving the quality of the vehicles (Shein, Shein, Bell & Bell, 2017). Ford vehicles are now more aligned to meet the desires of the consumers in the market. The cars are customer friendly. Moreover, the company has also significantly cut down the prices of its models. This implies that its products are now more affordable than ever before and the rising middle class can purchase them in the market. Furthermore, the vehicles of Ford now have been improved and come into the market with extra features compared to other rival companies in the automotive industry. Ford’s new models invented in the year 2015 have been recommended as very economical in terms of fuel consumption, a factor that has also played a major role increasing the quantity demanded for the company’s products.
Automotive Sector – North America, 2nd Quarter Reports for 2015
Source: Ford Motor Company 2016 Annual Report, 10K Form
Ford is now able to supply many units into the market within shorter periods compared to other competitors. The company has been able to invent new technology into its manufacturing process hence reduced the time of producing a single unit of a vehicle. This factor has played a major role in enabling the company to supply enough units for satisfaction of the high demand in the market. Moreover, Ford was able to boost its amount of products supplied into the market because of hiring more 1400 employees and introducing the double shifts. The use of dealers has also enabled Ford Company to supply a huge amount of its products hence satisfied the high demand in the market.
Examine the price elasticity of demand for the product
It is important to note that elasticity of demand refers to the degree of responsiveness of customers, in terms of demand, to changes in price of a given product. The elasticity of demand is calculated as change in the quantity demanded over change in price of the good. For purposes of this research paper, revenue of Ford Company is assumed to be solely derived from the number of units sold.
The demand change = 6,635,000 – 6323000 = 312,000
Price change = 22540 – 22786 = -246
Elasticity of demand at Ford Company = 312000/-246 = -1268
The above figures are based on the financial reports for the years 2015 and 2014. It is evident from the above result that the demand for the Ford Motor Company products is highly elastic. The reason for this elasticity of the demand for Ford products is the availability of substitute products from other companies like Toyota, General Motors, Mercedez and Mitsubishi. The implication of this elasticity of demand for Ford products is that the company cannot increase the price for the vehicles (Maxcy, 2013). Increasing the price for the vehicles of Ford may cause a rise in the demand for the products of other rival companies in the automotive industry (Fudenberg & Tirole, 2013). The customers of Ford are highly responsive to the price changes of its products. The consumers within the automotive industry have diverse options from which to choose the product to purchase.
However, despite the high elasticity of demand for the products of Ford, its luxurious models may still experience high demand in the market despite the increase in prices. For instance, the 2015 increase in the price of the F-150 aluminum material still led to the increase in its demand within the market. Such goods are for ostentation (Shein, Shein, Bell & Bell, 2017).
Examine the costs of production
The Ford Company has both variable and fixed costs of production. The variable costs change over time while the fixed ones are constant. Some of the fixed costs that Ford faces include machinery, plant, depreciation and insurance payments as well as research and development. The variable costs faced by Ford Company include expenses like water and electricity bills, labor wages and raw materials price (Shein, Shein, Bell & Bell, 2017). These costs have a bearing on the company’s profitability. It is important to note that Ford has been able to reduce its operational costs through inventing technological ways of producing efficiently and within very short time. The total operating expenses for Ford Company in the year 2015 was $14,199 million while the cost of goods sold in the same year stood at $124,041 million. In 2016, the cost of products sold rose to $126,584 million (Shein, Shein, Bell & Bell, 2017). Total variable costs and expenses for the year 2015 stood at $141,911 million. The total variable costs and expenses rose significantly in the year 2016 to $147,684.
Explore the overall market
The market share of Ford Motor Company in the United States automotive industry, taken as a percentage of the total revenues recorded in the market, was 15.2% in the year 2012. It rose to 15.7% in 2013, but decline significantly in the year 2014 to 14.7%. Ford’s market share fell to 7.6% in the year 2015.
The market share for the companies in the U.S.A. automobile industry in 2015
Source: Statista (2016)
It is not easy for a new company to enter the automotive industry in the United States because of the huge capital that is needed in order to make meaningful business out of it. The raw materials for this industry are very expensive while the skilled labor required for producing quality products demands huge amounts in salaries and wages. The kind of technology that one needs is also huge.
Recommendation
Based on the microeconomic situation of Ford Company, this research paper recommends that it intensifies the sale of its 2015 new car models through increased supply, which are on a very high demand. Moreover, it is recommendable that this company also focuses on the supply of the F-150 light-weight track because of its high demand in the market. It is prudent that company lowers the production of car models that recorded declined sales volumes in the year 2015 and 2016 in order to minimize the overall cost of production. Ford should go on with its innovative culture and integrate advanced technology in the process of manufacturing vehicles.
Despite the current stiff competition in the automotive industry, the future is bright for Ford Company. With increased innovation of new redesigned and improved vehicle models, minimization of the cost of goods sold and maintenance of affordable prices, Ford Motor Company will have sustained growth of its sales revenue and high profitability into the foreseeable future.
References
Economic Policy Institute. (2015). The Decline and Resurgence of the U.S. Auto Industry. Retrieved April 13, 2017 from http://www.epi.org/publication/the-decline-and-resurgence-of-the-u-s-auto-industry/ .
Ford Motor Company. (2017). 2016 Annual Report, 10K Form.
Fudenberg, D., & Tirole, J. (2013). Dynamic models of oligopoly . Abidgon-on-Thames: Taylor & Francis.
Maxcy, G. (2013). The Multinational Motor Industry (RLE International Business) . Abidgon-on-Thames: Routledge.
Shein, J. B., Shein, J. B., Bell, M., & Bell, M. (2017). At Ford, Turnaround Is Job One. Kellogg School of Management Cases , 1-15.
Wilson, J. M. (2014). Henry Ford vs. assembly line balancing. International Journal of Production Research , 52 (3), 757-765.
