Microeconomics and Market Choices
Microeconomics provides concepts and models that improve understanding of market choices. Corporations employ these principles to make decisions about pricing, output, and profit maximization. Furthermore, the microeconomic tools enable individuals to make recommendations to businesses on how to increase their profitability. The discussion is centered on Ford Motor Company. The paper is divided into six primary sections. Section 1 introduces the document by explaining the goal of the report and offering a corporate overview. Section 2 discusses the supply and demand for the company's products. This section also provides emphasis on the company's product demand patterns. Moreover, the section provides a data analysis on demand and supply of the products. Section 3 analyses the price elasticity through in-depth analysis of pricing data and factors influencing consumer responsiveness. Furthermore, this section examines the effects of price elasticity on pricing decisions and revenue growth. Section four of the discussion looks at the costs of production. The section is further divided into two subsections. Subsection one surveys the various costs of production, their trends, and effects on profitability. Subsection two pinpoints the concepts of variable and fixed costs. Section 5 focuses on overall market with discussions on the market share, market structure, and barriers to entry. The last section focuses on the recommendations. This section offers a foresight on the future of Ford Motor Company and brainstorms on the factors that will maintain the success of the company in future.
Ford Motor Company: Microeconomic Analysis
Purpose of Paper
Microeconomic tools influence the demand and supply of products. These tools also affect the profitability of companies, including Ford Motor Company. The history of this company reveals that different economic indicators influence the company's performance. The paper seeks to analyze how various instruments of microeconomics, such as price elasticity, production costs, market factors, barriers to entry, and competition, affect the automobile industry.
Overview of Ford Motor Company
Ford Motor Company is an international automotive company that came into existence in 1903 with John Gray as the president and Henry Ford as the vice president (The Henry Ford, 2017). The company's vision emphasizes lean teamwork, global enterprise, and mobility leadership. Ford's major objective focuses on the production of quality, safe, green, and smart products that improve the lives of people. The company offers various services and products. Ford designs, manufactures, markets, and services a range of Ford vehicles, trucks, SUVs, and luxury vehicles. Ford Motor Company has four lines of operations including financial services, central treasury services, automotive, and Ford Smart Mobility (Reuters, 2017).
The automotive line deals in the sale of the Ford and luxury vehicles, spare parts, and accessories while the financial line deals with the finances regarding vehicles, and leasing at the Ford Motor Credit Company. Ford Smart Mobility segment focuses on the designing, building, growth, and investment in evolving mobility services. The central treasury operations unit engages in decision-making, risk management, and provision of finances for the automotive unit (Reuters, 2017). Such organization suggests that Ford is keen on maximizing its profits through the various business units.
II. Supply And Demand Conditions For Company's Products
Trends in Demand
Ford Motor Company has about 62 plants and more than 203,000 employees across the world (Dearborn, 2014). The number of plants suggests that the company has significant number customers globally. Trends in demand in the automotive industry influence the trends in demand for Ford products. The industry experiences growing demand, high competition, and uses market share as a metric of performance. Consumers who fall under the category of Generation Z seem to inspire the attitudes of other consumers (Dearborn, 2014).
The Generation Z consumers prefer technology-based products. As such, the influence of the young consumers seems to increase the demand for innovative products from the Ford Motor Company. Moreover, the increasing excitement among the current customers increases the demand for the automotive products. However, such excitement calls for creative products forcing companies in the industry, including Ford Motor Company, to improve their production methods.
The trends in demand influence the company's products in various ways. The social, economic, political, technological, and environmental factors promote these trends. Studying the trends in demand helps the company to understand the factors that affect the attitudes and behaviors of the consumers. As such, information on trends guides the designers at Ford to create products that meet the expectations of the emerging generations. Moreover, the designers also need to understand that the current generation is evolving (Dearborn, 2014). As the generation evolves, its needs also evolve.
The trends in demand seem to make Ford embrace risks. Contemporary consumers in the automotive industry prefer individuals and companies with the ability to go beyond the limits. These trends also influence the marketing process. Marketers at Ford should understand that the current generation uses wearable devices and smartphone apps to get information (Dearborn, 2014). As such, it forces the company to use technology-driven methods of marketing.
Data Analysis on Demand and Supply
In 2014, the demand for small cars was about 7.5 million units. The demand remained the same in 2015 (John, 2016). However, the demand for trucks increased to almost 10 million units in 2015 from about 8 million units in the previous year. This information suggests that there is an increasing demand for both trucks and utility vehicles in the US.
Ford Motor Company's worldwide vehicle sales from FY 2012 to FY 2016 (in 1,000 units)
("Ford - global vehicle sales 2016 | Statistic", 2017)
The above table reveals that the demand for the Ford vehicles has been on the rise since 2012. Various factors contribute to the increase. The drop in the prices of crude oil at the international level encourages an additional number of consumers to buy vehicles (John, 2016). Furthermore, lower gasoline prices encourage more people to purchase the utility vehicles. The growing construction industry also contributes to the increasing demand for trucks. Experts predict that the demand is likely to increase as the construction industry expands. These factors have contributed to a high demand for the products of Ford Motor Company.
III. Price Elasticity
Analysis of Data on Pricing
Price elasticity of demand is the extent to which the capacity of demand for a certain product changes relative to the changes in prices. Price elasticity with a value more than one indicates that the demand responds significantly to the price changes. On the other hand, price elasticity with a value less than one shows that the demand responds insignificantly to the price changes. Ford's larger vehicles have high prices while the small vehicles have low prices.
In North America, the large vehicles had a contribution margin of about 140 percent of the total contribution margin of all vehicles. Moreover, government regulations seem to be increasing the prices of particular vehicles. However, Ford's utility vehicles command low prices due to their ability to conserve fuel.
The table and the calculations below show that the demand for the Ford products is elastic.
Factors Affecting Consumer Responsiveness
Various factors influence the consumer responsiveness. The availability of substitutes in the automobile industry encourages customers to consider products from other automobile companies when Ford increases its prices. The portion of income that consumers spend on vehicles also affects their responsiveness (Lipschultz, 2008). The larger vehicles of Ford command substantial prices. As such, consumers spend sizeable proportions of their incomes on such vehicles. An increase in the prices of these vehicles will force consumers to consider cheaper alternatives.
The nature of product influences consumer responsiveness (Lipschultz, 2008). Basic products such as food have inelastic demand while luxury products are elastic. In this case, Ford's luxury vehicles have elastic demand; hence influence the pricing decisions of the company. Furthermore, habit-forming products tend to be inelastic. A particular group of consumers prefers Ford's luxury vehicles such as the Lincoln to other luxury vehicles of Ford's competitors. In this case, the demand for Ford's product will be inelastic.
Impact of Price Elasticity on Pricing Decisions and Revenue Growth
Price elasticity affects pricing decisions and the growth of revenue. Companies in the industry, such as Ford Motor, experience price elasticity of more than one. In this case, consumers have a wide range of substitute products. If the company increases the prices of its products, then consumers will opt for other products from other companies such as Toyota, General Motors, and Fiat Chrysler Automobiles (John, 2016). As such, the demand for Ford's products will become elastic. In this regard, elastic demand forces Ford Motor Company to maintain the current prices to prevent consumers from switching to the substitutes. Consequently, such elasticity affects revenue growth.
The increase in prices of raw materials may require Ford to increase the prices of its products for profit maximization. However, the elastic demand forces the company to retain its prices reducing its profits. On the other hand, for inelastic demand, an increase in product prices boosts the total revenue, as consumers have no alternative.
IV. Costs of Production
Costs, Their Trends, and Impact on Profitability
Ford Motor Company has low production costs because the company aims at adhering to the guidelines of manufacturing management.
(Income Statement for Ford Motor Co (F) from Morningstar.com 2017)
From the table above, the company's cost of revenue was about $130,000 billion. The company's main production costs stem from the materials and the commodity costs. These two aspects make up to about two-thirds of the total costs of production. Ford is keen on innovation to improve the manufacturing capabilities. The company has developed technologies that seek to revolutionize the production process. These technologies will ensure mass production minimizing the production costs.
The new production process reduces the assembly period from about 12 hours to almost one and a half hours. As such, it cuts the time of production, the human resources, and the finances. Consequently, it lessens the overall production costs. Moreover, it is worth noting that a drop in the production costs results in a drop in the price of the product. For instance, the new process has led to the decrease of the price of Model T to about $300 from $850. This aspect makes the vehicles affordable to all individuals.
Concepts of Variable and Fixed Costs
Variable costs fluctuate in average with the changes in the levels of the activity. An increase in the level results in a similar surge in the variable costs (Goodwin, 2016). Various variable costs affect Ford's level of output. The costs include direct labor and raw materials for manufacturing. For instance, a surge in the capacity of the raw materials and human resources increases the level of activity at Ford's production plants. Ford and other companies in the automobile industry have limited variable costs because they utilize heavy machinery. However, they incur high costs in research and development.
Fixed costs remain the same in sum irrespective of the variations in the levels of activity. Examples of such costs are taxes, rent, and salaries. As such, the fixed costs fluctuate indirectly with the activity levels. As the capacity rises, the fixed costs reduce. Ford has a larger number of fixed costs compared to the variable costs. The company invests in heavy machinery to minimize employee labor (Goodwin, 2016). In this case, the company experiences depreciation and enjoys charges from leases while decreasing the labor costs.
V. Overall Market
Market Share
In 2014, the company had a market share of 14.7 percent and 7.2 percent in the U.S and globally respectively. In the US, the company has the second largest market share in the industry after General Motors. However, at the global level, the company is at the sixth position. In the previous decade, Ford had a significant market share. The company's share was about 11 percent in 2005 and fell to almost seven percent in 2015 (John, 2016). The drop in market share is due to the increasing competition in markets beyond North America. North America is a major source of revenue for Ford.
The increase in demand in other regions gives the company challenge in attracting and maintaining new consumers. As such, it is important for the company to consider other emerging markets without abandoning the existing markets in North America. As of 2012, Ford had a market share of about 12 percent of the US market while Toyota and General Motors had almost 15.6 percent and 15.3 percent respectively (Uzwyshyn, 2012).
Barriers to Entry
The automobile industry contributes significant proportions to a country's GDP. The sector offers employment to almost two million people in the country. Although the automobile industry is competitive, it has high barriers to entry. The initial capital is high limiting interested players from joining the industry. Moreover, it is difficult for companies to introduce novel products into the industry. Companies incur high costs in developing vehicles and marketing the automobile products.
Market Structure
The automobile market structure is oligopolistic. The Bureau of Census reports reveals that the four major companies dominate the automobile industry in the US. They cover almost 70 percent of the industry. The oligopolistic nature makes the automobile companies interdependent mutually. The top three automobile companies; Ford Motor Company, General Motors, and Chrysler, experience similar challenges. Other players in the industry include Hyundai-Kia, Honda, Nissan, and Toyota.
All the companies in the sector design and create automobiles for transport purposes. However, there is a noteworthy difference in the features of the products, variety of the alternatives, and prices of the products. As such, the companies have different marketing methods to reach out to several market segments.
VI. Recommendations
Future Production
The future success of organizations lies in its current plans and strategies. Organized strategies ensure future success and improved profitability. However, inability to develop good strategies risks the lifespan of a company's production. From the discussion, it is evident that Ford Motor Company has been an enduring company. The company's products have been on the market for over ten decades. Moreover, looking it at its current strategies, it is highly likely that it will record good performance in the future if its leaders will be keen on implementing the current plans. This discussion has the following recommendations for the company.
1. The production process of the company should adopt advanced technologies in the future. Currently, the company is using innovative methods that ensure mass production reducing the production time. In future, Ford should use innovative methods that guarantee quick delivery of prototypes. The conventional methods of production require between two and six months for the delivery. However, adoption of these methods will reduce the period to about three days reducing the production costs.
2. Ford should adopt the 3D printing in large scale. This technology will facilitate quick testing of prototypes by engineers reducing the overall production costs.
3. The company should embrace robotic technologies to improve production efficiency and product quality.
4. The company should create virtual factories and reduce production facilities to lessen the costs. The virtual factories will generate and analyze software simulations of vehicle assembly. The simulations will then be available in few facilities where the real assembling of vehicles will take place.
How Ford's Position Will Allow It to Consider the Recommendations
Ford is in a good position to consider the above recommendations because of several reasons. First, the company is technology-driven (Ford, 2017). As such, it will be willing to adopt any technologies that seem beneficial to the company. Secondly, the company targets the Generation Z consumers who are techno-savvy. As such, Ford will use innovative technologies to attract and maintain this group of consumers.
The Generation Z also influence other generations; hence, if Ford's products exceed their expectations, then the company's revenue will increase. Moreover, the company is keen on creating perfect and quality automobiles (Ford, 2017). This aspect will allow the company to adopt the robotics technology to enhance the production of improved products.
How Ford Will Sustain Its Success
Ford's future success lies in its ability to remain innovative in the automobile industry. The company should consider the future technological, political, economic, and environmental trends. For instance, it should shift towards the production of green products to minimize environmental pollution. Ford should also use creative methods to create products that supersede the expectations of its consumers. Moreover, the company should consider venturing into other markets outside North America.
References
Dearborn, M. (2014). 2015 Ford Trend Report Explores Generation Z and how Youngets Consumers are shaping view of the Future. Ford Motor Companny.
Ford. (2017). New Goals for Advanced, Flexible Manufacturing. Retrieved from Ford Motor Company: http://corporate.ford.com/innovation/100-years-moving-assembly-line.html
Goodwin, R. (2016). Cost-Volume-Profit . In Accounting Principles (pp. 1010-1051).
John, P. (2016). How Ford Can Benefit from the Recent Trend in the US Auto Market. Market Realist, Inc.
Lipschultz, J. (2008). A Microeconomic Analysis of the Full-Size Automobile Market. Economics & Business Journal, 1(1), 152-164.
Parker, J. (2016). How Ford Can Benefit from the Recent Trend in the US Auto Market. Market Realist, Inc.
Reuters. (2017). Ford Motor Co. (F.N). Reuters.
The Henry Ford. (2017, October 19). Ford Motor Co.: Chronology, 1903-2003. Retrieved October 19, 2017, from The Henry Ford Organization: https://www.thehenryford.org/collections-and-research/digital-resources/popular-topics/ford-company-chronology/
Uzwyshyn, R. (2012). The US Auto Industry in 2013: Five Forces to Consider. Automotive Industries.
