The following report discusses Ford Motor Company. It will first identify the appropriate
industry in which Ford operates followed by defining the market structure
surrounding said industry. Furthermore,
reasoning will be given as to why said market structure was chosen in
opposition to the alternatives. And
lastly, three competitive strategies will be recommended by me personally, to
help Ford retain customers, generate long-run profit, and stay ahead of the
competition.
Ford Motor Company is a part of the automotive industry: this
industry spans the globe dominated by companies such as Mercedes Benz, Honda,
General Motors, etc. While many of the
manufacturers in this industry over the past 20-30 years have diversified in
order to strengthen their grasp on multiple markets the bulk of their weight is
dedicated to the manufacture and sale of automobiles.
The market in which this industry operates can only be categorized
as an oligopoly and that is for a number of reasons which shall be listed in
the following paragraph. The first is
that while each of these manufacturers holds a significant market share,
significant enough to affect market prices, they do not hold enough individually
to be considered a monopoly. The second
reason is that because each of these larger companies holds enough power to
sway the market price but not enough to remove the competition they have all
become interdependent upon one another; a hallmark of oligopoly. A third reason why this industry fits the
model is that due to the sway these interdependent companies have upon the
market there are significant barriers to entry: unless a new company had
enormous resources, it could never hope to enter the automotive arena. The fourth reason that the automotive
industry is an oligopoly is that the manufacturers have some control over their
output in order exert control over market price: this control is far less
reaching than that of a monopoly, however.
And the last reason is that all these companies have the potential to
make long-run economic profit which brings up the next point; three
recommendations for Ford to maintain a competitive edge within this market.
The first recommendation that would enable Ford to keep ahead of
the competition for the long-run is by eliminating the potential for new
entrants into the market. This is done
by what is known as implicit price collusion: “firms just happen to charge the
same price but didn’t meet to discuss price strategy isn’t against the
law… For example, many oligopolistic
industries allow a price leader to set the price, and then others follow suit”
(Colander, 2010). While this method does
not ensure dominance in Ford’s given industry due to the relative size of other
competitors in said industry it prevent new entrants to the game. This type of collusion creates high barriers
for entry (discussed earlier as a key characteristic of an oligopoly) and
removes many potential entrants from the marketplace thus being an excellent
strategy for maintaining market control in the long-run.
The second competitive strategy for improving profits over the
long run is to create brand loyalty through a rigorous advertising campaign
over a period of years. This is done in accord
with the price collusion that was already mentioned. The former removes potential competition from
the market; the latter ensures that Ford maintains as large a share of the
market as possible. “Advertising works
by providing consumers with information about the firm’s product and by making
people want only a specific brand. That
allows the firm to sell more, to charge a higher price, or to enjoy a
combination of the two” (Colander, 2010).
Brand loyalty is a powerful tool developed by years of advertising and
nurtured by the consumer’s continuous exposure to the brand in a positive
light. For example, not too long ago,
Apple Inc. was on the brink of bankruptcy without any hope in sight: yet 15
years later they are a dominant force within their industry due to customer
loyalty to Apple Inc. and their golden child, the iPhone. The reality is the iPhone isn’t any better or
worse than the other products available in the market but through a rigorous
advertising campaign Apple Inc. has created brand loyalty on a scale similar to
the worship one would find at a church.
This didn’t happen by accident.
This was an example of the value of advertising in conjunction with ever
strengthening brand loyalty.
Furthermore, “advertising is another sunk cost- the more that is spent
by incumbent firms the greater the deterrent to new entrants” (“Oligopoly,”
2011). Advertising is necessary to stay
in business and since, as was stated, the cost is already sunk, only the best
marketing and advertising strategies are worthwhile. This is why firms pay hundreds of thousands
of dollars to advertise on Super Bowl night.
The next paragraph discusses the final recommendation for Ford Motor
Company.
The last recommendation given so that Ford can maintain profits in
both the short and long-run is that of research and development. This is a cousin of advertising in that by
continuously being ahead of the competition through a rigorous program
dedicated to research and development, one can stay ahead of developments in
the market. An interesting note at this
point is that this has already been implemented at Ford some ten years
ago. After the SUV craze that hit the
country began to fizzle due to ever increasing gas prices, Ford had to make an
abrupt about face and change with the times (At the time they were losing large
sums of money due to an enormous inventory of gas guzzling tanks). They did so by spending an enormous amount of
money and redesigning their power trains to be far more fuel efficient. This, coupled with a complete redesign of the
entire fleet of vehicles has brought about a renaissance at Ford Motor
Company. Ten years ago they, much like
Apple Inc. in a previous example, were on the verge of extinction, yet due to creating better products for less
money now have a substantial market share and are still gaining. For example, the Ford Fusion is well on its
way to steal the number one spot from the Toyota Camry for mid-sized sedan
sales in America. Toyota has held this
title for over 20 years but because Ford has created technologically superior
vehicles for less than the cost of Toyota via extensive research and
development, their 20 year reign is coming to an end. Thus, this final recommendation for Ford is
more of a tip of the hat and a recommendation that they keep doing what they’re
doing rather than a call to arms.
In conclusion, Ford Motor Company is a part of the automotive
industry that operates within an oligopoly market structure. This market structure is characterized by a
limited number of entrants, large barriers to entry, interdependent firms, and
the potential for long-run economic profits.
The three recommendations for Ford Motor Company in order to maintain a
competitive edge and make long-run profits were implicit price collusion, advertising,
and R&D.
Oligopoly. (2011). Retrieved from
http://economicsonline.co.uk/Business_economics/Oligopoly.html
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