The Importance Of S

The Importance Of S

Task 1. - The importance of Strategy Task 2 Emerging Economies Market Entry Task 3 Industry analysis Porter on 5 Forces Carmakers face battle over the best direction to steer industry By Henry Foy, Motor Industry Correspondent Stephen Odell, head of Ford Europe, knows all too well the impact of closing car factories. Around two dozen protesters armed with sticks and bats angry at the closure of Ford’s Belgian factory broke into the company’s management offices in Cologne last November, smashed through a glass wall and reached the door to his suite. More video But in the worst European car market for 20 years , he is still adamant that more factories must be shuttered to end the red ink that is drowning the continent’s carmakers. “We have a catastrophic decline in the industry,†says Mr Odell, chairman and chief executive of Ford Europe, Middle East and Africa. “In the end, you have to make the right decisions for the business . . . You can’t fight gravity.†He is not alone. All of Europe’s volume manufacturers are mired in what could turn out to be the worst sales crash on record , leaving them with about 7m cars per year of unused capacity, cumulative annual losses of about $5bn and eye-watering negative profit margins that analysts see continuing for at least three more years. “Very few companies, if any, are making money in Europe today,†says Ivan Hodac, secretary-general of the European Car Manufacturer’s Association (ACEA) “In the long run, this is unsustainable.†Fighting against the tide are Europe’s governments. Politicians from Paris, Rome and Madrid with strong influence on carmakers and a determination to protect employment have made it clear that further shutdowns – at least within their borders – are unacceptable. “There must be [more closures] and there will probably be some more restructuring,†says Mr Hodac, who represents the EU’s carmakers in Brussels. Car sales in the EU stood at 13.1m in 2012, down from 16m in 2008, and are on track to fall by around 7 per cent this year, to just over 12m vehicles. EU factories have the installed capacity to build a little over 19.1m cars per year. The financial impact is that six out of every 10 car factories in the EU are losing money, sparking a race to the bottom on margins as brands desperate to shift vehicles cut prices and ramp up incentives to unsustainable levels. But there are exceptions. In Germany, plant capacity is above 80 per cent, because of the profitable Volkswagen Group and its premium rivals BMW and Mercedes. Many of Volkswagen’s volume competitors blame German obstruction for the lack of a European-wide deal on restructuring, mooted by Fiat chairman Sergio Marchionne and supported by many of his peers across the continent. Some restructuring is under way. Ford is closing two vehicle plants in Europe, Peugeot and General Motors ’ Opel brand are closing one each . Fiat shut a factory in Sicily in 2011. Yet those closures equate to a capacity loss of a little over 1m cars per year, or roughly half the reduction required for the continent’s factories to meet the average utilisation level of 75 per cent considered to be profitable, assuming annual sales of 13m cars. “Some [capacity reduction] is happening . . . but probably not enough for where the industry’s going to be running. I do think there should be more,†Mr Odell says. “It doesn’t make sense. The demand isn’t there . . . There’s a clear consensus that the market is not going to come back quickly.†Peugeot, highly dependent on the French car market, burnt through $3bn worth of cash last year, while Ford made losses in Europe of $1.8bn. Both say they will work to break even by the middle of the decade. That is a tall order. Volume carmakers Ford, Opel, Peugeot, Renault and Fiat , which together account for around 42 per cent of EU car sales, ran negative operating margins in 2012 of between 3 and 9 per cent, according to Morgan Stanley research. Car discounts and dealer devilry deepen Want a new car but not willing to pay the list price? No problem. Just ask the dealer to sell it to themselves, and then buy the used car a few days later at a heavy discount. “Self-registrationsâ€, a dark art employed by dealers to shift more cars, is on the rise in Europe’s gloomy market, alongside heavy discounting and other financial incentives as manufacturers and showroom managers frantically look to keep the tills ringing. Continue reading But as bitter a pill as billion-dollar losses are to swallow, further restructuring, job cuts and factory closures are just as unthinkable for governments in a continent grappling with high unemployment. To prove their point, many executives point to the contrast with the US market, where after the bankruptcy of GM and Chrysler and near-collapse of Ford, three companies shut down factories and renegotiated pay terms with trade unions. Today, stripped of the excess capacity, all three are posting healthy profits . A similar solution in Europe appears unworkable. “In times of crisis, governments have one interest, and that is to keep employment . . . that’s the prime interest of most of the governments in Europe,†says ACEA’s Mr Hodac. “The European commissioner does not have any instruments to deal with this situation. It’s very much fragmented, and shows the fragmentation of Europe.†In lieu of a collaborative effort, executives are doing everything they can to muddle through. Renault – like Peugeot dangerously dependent on the French, Spanish and Italian markets that have been hardest hit by the sales slowdown – is cutting its headcount by 7,500 by 2016, and getting some help from its Japanese partner Nissan, which has asked Renault to build some of its cars and engines. “We are fixing it step by step,†says Carlos Tavares, chief operating officer of Renault, which will build 82,000 Nissan Micras at its Flins factory from 2016. “It’s about efficiency . . . We just need to challenge and ask people to do a better job.†In Italy, Fiat is sending workers home to collect a special state benefit rather than sacking them, as the country’s factories run at less than 50 per cent capacity, the lowest in Europe. “Maybe if they could act as totally free companies without any political regulation or influence, then they would close down the factories faster,†says Eric Heymann, senior economist at Deutsche Bank in Frankfurt. “There are still some discussions ongoing . . . I wouldn’t be surprised if there are some more closures in the next one to two years.†Ford has says it has no plans to cut more capacity in Europe, but is constantly monitoring the situation. “I would like to see Europe not stand in the way of what has to be done,†says Mr Odell, whose wood-panelled executive corridor is now protected by reinforced glass and a steel security airlock. “A mathematician would agree . . . but politics and mathematics don’t always follow the same path.â€

Paper For Above instruction

The text provided presents a comprehensive analysis of the current challenges and strategic responses within the European automotive industry, emphasizing the critical role of industry strategy amidst economic downturns, regulatory constraints, and market dynamics. It underlines the importance of strategic decision-making in navigating declining sales, capacity management, and restructuring efforts.

Strategic formulation is vital for automotive companies facing declining demand and profitability. As highlighted, European car manufacturers are confronted with a significant demand slump, with industry sales dropping from 16 million units in 2008 to just over 12 million in recent years. This decline necessitates strategic actions such as capacity reduction, cost cutting, and restructuring to sustain profitability. For example, Volkswagen and premium brands like BMW and Mercedes operate at high capacity utilization (>80%), demonstrating a strategic focus on efficiency and market positioning. Conversely, many firms struggle due to excess capacity and unprofitable operations, with six out of ten factories losing money, illustrating the need for strategic capacity planning and restructuring. This aligns with Porter’s Five Forces framework, where bargaining power of buyers is heightened due to intense price competition, and industry rivalry intensifies, impacting profitability and strategic choices.

Furthermore, government policies and labor regulations significantly influence strategic options. European governments' reluctance to approve factory closures to preserve employment complicates restructuring efforts. The contrasting US model of capacity reduction through factory shutdowns and union negotiations illustrates different strategic responses to industry downturns. US automakers like GM, Chrysler, and Ford restructured by closing excess capacity, leading to improved profitability. In Europe, political and social considerations hinder similar strategies, forcing companies to adopt incremental measures such as headcount reduction and operational efficiency improvements. The case of Renault and Fiat exemplifies this, where governments and labor unions influence strategic decisions, making the enforcement of industry consolidation more complex.

Restructuring and capacity management are critical components of strategic response. Ford’s decision to close two plants in Europe is a strategic move aimed at reducing excess capacity, aligning with the industry’s need for limited supply and increased efficiency. Similarly, other firms like Peugeot and Opel are adjusting their operations, indicating a recognition that aggressive restructuring is necessary to address profitability issues. These strategies reflect an understanding of the industry life cycle, where declining sales necessitate innovation, operational efficiencies, and cost management to survive and eventually rejuvenate. The capacity constraints and negative margins underscore the importance of strategic planning in resource allocation and operational efficiency.

The industry context also highlights the significance of competitive positioning and strategic alliances. The competitive landscape is marked by intense rivalry among European automakers, each trying to carve out competitive advantages through product differentiation, cost leadership, and innovation. For example, German manufacturers like Volkswagen leverage their strong brand reputation and high capacity utilization to withstand industry shocks better. Additionally, collaboration among firms, as seen in joint ventures or supplier partnerships, can be part of a strategic response to shared industry challenges. The critical analysis suggests that successful companies will be those that adapt their strategic focus toward efficiency, innovation, and market-tailored offerings in response to industry conditions.

Overall, the article emphasizes that strategic decision-making in the European automotive sector is crucial for survival amid economic decline, regulatory complexity, and competitive pressure. Companies must balance capacity management, cost control, and product innovation while navigating political influences and labor relations. Effective strategy development, grounded in industry analysis frameworks such as Porter’s Five Forces and industry life cycle considerations, is essential for positioning firms for recovery and future growth within an increasingly competitive global marketplace.

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