FIAT Auto Industry: Strategic Management - Thesis Example

This thesis is about the FIAT Auto industry. It should analyse the reasons why FIAT has been facing difficulties lately. Please use Porter's theories, as well as any others academic theories that may apply. Also is important to mention and reference economic journals, newspapers, and magazines. The following thesis will seek to examine the relatively poor performance of the FIAT group in recent years. All possible explanations shall be explored, whether academic or practical, whether through FIAT’s failings or the better performance of its competitors. The group made losses of 4.2 billion Euros during 2002 and despite measures to reduce its losses it still lost 1.5 billion Euros in 2004 (FIAT Annual Report 2004 p.10). The FIAT group’s performance will be compared to other motor manufacturers, Japanese and Korean ones in particular, to examine if there are any common factors in their performances and what makes other companies more or less successful than FIAT. Other factors that have made it harder or potentially harder for FIAT to make strong profits instead of losses, such as the availability of government subsidies and trade barriers will be examined as well. Manufactures and businesses such as FIAT can be prone to trends outside of their control like the price of steel, oil, and other raw materials they need to produce their goods. Theories relating to economic, strategic and management factors will be used as the theoretical framework for examining the FIAT group’s recent poor performance and suggesting ways that such performances could be improved upon. FIAT is the largest industrial enterprise in Italy, although its success began with motor manufacturing it diversified into many different activities and many different countries, some 61 countries by 2001 (FIAT, Annual Report 2001 p.42). Theoretical frameworks used will include the BCG (Boston Consulting Group) Matrix and SWOT (Strengths, Weaknesses, Opportunities, and Threats) or PEST analysis of all the internal and external factors that can make all the difference between success and failure. Porter’s theories relating to the comparative competitiveness of nations, regions, and businesses will also be explained and provide a framework for the analysis of FIAT’s recent poor performance. FIAT began in 1899, based in city of Turin, and for much of the period since has been that city’s largest employer. FIAT had collaborated extensively with the fascist regime in Italy before and during the Second World War. Building tanks, trucks and planes for the war effort had been a profitable enterprise. Giovanni Agnelli was the dominant figure in the group’s successes until his death in 1945. The rest of the Agnelli family was briefly banned from running the group due to that collaboration. FIAT helped to bring greater prosperity to Italy after the Second World War (Ginsborg, 1990 p.17). For much its history the motor section of the group was profitable and funded the expansion into different areas and the acquisition of other motor companies such as Ferrari, Lancia, and Alfa Romeo. It was Giovanni Agnelli’s grandson Gianni who went to be chairman for the group’s greatest successes but whose control of the group was merely nominal by the time it started making losses (Wikipedia). As well as luxury and sports cars, the companies owned by the FIAT group also produces family cars, vans, trucks, and buses (Datamonitor, May 2005 p. 18). FIAT managed to make profits despite occasionally strained relations with the Italian trade unions and some of its cars being regarded as not always being mechanically reliable. From the 1970s militant trade union activity diminished and FIAT’s management was able to modernise its plants (Ginsborg, 1990 p. 411). Whatever the mechanical failings of it car models, the designs of the cars themselves seemed to be popular both in Italy and abroad. The building of plants in other countries, taking over foreign manufacturers helped FIAT’s sales, or having their models built under license arrangements in countries such as Brazil, Poland, and Yugoslavia. Such arrangements had the advantages of overcoming import restrictions and opening new markets. It has not all been doom and gloom for FIAT in recent years, for instance FIAT is now the single most successful motor company in Brazil, holding a quarter of the market (FIAT group). Research has frequently shown that building or using factories where labour costs are cheaper does not make them more productive and does not automatically make the parent company more productive. However, it can be a good way of bypassing import restrictions. Governments are often happy to subsidise (or allow tax breaks or other incentives) companies that plan to set up factories in their countries as a means of attracting foreign investments (Flynn, 2005 p. 330). Firms can however make greater profits or losses depending on where they build or acquire factories abroad. The skills, education, and technical abilities of workforces can vary greatly. Ideally, if a firm wishes to expand in such a way it should compare the potential gains against the potential risks of doing so (Malecki, 1997 p. 44). FIAT’s competitiveness was arguably helped by the relatively low value of the Italian lira, especially after any of its periodic devaluation, such as in 1993. Any advantages that the low values of the lira brought were ended once Italy joined the single currency, the higher the value of the Euro increasing the cost of FIAT’s car. FIAT was less likely to obtain subsidies from the Italian government as some forms were not allowed because of the Single European Market, whilst the Italian government had to cut public spending to meet the convergence criteria to join the Euro. However, the replacement of the lira with the higher value Euro cannot adequately explain or be solely blamed for the FIAT group’s losses in recent years. The Euro should also save FIAT some money due to there being no currency exchange costs within the Euro zone (Baxter, Bannock & Davis, 2003 p. 128). Overall, the European single currency and the single market should have offered FIAT more opportunities than threats (Schmidt, 2002 p. 450. FIAT and other European carmakers used to be protected by import quotas placed on non- European built cars. Such quotas were not always a good thing as it meant that FIAT did not have to think about making itself as efficient as other car manufactures that had no such protection. The Japanese have proved adept at taking others technology and adopting it for them-selves and improving upon it, the car industry has certainly proved to be no exception (Daniels & Lever, 1996 p. 188) Import quotas were less effective against firms such as Ford and General Motors who had already operated car plants in Europe for decades. Those import quotas had originally affected companies such as Nissan and Toyota that eventually got around restrictions by opening plants within the European Union (the British government seemed particularly keen on these plants as a means of reducing unemployment). Nissan and Toyota also succeeded in opening car plants in North America, increasing their market share and value in that lucrative market not only at FIAT’s expense but also that of Ford and General Motors. The rise in the fortunes of Toyota has been the most remarkable of all. Toyota seems to have got the balance between sales; productivity, design, and price just right with spectacular results. Research suggests that it is the extra productivity of the workers within Toyota and Nissan that gives them the edge over their competitors as much as better technology (Malecki, 1997 p. 140). To illustrate the threat of Japanese and Korean carmakers to their competitors, their share of sales in Europe is 12.5% and 3.9% and increasing every year. The difficulty for FIAT making profits in the potentially lucrative North American market is shown by Japanese and Korean firms gaining 30% and 3.9% of car sales respectively (Automotive News Europe). The Single European Market was believed to offer enterprises the opportunities to rationalise production levels and, lower costs whilst allowing greater access to all the economies within the European Union. Porter suggested that the Single European Market would lead to a consolidation of businesses and their production processes, with the strongest or most effective businesses being in the best position to take advantage of their new opportunities (Johnson and Turner, 2000 p. 49). Porter put forward various factors that could make nations, regions, and business more competitive than their rivals did. Competitiveness, Porter argues, can be determined by the ways in which these nations, regions, and businesses use or do not use the resources that are readily available to them. The level of technological advance and consumer tastes can also help to determine the levels of production, production standards, and the services available to consumers. Nations, regions and businesses form partnerships and relationships with other nations, regions and business that can raise levels of trade, technological advances and profits, whilst forging stronger and more productive links between all those involved. Such relationships are not always even, with the nations, regions and businesses in the strongest position usually dominating those relationships. Governments, intra-governmental bodies such as the European Union, or NAFTA, and luck (whether good or bad) can affect the competitiveness of nations, regions, and businesses. Of course, nations, regions and businesses could also be affected by cycles of boom and recession in the international economy (Porter, 1990 p. 73). Fluctuations in the cost of raw materials can have a detrimental affect on many businesses, although conversely such changes can sometimes offer unforeseen opportunities. For instance, FIAT cars were more fuel -efficient than many American built or designed cars (the Americans preferred larger and faster cars). Oil prices increased sharply following the Iranian Revolution in 1978, American motorists turned in increasing numbers to FIAT cars due to their lower running costs and greater fuel efficiency. Unfortunately, for its long-term success many of those American motorists switched to buying Japanese cars which had similar attributes to FIAT models yet were more effectively marketed and more competitively priced (Wikipedia). Oil prices are currently at very high levels due to the unstable political situation in the Middle East although that is partly offset by the high value of the Euro (which as discussed elsewhere poses more problems for the group). More damaging to the group’s attempts to reverse its recent losses was the large increase in the price of steel, which rose by 68% during 2004. Whilst the group could find ways to reduce its consumption of oil there is no economically viable alternative to using steel for the manufacture of its cars (Datamonitor, May 2005 p.23). There are many practical reasons for businesses to develop strong links and relationships with each other, as well as there being sound theoretical advantages for developing such links. Link ups can achieve economies of scale, reduce expenditure on research and development, or by allowing access to each other’s home markets, increase profits for both companies. Link ups can allow the companies involved to pool their resources, their knowledge, and their specialist products. Well thought out and constructed business link ups can be a means to take advantage of combined strengths and opportunities, whilst reducing weaknesses. Using SWOT and the BSG Matrix can be a way of deciding whether or not to link up with other businesses, whether the potential gains of such relationships are much greater than the potential costs of carrying on operating as a business without any such links or relationships. The potential gains of business link ups certainly make considering such connections attractive options in sometime difficult operating conditions. However, some link ups have not been as good in actuality as they seemed to be in theory. FIAT has had mixed fortunes with its own acquisitions, link ups and agreements (Malecki, 1997 p. 107). FIAT has a long track record of linking up or acquiring other companies, Lancia, and Ferrari probably being the best examples. It was able to obtain Lancia and Maserati due to its strong links with the Italian government. Increased marketing, research and development costs when combined with less protection from non-European rivals and the unavailability of government subsidies would certainly add to the impetus if not the need to form partnerships seem more important. Lancia, coincidentally was acquired after the Italian government decided to end its state ownership, it could be classed as a business link up that was intended to take advantage of the opportunities offered by the single market and the Euro. The acquisition of Lancia and Ferrari gave FIAT a strong niche in the luxury car market, yet in the commercial and family car markets it has faced stiff competition. It is in the latter markets that FIAT’s profits or losses are made, for Ferrari only accounts for 3.2 % of total sales and therefore could not restore the group’s fortunes by itself. However, the group would want to maintain that share even it does not wish or afford to substantially expand that share (Datamonitor, May 2005 p. 18). Whilst the sales of Ferrari have been consistent, those of Lancia and Alfa Romeo have been poor. For the group as a whole only Maserati’s sales in the luxury car sector have increased. Not only can business management students, journalists, and academics use models or theories such as the BCG Matrix and SWOT; they could and probably should be used by the management boards of companies such as FIAT. Advocates of the BCG Matrix and SWOT would argue that basing management decisions on the analysis that were provided by those models would reduce the risk of failure, and increase the chances of success. SWOT was developed by academics during the 1950s yet did not become widely used by senior management in the private sector until the 1980s. Since then its analysis techniques have been adapted to assist public sector projects and even the projects that form part of the European Union Regional Development Fund. That fund is the only way in which private sector firms can hope to substantial government subsidies (Quinn ET al, 1988). Certainly, the dividing line between success and profitable, or failure and heavy losses can be a thin one, yet shrewd strategic management and marketing decisions are vital for long term success. There have been frequent changes in senior management during recent years at FIAT, although strategy may have varied all have attempted to reverse the company’s losses and return to profitability. FIAT has, for instance, tried to sell off non-essential parts of the group to raise funds and reduce costs. The FIAT group could find it easier to return to profitability if it can rid itself of any fixed costs that are longer needed or useful to the group’s overall performance (Flynn, 2005 p. 199). To a certain extent the reduction in the group’s losses between 2002 and can be explained by selling off its insurance and aviation sectors to DeAgostini and to Avio Holding respectively (Datamonitor, May 2005 p.23). The FIAT group’s management was not caught out by its recent poor performance and had in fact tried to reverse the downward trend in performance and sales. It was hoped that changing the senior management and the group’s board would start the revival process, a revival that would eventually make the upheavals in senior management justified. The group had in the past found its good relationships with trade unions a good way of avoiding strikes that had frequently harmed other parts of Italian industry (Ginsborg, 1990 p.251). However, good labour relations had been secured at the cost of restricted work practices. Those restrictions had hindered the group’s competitiveness compared to other European, American and Japanese carmakers. The group could no longer afford such restrictions as its market shares and values were declining alarmingly, even in Italy. By 1998 it was decided to bring in an outsider to revive the group’s fortunes, Paolo Fresco a man who made his name and fortune with General Electric. Fresco was unable to reverse the group’s decline; the trade unions, for instance, watered down the new performance related pay scheme so much that it was effectively useless (Wikipedia). Fresco’s style had not gone down well within the group but continued poor performance meant things could not be left alone or unchanged. Declining sales were the primary cause of the group’s losses, losses that were not helped by the instability of senior management especially after Fresco’s departure. The group’s management seemed to regain its sense of purpose when Sergio Marchionne was made chairman in June 2004. Under his guidance the group has also tried to introduce different working practices to raise its productivity, as well as changing employment patterns (for instance, ending the notion that a job at FIAT was a job for life). Marchionne is faced with the task of making the group Italian factories as productive as most of its other factories abroad. Fresco and others had been prepared to close some of the Italian factories which had meant the trade unions were unwilling to back any of the other measures needed to turnaround the group. Instead Marchionne has set about reducing the number of bureaucrats that seemed to be far too numerous to bring the group any extra benefits (The Economist, December 3, 2005 p. 65). To help take advantage of its strengths and reduce its weaknesses FIAT has attempted to link up with other motor companies to find a mutually beneficial means of increasing profits and competitiveness. The forging of link up would fit in Porter’s theories about maximising competitiveness, yet would also make sound sense if the FIAT management were using the BCG Matrix or SWOT as a means to analysis the group’s poor performance as a viable means of returning to profitability. The FIAT group did form a link with General Motors with a view to the groups eventually merging with General Motors effectively taking over FIAT. Howeve,r neither group was particularly help with the results, the link up did not bring the increased competitiveness and profitability that both groups had anticipated. For the FIAT group there was the consolation that General Motors had to pay $2 billion in compensation for breaking the partnership and not going ahead with the merger of the groups. The senior management at FIAT still regard a link up with another motor group as the best long-term strategy to restore its previous good performance. The group they are hoping to strike a deal with is Ford, which has also had its own problems recently (The Economist, December 3, 2005 p. 64). The changes in senior management were meant to give the FIAT group a tougher edge to the way it conducts its business, to shift the emphasis away from a paternalist approach to a more aggressive style. The group has ended its links with the Agnelli, which had actual as opposed to purely nominal control of the running of the group until 1996 when Gianni Agnelli was left with the title of chairman but had no decision-making power left in his hands (Wikipedia). The FIAT group has never lost its ability to produce distinctively designed cars, although the group has not always proved adept at knowing how to make that distinctiveness advantageous in terms of consistent sales and profits. FIAT’s distinctive designs whilst they may achieve critical acclaim from the general media and specialist motoring magazines and organisations have not always attracted the people that matter the most if it is to reverse its recent poor performance, its potential customers. Winning the European Car of the Year Award and other awards does not guarantee strong sales even if the FIAT groups factories have achieved optimum productivity, its cars are competitively priced, and advertising campaigns have gone well, especially if people do not the look of the group’s cars (Wikipedia). A good example was the Multipa mini people carrier whose sales hype was greater than its rather disappointing sales figures. More rigorous market research would be a more efficient use of the group’s time and resources than having to re-launch its models. Originally launched in 1999, FIAT had to redesign the Multipa as its design was seen to be too innovative for most potential customers to want to buy it. The Multipa itself was a well- produced car with many good features. The FIAT group’s recent poor performance could have been better if it had heed of the following advice, “its first impressions which really count. FIAT has learned that lesson the hard way” (Auto Express – 8 September 2004). However, providing FIAT could maintain strong product differentiation in terms of design, product image, and services, there should be no long-term reason for continued losses, certainly within Europe (Flynn, 2005 p. 280). Therefore it can be argued that the FIAT group’s recent poor performance has various causes, some of which the FIAT group can control or reduce whilst other causes ware outside the FIAT group’s control. The FIAT group could certainly use analysis tools such as SWOT and the BCG Matrix to find solutions to reverse its recent poor performance. Porter’s theories could also help to explain and suggest ways to stop the rot and return the FIAT group to profitability. The senior management of the FIAT group cannot be assumed to be completely ignorant of SWOT, the BCG Matrix and Porter’s theories regarding the competitiveness of nations, regions and businesses. The FIAT group has indeed developed and implemented strategies its poor performance over recent years, some successful and other not so successful. Previously, the FIAT group had a good track record of linking up with or acquiring car producers in other countries and converting such links or acquisitions into gaining of market share and value. Perhaps the way forward for the FIAT group is shown by its recent performance in Brazil, which has been particularly impressive in gaining 25% of market share and value. Maserati sales have also been promising in recent years partially making up for the poor performance of Ferrari, Lancia, and Alfa Romeo. Increasing its market shares and sales in the developing countries is certainly a viable option for improving profitability by exploiting new markets. This strategy could be aided by selling more basic car models that are cheaper to develop and sell than most of the cars that the FIAT group currently builds and sells for its customers in Europe and North America. Market share and value within Europe and North America has certainly been affected by the strong performance of Nissan and particularly Toyota in recent years. Reducing its costs and increasing its productivity would help the FIAT group. It could be argued that some of the recent poor performance of the FIAT group can be linked to Italy joining the Euro which has a greater value than the Lira used to have. The group has reduced its losses by improving productivity, selling off unneeded parts, reducing its number of bureaucrats and changing work practices. More drastic solutions such as closing some of it Italian factories would be unpopular and if the trade unions back Marchionne’s other measures should not be needed. 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