In 1997, Ford introduced the Expedition, a larger and roomier SUB. This car was also a big success and contributed significantly to Ford’s profits. By 2002, Ford was offering six SUB models and manufacturing over a half dozen others through the subsidiaries. In the period 2005 to 2007, higher gas prices and growing concerns about global warming took a toll on all SUB sales, and Ford’s profits turned to losses. In response, Ford worked on developing new and smaller cars. But Ford also modified its SUB models, making them lighter and more fuel efficient.
The design and efficient production of Ford’s Subs involved not only some impressive engineering, but a lot of economics as well. First, Ford had to think carefully about how the public would react to the design and performance of its new products. How strong would demand be initially, and how fast would it grow? How preferences and trade-offs and predicting demand and its responsiveness to price are essential to Ford and every other automobile manufacture. -0 _consumer preference and demand, product positioning_ Next, Ford had to be concerned tit the cost of manufacturing these cars.
How high would production costs be? How would costs depend on the number of cars produced each year? How would union wage negotiations and the prices of steel and other raw materials affect costs? How much and how fast would costs decline as managers and workers gained experience with the production process? And to maximize profits, how many of these cars should Ford plan to produce each year? 0 production costs and profit maximizing choice of output Ford also had to design a pricing strategy and consider how competitors would react to it.
For example, should Ford charge a low price for the basic stripped- down version of the Explorer but high prices for individual options such as leather seats? Ford chose, how were competitors likely to react? Would Demolisher’s try to undercut Ford by lowering the price of its Jeep Grand Cherokee? Might Ford be able to deter Demolisher’s or GM from lowering prices by threatening to respond with its own price cuts? 0 Pricing strategy, rivalry behaviors Because its SUB product line required large investments in new capital equipment, Ford had to consider both the kiss and possible outcomes of its decisions.
Some of this risk was due to uncertainty over the future price of gasoline. Some was due to uncertainty over the wages that Ford would have to pay its workers. What would happen if world oil prices doubled or tripled, or if the US government imposed a heavy tax on gasoline? How much bargaining power would unions have, and how might union demands affect wage rates? How should Ford take these uncertainties into account when making investment decisions? Ford also had to think about its relationship to the government ND the effects of regulatory policies.
For example, all of Ford’s cars must meet federal emissions standards Industry analysis Finally, Ford had to worry about organizational problems. Ford is an integrated firm in which separate divisions produce engines and parts and then assemble finished cars. How should managers of different divisions be rewarded? What price should the assembly divisions be charged for engines that it receives from another divisions? Should all parts be obtained from the upstream division, or should some be purchased from outside firms?