Ford Motor Company Design and Governance of the End User Interface Spring 2000 BA 266:

2 Ford Decisions & Generalizations Channel Design Options Determining EUI Value-Added Trade-offs Pooling the EUI Product Assortment Controlling Competition among EUI Governance Options Applying Pressure Dismembering Channels and Conflict Inventory Risk and Governance Old Chinese Proverb

3 EUI Design Options Return to smaller dealerships Ignore service problem, continue shift to larger dealer/service centers Separate, localized service locations –Operated by dealers –Third parties (sub-franchisees, contractors) –Operated by Ford Warehouse channel to hold dealer inventory

4 EUI V-A Trade-off Increasing the distance of the EUI to the end user diminishes the V-A provided, ceteris paribus –Closeness to the end user enhances access, but will reduce market size available to the EUI –Holding assortment constant, product turnover decline –Broader assortment V-A is more feasible as the EUI distance to EU increases Corollary: There is a trade-off in the provision of assortment and access services by an EUI

5 The Evolving Auto Channel? End-users Supplier S&S Dlr. End-users Supplier S&S Dlr. S&S = Sales and Service

6 Pooled EUI Product Mix The auto dealer provides a pooled mix of products (new & used cars) and repair services For early dealers, there was a match in end user access requirements and mix components With growth in supplier product line, TV advertising, there is a separation Corollary: Maintenance of a product mix with different end user V-A needs damages the channel equilibrium for products and service

7 EU Service Needs What benefits do end-users seek in their selection of an auto-service center? –Role of cost/price –Role of service quality (right the first time, fast) –Role of assortment, service capability (complexity) –Role of personal treatment by sales personnel –Role of distance How effectively can these services needs be satisfied within a centralized facility?

8 End-users Supplier S&S Dlr. Warehouse End-users Supplier Service S&S Dlr. Service Two Alternate EUI Designs

9 Competition Among EUI Increasing the distance between EUI and the end user reduces the number of dealers and reduces intra-channel price competition a la Saturn Competition among EUI is an important factor driving channel price toward cost despite some EU dislike Corollary: Higher EUI prices damage channel equilibrium, opening opportunities for new channels unless politically blocked and/or brand demand is powerful

10 Separate service operations from product sales and decentralize improve consumer access Enhance dealer interest in service by increasing profitability Increase pressure upon dealers by stronger enforcement of service quality standards Buy out service operations from dealers and operate directly Reduce pressure on dealers for volume; enhance product quality Some Governance Options

11 Governance Constraints What constraints limit supplier influence over dealer service quality –Limited power because of state legislation making dismissal difficult –Propensity of many consumers to bargain creates a unique transaction environment –Service is not seen as a strong profit center –Ford’s culture of strong sales orientation

12 Applying Pressure Application of pressure for conformance: –generates conflict where dealers do not perceive requirements to be fair or just –Is difficult to enforce because legal and historical position of the dealer has reduced supplier power Carrots continue to do better than sticks –Dealers must be shown that good service enhances their dealership, profits

13 Pooled Service & Sales Is there benefit to a common or pooled operation of service and sales in the same establishment? Is there benefit to a common ownership of service and sales, but not necessarily location? –To the new car dealer, end user, sale of used cars Would independent service facilities generate conflict within the channel? Change within a channel where power is closely balanced, benefits are unevenly distributed, and there is a lack of trust will generate chaos

14 Warehouse Channel Inventories Who will be responsible for inventory control? –The individual dealer? –The supplier? Both options create obstacles. –Dealers could not be individually responsible –If supplier were responsible, losses for cars not sold in timely fashion would generate losses Inventory risk is best controlled by channel member that controls turnover

15 Ford’s Perception of the Service-Sales Linkage Product characteristics are perceived to be increasingly less significant in determining end- user choice What are the factors that determine dealer choice? –Model availability –Assortment –Price Consultants are prone to lead clients down paths they want to travel (old Chinese proverb)