A Commitment to the Environment:Ford’s integrated approach to environmental management

Shelly MagierESM 210

May 30, 2002

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Table of Contents

Introduction 1

Corporate Strategy 1

Porter’s Five Forces +1 2

Corporate Environmental Strategy 3

What is ISO 14001? 5

Ford paving the way for ISO 14001 compliance in the U.S. 5

A commitment to the Environment 6

Implementation of ISO 14001 within the Ford Motor Company 6

Recommendations 8

References 9

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Introduction

The Ford Motor Company was incorporated in 1903. The company was incorporated to produce and sell automobiles designed and engineered by Henry Ford. They have grown since and are now the world's second-largest producer of cars and trucks in the world.

Ford has recently been experiencing a downturn. As a result an extensive review of their North and South American plants was conducted. It was completed on January 11, 2001. The outcome of that review was their revitalization plan. This plan includes a discussion regarding new products that will be introduced over the next ten years and a reduction in the North American plant capacity by approximately 1 million vehicles by 2006 in order to adjust to market demand.1

Corporate Strategy

Ford’s corporate environmental strategy is closely tied to their corporate strategy. The objective of a successful corporation is to maintain and sustain their competitive advantage. One method of maintaining a competitive advantage is to increase employee productivity. Ford accomplished this management goals by treating their people well and by giving them the tools to do their jobs well. In this way Ford motivates its employees to work to their full potential. The topic of the environment has proven to be a highly motivating topic for Ford’s employees. It is possible that Ford’s compliance with ISO 14001 guidelines has also been a useful motivational tool for the company. While the decision to achieve compliance emanated from the upper management, there is great support from the employees as well.

Recently Ford has seen a decline in growth and sales.2 In 1999 Ford reported a net income of $7.2 billion. By the end of 2001 Ford reported a loss of $5.5 billion. The lack of a rebound in stock prices appears to be occurring independent of the market trends. It is clear that while the rest of the market it recovering from a decline in stock prices that began in September 2001, Ford has not recovered(see Figure 1). As a result, they are reviewing their business strategy in order to bring the company out of this recent slump. “Nick Scheele,

1 Edgarscan: Ford’s 10-K-2001-12-31http://edgarscan.pwcglobal.com/servlets/getFilingDetail?accession=0000037996-02-0000152 Edgarscan: Ford’s 10-K-2001-12-31http://edgarscan.pwcglobal.com/servlets/getFilingDetail?accession=0000037996-02-000015

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Ford Motor's president and COO, rattled off the ills afflicting his company: anemic capital spending, high marketing costs, damaging employee lawsuits, the Firestone tire debacle. He found it hard to believe that Ford, which just two years ago was considered one of the world's best-run automakers, had fallen so far so fast. ‘It is absolutely nuts,’ he says.”3. Scheele goes on to mention that a deteriorating balance sheet, declining market share, poor assembly quality and a tattered new-product program have also contributed to Ford’s downturn.

Figure 1. Ford stock prices decline July 2001- May 2002.4

Porter’s five forces + 1

Porter’s five forces provides us with a method of analyzing market forces on the Ford. This analysis provides us with some rationale for Ford’s corporate strategic management choices such as being the first U.S. automotive company to become ISO 14001 compliant.

1. Internal Industry Competition:

Internal industry competition is high. Competitors such as Honda and Toyota produce a fleet that is similar and quite competitive with Ford’s fleet. Ford attempts to distinguish itself through financing promotions, advertising, extended warranties, producing high quality vehicles and through product innovation. Ford’s move towards a more environmentally sensative agenda is an example of product innovation and differentiation.

2. The bargaining power of suppliers:

The bargaining power of suppliers is low. This is evident by the fact that Ford has been able to successfully demand that its suppliers are

3 Taylor III, Alex. Fortune. Ford Motor: The Fiasco at Ford. February 4, 2002.http://www.hoovers.com/cgi-bin/offsite?site=HBN&url=http://www.fortune.com/lists/F500/index.html4 http://www.forbes.com

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ISO 14001 compliant. If supplier power were high one might expect that Ford would not be able to force its suppliers to be ISO compliant.

3. The power of buyers:

Buyer power is high. Ford has many competitors and it is possible that consumers can simply choose to purchase their car from another manufacturer. An indication of buyer power is reflected in the choices that Ford has made regarding the size of cars in its fleet. Ford has made the decision to focus on producing large SUVs because buyer demand for large vehicles is high, while demand for smaller vehicles is low.5

4. The power of substitutes:

Vehicle substitutes such as public transportation, bikes and walking are not viable alternatives for most people in the United States. This is due to both the lack of infrastructure and our cultural dependence on vehicles. Using a less formal definition of substitutes we see that the power of substitutes and buyer power are tightly connected as a consumer could choose another supplier with a car that is essentially the same as the car that Ford manufactures.

5. New entrants

The threat of entrants for this market and the automotive industry in general is low due to the high barriers to entry. Examples of barriers to entry include strong brand preference, customer loyalty, access to distribution channels, regulatory policies, tariffs and access to distribution channels. An experience curve also exists in this market. An experience curve exists when unit costs decline as a cumulative production volume increases.6 The high initial capital costs and economies of scale make it difficult for new entrants to be successful.

6. Non- market forces

Non-market forces such as political pressures and press coverage. These two forces are particularly important influences on the automotive industry. Often it is the political, and the resulting regulatory constraints, that dictate the direction of technological development in the automotive industry. The lack of movement

5 Edgarscan: Ford’s 10-K-2001-12-31http://edgarscan.pwcglobal.com/servlets/getFilingDetail?accession=0000037996-02-000015

6 Grant, R.M. Contemporary strategy analysis:concepts,techniques, applications, fourth edition. Blackwell Publishers Ltd. (Oxford) 2002.

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towards increasing fuel efficiency is a good example. Recently a proposal to increase the efficiency of SUVs was vetoed. If this law had passed, the promulgated regulations would have put strict constraints on the automotive industry. In terms of the influence of press coverage on this market, Ford and Firestone have provided us with a pertinent case study. Much of the posturing that was exhibited during the months after the story of the faulty tires broke was due to the intense negative publicity directed towards both Ford and Firestone. It is entirely possible that Ford’s tire replacement campaign, which was initiated after all of the recalls had already been announced by firestone, was an effort to squelch the concerns of nervous consumers.

In general the automotive industry competitive environment is attractive once the barriers to entry are overcome. Rivalry is strong, but entry to barriers are high, good substitutes do not exist and supplier power is weak.

Corporate Environmental Strategy

According to Ford Motor Company Chairman, Bill Ford, "A good company delivers excellent products and services; a great one does all that and strives to make the world a better place."7 Ford is committed to meeting regulatory requirements that apply to its businesses. It claims on it’s website that with respect to health and environmental concerns, regulatory compliance represents a minimum and cost does not preclude consideration of possible alternatives. When necessary and appropriate, they claim to establish and comply with standards of their own, which may go beyond legal mandates.

One disappointing find is that the only mention of environmental issues in the 10-K address issues of having to divest certain portions of their fleet as a consequence of impending Federal, State and Global (Kyoto Protocol) regulations. In addition, the 82 page annual report environmental issues are addressed twice—once in a one-paragraph description of their new hybrid SUV that will be premiered in 2003 and in the glossary.8 The inadequate attention given to environmental issues in these two key documents is unsettling and perhaps reflects an understanding that Ford’s investors may not believe that the environment is an attractive topic.

Despite this, Ford is in fact taking diverse and proactive steps to minimize their footprint while still increasing their profit. The way

7 Ford website: http://www.ford.com/en/ourCompany/environmentalInitiatives/default.htm8 Ford website: http://www.ford.com/en/ourCompany/investorInformation/companyReports/2001annualReport/default.htm

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that the Ford Motor Company is striving to make the world a better place is by improving its environmental strategy. Ford’s corporate environmental strategy is primarily driven by its compliance with ISO 14001 guidelines. Compliance with these guidelines will identify Ford as a company that distinguishes itself as being more environmentally friendly than its competitors.

Ford is the first U.S. automaker to have achieved ISO 14001 standards with all of its plants being certified in 1998 . Ford is the first U.S. automaker to require certification by suppliers and is one of only a few automakers in the world to require certification of its suppliers. The requirement follows the announcement in December that Ford is the first and only automotive company to certify its plants around the world under ISO 14001: 106 manufacturing facilities in 25 countries, which includes 43 European production facilities-including Jaguar and Aston Martin.9

Specifically, Ford is requiring suppliers to certify at least one manufacturing site to ISO 14001 by the end of 2001 and all manufacturing sites shipping products to Ford by July 1, 2003. To help suppliers meet these goals, Ford offers an ISO 14001 Awareness training. In addition, Ford is exploring tools that it can make available to suppliers to let them benefit from Ford's experience in achieving ISO 14001 certification at its plants.10

What it is ISO 14001?

An ISO 14001 environmental management system is meant to develop a systematic management approach to the environmental concerns of an organization. The goal of this approach is continual improvement in environmental management. The following is a list of the steps that must be taken by a company that intends to be ISO 14001 compliant.

Policy: The Company must define an environmental policy and commit to a formal environmental management system.

Planning: The Company must define a plan and the activities necessary to implement the policy.

Operation and implementation: The Company must develop the human, financial, technical and other capabilities to achieve the environmental policy initiatives.

9 Ford website: http://www.ford.com/en/ourCompany/environmentalInitiatives/default.htm

10 Ford website: http://www.ford.com/en/ourCompany/environmentalInitiatives/default.htm

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Checking and corrective action: The Company must measure, monitor and evaluate environmental performance.

Management review: Upper management must review the environmental management system at regular intervals.

Continual improvement: The Company must review and continually improve the environmental management system.11

While a business may improve its environmental record in the process of becoming and maintaining its compliance, ISO 14001 is does not mandate that businesses must change it’s practices in regard to environmental impact. Any improvements that are made seem to be a byproduct of the process.

Ford paving the way for ISO 14001 compliance in the U.S.

Maximizing profit is Ford’s ultimate goal. Market pressure is now the dominant force driving ISO 14001 registrations in the United States. This is no surprise, considering that many of the 10,000 companies worldwide registered to ISO 14001 are asking suppliers if they're registered to the standard. To maintain their customer base and continue to compete in a global economy, many companies must register to ISO 14001.

Both the Ford Motor Company and General Motors are requesting that their suppliers be compliant with ISO 14001 guidelines. On Sept. 9, 1999, Ford Motor Co. became the first U.S. automotive company to require all of its production and non-production suppliers to become certified to ISO 14001. Ford's deadline for certification is 2003. Two weeks after Ford's announcement, General Motors Co. announced that all of its suppliers will be required to register or self-certify to ISO 14001, with a deadline of Dec. 31, 2002.12

A commitment to the Environment

ISO 14001 came of age in the United States when Ford Motor Co. became the first automotive company to certify all of its facilities worldwide to the standard. Ford began registering facilities to ISO 14001 in 1996 and by 1999 had registered all 140 facilities in 26

11 SCHAPIRO, K. M. Firms shoot for environmental standards; Meeting goals seen as way to attract customers, Special to the Journal Sentinel March 4, 2001

12 "Ford Plants Lead the World in Environmental Performance," Ford Motor Co. press release, January 6, 1999; "The Environmental Management Report," vol. 3, no. 7. July 1998: The McGraw-Hill Companies.

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countries. "Achieving ISO certification highlights Ford's philosophy that environmental excellence is an element of both good business and corporate citizenship," says Jim Padilla, group vice president of manufacturing. "We feel it's important to be environmental leaders in the communities where we live and do business."13

One of the key factors to ensuring the success of ISO 14001 is upper management buy-in. Without upper-management buy-in it would be impossible for a business such as the Ford Motor Company to comply with such a comprehensive set of guidelines.

 The following specific examples demonstrate that ISO 14001 is very important to Ford14:

Ford's Michigan truck facility reduced water consumption by almost one million gallons per day. The facility also saves $66,000 a year in electricity by having replaced 1,975 fluorescent bulbs with metal halide bulbs.

The company implemented a process to reduce the amount of disposed paint sludge in 10 plants. Approximately 17,000 tons of paint waste has been recycled since 1995.

Ford reduced the quantity of disposable packaging that came into the plants by 163 million pounds by replacing cardboard and plywood boxes with reusable plastic or metal containers.

Implementation of ISO 14001 within the Ford Motor Company

Compliance with ISO 14001 guidelines does not in itself guarantee optimal environmental outcomes. Instead, it is a system that encourages businesses to consider implementation of more environmentally friendly technology where it is economically viable to do so, thereby minimizing their corporate footprint.

Two business wide changes have been made in the fields of waste reduction and fuel efficiency. Ford has taken some steps to realize their stated goals of being more environmentally aware. Their website outlines steps that have been taken to demonstrate that they are more environmentally friendly. The steps they include15:

Elimination of Chromium pre-paint coating

13 Ford website: http://www.ford.com/en/ourCompany/environmentalInitiatives/default.htm14 Ford website: http://www.ford.com/en/ourCompany/environmentalInitiatives/default.htm15 Ford website: http://www.ford.com/en/ourCompany/environmentalInitiatives/default.htm

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Chromium compounds were used, in conjunction with the phosphate coating, to chemically coat the metal surface of vehicle bodies prior to the painting process. By the end of 1997, most Ford facilities globally had converted to a chromium-free pre-paint coating process. Comparing TRI data for Chromium to the number of units sold per year shows that there has in fact been a decrease in the Chromium waste stream relative to the number of units sold (Figure 2). Since inventory turnover is high, it is appropriate to assume that units sold accurately represents the number of units produced.16

Figure 2. Chromium waste stream reduction

Removal of Mercury switchesMercury-containing switches are being eliminated from Ford vehicles, as part of a voluntary commitment to the Michigan Mercury Pollution Prevention Task Force.

Reduction of lubricating oil usageSeveral Ford component-manufacturing facilities have installed machining equipment that does not require lubricating oil. Use of these "dry" machines eliminates emissions, odors and disposal of the waste oil.

Elimination of PCB transformersFord is voluntarily removing PCB transformers from its facilities and offices, with the goal of eliminating all PCB transformers by year-end 2010.

Increased use of recycled parts:

16 TRI http://www.epa.gov/triexplorer; Edgarscan: Ford’s 10-K-2001-12-31http://edgarscan.pwcglobal.com/servlets/getFilingDetail?accession=0000037996-02-000015

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Ford has increased its use of recycled parts. This change in use patterns has resulted in an additional 140 million pounds of reuse of non-metallic materials (see Figure 3)17.

Water usageRealizing that water is valuable and limited resource Ford has made efforts to decrease the use of water. This is not only a U.S. policy but a global policy as well. Their numbers exclude water used in mill processes. While the processes that have been excluded from the analysis are the largest user of this resource it is important to acknowledge the steps that Ford is taking. In addition, to decreasing water usage, many Ford plants process their wastewater—taking yet another step towards minimizing their footprint (see Figure 4).18

Waste reductionIt is clear that Ford recognizes the importance of decreasing the amount of waste generated during the manufacturing process of their vehicles. They have in fact seen an overall decrease in waste generated at assembly plants located in North America. While these numbers only include waste at the assembly plants, and not for the entire manufacturing process, it is encouraging to see that they are taking steps to decrease overall waste generation in one part of the process (see Figure 5).19

Figure 3 Figure 4 Figure 5

Emissions reductions20;

17 Ford website (recycled material use): http://www.ford.com/en/ourCompany/corporateCitizenship/buildingRelationships/environmentalPerformance/closingLoopsMaterialUse.htm18 Ford website (water):http://www.ford.com/en/ourCompany/corporateCitizenship/buildingRelationships/environmentalPerformance/waterEverywhere.htm19 Ford website (emissions):http://www.ford.com/en/ourCompany/corporateCitizenship/buildingRelationships/environmentalPerformance/cuttingEmissionsCurbImpact.htm20 Ford website: http://www.ford.com/en/ourCompany/environmentalInitiatives/default.htm

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Ford Motor Company's efforts to improve fuel efficiency have focused on advanced technologies, including hybrid electric, and fuel cell powered vehicles. Their initiatives include:

• SUV fuel efficiency. Ford has made a voluntary commitment to increase the fuel economy of its SUV fleet in the United States by 25 percent by 2005. • Partnership for a New Generation Vehicle (PNGV). This partnership is designed to build a vehicle up to three times as fuel efficient as today's cars without compromising utility, safety, and affordability. The demonstration vehicle, the Ford Prodigy is capable of achieving up to 70 mpg. • SUV Hybrid. The Ford Escape SUV is slated for introduction in 2003. It achieves a fuel economy of about 40mpg.

• Committing to reduction the CO2 emissions of their vehicle fleet in Europe by 25 percent from a 1995 baseline, by 2008. • Investing more than $400 million in the development of fuel cell technology.

Recommendations

During the review of corporate/business strategy do not push environmental concerns to the side in an effort to increase profit. It is important to recognize that ISO 14001 guidelines are just that, they are merely guidelines. As a result, it may be tempting to forgo some of the efforts that Ford has taken towards improving their environmental record. Some of these changes have been made at some cost to Ford, and more cost effective, yet more environmentally damaging alternatives, may be a tempting alternative.21 Ford’s environmental corporate strategy must continue to remain well enmeshed with its corporate strategy.

Set objectives of decreasing SUV emissions by 25 % in the United States as well as in Europe. If the technology exists, there is no reason why it should not be applied to the U.S. Since increasing fuel efficiency of SUVs is not a politically attractive prospect, it will be necessary for the automotive industry to take the socially responsible steps of increasing fuel efficiency. One advantage of

21 Edgarscan: Ford’s 10-K-2001-12-31http://edgarscan.pwcglobal.com/servlets/getFilingDetail?accession=0000037996-02-000015

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putting this technology out on the market first is product differentiation. Ford is currently taking steps to put hybrids on the market but as this type of technology becomes more available and more mainstream, customers may lose sight of the steps that Ford has taken. Ford would increase its product differentiation by increasing the fuel efficiency of its entire fleet.

Continue to maintain a diverse range of strategies to minimize Ford’s corporate footprint. Funding research, supporting environmental non-profit groups, increasing fuel efficiency and making production more efficient while minimizing the waste stream are all strategies that Ford should continue to pursue.

References

Edgarscan: Ford’s 10-K-2001-12-31http://edgarscan.pwcglobal.com/servlets/getFilingDetail?accession=0000037996-02-000015

"Ford Plants Lead the World in Environmental Performance," Ford Motor Co. press release, January 6, 1999.

"The Environmental Management Report," vol. 3, no. 7. July 1998: The McGraw-Hill Companies.

Firms shoot for environmental standardsMeeting goals seen as way to attract customers KAREN M. SCHAPIROSpecial to the Journal Sentinel March 4, 2001

Ford annual report. http://www.ford.com/en/ourCompany/investorInformation/companyReports/2001annualReport/default.htm

Ford website: http://www.ford.com/en/ourCompany/environmentalInitiatives/default.htm(please note that several citations are footnoted from various pages that can be accessed from this page)

Grant, R.M. Contemporary strategy analysis:concepts,techniques, applications, fourth edition. Blackwell Publishers Ltd. (Oxford) 2002

Taylor III, Alex. Fortune. Ford Motor: The Fiasco at Ford. February 4, 2002.

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http://www.hoovers.com/cgi-bin/offsite?site=HBN&url=http://www.fortune.com/lists/F500/index.html

Toxics Release Inventory: http://www.epa.gov/triexplorer; Edgarscan: Ford’s 10-K-2001-12-31http://edgarscan.pwcglobal.com/servlets/getFilingDetail?accession=0000037996-02-000015

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