10-The Company Did Not Get an Invitation

Remember the grade school experience when you learned of a party to which you did not receive an invitation? For most of us, that was a hurtful experience. But the failure to receive an invitation can cost real money in the business world, both now and in the future.

In our research, we have found that there are two sources of failure when a new piece of business becomes available. The first is an invitation failure. A company did not get invited to bid. The second is evaluation failure. A company is invited to bid but the customer chooses another competitor. The more damaging of these two failures is the failure to get an invitation. Sometimes this failure can be caused by the customer simply not knowing about the company. More often, this failure occurs because the customer has a strongly negative impression about the company.

If an industry has a majority of customers who refuse to invite the company to bid for new business, the company faces real challenges. Recently, Ford announced that its research had found that both it and Chevrolet would be “considered” (read “invited”) to bid for a consumer’s new car purchase only 41% of the time. Toyota, on the other hand, would be invited to bid nearly 59% of the time. Further, public opinion is “favorable” toward Ford and GM less than 50% of the time. Toyota’s “favorable” ranking is 74%.

The used car statistics reinforce the concern that GM and Ford should have. The domestic manufacturers lose a far greater percentage of their original price after five years than does Toyota. In most automobile categories today, Toyota is priced slightly higher than Ford and GM for equivalent models. The difference is relatively slight, say $1000 to $1500 on a $25,000 to $30,000 automobile. On the other hand, the difference in residual value five years later is greater than 15% of the original purchase price. In other words, Toyota holds more of its original value, by far, than do Ford and GM. So, despite the fact that the original purchase price is higher, the long term cost of ownership is lower with the Toyota. It’s likely that a good deal of this difference in residual value is due to negative experiences that the GM and Ford customers have had after the sale.

How is Ford to overcome this problem? Marketing initiatives aren’t enough. Customers have to see that the Ford product offers the Function, Reliability and Convenience they want, especially in competition with Japanese manufacturers. The customers are looking for an experience that satisfies them. They want to know they can count on Ford. This consumer opinion takes years to develop and to destroy as well. Ford and GM have destroyed a lot of good will with customers over several years. On the other hand, the Japanese manufacturers have built much stronger relationships with customers over the same period of time. This set of impressions will not change easily. The after-sale experience has to be good for the new Ford and GM buyers. Until Ford and GM can reassure customers that their after-sale experience will be good, the market share of these two companies is likely to continue to slip away.

Ford and GM are in a deep hole. We have seen this in other industries. The sad rule is that companies end up in these deep holes because of conscious decisions they made to cheapen their product or reduce their responsiveness to customers in order to improve their margins. Usually the problems they face are self-inflicted. These companies don’t get an invitation because the consumer does not consider them a friend.

Posted 4/7/08

Update:

Both Ford and General Motors suffered through terrible years in the late 2010s. Ford’s product line fell behind its competition in the early 2000s. It lost market share and reported substantial net operating losses in the years 2006 through 2008. The Ford company streamlined its operations and reduced the number of models it offered.  In 2007, Ford had 27 different vehicle platforms across the world. By 2021, it was down to 2: Ford and Lincoln. In the process, it sold off or eliminated many of its other brands, especially the high-end product lines. While it came dangerously close to insolvency, Ford avoided bankruptcy and refused a government bailout.

General Motors continues to own and operate a number of automobile brands across the globe. However it also discontinued several brands. In addition, in 2017 GM sold its European division to French automaker PSA group after 16 consecutive yearly losses. General Motors declared bankruptcy in 2009.

Reliability’s success and failure play out over time in market share results. Today, Ford is a larger company, worldwide, than GM. In 2020, traditional US domestic manufacturers GM, Ford and Chrysler controlled only 48% of the light vehicle market in the US.  (GM 18.35, Ford 18.16, FCA 11.9).

As of 2019, Toyota held the largest global market share at 10.2%, followed by Volkswagen with 7.6% and Ford with 5.6%.

***

THE SOURCES OF STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile.  We put their facts into frameworks applicable to all industries and found patterns.  Strategystreet.com describes the inductive results of these thousands of observations and their patterns.