Ford Hybrid Car Case Bass Essay

Before beginning some(prenominal) case, students should familiarizethemselves with the regulate being calld. tradeing Engineering for Excel comes with tutorials that demonstrate the capability of from each one manakin. The tutorial can be found under each model inwardly the MEXL menu after starting Excel. These tutorials ar intentional to work with our OfficeStar examples which be located in the My Marketing Engineering theatre directory, commonly installed in My Documents during softw be installation.Thither is no external data behave associated with this case all necessary data are include herein. crosss interbreeding FutureIn phratry 2006, Alan Mulally had just interpreted over as the CEO of crosswalk, the fifth largest corporation in the unite States. track was in trouble, as was the entire American auto industry, part due to the rapid increase in amount grease-gun determines from $1.10 per gal for veritable(a), unleaded gaso product line in January 2002 to frequently(prenominal)(prenominal) than $2.50 per gallon in September 2006, according to the Energy Information Administration. Sport usefulness vehicles and trucks,the mainstays of crosswalks product line, no longer had the depth of consumer appeal they had in the foregone. intersections stock price had declined more than 30% from September 2004, and for the 2006 monetary year, carrefour executives were projecting a loss of almost $6 one thousand million from ongoing operations paired with restructuring salutes, the check projected losses reached nigh $9 billion. Through its mode Forward plan, crown of thornsisationization announced buyout offers for 75,000 periodical workers and planned to cut 30% of its 35,000 salaried employees in the coupled States. Although these cost-saving measures would better profitability, ultimately, hybridization needed to win in the marketplace to re form its recent status to win, it inevitably to take drastic market-oriented a ctions.As part of the Way Forward plan, the previous CEO (and current Chair) go outiam Clay fording ab initio announced that the company would build 250,000 crossbreed cable cable cars annually by 2010. outright Mulally is rethinking that commitment Would it be enough? Would that be too much? He call for a quick and credible answer to this question in the beginning deciding how forcefully to push the crossbreedingisation car program within Ford. Mulally withal recognizes that the technologies and manufacturing systems that support crown of thorns cars are growing more and more sophisticated, and companies much(prenominal) as Toyota and Honda, with their head starts in these areas, may move more pronto down the learning curve, producing their cars more cheaply and in great volumes, which would make it difficult for other companies to catch up to them. To plan Fords long-term investments in the crown of thorns car business, Mulally needs a 10-year forecast of the over all U.S. crossisation Copyright 2008 by DecisionPro, Inc. To order copies or request license to reproduce materials, go to www.decisionpro.biz. No part of this publishing may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the permission of DecisionPro, Inc.market, the worlds largest consumer of gasoline, on with corresponding forecasts for the gross r up to at presentue of Fords hybrid cars if they are made available to the market.BackgroundA hybrid car is an automobile big businessmaned by two sources (1) an internal combustion engine or diesel motor motor engine, as in a unconstipated car, and (2) an electrical motor. However, hybrid cars do not need to be recharged via electric plugs instead, they receive charge from the movement of the wheels and store the generated kinetic energy by dint of a process called regenerative braking. crown of thorns cars provide higher mileage by requiring a less aright engine than a comparable regular car and help conserve nonrenewable sources of energy, such as diesel or gasoline. The smaller engine in the hybrid car is powerful enough to move the car along on the freeway, but when it needs to accelerate or get up a steep hill, it needs the assistance of the electric motor and battery to boost the power output. crossbreed cars work much like regular cars and create little going in terms of how they are driven, refilled with gas, or serviced. However, hybrid cars typically cost approximately $3,000 more than comparable regular cars (base price of $25,000 to $30,000) and offer a 10 15% improvement in gas mileage. The actual nest egg depend on the driving habits of the user gradual acceleration, coasting, and the use of sheet control help increase mileage.Although many experts have predicted that hybrids leaveing be the cars of the succeeding(a), it remains difficult to predi ct their popularity with consumers and, consequently, their profitability for auto companies. Within the past fewer years, hybrid cars have gone from being novelties, bought largely by environmenta bring ups and technology-oriented consumers, to represent an established, though small, part of the automotive landscape. According to J.D. cater & Associates, hybrids micturate approximately 1.5% of the total U.S. light-vehicle market, but sales have been growing quickly as other segments have stagnated or fallen. gross sales in 2005 of 205,000 units were more than double the 2004 sales levels. A recent survey by J.D. Power alike reveals that 57% of consumers who expect to acquire a new vehicle within the next two years will consider a hybrid. Worldwide, approximately 800 million cars and light trucks are in operation, and 240 million of these are in the United States. By 2020, 1 billion cars and light trucks are expected to be in use widely distributed. All these cars could eventu ally be replaced by hybrid cars.In addition to consumer demand for hybrid cars, car manufacturing businesss interest in hybrid cars is driven by coffeehouse (Corporate fair give the axe Economy) regulation, according to which an automaker moldiness maintain a negligible mileage of 27.5 miles per gallon (mpg) crossways passenger cars in its product line and 20.7 mpg across light trucks. The U.S. Congress appears likely to raise these standards in the coming(prenominal) in response to societal pressures according to whatever experts, the CAFE number may rise to 35 mpg or higher by 2020 across the entire product line (i.e., including all passenger cars and light trucks produced by the manufacturer). Hybrid cars offer the opportunity to raise gas mileage sufficiently to meet this requirement, and therefore, most car manufacturers have either launched hybrid cars or announced plans to do so. An auto manufacturer that fails to meet the standard must pay a penalty to the federal go vernment, which some companies, including BMW, Porsche, and Ferrari, have paying(a) in 2006. 11The penalty for failing to meet CAFE standards is $5.50 per tenth of a mile per gallon under the target. Thus, a manufacturer that produces cars that average 2 miles below the target and sells 10,000 cars in a disposed year will pay a fine of $1,100,000 for that year. In 2006, BMW paid a fine of $5.1 million.FORD crossing CAR CASE2/8Forecasting ConsiderationsThe chart in Exhibit 1, from www.hybridcars.com, illust judge the variety of opinions regarding sales forecasts for hybrid cars. The black line shows hybrid sales continuing at their current pace, determined in the time since hybrids first were introduced in 2000. Considering the future five-year timeframe, J.D. Power forecasts are well below the line, whereas others (e.g., D.O.E., Freedonia Group, BoozAllen) predict wider public ad pickax of hybrids.Exhibit 1 Forecasts for Hybrid CarsThe wide variation in forecasts reflects some fundamental uncertainties surrounding this technology and marketTechnology uncertainties Many secondary technologies offer different price/ slaying points. The gaselectric hybrid is the most common alternative technologies include pure electric cars and can cell cars. Alternative furnishs readiness be used in nonhybrid cars and could gain popularity, swaying consumers away from buying hybrids. Some alternative fuels currently in use include E85 (an 85% ethanol blend), clean diesel, and natural gas. For 2006, Ford increase its production of four vehicles that can run on a compartmentalization of gasoline and E85 (i.e., F-150 pickup trucks, Ford Crown Victorias, Mercury Grand Marquis, and capital of Nebraska Towncars).In a 2005 KPMG survey of 140 senior auto executives, 88% predicted that gaselectric hybrids would gain market share. Even within the gaselectric hybrid market, automakers apply the hybrid technology at varying levels. For example, Honda and Toyota make full-blown hy brid cars, whereas General Motors eased into the sector with a scaled-down, less-expensive hybrid technology that still needed some gasoline to power the transmission. A FORD HYBRID CAR CASE3/8break by dint of in battery technology may create a shakeout among the alternative technologies. According to the Department of Energy, either lithium ion or lithium polymer batteries may offer the best future technologies. Lithium ion batteries possess or so twice the energy of NiMH (nickelmetal hydride) batteries but require significant circuitry to anticipate overcharging and undercharging. They also require thermal management and pose some arctic concerns.Hydraulic hybrid technology also is considered superior to the electric hybrid technology, according to the U.S. Environmental Protection Agency (EPA) UPS is currently testing hydraulic hybrid trucks for use in itsregular fleet. Auto companies are also testing other technologies in 2007, BMW plans to produce 100 hydrogen cars for its 7 series. BMW spokesperson Andreas Klugescheid notes that these cars will not be sold but sort of given to consumers who may have a potential drop impact on making a hydrogen economy happen. These cars will run on hydrogen or gasoline, depending on the drivers preference, which acknowledges the limited handiness of hydrogen fuel and the difficulties associated with distributing it.Market uncertainties Many uncertainties surround the decisions of both dealers and consumers. For consumers, the potential economic benefit of a hybrid car depends on the price of gasoline. At a gas price of $2.50 per gallon, the breakeven point between a hybrid and a regular gasoline car can go by after 50,000 miles of driving. The higher initial cost is also a prohibition to many consumers. To make hybrid cars more attractive to consumers, federal and give in governments offer some(prenominal) incentives. The Energy Policy Act of 2005 (EPACT) offers consumers and businesses federal evaluate attr ibute for their purchase of fuel-efficient, hybrid electric vehicles, in effect through 2007. The amount of tax credit depends on the fuel economy and ranges from $four hundred to $2500 per vehicle. Some states also offer additional incentives for hybrid car drivers, such as solo use of high occupancy lanes (e.g., Georgia, Florida, Arizona), tax credits (e.g., Utah, Illinois, Colorado), or exemption from sales tax on the car (e.g., Connecticut, fresh Mexico). At the same time, some consumers are uncoerced to buy hybrids, even at higher differential prices, to make a statement (you are what you drive). The Toyota Prius was such a success that dealers charged additional fees for the car and established purchaser waiting lists. According to surveys, some consumers would be willing to pay somewhat more for electricity to power their cars if they knew it was coming from renewable and nonpolluting resources.Hybrids also may require some changes in driving habits, such as learning to ac celerate and stop smoothly and coasting whenever possible. Many consumers also are not aware that, unlike most regular cars, hybrids hand better mileage during city driving compared with highway driving. Ford is organizing special driver education events, during which current ownerswill team up with Ford engineers to discover ways to improve gas mileage when using hybrid cars. The company hopes that such activities will get ahead wordof-mouth communications about Fords hybrid cars. According to Mary Ann Wright, Fords director of hybrid technologies, through this program, we created about 300 ambassadors for us. Its free advertising, and were getting some great feedback from them.Many celebrities, including Leonardo DiCaprio, Cameron Diaz, Bill Maher, and Will Ferrell, not only drive hybrid vehicles but openly promote their choice. Thus, it is becoming easier for consumers to hear buzz about hybrid cars and educate themselves, such as through Internet research or by discussing the option with friends and acquaintances who may own a hybrid.The demographics of the typical hybrid car buyer thus may change in the future, especially if the cars grow more attractive to mainstream car buyers. The characteristics of current hybrid car owners are summarized in theFORD HYBRID CAR CASE.4/8following list (Source Walter McManus, director of the Office for the Study of Automotive Transportation, University of Michigan)High level of education. high income than the average new buyerapproximately $100,000 a year versus $85,000 a year for the average buyer.to a greater extent likely to be female.A few years older than the average car buyercloser to 50 than the average age of 40 years for all car buyers. acquire fewer miles on average.Plan to keep their car longer than the average persona little more than five years quite than less than five years.Willing to pay more for an environmentally couthie (or green) product.Want to do something to help reduce vehicle pollution.More demoralized about the future of fuel prices than the average person.Forecasting Hybrid Car Adoption Using theBass ModelA separate consideration in developing forecasts using the Bass model is an accord of the diffusion process of analogous products. Several different product categories may provide suitable analogs based on the substitution of one sheath of technology by another. Using this logic, the market research group at Ford has proposed that the diffusion process of diesel cars in Europe might provide a suitable analogous situation because, over time, diesel cars substituted for gasoline cars as the technology of choice. Starting with Volkswagens introduction of its play diesel car in 1976, the adoption of diesel cars has progressed steadily, and diesel vehicles now account for more than 50% of new car registrations in horse opera Europe. However, according to Christy Swiecki, an auto industry analyst, the adoption of hybrid cars in the United States is likely to be slowe r, if the experience of switching to renewable energy is any guide. Although wind, solar, and geothermal sources of energy are more environmentally fond, their adoption rates have been slow, partly because traditional sources of energy (e.g., coal, petroleum) remain relatively cheap and convenient, and alternative sources may not provide greater economic benefits when the total consumer experience is taken into account. According to Swiecki, initial enthusiasm for hybrid cars will fade, especially once the market expands beyond the traditional high-income, environmentally friendlyconsumers and as people begin to realize the potential environmental issues with prise to the disposal of the rechargeable batteries in their hybrid cars. She therefore projects sales of hybrid cars in 2015 will be, at most, in the range of 68% of the total light-vehicle market of approximately 16.5 million vehicles.Another approach to prediction views hybrid technology as a feature enhancement to a reg ular car that increases its mileage. In that case, hybrid cars would be perceived as just another under-the-hood-innovation that delivers more fuel efficiency without sacrificing power, and they should appeal to a broad market. Using this perspective, the market research group at Ford has proposed that the adoption patterns of antilock braking systems (ABS) and fuel-injection technologies might be useful analogs.Both thesetechnologies were built into products and offered as enhanced features that the customer could choose to buy.Although ABS originally was created for use in aircrafts, by the early 1970s, ABS technology was being developed for automobiles. In 1978, Bosch createdFORD HYBRID CAR CASE5/8the first ABS that could be successfully mass produced, and Mercedes-Benz and BMW began to offer the technology. The early versions weighed about 6 lbs (compared with 1.5 lbs today) and cost several thousand dollars. By 1985, less than 1% of all new vehicles worldwide were equipped with ABSmostly high-profile, high-cost vehicles. In 1985, the Chevy Corvette came standard with ABS for the first time, and by 1989, it was standard in all Porsche models, followed by Mercedes-Benz in 1992. By 2000, 60% of new cars worldwide had ABS, and by 2003, this rate had increased to 69%.Fuel injection is another potential technology enhancement that could serve as an analog for hybrid cars. In a gasoline engine, small amounts of fuelmix with air during combustion. Since the inception of the auto industry, carburettors were the predominant method to bill the amount of fuel used. An engines air-to-fuel ratio must be controlled accurately in different operating conditions to achieve the desired performance metrics. With the development of electronic fuel injection (EFI) technology, fuel could be metered really accurately and precisely, which helped increase gas mileage and reduce air pollutants compared with their levels in carburetted engines. Even though EFI was a much superior technology, the transition from carburettors to EFI was gradual, winning about 14 years from 1979 to 1993 for EFI to displace carburettors. Reasons for the gradual transition included the initial high cost of EFI systems (about $600 more per unit than carburettors) and the lack of clear perceptible benefits for car owners. As a result, the early EFI systems appeared only in luxury and performance cars, which could absorb their higher costs into the overall price.From Market Forecasts to Forecasts for FordFord is primarily interested in how many hybrid cars it will be able to sell in the next 10 years so it can make sound judgments about how much capacity for hybrid cars to build in its factories, as well as the amount of effort it should devote to training its dealer network that will sell the cars. Therefore, marketlevel forecasts need to be converted into forecasts for Ford brand hybrid cars. Exhibits 2 and 3 summarize sales of hybrid cars from 2000 to 2006 and sales of Ford hyb rid cars relative to the total market in 2006. Ford introduced the Ford Escape hybrid in late 2004 and the Mercury Mariner hybrid in early 2006.YearNumber ofHybrid Models(LightVehicles)U.S. sales ofHybrid Cars(Units)U.S. Total Numberof New Cars (LightVehicles) Sold200029,35013,181,0002001220,28713,510,0002002235,00013,639,0002003347,52513,594,0002004588,00013,609,00020057215,00013,551,000200610252,63613,271,000Exhibit 2 Sales of Hybrids in the United StatesNotes Light vehicles include passenger cars, sport utility vehicles, vans, and pickup trucks.FORD HYBRID CAR CASE6/8Car ModelHonda InsightToyota PriusHonda CivicHonda AccordToyota CamryToyota HighlanderLexus RX400hLexus GS450hFord EscapeFord Mercury MarinerTotalCombined(city +highway)EPA mpg57555031392929263431Jan.2006597,6543,165351n/a2,2631,477n/a8019715,867Feb.2006726,5471,780783n/a2,6311,803n/a1,23310814,957Mar.2006797,9222,232581n/a2,9872,470n/a1,44114917,861Apr.20061108,2343,087614863,7682,2471413,03938121,707May.2006928,10 32,8905203,0323,7552,0062942,43442823,554Jun.2006779,6962,6013964,2682,7051,1902311,56931523,048Jul.20069111,1142,6735045,0232,7841,2201572,06042326,049Aug.200610911,1773,4114994,9772,5811,5141921,78935126,600Sep.20061910,4922,5083894,0442,3471,6871641,36928223,301Oct.200698,7332,2882872,8061,6431,2391771,34325918,784Nov200628,0082,2083113,1001,6671,3271761,32316118,283Dec200639,2912,4083634,0052,3541,9812521,74822022,625Total UnitSales 2006722106,97131,2515,59831,34131,48520,1611,78420,1493,174252,636Exhibit 3 Unit Sales of Different Models of Hybrid Cars, 2006. (Source www.hybridcars.com www.fueleconomy.gov).FORD HYBRID CAR CASE7/8EXERCISES(1) Summarize and justify alternative scenarios (i.e., compelling stories about the future) ranging from pessimistic to optimistic with regard to market performance of hybrid cars.(2) Develop forecasts of hybrid car acuteness in the U.S. market from 2007 through 2016 for each scenario you develop, along with a justification and explanation for your forecasts. (In applying the Bass model, note that market penetration data for the four analog products mentioned in the case, namely, ABS, EFI, Solar, and Diesel cars, were all reckoned in terms of the percentage of the target market that adopted the product. Thus the maximal market potential can at most be meet to 100).(3) Recommend short-term and long-term strategies that Ford should pursue based on the forecasts that you develop.Note This case was developed by Professor Arvind Rangaswamy with assistance from Megan condolence De Stefano and Sasi Amarlapudi. The case is based on publicly available information as of January 2007. Its purpose is to illustrate a business situation involving forecasting, based on real events it does not purport to represent actual decisions made by the Ford Motor Company. Data and the case situation described here are based on information obtained from public sources listed in the soundbox of the text and the following U.S. Department of Trans portation http//www.hybridcars.com USA Today, October 14, 2005 Plunkett Research, Ltd. The Wall lane Journal, September 13, 2006.