Suffered huge losses

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Executive Summary

Fiat, has suffered huge losses in recent years, primarily due to the weaker economic global environment and increased competition. Its immediate fortunes are dependent on old brands such as Punto, Panda, and Croma, and relies mainly on European markets. To improve competitiveness, the company needs to consider the affect of the external market forces and align them to its strengths and opportunities given. Some strategic options have been derived for the Auto division resulting in recommendation for future development.

Introduction

Fiat Group is one of the largest industrial groups in Italy which has also extensive operations in Western Europe and other countries of the World. The group has more than one hundred history (was set up in Turin in 1899) and specialized in the automotive field, manufacturing and marketing cars, designing, trucks, tractors, agricultural equipment, construction equipment, engines, components and production systems. (www.fiatgroup.com). In the late 1990s the company found itself in a very difficult situation, which threatens its very survival. Still, the company accounts for 40 per cent of the Fiat Group business. So it would be a huge mistake just to let the company go bust. Thus, the aim of the report is to clarify the roots of the Fiat Auto' fall from grace and to give some recommendations to improve the situation.

Macro-Environmental analysis

There are a lot of external forces which impact on organization's performance. The forces which are general and impact on every organization operating in a market are the subject of PESTEL (macro-environmental) analysis. More company-specific forces (mostly related to competitive environment) are the subject of micro-environmental analysis (Dibb, Simkin, Pride & Ferrell, 2001).

Political and legal factors:

  • One of the main political factors is removal of political protectionist policy in accordance with new EU competitive laws. During the decades Italian government has been protecting automotive industry and, especially, Fiat as the icon of it. But as a member of EU, Italy should follow the Competition Laws and the government is blocked from giving state aid to Fiat without approval from the EU. Thus, this situation is not favourable for Fiat because it leaves the company uncompetitive in comparison with other global market players (cheaper Korean and Japanese car manufactures);
  • On the other hand, realising the significance if the Fiat Group for the national economy as well inevitable lay-offs as the consequence of critical company's situation, Italian government is keen to help the company through some legal methods ( to provide a rescue of Fiat via Finmeccanica, an industrial conglomerate in which the state has a 32% stake through its participation in Fiat's industrial and financial plan or to take stake in Fiat Auto) (www.news.bbc.co.uk); This also means the threat of losing independence from state and governments ' possible interference with company's management which causes worries on the part of the investors;
  • Company's lay-offs as the part of its restructuring cost-cutting plan lead to deterioration of relations with trade unions and work stoppages, blocking railways and motorways held by them to protest against the job cut.
  • Increased car taxes.

Economical factors:

  • Economic problems in some key overseas markets (Brazil, Poland, Turkey) lead to reduction in export sales and incur the company in huge losses;
  • Differences in exchange rates (for example, Fiat Auto has its costs in euro and sells its cars in some markets in other currencies (for instance, in USA -in dollars). Thus, it leads to some losses ;
  • Unfavourable economic situation in Italy during recent years. "After recovering throughout 2004, the economy fell into recession early in 2005 with high unit labour cost growth, euro appreciation and other negative moments"
  • Rising steel Prices

Social factors:

  • Resistance on the part of trade unions to Fiat's cost-cutting strategy involving reducing workforce;
  • Italian nationalism: Italians do not want to "the former icon of Italian industry" to be sold to GM - American conglomerate.

Technological factors:

Other car manufactures' high expenditure on R&D (the company cannot keep pace with its main competitors' in this field);

As the result of the above mentioned factor-lack of innovations.

Environmental factors:

Ecological pollution leads to increase in peoples' ecological awareness so the customers prefer buying small environmentally friendly cars which are less harmful for the atmosphere. At the same time customers start buying cars with methane engines so this again makes the company spend more on innovation not to be left back its main competitors.

SWOT Analysis

Strengths:

  • reputation of the Fiat Automotive Car branch as the icon of Italian industry;
  • Italian government protectionist policy and back-up;
  • experience gained during decades of company's presence on the Italian domestic as well as global market;
  • success with the rejuvenation of the Alfa Romeo brand ( successful situation with Alfa Romeo made some of the Fiat's investors believe that Fiat Auto may overcome its difficulties);

Weaknesses:

  • damaged reputation of some Fiat brands as having bad quality;
  • huge losses and debts;
  • poor budget for research and development;
  • ineffective corporate structure : useless management reshuffles during recent years, too many layers, death of Agnelli, disputes between his inhabitants over whom is going to take control over the empire);
  • in competitiveness in terms of price
  • undifferentiated product: company is not able to present the product which would have the advantage over the competitors' products;

Threats:

  • low-cost competition on the part of Korean and Japanese car producers;
  • withdrawal of Italian government protection in accordance with EU competition laws;
  • company's overreliance on the domestic Italian market.

Opportunities:

  • increase in the synergies effect from alliance with GM;
  • expansion of dealership network;
  • Italian customers' loyalty to Fiats' brands;
  • strategic alliances with other car industry conglomerates which means new sources of capital for the company;
  • new attractive growing markets like China which can enable the company to boost its sales;
  • more appropriated and defined segmentation of the company's customers, maybe switch from mid-size hatchback market to concentration on more lucrative segments (high margin segments of young wealthy people );
  • preference for environmentally friendly cars (methane engines).

Industry Analysis (Porter's Five Forces)

Considering with the macro-environmental analysis Porter's Five Forces will provide us more aspects while reviewing industrial factors which influence Fiat's strategies:

I. Competitive Rivalry:

The level of rivalry in the industry is high. There are a lot of firms in car automotive industry, aside from Fiat Group. Main actors are BMW Group, Daimler Chrysler, Ford Motor Company, General Motors, Fuji Heavy Industries, Honda Motor Company, Volkswagen, Renault, Toyota Motor Corporation and many others.

II. The Threat of Entry:

The barriers for the potential entrants of the automotive industry are quite high and there are some reasons for this. First of all, the product standards are high and tend to increase, the technology and know-how in the automotive industry are protected by patents and not easily copied which is a clear barrier Of Entry for other carmakers. It is also obvious that the industry requires highly specialized technology. Finally, High fixed costs in the automotive industry result in an economy of scale effect that increases rivalry and elevates the barriers of entry for new incumbents.

III. The Power of Buyers:

Buyers of Fiat Auto are not powerful. Company distributes its automobiles through wide network of dealers in Italy, the rest of Western Europe, Brazil and Poland. At December 31, 2002 the Group's worldwide network consisted of 3195 dealer. (www.fiatgroup.com) Thus, such a significant number of Fiat's Auto Division buyers means that they are not concentrated and have no particular influence on price. Switching costs for buyers are significant (they cannot easily switch to another product) which also means that buyers are relatively weak. Furthermore, buyers are not influential enough to threaten to purchase Fiat Company. On the other hand, Fiat Company has the resources to buy out its buyers.

IV. Threat of substitutes:

Substitute products refer to products in other industries. For cars substitute products are bicycles, motorcycles, and other means of transport. For some markets such as Scandinavian countries, UK, Asian countries this threat is considerable.

V. The Power of Suppliers:

We can consider the companies providing Fiat Auto with the components to be the company's suppliers. So, one of the main Fiat Auto supplier of the components is Magneti Marrelli Holding S.p. a. This company is wholly owned subsidiary of Fiat. Magneti Marelli also supplies components to other car makers as Opel, GM, Peugeot PSA, Renault and others. (www.fiatgoup.com). So, companies suppliers (at least, one of them) are weak and there is an example of backward integration.

(Johnson and Scholes & Whittington, 2002)

Strategic options And Recommendations

In light with the macro-environmental and industry analysis, we enhance FIAT's strategy by considering possible strategic options positioned in the Porter's Generic:

First of all, Fiat could focus on more differentiated products. It can manage this by improving products, improving quality, innovation and, in turn, high expenditure on R&D. The company should provide for broader range of products by means of more modification of the same brand and concentrate primarily on small cars for families segment (where it has competitive advantages historically). More over, the company should pay more attention to clarity of its brands' image and also to define better its target audience. All brands should be separated (especially, those - in high-margin segments).

On the other hand, Fiat could also focus on cost leadership strategy to improve its financial state. The company could manage this by many ways. First of all, in order to gain access to fresh capital, reducing surplus capacity and revitalizing a weak product offering the company can lean to external injection through strategic alliance with some other car manufacturer. The company also can make the radical decision and sell off its business to General Motors according to Master Agreement between two car manufacturers. Yet there Fiat can also create ventures with other big car producers, including Ford, PSA Peugeot, Citroen ,Suzuki and the Indian group Tata Motors. These alliances can be created in small car segment (Fiat Panda) and permit to share financial and industrial resources of both companies and use the synergies effect. (www.carkeys.co.uk) The company also can gain cash through penetrating into new markets and obtaining profits in the future but this option requires a lot of initial resources, marketing research and can be considered in the long term prospective. Finally, Fiat can verge to reduce overcapacity which would be easier and effective to exercise but also implies some ''painful measures'' like cutting workforce, management's restructuring (making it less bureaucratic, removing several layers of management in order to speed up processes). It is also includes stock reduction, using new production technology as well as improving relations with its dealers and suppliers to obtain discounts.

Conclusion

Having conducted the analyses, It can be concluded that though Fiat Group, in general, and Fiat Auto Division, in particular, had a lot of problems and in 2004 again Fiat Auto registered operating loss of 840 million Euros (www.fiatgroup.com), there is still a possibility that the company can overcome its difficulties and turn into the profitable business. According to PESTEL, there are many negative environmental factors deterring Fiat from doing well, but at the same time there are some factors which provide for the opportunity to recover and they can be used to the company's advantage. SWOT analyses can present clear picture of companies strength and weaknesses and what is more important external factors: threats and opportunities. Five Porter's Forces analyses is also relevant because it helps to analyse the competitive environment in a particular industry Finally, taking into account all the information got from the analyses, it became possible to provide strategic options for the company based on Porter's Generic . Besides, some useful recommendations are made for the company to implement. In order Fiat Auto to gain its power in the auto industry the company should concentrate on one of the directions.

BIBLIOGRAPHY

  • "Fiat Case study", Strategic Planning and Implementations Course, APDMS, LSBM
  • Johnson, G. and Scholes, K. (2002), Exploring Corporate Strategy, 7th ed., Prentice Hall, England
  • Armstrong,G. and Kotler,P. (2000). Marketing An Introduction ( 5th edition), Prentice Hall, New Jersey
  • Dibb, S. Simkin, L. Pride W. Ferrell, O. (2001) Marketing Concepts and Strategies (5th edition), Houghton Mifflin Company, Boston
  • "Porter's Generic Strategies" [Online] URL:http://www.quickmba.com/strategy/generic.shtml (accessed 15 November 2009)
  • "Fiat and Ford Deal" [online] URL:http://www.carkeys.co.uk/news/2005/november/08/7345.asp (accessed 8 November 2009)
  • "Fiat and GM fail to agree on sale'' [online] URL:http://news.bbc.co.uk/2/hi/business/4225507.stm (accessed 08 November 2009)
  • "Fiat and Ford forge car alliance''[online] URL:http://news.bbc.co.uk/2/low/business/2329367.stm (accessed 08 November 2009)
  • "Fiat Group Annual Report consolidated and statutory financial statements at 31 December 2004" [online] URL:http://www.fiatgroup.com/comuni/php/file_get.php?w=D4F6ATRQ709RF4B5J9SC (accessed 01 November 2009)
  • "Fiat's Auto Business -Getting it right" [online] URL:http://www.fiatgroup.com/comuni/php/file_get.php?w=0T6VH40VWDYBD74DTCJ7 (accessed 01 November 2009)

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