FORD COMPANY AND THE VALUE OF EFFECTIVE ACCOUNTING STRATEGIES

Executive Summary

The Ford Automotive Company is an American Multinational Enterprise (MNE) based in Dearborn, Michigan, Detroit. It is the second largest automaker in the U.S.A. and operates out of three regions: Europe, Latin America and Asia Pacific. As a multinational enterprise the companys activities have a significant impact on the environmental, social and economic systems. The central objective of this report aims to identify how these activities are organized and accomplished through their cost accounting strategies. This research paper will discuss the corporations responsibility and focus on continuing operations. Accountants refer to this focus as the going concern assumption. According to Kieso in Intermediate Accounting, the going concern assumption is an accounting guideline, which allows readers of financial statements to assume that the company will continue long enough to carry out its objectives and commitments. Moreover, the going concern assumption aligns with the importance of implementing a sustainability strategy as part of the overall business strategy of a business. In Chapter 15 of Managerial Accounting by Braun and Tietz, sustainability is defined as the ability to meet the needs of the present without compromising the ability of future generations to meet their own needs (p. 886). With the ever-changing economics of business, it is more important than ever for a multinational firm such as Ford Motor Company to conform to the triple bottom line viewpoint. The triple bottom line considers a companys performance not only on its ability to generate economic profits, but recognizes three interrelated factors that affect a companys ability to survive and thrive in the long-run: profit, people, and planet (Braun 886). In the automobile industry the effects of using strategic innovative ideas and advanced technology is a major contributor to the fierce competition experienced with rivals. This paper will explore the managerial accounting decisions made by Ford Motor Company, which allowed it to survive the

Great Recession that afflicted global economies during the late 2000s, and how the implementation of a sustainability strategy has allowed Ford Motor Company to be one of the more thriving automobile makers in the world.

The Ford Motor Company has had many challenges to overcome since the global crisis. The companys board submitted a Business Plan to the Senate Committee that detailed the Companys growth and positioning in the market during this difficult period. The Business Plan identified the value-adding activities in their respective categories of the firm that resulted in the company reaching its targeted Profit Margin to provide a competitive advantage. To reiterate, the research of this paper will explore the overall decision-making Ford Motor Companys strategic accounting and sustainability strategy allowed them to make to withstand the global recession. Ford Motor Company: A Brief History Henry Ford founded the Ford Motor Company in 1903 in Dearborn, Michigan. Henry Ford innovatively introduced the concept of the assembly line, enabling large scale manufacturing to take place and more importantly, to achieve increased economies of scale. During the early years, the company produced just a few cars a day at its factory in Detroit, Michigan. Within a decade, the company would become a world leader in the expansion and refinement of the assembly line concept. Furthermore, Ford Motor Company would develop into one of the worlds largest and most profitable companies, while surviving the Great Depression. As of 2010, Ford Motor Company is the second-largest U.S-based automaker and the fifth largest in the world based on 2010 vehicle sales. In 2010, Ford Motor Company ranked eighth on the Fortune 500 list, based on 2009 global revenues of $118.3 billion. In 2008, Ford produced over

5 million automobiles employing over 200,000 employees in over 90 manufacturing plants worldwide. Ford was the only U.S. automaker that did not seek government bailout money as a result of the 2008 financial crisis.

The Ford Motor Company Business Plan On December 8th 2008, Ford Motor Company executives submitted a business plan to the Senate Banking Committee, as the United States automotive industry faced critical issues that threatened the survival of the industry as a whole. For the purpose of this research paper, an examination of the companies plan for viability through its cost accounting strategy led it successfully through the Great Recession. The knowledge and success that Ford Motor Company achieved in Europe and South America led the Company to adopt a plan the Company termed as One Ford-One Team-One Plan-One Goal. According to Fords Business Plan, One Ford firmly established the principle of one global company, with One Team, working together as a lean, global enterprise for automotive leadership, as measured by our customer, employee, dealer, investor, supplier, union, and community satisfaction (p. 8). Ford developed a strategic goal to develop profitable growth for all stakeholders. One of the first major cost reduction decisions Ford made was to simplify its brand structure as the result of selling the following brands: Aston Martin, Land Rover, Jaguar, and the majority of their ownership in Mazda. The aforementioned sales contributed to the overall liquidity of the Company. Jaguar and Land Rover were sold to Tata Motors of India for $2.3 billion on June 2, 2008 (Reuters 2008). Additionally, Ford forecasted a reduction in its North American operating costs by nearly $5 billion through a number of tough business decisions. For instance, Ford, painstakingly, downsized its operations to match capacity to real

demand that included closing 17 plants over a five year period and downsizing the workforce by 12,000 salaried and 45,000 hourly employees within a three year period. The Ford Business Plan to the Senate Banking Committee identified two strategies that were instrumental in surviving the Great Recession without receiving any governmental loan funds. The first instrumental strategy employed was to aggressively restructure its operations to operate profitably at current demand and changing model mix. In the area of manufacturing, Ford Motor Company strategically decided to leverage its strong U.S. manufacturing presence by converting three truck assembly plants to small car production to support the Companys belief that a permanent demand shift to smaller more fuel efficient vehicles. As a result, Ford has allocated approximately 50% of its U.S. capacity to small and medium-sized vehicles. Also, Ford projected that all of its U.S. manufacturing plants will have flexible body shops by 2012 that will allow the company to respond to changing consumer demands. Secondly, the research paper would like to highlight a series of operating and financing actions that assisted in the survival of the Ford Motor Company. Firstly, as of September 2008, Ford Motor Company had about $30 billion in liquidity of which $19 billion in cash and $11 billion in available credit lines. Secondly, various cost reductions were enacted to improve cash on the balance sheet by a total of $14 to $17 billion through 2010. Capital spending was forecasted to be reduced by nearly $5.5 billion during 2009-2010. In addition to the Ford Motor Company Business Plan, the introduction of sustainability at Ford has been monumental in the success that the Company has enjoyed since the doom and gloom of the Great Recession. The Benefits of Sustainability Previously, we defined sustainability as development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It has become

increasingly evident that businesses must embed sustainability into their organizations to thrive in the long-term. Some convincing business reasons to adopt sustainable practices include: 1) cost reduction 2) regulatory compliance 3) stakeholder influence 4) competitive strategy. The American Institute of CPAs states that accounting for sustainability involves linking sustainability initiatives to company strategy, evaluating risks and opportunities, and providing measurement, accounting and performance management skills to ensure that sustainability is embedded into the day-to-day operations of the company (ACIPA). For organizations to support sustainability, the organizations utilize environmental management accounting, which is a system, used for the identification, collection, analysis, and use of two types of information for internal decision making: monetary information and physical information (Braun p.890). Monetary information presented in environmental management accounting differ slightly from traditionally collected and reported by financial and management accounting systems. EMA systems monetary information may include materials costs of product outputs, materials costs of non-product outputs, waste and emission costs, research and development cost, just to name a few. Physical information has not been traditionally reported in managerial accounting systems but is a vital part of environmental management accounting. The collection and measurement of this environmental physical information allows environmental management accounting to show managers a clearer picture of the companys physical impact on the environment. Environmental management accounting information is strategically used to support management in planning, directing, and controlling operations. Additionally, environmental management accounting information helps management accountants determine the best integration of sustainable practices throughout the organization. After a brief introduction of accounting for

sustainability, the research paper will be concluded with an exploration of Ford Motor Companys Blueprint for Sustainability.

Fords Sustainability Strategy In June 2012, Ford Motor Company President and Chief Executive Officer described sustainability at Ford in a speech: Our goal is to create an exciting, viable, profitably growing company for the good of all of us. Were continuing to do that by making a full family of best-in-class vehicles, in terms of quality, and fuel efficiency, and safety and really smart designthe very best value by using our scale worldwide (Ford Sustainability 2011/2012). As of 2012, Ford Motor Company has aligned its objectives through its Ford One Plan, which includes a commitment to sustainability. As a result of the Ford One Plan and sustainability strategy, Ford was able to survive the Great Recession by posting a pre-tax operating profit of $8.8 billion-its third year in row of improved annual operating profits. In 2011, Fords sale of small cars in the U.S. increased by 25%. This commitment to producing more sustainable vehicles not only contributes to the financial bottom line but also makes significant contributions to the environmental sustainability of the planet as a whole. The commitment to sustainability has also led to Ford announcing in December 2011, a reinstatement of quarterly stock dividends to shareholders which are evidence of a strengthened balance sheet. Ford Motor Company has remained committed to the Ford One Plan that includes working together as one-in all aspects of the Company to produce vehicles that are: green, safe, smart, and built with quality.