The Ford Motor Company is selling 18,000 a month Mustangs a month. They could sell more but, darn it, then they’d have to make them.
To meet current demand, Ford considered investing in additional capacity to build more Mustangs… Executives decides against it to avoid getting stuck with too much capacity should demand slack off after a year or two.
If I were a share holder or an analyst, I’d be unhappy about this. Ford is leaving value on the table. And they are doing so, apparently, because they cannot predict demand a year or two down the road.
If I were a share holder or an analyst, I would say, "Predicting demand? Isn’t this what we pay you for? Haven’t you just declared yourself unfit for office?"
Anyone who hasn’t been living in North Korea the last couple of years knows that muscle cars are back. Even Hollywood got the news and managed to make a lot of money with a couple of pictures staring Vin Diesel. Mr. Diesel can’t act to save his life (or a picture) but then he didn’t have to. In fact, the real stars of The Fast and the Furious and XXX were the cars Mr. Diesel drove.
This is marketing for free. Contemporary culture in its wisdom and for its own particular reasons decided that cars were BACK. In other words, Detroit just got a great big gift.
But to ride the trend, Detroit must know the trend. And to know the trend Detroit must bridge the gap between kids racing in the streets and Detroit marketing executives. From an anthropological point of view, it’s hard to imagine two worlds more disparate. Men of middle age living in the leafy, gracious suburbs of Detroit (grosse point blank) versus kids working two jobs to race one car late, late at night in warehouse districts where leaves are not allowed. There is a vast cultural difference between them.
But the good news: bridging the gap is easy. The important thing: never use cool hunters, or a member of the car community. The trick: put on your dumbest, more conservative suit. Borrow the stupidest car you can find. A K-car would be an excellent choice. Get up at 2:00 in the morning, go to a warehouse district and listen for loud engines. Find the race, approach someone, and pepper them with questions.
You will be met with ridicule. This is good.
Ethnography begins with an act of humility and the declaration of igorance. The respondent will mock you at first and then something remarkable happens. When they see that you are not going to cut and run, that you are so sincere about finding out about what they know, you are prepared to endure a massive loss of face to do so, they will take you in, sit you down, and tell you all about it.
Clearly, this is only the first step. It remains to talk to everyone else in the diffusion chain about newly muscular cars. This will tell us which and how much of the innovations of the early adopter will come in from the margin to transform the tastes and preferences of more mainstream players. And this will tell us whether demand is sufficient to warrant expanding our production numbers for the next couple of years.
And this is a very good thing, because, frankly, I think share holders and analysts are watching.
References
Boudette, Neal. E. 2005. Muscle Cars Make a Comeback. Wall Street Journal. June 16, 2005, pp. D1, D3.
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Eh. You’re not wrong about ethnography. But, given how much of the buzz specifically about the new Mustangs has been driven by the difficulty in obtaining one, there’s something also to be said for erring on the side of supplying too little. Because the day after they have ten sitting unsold on dealer lots, they could very easily have a thousand.
But as long as every Mustang they make has an owner waiting to pick it up straight off the truck, they can maintain that self-reinforcing mystique.
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Matt, a little bit of scarcity goes a long way and can indeed encourage consumer interest. (scarcity makes the heart grow fonder.) But too much scarcity creates the opposite of interest: frustration. It is also a marketing failure. Thanks, Grant
Matt, a little bit of scarcity goes a long way and can indeed encourage consumer interest. (scarcity makes the heart grow fonder.) But too much scarcity creates the opposite of interest: frustration. It is also a marketing failure. Thanks, Grant
I think the critcism of Ford’s managment may not be entirely fair for other reasons. Stepping up production of Mustangs most likely would entail a rather substantial new capital investment to be recovered over a number of years. The question then becomes: If Ford installs the additional capacity, will Ford capture sufficient additional sales of Mustangs to recover the incremental capital investment and produce a profit? On the other hand, if the demand remains high, Ford might sell a sufficient number of Mustangs over the next three to five years, without incurring the additional investment, to actually make more money for their stockholders than trying to chase the immediate demand. While, under that strategy, it is true that Ford’s sales and profits might be lower in 2005 than would be the case if the immediate demand were pursued, I would hope that in the post-Enron economy, stockholders understand the benefit of a longer-term strategy than simply playing for the next quarter’s or six month’s earnings. Cars are not flash-in-the-pan enthusiasms, like Beany Babies. The demand for a given make of car can continue for several years, and adopting a more measured, longer-term strategy may be in the investors’ interests, as compared to risking their capital in increasing capacity which might not produce materially greater profits over time.
Davison, thanks for this cogent observation. I agree entirely about the capital question. And there was no way for an outsider like me to calculate the upside, the downside and the risk in any detailed way. But we know this much: Detroit is doing badly and Ford has done especially poorly with the Fairlane (I think it is). This leaves me to wonder whether they can afford to pass up the gift that muscle cars represent. The muscle trend is now at least 7 years old. Ford has had plenty of time to position themselves to take advantage of it. Thanks again. Grant
Ford had a Scarlett O’Hara moment in the early ’80s when their excess capacity (across all lines) during a recession almost forced the company into Chapter 11. They swore to never go hungry again, and following a painful rationalization of capacity adopted a policy of 1) maintaining a large cash cushion and 2) of erring on the side of low capacity. They would rather miss some of the upside than get clobbered on the downside.
Is this good for shareholders? You’d need a quantitative investigation of the probability distribution of returns under different capacity policies, which in turn requires a kind of statistical knowledge about demand. You’d also have to account for the discontinuously large impact of bankruptcy on shareholder value so as to give credit for not getting near it very often.
I wonder if Grant’s dream of a marketing discipline that can predict firm or model-level sales in advance is consistent with competition in reasonably efficient markets. If such a technology existed and were publically available, then all firms would act ahead of trends, creating enough competition for rising categories like muscle cars to wipe out the profits (and the certainty of sales) in those categories.
Ford had a Scarlett O’Hara moment in the early ’80s when their excess capacity (across all lines) during a recession almost forced the company into Chapter 11. They swore to never go hungry again, and following a painful rationalization of capacity adopted a policy of 1) maintaining a large cash cushion and 2) of erring on the side of low capacity. They would rather miss some of the upside than get clobbered on the downside.
Is this good for shareholders? You’d need a quantitative investigation of the probability distribution of returns under different capacity policies, which in turn requires a kind of statistical knowledge about demand. You’d also have to account for the discontinuously large impact of bankruptcy on shareholder value so as to give credit for not getting near it very often.
I wonder if Grant’s dream of a marketing discipline that can predict firm or model-level sales in advance is consistent with competition in reasonably efficient markets. If such a technology existed and were publically available, then all firms would act ahead of trends, creating enough competition for rising categories like muscle cars to wipe out the profits (and the certainty of sales) in those categories.
Steve, great post, thanks, but surely my dream is already a reality, which is to say Ford is making some guesses about the future. All I am asking for is better guesses, or at least guesses good enough that they would have the courage not to leave value on the table. As to a distributed intelligence system, that means everyone knows what trends are coming…is this not precisely the way most competitive situations are decided, who is better at doing the same things. Thanks! Gant