JAGUAR: WHAT TO DO WITH A TROUBLED LEGEND?

Journal of the International Academy for Case Studies, 2007 by Morrisette, Shelley, Hatfield, Louise

CASE DESCRIPTION

The subject matter of this case addresses the issues of turnaround, spin-off, sunk cost, and international image. This case would be most appropriate for undergraduate courses in entrepreneurship, small business management, and strategic management, as a written assignment-and graduate courses as a class discussion. The case is designed to be discussed in one to one and one-half hours and should take students no more than three hours of outside preparation.

CASE SYNOPSIS

This case traces the rise and fail of a once great company and product-a product that is still considered a British "national treasure". At one level, this case addresses the need for a turnaround-the need to rejuvenate a once classic brand. At another level, this case addresses the dilemma of what to do with a once great product that should never have been acquired in the first place.

INSTRUCTORS' NOTES

Case Questions

1. Why was Jaguar not a good acquisition for Ford?

This case is about a bad strategic decision - Jaguar was not a good fit for Ford. First, Jaguar was on the market because it wasn't a viable profit center. If a firm acquires such a company they should have a turnaround strategy before making the acquisition. Ford didn't have such a strategy, and in an increasingly competitive and cost pressure industry, acquiring a firm with a high cost production location without the likelihood of being able to change that fact was foolish.

Jaguar had little choice in the merger. It needed Ford's financial backing to stay afloat-there was no synergy. Jaguar saw Ford as a kind of savior, at least throughout most of the 1990s when times were good. When the bottom began to fall-out and Ford demanded better performance the marriage was over, and Jaguar was pressured to produce results quickly.

There was also a "clash of cultures." Both companies are "car-companies" with proud and rich traditions, but that is where the similarities end. Ford produces millions of cars for markets all over the world. Jaguar is a niche-player that must export 85% of its products. Thus, just the scale that each company must focus on is completely different. Jaguar cars are still produced in its historical Coventry plant that was bombed by the Luftwaffe in WWII. The craft of making cars is handed down from one generation to the next. Ford, on the other hand, cannot produce cars this way. Ford must compete across the world in all auto categories. Thus, the cultures clashed.

In 1990 when Ford purchased Jaguar it did so to begin to become a "worldwide automobile company." Its strategy was linked to the increasing globalization of all markets. The strategy is a sound one, but the choice of Jaguar to execute this strategy was a poor one. Ford already had a luxury brand in the USA --- Lincoln. Granted Lincoln has never been a great success, but why purchase another brand to compete directly with it. Additionally, with the purchase of Volvo and Aston Martin the strategy execution becomes even more convoluted. Ford gained little in the acquisition. Jaguar had poor production facilities, no great R&D secrets, and required capital. Ford probably made the purchase because it "thought" it helped them globally and because it was cheap. These are not good reasons to make an acquisition.

Ford now has five brands of cars competing in the luxury car market --- Lincoln, Jaguar, Volvo, Aston-Martin, and some Land Rover models. This is just plain stupid. Each of these brands competing for the same limited customer base just increases costs while keeping Ford from being able to concentrate its limited resources.

2. Should Ford keep Jaguar?

Ford must look at the costs of keeping Jaguar, selling Jaguar, or closing Jaguar's doors. It is doubtful if Jaguar will ever be a money maker. The worldwide automobile industry is consolidating at a fantastic rate. Experts believe that in ten years there will only be five or six automotive companies producing cars worldwide. It is generally believed that Toyota, Honda, Nissan, and Mercedes will make the cut. Who the other big-play er(s) will be is anyone's guess. One thing is for sure --- Jaguar will never be a stand alone car company. The company has never produced more than 125,000 cars in a year, which places it in the minor leagues. With the Chinese auto industry just beginning to flex its muscles, the picture becomes even more cloudy and unpredictable.

Thus, the possibility of Ford "spinning off Jaguar as a public company is zero. No investment bank would underwrite the public offering because no one would buy the stock. Jaguar's management could not take the company private (i.e., LBO) because there is not enough cash-flow to make the substantial interest payments.

This is a good time to talk about how Ford's investment (capital, lost profits, and cash flows) are sunk costs. Therefore, deciding what it should do with Jaguar should be driven by what the future holds for the brand --- the past is the past and should be forgotten in this situation. This is the problem: The future looks just as bleak as the past five years, especially in the USA market where the luxury car market has become a slugfest and Jaguar is the biggest underdog. Thus, based on Jaguar's profit and loss projection students might say dump it - Ford should cut their losses and walk away.