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Analysis of Automotive Industry
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INTRODUCTION
1.1.
Background of the industry
The global automotive industry is a highly diversified sector that comprises of manufacturers, suppliers, dealers, retailers, original equipment manufacturers, aftermarket parts manufacturers, automotive engineers, motor mechanics, auto electricians, spray painters or body repairers, fuel producers, environmental and transport safety groups, and trade unions. This paper identifies what is target market and explains competitive strategies and its major implications. Additionally, this essay examines product mix using the example of Mercedes Benz Company. 1.2.
Major Industry Players
The worldwide automobile industry is largely dominated by five leading automobile manufacturing corporations namely Toyota, General Motors, F ord Motor Company, Volkswagen AG, and Daimler Chrysler. These corporations have their presence in almost every country and they continue to invest into production facilities in emerging markets namely Latin America, Middle East, Eastern Europe, China, Malaysia and other markets in Southeast Asia with the main aim of reducing their production costs.
1.3.
Segments of automotive industry
The automotive manufacturing sector consists of: automobile light truck manufacturers motor vehicle body manufacturers motor vehicle parts supplies manufacturers
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www.researchoptimizer.com This sector is engaged in manufacturing of automotives and light duty motor vehicles, motor vehicle bodies, chassis, cabs, trucks, automobile and utility trailers, buses, military vehicles, and motor vehicle gasoline engines. Auto components amount to 31.5% share of the global automobiles and components industry group's value. The global automotive component industry is highly diverse and comprises of various product segments like engine parts, drive transmission and steering parts, suspension and braking parts, electrical parts and other auto components parts.
Fig 1 Automotive product segments Segment
Production Share in global
Parts
auto component industry Engine Parts segment
fuel
delivery
products
system
such
as
and
31%
pistons,
piston rings, engine valves, carburetors, and diesel-based fuel delivery systems Electrical Parts segment
generators,
starter
motors
9%
steering
19%
and spark plugs Drive
Transmission
and
gears,
wheels,
Steering Parts segment
systems, axles and clutches
Suspension
brakes,
and
Braking
Parts segment
brake
assemblies,
12%
leaf springs, shock absorbers, brake linings
Body
and
segment
Chassis
Parts
body metal
and
chassis,
sheet
components,
and
12%
plastic-molded parts
Source: BERA: Issue 2 Automotive Industry: Automotive History, http://www.loc.gov/rr/business/BERA/issue2/history.html
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Fig 1 Automobile market segmentation
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2. Mercedes Benz background and Analysis
2.1. The history of the Mercedes -Benz Gottlieb Daimler and Carl-Benz are the founders of the famous luxury cars Mercedes'-Benz. In 1926, the companies founded by Daimler and Benz merged to form Daimler-Benz AG, and the Mercedes-Benz brand was born. Right from the
start,
the
Mercedes -Benz
name
was
synonymous
with
automotive
excellence. These are German made cars and are known as status symbol of high class consumers. All customers have their own values and beliefs while purchasing a car. There are several factors responsible for the purchas e decision (see Appendix 1). Car industry is growing very fast worldwide. There is a rapid change in trends and consumers preferences for comfortable, reliable, highly efficient and economical cars. Mercedes Benz currently offers nine classes of vehicles, all with multiple models and body style options, to meet the specific wants, needs, and desires of its target market.
.
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2.2. Business Analysis of Mercedes Benz Business analysis of Mercedes-Benz involves the detailed review of factors such as consumer demand, competition, new product development, production costs, marketing costs and profitability for each proposed new product. Fig 2 Business Analysis Factors
Description and example
Consumer Demand
Currently, consumers are very smart in selecting a car. They look for the best option available in the market. Their demands are highly efficient, affordable cost, reliable, comfortable and stylish models cars. Some consumers also consider that the cars should be environment friendly.
Competition
Mercedes-Benz is facing a very strong competition from Japanese cars and also from domestic cars. Japanese cars have taken a considerable market share of Mercedes cars. In India, government was providing Mercedes cars to its VIPs and VVIPs but now the place of Mercedes cars has taken by Toyota Corolla cars as these cars are more efficient and mechanically more sound.
New Product Development
R&D department of Mercedes is inventing new cars and also doing modifications in the old models to increase its market share and to attract the customers. The latest cars of Mercedes company are Bionic cars. In April 2004, Mercedes deliveries to customers a new super sports car Mercedes -Benz SLR
Sales
The Mercedes Car Group sold 1,226,800 vehicles in 2004 (2003: 1,216,900). For model life-cycle reasons, unit sales of the Mercedes Benz brand were 2% lower than in the prior year, however. smart's unit sales increased by 22% due to the launch of the smart for four .
Production Profitability
Costs
and
The Mercedes Car Group is in trouble after a long slide in vehicle quality and profitability. Sales are slumping. Production costs are too high, especially in its native Germany. The Smart mini car line is
Source: "Autos Insider." Can Mercedes Regain Luster 12 Nov 2005
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"DaimlerChrysler." 12 Nov 2005 http://www.daimlerchrysler.com/dccom/0,,0-5-7171-1-462679-1-0-0-0-0-0-70-7164-0-0-0-0-0-0-0,00.html
www.researchoptimizer.com bleeding money, and its Maybach super limousine is achieving half of targeted sales
2.3. Segmentation According to Kotler & Armstrong (2008) market segmenting- dividing a market into smaller groups of buyers with distinct needs, characteristics and behaviors, that might require separate products or marketing mixes.
Fig 3 Three building blocks of effective customer segmentation
Source:
IBM Institute for Business Value analysis, 2003
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Fig 4 Purposes and levels of segmentation
To get full value from segmentation and apply it correctly, companies must pursue comprehensive, dynamic segmentation. Customers today are on the move, always learning, constantly changing; companies have to know not only what customers look like today, but how their appearance will differ the next week and differ again the next month. On top of that, companies have to know how customers act, because, while first impressions reveal a great deal, appearances can be deceiving.
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Fig 5 Changing patterns: Compan y analysis and interpretation (illustrative)
Source: IBM Institute for Business Value analysis, 2007
Identifying and acting on customers‟ changing patterns is critical to beating competitors in the marketplace. Mercedes Benz‟ competitors have similar target segments;
understanding
and
acting first
on
chang ing
patterns
is
the
differentiator for Mercedes. According to Porter‟s theory (Kotler & Keller, 2006), by performing in low cost advantage, differentiation advantage or focus, a company could attain competitive advantage which other competitors could not match. One of the alternative approaches of competitive advantage is the company‟s ability to identify an advantageous opportunity and establish a superior market position (Miles, 2006, citing von Mises, 1966; Porter, 1985). Not paying attention to changing patterns could result in a company wasting
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www.researchoptimizer.com months and dollars targeting a customer who is no longer (or never was) profitable. In Mercedes-Benz case it would be wise to select behavioral as the approach to for segmenting consumer markets. From there the benefits sought must be carefully considered, and the following questions should be answered: W hat is the buyer looking to satisfy in the purchase of Mercedes cars?
Does it match his/her status?
Does it offer all the extras he/she is looking for? In answering these questions Mercedes Benz will be able to organize the range of Classes it offers from engine size to colors and standard features offered. The next step is to see whether the market segment has already been developed. In Mercedes Benz's case they have never ventured into the small car segment. The particular segment they plan to enter is already dominated by the Volkswagen Golf and the Renault Scenic. These manufacturers have much more knowledge in this segment which gives them the advantage. Currently, Mercedes Benz positions its products on various segments: lower medium, upper medium, executive, dual purpose, luxury saloon and specialist sports range. Thus, a luxury car may refer to an upper medium, executive, dual purpose, luxury saloon, or specialist sport car. These types of cars are the cars the owners may drive to the forecourt at a gala dinner and still highlight the owner‟s sense of prestige and status. Managing customer segment becomes difficult for the following reasons: Large
investment
(software,
hardware,
communication,
maintain
a
customer database), (Kotler & Keller, 2006). Database is not omnipotent, consumers are not always loyal “Market segmentation analysis must be done periodically because segments change” (Kotler & Keller, 2006, p. 266)
Marketers could not predict the consumers‟ future demands from the consumers‟ past preference shown in the historical database
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www.researchoptimizer.com The customer segment management lacks of the participations from both customers and employees. On one side, “employees find it easier to carry on traditional transaction marketing”, and reluctant to “use the available information” (Kotler & Keller, 2006, p. 165). The other side, customers are more concerned about their privacy and security. Undoubtedly, it is very hard to put the theory into practice. It is a long progress for marketers to execute an effective and actionable customer management, in which they should make great efforts.
2.4. Target market Target market is a set of buyers sharing common needs or characteri stics that the company decides to serve (Kotler & Armstrong, 2008). Mercedes-Benz is the global leader in the premium market segment. Mercedes Benz is targeting on high level income consumers in passenger car segment and because of its brand image, its products generally preferred by the consumers. Mercedes Benz a sophisticated car that would be best suited for individuals of age thirty and up who have successful careers. A luxury car brand is a „multi-segment‟ (Kapferer, 1995) brand that wants to cover all customer market segments. That is why Mercedes Benz target different markets, such as families(R Class), organizations (tracks, vans, buses, MPVs) and individuals. Target marketing for Mercedes involves three factors that need to be considered: The size and growth potential of each segment Their structural attractiveness The organization's objectives and resources Reputation for quality and safety The brand name (it has its own advantage to enter unknown segment)
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The consumers for Mercedes -Benz cars can be split into three categories: Fig 6 Mercedes-Benz‟ categories Category
Description
Income
Age
Expectation
The very rich
a small but
assets in excess of
over 50
high level of
strategically
$1million
service
assets of around
safety and
$100,000
luxury
significant group The rich
a far larger group
High net worth
a semi-mass
assets available for
25-35
superior
individuals
market
investment of
customer
$15,000-$100,000
value, competitive prices
Some individuals are interested in owning cars that cost a lot of money because they expect that others will perceive them as better than if they drove a less expensive car. Others consider the utility of a particular vehicle and prefer the perception that they shop for value rather than conspicuous c onsumption. The motivations behind why people purchase the cars they do are complex (see Appendix 2). 2.5. Market Attractiveness 2.5.1. Market Size Their biggest markets are the USA and the EU, which represent the highest sales figures over the last 5 years. These are extremely large markets where on a yearly level around 300,000 cars are delivered to each continent. 2.5.2. Market Growth
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www.researchoptimizer.com For Mercedes-Benz these markets have been growing consistently over the last five years. W ith the introduction of 15 new models it is clear the Mercedes -Benz has contributed to the growth in these markets. The growth rate per year has been around 6%. 2.5.3. Perceptual mapping. Positioning Perceptual maps have been a very useful tool for marketers in understanding product differentiation, (Dickson and Ginter 1987), product positioning and product preferences. Fig 7 Durability vs. Reliability
Figure 7 illustrates that Mercedes have to improve its position among other competitors. Mercedes can focus on expandin g into emerging into markets worldwide. Additionally they should invest in research and development in order to understand customer needs and increase the level of security, safety and reliability.
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Fig 8 Price vs. Quality
Mercedes always stays for high quality and luxury price, however in order to compete in current auto market they may develop a new strategy by decreasing costs of production or labor.
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Fig 9 Prestige vs. Performance
According to figure 9 Mercedes has a good place. The main purpose for them in this field is to sustain their position by investing in product development and research.
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3. Product mix 3.1.Product – is one of the components of the marketing mix. It is used to summaries everything that firms can offer to the target market, including goods, services, places or ideas (Kotler et al, 2005). Mercedes-Benz is dealing in the car industry, selling brand new cars from all classes. In comparison with their direct rivals, BMW and Lexus, Mercedes has the greatest variety of classes which gives them higher share of the market. There several aspects which reflect product: Develop and maintain a brand name (it is not enough to have just a product). A strong brand association can help companies attract pr ofitable and loyalty customers. During their 100 years of history, Mercedes managed to develop strong brand name, which in the year 2000 was rated as the best automobile brand worldwide by the Interbrand Rating Agency (T -s ystems, 2006). Quality, which also has an impact on product performance and consumer satisfaction. Mercedes-Benz is a firm with traditions. Every single Mercedes car can guarantee a high quality level of every aspect. In order to boost their profitability, Mercedes is concentrating their efforts on the issue of quality as well as efficiency and profitability. Design can be used as a tool by businesses for differentiating and positioning different kinds of product. A distinctive product design can add additional customer value.
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www.researchoptimizer.com The Mercedes cars‟ design aims to give both trendsetting and tradition design of their cars. Every new model is setting a new trend in design that smaller firms can follow. Features are another strategy used by companies to differentiate their product and in the same time stay competitive on the market Every new model of Mercedes can be equipped with features like SRS airbag, which is safety technological innovation, Smart key (theft -protective system), Hands free communication system, DVD navigation system and ot her innovative technological features. The company‟s aim is to provide additional level of luxury and safety. Product-support-services
can
be considered
as
a way
of
gaining
competitive advantage Operating in the car industry, for Mercedes is very importan t to assure its customers of heaving a quality after-sale service and warranties for their products. Mercedes-Benz has a top qualified service team at each local dealer. The company guarantees its customers that their car will be serviced by professionals, with genuine parts at competitive prices. 3.2. BCG matrix In order to understand Mercedes-Benz product portfolio Boston Matrix (see Appendix 3) was conducted. Figure 5 illustrates that Mercedes‟ portfolio for A, C, SL, M and S classes.
Mercedes portfolio is balanced even though certain
cars such as the A-Class and the M-Class are not performing well.
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Fig 5 Boston Matrix Step 1
Step 2
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Step 3
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Market Growth Rate
Boston Matrix for Mercedes Benz
Relative Market Share
3.2.1. Analysis of BCG Class
Position M Class
Question Marks
S class
Stars-Question mark
Description
Action
low market share, highgrowth market
Invest, increase market share, use Cash Cows to support required investments. Need investments for sales growth and market share to take the full position of Stars. Mercedes needs to expand product and
high market share, highgrowth market, market leader
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SL, C Classes
A Class
Cash Cows
market is not very attractive, low market growth rate, generates a lot of cash and helps the organization invest in other businesses
Dogs
low market share and operates in lowgrowth market
invest in R & D Maintain the strong market position and defend market share, does not need substantial investments to keep the market share Mercedes needs to divert this product, because it makes losses for company, and A class is not so popular to keep it in order to provide product range
4. Competitors The luxury car segment is a competitive industry where each rival has to constantly scan its competitors for any changes whether they're in price or in the product itself. The market is growing particularly in Mercedes -Benz case, and external competitors who do not hold a share in the luxury segment can attempt to offer substitutes in the goal of stealing away some customers. Mercedes-Benz is facing a very strong competition from Japanese cars and also from domestic cars. 4.1. Direct and Indirect competitors
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www.researchoptimizer.com Mercedes-Benz Main competitor is BMW , firstly because they compete directly in the luxury segment with their 5 series and 7 series models and secondly because they are of roughly the same size. Rivalry between them is high, but Mercedes-Benz has managed to keep them at bay through a strong sales policy that has lead to record sales particularly o ver the last two years. Other rivals include Jaguar, Audi and Rolls -Royce. However they are not in direct competition as they have targeted a different market segment that does not compare to that of Mercedes-Benz. The reason for this is that Mercedes Benz has made the standard in quality and safety, in other words it has set the standards for its competitors to match. Currently,
consumers'
attitude
towards
buying
luxury
cars
is
changing
dynamically. Consumers are more interested in saving money rather th an spending it for more expensive luxury cars. Due to the above it would be wise for Mercedes Benz to scan companies such as Honda, Nissan, Ford, who seems to be making a move in that direction that, could pose a future threat.
4.2. Porter‟s 5-forces In order to better understand the environment in which Mercedes Benz operates in it is crucial to perform the 5-forces analysis. This Strategic tool is used to investigate how the organization needs to form its strategy so that it can develop opportunities in its environment and protect itself against competition and other threats. Fig 6 Porter's Five Forces
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Source: http://www.justice.gov/atr/public/hearings/single_firm/docs/219395_8.gif
Threat of New Entrants The threat of new entrants is very low in the automobile industry. The industry is very mature and it has succ essfully reached economies of scale. In order to compete in this industry a manufacture must be able to:
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www.researchoptimizer.com Achieve economies of scale Mass-produce the automobiles Invest extreme amount of capital in research and development Find distribution channels
Threat of Substitute Products The second is the threats from substitutes, as there are many make and model of other premium branded cars, hence, Jaguar, Audi, BMW , Porsche, Lexus, etc. Some of the substitutes are walking, riding bike or taking a train. Subs titutes products all depend on the geographic location of the consumer. In some cities such as New York or Chicago, a car is not as necessary. In cities such as those, the subway is the most effective means of transportation. Bargaining Power of Buyers The third force is the threats from the bargaining power of buyers. It is strong for both Mercedes Benz and the entire automobile industry with a large number of alternative suppliers, hence, the aggressive pricing strategy. This results in a very strong competitive rivalry in the industry. W ith around 25-30 dealerships in each country or state Mercedes Benz reaches all its customers, through an excellent network.
Bargaining Power of Suppliers Finally the threats from the suppliers bargaining power, this is fairly low in the automobile industry, due to dual sourcing strategies, using a range of alternative sources of supply for parts. There are so many parts that are used to produce an automobile, that it takes many suppliers to accomplish this. W hen there are
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www.researchoptimizer.com many suppliers in an industry, they do not have much power. Mercedes Benz holds excellent relationships with all its suppliers this is due partly to the scale of operations and the total expenditure on suppliers. This is evident from the collaborative project they undertook with Bosch (the brake manufacturers) in the creation of the ABS (Anti-Lock Braking System). In the car manufacturing industry suppliers are usually large in number, and Mercedes Benz recognizes this which is why they manage an effective and friendly relationship with all suppliers. This can be seen by the economic downturn of the late nineties when Mercedes Benz had asked if suppliers could reduce their prices, which they all did. Intensity of Rivalry among Competitors Rivalry among the competitors is very strong is this industry. The major competitors are so closely balanced that it increases the rivalry. In order to gain market share in the automobile must gain market share by taking it from their competitors. One of the other reasons there is such high rivalry is that there is a lack of differentiation opportunities. All the companies make cars, trucks or SUV‟s. The competitors are compared to one another constantly. The price, quality, durability, and many other aspects of differ ent manufacturers are greatly taken into consideration when deciding what type of vehicle to purchase. W hen the different manufacturers advertise they even compare their products to their competitors.
4.3. Strategy Mercedes Benz marketing strategy was once centered on the safety, luxury, and precision engineering of its cars, but due to increase competition in the luxury car industry and changing consumer attitudes about the Mercedes Benz brand
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www.researchoptimizer.com that strategy has changed. Now their marketing strategy is more life style oriented and is focused more on presenting the more fun loving, approachable, and energetic side of Mercedes Benz. The evolution of Mercedes Benz‟s marketing strategy can be directly connected to the expansion of its target market, which now includes persons twenty five to thirty five years old as well as its initial targets the baby boomers. In order to provide superior customer value to its target market Mercedes Benz has found it necessary to expand its product line up, provide more competitive prices, increase communications with its target market, maintain accessibility to consumers, and continue its excellent customer service. Mercedes-Benz‟s current strategy is built on four central pillars: global presence leadership in technology strong brands broad product range
5. Analysis Methodology and findings 5.1 Methodology The report begins with a historical overview of the automotive industry. Company is analyzed in terms of their market position, their financial situation, and their management strategy. W here useful, specific statistics have been
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www.researchoptimizer.com incorporated into the analysis including: market share, revenues, net expenses, net income, market, value added and number of models. This is followed by an analysis of the industry‟s struc tural characteristics using Porter‟s 5 Forces Model as a framework, which provides an understanding of the automotive industry as a whole in its current state. The examination of the industry as a whole and of some of the major players in the industry provides a good framework within which insightful conclusions can be derived about the current state and future of the Mercedes Benz. The report concludes with the recommendation section, which provides a prediction of the near-future success of each of the company.
5.2. Conclusion and recommendation Accordingly, the luxury car market overall is currently undertaking a social change with luxury brands seeming less remote, less different, and less exclusive with the quality of life improving. As a result, increasing competition between makes has intensified the importance of brand identity. As product standards continue to rise, the perceived image of a car make plays a key role in the buying decision. Mercedes -Benz must develop attributes and values that reflect changing social values which influence buyers emotionally, in order to maintain its position in different regions of the global market. Prestigious luxury brands like Mercedes do not need to expose customers to frequent advertisements. In current practice, the necessary occasions take plac e only when new models are introduced. Such top luxury car manufacturers are now attempting to level up their brand with the post-modern approach namely „brand as company‟ and „brand as policy‟. At this stage, marketers are aware of consumer cynicism and cautious about their actions which could affect customer and public values positively or negatively. Mercedes need to preconceive their physical products as products and services (luxury cars, after sales services and warranty) and reassure their dealers to create, maintain, and build customer values. W hile all things being equal, it is the era of the service industry at which
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www.researchoptimizer.com companies can gain a competitive edge by focusing on customer value -building an actual „emotional bond‟ with the customers (Butz and Goodstein, 1996 ,p 63). Mercedes Benz revenues have steadily increased over recent years and demand for its vehicles has also been on the rise. These positive aspects suggest that Mercedes Benz is in a good position for future success. W hether or not the future plays out according to these recommendations will depend on factors both internal and external. Regardless, many of the companies will face major turning points in their corporate existence over the next five years; the near future will almost surely be a defining period for the automotive industry. Mercedes-Benz is known to be a status symbol of high class consumers. Middle class consumers feel rich if they buy Mercedes' cars. Currently, consumers are more conscious for the performance and price of cars they are going to buy. Although the company is making many changes in its price, product and promotion strategies but still there is lot to do to attract the consumers and to increase its market share. The components of marketing mix (product, promotion, place and price) need to be coordinated and consistent with a company's marketing mission. The company should take regular feedback from its consumers to know their exact demand and needs. The buying behavior of the consumers is changing very fast. The company can conduct surveys to know the attitude of the consumers while buying a car. Mercedes -Benz should also open spare parts warehouse so that consumers can easily get the spare parts of Mercedes cars. The cost of spare parts should be affordable by the consumers.
5.3. Conclusion W ith their more than 100 years of history, Mercedes -Benz has managed to build a brand name that might be considered as their only heritage. Trough years, the company succeeded in maintaining the traditions of luxury and safety cars in combination with trendsetting designs and new technological innovations. At the present time, the car industry is flooding the market. This increases the
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www.researchoptimizer.com managerial attention in operating in such environm ent of great competition. But whatever managerial mistakes the company had made or will make in the future, it will still be Mercedes.
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