Porter Generic Strategies and Strategic Group free essay sample

The report will undertake a strategic analysis of Global Automobile Industry. Relevant theoretical frameworks and concepts will be applied to the automobile industry in order to make better understanding of its strategies. Firstly, the report will provide background information such as industry definition, competitors and history outline. It will also include reasons for undertaking this research. Secondly, strategic analysis of Automobile industry will be conducted with respect to Macro-environment (PESTEL) factors. In addition, impact of macro-environment factors on consumer demand and growth in the industry will be evaluated. Main key drivers among the PESTEL factors will be identified and explained. Thirdly, the report will conduct analysis of the Automobile industry on the basis of Porter’s five forces (Industry analysis) and implications for the same will be provided. In the next section, strategic groups operating in the Automobile industry will be identified and analyzed. A Strategy Canvas will be formulated and blue ocean space will be suggested. Lastly, generic strategy as pursued by strategic group will be explained along with its response to macro and industry forces. The reports will conclude with a summary of key findings. 2. INTRODUCTION 2. 1 Rationale for the research The research will focus on strategic analysis of Automobile Industry. Automobile Industry is one of the most prospering industry having footprints globally. This research is being conducted to gain insights to strategies adopted by a global industry in order to fulfill customer and macro environment needs. It would be worth knowing how a huge industry behaves in different environments. This research is valuable to companies or individuals looking to expand into automobile industry. Through this report, they can get familiar with different strategies implemented by companies to remain competitive. 2. 2 Automobile Industry And Its History Automobile industry is defined as number of companies involved in production, design, development, selling and marketing of motor vehicles. Many companies in this industry are also involved in manufacture of components such as engines, bodies and batteries. Key competitors in automobile industry include Toyota, General motors, Ford, Hyundai, Volkswagen. Outline of Automobile industry history is as follows:  1769- Automobile powered by steam engine designed by French engineer Nicolas J. Cugnot. 1886- this era is regarded as birth of modern automobile. A German named Karl Benz manufactured three-wheeled Motor wagon. 1900s- In 1908, Ford Company led by Henry Ford created the ‘Model T’, being the first car sold to average families. William C. Durant established General Motors. 1910s- Ford set up an assembly line of mass production of Model T selling at an affordable price. In 1914, four cylinder based Dodge ‘Model 30’ was manufactured.  1920s- this stage is regarded as growth stage with many people purchasing their first car. In 1925, Chrysler Corporation was established with many other small companies being set up. 1930s- Due to 1920s great depression, there was a decline in sales growth. 1940s- During Second World War, there were advances in technology with vehicles being manufactured for military purposes. 1950s- More technological advances in cars were seen. 1960s- Automakers shifted focus to safety features. The first company to invent seat belt in its all series as a standard feature was Studebaker- Packard.  1970s- Due to oil crises, focus of automobile industry shifted to production of fuel-efficient cars. After 1980s- Car production became global with companies enjoying benefits of low cost labors in India and China. Currently, Automobile industry is in growth stage as companies are in process expanding market share and differentiating their offerings. There is more room for technology improvement and product features upgrade. 3. STRATEGIC ANALYSIS 3. 1 METHODS OF DATA COLLECTION This report is based on secondary sources of data as it best fulfills the requirements of the research. Mostly, Qualitative data is used to answer all the sections of the report as the research is based on theoretical strategies. Theoretical frameworks and concept stated by relevant authors have been used. For this, related articles as written by concerned authors are used. The research is based on articles accessed via Google scholar and concepts have been extracted from Google books in order to form basic knowledge of various strategies or theoretical frameworks. Other famous books reviewed by Harvard and Oxford are also used for the same purpose. The researcher has also made use of industry reports such as Data monitor and KPMG survey report. In terms of media articles, quality sources such as wall Street journal and Economic Times are used. 3. 2. 0 MACRO-ENVIRONMENT ANALYSIS Macro environment refers to the context in which the industry or a company operates. These factors are uncontrollable which influences industry’s strategic decision-making and implementation. PESTLE (political, economical, social, technological, Legal, environmental) framework is used to assess the industry’s external macro environment. Political/Legal According to Henry (2008), political factor includes taxation rule, government regulations, and government stability that may influence the investment and working of an industry. Various laws are implemented for employment, health and safety, etc. and these laws various from one nation to another. The automobile industry faces strict regulations from the government in various fields such as taxes, trade restrictions, gas emission control, vehicles recycling, vehicle safety and noise pollution control. In addition, there are government standards like theft prevention applicable to engines, equipment and new vehicles manufactured for sale in Unites States, Europe, etc. (Datamonitor Industry profile, 2010). As a result of growing environmental concerns, government has also imposed strict regulations on manufacturing facilities pertaining to water discharges, air emissions and usage and discarding of harmful materials. Thus, Political and legal factors can be considered negative for the industry because of heavy taxation, strict laws being an obstacle to auto industry activities and moreover this varies from home country to host country. Economical Economic factors refer to monetary policies, inflation, employment rate and price of raw materials. There has been a recent price hike in fuel, which has shifted demand to fuel economical or hybrid cars. For example, In India, there has been decrease in sales of petrol cars due to recent price rise. There will be more demand for diesel cars that will affect entry-level car’s business which are mostly petrol driven (Economic times, 2012). Economic factors can pose a negative impact on automobile industry due to sudden activities such as recession that leads to decrease in vehicles sale. However, It can also be considered positive due to favorable factors like urbanization, increase in household income, growth in economies particularly in developing nations such as India and China, which accounts for more population. Social Dransfield (2001) states that numerous changes take place in a society that affects business in some or the other way. It can be age, population, buying preference or employment. In developing countries, car is regarded as a symbol of social status as compared to usage. Some consumers are more concerned about the design. There has been a shift in consumer preference due to awareness of environmental problems and are prompted to buy hybrid cars which are environmental friendly. Social factors are positive as demand for more choices (styling and body shape of car) is continuously growing. This leads to development of niche (sub segments) market for vehicles. Technological Due to the influence of other macro factors (political, environmental), technology for electric and hybrid vehicles is developing. Research is underway for increasing battery capacity. Some countries are developing their infrastructure to set up battery charging stations. In order to attract safety conscious consumers, automakers have developed: New airbag: Sweden’ s Autoliv (safety technology suppliers) have developed shoulder straps with built in air bag for extra safety Pedestrian’s safety: New system installed in cars to spot people on foot in dark to avoid accident. Fuel efficiency: Addition of more gears to transmission Automated driving (Wall street Journal, 2013) Thus, Technological factor is considered as positive due to recent developments in automobile industry. Environmental Auto industry is concentrating on the production of zero emission cars for the safety of environment. There are various regulations for gas emission and disposal of harmful materials. Environmental regulations are being imposed on original equipment manufacturers (OEM) for fuel economy and gas emissions (KPMG International, 2010). Moreover, these restrictions vary globally from one region to another adding complexity to the various vehicles manufactured by OEM as they have to regularly update their product assembly in order to meet various regional regulations and hence this increases manufacturing cost. In this case, Environmental factor is negative for the industry. 3. 2. 1 IMPACT OF PESTEL FACTORS ON GROWTH AND CONSUMER DEMAND Social, Economic and Environmental factors have a huge impact on growth and consumer demand in automobile industry. With the growing awareness of environment and health safety, auto industry is focusing on hybrid cars with the help of government incentives. Moreover, fuel economy has also prompted buyers to opt for green products. For example, the recession adversely affects consumer demand, as people tend to save money for essential necessities. Sturgeon and Biesebroeck (2010) states that the worst impact of economic crises was faced by US auto assembly line and parts manufacturing units in North America, some of which were permanently closed down. Also, vehicle sales declined in the UK in may 2009 by 24. 8% as compared to the same month in 2008 (Institute of motor industry, 2010). Currently, the consumer demand for vehicles has shifted to developing economies as mature markets are facing recession and are subjected to urban driving restrictions. Emerging economies are more focused in purchasing luxurious cars as compared to matured markets, which are opting for green cars (KPMG Global Automotive Executive survey, 2013). The automobile industry is targeting expanding middle classes in BRIC (Brazil, Russia, India, China) due to more opportunity. The graph (Figure 1) clearly shows increase in vehicle sales and production in developing markets while the same decreasing in developed markets. This influence can be contributed to Economic factor affecting Auto industry. Figure : Vehicle Sales and production in developing and developed markets (Source: KPMG Survey, 2013) 3. 2. 2 FUTURE KEY DRIVERS FOR AUTOMOBILE INDUSTRY The researcher suggests that technology and economic factors are the two key drivers as compared to other macro factors. Any industry is successful only if consumer demand is there. Consumer demand is influenced by income and economic growth. In a healthy economy like BRIC, industry will grow more rapidly as compared in matured markets. Hence, Economic conditions play a major role in future growth of automobile industry. Technology helps in various ways such as reducing production cost, being competitive, providing new solution and creating new segments. For Example: Production of electric car due to technology has led to birth of new market segment and accounts for more sale. 3. 3. 0 INDUSTRY ANALYSIS 3. 3. 1 FIVE FOURCES ANALYSIS OF AUTOMOBILE INDUSTRY AND ITS IMPLICATIONS According to Porter (2008), there are five forces that shape industry competition such as Threat of new entrants, Rivalry among existing competitors, bargaining power of suppliers, Bargaining power of buyers and Threat of substitutes (Figure 2). Figure : Porters five forces Threat Of New Entrants Threat of a new entrant to automobile industry is low because of many barriers to entry. Small-scale investment cannot be fruitful for someone to enter automobile industry. There are huge costs associated with startup production plan and developing technology. Furthermore, it is difficult for a new entry to establish network with dealers and distributors, who prefer a known brand name having more consumer demand in the market. There are already numbers of well-established brand names present in Automobile industry like Audi, Toyota, Mercedes, BMW, and Honda etc. The top players such as GM motors hold licenses to copyrights, many patents and trademarks (Datamonitor, 2010). Bargaining Power Of Buyers In Automobile industry, buyers are large organizations that are financially strong. There are many players in automobile industry. Buyers are dominant when they have many options to choose (Porter, 2008). However, this is weakened by brand strength of top incumbents, as buyers are likely to deal with a well-established name in order to boost its sales. Buyer power can be considered as moderate. Threat Of Substitute Or Products Used cars can be considered as major threat as a substitute. Consumers look for more affordable solutions and opt for used cars, as they are cheaper than new ones. However, customers in emerging economies give preference to social status earned by buying a new car. Transport links are also improving in many countries but this won’t have much effect on consumer buying pattern. Overall, threat of substitute is weak. Bargaining Power Of Suppliers Raw materials in Automobile industry include steel, wood aluminum etc. In addition, it also comprises of assembled components, transportation, energy, etc. These suppliers are generally big companies who supply inputs to wide variety of Industries and their operation is not limited to just Automobile industry. Hence, this makes them powerful. However, Also Automobile players are not dependent on any one supplier as they purchase raw materials or services from number of suppliers. Thus, bargaining power of suppliers is moderate. Rivalry Among Existing Competitors Due to presence of number of players in automobile industry, rivalry between competitors is high. Customers have wide variety of options to choose from. Players have to remain competitive to meet customer demands. Factors such as increase in raw materials, cost in production, cost in developing technologies put pressure on incumbents. 3. 4. 0 STRATEGIC GROUP ANALYSIS 3. 4. 1 STRATEGIC GROUP IN AUTOMOBILE INDUSTRY Strategic group analysis helps in understanding competitive structure of a broad industry. A strategic group is defined as group of firms or companies that has following characteristics: Pursuing similar competitive strategies. For Example: using similar price positioning strategies, using same distribution channels. Similar characteristics in terms of aggressiveness and size. Having same resources and competencies. For example, global existence, RD, brand relations and logistics ability. (Aaker and McLoughlin, 2010) In Automobile industry, there are three strategic groups namely Ultra luxury, Luxury and mass market group. Two dimensional graph using prestige and price positioning is shown in the figure 3. Ultra luxury strategic group such as Bentley, Ferrari and Lamborghini follows similar strategies focusing on narrow segment of customers while luxury cars group such as Audi, BMW provides differentiated and valuable features to more customers as compared to Ultra luxury. Mass-market strategic group such as Toyota, Ford provides services at an affordable cost to high number of customers. Firms tend to compete with each other in their respective groups. Figure : Strategic group (Peng, 2012) 3. 4. 2 STRATEGY CANVAS AND BLUE OCEAN STRATEGY Strategy canvas is a tool proposed by W. Chan Kim and Renee Mauborgne in their famous book related to Blue ocean strategy. Strategy canvas shows range of factors on which the firms competes. In simple words, it shows how competitors in an industry attract customers or the way customers buy the product or service. The strategy canvas (Figure 4) done on main competitors of Automobile Industry shows various factors on horizontal axis and vertical left side represent offering level. Figure : Strategy canvas of main competitors (Strategic learning software, 2013) For Mass-market strategic group (Ford, Honda, Hyundai, Toyota), the two critical success factors are mileage and price as shown in strategy canvas. They invest heavily on manufacture of fuel-efficient cars and low cost in order to attract customers. Mass-market buyers look for cars those are cheaper to buy but at the same time have good fuel mileage. For Luxury strategic group (Audi, BMW, Lexus, Mercedes), two factors for success are safety and style. Customers in this group looks for safety as well as style, these customers have more money to spend and therefore they look for all round package, which means, a company that offers almost everything. Luxury group competitors like Audi, BMW Mercedes, try to offer a complete package to its customers. For Ultra luxury group, two factors critical for success are style and horsepower. Competitors attract their customers by offering the most powerful engines. Customers in this group also like to stand out of the crowd and thus they go after the most stylish car. Price is the last factor they are concerned about. According to Kim and Mauborgne (2005), Blue ocean strategy means creating uncontested market place where competition becomes irrelevant instead of competing in existing market place. It can be noticed from Strategy canvas that competitors within a particular group competes against each other on same factors. In mass market, Ford, Honda, Hyundai and Toyota follow same path to attract customers by offering them value car at affordable price  with good mileage and low maintenance cost whereas in Ultra Luxury segment, Prices and maintenance cost of the car are the least competing factors for car manufacturers in this group. However, there are customers who want a powerful and stylish car as offered by Ultra luxury group but at the same time they want to purchase it at a price offered by mass-market group. So, we can see there is a g ap in the market where a new space or category can be born by merging style, horsepower and low cost. 3. 5 BUSINESS STRATEGY CHOICE There are main three generic strategies namely Cost Leadership, Differentiation, Focus strategy (Focus low cost and Focus differentiation) as seen in Figure 5. Focus low cost strategy caters to demands of narrow segment with low cost as compared to remaining market while Focus differentiation strategy caters to demands of narrow segment competing through differentiated services/products (Mellahi, Frynas and Finlay, 2005). According to Porter, the generic strategies are proposed to strengthen principal firm’s position relative to the Porter’s five competitive forces (Peng, 2012). Figure : Generic strategy (Google image) Mass Market strategic group follows cost leadership strategy that competes on low cost providing better value to average customers. This group pursues cost leadership strategy with functional areas such as logistics, manufacturing services and materials (Figure 6). For example: Nissan pursuing cost leadership strategy by its alliance with Renault by reducing production cost under Renault Nissan purchasing Organization (Nissan Annual report, 2008). Luxury strategic group pursues differentiation strategy providing differentiated and unique features to customers whose main functional areas are RD, Marketing, sales. These firms invest hugely on brand recognition, innovative technologies and quality. Ultra Luxury group pursues focus strategy, which focuses on a particular or narrow group or special of customers who are ready to pay high prices. Figure : Funtional areas of strategic group Cost Leadership strategy doesn’t imply selling products at low price but is concerned with selling products at an average price and enjoying above average returns achievable through low cost production. Use of advanced technology has made this possible. With firms pursuing low cost strategy, they can build threat to a new entry and also reduce threat of substitutes (low cost used cars). According to Miller (1988), Cost leadership strategy can be best pursued in stable and predictable environment whereas differentiation strategy is best suited to uncertain environments with the use of liaison devices and technocrats. Differentiation strategy can create further barriers to potential new entrants due to its excellence in innovation, marketing and brand power. In addition, threat of substitute is lowered because of customer loyalty to the luxury brands. Buyers have less negotiating power due to absence of close choices or alternatives. However, differentiation strategy firms can face risk in case of recession because customers can become price sensitive and value price over differentiation (unique features). A firm following Focus strategy has limited segments and thus enjoys more protection from rivalry. High degree of customer loyalty and efficient core competencies poses a threat to new entrants. As it focuses on a specialized segment, it has more degree of protection against substitutes. 4. CONCLUSION Automobile industry has to obey various government regulations, legal requirements and environmental norms and this varies from one region to another. As compared to other macro factors, Technological and Economic factors will be the drivers for Automobile industry. Innovation is critical to success of automobile industry in terms of upgraded automobile features, production facilities and competition. Competition is high in automobile industry with the presence of many players. Threat of a new entrant is low to incumbents as it involves huge investment in production and technology. Customer loyalty also plays a vital role in automobile industry. At present, there are three strategic groups operating in auto Industry following different generic strategies: Mass-market pursues cost leadership; Luxury group follows differentiation and Ultra luxury strategic group pursues focus strategy. Companies in a particular strategic group tend to compete on the basis of same factors such as price, maintenance cost, service, etc. Generic strategies also influence industry forces in automobile industry.