1 university of nottingham competitive strategies between formula
TRANSCRIPT
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University of Nottingham
Competitive Strategies between Formula 1 Manufacturers in the Global Mass-
Market for Road Cars
Mark Robinson
MA Corporate Strategy & Governance
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Competitive Strategies between Formula 1 Manufacturers in the Global Mass-
Market for Road Cars
by
Mark Robinson
2007
A dissertation presented in part consideration for the degree of MA Corporate Strategy & Governance
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Abstract
This paper employs qualitative secondary source analysis to examine competitive strategies between those road car manufacturers that are also Formula 1 engine manufacturers. Particular emphasis is placed on Porter’s (1980) generic strategies, the resource-based view, and the role of corporate culture and brand reputation. The external market in which these firms compete is examined. Then the internal, historical strategic development of each of the firms is reviewed. This allows future strategic recommendations to be proposed for each firm. Findings stress the importance of responding to the need for low emissions vehicles, the external threat of the large Asia-Pacific firms, and the importance of fostering a company’s brand reputation.
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Contents
1. Introduction 5
1.1 - Competitive strategy 6
1.2 - Formula 1 manufacturers 6
1.3 - Mass-market 8
1.4 - Road cars 9
1.5 - Structure and aims 9
2. Literature Review 11
2.1 - The nature of competitive advantage and Porter’s five forces model 11
2.2 - Porter’s generic strategies 18
2.3 - Porter’s value chain 23
2.4 - The resource-based view 26
2.5 - General literature on the car industry 31
3. External Analysis 36
3.1 - Competitive space defined 36
3.2 - Historic evolution of rivalry 40
3.3 - Market shares defined 41
4. Internal Audits 45
4.1 - Toyota 45
4.2 - Honda 49
4.3 - Renault 53
4.4 - Mercedes-Benz 56
4.5 - BMW 59
4.6 - Summary tables of internal firm findings 64
5. Proposed Strategies & Conclusions 66
5.1 - Toyota 66
5.2 - Honda 68
5.3 - Renault 69
5.4 - Mercedes-Benz 71
5.5 - BMW 72
5.6 - Concluding remarks 74
6. References 76
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Chapter 1 – Introduction
Formula 1 racing is a highly competitive sport that relies on a massive technology
input from car chassis constructors and engine manufacturers in order to improve the
success rate of a driver and team. The top teams have budgets that run into several
hundred millions of dollars, and there are large levels of expenditure on research and
development (R&D) in order to create innovative new technologies that attempt to
improve a car’s lap time by mere tenths of a second. This strategic approach certainly
differs from the commercial road car side of the Formula 1 manufacturers, where
there is no sponsorship and firms must weigh-up combinations of strategic approaches
in order to capture market share from their rivals and maintain profitability.
In this project, I aim to analyse the strategies employed by those mass-market road car
firms that also have an involvement in Formula 1 racing. This will enable to me to
ultimately suggest future strategic directions for these firms that will enable them to
protect, maintain or increase their current shares in this market. It is important to
stress that my analysis centres on firms that are producing road-going automobiles.
The Formula 1 element of the question isolates what I feel is a special case of
marketing. Those road car firms that have an involvement in Formula 1 racing
experience the global marketing effects of this sport: they are automatically associated
with the prestige, glamour, celebrity and technological aspects of the sport. The sport
is considered by manufacturers to be a showcase for their technological capabilities,
as well as signalling the reliability and power of their engines. Hence, as we shall see,
this competitive rivalry is one that spills over into the mass market for road cars
between Formula 1 engine manufacturers. I believe that it is an intriguing question to
examine the nature of road car competition between this unique set of firms. I begin
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by defining the terms of the question posed more precisely and then explain the
outline of this paper below.
1.1 – Competitive Strategy
The term “competitive strategy” refers to any plan or method that achieves a
particular aim or result that creates an advantage for an agent over its rivals. The
nature of competitive strategy is examined more closely in sub-chapter 2.1.
1.2 – Formula 1 Manufacturers
The typical nomenclature of Formula 1 teams blurs the distinction between Formula 1
constructors and Formula 1 manufacturers. Hence I provide clarification:
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Table 1.1.2 – Formula 1 teams as constructors and manufacturers1
Team Name Chassis Constructor Engine Manufacturer
McLaren-Mercedes McLaren Mercedes-Benz
Renault F1 Renault Renault
Scuderia Ferrari Ferrari Ferrari
Honda Racing Honda Honda
BMW Sauber BMW/Sauber BMW
Toyota Toyota Toyota
Red Bull Racing Red Bull Renault (customer)
Williams Williams Toyota (customer)
Scuderia Toro Rosso Toro Rosso Ferrari (customer)
Spyker F1 Spyker Ferrari (customer)
Super Aguri F1 Super Aguri Honda (customer)
Constructors are involved with the development of the cars’ bodies, aerodynamics,
electronics, and suspension systems etc. Manufacturers provide the cars’ engines and
their associated devices (gearboxes, traction control systems). Whilst constructors and
manufacturers work closely, and even overlap, on many mechanical engineering
tasks, for the purposes of this paper I wish to examine only Formula 1 manufacturers.
This is because, as per Table 1.1.2, not all the constructors have road car divisions
(Red Bull, Toro Rosso and Super Aguri do not) and so would be excluded from the
analysis. However, when viewed as manufacturers, all six engine suppliers have road
car departments and so can be potentially considered for strategic analysis.
1 Order of presentation based on 2007 season car number rankings.
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1.3 – Mass-market
The term “mass-market” has a wide range of definitions but is generally regarded as
referring to those products that are produced in large quantities and designed to appeal
to the widest range of consumers. With respect to the road car divisions of the six
Formula 1 manufacturers, Mercedes-Benz, Renault, Honda, BMW and Toyota all
produce wide model ranges to appeal to a broad range of consumer demand. They
also each sell millions of road cars (see sub-chapter 3.3) and therefore can truly be
considered mass-market producers. However, Ferrari is renowned for pursuing a
highly differentiated strategy. It aims to produce limited numbers of high cost,
supremely technologically advanced road-going sports cars and focuses on just one
segment of consumer demand: that of superlatively luxury sports cars. As a result of
these strategies Ferrari sold a mere 5,671 cars in 2006 (Ferrari 2006 Annual Report)
and so cannot be considered mass-market. Since Ferrari does not compete in the same
market as the other five firms, it will be excluded from my analysis from hereon.
Hence the competitive strategies of the mass-market road car producers Mercedes-
Benz, Renault, Honda, BMW and Toyota will be examined here. Increasing levels of
globalisation since the 1970s mean that these firms are now globally organised. Hence
the founding nation state of each company is not a useful element for analysis and a
global stage should be considered. Furthermore, as Formula 1 is a global sport with
annual races in seventeen different countries around the world, the global market for
Formula 1 manufacturers’ road cars will be examined in this paper.
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1.4 – Road Cars
A “car” or “automobile” is typically a four-wheeled vehicle that is driven by an
internal combustion engine, with space for up to eight passengers and luggage, and
that is designed to be driven on ordinary roads. Hence I will examine competitive
strategies between these firms only in the market for road cars; excluding
motorcycles, vans, trucks, lorries, buses and aeroplanes.
1.5 – Structure & Aims
In order to ultimately suggest future strategic directions for the five firms in question,
I must first thoroughly acquaint myself with the theories underlying the nature of
competitive strategy and competitive advantage, the type of industry in which they
compete, the nature of the strategies that a firm may employ, and a firm’s potential
sources of strength. This is achieved in the literature review found in chapter 2, which
highlights the fact that a combined external and internal analysis approach is required
to reach a successful outcome. Therefore, I next examine the external market in order
to define the competitive space in which these firms operate. This also allows me to
allocate market shares in terms of unit sales as a proportion of the total market. With
this information I can assign a position (leader, follower etc.) to each firm in this
market. Next, I examine the internal structure of each firm by looking at their
historical evolution in order to assess strengths (resources), weaknesses and
sustainability. This enables me to justify their current strategic positions. Finally this
leads on to a conclusion in which I propose a new, future direction for competitive
strategies for each firm; in order to protect or improve their market share and
profitability. We shall see that several key issues emerge, namely: alternative fuels,
the threat from new Asia-Pacific firms, and the importance of brand reputation.
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Data for my analysis comes from a variety of secondary sources: academic books,
journals, and the companies’ and financial news websites.
I begin by reviewing relevant literature to the business strategy area.
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Chapter 2 – Literature Review
In the following pages I aim to define some of the theories that are most relevant to
the type of strategy analysis present in this paper. These are Porter’s (1980) Generic
Strategies, Porter’s (1985) Value Chain, and the Resource Based View. I choose these
theories since, as explained in more detail below, Porter’s (1980) and (1985) works
represent prominent formulations of industrial organisation economics that permit the
theoretical modelling of firm behaviour. The resource-based view is a popular
alternative that uses an internal approach to examine firms’ strengths and hence
strategies. I then examine relevant journals to determine the success of each of these
theories at predicting reality. This will prove useful in the chapters on external and
internal analysis of the firms in question; since an examination of the grounding of
their current strategies may be found in these theories. I finish with a review of the
literature that relates to the motor industry in order to assess existing contributions to
this general research area.
However, I wish to begin with an introduction to the nature of competitive advantage,
and how this advantage may arise for a firm. I then provide a brief overview of
Porter’s (1980) five forces model, with the aim of estimating industry profitability for
the road car sector.
2.1 – The Nature of Competitive Advantage & Porter’s (1980) Five Forces Model
The term ‘competitive advantage’ can be thought of as the gain, profit or benefit that
arises from producing or providing a good or service that is ‘better’ than one’s rivals,
either in terms of perceived value, or cost of production. Lancaster (1975) explains
that goods and services each possess a collection of attributes that yield them a value.
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This value depends on both the value added through the production process and the
extent to which the offerings of the good or service match consumer wants or needs.
Lancaster (1975) states the effect of consumer preferences more formally:
Suppose, for example, the existing resources can be used to produce a unit of
either good G1 (embodying 2 units of characteristic z1 and 1 of z2) or good G2
(1 unit of z1, 2 of z2). If there is a single consumer whose preferences are for
high z1-content, a lower welfare level will be attained by producing G2 than by
producing G1. In this case, G2 represents inefficient transfer relative to G1 [and
vice-versa if z2 is preferred] (p. 568).
From this theoretical approach I infer that firms will seek to tailor their products or
services to match consumer preferences. This is observed in the automobile industry
where firms are known to produce entire model ranges to service a particular
consumer want, e.g. the “tall” SUVs (sports utility vehicles) and mini people-carriers
that fulfil drivers’ desires for personal safety. Hence this concept may lead to a degree
of product differentiation between firms in the same market with a different
perception of consumer wants.
Reed & DeFillippi (1990) provide an alternative cause for the presence of competitive
advantage. Citing Hofer & Schendel (1978) and Selznick (1957) they explain that
firms may focus on their core skills, or competencies, to gain an advantage over
rivals. ‘Competencies’ refer to “the particular skills and resources a firm possesses,
and the superior way in which they are used” (Reed & DeFillippi, 1990 p. 90). By
concentrating on areas in which they have a particular competency, firms achieve a
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“unique position” (Reed & DeFillippi, 1990 p. 88) in the marketplace relative to
rivals, and so obtain a competitive advantage. For example, Land Rover focuses on
the production of 4x4 off-road vehicles. The causes of a given firm’s particular
competencies are typically intangible; and this causally ambiguous nature means that
rivals cannot easily mimic the firm’s competencies or competitive strategies.
The notions of differentiation and competency focus, along with cost reduction
methods, are examined in more detail by Porter’s (1980) generic strategies in the next
sub-chapter.
Porter’s (1980) five forces framework models the five most significant competitive
rivalry forces in an industry in order to determine that industry’s profitability. This is
a proxy for the attractiveness of the industry for potential entrants. The forces are: the
rivalry between existing firms in the industry, the bargaining power of suppliers, the
bargaining power of consumers, the barriers to entry (and hence the threat of potential
entrants) and the threat of substitute industries.
Porter’s five forces model has its roots in the Bain/Mason industrial organisation
paradigm, which takes a structure-conduct-performance (SCP) approach in order to
explain why some industries are consistently more profitable than others. The SCP
model suggests that consumers, via their buying decisions, instruct firms’ strategy
decisions. It is the structure of the industry that determines average industry
profitability; this structure is determined by the number of firms and their size, the
level of entry and exit barriers to and from the industry, the level of product
differentiation, and the availability of information on buying and selling preferences.
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Fewer firms, higher barriers, more differentiation and poorer information all allow
firms to increase profitability.
However this Bain/Mason SCP approach has several key flaws. Porter (1981)
explains that this approach is industry, rather than firm, based, and so treats all firms
as being homogeneous. It also does not account for exogenous changes that may
occur over time and affect industry and firm performance. But Porter (1981) suggests
that the static, unidirectional nature of SCP economics can be relaxed in order to
include the effects of cost saving through joint production (economies of scope) and
cost saving through cumulative production (learning curve effects).
Porter’s (1980) five forces model improves on the Bain/Mason paradigm by
accounting for exit barriers (such as sunk costs). Crucially, he incorporates the idea
that firms at different stages of a vertical production sequence, which provide
components to firms above them in the hierarchy, have meaningful bargaining
interactions with each other. Hence Porter’s (1980) five forces model appears as
follows:
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Figure 2.1.1 – Porter’s (1980) five forces model
SUPPLIERS
Bargaining power of
suppliers
POTENTIAL
ENTRANTS
Threat of new entrants
INDUSTRY
COMPETITORS
Rivalry between existing
firms
SUBSTITUTES
Threat of substitutes
BUYERS
Bargaining power of
buyers
Porter’s five forces model aims to explain why some industries are consistently more
profitable than others. This is achieved through an examination of industry
competitive forces: the strength of the five forces determines industry profitability.
Rivalry between existing firms may include price cuts, new product ranges, product
differentiation and brand power. This rivalry may be gentil or cut-throat. The higher
the bargaining power of suppliers or buyers, the less profitable the industry will be.
Bargaining power may arise from being few in number or possessing a unique
resource. The threat of new entrants is determined by the potential for new capacity in
the industry and the level of barriers to entry and exit, e.g. start-up costs, advertising
costs, and decommissioning costs on exit. Finally, the closeness of substitutes affects
the ability of firms to raise prices. A firm with very close substitute competitors
cannot raise prices and increase profitability. It should also be noted that government
regulation may affect all five of these forces.
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The five forces model provides a step forward over the traditional SCP approach since
it allows a firm to determine its strategic position. By examining the five forces in its
industry, a firm can choose a strategic path that aims to minimise competitive rivalry
and increase profitability. I examine such strategies in the next sub-chapter.
Furthermore, a firm can seek to alter the nature of the five forces themselves in order
to reduce rivalry. For example, it is possible to raise entry barriers, encourage
customer loyalty and dependence to reduce buyer power, and utilise many suppliers
or increase in-house component production to reduce supplier power.
Porter’s (1980) five forces model can be applied to the road car industry as follows:
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Figure 2.1.2 – Porter’s (1980) five forces model applied to the road car industry
SUPPLIERS – Weak
Many component suppliers
Plentiful steel, rubber and
plastic supplies
Most production in-house
POTENTIAL
ENTRANTS – Weak
Huge initial capital input
required
High R&D costs
High sunk costs of
advertising
Strong existing consumer
loyalty
Safety considerations for
final products
INDUSTRY
COMPETITORS –
Strong
Significant number of
large firms
Poorly informed
consumers view cars as
almost homogeneous.
Firms keen to promote
own products
Strong incentive to gain
custom as more money can
be made from after-sales
servicing
SUBSTITUTES – Weak
Public transport is a poor
substitute (overcrowded
and geographically
indirect), even in light of
current “green”
sentiments
Walking/cycling
considered too slow and
difficult over long distance
BUYERS – Weak
Few large (fleet) buyers
Many small, uninformed
buyers
Once consumers have
made purchase, are tied in
for servicing etc.
From this five forces analysis it appears that conditions in the car industry are
favourable towards making high profits. Barriers to entry are high, substitute
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industries are few, and buyer and supplier powers are weak. The biggest threat to pure
supernormal profit making comes from rivalry within the industry itself. Firms may
be obliged to drive down costs or prices in order to gain a competitive edge over
rivals, or raise research costs in pursuit of product differentiation and advertising.
Furthermore, government regulation may well play an increasing role as
environmental regulation requires firms to explore more efficient and alternative
means of powering their vehicles. This has a mixed effect: higher research and
development costs may reduce profit levels but, in the long run, firms meet consumer
preferences for “greener” vehicles and so may see a rise in sales and profitability.
2.2 – Porter’s (1980) Generic Strategies
Porter’s (1980) ‘generic strategies’ refer to three possible strategies that may be
pursued by a firm to capture or protect market share. These are: differentiation, cost
leadership, and focus. ‘Differentiation’ refers to the need for a company to produce a
good or service that possesses at least one element of exclusivity. Firms should aim to
provide a product that is distinctive in at least one way. For example, Bang & Olufsen
aim to produce very high quality audio/visual products, whilst Apple seek constant
innovation with products such as their touch screen iPhone mobile phone. We have
already seen that differentiation in the market for automobiles may be essential since
firm rivalry is so high. Miller & Friesen (1986) add that firms may aim to provide
more than one type of differentiation at the same time. The ultimate aim of a
differentiating firm is to eat into consumer surplus (the difference between what
consumers are willing to pay for a good, and what they actually do pay) in order to
increase profit levels. This is achieved by increasing consumers’ loyalty towards the
firm’s brand; thereby reducing the price elasticity of demand. This is observed in the
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car industry through the use of after-sales car servicing and magazines providing
information on new models the company is about to release. More inelastic consumer
demand means that firms can raise total revenue by charging higher prices. Miller &
Friesen (1986) add that raising brand loyalty through differentiation can “erect
competitive barriers to entry, providing higher sales margins, and mitigate the power
of buyers who lack acceptable substitute products” (p. 38). It is important to note that,
since differentiation may require a high level of research, development, advertising or
after-sales service, it is unlikely that firms pursuing this strategy will be low cost
providers.
Hence Porter (1980) proposes an alternative to a differentiation strategy: that of ‘cost
leadership’. He suggests that firms should aim to produce at the lowest cost compared
to its rivals in a given industry. This may be achieved through raising productive
efficiency (minimising input costs for a given level of output or maximising output
for given inputs) through learning effects, in the areas of raw material prices,
marketing, after-sales service, employee wages, and research and development. As the
name of this strategy hints, the largest emphasis placed by firms is on ensuring that
costs are minimised in all of the possible areas. The concept of increasing the scale of
output to reduce average production costs (economies of scale) may also be
employed. These techniques are particularly seen in the production plants of the far-
Eastern car companies: Toyota, Honda, and especially Kia and Hyundai are known
for highly efficient, cost-effective, mass-production techniques.
A cost leadership strategy may be successful in terms of increasing market share since
low cost producers are able to charge a correspondingly lower price than rivals, whilst
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still enjoying supernormal profits. Miller & Friesen (1986) also raise the point that “it
provides a margin of safety that reduces the dangers of price increases from suppliers
and bargaining from customers” (p. 38). Research and development into production
methods may be widespread in order to aggressively exploit economies of scale and
sell final products at prices that heavily undercut rivals in order to gain market share.
Finally, Porter (1980) proposes a ‘focus’ generic strategy. This strategy states that
firms should identify a market niche (a particular location, product group or consumer
group) to which they have a comparative advantage in production over rivals. They
should then concentrate their production effort on catering to the precise needs or
wants of this niche. As mentioned previously, Land Rover caters exclusively to the
4x4 market whilst many small sports car manufacturers (Lotus, Noble, Radical) focus
on highly specific car and customer types. By specialising in this way a firm can gain
market share from a given niche over its rivals, who are targeting a wider customer
base. This is related to the differentiation strategy in that the focussed firm is
providing a highly differentiated product that appeals to a particular segment of
demand. It is also related to the cost leadership strategy in that production to a given
niche can be raised and economies of scale can be exploited.
A focussed strategy works best when the firm identifies a segment of the market that
has been neglected by competitors. However, a downside of this strategy is that
tailoring supply to needs of a particular niche will, by definition, decrease sales
volumes as the good or service has less wide an appeal. A firm that plans to focus
must carefully assess whether the gains to profitability, that result from focussing, will
be large enough to offset the decline in demand quantity.
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Some support for Porter’s (1980) generic strategies is provided by Hambrick (1983).
He agrees that “there are a limited number of strategic archetypes that capture the
essence of most business units’ competitive postures” (p. 688). Hambrick (1983) uses
regression techniques to assess the effects of a firm’s strategy on its return to
investment. A relatively unusual aspect of his work was the use of cluster analysis to
investigate the “recurring combinations of strategic attributes among high performers
in each industry type” (p. 695). By using this method, Hambrick (1983) finds support
for the existence of all three of Porter’s (1980) generic strategies. Furthermore,
Hambrick’s (1983) cluster analysis illustrates that firms pursue either a cost
leadership strategy or a differentiation strategy; but not both at the same time. This is
in keeping with Porter’s (1980) theory that differentiation can only be achieved at a
cost, as explained previously.
However, Hambrick (1983) raises the key point that Porter’s (1980) generic strategies
are unspecific and provide wide umbrellas under which more precise strategies fall.
For example, a ‘differentiation’ strategy may be high quality based, broad-based
(involving a close relationship with customers and technology ownership), or prospect
based (where a firm aims to encourage and cater for a specific future consumer
desire). But overall, Hambrick (1983) is supportive of Porter’s (1980) generic
strategies and adds that market leaders, at least for the “mature industrial product”
(Hambrick, 1983 p. 706) markets he examines, tend to be those that pursue a
differentiation strategy.
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Dess & Davis (1984) identify the intended strategies of a sample of US paint industry
firms and attempt to cluster them according to Porter’s (1980) three generic strategies.
They also determine the relative performance of firms employing different strategies
in the same industry. Their conclusion is that “three sets of internally consistent
competitive methods were identified that conformed to Porter’s (1980) three generic
strategies” (p. 483). This was particularly true of the cost leadership and
differentiation strategies. However, Dess & Davis (1984) explain that the usefulness
of the focus generic strategy is less clear cut. Citing Hofer (1982), they explain that
Porter’s focus strategy is limited since it does not explain the wide number of methods
by which a firm may choose to focus; for example: the number of market segments
that the firm chooses to focus upon. Porter’s (1980) broad view of focus leads Dess &
Davis (1984) to conclude that one cannot “prescribe a single set of competitive
methods applicable for all the potential strategy combinations within the single
generic strategy” (p. 483).
Furthermore, Dess & Davis (1984) find that, for high performing firms, there is not
necessarily a single, clear cut, generic strategy in place. They found that the highest
performing firms were cost leaders, but also quite highly focussed. This somewhat
contradicts Porter’s (1980) assertion that firms will tend to pursue only one of his
generic strategies. I believe Dess & Davis’ (1984) finding may be explained by the
fact that, through attempting to limit costs (as a primary strategy), firms perhaps
unintentionally begin to streamline production and resources to cater to a given
market segment; thereby inadvertently satisfying the ‘focus’ criteria. However, Dess
& Davis (1984) reveal that firms pursuing at least one of Porter’s generic strategies
perform better than those pursuing none of Porter’s generic strategies.
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Miller & Friesen (1986) are relatively critical of Porter’s (1980) three generic
strategies. Their study, which covers a variety of US consumer durable businesses,
finds that many firms pursue strategies of differentiation and cost leadership at the
same time, thereby suggesting Porter’s (1980) assertion that firms are either
differentiators or cost leaders is incorrect. Furthermore, Miller & Friesen (1986) find
that certain clusters of firms do not focus, and only show weak signs of differentiation
and cost leadership strategies (again at the same time). Only those firms that are very
highly focussed appear to be pure cost leaders; consistent with Porter’s tradition.
Miller & Friesen (1986a) are also supportive of Porter’s view that those firms not
pursuing any of the three generic strategies will be relatively unsuccessful in their
industry. Hence Miller & Friesen’s (1986) findings differ slightly not only from
Porter (1980), but also from Hambrick (1983) and Dess & Davis (1984). This may be
due to industry sample selection; I personally feel that Miller & Friesen’s (1986)
findings hold more weight as the consumer durables market is characterised by real
world consumer individuals making buying decisions in the presence of imperfect
information (as in the automobile industry); this allows brand differentiation and cost
minimisation strategies to be implemented simultaneously.
2.3 – Porter’s (1985) Value Chain
Porter’s (1985) ‘value chain’ offers an explanation as to how firms add value to their
inputs by transforming them into outputs through a process, or chain, of production.
Stabell & Fjeldstad (1998) explain that the firm in question can be broken up into its
strategically relevant actions. Each of these actions may then be examined in order to
determine the effect of each action on cost or value creation. Porter (1985) explains
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that the five primary value chain activities are: inbound logistics, operations (or
manufacturing), outbound logistics, marketing and sales, and after-sales service (such
as maintenance). These generic activities are further supported by the activities of
firm infrastructure, human resource management, research and development, and the
appropriate, cheap and timely provision of input goods (procurement). It can be seen
that each of these activities is present in the road car manufacturing process.
Porter’s (1985) belief is that it is possible to examine each of the aforementioned
actions in detail in order to see how each contributes to cost and value. In this way it
should be possible to minimise costs and maximise value creation for each activity,
and hence for the organisation as a whole.
Armistead & Clark (1993) explain that a greater emphasis can be placed on the
‘operations’ aspect of Porter’s (1985) model in order to explain strategic choices in
the service sector. In his 1985 work, Porter describes how his own model can be
adapted in order to explain the precise method of service delivery, for example, for an
airline company. He adjusts his value chain model to focus on costs rather than value
creation; and therefore explains how a firm can alter its value chain to reduce costs
and obtain a competitive advantage over rivals. However, Porter (1985) does not
include the secondary activities of firm infrastructure, human resource management,
research and development, and procurement in this new model. Armistead & Clark
(1993) go on to explain that, whilst Porter’s (1985) new model definition may only be
a minor change, it still allows attention to be centred around the allocation of
resources and the better provision of services. This may be of relevance to the after-
sales provision of automobile servicing.
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Hergert & Morris (1989) are also supportive of Porter’s (1985) model; explaining its
use when combined with accounting data. In this way, Hergert & Morris (1989)
explain that it is possible to establish costs at the various stages of the chain and in
doing so determine a firm’s strengths and weaknesses. However, identifying these
costs may be difficult; especially if they are pooled between a firm’s subdivisions.
However, Stabell & Fjeldstad (1998) believe that Porter’s (1985) approach is too
vague. They explain that Porter’s tradition is effective in explaining value creation at
a “traditional manufacturing” (p. 414) firm but fails to recognise other production
technologies that also add value. When applied to, say, a firm that produces intangible
output from intangible inputs in the service sector (e.g. a law firm), it becomes
difficult to identify Porter’s five primary activities. Furthermore, applying Porter’s
rather rigid framework to a service sector firm “obscures rather than illuminates the
essence of value creation… from a strategic point of view” (Stabell & Fjeldstad, 1998
p. 414). To reconsider my law firm example: arguably the precise causes of value
creation are the thought processes, argumentative abilities and persuasiveness of a
barrister. Yet Porter’s (1985) value chain would simply lump these attributes together
under the ‘operations’ heading thereby hiding the most important aspects of value
creation.
Hence Stabell & Fjeldstad (1998) propose that Porter’s value chain should only be
applied to manufacturing firms; whilst their own ‘value shop’ and ‘value network’
models should be implemented where appropriate. Value shop models apply to
service sector firms where resources are utilised to meet consumer needs and wants.
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Value network models apply to those firms that create value by implementing and
maintaining inter-customer networks, e.g. telecommunications companies. Choosing
one of these three ‘value configuration’ models allows them to more accurately source
value creation at a specific firm.
2.4 – The Resource-Based View
The resource-based view (RBV) consists of a variety of theories, each with the central
premise that firms should be analysed in terms of their resources. It is these resources
that ultimately determine a firm’s strategic capabilities. This school of thought
provides an alternative to the previous theories supplied by Porter (1980, 1985), who
makes the assumption that strategic choices are product market-based. Wernerfelt
(1984) explains that final products rely on the application of at least one resource, and
so by defining a firm in terms of its resource capabilities, it is possible to intimate the
most competitive output strategy for a given firm.
Wernerfelt (1984) therefore suggests that firms are not homogeneous and that the
profitability of each is linked to their own resource base. He contradicts Porter’s
(1980) view that industry analysis determines a firm’s strategic standpoint: in fact,
internal resource analysis is the key to strategy determination. However, both
approaches may lead to the same choice of strategy. This would appear to be vitally
important to the automobile sector, where many firms are seen to implement different
strategies that are based on their individual resource capabilities.
27
Wernerfelt (1984) defines a resource as:
anything which could be though of as a strength or weakness of a given firm.
More formally, a firm’s resources at a given time could be defined as those
(tangible and intangible) assets which are tied semi-permanently to the firm
(p.172).
This can include a firm’s (skilled) workers, familiarity with production techniques,
brand (and customer loyalty to this brand), capital, equipment, and the ability to carry
out production efficiently. He then goes on to explain the role of resources using
Porter’s (1980) five forces model as a framework. For example, a supplier may have
monopoly power over the provision of an input; this input is a resource to the central
firm being supplied. Hence supplier monopoly power reduces the potential
profitability of the central firm. Furthermore, the nature of the goods created by the
resource may affect profitability: if the resource is used to make too consumer-
specific a good, then that consumer will have monopsony power (in the extreme case)
and can pay a lower price, reducing firm profitability (ceteris paribus). Thirdly, the
existence of a substitute resource will decrease the return to any given resource.
It is important to note that resources may be developed over time, for example as the
firm learns a production technique. Furthermore, a resource may be lost at any time: a
contract with a supplier may break down, a particularly talented worker may be lost,
or a piece of unique equipment may break. Hence a resource cannot be considered as
either constant or permanent. Wernerfelt (1984) therefore explains that a successful
firm’s growth strategy “involves striking a balance between the exploitation of
existing resources and the development of new ones” (p. 180), an idea confirmed by
Lockett et al. (2007). This assumes that customers value the firm’s existing strengths.
28
Barney (1991) provides an examination of the connection between a firm’s resources
and the sustainability of its competitive advantage over rivals. He also stresses the
importance of considering firms as heterogeneous bundles of resources. These
resources may be unique to a given firm and non-transferrable to other firms. Barney
(1991) cites Daft (1983) in explaining that resources are
all assets, capabilities, organisational processes, firm attributes, information,
knowledge, etc. controlled by a firm that enable the firm to conceive of and
implement strategies that improve its efficiency and effectiveness (p. 101).
However, not all resources are relevant to a firm’s current strategic path and so should
not necessarily be implemented; especially if they inhibit the use of potentially value-
enhancing strategies.
In his 1991 work, Barney’s key contribution to the RBV is to explain the attributes
required of a resource in order for it to generate a sustainable competitive advantage
(SCA) for the firm. A SCA arises when a firm implements
a value creating strategy not simultaneously being implemented by any current
or potential competitors and when those other firms are unable to duplicate the
benefits of this strategy (p. 102).
Therefore, the resources that contribute to a given strategy will be heterogeneous and
immobile between firms. As we shall see in the next sub-chapter, this notion proved
important for Japanese automobile firms located in the US. Barney (1991) explains
that a resource will generate a SCA if it is valuable, rare, inimitable and non-
substitutable. A resource is ‘valuable’ if it allows the firm possessing it to create value
for itself, or reduce the ability of rivals to create value. A resource is ‘rare’ if it is in
29
limited or short supply between the firm and its rivals and ‘inimitable’ if it cannot be
precisely replicated by competitors. In order to be ‘non-substitutable’ it should not
have any valuable alternative strategies.
Hence the value and rarity of a resource contribute to the degree of competitive
advantage that it creates. The imitability and non-substitutability of the resource
contribute to the sustainability of this competitive advantage. Barney (1991) also
explains that imitation may be difficult since a resource may be causally ambiguous
(value creation might be caused by intangible means such as ingenuity, which are
little understood), result from historical learning effects within the firm, or from
socially complex processes such as corporate culture and the way the employees
interact with one another.
However, McWilliams & Smart (1995) are somewhat critical of the RBV. They
explain that the roots of the RBV lie in the SCP paradigm: “based on the assumption
that demand is known and constant and that competition is a state” (p. 309). This does
not reflect real world market conditions and so reduces the predictive power of the
RBV as a strategic model. Hence, whilst the move from Porter (1980) to Wernerfelt
(1984) and Barney (1991) is a shift from external industry to internal firm
investigation, there has not been any significant advance from industrial organisation
economics.
McWilliams & Smart (1995) explain that an essential aspect of the SCP paradigm is
its base in perfect competition (many small firms, producing homogeneous products,
with no market power, and a long run equilibrium of normal profits). They claim that
30
this long run equilibrium view means that “competition is a state, [but the reality is
that] in strategic management, competition is… vying for access to inputs and
consumers, that is, competition is a process” (p. 310). Hence Wernerfelt (1984) and
Barney (1991) have only a descriptive, but not predictive, ability. The RBV must treat
competition as a process and demand as variable, and place a greater emphasis on the
role of strategy-makers, in order to be of strategic worth.
Lockett & Thompson (2001) examine how the RBV has affected economic thinking
and research, and explain how this may affect firm-level competitive strategies. They
describe how the core concepts of the RBV, as outlined above, have lead to an
acceptance of the belief that firms are not homogenous: it is the difference between
firms’ resources that affect their relative performance. This view is as widely accepted
as Porter’s (1980) claim that structural differences between industries are key. In
addition, the concept of path dependence is crucial: as explained by Wernerfelt
(1984): for a given firm, the current crop of resources depends on the employment of
past resources. Hence the power of the RBV lies in its ability to explain performance
differences between firms operating in the same market or industry. This is vital
information for strategy-makers and so should make the RBV a useful real life tool
for analysis. However, Lockett & Thompson (2001) raise the point that it is hard to
identify intangible resources, such as knowledge, which may be vital to a firm’s
success; hence there may be problems in making or justifying improvements to
strategic direction.
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2.5 – Literature on the Automobile Industry
In the following section I review general scholarly literature that attempts to model,
describe or explain trends in the automobile industry. I begin with Berkovec’s (1985)
model of this market, focussing on new car sales. He describes automobiles as “highly
differentiated durable goods” (p. 195) and so automobile demand should be modelled
using “discrete choice models of vehicle demand” (p. 196) which incorporate the
heterogeneity of both the consumers’ preferences and the cars themselves. Berkovec
(1985) also explains the effects of various economic shocks to a country’s domestic
car market. For example, in the US, an increase in automobile imports tends to
depress demand for domestically produced cars. Government regulation on the supply
side (safety and environmental) also interferes with research decisions, supply, and
consumption patterns.
Sturgeon (1993) explains that a high level of globalisation over the last three decades
has led to both a massive increase in the scale of production organisation, and to the
formation of coalitions between some manufacturers. The latter of these points is not
true for coalitions between the five firms in question in this paper, who remain fierce
rivals. Sturgeon (1993) goes on to explain the change in resources that has occurred
over time in the automobile industry. He particularly focuses on the role of computers
in the design, manufacture (robotics) and even management (organisation and co-
ordination) of car manufacturing tasks. This has enabled vast time and cost savings at
all stages of the production chain.
Sturgeon (1993) also makes interesting use of statistics: in 1990 it took the average
Japanese firm just 16 hours to assemble a car, whilst in Europe the average was 36
32
hours (p. 620). This has implications for potential efficiency gains. In his short but
highly entertaining work he finally claims that economic nationalism plays a role:
firstly through consumer preferences, as individuals may be biased towards, or simply
more used to, the brand and designs of their domestic nation. Furthermore,
automobile firms may alter the domestic/imported-parts mix of cars in order to take
advantage of the differing regulations that apply to domestic and foreign cars.
Ramratten (1991) examines another effect of imported cars: their influence on price
competition in the US. In the absence of automobile trade it was typical to see the
largest motor company choosing a target rate of return, and combining this figure with
demand projections to set a price. Rival firms would then attempt to mimic, or slightly
undercut, this price. However, the level of imported cars rose “from 14.53 percent in
1972, to 32.09 percent in 1987” (p. 60). Ramratten (1991) explains that domestic
firms were forced to respond; they did so by reducing prices (especially in the western
regions of the US where import competition was at its most fierce), manufacturing
smaller cars that were substitutes for the small, imported models, and improving
efficiency by reducing employee wages and shutting down factories.
Ramratten (1991) provides evidence of collusive pricing acts between US firms but
says that at least one individual firm would break the cartel agreement every year in
order to compete with domestic rivals on price. He also suggests that the US and
Japan may have inadvertently entered into a cartel through the implementation of
voluntary import quotas (a physical limit on imports); thereby fixing prices.
33
Dardis & Soberon-Ferrer (1994) attempt to quantitatively explain the rapid growth in
Japanese cars in the US, as mentioned in Ramratten (1991). They explain that it is the
characteristics of Japanese cars that appeal to consumer preferences and generate
sales. Specifically: high fuel efficiency, high mass, a low rate of depreciation, less of a
need for repairs, and low running costs are the most significant advantageous
characteristics possessed by Japanese cars. These characteristics can be summarised
more simply under the umbrella of higher quality compared to the products of US
rivals.
The rapid growth in market share was initially caused by the higher cost-effectiveness
of Japanese small car manufacture; however there was no particular US consumer
preference towards smaller cars. It is the preference for higher quality that was key.
Furthermore, Japanese manufacturers were able to improve efficiency by eliminating
the problems of transport costs and voluntary import restraints. This was achieved
simply by locating production plants in the US itself.
Dardis & Soberon-Ferrer (1994) included household attributes in their model of
automobile consumption, and found that none of these attributes affected the
consumption decision. Hence they recommend that US firms focus on quality in order
to “attract and retain customers” (p. 126).
Banerji & Sambharya (1996) provide a further explanation of the success of Japanese
automobile firms in the US and around the world. They explain that the Japanese
firms “were able to duplicate their intricate inter-organisational network of affiliate
firms” (p. 108); that is, the large Japanese car companies encouraged their Japanese
34
supplier companies to move abroad with them. Forming a loose coalition of firms in
this way is known as keiretsu. This was the key to the Japanese car companies’ SCA,
but also required that their Japanese affiliates were keen to move into the US market
along with them. By moving from Japan to the US together, automobile firms and
their affiliates provided each other with “security… in the form of an enduring long-
term relationship” (p. 108) in the form of assured component supplies and a market
for these. The component supply affiliates actually became more powerful in this
situation since the car firms became dependent on them in the US. Furthermore, the
Japanese affiliates in the US were able to boost revenue by selling parts to the
domestic US car firms.
Finally, I wish to examine the work of Badrtalei & Bates (2007), who examine the
effects that intra-organisational cultures may have on international partnerships. Their
case study is the 1998 formation of the DaimlerChrysler group, which is of some
relevance to this study since Daimler AG is now the ultimate owner of Mercedes-
Benz. Badrtalei & Bates (2007) explain that 55 to 75 percent of all international
partnerships in the 1980s and 1990s failed due to a clash of cultures between the two
firms involved (pp. 303-304). These clashes have an adverse effect on employee
morale and productivity; ultimately reducing the value of output produced.
Badrtalei & Bates (2007) cite Cartwright & Cooper (1993) in explaining that culture
is “the traditions, shared beliefs, and expectations about how individuals behave and
accomplish tasks in organisations” (p. 304). In the case of DaimlerChrysler, cultural
issues arose due the pay differences between executives at the two companies, the
standard of business travel (literally, first class vs. economy), the nature of
35
respect/hierarchy and the formality of discussions, the authority required to make
strategic decisions, and the difference in accounting systems between the two
companies (pp. 309-310). Even years later not all of these differences have been
resolved. Badrtalei & Bates (2007) conclude that the key to successful mergers is to
avoid equal partnerships (accept that one firm must dominate the other), and be
humble, communicative and open to change.
36
Chapter 3 – External Analysis
This chapter marks the beginning of the strategic analysis of the market and firms in
question. I begin by defining the market boundaries and providing reasons for the
competitive rivalry between the five firms. This forms an explanation of the
underlying reasons behind this research question and allows the historical evolution of
firm rivalry to be examined and market shares to be defined.
3.1 – Competitive Space Defined
As described in the introduction to this paper, the nature of the research question
naturally limits my analysis to the examination of the road car production of five
companies: Mercedes-Benz, Renault, Honda, BMW and Toyota. The competitive
space for these road cars can be defined in two ways: in terms of the characteristics of
the products themselves, and in terms of the consumer wants or needs that they fulfil.
The road car market boundaries can firstly be defined by the nature of the products
themselves. A road car, or automobile, can be thought of as an enclosed passenger
vehicle, usually with four wheels, that provides transport to people and luggage on
normal roads. This transport can be achieved through internal combustion or
alternative fuels means. This definition therefore precludes the inclusion of
motorbikes, vans, lorries, trains and planes in my analysis. Since the building of an
automobile is a largely esoteric activity, firms add value by creating the components
required for this process, and then connecting them together appropriately to create a
fully functioning vehicle. This is far beyond the capabilities of a typical consumer and
so firms can charge a premium for the expertise employed in producing the finished
good.
37
The road car market boundaries can also be defined in terms of consumer wants and
needs. At the fundamental level, a road car fulfils the need for a device to save the
physical labour of a journey. However, in recent decades (and especially in more
economically developed countries) road cars have come to be viewed as significantly
more than that: consumer wants dictate that road cars should provide a means of
private transport that is fast, reliable, comfortable and even entertaining. Furthermore,
the decline in (geographically) local employment means there has been a massive
increase in global road car demand in order to mobilise the work force. Certainly, the
five firms in question seek to fulfil these wants and are therefore competing in the
same market. They are required to produce cars which, as well as working reliably,
are fast and powerful, spacious, safe in the event of a crash, and contain features such
as stereo systems, TV screens and satellite navigation. Such features are important to
meet consumer wants.
As I outlined in chapter 1, the research question narrows down my choice of firms I
am to compare to Mercedes-Benz, Renault, Ferrari, Honda, BMW and Toyota; but
excludes Ferrari since it is not a mass-market producer. This leaves us with Mercedes-
Benz, Renault, Honda, BMW and Toyota although this creates a potential problem
that must be addressed. In general terms it is argued that the boundaries of an
economic market are defined by the closeness of substitute goods in terms of
consumer preferences. This leads some academics to argue that, for example,
Mercedes-Benz and BMW are not in the same market as Renault, Honda and Toyota
since the former two companies aim to cater more to the luxury segment of demand
(Kay, 1990). Hence it is argued that, despite possessing similar fundamental product
38
characteristics, luxury manufacturers should not be viewed as competitive rivals to
cost leaders.
However, in this paper I disagree with this notion on two levels. Firstly, the five
manufacturers in question do compete on price. This is because of the nature of
automobiles as final products, which can be configured with optional extras and so
cover a range of prices which overlap. An example is given below for the five
companies’ medium saloon cars, at current UK prices:
Table 3.1.1 – Current UK price ranges of medium saloon cars
Manufacturer Model Price Range/£
Renault Laguna 16,555-23,750
Mercedes-Benz C-Class 22,155-50,297
Honda Accord 17,527-27,652
BMW 3-Series 20,705-50,625
Toyota Avensis 14,192-22,595
Source: Manufacturers’ official websites, August 2007
The above table shows that prices of the model ranges between the companies do
indeed overlap; this is also true for the other model ranges in which they compete.
This shows that it is overly dismissive to claim that, say; Renault (a cost-leader) and
BMW (a luxury differentiator) are not in competition when in fact this depends on the
individual’s preference function. A well-informed consumer will choose between
these two cars based on their own preferences for luxury, brand prestige, optional
extras, and the trade-off between optional extras and price. Hence these two differing
brands do still compete for that consumer’s custom, and so operate in the same
39
market. Furthermore, I go along with Stigler & Sherwin’s (1995) assertion that
different products can be considered to be in the same market if there is a stable ratio
between their relative prices. This is true of this car market, where external shocks
affect all firms equally and relative price fluctuations are minimal.
Secondly, I consider these five firms to be in the same market as they represent a
special marketing case due to their links with Formula 1. By manufacturing engines
and, in some cases, wholly running teams in this sport, these five companies
immediately associate themselves with the prestige and glamour of this truly global
sport that runs for eight months of the year, providing near-constant exposure, and
attracting 160 million television viewers globally, per race (SportBusiness Market
Research). The racing drivers are talented sportsmen as well as celebrities who are
effectively endorsing the cars they drive. Hence Formula 1 represents a special
marketing case that only these five firms experience, and so acts as another link
between them that means that compete in the same market.
Formula 1 is considered to be the technological pinnacle of motor sport, and teams
spend hundreds of millions of dollars on R&D projects to develop high quality
engines and components. Hence these five companies experience trickle-down
technology effects that give them the potential to improve their road cars, such as high
performance engines, sequential paddle-shift gearboxes, special oils, more crash-
resistant materials, traction control systems, and aerodynamic devices such as
diffusers. In a sense the Formula 1 manufacturing divisions act as R&D departments
for the road car divisions of the company groups. Hence all five of our firms
experience the same level of exposure on this particular stage and so compete in a
40
unique market that is the result of the marketing reach attained by competing in
Formula 1.
3.2 – Historic Evolution of Rivalry
Mercedes-Benz, Renault, Honda, BMW and Toyota have competed in Formula 1 for
hugely variable lengths of time and with vast variations in success. For example,
Renault competed in the earliest Grand Prix events at the turn of the 20th Century and
has won the last two (2005 and 2006) drivers’ and constructors’ world
championships. On the other hand, Toyota only began Formula 1 racing in 2002 and
is yet to win a race.
But it is the evolution of rivalry off the track that is of interest here. Throughout the
20th century the three European manufacturers dominated the European car market.
This was also true of the Japanese manufacturers in Japan in the latter half of the
century. However, increasing levels of trade and globalisation have caused this
situation to change rapidly. Since the 1970s in particular, the Japanese manufacturers
have started to make inroads into the rest of the world and have captured market share
from their European rivals; mainly through the implementation of joint ventures
around the world (Dardis & Soberon-Ferrer, 1994). It appears that Honda and Toyota
were able to supply cars that both undercut the price, whilst simultaneously exceeding
the reliability and build-quality, of European rivals’ vehicles. Indeed, the Japanese
firms quickly established a worldwide reputation for the practicality and reliability of
their road cars.
41
The increasing level of trade with East-Asian economies such as China has also
proved beneficial to all five firms. By setting up joint ventures with Chinese
component and assembly firms, the European and Japanese car makers are able to
reduce labour and input costs significantly and so attempt to eek out a competitive
advantage over and above one another. This has been especially observed over the last
ten years. However, with Japan being both geographically and culturally closer to
China than Europe, Honda and Toyota have arguably found the joint venture process
with Chinese firms easier than Mercedes-Benz, Renault and BMW (Badrtalei &
Bates, 2007). Indeed, the latter three firms are increasingly looking to shift production
to Eastern European countries such as Czech Republic, Slovakia and Romania in
order to reduce transport costs and cultural differences (Hutton, 2007a).
The total global automobile industry has annual revenue of around $2 trillion and
employs eight million people directly, with millions more employed via its suppliers
(Regassa & Ahmadian, 2007). The five firms being considered by this paper
contribute about $500 million to this revenue and employ close to one million people
between them. Hence this market is a highly significant proportion of global sales.
3.3 – Market Shares Defined
I will now define the market shares for each of the five firms in this industry, based on
global unit road car sales. This is a crucial stage in determining the relative successes
of our five companies in order to assess the strategic directions they should take in the
future. For example, a firm’s market share dictates to an extent whether it should
implement an attacking strategy to gain market share, or more defensive strategies to
42
defend its market share. Sales figures for 2006 and market shares are provided for the
five companies below:
Table 3.3.1 – 2006 sales figures and market shares for the five firms2
Manufacturer Total unit car sales Market share/%
Mercedes-Benz 1,251,797 8.38
Renault 2,115,176 14.16
Honda 3,652,000 24.46
BMW 1,179,317 7.90
Toyota 6,735,000 45.10
TOTAL 14,933,290 100.00
Source: Companies’ annual reports
Figure 3.3.1 – 2006 market shares
2 Annual reports are for year ended December 2006 for BMW, Mercedes-Benz and Renault, and year ended March 2007 for Honda and Toyota. Figures are for given individual brands, not motoring groups. Figures are for automobiles and do not include motorcycles, lorries etc.
43
The above figures show that Toyota was by far the biggest seller in this market and
holds a very dominant market position with nearly half of all sales. Hence for the
remainder of this paper I will treat it as the market leader. The other cost-leading
firms, Honda and Renault also have impressive market shares, whilst BMW and
Mercedes are very small firms in term of sales volumes.
Given that there are only five large firms in this market, it can be considered an
oligopoly. This market structure is associated with significant barriers to entry; as
demonstrated by the high costs of setting up a car plant, acquiring raw materials, and
expert engineers. There is potential for product differentiation: as mentioned earlier
the five firms compete in slightly different areas with Mercedes-Benz and BMW
focussing more on luxury and technology, whilst Renault concentrates on superficial
design and cost, and Toyota and Honda are cost leaders. This will be discussed in
more detail in chapter 4. The oligopoly characteristics of this market tie-in with the
five forces analysis carried out in chapter 2. The global car market’s sales take place
mainly in North America, Europe and the Far East. However, the emerging BRIC
nations (Brazil, Russia, India and China) are just starting to provide huge virgin
territories for our five firms.
The five companies add value in two distinct ways. Firstly, the vast amount of
research and development costs that they incur enable a level of expertise that enables
the transformation of individual mechanical and electrical components, that
themselves have little intrinsic value, into a machine that is capable of fast,
comfortable passenger transport. Secondly, this transformation of raw materials
44
enables consumers to travel: on holidays, to centres of commerce, and to work. Hence
the car production process adds a large amount of value.
With respect to consumer preferences in this market, it seems that Toyota and
Honda’s cheap and reliable cars, as well as their excellent customer service, is
boosting their reputation over their European rivals. Quality Progress (2007) describe
how Toyota won the customer satisfaction surveys for all ten vehicle categories in the
Consumer Reports car rankings. Furthermore, Honda, Mazda and Nissan also scored
well in the surveys suggesting that Japanese manufacturers have an innate ability to
provide all-round quality and service packages that suit customers’ needs. There is
also growing evidence of a shift in consumer preferences towards fuel-efficient and
alternative-fuelled cars in light of higher oil prices, steeper emissions taxes and
awareness of the threat of climate change.
45
Chapter 4 – Internal Audit of the Firms
Now that I have analysed the competitive space in the market, it is important to look
at the central five companies in greater depth. Throughout the course of this chapter I
will examine the each of the five firms internally. This will consist of an exploration
of the history of each firm in order to assess the development of its strategies over
time. I will also examine the causes of each company’s particular strengths in terms of
its resources and culture. Through this I will be able to thoroughly inspect the
evidence that will underlie my future strategic recommendations in the final chapter. I
begin with an examination of the firm with the largest market share, Toyota.
4.1 – Toyota
The Toyota Motor Corporation was created in 1937 after founder Kiichiro Toyoda
successfully built a prototype car in 1935 (Toyota official history website). The
production of passenger cars and trucks then expanded rapidly; fuelled initially by
demand for military vehicles during the Second World War. I dwell on this point for a
moment longer, since this period of production had a profound effect on Toyota’s
manufacturing philosophy. Raw materials were scarce in wartime Japan and so
Toyota quickly learnt the value of efficient production and cost leadership (Porter,
1980). Cost-saving innovations naturally arose, such as the production of trucks with
one, centrally mounted, headlight.
Furthermore, in the post war era, Toyota quickly learnt its production processes from
the United States Army, where a focus on quality was emphasised. Again, this is a
differentiation strategy as suggested by Porter (1980). However, Toyota’s dual
strategy of cost leadership and differentiation through quality goes along with Miller
46
& Friesen’s (1986) findings. Perhaps the most important point to be taken home from
these findings is that Toyota learnt to pursue these strategies very early in its life;
hence these ideals are built into its organisational culture. This is a vital resource
(Wernerfelt, 1984, Barney 1991) to the company since all projects undertaken
immediately have a natural bias towards efficiency and build-quality.
Toyota began to export automobiles to the rest of the world in the late 1950s and has
been winning awards for quality control at the national and international level since
the 1970s. This reflects the company’s quality-orientated strategies (Dardis &
Soberon-Ferrer, 1994). At this time Toyota began to take part in motor sport events in
order to publicise the brand. In addition, Toyota’s initial strategy of producing small,
fuel-efficient road cars paid off when the 1973 oil crisis saw a surge in demand for
this type of vehicle in the US and Western Europe. Another crucial stage in the
evolution of Toyota’s strategic knowledge was a 1984 joint venture into the US with
General Motors (GM), which goes along with Sturgeon’s (1993) findings of affiliated
globalisation. This provided Toyota with a hugely valuable introduction to production
in the US. From here, Toyota has pursued a long-term growth strategy of gradually
increasing market share through wider model ranges and persistent advertising. It
aims to grow in a sustainable manner and avoid joint ventures or takeovers; instead
developing its own products to compete with rivals’ models.
One key aspect of Toyota’s success is its Toyota Production System (TPS) (Spear &
Bowen, 1999), which has proved so successful that it is mimicked both by rival firms
and other firms in the manufacturing sector e.g. by Boeing in aircraft manufacturing.
The TPS stresses that strategy decisions should be based on long-term growth
47
objectives even if this means sacrificing short-term aims. There should be continual
monitoring of quality and problems; if any problems arise then design or production
should be stopped immediately so no defective final products are ever produced. It is
essential that procurement is precise, that is; car parts are made available just in time
to be utilised. The TPS also states that the standardisation of worker tasks allows for
greater understanding and productivity, whilst managers should be respectful of the
company’s culture and willing to seek advice from its partners. The TPS is backed up
by the Toyota Business System and Plan, Do, Action (PDA) rule that “provide a
framework for consensual management” and mean that it is “the business culture
[that] makes this [Toyota] company so successful” (Hutton, 2007).
Toyota currently pursues several strategic choices in order to maintain its competitive
advantage over rivals. However, it is chiefly known for cost leadership and lack of
innovation; in the past Toyota has even been accused of copying rivals. This is quite
surprising as a company with annual revenues in the region of $200 billion has
significant capital scope for innovation and product experimentation. But one of the
most publicised exceptions to this lack of originality is its focus on making
environmentally friendly “hybrid” cars. Toyota put a great deal of research effort into
the development of these cars, which combine a conventional petrol engine with an
electrical, battery operated, engine for use at low speeds. This reduces vehicle
emissions in urban areas. A prominent example is the ‘Prius’ model, which is driven
by many Hollywood A-list celebrities who wish to appear to care for the environment.
At the time of writing an imminent announcement is due from Toyota and the French
energy giant EDF, which will announce the implementation of plug-in recharging
point infrastructure for Toyota hybrid cars (Hollinger & Reed, 2007). This will begin
48
in France but should extend across Europe, strengthening Toyota’s market position in
this rapidly expanding niche.
Toyota naturally claims that hybrid models such as the Prius are developed with a
social responsibility to the environment in mind, although the cynical analyst might
suggest that Toyota are simply responding to a shift in consumer preferences (in
Berkovec’s (1985) tradition) in light of recent evidence linking vehicle emissions to
man-made climate change. In fact the Prius model currently only makes a small
supernormal profit since the hybrid technology is so costly. This should change as
output expands and economics of scale are experienced. This represents a Porterian
(1980) focus strategy, since a particular segment of demand is being catered to. It is
also something of a differentiation strategy since, at the time of writing, Honda is the
only other of our five firms to produce a hybrid vehicle.
Toyota produces a wide spread of road car types in order to cater to all aspects of
consumer wants. Its car model range competes in the super-mini (city car), small car,
medium hatchback, mini-people carrier, hybrid hatchback, sports roadster, large
family saloon/estate, small and large 4x4, and pickup truck markets. Comprehensive
advert campaigns through a variety of media help to build brand awareness in each of
these segments.
Toyota’s reputation is for quality, reliability and customer service; and it does not
concentrate primarily on sales numbers. As company president Katsuaki Watanabe
explains: “[w]e don’t look at volume as an indicator of reaching the top. Rather, we
49
aspire to be number one in a qualitative sense, as a result of offering product value
and profitability” (Hutton, 2007).
It is becoming increasingly apparent that Toyota is aware of its image of producing
high quality, reliable but perhaps aesthetically undesirable cars. This is shown by the
development of its ED2 (or EDD: European Design Development) studios on the Côte
d’Azur. The idea is to transport designers away from the concrete and pressures of
work at Toyota City, Nagoya, and provide them with a stirring environment where
more stylish cars can be designed. Furthermore, its Formula 1 team was launched
with the idea of injecting a spirit of excitement into the Toyota brand. All of this is
ultimately to aid Toyota’s appeal to the youth markets and the fashion-conscious.
4.2 – Honda
The Honda Motor Company Ltd has its roots in motorcycle manufacture. Founder
Soichiro Honda, a mechanic, realised that Japan needed a cheap and accessible
transport mechanism after the Second World War. Attaching an engine to a bicycle
achieved this goal, and in 1948 the Honda Motor Company was founded. Soichiro
Honda was something of an eccentric inventor; indeed, Pascale (1984) describes how
Mr. Honda
is variously reported to have tossed a geisha out of a second-story window,
climbed inside a sceptic tank to retrieve a visiting supplier’s false teeth (and
subsequently placed the teeth in his mouth), appeared inebriated and in
costume before a formal presentation to Honda’s bankers requesting financing
vital to the firm’s survival (the loan was denied), hit a worker on the head with
50
a wrench, and stripped naked before his engineers to assemble a motorcycle
engine (p. 51).
Whilst this quotation may appear to be mere light-hearted relief, I feel it demonstrates
a truth that lies at the heart of the Honda Motor Company today: that of creative
genius, and a thirst for technological advances and off-the-wall innovation. This is
reflected by the company’s current advertising campaign, entitled “Honda Mentalism”
(official Honda website), and is founded in the company’s desire for motor sport, as I
will discuss later. Hence the nature of Honda’s product development appears to derive
from an organisational culture that stems from early engine design solutions, where
the company philosophy was to use ingenuity to achieve anything. This is a source of
the company’s competitive advantage that is a vital resource to the firm in Barney’s
(1991) and Wernerfelt’s (1984) traditions: the culture derives for the firm’s social
history and so is causally ambiguous and difficult to replicate by competitors.
Honda’s early strategies centred on cost leadership (Porter, 1980; Pascale, 1984). By
predicting future demand the company was able to mass-produce in advance and so
enjoy economies of scale and learning curve effects. However, this was coupled with
a continuous stream of innovative products that I consider to be the result of
differentiation strategies in Porter’s (1980) tradition. Indeed, it was Soichiro Honda’s
primary aim to achieve success in motorcycle racing spheres. Hence the commercial
firm’s resources and revenues were ploughed into research in engine design; thanks to
Mr. Honda’s ingenuity this inevitably resulted in more powerful, more efficient and
quieter engines that lead to success from the late 1950s in both competitions and in
terms of commercial market sales. This illustrates the trickle down effects of racing
51
technology on a company’s mass production side; in the same way, innovations from
Honda’s Formula 1 car engines should be seen in its road cars.
Honda’s early expansion into foreign markets such as the US (in 1958)
had no strategy other than the idea of seeing if we [Honda] could sell
something… It was a new frontier, a new challenge, and it fit the “success
against all odds” culture that Mr. Honda had cultivated (Kihachrio
Kawashima, then Executive Vice President of Honda, in Pascale, 1984, p. 54).
This demonstrates the spirit of entrepreneurship that exists alongside Honda’s
innovative culture, an essential resource that has contributed to the company’s
sustained competitive advantage. By focussing on its strengths in this way, Honda has
been the world’s largest seller of motorcycles since the 1970s. However, Pascale
(1984) reveals that Honda’s success is rather more down to hard work and luck than a
particular growth strategy.
Honda applied the same method to its road cars, of which production began in the
early 1960s. Innovations learnt from motorcycle manufacture were applied to car
design and production. The company’s strategy here was two-fold: cost leadership
was still essential but the small company chose to focus on particular market
segments: its first two road car models were (contrastingly) a small pickup truck for
the working classes, and a sports roadster for pleasure drivers and the fashion-
conscious. As Berkovec (1985) suggests, consumer preferences played a key role in
determining demand predictions and therefore choice of production. Early moves into
the US market (as per Sturgeon, 1993) were unsuccessful as Honda cars were viewed
as small and powerless. But, as with Toyota, the 1970s oil crisis proved to be a
52
blessing for Honda, again going along with Pascale’s (1984) view that good fortune,
rather than any particular strategic strength, helped it to succeed. Whilst US
manufacturers were forced to raise prices due to the cost of adding emission-reducing
devices to their engines, Honda again called on its innovative roots and core
competencies (Hamel & Prahalad, 1989) to produce a Compound Vortex Controlled
Combustion (CVCC) engine, which was more efficient and less emissive in the first
place. The company’s reputation for producing, reliable, innovative, efficient and
value-for-money cars was cemented (Dardis & Soberon-Ferrer, 1994).
Since then, Honda has prided itself on pursuing a differentiation strategy of
technological innovation; producing the first road cars with four wheel steering and
variable valve timing engines (which improve both performance and fuel efficiency).
It launched its own hybrid model, the two-seater ‘Insight’ in 1999, which has a small
petrol engine that is given an acceleration boost by an electric battery pack. Honda
produces a wide range of models in order to cater to all segments of consumer
demand. This range includes a small car, medium hatchback, two hybrid models, a
sports roadster, medium family saloon/estate, medium 4x4, large executive saloon,
and medium people carrier. These are promoted through Honda’s “The Power of
Dreams” adverts, which stress the company’s creativity.
Honda also competes in Formula 1, motorcycle racing and powerboat racing to
demonstrate its engineering prowess and push the boundaries of innovation. It runs
television adverts around the world that proclaim its racing heritage and stress that
this engineering expertise is present in its road cars.
53
4.3 – Renault
Renault began producing road cars as early as 1898 and so has a long history in this
manufacturing sector. One would expect this history to come with a degree of
production expertise and a historical understanding of the nature of the market for
road cars, which Wernerfelt (1984) would view as an intangible resource to the firm.
Furthermore, Renault was the first of our five companies to realise the marketing
effect that motor racing could have. Hence it was quick to enter the first Grand Prix at
the start of the 20th century that were typically rallies held between cities in France,
Spain and Switzerland. Indeed the company initially prided itself on engineering
innovation: in the years leading up to the First World War it produced powerful cars,
followed by aeroplane engines and even tanks during the war. But this costly
innovation strategy proved unsustainable as the post-war small car market boomed.
Renault chose to pursue a more cautious cost-leadership strategy: producing mainly
small and light cars that were much cheaper and appealed to the masses (as per
Berkovec, 1985). Indeed, Renault has now employed this cost-leading strategy up to
the present day and has therefore had some 80 years to refine its production
techniques to be more cost-effective (Kessler, 1986). The long-term use of a similar
generic strategy means that it is engrained into the firm’s collective consciousness; an
important intangible resource that goes along with Barney’s (1991) theory of causal
ambiguity. It also demonstrates the sustainability of this type of generic strategy
although this may soon be to change in light of the rapidly expanding Asia-Pacific car
makers who are also cost-leaders. This is discussed in more length in chapter 5.
Another consistent strategy is Renault’s continual use of motor sport to advertise both
the speed and reliability of its cars. After the Second World War the company
54
repeatedly entered endurance racing and long distance rally events. This should not be
underestimated as a source of advertising; not least because Renault enjoyed much
success in these types of racing and was able to reach out to a large audience in the
process thereby improving the reputation of its brand. This is an important source of
sustainable competitive advantage over rivals in the road car sector; especially since
Toyota in particular seems bizarrely reluctant to publicise its racing achievements in
relation to its road cars. In the 1950s and 1960s in particular, Renault was quick to
realise that a compromise between cost-leadership and racing publicity (which is
typically a very costly activity) could be reached by entering mainly small-car rallies
with its inexpensive small models. This was crucial in improving the company’s
mass-market appeal. As the reigning Formula 1 constructors’ champion (at the time of
writing) Renault currently uses “World Champions” as a tag line in its television
adverts.
Renault was also amongst the first of the companies in this market to realise the
advantages of overseas production, as Sturgeon (1993) described in sub-chapter 2.5.
In the 1950s it opened plants in Africa to take advantage of cheap labour costs, and in
North America in an attempt to tap into the large market therein. When its initial
attempts in North America were poorly received Renault quickly brought out new
designs of small car and concentrated heavily on cost-leadership in order to increase
its appeal in this market. As with Toyota and Honda, the small-car focus strategy
proved timely as the 1970s oil crisis saw a surge in demand for cars of this type. At
this time, Renault saw the potential for small, cheap cars in the huge market of South-
East Asia and all but abandoned its efforts in North America to increase production
there instead.
55
Furthermore, Renault also began to initiate a number of joint ventures from the 1970s
onwards; a strategic decision that still affects the firm’s operations to this date. For
example, it formed alliances with Dacia in Eastern Europe, AMC in North America,
as well with Volvo and Peugeot on joint technological development regimes. This
allowed for a pooling of resources between supposedly rival firms. It also improved
Renault’s ability to integrate into new markets and provide technological advances in
its cars at a lower cost. Since 2000, Renault has had an important alliance with the
Nissan Motor Company of Japan (Chalhoub, 2007), a company with a similar cultural
makeup and strategic design to Toyota. Renault now has a 44% stake in Nissan, in
return for Nissan’s 15% stake in Renault. There will undoubtedly be large positive
learning effects for Renault from this partnership that will enable it to understand and
attack the cultures, strategies and production processes of firms such as Toyota and
Honda.
In the last two decades Renault has continued its trend for using motor sport as a
marketing tool with an increasing involvement in Formula 1 as an engine
manufacturer and then a constructor-manufacturer. On the road car side, the company
also made a name for itself by inventing the people carrier genre with its Espace
model. Renault currently produces cars for the city car, small car, medium car,
medium saloon/estate, sports roadster, and medium and large people carrier markets.
In keeping with its cost-leadership strategy Renault does not provide any executive
cars, although an unsuccessful foray into this market was made in the 1980s.
However, since being privatised in 1996 (Chalhoub, 2007a) it has attempted to
differentiate its brand through distinctive, contemporary external (superficial) car
56
designs. This is an intelligent idea since the cost of this differentiation is only the cost
of a new design team, which is far cheaper than the billions of dollars of
R&D/innovation costs incurred by the other technology-differentiating firms in this
market. However, avant-garde designs such as Renault’s only appeal to particular
consumers with matching tastes and so may be limiting the breadth of the company’s
appeal. Renault has also introduced other innovative customer-orientated measures
such as attempting to reduce the time between the customer placing an order for a
precise specification of car, and that car being delivered (Nguyen, 2006). This should
boost demand from those consumers who value having the precise car they want, as
well as reducing Renault’s car stockpiles and eliminating the need for discounts on
cars that do not match an individual customer’s precise needs due to availability.
4.4 – Mercedes-Benz
Mercedes-Benz is a company with a history based entirely in automobile design and
manufacture. Karl Benz and his Benz & Cie. company are acknowledged as the
inventor of the first motor car in 1886. The Daimler car company invented a
motorised horse carriage at about the same time, and in 1926 the two companies
merged to form Daimler-Benz. The brand Mercedes-Benz was created at this time to
make the marque unique, since the Daimler name was licensed to other automobile
types in France and the UK. The Mercedes-Benz brand is widely known throughout
the world as the world’s oldest car company, and the associated prestige is a key asset
to the firm. Indeed, Mercedes-Benz cars are still a by-word for quality. The
underlying reasons for this appear to be cultural: Mercedes-Benz is a German brand
and this nation is characterised socially by high levels of organisation and efficiency.
Furthermore, roads such as Germany’s speed-unlimited autobahns require that cars be
57
well engineered; so that they can cruise at tremendous speeds without mechanical
strain or interior noise. Factors such as these lead to a causally ambiguous quest for
quality that Barney (1991) and Wernerfelt (1984) would say is a significant resource
for the firm’s sustained competitive advantage.
Mercedes-Benz has always practised a differentiation strategy (Porter, 1980) of
quality; creating cars that appear more luxurious than the models of rivals in the same
range. This goes along with Berkovec’s (1985) view that consumer preferences can
affect production decision. For Mercedes, this strategy has traditionally been at the
expense of cost leadership and efficiency. Indeed, Mercedes-Benz’s models made
headlines for the wrong reasons between 1998-2003 (Edmondson, 2003) as the
company scrimped on quality materials whilst attempting a dual strategy of cost
leadership with high quality differentiation. The build quality of its cars suffered and
the backlash against Mercedes was so severe that it was forced to revert to a pure
luxury strategy again, at the expense of cost. This backs up Porter’s (1980) view that
cost and differentiation strategies cannot be pursued simultaneously, and so
contradicts Miller & Friesen’s (1986) belief that both of these generic strategies can
be pursued at once. However, the organisation does have manufacturing plants in
South America and South East Asia to take advantage of the lower labour costs
therein.
Mercedes-Benz is keen to encourage an internal culture of continuous improvement
(Kuhn, 2000). This ensures that employees across all production plants continually
strive to improve output to meet Mercedes-Benz’s quality benchmarks. Hessenberger
et al. (1997) explain that this is an essential facet of the company’s sustainable
58
competitive advantage over rivals. Employee culture is nurtured from as early as
possible an age, and Mercedes-Benz recruits and trains many young workers through
its Vocational Academy program (Weihrich et al., 1996); fostering their loyalty to the
firm’s values. Mercedes-Benz is ultimately aiming to conform to a scheme of Total
Quality Management (TQM), which relies not only on final product quality, but also
on the monitoring and continual improvement of production processes (Koster, 1994).
Hence managers make a special effort to plan, control and promote the spirit of
quality.
Mercedes-Benz is also a world leader in safety and is renowned for huge R&D
expenditure into this area ($3 billion in 2006), even at the expense of profitability and
competitive advantage. This is another differentiation strategy. For example, the
various versions of its flagship S-Class model (a large executive saloon) over the
years have been the first ever road cars to feature seatbelt pre-tensioners, airbags,
traction control and electronic stability programs (ESP). Mercedes-Benz has won
numerous industry awards for safety and technological innovation. These have
strengthened its desire to continue producing the most technologically advanced cars
on the market in order to differentiate itself from rivals, and improved the reputation
of its brand.
Like Honda, Mercedes-Benz has a long history of competing in motor sport. In fact,
the (then separate) Benz and Daimler companies both entered the first ever
automobile race in France in 1894. Pedigree such as this is an asset to the firm’s
brand. Furthermore, the learning curve effects of producing high performance engines
are an important resource for the commercial side of the company (Barney, 1991). For
59
example, the Mercedes-Benz McLaren SLR supercar is part produced at the McLaren
Formula 1 team’s base in Woking, England.
Mercedes-Benz has perhaps the most extensive model range of any car manufacturer
in the world today. This reflects not only the company’s commitment to provide to
every segment of consumer demand, but also its quest to identify new market
segments and create innovate model types to cater to these areas. An example of this
is the R-Class model, introduced in 2006, which uniquely features six seats in three
rows of two; thereby offering the luxury of a large executive saloon car combined
with the spaciousness and practicality of a people-carrier. Mercedes-Benz’s model
range consists of small cars, medium hatchbacks, both medium and large
saloons/estates, two sports roadsters, two large coupes, both large and very large
executive saloons, two large 4x4s, a large people-carrier and a supercar. The company
is currently a subsidiary of DaimlerChrysler; a company that in the last two years has
restructured in favour of the Mercedes car company. This was achieved by selling off
or shutting down the under performing parts of the business (Chrysler and Smart
respectively): a move that has both improved shareholder confidence and steadied the
company as a whole, providing a stable capital base for Mercedes-Benz to pursue its
research, development and production strategies (Betts, 2007).
4.5 – BMW
The Bayerische Motoren Werke Automotive Group or Bayern Motor Works (BMW)
started life as a fighter plane engine manufacturer in the First World War. After the
war BMW shifted to the manufacture of furniture, motorcycles and railway trains
(BMW official history website). Hence an important resource to the company is its
60
engineering expertise, which has resulted from almost a century of mechanical
production. After a successful start in the production of motorbikes and plane engines,
BMW built its first road car in 1928. At the time the company’s main strategy was to
produce powerful cars that were capable of winning rallies and races; whilst also
being suitable for every day use. There are echoes of this strategy in the company
today: BMW is well known for the power of its high-performing road car engines,
and prides itself on its flagship models: the ‘M’ (Motorsport) editions of its 3-, 5- and
6-Series road cars. These offer near-supercar performance despite being practical
saloon and coupe cars that can be used on everyday roads. As with Mercedes-Benz,
the consumer desire for cars such as this may stem from social reasons such as
Germany’s autobahns; the strategy to build these cars is therefore partly culturally
defined and is again causally ambiguous in Barney (1991) and Wernerfelt’s (1984)
traditions.
After being nearly destroyed by the Second World War and the post-war production
ban in Germany, BMW rebounded with a focus strategy on large luxury saloon cars.
Initially this proved to be a flawed decision since German post-war incomes and
consumer confidence were at an all-time low; there was simply little to no demand for
cars of this type. In Berkovec’s (1985) tradition, BMW was quick to respond to this
set of consumer preferences: producing a small, cheap work-horse car. However, the
company’s strategic aspirations seem to have always been to focus on the luxury
market segment, since by the end of the 1950s it was again producing high-powered
sports touring and saloon cars. Furthermore, since the start of the 1960s it is apparent
that the company has aimed to differentiate itself in quality terms by producing
technically and mechanically excellent cars with striking external design features.
61
These strategies have typically been at the expense of cost leadership, but BMW’s
well-establish reputation for producing powerful but reliable cars has held the
company in good stead.
BMW prides itself on this reputation and so becoming a Formula 1 engine
manufacturer makes sense, firstly as a highly competitive medium for developing
technologically advanced engines, and secondly as a marketing exercise. The
company has provided Formula 1 world championship-winning engines since the
early 1980s and launched its own works team in 2006. Importantly, of the five
companies being reviewed in this paper, BMW is perhaps the most proud of it racing
heritage and realises the full potential of Formula 1 as a marketing tool. The
company’s “Pit Lane Park” (BMW Sauber F1 website) is an impressive publicity
feature that is transported to most global Formula 1 race where it resides next to the
circuit. The park, which was partly designed by Disney World, consists of
grandstands and a miniature track where racing car demonstrations are given, plus a
mock pit garage, ‘inside information’ on the team and cars, and a racing car
collection, all of which the tens of thousands of fans who attend a race weekend are
encourage to browse. Crucially, there is more than a subtle nod towards how this
technological prowess means BMW makes the best road cars; in this writer’s
experience at least.
In the mid-1980s the road car division of the group created a research and innovation
centre, again demonstrating this company’s strategic commitment to differentiation by
creating technologically advanced cars. It is also interesting to note that, up until very
recently, the company only had production plants in Germany and Austria to avoid
62
cultural complications and transport costs. This situation did not change until the 1994
opening of a plant in the US, which produced the Z3 roadster, and later the X5 SUV:
cars that were deemed likely to be popular in the US market. The X5 and Z4 models
are still produced there today for both the US and global markets. Since the beginning
of the 21st century BMW has also opened three plants in England and one in
Shenyang, China. The company is keen to emphasise that the production standards at
the plant in China are just as high as in the rest of the world, and that producing cars
here is vital for access to the vast Chinese market.
The performance-focus strategy of BMW means that it has the smallest model range
of all five of the companies in this market; choosing to cater to the small car, medium
saloon/estate, large saloon/estate and execute, sports roadster, large coupe, very large
executive and medium and large 4x4 markets. However, for a company that proudly
claims to engage in large amounts of research and innovation it is strange to see that
BMW does not offer any unique model types or hybrid cars. Arguably BMW carved
out several of these model categories in the first place with the long-running success
of the various incarnations of its 3-, 5- and 7-Series models. Yet in light of the huge
market shares possessed by Toyota and Honda is surprising that BMW appears not to
have responded to the threat from these companies and erosion of its market share
since the Japanese automobile firms arrived in Europe. Furthermore, BMW seems
slow to respond to new model launches from rivals: its 1-Series and X5 models were
launched years after Mercedes-Benz’s A-Class and M-Class respectively.
The company is aware if its current low market share and is particularly concerned
about the threat from other EU luxury manufacturers and the Japanese manufacturers
63
(Connolly, 2007). New chairman and CEO Norbert Reithofer is currently considering
a variety of strategic paths including the production and promotion of more fuel-
efficient models and the possibility of forming alliances with overseas companies.
64
4.6 – Summary of Internal Firm Findings
Here I provide tables summarising the key findings of the last five sub-chapters:
Table 4.6.1 – Summary of firm strategies and resources as per the theories
Toyota Honda Mercedes-
Benz
BMW Renault
Production
experience
(approx.
years)
70 60 110 100 110
Revenue
(2006, $bn)
202.86 93.92 77.11 69.23 58.67
Net income
(2006, $bn)
13.93 5.02 8.67 7.59 4.05
Porter’s
generic
strategies
Cost leader, build-quality differentiator
Cost leader, engineering excellence differentiator
Luxury and prestige differentiator
Luxury and technology differentiator
Cost leader and style differentiator
Other
strategies
Imitation, high quality management
Mechanical innovation
New model genre innovator
High quality management
Joint ventures
Reputation
and
prestige
Reputation for quality but lack prestige
Reputation for quality but lack prestige
Luxury, high quality, technologically advanced
High quality, technologically advanced
Poor reputation for quality and lack prestige
Key
resources
Quality management, production systems
Ingenuity of designers, R&D
Brand prestige, expertise, R&D abilities
Brand prestige, expertise, R&D abilities
Designers, cost leadership ethos
Key
weaknesses
Threat from Asia-Pacific rivals, dull image
Threat from Asia-Pacific rivals
High costs High costs, small model range, inflexible responses
Poor build quality, threat from Asia-Pacific rivals
65
Table 4.6.2 – Summary of models offered by the firms
Toyota Honda Mercedes-
Benz
BMW Renault
Supermini/
city car
Aygo - - - Twingo
Small car Yaris Jazz A-Class 1-Series Clio, Modus
Medium car Auris Civic, Civic Saloon
B-Class - Megane
Hybrid
hatchback
Prius Insight, Civic Hybrid
- - -
Medium
saloon/estate
Avensis Accord C-Class 3-Series Laguna
Large
saloon/estate
- - E-Class 5-Series -
Sports
roadster
MR2 S2000 SLK-Class, SL-Class
Z4 Megane Coupe
Large coupe - - CL-Class, CLK-Class
6-Series -
Large
executive
saloon
- Legend CLS-Class, E-Class
5-Series -
Very large
executive
saloon
- - S-Class 7-Series -
Small-
medium 4x4
Rav4 CR-V - X3 -
Large 4x4 Land Cruiser, Amazon
- M-Class, GL-Class
X5 -
Medium
people-
carrier
Corolla Verso
FR-V - - Kangoo, Scenic
Large
people-
carrier
- - R-Class - Espace
Supercar - - McLaren SLR
- -
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Chapter 5 – Proposed Strategies & Conclusions
Now that a full review of the firm’s market positions, strengths and weaknesses has
been carried I can propose future competitive strategies for the five firms in order to
protect or raise their marker shares. I present this in decreasing order of market share;
therefore starting with Toyota.
5.1 – Toyota
Toyota certainly appears to be in a strong market position, with a dominant market
share protected by a good reputation. Certainly up until this point the strategic
direction it employs has worked well. In particular the rapid production of the world’s
first convenient family hybrid car has generated a huge first-mover advantage for
Toyota, as well as working wonders for its image in terms of corporate social
responsibility. However, it appears to be lacking in several areas. Firstly, its rivals in
this market produce several styles of car that Toyota does not yet produce (Table
4.6.2). It would certainly be an asset to the company to add these models to its line-up
in order to appeal to a wider customer base.
Secondly, the sustainability of Toyota’s current strategies must be questioned,
especially in light of the emerging car markets in China and South-East Asia. These
countries have huge excess capacity and so pose a future threat to Toyota’s cost
leadership strategy. Currently these companies are suffering from concerns over
build-quality and safety, but when these problems are ironed out the threat to Toyota
will be realised.
67
Thirdly, Toyota seems to be missing a trick with respect to its Formula 1 marketing,
and this is an important area that I feel should form a basis for the future strategic
decisions of the company. As mentioned earlier, Formula 1 is the pinnacle of motor
sport and is an excellent vehicle to provide a company with a showcase for its
technological prowess and exciting, glamorous cars. Yet Toyota forgoes these
benefits by producing featureless, run-of-the-mill ordinary vehicles that do not
capture any of the spirit or technology of Formula 1 racing, and which cheapen the
Toyota brand. This is a peculiar ambiguity, and one that I feel needs to be addressed.
Toyota needs to have more faith in its brand. It is a hugely successful road car
company and has a relatively successful Formula 1 team. The road car division needs
to tap into the rich vein of prestigious publicity provided by Formula 1. This could be
achieved through transporting Formula 1 technologies from the track and into the road
cars at both the fundamental mechanical and superficial levels. Formula 1-style
sequential paddle-shift gearboxes, aerodynamic wings and diffusers, body styling, and
crash crumple zones would work wonders for the brand and sales if marketed
suitably.
I demonstrated in chapter 4 that Toyota is lacking in the executive car market (in fact
it hides behind its “prestige” Lexus brand for this market), another area where the
company can make gains. The Formula 1 ties give should give the Toyota name all
the glamour, prestige and endorsement it requires in this market. In the same way that
BMW and Mercedes-Benz pride themselves on being executive car makers and
Formula 1 manufacturers, so should Toyota.
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5.2 – Honda
Like Toyota, Honda enjoys a large market share that can be attributed to an historic
reputation of providing brilliantly reliable engines and high build-quality cars at a low
cost of production. The differentiation strategy of concentrating on reliable engines,
based on a sound mechanical and racing knowledge base, has clearly the set the
company in very good stead. Unlike Toyota, Honda is also not afraid to advertise the
strength of its heritage and brand. Its “The Power of Dreams” adverts continually
celebrate the company’s racing heritage in a variety of spheres including Formula 1.
Such adverts achieve the aim of demonstrating that the company’s superlative
mechanical engineering standards will be present in its road cars. But, as with Toyota,
it is therefore slightly surprising that Honda road cars are again quite ordinary, run-of-
the-mill vehicles.
This mass-appeal design strategy has certainly worked well for Honda up to the
present, but again the long-term sustainability of such a strategy must be called into
question in view of the emerging Chinese and South-East Asian competition. For a
company that prides itself on technical ingenuity, it is astonishing to see that Honda
does not produce a dedicated hybrid hatchback. Its Insight model, whilst
groundbreaking at the time of launch, is an impractical two-seater, and its Civic
Hybrid, whilst clearly designed to compete with Toyota’s Prius, is little-known,
poorly marketed, and not technically celebrated. This is a clear area of weakness of
the Honda Motor Car Company. I would suggest that a greater level of R&D
expenditure should be earmarked for use in the hybrid or alternative fuels field, and
great advertising expenditure should be used to publicise the Civic Hybrid and erode
the dominant hybrid market position of Toyota’s ubiquitous Prius.
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As I mentioned above, Honda’s reputation for providing low profile but reliable, low
maintenance cars is somewhat at odds with its racing heritage and advertisements.
The company should have more confidence in its brand and should not be afraid to
implement and publicise the use of Formula 1 technology in its road cars, as this will
maintain their mass-market appeal and make Honda cars more attractive to motor
sport fans. Since these technologies have been well-developed by the company’s
racing division R&D costs should be minimal and so not have too detrimental an
effect on Honda’s cost leadership strategy. It would give also Honda cars added
prestige; an important factor that may well help sales in the executive car market; one
of Honda’s weak areas. Again Honda should perhaps follow the example of BMW
and Mercedes-Benz in this segment: implement its racing prestige and mechanical
build quality knowledge to produce high quality cars for this sector.
5.3 – Renault
Renault has a fairly large market share owing largely to the fact that it is a well-
established cost-leader. However, it lags considerably behind its more direct strategic
competition here of Toyota and Honda, showing there is much room for sales gains if
appropriate strategic alterations are made. Currently the company appears to employ a
dual strategy of cost leadership coupled with differentiation based on the physical
appearance of its cars. Whilst admirable, these strategies are not working especially
well for the company; in fact it is known for poor build quality and reliability and
designs that, whilst being cutting edge, are certainly not universally liked. To an
extent it appears that Renault should choose to concentrate more on one strategy than
the other. It does not make sense to produce cars that, superficially, promise to be
70
high-tech, futuristic and pinnacles of design but are, internally, poorly constructed and
prone to failure.
Furthermore, it is important to consider the overseas threat in light of the emerging
Chinese and South-East Asian car manufacturers who have such high capacities that
cost leadership gains can easily be achieved. Indeed, Renault is in the unfortunate
position of experiencing something of a pincer motion from either side. The Asian
cost leaders are beginning to erode away its low price advantage, whilst its lack of
reputation for build quality means that Toyota, Honda and the luxury brands are
attacking its market share from the upper side. This makes the company’s future look
difficult to say the least.
In light of the threat from other-cost leaders, who enjoy vast economies of scale and
increasing global recognition, I would not recommend that Renault continues to
pursue this strategy. One possible option would be to form a partnership with one of
the East Asian giants in order to reduce costs through joint production. An alternative
is to swing the other way and begin to improve build quality at the expense of low
cost. I feel that this strategy would be more suited to Renault, again because of its role
in Formula 1. The company should work on a differentiation strategy of producing
cars that are avant-garde and futuristic by design (as they are now), but which
maintain their high-tech external image by having high quality interiors and engines.
Given the company’s major success in Formula 1 in 2005 and 2006 (it was
constructors’ champion in both these years) it certainly has the information available
to it to produce high quality and high performance engines. This is an area that
Renault should be proud to employ and advertise. Over the long term, this should help
71
to improve the company’s reputation for road cars and provide a sustainable
competitive advantage over rivals both in this market, and the rest of the world.
5.4 – Mercedes-Benz
Mercedes-Benz is also a relatively successful road car producer, although sales are
poor compared to its rivals in this market. Its success has two key elements. Firstly,
the Mercedes-Benz brand is a very powerful asset: over the years it has become
synonymous with the creation of the motor car itself and with the production of very
high quality, luxurious cars. This differentiation strategy is therefore an integral part
of Mercedes’s success. I believe that it is crucial that Mercedes-Benz maintains this
strategy so as not to hurt the brand. Furthermore, as the above two sub-chapters
demonstrated; the luxury status of the Mercedes-Benz company is a vital element of
its competitive advantage over Toyota and Honda, which struggle in this sector.
Secondly, Mercedes-Benz has a very broad strategy covering a huge model range (the
largest range of the five companies in question) in order to cater to all whims of
consumer demand. This doubtlessly aids global sales by producing a model for almost
every type of consumer. It is therefore somewhat perplexing to observe that
Mercedes-Benz does not offer a hybrid model, or even a hybrid version of any of its
current models. This is a large oversight, given that consumer preferences for cleaner
cars and the Toyota Prius and Honda Insight have been available to the public for
some years now. Perhaps this is because Mercedes assumes that wealthy luxury car
buyers will not be especially interested in frugal hybrid vehicles, although the
popularity of Toyota’s Prius amongst Hollywood A-list celebrities (who would
normally have a taste for luxury) has certainly shown this is not always the case.
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Hence I strongly recommend that Mercedes-Benz increases R&D levels in the
alternative fuels area, whilst maintaining its luxury image. For example, hybrid
versions of its existing A-, B- and C-Class models at least would cater to this facet of
consumer demand and should see a rise in sales. Furthermore, in view of proposed
worldwide heavier vehicle taxes on large executive saloons, Mercedes-Benz is one of
the companies that would benefit the most from providing hybrid-drive E-, CLS- and
S-class cars since hybrid cars are currently green- and road tax-exempt.
5.5 – BMW
BMW has arguably the smallest vehicle range of our five companies, providing just
eight different model types compared to Mercedes-Benz’s fourteen. This is one of the
key reasons for the company’s relatively small market share. It is particularly lacking
in the medium-sized car market, where it is the only one of the five companies here
not to cater to this segment of demand. BMW’s models are also characterised by their
lack of versatility. For example, in the small car segment, whilst Honda’s Jazz and
Renault’s Modus blur the line between small car and small people-carrier by being
(literally) very tall in their class, BMW’s 1-Series is a small car, and just a small car.
Hence I propose that BMW should broaden its model range in order to widen its
overall market appeal. This could be achieved not only by mimicking the models of
rivals, but also by creating new models and new genres of cars. BMW may also have
reached this conclusion; its forthcoming X6 model is a crossover between a sports
coupe and a 4x4 off-road vehicle thereby creating a whole new market segment.
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BMW’s success thus far must be put down to that fact that what few models it does
manufacture, it manufactures very well. Indeed, its reputation for build-quality and
luxury is nothing short of legendary. BMW is very keen to use technology developed
in Formula 1 in its road cars, which feature everything from high performance engines
to sequential paddle-shift gears and Formula 1 car-style diffusers. Indeed one of the
company’s flagship models, the M5 edition of the 5-Series, is used as a showcase for
the company’s abilities and has supercar-beating performance despite being a
practical saloon or estate. The strategy to differentiate itself by performance has
worked fairly well for BMW and should be maintained by employing the highest
calibre engineers to continually research and innovate the cars’ mechanical designs.
The company’s ability to produce immensely high performance vehicles certainly
mean it should be capable of producing a supercar to compete with Mercedes’s
McLaren SLR, and this should be an area of consideration.
BMW should also consider the advantages of shifting production overseas. Currently
its plants lie mainly in Germany, with one in North America and one in China. There
is scope to shift more production to South-East Asia and Africa to take advantage of
the cheaper labour and plentiful, local raw materials such as steel and aluminium. As
long as similar management structures and quality control mechanisms are enforced,
BMW can maintain is reputation whilst increasing profitability. Furthermore, a
fundamental flaw in BMW’s approach to innovation is that it chooses to innovate on
the technology side rather than in terms of meeting consumer wants. This is an easy
trap for a Formula 1 manufacturer to fall into. BMW needs to be quicker in releasing
models that cater to particular segments of demand. One such area is that of hybrid
cars, where BMW is yet to release a model, although it did recently unveil a hybrid
74
concept car. This is a crucial oversight for a company that prides itself on
technological prowess, especially considering that Toyota and Honda have been
selling hybrids on a global scale for some seven years now.
5.6 – Concluding Remarks
Whilst the start of this chapter offers company-specific remarks, I wish to make some
final general statements about the competitive forces operating in the car industry that
I have learnt from my research. Firstly, environmental considerations are key, and
should be considered carefully all five companies in question. This is because of a
recent rise in concerns over human-induced climate change, which has lead to a shift
in consumer preferences towards more environmentally friendly cars. Hence the role
of hybrid and other alternative fuelled cars is vital to creating a sustained competitive
advantage in this sector, as Toyota has ably demonstrated with the success of it Prius:
the world’s first practical mass-market hybrid car.
Secondly, all companies need to consider the future role of the rapidly growing car
companies from the Asia-Pacific region. These companies work hard firstly at being
cost leaders and then, once established, on improving build-quality and reliability to
compete more and more effectively with the established firms. Hutton (2007b) is
particularly wary of this threat. He explains that there is a pattern in most world
manufacturing industries (such as electronic and ship-building): namely that the
centre of world production typically shifts from the US and Europe to Japan, Korea,
and finally China. This trend is now being observed in the road car industry. Other car
companies need to respond either by finding their own ways to cost-lead, forming
75
alliances with the new Asian giants, or working on promoting the prestige and quality
of their brand in order to maintain consumer loyalty.
Thirdly, the importance of a company’s reputation emerged as a key determinant of
consumer confidence and demand. Toyota and Honda did not achieve worldwide
success until their cars became known for reliability. Mercedes relies significantly on
its reputation for luxury and BMW on being renown for combining build-quality and
technology with luxury. Hence a long-term sustainable strategy for any car firm
appears to rely on raising awareness of the strengths of its brand. The strength of a
company’s brand should be carefully nurtured since it is one of the few definite
sustainable resource advantages that these five companies possess over emerging
Asia-Pacific firms such as Hyundai and Kia.
It is also noteworthy that the European manufacturers in question here have been
producing road cars for considerably longer than their Japanese rivals, yet (in terms of
market share) appear to be considerably worse at doing so. Whilst some of this
difference may be down to differing focus strategies, could it be that the long-
establish European car makers are overly set in their strategic and cultural ways, to
the point that they are too slow to respond to consumer needs and wants? From the
analysis provided in this paper, it certainly seems that this is so. A company’s
corporate culture may well have the largest bearing of all on its strategic decisions and
ultimate success.
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