Automotive industry

Question 1 Which role should marketing managers play in helping to formulate business-level (SBU) strategies in a large diversified firm such as General Motor? Visit the company’s South African website at http://www. gmsa. co. za and use the information obtainable from it to formulate your answer. At the business unit level the strategic issues of General Motors are both practical co-ordination of operating units and about developing and sustaining a competitive advantage for the cars and industry that they provide.

The marketing manager’s role is to formulate and implement strategies that deal with the positioning: General Motors has to find a way of positioning and differentiating its cars and services against rivals such as BMW. They should anticipate changes in technology and customer perceptions and adjust the strategy to accommodate them. A need for influencing the nature of the competition through strategic actions such as virtual integration through political actions is a role of marketing managers. They assist in building strategic partnerships and co-innovating with other business units, partners and customers.

Marketing managers translate the general statements of direction and intent churned out at corporate level. The manager identifies the most profitable market segment for GM where they can excel keeping in focus the vision of GM: ‘to be the world leader in transportation products and related services. We will earn our customers enthusiasm through continuous improvement driven by the integrity, teamwork and innovation of the GM people. The SBU might be based on product lines, geographical market or the differentiating strategies are formulated at each level since GM is a company ‘of diverse brands selling over 7.

5 million vehicles in more than 120 countries worldwide. ’ ‘GM has a special package of services designed to help keep hard-earned vehicle investment secure and the family safe’ – the role of the marketing manager. General Motors has a warranty protection, road side assistance and a unique payment deal. We see from the above how important the marketing managers role impacts on the GM’s business level units. Question 2 The Swire Coca-Cola USA Bottling Company, located in a large metropolitan area of some 5 million people, produced and marketed a line of carbonated beverages consisting mainly of flavored soft drinks (not including colas), soda water, and tonics.

They were sold in different types of packages and sizes to a wide variety of retail accounts. How might such a firm expand its revenues by pursuing each of the following expansion strategies? •Market penetration •Product development •Market development •Diversification Visit the company’s website (http://www. swirecc. com/) and use the information obtainable from it to formulate your answer.

The soft drink industry is very completive for all corporations involved, with the greatest competition being that from rival sellers within the industry. All soft drink companies have to think about the pressures that are from rival sellers within the industry, new entrants to the industry, substitute products, suppliers and buyers. The competitive pressure from rival sellers is the greatest competition that Swire Coca-Cola USA Bottling Company faces in the soft drink industry. Market penetration- new entrants are not a strong competitive pressure for the soft drink industry.

Coca-Cola co-dominates the industry with their strong brand and great distribution channels. Market penetration is one of the 4 growth strategies of the product market growth mix designed by Ansoff. The best way for Coca-Cola Company to penetrate a market is by gaining competitors’ customers (part of their market share). Market penetration occurs when the product and market already exist. In this case, Coca-Cola can attract non-users of the product with the soda water and tonics; these could be the types of customers that are health conscience.

The existing customers can now be convinced to buy these new drinks by perhaps a vicious advertising campaign. In other words, incidental customers are turned to regular customers while regular customers are turned to heavy clients. Typical systems are relationship management, volume discounts, special offers and bonus cards. Product development- Existing products, new markets. The Swire Company needs to screen their product. Afterwards they should test the concept; this is where the customer is presented with a proposal product and measures attitudes and intentions.

At this early stage of development, concept testing is a quick and inexpensive way of measuring consumer enthusiasm. It asks potential consumers to the product. This enables Swire to determine initial attitudes prior to expensive time consuming prototype development. Business and financial analysis for the remaining product concepts is much more detailed than product screening. The factors considered in the business analysis are demand projections, cost projections, competition, required investment and profitability. Now there is need to position and test the product.

Swire can now place its drinks for sale in selected area(s) and observe its actual performance under the proposed plan. The purpose is to evaluate the product and pretest marketing efforts in a real setting prior to a full scale introduction. It allows actual customer behavior to be observed. After testing is completed, Swire is ready to introduce the product to its full target market. This is commercialization and corresponds to the introductory stage of the product life cycle. Market development- new markets, existing products.

Firstly Swire has to determine if the market is attractive (to answer this question market research is required), is it really willing to commit the required time and resources to reach the new market and will it maintain its current competitive advantage in this new market.. Swire can expand geographically, be it regionally, nationally or internationally. Its ability to expand will depend on its ability to finance such an expansion. Reaching into market segments is also beneficial to the increase in revenues for Swire. Diversification- new product, new market.

Seeks to increase profitability through greater sales volume obtained from new products and new markets. Vertical diversification will be along the value chain of Swire, horizontal diversification- moving into new industry and geographical diversification- opening new markets into the 5 million populations. Question 3 Select any tow firms in South Africa, one being a ‘prospector ‘and the other a ‘low-cost defender’. Compare and contrast their business strategies on each of the following strategic dimensions: a. Scope b. Objectives c. Deployment of resources d. Sources of synergy

Introduction

With a population of over 48 million citizens, the South African retail industry is a lucrative industry, contributing over R125 billion to the economy’s GDP in 2006 (Stats SA). With a mixture of local and International players, the clothing and footwear retail industry forms a sizable proportion of this retail industry. There are no official figures available to the public to quantify the size of the clothing and footwear retail industry; however, articles suggest it is the second biggest contributor behind food retailers.

Where strategy is defined as ‘the deployment of resources in achieving a competitive advantage’ (Mohabir.S, 2008), this document looks at two South African clothing and footwear retailers that have managed to penetrate the market successfully using two opposing strategies, the Prospector strategy and the low cost Defender. Where Edgars is the Prospector and Jet is the Defender. Scope The market: Since the fall of apartheid, South Africa has achieved enormous successes in the political, social and economic realms. Despite these improved conditions, there is still a significant portion of the country’s population living in poverty (Stats SA 2005).

The resulting population is a dichotomy where there are some citizens living below the poverty line and others living in middle and upper class circumstances. The South African market is therefore characterized by two opposing target segments – low income consumers and middle and upper class consumers. The Prospector: Edgars defines itself as ‘a national department store serving middle and upper income families of southern Africa’ (http://www. edgars. co. za). The majority of its stores are situated in malls built within high income catchment areas.

The success of Edgars is evident as its stores act as anchor stores for most malls in South Africa. This retailer understands that its core target consumers generally have higher disposable income than the average South African and can afford to purchase more than just clothing and footwear. Edgars’ product offering is therefore extended to include accessories, active wear, cosmetics, fragrances, hand bags and lingerie. The retailer also understands that its core target Market is aware of global trends and brands and has an understanding of the general value of these brands.

Hence Edgars heavily employs the store within a store strategy. This is where international and local brands have mini stalls with high branding visibility. These include Clinique (in cosmetics), Levi (in clothing), Victoria Secrets (in lingerie) and Zoom (in footwear), to name a few (http://www. edgars. co. za). Edgars understands that its core target market is looking for and will pay for options. The defender: ‘Jet is a discount clothing and footwear retailer, catering to the needs of families in Southern Africa.

It is a company that was created to serve a huge and important market: the people of Africa who want a choice of good quality, affordable fashion. ’ (http://www. jetstores. co. za). Jet’s core target market is made of low income consumers. Very few outlets are in shopping malls (which have higher rentals) but have rather remained in their location pre- the shopping mall era. Therefore one is likely to find a Jet store in a strip mall setting or down town. Its consumers are more likely to purchase by price than affiliation to a brand name or the search for high quality clothing and footwear.

Its product offering is limited to clothing and footwear. Only recently has Jet introduced a baby range which includes selling diapers and a few infant and toddler accessories (plastic bathtubs, prams, but the range is very limited) (http://www. jetstores. co. za). Objectives According to Miles and Snow (1978) when companies are aligning their company objectives with the company strategies there are three main problems that have to be dealt with.

The Entrepreneurial problem, the Engineering problem and the Administrative problem. In brief the Entrepreneurial problem focuses on ensuring the product offering remains relevant to its core target market, whilst the Engineering problem focuses on the company’s operations and the Administrative problem addresses The issue of managing the operations. We look at how Edgars’ and Jet’s company’s objectives are affected by these three problems given their respective strategies.

The Prospector: Miles and Snow (1978) state that for the Entrepreneurial problem, a Prospector company’s objective is to figure out how they can locate new products and market opportunities. For Edgars, this has resulted in the role out of stores within store brands.

This has two advantages. The first is that it is the manufacturer’s (the actual brand within Edgars) responsibility to ensure that the products offered at any given time are in line with what the market is looking for. Failure to ensure availability of stock efficiently means low sales for manufacturer.

The second is it is also the manufacturer’s responsibility to ensure that product offerings are up to date with global trends – as the core target market is globalised. Miles and Snow (1978) also state that the objective of a Prospector company’s Engineering problem is to avoid long term commitments to a single process.

Manufacturers that do not perform discontinue in the Edgars stores. The Tomato watch brand is a good example, where the manufacturer discontinued in some the Edgars stores due to poor sales. The risk of trying a new brand for Edgars is lower as most of the investment is from the manufacturer. That is, the cost of setting up the stall, bringing in merchandise and employing a representative to man the stall. Miles and Snow state that the objective of a Prospector company’s Administrative problem is to facilitate and coordinate numerous and diverse operations. Edgars has incorporated technology to facilitate the Administrative problem.

Their online system allows them to seamlessly sell any product in the store but will be able to trace back to each manufacturer. One can purchase Levis Jeans at the Clinique counter. Over and above this Edgars also offers a loyalty card system. The consumer can purchase from any store in South Africa (and even in Botswana and Namibia). The Defender: According to Miles and Snow (1978), for the Entrepreneurial problem the Defender’s objective is to establish how they can seal off a portion of the total market. The majority of Jet’s promotions are centered on the Good Card promotion. This is the Jet loyalty card.

Unlike for Edgars where the loyalty card is more effective for administrative purposes, for Jet the objective of the loyalty card is more for ensuring higher loyalty from its consumers. The brand understands that its consumers are more likely to purchase more on credit, as they have generally have less disposable income than Edgars’ core target market. To entice usage of the loyalty card, Jet offers it club member’s access to free funeral benefits, a chance to win from monthly cash draws and the chance to be eligible to participate in a bursary competition (http://www. jetstores. co. za).

In terms of the Engineering problem, the Defender’s objective is to distribute goods and services as efficiently as possible. With the objective of lowering its rental expenses, most of the Jet stores are located in strip malls or located where there is high foot traffic in down town areas. Over and above this, the Jet stores that are in malls are smaller, in terms of area, than Edgar’s store. Less rental space means lower rentals. In terms of the administrative problem, Miles and Snow (1978) state that the Defender’s objective is to maintain strict control of the organization to ensure efficiency.

All of the clothes sold in Jet stores are under the house brand (the Jet brand), ensuring that they get the final products to their consumer at the lowest price possible. Deployment of resources Mohabir (2008) states in her paper that there is a school of thought that believes resources available to a company for effective strategic implementation are made of three key entities, the physical resources, the human resources and the organizational resources.

Mohabir (2008) further notes that there are two key methods of deploying resources, through exploitation or through exploration. Mohabir’s (2008) description of Exploitation states that it ‘refers to the refining and extending of skills and capabilities’. Auh and Menguc (2005) state that exploration is primarily concerned with revolutionary change; change that requires the operation of a company to be carried out under new assumptions and paradigms.

Sources of synergy In Mohabir’s (2008) paper, she states that ‘companies that utilizing more of an exploration capability at the absence of exploitation would tend to incur major costs due to experimentation without gaining any benefits, while firms utilizing exploitation capabilities at the expense of exploration are left trapped in a static dimension and could struggle to see beyond their false sense of security’.

There is a need for companies to look for a balance of the two strategies. Edgars exploits its store with in store strategy. They have been using this method for years and have established what seems to be a seamless operation strategy.

Jet has also explored by extending its brand offering to infant and toddler accessories and the selling of cellular phones in their stores. Question 4 Taking into account the five competitive forces, what do you think lies ahead for the worldwide automotive industry? Google the following three sources of information and use them to formulate your answer. •Black export success pdf •101-determinats-of-industrial-location •Brand speak. asp 1. Introduction 1. 1. The five competitive forces According to Wikipedia, ‘Porter’s five competitive forces is a framework for industry analysis and business strategy development formed by Michael E.

Porter of Harvard Business School in 1979’ (http://en. wikipedia. org/). The framework outlines five forces that affect a company’s competitive intensity and therefore the profitability of a market. Porter describes a profitable market as attractive, and a market that is approaching pure competition (low profits) as unattractive. The five competitive forces are depicted in the diagram below. The five competitive forces mainly include the bargaining power of suppliers, the bargaining power of customers, the threat of new entrants, the threat of substitute products and the competitive rivalry within the industry.

We look at these briefly. The threat of entry: New entrants into the market place means, more options for consumers. At the same time for consumers to be enticed to try a new brand, new entrants are most likely to use lower prices to attract users of to their product. The power of suppliers: this usually occurs when the supplier has a monopoly status. Porter gives the example of Microsoft which ‘has contributed to the erosion of profitability among personal computer makers by raising the prices on operating systems’. The power of buyers: this usually occurs when the buyer uses their clout to force a supplier’s prices down.

In South Africa Pick n’ Pay is well known for using this strategy of forcing its suppliers to give them products at a low price. The threat of substitutes: according to Porter this usually occurs when another product gives the same benefits or similar benefits to your company’s product or service. The threat of the substitute is high when there is a big price difference (cost to the buyer). Rivalry among existing competitors: Porter states that this can be in the form of ‘price discounting, new product introductions, advertising campaigns and service improvements’.

According to Porter, if the forces are intense almost no company makes a profit, but if the forces are benign then most companies in that industry are profitable. Understanding of these five competitive forces gives clarity and guidance of strategy formulation. 1. 2 The Motor Industry in South Africa – recent developments ‘After decades of protection, [the South African motor industry] had, developed a fairly large and diversified automotive industry’ (Black 2008). As a result this inward orientation created a monopoly for car manufacturers in South Africa, resulting in cars being produced at a relatively high cost.

It was the end consumer who had to bear the brunt. Then came the introduction of Phase VI of the Motor Industry Development Program. The policy was the first attempt to address the problems of inwardly oriented, overly fragmented industry with low volume output and associated high input costs. Black depicts using a diagram the impact the policy would have on the motoring industry. Figure 1: the Schematic impact of higher volumes and economies of scale The policy removed the prohibitive policy allowing manufacturers to source components internationally at more competitive prices.

The intention was a resulting ripple effect that would lead to reduced vehicle prices. The car manufacturing industry is becoming a key contributor to the South African economy. In 2003 the ‘automotive exports [comprised] 12, 8% of South Africa’s total exports, a three-fold increase from 4% in 1995. In 2002, the automotive sector was the third largest sector in South Africa’s economy (after mining and financial services), contributing 6,3% to the country’s GDP’(http://www. dti. gov. za/).

During the same year the DTI estimated that, South Africa manufactured 83% of the continent’s vehicle output (http://www. dti. gov. za/). In 2007 South Africa manufactured just over 600, 000 vehicles (see diagram below). Source: NAAMSA The graph above shows a steady increase in the industry’s growth. What lies ahead for the worldwide automotive industry? Compared to China, Japan and the United States, South Africa still has a long way to go. (See diagram below)

The interesting case to look at here is China because; only until recently it was not the number one manufacturer in the world. In 2005, it was number 4 in the world (http://en. wikipedia. org/). (See graph below of figures since 2003). In a space of 6 yrs China has almost tripled the number of cars it manufacturers. YearMotor Vehicle production in units (ranking) 20034 444 000 (4th) 20045 071 000 (4th) 20055 708 000 (4th) 20067 189 000 (3rd) 20078 882 000 (3rd) 20089 345 101 (2nd) 200913 790 994 (1st)

According to Russo and Ke (2010), the growth of the Chinese motor manufacturing industry can be attributed to two things: the Chinese government’s stimulation to encourage the growth of the industry and ‘the reallocation of production and supply resources to China [which] has fundamentally changed the cost structure of the industry—[changing] the entire competitive pricing game’. China’s story mirrors that of South Africa.

South Africa too has a government that has prioritized this industry and the current changes in the market have seen South African manufacturers sourcing cheaper components without compromising the overall quality of the final product.

China is a classic case of how ‘understanding the five competitive forces can help reshape an entire industry to stake out a position that is more profitable and less vulnerable to attack’ (Porter, 2006). A look at how China has managed to take itself to the top could give an idea of what could be in store for South Africa. As mentioned before the five competitive forces include, the bargaining power of suppliers, the bargaining power of customers, the threat of new entrants, the threat of substitute products and the competitive rivalry within the industry.

The Chinese government support and the change in costing structure have manipulated three of the five competitive forces. The first is the threat of entry has actually been increased to push down the purchase price of vehicles manufactured in China. According to Porter, this is because ‘new entrants to the industry bring new capacity and a desire to gain market share that puts pressure on prices, costs and rate of investment necessary to compete… [New entrants] shake up competition’. Over and above this, the change in policy by Chinese government has played an active role in stimulating this industry in China.

Russo and Ke (2010) state that ‘the Chinese government views the automotive industry as a “pillar” of its economy since it brings technology, jobs and investment to the economy. As such, several agencies of the China government play an active role in sponsoring initiatives to further stimulate automotive development and growth’. This enables manufacturers to produce larger volumes and the result is realizing economies of scale in terms of components (supply side economies of scale). The manipulation of the second force results in the leverage of the third force.

That is through sourcing components globally, the power of suppliers that provide components to the Chinese motor manufacturing industry has been reduced, shifting the balance of power to the buyers (the car manufacturers). What does this mean for the worldwide automotive industry? It means countries that are adopting strategies to ensure the cars their respective industries are manufacturing are affordable without compromising the quality are going to be the leaders in supplying the world with vehicles in the medium term. China’s exponential growth is testament to how rapid the effects can occur.

It is interesting to note that South Africa’s strategy mirrors that of China. The recent years have seen growth in the units manufactured in South Africa – the further is looking bright for the South African motor manufacturing industry, ceteris paribus (with other things equal). Bibliography: •Auh. S and Menguc. B (2005) Balancing exploration and exploitation. The moderating role of competitive intensity. Journal Business Research, 5, 1652 - 1661 •Miles. RE, Snow. CC, Mey. AA, and Coleman. HJ Jnr (1978) Organizational strategy, structure and process. Academy of Management. The Academy of Management Review, 3 , 546 - 562 •Mohabir.

S, (2008) the association between ambidexterity strategic orientation and business performance in the financial services (banking) sector Websites: •http://www. edgars. co. za/Edgars/About_Edgars/about_us. htm? MenuItem=About_Edgars •http://www. jetstores. co. za/Jet/About+Jet/ •http://www. theretailer. co. za/news/9-latest/2086-gdp-growth-at-26-statssa •http://en. wikipedia. org/wiki/Porter_five_forces_analysis •http://www. dti. gov. za/publications/automotiveindustry. pdf •http://www. gmsa. co. za •http://www. swirecc. com/ •http://www. booz. com/media/file/China%E2%80%99s_Next_Revolution_en. pdf