Strategy Development in the Global Automotive Industry - Essay Example

Topic: Strategy Development In The Global Automotive Industry Q1. Toyota, Honda, Volkswagen, and DaimlerChrylser are among the top 10 giant multinational automobile manufacturers. Using examples from any TWO multinational automakers of your choice critically examine the main arguments for and against 'globalization' and explain how the factors driving globalisation have impacted on Strategic Alliances, Mergers and Acquisitions in the automotive industry. Your answer should be based on critical 'industry' and 'competitor' analyses using appropriate analytical techniques. A1. Globalization is the in-thing today. Whether it is automobiles, video games, fashion accessories, signature brands, exclusive jewelry or plain environment friendly construction material, goods and services are being offered and bought from one corner of the globe to another. Modern technology has made it easier to manage and expand businesses, without even moving out of your office. As the world is getting smaller, markets are getting bigger! Every industry is witnessing mergers, acquisitions, a foray into new and emerging markets and a boost in sales and profits. The customer has never had it so good! Competition on a global basis has resulted in reduced costs, better quality, improved responsiveness and excellent customer service for any product. The automobile industry is a classic example to demonstrate this phenomenon. Let us take the examples of two automobile companies: Daimler Chrysler and Honda and examine how globalization has affected the operations of these two companies. Daimler Chrysler For Globalization In 1998, US-based Chrysler Corp. merged with German automaker Daimler-Benz (1926-1998) of Stuttgart, Germany in a deal that was expected to reshape the auto industry. The deal created a new entity, DaimlerChrysler, which was the highest revenue earner in Germany. The best of technology, safety and comfort in automobiles came together to create the world's best known car company. With the merger, it was thought that Chrysler would have a better access to the European market, while Mercedes parent Daimler-Benz would gain a bigger foothold in the American market. This also gave a chance to both companies to reduce costs. Against globalization According to the article "The DaimlerChrysler Merger" submitted at Tuck School of Business, Dartmouth, http://mba.tuck.dartmouth.edu/pdf/2002-1-0071.pdf , accessed 5th May,2008, "In 2001, three years after a "merger of equals" with Daimler-Benz, the outlook is much bleaker. The financial data is sobering: Chrysler Group is on track to hemorrhage $3 billion this year, its U.S. market share has sunk to 14%, earnings have slid by 20%, and the once independent company has been fully subordinated to Stuttgart4. Its key revenue generators - the minivan, the Jeep SUV, and the supercharged pickup truck - have all come under heavy competition from Toyota, Honda, General Motors and Ford. Chrysler continues to make few passenger cars of note, save the Neon and limited-release Viper and Prowler." Competition from Toyota According to Premium Brand Analysis http://www.pwc.com/extweb/industry.nsf/docid/ccd6ae64aad8ea31802570d90035614e/$file/wylie_stbildagen07.pdf,accessed on 5th May,2008, "In the EU, European Premium brands have attained - and maintained - a position of dominance in the Premium market space. European Premium leads the way, in the USA, but others maybe catching up fast. In the USA, European Premium brands have also grown, but have also faced competition from Asian brands. US Premium segment is also targeted by Japanese Premium brands (Lexus, Infinti and Acura), which collectively held 3.8% of the market in 2005" Competition from Asian bigwigs like Toyota is definitely eating into Daimler Chrysler's profit margins across the globe. People today have a choice between a pricier, classy Mercedes and an equally efficient, dependable, but much more economical Toyota! Company : Honda For Globalization Through globalization, even small and mid-sized companies have been successful in capturing foreign markets. Through the focused application of technology, these small and mid-sized companies have gained access to scale which, otherwise would have been impossible. John Mendel, Senior Vice President, American Honda Motor Co., Inc. stated in the Management Briefing Seminars 2006 that "At Honda, our goal is to create new value for the customer... through the development of original technology that creates unique products that people want to buy... and to do so in a way that reduces our environmental footprint." Honda acknowledges that while their products are global, their customers are local. Efforts are directed towards tailoring their products and operations to suit the needs of these regional customers. With globalization, auto manufacturers from emerging markets like China are also ready to invest in the sector on a large scale. Against globalization Any expansion in operations has to be accompanied by a huge investment. The same is true as far as Honda's efforts for globalization and expansion are concerned. To gain a competitive edge in the global markets, Honda has a well- trained supplier network in the foreign markets. Since the company feels that suppliers are a critical part of the business and directly contribute to the customers' satisfaction, it regularly and strategically employs several outreach initiatives to attract, develop and retain ethnic minority suppliers. This is done at all of Honda's business and manufacturing operating units. John Mendel, Senior Vice President, American Honda Motor Co., Inc. stated in the Management Briefing Seminars 2006 that "Workshops are conducted by professional purchasing/acquisition managers to educate potential ethnic minority suppliers on Honda business operations, formulating strategic alliances and joint ventures, loan and venture capitalization, empowerment programs and other available resources." As any business diversifies, more capital is required to deploy suppliers, train them and keep track of all operations. Also, Honda initiated the Honda of America Mfg. Foundation (HAM), in 1981 to support community outreach in Ohio. The company is spending a huge amount of capital in this effort. The flip side of globalization might be a substantial investment in the form of suppliers, who have to be trained regularly to keep them abreast of the latest models and developments in the company. Managing geographically diverse manufacturing units might become a burden on the parent company. Adhering to quality standards across the globe might become a problem. Cheaper versions of local automobiles might pose a threat to the sales of Honda automobiles. To ensure higher sales, any company has to make sure its suppliers are well equipped to handle the customers' queries and complaints. An efficient supplier can help reduce product and material cost while maintaining a high level of quality and good after sales service.Selecting a competent supplier is very essential for successful supply chain management. According to Gnanasekaran, Sasikumar, Velappan, Selladurai, P, Manimaran in the article "Application of Analytical Hierarchy Process in Supplier Selection: An Automobile Industry Case Study" in South Asian Journal of Management, Oct-Dec 2006 , accessed on May 6th,2008. "This process begins with the realization of the need for a new supplier; determination and formulation of decision criteria; pre-qualification (initial screening and drawing up a shortlist of potential suppliers from a large list); final supplier selection; and monitoring of the suppliers selected (i.e., continuous evaluation and assessment)." The article explains the use of the Analytical Hierarchy Process (AHP) method to overcome supplier selection problems. They feel AHP has the capability to handle qualitative and quantitative criteria used in supplier selection problems. Saaty (1986) suggested that AHP can be used in making decisions that are complex, unstructured, and contain multiple attributes. STAGES IN Analytical Hierarchy Process (AHP ) The AHP involves four stages such as: Stage 1 Setting up the decision hierarchy by breaking down the decision problem into hierarchy of interrelated decision elements. Stage 2 Collecting input data by pairwise comparisons of decision elements. Stage 3 Using the Eigen Vector Method (EVM) to estimate the relative weights of decisional elements and determine the indicators of consistency in making pairwise comparisons. Stage 4 Aggregating the relative weights of decision elements to arrive at a set of ratings for the decision alternatives. Using this four-stage approach, an AHP model for the supplier selection problem is formulated. The AHP model can be visualized as: Step 1: The first level is the overall goal to select best supplier; Step 2: At the second level, factors such as quality, quantity, delivery time and cost will contribute to the achievement of the overall goal; and Step 3: Decision alternatives will be evaluated through these criteria in a unique way. Thus we see that management tools can also be used to give supplier ratings and help companies decide the criteria for selecting suppliers for their products. Question 2: Global market dynamics is an important factor, which accounts for the increasing global competition amongst global car manufacturers and positioning within foreign markets. Critically evaluate the global market dynamics since the year 2000 and discuss how General Motors OR Ford continues to invest into production facilities in order to reduce production costs. Include examples from emerging markets of your choice. A.2 Since 2000, Asian and Latin American countries have been on an overdrive to expand and liberalize their economies. This has resulted in large- scale investments from majors in all industries, including the auto-industry. Land and labour costs are comparatively low in these countries and availability of cheap, skilled labour high. To name a few, Ford and General Motors have been continuously setting up manufacturing units in India, Brazil, China, Vietnam and Thailand in the past eight years. According to Modern Global Automobile Industry, Issue 2: Fall 2004 : The Automotive Industry http://www.loc.gov/rr/business/BERA/issue2/issue2_main.html,accessed 5th May,2008, "Increasing global trade has enabled the growth in world commercial distribution systems, which has also expanded global competition amongst the automobile manufacturers. Japanese automakers in particular, have instituted innovative production methods by modifying the U.S. manufacturing model, as well as adapting and utilizing technology to enhance production and increase product competition. There are a number of trends that can be identified by examining the global automotive market, which can be divided into the following factors:3 Global Market Dynamics - The world's largest automobile manufacturers continue to invest into production facilities in emerging markets in order to reduce production costs. These emerging markets include Latin America, China, Malaysia and other markets in Southeast Asia. Establishment of Global Alliances - U.S. automakers, "The Big Three" (GM, Ford and Chrysler) have merged with, and in some cases established commercial strategic partnerships with other European and Japanese automobile manufacturers. Overall, there has been a trend by the world automakers to expand in overseas markets. Industry Consolidation - Increasing global competition amongst the global manufacturers and positioning within foreign markets has divided the world's automakers into three tiers, the first tier being GM, Ford, Toyota, Honda and Volkswagen, and the two remaining tier manufacturers attempting to consolidate or merge with other lower tier automakers to compete with the first tier companies." Expansion of GMs Production Facilities to Reduce Costs According to Ganesh, in Machinist.in http://machinist.in/index.phpoption=com_content&task=view&id=771&Itemid=2,dated 09 January 2008, accessed 5th May,2008, "Ford to invest $500 Million to Expand India Operation. Current manufacturing facility will be expanded to accommodate volume production of new small car. A fully integrated and flexible engine manufacturing facility will produce petrol and next generation diesel engines for domestic and export markets." "The new facilities and capacity expansion will create more than 9,000 jobs - including 1,500 direct and 7,500 indirect jobs - as Ford India considerably increases its supplier base to meet the expanded production volumes. This, in turn, will compound additional investment by its suppliers and vendors and contribute to the overall growth of India's auto industry." Ford is planning to invest an additional $500 Million in Chennai to its existing plant. This will help to: Expand the plant and accommodate volume production of the new small car. add a diesel engine assembly plant with an initial manufacturing capacity of 50,000 units per annum new state-of the-art engine manufacturing facility to be set up adjacent to the existing unit for manufacture of petrol and diesel engines increase its domestic sales and exports manifold. Question Three: Discuss the ability of Chrysler's new Chief Executive Officer (CEO) Bob Nardelli and of Cerberus Capital the new owners of Chrysler to quickly improve Chrysler's products and car buyers' perception of them by the year 2010. You are expected to make reference to (1) the recent article by Bernard Simon in the Financial Times of Monday 15 October 2007 titled "Chrysler cuts a dash with speed and decisiveness" and (2) your own understanding of the approach to strategy development at Chrysler before the change in ownership and chief executive. A3. Within 10 weeks of taking over Daimler Chrysler, Cerebrus Capital the new owners of Chrysler showed that they meant business. Efforts to improve the public image of Chrysler included: Enforcing a new labour contract between Chrysler and the United Auto after a work stoppage lasting just six hours. Reduced/stopped production of slow selling models. In all, nine plants were shut down by 15 th October,2007, after Cerberus Capital took over Chrysler Improve relations with Chrysler, Dodge and Jeep dealers and accelerate the tightening of dealer network. The production shutdowns would have cut fourth-quarter production by 82,000 vehicles, and costed about $1bn in cash flow. requested more than 200 engineering changes to existing and future models. plans to eliminate overlapping vehicles among its three brands but may also enter some new market segments. reinstating a dealer advisory board that was disbanded a few years ago In 1998, US-based Chrysler Corp. merged with German automaker Daimler-Benz (1926-1998) of Stuttgart, Germany in a deal that was expected to reshape the auto industry. The deal created a new entity, Daimler Chrysler, which was the highest revenue earner in Germany. The best of technology, safety and comfort in automobiles came together to create the world's best known car company. With the merger, it was thought that Chrysler would have a better access to the European market, while Mercedes parent Daimler-Benz would gain a bigger foothold in the American market. This also gave a chance to both companies to reduce costs. What was not foreseen, however was the major competition from other auto majors like Volvo, Audi, Honda, Lexus and Volkswagen. In 2006, unable to adjust to price sensitivity, the company faced a huge loss. Competition from other brands, which were equally capable machines, but very competitively priced, led to a decline in sales for the company. Thus, what was once supposed to be a strategic decision no longer worked in favour of the company and they were ready for a restructuring (buyout) by Cerebrus Capital. We can conclude that while acquisitions and mergers among leaders in the industry is generally expected to bring about bigger success and sales numbers for both the companies, some times the merger/acquisition could have a boomerang effect, as can be seen in the case of Daimler-Benz. Thus it might be advisable for the companies to invest in quality market research on the pros and cons of a merger/acquisition before actually going in for one. Strategies would have to be developed to beat the local competition, keeping in mind the cost factor. Today's customer has a wide range to choose from, so pricing becomes a deciding factor in the successful launch of any new automobile. References 1.http://www.pwc.com/extweb/industry.nsf/docid/ccd6ae64aad8ea31802570d90035614e/$file/wylie_stbildagen07.pdf 2.http://machinist.in/index.phpoption=com_content&task=view&id=771&Itemid=2,dated 09 January 2008 3. http://www.loc.gov/rr/business/BERA/issue2/issue2_main.html,accessed 5th May,2008, 4.http://www.pwc.com/extweb/industry.nsf/docid/ccd6ae64aad8ea31802570d90035614e/$file/wylie_stbildagen07.pdf. 5. http://mba.tuck.dartmouth.edu/pdf/2002-1-0071.pdf 6. http://findarticles.com/p/articles/mi_qa5483/is_200610/ai_n21406101 Read More