Hyundai Motor Company Business Challenges and Relationships - Case Study Example

 HYUNDAI MOTOR COMPANY CASE STUDY 1. The Strategic Challenges Facing Hyundai Motor Company The company faces various strategic challenges in their bid to enter the markets of more developed countries. In the past decades Hyundai had performed incredibly well in their local and international markets but currently the continuity of this success is put into question. Major competitors of the company in developed companies such as Mazda and Chrysler have emulated its 100000 miles warranty (Borstnar, 1999). They have also designed a variety of lucrative marketing strategies that seem very promising. This fact poses a threat to the advantage the company had over its competitors when it comes to the issue of warranty. The company has a packaging strategy that enables it have a higher edge when it comes to it competing against other players in its sector. The packaging strategy entails it using cheaper accessories and equipment in the manufacture of its vehicles. This strategy makes the cars from Hyundai to retail at cheaper prices. Competitors of the company criticised this strategy by implying that a car’s price is its worth and value. Despite this criticism, many customers’ preferred Hyundai cars due to the cheaper prices they retailed at. Its packaging strategy came with it incorporating flashy designs in the manufacture of its cars (Czinkota, Ronkainen and Moffett, 1999). This move helped the company to change its cheap car image and rank as high as its competitors despite their short-term tactics of price-cutting. The company realised that it had reached a high time for it to change its brand image to attract more customers. The key to this fundamental change that the company relied was closely linked to it restructuring its designs and its marketing strategies in penetrating into the markets of developed countries. They had to take these strategic actions despite their worries of concerning the uncertainty about the possible outcomes that were expected in the strategic direction that they were taking. In a bid to penetrate to the markets of the developed countries, the company’s packaging strategy faced great challenges. First, the company’s most expensive car model such as the Santa Fe and Sonata were undervalued when compared against their competitors in those markets. A research in these markets reviled that despite the cars from Hyundai ranking high in terms of quality scores when compared to their competitors, they still had lower resale values. A good example is the Hyundai’s Elantra which had higher quality rankings than the Dodge Neon, Nissan Sentra and Chrysler but when it came to the resale values all these car models ranked well than it. Similarly this was phenomena was also exhibited in the Hyundai Santa Fe. Its quality rankings ranked higher than that of competing models such as the Toyota RAV 4, Toyota Highlander, the Jeep Liberty, the Ford Escape and the Mazda Tribute (Ketelhöhn Escobar and Kubeš, 1995). After one-year of sale, the retail value of the Hyundai Santa Fe was much lower than all these car models from competitors. To make matters worse the resale value gap between the Hyundai Santa Fe car and its competitors such as the car models from Toyota was larger than the quality gap between the car models. The resale value of a car is usually considered as the market’s perception of the quality, worth and value of that specific model. It does not relate to the actual quality of the car in any way. These low ranking of the models from Hyundai models in the markets of developed nations pose a great challenge to the survival of the company in those markets. It seems that the car models from the company are not welcomed in these new territories. In the past Hyundai Company used to rely heavily on Mitsubishi’s technology in the designing and manufacturing of their cars but this is not the case anymore. The company has now established their own structures and designs which are unique and do not emulate the designs from Mitsubishi in way. Many of the customers in markets of the developed countries still have the perception of Mitsubishi cars ranking better than Hyundai models. Some of Hyundai’s car models are almost physically identical to those in Mitsubishi but this similarity is not exhibited in their resale values. After a period of usage, these models from Mitsubishi have higher resale values than the car models from Hyundai. This is a big blow to the image of the brand since it loses its quality to Mitsubishi. Despite Hyundai having lower quality rating s when it comes to lower entrant cars, they have better quality ratings when it comes to medium sized cars. The challenge comes in when customers in the developed countries’ market misjudge the two types of cars. They consider them to have the same quality when making decision on purchasing cars (Hibbert, 1997). An example is the way most customers relate Hyundai Santa Fe’s quality to be the same as that of Hyundai Accent’s despite the fact the former has a superior quality due to the depth of technological advancement invested in it. This is problem is of product mix is affecting the overseas sales of the company. The research and development team have a lot to do to come up with a solution to this problem since competitors are taking advantage of it. The fact that Hyundai manufactures cars that have relatively cheaper prices poses great challenge in its penetration into the markets of developed countries. In most developed economies, the average retail prices of Hyundai cars rank lowest. For example in the United States of America, it is almost impossible to find a Hyundai car that has a retail price of more than 30000 dollars (Fayerweather, 1978). This fact makes many customers in these markets to have the perception that Hyundai lacks the capability to manufacture expensive cars. They relate the low retail prices that Hyundai cars have to low qualities. Majority of the customers of cars in developed countries relate the prices and qualities of cars to social classes. This makes Hyundai cars taken as those for the lower classes in the society (Ellis and Williams, 1995). 2. South Korea’s Assessment as the home of Hyundai Motor Company In a bid to analyse the comparative advantage and disadvantage that South Korea has as home to Hyundai Motor Company it is critical that Porter’s Diamond Model is considered. The Diamond Model contains four conditions: demand conditions; factor conditions; firm strategy, rivalry and structure; and related and supporting industries (Dalton and Best, 2009). Factor conditions mainly relate to a nation’s factor endowment and can be separated into two broad categories: advanced factors and basic factors. Basic factors consist of things such as physical resources, natural resources, capital resources and unskilled labour while the advanced factors consists of highly skilled labour and the technologically advanced communication infrastructure (Verbeke, 2005). The demand conditions illustrate the nature and behaviour of the demand of a certain products and services in that specific country. It goes to an extent of describing the pattern, composition and the internalisation of the domestic demand (Rugman and Collinson, 2009). Relating and supporting industries factors show the availability of enterprises that can support the specific industry in its operations. These supporting and relating industries may include the marketing industries, supplies industries, labour industries and the transportation industries. Firm structure, strategy and rivalry conditions are those rules and regulations in a country that create a framework which give a direction on how firms in specific industries should run. It also consists of the conditions that control entrance of new business in the market, the extent of domestic rivalry and the tariffs that protect domestic industries from external competition. South Korea’s factor conditions have various advantages and disadvantages to Hyundai Motor Company as their home in the international motor industries. First, the country has a vast capacity of skilled workers. The country invests heavily in the higher education sector, which facilitates the ever-growing technological and manufacturing industries with experts of the best quality and experience. The large population of skilled personnel provides their expertise to multinational enterprises such as Hyundai at convenient rates (Verbeke, 2009). The skilled and semi-skilled labour in South Korea is relatively cheaper as compared to other developed countries (Kim and Jaffe, 2010). This fact gives Multinational enterprises that have their homes in this country a competitive advantage over their competitors in other developed countries such the United States of America. These firms are able to save large sums of money from their labour costs, which make them have higher profit margins than their competitors. The Country has also natural resources that favour Hyundai Motor Company (Kenna and Lacy, 1995). These natural resources include, big lands, raw materials, and energy. The country has many yards of land, which give room to the expansion of multinational corporations such as Hyundai. Purchasing or leasing these lands in South Korea is relatively cheaper as doing so in other developed countries. Moreover, the companies that have their headquarters in this country benefit in terms of the reduction in capital costs. South Korea has readily available raw materials such as steel, which are used in motor industries. Having a home facilitates a country with these raw materials hence there will be no need of importing them. Despite the many advantages, that country’s factor conditions pose to multinational enterprises there is a challenge of political instability. The country often clashes with North Korea due to trade and boundary disputes. This fact scares away potential investors from investing in the company. They usually see it as a risky investment due to the uncertainty that come along with the effects of the clashes between the two nations. These investors prefer investing in the multinational enterprises that have their homes in developed in the developed countries (Lee, 1997). The demand conditions of South Korea give multinational enterprises in the country a competitive advantage over their competitors in the developed countries. The country has a large population of people hence high demand for the products and services offered by the multinational enterprises. Majority of the population in the country are above the poverty line hence an increase in demand of products and services (Le Bas, 2010). These companies will be able sell their products locally at high volumes than their foreign competitors do in their respective markets. This aspect gives them a competitive advantage when the multinational enterprises are expanding to foreign markets. A strong trend of the companies in the local markets will help the firms anticipate better the global trends (Lansbury, Suh and Kwŏn, 2007). The availability of supporting and related industries in South Korea gives multinational enterprises in the country a competitive advantage over their competitors. The country has well established industries in marketing, technology, supplies and transportation (Lee, 1987). The marketing industries facilitate the penetration of the company in foreign markets at convenient costs. The country is equipped with vast technology industries, which facilitate the innovation and improvement of the multinational enterprises (Ketelhöhn Escobar, 1993). The well-established supplies industry in the country works hand in hand with the multinational enterprises in providing them with required inputs at convenient prices. They go to an extent of helping the companies such as Hyundai in selling and distributing their products. The country has a good transport network system (Lansbury, 2006). This aids in the transportation of raw materials to the specific multinational enterprises and the distribution of their products. The main disadvantage that is caused by these related industries is that they can bring domestic competition to these enterprises in cases where they produce the similar products and services. South Korea does not impose many regulations to the multinational enterprises in the company hence leaving market forces to drive the firms’ structure, strategy and rivalry. This gives enterprises the freedom to apply methods that will give them a competitive advantage (Genzberger, 1994). If I were the chief strategist at Hyundai Motor Company, I would advise the company to maintain South Korea as its home. This is because the Porter’s Diamond analyses of South Korea gives multinational enterprises in Korea a competitive advantage over its competitors especially those in the developed nations. Having their headquarters in South Korea is thus in line with its global strategy. 3. Relationship existing between Hyundai’s main office and it’s US subsidiary The strategic challenges Hyundai Motor Company experienced made it open a subsidiary in the US to keep in track with its global strategy. Hyundai’s head office produces entry-level cars and medium sized cars while the US subsidiary only concentrates in medium sized cars and luxury cars (Hahn, Duplaga and Hartley, 2000). The US subsidiary does this in a bid scrap off the cheap brand car image so that it can be at par with its competitors. The US subsidiaries work hand in hand with the Hyundai’s main office in pursuing its global strategy. For instance, the launching of luxury car models by the US subsidiary makes the intermediate car models such as Hyundai XG and Hyundai Sonata from the main office in South Korea more appealing. The US subsidiary helps Hyundai to compete favourably with other foreign automakers such as Toyota. They are no longer viewed as a low class brand image. The US subsidiary facilitates the sale of Hyundai in the situation of high import quotas and import barriers. The US imposes high import quotas and trade barriers to protect their local companies against competition. These import quotas and trade barriers affect many foreign automakers such as the Japanese automakers (Chambers, 1999). It forces them to put their retail prices high to make sufficient profits from their sales. This aspect does not affect Hyundai since it has a subsidiary in the US. Its subsidiary is treated as domestic company. This fact gives Hyundai a competitive advantage in its global strategy. The retail prices of Hyundai cars from its US subsidiary are higher than that from its head office. The difference in retail prices is caused by various factors. First, the labour costs in US are relatively high compared to that in South Korea. The subsidiary therefore has to reflect the difference in labour costs to its retail prices to maintain its profit margin. The US subsidiaries also import most of the raw materials from South Korea where the main office has easy access of them (Hyun, 1999). Importing these raw materials increases the production costs of the cars, which are reflected in the retail prices of the cars. The sources of energy used by the US subsidiary are more expensive as compared to those used by the head office in South Korea (Jansson, 2007). These factors increase the retail price of Hyundai cars and make them loose the price advantage that they have over other companies. Despite the US subsidiary losing its price advantage it provides customers their products manner in a convenient and timely manner (Katsioloudes, 2012). In a move to lower its retail price to be at par with that of its head office, the US subsidiary applies a less labour –intensive production system (Violet, 2012). It only employs less than 2000 employees in its factories. This is way below than the expected number of workers for such an industry. They fill this labour gap by the use of robots and the automation of their product systems. Recently the labour costs of the Hyundai’s head office are very high (Kim, 1997). Most of their employees are paid higher salaries than the ones paid to directors of small and medium sized companies. Due to this, the US subsidiary does not have worries of its labour costs leading to loss of the company’s price advantage. Despite this fact, the main office of the company has plenty of operational interruptions due to strikes caused by the workers union. These operational interruptions are not experienced in its US subsidiary. The workers in the main office in South Korea hold these strikes because they get lower salaries as compared to their colleagues in the US subsidiary (Gray, 2008). This takes place besides them having the same productive capacity as their colleagues abroad. The US subsidiaries enjoy smooth running in their operations since the labour unions in US do not participate in decision-making processes as the ones in South Korea do. The US subsidiary has helped the head office in South Korea to design and launch products that suits more the foreign markets. The research and development team in the subsidiary works closely with that of the head office to advise appropriately on which designs to put more emphasis when dealing with foreign markets (Stevens, Loudon and Warren, 1991). The tastes and preferences of consumers differ across markets. It would be highly inappropriate to assume that the customers in the US will be attracted by this designs that attract those in South Korea. It needs the intervention of the US subsidiary to study its local customers and competitors and advice its main office on the way forward. In move to abide with this technique, the US subsidiary advised the head office to concentrate on luxurious car models when targeting the foreign markets (Thompson et al., 2003). This led to the production of Hyundai’s Santa Fe and Hyundai’s Sonata. The two car models were highly appreciated in the foreign markets such as the US. The coordination of the subsidiary and main office in this aspect worked together in relation to the company’s global strategy. The close relationship between the company’s main office and its subsidiary in the USA attributes to its success in international markets. It gives the company a competitive advantage. This is because its major competitors such as Japanese automakers and Chinese automakers lack US subsidiaries. This locks them from getting the advantages Hyundai gets by having this subsidiary. References Borstnar, C. 1999. The positioning of South Korean companies in europe. Bamberg. Chambers, V. 1999. Environmental technology and trade. 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Violet, S, 2012. The Improvement of Competitive Advantage and Internationalization Strategy of Hyundai Motor Company by Stages - Never-ending Challenges and Growth toward Global Markets -. Productivity Review, 26(2), pp.265-299. Read More