Decline of the Fiats Performance and Ranking in the Automotive Industry - Assignment Example

Fiat Executive Summary Fiat is one of the pioneers in the automobile industry. It is known for its creativity, versatility and practicality. The company has won the Car of the Year award on eleven different occasions. It is the maker of many successful brands such as Ferrari, the FIAT brand etc. It primarily focuses on the industrial manufacturing of cars but has operations many other fields. With the global recession faced by all the industries, FIAT has also faced a downturn in the recent years. This is because the environment for car industry has changed dramatically in the past few years. There are many reasons such as inflation, increased competitiveness from Japanese and Korean manufacturers, the emergence of low cost Asian manufacturers, change in policies and the global crisis. As a result, huge losses have been faced in terms of sales and turnover. There are many internal issues as well that have added to the existing problem of Fiat. This can be handled by identifying the key opportunities. The transformation of opportunities into strengths is the need of Fiat to come out from the crisis. Legal and consumer trends are looking for green technology and gas- efficient cars. This can be a major advantage for Fiat as it has always been addressing environmental concerns. In this report, an analysis of all such areas has been done which have contributed towards the decline of the Fiat’s performance and ranking in the automotive industry. The aim is to figure out the problematic areas where change and direction is required. In the first section, the background of the company is discussed. The external factors such as economic or technological which are the major indicators of growth or decline in any industry are evaluated to understand the current market trends and situation. The major challenges faced by Fait group are outlined keeping in mind its strengths and weaknesses. In the end, recommendations are given in the form of solutions that must be incorporated in the company’s strategy to address the major areas of concern. Company Background: Fiat is one of the founders of European Automotive Industry and has a history of more than 100 years. The acronym of FIAT is Fabbrica Italiana Automobili Torino. It was established on the eleventh of July 1899 by a group of investors and has its headquarters in Turin, Italy. Today, it has been operating in more than 61 countries with 1,063 companies. It has diversified into a pool of industries and has been designing and selling cars, trucks, construction & agriculture equipment, engines, military vehicles, aviation etc. At the time of its inception, Giovanni Agnelli, one of the members of the Board of Directors, stood out and was known as the company’s innovator and mastermind. He had a great strategic vision and determination to make the company highly successful. Due to his utmost efforts along with the other members of the company, Fiat gained recognition at a very early stage and it is said to produce more than 10% percent of Italy’s GDP. In 1900, the first factory was opened in Carso Dante with a workforce of 150 workers who produced 24 cars. As of 2009, only the domestic workforce has reached to 198,348 workers. It has a workforce of about 223,000 people. Out of which, 111,000 are outside Italy. Fiat logo was designed in 1904 which has become a status symbol due to the superior and world-class cars manufactured by the company. During the First World War, it aimed at the production of munitions. With the rapid technological changes, developments were made at the railway sector, commercial vehicles etc. The year 1958 was marked as an economic boom for Italy which was facing a downfall due to the advent of the Second World War. The automobile sector also grew as it was the driving force for the Italian economy. Fiat experienced an increased production along with the exports from 1965 to 1977. In the year 1979, an independent automobile sector came into existence which was named as Fiat Auto S.P.A which included Fiat, Autobianchi, Ferrari, Abarth and Lancia. Maserati and Alfa Romeo were acquired in 1993 and 1984 respectively. Strategic Challenges faced by FIAT: Fiat is the world’s ninth largest manufacturer of cars and trucks with annual sales of more than 20 billion units. As the world is growing, it has become more difficult for the car industry to survive in this highly competitive environment. In order to maintain and grow its business, FIAT faces many challenges such as: Identification of the upgrade niche market to cover the costs of highly expensive components used in the automobiles. There is an urgent need for a hot-selling new car model from the FIAT group. Domestic dominance is under pressure and there is a need to address this issue. Variation in its pricing strategies to increase the market share. The business is running smooth on a day to day basis but Fiat has to come up with broader and more fundamental objectives. The marketing effectiveness of Fiat should be increased. Availability of the brands in other regions of the world after from the European market. Style-consciousness has been rising in Italy and Fiat needs to focus on the Style centre. Macro Environment Analysis: To analyze the car industry environment is a very complex task as it involves a wide range of customers, suppliers, product makers who are spread all over the globe. It can be named as the ‘industry of all the industries’. There are many economic, social, technological, ecological, political trends that have a great impact upon the entire industry. In order to understand the current market standing FIAT needs to understand the external condition as it plays a huge role in the world economy. It is essential to understand the historical and economic evolution of the company in order to reinvent the current global strategy and deal with the challenges. P.E.S.T. Analysis of the industry: This analysis is carried out to determine those factors that have been affecting the performance of FIAT as well as the car industry as a whole. Four dimensions will be covered in this analysis namely: Political, Economic, Social and Technological. This will help in understanding the important scenarios that shape the corporate strategy and other important decisions. Political Factors: In the period of 2008 to 2012, According to the Kyoto Protocol: All the supporting companies must reduce or minimize the carbon gas emission by 8% as compare to the levels of 1990. This is an important factor to consider because more than 100 countries including EU have ratified the protocol. These environmental restrictions are very strict in the European market and Fiat needs to make changes accordingly. The expansion of the European Union should be also taken into account. The distribution of cars is mainly dependent upon the domestic markets. In this era of globalization, Fiat must expand its distribution channels to move to other countries. The economic downturn faced by the whole world should be considered as it has increased the oil prices. This has affected the demand of the cars since petrol and cars are interrelated and complementary products. However, this factor might not influence the purchasing power of developed countries with high revenue per capita. Economic Factors: The automotive market in China is growing very rapidly and its sales have increased to approximately 69% with more than 1.45 million cars. The sales of buses have been doubled and commercial vehicles have grown by 30% in two to three years. It has been forecasted that China will be the third largest market for cars by the end of this decade. This is a big threat for Fiat as it will provide an opportunity to the Chinese manufacturers to market their products internationally. Although Europe leads in the production of passenger cars with 42% share followed by America with 21% and Asia-Oceania with 35% (2002). Technological Factors: The global oil production was at peak in the previous year and the demand ‘outstripped the production’. Due to this ‘oil peak’, automobile companies are searching for alternative fuel solutions. For instance, Iceland is using hydrogen fuel cells to get self-sufficient in another 35 years. Social Factors: The social awareness of pollution has increased tremendously. People have become more conscious and are trying to support EU by using public transportation etc. The unstable situation all over the world such as terrorism attacks has also negatively affected the buying behaviour of the consumers. FIAT Porter’s Five Forces: Rivarly within the industry: The competition between the automobile companies is very intense both on the domestic and international levels. Fiat has been gaining advantage by implemeting innovation product features and product differentiation ideas. For instance, in the early 90s Fiat began to outsource more contracts to lower the costs. It tried to work with one-tier suppliers who absorb much of the R&D costs. In the same way, investements in foreign countries can have a postive impact in the internalization strategies particularly in the labor costs. Fiat-GM alliance has increased the global purchasing advantages due to the availability of more resources. These alliances can also be made with other makers such as Ford, Indian group Tata Motor etc. The power of Suppliers: In order to produce any product, raw materials, different components and labor is provided by the suppliers. The suppliers of Fiat are divided into two main categories namely the italian component suppliers who ae economically dependent on the Fiat group for their business activities. They are basically the subsidairies of Fiat such as Teksid and Magneti Marelli. In a more direct way, the other category of suppliers include hundreds of smaller firms. As fiat has been on its way to expand the business internationally, many italian suppliers have also moved to abroad. Threat of new entrants: The entry of any new competitor can be a threat to the entire market. However, barriers can be used to stop the entrance of any new firm and to maintain a fixed level of profit for the exisiting firms. The strategy pursued for this purpose by Fiat is to expand its portfolio. Firms can merge with foreign markets such as India to build new relationships with the other companies. Mergers will reduce the threat of facing a new entrant and will be the biggest barrier. All the major car companies such as Nissan and Renault, Honda and Toyaota have merged and even found themselves at a a very complex position of cross-ownership network. Fiat has also managed to maintain its brand identity which is a key strength in avoiding this threat. The power of customers: The power of customers refers to the purchasing power of the buyers and their impact upon the producing industry. Companies like BMW, Ford and GM have been using multi-brand strategies in order to attract different types of customers in different markets. The marketing strategy of Fiat is comparatively weak in this regard and it was worsened by the trend of last ten years. This was the reason of decline in the share of Fiat in the Italian market as style-conscious people also strated looking for someother products. Fiat also lost its share in the international market due to some products which were considered as unreliable and very expensive. The Fiat Punto was a ray of hope for the company to foster better outcomes and make some profit. The aim of Fiat had been to improve the power of buyers and reach out to the new goal which says “We and our dealers must improve the customer experience, give better customer satisfaction and we now have the right models for them to sell.” (Giulio Salomone). The threat of Substitutes: In the automobile industry, the price competition can be a major reason to go for substitute products. This is an alarming situation for Fiat because the availability and popularity of Fiat’s models is low in Europe other than Italy and it becomes difficult to become a strong competitor with the other car companies. The inefficient management of the brand is another reason of the crisis faced by Fiat. This can be overcome by creating better and newer products so that buyers can have more options to compare models with other brands. Company Resource Audit: The resource audit of any company determines the available resources for a particular firm. Some of these can be owned such as machinery, trademarks, retail outlets etc. Whereas, others can be acquired through partnerships, joint ventures etc. Research- a valuable asset of FIAT: In the recent years, Fiat has paid much attention in the R&D area and has recognized the need to change. By the term change, it doesn’t refer to the change in style, safety and innovation but also on the environmental basis. The R&D department of Fiat has revolutionized the industry as it discovered the environment friendly diesel engine technology which is now used by many major European car makers. Sergio Chiamparino, Turin Mayor, says the quality of the CRF research convinced the US administration to support the Fiat-Chrysler Deal. The research centre has also attracted the General Motors due to the technological equipments. This technological know-how can be vital in determining the future needs and patterns of the industry. This has lead to the recruitment of such people who are creative, dedicated, and dynamic with knowledge to move forward. Leading people with leading change are the core values of Fiat which makes it a globally competitive brand. In 2005, the Fiat group created a function known as “Research and Innovation” with its main player being Centro Ricerche Fiat and Elasis to guide all the research activities. An ‘Elasis Research Center’ is also present which has highly specialized people in vehicle development, technological innovation, traffic safety etc. Control of US car maker ‘Chrysler’: After the absorption of General Motors due to the severe crisis faced by Fiat, it has now taken control of the US car maker Chrysler and is trying to find additional partners to become a super group as a whole. This is essential to face the complex challenges and stand a chance in the brutal competition with the other car companies. This alliance can be taken as a great opportunity for the company’s financial position as well as in terms of market value. Environment: This is also one of the strategic priorities of Fiat in developing new products i.e. to make all such decisions bearing in mind its environmental repercussions. The Fiat Code of Conduct has outlined separate guidelines as environmental policy which includes: Pollution Prevention: The use of environment friendly materials. Conservation of resources: A design should be used for all the products and processes. Minimization of the Environmental Impact: It must account for each and every stage of product and process life cycle. Reduction in Waste generation: Using materials that can be reused, recovered and recycled. This is a real asset for Fiat Group as the world is more eco-friendly, people are now looking for such environmental solutions along with the use of their favourite products. FIAT’s major lines of Business: Since 1899, Fiat has evolved as a producer of almost all the things powered by them from automobiles to trains, construction equipment trucks, tractors, etc. Here are the four main segments focused by Fiat: Automobiles: Apart from the partnership with Chrysler, Fiat Group Automobiles produce and sell vehicles under the following brands: Alfa Romeo, Lancia, Abarth etc. Light weight commercial vehicles are manufactured under the name of Fiat Professional Brands. Luxury cars such as Ferrari and Maserati are also produced by the Fiat group. There are five assembly plants of in Italy and one each in Poland, Brazil and Argentina. It has also participated in joint ventures for production with countries like Turkey, India and Serbia. Trucks and Commercial vehicles: A complete line of industrial vehicles are produced by Fiat group with its lveco subsidiary. It also produces buses under the irisbus brand. Astra and Magirus brand is used for fire fighting and special purpose vehicles. Components: It includes Magneti Marelli for different automotive systems, Teksid for engine blocks, Comau for industrial automation and Fiat Power train technologies for engines and transmissions. Agriculture and Construction Equipment: Fiat produces all the related equipments with the help of its Case New Holland Subsidiary which was created in 1999 through the merger of Case Company and Fiat’s New Holland. Publishing and Communications: Itede operates in this sector of communications and publicising. It includes the advertising company known as ‘Publikompas’ and daily newspaper ‘La Stampa’. Organizational Changes: In 2009, Sergio Marchionne considering the worst situation of the company made some immediate changes such as: Appointing fresh leaders to top management positions. Empowerment of the employees by giving them more authority. Replacing the engineers with marketers for external specialists. These changes have been working for Fiat. The employees need to dedicate extraordinary time and efforts to drive the company. This is creating a work-life imbalance but it is the need of the company at the moment. Code of conduct at Fiat: "Success is measured in part by the way we achieve it" (Fiat Group). These are the values upon which this company is based and are as important as their financial and industrial projects. Fiat is very well aware of the fact that only machinery and plants cannot make a company successful. It is the legacy of its people who make the company. Fiat is commercial group because of its size and activities. Therefore, it needs to incorporate the concept of credibility, cooperation, respect and equality at all times. All those values and principles the company abides by are present in the code of conduct and are implemented at all levels from the lowest worker to the higher officials. The document is not just formulated for the employees but also for the suppliers and commercial partners that represent a major portion of the company. Corporate level Strategy of Fiat: The current corporate strategy of Fiat is to split its core auto business from its machinery and truck units in order to revive and focus on the auto business. After the huge loss in 2002, the company is trying to focus on the strategic choices made by the managers. This strategy has been formulated to turn the formidable economic and political situation back to the good times of Fiat Group. The strategy projects Fiat onto the whole world as a leading brand. Earlier in the year 2003, Fiat focused on manufacturing and services activities over the automotive sector. Till 2007 it continued to strength these two sectors with alliances in high-growth markets like India. Recently, the targets are set to gain market share in Italy, Western Europe and Asia. Core Competencies of Fiat: It is a strong brand with historical value and recognition. Efficient system for production. Innovator in small car technology and fuel-efficiency. Experienced joint ventures, partnerships, licensing. An environment friendly auto- maker. Successfully restricting from the crisis. Weaknesses: Highly dependent on the European Market. Lack of leadership skills from the management. Not at all established in the major markets except South America. No economies of scale. No such variety of product lines to target the global markets. No recognition in the US market. Gaps in the Global Strategy: There is no production on the global level especially in two major markets namely Asia and North America. There are is a lack of communication and distribution channels in the above markets. There is no strategy to make the brand popular globally. From the production point-of-view, there is no strategy for mid-size of family size cars to cater the markets in places like USA. Strategic Solutions for FIAT- Course of Action: Revaluation of the Brand Equity: Fiat should make use of its established historical name and the golden years of 1950s and 1960s. The company must exploit its famous and evocative brands such as Lancia and Alfa Romeo which are popular for sports car model and elegance respectively. Another very major advantage of Fiat is the made in Italy tag which is highly recognizable in other parts of the world. On the bases of these strong points, Fiat can make wonders and re-gain its lost value and recognition. Competitive Advantage: Firstly, Fiat must reach to those people who owned a Fiat marked by the golden years. This would be helpful in building good reputation with old loyal customers and in attracting new potential customers. Fiat must focus on attributes such as Style from all the aspects with all great designers of the world. This characterization will help FIAT in gaining a competitive advantage not only in the domestic market but also in the foreign countries where Italian style is deeply appreciated. Fiat must renew its entire system keeping in mind the current trends of the competitors. The combination of old style with the modern features can create a product which can sense the taste of Italians as well as outsiders. In order to achieve these goals, it is essential to focus on two key areas namely the marketing side of Fiat and the supremacy of engineering. Fiat is still lacking in the core competencies of engineering and style that meets the today’s demands. Fiat need to employ such people who are aware of the current trends and can come up with innovative ideas to structure such products that can work out for Fiat. There must be a combination of some great designers with skilled engineers to make this happen in a more realistic manner. There must be a balance between and there should be no supremacy by the engineering staff. This relationship will surely lead to the creation of a high quality product. Marketing strategy of Fiat has always been very weak and has added more to the crisis faced by the company. Promotions and discounts have always been offered before the entry of a new model in the market. This has always passed a fragmented perception of the Fiat’s car to such an extent that nobody knows what the abbreviation of FIAT is. In order to meet the demands of its target market, Fiat must use a customer-centric approach particularly to handle the marketing affairs. This will provide the real information regarding what is required by the market and how engineers should use the perfect idea to deal with it. It will also help in determining the market trends on the basis of which, major marketing and product decisions can be made. Market Orientation: Fiat is unable to understand what is happening in the present times and that is why the company was unable to comprehend the reasons of huge losses. They have shown the inability to cope up with the environmental and internal changes which have make it unstable and uncompetitive. The outdated top management has been another issue for Fiat. This problem can be solved with an ‘updated management system’ where young talent is recruited with both experience and the corporate education to drag the company from this chaotic situation. Fiat can reap the benefits of its privileged history and tradition with the mix of flexible, charismatic and reactive leaders. Economies of Scale: Another important issue to encounter is the wrong implementation of the economies of scale. This is due to the internationalization of Fiat plants which are mainly located in abroad. This strategy has not been profitable for Fiat. Therefore, it must implement such economies of scope that can fit different models by the integration of produced components. For instance, the same chassis should be used to assemble a variety of cars. This will lower the costs as well as help in diversification of the products. The costs saved in this way should be utilized in the innovation and research department to improve quality and other relative features. This is important as it will allow the company to focus on basic models of the cars according to the emerging countries. This leads to the production of small cars with no air conditioner for underdeveloped countries and more expensive and accessorized cars for the developed countries. This will also solve the inventory issues which incur high costs to the company. Exploitation of its strength: Fiat must identify its key strengths such as the utility cars not only in the underdeveloped countries but also in the developed countries. This is because there is always a price-sensitive segment i.e. younger generation in each country. Outsourcing: Another issue of concern for Fiat is Outsourcing. Fiat must take control of the suppliers and value chain. The solution for this problem lies in the term ‘collaborative commerce’ or ‘virtual integration’ in which a group of suppliers who are not directly linked with Fiat behave as they are. This strategy should be based on two main factors: collaboration and flexibility. Free Trade: Trade liberalization has been a major concern of World Trade organization. Expansions and opportunities are available and Fiat should benefit from these activities. This will help in entering new markets and building stronger relations with the existing market. Affiliation with the Italian (home) market: It can be noticed that the German and French companies share strong affiliation in their respective home markets. This shows the domestic trust of the people towards the domestically designed cars. This link of Fiat is weaker than these brands. They have more focused towards the European market only. Measures should be taken to change the internal perspective towards the brand. Environmental concerns and research: These two areas are the major strengths of Fiat. They must continue show commitment as this is the organized manner for future businesses. Fiat is recognized all over the world for its efforts in these areas and must invest more to sustain it. Conclusion: It can be concluded from the above discussion that the current model of business is unsatisfactory and very limited to the European market. It is not sustainable in terms of technology, product lines, marketing etc. There is no control over the distribution networks and governmental support. The entire structure, system should be redesigned to meet the current needs. As it has been identified that FIAT is on its way to focus on the car sector to regain its reputation, this is the right time to formulate some goals and objectives which are measurable and challenging. Fiat needs to come out of its comfortable zone of business and cater to the world in order to survive in this fast growing industry. The long history of global partnerships should be utilized to make some global changes and achievements. The strong R&D department is capable to discover new horizons of success. The customer orientation should be a part of new strategy. Decision should be made according to the customer insights and preferences. Strategic alliances with other companies in different markets will also be beneficial. The global business activities of FIAT should purely play the auto-focused game. The new logo of Fiat has brought a wave of new identity among the customers and it sums up the concept of change and innovation tied to the today’s vision of the company. Bibliography Diana Kao &Tony Mao. “Using km model to examine a form’s external environment in strategic analysis.” Myacme.org. Odette School of Business. 12th April ,2011 http://www.myacme.org/ACMEProceedings09/p54.pdf Gilligan, Richard. Strategic Marketing Management: Planning, Implementation and Control. Elsevier Butterworth Heinemann, 2005. Lowe, Isobel. Strategic marketing decisions in global market. Italy : Thomson Learning, 2005. Fiat Group. “Operating Responsibly.” Fiatspa.com. Turin Companies. 10th April 2011. http://annualreport2010.fiatspa.com/en/group-glance/operating-responsibly Tallman, Stephen. Global Strategy. Wiley Publishers, 2003. Prof. Erik. R. Larsen. The Fiat Case: A therapeutical Crisis.Lulu.com 12th April 2011. http://www.lulu.com/items/volume_30/470000/470624/1/print/470624.pdf Read More