The United States Automobile Industry: An Analysis of Brand Power and Market Position - Research Paper Example

The United s Automobile Industry: An analysis of brand power and market position BY YOU YOUR SCHOOL INFO HERE HERE TABLE OF CONTENTS Purpose/Objective of Paper………………………………………………………. 2. Executive Overview……………………………………………………………… 3. How Toyota managed to take the Lead………………………………………….. 4. Toyota’s Sudden Decline in Market Share……………………………………….. 5. Potential Problems with Big 3 Automakers………………………………………. 6. The most Important Marketing Mix Issue………………………………………… 7. Hybrid Vehicle Advantages………………………………………………………. 8. Summary and Conclusions………………………………………………………… 9. Personal Benefit of Research Study………………………………………………. The United States Automobile Industry 1. Purpose/Objective of Paper The United States auto industry has not been steady in regards to which automakers had the highest sustainable market share in the U.S. Up until 2008, General Motors had been the top ranking automaker related to sales and profit. After 2008 Toyota took the lead in highest market share. The purpose of the paper is to examine the factors that lead to such a dramatic turnaround by major automakers. By understanding the industry factors, consumer-related factors, and individual business situations that have occurred since 2007, a solid explanation can be provided in order to help automakers either keep their current market position or improve their standing in this very competitive sales market in the United States. 2. Executive Overview Research shows that price is a major reason why Toyota is able to outperform competition. Their brand reputation was harmed between 2008 and 2010, but the business recovered because the business was an innovator that gives customers better gas mileage on many models. This is better than competition. The report shows external factors, consumer-related factors and the most important part of the marketing mix that makes the Big 3 unable to gain the top industry position against Toyota. 3. How Toyota managed to take the Lead Up until 2007, General Motors had always been a leader in quality with a very respected and long-standing brand in the U.S. market. When GM began to see sales slip suddenly in 2007, it was not a change in brand reputation related to consumer beliefs about GM quality. It was conditions in the macro environment that was a powerful influence in why GM lost revenues. In 2008, the cost of petroleum in the United States skyrocketed over $4 per gallon, making higher-cost trucks and SUVs undesirable by many consumer markets (CBS News 3). GM had invested many financial resources into production of heavy-duty and light trucks as well as sport utility vehicles that were in high demand between 2000 and 2007. General Motors, due to the high gas prices affecting consumer incomes, reported the largest financial loss on record for an automaker of $38.7 billion dollars. In order to stay liquid, GM was forced to halt production of trucks and SUVs and end operations in several production plants across the country. During this same time period, Toyota was able to shelter itself from sales losses since most automobiles produced were small to mid-sized cars with a more affordable price than General Motors’ products. Many customers realized that they would be able to afford higher gas prices due to the fact that Toyota was not only priced cheaper, but had better gas mileage than General Motors, Ford and Chrysler products. For example, the high-selling tenth generation Toyota Corolla could get 38 miles per gallon on the highway (Edmunds.com 8). This was approximately 35 percent more fuel efficient than Chrysler, GM and Ford products in the non-hybrid category. This not only made Toyota’s products more attractive to price-sensitive consumers, but also improved the overall brand reputation of Toyota for meeting consumer expense needs. Toyota was also becoming superior to other U.S. automakers between 2004 and 2007 in reducing costs throughout the entire value chain. Toyota developed a lean manufacturing system which involves using the smallest possible stock levels and finding opportunities to improve efficiency that led to less waste. This is part of a low cost leadership strategy described by Michael Porter. This strategy is effective when the market has very competitive pricing rivalry between main competitors because the low cost leader is able to control costs and give consumers lower priced products (Thompson 134). None of the other automakers that have production plants in the United States could compare with the lean production system used by Toyota. With rising prices happening in the supply chain for many competitors, Toyota could always use lower pricing strategies. By 2007, Toyota had developed such an efficient lean production system and cost reduction strategy that no other competitor could offer similar low cost products in many different car categories. This led to Toyota being able to take a lead by lowering operational costs much better than all other U.S. and Japanese auto companies. There is yet another reason why Toyota took the lead in 2008. After General Motors had record losses, the company’s executives started asking the government for financial help in order to stop the collapse of the company. By 2008, it was heading toward bankruptcy since its assets were not equal to the high debt load of GM. Consumers began to think that the company was being controlled by very inefficient executives which damages the brand reputation of the business. There was also much negative publicity for General Motors and Ford between 2005 and 2007. Both companies were going through restructuring in order to save operation costs. This led to both businesses laying off employees and closing plants. In 2006, the Wall Street Journal hosted a poll asking consumers about their attitudes toward many companies (not just automakers) to understand their brand positions. General Motors plummeted from 38th place in the annual survey to 57 in just a single year (Fontanelle 1). Toyota was not affected by these negative attitudes. Instead, the business was getting very good public relations attention for quality standards and cost controls. Toyota was also seen as a company with very good management leadership. Why is negative publicity so important for keeping sales levels high? There are models in psychology and marketing that tell about how consumers look toward reference groups when making buying decisions. Reference groups are people that consumers identify with, such as celebrities (Boone and Kurtz 281). Many buyer markets also make purchase decisions based on their belief about a business’ corporate social responsibility efforts (Watts 87). There was a combination of factors that were making customers feel sorry for their reference groups (the workers being hurt by GM and Ford practices). The businesses were also losing sales for being believed to be unethical leaders. There was therefore a reduced belief with many markets that GM and Ford both had a climate of unethical behavior. 4. Toyota’s Sudden Decline in Market Share In 2009, Toyota began to get their own negative publicity for being an unsafe company. That year, the company recalled 350,000 Prius models for faulty water pumps and even situations where the electric circuit problems in this model caused the car to suddenly stop while driving (Siu 1). Other recalls included a problem with the accelerator pedal getting stuck in floor mats and in the carpeting on many models. In total, the recalls in the United States and in other countries where Toyota operates totaled over 20 million different models over a three year period. There was much media coverage about the recalls making the industry leaders and many other stakeholders question whether Toyota was having problems with safety and quality. This was not a good situation for Toyota’s brand reputation. A 2010 study showed that 41 percent of all consumers got their news information from online sources (Pew Center 2). Many of the stories that were showing the recall issues that happened between 2007 and 2009 were reported on the Internet. What makes the Web news so different from television and newspaper is that there are many consumer blogs and opinion editorials online. People and news reporters allowed to give their own beliefs about Toyota’s brand and its safety/quality record changed some markets’ beliefs about Toyota’s track record as an automaker leader. In 2011, researchers examined the potential impact on brand reputation of Toyota to try to understand whether the recalls were causing problems with its image. The study involved use of many different online sources and printed newspaper sources as references in the examination. Using statistical models to analyze, the researchers were able to predict that by 2010 Toyota was experiencing a 35 percent decrease in brand reputation as a result of negative opinion from many media sources (Fan, Geddes and Flory 2011). Blogs were the main predictor of quality brand presence losses in the study. Because so many consumers believed that online news sources were quality sources for information, Toyota had many problems with many different consumer segments. It was not just the recalls that caused Toyota to lose market share. In 2011, Japan was hit with a massive earthquake and tsunami that caused production problems with the business. A total of 62.7 percent of the business’ production was stopped when there was a supply problem with many cars that are manufactured in Japan (Associated Press 1). This led to a total loss of approximately $12 billion in lost sales because the business now had a supply problem with finished product available in the U.S. market. GM did not have as much of their production in Japan and their supply network was largely in the U.S., Canada and Mexico so this business did not have nearly the same problems in continuing production after the tsunami. Major losses while GM and Ford were improving their business models and increasing sales gave GM the chance to regain its top position as industry leader. Fortunately, Forbes magazine believes that Toyota was able to regain its brand reputation because of consumer characteristics. A contributor to this very respected news and business magazine says that consumers have very short memories (Halliday 2). In late 2009, JD Power also looked at the quality and safety record of many Toyota products. The report released that some of the most dependable cars on the road were being produced by Toyota. The findings were based on 31,000 Toyota owners. The blend of short-term consumer memory and sudden positive publicity about the business’ dependability improved its sales revenues that helped the business regain the top industry position. 5. Potential Problems with Big 3 Automakers It is assumed that one of the main problems with the Big 3 compared to Toyota is lack of innovation. The Wall Street Journal reports that GM, Chrysler and Ford have not made use of technologies that improve the finished product (Lazzaro 2). This is not true of Toyota that is always innovating new designs and building hybrid vehicles faster that have much better gas mileage. Many price-sensitive consumer markets look toward Toyota for reducing their expenses when driving a car because Toyota products have much better gas mileage in most models. GM, Chrysler and Ford products (except for subcompact and small-sized cars) are also priced much higher than most of Toyota’s products. The Big 3 manufacturers also have much higher operational costs. This is because they cannot copy the lean production system and just-in-time production that Toyota has built by having more industry control over its supply and value chains. The Big 3 are very dependent on suppliers under the QS9000 quality standards which raise the price of products when having to change supplier manufacturing systems to meet these standards. Toyota is able to remove the supplier power on the market by having more control and ownership over many of its supplied products. This is why Toyota uses its low cost leadership strategy to keep costs low and also be able to provide lower cost products. When businesses do not have to try to recover high operating costs they are usually forced to raise prices to get profit. This is why the Big 3 is unable to outperform Toyota in so many areas. General Motors and Ford are also having financial problems related to what is known as legacy costs. These are costs that involve payments for retirees in the form of pensions. The legacy costs at GM are the highest in the industry. It is estimated that GM, a company with 300,000 employees across the world, is paying expenses equal to a company with 800,000 employees (Mandel 1). These expenses are very high with many retirees from both GM and Ford being offered pensions that equal approximately $16 to $18 per hour in labor payments for each retiree. Toyota, which has not been in business as long, does not have the same kind of legacy cost problems. This allows the company to keep more of its operating costs lower than Ford and General Motors. In fact, when President Obama approved a massive multi-billion dollar bailout for General Motors, the Federal government agreed to make payments for its retirees so that business could enter a restructured bankruptcy. This shows the extent that the Big 3 companies must be worried about their retiree and pension expenses that are quite different from Toyota’s. Also, when the Big 3 was forced to offer very large cash discounts to customers in order to stay afloat, buyers began returning to these brands. Toyota and other foreign automakers immediately responded with competitive discounting. This was an absolutely new business strategy for Toyota that did not offer big discounts because they had enough sales. This means that Toyota is very good at responding to competition in areas of pricing and other marketing activities which gives them equal standing with the Big 3. Chrysler, Ford and General Motors do not like to offer discounts because they believe it causes problems with the brand being cheapened. Waiting too long to give consumers discounts is one reason why Toyota was able to regain its market position as a leader and keep it recently. If the Big 3 had started giving big discounts right after coming out of their financial troubles during 2008, they would have been able to build more brand loyalty with consumer markets. This would have given these businesses much more competitive edge from price-sensitive buyers. 6. The most Important Marketing Mix Issue When looking at all United States manufacturers, the most important of the 4Ps in the marketing mix is price. It was already shown in the report that buyers were not going to buy GM trucks and other makers’ SUVs simply because of a $1.00 increase in gasoline prices in the United States. When thinking about the cost of gas at a more reasonable price of approximately $2.50 per gallon, in a standard 13 gallon tank, this would be $32.50 for a fill up of gasoline. At $4.00 per gallon, this would be $52 total if the tank were filled from empty. With only a difference of $20 when gasoline prices rise, it shows how really price-sensitive buyers really are. The Big 3 automakers began offering discounts because they could not get buyers interested in returning to these brands. Again, this shows that buyers really look at their costs when they decide to buy a car and when they think about the total costs of driving the vehicle. Nearly all of the research information provided for the report showed that price was a factor involved, above and beyond product, place and promotion. All manufacturers invest much of their marketing expenses into very expensive advertising, so there is not much difference between automakers in this area. It is absolutely clear that pricing is what gives consumers more interest in making a car purchase. Since Toyota is able to keep operating costs low, they have a big competitive advantage over their main Big 3 competition. 7. Hybrid Vehicle Advantages Toyota has the lead as an innovator in hybrid concepts. The Toyota Prius is a very strong selling car that currently gets 50 miles per gallon for the 2012 model. This has no competitive equal offered by the Big 3 and other U.S. auto marketers. What gives Toyota such a big advantage in being able to produce hybrid vehicles is the supply chain used by the company. Big 3 manufacturers have to rely on partnerships with domestic U.S. suppliers and innovators to build hybrid-electric or flex-fuel automobiles which is expensive with the current value of the U.S. dollar. Toyota has much of its supply network in Japan, which has a very low exchange rate against the U.S. dollar. Because of this, Toyota can rely on its foreign suppliers with much lower payments for partnerships and supply of needed materials that gives the business more financial resources to expand innovation and research and development. Competition does not have this opportunity under its current supply strategies. 8. Summary and Conclusions If GM is to overtake Toyota, the business will need to innovate. The business should put more effort into market research to find out what consumers really want in price, design and hybrid models. GM still offers much higher prices than Toyota so the business would have to benchmark Toyota’s lean manufacturing systems in order to save operations costs. GM would also have to reduce its very high legacy costs for pensions by investing in different hedge funds or other cash-building activities. Only by reducing these costs can GM hope to overtake Toyota. This report showed the many factors that make Toyota a leader even when its brand was given a poor reputation for safety and quality. Pricing is definitely a major factor in what drives customers to Toyota as well as the business’ ability to give consumers much better gas mileage. 9. Personal Benefit of Research Study This report helped the researcher understand how large corporations compete with one another. As a future marketing professional it is necessary to witness not only medium-sized company strategies but also look at the industry characteristics that have affects on business strategy. Through this study examination, the researcher learned about the forces that guide business strategy with large companies to learn just how much external factors should be considered as a marketing businessperson. The researcher also was able to improve their researching skills, which is important in academics as well as toward the receipt of final degree. Research helps businesses build better strategies and also the student in giving more quality work that is supported by statistics. This was a very valuable study. Works Cited Associated Press. Toyota Car Production Plummets after Tsunami. April 25, 2011. Web. April 18, 2013 < http://autos.aol.com/article/toyota-car-production-plummets-tsunami/> Boone, Louis and David Kurtz. Contemporary Marketing, 12th ed. Thompson South-Western, 2007. Print. CBS News. General Motors: Timeline. 2009. Web. April 18, 2013 < http://www.cbsnews.com/2100-500144_162-5049636.html> Edmunds.com. Toyota Corolla History. 2013. Web. April 17, 2013 < http://www.edmunds.com/toyota/corolla/history.html> Fan, David, David Geddes and Felix Flory. The Toyota Recall Crisis: Media Impact on Toyota’s Corporate Brand Reputation. Joint Statistical Meetings Proceedings, American Association of Public Opinion Research. 2011. Web. 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