Information Technology and the Auto Industry: Comparative Analysis of Performance Management Strategies - Research Paper Example

 Table of Content Table of Content 1 Introduction 1 Features of E-commerce 4 Impact of E-commerce on Auto Dealers 7 GM’s Build-to-order Model 8 Database Marketing and Information Asymmetry 9 Database Marketing 9 Achieving Customer Intimacy through Direct Marketing 10 Disintermediation in the Auto Industry 10 Adding Value to the Auto Industry Value Chain 11 The Changing Cost Structure of Auto Industry 12 The Future Trend of E-commerce of Auto Industry in the USA 14 Conclusion 15 References 16 Comparative Analysis of Performance Management Strategies Introduction The upsurge in information technology has resulted in a structural change of many industries across the United States. Internet, as the primary tool of information technology, has successfully created a competitive advantage for firms to cater the fragmented consumer demand and geographically dispersed supply chains. Globalization has fuelled this growth of virtual proximity of physically dispersed demand as well as production processes (Kotler, 2006). Production is no longer concentrated in one part of the world, successful examples of HP and GM motors show how internet has facilitated an infrastructure conducive to demand fragmentation with the most important underlying motif of seeking cost leadership. Of the most impacted industries is the auto industry, which has experienced a massive structural change in the value chain with an upsurge of e-commerce in the United States (Helper, 2000). Dramatic drops in auto sales have led to a wide spread crisis in the United States auto industry. As recently as 2008 each of the “Big Three” U.S. automakers: General Motors, Ford Motor Company and Chrysler requested emergency loans in order to address impending cash shortages. In 2009, both GM and Chrysler were forced to file for debt relief under chapter 11 bankruptcy. Ford avoided bankruptcy by obtaining a large line of credit. Better business decision and cost-cutting initiatives are needed to insure financial success in the auto industry. E-commerce provides an avenue for manufacturers to create a new market structure that will increase profits by lowering distribution cost and increasing customer satisfaction (John, 2011). Direct manufacturer auto sales are prohibited in most of the states in the United States. The territorial restrictions regulate entry of dealers in state laws bar manufacturer ownerships of dealerships (Laudon, 2007). Analysis of the economic effects of these laws has led some to conclude that these state laws could harm consumers by limiting the development of a more cost-effective method of auto distribution. With the cost of the auto distribution system being estimated at an average of 30 percent of the vehicle price, dealer networks are rationalized as part of the manufacturers cost cutting initiative. Dealerships and manufacturers have always had a mutually beneficial relationship, with dealerships being the primary information source for the consumer (Laudon, 2007). Manufacturers see direct sales to car buyers as an opportunity to lower distribution cost and increase profits. They now see the internet as a medium for communicating data, by allowing them the ability to connect with customers directly and share rich amounts of information easily and inexpensively - with many people, with minimal friction and in real time. By using this method customer could eventually build to order assembled vehicles of their choice directly from the automaker and embrace the e-commerce strategy for sake of speed and convenience (Kotler, 2006). The internet has changed the way the auto industry does business. Quickly fading are the days where customers simply walk into a local dealership looking for a brochure. The “walk –in lays the basis for the franchise system so that dealers could pay for geographic exclusivity assuming that they would be able to gain a customer base. It is quite probable that customer continue to want some hands before purchasing the product through possibly changed role for the dealers” (Laudon, 2007). Hence, the object of this research is to evaluate the impact of information technology, particularly e-commerce, on the auto industry of United States including the auto manufacturers as well as production part suppliers. The study aims to examine and critically analyse this impact with regard to the type of technology used in the process that starts from making an offer and ends with making a payment. The purpose of this study is to analyze the effect of electronic commerce on auto industry. It correlates the viewpoints of the manufacturer, dealer and customer along with the explanation of the references to the push and pull views of the supply chain (Chopra, 2010). Features of E-commerce To further analyse the impact of e-commerce on the auto industry, the characteristics and features through which the impact is directed must be understood. The seven features of E-commerce are as follows; 1. Ubiquity Internet is available almost everywhere except for some less developed areas thus the e-commerce facility can be accessed through any place; your house, school, and work place. The fact that e-commerce can be reached easily elicits that more and more people will adapt to it for making car purchase decisions. Instead of visiting the physical locations of car dealers, it has now become more convenient for the customers to access the manufacturers’ websites online so as to get information of the prices and the car features (Laudon, 2007). Although most of the actual purchases are still made in the traditional manner, yet internet serves as a medium to lower transaction and search costs for the consumer. However, internet access reduces the cognitive effort that is needed and which is much difficult to obtain from the modern day busy consumer (Bajaj, 2005). 2. Global Reach The internet is a global medium of communication and the content can be advertised on a global scale, crossing all geographic and demographic boundaries. Internet provides a link of correspondence between different sections of the society and links people of different ages, income groups, qualification etc. At the same time internet access targets the customer in a cost effective method. The booming trend in automobile industry through internet access is gaining accreditation in Europe. The consumers across the world have an access to the facility and the cost of physical marketing is reduced (Chun, 2000). 3. Universal Standards The e-commerce uses global technical standards including the software content (World Wide Web) and standards that are universally recognised (TCP/IP). E-commerce is universal and easily accessible across the world. Therefore, E-commerce provides advantages for the consumers in the form of convenience, reduced market entry costs for manufactures (John, 2011). This means that more and more dealers and manufacturers are not adapting to the click and mortar business model. On the flip side, it increases clutter for the consumer and competition for the auto manufacturers. It is much easier for marketers to build their websites and initiate operations as auto manufacturers and dealers but it is, at the same time, difficult to maintain because of high clutter (Helper, 2000). Furthermore, universal standards also support information integration whereby websites like AutoConnect.com and Autobytel.com make price comparisons much easier for the consumer. Consumers now have more access to pricing information, which means the switching costs are low. This imposes the auto manufacturers to keep prices competitive and improve service options in attempt to attract and retain the customer (Woo, 2000). 4. Richness The companies using e-commerce models to support new car sales or used car sales can benefit from the option of internet to provide greater richness. Using animations, audio, video clips and rich media are attempts to get the consumer involved in the process. Internet can thus provide rich media advertisement and promotions to the auto industry as compared to the traditional media as the same message can be delivered using better audio and visual cues which results in higher recall and retention (Kotler, 2006). 5. Interactivity E-commerce enables greater interactivity as it facilitates the consumers to interact with the website. Whereas traditional television and newspapers are a passive media for advertisements and promotions, internet provides greater ability for users to interact without any hassle. Features can be embedded like “call now”, toll free numbers, “click now”, and 0800 numbers which encourage users to act immediately. It is difficult to achieve such interaction on the passive medium of television and newspaper broadcasting (Kotler, 2006). Hence, car dealers can encourage internet users to book their appointments, book the cars, call customer sales representative or simply order more information about certain models and prices of cars. E-commerce thus provides greater interactivity and makes the search process more interesting and engaging than the traditional trade journals (Chopra, 2010). 6. Information Density The internet enables the auto manufacturers and dealers to integrate greater amount of information in their websites. This is true in case of maintaining customer databases to maintain consumer profiles to enable direct marketing and tailored promotional content to the customers as well as it enables manufacturers and dealers to provide more information to consumer which can otherwise not fit into the newspaper or magazine ad. Various models and prices, colours and features of old and new cars can be integrated into the same website. This makes it easy for customers to retrieve information at the time of decision making and make rational decisions. Hence, the quality of information may also increase (Vladislav, 2005). 7. Personalization/ customization The famous build to order model of General Motors has attracted a much greater amount of audience. With the individualization of demand and fragmentation of consumers, it is becoming increasingly profitable for marketers to target the newly developing niches and cater to the individual demand requirement of consumers. In a mass scale industry like the auto industry, only e-commerce enables such a modular design strategy. Consumers are able to choose amongst the optional features they want to be displayed in their cars through the use of interactive software. They can choose colours, graffiti and seat finishes etc based on this technology wizard (Chopra, 2010). Impact of E-commerce on Auto Dealers The impact of e-commerce on auto dealers is one to be noted as it has been significantly affected by the change in the business model and policies of auto manufacturers regarding direct sales to customers. Weakened economic conditions and high levels of barriers for new dealers to make their way in the market have combined with the pressures of e-commerce business that auto manufacturers are increasingly pursuing to cut back on their losses and cost reductions (Jack Faucett Associates, 2001). Moreover, dealership businesses are also finding it difficult to hire human services for making their e-commerce websites abreast and competitive as the cost of doing business is on the rise and this the reason that the recent financial crisis which greatly affected the dealership business has led to major closures and decline in human capital hired by dealerships. With the rise in e-commerce activities by automobile manufacturers the market has experienced a major consolidation process through which small dealers and other businesses associated with the industry have merged together and they have benefited from a general reduction in the auto prices. Direct marketing, through the use of internet by automobile manufacturers, has a wider approach to accessing customer base in comparison to traditional dealership based retailing. The emphasis on the information and choices available to the customers through the use of internet have surely put pressure on dealerships to provide the best service to customers otherwise this could push them out of business (Chun, 2000). The sales channel via internet also provides higher level of customer satisfaction as the time of delivery is significantly reduced (Susan & Sako, 1995). Ford Motors, for example has used the e-commerce model to reduce its order to delivery time from 50 days to just 15 days. The trend has been increasing. In 1999, 17% of the new car sales were based on the build to order custom model. The similar build to order model in the online retail industry replicates the process. Consumers are enabled to configure the vehicles they want and place orders. This reduces the inventory holding costs for the dealers and manufacturers as no physical inventory has to be held (Helper, 2000). As a result, in the year 2000, the annual savings on sales commission to dealers mounted to $4,916 million. This has given rise to a new business model of business to service (B2S) whereby, internet has been used as a primary medium to deliver sales services as opposed to the traditional dealership. This includes Ford Motor and General Motor models of business-to-vehicle whereby internet-ready models are delivered through the internet. Internet, hence, has produced savings mounting to a total of $219 million (Vladislav, 2005). GM’s Build-to-order Model In 2001, General Motors (GM) introduced one of its models Chevrolet Celta in 2001, which was build-to-order which gained popularity and became one of the leading car models in Brazil. This model is available through local dealerships and also through the company’s website. The company’s websites offer characteristics including “E-Commerce, One price, direct invoicing and Fast delivery to the customer”, which are the main reasons for its success. The website allows customers to access it from any location and place the order without physically looking at the car and selecting features which they prefer to have in their selected model. Customers can buy the car they want via the internet 24 hours a day and the delivery could take place within 4 to 7 working days. This by far exceeds the delivery time period of 45 days in the US for purchase of new car and its delivery that has surely resulted in higher levels of customer satisfaction amongst Brazilian customers (John, 2011). Database Marketing and Information Asymmetry E-commerce provides website owners to track the movement of their customers through click stream tracking tools. Through registrations made on dealers’ websites and series of clicks that include the navigation time etc, auto car dealers have gained consumer insight to get a better idea of their target market needs. The internet tracking systems track the customer’s movement to know their interests and preferences. This means dealers can tailor their offers according to the needs and requirements of specific customers. Moreover, with more direct information regarding consumers’ preference manufacturers can maintain an optimum level of inventory and thus, cost reduction can be experienced by manufacturers (Laudon, 2007). On the contrary, it could be argued that database marketing increases information asymmetry, whereby, the auto dealers have more information about the customer to benefit from the transaction. However, the implication of this concept has changed with the e-commerce model as it allows customers to have more information about the dealers, car owners, competitors and the prices can be traced back to the suppliers. Hence, both the parties have balanced information so which does not put any party at greater risk. Database Marketing E-commerce provides website owners to track the movement of their customers through click stream tracking tools (Larson, 1998). Through registrations made on dealers’ websites and series of clicks that include the navigation time etc. auto car dealers have gained consumer insight to get a better idea of their target market needs. The internet tracking systems track the customer’s movement to know their interests and preferences. This means dealers can tailor their offers according to the needs and requirements of specific customers. Achieving Customer Intimacy through Direct Marketing Corporate websites allow customers to have access to up-to-date, detailed, and interactive information which actually helps them in making their buying decisions. However, when it comes to obtaining price quotations for a particular car model these websites are directed to the websites of dealers which provide pricing based on the commission level that the manufacturer offers to their dealers. In this way, customers are forced to get price quotes from dealers that have different pricing strategies. This could actually affect the business of the manufacturer. Increasingly, manufacturing companies are offering direct purchase price quotes to customers so that the consumers do not have to rely on intermediaries for acquiring a price quote and this would surely affect the business model which dealers are accustomed to and they will require to find new efficient ways of finding buyers online (Chun, 2000). Other advantages that direct sales from the manufacturer to customers can include higher levels of satisfaction as this allows meeting customers’ requirements in more effective manner and customization of cars is possible which is one feature that consumers by large prefer to have before making choice of their cars This is reflected by statistics obtained regarding “the total value of new car inventory held by 20,700 franchised new car dealerships in the U.S. near the end of 2008 was about $100 billion and the annual carrying cost of that inventory was estimated as $890 million in 2009” (Bodisch, 2009). Disintermediation in the Auto Industry The successful partnering of Carsdirect.com with Amazon.com has further reduced the role of physical dealerships businesses in the country. Amazon.com has listed Carsdirect.com as trusted partnership (Larson, 1998). Likewise, AutoTrader.com has also built brand awareness through the purchase of a Super Bowl advertisement. AutoTrader.com has partnered with eBay. This not only indicates how strategic associations with well recognized brands increases the customer base for these auto car websites but also indicates how manufacturers have benefited from direct selling through these websites (Chopra, 2010). This has clearly given rise to disintermediation in the supply chains whereby one or more impellers of the supply chain have been forced out of the market to reduce costs of intermediaries and provide customers with direct sales services. The trend of brick and mortar companies has been reducing in favour of click and mortar companies indicating a reduced high street shopping in the auto industry in particular. The research shows that in 1998, more than 10% of the shopping decisions related to cars were being affected by the internet. Thus, electronic commerce facilitated sale of 2 million new cars and 4.2 million of the used cars (Woo, 2000). The modular manufacturing system has enabled the development of manufacturing facilities to test modular prototypes. E-commerce features have enabled auto companies to integrate suppliers and assemblers to carry out a modular production strategy as opposed to the traditional mass assembly line production system. This means that each modular design is devised to best suit the market requirements of the geographically dispersed market characterised with differences in tastes, technical requirements and culture (Woo, 2000). Adding Value to the Auto Industry Value Chain The automobile lifecycle is predominantly phased into the production of supplies, production and manufacturing, sales and distribution and the after sales services. The major processes that can add or deduce value from the value chain are the external transactions with the final customer. When the suppliers have produced modules and parts and components have been assembled, the automaker receives these parts. Each firm in this stage combines to make the finished product which is then distributed to the dealers. E-commerce thus has the greatest potential in this aspect of business activity within the auto industry. E-commerce, as mentioned above can play the role of a direct management shop that delivers the final vehicle and conducts all after sales services. It can then de concluded, that e-commerce benefits consumers, by providing then direct channels of communication, to manufacturers and dealers by facilitating their transactions and reducing their costs hence eventually adding value to the value chain (Kotler, 2006). . This shows how information technology has enabled internet procurement systems like Auto-Xchange and Covisint in the USA to benefit the new car manufacturers. This has resulted in more accurate forecasts of demand and more accurate inventory stock levels (Hoon, 2004). Through e-commerce, shorter production planning and development can be acquired. The productivity for development then increases. E-commerce further supports just in time practices which render the automakers with competitive advantage. Information operation processing is advanced in the United States as compared to the European or Korean automobile industry (Susan & Sako, 1995). The Changing Cost Structure of Auto Industry E-commerce has changed the cost structure of the US industry in the following three categories; The cost of sales execution Procurement and Production costs Manufacturing and Delivering the Product These three broad categories further affect the operations of dealers, customers and manufactures and impact each category in different ways. The merchants of e-commerce transfer the transaction costs to the customers by integrating information on the websites and allowing free access to the customers. This means customers already know what to do even if they make the purchase in the traditional way. The efficiency of the sales process hence increases as a result. Nonetheless, e-commerce reduces the costs for attracting new customers as internet is the cheapest medium. Thus car referral websites like CarPoint charge the dealers $200 for advertising of each car sold while the dealers spend $450 on each car sold through traditional media. E-commerce has enabled firms to reduce their major costs which comprise of customer services, sales staff, sophisticated products etc. With the help of e-commerce, companies are cutting down on the number of staff required, fancy offices, physical inventories and training of sales staff etc. For example, Federal Express saved 20,000 new hires through an e-commerce model. Moreover, costs associated with purchasing are also reduces. Procurement comprises as the largest internal costs for the auto car manufacturer. A typical purchase order for a low value office supplies costs about $80-$125 which means the costs are a waste as the value of material that is bought does not justify the costs. E-commerce supports the use of EDI (Electric Data Interchange) for small purchases which reduces errors incurred in these small purchases which can cost the company a great amount of damage and at the same time speeds up the process (MacDuffie & Paul, 1997). At the same time, the inventory costs are also reduced as e-commerce facilitates a fast order and delivery system. In the auto industry of USA, 37% of the total inventory is carried by the manufacturer, 25% is held by the wholesaler and 27% is held by the retailer. This shows that in the auto industry inventory costs are considerably high so e-commerce will reduce this problem (Zettelmeyer, 2006). E-commerce also enables them to make accurate forecasts because of the build to order system which means that pull process of production will be focused upon. Otherwise, the traditional pull process is used which adds to the problem of inventory accumulation in the auto industry. On the contrary, the shipping costs with a build to order model may rise and may add to the final price but the distribution costs will be offset (Zettelmeyer, 2006). The Future Trend of E-commerce of Auto Industry in the USA The auto industry in the US have been traditionally characterised with innovation and dynamism which has allowed car manufacturers not only to expand locally but also internationally. It is still growing and massive research and development is taking place including the expansion of communication channels. The impact of information technology has been considerably high in this industry as the new and emerging channels and systems have lead it to further expansion of this industry (Sewell, 2009). This sector has been a reference point for other industries in terms of its technological advances, quality management, efficient logistics, and operational excellence and management competencies. With the number of internet users still increasing in the US and abroad, e-commerce has great potential to increase as the new way of car manufacturing and purchase (MacDuffie & Paul, 1997). Advancements in information technology have historically favoured the US auto industry. The computer aided manufacturing and computer aided design has been implemented and practiced in highly innovative, technology intensive automobile industry and has lead to tremendous cost reductions and operational improvement. The technology has enabled the US auto industry to integrate a geographically dispersed supply chain and logistics. Likewise, the e-commerce has a great potential in the US market as more and more dealers find it more cost effective to transfer their operations online because of the reduced transfer costs and information processing costs (Zettelmeyer, 2010). Conclusion The study shows that information technology has metamorphosed some of the industries in the United States. Auto industry is one of those industries that is characterised with high innovation, escalating investment in research and development and requires a constant growth in terms of profitability and technological advancement. The US auto industry has been very competent in this regard as the advancements of information technology have facilitated operational excellence. E-commerce has considerably changed the way business transactions have traditionally taken place in this industry. The automakers have benefited from technologically equipped procurement and design facilities that result in lower inventories and lower costs. The dealers of new and used auto mobiles have had a mixed impact. On the one hand, they have benefitted from information integration and cost reductions in terms of low inventory costs whilst on the other hand, this has given rise to direct marketing which has in many instances forced dealerships out of the auto industry. The greatest benefiters of this e-commerce revolution have been the customers who now have the option for build-to-order processing, customized vehicle order payment systems and a greater access to the information which not only makes it easy for them to make price comparison but also demand higher customer service. The trend is expected to increase as more and more internet users continue to use e-commerce facilities. References Bajaj, K. K. (2005). E-commerce 2nd Edition. New Delhi: McGraw Hill Publishing Company Limited. Bodisch, G. R. (2009). Economic Effects of State Bans on Direct. 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