Factors Affecting the Automotive Industry

The automotive industry is the industry involved that is in the design, development, manufacture, marketing, and sale of motor vehicles. The automotive industry is a great candidate for social media and online communities in particular. The product is one that people are passionate about, either because it is an aspiration purchase, or because it fulfills a very important and functional role in their lives. People very often have strong allegiances to particular brands that they may choose to purchase always. (Woo Jung Kim., 2007)

Definition of Strategic analysis

This includes an analysis of the general environment and the competitive environment. Strategy analysis also deals with the organization’s internal environment. It allows the organization to evaluate how well it is positioned to exploit the opportunities in its external environment. (Henry, 2008)

The PEST analysis

A PEST analysis is a business measurement tool. PEST is an acronym for Political, Economic, Social and Technological factors, which is used to assess the market for a business or organizational unit. (Tae Gu Lee, 2003)

Factors affecting the Automotive Industry (PEST Analysis)

1) Political factors

Political factors may also include goods and services which the government wants to provide or be provided and those that the government does not want to be provided.

Almost all of the regulations come from consumers increasing concerns for the environment and the concern for safer automotives. For instance trade barriers and incentives to the public to buy new cars. (Campbell, Stone house, Houston, 2007)

2) Economic factors

Economic factors include interest rates, disposable income, unemployment rates, retail price index (inflation), gross domestic product(GDP), and exchange rates. These factors have major impacts on how businesses operate and make decisions.

The automotive industry has a huge impact on every country’s economy. According to various studies this industry is the major user of computer chips, textiles, aluminum, copper, steel, iron, lead, plastics, vinyl, and rubber. These industries include anything from the aluminums to lead to vinyl. (Henry, 2008)

3) Social factors

Social factors include the cultural aspects and include awareness, population growth rate, age distribution, career attitudes and emphasis on safety. Trends in social factors affect the demand for a company’s products and how that company operates. Furthermore, companies may change various management strategies to adapt to these social trends.

Anyone who drives a nice vehicle is thought to be wealthy. No one wants to be seen driving an unattractive piece of junk because of what other people will think of him or her. Consumers also just feel better when they are driving a nice or new car, if makes them feel better about themselves. (Woo Jung Kim, 2007)

4) Technological factors

Technological factors include ecological and environmental aspects, such as R&D activity, automation, technology incentives and the rate of technological change. Furthermore, technological shifts can affect costs, quality, and lead to innovation.

The internet has affected just about every industry in the world and has also had a huge impact on the automotive industry. Business-to-business marketplaces have given the industry many opportunities because of the internet, such as more efficiency and lower cost. (Needle, 2000)

SWOT analysis.

SWOT analysis refers to strength, weaknesses, opportunities, and threats. As PEST factors are essentially external, completing a PEST analysis is helpful prior to completing a SWOT analysis. (Henry A., 2008)

1) Strengths

1. Large Market Share

Although GM’s market share in the US has dropped it is still very much competitive at 26 percent. They also have an increasing share in the Chinese market. With the right decisions there is no reason for GM not to become the automotive leader it once was.

2. Brand loyalty

The current GM brands include: Chevrolet, GMC, Cadillac, Buick, Pontiac, Saturn, Hummer, Saab, Daewoo, Opel, and Holden.

3. New technology

This technology allows the vehicles to be tracked in the event of an emergency or theft. It also allows the driver and or passengers the ability to communicate with personnel at the click of a button. Most automotive company has a new technology. For example, DMES (Digital Manufacturing Engineering System). (Woo Jung Kim, 2007)

2) Weaknesses

1. Poor Organizational Structure

As we can see in exhibit 1 of the case GM’s organizational structure seems to be too vertically integrated. This causes a lack of communication between employees from top to bottom and may have played a part in GM falling behind on the alternative energy movement.

2. Behind on Alternative Energy Movement

This has led to many problems including loss of market share and a decrease in

company profit. In order for any automotive company to be successful from this point forward they must be Hybrid friendly and fuel efficient. (Woo Jung Kim, 2007)

3) Opportunities

1. Alternative Energy Movement

It is obvious that automotive industry was behind its competition with regards to the research and development of hybrid vehicles. However hybrid technology is still very much new giving the automotive company an opportunity to once again become the automotive industry’s leader in innovation and technology.

2. Low Interest Rates

With the right marketing strategy, the low interest rates have the potential to generate an immediate increase in sales.

3. The power of buyers and availability of substitutes

If buyers are strong and there are close substitutes available for the product, the degree of competitive rivalry will be greater.

In recent years, many automotive industries have become more competitive.

4. Develop New Vehicle Styles and Models

This is an opportunity that will never be satisfied, meaning that every automobile company should always be attempting to develop the automotive world’s most popular vehicles, and as we know, what is in today will be out tomorrow. (Woo Jung Kim, 2007, )

4) Threats

1. Rising Fuel Prices

Nowadays most cars use a fuel. But recent fuel price steeply increased.

Most automobile company sales have drastically decreased due to the lack of fuel efficiency.

2. Growth of Competitors

Nowadays in automotive industry there is a growth of competitors.

For instance, GM no longer has the luxury of being the known leader in the automotive industry and faces the reality that they are in serious trouble.

3. Pension Payouts.

Automotive company is responsible for providing generous pension benefits to its employees, who at the time seemed like a great idea, however they are now experiencing problems as more and more aging people begin to collect their pensions.

4. Increased Health Care Costs

Many large automotive companies with quality employee health care benefits are experiencing a large financial hit that only gets worse as time continues. (Woo Jung Kim, 2007)

Definition of strategy formulation

As managers formulate strategies, they have to consider the realities of the external environment and their available resources and capabilities they should design strategies that will help the organization achieve its goal. (Campbell D., Stonehouse G., Houston B., 2007)

What is Business Level Strategy?

Any given organization may comprise of a number of different businesses, each operating in distinct markets and serving different customers. A market is defined by demand conditions and based on an organization’s customers and potential customers. This compares with an industry which is determined by supply conditions and based on production technology. (Henry A., 2008)

1) Overall Cost Leadership

Organizations compete for a wide customer based on price. Price is based on internal efficiency in order to have a margin that will sustain above average returns and cost to the customer so that customers will purchase your product/service. It works well when product/service is standardized, and is able to have generic goods that are acceptable to many customers, and can offer the lowest price. A continuous effort to lower costs relative to competitors is necessary in order to successfully be a cost leader.

For instance, the automotive industry and forces each company to cut manufacturing and production costs as much as possible, without taking away from the quality of the product. (Stephen p., 2007)

Firms compete on both price and non-price dimensions. The price competition erodes profits by drawing down price-cost margins while non-price competition (e.g., new car rebates and interest free loans) drives up fixed cost (new product development) and marginal cost (adding product features). One of the other reasons there is such high rivalry is that there is a lack of differentiation opportunities. All the companies make cars, trucks or SUVs. (Jeffrey S., Caron H., 2008)

2) Differentiation strategy

Value is provided to customers through unique features and characteristics of an organization’s products rather than by the lowest price. This is done through high quality, features, high customer service, rapid product innovation, advanced technological features, image management. (Stephen P. Mary C., 2007)

For example, Hyundai and Kia will be promoted under separate brand slogans. The Hyundai slogan ‘Drive your way’ is designed to communicate the company’s refined and confident’ brand attributes, while the slogan ‘The power to surprise’ is aimed at embodying the ‘exciting and enabling’ values of the Kia brand. (www.daum.net/kia sarang)

3) Focus strategy

It is necessary to choose a number of distinct market segments and to target a few special product offerings to meet these customers’ needs. (Bob D., Ron M., 2005)

For example, Toyota for hybrid cars, the Camry is the latest Toyota model to be given a hybrid engine. (Henry A., 2008)

What is Corporate Level Strategy?

Corporate strategy is a strategy that determines what businesses a company is in,

should be in, or wants to be in, and what it wants to do with those businesses. It’s based on the mission and goals of the organization and the roles that each business unit of the organization will play.

For instance, Wal-Mart, Cadbury Schweppes, and General Motors are companies that seem to be going in different directions. Wal-Mart is rapidly expanding its operations and developing new business and retailing concepts. Cadbury’s managers, on the other hand, are content to maintain the status quo and focus on the candy industry. Meanwhile, sluggish sales and an uncertain outlook in the automotive industry have promoted GM to take drastic measures in dealing with its problems. (Stephen p., 2007)

1) Portfolio Analysis

Individual businesses can have very different financial characteristics and face different strategic options depending on how they are placed in terms of growth and relative competitive position.

• Stars: High growth, high share
• Cash cows: Low growth, high share
• Dogs: Low growth, low share
• Question marks: High growth, low share

GM is examples of predominantly cash cow companies. (Bob D, Ron M., 2005)

2) Growth strategies

At the growth stage, a company must consolidate its position and increase its market share to survive the coming shakeout. Hence the appropriate investment strategy is the growth strategy. (http://www.csus.edu/indiv/k/kuhlej/182ch6/tsld002.htm)

3) Vertical integration

It is whether the organization is moving backward or forward integration which to have a greater control to its value chain activities.

GM is a good example. During the 1990s, GM moved from vertical integration to arms-length relationships with suppliers, while Chrysler and Toyota developed Keiretsu (collaborative) relationships with the same US suppliers. Much of the success of Toyota and Chrysler in overtaking GM is attributed to their ability to leverage the creativity of their supplier base while keeping the cost of crossing company boundaries low. (http://www.cutter.com/research/2004/edge040302.html)

What is International Strategy and Globalization?

International, refers to business activities that straddle two or more countries. Business is increasingly looking beyond the boundaries of their home country for new opportunities. (Morrison J., 2006)

For example, General Motors, Ford Motor Company, Daimler Chrysler, BMW, Volkswagen, Volvo, Toyota, Mazda, and Nissan Motor Company come together to create a new trade association created the Alliance of Automobile Manufacturers. The organization was to replace the American Automobile Manufactures Association that only consisted of American manufacturers, the goals of the associations were to work together on public policy matters of common interest to provide credible industry information and data, and seek consistent global regulatory standards.

Strategy implementation

Implement strategies effectively requires the organization to be sufficiently flexible in its organizational design. Strategies need to be effectively communicated and properly resourced, and the reason for change needs to be understood and properly coordinated with stakeholders inside and outside the organization. (Henry A., 2008)

Interorganizational Relationships

Partnerships can help organizations achieve many of the same objectives that are sought through mergers and acquisitions. They can lead to improved sales growth, to increased earnings, or they can provide balance to a portfolio of businesses, which are some of the most commonly cited reasons for acquisitions.

For example, one of the largest and most profitable robot manufacturers in the world is a joint venture between GM and Fanuc Ltd. Called GMFanuc (GMF) Robotics Corporation. (Jeffrey S., 2003)

Organizational Structures

The division of labor into specialized and coordination between these task. It includes the entrepreneurial, functional, divisional, matrix, and network structure. (Henry A., 2008)

GM implementation

Recommended strategies for General Motors would start with product development then market development, liquidation, and restructuring. Reasons for product development being at the top of priorities is that GM has to create a type of Hybrid vehicle that will allow it to keep up with the pace of the competitive environment, but must be a product that stands out from the crowd at the same time. Prime example of their idea for a Hybrid SUV, it fits the GM profile with maintaining the SUV portion, but allows the firm to stay with trend patterns.

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GM must also re-evaluate the market they are trying to approach, because for so long they have continued with a tradition outlook for automobiles, but now that times are changing their original target market is not looking for what they once were. General Motors needs to take a step back and take look at how they want to position themselves and towards what market since what they have been doing is no longer in favor for the company. An example of what GM could possibly do is produce a futuristic vehicle, which has been heard in rumors from Toyota about their next plan of action. If General Motors could provide a “futuristic” vehicle before Toyota has the chance to hit the market with theirs GM would be a step ahead of the competition. Liquidation is important to GM because their assets are a lot higher than revenues, and if GM could turn assets into cash then their would be more readily available funds and then GM would not have to depend some much on their U.S. sales, which only include 2/3 of that market and their financing tactic wouldn’t be as much of a risk. Liquidation would clearly help out the financial parts of the organization.

Last but not least is restructuring, which General Motors most desperately needs to review possibilities. The company has taken a large hit in recent years and needs to find a way back to the top. This is only going to be achieved if something drastic is changed. Restructuring the product development pace would be a start as well as cutting back on employees because the company is growing in size but not in profit, which causes a red flag for GM. The company needs to be reevaluated in many ways, but GM has been strong for many years that it is very possible for the company to come above these issues. (Woo Jung Kim., 2007) First, the starter generator delivers fast, powerful, and quiet engine starting, enabling the stop/start function. Second, the unit generates electrical current during coast-down to act as a regenerative braking sys-tem for recharging the battery bank. Finally, the starter-generator system helps smooth out driveline surges. (http://www.greencar.com/articles/chevrolet-silverado-mild-hybrid-pickup-offers-fuel-savings.php)

Foreign joint ventures

General Motors used the marketing and sales strategy from its Saturn division in the United States to produce and sell new Buicks in China that were manufactured by a 50/50 joint venture with Shanghai Automotive Industry Co. In Shanghai. The strategy seemed to be working; the new cars were selling well and there was a long waiting list despite a price that was the equivalent of about US$45,000 at the official exchange rate. General Motors’ Philip Murtaugh, executive vice-president for Shanghai GM, was fiercely proud of his operation and respect it showed for the Chinese people. GM’s investment in the project was around US$1.5billion, and the joint venture was capable of producing about 100,000 units per year. (Jeffrey S., 2003)

Strategic change

Strategic change is about changing the way in which an organization interacts with its external environment. It is about creating new and innovative ways of doing business. It involves changing an organization’s system in order to adapt to external changes.

For instance, current changes taking places at GM point to a brighter future. For example, GM is taking steps to reduce confusion, save time, and eliminate duplication throughout the company. To achieve this objective, the company is focusing on using common processes, parts and vehicle platforms worldwide (GM plans to reduce the number of vehicle platforms used worldwide from 16 to 8). General Motors has substantial interests in telecommunications and space, aerospace and defense, consumer and automotive electronics, financial and insurance services, locomotives, automotive systems, and heavy-duty automatic transmissions. (Jeffrey S., 2003)

Strategy innovation

Strategy innovation is about challenging existing industry methods of creating customer value in order to meet newly emerging customer needs, add additional value, and crate new markets and new customer groups of the sponsoring company. (http://cafe.daum.net/sewn/HKXp/61?docid=qV81|HKXp|61|20090227121252&q=Strategy%20innovation&srchid=CCBqV81|HKXp|61|20090227121252)

1) Product innovation

The process of bringing to life a new product/service to solve the customer’s problem benefits. (http://cafe.daum.net/sewn/HKXp/61?docid=qV81|HKXp|61|20090227121252&q=Strategy%20innovation&srchid=CCBqV81|HKXp|61|20090227121252)

For example, The core competence of General Motors is innovation. This is the driving force behind its $190 above turnover. General Motors has been utilizing innovation in service ad technology to secure itself a dominant position in the automobile industry, since 1908. In 1911, it conceptualized, engineered and commercialized the self-starter engine for the first time. Then in 1926, its product Cadillac was the pioneer in devising a nationwide service strategy. In 1996 General Motors introduced OnStar satellite technology which allows equipped vehicles to be tracked in case of an emergency or theft and allows the passengers to communicate with OnStar personnel. Other new car concepts include minicars such as Chevy Aveo.

However in the case of hybrid vehicles, General Motors was unable to keep up to the pace of the market demand. (Woo Jung Kim., 2007)

Leadership

Leadership has been described as the “process of social influence in which one person can to enlist the aid and support of others in the accomplishment of a common task.”

A definition more inclusive of followers comes from Alan Keith of Genentech who said “Leadership is ultimately about creating a way for people to contribute to making something extraordinary happen.” Students of leadership have produced theories involving traits, situational interaction, function, behavior, power, vision and values, charisma, and intelligence among others. (http://en.wikipedia.org/wiki/Leadership)

For example, The U.S. Treasury will provide working financing capital for GM for 60 days while GM completes a more accelerated and aggressive restructuring to put the company on sound long-term financial footing. We understand the historic opportunity this presents, and we are fully committed to successfully completing the reinvention of GM. During the next 60 days, GM will address the tough issues to improve the long-term viability of the company, including the restructuring of the financial obligations to the bond holders, unions and other stakeholders. Our strong preference is to complete this restructuring out of court. However, GM will take whatever steps are necessary to successfully restructure the company, which could include a court-supervised process. The men and women of GM, including our dealers, suppliers and other key partners, know what we must do to accomplish this task.

We are fully committed to making this successful. We owe that to the GM community, to our customers, and to the U.S. taxpayers, who are providing support during this exceptionally challenging time.

(http://www.wxyz.com/news/local/story/UPDATED-New-Leadership-at-GM/FdKJNIzyPE-48KPOWbikcQ.cspx)

Conclusion

Business strategy may evolve in many ways, emerging over time, rather than simply being the product of formal planning. Flexible organizations are more likely to be able to adapt strategy to the changing environment. (Morrison J., 2006)

We anticipate that high manufacturing costs and safety issues will stand in its way today. We need to remind ourselves that the automotive market can only tolerate a marginal cost increase for a new battery technology. Time will tell who will be the winner in the race for cleaner, more fuel-savvy vehicles and longer-living cars. In terms of longevity, the diesel would be the winner today. We hope that future batteries will one-day have the endurance to match or exceed the robust diesel engine. (3564words)

Sources of references

Campbell D., Stonehouse G., Houston B., 2007, Business Strategy second edition

Needle D., 2000., Business in Context An introduction to business and its environment, Thomson Learning, 3rd edition, London

Jeffrey S., Caron H., 2008, 2004., Foundations in Strategic Management., Thomson Learning, USA

Henry A., 2008., Understanding Strategic Management., Oxford University Press Inc., New York

Tae Gu Lee., 2003., Business and Management., Muyokpub., Korea

Woo Jung Kim.,2007.,Automotive Industry Strategy.,Suhakpub., Korea

Jeffrey S., 2003., Strategic Management of Resources And Relationships; Concepts and cases., John Wiley & Sons, Inc., 605 Third Avenue, New York

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