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Acheiving competitive s

  1. 1. Achieving competitive differentiation: thechallenge for automakersHerbert K. Tay AHerbert K. Tay is a principal t a time when many countries struggle to cope with the weakness and resultingwith A.T. Kearney’s Global uncertainty in the highly interdependent global economy, the automotive industry is at aAutomotive Practice. Based in crossroads. Notwithstanding the industry consolidation of recent years, there is onceCosta Mesa, California, he leads again too much capacity chasing consumers in the mature, af uent markets, while demand hasA.T. Kearney’s US West Coast yet to take off in emerging markets such as China and India, where huge manufacturing andautomotive practice assembly investments have been made. The pain of excess capacity is being felt most acutely( by several of the largest established automakers and their af liates. Meanwhile, a new wave of automakers stands poised to make competitive leaps. Hyundai Motor Company and Kia Motor Corporation have both announced their ambition to be ranked among the world’s top ve automakers by 2010. India’s Tata Industries plans to contract manufacture Rover’s new small car, opening up another source of low-cost product whose quality and competitiveness will – if history is any indicator – continue to improve over time. Domestic Chinese automakers such as First Automobile Works (FAW), Dongfang Motors and Shanghai Automotive Industry Group (SAIC) and their networks of established partners (including the Volkswagen Group, GM, PSA, and DaimlerChrysler) represent further signi cant potential sources of high-quality exports in the next decade. The trend toward increased exports of nished vehicles, kits and parts will gain momentum as trade barriers are lowered and dismantled, and as China and other countries join the World Trade Organization and regional free trade zones. There are great costs to sustaining demand in this oversupply environment. In particular, car model lines that are undistinguished, aging, ‘‘me too’’, or controversial have required huge incentives to generate sales and, as a result, manufacturers have seen their margins crumble. In today’s markets, only a few, focused, usually smaller and more nimble automakers have been able to achieve and sustain unique product, quality and cost positions – notably BMW, Honda, Nissan, Porsche, PSA and Toyota – and are solidly pro table. ‘‘ The painofofthe largest established automakers and their several excess capacity is being felt most acutely by af liates. ’’DOI 10.1108/10878570310483951 VOL. 31 NO. 4 2003, pp. 23-30, ã MCB UP Limited, ISSN 1087-8572 | STRATEGY & LEADERSHIP | PAGE 23
  2. 2. Achieving and sustaining competitive differentiation is the foremost challenge for the remaining automakers around the world, and their key to future survival and prosperity. The fundamentals of competitive differentiation Reduced to its essentials, competitive differentiation can be expressed as how an automaker innovates and delivers its products and services – compared with the competition – in three parameters: quality, cost/value and timeliness measures (see Exhibit 1). Regional markets will value and weigh aspects of these attributes differently. For example, fuel ef ciency and maneuverability are far more important in Europe than North America (with attendant implications for vehicle size, type and power trains preferred), while affordability is paramount to the majority of buyers in developing markets. Nonetheless, there are general principles of competitive differentiation that apply to all automakers, as travel, the media, information exchange and global branding shape the convergence of tastes and aspirations of consumers around the world. Quality: from tail ns to telematics Automotive quality has long since moved on from traditional, more objective, quanti able measures – reliability, durability, t-and- nish, and noise, vibration and harshness (NVH) control – to expanded de nitions that involve more subjective, experiential and emotional criteria. Dynamic measures – performance, ride and handling – have been synonymous with German brands such as BMW (the ‘‘ultimate driving machine’’) and Porsche, whose alchemy has been applied to achieve sporty handling even in their SUVs. The active safety bene ts of many ofExhibit 1 Competitive differentiation dimensions TIMELINESS QUALITY State-Of-Art Achiev able Reliabi lity Vehicle X Tim eliness to Market Fit & Finish Warran ty & Servi ce Durabi li ty COST/ Cost of Ow nershi p NVH Control VALUE Value Perform ance Price Ride Custom er Handling Vehicle Handl i ng Telem atics Ex terior Styl ing Advance d Body Constructi on Inter ior Styl ing Driving Aid Technol ogi es Packagi ng Safety - Passi ve Comfort & Conveni ence Feature s Safety - Acti ve Inter ior Tri ms & Treatm ents Pow ertrai ns Refi nem ent of Control sPAGE 24 | STRATEGY & LEADERSHIP | VOL. 31 NO. 4 2003
  3. 3. these aspects – maneuverability, handling, braking, and quick acceleration – have long been acknowledged as important components of the total safety proposition engineered into modern vehicles. For many years, adding comfort and convenience features and content to successive generations of vehicles has been a proven means of signaling a tangibly differentiated proposition. Competitive escalation has intensi ed to the point where features that were the exclusive preserve of high-end luxury cars only half-a-generation ago now routinely and quickly migrates down even to entry-level models. For example, climate control has been available for some time on VW Group’s smallest cars, while keyless entry is offered on Nissan’s latest B-segment March/Micra at a fraction of the price of Mercedes-Benz’ Keyless Go feature. Another manifestation of the battle for quality differentiation is the application of technology to successive generations of automotive programs and their migration down an OEM’s product# Alistair Davidson. range. In particular, many of the emissions, drivability and safety advances of the past 20 years would be inconceivable without the advances in electronics and their use in automotive applications. Pioneered by Mercedes-Benz on its top-line vehicles, ABS, ESP (electronic stability program) and EBD (electronic brake distribution) systems have since been rolled out model range-wide, as well as adopted by other automakers. Applying electronics to driver interfaces is rapidly increasing, with Mercedes-Benz and BMW at the forefront of expanding drive-by-wire applications to throttle control, brakes, adaptive suspension, cockpit controls and vehicle safety. The jury is still out on the user friendliness, reliability and actual bene ts of some of these technologies, but – for now – they represent unique selling propositions (USPs) that differentiate the products of these luxury automakers. Telematics communications systems such as GM’s OnStar were heralded as holding immense commercial opportunity for automakers and other stakeholders, as consumers were expected to voraciously embrace ever-expanding suites of safety, security, productivity, convenience, and entertainment content and service offerings. Certain telematics features – accident noti cation, satellite navigation, remote unlocking – are useful to all drivers, while concierge offerings via telematics are generally valued by more-upscale clients. The demand for telematic services has been slowed by the availability of substitutes (such as roadside assistance programs, account-based mobile calling, phone e-mail and e-commerce). In contrast, powertrains represent a powerful and sustainable avenue for competitive differentiation. Honda introduces new-generation engines with the frequency that other automakers undertake sheet metal redesigns. Honda and Toyota’s pioneering hybrid gasoline/ electric drive trains are just the latest example of their leadership in nding pragmatic solutions for greater fuel ef ciency and lower emissions. Automakers are taking stakes in longer-range, technically non-polluting propulsive technologies – for example, BMW in hydrogen and DaimlerChrysler in fuel cells – but commercialization of these emerging technologies is by no means assured. At the other end of the powertrain spectrum, Mercedes-Benz has escalated the horsepower race by introducing – within the span of half a year – eight range-topping models that employ supercharging to provide around 500 horsepower or more each. While products such as these sell in relatively small numbers, they glamorize the automaker’s image and boost sales of the rest of the range. The most visible means of differentiating cars has been – and still remains – captivating vehicle designs, both exterior and interior, that successfully blend style and function, appropriate for the vehicle’s purpose and times. After decades of focusing on meeting crashworthiness and emissions regulations, automakers are once again injecting the ‘‘wow’’ factor into their new vehicle designs. Many are complementing bread-and-butter model lines with smaller runs of niche designs made possible by computer-aided design and development, and intelligent platform and component sharing. Automakers are both looking to the past – incorporating retro or ‘‘heritage’’ styling cues – and experimenting with new idioms (for example, BMW’s ‘‘ ame surfacing’’) in coming up with distinctive, more emotional designs. Re ecting the times, small is once again beautiful. A new generation of small city vehicles – such as DaimlerChrysler’s Smart VOL. 31 NO. 4 2003 | STRATEGY & LEADERSHIP | PAGE 25
  4. 4. range and BMW’s New Mini – has been designed to accommodate the realities of Europe’s congested metropolitan centers with unique style and chic. Finally, a discussion on quality would not be complete without mentioning how car companies are improving the experience of buying and servicing a vehicle. Along with top-notch reliability, Lexus has made customer handling its USP in North America and Europe with its unrelenting focus on details. Mercedes-Benz provides free roadside assistance in the US for any Mercedes- Benz vehicle, regardless of age, a symbolic testament to the longevity of its vehicles. Now Mercedes-Benz is raising the customer service stakes by designating dedicated concierges for buyers of its Maybach ultra-luxury limousines, to handle all details of ownership, maintenance and repair. Cost/Value: delivering quality products at competitive prices Competitive intensity in the automotive industry has been such that no automaker – whatever its pedigree or positioning – has been able to defy the market imperatives of delivering competitively priced quality products that provide good value to consumers. In real terms, vehicle prices have decreased, as a consequence of two factors: (1) Declining real cost-of-goods-sold (COGS). Currency uctuations and competitive pressures have forced automakers to take out costs (through intelligent product design, strategic sourcing and other strategic levers) in successive generations of products and pass on those savings to consumers. (2) Margin shrinkage. Several factors have contributed to margin shrinkage, but none as much as information transparency, enabled in great part by the Internet. Accurate, up-to-date information on retail prices, dealer invoices, special holdbacks and rebates, trade-in values, and nancing rates is widely available to aid the sophisticated consumer in his negotiations. In the European Union, the introduction of the Euro has led to pricing harmonization across much larger territories and reduced the ability of automakers to price-discriminate across low-/high-tax and low-/high-income markets. Online buying services have sprung up to compete for the private buyer’s business, further enhancing the consumer’s power. Particularly in af uent markets where automotive leasing is well developed, affordability has been enhanced to the point where many consumers now base their vehicular choices on the affordability of monthly lease payments, and not the purchase price. There is also a broad-based trend to design powertrains for extended service intervals (e.g. 100,000 mile major service/spark plug changes), reducing service and maintenance costs as a differentiating proposition. While inherently attractive for the consumer, this trend poses a double-edged sword by signi cantly reducing the total lifetime per-vehicle service and parts revenues (a key contributor to dealer pro tability) and shifting a bigger proportion of the available business to the post-warranty aftermarket. Timeliness: bringing products to market faster than competitors There is immense value and competitive differentiation potential in bringing a new product to market quicker than competition, on time and within budget. All else being equal, an OEM can be more nimble in translating market trends and tastes into marketable products. As a result, vehicle development programs cost less to execute, because resources are deployed with greater focus for shorter gestation periods and with greater accountability; and products will generally be fresher and require fewer incentives to move over their lifetimes. All leading automakers have concerted initiatives underway to reduce their vehicle development cycle times (see Exhibit 2). The exemplars of rapid product development have been the leading Japanese OEMs – notably Toyota, Honda and Nissan – that have or will soon have the capability to roll-off new models from their assembly lines in 12 months or less. The implications of competitive differentiation# Alistair Davidson. There are a number of implications to how automakers approach and execute their differentiating strategies:PAGE 26 | STRATEGY & LEADERSHIP | VOL. 31 NO. 4 2003
  5. 5. Exhibit 2 Vehicle development lead time, styling freeze to SOP, months Redesign, with signi cant platform/ Major redesign component reuse GM 18 months or less (Hummer H2) Ford 32 to 36 months (F150) 16 to 18 months (target) (24 months target) DCX 24 to 26 months 18 months 48 months (MBZ E-Class) Toyota 26 months (Camry) 10 to 12 months 31 months (Corolla)/21 mos. (Matrix) Honda 18 months (Fit) 12 months BMW 35 months (X5) Renault 29 months (Megane II) Source: Variousf The web of differentiating attributes is constantly expanding, as the boundaries of the achievable are continuously rede ned by the creative imagination and resourcefulness of designers and engineers, advances in new materials and technology, industry regulations and requirements, and competitive pressures.f Attributes and features must be valued by consumers for them to serve as effective strategic differentiators.f The leading automakers have collectively achieved very high standards of performance on some dimensions, and further investments to effect incremental improvements generate only diminishing returns. Consumers become conditioned to expect high minimum acceptable levels of performance on these attributes, which then lose their power for strategic differentiation.f Experiential attributes are becoming more powerful drivers of competitive differentiation. Because most automakers are loading up their vehicles with features to improve consumers’ price/value perceptions, scoring well on feature checklists has not been an assured strategy for competitive advantage. Instead, factors such as superior t-and- nish, the tactility and re nement of vehicle controls and interfaces, the quality of interior materials and nishes, unusual design features, superlative ride and handling and NVH control – are much more dif cult to emulate consistently, and therefore represent sustained sources of strategic differentiation.f While customer handling is undeniably a powerful differentiating lever and should be part of a balanced integrated strategic proposition for any OEM, the strength of this lever is far outweighed by product attributes, particularly as vehicles are being designed for longer service intervals, thus reducing opportunities for customer interaction. Creating customer ‘‘pull’’ to buy succeeding generations of exciting ‘‘must-have’’ products will always be a more effective strategy than elaborate customer relationship marketing programs geared to ‘‘push’’ less-competitive products.f Finally, competitive product benchmarking is useful, but only up to a point. Because of the continual expansion of state-of-art achievable boundaries and the lead times associated with development cycles, automakers that strive merely for performance parity with their competitors’ current generation products often nd that their new products are quickly eclipsed.An automaker needs to be guided by its own clear beliefs and instincts about which keyparameters will form the basis of its own differentiated, consumer-valued strategic proposition –and follow through con dently and comprehensively in its execution. VOL. 31 NO. 4 2003 | STRATEGY & LEADERSHIP | PAGE 27
  6. 6. A foundation of winning strategies There are commonalities in the core principles that the leading automakers employ in their winning strategies to improve exibility and responsiveness, reduce overall cost structure and enhance competitiveness. These are the necessary but not suf cient foundations upon which OEMs build differentiated competitive propositions, which can sustain them for several years to come. They include: Investment in fresh, attractive, affordable, consumer-driven products. The automotive industry is introducing fresh products at an unprecedented rate hoping to win over af uent but increasingly ckle consumers (see Exhibit 3). The past two decades has seen the introduction of people movers and cross-over vehicle formats; the revival of the coupe, sports car, convertible ´ and GT genres; as well as the proliferation of sedans, sport-utility vehicles and trucks at every size and price point. In today’s ‘‘zero nance’’ marketplace, automakers realize that new- vehicle programs can be much better strategic investments for creating competitive differentiation, compared to routinely expending billions on marketing and incentives. The underlying message is clear: invest more money intelligently upfront on fresh affordable products and features that consumers want – or spend it later on rebates. Accelerated product development. A corollary of the new product explosion is the need to continuously gauge the consumer’s pulse and translate those ndings into the development of successful new products. Successive vehicle programs need to be developed more quickly at lower cost, to break even at lower production runs, and become pro table sooner. It is no coincidence that the nimblest automakers with respect to product development – Honda, Nissan and Toyota – are also among the most pro table. Intelligent platform and component sharing. A consequence of the imperative for quick, cost-effective product development is developing and perfecting the skills for intelligent platform, subassembly and component sharing. Estimates are that developing a new vehicle from an existing platform requires 30 to 50 percent less time than developing it from a new platform.Exhibit 3 Light vehicle models in US market (by model year) 1,314 1,125 1,079 1,051 996 916 1997 ’98 ’99 2000 ’01 ’02 Source: Automotive NewsPAGE 28 | STRATEGY & LEADERSHIP | VOL. 31 NO. 4 2003
  7. 7. Flexible manufacturing and work practices. After hemorrhaging money when demand slackened off for volume models produced in dedicated factories, many automakers are now investing huge sums to improve the exibility of their assembly plants. They are taking their cues from Honda, which since the mid-1980s has had the capability of assembling products as diverse as the Accord, Legend, Prelude and Civic wagon on a single assembly line in its Sayama plant. Optimized order to delivery processes. Automakers are also making signi cant investments to optimize lead management, build to order, and order to delivery processes and systems. When appropriately selected and well executed, these programs and initiatives provide consumers with better availability and shorter delivery times, while reducing pipeline and nished goods inventory levels across the automakers, their suppliers and distribution chains. Supplier leverage and partnering. With supplier outlays representing 50 to 60 percent of an automaker’s costs, the search for greater cost competitiveness is a never-ceasing endeavor, as market forces dictate that successive generations of products be delivered with more features and content for less money. There is growing evidence that the way at least some leading Asian automakers approach supplier relations – establishing longer-term partnerships over multiple vehicle program generations, delegating selected technology development, and balancing price and quality demands – pays off in better quality, scale and competitiveness, sustaining both the automaker and supplier for the long-term. Willingness to cap production of individual vehicle lines to control supply. Letting the market establish its natural level of demand for a particular vehicle model line – and having the resolve to cap production to achieve a supply/demand balance – is counterintuitive, if not downright heretical, to many automakers. For years they have measured their success in sales gures, relative to competitors. Yet, trying to bridge even relatively small oversupply situations by stimulating demand beyond what consumers will naturally absorb can put an automaker on the slippery slope of higher incentives, no-pro t eet sales, weakened residuals, poorer consumer lease affordability (without subvention support), and zero pro ts for reinvestment in the next generation of vehicles. Past a certain point, marginal revenue will fall below marginal cost for incremental sales, leading to sub-optimization of overall vehicle program pro tability, if not actual impairment. Focus on key developing markets. Large developing countries – notably China, India, Mexico and other export-led economies with a sizeable, growing middle-class – represent huge potential demand for private vehicular transportation, and the last remaining battle elds for automotive primacy. Indeed, China market projections suggest that annual sales could exceed 4 million units within ve years, ranking it third in global importance behind the USA and Japan. Automakers that have been fobbing off second-rate or obsolete products will become increasingly vulnerable as the opening of markets to competition exposes their protected positions. Conversely, those most likely to succeed will approach their customers from two ends: offering affordable, quality, versatile vehicles for the mass-market that are tailored to local conditions and requirements, while also bringing in the best of their current model ranges for early adopters and opinion leaders in the small but growing af uent upper-class. Customer relationship management. Establishing and executing effective long-range customer relationship management strategies to cultivate and win the hearts and minds of successive generations of customers is paramount. Product and ownership propositions that resonate with different generations in different geographies must be developed; messages that‘‘ Letting the market establish its natural level of demand for a particular vehicle model line – and having the resolve to cap production to achieve a supply/demand balance – is counterintuitive, if not downright heretical, to many automakers. ’’ VOL. 31 NO. 4 2003 | STRATEGY & LEADERSHIP | PAGE 29
  8. 8. speak to them must be couched, and delivered across the appropriate channels and media in ways that cut through the clutter. Continuous improvement mindset and commitment. Finally, the leanest and ttest vehicle manufacturers are characterized by a steadfast vigilance in maintaining and growing their competitive edge, on all cost, quality and timeliness dimensions. No automaker can afford to rest on its past achievements. ‘‘Good enough’’ simply isn’t, anymore. Automakers must make targeted investments in high-quality, differentiated products that truly mirror what consumers value, and they must precisely match their output to demand to achieve better margins and pro tability. The alternative is to pay ever-higher incentives to move uncompetitive products. One course sets the automaker on a virtuous circle of mutually reinforcing outcomes; the other, on a vicious spiral toward weakened nancials and marginalization. Acknowledgment Photo credit: The photographs of automobiles in this special issue are by Alistair Davison (; e-mail address, Alistair Davidson. www.alistairdavidson.comPAGE 30 | STRATEGY & LEADERSHIP | VOL. 31 NO. 4 2003