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Case Study Case 2: Production and Marketing of a Global Car: The Strategic Issues

MBA 600: Strategic Management


Section 3

Prepared for: Dr. M. A. Mannan Course Instructor

Prepared by: Mohammad Faisal Newaz Tasnim Rahman Md. Fazle Momen Mahmod Francis Jyoti Gomes Md. Anupom Hossain
Fall 2011

ID: 2010-3-95-042 ID: 2010-3-95-028 ID: 2010-3-95-030 ID: 2010-2-95-133 ID: 2011-1-95-161

East West University

Date of Submission: December 11, 2011

Question 1: What market situation is required for the success of a world car?
Firstly, models produced and marketed in North America, Europe and Japan do not always fit emerging markets' customers needs. Secondly, governments of emerging market countries put constraints and incentives on auto trade and manufacturing in order to hinder imports and favor foreign direct investment from large multinational companies. Thirdly, locating operations nearby the target market represents an advantage in terms of marketing, sales and logistics. Fourthly, cross-country cost differentials (especially labor cost), are often so high that they can themselves represent a reason why to locate production abroad. Within this new framework OEMs and suppliers have re-designed their relationships towards a new situation where: a) suppliers play a larger role in terms of parts' design, technology development and, sometimes, even assembly; and b) OEMs tend to focus their activities, narrowing the scope of the operations they carry on. More generally, assemblers have employed a series of measures to lower the minimum scale of vehicle assembly plant (Florida and Sturgeon, 1999) in order to reduce investment risk, respond more flexibly to volume changes, speed up models turnover, facilitate equipment upgrading, and minimize job impact and social cost in case of crisis. Financial considerations are especially critical given the enormous amount of money required by foreign direct investment strategies and the uncertainty of their rate of return and payback time. On the whole, globalization has sharpened competition and contributed to shaping a new international division of labor in the auto industry, one where suppliers can achieve economies of scale and of specialization and OEMs can reduce the organizational costs stemming from the complexity underlying international strategies. At the same time, new (especially Internet related) technologies are facilitating knowledge modification, reductions in information costs, and evolution towards mass customization and build to order. These technologies tend to lower the transaction-specific nature of information, knowledge and capabilities, reducing coordination
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costs for market-type relationships. Therefore, in the new global auto industry, there have been (and, to a certain extent, there still are) incentives to transfer component design/manufacturing responsibility to suppliers. This has entailed, from the OEM perspective, more outsourcing, and determined a power shift in favor of suppliers, as they continue to grow and consolidate in a wave of M&As operations.

Question 2: Is the companys new car really a world car? Why or why not?
First of all, whether the companys new car is really a world car or not, we have to know when a car can be called a World Car. A world car must be1. Manufactured and sold everywhere in the world with few or no substantial modifications. 2. Common consumer product design that would cost less to make than would multiple versions of cars. 3. Expected to enable its manufacturer to leverage resources and balance currency fluctuations better than can be done with multiple models for different countries. 4. The whole car is expected to be completed within a country rather than the company collects the parts from different countries. 5. Every model of the car must be available in every country so that an individual in each country can buy even a single model of the car. The companys new car is not a world car for the following reasons: 1. The company is unable to manufacture and sold its automobile everywhere in the world. 2. The V-6 engine, transmission and climate control system were developed in USA and structural engineering was done in Germany. Moreover Interior, suspension and electronics were developed in London. So the car had been made with the help of different countries automobile stuffs which is not a characteristic of a world car. 3. Price is not within public reach like in European market. So the company faces problem to market their car in the Europe. 4. A world car would have a universal consumer product design but the company do not have such car that everyone can buy all over the world although they produces different types of cars. For these reasons, the companys new car cannot be a world car.

Question 3: What are the advantages and disadvantages of trying to develop a single product for a global market?
Advantages: 1. Economies of Scale Developing a single product gives economies of scale. Since the company is making large quantities of same product in each market without significant modification the company benefits from the advantages associated with manufacturing in bulk. For example, components can be bought in large quantities, which reduce the cost-per-unit. These savings can then be applied to business' margin, lower price to consumer, or reinvested into the company for research and development. 2. Efficient Uses of Resources: Company can concentrate and control its resources more efficiently. Staff can be trained to enhance the quality of the product and manufacturers will invest in technology and equipment that can safeguard the quality of the single product offering. 3.Currency Fluctuations: Company balances currency fluctuations in different countries better. Usually, the manufacturing company has to reduce their profit margins when faced with depreciation against their own currency and need to increase the price in order to stabilise the prices in destination currency. The volatile nature of UKs exchange rates between UK and United States require U.S. manufacturer to price its product higher in UK market to absorb the risk of these volatile exchange rate. From the source, Bank of England (www.bankofengland.co.uk) we can see that effective exchange rate of British pound sterling depreciated during 1971-77, 1983-86, 1993-96, and appreciated during (1978-82, 1987-92, 1997-02). During 1992-1995, pound depreciation affected the U.S. car manufacturing company badly to be successful in the UK market, however, pound appreciations between 1996-2002 helps U.S. car company to increase its sale in UK market. Thus, in market where

volatile nature of exchange rate exists, firm able to balance its pricing and sales of the product more defiantly.

Figure 1: Effective exchange rate of British pound sterling, 1971-2002


4. Managing Portfolio:

If develop a single product, firms ability to manage countries as one portfolio is greater and easier for the firm to concentrate more on its single portfolio. 5. Need of Resources: Less resources and skills are needed compared to multiple product lines. In additions, staffs learning curve is steeper. Besides, small amount of cash is needed to keep the single product up to date as well as to take products to emerging and profitable new markets compared to multiple product lines. 6. Ease of developing Strategies: The more uniform the market positioning and marketing mix, the more the company can save in the cost of developing marketing strategies and programs. 7. Brand Image:
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A company may struggle with numerous brand names of its product lines and positioning around the world, but a single-mindedly company promote able to maintain same brand name throughout the world, and also have consistent images and positioning in different countries.

Disadvantages: 1. Demand of the Product: Car world market is changing rapidly. The needs of having a costly car have been shifting towards to needs of having a fuel efficient, environment friendly cheap car. Besides, the converging regulations (safety, emissions) vary country to country. Also, the need of type of car also varies from countries to countries. Therefore, a single product to the global market cant meet the demand of all different market segments. Thus, its very difficult to gain sufficient market share in the global market targeting only one group of the customers. 2. Premium Price: Manufacturer of single product in the global market employs a marketing strategy known as product differentiation to make their offering seem distinct from that of competitors, even though the products are largely the same to be worthy of a premium price. However, consumers of expensive products like car are generally do not purchase product unless it specifically meet their demand. Thus, strategy to pricing high with little or no differentiation cannot position its product as worthy as its rivals multiple models of car. 3. Competition: Targeting a small portion of the market and developing a single product to meet those customers needs wont give enough opportunity to be a market leader by achieving majority of market shares. 4. Effectiveness of Strategy: Considering the global market as a one portfolio is most effective when the overall market demand and taste are similar. But, in a car industry, where the overall market consists of
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many smaller segments whose members have certain characteristics or needs in common, not applying a market segmentation strategy will not work very well. 5. Innovation: To gain targeted market share with a single product, company should be the leader of innovative designs and styles. Competing with Japanese companies who already have an cost advantages, technological efficiency, offered shorter new product development, and priced their product lower than its competitors, its difficult for the U.S. manufacturing company to positioning own product as a innovative product. 6. Laws and Regulatory Framework: Another disadvantage with a single product in global market is that it depends largely upon economies of scale. With global businesses, company manufactures in a number of nations, for example, the U.S. car in our case developed its interior in London, structural engineering in Germany. However, some countries implement trade barriers this includes European Union. If this is the case, then localization and the resultant adaptation is inevitable. Also, if the manufacturer company cannot meet the global agreement as well as destined country specific vehicle regulation, then, it will not be able to sustain in that country.

Question 4: Should an automobile company have a strategy for developing such a product? Why or Why not?
No, an automobile company should not have a strategy to develop a single product for a global market due to the following reasons:
1. Widely Segmented Market:

Automobile market is a widely segmented market. The entire market is divided into different customer groups based on their taste, preference, and usefulness. Their needs and demands are different. Thus it is not wise to adopt such a strategy when the product is a car. 2. Higher Cost: If an automobile company wants to develop a single product for global market, they have to include all the features (safety, luxury, emissions, size, speed etc.) to attract a wide range of customers. In order to include all these features, the cost will be generally higher. And higher cost will lead to higher price. Thus, the ultimate goal of developing a world car will never be successful. 3. Nature of the product: An automobile is heterogeneous in nature. The need or purpose of an automobile varies person to person. Someone may need a small car where else someone may need a large family car. Again, someone might be concern about the safety where else someone might be concerned about fuel efficiency. Speed, Luxury, status, utility also will be considered as the basis for customer demand. As such, developing and offering a single product for a global market may not be a successful strategy. 4. Local Customers Responsiveness: The company who offers single model for different countries faces strong pressures to adapt their offerings to local requirements. Industries, like automobiles, a one-size-fits-all strategy is inappropriate as heterogeneous commodity in nature. Strategy to provide a single product is appropriate in those industries where the demand for local customization or
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responsiveness to local tastes is overwhelmed by economies of scale. A global strategy such for car market is not appropriate where local and changing tastes dominates. Global strategy with single product doesnt have the ability to respond to local conditions and cultures. 5. Less Competitiveness: Company offering a single product that meets the need of only a portion of the market is less completive than company offering diversified multiple products. Also, company that develops a single product to global market feels the need to refurbish existing line of product to stay competitive rather than actually knowing the need of customers, and then meet those needs.

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Question 5: What are the factors that need to be considered before developing a world car?
Developing a world car it could be a big dream and it is difficult to do but not impossible in a sense if the company can able to identify some factors which can facilitate the dream in a decent way.
1. Financial strength:

If the financial strength of an organization is sound that helps to adopt different project. Without money its not possible to go for huge expenditure or investment. Its the engine of the organization.
2. Extensive Market Research:

Market research plays a vital role in order to identify the problem and give a solution to the problem. It helps the organization to explore the opportunity.
3. Target Market Selection:

Selecting a right group of people is essential because it ensure the profitability for the market offerings.
4. Market Mix Selection:

If the organization can effectively select the marketing mix which will accelerate the growth of the organization, better than the competitor do.
5. Availability of Raw Materials:

Raw materials play a vital role in producing goods and organization can set up industry for being supplier of own or they can go for vertical integration in order to ensure efficient production.
6. Cultural differences:

Organizational progress sometimes hinder by the cultural variation of each country. So


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organizational should go for detail history of cultural aspects of each country.


7. Efficient and Expert Production Unit:

Efficient and Expert Production Unit lead the organization to achieve greater economic of scale which will ensure low cost per unit.
8. Service Center:

After sale service creates a positive impression in customer mind.


9. Just in time:

Organization can adopt just-in-time system to manage the raw materials effectively. It will save the cost of organization.
10. Expert Management:

Expert management gives the direction to go ahead.

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