Analysis of Auto Industry

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Analysis of

Automotive Industry

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1. INTRODUCTION

1.1. Background of the industry

The global automotive industry is a highly diversified sector that comprises of

manufacturers, suppliers, dealers, retailers, original equipment manufacturers,

aftermarket parts manufacturers, automotive engineers, motor mechanics, auto

electricians, spray painters or body repairers, fuel producers, environmental and

transport safety groups, and trade unions.

This paper identifies what is target market and explains competitive strategies

and its major implications. Additionally, this essay examines product mix using

the example of Mercedes Benz Company.

1.2. Major Industry Players

The worldwide automobile industry is largely dominated by five leading

automobile manufacturing corporations namely Toyota, General Motors, Ford

Motor Company, Volkswagen AG, and Daimler Chrysler. These corporations

have their presence in almost every country and they continue to invest into

production facilities in emerging markets namely Latin America, Middle East,

Eastern Europe, China, Malaysia and other markets in Southeast Asia with the

main aim of reducing their production costs.

1.3. Segments of automotive industry

The automotive manufacturing sector consists of:

automobile

light truck manufacturers

motor vehicle body manufacturers

motor vehicle parts

supplies

manufacturers


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This sector is engaged in manufacturing of automotives and light duty motor

vehicles, motor vehicle bodies, chassis, cabs, trucks, automobile and utility

trailers, buses, military vehicles, and motor vehicle gasoline engines.

Auto components amount to 31.5% share of the global automobiles and

components industry group's value. The global automotive component industry

is highly diverse and comprises of various product segments like engine parts,

drive transmission and steering parts, suspension and braking parts, electrical

parts and other auto components parts.

Fig 1 Automotive product segments

Segment Parts Production Share in global

auto component industry

Engine Parts segment fuel delivery system and

products such as pistons,

piston rings, engine valves,

carburetors, and diesel-based

fuel delivery systems

31%

Electrical Parts segment generators, starter motors

and spark plugs

9%

Drive Transmission and

Steering Parts segment

gears, wheels, steering

systems, axles and clutches

19%

Suspension and Braking

Parts segment

brakes, brake assemblies,

leaf springs, shock absorbers,

brake linings

12%

Body and Chassis Parts

segmentbody and chassis, sheetmetal components, and

plastic-molded parts

12%

Source: BERA: Issue 2 Automotive Industry: Automotive History, http://www.loc.gov/rr/business/BERA/issue2/history.html


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Fig 1 Automobile market segmentation


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2. Mercedes Benz background and Analysis

2.1. The history of the Mercedes-Benz

Gottlieb Daimler and Carl-Benz are the founders of the famous luxury cars -

Mercedes'-Benz. In 1926, the companies founded by Daimler and Benz merged

to form Daimler-Benz AG, and the Mercedes-Benz brand was born. Right from

the start, the Mercedes-Benz name was synonymous with automotive

excellence. These are German made cars and are known as status symbol of

high class consumers. All customers have their own values and beliefs while

purchasing a car. There are several factors responsible for the purchase

decision (see Appendix 1). Car industry is growing very fast worldwide. There is

a rapid change in trends and consumers preferences for comfortable, reliable,

highly efficient and economical cars. Mercedes Benz currently offers nine

classes of vehicles, all with multiple models and body style options, to meet the

specific wants, needs, and desires of its target market.

.


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2.2. Business Analysis of Mercedes Benz

Business analysis of Mercedes-Benz involves the detailed review of factors such

as consumer demand, competition, new product development, production costs,

marketing costs and profitability for each proposed new product.

Fig 2 Business Analysis

Factors Description and example

Consumer Demand Currently, consumers are very smart in selecting a car. They look for

the best option available in the market. Their demands are highly

efficient, affordable cost, reliable, comfortable and stylish models

cars. Some consumers also consider that the cars should be

environment friendly.

Competition Mercedes-Benz is facing a very strong competition from Japanese

cars and also from domestic cars. Japanese cars have taken a

considerable market share of Mercedes cars. In India, government

was providing Mercedes cars to its VIPs and VVIPs but n ow the place

of Mercedes cars has taken by Toyota Corolla cars as these cars are

more efficient and mechanically more sound.

New Product Development R&D department of Mercedes is inventing new cars and also doing

modifications in the old models to increase its market share and to

attract the customers. The latest cars of Mercedes company are

Bionic cars. In April 2004, Mercedes deliveries to customers a new

super sports car Mercedes-Benz SLR

Sales The Mercedes Car Group sold 1,226,800 vehicles in 2004 (2003:

1,216,900). For model life-cycle reasons, unit sales of the Mercedes-

Benz brand were 2% lower than in the prior year, however. smart'sunit sales increased by 22% due to the launch of the smart for four .

Production Costs and

Profitability

The Mercedes Car Group is in trouble after a long slide in vehicle

quality and profitability. Sales are slumping. Production costs are too

high, especially in its native Germany. The Smart mini car line is

Source: "Autos Insider." Can Mercedes Regain Luster 12 Nov 2005

"DaimlerChrysler." 12 Nov 2005 http://www.daimlerchrysler.com/dccom/0,,0-5-7171-1-462679-1-0-0-0-0-0-70-7164-0-0-0-0-0-0-0,00.html


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bleeding money, and its Maybach super limousine is achieving half of

targeted sales

2.3. Segmentation

According to Kotler & Armstrong (2008) market segmenting- dividing a marketinto smaller groups of buyers with distinct needs, characteristics and behaviors,

that might require separate products or marketing mixes.

Fig 3 Three building blocks of effective customer segmentation

Source: IBM Institute for Business Value analysis, 2003


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Fig 4 Purposes and levels of segmentation

To get full value from segmentation and apply it correctly, companies must

pursue comprehensive, dynamic segmentation. Customers today are on the

move, always learning, constantly changing; companies have to know not only

what customers look like today, but how their appearance will differ the next

week and differ again the next month. On top of that, companies have to know

how customers act, because, while first impressions reveal a great deal,

appearances can be deceiving.


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Fig 5 Changing patterns: Company analysis and interpretation (illustrative)

Identifying and acting on customers changing patterns is critical to beating

competitors in the marketplace. Mercedes Benz competitors have similar target

segments; understanding and acting first on changing patterns is the

differentiator for Mercedes. According to Porters theory (Kotler & Keller, 2006),

by performing in low cost advantage, differentiation advantage or focus, a

company could attain competitive advantage which other competitors could not

match. One of the alternative approaches of competitive advantage is the

companys ability to identify an advantageous opportunity and establish a

superior market position (Miles, 2006, citing von Mises, 1966; Porter, 1985).

Not paying attention to changing patterns could result in a company wasting

Source: IBM Institute for Business Value analysis, 2007


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months and dollars targeting a customer who is no longer (or never was)

profitable.

In Mercedes-Benz case it would be wise to select behavioral as the approach to

for segmenting consumer markets. From there the benefits sought must be

carefully considered, and the following questions should be answered:

What is the buyer looking to satisfy in the purchase of Mercedes cars?

Does it match his/her status?

Does it offer all the extras he/she is looking for?

In answering these questions Mercedes Benz will be able to organize the range

of Classes it offers from engine size to colors and standard features offered. The

next step is to see whether the market segment has already been developed. In

Mercedes Benz's case they have never ventured into the small car segment.

The particular segment they plan to enter is already dominated by the

Volkswagen Golf and the Renault Scenic. These manufacturers have much more

knowledge in this segment which gives them the advantage.

Currently, Mercedes Benz positions its products on various segments: lower

medium, upper medium, executive, dual purpose, luxury saloon and specialist

sports range. Thus, a luxury car may refer to an upper medium, executive, dual

purpose, luxury saloon, or specialist sport car. These types of cars are the carsthe owners may drive to the forecourt at a gala dinner and still highlight the

owners

sense of prestige and status.

Managing customer segment becomes difficult for the following reasons:

Large investment (software, hardware, communication, maintain a

customer database), (Kotler & Keller, 2006).

Database is not omnipotent, consumers are not always loyal

Market segmentation analysis must be done periodically because

segments change (Kotler & Keller, 2006, p. 266)

Marketers could not predict the consumers future demands from the

consumers past preference shown in the historical database


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The customer segment management lacks of the participations from both

customers and employees. On one side, employees find it easier to carry

on traditional transaction marketing, and reluctant to use the available

information (Kotler & Keller, 2006, p. 165). The other side, customers are

more concerned about their privacy and security. Undoubtedly, it is very

hard to put the theory into practice. It is a long progress for marketers to

execute an effective and actionable customer management, in which they

should make great efforts.

2.4. Target market

Target market is a set of buyers sharing common needs or characteristics that

the company decides to serve (Kotler & Armstrong, 2008).

Mercedes-Benz is the global leader in the premium market segment. Mercedes

Benz is targeting on high level income consumers in passenger car segment and

because of its brand image, its products generally preferred by the consumers.

Mercedes Benz a sophisticated car that would be best suited for individuals of

age thirty and up who have successful careers.

A luxury car brand is a multi-segment (Kapferer, 1995) brand that wants to

cover all customer market segments. That is why Mercedes Benz target different

markets, such as families(R Class), organizations (tracks, vans, buses, MPVs)

and individuals.

Target marketing for Mercedes involves three factors that need to be

considered:

The size and growth potential of each segment

Their structural attractiveness

The organization's objectives and resources

Reputation for quality and safety

The brand name (it has its own advantage to enter unknown segment)


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The consumers for Mercedes-Benz cars can be split into three categories:

Fig 6 Mercedes-Benz categories

Category Description Income Age Expectation

The very rich a small but

strategically

significant group

assets in excess of

$1million

over 50 high level of

service

The rich a far larger group assets of around

$100,000

safety and

luxury

High net worth

individuals

a semi-mass

market

assets available for

investment of

$15,000-$100,000

25-35 superior

customer

value,

competitive

prices

Some individuals are interested in owning cars that cost a lot of money because

they expect that others will perceive them as better than if they drove a less

expensive car. Others consider the utility of a particular vehicle and prefer the

perception that they shop for value rather than conspicuous consumption. The

motivations behind why people purchase the cars they do are complex (see

Appendix 2).

2.5. Market At tractiveness

2.5.1. Market Size

Their biggest markets are the USA and the EU, which represent the highest

sales figures over the last 5 years. These are extremely large markets where on

a yearly level around 300,000 cars are delivered to each continent.

2.5.2. Market Growth


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For Mercedes-Benz these markets have been growing consistently over the last

five years. With the introduction of 15 new models it is clear the Mercedes-Benz

has contributed to the growth in these markets. The growth rate per year has

been around 6%.

2.5.3. Perceptual mapping. Positioning

Perceptual maps have been a very useful tool for marketers in understanding product

differentiation, (Dickson and Ginter 1987), product positioning and product preferences.

Fig 7 Durability vs. Reliability

Figure 7 illustrates that Mercedes have to improve its position among other

competitors. Mercedes can focus on expanding into emerging into markets

worldwide. Additionally they should invest in research and development in order

to understand customer needs and increase the level of security, safety and

reliability.


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Fig 8 Price vs. Quality

Mercedes always stays for high quality and luxury price, however in order to

compete in current auto market they may develop a new strategy by decreasing

costs of production or labor.


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Fig 9 Prestige vs. Performance

According to figure 9 Mercedes has a good place. The main purpose for them in

this field is to sustain their position by investing in product development and

research.


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3. Product mix

3.1.Product is one of the components of the marketing mix. It is used to

summaries everything that firms can offer to the target market, including goods,

services, places or ideas (Kotler et al, 2005).

Mercedes-Benz is dealing in the car industry, selling brand new cars from all

classes. In comparison with their direct rivals, BMW and Lexus, Mercedes has

the greatest variety of classes which gives them higher share of the market.

There several aspects which reflect product:

Develop and maintain a brand name (it is not enough to have just a

product). A strong brand association can help companies attract profitable

and loyalty customers.

During their 100 years of history, Mercedes managed to develop strong brand

name, which in the year 2000 was rated as the best automobile brand worldwide

by the Interbrand Rating Agency (T-systems, 2006).

Quality, which also has an impact on product performance and consumer

satisfaction.

Mercedes-Benz is a firm with traditions. Every single Mercedes car can

guarantee a high quality level of every aspect. In order to boost their

profitability, Mercedes is concentrating their efforts on the issue of quality as

well as efficiency and profitability.

Design can be used as a tool by businesses for differentiating and

positioning different kinds of product. A distinctive product design can add

additional customer value.


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The Mercedes cars design aims to give both trendsetting and tradition design of

their cars. Every new model is setting a new trend in design that smaller firms

can follow.

Features are another strategy used by companies to differentiate theirproduct and in the same time stay competitive on the market

Every new model of Mercedes can be equipped with features like SRS airbag,

which is safety technological innovation, Smart key (theft-protective system),

Hands free communication system, DVD navigation system and other innovative

technological features. The companys aim is to provide additional level of luxury

and safety.

Product-support-services can be considered as a way of gaining

competitive advantage

Operating in the car industry, for Mercedes is very important to assure its

customers of heaving a quality after-sale service and warranties for their

products. Mercedes-Benz has a top qualified service team at each local dealer.

The company guarantees its customers that their car will be serviced by

professionals, with genuine parts at competitive prices.

3.2. BCG matrix

In order to understand Mercedes-Benz product portfolio Boston Matrix (see

Appendix 3) was conducted. Figure 5 illustrates that Mercedes portfolio for A,

C, SL, M and S classes. Mercedes portfolio is balanced even though certain

cars such as the A-Class and the M-Class are not performing well.


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Fig 5 Boston Matrix

Step 1

Step 2


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Step 3


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Boston Matrix for Mercedes

Benz

3.2.1. Analysis of BCG

Class Position Description Action

M Class Question Markslow market share, high-growth market Invest, increase marketshare, use Cash Cows

to support requiredinvestments.

S class Stars-Questionmark

high market share, high-growth market, marketleader

Need investments forsales growth and marketshare to take the fullposition of Stars.Mercedes needs toexpand product and

Relative Market Share

MarketGr

owthRate


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invest in R & D

SL, C Classes Cash Cows market is not veryattractive, low marketgrowth rate, generates alot of cash and helps theorganization invest in other

businesses

Maintain the strongmarket position anddefend market share,does not needsubstantial investments

to keep the marketshare

A Class Dogs low market share andoperates in low-growth market

Mercedes needs todivert this product,because it makes lossesfor company, and Aclass is not so popular tokeep it in order toprovide product range

4. Competitors

The luxury car segment is a competitive industry where each rival has to constantly

scan its competitors for any changes whether they're in price or in the product itself.

The market is growing particularly in Mercedes-Benz case, and externalcompetitors who do not hold a share in the luxury segment can attempt to offer

substitutes in the goal of stealing away some customers. Mercedes-Benz is

facing a very strong competition from Japanese cars and also from domestic

cars.

4.1. Direct and Indirect competitors


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Mercedes-Benz Main competitor is BMW, firstly because they compete directly

in the luxury segment with their 5 series and 7 series models and secondly

because they are of roughly the same size. Rivalry between them is high, but

Mercedes-Benz has managed to keep them at bay through a strong sales policy

that has lead to record sales particularly over the last two years.

Other rivals include Jaguar, Audi and Rolls-Royce. However they are not in

direct competition as they have targeted a different market segment that does

not compare to that of Mercedes-Benz. The reason for this is that Mercedes-

Benz has made the standard in quality and safety, in other words it has set the

standards for its competitors to match.

Currently, consumers' attitude towards buying luxury cars is changing

dynamically. Consumers are more interested in saving money rather than

spending it for more expensive luxury cars. Due to the above it would be wise

for Mercedes Benz to scan companies such as Honda, Nissan, Ford, who seems

to be making a move in that direction that, could pose a future threat.

4.2. Porters 5-forces

In order to better understand the environment in which Mercedes Benz operates in it is

crucial to perform the 5-forces analysis. This Strategic tool is used to investigate how

the organization needs to form its strategy so that it can develop opportunities in its

environment and protect itself against competition and other threats.

Fig 6 Porter's Five Forces


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Threat of New Entrants

The threat of new entrants is very low in the automobile industry. The industry is

very mature and it has successfully reached economies of scale. In order to

compete in this industry a manufacture must be able to:

Source: http://www.justice.gov/atr/public/hearings/single_firm/docs/219395_8.gif


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Achieve economies of scale

Mass-produce the automobiles

Invest extreme amount of capital in research and development

Find distribution channels

Threat of Substitute Products

The second is the threats from substitutes, as there are many make and model

of other premium branded cars, hence, Jaguar, Audi, BMW, Porsche, Lexus, etc.

Some of the substitutes are walking, riding bike or taking a train. Substitutes

products all depend on the geographic location of the consumer. In some cities

such as New York or Chicago, a car is not as necessary. In cities such as those,

the subway is the most effective means of transportation.

Bargaining Power of Buyers

The third force is the threats from the bargaining power of buyers. It is strong for

both Mercedes Benz and the entire automobile industry with a large number of

alternative suppliers, hence, the aggressive pricing strategy. This results in a

very strong competitive rivalry in the industry. With around 25-30 dealerships in

each country or state Mercedes Benz reaches all its customers, through an

excellent network.

Bargaining Power of Suppliers

Finally the threats from the suppliers bargaining power, this is fairly low in the

automobile industry, due to dual sourcing strategies, using a range of alternative

sources of supply for parts. There are so many parts that are used to produce

an automobile, that it takes many suppliers to accomplish this. When there are


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many suppliers in an industry, they do not have much power. Mercedes Benz

holds excellent relationships with all its suppliers this is due partly to the scale

of operations and the total expenditure on suppliers. This is evident from the

collaborative project they undertook with Bosch (the brake manufacturers) in the

creation of the ABS (Anti-Lock Braking System). In the car manufacturing

industry suppliers are usually large in number, and Mercedes Benz recognizes

this which is why they manage an effective and friendly relationship with all

suppliers. This can be seen by the economic downturn of the late nineties when

Mercedes Benz had asked if suppliers could reduce their prices, which they all

did.

Intensity of Rivalry among Competitors

Rivalry among the competitors is very strong is this industry. The major

competitors are so closely balanced that it increases the rivalry. In order to gain

market share in the automobile must gain market share by taking it from their

competitors. 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. The competitors are compared to one another constantly. The price,

quality, durability, and many other aspects of different manufacturers are greatlytaken into consideration when deciding what type of vehicle to purchase. When

the different manufacturers advertise they even compare their products to their

competitors.

4.3. Strategy

Mercedes Benz marketing strategy was once centered on the safety, luxury, and

precision engineering of its cars, but due to increase competition in the luxury

car industry and changing consumer attitudes about the Mercedes Benz brand


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that strategy has changed. Now their marketing strategy is more life style

oriented and is focused more on presenting the more fun loving, approachable,

and energetic side of Mercedes Benz. The evolution of Mercedes Benzs

marketing strategy can be directly connected to the expansion of its target

market, which now includes persons twenty five to thirty five years old as well as

its initial targets the baby boomers. In order to provide superior customer value

to its target market Mercedes Benz has found it necessary to expand its product

line up, provide more competitive prices, increase communications with its

target market, maintain accessibility to consumers, and continue its excellent

customer service.

Mercedes-Benzs current s trategy is built on four central pillars:

global presence

leadership in technology

strong brands

broad product range

5. Analysis Methodology and findings

5.1 Methodology

The report begins with a historical overview of the automotive industry.

Company is analyzed in terms of their market position, their financial situation,

and their management strategy. Where useful, specific statistics have been


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incorporated into the analysis including: market share, revenues, net expenses,

net income, market, value added and number of models. This is followed by an

analysis of the industrys structural characteristics using Porters 5 Forces Model

as a framework, which provides an understanding of the automotive industry as

a whole in its current state.

The examination of the industry as a whole and of some of the major players in

the industry provides a good framework within which insightful conclusions can

be derived about the current state and future of the Mercedes Benz. The report

concludes with the recommendation section, which provides a prediction of the

near-future success of each of the company.

5.2. Conclusion and recommendation

Accordingly, the luxury car market overall is currently undertaking a social

change with luxury brands seeming less remote, less different, and less

exclusive with the quality of life improving. As a result, increasing competition

between makes has intensified the importance of brand identity. As product

standards continue to rise, the perceived image of a car make plays a key role

in the buying decision. Mercedes-Benz must develop attributes and values thatreflect changing social values which influence buyers emotionally, in order to

maintain its position in different regions of the global market.

Prestigious luxury brands like Mercedes do not need to expose customers to

frequent advertisements. In current practice, the necessary occasions take place

only when new models are introduced. Such top luxury car manufacturers are

now attempting to level up their brand with the post-modern approach namely

brand as company and brand as policy. At this stage, marketers are aware of

consumer cynicism and cautious about their actions which could affect customer

and public values positively or negatively. Mercedes need to preconceive their

physical products as products and services (luxury cars, after sales services and

warranty) and reassure their dealers to create, maintain, and build customer

values. While all things being equal, it is the era of the service industry at which


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companies can gain a competitive edge by focusing on customer value-building

an actual emotional bond with the customers (Butz and Goodstein, 1996 ,p 63).

Mercedes Benz revenues have steadily increased over recent years and

demand for its vehicles has also been on the rise. These positive aspects

suggest that Mercedes Benz is in a good position for future success. Whether or

not the future plays out according to these recommendations will depend on

factors both internal and external.

Regardless, many of the companies will face major turning points in their

corporate existence over the next five years; the near future will almost surely

be a defining period for the automotive industry.

Mercedes-Benz is known to be a status symbol of high class consumers. Middle

class consumers feel rich if they buy Mercedes' cars. Currently, consumers are

more conscious for the performance and price of cars they are going to buy.

Although the company is making many changes in its price, product and

promotion strategies but still there is lot to do to attract the consumers and to

increase its market share. The components of marketing mix (product,

promotion, place and price) need to be coordinated and consistent with a

company's marketing mission. The company should take regular feedback from

its consumers to know their exact demand and needs. The buying behavior ofthe consumers is changing very fast. The company can conduct surveys to know

the attitude of the consumers while buying a car. Mercedes-Benz should also

open spare parts warehouse so that consumers can easily get the spare parts of

Mercedes cars. The cost of spare parts should be affordable by the consumers.

5.3. Conclusion

With their more than 100 years of history, Mercedes-Benz has managed to build

a brand name that might be considered as their only heritage. Trough years, the

company succeeded in maintaining the traditions of luxury and safety cars in

combination with trendsetting designs and new technological innovations. At the

present time, the car industry is flooding the market. This increases the


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managerial attention in operating in such environment of great competition. But

whatever managerial mistakes the company had made or will make in the future,

it will still be Mercedes.

Analysis of Auto Industry

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