hyper competition in bric countries

EXECUTIVE SUMMARY:

The report outlines the latest trends that the automobile industry is facing in the current

times. The issues arising from these trends are discussed in detail and a basic framework has

been established through scenario planning to highlight how these trends will affect the

automakers in the future.

Scenario planning is used to generate different scenarios that might occur in the future.

Mckinsey 7s Model is used to generate the recommendations for the different scenarios.

of 17

Contents

Executive Summary:........................................................................................................................1

Strategic issues:...............................................................................................................................3

Hyper Competition In Bric Countries:........................................................................................3

Energy Efficiency:.......................................................................................................................5

Scenario Planning:...........................................................................................................................6

Scenario 1: Hypercompetition:....................................................................................................6

Scenario 2: Green Evolution:.......................................................................................................7

Scenario 3: Global Supply Chain and Competitive Pricing:.......................................................8

Recommendations:..........................................................................................................................9

The New 7S’s:.............................................................................................................................9

References:....................................................................................................................................12

Appendix:......................................................................................................................................15

of 17

STRATEGIC ISSUES:

HYPER COMPETITION IN BRIC COUNTRIES:

Hypercompetition “an environment characterized by intense and rapid competitive

moves, in which competitors must move quickly to build new advantages and [simultaneously]

erode the advantages of their rivals.” Some analysts say hypercompetition is “high velocity

competition.” because of the speed of technological change. Not only is there more competition,

there is also tougher and smarter competition. (D’Aveni, 2004)

Hypercompetition is reshaping the way firms do business because in a hypercompetitive

context, competitive advantages tend to be so short-lived, thus achieving and sustaining a

competitive advantage may mean that the best strategies for winning will be short-term and

constantly revised.

A state of hypercompetition prevails in constantly growing markets of China, India,

Russia and Brazil. Research states that by 2015, there will be more than 90 automotive brands

competing in China's passenger-vehicle market, more than any other market in the world and

more than twice the number of brands in the United States. In addition, by 2015, there will be

more than 300 models produced in China, and hundreds more models that will be imported (J.D

Power & Associates, 2010). The Shanghai Motor Show held in April 2009 showcased 900

models of automobiles and over 300 of which were imports (Russo, B., 2009).

Similarly the industry rivalry is extremely high in India with any being product being

matched in a few months by the competitors. This instinct of the industry is primarily driven by

technical capabilities acquired over years of development under the technical collaboration with

international players. The liberalization policy and various tax reliefs by the Govt. of India in

recent years has made remarkable impacts on Indian Automobile Industry. Indian auto industry,

which is currently growing at the pace of around 18 % per annum, has become a hot destination

for global auto players like Volvo, General Motors and Ford. India is the 11th largest Passenger

Cars producing countries in the world and 4th largest in Heavy Trucks (Surfindia, 2010).

of 17

The demand of cars in Brazil is so high that some customers have to wait up to three

months to get a car. Brazil's auto industry is enjoying another excellent year as car sales and

output are surging to one record after another. Last month, sales in the country jumped to an all-

time high of 244,200 vehicles, while output soared 34.4 percent to 300,600. Many manufacturers

in Brazil are expanding by hiring more employees and opening new factories. Ford Motor Co

was ahead of the curve when it opened a $1.9 billion plant in the northeastern part of the country

in 2002. Today, the state-of-the-art facility ensures nearly constant production with three shifts

six days a week (Beasley, 2008).

The intensity of competition in Russia is not as strong as China or India but soon it will

reach the same scales as the next two months will see several "premieres" from the auto industry

since three foreign car assembly plants will open in Russia in a row. A dozen similar projects are

planned for the next three years as well. By now, almost all the key players in the international

car-manufacturing market have opened production facilities in Russia with Volkswagen alone

producing 150,000 cars a year The sales of passenger cars in Russia are forecasted to reach about

5.9 Million Units by 2012. The stock of passenger car per 1,000 people is expected to cross 300

Units by 2012, reflecting the vast potential this market has (Belov, 2007)

of 17

ENERGY EFFICIENCY:

The huge demand and supply of car will cause a considerable amount of pressure over

the natural resources of these countries. As China’s auto market continues to grow, pollution

significantly increases while China’s self-sufficiency rate of crude oil continues to decrease.

Therefore china is making great strides towards the development of hybrid and electric cars.

With independent companies such as BYD – a cell phone and battery maker aspiring to

become a leader in electric vehicles has clearly startled the world by delivering the first mass-

produced plug-in Electric Vehicle.

To encourage the use of more fuel-efficient and less polluting vehicles, the central government’s

2009 stimulus plan included objectives for increasing the proportion of smaller vehicles in the

China market.

China’s Minister of Science and Technology, Mr. Wan has recently unveiled a plan to

support the development of what China calls “New Energy Vehicles” (NEVs). The Ministry of

Science and Technology is sponsoring an ambitious plan to promote the use of NEVs initially

targeting 13 pilot cities, which include Beijing, Shanghai, Chongqing, Changchun, Dalian,

Hangzhou, Jinan, Wuhan, Shenzhen, Hefei, Changsha, Kunming, and Nanchang. The plan

includes support for the development of energy-saving technology for use in government fleets,

including buses, postal, and sanitation vehicles. The plan targets the deployment of 60,000

energy saving vehicles in China by 2012 (Russo, B., 2009)

of 17

SCENARIO PLANNING:

According to Lynch (2003), scenario are detailed and plausible views of how

the business environment of an organization might develop in the future based on grouping of

important environment influences and drivers of change about which there is a high level of

uncertainty. A scenario planning consists of developing possible representations of a firm's

potential future that make different assumptions about forces driving the market and include

different uncertainties (Kotler, 2003).

By casting strategies as scenarios, companies can accelerate the process of strategic

decision making in high changing environments. Scenario Planning involves with three steps

Identifying high-impact, high uncertainty factors in the environment:

A. The growth of BRIC markets and the decline of sales in American market.

B. The growth of hybrid and electric cars.

Scenario 1: Hypercompetition:

Hypercompetition at its peak: the effect of this will result in all the firms fighting for the

major share of the BRIC countries markets. Firms like Daimler and wolksvagon will have to

constantly make products to suit these specific markets. These markets are comparatively

different than one another therefore coming up with successful segmentation and product designs

to suit the needs of the markets will be very difficult tasks for the firms. Any firm which

succeeds in coming up with a perfect mix of product and pricing attributes will capture the

market. The manufacturers that fail to understand the needs will potentially lose out on a large

share of market and will have to try to sell the products in the diminishing markets of Europe and

America.

Early-movers in the China market such as Volkswagen and General Motors have enjoyed

significant profit margins by occupying mid-size, full-size and MPV segments without a great

deal of competition. However, today's China market no longer offers such an easy road to

profitability. Virtually every major vehicle manufacturer is now present in the China market. A

of 17

recent J.D. Power & Associates study has reported that many of the cars sold in 2009 were in

low-end segments that are eligible for tax incentives and that many of these cars earn the

manufacturers as little as $100 each. China has rapidly become the largest car market in the

world. For the first half of 2009, China posted sales of 6.1 million units versus 4.8 million

vehicles sold in the US market. It now seems like all the ingredients are there for the “Chinese

automotive factory” to expand to the global markets (Russo, B., 2009)

The accelerated competition (hypercompetition) means it is no longer possible to wait for

a competitor to move before deciding to react. Thus the various car manufacturer firms have to

come up with strategies to fight the competition.

Scenario 2: Green Evolution:

The largest sector of this Chinese market in future will consist of hybrid and electric cars.

Firms should try to maximize their R & D towards the development and innovation of these

technologically advanced cars. These firms will face tough competition from the local

manufacturers as at this year's China’s entire leading compact car producer’s showcased

futuristic electric models alongside hybrids and fuel-efficient conventional vehicles.

Geely Auto, one of China's fastest growing compact car makers, has unveiled two electric

models at Auto China and promoted one of the most eye-catching concept vehicles, the

Intelligent Geely, or IG. Geely's IG transmission systems allow a choice of electric, hybrid or

petrol engines in an identical model. Solar panels on the roof and bonnet of the IG can also

power the vehicle for up to six hours (Smith, 2010).

Firms like Toyota have also made their mark in the green technology field. Reports state

that Toyota is planning on placing hybrid technology across its entire lineup of cars. By doing so,

they plan on selling 1 million hybrid vehicles by 2012. Currently Toyota sells the Prius, the

Highlander hybrid and the Lexus RX 400h hybrid. Toyota currently sells more hybrid

vehicles than all other companies combined. Toyota is hoping to keep production costs down and

so keep the retail price between hybrid and gas-only cars under $2550. They are also hoping to

sell 2,000 hybrid cars in North America alone this year (AP, 2012).

of 17

The race to find the first mass-market best-seller can only add to the fierce competition in

what is still regarded as the nation with the biggest untapped potential for car ownership.

Scenario 3: Global Supply Chain and Competitive Pricing:

As automobile industry is becoming more and more standardized, the level of

competition is increasing and production base of most of auto-giant companies are being shifted

from the developed countries to developing countries to take the advantage of low cost of

production. Many cars sold in the US and elsewhere today already does come from China.

Because a significant percentage of the total cost of a car is in the manufactured components,

there has already been a significant movement of the production of supplied parts to China. A

great many of the components used in cars today either are or can quickly be manufactured in

China. This is purely driven by the efficiencies gained from sourcing in China.

The future outlook is that local brands and international brands will install more capacity

in China, placing even more pressure on pricing in order to increase capacity utilization. Weak

brands and older models will become the first casualties as market and competitive forces

squeeze them out. The competitive battle can only be won with strong brands and contemporary

models that can be delivered profitably to savvy global consumers with choices that demand a

competitive price (Banarjee, 2007)

Big players in automobile industry do not have just one big factory which exports its

products to all other countries. In addition, the products are not identical in each different market.

It may have the same technical platform, but the design and the options and features differ

between countries. They are different because the demands of customers differ between

countries. So car makers are researching what their customers want and changing the car for each

market otherwise they will lose customers.

Nowadays, major companies target cost reduction along with the design and models over

a period of time. For example, German companies are targeting price reduction of 13% for the

next generation model. Ford and Renault targets price reduction of 5-8% per annum and the

figure is 13% for Toyota over 3 years (Veloso & Kumar 2002).

of 17

RECOMMENDATIONS:

Hypercompetition creates an environment where no organization can build a competitive

advantage that is sustainable. Every advantage erodes. So in this hypercompetitive environment,

companies must actively work to disrupt their own advantages and the advantages of

competitors. To cope with this new reality, managers must employ a new 7S’s framework that

can be used to analyze industries and competitors and to identify one’s own strengths and

weaknesses in meeting the challengers of hypercompetition.

Unlike the old 7S framework, originally developed by McKinsey and Company, the new

framework in based on a strategy of finding and building temporary advantages through market

disruption rather than sustaining advantage and perpetuating an equilibrium.

The New 7S’s:

superior stakeholder satisfaction strategic soothsaying positioning for speed positioning for surprise shifting the rules of the game signaling strategic intent simultaneous and sequential strategic thrusts.

Because of the nature of the hyper competitive environment, the New 7S’s are not presented

as a series of generic strategies or a recipe of success. Instead, these are key approaches that can

be used to carry the firm in many different directions. To achieve competitive advantage the

firms can choose any of the aforementioned strategy. The superior stake holder satisfaction

relates to creating the ability to serve the customer better than competitors can. Automobile

industries can perform this task by tailor making their services to satisfy the needs of their

customers. The Logan produced by Renault in India is one good example. Through engine re-

engineering and parts simplification, Renault successfully adapted this car to be more cost

efficient and easy to repair for Indian customers. Excellent sales have resulted from delivering

products tailored to the local consumer taste - delivered at a cost made possible from the cost

efficiencies and scale achievable in the China market (D’Aveni, 2004).

of 17

The second S, strategic soothsaying, is concerned with understanding the future evolution

of markets and technology that will proactively create new opportunities to serve existing or new

customers. This also contributes to the firm’s vision of where the next advantage will be

discovered and where the company should focus its disruption. If two companies recognize the

opportunity to create a new advantage at the same time, the company that can create the

advantage faster will win. The emerging market of hybrid car and electric cars poses a great

opportunity for firms. They should dedicate their R & D resources to develop hybrid cars which

target the highly developing markets in China and India. Companies that are developing electric

cars include Maruti Suzuki India (MSI) that will unveil its hybrid vehicles in the 2010

Commonwealth Games, as part of the Indian government’s hybrid development project (Singh,

2009).

Fiat Automóveis, along with Companhia Energetica de Minas Gerais (CEMIG) and

Itaipu Binacional, have developed the Fiat Palio Elétrico. Plans are to produce an initial 30 all-

electric cars for the electricity generating giant, Cemig, to show Brazilians that EVs are viable in

Brazil (Suiriu, 2008)

Firms should also relocate their production bases to developing countries like China and

India to gain the advantages of low manufacturing costs. In recent times, India has emerged as

one of the favorite investment destinations for automotive manufacturers. German car major

Audi will start assembling its sports utility vehicle Audi Q5 from mid-2010. The company plans

to assemble more cars locally at its Aurangabad plant instead of importing completely built units

(CBUs).

Ford India commenced commercial production of its compact car Figo, and diesel and

petrol engines at a new factory in Chennai. The Figo will be built exclusively in India and

exported to Asian countries and South Africa.

Japanese major Nissan has decided to shift the entire production of its small car, Micra,

from the UK to India. After production of the Micra begins here, Nissan plans to manufacture

four more models in India, involving a total investment of over US$ 412.2 million (IBEF, 2010).

of 17

In hyper competition it is not enough to build a static set of competencies. Good

resources are not enough. They must be used effectively. Automobile industries are facing

various challenges. To respond to these challenges, global vehicle producers will need to

innovate rapidly to meet diverse local requirements, while incorporating suppliers, assemblers

and distributors from around the world into their value chain. Automakers that are agile and

responsive, and ready to rethink their business models, will be in a position to reap the bonanza

of this new market reality

of 17

REFERENCES:

Books:

Lynch, R., 2003, “Corporate Strategy”, Prentice Hall, London.

Kotler, P., 2003, “Marketing Management”, Prentice Hall, New York.

Electronic Sources:

AP, 2012, “Toyota to Implement Hybrid Technology Across The Board” Available At:

[http://www.hybridautoreview.net/toyota-to-implement-hybrid-technology-across-the-

board.html]

Date Accessed: 15th May, 2010

Banerjee, 2007, Changing Features of the Automobile Industry in Asia: Comparison of

Production, Trade and Market Structure in Selected Countries, Available At:

[http://www.unescap.org/tid/artnet/pub/wp3707.pdf]


Beedie, M., 2007, Rise of the BRIC Nations, Available At:

[http://www.power-technology.com/features/feature1417/]


Belov, M., 2007, Volkswagen to became part of Russian auto industry, Available At:

[http://en.rian.ru/analysis/20071128/89997657.html]


Beasley, S., 2008, Brazil's Auto Industry Cruises as Economy Booms, Available At:

[http://www.reuters.com/article/idUSN23173283]


Crane, D., 2007, Globalization Hitting Our Auto Industry, Available At:

[http://www.thestar.com/comment/columnists/article/211079]


of 17

http://www.thestar.com/comment/columnists/article/211079

http://www.reuters.com/article/idUSN23173283

http://en.rian.ru/analysis/20071128/89997657.html

http://www.power-technology.com/features/feature1417/

http://www.unescap.org/tid/artnet/pub/wp3707.pdf

http://www.hybridautoreview.net/toyota-to-implement-hybrid-technology-across-the-board.html

http://www.hybridautoreview.net/toyota-to-implement-hybrid-technology-across-the-board.html

D’Aveni, R., 2004, Welcome to Hypercompetition - Competitive Advantage at its Fastest,

Available At: [http://knowledge.emory.edu/article.cfm?

articleid=806] Date Accessed: 15th May, 2010

Guerin, B., 2005, Full speed ahead for Indonesia’s auto industry, Available At:

[http://www.atimes.com/atimes/Southeast_Asia/GG01Ae01.html]


IBEF, 2010, Automobiles, Available At:

[http://www.ibef.org/industry/automobiles.aspx]


Russo, B., et al, 2009, The Eight Overarching China Automotive Trends that are Revolutionizing

the Auto Industry, Available At:

[

http://www.booz.com/media/file/The_Eight_Overarching_China_Automotive_Trends_en_part2.

pdf]


Paul, M., & Moavenzadeh, F., 2001, How Is the Auto Industry Responding to Technological

Change, Available At:

[http://imvp.mit.edu/sloanres.html]


J.D Power & Associates, 2010, J.D. Power and Associates Outlines Five-Year Forecast in China

Automotive 2015: The Cost of Opportunity, Available At:

[http://businesscenter.jdpower.com/news/pressrelease.aspx?ID=2010066]


Roznov, K., 2010, Bric Countries Try to Shift Global Balance of Power, Available At:

[http://news.bbc.co.uk/2/hi/8620178.stm]


Reportlinker, 2010, New Cars - BRIC (Brazil, Russia, India, China) Industry Guide, Available

At:

of 17

http://news.bbc.co.uk/2/hi/8620178.stm

http://businesscenter.jdpower.com/news/pressrelease.aspx?ID=2010066

http://imvp.mit.edu/sloanres.html

http://www.booz.com/media/file/The_Eight_Overarching_China_Automotive_Trends_en_part2.pdf

http://www.booz.com/media/file/The_Eight_Overarching_China_Automotive_Trends_en_part2.pdf

http://www.ibef.org/industry/automobiles.aspx

http://www.atimes.com/atimes/Southeast_Asia/GG01Ae01.html

http://knowledge.emory.edu/article.cfm?articleid=806

http://knowledge.emory.edu/article.cfm?articleid=806

[http://www.reportlinker.com/p0191872/New-Cars-BRIC-Brazil-Russia-India-China-Industry-

Guide.html?request=news]


Smith, B., 2010, Electric future sparks race among Chinese car firms, Available At:

[http://www.monstersandcritics.com/news/business/features/article_1551537.php/Electric-

future-sparks-race-among-Chinese-car-firms-News-Feature]


SurfIndia, 2010, Automobile Industry, Available At:

[http://www.surfindia.com/automobile/automobile-industry.html]


Singh, P., 2009, Made in India: The $12,000 Electric Car, Available At:

http://www.time.com/time/world/article/0,8599,1911869,00.html

Suiru, B., 2009, Fiat Brazil to Produce an Electric Car, Available At:

[http://www.greencar.com/articles/fiat-brazil-produce-electric-car.php]


of 17

http://www.greencar.com/articles/fiat-brazil-produce-electric-car.php

http://www.time.com/time/world/article/0,8599,1911869,00.html

http://www.surfindia.com/automobile/automobile-industry.html

http://www.monstersandcritics.com/news/business/features/article_1551537.php/Electric-future-sparks-race-among-Chinese-car-firms-News-Feature

http://www.monstersandcritics.com/news/business/features/article_1551537.php/Electric-future-sparks-race-among-Chinese-car-firms-News-Feature

http://www.reportlinker.com/p0191872/New-Cars-BRIC-Brazil-Russia-India-China-Industry-Guide.html?request=news

http://www.reportlinker.com/p0191872/New-Cars-BRIC-Brazil-Russia-India-China-Industry-Guide.html?request=news

APPENDIX:

Porters Five Forces Analysis:

Degree of Rivalry

The rivalry among car manufacturers in the U.S. and the global automotive industry is intense.

The automotive industry in the U.S. is no longer the playground of the Big 3 (GM, Ford, and

Daimler Chrysler); global companies compete in the U.S. market, while U.S. companies have

globalized themselves. The great diversity of rivals in terms of cultures and associated

philosophies has intensified rivalry in the industry. Market growth is slow in the established

markets of the U.S. and Western Europe, and companies must fight fiercely to take out gains or

prevent losses in market share. However, growth is potentially huge in the rapidly industrializing

nations of China and India; in these booming markets, companies could take advantage of the

opportunities to reap handsome rewards. The degree of rivalry in the automotive industry is

further heightened by high fixed costs associated with manufacturing cars and trucks and the low

switching costs for consumers when buying different makes and models.

Barriers to Entry

The barriers to enter the automotive industry are substantial. For a new company, the startup

capital required to establish manufacturing capacity to achieve minimum efficient scale is

prohibitive. An automotive manufacturing facility is quite specialized and in the event of failure

could not be easily retooled. Although the barriers to new companies are substantial, established

companies are entering new markets through strategic partnerships or through buying out or

merging with other companies. In fact, the barriers to entry for new (or different) markets may be

quite low; in the 1980s, U.S. companies practically invited Japanese makers into the U.S. by

failing to offer quality vehicles in the lower price markets. All of the large automotive companies

have globalized and entered foreign markets with varying degrees of success. In the newer,

undeveloped markets of Asia, Africa, and South America, the barriers to entry similarly exist.

However, a domestic start up, with local knowledge and expertise, has the potential to compete

in its home market against the global firms who are not yet well established there. Such an

of 17

operation, if successful, would surely be snatched up by one of the global giants and

incorporated into its fold. The existing loyalty to major brands, incentives for using a particular

buyer, higher fixed costs, scarcity of resources, high costs of switching companies, and

government regulations constituted the barriers to entry which in turn reduced the competition in

an industry. The success of foreign car manufacturers like the Honda Motor Co. had disproved

the general belief that the Big Three were invincible. The only factors expected to retard the

growing significance of foreign auto dealers were the loyalty to American made vehicles and the

after-sale services offered

Buyer and Supplier Power

In the relationship between the automotive industry and its suppliers, the power axis is

substantially tipped in the industry’s favor. The automotive industry is comprised of powerful

buyers who are generally able to dictate their terms to their suppliers. There are specific

characteristics that make members of the automotive industry powerful buyers: (1) there is not a

grand proliferation of companies manufacturing automotives, and the four largest automotive

companies in the U.S. have roughly 90% of the value of shipments and value added in the U.S.

(see Appendix D); (2) automotive parts (e.g., oil filters, mufflers, belts, etc.) are standardized

commodities and these parts are only used on automobiles; and (3) backward integration can and

does occur, as seen in summer 2005 when Ford purchased struggling parts maker Visteon. The

presence of very few suppliers of a particular product, and the absence of any substitutes for the

product supplied reflected the pressure exerted by the supplier. Sometimes the product was

extremely important to the auto-maker and the alternatives proved to be very costly. In such

cases the suppliers were in a better position to dictate terms. A lot of suppliers depended on

automakers to buy their products. But if the automaker decided to change suppliers it would

badly affect the supplier’s role in auto manufacturing.

In the relationship between the automotive industry and its ultimate consumers, purchasers of

finished vehicles, the power axis is tipped in the consumers’ favor. Consumers wield the greatest

power in this relationship due to the fairly standardized nature of the automotive commodity (a

vehicle) and the low switching costs associated with selecting from among competing brands.

However, the automotive industry remains marginally powerful due to the large customer to

of 17

producer ratio. The automotive industry is a dynamic place. With the forces above at play, and

with history as a guide, it is safe to say that the automotive industry will continue to change,

evolve, and adapt. Small number of buyers, purchases of large volumes, prevalence of

alternative options, and price sensitive customers were some of the factors that determined the

extent of influence of the buyers in any industry. American consumers were driven towards

foreign cars mainly because most of the auto-makers sourced their key auto-parts from different

suppliers. But this raised doubts on the reliability of the vehicle itself.

Threat of Substitutes

The threat of substitutes to the automotive industry is fairly mild. Numerous other forms of

transportation are available, but none offer the utility, convenience, independence, and value

afforded by automobiles. The switching costs associated with using a different mode of

transportation, such as train, may be high in terms of personal time (i.e., independence),

convenience, and utility (e.g., luggage capacity), but not necessarily monetarily (e.g., round trip

train fare on MARTA would most likely be less expensive than the cost of fuel consumed on a

similar round trip, daily parking, car insurance, and maintenance).

The exception to this statement occurs in the global urban areas with high population densities.

In these areas, the substitutes available (e.g., walking, mass transit, bicycles, etc.) can be less

costly than automobiles and thus alternative modes of transportation are often preferred. Also,

there are inherent underlying social and cultural attitudes that keep people from owning

automobiles in some parts of the world. Many nations are not as spread out or as mobile as the

U.S.; they are constrained either by geography, race, class, or religion and the need for personal

transportation is not as great, yet. The American dream of “a car [or two] in every garage” is not

what the rest of the world currently wants or needs. However, the marketing arms of the global

automotive manufacturers are certainly working very hard to change this paradigm, and with

unprecedented production volumes worldwide, all signs indicate that they are succeeding.

of 17

hyper competition in bric countries

Documents