Within the automobile industry, it is vital that companies adequately compete for consumer sales. With the industry struggling due to the current economic conditions, as well as a push for environmental sustainability, companies have to come up with new competitive strategies. There are 6 major ways that a company can give themselves an advantage over others. They are cost, quality, service, brand, innovation, and convenience. (McCrimmon, 2008) Three automotive companies are compared in terms of their strategies to compete against one another. Ford’s main strategy is on product development and efficient leadership.
They use a low-cost strategy to help give a pricing advantage to consumers as well as centralized strategic leadership.(Hopkins, 2010) General Motors focuses on innovation of great quality products, and uses decentralized control in terms of making decisions.(Hopkins, 2010) Toyota’s strategy is in quality and product differentiation. This is obtained by focusing on the development of the process of building automobiles, rather then the development of automobiles themselves.(Hopkins, 2010)
Competitive Advantage Within The Automotive Industry The North America automotive industry continuously competes for the business of consumers.
With the industry struggling due to the current economic conditions, as well as a push for environmental sustainability, it is ever so important that automotive companies compete in a way that will give them an advantage over others. One would ask, how do these companies compete and what strategies do they use? Three major automotive companies; Ford, General Motors, and Toyota, will be comparatively analyzed in the ways that they attempt to gain advantage over one another, in such a volatile market.
Competitive advantage is defined as the ability of an organization to produce goods or services more effectively than its competitors do, thereby outperforming them. (Williams & Kinicki, 2009) There are 6 major areas in which businesses use to differentiate themselves from one another. They are cost, quality, service, brand, innovation, and convenience. (McCrimmon, 2008)
Cost The underlying decision in a consumer buying a product or service from a company is how the purchase price will make a dent in their wallet. A common way for companies to try and outcompete each other is by making the price of the product or service lower than the price of their competitors, while still being able to turn a profit. Automotive companies try to outcompete each other by having the best quality products for the lowest prices.
If you were to go in to buy a new vehicle from a dealer, you have the option to bargain on your price. If you are not satisfied, dealers are willing to lower their prices in order for you to buy their product, rather than someone else’s. Dealerships have large sales and incentive programs in order to make their products seem more attractive and to encourage a buyer to look at their products rather than a competitors. Packaging and bundling can also be a deal breaker on a sale; however, adding on the “little extras” can help make the deal worthwhile.
One way a company can lower the costs of their products or services is to try and cut production costs and other internal costs within the company. This is the reason why so many companies will manufacture their products outside the United States, because cost of labor and materials is marginally cheaper in countries such as China or Taiwan. With lower costs, companies can then lower the prices of the products for the consumers and still make a profit, creating a pricing advantage for the consumers. The automotive industry is a little different however, because people take pride in where their vehicles are made, which can play a factor in whether or not they buy the product. Automotive companies strive to lower their internal costs by cutting production costs and by keeping a close eye on what the market demand is. Closing production plants has been a recent issue when the economy weakened in order to save some money.
According to Michael Porter, a Harvard Business Professor, companies will use a cost-leadership strategy for competing. Cost-leadership strategy is to keep the costs, hence the prices, of a product or service below those of competitors and to target a wide market. (Williams & Kinicki, 2009) For example, Ford Motor Company is now using a low cost strategy aimed at reducing the cost of production by cutting all of the excessive costs in all parts of its operations. (Hopkins, 2010) This included closing 5 plants in 2005 and reducing its engineering department by 30%. (Hopkins, 2010). In return, Ford was able to create a pricing advantage on its products for consumers.
Quality Companies need to provide products and services that are of excellent quality for a reasonable price, in order to out compete competitors. Consumers however, will sacrifice cost if they can get a high quality product that will last for a reasonable amount of time.
Toyota is known for their consistent good quality vehicles. Toyota focuses on continuous development and improvement of the process of making their vehicles, rather than improvements on the vehicles themselves. Their employees are encouraged to think outside the box in order to improve production. The time that employees spend on developing the correct process rather than the product itself ensures that there is a continuous production of quality vehicles.(Hopkins, 2010)
Consumers have the ability to test drive different vehicles at dealerships to get a taste for how the vehicles will drive, and get to experience the different luxuries that comes with the product. Test-driving vehicles allows consumers to first hand compare different products and models with one another and get a feel for the quality of the products that they are purchasing.
Once products are on the market, it is important for a company to maintain its standards, especially once they are set. This forces a company to meet customer demands and surpass expectations.(Lloyds TSB, 2009)
Companies honor quality by providing warranties on their products for a certain amount of time in case there is a flaw within the products. This provides customer confidence within the company in case there is a flaw with the product.
Service Customer service is a very popular way for companies to compete against one another, especially if the companies offer very similar products or services. Therefore, it is important to maintain excellent customer service. Employees need to go out of there way to make a customer happy, because if the customers are not happy, then they are most likely to take their business somewhere else.
When competing, the company needs to be easy to do business with. There are four major areas that are important to remember when dealing with customer service. Companies need to be accessible to consumers, prompt in order to set standards, use simple systems such as easy outlined automated phone systems to avoid customer confusion, and need to be flexible. (Lloyds TSB, 2009) If a company can work with a consumer to determine their exact needs, it is more likely that they will be able to receive and keep getting the business of the customer.
It is also important that a company is able to communicate effectively, within itself and with customers. Ford Motors uses a centralized leadership strategy, where top management does all of the decision-making. (Hopkins, 2010) This strategy was implemented to eliminate some of the lower levels of management in order to improve communication within the company. General Motors however uses a decentralized control strategy, which empowers managers of different branches to make important decisions on behalf of the company.
Brand A companies name is made by their reputation. A reputation is made by continuous quality of the product or service offered. People will pay extra for good quality, but some people will pay a lot extra just for a name brand. Luxury cars often come with a hefty price tag, and some consumers only want to drive the best of the best. Therefore, companies can outcompete each other by building a “name brand” for themselves.
It is much easier to sell a product to someone who has been loyal to the company or the brand for a long time. How many times have you heard “I will only ever drive a Ford!”? Customer loyalty is important and everyone has a preference. Some people prefer to only drive American made vehicles, or only stick to a specific brand. It’s all about personal choice.
The advertising industry has an enormous effect on what a consumer wants to buy and from whom. Commercials on television will make their products look and sound better then their competitors, and use strategic ways to try and influence their target audiences. Ford, for example, uses country music star Toby Keith to try and help sell trucks. “If Toby Keith drives a Ford, then maybe I should as well!”. Advertising can have a very influential effect on what people think and their decision on what products they want to buy.
There are three main functions of advertising. The first is an identification function, which means that advertising is supposed to identify the product and differentiate it from others. The second function is to communicate information about the product that is being sold. This includes what the product is, its attributes, as well as the location in which the product is sold. The third function of advertising is persuasion. The goal is to persuade consumers to try out the product that is being sold. (JRank, 2010)
Innovation Consumers want the latest and greatest in technology. Even within the automotive industry, companies are using creative thinking to give their products a competitive advantage over others. With today’s global warming issues, companies are worrying about cutting back on the emissions of their vehicles. They want to create more green friendly products to help save the environment. General Motors is an example of one company who has put their creative thinking forward in developing alternative vehicles (electric, fuel cell hybrid, and ethanol). (Hopkins, 2010) General Motors was the first company to produce an electric car and are known for their innovative thinking.
According to Michael Porter, differentiation strategy is an important ideal when looking at innovation. Differentiation strategy involves offering products or services that are of unique and superior value compared to those of competitors and targets a wide market. (Williams & Kinicki, 2009) If businesses are looking to compete, then they have to be willing to develop products that will be fit for the future and future markets. Companies need to be adaptable to their surroundings. If they are adaptable, then they can react fast to a changing market.
Convenience Consumers are often placed in a position where they will pay a little extra for a convenience that will save them time and money. The Internet has made it possible to online shop, even for a vehicle. A consumer can order the vehicle exactly the way they want it to be, although it will cost them more than if they were to go to a dealership. Dealers will make customers a deal on vehicles that they have on the lot, but customers will have to settle on only the selection that they have and may not get everything that they are wanting on their vehicle.
Also, consumers usually prefer to test drive a vehicle before they buy. Companies generally place dealerships in strategic locations, generally close to other competitors, in order to attract consumers to stop by their lots to look at their products.
A Comparison Ford, General Motors, and Toyota are three of North America’s leading automotive companies. Each has their own strategies in competing with one another. Ford’s main focus is in product development and efficient leadership. They are using a low-cost strategy to cut costs in order to lower prices, and centralized strategic leadership for more effective decision-making. Ford is focusing on the strength of its name and product improvement as a way of competing.(Hopkins, 2010) However, with the economy crisis and other sale impacting events, Ford’s American sales have been on the decline. In 1999, Ford’s auto sales were at 4,163,369, while in 2009, sales were reported as 1,620,888. (Wikipedia, 2010)
General Motors focuses on the innovation of great quality products. With the rising fuel costs and global warming issues being of great concern, General Motors has taken initiative to create environmentally friendly and fuel efficient products to compete within the market. These alternate vehicles include electric vehicles, fuel celled hybrid vehicles, as well as ethanol powered vehicles. (Hopkins, 2010) General Motors also uses decentralized control as a means of decision-making, where managers at every branch have been empowered to make critical decisions on behalf of the company. (Hopkins, 2010) U.S auto sales for General Motors in 1999 were at 5,017,150, and have steadily decreased to 2,084,492 sales in 2009. (Wikipedia, 2010)
Toyota is a Japanese based company whose strategy is product differentiation. The company can produce quality products faster than competitors, ensuring that they can always meet demand. Toyota focuses on developing the process of building the vehicles, rather than the vehicles themselves. This has proved that Toyota can continuously produce quality products at a faster rate than competitors. The company is also ranked first in producing new models into the market. Another advantage Toyota has over its competitors is that it has spread its financial risks out into other markets. Toyota produces robotics, as well as provides different financial services under Toyota Financial services. (Hopkins, 2010) Toyota sales within the United States have not been as drastically affected by the economic crisis. In the year 2000, Toyota was able to sell 1,619,206 vehicles, which rose as high as 2,620,825 vehicles in 2007, and then dropped to 1,770,147 again in 2009. (Wikipedia, 2010)
The automobile industry has seen it’s fair share of struggles within the past few years, and finding ways to out compete competitors is vital in trying to stay a float. The current economic conditions and the push for environmental sustainability have driven companies to find new ways of competing. Whether that is through innovation of new fuel efficient and green products, or finding ways to give a cost advantage to consumers, companies will do whatever they can to give themselves a competitive advantage to survive in future markets.