Magoosh GRE

European Automotive Industry Simulation

| August 16, 2016

Part 1 Initial strategic position and intentions

  • Detailed analysis of the overall external and internal initial situation

All companies are often exposed to some factors that influence their operations irrespective of the nature of the industry that they are operating in. Pride (2011, p. 33) says that these factors both internal and external have direct influence on the decisions and strategies adopted by a company. As such it is very important for all business organizations to be updated on the status of these factors as they are the ones that dictate the nature of strategies and plans to be adopted by the company. Failure to do this may be catastrophic to the overall well being of a company because of the resultant high levels of inefficiency.  The global performance of the automotive industry is a summation of the performance of the automobiles and other supporting activities like sale of car parts and gas station retail. Peters (2011, p. 81) asserts that the global yearly growth of the industry is expected to surpass 5.5% from 2010 to 2015. This implies that by 2015 it will have reached a value of more than $ 5.1.

External Analysis

The automotive market in Europe is mainly dominated by productions from France, Germany and Italy (West 2009, p. 64). The industry employs over 2.3 million people directly and other 10.5 million indirectly in Europe. Europe produces more than 17 million vehicles annually which represent a quarter of the overall global production. The region has 17 vehicle manufactures with their less than 170 facilities spread in different areas across the 16 member nations (Wells 2010, p43). The leading players include Volvo, Fiat, Peugeot Citroen, BMW, Volkswagen and Renault.

 

Initial PESTEL

Political Analysis

Since ABD operates in different countries across Europe, it needs to pay attention to the political climate across all the nations because politics has a direct influence on its success in the long run. The management should comply with all the laws and regulations of individual countries and also pay attention to all the regional requirements to avoid unnecessary lawsuits that may be costly at times. These laws include the laws governing trade, commerce, growth and investment and a thorough comprehension of the interdependence between local, national and regional economies. Jerenz (2008) claims that lack of political stability in any country or region makes it very difficult for the company to formulate long term plans because the frequent changes in government policies create a lot of uncertainty in the business environment. Additionally, the increased regulations in the car industry across Europe have exposed the industry to huge taxations on trade.

Economic Analysis

ABD operates in different counties across Europe and focuses on individual market segments in order to be able to serve the customers in the best possible way and maximize on returns. A regional approach enables the company to adapt and be able to learn from other companies in the industry. The company is able to attract employees from all over Europe because it has the resources and facilities like finance and good working environment.  As such it enjoys a relatively rich pool of skills.  In terms of sales, most of the people across Europe are still recovering from the effects of recession and this has reduced their purchasing power as some people are still struggling to get well paying jobs (Peng 2009, p. 39).

Social Analysis

The current automobile environment is characterized by a shift in consumer preferences as households prefer small fuel efficient cars. Freeman (2010, p72) asserts that this is due to the frequent rises in fuel prices and the new regulations on environmental conservation.  In fact some governments across Europe are offering tax incentives to the people buying eco-friendly and fuel-efficient cars in order to encourage more people to conform to the new requirements. ABD should therefore produce the right models that suit the current requirements for it to succeed in the industry.

Technological Analysis

The current standards set by most countries in Europe require companies to use the best technology in order to be able to ensure that their products meet the demands of fuel efficient and environment friendly cars (Witcher & Chau, 2010, p99). Low carbon emissions and safety of the passengers are two factors that require the use of efficient technologies and as such ABD should embrace the best technology in production.

Environmental Analysis 

The vehicles currently being produced must meet certain global standards as the world is now more conscious of environmental conservation. Global warming has led nations to look for ways to reduce carbon emissions, for example by defining strict standards for vehicle manufacturers. Nitschke (2011, p12) asserts that some governments even encourage the people to embrace public transport like railways as means of curbing carbon emissions. This is weighing down on the automobile industry as it has a negative effect on the total sales.

Legal Analysis

Kubik (2011, p.47) says that many countries across Europe have passed laws that protect the environment and this has hit the automotive industry hard as the companies are now required to meet new standards that are much tighter than the previous ones. The clean air and the environmental protection acts have also brought changes in the customer preferences. Some governments have even passed laws that pass heavy taxes on cars that emit heavy carbon into the atmosphere. This is happening in tandem with offering incentives to the people driving fuel efficient cars in order to influence choices and preferences. These changes require the companies operating in the automobile industry to adapt to the new standards or else face the harsh taxes and hostile market reception.

The key drivers for change

The key drivers for change in the automobile industry are decarbonisation of cars and production of vehicles that consume less fuel. At the moment, countries and governments are working towards the reduction of carbon in the atmosphere through the use of new technologies and enactment of more stringent standards for reducing emissions and other pollutants like noise. The current market is characterized by a shifting demand in tastes and preferences as households now prefer fuel efficiency and cutting edge design to vehicle size and brand loyalty.  Faarup (2010, p.34) claims that the emerging face of the industry is based on a different model that rewards innovation, caters for new economic realities and listens to the needs of the customers. The other drivers are economies of scale and global harmonization. Edelhoff (2009, p35) says that the manufacturers are now focusing their energies towards taking advantage of the emerging economies as this widens the market for their products.

Five forces analysis

The five forces analysis helps companies in identifying competitive opportunities and attractiveness within the market or industry. The automobile industry is one of the most convenient methods of transport across the world.  Globalization has made competition in the industry stiffer as other foreign companies have also entered the European market (Witcher, & Chau, 2010, p59).

The threat of new entrants

It is true that the barriers to entry in the automobile industry are very high in Europe although the increasing nature of the global economy has invited foreign competitors with huge amounts of capital, sound management, good technology and efficient marketing skills that represent a threat to the domestic European manufacturers (Pride, 2011, p43).  Therefore as a strategy, the European manufacturers should identify further global opportunities, study the methods used by the competitors and device means of also entering the global market.

The bargaining power of customers/ buyers

The power of the buyers in the automobile industry is relatively fair. The buyers in this situation act as individuals and not groups even though they still have a wide range of information on pricing and the cost of manufacture (Pride 2011, p40). The relationship between the car industry and the ultimate consumer is that the latter always has a slight advantage. The consumers hold an upper hand owing to the relatively standardized nature of the industry and the low cost of switching between competing brands. As a consequence the consumers have a strong bargaining power when it comes to negotiating the purchasing price.

The threat of substitute products

If the consumers can easily switch brands because of the low switching costs then this force is a real threat to the manufacturers. Pride (2011, p85) asserts that the switching costs are high for new cars because they cannot be sold at the same price for which they were bought.

The bargaining power of the suppliers

In the car industry, suppliers refer to the organizations or individuals who supply parts, components, tires, electronics and the auto unions. Chandrasekar (2010, p.75) claims that the auto unions are very powerful, but some suppliers have only one car maker as a client so this force is a little tricky to evaluate.

Competitive rivalry

The car manufacturers are all engaged in fierce competition for the European market. Slashes in price occur almost simultaneously across different brands, intensive campaigns and rapid product developments are also recurrent here as they struggle to have an edge in innovation and profitability (Freeman 2010, p 48 & Baines, P., Fill, C., & Page 2013, p.88). The intense rivalry drives down the margins especially for the small companies.

Initial resource audits

The initial investment value for ABD is £ 16, 310. 34 million and the total capital employed at the start of the simulation stood at £ 30, 054.30 million.

Intended Strategic Direction for the next 5 simulated years (decision periods)

Mission Statement

The mission of ABD is to be the leading provider of sheer driving pleasure and safety to Europe and beyond. The ABD brand combines dynamic performance and superb design to the customers at relatively affordable prices.

Overall Target Markets and Strategy

ABD motors targets mostly the younger drivers and strives to give then fun, safety, modern technology and design. The company relies heavily on advertisement as a marketing method although it also gives the products a chance to market themselves through quality and efficiency.

Financial and Strategic Objectives

In order for the ABD motors to establish and maintain a competitive edge, it strives to localize its operations through increased local sourcing in order to penetrate the European market. In terms of pricing the company aims at pricing its products competitively in order to attract more customers.

 

Assignment Part 2 Strategy development and progress against your plan over the 5 to 6 simulated years.

 

  1. Your strategic analysis for each trading period – such as changes in the macro environment (PESTEL) and competitive environment (including any changes to the industries 5 forces and critical success factors as well as to your company’s internal position).

  

In the round 5 results the company produced 1643 units of ABD LXY and then sold 3939 in the same period. This implies that all the units produced were sold together with some that remained from the previous round. The performance of this period on the model is an indication that the company failed to produce enough units of ABD LXY model as evidenced by the zero units in stock. This could have been as a result of the 2296 units that remained from the previous period which prompted the company to produce less of the same model. Although this decision was partly right, the company should have laid plans for immediate production of more units when they realized that the sales went up compared to the last trading period. Having zero units in stock is not healthy for the company because the inconsistencies in production cause unnecessary inconveniences to the customers. Furthermore, the market share for the model is 0.57% which is relatively low.

For the ABD 400, the sales stood at 65714, and 29610 is still in stock. The market share stands at 1.26% which is not bad.  ABD A5 all the units produced were sold just like in the previous period as evidenced by the zero units in stock. The market share stands at 0.14% but the company can still take it higher given that it may not be producing enough units for the market because of the zero units in stock. Lambooo model has many units in stock but the 1.51% market share indicates that the units were produced in excess during the previous period.  For the Skittles their case is somewhat similar to that of ABD A5 although the market share is higher than it by a margin of 0.01%.

 

b. How your short term plans and strategic objectives/tactics have been adjusted in terms of the above changes to the external environment and also your company’s changing internal position

 Operations strategies (capacity, production & inventory changes)

The operational strategies of ABD are in some ways out of touch with the reality on the ground as evidenced by the zero units in stock for some models and excess units of other models. This is not good for business as the excess units of some models are tying up funds for the other models, the company should therefore base its production depending on how first the merchandise is moving in order to improve the overall performance in terms of consistency and efficiency.

Marketing strategy (4P’s)

In terms of the marketing strategy, the company is producing the right products as evidenced by the market share. The automobile industry has a very strong competition especially from the well established brands like Toyota, BMW, Honda and General Motors. However, the company should consider designing new products in order to improve its financial performance. In terms of pricing, the products are well priced because there is no evidence suggesting that the price of the models is affecting sales. In fact the expensive models like ABD LXY and Lambooo performed relatively well. The ABD LXY sold all the units whereas Lambooo was only second to ABD 400 in terms of total sales.

In terms of promotion the company still needs to do a lot of marketing especially for model ABD 400 which still has a lot of units in stock. The same should also be done for Lamboo and all the other models in order to improve their market share. On the last item of marketing strategy which is place, the company should try to establish itself out of Europe by trying other markets like the other companies. A global approach will give it a wide customer base and in process enable it to benefit from economies of scale.

a. Financial management

The company does not have enough money for the chosen projects and still needs better financial and strategic plans for success in the short run. The balance sheet indicates that the company has negative net current assets, negative net total assets less current liabilities and a huge bank overdraft.  The company should therefore produce more of the well performing brands and reduce the less performing ones to raise the additional funds for reinvestment.

b. Human Resources

The team has an adequate workforce that is competent and efficient. The workforce only had 3 days of strike which implies that they are relatively happy with the terms of the employment and working conditions at the company. The productivity index of 0.73 is also healthy meaning that the human resource department is working efficiently.

c. Your changing corporate portfolio of products (SBU’s)

Generally, the company made some strategic decisions aimed at improving the performance from the previous period. These decisions were fruitful for some models like the ABD LXY but some failed short of expectations like the Lambooo. In the case of the Lambooo the competitors managed to neutralize the plans of the company as the brand failed to perform as expected.

 Assignment Part 3 Final Report – A Reflective Portfolio

The team ended with a closing balance of £ -47009.05 million which is not good for the general health of the company. This poor performance is as a result of the big loss of £ -30,554.30 million suffered by the company. The profit and loss account reveals a problem with the pricing of the final products, the sales stood at £ 1694.44 million and the cost of sales is £ 1386.34 million. In this case the gross profit is £ 308.01 million which is not even enough to cover for the operational expenses and still generate revenue for the company. The implication here is that the price component of the marketing mix element has a problem. The cost of production is very high and this is weighing down heavily on the company and if the trend persists then this could even force the company out of business in the long run. The company can solve this problem by pursuing two approaches either jointly or partly.

The first option is to reduce the cost of production through looking for different suppliers and adoption of better technology to reduce operational costs. This will increase the profit margin for the company. The other option is to raise the price of the final company products. However, because raising the price of the products may backfire as it may turn off some customers; it is advisable for the team to first consider lowering the cost of production.

3.1 Description of your company’s successes and failures and your learning’s in implementing your strategy against your set mission/vision and plans as given in part one of your report.

Generally the products of the company have been accepted by the consumers as evidenced by the market share of the different models. The company has managed to live to its mission statement, with the only problem now being revenue generation. This is the reason why the management now needs to come forward with better financial and strategic plans that will steer the company forward and start generating huge profits like the other companies in the industry. The first possible method is to reduce the cost of production through using better technology or getting better suppliers or even both if possible.

3.2 Include in your final report your reflections on this learning exercise

This learning exercise has made me realize the essence of planning and understanding the nature of the industry before venturing into business. I have also learned that at times things do not work as planned and that it is always critical to review decisions in order to correct mistakes and also learn from the techniques used by the competitors as methods of succeeding in the competitive business environment.

 3.3 company’s “end game” position (trading period 5), strategic recommendations for the next five years for the Executive company.

The strategic recommendation for the company in the next five years is that it should deploy ways of lowering the cost of production. It can do this through outsourcing some of its operations to countries with lower costs of labor. This should be done in tandem with efficient and exhaustive marketing of the company products in order to generate more sales. Additionally, the company should widen its range of products so as to increase its sources of revenue. Lastly the company should adopt the concept of competitor profiling as a technique of staying ahead of the competitors in business. Competitor profiling and competitor analysis entails studying the techniques used by other companies in the industry and then devising ways of outdoing them in business.

 

Bibliography

Baines, P., Fill, C., & Page, K. (2013). Essentials of marketing. Oxford: Oxford University Press.

Chandrasekar, K. S. (2010). Marketing management: Text and cases. New Delhi: Tata McGraw-Hill.

Edelhoff, J. (2009). The European Automobile Industry: Technological change, changing of production and changing of organization. München: GRIN Verlag.

Faarup, P. K. (2010). The marketing framework. Aarhus: Academica.

Freeman, R. E. (2010). Strategic management: A stakeholder approach. Cambridge: Cambridge University Press.

Jerenz, A. (2008). Revenue management and survival analysis in the automobile industry. Wiesbaden: Betriebswirtschaftlicher Verl. Gabler.

Kubik, J. (2011). Analysis and evaluation of chosen resources of Volkswagen in Germany and in respect of the Indian minicar market and the role of Suzuki as a Joint Venture prospect. München: GRIN Verlag GmbH.

Nitschke, C. (2011). Outsourcing vs. Insourcing in the Automotive Industry – The Role and Concepts of Suppliers. Munich: GRIN Verlag GmbH.

Peng, M. W. (2009). Global strategy. Mason, Ohio: South-Western/Cengage Learning.

Peters, N. (2011). The impact of the global downturn on the car manufacturing industry. München: GRIN Verlag GmbH.

Pride, W. M. (2011). Marketing principles. South Melbourne, Vic: Cengage Learning.

Wells, P. E. (2010). The automotive industry in a era of eco-austerity: Creating an industry as if the planet mattered. Cheltenham, UK: Edward Elgar.

West, D. (2009). Strategic marketing. Oxford: Univ. Press.

Witcher, B. J., & Chau, V. S. (2010). Strategic management: Principles and practice. S.l.: Cengage Learning.

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