Sources of Competitive Advantage in the Automobiles Industry
The global automobile industry is remarkable for so many things and apart from its immense growth in the last century, it has created billions of jobs around the world. It is one of the most important players in the global economy. In Europe, it accounts for nearly 12 million jobs and in US around 8 million. In Japan too, the number is above 5 million. The automotive industry has a long history of innovation and technological growth. It has continued to spend on technologies that make driving safer and better for people. While the situation today may be more demanding and intensely competitive, the industry is pretty aggressive about growth. It has evolved through several phases and is in a much better situation than it was some years ago. It is expected to be in even better shape by 2020. The industry landscape is changing and apart from cost pressures legal challenges are also making the situation difficult for automobile makers.
Maintaining a competitive advantage has become all the more essential. Growing need for digitization is adding to costs but at the same time seeing the intensity of competition, it has become important to invest in technology and better supply and distribution chain management. A well managed supply and distribution chain are a source of competitive advantage for the car brands but R&D and marketing are equally important. This article analyzes the various sources from which car brands can obtain a competitive advantage and remain strong against changing market situation and competitive landscape.
Brand image can be a major source of competitive advantage. How your customers think of your brand to a large extent affects your sales and profitability. While this is not the only source of competitive advantage and will not alone help you against fast changing market conditions, still it has a great role in helping you survive fast changing winds. Your brand equity results from your customers’ perception of your brand. There are a variety of car brands in the market with varying brand images. From luxury to low cost, there are a wide range of alternatives available to customers. Some of the brands have the image of sporty and stylish while other have more of a premium image. The brand image of some is connected with technology. From Ford to Toyota, BMW and Audi, all these brands cater to different segments of customers with varying tastes.
Responding to customer expectations in time and providing them a product that suits both their style needs and utility expectations is an important strategy that helps brands build equity. However, brand equity becomes a source of competitive advantage and in the long term helps you bear small and big shocks that could otherwise shake an automotive brand’s roots. Volkswagen’s recent Diesel scandal case can be cited as an example. While the scandal was expected to have tarnished its reputation and must have taken the brand a lot of time to overcome, it did not take very long for the famous automotive brand to shift gear and get back in form. Brand image and brand equity are important reasons that can help automotive makers in such times. If your customers love you, it is one of your biggest sources of competitive advantage. Moreover, a higher brand equity and stronger brand image can help with marketing too. A lot of marketing in the automobile industry takes place through the media and stronger image means higher coverage of your brand and products. Positive experience with a brand leads to higher level of trust and higher customer satisfaction translates into better brand image and therefore higher sales.
In the 21st century, technology is your biggest source of competitive advantage. Now the expectations are set very high and customers want everything in a single product. Technology can only help you cater to the high expectations of customers and keep them satisfied. Technological innovation became important for other reasons too. Environmental concerns have grown central in the automobiles industry and therefore brands are investing more in sustainability. Simultaneously, the demand for digital has also gone up requiring brands to invest more in this area. While Tesla is making solely environment friendly vehicles and products, there are other brands also making hybrids and Electric vehicles. Hands free or automate driving is already on the horizon and the landscape of the automotive industry is changing so fast that unless you have the best in class, you will find yourself beaten by competition. Down the supply chain and distribution chain too, the need for technology has grown. Ford, Toyota, and other major names have gained a leadership status in the industry by virtue of great technology. Artificial intelligence has already become a driving force across several industries including the automobile industry. Even before autonomous driving, AI can assist driver in other ways too.
Now, the automobile manufacturers are leading towards AI to make vehicles safer and to provide a higher level of connectivity that can help the customers locate everything from gas stations, restaurants and shopping malls. AI also helps with monitoring product safety and providing automatic updates when a software or hardware may need updating. While the functionality of GPS platforms and systems may be limited, AI can further help with traffic and on-road risks. Overall technology is both inescapable and inevitable. While automated driving is on the horizon, AI and digital technology have already become important for differentiation. Whether in the value or premium segment, technology becomes a key determinant of popularity and affects sales directly. It would not be wrong to say that competitive advantage is not possible without technology in the automobiles industry. Ford invests in engineering research and development to improve the performance and safety of its products. It invests billions in Research and development every year. For 2014, 2015 and 2016, the brand invested $6.7 Billion, $6.7 Billion and $7.3 Billion respectively. Other brands like Toyota, BMW and Volkswagen also make heavy annual investments in R&D. Efficient engineering, vehicle design and vehicle safety have all become important to having a competitive advantage and therefore brands have placed heavy focus on engineering and R&D.
Efficient Global Supply and Distribution System:
Apart from everything brands that want to rule the market have to focus on supply and distribution chain management as well as satisfactory after sales service. An efficient supply chain is an essential part of a high standard value chain. Supply chain efficiency means you do not have to look for raw material when you need it for production. Most of the well known automobile brands of the world have large and well managed supply chains situated across the globe. It enables them to have the right quality raw material at the right time. Quality in the supply chain has become an important concern and so the automobile brands only adopt the suppliers who have the ability to surpass the minimum quality standards and deliver better than expectations. To manufacture great cars, you need great quality raw materials where every part must pass the test since quality and safety related laws have become more stringent across the globe. It is why there is a lot of competition among the brands related to supply chain management as well.
An efficient supply and distribution network also helps manage a smart global presence. Brands are striking local partnerships in Asian countries to manage a better distribution network and to assemble their cars locally. The Asian markets have proved very important because Asian economies are among the fastest growing in the world. Local production and assembly helps with cutting down costs and makes it easier to provide after sales service to the customers and maximize customer satisfaction. The costs saved can be passed on to the customers. Brand presence can be a strong source of competitive advantage because people will know your brand when you are present in their vicinity. Therefore, a large distribution network helps with managing your brand presence and obtaining a competitive advantage. A smarter and well managed supply chain helps you better anticipate and respond to customer demand. These factors can give an automobile brand an edge in terms of competition which is one of the biggest challenges before the car makers all of which are quite aggressive in terms of sales and marketing. The global brands also face stiff competition from the local brands in the Asian markets and therefore a local supply and distribution network becomes a solid support.
Strong Financial Position:
Financial strength of a brand also determines how easy or difficult it will find to respond to the fast changing market conditions. The changing economic and geopolitical tide is also one of the most important challenges before the automobile industry. The global economic and financial system is more interconnected and an event in one part of the world has the potential to affect not just that region or market but can have adverse effects in real time on other connected markets as well. Changing economic situations can give rise to bitter uncertainties which can be more bearable for the brands with enough financial clout. Otherwise changing economic and geopolitical conditions bring large and hidden risks which can otherwise affect the brand’s market position adversely. Protectionist trade policies pose a similar challenge. Moreover, higher financial clout is a reflection of better market position in itself. Brands with higher financial strength can invest more in R&D and can grow their market and business faster. Such brands find investing in global expansion, new products and ideas and technological innovation easier. In the recent years, growing warranty costs have also made the situation challenging for businesses. Stable financial position helps battle these forces and serves as a competitive advantage and a wall against changing tides. The compliance costs for the automobiles brands have also grown and there are also several other risks adding to operational costs. It reduces a business’ dependence on external finance making it more secure against financial difficulties. Investing in marketing is easier for financially strong brands which has become all the more essential in the light of heavy innovation and competition.
Innovative marketing capabilities have become all the more essential to retaining leadership position in the automobile industry. Competition in the automobile world has kept growing intense giving rise to a need for innovative marketing methods and capabilities. Auto marketers are trying every channel from the traditional ones to the social media to market their products and brand. Marketers are using digital channels and technology to target their marketing efforts. Brands have become more aggressive in terms of marketing since sales to a great extent are affected by how much positive buzz you create related to your product. Apart from dedicated global and local marketing teams, it is also important to have a well defined and strong marketing strategy to remain competitive. Now, when the competition in the industry is being affected by the level of marketing expertise of a brand and its experience in this area, dedicating a large budget to the marketing of your new products also creates a competitive advantage. Brands are trying to give their marketing capabilities an edge by using AI, data and analytics to peep into the customers’ mindset and expectations and accordingly design products and marketing campaigns. Whether catering to the value segment or the premium it is must that you use a great marketing strategy to reach your prospective customers and to create brand loyalty.
Efficient organizational structure and leadership:
The role of leadership, organizational structure and culture has been highlighted time and again with regards to creating a competitive advantage. Efficient organizational structure helps with unhindered flow of communication and removes bottlenecks to performance. A simplified structures aids quicker flow of ideas and smooth flow of operations and projects. In such an environment, it is easier to gear the efforts in the right direction and to create the expected results. In the 21st century, the need for strong and motivated leadership has grow stronger. The case of Ford already proved that how leadership vision could change the fortune of a brand. Alan Mulally’s leadership and one Ford Vision reversed the failing fortunes of a global brand that was otherwise on the brink of losing the game. His One Ford vision helped set the priorities and align the efforts of the organization globally and channel its efforts in one direction. His leadership and Ford’s case is being taught across several business schools as one of the most amazing victories set by a strong leadership. It proved that visionary leadership could be a source of competitive advantage. Not just in the automobile industry, but other sectors to, the importance of visionary leadership has grown more highlighted. Futuristic leaders who have the ability to see beyond the horizon can change a brand’s Fortune and while no brand wants to be lagging behind, it is not possible without great leadership and culture.
These were some of the main sources of competitive advantage for the automobile brands. Apart from these there can be other small or big sources to create competitive advantage as well. While technology has become the most important differentiator in 21st century, the role of brand image and equity and financial clout has also grown important. The stronger and more well managed your supply and distribution chain, the better your position in the market. It is because the quality of your product depends on the quality of your supply chain and your global presence also depends on your distribution network. Marketing capabilities of your brand also determine your fate in the market and financial clout helps you weather the storm. The arrival of AI has changed many things in the automobile industry including how the brands marketed themselves and customer service. The standards are set very high and every brand needs several sources of competitive advantage to remain competitive. Despite all these things giving rise to new sources of competitive advantage, the role of leadership is still important. As was in the case of Ford, without a visionary leadership, your biggest sources of competitive advantage can fail.
- McKinsey Report on Automobile Industry
- Volkswagen Annual Report