1. Achieving competitive differentiation: the
challenge for automakers
Herbert K. Tay
A
Herbert K. Tay is a principal t a time when many countries struggle to cope with the weakness and resulting
with A.T. Kearney’s Global uncertainty in the highly interdependent global economy, the automotive industry is at a
Automotive Practice. Based in crossroads. Notwithstanding the industry consolidation of recent years, there is once
Costa Mesa, California, he leads again too much capacity chasing consumers in the mature, af uent markets, while demand has
A.T. Kearney’s US West Coast yet to take off in emerging markets such as China and India, where huge manufacturing and
automotive practice
assembly investments have been made. The pain of excess capacity is being felt most acutely
(herbert.tay@atkearney.com).
by several of the largest established automakers and their af liates.
Meanwhile, a new wave of automakers stands poised to make competitive leaps. Hyundai
Motor Company and Kia Motor Corporation have both announced their ambition to be ranked
among the world’s top ve automakers by 2010. India’s Tata Industries plans to contract
manufacture Rover’s new small car, opening up another source of low-cost product whose
quality and competitiveness will – if history is any indicator – continue to improve over time.
Domestic Chinese automakers such as First Automobile Works (FAW), Dongfang Motors and
Shanghai Automotive Industry Group (SAIC) and their networks of established partners
(including the Volkswagen Group, GM, PSA, and DaimlerChrysler) represent further signi cant
potential sources of high-quality exports in the next decade. The trend toward increased
exports of nished vehicles, kits and parts will gain momentum as trade barriers are lowered
and dismantled, and as China and other countries join the World Trade Organization and
regional free trade zones.
There are great costs to sustaining demand in this oversupply environment. In particular, car
model lines that are undistinguished, aging, ‘‘me too’’, or controversial have required huge
incentives to generate sales and, as a result, manufacturers have seen their margins crumble.
In today’s markets, only a few, focused, usually smaller and more nimble automakers have
been able to achieve and sustain unique product, quality and cost positions – notably BMW,
Honda, Nissan, Porsche, PSA and Toyota – and are solidly pro table.
‘‘ The painofofthe largest established automakers and their
several
excess capacity is being felt most acutely by
af liates.
’’
DOI 10.1108/10878570310483951 VOL. 31 NO. 4 2003, pp. 23-30, ã MCB UP Limited, ISSN 1087-8572
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2. Achieving and sustaining competitive differentiation is the foremost challenge for the remaining
automakers around the world, and their key to future survival and prosperity.
The fundamentals of competitive differentiation
Reduced to its essentials, competitive differentiation can be expressed as how an automaker
innovates and delivers its products and services – compared with the competition – in three
parameters: quality, cost/value and timeliness measures (see Exhibit 1). Regional markets
will value and weigh aspects of these attributes differently. For example, fuel ef ciency and
maneuverability are far more important in Europe than North America (with attendant
implications for vehicle size, type and power trains preferred), while affordability is paramount to
the majority of buyers in developing markets. Nonetheless, there are general principles of
competitive differentiation that apply to all automakers, as travel, the media, information
exchange and global branding shape the convergence of tastes and aspirations of consumers
around the world.
Quality: from tail ns to telematics
Automotive quality has long since moved on from traditional, more objective, quanti able
measures – reliability, durability, t-and- nish, and noise, vibration and harshness (NVH) control
– to expanded de nitions that involve more subjective, experiential and emotional criteria.
Dynamic measures – performance, ride and handling – have been synonymous with German
brands such as BMW (the ‘‘ultimate driving machine’’) and Porsche, whose alchemy has been
applied to achieve sporty handling even in their SUVs. The active safety bene ts of many of
Exhibit 1 Competitive differentiation dimensions
TIMELINESS QUALITY
State-Of-Art Achiev able
Reliabi lity
Vehicle X
Tim eliness to Market Fit & Finish
Warran ty & Servi ce Durabi li ty
COST/ Cost of Ow nershi p NVH Control
VALUE
Value Perform ance
Price Ride
Custom er Handling Vehicle Handl i ng
Telem atics Ex terior Styl ing
Advance d Body Constructi on Inter ior Styl ing
Driving Aid Technol ogi es Packagi ng
Safety - Passi ve Comfort & Conveni ence Feature s
Safety - Acti ve Inter ior Tri ms & Treatm ents
Pow ertrai ns Refi nem ent of Control s
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3. these aspects – maneuverability, handling, braking, and quick acceleration – have long been
acknowledged as important components of the total safety proposition engineered into modern
vehicles.
For many years, adding comfort and convenience features and content to successive
generations of vehicles has been a proven means of signaling a tangibly differentiated
proposition. Competitive escalation has intensi ed to the point where features that were the
exclusive preserve of high-end luxury cars only half-a-generation ago now routinely and quickly
migrates down even to entry-level models. For example, climate control has been available for
some time on VW Group’s smallest cars, while keyless entry is offered on Nissan’s latest
B-segment March/Micra at a fraction of the price of Mercedes-Benz’ Keyless Go feature.
Another manifestation of the battle for quality differentiation is the application of technology to
successive generations of automotive programs and their migration down an OEM’s product
# Alistair Davidson. www.alistairdavidson.com range. In particular, many of the emissions, drivability and safety advances of the past 20 years
would be inconceivable without the advances in electronics and their use in automotive
applications. Pioneered by Mercedes-Benz on its top-line vehicles, ABS, ESP (electronic
stability program) and EBD (electronic brake distribution) systems have since been rolled out
model range-wide, as well as adopted by other automakers. Applying electronics to driver
interfaces is rapidly increasing, with Mercedes-Benz and BMW at the forefront of expanding
drive-by-wire applications to throttle control, brakes, adaptive suspension, cockpit controls and
vehicle safety. The jury is still out on the user friendliness, reliability and actual bene ts of some
of these technologies, but – for now – they represent unique selling propositions (USPs) that
differentiate the products of these luxury automakers.
Telematics communications systems such as GM’s OnStar were heralded as holding immense
commercial opportunity for automakers and other stakeholders, as consumers were expected
to voraciously embrace ever-expanding suites of safety, security, productivity, convenience,
and entertainment content and service offerings. Certain telematics features – accident
noti cation, satellite navigation, remote unlocking – are useful to all drivers, while concierge
offerings via telematics are generally valued by more-upscale clients. The demand for telematic
services has been slowed by the availability of substitutes (such as roadside assistance
programs, account-based mobile calling, phone e-mail and e-commerce).
In contrast, powertrains represent a powerful and sustainable avenue for competitive
differentiation. Honda introduces new-generation engines with the frequency that other
automakers undertake sheet metal redesigns. Honda and Toyota’s pioneering hybrid gasoline/
electric drive trains are just the latest example of their leadership in nding pragmatic solutions
for greater fuel ef ciency and lower emissions. Automakers are taking stakes in longer-range,
technically non-polluting propulsive technologies – for example, BMW in hydrogen and
DaimlerChrysler in fuel cells – but commercialization of these emerging technologies is by no
means assured.
At the other end of the powertrain spectrum, Mercedes-Benz has escalated the horsepower
race by introducing – within the span of half a year – eight range-topping models that employ
supercharging to provide around 500 horsepower or more each. While products such as these
sell in relatively small numbers, they glamorize the automaker’s image and boost sales of the
rest of the range.
The most visible means of differentiating cars has been – and still remains – captivating vehicle
designs, both exterior and interior, that successfully blend style and function, appropriate for the
vehicle’s purpose and times. After decades of focusing on meeting crashworthiness and
emissions regulations, automakers are once again injecting the ‘‘wow’’ factor into their new
vehicle designs. Many are complementing bread-and-butter model lines with smaller runs of
niche designs made possible by computer-aided design and development, and intelligent
platform and component sharing. Automakers are both looking to the past – incorporating retro
or ‘‘heritage’’ styling cues – and experimenting with new idioms (for example, BMW’s ‘‘ ame
surfacing’’) in coming up with distinctive, more emotional designs. Re ecting the times, small is
once again beautiful. A new generation of small city vehicles – such as DaimlerChrysler’s Smart
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4. range and BMW’s New Mini – has been designed to accommodate the realities of Europe’s
congested metropolitan centers with unique style and chic.
Finally, a discussion on quality would not be complete without mentioning how car companies
are improving the experience of buying and servicing a vehicle. Along with top-notch reliability,
Lexus has made customer handling its USP in North America and Europe with its unrelenting
focus on details. Mercedes-Benz provides free roadside assistance in the US for any Mercedes-
Benz vehicle, regardless of age, a symbolic testament to the longevity of its vehicles. Now
Mercedes-Benz is raising the customer service stakes by designating dedicated concierges for
buyers of its Maybach ultra-luxury limousines, to handle all details of ownership, maintenance
and repair.
Cost/Value: delivering quality products at competitive prices
Competitive intensity in the automotive industry has been such that no automaker – whatever
its pedigree or positioning – has been able to defy the market imperatives of delivering
competitively priced quality products that provide good value to consumers.
In real terms, vehicle prices have decreased, as a consequence of two factors:
(1) Declining real cost-of-goods-sold (COGS). Currency uctuations and competitive
pressures have forced automakers to take out costs (through intelligent product design,
strategic sourcing and other strategic levers) in successive generations of products and
pass on those savings to consumers.
(2) Margin shrinkage. Several factors have contributed to margin shrinkage, but none as much
as information transparency, enabled in great part by the Internet. Accurate, up-to-date
information on retail prices, dealer invoices, special holdbacks and rebates, trade-in values,
and nancing rates is widely available to aid the sophisticated consumer in his negotiations.
In the European Union, the introduction of the Euro has led to pricing harmonization across
much larger territories and reduced the ability of automakers to price-discriminate across
low-/high-tax and low-/high-income markets. Online buying services have sprung up to
compete for the private buyer’s business, further enhancing the consumer’s power.
Particularly in af uent markets where automotive leasing is well developed, affordability has
been enhanced to the point where many consumers now base their vehicular choices on the
affordability of monthly lease payments, and not the purchase price.
There is also a broad-based trend to design powertrains for extended service intervals (e.g.
100,000 mile major service/spark plug changes), reducing service and maintenance costs as a
differentiating proposition. While inherently attractive for the consumer, this trend poses a
double-edged sword by signi cantly reducing the total lifetime per-vehicle service and parts
revenues (a key contributor to dealer pro tability) and shifting a bigger proportion of the available
business to the post-warranty aftermarket.
Timeliness: bringing products to market faster than competitors
There is immense value and competitive differentiation potential in bringing a new product to
market quicker than competition, on time and within budget. All else being equal, an OEM can
be more nimble in translating market trends and tastes into marketable products. As a result,
vehicle development programs cost less to execute, because resources are deployed with
greater focus for shorter gestation periods and with greater accountability; and products will
generally be fresher and require fewer incentives to move over their lifetimes.
All leading automakers have concerted initiatives underway to reduce their vehicle development
cycle times (see Exhibit 2). The exemplars of rapid product development have been the leading
Japanese OEMs – notably Toyota, Honda and Nissan – that have or will soon have the
capability to roll-off new models from their assembly lines in 12 months or less.
The implications of competitive differentiation
# Alistair Davidson. www.alistairdavidson.com
There are a number of implications to how automakers approach and execute their
differentiating strategies:
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5. Exhibit 2 Vehicle development lead time, styling freeze to SOP, months
Redesign, with signi cant platform/
Major redesign component reuse
GM 18 months or less (Hummer H2)
Ford 32 to 36 months (F150) 16 to 18 months (target)
(24 months target)
DCX 24 to 26 months 18 months
48 months (MBZ E-Class)
Toyota 26 months (Camry) 10 to 12 months
31 months (Corolla)/21 mos. (Matrix)
Honda 18 months (Fit) 12 months
BMW 35 months (X5)
Renault 29 months (Megane II)
Source: Various
f The web of differentiating attributes is constantly expanding, as the boundaries of the
achievable are continuously rede ned by the creative imagination and resourcefulness of
designers and engineers, advances in new materials and technology, industry regulations
and requirements, and competitive pressures.
f Attributes and features must be valued by consumers for them to serve as effective strategic
differentiators.
f The leading automakers have collectively achieved very high standards of performance on
some dimensions, and further investments to effect incremental improvements generate only
diminishing returns. Consumers become conditioned to expect high minimum acceptable
levels of performance on these attributes, which then lose their power for strategic
differentiation.
f Experiential attributes are becoming more powerful drivers of competitive differentiation.
Because most automakers are loading up their vehicles with features to improve consumers’
price/value perceptions, scoring well on feature checklists has not been an assured strategy
for competitive advantage. Instead, factors such as superior t-and- nish, the tactility and
re nement of vehicle controls and interfaces, the quality of interior materials and nishes,
unusual design features, superlative ride and handling and NVH control – are much more
dif cult to emulate consistently, and therefore represent sustained sources of strategic
differentiation.
f While customer handling is undeniably a powerful differentiating lever and should be part of a
balanced integrated strategic proposition for any OEM, the strength of this lever is far
outweighed by product attributes, particularly as vehicles are being designed for longer
service intervals, thus reducing opportunities for customer interaction. Creating customer
‘‘pull’’ to buy succeeding generations of exciting ‘‘must-have’’ products will always be a
more effective strategy than elaborate customer relationship marketing programs geared to
‘‘push’’ less-competitive products.
f Finally, competitive product benchmarking is useful, but only up to a point. Because of the
continual expansion of state-of-art achievable boundaries and the lead times associated
with development cycles, automakers that strive merely for performance parity with their
competitors’ current generation products often nd that their new products are quickly
eclipsed.
An automaker needs to be guided by its own clear beliefs and instincts about which key
parameters will form the basis of its own differentiated, consumer-valued strategic proposition –
and follow through con dently and comprehensively in its execution.
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6. A foundation of winning strategies
There are commonalities in the core principles that the leading automakers employ in their
winning strategies to improve exibility and responsiveness, reduce overall cost structure and
enhance competitiveness. These are the necessary but not suf cient foundations upon which
OEMs build differentiated competitive propositions, which can sustain them for several years to
come. They include:
Investment in fresh, attractive, affordable, consumer-driven products. The automotive
industry is introducing fresh products at an unprecedented rate hoping to win over af uent but
increasingly ckle consumers (see Exhibit 3). The past two decades has seen the introduction of
people movers and cross-over vehicle formats; the revival of the coupe, sports car, convertible
´
and GT genres; as well as the proliferation of sedans, sport-utility vehicles and trucks at every
size and price point. In today’s ‘‘zero nance’’ marketplace, automakers realize that new-
vehicle programs can be much better strategic investments for creating competitive
differentiation, compared to routinely expending billions on marketing and incentives. The
underlying message is clear: invest more money intelligently upfront on fresh affordable
products and features that consumers want – or spend it later on rebates.
Accelerated product development. A corollary of the new product explosion is the need to
continuously gauge the consumer’s pulse and translate those ndings into the development of
successful new products. Successive vehicle programs need to be developed more quickly at
lower cost, to break even at lower production runs, and become pro table sooner. It is no
coincidence that the nimblest automakers with respect to product development – Honda,
Nissan and Toyota – are also among the most pro table.
Intelligent platform and component sharing. A consequence of the imperative for quick,
cost-effective product development is developing and perfecting the skills for intelligent
platform, subassembly and component sharing. Estimates are that developing a new vehicle
from an existing platform requires 30 to 50 percent less time than developing it from a new
platform.
Exhibit 3 Light vehicle models in US market (by model year)
1,314
1,125
1,079
1,051
996
916
1997 ’98 ’99 2000 ’01 ’02
Source: Automotive News
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7. Flexible manufacturing and work practices. After hemorrhaging money when demand
slackened off for volume models produced in dedicated factories, many automakers are now
investing huge sums to improve the exibility of their assembly plants. They are taking their cues
from Honda, which since the mid-1980s has had the capability of assembling products as
diverse as the Accord, Legend, Prelude and Civic wagon on a single assembly line in its
Sayama plant.
Optimized order to delivery processes. Automakers are also making signi cant investments
to optimize lead management, build to order, and order to delivery processes and systems.
When appropriately selected and well executed, these programs and initiatives provide
consumers with better availability and shorter delivery times, while reducing pipeline and
nished goods inventory levels across the automakers, their suppliers and distribution chains.
Supplier leverage and partnering. With supplier outlays representing 50 to 60 percent of an
automaker’s costs, the search for greater cost competitiveness is a never-ceasing endeavor, as
market forces dictate that successive generations of products be delivered with more features
and content for less money. There is growing evidence that the way at least some leading Asian
automakers approach supplier relations – establishing longer-term partnerships over multiple
vehicle program generations, delegating selected technology development, and balancing price
and quality demands – pays off in better quality, scale and competitiveness, sustaining both the
automaker and supplier for the long-term.
Willingness to cap production of individual vehicle lines to control supply. Letting the
market establish its natural level of demand for a particular vehicle model line – and having the
resolve to cap production to achieve a supply/demand balance – is counterintuitive, if not
downright heretical, to many automakers. For years they have measured their success in sales
gures, relative to competitors. Yet, trying to bridge even relatively small oversupply situations
by stimulating demand beyond what consumers will naturally absorb can put an automaker
on the slippery slope of higher incentives, no-pro t eet sales, weakened residuals, poorer
consumer lease affordability (without subvention support), and zero pro ts for reinvestment in
the next generation of vehicles. Past a certain point, marginal revenue will fall below marginal
cost for incremental sales, leading to sub-optimization of overall vehicle program pro tability, if
not actual impairment.
Focus on key developing markets. Large developing countries – notably China, India, Mexico
and other export-led economies with a sizeable, growing middle-class – represent huge
potential demand for private vehicular transportation, and the last remaining battle elds for
automotive primacy. Indeed, China market projections suggest that annual sales could exceed
4 million units within ve years, ranking it third in global importance behind the USA and Japan.
Automakers that have been fobbing off second-rate or obsolete products will become
increasingly vulnerable as the opening of markets to competition exposes their protected
positions. Conversely, those most likely to succeed will approach their customers from two
ends: offering affordable, quality, versatile vehicles for the mass-market that are tailored to local
conditions and requirements, while also bringing in the best of their current model ranges for
early adopters and opinion leaders in the small but growing af uent upper-class.
Customer relationship management. Establishing and executing effective long-range
customer relationship management strategies to cultivate and win the hearts and minds of
successive generations of customers is paramount. Product and ownership propositions that
resonate with different generations in different geographies must be developed; messages that
‘‘ Letting the market establish its natural level of demand
for a particular vehicle model line – and having the
resolve to cap production to achieve a supply/demand
balance – is counterintuitive, if not downright heretical,
to many automakers.
’’
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8. speak to them must be couched, and delivered across the appropriate channels and media in
ways that cut through the clutter.
Continuous improvement mindset and commitment. Finally, the leanest and ttest vehicle
manufacturers are characterized by a steadfast vigilance in maintaining and growing their
competitive edge, on all cost, quality and timeliness dimensions.
No automaker can afford to rest on its past achievements. ‘‘Good enough’’ simply isn’t,
anymore. Automakers must make targeted investments in high-quality, differentiated products
that truly mirror what consumers value, and they must precisely match their output to demand
to achieve better margins and pro tability. The alternative is to pay ever-higher incentives to
move uncompetitive products. One course sets the automaker on a virtuous circle of mutually
reinforcing outcomes; the other, on a vicious spiral toward weakened nancials and
marginalization.
Acknowledgment
Photo credit: The photographs of automobiles in this special issue are by Alistair Davison
(www.alistairdavidson.com); e-mail address, alistair@eclicktick.com
# Alistair Davidson. www.alistairdavidson.com
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