The European Automotive Industry
SEGMENTATION AND STRATEGIC GROUPS
In this section we shall discuss segmentation and strategic groups. These two are interre-lated, as we use the market segmentation to divide the actors into strategic groups.
While segmentation analysis concentrates on the characteristics of product markets as the basis for dividing industries, strategic group analysis uses the characteristics of firms as the basis for division. When the nature of intensity of competition varies within an indu-stry, it is useful to divide the industry into segments and analyse its structural characteri-stics. Segmentation is not only useful for the new entrants in determining which part of a market to enter, but also for the established firms in deciding in which segments to main-tain a presence and how to allocate resources between them .
Strategic groups are defined as clusters of firms within an industry that have common characteristics and thus follow the same or similar strategies in setting key decision varia-bles. These key decision variables may include product market scope, choice of distributi-on channels, levels of product quality, degree of vertical integration, choice of technology and so on. A strategic group is part of an industry that may play a role in understanding performance differences among firms. One group of firms may exhibit high advertising to sales ratios, extensive marketing efforts, careful attention to services and wide brand ran-ges. Other groups of firms in the same industry may follow the quite different strategy, focusing perhaps on volume production of a single brand.
In terms of analysis, the strategic group is a middle ground between the industry and the firm. In some industries, the group structure is obvious and very important. In other indu-stries, some differences in strategies among firms seem to exist, but they only play a little permanent role in the evolution of the industry. Strategic group analysis is unlikely to of-fer much insight into why some firms are more profitable than others. It, however, provi-des a broad picture of types of firms within an industry. Furthermore, It can contribute to an understanding of the structure, competitive dynamics and the evolution of an industry and to issues of strategic management within it.
The European market for passenger cars consists of a number of different sized automo-biles. In this section we will discuss the segmentation of the European passenger car mar-ket.
There are numerous ways in which the car market can be segmented, but it is usual to divide it into some distinct groups according to a combination of size and price. The UK motor industry trade association, the society of Motor Manufacturers and Traders (SMMT), has now formalised segmentation into nine market segments on the basis of vehicle size, and this method has been widely accepted throughout the industry.
Nine segments have been identified, and together they cover almost 99% of the European car market. Each is defined as follows :
# A segment-mini
# B segment-small
# C segment-lower-medium
# D segment-upper-medium
# E segment-executive
# F segment-luxury
# G segment-sports
# H segment-dual-purpose
# I segment-multi-purpose vehicle (MPV)
In this project, we will mainly analyse the first 7 segments (A - G), as the H and I seg-ments are less well defined, and make up a small part of the total market.
Before we discuss the details of each segment, we will present a quick overview of the markets overall segmentation.
Indsæt figure 6.1 fra side 76
Two segments, small cars and lower-medium cars, both of which
account for a 30% mar-ket share, dominate the European market.
The upper-medium sector is slightly smaller than the other two
sectors, but if one add these three together, it accounts for
over 80% of the total market in terms of units.
The other segment with a significant volume of vehicles is the executive car segment, while all others are considered to be niche markets.
The concentration of the market within these three main sectors influences the strategy of the manufacturers. Companies such as Mercedes-Benz and Audi have had very little inte-rest in these segments historically, but because of the big market share of these three seg-ments, they can't ignore them, and are now introducing or planning models in these seg-ments in order to get a bigger market share. On the other hand, the companies, which tra-ditionally dominated these segments, are now looking at ways of breaking down each market area into sub segments and offering specific models for each. An example of this is the C segment, which we shall discuss later in section 6.1.4.
The smaller market segments are also important to most manufacturers. Such smaller and niche market segments often represent new or growing markets that are important for all manufacturers.
In appendix C we have produced a table, showing the importance of different segments in different markets. Further in Appendix D, we have shown the importance of different segments to different manufacturers.
6.1.2 Segment A: Mini Cars
This segment has never been a major part of the overall car market in Europe, and demand for these vehicles fluctuate significantly. In the European market, the consumers tend to think that these cars are too small for general use.
Although the cars are priced at the entry level for the car market, most new car buyers bypass this segment and move straight to the B segment. Consequently the A segment has not grown in recent years.
Italy is by far the largest market for mini cars, with more than twice as many registrations as France. Generally speaking mini cars are more popular in southern Europe, except for Spain and Portugal that have below average shares of their markets controlled by minis. The use of mini cars in Scandinavia is almost non-existent.
Most of the broad line manufacturers now produce so called sub-B segment cars, which are cut-down versions of B segment cars rather than specific designs for the A segment. In this segment, Fiat Cinquecento and the Renault Twingo have been very successful. Ford launched the Ka in the late 1996 and GM will follow with a more conventional sub-B model in 1997. Volkswagen launched SEAT Arosa and Lupo in early 1997. Mercedes-Benz in a joint venture with SMH of Switzerland will launch the Smart Car in 1998. The pure A segment seems to be fairly static in terms of growth, but there could be a lot of potential in the sub-B class. However, at present Fiat totally dominates this segment, with 78 % of the market .
Segment B: Small Cars
The B segment is one of the largest two segments of the car market. (The other one is the C segment). If all the new sub-B cars were included in this segment, it would become larger than the C segment.
Between 1995 and 1996, the B segment grew marginally more than the total market and it remains the key market sector, since this segment is the entry-level for most first-time buyers in the new car market. In this segment, the design is usually a hatchback in order to maximise the volume of the car with the comparatively short length. Besides this most models provide a degree of choice for the customer, such as the choice of 3- or 5- doors and a variety of engines, including diesel.
Among the models in this segment, the Fiat Punto is the best selling car . In 1996, the new Fiesta and the Corsa sales increased too. The Polo also rose sharply, whereas the Clio, which was the segment leader in 1992, dropped away further. Typically, the best-selling model will sell about 600,000 cars, but it is a very competitive sector and the lea-der changes frequently. In recent years Fiat, Ford and Renault have led the sector, becau-se of the high volumes involved.
The B segment is likely to grow in the future as a function of the ageing population, a growing car parc and changes in household structures, such as the growth in single house-holds and retired lifestyles. Linked with this, is the increase in individual choice with the rise of multi-car households.
The B segment has been fragmented into four broad groupings. The advantage of doing this is that manufacturers can reorganise the product line-up in order to target an increa-singly fragmented market. Thus the 90's has seen the emergence of three sections within the B segments. There are the traditional cars, which are practical general purpose cars, and small cars designed for urban driving, as well as new cars with improved driving dy-namics. Further, some of the high-end producers have introduced small luxury cars in this segment.
The market share for this segment in the European Market as a whole, is 30%, but in France and Italy it is well over 40% and in Portugal over 50%. In the Scandinavian coun-tries the market share is rather small, as well as in the German Market.
Segment C: Lower Medium
This segment is the largest segment of the European car market and the most competitive one too.
It is the area where private buyers of new cars and company buyers overlap. Competition is further increased in this segment because both traditional manufacturers of small cars, and up-scale manufacturers eye this market. The sector grew by 7.3% in 1996, which is 1 %-point more than the market average.
VW is the largest company in this segment, due to its highly successful Golf model . The other leading models are Opel Astra and Ford Escort. Although the sales of these three models are on decline, they still hold on to their leading position. Several up-scale manufacturers have entered this segment in 1996, such as Audi A3 and the Mercedes-Benz A-class. This is a logical move for both companies as they are extending their range into a large market where they have not previously been represented.
The market share for this segment is relatively even across Europe. The big markets such as Germany, France and the UK are fairly near the average. Italy is relatively small be-cause it is so much stronger in small cars. Denmark, Austria, Finland and Ireland are large markets for this segment.
Segment D: Upper Medium
Segment D is the 3rd largest segment after B and C segment as it accounts for 21% of the market. It grew by 7% in 1996, more than the market as a whole, but no company domi-nates this sector.
In the late 1980s and early 1990s GM's Opel Vectra was the best selling car in this seg-ment. Ford fought back with the Mondeo, and achieved leadership from 1993. By 1995 there were six models outselling the GM Vectra/Cavalier, however in 1996 the full power of the GM marketing effort was brought to bear, and the Vectra once again became the top-selling car. All its competitors slipped back in 1996 with the exception of the Audi A4 and the VW Passat.
This segment is popular throughout Europe, although it is stronger in northern Europe than it is in south. Of the four largest markets, Germany and UK are strong, while France and Italy are relatively small in the D segment. Conversely in Belgium, Netherlands and all the Scandinavian countries, D segment cars are popular. In Denmark, Finland and Norway it holds over one-third of the market shares.
Segment E: Executive cars
The executive car segment is a relatively small part of the European market, with less than 10% of the total. In 1996 it only grew by 1.6%, far less than the market as a whole. The overall share fell to 8.4%. However, it still accounts for over 1m cars each year and it is important for the prestige of the manufacturers involved. Thus performance in this seg-ment may affect performance in the other segments.
Mercedes-Benz is the dominant player, with almost 40% of the total market segment. BMW and Volvo are the other significant manufacturers. VW does not make vehicles in this category, leaving the field to Audi. Ford and GM participate in this segment too. GM has share of this market with Omega model, and Ford with its Scorpio, but in general, they are regarded as minor players.
Germany is by far the most important market in this segment. It accounts for over 45% of the market demand. The highest market share is demonstrated in Sweden. The Volvo and Saab models make the market share of E-segment cars over one-third of the market. Fin-land, Norway, Switzerland, Luxembourg and Belgium also have high proportion of the E-segment cars.
Segment F: Luxury Cars
This is the smallest of all segments in the European car market, accounting for less than 100,000 vehicles. However, it is a very prestigious and profitable segment and thus it is highly important to the manufacturers.
The market leader in this segment is Mercedes-Benz. The largest market by far is Ger-many, accounting for over half of all luxury cars sold. The UK is also a substantial mar-ket, while France and Italy are relatively small. Belgium Switzerland and Luxembourg are significant markets for this segment, relative to their small size.
The Mercedes-Benz has decided that they will reduce the size of its current S-class and will introduce a larger, more luxurious new class above the existing range. All the other manufactures in this segment are looking into other markets. Audi, BMW and Mercedes-Benz are all bringing out smaller cars and Jaguar is moving back into areas of the sports segment that it had abandoned previously.
Segment G: Specialist sports cars
This segment is a small niche in European Market, but lately it has received much attenti-on from companies that had previously abandoned the segment.
GM leads the market with over a quarter of all sales with its Tigra model. Ford and GM have developed sports cars from time to time to complement their standard range. The Opel Calibra, first into market in 1990, sold over 60,000 units across Europe within two years. In this section, the design of the cars is very important and attracted to more and more customers' attention. Therefore nearly all the big companies are have product in these segments.
The biggest market for sports cars is Germany, followed by UK and Italy. The market with highest penetration of sports cars is Switzerland, closely followed by Luxembourg. Other countries with an above average preference for these cars are Italy, UK, and Ger-many. In contrast, the Scandinavian countries have very few sports cars relative to their overall markets and France is below the average.
The long-term growth of this segment is secure due to changes in the lifestyle and an in-crease in discretionary income. Manufacturers have invested heavily in this segment, and some new models have and will come to the market.
Below we shall divide the actors into strategic groups. As mentioned above, this can be done through a number of criteria. We shall use the segments discussed above for our strategic group analysis.
For the first criteria we shall use diversification of product lines. Thus the actors will be segmented on a basis of niche players versus broad line producers. The second criteria will be up scale versus down scale producer. For both criteria we shall use the market segments above. Thus by diversification we mean how well the company's products are dispersed across the segments, while the latter criteria refers to the companys most im-portant segment.
Finding a good measure of the latter criteria is easy. Here we simply choose the segment in which the company sells most units. Thus companies will be placed on a scale from segment A to G. It would be more optimal to use sales in each segment, for this analysis, but unfortunately such data has been unavailable. Hence there is a bias towards the lower priced segments.
Finding a measure for the diversification criteria is more difficult. Simply using the num-ber of segments in which the company is represented is inadequate, since it only measures the number of segments, and doesn't take the importance of each segment into account. An example is Mercedes-Benz that is represented in 3 segments, but has 91,6% of its sa-les in the E segment. Instead we need a measure that takes the amount of sales in each segment into account. For this we shall use the following formula:
Where N = Number of Segments
S = The percentage share of the ith segment
This index works by squaring the market shares individually,
while the square root is ta-ken of the total. Thus firms that
operate in only one segment (Niche Players) will receive an index
score of 100, while firms that are differentiated across an
indefinite number of segments, will receive a score of 1.
The summation part of the index is the same as the Herfindahl-Hirschman index, which is normally used to calculate the concentration within an industry. Thus this index is simply a different use of the HHI, although we have added the square root. This is done to avoid the exponential character of the HHI.
In appendix D we have shown how the new registrations of different manufactures are distributed across the segments. We have used this to set up the table below.
Source: Appendix D
The data in the table is then used to set up the diagram
below. From the diagram we can identify 4 strategic groups:
Nr. 1: Diversified Low End Producers: Nissan, PSA, Fiat, Ford, GM, Renault Suzuki
Nr.2: Diversified High End Producers: BMW, Mazda, Toyota and Volkswagen
Nr.3: Specialised Medium Producers: Honda
Nr.4: Specialised High End Producers: Mercedes, Volvo
Obviously this result is heavily dependent on the chosen criteria. In many textbooks regarding the automotive industry, a similar analysis is conducted with respect to the differentiation, and the extend to which the company has a global focus. We have chosen a different approach because this report is focused only on the European market. Thus the global scope of companies is of lesser importance.
The Strategic Groups below consist of companies that continuously run into each as op-ponents in the European market. This happens because companies in the same strategic group, focus on the same primary segment, and run into each other across many of these segments. For example are Volkswagen and BMW likely to compete in almost all their market segments.
Indsæt figure 6.2 fra side 85
One should be very careful when using a strategic group
analysis in the car industry. The industry is highly competitive
in nature, and even companies that are distanced from each other
in the diagram below, are likely to compete in some market
segments. An example of this is Fiat and Mercedes, which are
positioned at opposite ends of the diagram. Even so they face
each other in the E segment (See appendix D). This demonstrates
that in the car industry, all companies compete against each
other in some ways. Thus the strategic group analysis is merely a
measure, of which companies face each other most often.
It is evident from the figure above, that there are very few specialised manufacturers. This is an effect of the horizontal integration in the industry. An example is the BMW group, which use its BMW brand for vehicles at the high end of the market, and its Rover brand for vehicles at the lower end of the market. Another reason is that this analysis only con-tains large companies, and thus smaller specialised companies are not included.
In this chapter we have divided the market for passenger cars in Europe into seven seg-ments according to vehicle size. The most important of these, are the segments for small cars and lower medium sized cars. However luxury cars are also important for prestige reasons, while some of the small segments are important, as high growth is expected in these segments.
The segments have been used for an analysis of strategic groups. Here we use diversifica-tion across segments, and primary segments as criteria. For the first criteria we used the index in section 6.2 to make a quantifiable measure.
Through the analysis we identified four different strategic groups. The significance of this analysis is that firms within each strategic group compete against each other in several segments. Thus actors should be especially aware of the moves of actors within their own strategic group. However, in the car industry there is also heavy competition across these segments.