Volkswagen has rolled out three memorable and significant cars since existence – the Volkswagen Beetle, Volkswagen Bus and Volkswagen Golf. Of these, only the Beetle and Golf are still in production, although with brand new platforms, engines and designs. Of the 10-bestselling car nameplates till date, Volkswagen’s Golf stands at number three with over 26 Million units produced, the Beetle with over 21.5 Million units produced and the Volkswagen Passat with over 15 Million units sold.

Volkswagen’s innovations revolve primarily around x broad categories – Powertrains, BlueMotion, Assistance Systems and Future Mobility. On the Powertrains front, Volkswagen has been the pioneer in deploying TSI, or Turbo Stratified Injection, technology in its mainstream cars. While cars have been turbocharged for decades, they have been limited to performance motoring vehicles as no manufacturer has installed turbochargers in its mainstream cars, primarily because of cost constraints on mass-market models such on Sub-Compact cars such as the Volkswagen Golf, and compact cars such as the Volkswagen Jetta. What Volkswagen has done with its TSI range of engines is mate direct injection technology with turbochargers, something which is considerably new for gasoline engines. This was primarily inspired by the efficiency and power delivered by modern-day common rail diesel engines. TSI has allowed Volkswagen to significantly downsizing engines without sacrificing the torque and power produced by a car. The use of direct injection with turbo charging allows gasoline to burn far more efficiently than in ‘conventional’ multi-point fuel injection (MPFI) engines. The result is that TSI engines produce considerably more power in the same size than a conventional naturally aspirated MPFI engine. What’s groundbreaking about this technology is that it, as opposed to conventional wisdom, allows for increased power without compromising a great deal on efficiency. In effect, 1400cc TSI engines produce power which is comparable to 2000cc naturally aspirated engines, with an efficiency of a 1400cc engine because peak torque is available at as low as 1500 revolutions per minute! Volkswagen has taken the TSI technology forward by introducing TSI engines in its mainstream cars such as the brand new Polo, the Golf and the Jetta to name a few. The spillover effect has been present in other group brands as well. The Skoda Octavia (Laura in India) has been given a 1.8TSI heart which produces close to 150bhp on Indian fuel, and delivers efficiency comparable to naturally aspirated engines as in the Japanese competition such as the Honda Civic and Toyota Corolla. The engine technology is world acclaimed and has given Volkswagen multiple Engine of the Year awards in the past few years. To aid performance, Volkswagen developed a 7-speed Dual-Clutch technology which allows for lightning-fast gear shifts without compromising on durability of the gearbox, or the fuel efficiency of the car. The innovative ‘dry’ double clutch gives a driver the dynamic drive of a manual transmission with the convenience of an automatic transmission, and all this, with 10% less fuel consumption than a conventional automatic gearbox while further reducing CO2 emissions. The powertrain front of Volkswagen has given significant importance to increasing efficiency while retaining, or even increasing performance.

Volkswagen powertrain innovations and technology give a great deal of importance to sustainable mobility. For Volkswagen, this means deployment of significant resources for research & development, among other activities. The direct result of research & development on sustainable mobility using existing technology and making it more efficiency, Volkswagen introduced its BlueMotion technology umbrella which aims at maximizing the overall efficiency of the car through use of multiple measures which use packages that enable interplay of the engine, gearbox, aerodynamics and tyres. The most distinguished part of the BlueMotion technology is that it is very cost-effective. By using modified software for engine management, reduced idle speed, longer ratios for higher gears, minimizing aerodynamic drag, lowered rolling resistance of tyres, lower suspension settings and a basic start-stop system, Volkswagen cars can reduce their fuel consumption by over half a litre per 100 kilometres, which effectively translates into increasing fuel efficiency by close to 10% for the Volkswagen Golf over the non-BlueMotion model. The fact that all this is achievable at a cost which does not harm the economical motives of the consumer by keeping the purchase costs in check. While most other manufacturers have been rigorously spending millions of dollars on alternative technologies such as Hybrid engines and Fuel Cell engines, Volkswagen has got the upper hand through the use of available technological innovations and delivering the end-consumer what matters most – improved efficiency without compromising on performance without having to spend thousands of dollars to achieve it. This, of course, does not go to say that Volkswagen is not investing in these technologies. Volkswagen’s Alternative Powertrain programme has developed the BiFuel & EcoFuel powertrains which allow for use of two fuels simultaneously. Other Volkswagen group brands such as Audi have already developed their first electric sports cars and in partnership with Porsche, are developing Hybrid engines for SUVs.

Volkswagen group has streamlined the use of Assistance Systems in its cars across all segments. Assistance Systems aid the drivers’ judgement and driving process. The Lane Assist system is a preventive system that alerts the driver when he/she is moving in harm’s way into another lane. This, along with the Side Assist system that works on the side-view mirrors of cars through use of sensors, look to minimize the potential damage caused by lane changing accidents, particularly those cause by blind spots and driver fatigue. The Automatic distance control system and the Front Assist system are in-car aids that work with the cruise control system of the car to ensure a safe distance is maintained between the driver’s car and the cars in front and behind. These are technologies that are more focused on ensuring safety of drivers and passengers in Volkswagen group vehicles. These technologies have been incorporated into not only high-end and luxury segment vehicles of the Volkswagen Group vehicles, but have found their way to the mainstream compact vehicles such as the Volkswagen Jetta. Volkswagen has kept the customers’ daily convenience in mind while developing technology as well. Systems such as the Park Assist, which gives the driver a real-time view of tight parking spots through the use of sonar based technology, and Rear Assist, which uses a rear-mounted camera to give the driver a real time view of the actual distance to hit.

On the Future Mobility front, Volkswagen, along with sustainable technology in powertrains, has been thriving on computer-controlled vehicles. In the Urban Challenge 2007, Volkswagen’s Passat ‘Junior’ won the company a silver medal. The competition involved the computer controlled car performing everyday tasks such as parking, driving in dense traffic etc. Driver systems such as this are aimed at considerably enhancing levels of safety for both drivers and pedestrians while increasing driving comfort on the road.

Volkswagen’s research & development process to come up with these innovations is also notable. Volkswagen treats each of its brand companies as a separate entity, which translates into brand centric research as well. While this doesn’t limit the technology transfer, it allows for multiple research avenues which offer multiple variations and hence, allow for multiple solutions to often similar problems. For example, Volkswagen had developed the TDI technology, while Skoda, its subsidiary from the Czech Republic developed a technology that uses a non-common rail turbo-charged diesel but incorporates a technology called the Pumpe Deuse. This particular technology kept costs down because it did not incorporate the then-expensive direct injection technology. While the collective effort was to develop a more efficient and powerful engine with the same displacement capacity, Volkswagen did it in two ways, one using an upcoming expensive technology and the other using a far cheaper technology. The Skoda development was, of course, because Skoda, as a brand, stands for Frugal engineering across Western Europe and hence, is expected to produce cheaper cars. Volkswagen gives due importance to collective effort as well, which is why all brand research is also done at Wolfsburg, the location of Volkswagen headquarters. This, in effect, translates into effective research as the networking and communication processes between the Wolfsburg centres ensures that similar research is not duplicated at other brand headquarters and that individual brands can focus on developing components that are more suited to their own specific needs. The strategic orientation extends beyond the European mainland. Volkswagen has Research & Development bases in California in the United States of America, Tokyo and China, and an upcoming base in India, which is primarily aimed at frugal engineering from the country. This allows for market-specific development to suit the needs of specific markets and hence, allows a far more focused customer driven innovation process whereby the group brands can deliver innovations which meet the demands and needs of the local consumers.

The Innovations put through by Volkswagen are evidence of their inclination towards customer driven innovation. Innovations like BlueMotion technologies and TSI engines speak volumes about the amount of emphasis Volkswagen lays on delivering exceptional value to its customers by offering them practical solutions to their problems without either party spending exorbitant amounts in acquiring the same. Volkswagen’s innovations have translated into sales and customer satisfaction across brands, which is precisely why it is the world’s number one automobile manufacturer.

Interestingly, the Strategic Groups, as mentioned, also have a lot in common with market shares of these firms. While Group A firms tend to enjoy a high market share with their products with mass-market appeal internationally, Group B, on the other end of the spectrum, has firms with products of very limited appeal, primarily because of the exorbitant price tags. Group C firms have much smaller market shares than that of Group A, and have a middle-of-the-road appeal in terms of luxury and performance and price. Group D, on the other hand, consists of firms with large market shares in only a few markets, most commonly in the country they originate from. It is also interesting to understand the ownership patterns of firms across various Strategic Groups. Broadly, the largest Global players enjoy a presence, through one or more of their brands, in at least three of the four strategic groups. For example, Volkswagen Group has a presence in Group A with its Volkswagen brand, in Group B with Bugatti & Bentley, in Group C with Audi & Porsche, and in Group D with Skoda & SEAT. Similarly, Fiat Group has a presence in the three groups with Fiat in Group A, Ferrari in Group B and Alfa-Romeo in Group C. The benefits are primarily in the form of platform sharing and in effect, cost saving because of reduced Research & Development costs, Market Power and the sharing of critical components.

Industry Rivalry

Rivalry within a Strategic Group is likely to be more in industries where there is a great difference between product lines of firms, especially in terms of pricing. In the Automobile Industry, the rivalry among the firms within a Group is far greater than the inter-group rivalry, as opposed to an industry where the substitutes are very close and are available in plenty. The inter-group rivalry is at a far lower level internationally because of the scale and appeal of products of firms from different groups. On the customers’ part, there can be a shift from one group to another, especially when upgrading to a more expensive automobile, the firms effectively compete for customers in different market segments on their parts. For example, Ford does not compete with Ferrari, but it does, in some segments, with BMW, Audi & Mercedes. This is because Ford’s more expensive and less mass-market range of cars are in similar segments with BMW’s lesser expensive, more mass-market cars. So a Ford Focus would compete with a BMW 1-Series and not a BMW 7-Series as the target customers for both are poles apart. Similarly, firms from Group D can often compete with firms from Group A on a regional level, which is why we see Maruti-Suzuki competing with Ford, Fiat & Chevrolet because their target customers in the Indian market are broadly similar, but differ in the global context.

Bargaining Power of Suppliers

Different strategic groups enjoy different degreed of bargaining power of suppliers. In Strategic Groups where firms are primarily assemblers, the bargaining power of suppliers tends to be low primarily because of the scale of production of these firms. Often firms that operate in the mass-market enjoy market power because of their market share. This allows them to leverage their position to bargain with suppliers and have components customized for their use than that of other players. For example, Denso is a key supplier of Toyota to such an extent that Denso follows Toyota to whichever market Toyota enters. The bargaining power of Toyota over Denso is fairly high because of standardization of components and faster product development times across the industry because of which Toyota has the advantage of purchasing similar components from Bosch or Delphi. But because Denso is so dependent on Toyota for its revenues, it has to operate in a manner which suits Toyota, hence effectively lowering possibilities of serving another client. The existence of multiple-suppliers allows firms to pick and choose from a bouquet of firms and attain the lowest possible costs, keeping in mind the specification of the components in concern. In other strategic groups such as Group B, the bargaining power of suppliers is fairly high because of the focus on quality of the product. Most firms in Group B product most components of their cars and outsource only a few. The few components that they outsource come from specialist suppliers. The switching costs may not be very high, but the costs of customization of products to suit the manufacturer is very high because of the nature of the product.

Bargaining Power of Buyers

Bargaining power of buyers varies from group to group. Groups where mass-market players exist with minimal product differentiation have to deal with high bargaining power of buyers while groups with highly differentiated products enjoy low bargaining power of buyers. Strategic Group A, where firms are mass-market players with low product differentiation in most cases, have to deal with very high bargaining power of customers, primarily because of the availability of a plethora of options both from the same firm as well as from constituents of the Strategic Group. The bargaining power of buyers is slightly lower for Group C firms than that of Group A, because each Group C firm has a brand identity which is peculiar to that firm alone while others are close to achieving similar results, but are not widely known for the same. For example, BMWs are identified with their handling and performance, while Mercedes cars are identified as the more luxurious of the two. While customers pick between one of the brands, they have an agenda in mind while purchasing cars from this particular group. A customer who would like more performance than luxury is likely to go for one brand over the other, but at the same time, the customer also enjoys the presence of multiple players and can shift from one brand to another because the products are so close to each other in terms of specifications, features, luxury and performance. Firms in Group B enjoy low bargaining power of buyers, primarily because they have highly differentiated products with varied features and specifications. The products are normally either extremely high on luxury, or on performance. While all products in this strategic group are far more luxurious and better in performance than those in the other groups, they tend to have an inclination towards one side of the spectrum. While Rolls Royce cars are the epitome of luxury on wheels, Ferrari’s are the best performers of the lot, which is not to say Rolls Royce is archaic in terms of performance and Ferrari in luxury. The customers here have a clear-cut demand which can only normally be filled by one of the brands, which essentially goes to say that the bargaining power of buyers is low for Strategic Group B firms.

Threat of Substitutes

Substitutes to passenger cars are broadly based on the price points of the vehicles. While at the lower-end of the spectrum, substitutes are public transport and 2-wheelers, the higher-end of the spectrum only has air-travel as a substitute, which is only applicable for inter-city travel. Group A and Group D face the threat of substitutes such as 2-wheelers and public transport because of their price points. For example, the Tata Nano faces threat of substitutes by Motorbikes in India, especially for unmarried individuals, married without children and empty-nesters. The other threat to lower-end cars is Public Transport, primarily because of the limited spending capacity of the target customers of these products. Firms in Strategic Group B only face threat from substitutes such as Helicopters and Airplanes, the latter primarily for inter-city travel and the former for intra-city travel. The threat is low because of the scarcity of helipads in most parts of the world.

Threat of New Entrants

Threat of new entrants is low across the industry at a global level primarily because of the capital requirements for setting up of production facilities and distribution channels. The threat is low on a global level, but at a local level, threat in parts of the world is high. For example, in India, the threat of new entrants is at a medium level because of the absence of multiple global players. When these players decide to enter India, they can, and are willing to, spend Millions of dollars in setting up infrastructure to support their products. This is aided by a huge potential market for products of these firms, which are primarily members of Group A. Establishing of brands is also a very difficult task, especially for firms looking to enter Group B or Group C. Most firms in these groups have been present in the market for decades and have established their brands over years and years of existence and can hence charge a huge price tag for their offerings.

Reference:
Competitive Strategy, Michael E. Porter

Michelin, the world’s second largest tyre maker, is an Entrepreneurial venture started by André and Edouard Michelin in 1888 to address a gap in the market. It was started when a cyclist with a busted pneumatic tyre approached the brothers, who ran a rubber factory at the time, to fix it. Upon their analysis of the tyre and the fact that it was glued to the rim of the bicycle, they identified a gap in the market in the form of a ‘removable pneumatic tyre’ which didn’t need to be glued to the rim to function properly and could be replaced faster than the conventional pneumatic tyres which took a couple of hours to dry. The brothers filed a patent for the same in 1891.Thereon, the organisation has made a large number of innovations, from improving the design of the pneumatic tyre to the Radial tyre in 1941 to the ActiveWheel system which has motors built into the wheel, and is to be launched in 2012. Michelin is the creator of, arguably the most recognized trademarks in the world, The Michelin Man or Bibendum, which was introduced in 1898 and represents Michelin in over 150 countries. Bibendum is essentially a man made out of numerous stacks of tyres and is used by the organisation in various promotional related activities across the world, and is shown doing a variety of activities in Michelins advertisements.

Innovation then runs in the blood of Michelin. This, for me, is the most prominent feature of an entrepreneurial venture as it is the factor that distinguishes the entrepreneur from the businessman. An Entrepreneur innovates existing products/services and creates one that is more functional or utilitarian, which is exactly what the Michelin brothers established. With tweaks in the design of the pneumatic tyre, they managed to have it grab the rim of the wheel without actually gluing the tyre which essentially allowed the repairing of tyres to become a much quicker and easier job. This transformed the entire industry to develop into what we know it as now. Had this innovation not been thought of, we’d be carrying glue in the back of our vehicles along with the spare tyre. To prove the usability of their version of the pneumatic tyre, the brothers actually scattered nails on the road during a cycle race and depicted to the people there the superiority of their tyre over the conventional tyres. The organisation then went on to focusing on developing tyres for Cars and eventually partnered with Citroën to develop the Radial type tyre.

Michelin, as an organisation, has grown exponentially in the past, especially with the grown in the global auto sector post-world war 2, which was followed by two decades worth of stagnancy, and then growth again beginning the late 1980’s, during which Michelin picked up OEM, or Original Equipment Manufacturer, contracts with General Motors, Volkswagen and Volvo to name a few. The evolution of Michelin as a company was stupendously fast during the first five decades of its existence, mostly because the tyre market was still maturing, along with the auto industry. Off late, especially in the last three decades, Michelins growth has primarily been focussed on motorsports, primarily Le Mans and A1 GP. The primary reason for this focus, as Michelin puts it, is to help develop better tyres for street cars and motorbikes alike. This has proved to be of some substance with Michelin coming up with continual augmentations being made to tyres already being produced. With a decade of research and few tweaks, Michelin has managed to improve its Energy Saver tyres, which reduce fuel consumption by 0.2 litres per 100 Kilometres, and consequently reduce CO2 emissions by up to 4 grams per kilometre. Another innovation which the company is working on is the ‘Tweel’. The Tweel is a replacement for the very invention that took Michelin from Zero to Hero, the Radial tyre. The Tweel is made out of rubber and doesn’t need any air; instead the spokes of the wheel twist and bend as opposed to staying fixed solid. This not only allows for a more comfortable ride as the surface area of the tyre and the wheel are incorporated, but also allows for more flexibility and of course, punctures will be history once this tyre is put into use. These are just few of the many innovations Michelin is working on, which is why it features on the Forbes 100 list of companies that will survive a 100 years. Another reason why Michelin features on the Forbes 100 list is probably that they’re not afraid to admit failure and pull out of a non-profitable or unviable business. They did so with both Formula 1 and MotoGP because they understood that their products weren’t competent enough to go head to head with the master of all circuit racing tyres, Bridgestone. They do, however, still supply tyres to A1 GP and a host of other races where they know they have the cost advantage. This also is conceivably Michelins Achilles heel. Simply because they could not match the functional superiority of Bridgestone, they packed their bags and bid adieu as opposed to developing their product to meet the rigorous requirements of the pinnacle motorsport divisions. 

Michelins success, at least the way I see it, can be attributed to innovation, and by innovation, I refer specifically to those which were required by the market. The fact that Michelin have been able to sustain their spot in the global tyre market, even when competitors with differentiated, and sometimes superior, products have come in to snatch away segments of the market, is a symbol of their unwavering spirit to succeed, which has primarily been done through a deep, clear understanding of market trends and providing what actually mattered, as opposed to anything out of the sandbox. Whether it’s the Energy Saver Tyres, or the Tweel or the ActiveWheel, they are all innovations which have purely been derived out of the need of the market, and not as an attempt to display technological or operational superiority. Michelin, hence, can, and will, survive over a hundred years, because they don’t just change the rules of the game, they change the entire game.

References:

http://www.michelin.com

http://www.michelinman.com

http://www.michelin-passion.com/passion/home/en/home.jsp?lang=EN

http://www.forbes.com/2009/01/28/long-lived-companies-leadership_0128_sustainability.html

http://en.wikipedia.org/wiki/Michelin

Benefits of International Trade

International trade, at face value, has one basic benefit – allowing for purchase of goods and services at low prices. This puts more income in the hands of households as they can use their disposable incomes in purchasing cheaper goods and services. The country as a whole benefits as well as its resources can be applied in producing goods and services which it has a comparative advantage in producing and add a larger contribution to its GDP. The sellers of an exporting country get the advantage of increasing their prices in-line with the world prices, which would ideally be higher than the domestic prices if the exporting country has a competitive advantage in producing the commodity to be exported. This puts in more money into their pockets, hence increasing their profitability and their contribution to the GDP and tax revenues. Trade can also force prices to fall. If the domestic producers face competition from foreign countries which offer similar commodities at lower prices, they have to, normally, lower their prices in order to maintain competitiveness. This allows for households to purchase goods and services at lower prices, hence increasing their individual purchasing powers. This, however, only stands true if the commodities in concern are close substitutes or are almost identical. In cases where commodities being imported are of inferior quality, then they act like inferior goods and their sales increase once incomes fall. Exports also allows for countries to earn Foreign Exchange which not only helps them meet their international debt obligations, but also allows for an appreciation of their currency. Exports also allow for domestic producers to achieve higher economies of scale as they have the opportunity of producing more of a commodity, hence absorbing a larger amount of fixed cost at any given time while reducing their prices as lesser fixed costs are charged per unit. International trade also provides consumers with a wider variety of options to choose from for the same or similar product types as imports from other countries may be distinctly different in functionality and aesthetics from the domestic produce.

Losses from International Trade

International trade increases dependency of countries on other countries. Countries that import essential commodities from other nations become dependent on the exporting nations for the fulfilment of the need of their people of that commodity. This happens because the domestic producers are often de-motivated from producing imported commodities of identical attributes that are available at lower prices in the market. These producers move on to production of other commodities and reduce the domestic supply of these commodities. This also limits growth of industries in the importing country as incentives that a producer derives from operating in a particular industry may be minimized with the introduction of import substitutes, which may be of superior quality and utility. Often, countries import essential commodities that cannot be produced domestically or can only be produced in small quantities which do not meet the demand for them. For example, most countries around the world import oil from OPEC, Venezuela etc. as their domestic supplies don’t match up to their domestic produce. This makes them dependent on these oil exporting countries for a commodity as basic as oil. If these countries stop exporting oil, most of the world would come to a standstill in a matter of weeks as the worldwide demand can only be met by their supply. On the flip side, if producers of a country find comparative advantage in international trade of a particular commodity, they start focussing on exports of that particular commodity and can sometimes manage to have an upper hand over some country, which they may use to their benefit. Another aspect of this is that producers, who focus on exports, increase the domestic prices in line with the world prices, which essentially reduces the purchasing power of consumers as they have to shell out more cash for the purchase of the commodity in concern. The fact is that very high dependence on foreign imports can often lead the trading countries to become susceptible to the economic, social and political environmental variables of their counterparts.

India’s Case

Pre-liberalized India (Independence to 1991) had a whole lot of trade barriers, particularly pertaining to imports. The government followed an import substitution policy in order to help develop local industries, most of which remained stuck in their infant stage for a large part of this period. During this period, India only managed to attain a, what was then known as, the “Hindu Growth Rate”, i.e. 2-3% growth in GDP every year. The problem here was that the country was still developing and such a growth rate was unacceptable, given the resources the country had. And with the growing population of the country, serious action was required to ensure survival. The tipping point, perhaps, was a point in time during the early 1990’s when the country only had enough foreign exchange to purchase a few more days of oil – an essential commodity for survival. When India turned to international lending institutions, they were clear on their approach – open up your borders for trade and investments. This led the country toward liberalizing its trade policies. Cut to about 17 years later, the country is growing at about 8.7% per year with adequate foreign exchange reserves. All this can be attributed to international trade. For example, India has a competitive edge in IT services – specifically software’s and business process outsourcing. This industry is primarily dependent on providing services to US based organisations which hire India’s resources as the labor required for these services is significantly cheaper in India than the US. This motivates US based companies to employ Indians in India and Indian companies for obvious reasons. The government gains as foreign exchange keeps pouring in and unemployment is cut marginally. The employees get jobs that pay a decent sum of money for their services. Everything, however, isn’t all hunky-dory. India’s dependence on the US has increased significantly as India’s growth has been also because of foreign investments pouring in from various countries which means that if the American economy faces a recession, the Indian economy suffers as well – which is exactly what’s happening right now. The overall growth rate of the country is affected and expected to fall down to a 7% mark as opposed to the projected 9+% mark. The people employed in these organisations suffer as their career growth takes a beating, banks and financial institutions also face the crunch. India’s trade dependence with the rest of the world then makes it more vulnerable to their actions than it would have been had it not liberalized. It is then a matter of choice – slow growth vs. Vulnerability to the world’s economies.

Reference: Mankiw, Economics

Co-Branding carries a strong list of advantages, partly relating to brand associations and values, and partly with the product or service offering itself. The former is done to enhance customer experience and influence behaviour, the latter is done to incorporate usage of technology or brand attributes like design, aesthetics et al in the product or service in order to offer an enhanced or augmented product or service. New product launches often depend on Co-Branding for establishing market position by having customer identify new brands and their offerings through an already existing brand. This can often be combined with Synergies offered by particular brands. An example of this would be, although in its nascent stage, the Mahindra-Renault partnership where Mahindra’s expertise in the Indian market was used to develop distribution and service channels, and Renault’s product portfolio is used to produce and design cars. Mahindra benefits through Renault’s expertise in producing sedans and hatchbacks for their future portfolios, and Renault benefits in saving huge dealer development costs and having its current mid-size offering, the Logan, being identified as a cheap to run, frugal and reliable automobile, all values housed by Mahindra brands such as the Scorpio and the Bolero. Image re-enforcement has become another common trend in the marketplace where two complementary brands come together and market their offerings together. A very apt example of this would be Jack Daniel’s and Coca-Cola, or as they call it, ‘Jack & Coke’. When this campaign was carried out in pubs and bars across the United States, Jack Daniel’s was perceived more as a rugged brand or rednecks, and coke has a wider appeal to the youth. The middle ground was the newly legal adults who had experienced Coke for decades, but hadn’t experienced Jack Daniel’s whiskey. This Co-Branding exercise was carried out to appeal to the market in between the typical Coke and Jack Daniel’s markets, i.e., 21 to 35 year olds. It became such a success that Jack & Coke has become a favourite amongst not only the targeted segments of the market, but also with older, more mature audiences. In a nutshell, Co-Branding essentially has to take into consideration the brand partnership that the customer perceives (purpose, advantages), the common values the brands and its customers share and what the co-branding offering means to the target audiences.

Brand Loyalty, when it comes to Co-Branding, is a tricky business. When a service or product offering is similar to the brand value or image offered by the Co-Branded offering, success is often witnessed. An example of this would be the limited edition Tonino Lamborghini Espresso Machine. Only 1000 units were produced, priced at about $1750. Since the offering appealed directly to the Lamborghini target market, it was sold-out within a matter of days. The buyers were not just Lamborghini car owners, they were also people who admired the Lamborghini brand and couldn’t own the car, so the association created with the espresso machine goes a long way in delivering customer delight, even without owning a Lamborghini is truly astounding. However, this can be often fatal to the image of brands as well. The formerly GM owned SUV cult brand Hummer had launched a mobile phone with a company named ‘Fly’. The product was, for lack of a better phrase, inadequate. Where the Hummer brand stood for rugged looks and go-anywhere attitude, the Fly Hummer phone stood for neither. The phone was perceived by the market as flimsy and basic, whereas the Hummer brand stood for all else. The Co-Branding was a failure where even Hummer car owners were also turned off by the entire exercise.

Famous examples of fairly successful Co-Branding include ICICI and Hindustan Petroleum Credit Cards, Lease-Plan and Mondial assistance, Intel with major computer manufacturers like Hewellet-Packard, Dell etc., Acer-Ferrari Laptops, Asus-Lamborghini Laptops, Puma-Ferrari merchandise, Fiat-Mattel Barbie Fiat 500, TataSky digital Dish TV, The Global Fund (Red) with various brands like Apple, American Express, Dell, Starbucks, Hallmark, Converse etc., Jack Daniel’s and TGI Friday’s with multiple Jack Daniel dishes, and the list goes on and on. However, failures have included British Telecom and AT&T, Mahindra-Renault, Braun-Gillette Body Shavers, Fly Hummer Mobile Phones, and many more.

Co-Branding, hence, is a double edged sword, with each side being sharp enough to cut through titanium. Organisations have to be very careful while co-branding and aiming for success simply because of the fact that a wrong move can result in stupendous disasters that may plague the brands involved for a long period of time where the organisation may end up spending millions to revive the brand.

Porter created a diamond model which essentially points out four determinants of national competitive advantage – Firm Strategy, Structure & Rivalry, Demand Conditions, Related & Supporting Industries and Factor Conditions. Firm Strategy deals with how the companies within a country are created, managed and essentially how they function, and the nature of domestic competition. Demand Conditions, as the name suggests, talks about the magnitude of demand for the products of various companies in the home market. Related & Supporting Industries refers to the presence of ancillary units to various production units. Factor Conditions refers to the availability and quality of the factors of production.

Porter has given numerous examples of each of the above stated determinants of national strategy. If looked at in isolation, each one can account for the success or failure of industries at once. As a combination, the understanding of these determinants is pivotal for the development of a nation’s industries. What porter has consistently pointed out is the role of government as an agent for propagating change. Governments, on their parts, need to encourage the setting up of various industries and then further encourage them to continually innovate their offerings, and most importantly, stimulate demand for the products in concern. Porter talks about deregulation of industries and how it can prove to be a double edged sword. If an example from India is taken from one of the fastest growing sectors in the country – the Auto sector, one can clearly see the evolution that the country has witnessed in the past 15 years. Post-Liberalisation, the consumer Automobile (Four-Wheelers) industry, which was dominated by the partly Government owned Maruti-Suzuki, and privately held smaller firms Hindustan Motors and Premier, has been on a continuous surge for the past 10 years. This surge is not just in the number of cars sold within India, it extends to the development that has taken place in the sector. From a country which had barely 5 four wheelers to choose from in the later 1980s, we are now at a stage where choices are practically limitless, and not just in absolute terms, also within segments. If one looks at the process, it is clearly understandable that foreign players haven’t been successful unless they’ve set up their production facilities within the country because of the existing duty structure (120% Customs Duty on imports). Companies from the Korean giant Hyundai to the German marquee Bayerische Motoren Werke (BMW) have set up their production facilities in the country because of the support available from the related & supportive industries, the existence of demand and availability of cheap factors of production. In fact, because of the inherent advantages offered by the country, Hyundai Motors India has actually converted India into its global production hub for two of its internationally successful models – the Hyundai i10 and Hyundai i20. This essentially points out the competitive advantage that India holds for Automobile manufacturers, which becomes a win-win situation where in the manufacturers have the advantage of low-cost production without compromising quality, and the country gets the advantage of the internationally updated product offerings and further enhancement of the sector.

However, the competitive advantage of a nation is highly dependent of that of other nations. It is evident that Hyundai would not consider India for a high-end automobile because the country simply does not offer an advantage over the company’s existing facilities in its own homeland South Korea, which is precisely why the high-end Hyundai’s are still produced there and then sold globally.

Reference:

The Competitive Advantage of Nations, Michael E. Porter

Porter mentions the importance of clusters with numerous examples from across the globe, ranging from the Italian footwear Industry, to California’s Wine industry, to the IT industry in Silicon Valley and so on. The striking feature here is the number of support and supplementary industries that have formed on account of the inherent advantages offered by the success of a fragment of the entire Cluster. Essentially, clusters play a major role in innovation through continual innovation and contribute to the foci of the cluster through education, marketing, supporting through ancillaries and so on. Further, Clusters are a hotbed for competition, which also contributes a great deal to innovation as intensity in competition drives organisations to focus more on innovations in terms of the durability of their offerings and cost-related advantages. Another significant attribute of clusters is the fact that they provide a bottomless pitcher of employees through the development of institutions of professional training and research. Not only does this allow organisations in the clusters to infuse new talent into their operations, it also ensures availability of workforce on an as-and-when basis.

On further articulation, a clear cut live example of Clusters and their contribution to competitive advantage can be seen in the Automobile Industry Cluster in the New Delhi & NCR area. It started with Maruti-Suzuki’s first production facilities in Manesar, Haryana and now accommodates two Maruti-Suzuki plants, a Hero Honda plant, Honda Motorcycles and Scooters facility, and a plethora of component manufacturers in the Gurgaon-Manesar area near New Delhi, and Honda Siel Motors and Yamaha India in Greater Noida on the other side of the capital. The factors that have attributed to this cluster are the sprouting of component manufacturers such as Sona Steering, Minda, Apollo Tyres et al around the Maruti-Suzuki facility in Manesar, and of further support organisations in areas of Delhi such as Mayapuri Industrial Area. The fact is, however, that the cluster was essentially instigated by the Government with the set up of the Maruti-Suzuki production facility in Manesar back in the mid-1980’s and the various tax and real-estate benefits offered by both the Central and State governments. This allowed for the set-up of a large number of component manufacturers since importing components at the pre-liberalisation era was just not a cost-effective option. Given the high demand for engineering graduates and management professionals, a large number of institutions were set up both by the government and private players to meet the demand through a never-ending supply of manpower. This essentially further motivated more Automobile manufacturers to set up shop around the area because of the logistical, cost and manpower advantages. A similar pattern can be seen at Pune, Maharashtra as well, which was primarily instigated by the setting up of the Tata Motors plant and Bajaj Motors plant, where the best of Automobile manufacturers are setting up shop, from Volkswagen to Daimler AG.

To conclude, the competitive advantage offered by clusters is highly beneficial for both the constituents of the clusters as well as the government as a whole. It is evident that most manufacturers can source parts from countries such as China and South Korea, but they stick to Indian component manufacturers because of the plethora of advantages offered by them.

Reference:

Clusters and the New Economics of Competition

I hate to admit it, but most of these changes were propagated by one single vehicle – The Suzuki Swift. The Swift came into a market where ABS was the highest level of equipment that was offered on a hatchback (in the Getz, Santro Xing and WagonR at the time). The swift was the first to come with Airbags, ABS and Automatic Climate Control at that time in a hatchback when they weren’t even offered in cars twice the price. The swift packed in an engine which had proved its worth in a sedan – the Esteem. The swift was an all-new car which was launched in India along with the world. The Swift was leaps and bounds ahead of the Esteem in terms of quality and, most importantly, it was accepted by customers. The acceptance part was primarily because of the brand of the car – Maruti-Suzuki. The most reliable, cheapest to run and trustworthy car manufacturer in the country as per the masses. In my last post I had mentioned that the idea of a hatchback for anything above the Rs. 400,000 mark a few years back was a joke. The Swift was the car that blew that mindset into pieces, and did the cha-cha-cha over it.

What’s the point I’m trying to make? The propagator for change, at least in the Indian Auto Industry, is a locally established, trusted and reliable manufacturer. Sure price played a role in whole game, but that really isn’t the point of this post. Even though the Hyundai Getz was a very competitive product and better than the swift in a bunch of departments, people didn’t buy it even though Hyundai had established a stronghold in the Hatchback Segment with the Santro Xing. Question is, WHY?! Very complex situation for a Hyundai, or even a Chevrolet which was planning on launching the U-VA at the time – what the hell do you do to make your cars sell? How do you price it? How do you style it? My answer is that pretty much anything either of them did at the time wouldn’t have harmed the swift in any way because the swift had already had a halo above his head even before it was launched. What made it stick was the fact that it was styled radically and away from anything the Indian Customers had seen before. Heck, people would have bought it for the price even if it came with a 1.1L WagonR engine!  It was truly a historic launch, and has proved to be the change the industry needed. Let’s face it – the Swift is one of the primary reasons for the changes we’ve seen in the industry – whether its airbags being made standard on the new Honda City, or it’s the i10 having an option of Airbags and a Sunroof, or the possible introduction of world-class cars like the Volkswagen Polo, Fiat Punto, Skoda Fabia and many, many more in India. I hate to admit it, but the Swift was the change the Indian Auto Industry needed, and heck, it did it with a bang louder than what any of us could have imagined.

Enter Skoda Fabia, followed by the Hyundai i20 and soon, the Honda Jazz, creating a spanking new segment in the Indian auto market, which I like to call, the SuperMini segment. Hatchbacks for Rs. 600,000 and above, for a market that thinks anything above Rs. 500,000 for a hatchback is absurd! Why get these cars to India? Because there is a market for SuperMinis. These hatchbacks come with features that put most sedans, sometimes twice their price, to shame. Over and above the benchmark of the luxury hatchback segment, the Hyundai i20 comes with 6 airbags, steering mounted audio controls, electric folding mirrors and a bunch of bells and whistles. The Skoda Fabia comes with a sunroof, parking sensors and interiors that can easily be compared to its elder sibling, the Skoda Laura (Priced at over Rs. 1,500,000!). These SuperMinis are high on space and style, with a clear-cut inclination towards pampering the passengers of the vehicle by offering a whole lot more space, comfort and features than most sedans below the Rs. 1,000,000 mark. Sure, the engines are no red hot fire crackers, but that is, to me, the point. These SuperMinis are meant purely for city use. They’re meant for people who already have a big sedan but want a car for everyday use that gives them the luxury they require without being a pain in the neck to drive around and park in the city. They’re mean for people who don’t actually need the extra headache of a boot on their vehicles, but want the luxury feel offered by a mid-level sedan. SuperMinis appeal to a niche market that wants everything that a sedan offers and more, but without a boot! Sure, we’d like them to have more horses under the boot, but given the excise cut they enjoy with petrol engines below the 1200cc mark and diesels below the 1500cc mark are reason enough for them to not be rocket ships. This, however, does not say that these SuperMinis are slouches, they can carry their weight around well-enough, just not well enough to make a Honda City or Ford Fiesta eat some dust.

A question rises here, at least in my head. Why would anyone who doesn’t really give a sparrows feather about a boot, purchase a SuperMini? Well, to start with, the quality and feel of these cars, specifically their interiors, are leaps and bounds ahead of cars like the Chevrolet Aveo, Ford Fiesta and even Honda City in most aspects. This, I feel, is a very conscious effort on the part of the manufacturers of these SuperMinis. I say this because the typical buyer of these SuperMinis, as described previously, is an individual who already has a sedan and is looking for an everyday city car. So pampering this person with interiors of really good quality and feel, combined with all the bells and whistles his/her existing car would already have is essential to act as variable strong enough for him/her to make the purchase. The way I see it, sooner or later, the Indian public will start appreciating the value proposition of these SuperMinis and shift from entry-level sedans to these. However, to give a person like me to spend that extra hundred grand and purchase a SuperMini, they’d have to give at least 20% more horses under that hood.

- © Anish Arora