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1 Torsten Arnold – Market Entry Strategies for Premium SUVs
Strategy Case Study:
Market Entry Strategies for Premium SUVs
Tuebingen 2010/11/29
University of Tuebingen
A case study in the context of the masters seminar
Competitive Strategies
Winter semester 2010/2011
Prof. Dr. Wilhelm Rall
Torsten Arnold
2 Torsten Arnold – Market Entry Strategies for Premium SUVs
Purpose and Organization of the Research
3 Torsten Arnold – Market Entry Strategies for Premium SUVs
Questions to be answered
1. Understanding the context
• What are the driving forces behind the development of
the premium SUV segment?
2. Uncertainty pattern and strategic rationale
• Description of the uncertainty pattern in the years 1993
(MB decision),1998, 2002, 2004 (Q7 point of no return)
• Which strategic rationale, if any, can be assumed
behind the model introduction sequence of the different
OEMs?
• Did Audi make the right decision to introduce the Q7 as
late as 2005?
4 Torsten Arnold – Market Entry Strategies for Premium SUVs
Outline
1. Understanding the context • Economics of the global car industry
• Global dimensions and growth of the premium SUV segment
• Driving forces of the segment
• Opportunities for OEMs
2. Uncertainty pattern and strategic rationale • Model introduction sequences
• Global and OEM specific uncertainty patterns
• Abstraction Process • „Strategic“ market entry
• Generalized Cournot model
• Stackelberg model
• Limited capacities (Kreps/Scheinkman)
• Conclusion Audi
5 Torsten Arnold – Market Entry Strategies for Premium SUVs
1. Understanding the context
6 Torsten Arnold – Market Entry Strategies for Premium SUVs
The automotive industry is a high commitment industry with high
sunk costs and long development cycles of up to 60 months
• Huge investments into new production technology and manufacturing plants are necessary (several 100 Mio. USD)
• Long lead times and development cycles for new models (36 - 60 months)
• High total development costs (1 - 2 Bn. USD) and early initial costs (biggest cost block at launch minus 18 - 24 months)
Point of no return
Figure 1: Development time of new car in months, cost blocks and accumulated costs
in percentage [McKinsey & Company 2010, own graph]
7 Torsten Arnold – Market Entry Strategies for Premium SUVs
Global annual sales by segment: Premium SUV segment is emerging
and yet small, but one of the fastest growing segments
• Automotive industry is a relatively mature industry with moderate to low growth rates
• SUV segment evolved from off-road segment
• Premium SUV market is a very small niche market which was „tailored“ to upcoming customer preferences in the late 1990s
66
50
8,5
3
0,45
0,15
2008
1997
0 10 20 30 40 50 60 70
Premium SUV sales
SUV
Global light vehicle sales
Figure 2: Global light vehicle sales, SUV sales, Premium SUV sales, 1997 and 2008
in million units [McKinsey & Company 2010, own graph]
8 Torsten Arnold – Market Entry Strategies for Premium SUVs
Premium SUV sales are flourishing
0
50
100
150
200
250
300
1997 2000 2003 2006 2008
Europe 0 46 123 258 239
US 15 79 100 120 115
China 0 0 3 9 31
Rest of World 0 16 26 54 60
Th
ou
sa
nd
un
its
* SUV models: VW Touareg, BMW X5 and X3, Mercedes M-Class, Porsche Cayenne, Audi Q7 and Q5
Figure 3, Table 1: Sales of selected premium SUVs*, 1997-2008 [McKinsey & Company 2010, own graph]
9 Torsten Arnold – Market Entry Strategies for Premium SUVs
Very high growth dynamics in the premium SUV segment with remarkable
market performance of German premium SUVs* – yet with global differences
• Stable and significant share of German premium brands in Europe (~20%)
• Premium SUV market with increasing volume based on high growth rates since 1997
• Europe as the leading force in annual premium SUV sales since ~2002
• German premium SUVs with share gains in Europe (2002-2007: 46.5% -> 63.9 %)
• Relatively small market share of German premium brands on the US market (~5%)
• US market is the initial leading force for premium SUV sales, with high growth rates up to ~2002
• Premium SUV segment is growing but on rather moderate growth rates (1997-2008: ~21% p.a.)
• German premium SUVs do not realize share gains in the USA (2002-2007: 22.1% -> 20.4 %)
• Moderate market share of German premium brands in China
• Very high (> 60%) market share in the small but growing Premium SUV market
• Late introduction of German premium SUVs (2003+), since then significant growth rates
• German premium brands have a market share of above 10% in the global car market
• Premium SUVs exhibit a low, but growing share of German premium OEMs total production
(1997: 0.4% -> 2007: 7.3%)
• High growth in the premium segment in general and very high growth dynamics in
particular for premium SUVs.
• Global growth rates of premium SUV segment (CAGR +36% p.a.) clearly outperform non-
premium SUV segment‘s growth rates (CAGR +7%) as well as light vehicle growth rates
(CAGR +2%) (1997-2008)
* SUV models: VW Touareg, BMW X5 and X3, Mercedes M-Class, Porsche Cayenne, Audi Q7 and Q5
Table 2: Premium SUV* share and growth in EU, US, China, World, 1997-2008 [McKinsey & Company 2010, own illustration]
10 Torsten Arnold – Market Entry Strategies for Premium SUVs
Various forces drive the development of the
Premium SUV segment
Customers (demand side)
Capture consumer rent
• Socio-economic/demographic factors (increased purchasing power of upper-
and upper-middle class in developing countries)
• Lifestyle / Personality (Premium SUV = chic, state-of-the-art)
• Trends (Individualisation and differentiation)
Internal organizational perspective • Availability of technological development
• Utilisation of (local) production capacity
• Extent of scale economies (e.g. platform
production)
• Compliance with organizational setup
• Liquidity constraints
• Natural hedging (price pressure, EUR/USD)
Competition of premium OEMs • Expand market volume against trend
• Conquer market share in new or
developing markets (e.g. China, etc.)
• Improve premium brand loyalty +
positioning
• Expansion of model line-up
• Occupy market niches
New segment: Premium
SUVs Government initiatives,
regulations and
legislation
Energy policy, tax relief
plans, reduction in tax
rates, etc.
Environm
enta
l
uncert
ain
ty
Str
ate
gic
uncert
ain
ty
Figure 4: Driving forces of the premium SUV market [own illustration]
11 Torsten Arnold – Market Entry Strategies for Premium SUVs
New growth for premium OEMs in the mature automotive
industry is only possible through expansion of model lineup
and through further global expansion
Imp
roved
mark
et
pen
etr
ati
on
(e
specia
lly in g
row
ing m
ark
ets
)
New products (selective addition to existing product range)
Figure 5: OEM expansion possibility space
[Adapted from: AUDI AG, Rupert Stadler, Sandford Bernstein, 2nd Strategic Decisions Conference, London, 27.09.2005]
12 Torsten Arnold – Market Entry Strategies for Premium SUVs
2. Uncertainty pattern and strategic rationale
13 Torsten Arnold – Market Entry Strategies for Premium SUVs
Model Introduction Sequences: The Three Waves
First-Mover Fast Follower/
Second Mover Late Follower
• M-Class was the first
premium SUV and opened a
new segment
• BMW X5 was already at the
planning stage before the M-
Class was launched in 1997
• For both firms it was very
difficult to forecast the future
in this segment
• Volkswagen and Porsche
launched their models in a
relatively clear market
situation
• The segment was already
established and growing
• Audi was the last premium
manufacturer to enter the
segment with its Q7
• However, they launched a
differentiated type of model,
mainly tailored to the needs
of the US-market
Figure 6: Model introduction sequence of selected premium SUV OEMs [own illustration]
14 Torsten Arnold – Market Entry Strategies for Premium SUVs
Environmental Uncertainty Strategic Uncertainty
OEMs faced different sources of uncertainty
• Regulations
• Technological
developments
• Demand patterns
• Socioeconomic
factors
• Competitive action
and reaction
Figure 7: Sources of environmental and strategic uncertainty of selected premium SUV OEMs [own illustration]
15 Torsten Arnold – Market Entry Strategies for Premium SUVs
Altering uncertainty patterns within the global
premium SUV segment
15 60
84
141 179
200
252
392 407
441
516
445
M-Class X5
Touare
g
Cayenn
e Q7
Crude Oil Price
EUR/USD
1997 2001 2005 2011 2008 1998 1999 2000 2002 2003 2004 2006 2007 2009 2010
Weak US-Dollar
and increasing oil price
Global Sales of premium
SUV`s (in thousand units)
EUR/USD USD
1993 announcement
Level of uncertainty
high
medium
low
Figure 8: Global uncertainty patterns within the global premium SUV segment and selected influencing factors,1997-2008 [own illustration]
16 Torsten Arnold – Market Entry Strategies for Premium SUVs
Mercedes Benz – Environmental uncertainty
High level of
uncertainty:
• New plant
• Foreign market
• New model
• New employees
• High investment
1997 2001 2005 2011 2008 1998 1999 2000 2002 2003 2004 2006 2007 2009 2010
Start of production:
M-Class W163; $
300 Mio investment;
Capacity 65,000
Facelift M-
Class W163
M-Class W164
26.000 additional vehicles
of the M-Class built at
Magna-Steyr in Graz,
Capacity 106,000
Facelift M-
Class W164
M-Class
W16X
Addition $ 80
Mio investment;
Capacity 80,000
Medium level of uncertainty:
• Growing demand
• New investments
announced
• Established model
• Efficient plant
• New entrants (e.g BMW)
Low level of uncertainty:
• Growing sales in the
SUV segment
• Audi as new entrant
• Economic boom
• New model update
High level of
uncertainty:
• Economic
downturn
• Increasing oil price
(Jul 2008 – $
133.90
• Flagging USD
• CO2 discussion
Audi Q7
1993 announcement
Figure 9: Environmental uncertainty for Mercedes Benz 1993-2008 [own illustration]
17 Torsten Arnold – Market Entry Strategies for Premium SUVs
BMW – Environmental uncertainty
High level of uncertainty:
• New production
• Foreign market
• New model
• New employees
• High investment
However: Land Rover‘s SUV
know-how
Start of production:
X5 E53
Low level of uncertainty:
• Growing demand for premium SUVs
• Customers are familiar with the segment
• High investments
• Established M-Class since 1997
• New entrants in the market (e.g VW, Porsche
and Audi)
• Facelift and the announcement of a
new model
High level of
uncertainty:
• Economic downturn
• Increasing oil price
(Jul 2008 – $ 133.90
• Flagging USD
• CO2 discussion
Expanding the
production
South
Carolina, USA:
$ 200 Mio.
investment;
Capacity
140,000+
Facelift X5 E53 X5 E70 Facelift X5 E70
+ $ 750 Mio investment
(X3,X5 & X6 production)
1997 2001 2005 2011 2008 1998 1999 2000 2002 2003 2004 2006 2007 2009 2010
+ $ 300 Mio
investment
Audi Q7 Figure 10: Environmental uncertainty for BMW 1997-2008 [own illustration]
18 Torsten Arnold – Market Entry Strategies for Premium SUVs
Volkswagen – Uncertainty patterns
1997 2001 2005 2011 2008 1998 1999 2000 2002 2003 2004 2006 2007 2009 2010
21.04.2006: Production of
the 250,000th Touareg
Announcement
of co-platform
developement
with Porsche Mass Production
of VW Touareg I
(30. 06.2002) Model
introduction USA
Facelift Touareg I
Touareg II
introduction
Medium level of uncertainty:
• Development of a new
model in a growing
segment
• Cooperation with Porsche
to lower costs
Low level of uncertainty:
• Growing demand for premium
SUVs
• Customers are familiar with the
segment
• Established M-Class since 1997
• Audi also enters the market in
2005
High level of
uncertainty:
• Economic downturn
• Increasing oil price
(Jul 2008 – $
133.90
• Flagging USD
• CO2 discussion
Audi Q7 Figure 11: Uncertainty for Volkswagen 1998-2008 [own illustration]
19 Torsten Arnold – Market Entry Strategies for Premium SUVs
Porsche – Uncertainty patterns
Announcement
of co-platform
development
with Volkswagen
1997 2001 2005 2011 2008 1998 1999 2000 2002 2003 2004 2006 2007 2009 2010
Audi Q7
Model presentation
in Europe -
December 2001
Production plant
Leipzig finished Production start Cayenne I in
Bratislava / Leipzig / Zuffenhausen
(Sept 2002)
Model introduction
USA 2003
~ 270,000 sales
Facelift Cayenne I Cayenne II
launch
Medium level of uncertainty:
• Development of a new
model in a growing
segment
• Expansion of model line-
up, real hedging strategy
• Cooperation with
Volkswagen to lower costs
• Capacity inverstments in
Leipzig and Bratislava
Low level of uncertainty:
• Growing demand for premium
SUVs
• Customers are familiar with the
segment
• Established M-Class since 1997
• Audi also enters the market in
2005
High level of
uncertainty:
• Economic downturn
• Increasing oil price
(Jul 2008 – $
133.90
• Flagging USD
• CO2 discussion
• Decreasing sales
figures on the
Cayenne
Figure 12: Uncertainty for Porsche 1998-2008 [own illustration]
20 Torsten Arnold – Market Entry Strategies for Premium SUVs
Audi seeks to conquer the premium
segment by focusing on prestige
Premium
Traditional
Volume
1994
2005
2015
Progressive
Figure 13: OEM profiles with respect to image and volume and AUDI’s focus on premium image
[ Adapted from: AUDI AG, Rupert Stadler, Sandford Bernstein, 2nd Strategic Decisions Conference, London, 27.09.2005]
21 Torsten Arnold – Market Entry Strategies for Premium SUVs
Audi – Strategic uncertainty
1997 2001 2005 2011 2008 1998 1999 2000 2002 2003 2004 2006 2007 2009 2010
Audi declined platform
development with
VW/Porsche, hence A6
Allroad disaster
Decision to build Q7
on PL71 platform in
Bratislava, Slovakia
Q7 Prototype Detroit
Motor Show
SOP first generation
Q7 in Bratislava ,
Slovakia
New model planned
2011 (CO2 emission
reduced)
Facelift Q7
Low / Medium level of
uncertainty
• Audi was the last premium
manufacturer to enter the
SUV segment
• After A6 Allroad disaster,
cooperation with VW and
Porsche
Low level of uncertainty:
• Ongoing growth demand for
premium SUVs
• Customers are familiar with the
segment
• Established M-Class since 1997
• Cooperation with VW & Porsche
• “Crossover” SUV for the large
U.S. market
High level of
uncertainty:
• Economic downturn
• Increasing oil price
(Jul 2008 – $
133.90
• Flagging USD
• CO2 discussion
Q7 point of no return Approx. 300 Mio. € investment in the
joint production facility in Bratislava
Figure 14: Strategic uncertainty for AUDI 2000-2008 [own illustration]
22 Torsten Arnold – Market Entry Strategies for Premium SUVs
2. Uncertainty pattern and strategic rationale
Abstraction process
23 Torsten Arnold – Market Entry Strategies for Premium SUVs
Abstraction process: „Strategic“ Market Entry (1/5)
First mover (Mercedes-Benz / BMW) • Advantages („The early bird catches the worm“)
• Could face high market demand / monopoly position
• Disadavantages • High innovation costs (R&D)
• Incumbent inertia • locked in to a specific set of fixed assets
• reluctant to cannibalize existing product lines
• may become organizationally inflexible
Second mover / Fast follower (VW / Porsche) • Advantages ("The second mouse gets the cheese“)
• Free rider effects • Buyer education (public education)
• R&D
• Infrastructure development
• Imitation costs < innovation costs
• Lower market uncertainty and better technological opportunities
• Disadavantages • Has to react to first mover‘s commitment
24 Torsten Arnold – Market Entry Strategies for Premium SUVs
Abstraction process: „Strategic“ Market Entry (2/5)
• Late mover (Audi)
„Late movers are companies that respond to a competitive
action, but only after considerable time has elapsed after
the first mover‘s action and the second mover‘s response.“
• Advantages
• Shifts in technology or customer needs
• New technologies (rapid virtual prototyping)
• Even lower imitation costs
• Further resolution of uncertainty
• Disadvantages
• As late movers are the last ones to respond to the first and
second movers‘ actions, late movers tend to be poor performers
and often are weak competitors!
* Quote from: Michael A. Hitt,R. Duane Ireland,Robert E. Hoskisson. 2009. Strategic management: competitiveness and globalization : concepts & cases.
25 Torsten Arnold – Market Entry Strategies for Premium SUVs
Abstraction process: „Strategic“ Market Entry (3/5)
The generalized Cournot-model for asymmetrical firms:
• Profit functions of the firms
• Profit maximization w.r.t. the output yields the market price:
• and the profits:
* Formulas and results from Tirole, Jean, The Theory of Industrial Organization (1998); Stadler, Manfred, Industrial Organization lecture notes
Equation [1]
Equation [2]
Equation [3]
26 Torsten Arnold – Market Entry Strategies for Premium SUVs
Abstraction process: „Strategic“ Market Entry (4/5)
• Starting point in standard Stackelberg model:
• An incumbent i=1 (Mercedes), already established in worldwide
SUV premium market with a first-mover advantage
• A potential entrant i=2 (VW/Porsche), has to pay fixed costs
• For the following profit functions will result in
competition in quantities:
• Stackelberg-solution with the leader 1 and the follower 2 for
* Formulas and results from Tirole, Jean, The Theory of Industrial Organization (1998); Stadler, Manfred, Industrial Organization lecture notes
Equation [4]
Equation [5]
27 Torsten Arnold – Market Entry Strategies for Premium SUVs
Abstraction process: „Strategic“ Market Entry (5/5)
• From a model perspective, we see a first mover advantage for
Mercedes, setting the quantitiy and anticipating the best answer of
VW/Porsche. Best answer function:
• BUT, since the natural market entry barriers are enormously high
a creation of strategic entry barriers is unnecessary
model: a blockaded entry with
• However, VW/Porsche could afford entry costs anyways, worldwide
demand exceeds capacity of incumbent model with limited
capacities needed (Kreps/Scheinkman 1983)
• AUDI can‘t afford for entry into premium SUV segment, until late
cooperation with VW/Porsche to divide among this „platform coalition“
28 Torsten Arnold – Market Entry Strategies for Premium SUVs
Kreps / Scheinkmann (1983):
• Assumption: Technically seen, relatively homogenous goods within the market niche for
premium SUVs
• Capacities as strategic variables
• Prices as tactical variables
Determination of the subgame perfect Nash-equilibrium through backward induction:
1st stage
(strategic var.)
2nd stage
(tactic var.)
1st step
• Determination of the prices on the second stage with alternative
quantitative commitments (capacity) on the first stage
2nd step
• Determination of the optimal capacities on the first stage with
anticipation of the following price determination
3rd step
• Determination of the optimal prices on the second stage, given
the optimal capacity commitments on the first stage
Abstraction process: Limited Capacities (1/5)
Figure 15: Determination of the subgame perfect Nash-equilibrium [own illustration]
29 Torsten Arnold – Market Entry Strategies for Premium SUVs
Fundamental assumptions:
• Standardised market demand function:
• Unit production costs:
• Efficient-rationing rule:
Abstraction process: Limited Capacities (2/5)
* Formulas and results from Tirole, Jean, The Theory of Industrial Organization (1998); Stadler, Manfred, Industrial Organization lecture notes
Figure 16: Shape of the unit cost function [own illustration]
Figure 17: Efficient rationing example [own illustration]
Equation [6]
Equation [7,8]
Equation [9,10]
30 Torsten Arnold – Market Entry Strategies for Premium SUVs
Optimal setting of the price on the second stage:
• The market clearing price with given capacities:
• creates a Nash-equilibrium in „pure“ strategies, if:
Abstraction process: Limited Capacities (3/5)
* Formulas and results from Tirole, Jean, The Theory of Industrial Organization (1998); Stadler, Manfred, Industrial Organization lecture notes
Figure 18: Firm capacity example in pure strategies
[own illustration]
Equation [11]
“Equation” [12]
31 Torsten Arnold – Market Entry Strategies for Premium SUVs
Optimal setting of the price on the second stage:
• for higher capacities Nash-equilibria in „mixed“ strategies (non-deterministic)
• for the Bertrand-equilibrium
• In the SUV case we expect Cournot-results, „mixed“ strategies ruled out
1
1
Abstraction process: Limited Capacities (4/5)
* Formulas and results from Tirole, Jean, The Theory of Industrial Organization (1998); Stadler, Manfred, Industrial Organization lecture notes
Figure 19: Cournot and Bertrand results depending on capacity precommitment [own illustration]
32 Torsten Arnold – Market Entry Strategies for Premium SUVs
• Profit function in reduced (Cournot-) form with
average capacity building costs :
• Optimal capacity dimensioning at the first stage:
• Optimal prices and profits:
Bertrand price competition softened!
Abstraction process: Limited Capacities (5/5)
* Formulas and results from Tirole, Jean, The Theory of Industrial Organization (1998); Stadler, Manfred, Industrial Organization lecture notes
Equation [13]
Equation [14]
Equation [15]
33 Torsten Arnold – Market Entry Strategies for Premium SUVs
Classification into the Taxonomy of Business
Strategies (TIROLE)
Fundamental equation of strategic competition:
(+) direct effect negative investment makes competitor agressive
underinvestment
Assumption:
In the normal case of substitutes
Prices have a strategic complementary character and
quantities/capacities have a strategic substitutive character.
In this case the investment in the strategic variable (capacities) makes
competitors agressive. As prices are strategic complements, companies choose:
puppy dog strategy of peaceful underinvestment
(-) strategic effect,
tactical variables strategic complementary
34 Torsten Arnold – Market Entry Strategies for Premium SUVs
Conclusion Audi
35 Torsten Arnold – Market Entry Strategies for Premium SUVs
Did Audi make the right decision to
introduce the Q7 as late as 2005?
Ex ante
• Low uncertainty • US market already mature
• Europe‘s sales outperforming US sales
• Already 900k premium SUVs sold in total world-wide
• Goal: World-wide leader in the premium segment* • Strenghten core brand
• Historical issue in the USA: Audi 5000
• US market penetration through the premium SUV segment
• New model: Luxurious cross-over SUV (prestige)
• Audi tailored a model to the US market
• Technological know-how (quattro experience, rapid prototyping)
• Product pipeline mismanagement and corporate constraints
* AUDI AG, Financial Report 2006: [http://www.audi.de/etc/medialib/cms4imp/audi2/company/financial_information/pdf.Par.0267.File.pdf]
36 Torsten Arnold – Market Entry Strategies for Premium SUVs
Did Audi make the right decision to
introduce the Q7 as late as 2005?
Ex post
• Too late
• Audi could not capitalize on the first 900k sales
• Brand loyalty problem due to late move in the markets
• Despite late introduction, high growth dynamics and
rapid market penetration from Audi Q7, especially in
the important US-market and later in China
• Establishment of new premium SUV derivative („cross-
over SUV“)
• Late follower strategy was unexpectedly successful
37 Torsten Arnold – Market Entry Strategies for Premium SUVs
Questions
38 Torsten Arnold – Market Entry Strategies for Premium SUVs
Thank you for your attention!
39 Torsten Arnold – Market Entry Strategies for Premium SUVs
Appendix
40 Torsten Arnold – Market Entry Strategies for Premium SUVs
List of Figures
Figure 1: Development time of new car in months, cost blocks and accumulated costs in percentage
[McKinsey & Company 2010, own graph]
Figure 2: Global light vehicle sales, SUV sales, Premium SUV sales, 1997 and 2008 in million units
[McKinsey & Company 2010, own graph]
Figure 3: Sales of selected premium SUVs*, 1997-2008
[McKinsey & Company 2010, own graph]
Figure 4: Driving forces of the premium SUV market
[own illustration]
Figure 5: OEM expansion possibility space
[ Adapted from: AUDI AG, Rupert Stadler, Sandford Bernstein, 2nd Strategic Decisions Conference, London, 27.09.2005]
Figure 6: Model introduction sequence of selected premium SUV OEMs [own illustration]
Figure 7: Sources of environmental and strategic uncertainity of selected premium SUV OEMs[own illustration]
Figure 8: Global uncertainty patterns within the global premium SUV segment and selected influencing factors,1997-2008
[own illustration]
Figure 9: Environmental uncertainty for Mercedes Benz 1993-2008 [own illustration]
Figure 10: Environmental uncertainty for BMW 1997-2008 [own illustration]
Figure 11: Uncertainty for Volkswagen 1998-2008 [own illustration]
Figure 12: Uncertainty for Porsche 1998-2008 [own illustration]
Figure 13: OEM profiles with respect to image and volume and AUDI’s focus on premium image
[ Adapted from: AUDI AG, Rupert Stadler, Sandford Bernstein, 2nd Strategic Decisions Conference, London, 27.09.2005]
Figure 14: Strategic uncertainty for AUDI 2000-2008 [own illustration]
Figure 15: Determination of the subgame perfect Nash-equilibrium [own illustration]
Figure 16: Shape of the unit cost function [own illustration]
Figure 17: Efficient rationing example [own illustration]
Figure 18: Firm capacity example in pure strategies [own illustration]
Figure 19: Cournot and Bertrand results depending on capacity precommitment [own illustration]
41 Torsten Arnold – Market Entry Strategies for Premium SUVs
List of Tables
Table 1: Sales of selected premium SUVs*, 1997-2008 [McKinsey & Company 2010, own graph]
Table 2: Premium SUV* share and growth in EU, US, China, World 1997-2008 [McKinsey & Company 2010, own illustration]
42 Torsten Arnold – Market Entry Strategies for Premium SUVs
Backup charts and information
43 Torsten Arnold – Market Entry Strategies for Premium SUVs
Strategic decision timeline
1993 1998 2002 2004
Mercedes-
Benz
Decision M-
Class
BMW Production X5
Volkswagen Joint Venture
PL71
Production
Touareg
Porsche Joint Venture
PL71
Production
Cayenne
Audi Point of no return
Q7
44 Torsten Arnold – Market Entry Strategies for Premium SUVs
Global Capacity Surplus Worldwide
(all model lines, all OEMs)
Global surplus
capacity approx.
5 million vehicles
p.a.
Approximation based on B&D Forecast, Prof. Dr. Dudenhöffer, 2005
AUDI AG, Sanford Bernstein, 2nd Strategic Decisions Conference, 2005
45 Torsten Arnold – Market Entry Strategies for Premium SUVs
46 Torsten Arnold – Market Entry Strategies for Premium SUVs
Backup: Preisübersicht – Premium SUVs
Smallest Diesel Entry Price
47 Torsten Arnold – Market Entry Strategies for Premium SUVs
Overview Model Lineup
A1 A3 A4 A5 A6 A8 Q5 Q7 TT R8
Mini 1er 3er 6er 5er 7er X3 X5 Z4 Z8
48 Torsten Arnold – Market Entry Strategies for Premium SUVs
Various forces drive the development of the
premium SUV segment
© provenmodels
Market / Customers
• value of firm-specific know-how
• tacit nature of know-how
Environmental variable • country risk
• location familiarity
• demand conditions
• volatility of competition
Competition
• extent of national difference
• extent of scale economies
• global concentration
Development of premium
SUV segment
49 Torsten Arnold – Market Entry Strategies for Premium SUVs
Market entry
50 Torsten Arnold – Market Entry Strategies for Premium SUVs
Key characteristics entry mode alternatives
required resources
co
ntr
ol
exporting
low
low
high
high
licensing
joint venture
wos
tec
hn
olo
gy
ris
k
low
high
required resources low high
exporting
wos
joint venture
licensing
51 Torsten Arnold – Market Entry Strategies for Premium SUVs
Entry mode depends on interplay variables
...
synthesis
1. For certain groups of MNCs reducing
dissemination risk is of vital
importance; e.g. when competitive
advantage is based on proprietary
know-how.
2. when an organisation has multiple
foreign operations optimizing the
portfolio is better than optimizing a
simple market entry decision; e.g.
when market conditions are very
similar and scale economies can be
achieved, a global strategy based on
wholly-owned subsidiaries provides
the highest returns. Reduced strategic
and tactical flexibility from higher
resource commitments is the
consequence from pursuing such a
strategy.
environ- mental
strategic
transaction
52 Torsten Arnold – Market Entry Strategies for Premium SUVs
Entry mode advantages/disadvantages
entry mode advantage disadvantage
exporting • ability to realize location and experience
curve economies
• high transport costs
• trade barriers
• problems with local marketing agents
turnkey contract • ability to earn returns from process
technology skills in countries where FDI
is restricted
• creating efficient competitors
• lack of long-term market presence
licensing • low development costs and risks
• lack of control over technology
• inability to realize location and experience curve
economies
• inability to engage in global strategic coordination
franchising • low development costs and risks • lack of control over quality
• inability to engage in global strategic coordination
joint venture
• access to local partner’s knowledge
• sharing development costs and risk
• politically acceptable
• lack of control over technology
• inability to engage in global strategic coordination
• inability to realize location and experience curve
economies
wholly owned
subsidiary
• protection of technology
• ability to engage in global strategic
coordination
• ability to realize location and experience
economies
• high costs and risks
53 Torsten Arnold – Market Entry Strategies for Premium SUVs
Porter‘s Five Forces Framework
54 Torsten Arnold – Market Entry Strategies for Premium SUVs
Porters Five Forces
55 Torsten Arnold – Market Entry Strategies for Premium SUVs
Mercedes-Benz Backup
56 Torsten Arnold – Market Entry Strategies for Premium SUVs
Mercedes Benz - Overview
M-Klasse W164
(ab 50.873 €)
M-Klasse W165 M-Klasse W163
(ab 32.057 €)
1997 2001
M-Klasse W163
Modellpflege
(ab 43.500 €)
2005 2011
M-Klasse W164
Modellpflege
(ab 52.539 €)
2008 1998 1999 2000 2002 2003 2004 2006 2007 2009 2010
Produktionsbeginn in
Tuscaloosa County,
Alabama,USA:
$ 300 Mio investment;
Capacity 65.000
Addition $ 80 Mio
investment in the USA;
Capacity 80.000
26.000 addition vehicles of
the M-Class built Magna-
Steyr in Graz, particular for
the European Market;
Capacity 106.000
Mercedes Benz
announces a new $ 600
Mio investment in the plant
to bulit M-, R-, GL-Class.
Total annual
production
volume after
expansion;
capacity app.
174,000 units
(including M-, R-
and G-Class)
DaimlerChrys
ler Merger
Daimler sells
Chrysler to Cerberus
57 Torsten Arnold – Market Entry Strategies for Premium SUVs
Medium level of uncertainty:
• Growing demand and
segment (see McKinsey)
• New investments
announced
• Established model
• Working plant
• New entrants
Mercedes Benz – Uncertainty Pattern
M-Klasse W164 M-Klasse W165
1997 2001
M-Klasse W163
Modellpflege
2005 2011
M-Klasse W164
Modellpflege
2008 1998 1999 2000 2002 2003 2004 2006 2007 2009 2010
Produktions
beginn: M-
Klasse
W163
Addition
investment
Addition vehicles Magna-
Steyr in Graz
Announces a new $ 600
Mio Investment
High level of uncertainty:
• New plant
• Foreign country/market
• New model
• New employees
• High investment
Low level of uncertainty:
• Fast growing market
• More competitors
• Established
market/model
• Economic Boom
• New Model Update
• Boom in the SUV
Segment
Medium level of
uncertainty:
• Decreasing sales
• Co2 discussion
• Worldwide Economic
Crisis
• Lower deman
Low level of
uncertainty:
• Boom in China
• Growing demand
• Recurring
economic growth
• New model in
2011
• Established plant
with new model
58 Torsten Arnold – Market Entry Strategies for Premium SUVs
BMW Backup
59 Torsten Arnold – Market Entry Strategies for Premium SUVs
BMW - Model introduction sequence
1997 2001
X5 (E 70)
(from 53.100 €)
2005 2011 2008 1998 1999 2000 2002 2003 2004 2006 2007 2009 2010
Expanding the production
facility for the X5 model in
Spartanburg, South
Carolina, USA:
$200 Mio additional
investment (Total = $800
Mio); Capacity 140.000+
1994: BMW
acquires LandRover
BMW sells LandRover
(excl. Mini) to Ford
Introduction X3
(Steyr, AU)
X5 (E 53) introduced
at Detroit Auto Show
Facelifted X5 (E 70)
(from 54.200 €)
Facelifted X3
(Spartanburg, USA)
X5 (E 53 )
(09/1999)
40.000+ € Facelifted X5 (E 53)
(09/2003)
(from 48.050 €)
+ $300 mio
+ $50 mio
08/2001:
100,000th X5
shipped
09/2007:
100,000th
next gen. X5
shipped
06/2010: 1.0 million
X5 shipped
…
Total invest. value: $3.0
billion. Annual capacity
240.000+
+ $750 mio
60 Torsten Arnold – Market Entry Strategies for Premium SUVs
Low level of uncertainty:
• Growing demand and segment
(see McKinsey)
• New investments announced
• Established model
• Economies of Scale; great plant
• Major investments
• Announcement of facelift model
• But: New entrants/competitors
BMW – Uncertainty Patterns
1997 2001 2005 2011 2008 1998 1999 2000 2002 2003 2004 2006 2007 2009 2010
Medium level of uncertainty:
• New plant
• Foreign country/market
• New model, high R&D costs
• New staff
• High investments
• However: Fast follower +
Land Rover SUV know-how
• Moderate degree of novelty
Low to medium level of
uncertainty:
• Fast growing market
• More competitors
• Established
market/model X5
• Economic Boom
• New Model Update
• Boom in the SUV
Segment
• But: Initial uncertainty
about X3 potential
Medium level of
uncertainty:
• Decreasing sales
• Co2 discussion
• Worldwide Economic
Crisis
Low level of
uncertainty:
• Boom in China
• Growing demand
• Recurring
economic growth
• New model in
2011
• Established plant
with new model
1994: BMW
acquires Land
Rover
BMW sells Land Rover
(excl. Mini) to Ford
Launch of X3 (prod.
in Steyr, AU)
Launch of
facelifted X3
(USA)
+ $300 million + $50 million
+ $400 million
09/2007:
100,000th
next gen. X5
shipped
Launch of
facelifted
X5 (E 53)
$200 million
add. investment
Launch of
facelifted
X5 (E 70)
Launch
X5 (E 53),
USA
Launch
X5 (E 70)
PONR
1 million X5
shipped
Medium:
• Next gen.
model with
2,400 new
parts
• Explosion of
mid-size
SUVmarket
• First mover
for X3 mid-
size prem
SUV
61 Torsten Arnold – Market Entry Strategies for Premium SUVs
1 series 13%
3 series 43%
5 series 19%
6 series 2%
7 series 4%
X3 114.000
10%
X5 75.321
6%
Z4 3%
BACKUP: Product Split of BMW in 2006
by produced vehicles, in total 1.185.088
62 Torsten Arnold – Market Entry Strategies for Premium SUVs
Model introduction sequence of BMW
• History and identy/image of the company • BMW is famous worldwide for cars and as a powerful and respected
brand that means as much to those who do not drive a BMW as those who do.
• "People will not buy products from companies they don't know and don't like," says BMW's Freymann. "Car manufacturers from countries like China will grow from the bottom up. They may become a threat to a company like Ford, but not to us. We are not just selling a car, we are selling an image.“
• Freude am Fahren – sheer driving pleasure
• BMW is one of the best-known brands in the world. The famous blue and white roundel symbol is clear proof that the owner is driving a prestige car (or motorbike). The symbol also identifies the brand as delivering the finest design, technology, engineering and quality available in motoring today.
• How does the model lineup (Modelpalette) look like?
63 Torsten Arnold – Market Entry Strategies for Premium SUVs
Model introduction sequence of BMW
• Model introduction sequence: • When was which model introduced?
• Facelift / new models / product life cycle
BMW X5
• The X5 represents BMW's first foray into the popular sport-utility-vehicle marketplace.
• Billed as a "Sports Activity Vehicle" by its maker, the X5 is designed to handle like a true BMW.
• Unveiled in Detroit at the 1999 North American International Auto Show
• For sale in late 1999
• By the end of its second model year was BMW's second-best-selling model.
• November 2006: Redesignb of E53 - For 2007 the X5 was redesigned with a revised chassis, more powerful and fuel efficient engines and a more responsive 6-speed automatic transmission. Longer, wider and taller than its predecessor, the X5 now offers available 7-passenger seating.
• First X5 (E53) was built between 1999 and 2006: many parts in common with Land Rover (bought in 1994, sold in 2000)
• Next BMW X5 (E70) since 2007
• The X5 heralded the shift from truck-based body-on-frame SUVs to sedan-based crossovers that would come to fruition in the late 2000s.
• BMW describes the X5 as a Sport Activity Vehicle (SAV) rather than an SUV, to emphasize its on-road ability despite its size.
• Expansion of production in the USA is a strategic rationle (natural hedging due to weak dollar) http://www.automobile.de/cgi-bin/deeplink.pl/news/bmw/x3/BMW-will-weiter-wachsen-X6-und-neuer-X3-werden-in-USA-gebaut-19038.html
• With sales of approximately 580,000 units worldwide since its launch in 1999, the BMW X5 has become an outstanding global success and still enjoys great popularity to this day. Of course the U.S. is the market where the X5 has had the greatest impact. Over 240,000 BMW X5s have been sold in the U.S. alone. Read more: http://www.worldcarfans.com/10608086491/new-bmw-x5-unveiled-in-detail#ixzz15NJVDacI
• One millionth X5 produced in June 2010! Sold to China =)
• Built in Spartanburg County (USA), South Carolina. Dense network of suppliers in close proximity!
• Sold on 120 markets worldwide
64 Torsten Arnold – Market Entry Strategies for Premium SUVs
• OVERVIEW • The 1990s was the decade of the four-wheel drive -- boom time for mud-pluggers with a civilised twist
as Australians discovered the people-carrying practicalities of bush bashers. Big-engined power, high seating position, plenty of room, towing prowess and that elusive -- and rarely fulfilled -- dream of conquering Big Red lured thousands into 4X4 sport utility vehicles.
• Prestige brands like Mercedes-Benz and BMW foresaw a demand for upmarket sports utility vehicles (SUVs), not so much for the well-heeled Outback wanderer, but for all those urban needs. Hence the emergence in the late 1990s of the Mercedes-Benz M-class, followed in 2000 by the BMW X5.
• BMW's success with X5 has been unstoppable since launching first with a 4.4-litre petrol V8, followed a few months later by a keenly priced 3.0-litre, six-cylinder model. Since then two more have joined the line-up; the high performance 4.6iS in February 2002 and the 3.0-litre diesel in January 2003. BMW's off-roader, it seems, has come full circle.
• COMPETITORS • Immediate competition for the BMW X5 essentially consists of the Mercedes-Benz M-class. The
cheaper Land Rover Discovery offers a rival for some models, while the more expensive Range Rover features the same diesel and 4.4-litre V8 engine as the BMW.
• Mainstays like the Nissan Patrol and Toyota LandCruiser can't match the X5's refinement or car-like performance, and while the Audi AllRoad TDi certainly can, it can't equal the X5's 2700kg towing capacity.
• Since the start of 2003, the mid-sized SUV market has exploded. Rivals for BMW and Benz now include Honda MDX, Volvo XC90, Lexus RX330, Volkswagen Touareg and even Porsche Cayenne.
Model introduction sequence of BMW
65 Torsten Arnold – Market Entry Strategies for Premium SUVs
Volkswagen/Porsche Backup
66 Torsten Arnold – Market Entry Strategies for Premium SUVs
Audi Q7
Volkswagen – Overview
1997 2001 2005 2011 2008 1998 1999 2000 2002 2003 2004 2006 2007 2009 2010
Prod. / Sales
6343
Prod. / Sales
59.625
Announcement of
co-platform
developement with
Volkswagen
Mass Production of
VW Touareg I
(30. 06.2002)
Model introduction
USA 2003
21. 4.2006: 250 000 st
Touareg V10 TDI 5,0l
verlässt die
Fertigungsstraße
Touareg I Facelift
Modellpflege
Touareg II
introduction
67 Torsten Arnold – Market Entry Strategies for Premium SUVs
Audi Q7
Porsche – Overview
1997 2001 2005 2011 2008 1998 1999 2000 2002 2003 2004 2006 2007 2009 2010
Sales volume
-30% Europe;
-40% USA
Prod. / Sales
24.925 / 20.603
Prod. / Sales
41.149 / 39.913
Prod. / Sales
41.299 / 41.299
Prod. / Sales
35.128 / 34.134
Prod. / Sales
36.169 / 33.943
Prod. / Sales
~46.000 / 45.478
~ 270.000 sales
Prod. / Sales
~36.000 / 35.250
Model introduction
in Europe -
December 2001
Model introduction
USA 2003
Announcement of
co-platform
developement with
Volkswagen
Production
plant Leipzig
finished
Production start Cayenne I in Bratislava / Leipzig
/ Zuffenhausen (Sept 2002) Cayenne nearly half
of total sales!
Facelift Cayenne I Cayenne II launch
68 Torsten Arnold – Market Entry Strategies for Premium SUVs
Audi Backup
69 Torsten Arnold – Market Entry Strategies for Premium SUVs
AUDI Q7- Overview
1997 2001 2005 2011 2008 1998 1999 2000 2002 2003 2004 2006 2007 2009 2010
Audi declined platform
developement with
VW/Porsche, instead A6
all-road desaster
Decision to build
Q7 on PL71
platform in
Bratislava,
Slovakia
Q7 Prototype
Detroit Motor
Show (Jan.
2003)
Start of First generation
(2005- ) mass production,
Bratislava , Slovakia (Aug.
2005)
Introduction Basisversion Q7 (starting at 64000 €),
March 2006, annual plan: 50,000-70,000 vehicles
March: Germany, June: USA and China
Hediging it’s bets with updates
Facelift, Q7 3.0 TDI clean
diesel quattro
(CO2 emission reduced
234 g/km)
Facelift planned
Q7 2011 (CO2 emission
reduced, 195 g/km)
2005/2006(total
production all models:
250.000) [5]
Prod. / Sales
59.008 / NA
Prod. / Sales
27.929 / NA
Prod. / Sales
77.395 / NA
Prod. / Sales
79.169 / 52.771 Prod. / Sales
81.775/ NA
Approx. 300 Mio. €
investment in the joint
production facility in
Bratislava
Q7 point of no return
70 Torsten Arnold – Market Entry Strategies for Premium SUVs
71 Torsten Arnold – Market Entry Strategies for Premium SUVs
The increasing diversity of types of households goes hand in
hand with the increasing number of body derivatives.
72 Torsten Arnold – Market Entry Strategies for Premium SUVs
Internal -> Leader in the Premium segment
vs. Very late introduction of Q7
Resources technology not available and A6
Allround deaster • Eigentliche Kernstory: Konzernstruktur VW/Audi – Dilemma Plattform – A6 Allroad
Desaster
• Das Erbe: Audi fehlen durch die falsche Produktpolitik der Vorjahre Modelle. Mit Rücksicht auf VW und den damaligen Chef Ferdinand Piëch musste beispielsweise der VW-Flop Phaeton vor dem neuen A8 eingeführt werden. Und VW baute den Geländewagen Touareg, der besser zur Premiummarke Audi passt. Erst zum Jahreswechsel kommt jetzt der Q7 (2005/2006).
• Missmanagement in der Produktpalette
• Produktpalette nach oben auffüllen / abrunden
• VW Abhängigkeit / Konzernstruktur VW/Audi – Dilemma Plattform – A6 Allroad Desaster
• New Car concept within premium SUV segment – seven seats, cross-over, US market!
• AUDI gebranntes Kind im US Markt durch AUDI 5000 Automatik Problem („Manufacturing the AUDI scare“ WSJ 1988) Erst 16 später erholt … Vorher kein standing – strategisch in USA reinkommen mit erfolgsmodell
• US Makrt extrem wichtig - Volumen
• Einstieg in Trend „Cross-Over“
• Audi profitiert im Premium SUV Segment ggü. US-Mitbewerbern vom exorbitant steigenden Ölpreis.