a comparison between the responses to the economic
TRANSCRIPT
Recession in the automobile industry
A comparison between the responses to the economic
recession of the United States and Europe
Anja Majstorovic
June 11, 2010
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Refocusing of Strategy on existing Resource & Capabilities
and Product Innovation
United States VS Europe
Bachelor thesis Premaster Strategic Management
Name: Anja Majstorovic
ANR: 441981
Supervisor: Dean Hennessy
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Management Summary
This thesis deals with refocusing of strategies due to a falling demand in the automotive industry. It is
illustrated how the US and European car manufacturers tried to recover from the economical crises that
occurred in 2008, by means of refocusing strategy on existing resource and capabilities and product
innovation.
As result of refocusing of strategies firms can implement three types of strategies in difficult economical
conditions, namely Retrenchment, Investment and Ambidextrous strategies (Kitching et al., 2009). Firms
differ in the extent to which they view a recession as an opportunity (Srinivasan, Rangaswamy and Lilien,
2005). Research by Dutton and Duncan (1987) suggest that how an organization perceives a change in
the environment (in this case the recession) significantly affects both the level and the type of response.
Firms that view a recession as an opportunity perceive invest during the recession and firms that consider
the recession a threat respond by conserving resources (Srinivasan et. al., 2005; Rumelt 2008).
Looking at the automobile industry it is noticeable that the recession not only forced manufactures both in
US as in Europe to minimize their costs but also to improve and accelerate their technological
developments. Car manufactures implemented retrenchment strategies by reorganizations and closing
plants, which led to cost reductions. In contrast to retrenchment strategies car manufacturers also
implemented a combination of both retrenchment and investment strategies, namely Ambidextrous
strategies to recover their profitability. By strategic focusing on cooperating and forming alliances with
competitors car manufactures can share knowhow on technological development and this way develop
their capabilities .
The economical recession has had a stimulating effect on further development of clean and fuel efficient
vehicles, since the running costs of these cars are lower. This in addition meets the current requirements
in the need for consumers and companies to spend less money on mobility.
Furthermore it can be said that the US needs to focus more on product innovation based on these
changes, such as hybrid vehicles and invest in alternative energies to keep up with the falling and
changing demand. Car manufacturers that are owing to their competitiveness in small car manufacturing
can consider economic crisis as a new opportunity to take the leap.
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Table of Contents
Management Summary .......................................................................................................................... 3
1 Introduction ......................................................................................................................................... 6
1.1 Problem Indication .......................................................................................................................... 7
1.2 Problem statement ......................................................................................................................... 8
1.3 Research Questions ....................................................................................................................... 8
1.4 Research Design and data collection .............................................................................................. 8
1.5 Overview of the Rest of the Chapters ............................................................................................ 9
2 Re-focusing of strategy .................................................................................................................... 10
2.1 Strategic responses to a recession ............................................................................................... 10
2.1.1 Retrenchment strategies ........................................................................................................ 12
2.2 Automobile industry re-focusing strategy ...................................................................................... 15
2.2.1 US refocusing strategy .......................................................................................................... 16
2.2.2 Europe refocusing strategy .................................................................................................... 18
3 Product InnovationRe-focusing of strategy ................................................................................... 109
3.1 Product innovation ........................................................................................................................ 20
3.2 Innovation strategy ....................................................................................................................... 21
3.2.1 Reaearch & Development ...................................................................................................... 22
3.3 Product Innovation in Automotive Industry .................................................................................... 24
3.3.1 European product innovation ................................................................................................. 25
3.3.2 United States product innovation ........................................................................................... 27
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4 Conclusion and Recommendations ................................................................................................. 29
4.1 Conclusion Problem statement ..................................................................................................... 29
4.1.1 Conclusions Research Questions .......................................................................................... 30
4.2 Recommendations for further research ......................................................................................... 32
References ....................................................................................................................................... 33
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1 Introduction
This thesis is a theoretical approach that deals with the United States (US) and European automotive
industry. This research will help to provide insight in how the US and European automotive industry tried
to recover from the economical crises that occurred in 2008.
Unstable financial markets, rising fuel prices, and increasing taxes are some of the problems faced by the
automobile industry. The US economy and weak dollar conversion rates have contributed to the increase
in crude oil prices. This has a direct impact on the entire automobile industry. The economical crises that
started in 2008 there has led to over-capacity in the global car industry which affected among others, the
US and European car manufacturers. As a result of such market conditions car manufacturers and
dealers have seen a marginal loss in the sales of vehicles. European and US markets have reported huge
losses in the automobile industry. “Failing inventories and a highly volatile employment gauge has
escalated the impact of the recession within the industry. Decline in productivity has resulted in less output
and a shrinking workforce, within the automobile industry” 1.
Because there are a limited number of studies addressing to business responses under recession
conditions, the literature search is based, among others, on research of firms responding to
‘environmental jolts’ (Meyer, 1990). Environmental jolts are “temporary perturbations whose occurrences
are difficult to foresee and whose impacts on organizations are disruptive and potentially inimical” (Meyer
1982, p. 515).
Car manufacturers have to come to a decision how to operate. In this thesis the strategic responses of
the US and the European automobile industry will be illustrated, as they attempt to retain their status in the
market.
1 US Economic Crisis: Impact on Automobile Industry, by Gaynor Borade. Online at: http://www.buzzle.com/articles/us-economic-
crisis-impact-on-automobile-industry.html
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Existing resource and
capabilities Recovering Profitability
Product Innovation
Re-focusing strategy
1.1 Problem Indication
This thesis focuses on the effect of the 2008th economic recession on the automotive industry. It is
illustrated how the US and Europe car manufacturers try catch up with the falling demand of car sales,
which have for one led to huge supplies. By re-focusing the strategy on existing resource and capabilities
and product innovation, their profitability can be recovered.
The economic recession has redefined many modern economies, including the automobile industry. The
automobile industry is one of the significant ones in the world that provides employment to 25 million
people across the globe. The effect of the downside associated with the recession in the US and Europe
since 2008 is easy to recognize within the automobile industry. The automobile industry in the US and
Europe is staggering under the vicious cycle of drooping revenue, job cuts and a deflated fuel economy.
Existing resource & capabilities and product innovation decisions have been playing an important role in
determining a new strategic position due to the falling of car sales.
In a radically changing environment, such as the current recession, the concept of re-focusing on existing
resource & capabilities and product innovation will help to illustrate how the automobile industry tries to
recover from this recession.
The theoretical framework below (Figure 1) gives a clear view of the basis of this thesis.
Figure 1: Theoretical framework
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1.2 Problem statement
Since the economic recession, the main problem for car manufactures is that they need to manage their
over-capacity due to the falling demand.
Therefore, the problem statement is:
How do the automobile industry of the United States and Europe try to recover from the current economic
recession to improve their profitability considering re-focusing of strategy on existing resource and
capabilities and product innovation?
1.3 Research Questions
1. What would be the best way for the US and European car manufactures to refocus their strategy
on existing resource and capabilities?
2. How did the US and the European automotive industry used product innovation to recover from
the downfall of their profitability?
1.4 Research Design and data collection
This research is based on a theoretical approach with the objective to understand the strategic responses
of car manufacturers in the US and Europe during a economical recession. This means the main
concepts, factors and variables are based on leading articles in the field (Sekeran, 2003). The theoretical
framework illustrates the factors that influence the recovery of the profitability for car manufacturers.
It relies on the knowledge and existing articles of relevant researches, literature and consideration of
illustrative examples added by my interpretation. These data are found in well qualified academic papers
and journal articles. The articles and papers are mainly found in the Online Library Database powered by
the University of Tilburg.
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1.5 Overview of the Rest of the Chapters
Chapter two first describes the various strategies firms implement during difficult economical conditions, in
this case the 2008th
economical recession. Researchers show different suggestions on how a firm should
react during a recession. After having discussed the variety of strategies a link will be drawn to the
automobile industry, in which a distinction will be made between the implemented strategies of the US and
Europe to cope with economic recession.
The third chapter focuses on product innovation strategies that firms implement during a slowdown phase.
Second the strategy of product innovation will be linked to the European and US automobile industry and
how it can contribute to improving profitability during a recession.
The final chapter consists of conclusions regarding the problem statement and recommendations for
further research.
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2 Re-focusing of strategy
In this chapter the re-focusing strategies in the US and European automobile industry, due to the
recession, will be illustrated. Because there are a limited number of studies addressing to business
responses under recession conditions, the literature will be, among others, based on research of firms
responding to ‘environmental jolts’ (Meyer, 1990) which in this thesis covers the recession. In this thesis
strategy is defined as ‘the match an organization makes between its internal resources and skills and the
opportunities and risks created by its external environment (Grant, 1991). In the paragraphs 2.1 and 2.2
the theoretical background will be discussed, followed by a linkage to the automotive industry.
2.1 Strategic responses to a recession
In a radically changing environment, such as the current recession firms have different ways of responding
to those changes. Meyer (1982) describes radically changing environments as ‘environmental jolts’;
“a transient perturbation whose occurrences are difficult to foresee and whose impacts on organizations
are disruptive and potentially inimical” (Meyer 1982, p. 515).
A ‘environmental jolt’ such as the 2008th recession, presents an opportunity for strategists to design new
strategies. Grant (1991) argues that when the external environment is in a state of instability, the firms
own resource and capabilities may be a much more stable basis on which to define its identity. Increasing
emphasis on the role of resources and capabilities as the basis for strategy is the result of two factors.
First, as firms’ industry environments have become more unstable, so internal resources and capabilities
rather than external market focus has been viewed as a securer base for formulating strategy. Second, it
has become increasingly apparent that competitive advantage rather than industry attractiveness is the
primary source of superior profitability (Grant 2008, p.125). Developing of capabilities can, for one, be
done by forming strategic alliances. Gulati (1998) defines strategic alliances as; “voluntary arrangements
between firms involving exchange, sharing, or co development of products, technologies, or services.
They can occur as a result of a wide range of motives and goals, take a variety of forms, and occur across
vertical and horizontal boundaries (Gulati 1998, p. 293)
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Past research of Miller (1987) has empirically established that the environment plays a significant role in
reminding firms to adapt, with attendant consequences for firm performance. Bourgeois (1984) in addition
goes further, suggesting that organizations proactively manipulate their environments or create new
environments by exploiting for example technology developments to achieve their objectives.
Drawing upon these viewpoints, Srinivasan, Rangaswamy and Lilien (2005) suggest that firms differ both
in the extent to which they view a recession as an opportunity. According to Jensen (1989) financial
distress can improve a firms value by forcing managers to make difficult value-maximizing choices, which
they would otherwise avoid. Bigelow and Chan (1992) complement that a strategic response to a
recession is no simple matter for most firms, especially for managers. Ghemawat (1993) adds that
recessions complicate managerial decision-making within organizations, because they must weigh the
financial risk of investing against the competitive risk of not investing.
Research by Dutton and Duncan (1987) suggest that how an organization perceives a change in the
environment (in this case the recession) significantly affects both the level and the type of response. Firms
that view a recession as an opportunity perceive that they have control over both the situation and the
resultant outcome, and, therefore, invest during the recession. Firms that consider the recession a threat,
perceive a lack of control over the situation and the resultant outcome, and respond by conserving
resources (Srinivasan et. al., 2005; Rumelt 2008).
Fiol (2001) adds that competitive advantages can exist in dynamic markets only because of the ability of
firms to continuously change, and that sustained competitive advantages are not possible in these
markets. He suggest that these environments evolve so quickly that no sustained competitive advantage
is possible. Eisenhardt and Martin (2000) also argue that sustained competitive advantages are not
possible in dynamic markets. When a firm is able to change quickly, and more alert to changes in their
competitive environment, they will be able to adapt to changing market conditions more rapidly than
competitors, and thus can gain competitive advantage.
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According to Kitching, Blackburn, Smallbone and Dixon (2009), firms resources and capabilities may be
exploited to increase operational efficiency. To leverage these capabilities, firms implement a variety of
strategies, this in addition to alliances.. Teece (1997) argues that proactive firms may be seen as a
manifestation of dynamic capability whereby the firm leverages internal resources and capabilities
(investments) and external constraints (recession) to cope with the changes in the marketplace.
Three types of strategies, elaborated in the paragraphs 2.2.1, 2.2.2 and 2.2.3, that organizations can
implement in difficult economical conditions will be discussed (Kitching et al., 2009).
2.1.1 Retrenchment strategies
Retrenchment can be defined as a set of organizational activities undertaken to achieve cost and asset
reductions and disinvestment of non-core assets (Hofer 1980; Robbins and Pearce 1993; Kitching et al.,
2009). The reason why some business decide to implement a retrenchment strategy is because they
assume it is easier to reduce costs rather than generate additional revenue. According to Pearce and
Robbins (1994) retrenchment is of special importance to small firms during recession.
Bibeault (1982) on the other hand observed significant differences between the "best" performer, the
"average" performer, and the "worst" performer within declining industries. Bibeault (1982) mentions in his
research that well-managed firms either remained profitable or quickly returned to profitable levels of
performance via effective retrenchment and turnaround strategies. Slatter (1984) research adds that in
difficult environmental conditions, firms that engage in retrenchment enjoy a significant performance
benefit over rivals.
According to Geroski and Gregg’s (1997) investments in intangible assets such as R&D and training are
less affected in times of recession, this in addition to declining investments in plant and equipment.
Referring to retrenchment strategies it can be concluded that in times of recession firms focus more on
instant survival rather than on long-term goals and firms often then shorten with managers.
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2.1.2. Investment Strategies
As a contradiction to retrenchment strategies during a recession, there are firms who choose to implement
investment strategies. Such firms perceive a recession as a opportunity to invest, innovate and expand in
order to achieve competitive advantage during the recession. According to Bibeault (1982) the best
performance companies look at a downturn as a time to increase their market positions and make
acquisitions. With available credit, and strategic resolve, these firms aggressively take advantage of rare
opportunities that can result in fundamental changes in the competitive landscape. In most cases, high
quality assets can be purchased at prices well below their actual worth as weaker competitors are forced
to make desperate strategic moves to preserve their companies. Bryan & Farrell (2008) argue that history
has shown that companies can secure competitive advantage during recessions through innovation in
products, services and business models and by entering new markets. They mention in their research that
Rockefeller and Carnegie established dominant positions in the emerging oil and steel industries during
the 1870s recession by taking advantage of new refining and steel production technologies and of the
weakness of competitors.
Investment strategies require resource finance, managerial skills, technical expertise. Firms with limited
resources are less able to implement such investment strategies during a recession.
2.1.3. Ambidextrous Strategies
‘Ambidextrous’ organizations combine incremental change with discontinuous change, or the exploitation
of existing resources to improve efficiency, with exploration of new sources of competitive advantage and
innovation (Tushman and O'Reilly, 1996 p.170). Tushman and O'Reilly (1996) argue that if firms want to
remain successful over long periods, managers and organizations must be ‘ambidextrous’ – able to
implement both incremental and revolutionary change. Such organizations are said to combine
retrenchment and investment strategies. Its expected for firms to combine increased efficiency with
increased innovation. This way firms van position themselves for an upturn. Choosing the appropriate
investments to make and costs to cut, takes on additional importance during recession. To succeed over
long haul, firms have to periodically reorient themselves by adopting new strategies and structures that
are necessary to accommodate changing environmental conditions (Tushman and O'Reilly, 1996).
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Kitching et al. (2009) conclude that ambidextrous strategies offer firms both a short-term route to survival,
as well as a longer-term opportunity to secure competitive advantage, because of the combination of
exploitation (improving efficiency) with exploration (seeking new sources of competitive advantage) that
appear to be an important strategy in recession.
In summary, according to most research it is difficult for firms to choose how to react during a recession,
meaning in a proactive or no-proactive manner. As mentioned earlier, firms that view a recession as an
opportunity invest during the recession and firms that consider the recession a threat respond by
conserving resources (Srinivasan et. al., 2005).
Retrenchment strategies are the most common approach adopted by businesses to deal with recession
conditions, because when revenues decrease it can said that management naturally switches its focus to
cutting costs and maintaining earning. Most firms are more focused on instant survival rather than long
term goals
Referring to investment strategies history has shown that companies can secure competitive advantage
during recessions by investing, such as Rockefeller and Carnegie. However it is still uncertain why
particular firms adopt investment strategies and what the potential risks of attempting such strategies are,
because most firms are not in a financial position to exploit the opportunities that a downturns present
(Bibeault, 1982).
Finally it can be said that firms that are able to implement the so called ‘ambidextrous strategies’ take
advantage of rare opportunities such as competitive mistakes, distress sales, high quality employees who
may suddenly be available, or affiliation / partnership opportunities that could result in a much stronger
business when the market returns to a more normal level.
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2.2 Automobile industry re-focusing strategy
When the 2008th recession started the US and European car manufacturers had to refocus their strategy
to remain profitable. Achieving a competitive advantage is in this case also of great importance for car
manufactures. According to Stalk and Hout (1990) competitive advantage can be obtained by the
capability of industries to rapidly develop new products. Car manufactures who develop innovative
products more quickly than their competitors have this advantage because their current models are more
advanced and include the latest in technology (Stalk and Hout, 1990).
Looking at the automobile industry it is noticeable that the recession not only forced manufactures both in
US as in Europe to minimize their costs but also to improve and accelerate their technological
developments. By refocusing their strategies based on their resource and capabilities, car manufactures
can form alliances, joint ventures and cooperation with their competitors as they try to stabilize and avoid
further slump. However their main goal was still instant survival (Williams, 2009).
US and European car manufactures looked at the recession in the beginning as a threat and responded
by conserving their resources. Though later in recession that the focus shifted from retrenchment to
ambidextrous strategies, car manufactures appeared to improve their efficiency and searched for new
sources of competitive advantage during the recession.
Recession or no recession, cost focus stays one of the major focuses of car manufacturers.
Environmental concerns are also critical elements that are rising on the manufacturer’s agenda. A
challenge gaining increased attention is the rising price of petroleum in the US, which forced
manufacturers to produce fuel- efficient vehicles (Howell, 2000).
Currently the automotive distribution industry is undergoing a profound reorganization because of many
pressures that include saturation of demand and intense competition, falling margins and increasing fixed
costs (especially representation standards), and developments in information and communication
technologies (Buzzavo 2008, p.105)
In the paragraphs 2.2.1 and 2.2.2 the refocused strategy of the US and European car manufacturers will
be illustrated.
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2.2.1 US refocusing strategy
Various factors have had a large influence on the US car sales. According to a interview with David Cole,
a PM Advisory Board Member and Chairman of the Center for Automotive Research, one of these factors
was the dramatic rise in energy prices in 2008 (Webster, 2008). The increasing energy prices caused a
rapid shift in vehicles and had a major impact on the profitability. Cole mentions in the interview that GM,
Ford and Chrysler (Big Three) have relied on SUVs and trucks for the majority of their profits. When
demand for large vehicles dropped quickly and customers went for smaller, less expensive, less profitable
cars, car manufacturers had two major issues to deal with, namely a loss of revenue and a backlog of
unwanted trucks. US car manufacturers need to adjust to these high oil prices by converting their
manufacturing facilities to produce less expensive cars yielding much thinner profit margins (Webster,
2008).
The crisis in the US is mainly defined by government bailouts and takeovers. “The Big Three turned
several times to the government, at the beginning of the recession in 2008, for emergency assistance.
Their first request was to help them respond to the increasing gas prices. Due to these bail-outs the Big
Three could be saved from bankruptcy” 2. For example, GM has decided to close a plant of Opel in
Antwerp eliminating 2,606 job due to the declining demand and shrinking European market. By closing the
plant they seek to return the Opel division to profit. Though in addition to just cutting costs and capacity,
Opel has to develop a strategy to compete on the product side (Jolly, 2010).
In an interview with Umesh Ramakrishnan, vice chairman at CT Partners, he argues that US car
manufacturers have operated in emergency mode, and therefore lose sight of long-term plans (Healey,
2009). The US focused more implementing retrenchment strategies by reorganizations and closing
plants. “They responded to the recession by reorganization and cutting jobs, to meet the challenges of the
suppressed market. General Motors Corporation for example eliminated 30,000 jobs and closed nine
North American plants by 2008 as part of an effort to get production in line with demand” 3.
2 The New York Times, Wednesday, June 8, 2010. Title: Automotive Industry Crisis
3 Associated press, November 21, 2005. Title: GM slashing 30,000 jobs, closing plants
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Gregor Claussen, an automobile market analyst at Commerzbank in Frankfurt, said; “that cutting capacity
is absolutely one of the things car manufacturers have to do to get back to profit” 4.
The industry has, according to Ramakrishna, been focused inward for to long. For example Ford Motor is
now recruiting high-level people outside the auto industry for fresh ideas on cost savings, alternative
energy and software (Healey, 2009). In contradiction to the cost cutting the US car manufacturers also
implemented investment strategies in product innovation and cooperate R&D activity with competitors to
keep up with the recession and future market demands. On of these investment strategies is the ‘new
model implementation’, which include investments in R&D. Due to rising market in China, General Motors
(GM) for instance has re-focused their strategy on the Chinese market. GM was in 2009 the best selling
car manufacturer in China, GM sold 814,000 cars in China in the first half of 2009 - only 130,000 less than
it sold in the US. GM plans to launch more than 30 new Chinese models over the next few years and
expects to be selling two million units a year there by 2014 (Pradeepa, 2009).
“Ford for example has the intent on refocusing their strategy by boosting the assortment of small vehicles
it sells in the US. They adapted some European-market models for U.S. sale, such as the Transit
Connect small commercial van and next year's Fiesta. Ford also has developed others vehicles for global
sale, such as the next-generation Focus” 5 (Healey, 2009).
It can be concluded that US car manufactures need to expand their investment for the development of
environment-friendly car and this way keep up with the changing demand for smaller and fuel-efficient
vehicles.
4 Jolly, D. (2010). G.M. Starts Revamp in Europe by Closing an Opel Plant. The New York Times
5 Healey, J.R. (2009). U.S. automakers need to leave survival mode, look to future. USA Today
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2.2.2 Europe refocusing strategy
European car manufactures also implemented retrenchment strategies by reorganizations and closing
plants, which led to cost reductions.
In contrast to retrenchment strategies car manufacturers also implemented ambidextrous strategies. An
example in which firms combined increased efficiency with increased innovation by choosing the
appropriate investments to make and costs to cut is Fiat. Fiat bought the American Chrysler in order to
reduce production cost per car and get access to the massive US Car market. The US market is expected
to have increasing demand for smaller fuel efficient cars, one of Fiats historical strengths (Bunkley, 2009).
Renault also has benefits increasingly from its cooperation with Nissan. The companies have further plans
for cooperation with Daimler-Benz, sharing platforms (development of the Smart Forfour and Renault
twingo) and engines (Mercedes needs Renaults’ downsized engines ; Infinity needs Mercedes’ high end
engines). Sharing knowledge and development for Electrical vehicles is also seen around various
European car manufacturers (Mufson and Whoriskey, 2009). By cooperating and form alliances with
competitors European car manufactures focused on their capabilities to conserve resources, share risks,
gain new competencies and share technological knowhow (Gulati, 1998; Hamel, Doz and Prahalad, 1989;
Hagedoorn, 1993).
Bonus scheme is another strategy that the European automobile market and government have
implemented to increase the car sales. This bonus consists of a subsidy between the €1,000 and €2,500
(depending on the European country),which the government pays, to anyone who trades in a old car for a
new one. This ‘bonus scheme’ strategy resulted in an immediate 30% increase in new car registrations. A
similar strategy is the so called ‘interest free loans’. Lower carbon emission vehicles are getting in Europe
an interest free loan (Pradeepa, 2009).
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It can be concluded that an important difference between the European and US strategy is, that European
car manufacturers were striving, even before the recession, to realize changes in the market towards
more environmental friendly cars and have tried to adopt these changes. The US in contrast began to do
so when the recession has already started. This has among others led to different results in the European
and US market. These differences will be further elaborated in chapter 3. Analysts, consultants and the
automakers agree that for the long term, the survivors must make electric and other clean-fuel alternatives
their mainstream task, not a niche. Survivors must also defend their home market against emerging low-
cost rivals such as China, India and Russia, while also trying to sell their products in those growing
markets (Healey, 2009).
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3 Product Innovation
This chapter illustrates the product innovation in the automobile industry. Therefore innovation during a
slowdown phase of an organization and innovation strategies will be examined. Second the strategy of
product innovation will be linked to the European and US automobile industry and how it can contribute to
improving profitability during a recession.
3.1 Product innovation
Innovation activity is often cut during recession. Geroski and Walters (1995) found that that innovation
activity tends to vary over the business cycle, with fewer major innovations and patents awarded during
periods of downturn. Businesses undertook considerable organizational restructuring too, although less
than during the immediate pre-recession period which witnessed high levels of merger and acquisition
activity. Teece et al.(1997) mention that winners in the global marketplace have been firms that can
demonstrate timely responsiveness to product innovation, coupled with the management capability to
effectively coordinate and redeploy internal and external competences.
Several studies (Tushman and O'Reilly ,1996; Darling and Box, 1999) argue that innovation is a key to the
success of firms in a pre-slowdown period and acts as a survival strategy in the slowdown phase. Thus,
unlike innovative firms that continue to offer new products and services, non-innovative firms are likely to
face relatively greater growth loss. Similarly, firms that have heavily invested in differentiating themselves
and building brand loyalty are expected to suffer less from the crisis than firms with weak differentiation in
the market place.
Miller (1988) states in his research that there are two different types of differentiation strategies. Namely a
differentiation strategy based on product innovation and one based on intensive marketing and image
management. The first strives to create the most up-to-date and attractive products by leading competitors
in quality, efficiency, design innovations, or style. The second attempts to create a unique image for a
product through marketing practices. Differentiation via product innovation often involves new
technologies, unforeseen customer and competitor reactions, and the confluence of many.
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Technological activities are known to be a crucial factor affecting firms’ growth and competitiveness. They
enable firms to achieve new process development, improved quality of existing products, introduction of
new products, etc. at significant cost reduction.
Before the beginning of the economical slowdown, firms engaged in technological activities like in-house
R&D and acquisition of new technological resources. External sources are on the other hand expected to
be relatively less affected on growth, keeping all other things constant
(Pradhan , 2009).
3.2 Innovation strategy
To take a closer look on product innovation Sanchez (1995) definition of innovation will be illustrated.
Sanchez (1995) defines in his research two sets of related innovation namely; technological innovation;
affect the development and production of products have radically increased the flexibilities in product
creation processes, making possible an acceleration of product creation processes and managerial
innovations; devising new product strategies and new organizational forms that enabled some firms to be
more effective in strategically exploiting the flexibilities of the new technologies in developing, producing,
and marketing products (p. 137).
According to Sanchez (1995) a combination of these two innovations leads to highly competitive
environments which resulted in more aggressive product strategies. In order to keep up in these highly
competitive and dynamic product markets, a solution could be to cooperate with
other firms (Sanchez, 1995).
As mentioned in paragraph 2.2.2 companies can secure competitive advantage during recessions
through innovation in products, services and business models and by entering new markets (Bryan &
Farrell, 2008). Looking at technological product innovation a brief look will be given on Research &
Development (R&D), because R&D plays an important role for car manufacturers in distinguishing their
selves from competitors.
R&D refers to the investigation and experimentation stage of creating a new product or improving an
existing product (Teece et. al, 1997; Opler and Titman, 1994; Berschi et al., 2003).
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3.2.1 Research & Development
A company in an imperfectly competitive market has incentives to constantly improve the quality of its
products in order to avoid vulnerability to potential competitors (Garcia Vega, 2006). Such a quality
improvement can require some diversification of its technological base, that is, firms need to span their
innovative activities over more than one technology (Breschi et al., 2003).
According to Berschi et al. (2003) companies that focus their R&D in a small number of technological
fields can profit from the specialization of their research activities. Secondly, investments in R&D are used
as competitive “weapons” (Baumol, 2002) and they entail some risks for the company. Scherer (1999)
reports that on average, approximately only half of the technological projects that a firm undertakes are
successful.
Additionally, the growing competition (especially in highly innovative markets), technological change, and
the rate of imitation are sources of economic depreciation or obsolescence for the firm’s technology
(“creative destruction”, Schumpeter, 1942).
Geroksi and Greg (1991) argue that much of the discussion in literature has been concentrated on
Shumpeterian hypothesis which argues that large firms with at least some monopoly power are likely to be
more innovative then firms in very competitive industries. Many of these arguments turn on the ability for
monopolists to finance risky R&D form retrained profits. However, theoretical research also indicates that
a monopolist can have less incentive to innovate. Arrow (1962) shows in his research that a competitor
can profit more than a monopolist from innovation.
Collaborative R&D as a response to shifting knowledge environments has been linked to a variety of
positive outcomes including greater firm innovativeness and performance (Rothaermel, 2001). Rothaermel
(2001) mentioned in his research that a number of empirical studies have found support for the notion that
the capacity to recognize, value, assimilate, and apply new external knowledge is a significant predictor of
successful organizational transformation.
In accordance to Rothaermel (2001), Antonelli and Calderini (2008) also include that technological
knowledge is the combination of internal sources, which are derived by learning, and teamwork, and
external sources which are acquired by the purchase of patents or services provided by third parties.
23
The dynamics of R&D collaborations and strategic processes like alliances and product development are
relevant for this research on the response of car manufacturers on the recession (Eisenhardt and Martin,
2000 p.118).
Another important factor which can have influence in encouraging innovation is the government. Over the
past 30 years the range of policy instruments used to support science, technology, innovation and
industrial development has broadened considerably (John and Guy, 1998).
The 2008th crisis has in addition to encouraging innovation, also led to government bail-out of car-
manufacturers, namely in the US. The lower emissions standard have received attention in bail-out plans
that governments around the world introduced to sustain their economies.
In summary it can be concluded that the competitive need for product innovation during a economical
downturn is an important factor for firms. Firms that make consistent investment for R&D during a
recession, have more chance on continuing a constant growth (Tushman and O'Reilly ,1996; Darling and
Box, 1999).
24
3.3 Product Innovation in Automotive Industry
Diffusion of flexible product creation technologies causes product markets to become more dynamic and
competitive, demand for these technologies stimulates further technological development (Sanchez,
1995). As Eisenhardt and Martin (2000) mention is that the extent that some firms in a rapidly changing
market are more able to change quickly, and more alert to changes in their competitive environment, they
will be able to adapt to changing market conditions more rapidly than competitors, and thus can gain
competitive advantage.
To illustrate the most recent innovations in the automobile industry, among others the research on “Car
Innovation 2015” form Oliver Wayman (2007) will be considered. Oliver Wayman is an international
management consulting firm that combines industry knowledge with specialized expertise in strategy,
operations, risk management, organizational transformation, and leadership development. This research
analyzes the complete framework of automotive innovations: societal and governmental influences,
technology trends, the voice of the customer, innovation economics, and innovation management and
strategies.
According to the Oliver Wayman (2007) research it is noticeable the most significant innovation focus in
the automobile industry lays in emissions, fuel efficiency and weight of the vehicles.
The most prominent product innovation on environmental-friendly cars are the hybrid-powered vehicles.
Hybrid technology is very versatile and can be used with all sorts of combustion engines – gasoline,
diesel, natural gas and alternative fuels.
The most current innovation regarding lower emission and fuel efficiency in the automotive industry are
the hydrogen technology and the electric vehicles. The hydrogen technology is a new innovation achieved
by BMW. Waymans research mentions that electric vehicles and electronics will remain the most
important enabler of automotive innovations through 2015 and beyond.
In paragraphs 3.3.1 and 3.3.2 the product innovation strategies that are implemented by the US market
and European market, linked with the recession will be illustrated.
25
3.3.1 European product innovation
In the last ten years European car manufacturers have put their focus on innovating and reducing the CO2
emission of automobiles. In 1998 the European Automobile Manufacturers Association (ACEA) have set a
voluntary goal to reduce CO2 emissions from passenger cars and to improve the fuel efficiency. Another
notable change in European car sales in the past decade is the increasing share of diesel cars. Diesel
engines have lower specific emissions of CO2 than petrol engines (DLR, 2004).
European car manufactures have used and implemented the knowledge of the Japanese automotive
industry to copycat the hybrid technology (Taylor et al., 2008). However their focus was also to stay with
their strengths, which is the diesel-technology.
As Teece et al.(1997) mention in their research, winners in the global marketplace have been firms that
can demonstrate timely responsiveness and rapid and flexible product innovation. European car
manufacturers have in this case responded rapidly in their product development based on CO2 reduction.
The business undertook a considerable organizational restructuring to produce cars with a low CO2
emission, namely the immediate pre-recession period which witnessed high levels of merger and
acquisition activity.
For European car manufacturers product innovation based on producing cars with a lower CO2 emission
was the key to the success during the pre-slowdown (Tushman and O'Reilly ,1996; Darling and Box,
1999). They focused more on differentiation strategy based on product innovation by creating the most up-
to-date and attractive products by leading competitors in quality, efficiency, design innovations, or style
(Miller, 1988). As Miller states in his research, differentiation via product innovation often involves new
technologies, which enable firms to achieve new process development, improved quality of existing
products, introduction of new products, etc. at significant cost reduction.
During the recession it was also noticeable that car manufacturers chose to collaborate to reduce costs
and share knowledge. As Rothaermel (2001) mentions, collaborative R&D as a response to shifting
knowledge environments has been linked to a variety of positive outcomes including greater firm
innovativeness and performance, which the European car manufacturers also believed.
26
As mentioned in §2.2.2 car manufactures like Renault benefit increasingly from its cooperation with
Nissan. By sharing each others knowledge, for one in the field of R&D, they can reduce production costs
and enhance their innovativeness (Mufson and Whoriskey, 2009).
In summary; European car manufacturers have seen product innovation as s key to their success in a pre-
slowdown period. They differentiated product innovation via new technologies and collaboration with
competitors (Pradhan , 2009).
27
3.3.2 United States product innovation
Various factors have had a large influence on the falling demand of car sales and initiative to innovate in
the US. The dramatic rise in energy prices in 2008 caused a rapid shift in vehicle and had a major impact
on profitability (Webster, 2008). As mentioned in §2.2.1 GM, Ford and Chrysler (The Big Three) have
relied on SUVs and trucks for the majority of their profits and therefore have not focused on innovating
and satisfying the upcoming demand for smaller, less expensive and fuel efficient vehicles. When demand
for large vehicles dropped in 2008 and customers went for these smaller vehicles, car manufacturers had
two major issues to deal with, namely a loss of revenue and a backlog of unwanted trucks (Webster,
2008).
In addition to the European ACEA the US has in 1975 established the Corporate Average Fuel Economy
(CAFE) standards which had the goal to protect petroleum. However the CAFE standards has, in contrast
to the ACEA, a mandatory average fuel economy standards for automobile manufacturers. According to
Portney, Howard, Gruenspecht and Harrington (2003) the fuel economy standard for passenger cars have
not been raised since 1985. Therefore it can be said that the US standards are less striving on reducing
CO2 emission compared to the European targets. Figure 2 below illustrates that the average fuel
economy of new cars in the US has not improved since the mid-1980s looking at the year 2000. A reason
for this trend was mostly due to the low petrol prices in the US.
Due to the above described factors US car manufacturers never had the incentive to be innovative and
produce smaller and fuel efficient cars, this in contrast with European car manufacturers. It can be said hat
the CAFE did not stimulate environmental innovation enough in the US automobile industry.
28
Figure 2: New Vehicle Fuel Economy U. S. (1975-2000)
Adapted from Gerard, D. & Lave, L.B. (2005) Implementing Technology-Forcing Policies
In summary, the economical recession has had a stimulating effect on further development of clean and
fuel efficient vehicles, since the running costs of these cars are lower. This meets the current requirements
in the need for consumers to spend less money on mobility.
European car manufacturers realized changes in the market and tried to adopt these changes towards
environmental friendly cars more quickly than the US did.
Further it can be said that the US needs to focus more on product innovation based on these changes,
such as hybrid vehicles and investing in alternative energies to keep up with the changing demand.
Looking at innovation the European car manufacturers perform better than the US car manufactures.
The main reason for this result is due to the large gap between the strictness of fuel-efficiency standards
in Europe and the US. It can be said that the European automobile industry is more progressive in their
product innovation, than the US.
29
4 Conclusion and Recommendations
Trying to recover from the recession by means of refocusing of strategy is a highly difficult process for
the automobile industry.
European automobile companies responded relatively early to the recession that started in 2008. They
aggressively challenged the need for emission controls, and have invested in a range of long-term
technological approaches to emission reductions without committing to production vehicles.
The US automobile industry also had to change dramatically. Before the crisis the Big Three relied on
SUVs and (pick-up)trucks for the majority of their profits and therefore have not focused on innovating and
satisfying the upcoming demand for smaller, less expensive and fuel efficient vehicles. However, when the
prices of automotive fuels started to increase in 2003-2008, the demand for SUVs and pickup trucks
decreased drastically .
4.1 Conclusion Problem statement
How does the automobile industry of the United States and Europe try to recover from the current
economic recession to improve their profitability considering re-focusing of strategy on existing resource
and capabilities and product innovation?
It has been noticeable that US and European car manufacturers responded in somewhat similar ways to
the changes of the recession. They try to recover from the recession by using their resource and
capabilities, retrenchment strategies, ambidextrous strategies and product innovation (Grant, 1991;
Tushman and O'Reilly, 1996; Hofer 1980; Robbins and Pearce 1993; Kitching et al., 2009).
Looking at the automobile industry it is noticeable that the recession not only forced manufactures both in
US as in Europe to minimize their costs but also to improve and accelerate their technological
developments. European and US car manufacturers looked at the recession in the beginning as a threat
and perceived and responded by conserving resources as they focused more on implementing
retrenchment strategies by reorganizations and closing plants. Later on in recession the focus has shifted
30
from retrenchment to ambidextrous strategies. By looking at the recession as an opportunity and
therefore invest during the recession, car manufactures tried to recover their profitability (Srinivasan et. al.,
2005; Rumelt, 2008; Dutton and Duncan, 1987).
As the US and European car manufacturers try to recover their profitability, they have also focused on
their capability to cooperate and form alliances with competitors. By forming alliance firms can conserve
resources, share risks, gain new competencies and share technological knowhow
(Hamel, Doz and Prahalad, 1989; Hagedoorn, 1993).
An important difference between the European and US strategy based on product innovation is, that the
European automobile industries were striving, even before the recession, to realize changes in the market
towards more environmental friendly cars. The US in contrast began to do so when the recession has
already started. This has among others led to different results in the European and US market. European
car manufacturers have seen product innovation as key to their success in a pre-slowdown period. They
differentiated product innovation via new technologies and collaboration with competitors (Pradhan, 2009).
By evolving new strategies, signing up new contracts and joint ventures they tried to stabilize and avoid
further slump. However their main goal at the beginning of the recession was still instant survival.
4.1.1 Conclusions Research Questions
Going back to the research questions, some concluding remarks and perspectives outlines follow:
1. What would be the best way for the US and European car manufactures to refocus their strategy
on existing resource and capabilities?
The best way for US and European car manufactures to refocus their strategy on existing resource and
capabilities can be a combination of retrenchment strategies and investment strategies, namely
ambidextrous strategies (Tushman and O'Reilly, 1996; Hofer 1980; Robbins and Pearce 1993; Kitching et
al., 2009).
31
Firstly car manufacturers need to view the recession as an opportunity and therefore invest during the
recession to achieve competitive advantage (Dutton and Duncan, 1987). According to Stalk and Hout
(1990) the capability to rapidly develop new products is an important source of competitive advantage in
many industries. Car manufactures who develop new models more quickly than competitors have an
advantage because their current models are more advanced and include the latest in technology (Stalk
and Hout, 1990). This effect was noticeable in Europe, which have challenged the need for emission
controls and technological approaches to emission reductions much faster than the US did.
Second, in addition to investing during a recession car manufacturers also need retrench to achieve cost
reductions. “Cutting capacity is also one of the things car manufacturers have to do to get back to profit” 6.
Referring to ambidextrous strategies car manufacturers need to combine investment and retrenchment
strategies, by choosing the appropriate investments to make and costs to cut.
Third, by focusing on their capability to cooperate and form alliances with competitors, car manufacturers
can conserve resources, share risks, gain new competencies and share technological knowhow
(Hamel, Doz and Prahalad, 1989; Hagedoorn, 1993).
Finally, “analysts, consultants and the automakers agree that for the long term, car manufacturers must
make electric and other clean-fuel alternatives their mainstream task, not a niche” 7. However, successful
strategies to cope with recession are likely to be context-specific, varying across industrial and
geographical settings (Kitching et. al., 2009)
2. How do the US and the European automotive industry use product innovation to recover from the
downfall of their profitability?
The US and European car manufacturers have used product innovation to recover from the downfall of
their profitability. The most significant focus on product innovation lays in emissions and fuel efficiency of
vehicles. European car manufacturers have in this case responded rapidly in their product development
based on CO2 reduction, because they have focused on fuel efficiency before the recession.
6 Jolly, D. (2010). G.M. Starts Revamp in Europe by Closing an Opel Plant. The New York Times.
7 Healey, J.R. (2009). U.S. automakers need to leave survival mode, look to future. USA Today.
32
As several studies (Tushman and O'Reilly ,1996; Darling and Box, 1999) argue that innovation is a key to
the success of firms in a pre-slowdown period and acts as a survival strategy in the slowdown phase, car
manufactures also believed this. They differentiated product innovation via new technologies and
collaboration with competitors (Pradhan , 2009). It can be concluded that the economical recession has
had a stimulating effect on further development of clean and fuel efficient vehicles, since the running costs
of these cars are lower. European car manufacturers realized changes in the market and tried to adopt
these changes towards environmental friendly cars more quickly than the US did.
Looking at innovation the European car manufacturers perform better than the US car manufactures.
The main reason for this result is due to the large gap between the strictness of fuel-efficiency standards
in Europe and the US.
4.2 Recommendations for further research
Further research could focus on the various strategies that different car manufacturers have implemented
to catch up with the falling demand. Looking which car manufacturer have remained most profitable during
the recession and how they realized this may be interesting for further research. A case-study can be
performed on the differences between the "best" performer, the "average" performer, and the "worst"
performer within the declining automobile industry (Bibeault, 1982). When comparing the best and worst
performers before and after the recession, it can be investigated whether the “best” performing car
manufacturers indeed remained profitable or quickly returned to profitable levels in contrast to the “worst”
performing car manufacturers (Bibeault, 1982), and what the specific key differentiating factors are.
Another research could extent to the Japanese automotive industry, since Japanese car manufactures
have a first first-mover advantage on the development of hybrid vehicles, which Lieberman and
Montgomery (1988) define as the ability of firms to earn positive economic profits in the pioneering stage.
It can be investigated to what extent the recession affected the competitive advantage of the Japanese
hybrid production in comparison to the US and European car manufacturers.
33
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http://www.msnbc.msn.com/id/10138507/
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at: http://www.nytimes.com/2010/01/22/business/global/22opel.html
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http://www.usatoday.com/money/autos/2009-08-10-us-automakers-future_N.htm