Car Manufacturer

Question:

An Asian car manufacturer currently offers two models in the U.S. market: one mid-level car, and one high-end. It is considering introducing an entry-level car in the US. that it is already selling in various foreign markets. However, these are in markets with different competitors and brands.

In the U.S., there are numerous entry-level cars available for sale. The company would like you to create a positioning strategy for its entry-level model.

It is not clear what the interviewer means by entry-level cars. You have a feeling it has to do with price, but it might include other factors. It’s better to clarify.

Candidate: I would like to start by clarifying the definition of an “entry-level” car. Is this a categorization based solely on price?

Interviewer: No, price is not the only factor. “Entry-level” can be defined on a number of dimensions: type of buyer, standard versus extra options, technical specifications, and price, among other factors. However, for the sake of convenience, let’s assume price is the most significant.

Now you would like to set up the framework for the discussion. The important issues to consider in a market entry case – which is what this is – are all the factors that will influence the pricing decisions. The key external factors are customers and competition.

Candidate: I’d like to look at the following issues in this analysis: the competition, customers, and finally the various facets of a positioning strategy.

Interviewer: Fine.

You can start by asking about the different cars and companies that our client will compete with first.

Candidate: Could you please tell me a little about the competition the company expects to face at the entry-level level?

Interviewer: You can rely on your knowledge of the United States car market.

Better draw on your own knowledge of the car market. The interviewer should let you know, either verbally or nonverbally, that you’re on the right track.

Candidate: I’m thinking of Neons, Hyundai Accents, Saturns – that level of car, with a price ranging between $10,000 and $15,000.

Interviewer: That sounds OK.

Now that you know that you’re in this kind of market, you’re more comfortable with this case. Now you need more information on your customers. How do they select a car?

Candidate: How do our client’s cars differ from the competition? On what factors do the existing mid- and high-level models compete?

Interviewer: The company prides itself on providing maximum value to the customer.

Now don’t jump to conclusions! You know the strategic concept of value – the difference between benefit and price – but you want to make sure the company doesn’t define it differently.

Candidate: And how does it define value?

Interviewer: How would you define value?

If the company had its own definition for value, the interviewer would have probably revealed it. Then again, the interviewer might just be curious to hear what you have to say. Go ahead and apply your definition of value to entry-level cars.

Candidate: Value would be the difference between the perceived benefit of the car and the price that is paid for it. While price is easy to measure, benefit is more troublesome. For a car, value would be a function of a number of attributes: quality, design, brand, specifications, comfort, capacity, maintenance plan and so on. A market research survey can be carried out to measure the value customers would place on a mix of these various attributes. Has the company attempted to carry out any market research to measure perceived benefits?

Interviewer:  Yes, the company has estimates of benefits as a the result of some focus groups it ran recently. Here is a table that gives price (as paid by the consumer) and benefit data for the top three competitors.

Screenshot_2017-07-01-23-29-17.png

This is excellent! You now know the “value” that each of the competitor’s models provides. You can work backwards to compute the price for our client’s model based on the second competitor’s value calculation – since it currently provides the highest value to customers.

Candidate:  From this data, competitor 2 provides the highest value, $3,000. Our client would have to price its model below $8,000 in order to provide a higher value to its customers. Given its cost base, is this realistic?

Interviewer: Why is it necessary to consider cost in making a positioning decision?

This is an easy question. Of course, cost matters, because it’s possible that the firm’s cost is higher than $8,000, in which case it cannot price it at that level. But you’re already thinking ahead. What if this is the case? Then the company could try to lower costs. Or it could try to increase the perceived benefits.

Candidate: Cost would impact the company’s profitability. The optimal pricing decision would actually depend on an estimate of the demand elasticity for this car model. I would recommend that the company increase its market research efforts to estimate demand at different price points.

While the value analysis is useful to provide a benchmark price, the precise price would maximize profitability, given the estimated quantity demanded.

The cost is also important to consider because the company may not be in a position to extend its value maximization strategy to this model, if for instance, this model costs $9,000 to produce.

Interviewer: What should the company do if value maximization is not possible because of a higher cost structure?

Good. You were expecting this question, and you’ve already thought it through. Go ahead and present the two options you were considering earlier.

Candidate: There are at least two things the company might be able to do. The obvious thing is to try to reduce costs. An analysis of the various cost components, such as production costs, shipping and transportation, distribution, marketing and advertising would be a good place to begin.

A second option would be to try to raise the perceived benefit to the customer. This might be possible through improved marketing. It is also possible to add product features to the vehicle that cost less than the incremental perceived benefit. Once again this is a marketing research problem: What is the optimal combination of product features which results in the highest increase in benefit, for the lowest increase in product cost? Third, the company might simply attempt to compete on price and not value, as the cost of its entry-level model is the lowest of all cars at its level.

Interviewer: Are there other issues that the company should consider?

Here’s where you can demonstrate your creativity. Take a few seconds to gather your thoughts if you’d like. There are many additional issues that can be discussed here. You can discuss the fact that the firm could use its experience in selling the entry- level model in other markets. You can also talk about the fact that introducing an additional model has cost benefits: lower overall distribution costs, since the firm already has established distributors; lower advertising and promotion costs perhaps, especially related to overall brand building. With the addition of an entry-level car, the firm can also provide its customers with an option at every stage of life, and try to retain them for their entire lifetimes – beginning with selling them an entry level model, and then presenting them with higher options as they become ready to trade up. You can discuss any of these issues.

Candidate: Yes, a couple of other issues come to mind. The company could cater to customers buying their first car, and then work on graduating them up to higher end models later in life. A negative impact might be some risk of cannibalization with other models, but considering the entry-level model would probably cater to a different customer segment, I would expect the impact of this to be quite low indeed.

A second issue is the fact that the company already sells the entry-level car in foreign markets. It might draw on its experience in those markets, look at the value calculations there, anticipate competitive actions and so on.

 

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s