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Essay: Current trends and drivers for change in the automotive industry

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  • Current trends and drivers for change in the automotive industry
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In a time where the world around us is continually changing, organisations have to constantly adapt to their environment and implement effective changes within. Implementing change effectively requires management and leadership skills. In any organisations, there needs to be leaders as much as there needs to be managers, it is essential for the firm durability. Leaders have a clear vision of change, they think long term and decides of the goals to rich. On the other hand, as stated by Mueller-Eberstein (2012), managers implement the strategic decisions operationally, they communicate and reassure the employees throughout the change.

It is important to take into consideration that only 20% of strategic changes in organisations are successful. According to McKinsey (2014), 70% of strategic changes in firms resume as failures and these can be explained by three main reasons: poorly planned integration approaches, incorrect target identification and delayed implementations. These figures demonstrate that leaders in organisations need different skills and competencies in accordance with their firm’s environment to be able to face the challenges ahead. As stated by Mueller-Eberstein (2012) change is scary, but is needed in order to push the organization forward and to always be ahead of the competition.
Throughout this report, we will analyse the current trends and drivers for change in the automotive industry and how leaders and organisations may respond to it effectively.

1.1 Drivers for change in the automative industry

1.2 Technology and competition

I have chosen the automotive industry in order to further expand how changes affect organisations in this particular industry which is facing interesting major changes.

The automotive industry has always been developing at a fast rate, requiring firms to be able to adapt quickly to its environment. Only 252 years ago, internal combustion cars were created by François Isaac de Rivas (1769). Now, 159 years later, as stated by Wolcott (2017), we assist to the end of Internal Combustion vehicles which are slowly but surely getting replaced by electric cars and autonomous vehicles in response to the climate change. The electric car market share has increased of 54% between 2016 and 2017 and is forecast to increase even more rapidly in the next few years. According to the International Energy Agency forecasts, there will be around 125 million electric cars on the road by 2030. Besides these new technologies and innovations, the price of fuel has increased quite considerably since the 2000s and is expected to persist in the next years (Allcott and Hunt, 2010), pushing consumers to buy electric cars.

The car market is an oligopolistic market, which means the industry is lead by a small number of carmakers. Therefore, it can be really difficult for new companies to entry the market. Competition in the car industry is really tough, as the car innovation progress grows rapidly, companies have to to keep up by offering cars with the highest technology and to constantly renew they car ranges to respond to the competition environment and the consumers demands and needs.

1.3 Consumer behavior

These new trends are the drivers for change and have had a direct impact on the consumers behavior. Nowadays, according to Matousek (2018) consumers are looking for high technological and safer vehicles. Indeed, driving a car is not only an individual form of transport to get from a point A to a point B anymore. Drivers are now looking for vehicles that accommodate performance, safety, comfort and high technology for a reasonable price. This change of demand in the consumers behavior, the new trends (high technological and ‘greener’ vehicles) and the tough competition are the challenges the automotive industry is facing. It is therefore essential for firms of the automotive industry to consider all of these external factors that imply internal changes in order to respond effectively.

1.4 Implementing change

With the objective to react effectively to the changes of the automotive industry, firms will have to make changes within. Managing and leading change are essential skills that an organisation has to have in order to insure its durability. Leaders and managers must work together to come up with new plans and strategies that will insure that the changes will be implemented effectively. As mentioned above, innovations such as electric, autonomous and high technological vehicles, the tough completion and the change in the consumers behaviors will directly influence and impact the organisations dynamic. Accordingly, leaders and managers will have to work within. The first and most important step will be to establish Beckhard and Harris’ Change Management model. This first step is essential to any organizations facing change, this is will help to identify and assess the change, and to implement it effectively within the organization. Leaders will have to decide of new strategies and possibly of a new structure. Managers will have to implement the changes operationally and will have to guide and reassure the staff through these changes. In other words, referring to the Mc Kinsey 7S diagram (Ravasan et al, 2011), managers and leaders will have to figure the right strategy which could solve the problems that have been arising with the obdurate environment changes. Consequently, they will have to figure out which structure will be needed to execute the chosen strategy, as well as they will need to analyse the skills that will be required through these changes. According the the 7S diagram, there will be a need of alignment between these three areas of change.

Change tend to increase the firms’ productivity and service, it brings opportunities. Thus, firms of the automotive industry need to consider these drivers for change as opportunities to increase their knowledge, competencies and flexibility which will enable them to always be ahead of the competition.

2.0 Key areas of change

2.1 Implementing the right strategy, Internal and external diagnostics

A strategy is a plan of action established to achieve a long-term goal or to solve a problem. In order to set up effective strategies, firms need to fully acknowledge their environment. The first step of any strategic decision-making process is to analyse the firm’s micro and macro environment.

Therefore, an external diagnostic based on a PEST analysis (Aguilar, 1967), an internal diagnostic and a SWOT matrix (Humphrey,1960s) will have to be led.

Doing a PEST analysis will enable firms of the automotive industry to understand and to take into account essential elements of their macro environment. The second step will be to carry out an internal diagnostic. It will enable firms to acknowledge their micro environment and to evaluate their actual resources to measure the gap between now and where they want to get. Finally, the SWOT matrix will point out the strengths and weaknesses of the company’s micro environment as well as the threats and opportunities of its macro environment. These diagnostics are essential in any strategic decision-making as leaders and managers need to fully acknowledge their macro and micro environment in order to make the most effective decisions and to implement the right strategy.

According to Gupta (2013), the PEST analysis is a common approach for considering organisations’ macro-environment. Corporations of the automotive industry have to consider their external environment in their decision-making process. Therefore, considering the drivers for change in the automotive industry, leaders will have to take into account these main macro factors among others:

  • Politic: governments around the world tend to taxe « fuel gazzler » cars and favorise low emission vehicles.
  • Economic: fuel prices rising.
  • Social: change in the consumers behaviour, consumers are now looking for highly technological and safer vehicles.
  • Technological: new expanding market of the electrical, hybrid and autonomous vehicles.

Regarding the internal diagnostic, Penrose (1959) identifies three types of resources:

  • Tangibles resources: human resources, financial, material/equipment.
  • Intangibles resources: technological (certificates, patents, research and development costs, etc), organisational (know-how / expertise, organisation’s structure, flexibility, etc), marketing (renown, trade mark reputation)
  • Strategic resources: any resources that constitute a strength to the firm, a competitive advantage over its competitors.

Doing this internal diagnostic will enable firms of the automotive industry to assess their actual resources and to evaluate what resources will be needed in their strategic change process.

On the other hand, the SWOT (Humphrey 1960s) matrix will determine the threats and opportunities of the firms environment.

Consequently, here, the threats of the automotive industry are the tough competition, the new technologies and the change in the consumers behavior. We can also point out, that climate change has had a big impact on the industry as well. This macro factor represent both opportunities and threats for organisations of the automotive industry. Indeed, in response to climate change and the new technological trends, companies are now realising « greener » vehicles, that are electrical and hybrid. This can be considered as an opportunity for the industry as it is the start of a new high potential market. As the fuel prices rise, people are more likely to buy these types of vehicles in the future. However, the threat here, is that to create these new types of cars, companies will have to adapt their technologies, knowledge and competencies which implies heavy costs. Therefore, companies of the automotive industry will have to adapt their strategy.

2.2 Change of strategy

In a market subject to many changes, companies of the automotive industry will have to react effectively by implementing the right strategy. A change of strategy can only be implemented after a deep analysis of the firm internal and external environment. Once the firm fully acknowledge its environment, leaders will have to think of the best strategy to implement in accordance to these macro and micro factors.
According to Porter (1991), implementing the right strategy is a source of competitive advantage. Therefore, it is essential for companies to implement the right one. Porter, identifies two types of strategies: the lower cost strategy and the differentiation strategy.

The lower cost strategy is about making additional profits from cost savings. Dacia-Renault is an example of the automotive brands which has implemented a strategy of lower cost. As stated by Funaru, Dacia-Renault pricing strategy is to maintain their prices at the lowest cost possible with a margin as small as possible. To do so, Dacia cars are manufactured in Romania and their design and features remain qualitative but quite simple. In a competitive environment, Renault-Dacia strategy is to position themselves as a general coast leader on the broad market of the automotive industry. This lower cost strategy implemented by the firm seem to be a success as in 2009, Dacia has recorded the strongest rise in sales of all brands of the Western Europe market, +29,2%. Inevitably, Dacia is currently the most dynamic car brand in Europe. Thus, we can say that Dacia implemented the right strategy in concordance with its environment, vision and objectives. Even though the lower cost strategy is successful for Dacia-Renault, such a strategy has also its disadvantages, there are essential to consider. Indeed, as stated by Root (2018), the lower cost strategy can have a negative effect on the consumer’s perception. Consumers tend to think that low cost products are of little quality. Moreover, a strategy of lower cost implies a heavy investment in production material and requires a great capacity of innovation.

The differentiation strategy, according to Allen (2001), this strategy is about focusing efforts and resources on providing a unique product or service. The differentiation strategy provides high customer loyalty and enables the firms to set a premium price. Although, Allen also states that this type of strategy is only effectively implemented when the firm provides unique and/or high value products or services. The main disadvantage of this strategy is the heavy costs that it implies to produce unique and high quality products/services.

In order to respond to the tough competition of the automotive industry, the new innovations and the change in the consumers’ behaviour, we could think that the most effective strategy to implement for companies of the car industry would be the strategy of differentiation. This strategy would enable cars corporations to come up with new technologies (high-tech, safety features, designs) which would differentiate them from their competitors. By doing so, car companies will have competitive advantages, thus they would stand out from the competitors as well as answering the new consumers demand and needs.

We can point out that Tesla implements a strategy of differentiation. Known worldwide, Tesla is specialised in luxury, high technological, electrical and autonomous vehicles. The Tesla 3 is even considered as one of the safest car in the world according to the last study from the NHTSA after carrying out a side intrusion test. The firm sales its high hand luxury vehicles to a selected target on a niche market, in other words the brand is a focused differentiator. Tesla is a multinational company of turnover worth 3.3 B $ in 2017 and is expected to reach 4B$ in 2018. Its increasing turnover demonstrates of the company’s success and therefore of its strategy of differentiation success.

2.3 Change of structure

According to Mintzberg (1979), a structure is the result of dividing work in several distinct tasks which insure a certain coordination in the workload.

In a complex environment, firms of the automotive industry need flexibility, it is essential for their long-term sustainability. Flexibility will enable firms to quickly adapt to their changing environment and to always be ahead of the competition. As we have mentioned above, the new drivers of change in the automotive industry continually pushes firms to react and adapt effectively to them. To do so, several types of structures exist. Each type of structure is adapted to the organisation’s growth and size. We will here focus on the two main structures that are the most adapted for the turbulent environment of the automotive industry and multinational companies. They make it easier for corporations to respond to market change. These are the divisional structure and the matrix structures.

The divisional structure was created by Pritchard (trouver ref et date), this type of structure consists of organising the firm by departments where the projects and products are governed independently from each other.

  • Flexible, easily adaptable (in case of the creation or suppression of an activity).
  • Decentralised power, enables rapidity in actions, quality of communication, increase employees motivation.
  • Competition can happen between the divisions and therefore can improve their performance.
  • Duplication in departments can cause problems of coordination between them.
  • Risque de perte de cohérence

This type of structure implies heavy costs as it requires allocation of resources for each department.

The matrix structure, created by Galbraith (1970), consists of organising work in projects team, bringing skills and competencies from all across the company. Although there teams projects remain divisions.

  • Flexibility assured by the project teams
  • Pooling of the resources
  • Strong transversal communication which means the information is going through well.
  • Decentralised power
  • Good participation and motivation of the employees
  • Divisional and double functional command can be a source of conflict and requires a lot of focus.
  • Heavy costs due to the structure complexity.

By implementing one these of two structures, firms of the automotive industry will be more flexible. Flexibility will enable them to respond more rapidly and effectively to the quick evolution of the consumers behaviour, the new technologies and the tough competition of the automotive industry.

2.4 Skills needed to implement change.

Implementing change effectively within organisations is challenging for Leaders and Managers. They have to have leadership and managerial skills but most importantly communication skills. In any strategic change the main key to success is communication. According to Hayes (2010), communication is vital in any change process, it enables leaders and managers to create a shared sense of direction. Leaders will have to communicate effectively to avoid reduce resistances to change. Indeed, employees need to know why change is implemented, how and when it will be implemented and finally in which way it will benefit them. Finding the motivational factors will drive employees to work towards that new vision of change.

Accordingly to the firm’s environment and drivers for change, Leaders will have to set the right vision. That vision will need to be clear and effective. Therefore, it will have to be composed of cognitive components that focus on the outcomes and how to achieve them, and of affective components that will help motivate people and their commitment to this vision (Boal and Hoojiberg, 2000). Leaders and managers will also have to make sure employees follow them through the change. To do so leaders have to connect to their staff. But as stated by Maxwell in the theory of the 5 levels of leadership, a title isn’t enough. It’s not because someone is designated as the leader that people will follow him/her. Leaders need to be the person they want their employees to be like, showing them how to be effective, developing their skills and training them will motivate them to work towards the firms objectives. Leaders of the automotive corporations will have to assess on which level of leadership they are in order to work towards getting to that one last 5th level, to which their leadership will be the most effective.

3.0 Conclusion

As we have been able to further understand throughout the report, the automotive industry is subjects to constant changes leading Managers and Leaders to respond to it effectively. Even though strategic changes are scary as only 20% of them are successful, change brings considerable opportunities to firms. The drivers for change of the automotive industry are therefore not only threats but opportunities for firms to develop their skills and competencies creating new competitive advantages that will bring them to always be ahead of the competition. Continual changes in the automotive industry is not only an opportunity for corporations of this industry but also for consumers. These changes pushes firms to continually realise cars with the last technology, enabling consumers to have « large choix de voibure, high tech continuellement ». The reason why the automotive industry has always been evolving rapidly is due to its environmental changes that continually pushes corporations to respond to them effectively, resulting in realising always better and higher technological cars. In order to respond effectively to these drivers of change, managers and leaders will have to respond effectively.

3.1 Recommendations

We distinct three main drivers for change in the automotive industry : the tough competition, new technologies and the change in the consumer behavior. To respond to these drivers for change, corporations will have to work within, on 3 main keys areas. Once corporations fully acknowledge their environment, Managers and Leaders will have to decide of the right strategy in accordance with the right structure to implement. They will also have to determine what skills and qualities will be needed to lead the change process successfully. Change is only effective when the right changes are applied within but it also goes with that Leaders and Managers have to have the right skills and qualities. A good leader implement a clear and right vision to create a sense of shared values that will drive employees to work towards the firms aims. As stated by McKinsey (2014), a clear vision more than double corporations success in strategic change. Leaders will have to connect to their employees, show them how to be effective and how change can benefit them. Good communication and leadership skills will tremendously help reduce resistances to change, which are the main cause of strategic change failure. Reducing these will increase the chance of strategic change success.

These qualities and skills are key to success to sustainable responses to change. By implementing the right strategy, the right structure and with good leaders and managers, corporations of the automotive industry will be able to face its environmental changes.

26.11.2018

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