Q 43Q 43
Your Integrated Case
Recall in Case 1 that Nick Thomas is the new CEO of Advanced Automobile Concepts (AAC), a new division of a large automobile manufacturer, ZEN Motors. ZEN is a multinational manufacturer headquartered in the United States, and has multiple divisions representing several automobile and truck brands. ZEN's divisions have been slowly losing market share to other competitors.AAC was created to revive the aging ZEN automobile brands by either reengineering existing models or developing totally new models that are more competitive in today's new-car market.
Advanced Automobile Concepts Nick Thomas is CEO of Advanced Automobile Concepts (AAC), a new division of a large automobile manufacturer, ZEN Motors. ZEN is a multinational manufacturer headquartered in the United States. It has multiple divisions representing several auto and truck brands. ZEN's divisions have been slowly losing market share to other competitors. AAC was created to revive the aging ZEN automobile brands by either reengineering existing models or developing totally new models that are more in tune with today's changing automobile market.
Nick is very familiar with the automobile industry, as his entire adult life has been in the business. He follows trade publications carefully and believes ZEN's most significant losses are due to the growing popularity of several foreign brands, particularly brands from Japan and Korea. As CEO, Nick has been given the authority to do what he believes is needed to revive the company's brands and help return ZEN to prominence in automobile manufacturing.
Nick has retrieved company sales data for all ZEN models for the last decade from ZEN's internal reports system, part of ZEN's management information system (MIS). He has accessed the intelligence system to obtain trade industry articles written about the market, including evaluations of top competitors'models. He notices that several highly evaluated models are small and fuel efficient. He also has recognized that foreign competition has severely eroded ZEN's market share of their only large, luxury car brand. ZEN's brand has been around for many years and now fails to compete with the newer luxury car models on the market.
ZEN has been reluctant to move into the very small and highly fuel-efficient market for a couple of reasons. First, historically, ZEN has earned higher profits on larger vehicles. Every ZEN division has a large and extra-large model SUV. Historically these SUV models, ZEN's large trucks, and their larger family cars have been very profitable. Secondly, as sales have eroded in recent years, ZEN has been reluctant to invest the funds needed to develop radically different designs from those models that have been their "bread and butter" cars for decades. However, in recent months ZEN's sales have plummeted as fuel prices have soared. ZEN management realizes they must innovate and that is why they created the AAC division.
Nick Thomas realizes that he must develop innovations in automobile design and engineering, but he is not certain in which direction he should guide his division. He realizes that, for now, oil prices are high and he understands the increases in sales of fuel-efficient gasoline, diesel, and electric hybrids. However, Nick has seen these environmental changes come and go. He tells his younger vice presidents, "When the crises are over, the car buying public wants big vehicles and we have earned our standing in the industry by giving the market what they want." Nick wonders to himself if this oil crisis is here to stay. He has also been concerned about the prospects of real global warming. He's read the reports on climate change and is confused-he doesn't know whether to believe Al Gore or Rush Limbaugh. Nick also isn't certain about the future of alternative fuels. Will the U.S. government really encourage the reduction of the country's dependence on foreign energy? He vividly recalls this being an issue in the 1970s and President Carter calling for a switch to alternative fuels. He also knows that the country didn't follow through on this at the time. Nick wonders if today's promises by politicians of reducing foreign dependence on energy will be forgotten just as it has in the past. Nick is not sure what will happen but he knows that continued high prices of fuel and increasing evidence of global warming will affect consumer behavior with regard to automobiles.
Thomas is concerned about the strategic directionAAC should take. On the one hand, he knows the trend has been toward smaller, fuel-efficient automobiles; but on the other hand, he knows that this may be a passing trend, similar to what occurred in the 1970s when fuel costs soared. This previous spike led to greater demand for smaller cars and diesel engines for passenger cars. However, as soon as OPEC countries lowered their prices, Americans had a growing demand for larger cars for many years. This eventually led to the SUV craze of the 1990s through about 2006. Now, a few years after oil prices again spiked in 2008, he wonders if consumers really believe oil prices will remain high. If consumers believe this, they will probably prefer smaller, fuel-efficient vehicles. If they do not, he believes demand for these smaller vehicles will be a passing fad.
A second issue that concerns Thomas is the market's attitudes toward global warming. He is concerned because even though he realizes the scientific community is in reasonable agreement about global warming, there is enough controversy in the information environment to cause consumers to wonder if concern for global warming is real. Also, Thomas doesn't know how to deal with global warming in terms of the direction he should take with his automobiles. He knows consumers have varied thoughts about global warming. Some believe it is a hoax. These consumers enjoy citing record-low temperatures which appear from time to time. Other consumers believe there may be global warming but it is a natural phenomenon of the earth's temperature cycles. These consumers do not believe mankind contributes to global warming. If either of these arguments-either it doesn't exist or it exists but mankind does not affect it-becomes widely accepted, then global warming will have little effect on automobiles. On the other hand, if consumers believe their automobile exhaust affects global warming and it is a real potential threat to life on the planet Earth, there could be tremendous changes in the types of automobiles desired in the near future. Not long after Thomas was hired as CEO, he hired Marilyn Douglass, former director of marketing research at Nord Motors, who has many years of experience working in the automotive industry. Nord Motors is a major competitor of ZEN. Thomas wanted Douglass on his team because he felt he needed someone to interpret consumers' future automotive needs. He asked Douglass to prepare a report summarizing what she felt were the major automobile alternatives for ZEN to consider. Her report, referred to in the company as the "Douglass Report," outlined the following major alternatives.
Regarding fuels, ZEN should consider only making hybrid autos in the near future. ZEN has another division of top researchers who are investigating new fuels and engines of the future. They have spent considerable time on developing a hydrogen cell but it will be several years before they have perfected a version that will be safe for public use. The rationale for Douglass's decision about hybrids is that some form of electric motor should be used. They are quiet, almost maintenance free, and the cost per mile is much cheaper than present internal combustion engines. But, the problem with all electric vehicles is their poor infrastructure to support the vehicle. For example, an all-electric car will not be useful except in very limited conditions due to restrictions on its range. For now, the range is not sufficient on the best of electric cars for use without the widespread availability of electrical plug-in receptacles needed to recharge the car. This is not something that will change overnight and even if there are plugs available, there must be meters with pay receptacles allowing users to pay for the electricity consumed. This may occur in limited situations but it will be many years before the driving public has such an infrastructure available.
Douglass believes that all electric cars will find a niche in the market but that the range limitation would cap sales. She believes that several manufacturers will enter this business and will develop different vehicles for different purposes. These vehicles will differ in terms of speeds, passenger space and storage payloads, range, and cost. She believes there will be many market entries, competition will be fierce, and no one will get an upper hand on the volume needed to earn respectable profits.
The Douglass Report suggests that ZEN's best opportunity will reside with hybrids that use both electric power and engine power, using either gasoline, diesel, biodiesel, or even CNG. The key to the future was thought to be hybrid cars with an electric motor charged by and alternating with an internal combustion engine. Her best choice for the engine fuel for now is biodiesel simply because diesel engines get higher miles per gallon (mpg) than gasoline and there is not likely to be a major change in the infrastructure needed to make biodiesel widely available. Some form of diesel will be necessary for the trucking industry, for example, for years to come. The Douglass Report recommends that this decision be confirmed by others at ZEN.
The report stated that ZEN's competitiveness will depend on selecting the car designs (models) that best meet market demand. The underlying premise is that all vehicles will need to have high mpg ratings and that demand will differ depending on the size of the vehicles. Generally speaking, the larger the vehicle the less the mpg; so the smallest vehicle will have "very high" mpg and the largest proposed model will have "good" mpg. Some broad choices include:
a. Very small, one-seat vehicle designed to get near maximum mpg
b. Small, two-seat vehicle designed to get high mpg
c. Larger, economy/compact size, four-seat vehicle designed to get good mpg
d. Large, standard size, five- to six-seat vehicle with conventional trunk space designed to get reasonably good mpg
How many of these models will ZEN want to create, manufacture, and market? The Douglass Report explains that there may very well be enough demand to justify several ZEN models. It will be critical to determine which models have the greatest demand. Secondly, Douglass warned that just because we have an energy and environmental crisis, the car-buying public will not be satisfied with one solution. Similar to the market today, there are varied segments and each may prefer a unique model to best satisfy their demands and to determine market segments.
Finally, the Douglass Report discusses the need to market vehicles in the future as efficiently as possible. Two factors are given for the additional efficiency requirements in the future. First, there will be increased competition. Start-up firms will be encouraged by new governmental policies to produce new, energy-saving vehicles. Second, profit margins will be lower on smaller vehicles of the future. As noted earlier, smaller cars traditionally have been priced competitively; they do not have the "higher" price points of some of the larger, luxury cars. Marketing efforts will need to clearly "reach" the market segments with promotional materials without wasting promotional dollars on market segments that are not interested in the vehicle being promoted. Media can be purchased that targets markets based upon knowledge of standard demographic data, such as gender, marital status, number of persons in a household, age, level of education, job category, income, dwelling type, number of vehicles owned/leased, and type of vehicle owned (economy, standard, luxury, SUV, pickup truck, van). Also, dealer locations can be selected based on other factors, such as size of the city. Thomas read the Douglass Report carefully. He believed it was a good point to start the decision-making process, but he needed additional information.
Given what you wrote in question 2, write the research objective.