ANALYSIS of HYBRID CARS

CASE ANALYSIS HYBRID CARS

Date: November 9, 2005 For: Prof. Zwick

Group #3 Xiang Chen John Farcich Christopher Irwin Lori Rayner Weijie Yang

1 APPROACH

Our approach is from the perspective of the product category of hybrid cars, which we define broadly as: “automobiles that do not use traditional fossil fuels as the primary source of energy.” (NOTE: Mild hybrids do not qualify under this definition.)

PROBLEM STATEMENT

Although the technology for hybrid cars is ready, the problem facing this product category is: How to increase sales of hybrid cars in Canada and the U.S.?

The main cause of this problem appears to be (1) lack of awareness and (2) insufficient stimulus for consumers to choose a hybrid vehicle over a standard combustion-engine vehicle.

UNDERLYING ISSUES

There are a number of contributing factors that shape our analysis, many of which we deal with in the following Product and Industry analyses. These are:

. Limited sales volume inhibits the economies of scale that enable price parity with fuel-

consuming cars.

. Consumers are unfamiliar with the technology, the product, and the ownership experience.

. Actual limitations exist with the technology compared to existing cars.

. Some economic/political segments may thwart efforts to change oil-consuming behaviour.

2 PRODUCT ANALYSIS

Since the time of the case writing, hybrid cars have entered “prime time” from a function

standpoint. The following illustrates strengths and weaknesses of hybrid cars:

Strengths Weaknesses Instrumental in meeting “clean air” Environmental value proposition insufficient in legislation by reducing harmful chemical persuading consumers to purchase hybrid cars. emissions Outward/performance parity to existing Emergent user, complement and producer automobiles networks Overall efficiency (e.g: more efficient in Unfamiliarity as a concept and some stark converting fuel to power vs. traditional cars) operations differences (e.g. “silent idling”) Expensive to produce/limited economies of scale Perception of technological transience (e.g. “stop gap” or stepping stone toward fuel-cell vehicles)

NETWORK ANALYSIS

User Network - The potential user network for hybrid cars consists of both individuals and

companies. The strategic value of the inroads into “fleet” markets (trucks, etc.), is minimized

because these user groups appears rather closed. A larger user network is the key inhibitor to the

success of this product.

Complements Network - The complementary network has several subsets.

Fuelling/recharging network: Although the hybrid does not completely eliminate the “gas

station,” it does minimize its importance. The replacement is locations that allow for

“recharging” while cars are not in use. A number of locations could form this network with

electric outlets; whether in people’s garages, parking lots, offices, shopping malls, etc.

Parts and repairs (including emergency response): This complements network could develop

more easily, as more similarities exist between the current parts/repair network of dealer shops,

3 gas stations or other independent operations. The ties to the Producer Network will likely make this more easily adopted. Any increase in ensuing dangers following vehicle collisions will have to be mitigated through the necessary public sector/ public service channels. (e.g. first-response teams handling a car crash involving hybrid or fuel-cell vehicles).

Roads and infrastructure (including parking and drive-thru): This network is largely supported chiefly by municipalities, which could provide leverage for governments to further the initiative in order to serve environmental objectives. Again, this network will be almost identical to the existing network that supports fossil fuel burning vehicles. Potential differences may exist should novel designs (e.g. Smart Car) persist.

Producer Network - The producer network appears to have the least threat of change should there be widespread acceptance to non-traditional automobiles. Increases in demand will provide motivation for car manufacturers to invest in new types of vehicles to capture first- mover advantage. At the time of the case, the producer network included primarily Toyota and

Honda, but there are currently offerings by all the major car manufacturers, including General

Motors, Daimler-Chrysler (with Smart) and Nissan.

STAKEHOLDERS ANALYSIS

Due to the positive environmental effects of widespread use of hybrid car, humanity at large is a key stakeholder. The movement toward these vehicles can count on strong support from environmental organizations, and from the scientific community. Support from the public sector will vary with public opinion, as well as with the effectiveness of lobbying efforts from

4 various industry stakeholders. Resistance will come from industries—and countries—that rely

heavily on oil and gas resources.

STAKEHOLDER POSITION VIS-À-VIS HYBRID CARS Policy makers (Governments levels) Varies Environmentalists Favourable Scientists Favourable Car manufacturers Favourable Oil producers Opposed Oil distributors Opposed Consumers/Society Neutral/TBD

INDUSTRY ANALYSIS

Each producer may approach this new market opportunity differently, but the overall

environment presents the following Opportunities and Threats. (See Appendices A & B)

OPPORTUNITIES THREATS Vast potential market (car sales in the Retaliation from oil producing network U.S. in 2000 topped 17M units) Curry favour with municipalities by Reduction in the overall car market due to reducing metropolitan pollution limitations of urban infrastructure Curtail supplier power of oil producing Inability to achieve economies of scale network necessary to make hybrid cars profitable

CRITERIA FOR EVALUATION1

In order to evaluate the alternatives that will successfully address the root cause of the main

problem, we have developed four criteria.

1. DOES IT CREATE A COMPELLING REASON TO BUY?

This addresses the main problem, and identifies whether the alternative will provide the sales lift

that will help auto manufacturers to achieve necessary economies of scale.

1 Moore, G. A.; Crossing the Chasm

5 2. DOES IT SIGNIFICANTLY INCREASE FAMILIARITY FOR EARLY MAJORITY?

Increasing familiarity (awareness) for early/late majority will definitely help overcome the

chasm, which is essential for a new product to achieve success in mass market.

3. WILL IT PROVIDE A BREAKTHROUGH WITHIN 5 YEARS?

Since the hybrid car is a “stopgap” between current traditional cars to fuel-cell cars, it is essential

for hybrid car manufacturers to catch the marketing opportunity in the near-term.

4. IS THERE A REASONABLE COST/BENEFIT RETURN?

When we evaluate the alternatives, we will also consider the cost and benefit. Increasing sales is

not the only goal. Objectives should be achieved in the context of reasonable implementation

cost and profit margin.

ALTERNATIVE I – BOWLING ALLEY

In this alternative, car companies will invest and cooperate with transportation-related

businesses to increase exposure to consumers. In order to increase the awareness and encourage

trial, we can use this “bowling alley” strategy2 to win related groups of customers.

One of the obstacles for hybrid cars to become a mainstream product is the lack

familiarity, which hinders sales. The technology perception is at the product level now. By

experiencing the vehicles performance first hand, this can move to the process level, and the

consumer will see the parity to traditional automobiles.

PROS CONS Increase the exposure of hybrid cars to the public High cost associated with companies purchasing hybrid cars Consumers have the opportunity to experience the It takes a relatively long time to build consumer hybrid car i.e.: taxi’s familiarity

2 Geoffrey A. Moore – Crossing the Chasm: Marketing and Selling High Tech Products to Mainstream Consumers

6 ALTERNATIVE II – LOBBYING THE NETWORK

Under this alternative, Governments and other Network participants will provide

incentives for consumers to buy hybrid cars and impose penalties on owning gas-consuming

vehicles. For example, the Government will provide more favourable incentives for hybrid car

buyers (tax credits, special road rights, and free parking) and to manufacturers (subsidies). At

the same time, the Government will also impose penalties on gas-consuming car buyers: parking

restriction in certain areas; driving restriction in certain areas; and punitive taxes for emission

generating cars.

PROS CONS Consumers will have incentives to purchase hybrid Requires a strong lobbying effort, in order for cars (high potential to inc. sales) gov’t to introduce this type of program Automakers can also implement programs. i.e.: Counter lobbying and delays higher trade-in value for hybrid buyers. Automakers will have monetary incentive to Actual result highly contingent on lobbying impact produce more hybrid vehicles. on policies (cost/benefit)

ALTERNATIVE III – PUBLIC AWARENESS

The third alternative deals primarily with education and promotion. Under this

alternative, education will be offered to mass consumers. For instance conferences will be held

to promote the benefits of driving a hybrid car, mass marketing campaign such as TV shows,

magazine, newspapers, online and radio broadcasting will be organized to educate the consumers

and promote the use of hybrid cars.

7 PROS CONS Easy to implement – players in car mfg Education and environmental conciseness are industry can create promotional/ awareness not the main factors for consumers. Without campaigns together, as well as by themselves. concrete and monetary incentive, the impact of the promotion will be limited. The cost is relatively low in comparison to A one-time marketing and educational other alternatives. campaign will not be enough to create awareness of hybrid cars to mass consumers.

EVALUATION OF ALTERNATIVES AND RECOMMENDATION

Compelling Familiarity Time Cost and Total reason benefit score Bowling Alley 2 3 3 2 10 Lobbying Network 3 2 2 2 9 Public Awareness 1 1 1 2 5

BOWLING ALLEY STRATEGY WINS

IMPLEMENTATION

According to Geoffrey A. Moore, many business plans are based on traditional

Technology Adoption Life Cycle (TALC).3 TALC is a smooth bell curve of high tech

customers, progressing from Innovators, Early Adopters, Early Majority, Late Majority, and

finally Laggards, with a “chasm” between Early Adopters and Early Majority.4 Right now, the

market for hybrid car is right in the chasm.

In order to cross the chasm, it is essential to win the pragmatists (as opposed to

technology enthusiasts), who require is a 100 percent solution to their problems- the whole

product. According to Moore, the winning strategy is to identify a single beachhead of

pragmatist customers in a mainstream market segment and win a niche foothold (e.g.

referencable customer) as quickly as possible – this is what is meant by crossing the chasm.

3 Ibid 4 Ibid

8 The following questions server to evaluate a segment within the Early Majority

(Example: Taxi companies)

• Q1 -Is the target (taxi companies) well funded and accessible to our sales force?

- Yes, in fact taxi companies typically replace its taxis every three to five years.5

- Q2 - Do taxi companies have a compelling reason to buy a hybrid car?

- No, not yet. We need to develop a compelling reason. E.g.: save on gasoline costs,

protect environment (environmentally conscious company).

• Q3 - Can manufacturers today, with the help of partners, deliver a whole product?

– Yes, but car manufacturers must still work on it. (e.g. Complements network)

• Q4 – Could an entrenched competition prevent a fair shot at this business?

– No entrenched competition exists.

• Q5 - If this segment is won, can it be leveraged to enter additional segments?

– Yes, it can be leveraged to other related segments, increasing exposure to consumers.

Therefore, our implementation plan is as follows:

1) Identify companies that are potential partners to build familiarity with consumers.

1 Taxi companies 2 Rental car companies 3 Utilities companies 4 Driving schools 5 Delivery Fedex, etc. 6 Restaurant delivery (i.e.: pizza) 6 Buses (public/school) 7 Any other car fleet company

Note: Ranking is in order of importance for building familiarity with consumers. We discuss the TOP THREE prospects below.

5 Gillbert and Schaller. “Fixing New York City Taxi Service”. Accessed from: www.schallerconsult.com/taxi/taxi3.htm. Nov 1, 2005.

9 Taxi Companies: Taxies are not only our moving advertising medium, but also they are able to provide people with real hybrid riding experience. Once people have the same experience when traveling in a hybrid vehicle as they would in a traditional car, they will have increased confidence in the cars, moving the perceived technology from the product to process level.

Car Rental Companies: After penetrating the taxi segment, manufacturers should target car rental companies. These companies also have high exposure to the public, as well; they enable consumers to have a first hand experience driving the vehicles.

Utility Companies: These are the companies that also have high exposure to the public i.e; Bell

Canada, Rogers, Enbridge and Toronto Hydro. As people see these utility companies’ hybrid vehicles more often, they will get familiar with hybrid cars.

2) Identify unique needs of each company:

Taxi Companies Rental Car Companies Utility Companies Often stop and go traffic (mostly Stop and go traffic and hwy Larger vehicles – truck and vans in-city) driving More efficient use of gasoline Assistance/info will be required Customized interior to fit tools can save them money. for new users and equipment. Vehicles need to be comfortable Vehicles need to be comfortable

3) Offer tailored incentives to each company:

Taxi Companies Rental Car Companies Utility Companies Work with gov't/ municipalities Work with gov't/ municipalities Work with gov't/ municipalities to offer cars at a subsidized cost to offer cars at a subsidized cost to offer cars at a subsidized cost Providing hybrid training to all Providing training to all staff on Providing hybrid training to all drivers / company mechanics hybrid vehicles drivers / company mechanics Extended car maintenance Extended car maintenance Extended car maintenance agreements agreements agreements Encourage bulk purchase - i.e.: if Provide one page training Q & A company buys 20 cars, get 1 "cheat sheets" for all rental car complimentary vehicle drivers.

10 4) Create a public relations campaign to leverage the press (television, newspapers and

magazines), in general and for each market, to promote environmental friendliness.

Taxi Companies Rental Car Companies Utility Companies Paint taxi green to symbolize Put a sign/logo on hybrid cars Put a sign/logo on hybrid cars that it is an environmentally to symbolize that is an to symbolize that is an friendly vehicle. environmentally friend car. environmentally friend car.

CONCLUSION

We believe that alternative I provide “whole products” for a segment of customers. As a

result, this will enable manufacturers to build familiarity with consumers. The goal of this

implementation plan is to target the pragmatists. When pragmatists adopt the hybrid car, it will

become a mainstream product. As more and more customers buy hybrid cars, manufacturers can

achieve economies of scale and therefore lower their cost significantly.

Lower cost will again encourage the purchase of hybrid cars, and then it becomes an

upward cycle.

11 APPENDICES

Appendix A PESTE Analysis

POLITICAL - Favoured

Political factors include government regulations and legal issues and define both formal and informal rules under which the firm must operate.

1. Tax credit to those who purchased a hybrid vehicle favours its introduction to US market.

2. Dependence on foreign oil increased from 8% to 52%. Hybrid cars could be a solution to

reduce the dependence.

3. Federal government began legislating emission controls. The first attempt was the Clean Air

Act in 1970.

4. CAFE calls for fuel efficiency.

5. CARB mandated that by 1998, 2% of all passenger vehicles sold in California had to be

“Zero emission” vehicles.

ECONOMIC - Not favoured

Economic factors affect the purchasing power of potential customers and the firm's cost of capital.

1. Purchasing power of potential customers are increasing but not to a degree for customer to

buy at a $5000 price premium.

2. Cost of manufacturing hybrid vehicle is still $4000 and $5000 above the cost of

manufacturing a comparably outfitted gasoline-only vehicle.

SOCIAL - Not favoured

Social factors include the demographic and cultural aspects of the external microenvironment.

12 1. Price premium about $5000. Demand is still low. The combined sales of the two vehicles

still amount to only about 17000 units per year

2. Sharp increases in gasoline prices caused consumers to seek out smaller, more fuel-efficient

vehicles.

3. Environmental consciousness caused some consumers to question the logic of a vehicle that

got only 10 MPG.

4. Light trucks- SUVs and minivans are favoured both by customers because of their visibility

and crash protection and by manufacturers because of their high profit margins.

5. It was unclear that consumers were as committed to reducing gasoline consumption and

emission as were state and federal governments.

6. Customers ranked functionality, safety, and price over gas mileage.

7. Only 4.3% of the 32000 car buyers surveyed considered gas mileage the most important

factor in their choices of vehicle.

TECHNOLOGICAL – Favoured

Technological factors can lower barriers to entry, reduce minimum efficient production levels,

and influence outsourcing decisions.

1. Generally, hybrid cars are ready in terms of technology and it could be a stopgap measure

until so-called “zero-emission” vehicles.

a) High mileage makes it cost-effective commuting car.

b) It is practical enough to take on longer trips.

c) But there are also some disadvantages, for example, too slow, small and too vulnerable

on a crowded road.

13 2. Currently, the internal combustion engine was not efficient; it converted only about 20% of

its total energy out.

3. Zero emission vehicles are not perfected yet.

ENVIORNMENTAL - Favoured

1. The United States was the single largest polluter in the world, accounting for 25％

worldwide emissions in 1999. A chief source of these emissions was the automobile.

2. Environmentalists are against the use of gasoline-relied automobiles.

3. Increase concerns about the environment.

Conclusion of PESTE analysis

Overall, hybrid cars are favoured by governments, environmentalists and scientists. The hybrid is supported politically, environmentally and technologically. However, the majority of consumers are not ready to buy those cars because of the premium price of hybrid cars vs. traditional cars.

As well, many consumers are not confident in the new technology.

PESTE DIAGRAM:

Economic, - 50%

Technological, 70%

Social, -50% 1

Environmental, 100%

Political, 100%

-100% -50% 0% 50% 100% 150%

14 Appendix B Porter’s Five forces

Rivalry - High

1. Exit barrier is high due to the large investment

2. Fixed cost is high

3. Companies are responsive to competitors’ strategic actions

Suppliers’ Power - Medium

1. The suppliers’ power is increasing since increased gasoline prices will drive up the cost of

raw material for auto makers

Threats of Substitutes - Low

1. There is an increase in miles driven per vehicle

2. Automobiles are the primary means of transportation (North America)

Barriers to Entry -High

1. Globalization and consolidation in auto industry

2. High capital requirement

3. Brand equity is an important factor when consumers purchase cars

Buyer power - High

1. Consumers have many choices when they buy cars

2. Switching cost is low since many North Americans change their cars within 3 years

3. Consumers are price sensitive.