Market Entry Strategies For Premium SUVs

Strategy Case Study: Market Entry Strategies for Premium SUVs
Tuebingen 2010/11/29 University of Tuebingen A case study in the context of the masters seminar Competitive Strategies Winter semester 2010/2011 Prof. Dr. Wilhelm Rall Torsten Arnold
Torsten Arnold Market Entry Strategies for Premium SUVs
Purpose and Organization of the Research
Questions to be answered 1. Understanding the context

What are the driving forces behind the development of the premium SUV segment?
2. Uncertainty pattern and strategic rationale

Description of the uncertainty pattern in the years 1993 (MB decision),1998, 2002, 2004 (Q7 point of no return) Which strategic rationale, if any, can be assumed behind the model introduction sequence of the different OEMs? Did Audi make the right decision to introduce the Q7 as late as 2005?
Torsten Arnold Market Entry Strategies for Premium SUVs 3
Outline
1. Understanding the context
Economics of the global car industry Global dimensions and growth of the premium SUV segment Driving forces of the segment Opportunities for OEMs

Model introduction sequences Global and OEM specific uncertainty patterns Abstraction Process
Strategic market entry
Generalized Cournot model Stackelberg model
Limited capacities (Kreps/Scheinkman)
Conclusion Audi
1. Understanding the context
The automotive industry is a high commitment industry with high sunk costs and long development cycles of up to 60 months
Huge investments into new production technology and manufacturing plants are necessary (several 100 Mio. USD) Long lead times and development cycles for new models (36 - 60 months) High total development costs (1 - 2 Bn. USD) and early initial costs (biggest cost block at launch minus 18 - 24 months)
Point of no return
Figure 1: Development time of new car in months, cost blocks and accumulated costs in percentage [McKinsey & Company 2010, own graph] Torsten Arnold Market Entry Strategies for Premium SUVs 6
Global annual sales by segment: Premium SUV segment is emerging and yet small, but one of the fastest growing segments
Automotive industry is a relatively mature industry with moderate to low growth rates SUV segment evolved from off-road segment Premium SUV market is a very small niche market which was tailored to upcoming customer preferences in the late 1990s
0,15
1997
3 50
Premium SUV sales
SUV
0,45
2008
Global light vehicle sales
8,5 66
0 10 20 30 40 50 60 70
Figure 2: Global light vehicle sales, SUV sales, Premium SUV sales, 1997 and 2008 in million units [McKinsey & Company 2010, own graph] Torsten Arnold Market Entry Strategies for Premium SUVs 7
Premium SUV sales are flourishing

300 250 Thousand units 200 150 100 50 0 Europe US China Rest of World 1997 0 15 0 0 2000 46 79 0 16 2003 123 100 3 26 2006 258 120 9 54 2008 239 115 31 60
Figure 3, Table 1: Sales of selected premium SUVs*, 1997-2008 [McKinsey & Company 2010, own graph]
* SUV models: VW Touareg, BMW X5 and X3, Mercedes M-Class, Porsche Cayenne, Audi Q7 and Q5
Very high growth dynamics in the premium SUV segment with remarkable market performance of German premium SUVs* yet with global differences
Stable and significant share of German premium brands in Europe (~20%) Premium SUV market with increasing volume based on high growth rates since 1997 Europe as the leading force in annual premium SUV sales since ~2002 German premium SUVs with share gains in Europe (2002-2007: 46.5% -> 63.9 %) Relatively small market share of German premium brands on the US market (~5%) US market is the initial leading force for premium SUV sales, with high growth rates up to ~2002 Premium SUV segment is growing but on rather moderate growth rates (1997-2008: ~21% p.a.) German premium SUVs do not realize share gains in the USA (2002-2007: 22.1% -> 20.4 %)
Moderate market share of German premium brands in China Very high (> 60%) market share in the small but growing Premium SUV market Late introduction of German premium SUVs (2003+), since then significant growth rates German premium brands have a market share of above 10% in the global car market Premium SUVs exhibit a low, but growing share of German premium OEMs total production (1997: 0.4% -> 2007: 7.3%) High growth in the premium segment in general and very high growth dynamics in particular for premium SUVs. Global growth rates of premium SUV segment (CAGR +36% p.a.) clearly outperform nonpremium SUV segments growth rates (CAGR +7%) as well as light vehicle growth rates (CAGR +2%) (1997-2008)
Table 2: Premium SUV* share and growth in EU, US, China, World, 1997-2008 [McKinsey & Company 2010, own illustration]
* SUV models: VW Touareg, BMW X5 and X3, Mercedes M-Class, Porsche Cayenne, Audi Q7 and Q5
Various forces drive the development of the Premium SUV segment

Competition of premium OEMs
Expand market volume against trend Conquer market share in new or developing markets (e.g. China, etc.) Improve premium brand loyalty + positioning Expansion of model line-up Occupy market niches
Strategic uncertainty
Internal organizational perspective

Availability of technological development Utilisation of (local) production capacity Extent of scale economies (e.g. platform production) Compliance with organizational setup Liquidity constraints Natural hedging (price pressure, EUR/USD)
Government initiatives, regulations and legislation Energy policy, tax relief plans, reduction in tax rates, etc.
New segment: Premium SUVs
Customers (demand side)

Capture consumer rent Socio-economic/demographic factors (increased purchasing power of upperand upper-middle class in developing countries) Lifestyle / Personality (Premium SUV = chic, state-of-the-art) Trends (Individualisation and differentiation)
Environmental uncertainty
Figure 4: Driving forces of the premium SUV market [own illustration] Torsten Arnold Market Entry Strategies for Premium SUVs 10
New growth for premium OEMs in the mature automotive industry is only possible through expansion of model lineup and through further global expansion
(especially in growing markets)
Improved market penetration
New products
(selective addition to existing product range)
Figure 5: OEM expansion possibility space [Adapted from: AUDI AG, Rupert Stadler, Sandford Bernstein, 2nd Strategic Decisions Conference, London, 27.09.2005] Torsten Arnold Market Entry Strategies for Premium SUVs 11
12
Model Introduction Sequences: The Three Waves
First-Mover
Fast Follower/ Second Mover
Late Follower
M-Class was the first premium SUV and opened a new segment BMW X5 was already at the planning stage before the MClass was launched in 1997 For both firms it was very difficult to forecast the future in this segment
Volkswagen and Porsche launched their models in a relatively clear market situation The segment was already established and growing
Audi was the last premium manufacturer to enter the segment with its Q7 However, they launched a differentiated type of model, mainly tailored to the needs of the US-market
Figure 6: Model introduction sequence of selected premium SUV OEMs [own illustration] Torsten Arnold Market Entry Strategies for Premium SUVs 13
OEMs faced different sources of uncertainty

Environmental Uncertainty Strategic Uncertainty
Regulations Technological developments Demand patterns Socioeconomic factors
Competitive action and reaction
Figure 7: Sources of environmental and strategic uncertainty of selected premium SUV OEMs [own illustration] Torsten Arnold Market Entry Strategies for Premium SUVs 14
Altering uncertainty patterns within the global premium SUV segment

USD Crude Oil Price EUR/USD Global Sales of premium SUV`s (in thousand units) 392 441 445 516 EUR/USD
407
252
200
179 141
84 15
1997 1998
60
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Weak US-Dollar and increasing oil price
Level of uncertainty high

medium low
1993 announcement
Figure 8: Global uncertainty patterns within the global premium SUV segment and selected influencing factors,1997-2008 [own illustration] Torsten Arnold Market Entry Strategies for Premium SUVs 15
M-Class
X5
Touare g
Cayenn e
Q7
Mercedes Benz Environmental uncertainty

High level of uncertainty: New plant Foreign market New model New employees High investment Medium level of uncertainty: Growing demand New investments announced Established model Efficient plant New entrants (e.g BMW)
26.000 additional vehicles of the M-Class built at Magna-Steyr in Graz, Capacity 106,000
Low level of uncertainty: Growing sales in the SUV segment Audi as new entrant Economic boom New model update
High level of uncertainty: Economic downturn Increasing oil price (Jul 2008 $ 133.90 Flagging USD CO2 discussion
Addition $ 80 Mio investment; Capacity 80,000
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1993 announcement
Start of production: M-Class W163; $ 300 Mio investment; Capacity 65,000
Facelift MClass W163
M-Class W164
Facelift MClass W164
M-Class W16X
Audi Q7
Figure 9: Environmental uncertainty for Mercedes Benz 1993-2008 [own illustration] Torsten Arnold Market Entry Strategies for Premium SUVs 16
BMW Environmental uncertainty

High level of uncertainty: New production Foreign market New model New employees High investment However: Land Rovers SUV know-how Low level of uncertainty: Growing demand for premium SUVs Customers are familiar with the segment High investments Established M-Class since 1997 New entrants in the market (e.g VW, Porsche and Audi) Facelift and the announcement of a new model High level of uncertainty: Economic downturn Increasing oil price (Jul 2008 $ 133.90 Flagging USD CO2 discussion
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Expanding the production South Carolina, USA: $ 200 Mio. investment; Capacity 140,000+
+ $ 300 Mio investment Facelift X5 E70 + $ 750 Mio investment (X3,X5 & X6 production)
Start of production: X5 E53
Facelift X5 E53
X5 E70
Audi Q7
Figure 10: Environmental uncertainty for BMW 1997-2008 [own illustration] Torsten Arnold Market Entry Strategies for Premium SUVs 17
Volkswagen Uncertainty patterns

Medium level of uncertainty: Development of a new model in a growing segment Cooperation with Porsche to lower costs Low level of uncertainty: Growing demand for premium SUVs Customers are familiar with the segment Established M-Class since 1997 Audi also enters the market in 2005
21.04.2006: Production of the 250,000th Touareg
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Announcement of co-platform developement with Porsche
Mass Production of VW Touareg I (30. 06.2002)
Touareg II introduction Model introduction USA Facelift Touareg I
Audi Q7
18
Figure 11: Uncertainty for Volkswagen 1998-2008 [own illustration] Torsten Arnold Market Entry Strategies for Premium SUVs
Porsche Uncertainty patterns

Medium level of uncertainty: Development of a new model in a growing segment Expansion of model lineup, real hedging strategy Cooperation with Volkswagen to lower costs Capacity inverstments in Leipzig and Bratislava Low level of uncertainty: Growing demand for premium SUVs Customers are familiar with the segment Established M-Class since 1997 Audi also enters the market in 2005 High level of uncertainty: Economic downturn Increasing oil price (Jul 2008 $ 133.90 Flagging USD CO2 discussion Decreasing sales figures on the Cayenne
~ 270,000 sales
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Announcement of co-platform development with Volkswagen
Production plant Leipzig finished Model presentation in Europe December 2001
Production start Cayenne I in Bratislava / Leipzig / Zuffenhausen (Sept 2002) Facelift Cayenne I Model introduction USA 2003 Cayenne II launch
Audi Q7
19
Figure 12: Uncertainty for Porsche 1998-2008 [own illustration] Torsten Arnold Market Entry Strategies for Premium SUVs
Audi seeks to conquer the premium segment by focusing on prestige

Traditional Progressive
Premium
2005
2015
1994
Volume
Figure 13: OEM profiles with respect to image and volume and AUDIs focus on premium image [ Adapted from: AUDI AG, Rupert Stadler, Sandford Bernstein, 2nd Strategic Decisions Conference, London, 27.09.2005] Torsten Arnold Market Entry Strategies for Premium SUVs 20
Audi Strategic uncertainty

Low / Medium level of uncertainty Audi was the last premium manufacturer to enter the SUV segment After A6 Allroad disaster, cooperation with VW and Porsche Low level of uncertainty: Ongoing growth demand for premium SUVs Customers are familiar with the segment Established M-Class since 1997 Cooperation with VW & Porsche Crossover SUV for the large U.S. market
Q7 point of no return Approx. 300 Mio. investment in the joint production facility in Bratislava
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Audi declined platform development with VW/Porsche, hence A6 Allroad disaster
Decision to build Q7 on PL71 platform in Bratislava, Slovakia Q7 Prototype Detroit Motor Show
Facelift Q7
SOP first generation Q7 in Bratislava , Slovakia
New model planned 2011 (CO2 emission reduced)

21
Figure 14: Strategic uncertainty for AUDI 2000-2008 [own illustration] Torsten Arnold Market Entry Strategies for Premium SUVs
2. Uncertainty pattern and strategic rationale Abstraction process
22
Abstraction process: Strategic Market Entry (1/5)

First mover (Mercedes-Benz / BMW)
Advantages (The early bird catches the worm)
Could face high market demand / monopoly position High innovation costs (R&D) Incumbent inertia
locked in to a specific set of fixed assets reluctant to cannibalize existing product lines may become organizationally inflexible
Disadavantages

Second mover / Fast follower (VW / Porsche)

Advantages ("The second mouse gets the cheese)
Free rider effects
Buyer education (public education) R&D Infrastructure development
Imitation costs < innovation costs Lower market uncertainty and better technological opportunities
Disadavantages
Has to react to first movers commitment
23

Late mover (Audi) Late movers are companies that respond to a competitive action, but only after considerable time has elapsed after the first movers action and the second movers response.
Advantages
Shifts in technology or customer needs New technologies (rapid virtual prototyping) Even lower imitation costs Further resolution of uncertainty
Disadvantages
As late movers are the last ones to respond to the first and second movers actions, late movers tend to be poor performers and often are weak competitors!
* Quote from: Michael A. Hitt,R. Duane Ireland,Robert E. Hoskisson. 2009. Strategic management: competitiveness and globalization : concepts & cases. Torsten Arnold Market Entry Strategies for Premium SUVs 24

The generalized Cournot-model for Profit functions of the firms asymmetrical firms:
Equation [1]
Profit maximization w.r.t. the output yields the market price:
Equation [2]
and the profits:
Equation [3]
* Formulas and results from Tirole, Jean, The Theory of Industrial Organization (1998); Stadler, Manfred, Industrial Organization lecture notes Torsten Arnold Market Entry Strategies for Premium SUVs 25

Starting point in standard Stackelberg model: An incumbent i=1 (Mercedes), already established in worldwide SUV premium market with a first-mover advantage A potential entrant i=2 (VW/Porsche), has to pay fixed costs For the following profit functions will result in competition in quantities:
Equation [4]
Equation [5]
Stackelberg-solution with the leader 1 and the follower 2 for

From a model perspective, we see a first mover advantage for Mercedes, setting the quantitiy and anticipating the best answer of VW/Porsche. Best answer function:
BUT, since the natural market entry barriers are enormously high a creation of strategic entry barriers is unnecessary model: a blockaded entry with However, VW/Porsche could afford entry costs anyways, worldwide demand exceeds capacity of incumbent model with limited capacities needed (Kreps/Scheinkman 1983)
AUDI cant afford for entry into premium SUV segment, until late cooperation with VW/Porsche to divide among this platform coalition
27
Abstraction process: Limited Capacities (1/5)

Kreps / Scheinkmann (1983): Assumption: Technically seen, relatively homogenous goods within the market niche for premium SUVs Capacities as strategic variables Prices as tactical variables Determination of the subgame perfect Nash-equilibrium through backward induction:
1st stage (strategic var.)
2nd stage (tactic var.)
1st step Determination of the prices on the second stage with alternative quantitative commitments (capacity) on the first stage 2nd step Determination of the optimal capacities on the first stage with anticipation of the following price determination 3rd step Determination of the optimal prices on the second stage, given the optimal capacity commitments on the first stage
Figure 15: Determination of the subgame perfect Nash-equilibrium [own illustration] Torsten Arnold Market Entry Strategies for Premium SUVs 28

Fundamental assumptions: Standardised market demand function:
Equation [6]
Unit production costs:
Figure 16: Shape of the unit cost function [own illustration] Equation [7,8]
Efficient-rationing rule:
Figure 17: Efficient rationing example [own illustration]
Equation [9,10]

Optimal setting of the price on the second stage: The market clearing price with given capacities:
Equation [11]
creates a Nash-equilibrium in pure strategies, if:
Equation [12]
Figure 18: Firm capacity example in pure strategies [own illustration]

Optimal setting of the price on the second stage: for higher capacities Nash-equilibria in mixed strategies (non-deterministic) for the Bertrand-equilibrium In the SUV case we expect Cournot-results, mixed strategies ruled out
1
Figure 19: Cournot and Bertrand results depending on capacity precommitment [own illustration]

Profit function in reduced (Cournot-) form with average capacity building costs :
Equation [13]
Optimal capacity dimensioning at the first stage:
Equation [14]
Optimal prices and profits:

Bertrand price competition softened!
Equation [15]
Classification into the Taxonomy of Business Strategies (TIROLE)

Fundamental equation of strategic competition:
(-) strategic effect, tactical variables strategic complementary
(+) direct effect negative investment makes competitor agressive underinvestment
Assumption: In the normal case of substitutes Prices have a strategic complementary character and quantities/capacities have a strategic substitutive character. In this case the investment in the strategic variable (capacities) makes competitors agressive. As prices are strategic complements, companies choose: puppy dog strategy of peaceful underinvestment
Conclusion Audi
34
Did Audi make the right decision to introduce the Q7 as late as 2005?
Ex ante
Low uncertainty
US market already mature Europes sales outperforming US sales Already 900k premium SUVs sold in total world-wide
Goal: World-wide leader in the premium segment*

Strenghten core brand Historical issue in the USA: Audi 5000 US market penetration through the premium SUV segment New model: Luxurious cross-over SUV (prestige) Audi tailored a model to the US market
Technological know-how (quattro experience, rapid prototyping) Product pipeline mismanagement and corporate constraints
* AUDI AG, Financial Report 2006: [http://www.audi.de/etc/medialib/cms4imp/audi2/company/financial_information/pdf.Par.0267.File.pdf] Torsten Arnold Market Entry Strategies for Premium SUVs 35
Did Audi make the right decision to introduce the Q7 as late as 2005?
Ex post
Too late
Audi could not capitalize on the first 900k sales Brand loyalty problem due to late move in the markets
Despite late introduction, high growth dynamics and rapid market penetration from Audi Q7, especially in the important US-market and later in China Establishment of new premium SUV derivative (crossover SUV) Late follower strategy was unexpectedly successful
36
Questions
37
Thank you for your attention!
38
Appendix
39
List of Figures
Figure 1: Development time of new car in months, cost blocks and accumulated costs in percentage [McKinsey & Company 2010, own graph] Figure 2: Global light vehicle sales, SUV sales, Premium SUV sales, 1997 and 2008 in million units [McKinsey & Company 2010, own graph] Figure 3: Sales of selected premium SUVs*, 1997-2008 [McKinsey & Company 2010, own graph] Figure 4: Driving forces of the premium SUV market [own illustration] Figure 5: OEM expansion possibility space [ Adapted from: AUDI AG, Rupert Stadler, Sandford Bernstein, 2nd Strategic Decisions Conference, London, 27.09.2005] Figure 6: Model introduction sequence of selected premium SUV OEMs [own illustration] Figure 7: Sources of environmental and strategic uncertainity of selected premium SUV OEMs[own illustration] Figure 8: Global uncertainty patterns within the global premium SUV segment and selected influencing factors,1997-2008 [own illustration] Figure 9: Environmental uncertainty for Mercedes Benz 1993-2008 [own illustration] Figure 10: Environmental uncertainty for BMW 1997-2008 [own illustration] Figure 11: Uncertainty for Volkswagen 1998-2008 [own illustration] Figure 12: Uncertainty for Porsche 1998-2008 [own illustration] Figure 13: OEM profiles with respect to image and volume and AUDIs focus on premium image [ Adapted from: AUDI AG, Rupert Stadler, Sandford Bernstein, 2nd Strategic Decisions Conference, London, 27.09.2005] Figure 14: Strategic uncertainty for AUDI 2000-2008 [own illustration] Figure 15: Determination of the subgame perfect Nash-equilibrium [own illustration] Figure 16: Shape of the unit cost function [own illustration] Figure 17: Efficient rationing example [own illustration] Figure 18: Firm capacity example in pure strategies [own illustration] Figure 19: Cournot and Bertrand results depending on capacity precommitment [own illustration]
List of Tables
Table 1: Sales of selected premium SUVs*, 1997-2008 [McKinsey & Company 2010, own graph] Table 2: Premium SUV* share and growth in EU, US, China, World 1997-2008 [McKinsey & Company 2010, own illustration]
41
Backup charts and information
42
Strategic decision timeline

1993 MercedesBenz BMW Volkswagen
Decision MClass Production X5 Joint Venture PL71 Production Touareg
1998
2002
2004
Porsche
Audi
Joint Venture PL71
Production Cayenne
Point of no return Q7
43
Global Capacity Surplus Worldwide (all model lines, all OEMs)
Global surplus capacity approx. 5 million vehicles p.a.
Approximation based on B&D Forecast, Prof. Dr. Dudenhffer, 2005 AUDI AG, Sanford Bernstein, 2nd Strategic Decisions Conference, 2005 Torsten Arnold Market Entry Strategies for Premium SUVs 44
45
Backup: Preisbersicht Premium SUVs
Smallest Diesel Entry Price
46
Overview Model Lineup
A1
A3
A4
A5
A6
A8
Q5
Q7
TT
R8
Mini
1er
3er
6er
5er
7er
X3
X5
Z4
Z8
47
Various forces drive the development of the premium SUV segment

Competition
extent of national difference extent of scale economies global concentration
Environmental variable
country risk location familiarity demand conditions volatility of competition
Development of premium SUV segment
Market / Customers
value of firm-specific know-how tacit nature of know-how
provenmodels
48
Market entry
49
Key characteristics entry mode alternatives

high control
wos
joint venture licensing exporting
low low required resources high
high technology risk licensing joint venture wos exporting low required resources high
50
low
Entry mode depends on interplay variables

synthesis
1. For certain groups of MNCs reducing dissemination risk is of vital importance; e.g. when competitive advantage is based on proprietary know-how.
strategic
transaction
...
environmental
2. when an organisation has multiple foreign operations optimizing the portfolio is better than optimizing a simple market entry decision; e.g. when market conditions are very similar and scale economies can be achieved, a global strategy based on wholly-owned subsidiaries provides the highest returns. Reduced strategic and tactical flexibility from higher resource commitments is the consequence from pursuing such a strategy.
51
Entry mode advantages/disadvantages

entry mode
exporting
advantage
ability to realize location and experience curve economies ability to earn returns from process technology skills in countries where FDI is restricted
disadvantage
high transport costs trade barriers problems with local marketing agents
turnkey contract
creating efficient competitors lack of long-term market presence

lack of control over technology inability to realize location and experience curve economies inability to engage in global strategic coordination lack of control over quality inability to engage in global strategic coordination lack of control over technology inability to engage in global strategic coordination inability to realize location and experience curve economies
licensing
low development costs and risks
franchising
low development costs and risks access to local partners knowledge sharing development costs and risk politically acceptable protection of technology ability to engage in global strategic coordination ability to realize location and experience economies
joint venture
wholly owned subsidiary
high costs and risks
52
Porters Five Forces Framework
53
Porters Five Forces
54
Mercedes-Benz Backup
55
Mercedes Benz - Overview

Produktionsbeginn in Tuscaloosa County, Alabama,USA: $ 300 Mio investment; Capacity 65.000 Addition $ 80 Mio investment in the USA; Capacity 80.000
M-Klasse W163 Modellpflege (ab 43.500 )
M-Klasse W164 Modellpflege (ab 52.539 )
Total annual production volume after expansion; capacity app. 174,000 units (including M-, Rand G-Class)
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
26.000 addition vehicles of the M-Class built MagnaSteyr in Graz, particular for the European Market; Capacity 106.000
M-Klasse W163 (ab 32.057 )
M-Klasse W165 M-Klasse W164 (ab 50.873 )

Daimler sells Chrysler to Cerberus
56
DaimlerChrys ler Merger
Mercedes Benz announces a new $ 600 Mio investment in the plant to bulit M-, R-, GL-Class.
Mercedes Benz Uncertainty Pattern

High level of uncertainty: New plant Foreign country/market New model New employees High investment Medium level of uncertainty: Growing demand and segment (see McKinsey) New investments announced Established model Working plant New entrants Low level of uncertainty: Fast growing market More competitors Established market/model Economic Boom New Model Update Boom in the SUV Segment Medium level of uncertainty: Decreasing sales Co2 discussion Worldwide Economic Crisis Lower deman Low level of uncertainty: Boom in China Growing demand Recurring economic growth New model in 2011 Established plant with new model
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Addition investment
Addition vehicles MagnaSteyr in Graz
M-Klasse W164
Produktions beginn: MKlasse W163
M-Klasse W165
Announces a new $ 600 Mio Investment
M-Klasse W163 Modellpflege
M-Klasse W164 Modellpflege

57
BMW Backup
58
BMW - Model introduction sequence

Expanding the production facility for the X5 model in Spartanburg, South Carolina, USA: $200 Mio additional investment (Total = $800 Mio); Capacity 140.000+
Total invest. value: $3.0 billion. Annual capacity 240.000+
X5 (E 53 ) (09/1999) 40.000+
X5 (E 70) (from 53.100 )

Facelifted X5 (E 53) (09/2003) (from 48.050 )
X5 (E 53) introduced at Detroit Auto Show
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
+ $50 mio
08/2001: 100,000th X5 shipped
06/2010: 1.0 million X5 shipped
+ $300 mio
Introduction X3 (Steyr, AU)
09/2007: 100,000th next gen. X5 shipped
Facelifted X5 (E 70) (from 54.200 )
+ $750 mio
1994: BMW acquires LandRover
BMW sells LandRover (excl. Mini) to Ford
Facelifted X3 (Spartanburg, USA) 59
BMW Uncertainty Patterns

Medium level of uncertainty: New plant Foreign country/market New model, high R&D costs New staff High investments However: Fast follower + Land Rover SUV know-how Moderate degree of novelty Low level of uncertainty: Growing demand and segment (see McKinsey) New investments announced Established model Economies of Scale; great plant Major investments Announcement of facelift model But: New entrants/competitors Medium: Next gen. model with 2,400 new parts Explosion of mid-size SUVmarket First mover for X3 midsize prem SUV Low to medium level of uncertainty: Fast growing market More competitors Established market/model X5 Economic Boom New Model Update Boom in the SUV Segment But: Initial uncertainty about X3 potential Medium level of uncertainty: Decreasing sales Co2 discussion Worldwide Economic Crisis Low level of uncertainty: Boom in China Growing demand Recurring economic growth New model in 2011 Established plant with new model
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
PONR Launch X5 (E 53), USA Launch of facelifted X5 (E 53) Launch X5 (E 70)
$200 million add. investment
Launch of facelifted X5 (E 70)

1 million X5 shipped
+ $50 million
+ $300 million
Launch of X3 (prod. in Steyr, AU)
+ $400 million
09/2007: 100,000th next gen. X5 shipped
1994: BMW acquires Land Rover
BMW sells Land Rover (excl. Mini) to Ford
Launch of facelifted X3 (USA) 60
BACKUP: Product Split of BMW in 2006 by produced vehicles, in total 1.185.088 X5 75.321 6%
X3 114.000 10%
Z4 3%
1 series 13%
7 series 4% 6 series 2% 5 series 19% 3 series 43%
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Model introduction sequence of BMW

History and identy/image of the company
BMW is famous worldwide for cars and as a powerful and respected brand that means as much to those who do not drive a BMW as those who do. "People will not buy products from companies they don't know and don't like," says BMW's Freymann. "Car manufacturers from countries like China will grow from the bottom up. They may become a threat to a company like Ford, but not to us. We are not just selling a car, we are selling an image. Freude am Fahren sheer driving pleasure BMW is one of the best-known brands in the world. The famous blue and white roundel symbol is clear proof that the owner is driving a prestige car (or motorbike). The symbol also identifies the brand as delivering the finest design, technology, engineering and quality available in motoring today.
How does the model lineup (Modelpalette) look like?
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Model introduction sequence:
When was which model introduced? Facelift / new models / product life cycle
BMW X5 The X5 represents BMW's first foray into the popular sport-utility-vehicle marketplace. Billed as a "Sports Activity Vehicle" by its maker, the X5 is designed to handle like a true BMW. Unveiled in Detroit at the 1999 North American International Auto Show For sale in late 1999 By the end of its second model year was BMW's second-best-selling model. November 2006: Redesignb of E53 - For 2007 the X5 was redesigned with a revised chassis, more powerful and fuel efficient engines and a more responsive 6-speed automatic transmission. Longer, wider and taller than its predecessor, the X5 now offers available 7-passenger seating. First X5 (E53) was built between 1999 and 2006: many parts in common with Land Rover (bought in 1994, sold in 2000) Next BMW X5 (E70) since 2007 The X5 heralded the shift from truck-based body-on-frame SUVs to sedan-based crossovers that would come to fruition in the late 2000s. BMW describes the X5 as a Sport Activity Vehicle (SAV) rather than an SUV, to emphasize its on-road ability despite its size. Expansion of production in the USA is a strategic rationle (natural hedging due to weak dollar) http://www.automobile.de/cgibin/deeplink.pl/news/bmw/x3/BMW-will-weiter-wachsen-X6-und-neuer-X3-werden-in-USA-gebaut-19038.html
With sales of approximately 580,000 units worldwide since its launch in 1999, the BMW X5 has become an outstanding global success and still enjoys great popularity to this day. Of course the U.S. is the market where the X5 has had the greatest impact. Over 240,000 BMW X5s have been sold in the U.S. alone. Read more: http://www.worldcarfans.com/10608086491/new-bmw-x5-unveiled-in-detail#ixzz15NJVDacI One millionth X5 produced in June 2010! Sold to China =) Built in Spartanburg County (USA), South Carolina. Dense network of suppliers in close proximity! Sold on 120 markets worldwide 63

OVERVIEW
The 1990s was the decade of the four-wheel drive -- boom time for mud-pluggers with a civilised twist as Australians discovered the people-carrying practicalities of bush bashers. Big-engined power, high seating position, plenty of room, towing prowess and that elusive -- and rarely fulfilled -- dream of conquering Big Red lured thousands into 4X4 sport utility vehicles. Prestige brands like Mercedes-Benz and BMW foresaw a demand for upmarket sports utility vehicles (SUVs), not so much for the well-heeled Outback wanderer, but for all those urban needs. Hence the emergence in the late 1990s of the Mercedes-Benz M-class, followed in 2000 by the BMW X5. BMW's success with X5 has been unstoppable since launching first with a 4.4-litre petrol V8, followed a few months later by a keenly priced 3.0-litre, six-cylinder model. Since then two more have joined the line-up; the high performance 4.6iS in February 2002 and the 3.0-litre diesel in January 2003. BMW's off-roader, it seems, has come full circle. Immediate competition for the BMW X5 essentially consists of the Mercedes-Benz M-class. The cheaper Land Rover Discovery offers a rival for some models, while the more expensive Range Rover features the same diesel and 4.4-litre V8 engine as the BMW. Mainstays like the Nissan Patrol and Toyota LandCruiser can't match the X5's refinement or car-like performance, and while the Audi AllRoad TDi certainly can, it can't equal the X5's 2700kg towing capacity. Since the start of 2003, the mid-sized SUV market has exploded. Rivals for BMW and Benz now include Honda MDX, Volvo XC90, Lexus RX330, Volkswagen Touareg and even Porsche Cayenne.
COMPETITORS

64
Volkswagen/Porsche Backup
65
Volkswagen Overview
Model introduction USA 2003 Mass Production of VW Touareg I (30. 06.2002) 21. 4.2006: 250 000 st Touareg V10 TDI 5,0l verlsst die Fertigungsstrae Touareg I Facelift Modellpflege Touareg II introduction
Announcement of co-platform developement with Volkswagen
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Prod. / Sales 6343

Prod. / Sales 59.625
Audi Q7
Porsche Overview
Model introduction USA 2003 Model introduction in Europe December 2001 Facelift Cayenne I Cayenne II launch
Announcement of co-platform developement with Volkswagen
Production start Cayenne I in Bratislava / Leipzig / Zuffenhausen (Sept 2002)

Production plant Leipzig finished
Cayenne nearly half of total sales!
~ 270.000 sales
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Prod. / Sales 24.925 / 20.603
Prod. / Sales Prod. / Sales 41.299 / 41.299 36.169 / 33.943 Prod. / Sales 35.128 / 34.134 Sales volume -30% Europe; -40% USA
Prod. / Sales ~36.000 / 35.250
Prod. / Sales 41.149 / 39.913
Prod. / Sales ~46.000 / 45.478
Audi Q7
Audi Backup
68
AUDI Q7- Overview

Start of First generation (2005- ) mass production, Bratislava , Slovakia (Aug. 2005) Q7 point of no return Approx. 300 Mio. investment in the joint production facility in Bratislava
Introduction Basisversion Q7 (starting at 64000 ), March 2006, annual plan: 50,000-70,000 vehicles March: Germany, June: USA and China Hediging its bets with updates
Facelift, Q7 3.0 TDI clean diesel quattro (CO2 emission reduced 234 g/km)
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Prod. / Sales Prod. / Sales Prod. / Sales 27.929 / NA 79.169 / 52.771 81.775/ NA Prod. / Sales Prod. / Sales 77.395 / NA 59.008 / NA
Audi declined platform developement with VW/Porsche, instead A6 all-road desaster
Decision to build Q7 on PL71 platform in Bratislava, Slovakia
Q7 Prototype Detroit Motor Show (Jan. 2003) 2005/2006(total production all models: 250.000) [5]
Facelift planned Q7 2011 (CO2 emission reduced, 195 g/km)
69
70
The increasing diversity of types of households goes hand in hand with the increasing number of body derivatives.
71
Internal -> Leader in the Premium segment vs. Very late introduction of Q7 Resources technology not available and A6 Allround deaster
Eigentliche Kernstory: Konzernstruktur VW/Audi Dilemma Plattform A6 Allroad Desaster Das Erbe: Audi fehlen durch die falsche Produktpolitik der Vorjahre Modelle. Mit Rcksicht auf VW und den damaligen Chef Ferdinand Pich musste beispielsweise der VW-Flop Phaeton vor dem neuen A8 eingefhrt werden. Und VW baute den Gelndewagen Touareg, der besser zur Premiummarke Audi passt. Erst zum Jahreswechsel kommt jetzt der Q7 (2005/2006). Missmanagement in der Produktpalette Produktpalette nach oben auffllen / abrunden VW Abhngigkeit / Konzernstruktur VW/Audi Dilemma Plattform A6 Allroad Desaster New Car concept within premium SUV segment seven seats, cross-over, US market! AUDI gebranntes Kind im US Markt durch AUDI 5000 Automatik Problem (Manufacturing the AUDI scare WSJ 1988) Erst 16 spter erholt Vorher kein standing strategisch in USA reinkommen mit erfolgsmodell US Makrt extrem wichtig - Volumen Einstieg in Trend Cross-Over Audi profitiert im Premium SUV Segment gg. US-Mitbewerbern vom exorbitant steigenden lpreis.
72

Market Entry Strategies For Premium SUVs

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Market Entry Strategies For Premium SUVs

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Strategy Case Study: Market Entry Strategies for Premium SUVs

Torsten Arnold Market Entry Strategies for Premium SUVs

Purpose and Organization of the Research

Torsten Arnold Market Entry Strategies for Premium SUVs

Questions to be answered 1. Understanding the context

2. Uncertainty pattern and strategic rationale

2. Uncertainty pattern and strategic rationale

Limited capacities (Kreps/Scheinkman)

1. Understanding the context

Torsten Arnold Market Entry Strategies for Premium SUVs

Global light vehicle sales

Premium SUV sales are flourishing

Torsten Arnold Market Entry Strategies for Premium SUVs

Torsten Arnold Market Entry Strategies for Premium SUVs

Various forces drive the development of the Premium SUV segment

Internal organizational perspective

New segment: Premium SUVs

Customers (demand side)

(especially in growing markets)

Improved market penetration

2. Uncertainty pattern and strategic rationale

Torsten Arnold Market Entry Strategies for Premium SUVs

Model Introduction Sequences: The Three Waves

Fast Follower/ Second Mover

OEMs faced different sources of uncertainty

Regulations Technological developments Demand patterns Socioeconomic factors

Competitive action and reaction

Altering uncertainty patterns within the global premium SUV segment

Weak US-Dollar and increasing oil price

Level of uncertainty high

Mercedes Benz Environmental uncertainty

Addition $ 80 Mio investment; Capacity 80,000

Start of production: M-Class W163; $ 300 Mio investment; Capacity 65,000

Facelift MClass W163

Facelift MClass W164

BMW Environmental uncertainty

Start of production: X5 E53

Volkswagen Uncertainty patterns

Announcement of co-platform developement with Porsche

Mass Production of VW Touareg I (30. 06.2002)

Touareg II introduction Model introduction USA Facelift Touareg I

Porsche Uncertainty patterns

Announcement of co-platform development with Volkswagen

Production plant Leipzig finished Model presentation in Europe December 2001

Audi seeks to conquer the premium segment by focusing on prestige

Audi Strategic uncertainty

Audi declined platform development with VW/Porsche, hence A6 Allroad disaster

SOP first generation Q7 in Bratislava , Slovakia

New model planned 2011 (CO2 emission reduced)

2. Uncertainty pattern and strategic rationale Abstraction process

Torsten Arnold Market Entry Strategies for Premium SUVs

Abstraction process: Strategic Market Entry (1/5)

Second mover / Fast follower (VW / Porsche)

Torsten Arnold Market Entry Strategies for Premium SUVs

Abstraction process: Strategic Market Entry (2/5)

Abstraction process: Strategic Market Entry (3/5)

Profit maximization w.r.t. the output yields the market price:

and the profits:

Abstraction process: Strategic Market Entry (4/5)

Stackelberg-solution with the leader 1 and the follower 2 for

Abstraction process: Strategic Market Entry (5/5)

Torsten Arnold Market Entry Strategies for Premium SUVs

Abstraction process: Limited Capacities (1/5)