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Fiat, an Italian car manufacturer, has suffered huge losses in recent years, primarily due to the weaker economic global environment and increased competition. Its immediate fortunes are dependent on old brands such as Punto, Panda, and Croma, and relies mainly on European markets. To improve competitiveness, the company needs to consider the affect of the external market forces and align them to its strengths and opportunities given. Some strategic options have been derived for the Auto division resulting in recommendation for future development.
Fiat is a large industrial group engaged in the design, manufacture and selling of cars, tractors, trucks, agricultural machinery, motor vehicle engines and components, construction equipment and production systems. The Group's production and service activities are broadly classified into nine operating sectors. The Fiat Auto sector sells its products under three major brands viz. Fiat, Alfa Romeo and Lancia. Other operating sector is the Ferrari and Maserati Group (luxury sports cars). Its primary markets are Italy, South America and the rest of Europe. (ProQuest, 2004a) In 2004, total revenues of Fiat Group declined by €2.2 billion to €46.7 billion, a decrease of 5%. Fiat Auto's revenues marginally improved to €20.5 billion compared to €20 billion in 2003. (refer to Appendix, Table 1)
In the highly developed rich north-western European area the car industry is static and replacement demand predominates. (European Business Review, 2002) In Southern and Mediterranean Europe, where car density per head of population is much lower growth prospects are considered more buoyant as incomes rise. Eastern Europe has been perceived as a potentially medium- to long-term growth market. The major competitors of Fiat in the field of automobiles as a whole are GM, Ford, Daimler Chrysler, Mitsubishi, Hyundai Group, Mazda, BMW, Subaru, Porsche and others. (ProQuest, 2004a)
Purpose and aims
The purpose of this report is to analyse the main market and industry forces which should be considered by Fiat in order to compete effectively in the global automotive market. The aim is to identify the strategic options available to the auto division and recommend the best choice for the future.
I. Environmental Analysis
The macro-environment is reviewed with the help of a PEST framework focusing on four areas - political, economic, socio-cultural and technological (refer to Appendix, Table 2). In continuation is presented a summary of the main factors most likely to impact Fiat's operations.
1.1. PEST model
The Block Exemption Regulation, a legal framework established by the European Commission, allows companies to easily source cars from abroad and dealers to offer more than one manufacturer brand within the same showroom (Mintel, 2004). However, this will reduce the differentials between car prices across Europe, facilitate new entrants, and bring greater consolidation of dealer groups, meaning less choice and less competition.
The ageing population in Italy (Refer to Appendix, Table 3) signifies higher earning power and more disposable income. For the industry this might mean more adults trading up to higher-specification models or increase in volume sales. Also, the increase in cross-border travel encourages diversity and changes consumer tastes.
The economic difficulties in some key overseas markets reduced export sales and affected as a consequence the company due to its over reliance on those markets for its growth. In addition, the weak European market decreased demand and left car manufacturers with excess capacity. This acted as a drain on Fiat's financial resources. However, the enlargement of the EU offers opportunities.
The technological developments increase the standards and the consumer expectations. Companies will need to invest more in R&D, New Product Development and safety. The internet use favours the establishment of online dealers, which might undermine competition with low cost base.
Rising environmental initiatives for energy concervation and less pollution pressure manufacturers to develop environmentally-friendly production process and improve their corporate social responsibilities.
Three key drivers of change can be identified
- Consolidating dealer groups
- EU enlargement
Having looked at the macro-environment the following industry analysis will give an insight of the competitive forces affecting all the players. The objective is to identify which “forces” have the greatest impact on the industry and therefore on Fiat.
1.2. Porter's Five Forces Model
The car industry is highly competitive and saturated market place, where big manufacturers (mainly foreign) (Table 5) are feeling the pressure to hold onto their spots in the face of new product development and low cost competition. There is high brand awareness but the consumers' switching costs are low when their needs are satisfied.
The increasing consolidation of dealer groups might increase their power over selling prices. Furthermore, the entrance of online dealers, car supermarkets and used car retailers could reduce the customer base from traditional channels.
The Italian components industry has a tired-like structure. (Zirpoli and Caputo, 2002) First-tire suppliers are multi-customer, independent, global business players, and second-tire suppliers and Italian companies with few or only one customer. The lack of rational frameworks to negotiate goals concerning costs, continuous improvement and sharing of benefits have lead to more nervous suppliers looking for competitive advantages.
The high set-up costs, economies of scale and unattractive market condition are a high barrier for new entrants. The increase in mergers and acquisition has made the rivalry even fiercer with a focus on differentiation and low cost base.
Four key competitive forces can be drawn
- Intense competition - new product developments, cost efficiency
- Outsourced supply - reduced costs and guaranteed production volumes
- Established dealer network
- Brand image - quality perception
Organizations can be put into strategic groups depending on the characteristics that they share, how much of immediate competitors they are and how segmented their market is. (Johnson and Scholes, 2002)
1.3. Strategic Groups
According to market share (Table 4 & 5) and product range, Fiat shares similar characteristics with Honda. It can be viewed the other major producers who compete on broad product range. However, the low market share of Fiat suggests that its broad product range suffers strategic focus or that the marketing strategies of the competitors outperform its own.
The above mapping reveals the approximate position Fiat occupies on the market and where threats are most likely to come from.
1.4. Threats and Opportunities
Having analysed the external environment the following threats and opportunities could be derived:
Opportunities arising from the market place:
- Efficiencies from alliance with GM - extend supplier and distribution channels
- Expansion of global presence
- Producing in low-cost economies
- Small car preference
- MPV - a growing market segment
- Leaner production and sale of unprofitable assets
- Stagnant market - decline in demand
- Increased government regulation and taxes
- Foreign competition - cheaper product, weakening market position
- Reliance on home market
- Investor discontent - financial problems
- Future model failures - customer needs and tastes not met
- Low levels of R&D investment - poor innovation levels
Identifying the forces impacting the industry and the external threats and opportunities helps to determine the
Critical Success Factorsfor Fiat. These are the features of the product that are particularly valued by consumers and where the organisation must excel to outperform competition. (Dibb et al, 2005)
- Quality - reliable, safe; warranty
- Variety - choice, size and functionality
- Competitive prices - good value for product
- Economical - less pollution and energy consumption
1.5. Internal Analysis
product portfoliocan be examined using the Boston Matrix (Walls and Rees, 2004) categorising brands according to market share and market growth. It shows which are the most profitable Fiat brands (Punto, Uno, Croma), on which the company relies, and the ones that bring no return for their investment (Stilo - sold in 2001). Allows decisions to be made - invest more or dispose from Gingo and Idea; financial and marketing resources absorbed by Panda and Stilo brands to sustain their position.
However, since much of the cost and value creation occurs in the supply and distribution chains, management needs to understand how to manage these linkages and relationships to improve customer value. The ability of Fiat to influence other organisations in the
value chain(Appendix, Table 6) may be crucially important competence and a source of competitive advantage.
- Suppliers - outsourced, low cost, influenced on price; long-term relation, some backward integrated; bad linkage with operations - no incentive for R&D
- Operations - National and European assemblers; excess capacity, high costs
- Marketing - weak marketing, poor quality image
- Dealers - poor service; no linkage with marketing and production for customer feedback
- Service - delayed introduction of 2-year guaranties.
How and where value is created underlines the ore competences of Fiat.
Strategic Capability and Competitive Advantage
1.6. Strengths and Weaknesses
Comparing the company's resources and competences to the industry and the competitors, there can be highlighted the following strengths and weaknesses:
- Size and Market share in Italy
- Good image of “small car specialist”
- Strength of image of traditional brands (Punto, Uno)
- Italian quality design
- Positive government incentives and support
- Premium brands (Ferrari, Maserati)
- Poor dealership
- Bureaucratic culture, vertical structure
- Poor image and satisfaction scores - low performance and high running costs
- High cost of production in European countries
- Presence in week foreign markets
- Loose ground on Asian competition
- Loss of cite on changing consumer needs
- Dissatisfied workforce
- Over reliance on domestic market and popular car models
- Internal management problems - frequent change of directors
- Lack of R&D investment and delays in new product launches
II. Strategic Options
As showed by the Arthur D. Little's Lifecycle Portfolio Matrix (Appendix, Table 7.) Fiat uses the appropriate Renew / Differentiation strategy for the industry's life stage (Maturity / Ageing) and its competitive position (Favourable/Tenable). According to Porter's Generic Strategies model (Dibb et al., 2005), differentiation has broad competitive scope and high competitive advantage. Fiat has offered variety of product targeted to different customer segments in different markets
However, in light with the macro and industry analysis, Fiat needs to enhance this strategy by considering possible strategic directions positioned in the
Ansoff's matrix for Market Options:
A. Focusing on the Fiat Auto division could be a viable option for it to survive and decrease losses. Better and extensive marketing might improve the brand image and restore consumer confidence. Withdrawal from the market as a whole is another option; however, resistance might be met from Government and Trade unions - last resort option.
B. Product development using the current resources might meet changing consumer preferences and target different segments. Development into other industry sectors, on the other hand, would weaken the focus on automobile production and use necessary resources.
C. Market development into low cost and growing economies, offering existing products and maybe using more efficient and advanced techniques of production, could reduce overcapacity in mature EU countries and production costs.
D. The present existence of unrelated products in foreign new market has not been contributing to the division's performance - not a feasible option for the future.
The methods that can be used to develop and grow are shown in the
Expansion Method Matrixbelow:
Ø Market penetration - strengthen Fiat Auto's performance by:
- Re-launching existing but improved products
- Increase marketing - price promotions and aggressive advertising
- Decreased supplier prices and distribution costs
- Reduce unprofitable sales (rental cars and demos)
- Sell particular group assets
- Reduce over capacity and inventory
- R&D investment
- Separate management teams for different brands - horizontal structure
- Training programmes for dealers.
- Backward and forward integration
Ø Product development - on existing resources and current markets
- Innovations - economical cars
- Extend range and variety
Ø Market development - new markets, acquired competences
- New low cost suppliers and distributors
- Joint ventures - local representatives, manufacturers
- Acquisitions - of smaller competitors
In the Short-term (within 1 year):
§ Dispose from unrelated and low revenue assets and reorganise the organisation - facilitate the change, ensure job safety and offers compensations
§ Use the income to reinvest in re-launching some models
§ Marketing spend - improve the bad quality image on the national market first
§ R&D - advanced technology and innovative products
§ Backward integration - acquire small / big manufacturers to ensure quality, warranty costs and duration; feed back quickly on new components / parts needed; flexible supplies
§ Forward integrate - acquire dealers to set up competitive market prices; introduce customised training programmes; motivate and offer performance related incentives.
In the Longer-term (within 3 years):
§ Extend product range - new models customised to the target segments needs
§ Explore opportunities to enter new markets - adhesive countries, Asia
- Through joint-ventures - use local knowledge and experience of the market
- Acquisitions - extend on competences and distribution channels
- Adapt product to meet culture tastes and expectations
Overall, the prospects for Fiat in the future seem optimistic. However, a lot of effort will be needed to regain competitive position. If focus is sustained on the proposed direction, customer needs are met and added value is offered then improvement in the longer term can be expected. Observing the changing environment and following the market trends will allow Fiat to sustain its development strategies. Meeting the short-term and long-term objectives will ensure the success of the options recommended.