Hyundai Consultant Report
Team Seven
4/26/2011
MGMT 4000: Strategic Management
Michelle Marshall, Isaac Sokol, Tina StCyr,
Kevin Voigtschild, Chris Yonushewski
Decision Issue
Our group conducted an analysis of Hyundai Motor Company to determine whether or not the
company should continue to sell their luxury cars under the Hyundai brand, to sell them under a different
brand name, or to discontinue certain car lines. After an examination of the US automotive industry and
of the Hyundai Motor Company itself, our group focused on three different analysis tools to help answer
the strategic decision issue: an RBV analysis, a Value Stick analysis, and Game Theory analysis.
Ultimately, we conducted an exhaustive study of the pros and cons of the possible options Hyundai has
and made our recommendation.
Industry Analysis
We are researching Hyundai Motor Company, which operates in the automobile industry.
Hyundai’s operations are set in Korea and have been around for 44 years. The automobile industry is
dynamic and undergoing multiple changes throughout its landscape, including the bailout of major brands
in the US and abroad. By revenue, it is one of the most important economic sectors in the world. The top
five car manufacturers are Toyota, GM, Volkswagen, Ford and Hyundai-Kia. The automobile industry
has a moderately high threat of substitutes and a low threat of new entrants. Suppliers maintain a low
bargaining power, but buyers hold a high bargaining power and the intensity of rivalry among firms is
incredibly high.
Threat of Substitutes
The threat of substitutes for the automobile industry is moderately high. Customers will switch to
substitutes in response to price increases and their usage needs for the product. The substitutes for cars are
public transportation, motorcycles, bicycles, airplanes, and walking. Public transportation has limited
usage opportunities as the stops on a bus or train route are the only places one can arrive. Furthermore,
motorcycles are just as expensive as cars, if not more. They are limited in the sense that they cannot carry
more than two passengers and you must have a different type of license to drive them. Bicycles are
inexpensive compared to cars, however they do not provide the speed that comes with autos. It will take
more than double the time of a car to get to your destination. Airplanes are capable of traveling overseas,
however it is more expensive and the routes are limited. Also, one needs a means to get to and from the
airport, which complicates this form of transportation. Walking is great for short distances but not useful
for long ones. Although there are many pros and cons for each substitute, there are many different
transportation methods to choose from which makes the threat of substitutes high for the automobile
industry. That being said, these substitutes have been options for many decades and the automobile
industry has not suffered because of them. Therefore, the threat of substitutes is moderately high.
Threat of New Entrants
Due to high barriers of entry, the threat of new entrants is low for the automobile industry. The
industry utilizes a large economy of scale due to maturity, which deters entry. Product differentiation is
high due to the competition within the industry. Large capital investments are required to enter this
industry, specifically start up costs. One must have access to distribution channels, which is difficult
without knowledge and relationships with suppliers. Switching costs are high due to the amount of
investment it takes to switch from one project to another. There are a many government policies regarding
the industry such as pollution and emission guidelines on each automobile, carbon credits to companies
with eco friendly operations, and mileage requirements. The retaliation is high due to the high
competitive nature of the industry.
Threat of Suppliers
Suppliers of the automobile industry maintain a relatively low bargaining power. This being said,
steel has a high impact on the industry since it is the major raw material used. Relations between
manufacturers and suppliers are strong, and a high switching cost within these relationships has been built
in to the industry. There are many different steel suppliers and many different suppliers to make a car in
general. This lowers suppliers’ bargaining power and gives manufacturers many different options to
obtain their parts. However, the top suppliers in terms of quality produce for Honda and Toyota because
they have built those relationships and value quality. These quality suppliers are able to charge more for
their products, but this gap is closing as suppliers are continuously improving their materials.
Threat of Buyers
While the suppliers hold very little bargaining power, the buyers maintain a very tight grip on the
industry. Just recently the economy was in a downturn and the automobile industry was one of the hardest
hit industries. Consumers started having less money to spend on cars and manufacturers saw their profits
crash. Because this industry is highly saturated with manufacturers consumers have multiple options
when it comes to purchasing a car. With so many different manufacturers offering similar products,
consumers force the manufacturers to fight over their business. Dealerships also have a minor pull; they
just want to sell the companies that will earn them the most profit and they want to sell multiple brands,
not just one.
Intensity of Existing Rivalry
The intensity of rivalry among existing firms is high. The automobile industry is quite
concentrated. There are several companies and brands to choose from, as well as various styles and lines
of cars. When a market is growing, the intensity strengthens. This is currently occurring in the automobile
industry. Specifically, many companies including Jaguar, SAAB, and Lincoln/Cadillac/Buick are making
improvements to remain competitive. In addition, a company based out of India has purchased Volvo,
extending the industry to one of the most populated nations. The industry is capital intensive which also
strengthens the rivalry among firms. There are high fixed costs and companies must produce capacity to
attain the lowest unit costs. It is such a mature industry that differentiation between competitors has a
small impact on sales. Although there is high differentiation, there is only so much that companies can do
to distinguish themselves from one another. Therefore, the competition to be different and stand out is
fierce.
Firm Analysis
Financials
Financial analysis is critical in determining whether Hyundai should enter the luxury car market.
As one can see from their financial statements from 2006-2010, their company is in a stable, healthy
position (See Appendix – Figure 1). Their assets have grown 15.86% in 2010, compared to a -.87%
growth in 2006. Hyundai’s net income had a soaring 77.85% increase due to rising sales. They are taking
on less debt in 2010 compared to other years, their debt to equity ratio only being 7.86% in 2010
compared to 9.61% in the previous year. This is due to them financing more through their equity. Another
important ratio to note is their return on sales (Net Income before Interest and Taxes/Sales). In 2010, this
figure increased to 14.32%. This is a result from increasing operating income. This ratio lets us see how
Hyundai is growing more efficiently. Lastly, Hyundai’s earnings per share have increased from 10,890
KRW (in millions) to 19,409 KRW. This increase portrays how Hyundai is becoming a more profitable
company, and is also the result of increasing net income.
Hyundai engages in more overseas sales compared to their domestic sales (See Appendix –
Figure 2). From 2009-2010, their overseas sales increased dramatically because of Hyundai’s efforts to
enter emerging markets. An example of an emerging market that Hyundai is focused on is China.
Recently, Hyundai has also been interested in entering the luxury car market. Their first luxury vehicle
they introduced was the Genesis. Since 2008 (the year it was introduced), it has had steady sales, with a
slight increase each year (See Appendix – Figure 3). This is positive feedback for Hyundai, and gives
hope that their newest luxury vehicle, Equus, will also have success in the market.
Organizational Structure
Hyundai’s organizational structure is relatively flat, with little vertical depth across their
divisions. As a result, their internal structure and chain of command is relatively shallow, which
allows for a quick, but collaborative decision making. This lead to the creation of a lean board of
directors with relatively few members. Also, since Hyundai operates in a competitive industry
and has many high level competitors geographically close, resulting in a strong competitive
culture. Their product innovation and development is highly internalized as a result of the rivalry
amongst competitors. Hyundai values quick decision making and implementation, as well as a
drive to create a higher quality product than competitors.
Distribution Channels
Hyundai is a Korean company that was expanded globally. It is currently present in 193
countries and is the 8th largest automaker in the world. Hyundai has operations and distribution
channels in the US. They have a production facility in Alabama, a design facility in California,
and a technical engineering facility in Michigan. Although these facilities exist in the US,
Hyundai still needs to import a majority of their vehicles due to the fact that US demand does not
meet US production. Hyundai dealerships are stand alone enterprises, meaning they only sell
Hyundai vehicles, and are present in 50 states and are characterized by exclusive territories.
Current Offerings
The 2011 Hyundai line includes 13 automobiles available in the US markets. The compact market
segment has four different vehicles while their other segments have three options each.
Compacts
2011 Accent - 3 Door: $9,985
2011 Accent - 4 Door: $13, 695
2011 Elantra: $14, 830
2011 Elantra Touring: $15,995
Crossovers
2011 Tucson: $18,895
2011 Santa Fe: $21, 845
2011 Veracruz: $28,345
Family Sedans
2011 Sonata: $19,395
2011 Azera: $25,495
2011 Sonata Hybrid: $25, 795
Premium/Performance
2011 Genesis Coupe: $22, 250
2011 Genesis: $33,000
2011 Equus: $58,000
Current Markets
Hyundai is gaining US auto market share, currently at 4.7%, up .3% from last year (See Appendix
– Figure 4). Year to Year sales have also increased by nearly 30% (From 111,509 to 142,620 total sales).
Consumer perceptions are improving as the brand gains respect and market share. Hyundai now is viewed
as a quality affordable car, on par with Honda or Nissan, and currently has a higher perception than
Toyota. Just this year Hyundai’s Sonata was ranked best car for the small-car class by Consumer Reports,
beating out Toyota’s Corolla and the Honda Civic (See Appendix – Figure 5).
Competition in economy cars include: Nissan, Toyota, Honda, Ford, GM, VW, Suzuki. Each of
these firms, along with Hyundai, has established their place in the economy car market. Hyundai has used
the recession to make great strides here. Consumers looking at an inexpensive car find more than
expected, truly getting more value for their dollar. Hyundai’s recent ad campaigns, aimed at alleviating
the expectation of compact cars being uncomfortable, have demonstrated their mission to create a quality,
economy passenger vehicle.
Competition in luxury cars include: Lexus, Mazda, Volvo, Audi, BMW, Mercedes, Infiniti, and
Acura. Clearly more brands operate in this segment. There is also a higher level of competition amongst
brands here as the purchasing differences are based off quality not quantity. The recession also helped
sales in this segment. Hyundai offers an equally luxurious car as competitors but at a much lower cost to
consumers. “‘They’re really trying to use this recession as an opportunity to take market share, which
they have,’ Jessica Caldwell, director of industry analysis at Edmunds.com.” – NY Times.
Evaluation Strategies
RBV Analysis
Hyundai has many resources at its dispose, some of which are positives and strengths for the
company while others hinder Hyundai. Components within their value chain propel and block the
company from growth while working together in one way or another. In general, most of their strengths
come from the support side of the value chain, which is a sign of a good corporate structure. However its
negatives are found in various parts of value chain and need to be addressed in order for Hyundai to
continue to be profitable.
One positive resource for Hyundai is its well-structured currency exchange risk policy. Due to its
uniqueness, this policy is valuable, rare, inimitable, and non-substitutable. Their currency exchange
program is unique to Hyundai and is unlike any other seen in the industry. Hyundai operates on a global
scale and this policy allows for them to have an advanced understanding of exchange rates and currency
forecasts for the countries they do business in them. Essentially it safeguards them from losing money in
transactions due to currency exchange rates. Another positive is Hyundai’s quality advantage. This
relates to the technological development aspect in the support side of the value chain. It satisfies valuable
and the level of quality they have achieved is somewhat rare in the industry. Their quality is not
inimitable since other companies can offer similar quality and is therefore substitutable. Hyundai led the
industry in 2010 with five cars placing at the top of their respective segments in a total quality survey.
Furthermore, two of Hyundai’s cars placed in the top 20 cars sold in America last year (See Appendix –
Figure 6). Quality is something they need to continue to invest in and make it a differentiation point for
their company because the gaps are closing. Continuous investment in product development is one way to
obtain this. Hyundai also offers “Americas Best Warranty” which includes a 10 year 100,000 mile power
train protection plan. The warranty is credited to the marketing and sales component in the primary
activities of the value chain because it is a large selling point. However, their warranty is very imitable by
other car companies and is not a source of sustainable competitive advantage much like the frequent flyer
program in the airline industry. Hyundai has been on the frontier along with Ford for being the most fuelefficient auto company. Fuel efficiency is valuable and non-substitutable but it is not rare or inimitable.
This development in technology is at its upmost importance right now as gas prices continue to rise. Fuel
efficiency decreases the overall cost of ownership and in turn, increases overall value to the buyer. It is
especially important on a global scale since citizens of developing countries have less discretionary
income to spend on fuel.
Unfortunately Hyundai’s weaknesses come with its strengths. First, they lack long-term contracts
with commodity suppliers, which deal with the procurement in the support activities of the value chain.
Hyundai failed to secure these win-win relationships with suppliers that long-stays Toyota and Honda
have been so successful at. Not having long term contracts increases the uncertainty of COGS as
commodity prices fluctuate and in turn makes it much more difficult for the company to run at the highest
levels of financial efficiency. Hyundai car dealers also experience low margins on sales at 1.9% compared
to Honda dealers who make 3% margins. This is mostly attributed to consumer’s perception and their
unwillingness to spend more for the Hyundai brand. Low margins hurt their sales efforts because more
credible and established dealers choose to work with companies like Honda who offer higher margins.
Technology development is also a weakness for Hyundai because they offer a limited product line.
Hyundai lacks a luxury line along with multiple segments within their current product offering such as a
convertible and pick-up truck. The pick-up truck is the most profitable vehicle a company can make so in
this sense, Hyundai is missing a big boat. They need to invest more in research and development as far as
expanding its product line and offerings to consumers to better position itself in the market. All of these
previously mentioned weaknesses lead to Hyundai’s largest downfall, a low perceived brand image. This
can be blamed on their general and administrative activities in addition to their marketing and sales.
While auto trade publications continue to rank Hyundai high in quality reviews the consumer’s perception
has not changed much about the brand image. Buyers are still likely to spend less for the same amount of
quality when it comes to Hyundai and some of their competitors. Low brand image is a problem that is
hard to fix and is very inimitable and rare. A strong brand image increases value immensely but at the
same time Hyundai is taking steps to fix this problem.
Value Stick
The value stick analysis is used in order to compare value created between the Hyundai’s Equus
and Sonata, as well as the Lexus LS 460 (See Appendix – Figure 7). The Equus’s willingness to pay is
$58,900 and their cost is $55,104. Therefore the value created is $3,796. The Sonata only creates $159 of
value per unit. Then comparing the Hyundai’s Equus with the Lexus LS 460, the Equus still creates more
value. The Lexus LS 460 creates $3,369 of value per until compared with $3,796. This is because
Hyundai is able to charge a cheaper price than Lexus, while still offering the same luxuries and amenities
that the Lexus offers. Hyundai has a cost advantage. By analyzing the value sticks for these three
vehicles, one can predict that the Equus has a high chance for success.
Game Theory
With a few different potential options for Hyundai, we use game theory to break down the
potential for collaboration between Hyundai and Kia. The collaboration would involve using Kia as the
economy class brand while Hyundai moves into the luxury market. Because we do not know the outcome
of this collaboration, two separate prisoner’s dilemma in a joint venture game charts are needed; one for
successful collaboration and another for failed collaboration. Despite both outcomes suggesting an
incentive to defect, having the same ownership and ability to create a strategic partnership the focus is on
their collaboration.
Successful Collaboration:
Collaborate
Defect
Kia
10
12
Collaborate
10
Hyundai
5
5
Defect
12
8
8
Through successful collaboration between Hyundai and Kia, when both firms choose to
collaborate, each achieves a higher sales level than the current level. Because of the project design, if
only one firm chooses to switch to either only luxury or economy vehicles sales levels fall as the firm is
unable to occupy both low and high income markets. In this situation, the firm that chooses to defect on
the project attains the highest sales level due to less competition from the other firm. When both firms
choose to defect on the project, sales levels remain at the current level. While there is incentive for one
firm to defect on the project if the other carries it out, both firms can achieve a higher sales level through
collaboration on the project
Failed Collaboration:
Collaborate
Defect
Kia
5
Collaborate
Hyundai
5
Defect
12
3
3
12
8
8
In the case of failed collaboration between the two firms, when both firms choose to carry out the
project, sales levels fall below the current level. When only one firm chooses to carry out the project,
sales levels fall further due to the lack of diversity within the product line; while the other firm achieves a
sales level higher than the current level due to a decrease in competition. If both firms choose to defect
on the project, sales levels remain at the current level. Because neither firm has incentive to collaborate
the Nash equilibrium in this game is to defect on the project.
Potential Options
Option One – Separate Brand
In order to launch the luxury product line as a stand-alone brand Hyundai will need support and
commitment from upper management. Also, Hyundai will need to conduct separate market research for
this luxury brand with regards to consumer pricing, proper distribution channels and product positioning.
They must develop a new target market and distinguish a proper WTP resulting in an appropriate pricing
strategy, keeping him mind that luxury car consumers are less price sensitive. Therefore Hyundai will
have to further invest in marketing to generate interest in the new brand. Competition is high in the luxury
car market, and a new brand will need to be positioned in a way that allows for them to compete. The
advantage of separating the luxury cars from the Hyundai brand is that consumers will be able to view the
brand as a competitor with BMW, Mercedes, and Audi since the luxury brand will not be connected to a
Hyundai. Rather, it will be structured like its competitors within the luxury car market. In consumer’s
minds, the focus of the brand is offering the best features and capabilities amongst luxury cars rather than
for all product lines.
Option Two – Under Hyundai Brand
If Hyundai were to introduce the luxury cars as a product line within Hyundai’s current product
line the investment will be less than the first option. They will be able to sell the line at preexisting
Hyundai dealerships rather than create new distribution channels. Also, their existing buyers might adjust
their WTP because they are loyal to the brand and know the quality and features that they will be
receiving. Rather than gaining the trust and loyalty for a completely new brand line, Hyundai will already
have potential consumers. However, introducing the luxury brand within Hyundai’s product line has some
disadvantages. Certain consumers may not want to buy a luxury car, and therefore Hyundai will need to
conduct appropriate marketing to reach out to new consumers as well. Unfortunately, because the luxury
car will be introduced as part of Hyundai’s product line it may not be able to compete with brands like
Audi, BMW, and Mercedes. Consumers may not differentiate the luxury cars as a luxury brand because
they view it as an extension of Hyundai. There will be a level of disconnect between the luxury cars and
customer’s preconceived notions about Hyundai automobiles.
Option Three – Rebrand Hyundai as Luxury
Another option for Hyundai would be to stop producing economy cars under the Hyundai name.
They can collaborate with Kia to produce their models of economy cars under the Kia brand alongside
other Kia models. Thus, Hyundai will now be known as a luxury car brand. This option does not require
Hyundai to establish a new brand name, which is advantageous because competition in the luxury car
market is high. Introducing a new brand will require greater investment rather than redesigning and rebranding one that is preexisting. However, it may be difficult for Hyundai to transition from producing a
range of vehicles to solely luxury ones. Their target market will change and they will need to conduct
extensive market research in order to efficiently launch this new type of brand. Also, the culture of
Hyundai will need to realign with their new luxury brand rather than their traditional economy brand.
Option Four – Discontinue Luxury Line
If Hyundai chooses not to launch the luxury line at all they may miss the opportunity to expand
Hyundai. Currently discontinuing the luxury line seems like a mistake as, since the release of the Genesis,
that model has been one of Hyundai’s most profitable. On one hand, if the introduction flops, then
Hyundai could possibly save on the faulty investment.
Recommendation
Hyundai should utilize its internal strengths like its corporate support, quality and production
advantages, and industry leading fuel efficiency to combat its low brand image. In addition it’s important
for them to remain patient while they continue to produce higher quality vehicles and enter into the luxury
market. Entering into the luxury market with a sister brand should lend itself to a higher brand image
much to the likes of what Toyota has experience with Lexus. As shown in the value stick analysis,
Hyundai can make a higher gross margin from their luxury lines compared to their economy lines, while
still being priced competitively with other luxury brands. Despite the Nash Equilibrium resulting in
mutual defection, Hyundai will be able to communicate and create a binding, strategic collaboration with
other automakers. All in all, of the four potential options that Hyundai is faced with, the most attractive
decision is to create a sister brand, either for their economy vehicles or their luxury line.
Appendix
Figure 1
Figure 2
Figure 3
Hyundai Equus Unit Sales
50,000
40,000
30,000
20,000
10,000
0
2008
Figure 4
Figure 5
2009
2010
2011
Figure 6
Figure 7
Sources
Personal Interview - John Amato: Hyundai Dealership Owner, Milwaukee WI
Strategic Management, Gregory Dess et al. 5th Edition.
Wall Street Journal 2011 Auto Sales Data
<http://online.wsj.com/mdc/public/page/2_3022-autosales.html>
Hyundai Motor Company - World Wide
<http://worldwide.hyundai.com/>
Hyundai Motor Company – USA
<http://www.hyundaiusa.com/>
Hyundai Super Bowl Ads
<http://superbowl-ads.com/article_archive/2011/01/20/hyundai-super-bowl-marketing-campaignkicks-off-in-afc-championship/>
New York Times Article
<http://www.nytimes.com/2009/09/22/business/global/22hyundai.html>
Wall Street Journal Article
<http://online.wsj.com/article/SB10001424052748704506004576174480687898332.html?KEY
WORDS=market+data+hyun>dai
Dealer Article
<http://www.egmcartech.com/2011/03/22/hyundai-may-be-hot-dealers-profits-are-not/>
Arizona Central Article
<http://www.azcentral.com/business/articles/2010/06/03/20100603hyundaimuscle0604.html>
Commodity Chains & Global Capitalism, Gary Gereffi.
<http://books.google.com/books?id=A86j9pWfTcAC&pg=PA292&lpg=PA292&dq=hyundai+lac
k+of+commodities+contracts&source=bl&ots=gGa_00NBSb&sig=d-sRQEEFnRHhbU4BxHTV1CrJ4o&hl=en&ei=wb21TbuTHKLq0gGLoeH7CA&sa=X&oi=book_result&ct=result&resnum=3&sqi=2&v
ed=0CCoQ6AEwAg#v=onepage&q&f=false >