Marketing 6525 Case Study

THE FUTURE OF HYBRID ELECTRIC VEHICLES

Date: November 9, 2005

By: Donna GaudetSyed KazmiLora Sloan

Table of Contents

Introduction......................................................................................................................3

Problem Statement........................................................................................................3

Situation Analysis.........................................................................................................4

Network Model.............................................................................................................5

Resource Identification.................................................................................................6

Alternatives and Evaluation.............................................................................................7

Recommendation...........................................................................................................10

Implementation..............................................................................................................12

Appendices....................................................................................................................13

Appendix 1: SWOT Analysis....................................................................................13

Introduction

Honda is a well-known and reputable car manufacturer in North America. It is

now 2002, and Honda is planning on launching its second Hybrid Electric Vehicle (HEV)

to the market - a hybrid version of Honda's top selling vehicle, the Civic. The company's

first HEV, the two-seater Honda Insight coupe, was introduced to the U.S. in 1999. It

experienced modest sales of 3,788 units in 2000 and 5,000 units in 2001 and retailed at a

base price of approximately $19,100. However, demand outstripped supply and

consumers were forced to wait between one to two months for their vehicles.

Honda anticipates that sales of the hybrid Civic model will be much stronger than

previous HEV models, since the Civic already possesses a longstanding, strong brand

name. Right now, Honda must decide if they are willing to launch the hybrid Civic and

make it a part of its production line-up, despite the uncertain reception of the vehicle in

the market and the risk of a potential loss in profits.

Problem Statement

The problem that Honda faces right now, which could hurt the company’s overall

profits, is that consumers are not well educated and informed about the benefits that this

hybrid technology can offer. In other words, the positive features of a HEV have not

been marketed well enough to change buyers’ outlook on transportation options and train

them to look beyond the price premium (of up to $5,000) and buy a hybrid car.

According to a large-sample survey of recent car buyers, the top three factors that were

identified as being most important when purchasing a car were “reliability”, “value for

the money” and “well-made vehicle”. Similarly, auto dealers stated that buyers routinely

ranked “functionality”, “safety” and “price” as important factors when shopping for a car.

Factors, such as “gas mileage”, “technical innovation” and “environmentally friendly”

were also listed, but were all ranked well below the top five. Therefore, Honda is faced

with the obstacle of teaching buyers to consider other aspects when purchasing its new

Civic hybrid model.

Situation Analysis

The automobile industry is a very mature and is based almost entirely on gas engines. It

is a highly competitive and consolidated industry, however, Honda differentiates itself

with a value strategy.

Internal Analysis

Strengths

Honda Motor Company has a very strong reputation around the world for building

quality, reliable and performance-oriented automobiles, motorcycles and power

equipment. Honda has traditionally focused heavily on R&D capabilities and thus it

tends to be on the cutting edge of automotive technology.

Weaknesses

Adding high tech and performance-oriented features to their cars has meant that Honda

has occasionally had to recall their products, leading to a weaker brand image. In

addition, the spending on R&D has led to declining operating margins while the market

share is threatened by huge lineups from Toyota and Nissan.

Opportunities

There is an upsurge of interest in environmentally friendly vehicles, and Honda’s R&D

focus means that it is well poised to capitalize on its expertise in this industry. In

addition, Honda is a major player in the emerging markets (BRIC countries).

Threats

Rising oil and raw material prices in the world market can lead to decreased demand for

automotive vehicles. In addition, increased costs have led to decreased consumer

spending and the competitive rivalry is very high in this industry.

External Analysis

Political - There is increased pressure on governments from lobby groups to provide tax

incentives and subsidies to encourage consumers to purchase more environmentally

sensitive products. In addition, the Kyoto Accord has led to a renewed focus on reducing

pollutants.

Economic - Rising gas prices and increased costs of cleaning pollutants have started

hurting the consumer’s pocketbooks.

Social - Consumers have a higher awareness of the hidden costs of pollutants, and are

also more sensitive to prices. Therefore, there is a large number of consumers who are

willing to pay for technology and products that will help the environment.

Technology - Recent R&D investment into hybrid technology has led to significant gains

in efficiency and reductions in cost of the technology.

Network Model

User Network – The identified user network for hybrid cars would be the consumers who

see a benefit to paying a premium for these cars in the hope that the expected benefit to

the environment will be enough to justify the extra cost.

Complement Network – The complement network includes the dealers, gas stations and

service facilities that facilitate the ownership, operation and maintenance of any

automobile.

Producer Network – The producer network includes Honda Motor car, it’s automotive

parts suppliers and all other stakeholders associated with the production of the

automobile

Now using the Identify -> Differentiate -> Interact -> Customize model we have

to progress down a path of methodically segmenting our current target market into

smaller segments that we can target individually. At the customize stage, Honda should

be flexible enough to be able to offer the customers who require higher value the

products that they need, while focus on driving down their cost-to-serve for the lower

margin consumers.

Resource Identification

Having completed our SWOT analysis and our network model breakdown, we

can come to some key identifications of success factors in a product that the industry

requires to be successful. In addition, we can then compare these factors to the core

competencies of the Honda hybrid initiative.

We can see that car buyers value three factors above any other: “reliability”, “value for

the money” and “well-made vehicle”. Honda can provide all of these but there is

uncertainty in the first. Because the hybrid engines have not been around a long time, car

buyers are uncertain of the long term maintenance costs of such vehicles. In addition,

they are also not sure about the resale value of these cars, something which ties in to our

next point. Although hybrid cars have traditionally not been able to makeup their

premium strictly via gasoline cost savings, Honda has strived to only price the hybrid

Civic about $1000 - $2000 above the normal Civic. This minimzes the non-tangible

benefit that Honda needs to prove to consumers to persuade them to buy the car. In

addition, hybrids cost about $4 to $5 thousand more to produce than regular vehicles.

Honda is subsidizing a large portion of this cost to make the vehicle more affordable to

the consumers. In terms of reliability, Honda has a global reputation as a maker of quality

automobiles.

Alternatives and Evaluation

After analyzing this case, it is apparent that Honda must choose one of two paths.

Namely, launch the Civic hybrid or not launch. However, if Honda decides to launch, it

can either manufacture a full hybrid or mild hybrid version. Therefore, Honda is

essentially faced with three alternatives: (1) launch a full hybrid model, (2) launch a mild

hybrid model or (3) decide not to launch a hybrid in the North American market at all.

Before we can elaborate on the pros and cons and evaluate each alternative, we

must consider some very relevant underlying issues that exist in the case. Specifically,

there are some key questions that must be addressed when assessing both Alternative One

and Alternative Two. For example, should Honda lobby for government subsidies and/or

tax credits in order to mitigate its exposure to potential profit losses or should it fully

expose itself to this risk? How many vehicles should Honda manufacture (since price

decreases with economies of scale)? And how much money should Honda invest in

marketing to educate consumers and promote the product? The suggested answers to

these questions will be given in the Recommendation.

Alternative One: Launch a Full Hybrid Version of the Civic

One of the obvious pros to launching the full hybrid Civic would be that Honda

would become a market leader with respect to alternative-fuel vehicles. Specifically,

Honda could gain a competitive advantage over its competitors by leveraging its

knowledge and expertise gained early on during the introduction of the Honda Insight. In

addition, Honda could also earn the reputation of being environmentally friendly and at

the cutting edge of automotive technology. For instance, the full hybrid can improve gas

mileage by as much as 100% over a comparable gasoline-only vehicle, which would

decrease the amount of emissions produced. Creating this image could be very beneficial

for Honda; especially in a society whose emphasis and attention on sustainable

development and the environment will only continue to escalate.

There are also some potentially negative implications to launching the full hybrid

Civic. First and foremost, there is the potential that margins generated from the new

model will be lower than expected. The cost of producing a full hybrid vehicle is

substantially higher than the costs involved in manufacturing a comparable gasoline-only

car. In fact, some industry experts estimate that this value is somewhere in the range of

$4,000 to $5,000. In addition, the current demand for hybrids is not strong enough to

engender economies of scale (which would lower the retail price). Also, adverse studies

show that it takes several years before the gas savings from hybrids offset the price

premium. For many buyers, the intrinsic environmental benefits of buying a hybrid are

not enough - on their own - to justify paying a higher price. Therefore, Honda could lose

money by launching the full-hybrid Civic. Another potential con is that Honda’s

competitors can reap the benefits of being a follower. They can avoid the evident risks of

introducing a hybrid now, and learn from Honda’s mistakes. Afterwards, these

competitors can use what they have learned and produce a superior product that would

directly compete with Honda’s vehicles.

Alternative Two: Launch a Mild Hybrid Version of the Civic

One of the pros of manufacturing a mild hybrid version is that the mild hybrid

technology can be more easily incorporated into current vehicle models than the full

hybrid technology. As a result, the premium incorporated in the price of a mild hybrid is

lower than in that of a full hybrid. For example, the price premium associated with a full

hybrid is approximately $5,000, relative to the $2,000 to $3,000 price premium

associated with a mild hybrid version. This lower premium may increase consumer

demand for hybrid vehicles and allow Honda to manufacture on a larger scale. Also,

launching a mild hybrid would allow Honda to offer comparable prices to other hybrid

models produced by other vehicle manufacturers. Most other American manufacturers

interested in offering hybrid vehicles have chosen to employ the mild hybrid technology

for the reasons mentioned above. If Honda decides to manufacture a full hybrid, its

prices may too high and buyers interested in purchasing a hybrid may be attracted to the

lower prices offered by Honda’s competitors.

One of the cons of manufacturing a mild hybrid vehicle is that this option seems to be a

step backwards in terms of technological progress. Honda spent significant time and

money toward developing its full hybrid Insight model and to employ the less-advanced

mild hybrid technology would almost be counterintuitive. Moreover, by launching a mild

hybrid, Honda would lose its opportunity to distinguish its product from those of its

competitors and perhaps relinquish a temporary competitive advantage. Another con

would be that Honda might damage its image of being a company concerned about the

preservation of the environment. Although mild hybrid technology offers superior gas

mileage compared to a traditional gasoline-only vehicle, it can only improve it by 10% to

20%. This is almost insignificant and seems to make the entire process pointless.

Alternative Three: Do Not Launch the Civic Hybrid

If Honda does not launch the Civic hybrid model, it avoids any of the risks associated

with its manufacture. However, Honda is currently a market leader in the hybrid car

segment and has already invested a lot of money into research and development. A

decision to withdraw from the launch of the Civic hybrid would appear to go against the

organizational strategy witnessed to date and may forgo an opportunity to achieve a

competitive advantage in this cutthroat industry.

Recommendation

After weighing the pros and cons of each alternative, we have come to the

conclusion that Alternative One is the most attractive option for Honda. Full hybrid

technology is not being implemented in the vehicles of most of Honda’s competition.

Therefore, by utilizing the technology it already has, Honda currently has the opportunity

to distinguish its product from those of its rivals and achieve a competitive advantage in

the industry. There are some risks related to launching the full hybrid Civic but these

risks can be mitigated with proper marketing campaigns and education initiatives.

Firstly, Honda should lobby the government for subsidies and/or tax credits in

order to offset the price premium of the vehicle. This will both encourage consumers to

buy a hybrid and to minimize Honda’s risk of losing money. There have already been

discussions about increasing tax credits to $3,000 per vehicle. Therefore, Honda should

try and confirm this increase before launching the new model. This tax incentive would

surely make the marketing of the product easier. Also, any subsidy program the

government could offer would likely eliminate any hesitations Honda might have in

moving forward.

In terms of marketing, Honda should consider investing a considerable amount of

money toward educating the public about benefits of a full hybrid Civic via a large-scale

marketing campaign. Luckily, Honda already has an established brand name, but it now

must focus on teaching consumers both the financial and social rewards of buying a

hybrid. For example, not only do hybrids have superior gas mileage (dollar savings), but

also reduce the amount of emissions released into the air. Studies have shown that visits

to dealerships, consumer guides and word of mouth are the three most useful sources of

information for potential buyers. Therefore, Honda should ensure that its dealership sales

team is prepared to handle inquiries about the product and be able to convincingly sell the

attractive features of the vehicle. Moreover, Honda should create a lot of excitement and

propaganda (especially during the year before and of the launch) about the new product,

with special focus on public relations.

In addition to these tactics, Honda can improve its chances of making this venture

profitable by establishing strong producer and complements networks. For example,

Honda could sell their hybrid technology to other car manufacturers and generate revenue

by creating a special maintenance service for hybrid cars (if they are perceived as experts

in the field). In conclusion, the Honda Civic has a strong brand as a fuel efficient, easily

maintainable car. Creating a hybrid version of this model follows along with their

existing strategy, thereby strengthening their brand.

Implementation

Honda already has plans to offer the hybrid Civic in 2002, effectively for its 2003 model

year. Our focus is on marketing this model, rather than manufacturing it, as Honda

already has the manufacturing plan well underway. At a high level, our implementation

plan includes:

Lobby the government for subsidies and/or tax credits starting immediately.

In the summer of 2002, hold training seminars for all Honda Dealers, to ensure

they are up to speed on the hybrid as well as its benefits.

Create promotional packages for each dealership to bring an awareness of the

hybrid to those who are shopping for new cars. These should be in place at the

dealerships before the new model year cars are available, essentially in August

2002 at the latest.

Utilize car shows as soon as possible to incorporate as much of a “wow” factor as

can be gleaned due to the high technology nature of the hybrid engine in an every

day automobile.

Place promotional material in consumer guides beginning in September 2002, for

a 6-month period. Revisit this item at the end of term to see if it is effective.

We anticipate Honda allocating approximately 5% of their marketing budget to

the hybrid Civic, keeping in mind that all Brand advertising for the Civic will also

include the hybrid model.

Appendices

Appendix 1: SWOT Analysis

Marketing Mix Strengths WeaknessesProduct Strong Brand & Reputation

R&D-Cannibalization of existing market-Recalls

Price -Hybrid costs more to build so a premium on price; few sold so few economies of scale-Declining operating margin

Promotion Can capitalize on the existing Brand

Place - Growing market (more interest in environment)- Well placed in emerging markets

Still just a small niche market

Area Opportunities ThreatsSocial Hybrid reputation – stop gap measure,

poor acceleration, not as much powerTechnological - Get into the market early

- expertise in hybrids- improved hybrid performance

- Mild hybrids, fuel cell cars, alternative fuels- Highly competitive market

Economic Environmentally friendly –reduces emissions

- Globalization and Consolidation- Price of Gas- Rising cost of cleaning pollutants- decreased consumer spending

Political - In line with government requirements to reduce emissions- reduces reliance on foreign fuel

- Kyoto Accord