Hyundai Consultant ReportTeam Seven

4/26/2011MGMT 4000: Strategic Management

Michelle Marshall, Isaac Sokol, Tina StCyr, Kevin Voigtschild, Chris Yonushewski

Decision IssueOur 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 AnalysisWe 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 SubstitutesThe 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 SuppliersSuppliers 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 BuyersWhile 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 RivalryThe 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

FinancialsFinancial 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 StructureHyundai’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 ChannelsHyundai 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 OfferingsThe 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.

Compacts2011 Accent - 3 Door: $9,9852011 Accent - 4 Door: $13, 6952011 Elantra: $14, 8302011 Elantra Touring: $15,995

Family Sedans2011 Sonata: $19,3952011 Azera: $25,4952011 Sonata Hybrid: $25, 795

Crossovers2011 Tucson: $18,8952011 Santa Fe: $21, 8452011 Veracruz: $28,345

Premium/Performance2011 Genesis Coupe: $22, 2502011 Genesis: $33,0002011 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 AnalysisHyundai 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 fuel-

efficient 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 StickThe 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 TheoryWith 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

Collaborate

Hyundai

Defect

10

10

12

5

5

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

Collaborate

Hyundai

Defect

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.

5

5

12

3

3

12

8

8

Potential Options

Option One – Separate BrandIn 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 BrandIf 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 LuxuryAnother 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 re-

branding 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 LineIf 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.

RecommendationHyundai 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

2008 2009 2010 20110

10,00020,00030,00040,00050,000

Hyundai Equus Unit Sales

Figure 4

Figure 5

Figure 6

Figure 7

Sources

Personal Interview - John Amato: Hyundai Dealership Owner, Milwaukee WI

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Hyundai Motor Company - World Wide <http://worldwide.hyundai.com/>

Hyundai Motor Company – USA <http://www.hyundaiusa.com/>

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kicks-off-in-afc-championship/>

New York Times Article <http://www.nytimes.com/2009/09/22/business/global/22hyundai.html>

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KEYWORDS=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+lack+of+commodities+contracts&source=bl&ots=gGa_00NBSb&sig=d-sRQEEFnRHhbU4BxHTV1CrJ-4o&hl=en&ei=wb21TbuTHKLq0gGLoeH7CA&sa=X&oi=book_result&ct=result&resnum=3&sqi=2&ved=0CCoQ6AEwAg#v=onepage&q&f=false >