Where N = Number of Segments
S = The percentage share of the ith segment
The European Automotive Industry
SEGMENTATION AND STRATEGIC GROUPS
In this section we shall discuss segmentation and strategic
groups. These two are interre-lated, as we use the market
segmentation to divide the actors into strategic groups.
While segmentation analysis concentrates on the characteristics
of product markets as the basis for dividing industries,
strategic group analysis uses the characteristics of firms as the
basis for division. When the nature of intensity of competition
varies within an indu-stry, it is useful to divide the industry
into segments and analyse its structural characteri-stics.
Segmentation is not only useful for the new entrants in
determining which part of a market to enter, but also for the
established firms in deciding in which segments to main-tain a
presence and how to allocate resources between them .
Strategic groups are defined as clusters of firms within an
industry that have common characteristics and thus follow the
same or similar strategies in setting key decision varia-bles.
These key decision variables may include product market scope,
choice of distributi-on channels, levels of product quality,
degree of vertical integration, choice of technology and so on. A
strategic group is part of an industry that may play a role in
understanding performance differences among firms. One group of
firms may exhibit high advertising to sales ratios, extensive
marketing efforts, careful attention to services and wide brand
ran-ges. Other groups of firms in the same industry may follow
the quite different strategy, focusing perhaps on volume
production of a single brand.
In terms of analysis, the strategic group is a middle ground
between the industry and the firm. In some industries, the group
structure is obvious and very important. In other indu-stries,
some differences in strategies among firms seem to exist, but
they only play a little permanent role in the evolution of the
industry. Strategic group analysis is unlikely to of-fer much
insight into why some firms are more profitable than others. It,
however, provi-des a broad picture of types of firms within an
industry. Furthermore, It can contribute to an understanding of
the structure, competitive dynamics and the evolution of an
industry and to issues of strategic management within it.
MARKET SEGMENTATION
The European market for passenger cars consists of a number of
different sized automo-biles. In this section we will discuss the
segmentation of the European passenger car mar-ket.
There are numerous ways in which the car market can be segmented,
but it is usual to divide it into some distinct groups according
to a combination of size and price. The UK motor industry trade
association, the society of Motor Manufacturers and Traders
(SMMT), has now formalised segmentation into nine market segments
on the basis of vehicle size, and this method has been widely
accepted throughout the industry.
Nine segments have been identified, and together they cover
almost 99% of the European car market. Each is defined as follows
:
# A segment-mini
# B segment-small
# C segment-lower-medium
# D segment-upper-medium
# E segment-executive
# F segment-luxury
# G segment-sports
# H segment-dual-purpose
# I segment-multi-purpose vehicle (MPV)
In this project, we will mainly analyse the first 7 segments (A -
G), as the H and I seg-ments are less well defined, and make up a
small part of the total market.
Segmentation Overview
Before we discuss the details of each segment, we will present a
quick overview of the markets overall segmentation.
Indsæt figure 6.1 fra side 76
Two segments, small cars and lower-medium cars, both of which
account for a 30% mar-ket share, dominate the European market.
The upper-medium sector is slightly smaller than the other two
sectors, but if one add these three together, it accounts for
over 80% of the total market in terms of units.
The other segment with a significant volume of vehicles is the
executive car segment, while all others are considered to be
niche markets.
The concentration of the market within these three main sectors
influences the strategy of the manufacturers. Companies such as
Mercedes-Benz and Audi have had very little inte-rest in these
segments historically, but because of the big market share of
these three seg-ments, they can't ignore them, and are now
introducing or planning models in these seg-ments in order to get
a bigger market share. On the other hand, the companies, which
tra-ditionally dominated these segments, are now looking at ways
of breaking down each market area into sub segments and offering
specific models for each. An example of this is the C segment,
which we shall discuss later in section 6.1.4.
The smaller market segments are also important to most
manufacturers. Such smaller and niche market segments often
represent new or growing markets that are important for all
manufacturers.
In appendix C we have produced a table, showing the importance of
different segments in different markets. Further in Appendix D,
we have shown the importance of different segments to different
manufacturers.
6.1.2 Segment A: Mini Cars
This segment has never been a major part of the overall car
market in Europe, and demand for these vehicles fluctuate
significantly. In the European market, the consumers tend to
think that these cars are too small for general use.
Although the cars are priced at the entry level for the car
market, most new car buyers bypass this segment and move straight
to the B segment. Consequently the A segment has not grown in
recent years.
Italy is by far the largest market for mini cars, with more than
twice as many registrations as France. Generally speaking mini
cars are more popular in southern Europe, except for Spain and
Portugal that have below average shares of their markets
controlled by minis. The use of mini cars in Scandinavia is
almost non-existent.
Most of the broad line manufacturers now produce so called sub-B
segment cars, which are cut-down versions of B segment cars
rather than specific designs for the A segment. In this segment,
Fiat Cinquecento and the Renault Twingo have been very
successful. Ford launched the Ka in the late 1996 and GM will
follow with a more conventional sub-B model in 1997. Volkswagen
launched SEAT Arosa and Lupo in early 1997. Mercedes-Benz in a
joint venture with SMH of Switzerland will launch the Smart Car
in 1998. The pure A segment seems to be fairly static in terms of
growth, but there could be a lot of potential in the sub-B class.
However, at present Fiat totally dominates this segment, with 78
% of the market .
Segment B: Small Cars
The B segment is one of the largest two segments of the car
market. (The other one is the C segment). If all the new sub-B
cars were included in this segment, it would become larger than
the C segment.
Between 1995 and 1996, the B segment grew marginally more than
the total market and it remains the key market sector, since this
segment is the entry-level for most first-time buyers in the new
car market. In this segment, the design is usually a hatchback in
order to maximise the volume of the car with the comparatively
short length. Besides this most models provide a degree of choice
for the customer, such as the choice of 3- or 5- doors and a
variety of engines, including diesel.
Among the models in this segment, the Fiat Punto is the best
selling car . In 1996, the new Fiesta and the Corsa sales
increased too. The Polo also rose sharply, whereas the Clio,
which was the segment leader in 1992, dropped away further.
Typically, the best-selling model will sell about 600,000 cars,
but it is a very competitive sector and the lea-der changes
frequently. In recent years Fiat, Ford and Renault have led the
sector, becau-se of the high volumes involved.
The B segment is likely to grow in the future as a function of
the ageing population, a growing car parc and changes in
household structures, such as the growth in single house-holds
and retired lifestyles. Linked with this, is the increase in
individual choice with the rise of multi-car households.
The B segment has been fragmented into four broad groupings. The
advantage of doing this is that manufacturers can reorganise the
product line-up in order to target an increa-singly fragmented
market. Thus the 90's has seen the emergence of three sections
within the B segments. There are the traditional cars, which are
practical general purpose cars, and small cars designed for urban
driving, as well as new cars with improved driving dy-namics.
Further, some of the high-end producers have introduced small
luxury cars in this segment.
The market share for this segment in the European Market as a
whole, is 30%, but in France and Italy it is well over 40% and in
Portugal over 50%. In the Scandinavian coun-tries the market
share is rather small, as well as in the German Market.
Segment C: Lower Medium
This segment is the largest segment of the European car market
and the most competitive one too.
It is the area where private buyers of new cars and company
buyers overlap. Competition is further increased in this segment
because both traditional manufacturers of small cars, and
up-scale manufacturers eye this market. The sector grew by 7.3%
in 1996, which is 1 %-point more than the market average.
VW is the largest company in this segment, due to its highly
successful Golf model . The other leading models are Opel Astra
and Ford Escort. Although the sales of these three models are on
decline, they still hold on to their leading position. Several
up-scale manufacturers have entered this segment in 1996, such as
Audi A3 and the Mercedes-Benz A-class. This is a logical move for
both companies as they are extending their range into a large
market where they have not previously been represented.
The market share for this segment is relatively even across
Europe. The big markets such as Germany, France and the UK are
fairly near the average. Italy is relatively small be-cause it is
so much stronger in small cars. Denmark, Austria, Finland and
Ireland are large markets for this segment.
Segment D: Upper Medium
Segment D is the 3rd largest segment after B and C segment as it
accounts for 21% of the market. It grew by 7% in 1996, more than
the market as a whole, but no company domi-nates this sector.
In the late 1980s and early 1990s GM's Opel Vectra was the best
selling car in this seg-ment. Ford fought back with the Mondeo,
and achieved leadership from 1993. By 1995 there were six models
outselling the GM Vectra/Cavalier, however in 1996 the full power
of the GM marketing effort was brought to bear, and the Vectra
once again became the top-selling car. All its competitors
slipped back in 1996 with the exception of the Audi A4 and the VW
Passat.
This segment is popular throughout Europe, although it is
stronger in northern Europe than it is in south. Of the four
largest markets, Germany and UK are strong, while France and
Italy are relatively small in the D segment. Conversely in
Belgium, Netherlands and all the Scandinavian countries, D
segment cars are popular. In Denmark, Finland and Norway it holds
over one-third of the market shares.
Segment E: Executive cars
The executive car segment is a relatively small part of the
European market, with less than 10% of the total. In 1996 it only
grew by 1.6%, far less than the market as a whole. The overall
share fell to 8.4%. However, it still accounts for over 1m cars
each year and it is important for the prestige of the
manufacturers involved. Thus performance in this seg-ment may
affect performance in the other segments.
Mercedes-Benz is the dominant player, with almost 40% of the
total market segment. BMW and Volvo are the other significant
manufacturers. VW does not make vehicles in this category,
leaving the field to Audi. Ford and GM participate in this
segment too. GM has share of this market with Omega model, and
Ford with its Scorpio, but in general, they are regarded as minor
players.
Germany is by far the most important market in this segment. It
accounts for over 45% of the market demand. The highest market
share is demonstrated in Sweden. The Volvo and Saab models make
the market share of E-segment cars over one-third of the market.
Fin-land, Norway, Switzerland, Luxembourg and Belgium also have
high proportion of the E-segment cars.
Segment F: Luxury Cars
This is the smallest of all segments in the European car market,
accounting for less than 100,000 vehicles. However, it is a very
prestigious and profitable segment and thus it is highly
important to the manufacturers.
The market leader in this segment is Mercedes-Benz. The largest
market by far is Ger-many, accounting for over half of all luxury
cars sold. The UK is also a substantial mar-ket, while France and
Italy are relatively small. Belgium Switzerland and Luxembourg
are significant markets for this segment, relative to their small
size.
The Mercedes-Benz has decided that they will reduce the size of
its current S-class and will introduce a larger, more luxurious
new class above the existing range. All the other manufactures in
this segment are looking into other markets. Audi, BMW and
Mercedes-Benz are all bringing out smaller cars and Jaguar is
moving back into areas of the sports segment that it had
abandoned previously.
Segment G: Specialist sports cars
This segment is a small niche in European Market, but lately it
has received much attenti-on from companies that had previously
abandoned the segment.
GM leads the market with over a quarter of all sales with its
Tigra model. Ford and GM have developed sports cars from time to
time to complement their standard range. The Opel Calibra, first
into market in 1990, sold over 60,000 units across Europe within
two years. In this section, the design of the cars is very
important and attracted to more and more customers' attention.
Therefore nearly all the big companies are have product in these
segments.
The biggest market for sports cars is Germany, followed by UK and
Italy. The market with highest penetration of sports cars is
Switzerland, closely followed by Luxembourg. Other countries with
an above average preference for these cars are Italy, UK, and
Ger-many. In contrast, the Scandinavian countries have very few
sports cars relative to their overall markets and France is below
the average.
The long-term growth of this segment is secure due to changes in
the lifestyle and an in-crease in discretionary income.
Manufacturers have invested heavily in this segment, and some new
models have and will come to the market.
STRATEGIC GROUPS
Below we shall divide the actors into strategic groups. As
mentioned above, this can be done through a number of criteria.
We shall use the segments discussed above for our strategic group
analysis.
For the first criteria we shall use diversification of product
lines. Thus the actors will be segmented on a basis of niche
players versus broad line producers. The second criteria will be
up scale versus down scale producer. For both criteria we shall
use the market segments above. Thus by diversification we mean
how well the company's products are dispersed across the
segments, while the latter criteria refers to the companys most
im-portant segment.
Finding a good measure of the latter criteria is easy. Here we
simply choose the segment in which the company sells most units.
Thus companies will be placed on a scale from segment A to G. It
would be more optimal to use sales in each segment, for this
analysis, but unfortunately such data has been unavailable. Hence
there is a bias towards the lower priced segments.
Finding a measure for the diversification criteria is more
difficult. Simply using the num-ber of segments in which the
company is represented is inadequate, since it only measures the
number of segments, and doesn't take the importance of each
segment into account. An example is Mercedes-Benz that is
represented in 3 segments, but has 91,6% of its sa-les in the E
segment. Instead we need a measure that takes the amount of sales
in each segment into account. For this we shall use the following
formula:
Where N = Number of Segments
S = The percentage share of the ith segment
This index works by squaring the market shares individually,
while the square root is ta-ken of the total. Thus firms that
operate in only one segment (Niche Players) will receive an index
score of 100, while firms that are differentiated across an
indefinite number of segments, will receive a score of 1.
The summation part of the index is the same as the
Herfindahl-Hirschman index, which is normally used to calculate
the concentration within an industry. Thus this index is simply a
different use of the HHI, although we have added the square root.
This is done to avoid the exponential character of the HHI.
In appendix D we have shown how the new registrations of
different manufactures are distributed across the segments. We
have used this to set up the table below.
Table 6.1 
Source: Appendix D
The data in the table is then used to set up the diagram
below. From the diagram we can identify 4 strategic groups:
Nr. 1: Diversified Low End Producers:
Nissan, PSA, Fiat, Ford, GM, Renault Suzuki
Nr.2: Diversified High End Producers:
BMW, Mazda, Toyota and Volkswagen
Nr.3: Specialised Medium Producers:
Honda
Nr.4: Specialised High End Producers:
Mercedes, Volvo
Obviously this result is heavily dependent on the chosen
criteria. In many textbooks regarding the automotive industry, a
similar analysis is conducted with respect to the
differentiation, and the extend to which the company has a global
focus. We have chosen a different approach because this report is
focused only on the European market. Thus the global scope of
companies is of lesser importance.
The Strategic Groups below consist of companies that continuously
run into each as op-ponents in the European market. This happens
because companies in the same strategic group, focus on the same
primary segment, and run into each other across many of these
segments. For example are Volkswagen and BMW likely to compete in
almost all their market segments.
Indsæt figure 6.2 fra side 85
One should be very careful when using a strategic group
analysis in the car industry. The industry is highly competitive
in nature, and even companies that are distanced from each other
in the diagram below, are likely to compete in some market
segments. An example of this is Fiat and Mercedes, which are
positioned at opposite ends of the diagram. Even so they face
each other in the E segment (See appendix D). This demonstrates
that in the car industry, all companies compete against each
other in some ways. Thus the strategic group analysis is merely a
measure, of which companies face each other most often.
It is evident from the figure above, that there are very few
specialised manufacturers. This is an effect of the horizontal
integration in the industry. An example is the BMW group, which
use its BMW brand for vehicles at the high end of the market, and
its Rover brand for vehicles at the lower end of the market.
Another reason is that this analysis only con-tains large
companies, and thus smaller specialised companies are not
included.
SECTION SUMMARY
In this chapter we have divided the market for passenger cars in
Europe into seven seg-ments according to vehicle size. The most
important of these, are the segments for small cars and lower
medium sized cars. However luxury cars are also important for
prestige reasons, while some of the small segments are important,
as high growth is expected in these segments.
The segments have been used for an analysis of strategic groups.
Here we use diversifica-tion across segments, and primary
segments as criteria. For the first criteria we used the index in
section 6.2 to make a quantifiable measure.
Through the analysis we identified four different strategic
groups. The significance of this analysis is that firms within
each strategic group compete against each other in several
segments. Thus actors should be especially aware of the moves of
actors within their own strategic group. However, in the car
industry there is also heavy competition across these segments.