Market Segmentation Theories in the Automobile Industry

Market Segmentation Theories in the Automobile Industry

Running head: Market Segmentation Theories in the Automobile Industry: Literature Review 1

Market Segmentation Theories in the Automobile Industry: Literature Review 1

Market Segmentation Theories in the Automobile Industry: Literature Review

Valesha Temple

October 21, 2018

Theories

A common theory that is practiced among most major market leaders within the automotive industry pertains to segmenting one’s automobile products as being either low, medium, or high end, according to Thun (2018). Such segmentation allows automobile organizations to target specific bases of consumers by catering directly to the needs of each demographic (Thun, 2018). For example, medium end vehicles are found to be more sought after by middle-class families whom typically value a mixture of cost-effectiveness, quality, and economic gas mileage. Such consumers have progressed in their lives beyond the point of only being able to afford a low-end vehicle, but cannot justify spending the money on a luxury vehicle with children in tow who need financial support, while also adding extra wear and tear to vehicles. This stated, according to Thun, the medium end segment is one that requires a great balance of strategy in order to garner success and achieve consumer satisfaction. As the study states, “The middle segment is a crucial pathway for the development of new capabilities because it forces foreign and local firms to combine and re-combine their respective resources in new ways so as to achieve the exact ratio of price and quality demanded by ‘value for money’ customers” (Thun, 2018, p. 7).

In other words, operating within the medium end automobile segment is difficult for manufacturers that seek to market wholly domestically produced products (Thun, 2018). The two cornerstones do not easily go hand-in-hand. Rather, imported parts are often most associated with low-end segment automobiles, a mixture of imported and domestically produced parts are associated with medium end vehicles, and wholly domestically produced parts are typically associated with upper-end vehicles, although some variance does occur by country, of course (Thun, 2018). In this case, China was the particular country of study.

Achieving innovation in conjunction with maintaining previously strategized price point goals sometimes proves difficult for some automobile manufacturers, although is a theory that many strive to achieve: they want to prove their innovation abilities while maintaining the predetermined theory of market segmentation according to a price point (Gonzalez, Arrondo & Carcaba, 2017). In other words, consumers demand innovation, and all automakers are expected to produce it, whether they operate within the low, medium, or high-end segments (Gonzalez, Arrondo & Carcaba, 2017). The key is for automobile manufacturers to find the sweet spot of achievement; they need to find the precisely correct amount of innovation advancement according to their operating segment, while maintaining costs and profit margins within acceptable levels. Those firms that do not achieve this are referred to by Gonzalez, Arrondo & Carcaba as being forced to engage in catch-up effects, while those that do make the achievement are labeled as contributing to the best-buy frontier (Gonzalez, Arrondo, & Carcaba, 2017). Additionally, companies that contribute to the best-buy frontier not only achieve innovation while maintaining margins, but also often actually successfully cut prices in the process (Gonzalez, Arrondo & Carcaba, 2017). The study found Audi, Volkswagen, BMW, Honda, Kia, and Hyundai as exemplary brands that produced such achievements.

Next, two market segment theories somewhat overlap each other: striving for innovation and striving for global sustainability as a segment. Automobile firms that have been the first to concentrate on bringing electric vehicles to the consumer market are practicing both, according to X (Morton, Anable & Nelson, 2017). Certainly, electric vehicles are just about as innovative as a vehicle can get, arguably functioning within the segment that strives for high degrees of advancement and/or upper-end vehicles (Morton, Anable & Nelson, 2017). At the same time, a slice of the consumer base in multiple nations if currently focusing greatly on the demand for green vehicles as a means of increased global sustainability. This stated, the study conducted by Morton, Anable, and Nelson found that consumers measured in two ways: consumers are either highly attracted to the idea of electric vehicles or highly repelled by the idea (2017). This denotes electric vehicles as a highly specific niche portion of the overall environmentally sustainable segment of the automotive industry, a segment, which many economists agree is growing overall (Morton, Anable & Nelson, 2017).

One final theory relating to market segmentation within the automobile industry was studied by Cosar, Grieco, Li, and Tintelnot (2015) and pertains to the sole concentration of domestic sales by automobile firms. Via the mathematical study of automobile supply and demand in nine nations spanning through three continents, the scholars determined that the greatest degree of profitability exists within domestic sales. Thus, some manufacturers may choose to focus solely on domestic consumer bases and forgo exporting to consumers in other nations, at least for some of its operating segments. Even more important than profitability, is the achievement of leading market shares within their home nations, something that is imperative to the ability to grow and withstand the competition (Cosar et al., 2015).

A final aspect of theory relating to market segmentation in the automobile industry is the considerable amount of time, and thus cost, that it takes for auto manufacturers to bring new products to market. As X points out, bringing new products to market typically takes anywhere from four to five years, and can cost substantial amounts of capital, in addition to the opportunity cost given up as a result of relocating labor, financial, and intelligence resources (Mukherjee, Mathur & Dhar, 2015). It is absolutely imperative that an organization is well researched and irrevocably certain of its strategic market segment initiatives before undertaking the development of a new product for a segment. Often times, companies can be just a few market segment decisions away from financial ruin if theories are not established with great research and clarity. After all, as Mukherjee, Mathur and Dhar wrote, “Typically, new product development and introduction required four to five years to design, develop, test and produce with a budgeted spend of approximately 6 billion […]; hence, it was an important activity for MSIL” (2015, p. 1).

Bias & Limitations

The bias present in several of the aforementioned studies pertains greatly to geographic locations. The majority of studies regarding market segmentation within the automobile industry seem to focus on just one nation’s market, rather than the global market. Only one study located was indifferent to this rule. Additionally, the limitation of most studies on this subject matter are that they all seem to home in on one particular theory of market segmentation as being either wrong or right, without giving just consideration to taking a broader market approach by not offering specification of products, which is a potentially worthy opportunity within the market (Lynn, 2011). Generally, most market segment studies of all types of industries tend to enact this limitation, according to Lynn (2011).

Relevant Research Study

The report published by Deloitte addresses the main driving bias of geographic limitation via diving in-depth to consumer preferences and the most successful automobile market segments by world location (“Global automotive consumer study”, 2014). This report will prove highly useful to scholars and auto organizations alike, as it provides consumer data that will be useful to development market segmentation strategies, especially as they relate to engaging in international business expansion (“Global automotive consumer study”, 2014). The report provides data regarding the automobile industry in a staggering nineteen countries, as compared to the majority of more limited studies that only focus on one nation (“Global automotive consumer study”, 2014).

References

Cosar, A., Grieco, P., Li, S., & Tintelnot, F. (2015). Taste heterogeneity, trade costs, and global

market outcomes in the automobile industry. CESifo Area Conference on Global Economy, May 2015.

Global automotive consumer study: The changing nature of mobility. (2014). Deloitte. Retrieved

from https://www2.deloitte.com/content/dam/Deloitte/au/Documents

/manufacturing/deloitte-au-mfg-2014-global-automotive-consumer-study-changing-nature-mobility-290914.pdf

Gonzalez, E., Arrondo, R., & Carcaba, A. (2017). Product innovation in the Spanish auto

market: Frontier shift and catching-up effects. Transportation Research Part D:

Transport and Environment, 50(170-181).

Lynn, M. (2011). Segmenting and targeting your market: strategies and limitations. Cornell

University, School of Hospitality Administration. Retrieved from

https://pdfs.semanticscholar.org/c736/f493cf24b9414dcc47c6862f9875ce8537f5.pdf

Morton, C., Anable, J., & Nelson, J. (2017). Consumer structure in emerging market for electric

vehicles: Identifying market segments using cluster analysis. International Journal of Sustainable Transportation, 11(Lynn, 2011). Retrieved from https://dspace.lboro.ac.uk/dspace-jspui/bitstream/2134/28304/1/Morton_et_al_2017.pdf

Mukherjee, J., Mathur, G., & Dhar, N. (2015). Maruti Suzuki India: Defending market leadership

in the A-segment. Richard Ivy School of Business Foundation.

Thun, E. (2018). Innovation at the middle of the pyramid: state policy, market segmentation, and

the Chinese automotive sector. Technovation, 70-71(7-19). Retrieved from

https://www.sciencedirect.com/science/article/pii/S016649721830124X

PLACE THE ORDER WITH US TODAY AND GET A PERFECT SCORE!!!