The response of high-end car manufacturers in the automotive
industry on the emergence of car sharing services
A multi-case study on Audi, BMW, and Mercedes Benz Bachelor Thesis
BSc. Economics and Business - Business Studies Fabian F. A. Koning, 10462430, University of Amsterdam
Introduction
In recent years the attitude towards consumption have shifted and brought increasing concern over ecological, social, and developmental impact and therefore “collaborative consumption” has become an appealing alternative for consumers (Hamari, J., 2013).
The automobile industry is considered as the largest and fastest growing platform for CC. The increased popularity of shared economy platforms have led to a rapid growth of businesses which focus on the sharing of automobiles like Zipcar and Car2Go. The purpose of this research is to identify how high-end car manufacturers respond to the emergence of these disruptive innovators. Therefore the research question is:
“How did high-end car manufacturers respond to the growing trend of car sharing services?”
Despite the abundance of literature on the effects of car-sharing services on the household vehicle holdings, there is a lack of quantitative/qualitative studies on the response of car manufacturers. Therefore it is important to acknowledge the countermeasures taken by high-end car manufacturers to foresee a change in the traditional automotive industry due to the emergence of car sharing organisations and their growth.
Literature Review
Innovation
“The most important business issue of our time is finding a way to build companies where innovation is both radical and systemic” (Hamel, 2002). The importance of organisational innovation was first documented as long ago as Schumpeter (1950). According to Schumpeter, organisations should innovate in order to renew value of their asset endowment. Even before this, although the term innovation may not have been used extensively, processes that are associated with innovation and economic and technological change were perceived as being important
(Lorenzietal., 1912;Veblen,1899;Schumpeter,1934). As Zara and Covin (1994, p.183) suggest: “Innovation is widely considered as the life blood of corporate survival and growth”.
Baragheh (2009) states that the connotation of the “innovation” phenomenon can be described by newness:“Innovation is the generation, development, and adaptation of an idea or behaviour, new to the adopting organization” (Damanpour, 1996; Higgins, 1995); of success: “The first successful application of a product or process” (Cumming, 1998); and of change: “Innovation is conceived as a means of changing an organization, either as a response to changes in the external environment, or as a pre-emptive action to influence the environment” (Damanpour, 1996).
sFurthermore, the extent to which internal operations or external customers value a change, is As Baragheh (2009) mentions, technical innovation creates changes in processes, functionality, or utility and does not create value directly. The extent to which internal operations and external customers value change is where leverage is created (Paap & Katz, 2004)
Innovation can be classified as changes in processes, products and services. Johne (1999) differentiates product and process innovation from market innovation. Other objects of innovation mentioned in the literature include organisation, transaction, management style and business model (Slappendel, 1996; Higgins, 1995; Paap and Katz, 2004), although these types mainly relate to process innovation (Baragheh, 2009). Furthermore, Edquist (1997) distinguished innovation by aggregation level. Innovation appears at an individual level (improvement), at functional level (process improvement or adaption), at a company level as an entire value chain (radical product and service innovation, new business models), and at industry level (technology breakthroughs) as systems of innovation.
The impact that innovation has can vary from incremental or sustainable innovation to radical or disruptive innovation. As Figure 1 depicts incremental innovation development remains within the boundaries of its existing market and technology or processes of an organisation, where disruptive innovation tends to emerge in new markets with new technologies or processes (Baragheh, 2009).
Disruptive innovation
The continuous process of industrial renewal was first documented by Schumpeter (1942) with his creative destruction theory. According to this theory, dominant industries transform and become obsolete as a result of the invention and application of newly derived innovations by other firms. This theory was further elaborated by Abernathy and Utterback (1978), who claimed that the
emergence of a new technology develops in phases. The pre-dominant phase, where several designs of the new technology are introduced, which will eventually lead to one industry standard design. The dominant design is set once the standard design becomes broadly accepted. From that point competition shifts to process innovation and efficiencies resulting in cost reduction and economies of scale. This contributes to get a broader market acceptance of the dominant design and deterrence of other designs (Abernathy & Utterback, 1978).
Bower and Christensen (1995) were the first to introduce a more specific explanation of why many incumbent firms fail in the face of new technologies and coined it “disruptive technology”. According to Christensen, “disruptive technologies are technologies that provide different values from mainstream technologies and are initially inferior to mainstream technologies along the dimensions of performance that are most important to mainstream customers” (Bower & Christensen, 1995, p.45), but “they have other features that a few fringe (and generally new) customers value” (Christensen, 1997, p.18). Due to the changing customer values the new
technology will eventually displace the established technologies and, in the process, entrant firms that supported the disruptive technology will displace incumbent firms that supported the prior technology (Daneels, 2004). This process can best be described by the joint consideration offered by technological alternatives and the trajectories of performance demanded in various market segments (Daneels, 2004).
Christensen introduces these aspects of changing performance with time, he identified three critical elements of disruption, as depicted in figure 2. First, in every market there is a rate of improvement that customers can utilise or absorb, represented by the dotted line. Second, in every market there is a distinctly different trajectory of improvement that innovating companies provide as they introduce new and improved products. He further explains that this pace of technological progress almost always exceeds the ability of customers in any given tier of the market to use it, as the more steeply sloping lines in figure 2 indicate. Consequently, a company whose products are considerately positioned on mainstream customers’ current needs today will probably exceed the demand of those same mainstream customers in the future, resulting in performance overshoot with over-served customers.
The market disruption occurs when, despite its inferior performance, the new product displaces the mainstream product in the mainstream market (Daneels, 2004). Christensen mentions two preconditions for such a market disruption to occur: performance overshoot on the mainstream products, and asymmetric incentives between existing healthy business and potential disruptive business.
Despite its profound impact on business management literature and management practices, scholars from several disciplines of management research have generated critiques, doubts and challenges concerning the disruptive innovation model (Cohan, 2000; Danneels, 2004;
Govindarajan & Kopalle, 2006a, 2006b; Markides, 2006; Schmidt & Druehl, 2008 ). Most importantly, several scholars address the wide scope of the disruptive innovation concept (Yu & Hang, 2009). Christensen responded by refining his theory and emphasising that disruptive innovations could be broadly classified into low-end and new-market innovations (Christensen & Raynor, 2003). Low-end disruptions are those that attack the least-profitable and most over-served customers at the low end of the original value network, new-market disruptions create a new value network, where it is the non-consumption, not the incumbent, which must be overcome
(Christensen and Raynor, 2003). Furthermore, in recent years scholars noted that the theory lacks clear-cut criteria to differentiate between sustaining and disruptive innovations. Hence, the predictive use of the theory is challenged stating that it is difficult to distinguish between inferior products and products that underperform but have the potential to be disruptive (Daneels, 2004).
Therefore, Govindarajan and Kopalle (2006) introduced a scale for measuring the disruptiveness of innovations. For an innovation to be considered disruptive it had to meet the following four criteria: (1) offer a new set of features, performance and price attributes relative to the established products; (2) initially provide an unattractive combination for the mainstream customers; (3) attract a new customer segment that values the new set of features, performance and price attributes; and (4) disrupt the mainstream market after subsequent development over time. They further incorporated the notion that disruptive products do not necessarily need to have a lower price than established products, which they illustrate using the mobile cell phone market. Hence, this definition offers a more general view of innovations by including also disruptive innovations with a higher price, which they call high-end disruptive innovations. Based on this phenomena, a complementary framework has been introduced which refined new- market disruption into two types, fringe market low-end encroachment and detached market low-end encroachment (Schmidt and Druehl, 2008).
In further research it is deemed important to clarify some potential misunderstandings on disruptive innovation, as well as the examination of what constitutes as a real disruptive innovation through different lenses. In Yu and Hang (2009) three of these are highlighted and discussed. First, Yu & Hang (2009) describe that disruption is a relative phenomenon, where an innovation can be both sustainable and disruptive, depending on the business model used by the corporation who implements the innovation (Christensen and Raynor, 2003).
Second, disruptive innovation is not equal to destructive innovation (Yu & Hang, 2009). If a technological innovation has superior performance in key dimensions with a relatively low-cost structure, it would directly invade the mainstream market. This will cause more destructive effect that a normal disruptive innovation which focuses on low cost, inferior performance (Yu & Hang, 2009). In this school of thought, Utterback and Acee (2005) provided a more comprehensive view of technological innovations by adding the third dimension, ancillary performance. Utterback and Acee (2005) pointed out eight possibilities of discontinuous innovations, of which Christensens’ definition of disruptive innovation was one.
Third, as Yu & Hang (2009) article states “disruptive innovation does not always imply that entrants or emerging business will replace the incumbents or traditional business; it does not imply that disruptors are necessarily start-ups”. In some cases the incumbent business with existing high end technologies is able to survive by concentrating on the most demanding but least- price sensitive customers (Yu & Hang, 2009). Furthermore, incumbent firms have the ability to play the role of the smart disrupter. Both bring to bear that for an incumbent to survive the disruptive wave or take the role of disruptors, they have to accumulate transformational experience (experience related to previous market entry) from the past (King and Tucci 2002).
Christensen’s most influential recommendations has been that incumbents should set up a separate organization for venturing into disruptive technology. He reasons that the resource-allocation process tends to pull resources away from disruptive technology efforts to serve current customers, and therefore a separate organization with its own protected resources is required. Moreover, the disruptive technology may not fit with the mainstream organisation’s resources, processes, and values. After receiving critique from scholars who questioned the recommendation to setting up a separate business unit (Cohan, 2000; Gulati and Garino, 2000; Iansiti, McFarlan,
Westerman, 2002), Christensen (2002) decided to qualify his recommendation to set up an independent organization: ‘‘When a threatening disruptive technology requires a different cost structure in order to be profitable and competitive, or when the current size of the opportunity is
insignificant relative to the growth needs of the mainstream organization, then—and only then—is a spin- out organization a required part of the solution”.
P1: The majority of incumbents in the automotive industry respond by setting up an independent organization.
In short, as pointed out in Christensen and Raynor (2003) disruptive innovations include three distinct types, namely disruptive technological, product and business model innovation, which “arise in different ways, have different competitive effects, and requires different responses from incumbent firms”(Markides, 2006 P. 19). Chresbrough & Rosenbloom (2002) argued that disruptive innovations are frequently built based on disruptive technologies, and usually requires established firms to develop new business model to translate value later in the technologies into economic value, and then to capture some portion of that value. Therefore, inarguably there is correlation among those types. Furthermore, Christensen (2002) states that under most circumstances the development of an independent organization is most successful when an incumbents decides to venture into the disruptive technology.
As the concept of disruptive innovation has become more precise and consistent over time, it has enabled the application of the theory to disruptive innovations such as the car-sharing phenomena in the automotive industry. In the next section an historical overview will be provided of the emergence of the sharing economy and its increased presence in the automotive industry.
The Sharing Economy and the Car Sharing Industry
Sharing behaviour among collectives, corporations and communities has been evident for centuries (Belk, 2010), but in recent years new forms of collaborative consumption have found applications in the private, public and nonprofit sector alike (Bauwens et al., 2012;Griffith and Gilly, 2012). Although the term “car sharing” is widely used in everyday vocabulary and in press, in this paper it is defined as access-based consumption rather than sharing as defined by Belk (2007, 2010). Acces-based consumption is a transaction that may be market mediated in which no transfer of ownership takes place, where the consumer is acquiring consumption time with the item, and, in market mediated cases of access is willing to pay a price premium for use of that object (Durgee and O’Connor 1995).
Access over Ownership and Sharing
Ownership expresses the special relationship between a person and an object called “owning,” and the object is called “personal property” or a “possession” (Snare 1972, 200). Two of the major differences between ownership and access entail (1) the nature of the object-self relationship and (2) the rules that govern and regulate this relationship. In ownership, consumers may identify with their possessions, which can become part of their extended self (Belk 1988) and can be crucial in
maintaining, displaying, and transforming the self (Kleine, Kleine, and Allen 1995; Rich- ins 1994; Schouten 1991). In contrast to the long-term interaction with the object that characterizes
ownership, access is a temporary and circumstantial consumption context (Chen 2009). Thus, the consumer-object relationship in access-based consumption may be different from that in ownership. Additionally, in ownership, the individual has full property rights over the object that regulates the incentives and behaviours related to owned objects. The sole ownership enables freedom and responsibility toward the object with clear boundaries between self and others. The owner has the right to regulate or deny access to others; to use, sell, and retain any profits yielded from the object’s use; and to transform its structure (Snare 1972).
Access is similar to sharing, in that both modes of consumption do not involve a transfer of ownership. Sharing represents “the act and process of distributing what is ours to others for their use, and/or the act and process of receiving or taking something from others for our own use” (Belk 2007, 126). However, access and sharing differ with regard to the perceived or shared sense of ownership. Belk (2010) argues that in intrafamilial sharing, possession or ownership is joint, with no separate terms to distinguish partners. In sharing, joint possessions are free for all to use and generate no debts, and responsibilities, such as caretaking or not over- using the object, are shared.
In contrast to sharing, in access there is no transfer of ownership or joint ownership; the consumer simply gains access to use an object. Additionally, access may differ from sharing in that access is not necessarily altruistic or prosocial, as sharing is (Belk 2010), but can be underlined by economic exchange and reciprocity.
Emergence of access based consumption
The phenomenon of access was first documented in the popular business press by Rifkin (2000), who primarily examines the business-to-business sector and argues that we are living in an age of access in which property regimes have changed to access regimes characterized by short-term limited use of assets controlled by networks of suppliers. Historically, in the consumer market, access has existed in the not-for-profit and public sphere rather than the market, as, for example, consumption of art by visitors to museums (Chen 2009) or short-term borrowing of books and toys from public libraries (Ozanne and Ballantine 2010). Access was also derived through traditional rental forms in the marketplace, such as car or apartment rentals. However, little attention has been paid to the study and understanding of access as a consumption mode.
American consumer society has been proclaimed an ownership society (Walsh 2011). Ownership has been the normative ideal among modes of consumption based on cultural values about perceived advantages of ownership over access as well as reinforcing government and market practices. Historically, ownership is perceived to be cheaper, a means to capital accumulation, and a way to provide a sense of personal independence and security (Snare 1972). Ownership also
provides ontological security, “in fulfilling a deep- seated yearning of continuity and permanence in life” (Cheshire, Walters, and Rosenblatt 2010, 2599). Home ownership ideology, for example, has promoted a property-based citizenship that privileges home ownership over public and rental housing (Ronald 2008). It is embedded with rites to adulthood and bound up with discourses of choice and free- dom. Thus, the owner has been elevated to a better type of citizen, neighbor, and even parent (Baker 2008; Ronald 2008).
In contrast, historically, access has been stigmatized and was seen as an inferior
consumption mode (Ronald 2008). Access associated with traditional rental was seen as wasteful, precarious, and limited in individual freedom (Cheshire et al. 2010). Thus, individuals who engaged in traditional rentals were seen as feckless consumers who were misallocating their purchasing power (Rowlands and Gurney 2000). Renters do not acquire investment, pride of ownership,
depreciation credits, or the sense of security typically associated with ownership. They were also perceived to have lower financial power and status or to be at a more transitory life stage, as access has been considered to be purely financially motivated (Durgee and O’Conner 1995). In the context of housing, research has found that individuals who engage in access through traditional rentals were perceived to be flawed consumers failing in three domains of social life—aesthetics, ethics, and community—by undermining the aesthetic value of the neighborhood and by failing to demonstrate an ethic of care for themselves and others (Cheshire et al. 2010).
However, during the last decade we have seen a proliferation of access systems in the marketplace that go beyond traditional forms of access. This more recent access-based consumption differs from traditional rentals by virtue of being enabled through digital technology, being more self-service, and therefore, being more collaborative and not always mediated by the market (Botsman and Rogers 2010; Gansky 2010; Walsh 2011).
Digitalisation
Changing consumer behaviour
While historically access was perceived as an inferior mode of consumption, the market has indicated a shift in the sociocultural politics of consumption. The attitudes towards consumption have shifted and brought increasing concern over ecological, societal, and developmental impact. A growing concern about climate change and a yearning for social embeddedness by localness and communal consumption (Albinsson & Perera, 2012; Belk, 2010; Botsman & Rogers, 2010) have made the “collaborative consumption”/”sharing economy” an appealing alternative for consumers. The sharing economy is an emerging economic-technological phenomenon that is fuelled by
developments in information and communications technology (ICT), growing consumer awareness, proliferation of collaborative web communities as well as social commerce/sharing (Botsman & Rogers, 2010; Kaplan & Haenlein, 2010; Wang & Zhang, 2012). The consequence of this rise of the information and knowledge society is that value is increasingly reliant on cultural rather than
tangible resources (Radka and Margolis 2011).
P2: Incumbents of the automotive industry will enter the car-sharing market when they recognise changing consumer behaviour.
Economic factor
The popularity of access also coincides with the global economic crisis. Consumers are reexamining spending habits and rethinking their values, including the relationship between ownership and well-being. They have become more mindful of spending habits and more
resourceful (Communispace/Ogilvy 2011). The increase in the costs of acquiring and maintaining ownership over time, the instability in social relationships, as well as the uncertainties in the labor markets have rendered ownership a less attainable and more precarious consumption mode than it once was (Cheshire et al. 2010).
P3: Incumbents see the financial incentives of customers as a reason to enter the car-sharing market
Urbanisation
Finally, access has been especially popular in urban areas that by nature exhibit space
limitations (be it parking or storage). The popularity of access coincides with a structural shift in the American urban landscape: the move toward reurbanization. Americans are moving into cities and urban- style housing in walkable neighborhoods (Leinberger 2007). With density as a major concern of the reurbanization move- ment, sustainable development, apartments, and condos have increased in city centers, offering alternatives to the long commutes and reliance on cars that dominate
suburban living (Hsing 2009; Leinberger 2007). Living in more com- pact spaces in urban areas also requires a shift in ownership, with more young professionals and empty nesters now will- ing to pay to be closer to work, local shops, and businesses (Hsing 2009). Being able to access objects that are housed elsewhere facilitates the reurbanization movement. Now that we have outlined some of the reasons that access has come to the fore in consumption practices, we go on to identify dimensions that can be used to distinguish between various forms of access.
P4: Incumbents of the automotive industry will enter the car sharing market when they recognise urbanisation problems.
Theoretical Framework
Resource Based View (RBV)
When a new technical subfield of an industry emerges, a firm operating in the industry must decide whether to introduce the new products, when to do so, how to acquire necessary knowledge, and how to lever the value of its existing assets in the new segment of the industry [Mitchell (1989)l.l
Modes of market entry
Before we begin our analysis of market entry, it is helpful to define what it is we mean by ‘market’. Previous literature have emphasised that market entry tends to presume that entry occurs at the start of a new industry. But due to shifts in the state of business practice and technology firms must make entry decisions (whether or not to participate in these shifts) on many points during the lifecycle of an industry. Furtermore, Helfat and Lieberman (2002) state that it is not certain that entry into a new technology or state of the business practice will eventually turn out to be a new ‘product
generation’, a new customer or product segment of the market, or a new industry. (Helfat & Lieberman, 2002)
Helfat & Lieberman’s (2002) further contemplate on the developments of new niche or market segments. The creation of these new niches and markets through technological progress is often termed a new ‘product generation’, which may replace the old one, or generations may coexist for long periods of time. They note that the transition of these generations is uncertain at the earlier points in time when most entry decisions are made. Moreover, when a new product or service provided by the entrants makes large discontinuity from what has existed before, it constitutes a new industry (Helfat & Lieberman, 2002). The birth of new industries is most common through development of niches that become sufficiently large and distinct to be classified as industries in their own right. In this paper we do not pursue to resolve what constitutes a new industry or market, but rather show that any shift in technology, customer needs or the state of business practice can lead to new segments, where firms must decide whether or not to enter. In this study we will elaborate on the entry strategies applied by established European and U.S. car manufacturers in the car sharing market.
Hierarchical Model
In this study we examine the hierarchical model of market entry modes as suggested by Kumar and Subramaniam (1997). These modes of entry, seen in figure 3, can be classified as equity-based and non-equity based. The equity modes of entry are those that require a major resource commitment from the firm and can be classified as Joint Ventures, Acquisitions, Greenfield Investments. In contrast, non-equity modes rely less on resource commitment from the firm and can be classified as Exporting and Contractual Agreements. and At the next level of hierarchy, the equity modes are further divided into wholly owned operations and equity joint ventures (EJVs), while non equity modes are divided into contractual agreements and export. As Pan & Tse (2000) mention, the conceptualisation, as shown in figure 3, is appealing because it recognises that managers have a limited analytical capacity (Simon, 1955) and the hierarchical process is suitable for entry choice decision because of the differences among the various entry modes and criteria of choice at each level (Gatignon and Anderson, 1988). Therefore, this model facilitates the process of decision making for managers. We will now further elaborate on the different entry modes and there potential affects.
Equity Modes
Equity Joint Ventures
In Kogut’s paper (1986) a joint venture occurs when two or more firms pool a portion of their resources within a common legal organisation. Therefore a joint venture is a selection among
alternative modes by which two or more firms can transact. Kogut (1986) & Hennart (1996) provide some reasons to explain the motivations and choice of joint ventures over alternatives modes such as acquisitions, supply contracts, licensing, or spot market purchases.
The first approach is derived from the theory of transaction costs as developed by
Williamson (1975, 1985). He proposed that firms choose how to transact according to the criterion of minimising the sum of production and transaction costs. There might be a difference in
production costs between firms due to the scale of operations. Kogut (1986) explains the transaction costs as: “Transaction costs are the expanses incurred for writing and enforcing contracts, for
haggling over terms and contingent claims, for deviating from optimal kinds of investments in order to increase dependence on a party or to stabilise a relationship, and for administering a transaction.”
Furthermore, Hennart (1996) implies that one potential impediment to acquisitions is that the desired assets are hard to disentangle from non-desired ones. This is not the case for joint ventures, since the flow of services from the assets counts as a contribution to the joint venture. Therefore joint ventures may be preferred when the desired assets are not easily separable from the other assets owned by the parent, which is likely the case when the parents are large and not
divisionalised (Hennart, 1996). In addition, joint ventures are desired when acquirers do not know the value of the assets desired (Balakrishnan & Koza, 1993). It is an efficient way for reducing these information costs because it makes it possible both to gather additional information on the value of the partner’s assets and to rescind the relationship at relatively low cost (Hennart, 1996).
P5: The incumbent prefers a joint venture as market entry when the necessary resources and capabilities are hard to disentangle from non-desired ones.
Another reason is management costs, when there are cultural differences between the existing corps of employees in the two firms it is difficult to integrate such employees when a firm is acquired (Jemison and Sitkin, 1986). In contrast, a joint venture protects the incentives that
employees of both firms have to maximise the profits of the joint venture and therefore the management of the joint venture can be left to the local partner (Kogut and Singh, 1988).
The second approach focuses on strategic motivations and consists of a catalogue of formal and qualitative models describing competitive behaviour.
The third approach is derived from organisational theories, which have not been fully developed in terms of explaining the choice to joint venture relative to other modes of cooperation.
Wholly owned subsidiaries
Acquisitions and internal growth strategies are generally used by established firms entering new or established markets (Helfat & Lieberman, 2002). This will ensure the established firms to retain full ownership and control over their endeavours. Literature on this topic suggested that the degree of relatedness between a firm’s new product and its existing products should influence the choice of market entry mode. Early studies conducted by Yip (1982) argued that relatedness reduces the costs of entry when a firm enters via internal development, because the firm can take advantage of its resource base to overcome barriers to entry. In contrast, relatedness does not reduce the costs of entry when a firm enters via acquisition, since the price of the acquired firm is determined by the market for corporate control. Therefore a firm which enters a related market is more likely to use internal development and when they enter an unrelated market via acquisitions.
A firm must consider the relative advantages and disadvantages of the two entry modes before entering a market. Acquisitions and internal development differ with respect to cost, risk, and speed of entry. Firstly, acquisitions generally require payments of a significant financial premium (Jensen, 1993; Nielsen and Melicher, 1973; Slusky and Caves, 1991; Walsh, 1989), and commonly, as mentioned earlier, there are further transaction costs as well as costs of integrating the acquired company with the acquiring firm, which tends to make acquisitions a relatively expensive entry mode (Chi, 1994; Lubatkin, 1983; Zollo and Singh, 2004). Chatterjee (1990) found that high stock market valuation is significantly linked to the use of acquisition as entry mode. Therefore, firms with abundant financial resources embodied in their stock market valuation are more likely to use this form of entry mode. In addition to these findings Lee & Lieberman (2010) note that the relative costs of the two modes depend on the type of funding. Acquisitions can be funded through
mechanisms like exchange of stock, accumulated cash reserves, debt, or a combination of the above, whereas internal development, for established firms, is mostly funded by current cash flows (Hall, 2002). This implies that firms with high current profitability can support internal development and consequently tend to prefer that mode over acquisitions. Furthermore, Chang & Rosenweig (2001) and Hennart & Park (1993) found that firms with a high research and development (R&D) intensity are more likely to expand through internal development rather than acquisitions.
Lee & Lieberman’s (2010) second difference between the two modes is the risk of entry. Although both modes carry risk, there are several reasons for internal developments to bear lower overall risk. First, the losses associated with a failed acquisition tends to be greater than those associated with internal development, because acquisitions generally involves an investment through a single transaction and internal development takes place through incremental investments
which are divided across multiple transactions. Moreover, the acquiring firm risks overpaying or buying a ‘lemon’ due to information asymmetries between the acquiring firm and incumbent candidates (Akerlof, 1970). In contrast, Chatterjee (1990) and Chatterjee and Singh (1999) found a tendency for firms to enter concentrated markets by acquisition, because an increase in the number of competitors, which is the case with internal development, could intensify competition and thereby poses the risk of depressing profitability.
A third factor where internal development and acquisitions differ substantially is speed. Acquisitions are consummated relatively quickly and may allow the acquiring firm to realise revenue earlier, achieve scope economies faster, and capture a greater market share. Whereas internal development of new products or services normally takes months or years. (Lee &
Lieberman, 2010) Moreover, a study conducted by Biggadike (1979) concludes that entry through internal development often takes a decade or more to optimise the business to achieve the
Non Equity Modes
Methodology
Research Design
The literature review reveals that there is scope for further investigation in the market entry
strategies of automotive industry incumbents and the factors affecting their market entry decisions. The selected literature was based on recent articles and cited articles in the fields of disruptive innovation, car-sharing, resource based view (RBV) theory and market entry strategies.
In this paper a qualitative multiple case research approach will be followed. Qualitative research generates useful information which asks for an interpretive, naturalistic approach to its subject matter (Denzin & Lincoln, 1994 & 2000). It enables the researcher to compare facts to prior knowledge in order to contradict it or uncover new evidences (Gephart, 2004). The essence of qualitative research lays within the fact that it studies phenomena in the environment in which they naturally occur and uses social actors’ meanings to understand these phenomena (Denzin &
Lincoln, 1994). Therefore, this research is conducted through a qualitative analysis on the basis of a multiple case study, involving U.S. and German car manufacturers with car-sharing activities in there home-region markets.
According to Yin (2003) a case study should be considered when you want to research past phenomena of which the behaviour cannot be manipulated. Furthermore it states that multiple case study enables the researcher to explore differences within and between cases. As for this research, the entry strategies of U.S. and German car manufacturers in the car-sharing market will be conducted, a qualitative multiple case study will be applicable. It eventually hopes to find similarities across the different cases, or predict contrasting results based on the theory.
Furthermore, Yin (2013) argues that a case design is best to answer how or why questions. As this study is also trying to answer the factors affecting market entry decisions, a case study seems even more appropriate. The combination of both analysing the how and why a phenomena took place creates a comprehensive, contextual account (Yin, 2013). It will be a longitudinal study focusing on multiple-cases from 2008 to 2016. The main reason for this frame is the introduction of Daimler’s car-sharing service in 2008, which was the first U.S. or German car manufacturer to get involved in car-sharing activities. Therefore the data necessary to conduct this research starts at that point onward. Multiple-cases were selected to allow for cross-case analysis to support the theory better and to allow for a broader generalisation (Perry, 1998). Moreover, the cases will be designed to corroborate each other, allowing for literal replication (Yin, 2013) and strengthen the external validity of this research.
The methodological approach will be a mix of both inductive and deductive research. The data was first analysed on the factors presented in the literature review, but emerging aspects would be analysed as well. Using this mix allows for both an exploratory and explanatory research, prior literature can be used to strengthen the theory and indicate important search values, while emerging theory can create a realistic account (Perry, 1998).
Case selection
While there is extant literature on the market entry strategies into foreign markets, the literature lacks studies addressing the market entry strategies by incumbents into an industry subfield with disruptive characteristics. Therefore, by investigating the market entry strategies by U.S. and German car manufacturers this research will fill a gap and provide a basic framework for future research. The automotive industry is currently undergoing several transitions, as has been stated in the previous sections. The automotive industry is subject to an emerging technological phenomenon called the sharing economy, which is fuelled by developments in information and communications technology (ICT), growing consumer awareness, proliferation of collaborative web communities as well as social commerce/sharing (Botsman & Rogers, 2010; Kaplan & Haenlein, 2010; Wang & Zhang, 2012). This leads to car manufacturers rethinking their traditional business model and increasingly seeing the company as a mobility provider instead of a product manufacturer. The longitudinal multiple-case design of this study allowed us to investigate how companies have reacted in their market entry strategies of these developments.
Five companies were selected using the Global top 500 of motor vehicles and parts industry. The companies - Volkswagen, Daimler, General Motors, Ford Motor and BMW- were selected on the basis of their ranking in the list and if they fulfilled the criteria of being active in the U.S. and/or German car-sharing market. In Table X, an overview of the companies is provided.
Company Formation year HQ Location Rank in Global 500
Volkswagen AG 1937 Wolfsburg, Germany 8
Daimler AG 1998 Stuttgart, Germany 17
General Motors 1908 Detroit, USA 21
Ford Motors 1903 Dearborn, USA 27
Results
General Motors AG
On the 21st of January 2016 General Motors announced their personal mobility brand Maven, which combined and expanded the company’s multiple programs under one independent business unit. As the company states in a press release Maven’s mission is to give customers access to highly personalised, on-demand mobility services. The team includes over 50 dedicated employees from the connected car technology industry as well as ride- and car-sharing professionals from Google, Zipcar and Sidecar. The introduction of GM’s new car-sharing brand shows its dedication to
actively redefining personal mobility. An historical overview of General Motors involvement in car-sharing illustrates their strategy to developing their newly independent business unit Maven.
General Motors first large-scale involvement in car-sharing is a strategic partnership with RelayRides in 2011. It allowed millions of GM vehicle owners to leverage the OnStar system to rent out their cars through the RelayRides marketplace. “We’re using technology to make both our older and newest models car-share ready and available for those owners who choose to participate in car-sharing,”(Press release, 2011) said Stephen Girsky, GM vice chairman. “Our goal is to find ways to broaden our customer reach, reduce traffic congestion in America’s largest cities and address urban mobility concerns.” (Press release, 2011)
A second initiative by GM is the Chevrolet Spark EV pilot ride-share program in partnership with Google, announced in 2014. A General Motors report (2014) states: “This learning pilot
combines commuting data, analytics, telematics, navigation, and smartphones to run a smart, real-time system that mixes and matches drivers, riders and cars during morning and evening
commutes. Convenience through door-to-door service and flexible scheduling are key goals.” This Project demonstrated value and potential in creating automotive transportation services, which lead to other initiatives in the following years.
In 2015, General Motors AG, outlined its plans to capitalise on the future of personal mobility. CEO Mary Barra says: “The convergence of rapidly improving technology and changing consumer preferences is creating an inflection point for the transportation industry not seen in decades. Some might find this massive change to be daunting, but we look at it and see the opportunity to be a disruptor. We believe our decades of leadership in vehicle connectivity is fundamental to our quest to redefine the future of personal mobility.”
Following this statement General Motors launched a series of initiatives like Let’s Drive NYC, now part of the Maven brand, which provides urban mobility services to residents in New York City and Chicago with partnerships, respectively, Stonehenge Partners and Magellan
Development Group. GM President Dan Amman says: “Let’s Drive NYC is just one part of GM’s global urban mobility strategy. We view evolving consumer preferences, such as car-sharing, as real business opportunities, where we can quickly build on our existing capabilities such as OnStar connectivity to very effectively meet customer needs,” (Press release, 2015). In Europe the
company’s Opel brand had recently deployed a peer-to-peer sharing service called CarUnity, which incorporates dealers and their fleets to provide an array of available vehicles for sharing.
Accompanied with this new services General Motors Ventures (GMV) acquired a stake in internet and app-based ride-sharing platform flinc. Opel’s chief marketing officer Tina Muller said: "For Opel this partnership is a decisive strategic investment. It will be crucial in the future to evolve from a product manufacturer to a provider of networked mobility.” (Press release, 2015). Furthermore, various programs are running GM campuses in the U.S., Germany and China to refine and test future Maven commercial offerings.
Eventually, just before the launch of Maven, General Motors and Lyft announced a long-term strategic alliance to create an integrated network of on-demand autonomous vehicles in the U.S. GM invested $500 million in Lyft to help the company continue the rapid growth of its ride-sharing services. Moreover, it acquired the technology and most of the assets of the San Fransisco-based ride-hailing pioneer Sidecar Technologies Inc. David Roman, a GM spokesman, said the assets and employees would support the left alliance and other efforts of the car manufacturer.
Ford
At the beginning of 2015 Ford announced its Ford Smart Mobility, which is the company’s plan to utilise its R&D department to deliver the next level in connectivity, mobility, autonomous vehicles, the customer experience and big data (Press release, 2015). Alongside this plan are 25 experiments aimed at better understanding consumers’ mobility needs around the globe. The experiments mentioned in table x indicate that Ford emphasises on internal development to enter the newly emerged market.
The Ford Carsharing experiment was the first manufacturer-backed, nationwide car-sharing program incorporating dealerships. Ford has been working with Flinkster, a large car-sharing company with multiple partners, which allows Ford Carsharing customers to use the Flinkster vehicle, and Flinkster’s 270,000 customers can use the Ford fleet (Press release, 2015).
The second experiment operated in Bangalore, India, and named Share-Car, where Ford and Zoomcar tested a sharing concept that would allow small groups, such as co-workers, apartment dwellers and families, to share a vehicle among multiple drivers. The rhetoric behind the
experiment was to help consumers who wanted the benefits of owning a car but couldn’t afford one. (Press release, 2015).
The third project is Ford’s City Driving On-Demand service in London. Ford’s researchers explored the possibilities to optimise the on-demand service, such as offering pay-by-minute and enabling one-way trips across the city. It target was a better customer service and improved operational efficiency compared to existing car-sharing models.
The findings derived from six months of gathering data and consumer insights through the various experiments allowed Ford Motor Company to shift research to implementation. Where it is focusing on two strategic areas; flexible use and ownership of vehicles, and multimodal urban travel solutions. Ford Motor Credit Company started a peer-to-peer car-sharing pilot program for select customers in six U.S. cities and in London. The company’s partners in this project were Getaround in the U.S. and easyCar Club London. The other pilot is the London-based GoDrive car-sharing service. The service offers flexible, practical and affordable access to a fleet of cars for one-way journals with guaranteed parking. (Press release, 2015)
The internal development efforts to ‘transform Ford into an auto and mobility company’, as stated by the press release on January 11 2016, led to the introduction of Fordpass, ‘a platform that reimagines the relationship between automaker and consumer’. Ford President and CEO Mark Fields says: “Ford always has been motivated to make people’s lives better. We did it when we put the world on wheels a century ago and we do it now through our strong lineup of cars, SUVs, trucks and electrified vehicles. Today, we take our commitment one step further with the introduction of FordPass – an all-new platform that may be our most revolutionary yet,” (Press release, 2015).
Daimler AG
Daimler’s car2go car-sharing service is the largest, fastest growing car-sharing program in the world with more than 1,300,000 registered members with access to 14,300 car2go edition smart fortwo vehicles within 29 locations across the globe. The concept’s use of state-of-the-art technology makes it possible to rent car2go vehicles and park them at any location within the area served by the system. Daimler introduced their car-sharing service car2go in Ulm, Germany, in 2008. The smart mobility concept was developed by Daimler’s Business Innovation division, which identifies emerging business sectors and derives corresponding business models. Within years, Daimler’s strategy involving the introduction of the car2go mobility concept transformed Daimler to a world leading provider of flexible carsharing models.
After two years of testing the mobility concept in the city of Ulm and Austin, Daimler launched car2go in the spring of 2011. The company car2go Hamburg GmbH, is a joint-venture between Daimler subsidiary car2go GmbH and Hamburg-based Europcar Autovermietung GmbH, in which Europcar had a 75-percent majority stake. In a press release (2010) by Daimler the benefits of the partnership for both companies are outlined: “car2go can benefit from Europcar's vast
expertise in terms of fleet management and logistics as well as using its partner's extensive network of branches to offer customers further places to register for the scheme alongside its own car2go Shop.” Dr Matin Zimmerman, Vice President Strategy, Alliances & Business Innovation at Daimler AG identifies the purpose of the car2go: “Business Innovation is our fresh 'nucleus for new business ideas'. Our tasks also include demonstrating innovative responses to the challenges presented by the automotive markets of tomorrow. Both apply to car2go. This is an attractive business model that also offers an innovative mobility solution.”
The partnership between the two companies was further intensified a year later due to the formation of a new joint-venture to accelerate and extend their innovative partnership Europe-wide. The new company called “car2go Europe GmbH”, where car2go GmbH will be the majority
shareholder, enabled the two partners to bring their mobility server millions of drivers throughout Europe. CEO of car2go GmbH Robert Henrich said: “car2go Europe will be able to swiftly launch large-scale rollouts and strengthen our first mover advantage as the world’s first free-floating, one-way car-sharing service.” This statement implicates the importance of the joint-venture for car2go as it offers them the possibility to leverage on the core capabilities of Europcar, being car rental know-how and infrastructure.
In 2012, Daimler entered a new path of urban mobility by introducing a mobility platform called “moovel”. The platform shows users the various options to travel from point A to B. Daimler gained valuable experience in the ride-sharing market with two plot tests with car2gether in Ulm and Aachen. Furthermore, it holds a share in MyTaxi and invested in the world’s leading ridesharing network, carpooling.com GmbH. The capital investment by Daimler will be used for the
development and expansion of carpooling.com’s mobility solutions. The strategic partnership combined the know-how of two leading players in the mobility sector. As Wilfried Steffen says: “We view ridesharing as an important element of intelligently networked mobility. Our engagement in carpooling.com is a logical step in offering our customers an even wider range for getting from Point A to Point B” (Press release, 2012).
In 2014, the company acquired Ridescout and myTaxi.
BMW
BMW’s first involvement in the car-sharing industry started with the BMW on Demand pilot project announced in 2010. The mobility services offered customers the opportunity to hire vehicles with the highest quality features from the BMW models. Although the pilot program of twelve months never reached its second phase, it provided BMW with the resources and capabilities to introduce DriveNow in the beginning of 2011.
DriveNow had been established through a joint-venture with Sixt AG, in which each company had a 50-percent stake. The BMW Group provided the premium vehicles and the
technology within cars, while Sixt AG delivered premium services, car-hire know-how, IT systems and a comprehensive customer registration network. Member of the Board of Management of the BMW AG for Sales and Marketing, Ian Robertson mentions the motive for the entry into this market subfield in the following statement: “As a mobility provider, the BMW Group is not simply an automobile manufacturer. There is a growing demand for flexible mobility products in urban areas. DriveNow’s premium car sharing services are aimed precisely at this gap in the market. We
are aiming to launch a profitable new line of business while at the same time introducing potential new customers to our brands.” (Press release, 2011)
In 2012, BMW group extended its premium car sharing program DriveNow to the US. Although having a partnership with Sixt AG in the european car sharing market, its entrance in the US market is a wholly-owned subsidiary of the BMW Group. This indicates that BMW had enough expertise on the field of carsharing through its partnership with Sixt, that it no longer needed their help. The project eventually failed and four years later, in 2016, BMW Group launched another car-sharing service called ReachNow. Peter Schwarzenbauer, member of the Board of Management of BMW AG and responsible for MINI, BMW Motorrad, Rolls-Royce, After Sales and Mobility Services said: “We are currently witnessing an extremely exciting period in the development of the automotive industry. Our customers rightly expect uncomplicated and fast solutions to their
individual mobility needs, especially in metropolitan regions. This is why we are supplementing our classic business model with additional services that make life on the road easier for people in big cities” (Press release, 2016). The ReachNow additional services included a delivery service, longer-period usage, sharing for closed user groups, peer-to-peer and chauffeur services. The IT platform was provided by RideCell, which is ReachNow’s partner in the USA. The San Francisco-based technology start-up enterprise has been linked to BMW i since 2014, via a minority share held by BMW i Venture.
Volkswagen AG
The Volkswagen Group’s car-sharing service called Quicar debuted in Hannover by the end of 2011. Prior to its launch Volkswagen Group initiated a project in the same city to provide models with high vehicle availability and excellent functionality. The project was further developed by adding the Quicar Plus option to its car sharing service. As the service launched on November 16 2011, Christian Klingler, Board Member for Sales and Marketing for the Volkswagen Passenger Cars brand said: “"Volkswagen and car sharing go together outstandingly well. Quicar will make individual urban mobility possible for many people ranging from students to large families and trade customers. Quicar also demonstrates just how functional, efficient and inexpensive mobility made by Volkswagen can be,” (Press release, 2011). To further extend Volkswagen’s involvement in car-sharing it acquired a 60-percent stake in the Dutch car-sharing market leader Collect Car B.V., known for its brand ‘Greenwheels’.
