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On Strategy: Hybrids & Customers

With oil prices at a record high, global warming and depleting fossil fuel stocks, calls for efficient, environmentally friendly cars are becoming more frequent.

With oil prices at a record high, global warming and depleting fossil fuel stocks, calls for efficient, environmentally friendly cars are becoming more frequent. Contrary to the Japanese hybrid pioneers, European vehicle manufacturers have continued to depend on diesel technology and, in addition, have focused their research on fuel cell and hydrogen technologies. These technologies will not be ready for use until sometime between 2010 and 2020, at the earliest.

Manufacturers and experts are having technical debates on the strengths and weaknesses of diesel and hybrid technologies. As a result, consumers have become more confused and have not been encouraged to embrace environmentally friendly technologies. While the strength of diesel lies in long-distance journeys, hybrid engines are more efficient in cities, on short trips with a high rate of stop-and-go. The air pollution debate in Europe and the success of hybrid cars in the U.S. and Japan could put the hybrid engine on the fast track to success in Europe, as well.

In the U.S., diesel technology has always faced challenges because of strict emissions laws. Driven by the discussions on reducing emissions and public programs, over 80,000 hybrid vehicles were sold in 2004. More than 50,000 of these were Toyota Prius. In 2003, the Toyota hybrid gained visibility when environmentally-conscious celebrities drove up to the red carpet at the Oscars in their Priuses. Market research suggests that sales more than doubled last year, as 205,749 hybrids were sold. Over half of these were Toyotas, with 146,560 sold of its three hybrid models, including the Prius. By 2010, our revised expectation is a market volume of 800,000 hybrid vehicles.

TOYOTA’S APPROACH. Toyota, which has thus far been the automotive world leader in terms of growth, quality, and profit, is now taking advantage of the opportunity to become a technology leader and to develop an emotional image, particularly for its Lexus brand. The strategic move toward hybrid engines is a cornerstone of Toyota’s strategy to become the market leader by 2010. The company has continuously developed hybrid technology and is therefore years ahead of the competition. Toyota’s future plans include offering the hybrid option for all of its vehicles, and will therefore build up its production capacity and strengthen its development activities.

Toyota’s plans have made European manu-facturers nervous, as it could soon erode their market positions, such as the idea that “exciting and innovative cars come from Europe.”

European and American automotive manu-facturers have long hesitated in addressing the hybrid issue. For years, companies argued that two engines, the internal combustion engine and electric motor(s) of a hybrid, would be too expensive and too heavy. When the Prius’s hybrid engine was introduced in 2000, manufacturers did not see it as a challenge because of a design that resembled a science project and insufficient driving dynamics. However, they began to take the hybrid more seriously when the Lexus RX400h was presented. AUTO BILD, a German automotive magazine, gave the RX400h rave reviews: “Runs smoothly, is great fun and even calms your environmental conscience.” This statement precisely summarizes customers’ expectations of hybrid vehicles.

To make up for lost time, American and European automotive manufacturers have undertaken impressive efforts to catch up. They have announced the arrival of several new car models for the near future. Ford, for example, introduced a hybrid version of its Escape model at the end of 2004. Since demand for the car far exceeded expectations, four more Ford hybrid models will hit the market within the next couple of years. Honda introduced an over-240-horsepower hybrid version of the Accord. GM and DaimlerChrysler, who were long opposed to the hybrid concept, are cooperating (along with BMW) to develop an even more-efficient technology that they plan to present in 2007. Nissan is aiming for an annual output of 50,000 hybrid units of its Altima model, using Toyota electrical components. VW has developed a hybrid prototype based on the Touran. Audi is working intensively on a hybrid engine for its new Q7 SUV. Even Porsche is considering a hybrid version of its Cayenne SUV.

ADDRESSING CUSTOMER VALUE. The example of hybrid engines shows that integrating customer-oriented technology management into a company’s overall strategy is decisive. Already, the topic of safety brought on surprises when the Euro NCAP Crash test was introduced. While underestimated automotive manufacturers shone with five stars, one premium manufacturer had to accept a four-star result for its new product line. Now the topic of the environment shows that innovative engine technology alone does not sell cars. Customers are looking for a complete package that includes driving pleasure, performance, image, design, safety and environmental friendliness.

If manufacturers continue their efforts to differentiate themselves with high technology without considering the value for their customers, they will not be successful. Various technological developments such as by-wire technologies and telematics illustrate this. The competition between the technologies increased complexity and cost pressure. In the face of negative customer reactions, many companies are going to change their philosophies. They are now moving away from the “technology creates need” approach and toward the notion of “technology creates value for customers.” Companies who want to put this approach into practice need a technological positioning strategy that identifies new trends early and actively pursues technological change. Technological value creation at every level has to be consistently geared toward brand positioning and target customer needs.

Hybrid vehicles will continue to move into the fast lane, especially in the U.S. and Japan. European manufacturers must prepare for hybrid technology, which will compete with diesel engines within the next few years. Companies who want to maintain or improve their market position will have to ensure that their technology management can deal with the challenges of the future. 

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