Reference no: EM13867425

Advanced Automobile Concepts 

Nick Thomas is the new CEO ofAdvanced Automobile Concepts (AAC), a new division ofa large automobile manufacturer, ZEN Motors. ZEN is amultinational manufacturer headquartered in the UnitedStates, and has multiple divisions representing severalautomobile and truck brands. ZEN’s divisions have beenslowly losing market share to other competitors.AAC wascreated to revive the aging ZEN automobile brands byeither reengineering existing models or developing totallynew models that are more competitive in today’s new-carmarket.Thomas is concerned about the strategic directionAACshould take. On the one hand, he knows the trend has beentoward smaller, fuel-efficient automobiles; but on the otherhand, he knows that this may be a passing trend, similar towhat occurred in the 1970s when fuel costs soared. This previousspike led to greater demand for smaller cars and dieselengines for passenger cars. However, as soon as OPECcountries lowered their prices, Americans had a growingdemand for larger cars for many years. This eventually ledto the SUV craze of the 1990s through about 2006. Now, afew years after oil prices again spiked in 2008, he wondersif consumers really believe oil prices will remain high. Ifconsumers believe this, they will probably prefer smaller,fuel-efficient vehicles. If they do not, he believes demandfor these smaller vehicles will be a passing fad.A second issue that concerns Thomas is the market’sattitudes toward global warming. He is concerned becauseeven though he realizes the scientific community is in reasonableagreement about global warming, there is enoughcontroversy in the information environment to cause consumersto wonder if concern for global warming is real.Also, Thomas doesn’t know how to deal with global warmingin terms of the direction he should take with his automobiles.He knows consumers have varied thoughts aboutglobal warming. Some believe it is a hoax. These consumersenjoy citing record-low temperatures, which appearfrom time to time. Other consumers believe there may beglobal warming but it is a natural phenomenon of theearth’s temperature cycles. These consumers do not believemankind contributes to global warming. If either of thesearguments—either it doesn’t exist or it exists but mankinddoes not affect it—becomes widely accepted, then globalwarming will have little effect on automobiles. On the otherhand, if consumers believe their automobile exhaust affectsglobal warming and it is a real potential threat to life on theplanet Earth, there could be tremendous changes in thetypes of automobiles desired in the near future.Not long after Thomas was hired as CEO, he hiredMarilyn Douglass, former director of marketing research at

Nord Motors, who has many years of experience working in the automotive industry? Nord Motors is a major competitorof ZEN. Thomas wanted Douglass on his teambecause he felt he needed someone to interpret consumers’future automotive needs. He asked Douglass to prepare areport summarizing what she felt were the major automobilealternatives for ZEN to consider. Her report, referred toin the company as the “Douglass Report,” outlined thefollowing major alternatives.Regarding fuels, ZEN should consider only makinghybrid autos in the near future. ZEN has another divisionof top researchers who are investigating new fuels andengines of the future. They have spent considerable timeon developing a hydrogen cell but it will be several yearsbefore they have perfected a version that will be safe forpublic use. The rationale for Douglass’s decision abouthybrids is that some form of electric motor should be used.They are quiet, almost maintenance free, and the cost permile is much cheaper than present internal combustionengines. But, the problem with all electric vehicles is theirpoor infrastructure to support the vehicle. For example, anall-electric car will not be useful except in very limitedconditions due to restrictions on its range. For now, therange is not sufficient on the best of electric cars for usewithout the widespread availability of electrical plug-inreceptacles needed to recharge the car. This is not somethingthat will change overnight and even if there are plugsavailable, there must be meters with pay receptacles allowingusers to pay for the electricity consumed. This mayoccur in limited situations but it will be many years beforethe driving public has such an infrastructure available.Douglass believes that all electric cars will find a nichein the market but that the range limitation would cap sales.She believes that several manufacturers will enter this businessand will develop different vehicles for different purposes.These vehicles will differ in terms of speeds, passengerspace and storage payloads, range, and cost. She believesthere will be many market entries, competition will be fierce,and no one will get an upper hand on the volume needed toearn respectable profits.The Douglass Report suggests that ZEN’s best opportunitywill reside with hybrids that use both electric powerand engine power, using either gasoline, diesel, biodiesel, oreven CNG. The key to the future was thought to be hybridcars with an electric motor charged by and alternating withan internal combustion engine. Her best choice for theengine fuel for now is biodiesel simply because dieselengines get higher miles per gallon (mpg) than gasoline andthere is not likely to be a major change in the infrastructureneeded to make biodiesel widely available. Some form ofdiesel will be necessary for the trucking industry, for example, for years to come. The Douglass Report recommends that this decision be confirmed by others at ZEN.The report stated that ZEN’s competitiveness willdepend on selecting the car designs (models) that best meetmarket demand. The underlying premise is that all vehicleswill need to have high mpg ratings and that demand will differdepending on the size of the vehicles. Generally speaking,the larger the vehicle the less the mpg; so the smallestvehicle will have “very high” mpg and the largest proposedmodel will have “good” mpg. Some broad choices include:

 a.       Very small, one-seat vehicle designed to get near maximum mpg.

b.      Small, two-seat vehicle designed to get high mpg

c.       Larger, economy/compact size, four-seat vehicledesigned to get good mpg

d.      Large, standard size, five- to six-seat vehicle with conventional trunk space    designed to get reasonablygood mpg

 How many of these models will ZEN want to create, manufacture, and market? The Douglass Report explainsthat there may very well be enough demand to justify severalZEN models. It will be critical to determine whichmodels have the greatest demand. Secondly, Douglasswarned that just because we have an energy and environmentalcrisis, the car-buying public will not be satisfiedwith one solution. Similar to the market today, there arevaried segments and each may prefer a unique model tobest satisfy their demands and to determine marketsegments.Finally, the Douglass Report discusses the need tomarket vehicles in the future as efficiently as possible.Two factors are given for the additional efficiencyrequirements in the future. First, there will be increasedcompetition. Start-up firms will be encouraged by newgovernmental policies to produce new, energy-savingvehicles. Second, profit margins will be lower on smallervehicles of the future. As noted earlier, smaller carstraditionally have been priced competitively; they do nothave the “higher” price points of some of the larger, luxurycars. Marketing efforts will need to clearly “reach”the market segments with promotional materials withoutwasting promotional dollars on market segments that arenot interested in the vehicle being promoted. Media canbe purchased that targets markets based upon knowledgeof standard demographic data, such as gender, maritalstatus, number of persons in a household, age, level ofeducation, job category, income, dwelling type, numberof vehicles owned/leased, and type of vehicle owned(economy, standard, luxury, SUV, pickup truck, van).Also, dealer locations can be selected based on other factors,such as size of the city.Thomas read the Douglass Report carefully. He believed it was a good point to start the decision-makingprocess, but he needed additional information.

 1. How would you describe the “source” of the problem(s)facing Nick Thomas?

2. Focus just on one area identified in the DouglassReport: demand for the different basic models. Howwould you write this problem?

 

3. Given what you wrote in question 2, write the researchobjective