Question

Read the case below and answer the questions that follow.

The European economic crisis has changed how Renault, a French car maker, designs and produces cars for European customers. Historically, European car buyers have been sophisticated, demanding well-designed, feature-laden cars from manufacturers. When the economic crisis hit Europe in 2007, automakers saw a dramatic shift in demand. Overall demand dropped, and the customers who did come in to buy became much more cost conscious.

In these difficult conditions, Renault has been able to carve out a profitable market for itself, selling low-cost, no-frills cars. Renault responded to this shift by creating an entry-level car group that was charged with designing and producing cars for these more cost conscious consumers. For example, it took an ultra-cheap car, the Logan, that was originally aimed for emerging markets and redesigned it to meet the new needs of the European market. The boxy sedan, which sells for around $10,000, is now one of Renault’s best sellers. Its entry-level cars accounted for 30 percent of the cars sold by Renault in 2011 and generated operating profit margins over twice the profit margins of the higher-priced cars Renault sold.

What is the recipe for success Renault has found to generate high profits on low-price cars? It uses simple designs that incorporate components from older car designs at Renault and employs a no-discount retail policy. At the center of its design procedure is a “design-to-cost” philosophy. In this process, designers and engineers no longer strive for the cutting edge. Instead, they focus on choosing parts and materials for simplicity, ease of manufacturing, and availability. This often involves using components that were engineered for prior vehicle designs. When needing a new component, Renault begins by assessing how much customers would be willing to pay for certain features, such as air conditioning or power door locks, and then asks suppliers whether they can propose a way to offer this feature at a cost that matches what customers are willing to pay.

As it faces imitation of this strategy by Volkswagen and Toyota, Renault is not sitting idle. As Carlos Ghosn, Renault’s CEO, stated, “Our low-cost offering isn’t low-cost enough. So we’re working on a new platform that will be ultra low-cost.”

Sources: Pearson, D. 2012. Renault takes low-cost lead. wsj.com, April 16: np.; and Ciferri, L. 2013. How Renault’s low-cost Dacia has become a “cash cow.” Automotive News Europe, January 3: np

1. Which of Michael Porter's generic strategies did Renault primarily pursue after the economic crisis?

Multiple Choice

• Differentiation

• Breakaway positioning

• Consolidation

• Overall cost leadership

2. Renault's low-priced, no-frills cars can be seen as a form of ________.

Multiple Choice

• breakaway positioning

• reverse positioning

• competitive parity

• harvesting

• mass customization

3. What is the most likely reason that Renault's strategy might fail to result in a sustainable competitive advantage?

Multiple Choice

• The firm is vulnerable to new entrants into the market.

• Renault's competitive advantage appears to be sustainable.

• Renault's strategy could be imitated by competitors.

• The firm cannot earn enough profit selling low-end automobiles.

• There are many substitute products available to consumers.

4. The economic crisis sent the European market for full-featured automobiles ________.

Multiple Choice

• into competitive parity

• out of the industry life cycle

• down the experience curve

• into the maturity stage

• into the decline stage

Answer 1

1. Answer: Overall cost leadership

Rationale: Since Renault focussed on reducing the cost of production of their vehicles and manufactured lower-priced no-frill cars, the strategy that they used was the Overall cost leadership strategy where the main objective is to ensure that the manufacturing costs are low.

Breakaway positioning doesn't involve reducing the costs of components while manufacturing but it is a marketing technique that lures customers based on attributes, design and other features of the product. This shows that Renault didn't pursue this strategy.

Renault didn't pursue the differentiation strategy where the focus is to differentiate the products from competitors but this doesn't mean cost reduction of components to meet the needs of customers.

The consolidation strategy is characterized by mergers and acquisitions which is not the strategy adopted by Renault.

2. Answer: Mass customization

Rationale: Renault took advantage of the economic crisis by designing low-priced no-frill cars by evaluating every material based on the customer's need for lowering the cost, this is an example of mass customization where the cost of each unit is low and is mass-produced.

The low priced no-frill cars are not an example of breakaway positioning which uses unique product features to target customers rather than customizing based on lower-priced components.

The lower-priced no-frill cars are not an example of reverse positioning where the focus is to resonate with the customer via marketing campaigns that address value rather than reducing the unit cost of automobiles.

Harvesting is a phase in the final stage of a product where the products would be in the decline phase of the product life cycle and the company would be making profits by lowering the overall cost of the price of product which is not the case here.

3. Answer: Renault's strategy could be imitated by competitors.

Rationale: The cost leadership strategy that Renault adopted gave them an edge and competitive advantage in the market, Volkswagen and Toyota imitated this and Renault lost its competitive advantage. Therefore, this is the main threat to the sustainable competitive advantage of Renault.

The strategy which Renault adopted is not sustainable as the case shows examples of imitation from the competitors.

The firm can earn profits by selling low-end automobiles but only till the demand in the market is constantly growing. However, this doesn't act as a threat to the sustainable competitive advantage of Renault.

The sustainable competitive advantage of Renault is based on the competitor's imitation rather than substitutes which are not abundant based on the information given in the case.

4. Answer: into the decline stage

Rationale: The European crisis, according to the case led to a fall in the overall demand of the full-featured automobiles, this is a characteristic of the automobile's decline stage.

The fully-featured automobiles are not out of the industry life cycle as they were still in the market but their sales took a fall in revenue.

The fully-featured automobiles are not in the maturity stage as it would mean that the demand for them was high in the market. However, that is not the case here.

Down the experience curve would mean that the full-featured automobiles are produced in bulk at lower direct costs, however, the case indicates that the demand for them has fallen due to the crisis.