Hybrid Vehicles in the Auto Industry

There were two key issues raised by this example question: (a) why hybrid

vehicles were becoming important and (b) why the automakers were making the

quite different choices noted in the article.

Here, it was important to recognise the significant external pressures facing the

auto industry. One means of comprehensively addressing these issues was

through an application of Porter’s five forces framework. This identified intense

competition, rising oil and steel prices and growing environmental concerns as all

placing great pressure on automakers. These pressures had been evidenced in

poor profitability and through the ongoing rationalisation of the industry, with many

players being acquired or merging with other automakers. Hybrid vehicles are a

natural response to current pressures, in that they improve fuel efficiency and also

appease environmentally conscious consumers. However, it is important to

recognise that this is only a partial solution, as petrol remains the core power

source such that its suppliers are likely to be able to extract much value from

automakers and their customers. There are also significant cost-benefit tradeoffs

around the technology. Potentially even more efficient and environmentally

friendly technologies, such as hydrogen fuel cells and high percentage ethanol

fuel could become strong substitutes.

The move to hybrid vehicles seemed to offer the potential for first-mover

advantages. Toyota’s early lead through the development of the technology used

in the Prius suggested that it might have developed a resource that could provide

competitive advantage through learning curve effects. Moving first also provided

a valuable marketing advantage in the mind of consumers, especially through its

adoption by “environmentally conscious celebrities”. The best reports also

recognised how the different carmakers were likely to be affected in different

ways. Toyota with its focus on family cars felt the impact of petrol prices earliest

(and unsurprisingly moved first), while the US manufacturers who had focused on

SUVs seemed to have acted more slowly. This seems to have been a rational

choice, as Ford’s experience with its Escape SUV has been less than spectacular,

suggesting that hybrid won’t dominate in all product segments.

Another interesting issue surrounded the role of alliances. These related to the

ability to share the large R&D costs present as well as the impact that economies

of scale would have on the manufacture of the specialised parts used in hybrid

systems.