Analysis of Automotive industry by BuzOptimizier

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Background of the industry
Major Industry Players
Segments of automotive industry
The history of the Mercedes-Benz
Business Analysis of Mercedes Benz
Segmentation
Target market
Market Attractiveness
Market Size
Market Growth
Perceptual mapping. Positioning
Product mix
BCG matrix
Analysis of BCG
Competitors
and Indirect competitors
Direct
Porter’s 5-forces
Strategy
Analysis Methodology and findings
Conclusion and recommendation

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                   Analysis of
  Automotive Industry


For more information please contact:

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sekretnay@gmail.com

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1.     INTRODUCTION


1.1.   Background of the industry
The global automotive industry is a highly diversified sector that comprises of
manufacturers, suppliers, dealers, retailers, original equipment manufacturers,
aftermarket parts manufacturers, automotive engineers, motor mechanics, auto
electricians, spray painters or body repairers, fuel producers, environmental and
transport safety groups, and trade unions.

This paper identifies what is target market and explains competitive strategies
and its major implications. Additionally, this essay examines product mix using
the example of Mercedes Benz Company.

1.2.   Major Industry Players
The worldwide automobile industry is largely dominated by five leading
automobile manufacturing corporations namely Toyota, General Motors, F ord
Motor Company, Volkswagen AG, and Daimler Chrysler. These corporations
have their presence in almost every country and they continue to invest into
production facilities in emerging markets namely Latin America, Middle East,
Eastern Europe, China, Malaysia and other markets in Southeast Asia with the
main aim of reducing their production costs.


1.3.   Segments of automotive industry
The automotive manufacturing sector consists of:
      automobile
      light truck manufacturers
      motor vehicle body manufacturers
      motor vehicle parts
      supplies
      manufacturers




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This sector is engaged in manufacturing of automotives and light duty motor
vehicles, motor vehicle bodies, chassis, cabs, trucks, automobile and utility
trailers, buses, military vehicles, and motor vehicle gasoline engines.

Auto components amount to 31.5% share of the global automobiles and
components industry group's value. The global automotive component industry
is highly diverse and comprises of various product segments like engine parts,
drive transmission and steering parts, suspension and braking parts, electrical
parts and other auto components parts.


Fig 1 Automotive product segments
Segment                                    Parts                                          Production Share in global
                                                                                          auto component industry


Engine Parts segment                       fuel     delivery        system        and                       31%
                                           products        such      as     pistons,
                                           piston rings, engine valves,
                                           carburetors, and diesel-based
                                           fuel delivery systems

Electrical Parts segment                   generators,          starter      motors                          9%
                                           and spark plugs

Drive    Transmission              and     gears,         wheels,          steering                         19%
Steering Parts segment                     systems, axles and clutches

Suspension         and      Braking        brakes,        brake       assemblies,                           12%
Parts segment                              leaf springs, shock absorbers,
                                           brake linings

Body    and      Chassis        Parts      body       and      chassis,        sheet                        12%
segment                                    metal         components,              and
                                           plastic-molded parts


   Source: BERA: Issue 2 Automotive Industry: Automotive History, http://www.loc.gov/rr/business/BERA/issue2/history.html




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Fig 1 Automobile market segmentation




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2. Mercedes Benz background and Analysis


2.1. The history of the Mercedes -Benz
Gottlieb Daimler and Carl-Benz are the founders of the famous luxury cars -
Mercedes'-Benz. In 1926, the companies founded by Daimler and Benz merged
to form Daimler-Benz AG, and the Mercedes-Benz brand was born. Right from
the   start,   the   Mercedes -Benz   name   was   synonymous   with   automotive
excellence. These are German made cars and are known as status symbol of
high class consumers. All customers have their own values and beliefs while
purchasing a car. There are several factors responsible for the purchas e
decision (see Appendix 1). Car industry is growing very fast worldwide. There is
a rapid change in trends and consumers preferences for comfortable, reliable,
highly efficient and economical cars. Mercedes Benz currently offers nine
classes of vehicles, all with multiple models and body style options, to meet the
specific wants, needs, and desires of its target market.




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2.2. Business Analysis of Mercedes Benz

Business analysis of Mercedes-Benz involves the detailed review of factors such
as consumer demand, competition, new product development, production costs,
marketing costs and profitability for each proposed new product.

Fig 2 Business Analysis

Factors                                  Description and example
Consumer Demand                          Currently, consumers are very smart in selecting a car. They look for
                                         the best option available in the market. Their demands are highly
                                         efficient, affordable cost, reliable, comfortable and stylish models
                                         cars. Some consumers also consider that the cars should be
                                         environment friendly.


Competition                              Mercedes-Benz is facing a very strong competition from Japanese
                                         cars and also from domestic cars. Japanese cars have taken a
                                         considerable market share of Mercedes cars. In India, government
                                         was providing Mercedes cars to its VIPs and VVIPs but now the place
                                         of Mercedes cars has taken by Toyota Corolla cars as these cars are
                                         more efficient and mechanically more sound.


New Product Development                  R&D department of Mercedes is inventing new cars and also doing
                                         modifications in the old models to increase its market share and to
                                         attract the customers. The latest cars of Mercedes company are
                                         Bionic cars. In April 2004, Mercedes deliveries to customers a new
                                         super sports car Mercedes -Benz SLR
Sales                                    The Mercedes Car Group sold 1,226,800 vehicles in 2004 (2003:
                                         1,216,900). For model life-cycle reasons, unit sales of the Mercedes -
                                         Benz brand were 2% lower than in the prior year, however. smart's
                                         unit sales increased by 22% due to the launch of the smart for four .


Production         Costs         and     The Mercedes Car Group is in trouble after a long slide in vehicle
Profitability                            quality and profitability. Sales are slumping. Production costs are too
                                         high, especially in its native Germany. The Smart mini car line is




  Source: "Autos Insider." Can Mercedes Regain Luster 12 Nov 2005
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  "DaimlerChrysler." 12 Nov 2005 http://www.daimlerchrysler.com/dccom/0,,0-5-7171-1-462679-1-0-0-0-0-0-70-7164-0-0-0-0-0-0-0,00.html
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                              bleeding money, and its Maybach super limousine is achieving half of
                              targeted sales

2.3. Segmentation

According to Kotler & Armstrong (2008) market segmenting- dividing a market
into smaller groups of buyers with distinct needs, characteristics and behaviors,
that might require separate products or marketing mixes.


Fig 3 Three building blocks of effective customer segmentation




                    Source:   IBM Institute for Business Value analysis, 2003




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Fig 4 Purposes and levels of segmentation




To get full value from segmentation and apply it correctly, companies must
pursue comprehensive, dynamic segmentation. Customers today are on the
move, always learning, constantly changing; companies have to know not only
what customers look like today, but how their appearance will differ the next
week and differ again the next month. On top of that, companies have to know
how customers act, because, while first impressions reveal a great deal,
appearances can be deceiving.




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Fig 5 Changing patterns: Compan y analysis and interpretation (illustrative)




                   Source: IBM Institute for Business Value analysis, 2007




Identifying and acting on customers‟ changing patterns is critical to beating
competitors in the marketplace. Mercedes Benz‟ competitors have similar target
segments;   understanding         and      acting first          on      chang ing   patterns   is   the
differentiator for Mercedes. According to Porter‟s theory (Kotler & Keller, 2006),
by performing in low cost advantage, differentiation advantage or focus, a
company could attain competitive advantage which other competitors could not
match. One of the alternative approaches of competitive advantage is the
company‟s ability to identify an advantageous opportunity and establish a
superior market position (Miles, 2006, citing von Mises, 1966; Porter, 1985).
Not paying attention to changing patterns could result in a company wasting




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months and dollars targeting a customer who is no longer (or never was)
profitable.
In Mercedes-Benz case it would be wise to select behavioral as the approach to
for segmenting consumer markets. From there the benefits sought must be
carefully considered, and the following questions should be answered:
    W hat is the buyer looking to satisfy in the purchase of Mercedes cars?
      Does it match his/her status?
    Does it offer all the extras he/she is looking for?
In answering these questions Mercedes Benz will be able to organize the range
of Classes it offers from engine size to colors and standard features offered. The
next step is to see whether the market segment has already been developed. In
Mercedes Benz's case they have never ventured into the small car segment.
The particular segment they plan to enter is already dominated by the
Volkswagen Golf and the Renault Scenic. These manufacturers have much more
knowledge in this segment which gives them the advantage.
Currently, Mercedes Benz positions its products on various segments: lower
medium, upper medium, executive, dual purpose, luxury saloon and specialist
sports range. Thus, a luxury car may refer to an upper medium, executive, dual
purpose, luxury saloon, or specialist sport car. These types of cars are the cars
the owners may drive to the forecourt at a gala dinner and still highlight the
owner‟s
sense of prestige and status.
Managing customer segment becomes difficult for the following reasons:
    Large    investment    (software,   hardware,    communication,   maintain   a
       customer database), (Kotler & Keller, 2006).
    Database is not omnipotent, consumers are not always loyal
    “Market segmentation analysis must be done periodically because
       segments change” (Kotler & Keller, 2006, p. 266)
      Marketers could not predict the consumers‟ future demands from the
       consumers‟ past preference shown in the historical database




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    The customer segment management lacks of the participations from both
      customers and employees. On one side, “employees find it easier to carry
      on traditional transaction marketing”, and reluctant to “use the available
      information” (Kotler & Keller, 2006, p. 165). The other side, customers are
      more concerned about their privacy and security. Undoubtedly, it is very
      hard to put the theory into practice. It is a long progress for marketers to
      execute an effective and actionable customer management, in which they
      should make great efforts.


2.4. Target market
Target market is a set of buyers sharing common needs or characteri stics that
the company decides to serve (Kotler & Armstrong, 2008).

Mercedes-Benz is the global leader in the premium market segment. Mercedes
Benz is targeting on high level income consumers in passenger car segment and
because of its brand image, its products generally preferred by the consumers.
Mercedes Benz a sophisticated car that would be best suited for individuals of
age thirty and up who have successful careers.
A luxury car brand is a „multi-segment‟ (Kapferer, 1995) brand that wants to
cover all customer market segments. That is why Mercedes Benz target different
markets, such as families(R Class), organizations (tracks, vans, buses, MPVs)
and individuals.
Target marketing for Mercedes involves three factors that need to be
considered:

    The size and growth potential of each segment
    Their structural attractiveness
    The organization's objectives and resources
    Reputation for quality and safety
    The brand name (it has its own advantage to enter unknown segment)




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The consumers for Mercedes -Benz cars can be split into three categories:

Fig 6 Mercedes-Benz‟ categories

Category         Description          Income                 Age       Expectation
The very rich    a small but          assets in excess of    over 50   high level of
                 strategically        $1million                        service
                 significant group
The rich         a far larger group   assets of around                 safety and
                                      $100,000                         luxury
High net worth   a semi-mass          assets available for   25-35     superior
individuals      market               investment of                    customer
                                      $15,000-$100,000                 value,
                                                                       competitive
                                                                       prices



Some individuals are interested in owning cars that cost a lot of money because
they expect that others will perceive them as better than if they drove a less
expensive car. Others consider the utility of a particular vehicle and prefer the
perception that they shop for value rather than conspicuous c onsumption. The
motivations behind why people purchase the cars they do are complex (see
Appendix 2).

2.5. Market Attractiveness

2.5.1. Market Size

Their biggest markets are the USA and the EU, which represent the highest
sales figures over the last 5 years. These are extremely large markets where on
a yearly level around 300,000 cars are delivered to each continent.

2.5.2. Market Growth




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For Mercedes-Benz these markets have been growing consistently over the last
five years. W ith the introduction of 15 new models it is clear the Mercedes -Benz
has contributed to the growth in these markets. The growth rate per year has
been around 6%.

2.5.3. Perceptual mapping. Positioning

Perceptual maps have been a very useful tool for marketers in understanding product
differentiation, (Dickson and Ginter 1987), product positioning and product preferences.

Fig 7 Durability vs. Reliability




Figure 7 illustrates that Mercedes have to improve its position among other
competitors. Mercedes can focus on expandin g into emerging into markets
worldwide. Additionally they should invest in research and development in order
to understand customer needs and increase the level of security, safety and
reliability.




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Fig 8 Price vs. Quality




Mercedes always stays for high quality and luxury price, however in order to
compete in current auto market they may develop a new strategy by decreasing
costs of production or labor.




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Fig 9 Prestige vs. Performance




According to figure 9 Mercedes has a good place. The main purpose for them in
this field is to sustain their position by investing in product development and
research.




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3. Product mix

3.1.Product – is one of the components of the marketing mix. It is used to
summaries everything that firms can offer to the target market, including goods,
services, places or ideas (Kotler et al, 2005).

Mercedes-Benz is dealing in the car industry, selling brand new cars from all
classes. In comparison with their direct rivals, BMW and Lexus, Mercedes has
the greatest variety of classes which gives them higher share of the market.

There several aspects which reflect product:

    Develop and maintain a brand name (it is not enough to have just a
      product). A strong brand association can help companies attract pr ofitable
      and loyalty customers.

During their 100 years of history, Mercedes managed to develop strong brand
name, which in the year 2000 was rated as the best automobile brand worldwide
by the Interbrand Rating Agency (T -s ystems, 2006).

    Quality, which also has an impact on product performance and consumer
      satisfaction.

Mercedes-Benz is a firm with traditions. Every single Mercedes car can
guarantee a high quality level of every aspect. In order to boost their
profitability, Mercedes is concentrating their efforts on the issue of quality as
well as efficiency and profitability.

    Design can be used as a tool by businesses for differentiating and
      positioning different kinds of product. A distinctive product design can add
      additional customer value.




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The Mercedes cars‟ design aims to give both trendsetting and tradition design of
their cars. Every new model is setting a new trend in design that smaller firms
can follow.

    Features are another strategy used by companies to differentiate their
      product and in the same time stay competitive on the market

Every new model of Mercedes can be equipped with features like SRS airbag,
which is safety technological innovation, Smart key (theft -protective system),
Hands free communication system, DVD navigation system and ot her innovative
technological features. The company‟s aim is to provide additional level of luxury
and safety.

    Product-support-services    can   be considered       as   a way   of   gaining
      competitive advantage

Operating in the car industry, for Mercedes is very importan t to assure its
customers of heaving a quality after-sale service and warranties for their
products. Mercedes-Benz has a top qualified service team at each local dealer.
The company guarantees its customers that their car will be serviced by
professionals, with genuine parts at competitive prices.

3.2. BCG matrix

In order to understand Mercedes-Benz product portfolio Boston Matrix (see
Appendix 3) was conducted. Figure 5 illustrates that Mercedes‟ portfolio for A,
C, SL, M and S classes.     Mercedes portfolio is balanced even though certain
cars such as the A-Class and the M-Class are not performing well.




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Fig 5 Boston Matrix

Step 1




Step 2




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Step 3




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Boston Matrix for Mercedes
Benz
Market Growth Rate




                                          Relative Market Share




3.2.1. Analysis of BCG

Class                          Position            Description                Action
                                                   low market share, high-    Invest, increase market
                     M Class   Question Marks      growth market              share, use Cash Cows
                                                                              to support required
                                                                              investments.
                     S class   Stars-Question      high market share, high-   Need investments for
                               mark                growth market, market      sales growth and market
                                                   leader                     share to take the full
                                                                              position of Stars.
                                                                              Mercedes needs to
                                                                              expand product and




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                                                                         invest in R & D
   SL, C Classes      Cash Cows           market is not very             Maintain the strong
                                          attractive, low market         market position and
                                          growth rate, generates a       defend market share,
                                          lot of cash and helps the      does not need
                                          organization invest in other   substantial investments
                                          businesses                     to keep the market
                                                                         share
        A Class       Dogs                low market share and           Mercedes needs to
                                          operates in low-               divert this product,
                                                                         because it makes losses
                                          growth market                  for company, and A
                                                                         class is not so popular to
                                                                         keep it in order to
                                                                         provide product range




4. Competitors
The luxury car segment is a competitive industry where each rival has to constantly
scan its competitors for any changes whether they're in price or in the product itself.
The market is growing particularly in Mercedes -Benz case, and external
competitors who do not hold a share in the luxury segment can attempt to offer
substitutes in the goal of stealing away some customers. Mercedes-Benz is
facing a very strong competition from Japanese cars and also from domestic
cars.
4.1. Direct and Indirect competitors




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Mercedes-Benz Main competitor is BMW , firstly because they compete directly
in the luxury segment with their 5 series and 7 series models and secondly
because they are of roughly the same size. Rivalry between them is high, but
Mercedes-Benz has managed to keep them at bay through a strong sales policy
that has lead to record sales particularly o ver the last two years.
Other rivals include Jaguar, Audi and Rolls -Royce. However they are not in
direct competition as they have targeted a different market segment that does
not compare to that of Mercedes-Benz. The reason for this is that Mercedes -
Benz has made the standard in quality and safety, in other words it has set the
standards for its competitors to match.

Currently,   consumers'     attitude   towards   buying    luxury   cars   is   changing
dynamically. Consumers are more interested in saving money rather th an
spending it for more expensive luxury cars. Due to the above it would be wise
for Mercedes Benz to scan companies such as Honda, Nissan, Ford, who seems
to be making a move in that direction that, could pose a future threat.




4.2. Porter‟s 5-forces

In order to better understand the environment in which Mercedes Benz operates in it is
crucial to perform the 5-forces analysis. This Strategic tool is used to investigate how
the organization needs to form its strategy so that it can develop opportunities in its
environment and protect itself against competition and other threats.

Fig 6 Porter's Five Forces




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 Source: http://www.justice.gov/atr/public/hearings/single_firm/docs/219395_8.gif




    Threat of New Entrants

The threat of new entrants is very low in the automobile industry. The industry is
very mature and it has succ essfully reached economies of scale. In order to
compete in this industry a manufacture must be able to:




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    Achieve economies of scale
    Mass-produce the automobiles
    Invest extreme amount of capital in research and development
    Find distribution channels



    Threat of Substitute Products

The second is the threats from substitutes, as there are many make and model
of other premium branded cars, hence, Jaguar, Audi, BMW , Porsche, Lexus, etc.
Some of the substitutes are walking, riding bike or taking a train. Subs titutes
products all depend on the geographic location of the consumer. In some cities
such as New York or Chicago, a car is not as necessary. In cities such as those,
the subway is the most effective means of transportation.

    Bargaining Power of Buyers

The third force is the threats from the bargaining power of buyers. It is strong for
both Mercedes Benz and the entire automobile industry with a large number of
alternative suppliers, hence, the aggressive pricing strategy. This results in a
very strong competitive rivalry in the industry. W ith around 25-30 dealerships in
each country or state Mercedes Benz reaches all its customers, through an
excellent network.




    Bargaining Power of Suppliers

Finally the threats from the suppliers bargaining power, this is fairly low in the
automobile industry, due to dual sourcing strategies, using a range of alternative
sources of supply for parts. There are so many parts that are used to produce
an automobile, that it takes many suppliers to accomplish this. W hen there are




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many suppliers in an industry, they do not have much power. Mercedes Benz
holds excellent relationships with all its suppliers this is due partly to the scale
of operations and the total expenditure on suppliers. This is evident from the
collaborative project they undertook with Bosch (the brake manufacturers) in the
creation of the ABS (Anti-Lock Braking System). In the car manufacturing
industry suppliers are usually large in number, and Mercedes Benz recognizes
this which is why they manage an effective and friendly relationship with all
suppliers. This can be seen by the economic downturn of the late nineties when
Mercedes Benz had asked if suppliers could reduce their prices, which they all
did.

    Intensity of Rivalry among Competitors

Rivalry among the competitors is very strong is this industry. The major
competitors are so closely balanced that it increases the rivalry. In order to gain
market share in the automobile must gain market share by taking it from their
competitors. One of the other reasons there is such high rivalry is that there is a
lack of differentiation opportunities. All the companies make cars, trucks or
SUV‟s. The competitors are compared to one another constantly. The price,
quality, durability, and many other aspects of differ ent manufacturers are greatly
taken into consideration when deciding what type of vehicle to purchase. W hen
the different manufacturers advertise they even compare their products to their
competitors.




4.3. Strategy

Mercedes Benz marketing strategy was once centered on the safety, luxury, and
precision engineering of its cars, but due to increase competition in the luxury
car industry and changing consumer attitudes about the Mercedes Benz brand




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that strategy has changed. Now their marketing strategy is more life style
oriented and is focused more on presenting the more fun loving, approachable,
and energetic side of Mercedes Benz. The evolution of Mercedes Benz‟s
marketing strategy can be directly connected to the expansion of its target
market, which now includes persons twenty five to thirty five years old as well as
its initial targets the baby boomers. In order to provide superior customer value
to its target market Mercedes Benz has found it necessary to expand its product
line up, provide more competitive prices, increase communications with its
target market, maintain accessibility to consumers, and continue its excellent
customer service.
Mercedes-Benz‟s current strategy is built on four central pillars:

    global presence
    leadership in technology
    strong brands
    broad product range




5. Analysis Methodology and findings
5.1 Methodology
The report begins with a historical overview of the automotive industry.
Company is analyzed in terms of their market position, their financial situation,
and their management strategy. W here useful, specific statistics have been




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incorporated into the analysis including: market share, revenues, net expenses,
net income, market, value added and number of models. This is followed by an
analysis of the industry‟s struc tural characteristics using Porter‟s 5 Forces Model
as a framework, which provides an understanding of the automotive industry as
a whole in its current state.
The examination of the industry as a whole and of some of the major players in
the industry provides a good framework within which insightful conclusions can
be derived about the current state and future of the Mercedes Benz. The report
concludes with the recommendation section, which provides a prediction of the
near-future success of each of the company.




5.2. Conclusion and recommendation
Accordingly, the luxury car market overall is currently undertaking a social
change with luxury brands seeming less remote, less different, and less
exclusive with the quality of life improving. As a result, increasing competition
between makes has intensified the importance of brand identity. As product
standards continue to rise, the perceived image of a car make plays a key role
in the buying decision. Mercedes -Benz must develop attributes and values that
reflect changing social values which influence buyers emotionally, in order to
maintain its position in different regions of the global market.
Prestigious luxury brands like Mercedes do not need to expose customers to
frequent advertisements. In current practice, the necessary occasions take plac e
only when new models are introduced. Such top luxury car manufacturers are
now attempting to level up their brand with the post-modern approach namely
„brand as company‟ and „brand as policy‟. At this stage, marketers are aware of
consumer cynicism and cautious about their actions which could affect customer
and public values positively or negatively. Mercedes need to preconceive their
physical products as products and services (luxury cars, after sales services and
warranty) and reassure their dealers to create, maintain, and build customer
values. W hile all things being equal, it is the era of the service industry at which




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companies can gain a competitive edge by focusing on customer value -building
an actual „emotional bond‟ with the customers (Butz and Goodstein, 1996 ,p 63).
Mercedes Benz revenues have steadily increased over recent years and
demand for its vehicles has also been on the rise. These positive aspects
suggest that Mercedes Benz is in a good position for future success. W hether or
not the future plays out according to these recommendations will depend on
factors both internal and external.
Regardless, many of the companies will face major turning points in their
corporate existence over the next five years; the near future will almost surely
be a defining period for the automotive industry.
Mercedes-Benz is known to be a status symbol of high class consumers. Middle
class consumers feel rich if they buy Mercedes' cars. Currently, consumers are
more conscious for the performance and price of cars they are going to buy.
Although the company is making many changes in its price, product and
promotion strategies but still there is lot to do to attract the consumers and to
increase its market share. The components of marketing mix (product,
promotion, place and price) need to be coordinated and consistent with a
company's marketing mission. The company should take regular feedback from
its consumers to know their exact demand and needs. The buying behavior of
the consumers is changing very fast. The company can conduct surveys to know
the attitude of the consumers while buying a car. Mercedes -Benz should also
open spare parts warehouse so that consumers can easily get the spare parts of
Mercedes cars. The cost of spare parts should be affordable by the consumers.



5.3. Conclusion

W ith their more than 100 years of history, Mercedes -Benz has managed to build
a brand name that might be considered as their only heritage. Trough years, the
company succeeded in maintaining the traditions of luxury and safety cars in
combination with trendsetting designs and new technological innovations. At the
present time, the car industry is flooding the market. This increases the




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managerial attention in operating in such environm ent of great competition. But
whatever managerial mistakes the company had made or will make in the future,
it will still be Mercedes.




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