MAZDA

Strategic Issue

The main decision that Mazda has to make on whether or not it will commit to the growing trend
of making driverless vehicles, and how they would enter if they should choose to begin looking
into driverless cars. With most carmakers optimistic with their chances at developing a mostly
“auto-pilot” vehicle, Mazda’s current inaction may cause them to fall behind in the age of more
futuristic technologies. However, as a company that has struggled throughout its history, it may
be overly ambitious for Mazda to enter such a space.

Internal Analysis

Although Mazda owns a rather modest share of the automobile industry, it is still highly regarded
and enjoys a cult-like following. The company enjoys the reputation of being a “driver’s car”,
and their cars are built to optimize the driver’s experience. This emphasis has been shown
throughout Mazda’s history, as capitalizing on innovations like the rotary engine and steering
system, have provided consumers with more power and safety. In addition, the company has
boasted strong cash flows, allowing them the privilege of using capital to develop new products
when the need arises.

Despite this, the company’s history is riddled with distress and failures. Currently, Mazda is
suffering from low margins, hindering their profitability. Furthermore, while they are well loved,
they only retain 34% of their customers, a retention rate that has been unchanged despite the
company’s efforts. To make matters worse, investors are not a believer in the company’s
strengths, with shares dropping 15.7% in 2015, more than fives times worse than the industry
average.

External Analysis (Exhibit 1)

Automobile industry analyzed through Michael Porter’s Five Forces Analysis

Threat of New Entrants- Low

The automobile industry has notoriously high barriers to entry. First of all, establishing a car
brand requires an enormous investment. There is a need to hire qualified staff, set up
manufacturing facilities, and create distribution systems. On top of that, to be a serious
participant in the space, companies should be experiencing economies of scale, which would
require an even bigger investment in engineering and product development.

On top of this, the industry is well established with players that have been around for decades,
such as Ford, Toyota, and General Motors. Unless an entrant develops a specialized product that
is inimitable, the chances of grabbing a relevant market share are very slim.

Lastly, legal barriers are a serious deterrent for new entrants. Various governments have passed
legislation in recent years to discourage foreign brands with higher import taxes. In fact, there
are very few automobile entrants that have been able to make an international presence in recent
years.
Bargaining Power of Suppliers- Low
Suppliers in the automobile industry are generally plentiful and small-named companies. This
gives giants like BMW, Volkswagen, Toyota, etc. immense power in such relationships as
switching suppliers is easy, and raw materials are abundant. The small size of these suppliers
also minimizes the potential for forward integration.

Threat of Substitutes- Low

While there are many methods of transportation that can bring the same results as owning an
automobile, these do not offer the same accessibility and convenience that simply owning a car
provides. For example, the stress of missing a train or bus is non-existent if one owns an
automobile because one’s own car is available all the time. This increased convenience, for most
people, outweigh the high-maintenance and insurance costs that comes with car ownership.

While ride-sharing services like Uber and Lyft have the potential to cause market disturbance,
their presence have not noticeably affected car ownership, and the future of such services is too
uncertain to determine whether they are a viable substitute to owning a car. However, this threat
should still be considered.

Bargaining Power of Buyers- Medium to High

In this industry, there typically a large number of buyers. These buyers are comprised mostly of
individual buyers that are only looking for a single vehicle, but also businesses and government
agencies that may be in the market for a large order purchase. Both groups tend to have
substantial buying power, as switching costs are low. Also, due to the fact that there are
numerous car companies that offer similar features, the buyers are price sensitive. Depending on
the geographical location of the buyers, substitute modes of transportation can also be a factor in
the buyers’ buying power. Companies fight for customers through brand loyalty and offering
competitive price points.

Threat of Competition- High

The automobile industry is a mature industry, so the competition is intense. While many car
brands target different segments of the market, there is still plenty of overlap to establish rivalries
between firms. There are a variety of different companies, all of which offer cars with similar
features. Competitors in this area is generally try to differentiate through design, technology,
price, and establishing customer loyalty. Furthermore, the constantly evolving marketplace
means that companies that want to stay competitive must pour money into R&D in order to gain
initiative on new technologies and opportunities.

In addition, there are high barriers of exit that keep the space saturated. Most car companies have
contracts that would force them to bear immense sunken costs if exit were to take place, and face
pressure from governments and unions to keep the population employed. Otherwise, the
company would face paying severance packages.

Because of all this, the automobile industry is highly competitive, with the top five companies,
having once owned half of the global market place, seeing their market share diminish over the
last thirty years.
Strategical Responses (Exhibit 2)

Before determining Mazda’s options in the face of a potentially industry-changing driverless car
world, it is important to contemplate what considerations exist for any company that wants to
shift to driverless car technology. Firstly, the company must decide how feasible driverless
technology is, and how close that eventuality is. Current technologies are still far-off from
achieving the vision of an automobile that can handle all the intricacies of driving on its own.
Preparing for technology that might not be adopted for years to come could lead to unnecessary
expenditures that smaller companies like Mazda would not be able to afford. Of course, this risk
comes with the upside of being an early entrant in the market, and establishing a loyal customer
base early.

Another fact of the situation is that there will have to be a transition period where companies
must spend money on R&D for both traditional automobile trends and driverless car technology,
if they decide to enter the driverless car industry. Companies must seriously evaluate whether
their balance sheets could support a dual venture like this, as the current industry is marked by
aggressive R&D. Mazda and its peers could find itself in financial trouble if it cannot properly
support the company during such a transition phase. With this in consideration, the three options
Mazda has are as follows.

1. Begin Planning the Implementation of Driverless Cars

This decision would include Mazda committing to autonomous vehicles at a similar level of its
competitors. This avenue would allow Mazda to keep pace with the bigger players of the
industry, even in the new landscape. If the company starts now, they have an opportunity to
completely reinvent themselves in the autonomous vehicle marketplace. Instead of offering few
products that Mazda fans tend to enjoy, they could offer a variety of vehicles, relying on the
cutting-edge technology as the competitive advantage. This could open the company up to a
much wider customer-base, bringing a larger market share to Mazda.

Showing initiative for driverless cars can bring Mazda business partners in different ride-sharing
services. Perhaps Mazda can forge agreements and partnerships with companies like Uber and
Lyft, where they would use Mazda cars as part of their service. These agreements could provide
a steady source of revenue in a surely uncertain future of the automobile industry.

A major risk of taking this option is the enormous capital investment required. Automobile
companies already have to spend enormous amounts of money on R&D simply to compete at the
current technological level (non-autonomous vehicles). Orienting the company around a type of
technology so far from its current business proceedings would definitely lead to high fixed costs,
and high initial costs of starting off the development of such a product. Clearly, this would be
seen as a risky course of action by shareholders, leading to disinvestment. Evidently,
shareholders are already suspicious of Mazda, as the company has been hit harder than the
overall industry in 2015. Another hidden cost lies within the fact that Mazda would need to
overhaul its engineering team. Current Mazda employees are taught to work in the traditional
automobile marketplace. If Mazda truly wants to commit to competing in the driverless car
market at a high-level, they will have to re-train or fire much of their current staff, which is sure
to bring colossal costs. This course of action would also likely require the company to change
their company culture, as instead of focusing on the thrill of driving, they would be competing on
a product that eliminates the traditional driver experience.

2. Attempt to Carve a Niche in the Traditional Automobile Market

While the advent of autonomous vehicles will shake the industry, such a change actually presents
Mazda with a very unique opportunity. Mazda is widely-known as a company that emphasizes
driver experience and highlighting the “essence of driving pleasure, as stated by Mazda CEO Mr.
Kogai. Perhaps when all of the other companies delve into driverless cars, Mazda could create a
niche customer base with those that want to enjoy the feeling of driving. Although this
marketplace would undoubtedly be much smaller than the overall automobile customer base, the
company can still be very profitable if it commands such a niche. This option would also cause
the least friction within the company, as they would simply have to continue creating the same
type of vehicles that they always have been. There would be no need to shift the company culture
nor re-train employees.

This option would be most optimal in a scenario where autonomous vehicles are infeasible in the
near future. Though there are many optimistic about the possibility of driverless cars, it remains
to be seen how far in the future these products will truly be available. Choosing this option
means Mazda would forgo the R&D expenses required for developing a technology that might
not even be reliable for many years.

Even though the possibility of developing a strong niche may seem appealing, this option would
cut Mazda’s consumer base even more. Mazda is already a minor player in the automobile
industry, so intentionally reducing their possible customers may be an overly optimistic choice,
especially because it hinges on a traditional automobile market existing in a driverless car world.
Should such a niche not be large enough for a company like Mazda to be profitable, they will
inevitably be too late in developing the necessary technologies to suddenly shift to driverless cars
because the competition would have already established their respective footholds in that market.
Additionally, one of the major barriers to entry was the intense competition leaves little room for
new entrants. However, aiming for a niche could open Mazda to new competitors that also want
to compete in the traditional automobile market.

3. Continue Operations as Normal, but Invest in Driverless Technology Companies

This option means that Mazda would continue creating products that cater to driver experience,
but keep a watchful eye on driverless technology by investing in the companies that develop
them. This choice brings the benefit of flexibility, since the company could wait to see how
regulations regarding driverless technology come to pass and how far in the future these
technologies will be available before committing to anything. This could also serve as a way for
Mazda to hedge its risks from the two prior choices because they would still be an indirect
participant of the hunt for practical driverless technology, while not immediately shifting the
company’s culture and entering at a premature stage. If the autonomous vehicle market explodes,
Mazda could enjoy a profitable stake in the technology companies, while still developing the
niche products from the second option. Furthermore, Mazda could re-evaluate the situation when
the shift occurs, and consider acquiring the technology through a formal acquisition, instead of
possibly committing too early.

The biggest drawback of this option is the uncertainty of the timeline of the changes that will hit
the automobile market. With technology evolving at a rapid rate, there are no true estimates for
when driverless cars will be available. This option would give Mazda the flexibility of joining
this futuristic marketplace at a later stage, but they would also miss out on the first wave of
customers, missing their chance to be a leader in the industry.

Final Recommendation
Given Mazda’s current situation, the best course of action is to continue operations as normal,
but invest in driverless technology companies. Mazda is not an automobile giant, so it cannot
afford the same risks that a company like Ford could by committing early to driverless
technology. It is clear from Mazda’s current market share and lack of confidence from
shareholders that it would not be able to properly develop driverless technologies while still
meeting the regular R&D demands that the industry requires. Although the upside of being early
to a new era is promising, going bankrupt before that era would disallow the company from
reaping the benefits of committing early.

By choosing flexibility over commitment, Mazda would steer clear of the enormous risk of
trying to find a traditional automobile niche in the long-term and going spending too early. There
is no accurate time table for the driverless technology and its implementation, so a smaller
company like Mazda must avoid unnecessary risk so as to keep competing until the future is
more certain.

Appendix

Exhibit 1: Five Forces Analysis of Automobile Industry

Threat of New Bargaining Threat of Bargaining Threat of

Entrants- Low Power of Substitutes- Low Power of Competition- High
Suppliers- Low Customer-
Medium to High
• High • Suppliers • Substitutes • High • Overlap
barriers to are few in do not offer number of between
entry number enough buyers companies’
• Mature • Raw convenience • Price consumer
industry materials or sensitive bases
with are accessibility • Low • High
established abundant • Potential switching barriers to
companies market costs exit
disturbance • Saturated
from ride- space
sharing
services
Exhibit 2: Strategic Alternatives

Alternative Develop and Establish Niche in Invest in Driverless

Implement Driverless Traditional Technology, but
Cars Automobile Industry Operate as Normal
Competitive • Develop • Maintain • Maintain
Advantage(s) superior position as the position as
technology “driver’s car” “driver’s car”
• Profitable • Profit from
business new
partners technology
without
committing as
much
Risk(s) • Spending too • Niche might • Miss out on
much on not be initial wave of
R&D substantial driverless car
• Displeasure enough for customers
amongst profitability
shareholders • Leaves room
for new
entrants
Bottom Line Company would Opportunity to carve Allows Mazda to join
capitalize on new a niche where Mazda driverless car
technology and be a is already strong, but industry at a later
major player, but at would have to stage without
huge risk to firm’s evaluate overall spending as much,
financial stability profitability and but could miss the
competition chance to establish a
foothold in new space
Customer Impact Reach a wide-range Narrows consumer Continues serving
of customers that will base to those that current customer base
adopt new technology enjoy the traditional and keeps the door
driving experience open to reach
customers that adopt
new technology
Employee Impact Would require Potentially more No immediate
massive overhaul of emphasis on sales impact, but may need
engineering team and team, but culture and to consider adjusting
company culture engineering team engineering team in
would remain intact the future
Competitor Response Would need to adopt Potential for Could possibly
new technologies at a increased competition aggressively acquire
similar rate to Mazda in niche space driverless technology
to compete companies
Exhibit 3: Business Model

WHO:
• Customers that enjoy design and technology of Mazda cars
• Emphasis on driver experience
WHAT:
• Competitively-priced cars and SUVs
• Technology meant to enhance driving experience
HOW:
• Primary market is North America
• Communication between engineers, designers, suppliers, and production experts
to plan new models

Work Cited

Kallstrom, Henry. “What Makes the Auto Industry Highly Concentrated?” Yahoo! Finance,
Yahoo!, 6 Feb. 2015, finance.yahoo.com/news/makes-auto-industry-highly-concentrated-
140540290.html.

McCormick, John. “Why Mazdas Steer Better Than The Competition.” Forbes, Forbes
Magazine, 29 July 2016, www.forbes.com/sites/johnmccormick/2016/07/28/why-mazdas-
steer-better-than-the-competition/#5bf102e35339.

“The Long, Winding Road for Driverless Cars.” The Economist, The Economist Newspaper, 25
May 2017, www.economist.com/science-and-technology/2017/05/25/the-long-winding-
road-for-driverless-cars.

Muller, Joann. “A Driverless Car? Mazda Says Why Take All The Fun Out of It?” Forbes,
Forbes Magazine, 4 Jan. 2016, www.forbes.com/sites/joannmuller/2016/01/04/a-
driverless-car-mazda-says-why-take-all-the-fun-out-of-it/#467bda9e5a34.