Academic Researchers Conclude Product Matters - A LotBy Glenn Mercer November 15, 2010
When it comes to truisms, "product matters" reigns supreme in the automotive industry. It dominates automaker thinking as much as do similar assertions in other fields, such as in baseball: "It's all about pitching."
But how does it matter, and how much does it matter?
A recent and exhaustive study by researchers at Virginia Commonwealth University (VCU) concluded, in fact, that product matters more than any other lever management can pull. The relative rates of new product introduction - the rate at which models are restyled or refreshed -- wholly explains the rise of Japanese brands in America in recent years.
Researchers tracked essentially every model on sale in the United States from model year 1995 to model year 2006 - some 150 nameplates each year - in terms of sales and their market share within the segment. More specifically, the team focused on the rate of change (growth or decrease) in market share, to level the playing field between large and small manufacturers and take into account for overall economic conditions.
For each model in each year the team tracked:
- Transaction price (adjusted for feature content)
- Advertising spend
- Name changes (e.g. LeSabre to Lucerne)
- Changes to warranties (enhancements and curtailments)
- Additions and deletions of standard safety features (e.g. side airbags)
- Changes to quality ratings (from Consumer Reports)
- Incentive spending (customer cash, dealer cash, finance subvention)
- Number of competitors by segment
- Model year length (to compensate for mid-year launches)
- And finally, product restylings, categorized as either complete or partial.
A "partial" restyling was defined as one involving changes only to the grill, lighting, trim, fascia, or minor body panels; a "complete" restyle involved either all new sheet metal or an entirely new entrant to the segment.
The researchers then ran a regression model of market share change based on on the 10 variable factors, to determine which of these would have the most impact. These 10 inputs represent a strategic decision management could make.
Conclusion: Nothing Matters More Than Product
We already gave away the punch line: nothing matters more than product, in that nothing drove increases in segment market share like restyling the vehicle.
The surprise was how extreme the effect of restyling was.
A complete restyling of a model would boost its segment market share growth rate by 20 percent, on average, in a given year - and that gain would persist into the next year. A partial restyle generated only half as much impact, and for only one year.
(The rate of change in market share growth rate means that if Model X grew segment market share between Year 1 and Year 2 by 40 percent (say, from 30 percent share to 42 percent share), but then Model X was completely restyled it would see 20 percent more share growth, or 48 percent, going from 30 percent to almost 45 percent.)
Almost nothing else could touch the impact of a complete restyling: doubling advertising spend on a model would only lift share 15 percent; chopping its price by 10 percent would move share growth rate by only 2 percent; adding more safety equipment hardly mattered; and nor did a quality downgrade by Consumers Reports.
The only management lever with similar impact to a full restyle was a warranty curtailment; for instance, knocking 25,000 miles off warranty coverage would indeed trigger a plunge in market share. Apparently nothing rattled shoppers more than when a car's own manufacturer signaled a decline in its quality by slashing the warranty.
Source: Virginia Commonwealth University Research
In the Rearview Mirror
Stripping out just the "complete restyling" linkage to market share, the team applied this equation retrospectively to the 1995 to 2008 time period. Researchers went back to 1995, split the model lineup into Detroit product and Japanese product. They then input only the complete restyling events for the ensuing years; they ignored pricing, warranty changes, ad spend, and the like.
In 1995, the actual Japanese market share in the United States was 22.7 percent; by 2008, it was 39.5 percent. The VCU team's equation predicted 39.7 percent. Essentially, the faster rate of Japanese restyling over these years completely explained their market share growth, despite all the chatter about superior quality, stronger dealers, or other factors.
Between 1995 and 2008, Japanese models were restyled on average every three years, and Detroit models every four years. And that made all the difference.
Part of Detroit's problem during this era was the tendency to "waste" restyling efforts on low-volume niche models. For example, Chevrolet executed many restyles, but completely re-did its biggest volume model -- the Lumina/Impala -- only once, and only one model - Corsica/Malibu -- with more than 100,000 annual sales twice. During this period Toyota completely restyled all of its models that had 100,000 plus annual sales at least twice.
Lesson: Frequent Restyling Pays Dividends
The lessons automakers can learn from VCU's research are:
- maintain a fast pace of restyling;
- do a complete restyling rather than a partial if possible;
- restyle high-volume lines more often for the greatest impact;
- whatever you do, don't cut the warranty!
Mercer's Take: Outlook for Asians, Ford
If we now go beyond the VCU historical results, and extrapolate them into the future, based on published automaker product plans, we can predict further share gains by Asian automakers at the expense of General Motors, Chrysler and the European brands. Of the Detroit Three, only Ford has a refreshment rate rapid enough to gain share, if the historical link between product and market share still holds.
And further, if the equations hold true, additional spending on advertising and incentives or even quality improvements will not help them buck the trend.
Mercer's Caveats: What Research Ignores
While this research is compelling, it leaves out at least two major factors.
First, cost: Obviously, restylings are not free, and so an automaker must trade off cost against the expected share gain. Unless Asian automakers have figured out how to restyle a car for less money than have Detroit companies, this trade-off applies to them just as well, and yet the Asian firms (especially Hyundai/Kia) have made a collective decision to force the restyling pace.
Second, technology: The VCU team did not distinguish between purely cosmetic restylings from those that also incorporate changes in horsepower, powertrain type or other vehicle features. As a result, we can't be sure how much the public is responding to exterior changes versus internal improvements, and that distinction is crucial. In any case, however, styling changes do matter a great deal.
About the Author
Glenn Mercer was with the consulting firm McKinsey and Company for two decades, working almost entirely in the automotive arena. Since striking out on his own in 2006, he remains a self-described gearhead, with one foot in the world of automotive investing and the other in the world of automotive research. He is a director of the car-focused academic consortium International Motor Vehicle Program, best known for its publication of "The Machine That Changed the World," a book about the Toyota Production System.
Disclaimer: In this review any errors of interpretation of the authors' research results are entirely the fault of the reviewer. Academic researchers appropriately limit their conclusions to statements that can be definitively proven from their analyses, whereas your reviewer may draw other, broader inferences from the results.