Think SMART

ByMichael RossiMay 23, 2013

Capstone Paper

Table of Contents

1. Introduction

2. Background

3. Product and Services

4. Market Identification

5. History of the SMART Car

6. Segmentation Strategy

7. Porter’s Five Competitive Forces

8. Ansoff’s Strategic Opportunity Matrix

9. Market Segment Focus

10. Conclusion

11. Works Cited

Introduction

Driving down the road there seem to be hundreds of different types of cars out

there. There are Sedan/Coupes, SUV’s/CUV’s, Roadsters/Supercars, but then there is

one car that really catches your eye, because it is so radically different compared to the

rest. That car is the “SMART Car” made by Mercedes-Benz. The reason this car stands

out from the rest is because of its shape, its size, and that it only seats two people. But,

who is Mercedes-Benz marketing this car to? Why would anyone ever consider buying

this car? By looking at the background of Mercedes-Benz, the different types of

products that they produce, and the history of the SMART Car, will show that they have

been going after the wrong demographic for their SMART Car, by which using Porters 5

Competitive Forces and Anstoff’s Strategic Opportunity Matrix, I will show the right

market segment that they should be going after.

Background

The history of Mercedes-Benz starts with two men, Gottlieb Daimler and Carl

Benz. According to the company website these two men are said to have made the first

automobile in 1886. They both went on to create two separate companies. Daimler

created Daimler-Motoren-Gesellschaft (DMG) and Benz created Benz & Cie. After

creating each of their businesses, they became the leading force in the automotive

world. Gottlieb Daimler died in 1900, at the age of 65, just short of his 66th birthday.

Carl Benz died in 1929 at the age of 84. He was able to see his invention take off. It was

not until after the First World War in 1924, that both of these companies combined

forces and signed an agreement to combine their expertise, while still maintaining their

individual identities. It was not untill 1926 that both companies merged into one

company… the company we know now Daimler-Benz AG (DBAG). Along with the

merger of these two companies, it also gave rise to the Mercedes-Benz auto brand.

From Daimler-Benz, Mercedes-Benz has become a force to be reckoned with in

the automotive industry. Max Hoffman introduced Mercedes-Benz to the United States

in 1952. Max Hoffman was an importer of automobiles, who was known for his

handshake deals that were always upheld even without a written contract. Hoffman’s

push of the Mercedes-Benz brand cemented this legendary automobile company into

the United States. . In 1965 Mercedes-Benz USA (MBUSA) was established and the

company started selling its own cars through dealerships that the company owned.

Since then MBUSA has grown into a nationwide organization that employs 1,500 people.

MBUSA has 356 associated dealerships that employ 21,500 people. According to Forbes

in 2012, Mercedes-Benz had a brand value of $21.8 billion, was 16th in the world’s most

powerful brands and had $88.2 billion in sales.

Products/Services

The products/ services provided by Mercedes-Benz for its cars vary from each

type of car. The reasoning for this is because each type of car is molded to fit one type

of demographic to make sure that the specific demographic is covered completely. For

example not many people would buy a sports car that seats six, and has room for two

bikes in the trunk. This type of car would not be aesthetically pleasing to many people.

That is why each type of car is built to suit a specific type of person.

For the Sedan & Coupe, the cars can typically hold up to five people (including

the driver) and are typically fuel-efficient. “A sedan is defined as a vehicle with four

doors that features a traditional trunk design, and can include four-door hatchbacks.

There are three basic sizes: compact, midsize and large (or full-size)” according to

Edmunds.com. Edunds.com originally started out in magazine form, but now is a

website that specializes in automobile reviews and information. Edmunds.com also says

“Coupes and two-door hatchbacks are typically based on a corresponding four-door

sedan. The majority of coupes currently on the market are either compact or midsize,

while most hatchbacks are compacts.” These cars are often marketed towards families

or people that haul other people in their day-to-day live. The Sedan/Coupe type of car is

versatile and can be found all across the country suiting all sorts of different

demographical needs.

The SUV’s & CUV’s have larger number of seats and much larger cargo area.

Edmunds.com says “Sport-utility vehicles (SUVs) are generally classified into three

groups; compact, midsize and full-size; though the range of vehicles within each group

varies widely. You will often hear the term ‘crossover’ used, but this is really just a

marketing term to describe a utility vehicle based on a car platform rather than one

based on a truck platform. There are luxury models in each of the groups.” One service

that this product gives to the owner is larger seating area than the Sedan/Coupe, for

people that would like more space in the car. Another service that this product has is

the ability to tow small to large items depending on the particular SUV/CUV. Typically

“as you move up in size of the vehicle you also move up in engine power, towing ability,

passenger room and price” says Edmund.com.

Roadsters & Supercars can range from the status of having a Mercedes high-end

vehicle or to have a superior vehicle on the road. Roadsters and Supercars is known for

its powerful engine and ability top out at extreme speeds. These types of cars come

with a notion of power, wealth, and fast lifestyle that many owners have or want to

have. This kind of car typically seats two comfortably, has very limited trunk space, and

cannot tow anything.

For the SMART/Subcompact cars they are less expensive than most brand new

cars. Some, like the SMART Car, are extremely customizable, such as the door paneling

can be swapped out for a different patterns. They are super fuel efficient, getting nearly

50 miles per gallon. One of the biggest payoffs of the SMART/Subcompact cars is the

option of purchasing an electric version, in doing so, the owner receives a tax break.

The downside of these cars is very limited trunk space, seating, and not being able to

tow anything.

Market Identification

Mercedes-Benz Cars, which is the automotive branch of Daimler, divides their

markets into four segments. There are a multitude of different name brands operating

under the name of Mercedes-Benz either through splits or from buyouts. Three are

owned by Mercedes-Benz and AMG, while the fourth is operated under the name

“SMART.” These segments are classified as “Sedan & Coupe,” “Sport Utility Vehicles

(SUV) & Crossover Utility Vehicle (CUV),” “Roadsters & Supercars,” and “SMART.”

Mercedes-Benz Cars (Daimler) appeal to a wide variety of people with a wide variety of

needs.

The Sedan & Coupe is aimed at appealing to both the young and old

demographic. In fact this segment is the largest segment in the whole automobile

industry. It dominates approximately 30 percent of all new vehicles purchased in all

demographics; with the price range of the Mercedes-Benz versions of these vehicles,

they are meant for those with a higher income and for people who only need room for

four passengers and very little trunk space. The price of a Mercedes-Benz, according to

Auto.msn.com, brand new, sedan/coupe ranges from $35,350-$212,000, with most of

the sales are averaging the $35,350-$62,330

People between the ages of 25-44 years old generally the purchaser of

Mercedes-Benz SUV’s & CUV’s. These people have children at home and they really

appreciate the higher seating capacity and larger trunk space that these vehicles offer.

Although these types of cars have a much lower gas mileage than the Sedans/Coupe,

but are roomier in the cab, have the option of third-row seating and have the potential

of towing. Once again though, these vehicles are targeted to more of a higher-income

demographic. The starting price of SUV/CUV starts at $37,090 and goes all the way up

to $134,300.

Roadsters & Supercars are Mercedes-Benz Cars high-end vehicles. With high-end

vehicles this also means that they come with a high-end price tag. The roadsters are

peek-performance cars that are only affordable to those with incredible wealth. Often

times, many models of roadsters by Mercedes start at $100,000 (msrp). Most often

these people are celebrities that want to be seen driving cars that indicates a social

distinction while on the road. The typical starting price of these Roadsters and

Supercars is $42,900, for the very basic type model, and go up all the way to $206,000,

depending on upgrades.

Last, but not least is the “SMART Car.” These cars hold two passengers and are

priced low (less than $13,000) in order to satisfy consumer demands. SMART is

currently marketed toward 18-24 year olds, indicating that they are trying to capture a

young audience. This generation has been heavily influenced by the rise of gas prices

and the dangers surrounding the environment. When the SMART Car was first

introduced into the United States, in 2008, Daimler AG was looking at the price of gas

and oil prices going up and the economy was to stay buoyant. Something, Daimler

could not have predicted was the economy going into a recession and gas prices staying

the same. Another problem that the SMART Car ran into was the lack of advertising and

initially, the advertising that came out was intended for a much younger demographic.

History of the SMART Car

The concept of the SMART Car was first brought to reality in 1993 by

Mercedes-Benz while Mercedes was conducting studies on the feasibility of a

Subcompact car. In 1994 Mercedes-Benz joined with Swatch Group (SMH) in developing

the car. Later in 1994, development of the car started and was relocated from

Renningen, Germany to a custo- built facility in Hambach, France, that was later called

“Smartville.” Smartville is a top of the line SMART Car production facility, which

SUVs & CUVsAvg. Income $48,000 Age 25-44

employs over 2,000 people. The cost of the new facility in 1998 was 450 million euro.

In 1998, the first SMART Car rolled out of factories and hit the streets. Within 14

months of production, it had topped over 100,000 models sold in Europe.

In 2008, Mercedes-Benz decided to take a shot at introducing the SMART Car to

the United States. Mercedes-Benz hardly did any advertising for the SMART Car. The

reason for this is they believed the economy of the United States was doing well and gas

prices were starting to sky-rocket, therefore, the Smart Car should sell itself.

Unfortunately, for Mercedes, that was not the case. The economy tanked and gas

prices stayed about the same.

The few advertisements that Mercedes-Benz did produce were ones that

depicted Generation Y people (those born between 1983-1994) in or around the Smart

Car. The idea was that some of this generation was going to be turning 16 years-old, the

car was very affordable, and that the parents of Generation Y would possibly buy this

car as a Generation Y’s first car. Mercedes-Benz believed that because of the car’s high

safety rating and low price, this would win over the consumers. They also believed that

with the limited amount of seating, parents would want their kids to drive it, because

less people in the car meant less distractions for the driver. They also believed that the

high gas mileage would win over Generation Y, since no one wants to be spending lots

of money on gas.

The problem with this marketing strategy was that they did not take into account

that the American idea of “bigger is safer.” Parents did not buy this car because they

believed it was much too small to be safe. Their kids did not like it because it is not that

“awesome” looking of a car. Another problem that arose is not many families want to

buy or can afford a brand new car for their kids. A first car is typically a used car.

Segmentation Strategy

My segmentation strategy is based on Daimler AG’s own philosophy, “(Our

philosophy) is clear: We give our best for customers who expect the best – and we live a

culture of excellence that is based on shared values. “

The shared-consumer-values that surface consistently in the majority of different

segments are price, fuel efficiency, performance and safety. The SMART Car fulfills

these needs and then some. The low price makes it attractive for any segment. “SMART

fortwo” is one of the industry leaders in gas mileage and with the introduction of its

emission free electric vehicle, SMART has a strong appeal towards those worried about

rising gas prices and the overuse of fossil fuels. The safety features that SMART has

Threat of SubstitutesMotorcycles

Public Transit

Buyer PowerQuality

Alternatives

RivalsToyota

VW

Barrier to EntryEconomies of Scale

Many Choices

Supplier PowerRelationships

Switching Costs

integrated are outstanding, as well. The safety features that the SMART Car has is its

radically new “tridion safety cell” also known as the “egg design” because of its

appearance. The egg design is built almost identically to a racecar’s roll cage design and

it completely surrounds the car in high strength steel. The car also has eight airbags to

help keep its driver and passenger safe.

Porter’s Five Competitive Forces

Using the Porter’s Five Competitive Forces, a person can see the attractiveness of

the market and the obstacles that may arise. Although it is not a detailed plan for

competition, it is a great place to start. Porter’s model starts by looking at what

substitutes are out on the market that potential buyers can use instead of the Smart Car

. Substitutes consist of alternative modes of transportation such as motorcycles,

rideshare-vehicles, public transportation, vans, etc.

The next “Force” is the power of the company's suppliers; the more suppliers

there are in the market, the less power the suppliers have to influence the company.

For a company, it is important to have multiple suppliers because competition in the

supply chain leads to better efficiency in the manufacturing process. However, if there

are only a few suppliers in the industry, they have the power to drive up prices. For

Daimler they have suppliers all over the globe, therefore, they are in a strong position to

negotiate fair prices and have multiple contingency plans, should a supplier fail. The risk

of losing a large client like Daimler means that the suppliers will be more likely to bend

to Daimler’s demands.

The next “Force” consists of buyer’s power, which ultimately comes down to the

power a consumer has over a product. In the U.S., there are many different options for

a product and therefore the buyer’s power is strong. When a business is trying to sell a

product, the power is in the buyer’s hands because if the product does not meet their

demands, they will search elsewhere. They have the choice whether to buy it or not.

Because there are different options available to customers looking to buy SMART cars,

they have the ability to research and try and find the best option available to them.

“Barrier to Entry” is what market does the company need to get through before

reaching the primary objective; i.e., selling the SMART Car and making a profit. To

obtain this goal, Mercedes would first need to crack the American market and get the

American consumers to accept the SMART Car. Another barrier the company would

need to go through is to get the American population to stop thinking that bigger is

safer. Still another barrier Mercedes would need to overcome was that the government

was starting to regulate emissions highly. .

The final barrier is current firms’ rivalry. Rivalry among existing competitors is

the central focus of the Porter’s model because a company's competitors will always be

adapting and shifting their focus in order to gain a larger portion of the market share.

Since Porter’s Five Competitive Forces’ purpose is to determine where profits can be

made, this can be a significant obstacle. The more companies entering the field, the

lower the profits are going to be for each company. Although the new technology

would have a high attractiveness to competitors, the threat of any new participants to

SMART’s target audience would be low. For the established market, rivalries play a key

role in encouraging competition and product innovation. The comparable models to

the SMART Car that our rivals produce would be the new Volkswagen Bug, the Mini

Cooper, Fiat 500, Toyota Prius, Honda Incite, etc. All of these models share the same

core strengths that the SMART Car have.

Ansoff’s Strategic Opportunity Matrix

By using Ansoff’s Strategic Opportunity Matrix, a company is given various

directions of which to expand their market share. The first is Market Penetration, which

consists of trying to enhance a company’s market share in an existing market. The

company uses an existing product and tries to make an existing market aware of its

benefits and uses. This is usually the easiest form of entry because the product is

already established, and requires fewer resources than the other strategies. Market

Penetration helps by eliminating consumer concerns about quality because it is already

an established product. The company already has a foothold within the target market,

therefore.

Product Development consists of the research and development of a new

product and then marketing it to the company's existing customer base. This would be

like SMART coming out with a new Coupe that runs on diesel. This would not be a wise

choice for SMART because it would be stretching the company’s resources too thin.

Also, SMART risks the chance of losing its current customers because of the radical

change.

Diversification is the introduction of a new product to a new market of which the

company has no previous experience in. Daimler is already very diversified as far as the

industry goes and the introduction of an electric vehicle to the market is furthering their

diversification options. Diversification has the highest risk for a company because it

entails the use of many resources with no guarantee that there will be a high demand

for the product. This would be like SMART trying to open drive-thru food chains in order

to try and enter the fast-food market. It is a huge risk because it requires entry into a

field that SMART is unfamiliar and has no competitive advantage.

Market Development consists of marketing an existing product to a new market.

This may consist of tweaking advertisements and possibly changing the product slightly

to suit a different segmentation. Ultimately, the company is still selling the same

product but they are marketing it in a different way, to a different target audience. An

example for SMART would be shifting their focus for the Smart Car in way that would

Current

New Market DevelopmentCould the SMART Fortwo appeal to another segment as well?

Product DiversificationNew products for new markets

Cell phones?Drive-Thru Restaurant?

Market PenetrationLarger Percentage of 18-24 year olds

Product DevelopmentNew Product for an existing segment

New Type of vehicle for 18-24 year oldsCurrent

New

appeal to different market.

Market Segment Focus

After reviewing how Porter’s Five Competitive Forces and Ansoff’s Strategic

Opportunity Matrix relate to SMART, I believe that SMART should develop another

market for the SMART Car. SMART should develop the older baby boomer market.

The older baby boomers number over 38.4 million people and account for

approximately 9 percent of the U.S. population. They are also spending over $900

billion annually. This is a very large market. The specific sets of older baby boomers are

just entering or are nearing retirement age. A SMART Car would be wonderful for the

older baby boomers.

The SMART Car would be a great fit for this market because 60 percent of

boomers feel financially insecure. Their parents are living longer than expected and

they are being asked to help pay for their care. The low price of $12,490 would fit

wonderfully into their already constrained budget. With gas prices at a national average

of $3.382 a gallon and their projected raise over the next few years the gas mileage of

34 miles per gallon (city) and 38 miles per gallon (highway) would also help ease their

budget concerns. The older boomers are also finding themselves with empty nests. That

is leaving them and their spouses, if they have them, at home alone. The SMART Car is

the perfect size for these newly one and two person households.

I did not just jump to the idea of older baby boomers. I looked at other markets

to focus on, but the Mercedes product was lacking the seating capacity that would

appeal to them. The younger baby boomers would have also been a great segment to

focus on, but many of them still have children living at home. A two-seater vehicle

would be impractical. As was the case with all the other segments I examined. The

SMART Car was just too small.

Mercedes-Benz is not the only company believing that the baby boomers are a

great way to grow. SMART has three main competitors in the subcompact market. They

are Volkswagen's newly re-released Beetle, British Motor’s Mini Cooper, and the new-

to- the-U.S. market Fiat 500. All of these cars have models priced below $20,000. Most

are getting in the high 20’s for city mileage and upper 30’s for highway mileage.

Although these competitors have a seating capacity of four people and our SMART Car

can only seat two people.

• $15,500• 30/38 MPG• $0.45/Mile

• Seats 4

• $18,995• 22/31 MPG• $.46/Mile

• Seats 4

Conclusion

I believe that the most, logical and least risky marketing move would be to

expand the SMART Car’s market segment to include older baby boomers. The baby

boomers have the largest amount of disposable income currently and have strong

buying power. By looking at the background of Mercedes-Benz, the different types of

products that they produce, and the history of the SMART Car, will show that they have

been going after the wrong demographic for their SMART Car, by which using Porters 5

Competitive Forces and Anstoff’s Strategic Opportunity Matrix, I have showed the right

segment that they should be going after.

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