Words - 473
3. Introduction
3.1 About the Company
Renault Samsung Motor was established in 1994 under the name Samsung Motors. Due to the Asian financial crisis, SM merged with Renault in September 2000 to become Renault Samsung Motors (RSM). RSM and Nissan Motors of Japan share technology.
3.2 Products of the Company
RSM products can be categorized according to the engine size. Therefore:-
3.3 Case Definition
QM5 was produced on November of 2007 and launched on January 2008. QM5 has been underperforming due to negative customer perception. This is the serious problem which RSM and Renault face. It is crucial for RSM to overcome this problem. Therefore my research question is,
Should Renault Samsung Motors modify their pricing strategy to increase their sales volume in South Korea?
4. Methodology
Primary research consisted initially of a detailed interview with Mr. Lee Sang Beom and Mr. Jang Hyun Pyo who are the senior manager of RSM. This interview focused on identifying of current market position and strategies of RSM’s new launched product, QM5. The consumer survey revealed the actual and varied reasons of dissatisfactions as well as provided the reliability.
Secondary resources are internal reports of RSM which helped me to find out the problems. Through article In combination, this allowed analysis and provision of a conclusion and recommendation.
It must be noted however, that the period of financial data collected is competitively short term, which requires further validation. Hence long term performance observation of this product QM5 is inevitable. In addition, the validity of this report may be influenced by apparent subjectivity of some financial data given confidentiality issues.
5. Findings
The analysis has revealed the following marketing issues regarding QM5.
5.1 Price & Quality
● QM5 of RSM used Competition- Based Pricing Strategies. Specifically, Price leadership method is used for QM5.
● QM5 of RSM is an abnormal case of Premium brand as it is a problem product while other Premium brands product earn enormous profit.
● Price is mismatched with income group (2,000,000~ 3,000,000 Won per month) and also with the age group (20~30 year old) which RSM targets.
● QM5 of RSM is classified as high to medium level priced car. Thus it is a relatively price elastic product. By slightly reducing the price, the number of customers can go up.
● QM5 has maintained the same price since it was lunched without considering the market state.
5.2 Poor Design
Customers were not satisfied with the design of the product. This directly affected the sales volume.
5.3 External influences
There are several external influences which resulted from global economics fluctuations. These factors are :-
● Exchange rate ● Oil price ● Raw material
The three factors increased at the same time as they are correlated. Hence they affect consumer confidence.
● Consumer confidence is inversely proportional to inflation rate.
6. Analysis
6.1 Competition-Based Pricing Strategies
The Competition-Based Pricing Strategies refers to a firm’s pricing strategies that are based on the prices being charged by its competitors. Figure 1 shows the price of QM5 is remarkably higher price than competitors’ SUV models.
Figure 1. Comparing the price of SUV models in South Korean SUV market
Source:- Internal account reports of RSM (appendix2), obtained from interview with
manager of RSM on 28th June.
Figure 2. Market share of SUV model in South Korea in 2008
Source:- Internal account reports of RSM (appendix2), obtained from interview with manager of RSM on 28th June. (Table 1 & Figure 2)
Evaluation of Competition-Based Pricing Strategies
There are several categories of Competition-Based Pricing methods. The Price leadership is a strategy to determine higher price of a product compared with other company’s product. Therefore RSM is using Price leadership method for QM5. The Price leadership can be successful only when it used for the best selling products. As QM5 ranked last in the SUV market, it reveals that Competition-Based Pricing methods is not an appropriate pricing method for QM5.
6.2 Position (Perception) Map
The Position map given below is used to show customers’ perception of QM5 in relation to those of competitors. As RSM’s pricing strategy is the Competition-Based Pricing method, it is important to know the relationship with competitors.
Figure 3. Position Map for QM5
Source:- Obtained from a book on Marketing
Evaluation of Position (Perception) Map
The questionnaire revealed that the price of QM5 is high. Moreover the quality of QM5 is considered good. Thus QM5 can be marked on the Position map as a premium brand. As a premium brands, the company can earn enormous profit. However QM5 is the first example of failure of RSM, which is unusual for a premium brand. As a Premium brand, the company can apply market segment to target a specific consumer group.
6.3 Analysis and evaluation of Market segmentation
The purpose of segmenting is to understand which group should be targeted the target group. The market segment can be divided into several categories. The RSM’s market segment Demographic Segmentation and it is based on the age group and income group. The target age group was 20~30 years old but the respond of this age group to the design was negative. Another segment was for a specific income group. Unfortunately, the particular age group (20~30) was not able to afford the QM5 with their average income; as their average income was 2,000,000~ 3,000,000 Won per month.
6.4 Price Elasticity of Demand (PED)
Possessing a premium brand car is a status symbol for people and represents of the person’s success. People prefer a model which has better performance for a given price when they choose between high to medium priced cars. The other reason can be the preference for a particular company. The purchase of small car depends directly on the price.
Figure 4. Relatively price elastic demand curve
Source:- Obtained from the book
Evaluation of Price Elasticity of Demand
Thus as QM5 is classified as a high to medium priced of car, QM5 is a relatively price elastic product, whose sales are remarkably responsive to its price change. Therefore when the RSM reduces the price of QM5 it would lead to net revenue. Thus, the net revenue will increase remarkably. On the other hand, a slight increase in price could lead to substantially lower sales.
6.5 Product Life Cycle
Since QM5 was launched, QM5 has shown a decline in sales revenue.
Figure 5. Sales revenue in 2008
Source:- Internal account reports of RSM (appendix2), obtained from interview with manager of RSM on 28th June. (Table 2 & Figure 5)
The shape of the graph is similar to the shape in the Product Life Cycle. Figure 5 reveals that QM5 is a model which shows that sales decreases from the highest peak point at Maturity.
Figure6. Product Life Cycle and Sales trend of QM5
Source:-. Obtained from Business book
6.6 Evaluation of Price Elasticity of Demand and Product Life Cycle
As revealed in the introduction, the price of QM5 is high. This is because the company assumes a skim pricing strategy for a high profit margin as the early adopters buy the product and the firm seeks to recoup development costs quickly. Sometimes a penetration pricing strategy is used and introductory prices are set low to gain market share rapidly. In the growth stage, the company will maintain a high level of price if the demand of the product is high or reduce the price to capture additional customers. In the maturity stage, possible price reduction will take place in response to competition while avoiding a price war. In the decline stage, the prices may be reduced to liquidate inventory of discontinued products. The price of the product may be maintained for the product which serves a niche market. In the case of QM5, RSM adopted a skim pricing strategy for QM5; launched at higher price compared to the competitors and there has been no change in price so far. Thus as shown in the Figure 5, the product life cycle of QM5 is rather unusual.
6.7 Analysis and Evaluation of PEST
The acronym PEST is used to describe a framework for the analysis of macro environmental factors. As economic factors affect RSM significantly, the analysis will take only the economic factors into consideration.
● Economic Factors
- Exchange rate
The exchange rate is a crucial factor which determines the price of a car. The exchange rate of USD($), JPY and EUR(₤) have risen steadily against the Won(₩) from January to June. The exchange rates are significant as RSM has merged with Renault, which uses EUR, and shares technology with Nissan, which uses JPY. USD exchange rate is concerned as the most important standard as USD is a key currency.
Figure 7. Change in exchange rate
Source:- International exchange rate web site
- Oil price
The automobile industry has direct relationship with the oil prices as the cost of running the car is directly dependent on oil price. Moreover, the production costs also increased with increase in oil prices.
Figure 8. Change in oil price
Source:- International oil price web site
- Raw material price
All raw material prices have increased since January 2008. Consequently, the cost of the production has increased.
Figure 9. Change in the price of Catalyst
Figure 10. Change in the price of Steel
Figure 11. Change in the price of Aluminum & Copper
Source:- Internal account reports of RSM (appendix2), obtained from interview with manager of RSM on 28th June. (Figure 9,10,11)
4. Inflation Rate and Consumer Confidence
As the oil price increases, the price of raw materials increases too. When the price of raw materials increases, the total amount of money in circulation also increases. Therefore the value of money decreases. As a result inflation occurs. This is how inflation has deepened in the world. This is called Cost Push Inflation. When inflation takes place, consumer confidence is affected. Consumer confidence is the degree of optimism about the state of the economy. This can be measured by consumers’ saving and spending pattern. In Figure 11, the decrease in CCI is clear. The global average CCI and South Korea’s CCI decreased in first half of 2008 compared to that in the second half of 2007.
Figure 12. Global & South Korea CCI (Consumer Confidence Index)
Source:- Nielsen business company report, U.S
7. Conclusion
QM5 was launched with the Competitive Based Strategy. Specifically Price leadership method is used for QM5. The Price Leadership method can be successful only when the product is dominant in the market. The Price leadership method is not appropriately applied for QM5 as it is not gaining market share.
The QM5 is considered as a premium brands. However, it is not earning profit while other premium brand products can earn enormous profit. As a premium brand RSM had two market segments, income group and age group.
The target age group (20~30 age people) didn’t like the design of QM5. Koreans give a lot of importance to the appearance of a car. Thus, this became one of the major reasons of failure. Moreover, target customers’ income was not enough to afford the QM5.
QM5 is a relatively price elastic product since QM5 has been classified as high to medium level price of car, by reducing the price a little the company can attract more buyers. According to the relationship between PED to Product Life Cycle there should be some change in the price along the Product Life Cycle.
There are several external influences which occur due to global economic fluctuations. When the oil price increases the raw materials price increases. When the price of raw materials increases, the total amount of money in circulation increases. Therefore the value of money decreases and inflation occurs.
8. Recommendation
● To reduce the price of standard model, replace setting equipments which are equipped for the convenience as options for additional features. The advantages that would be possibly increase the choice for customers.
● Rapid progress in replacing global-resourcing to local-resourcing to enable reduction in production cost to make the product more competitive.
● RSM should provide intensives such as gift certificates for refueling as a short-run strategy to counter soaring oil price.
● For the mid-run strategy, RSM should redesign the front and rear design of QM5 within a year to attract more local buyers. South Koreans preference for design differs from that of Europeans and others.
● By reducing the price of QM5, QM5 can become a as the bargain brand product while maintaining the same market segment and aiming at the same target customers.
● As the exchange rate is high at present, Renault and Nissan can buy the parts that cannot be produced locally in South Korea. This will compensate for the affect of low Won. When the exchange rate comes down, RSM afford to Renault and Nissan.
● Using the concept of PED, the price should be flexible depending on what stage of the Product Life Cycle the QM5 is.
As my research is limited to analyze in-depth only in the short period of time; six months, it is indispensable to observe the performance with the modified strategies. By considering the long term, it will be possible to evaluate my conclusion and recommendation. If still the performance of QM5 is bad in the long term, it will enable to identify the grave problem of the product itself unbiased from other external factors. Hence further research is required on, ‘How could modified strategy of RSM help QM5 to reposition itself as a market leader in South Korean car market? ’
9. Bibliography
- Books
Hong Ha Sang Who can dominate the world, the stars of Samsung CEO, Seoul : Vision
Korea Ltd, June 2005
Ham Ju Han Follow the marketing guide, Seoul: Kilbut 2005
Yamanoto Kachnori, Jang sun young (Translate), Top sales formula of Top car seller (17
secrets) Tokyo 2003 (Published in S.Korea 2003)
Todd G. Buchholz, New Ideas From Dead Economists, U.S 1989 (Republished in 2007)
HR Management, Lee Seung Hwan (Translate) , Power Logical Thinking , Tokyo: Japan Research Organization 2002
Kim Jea Moon, e-business model and Ecrm, Seoul: Guhreum 2005
- Website
“The price of the cars” July 25. 2008 <http: //www.renaultsamsungm.com>
“The price of the cars” July 25. 2008 < http: //www.hyundaimotor.com>
“The price of the cars” July 25. 2008 < http://www.kia.co.kr >
“The price of the cars” July 25. 2008 < http://www.smotor.com/>
“The price of the cars” July 25. 2008 < http://www.gmdaewoo.co.kr/>
Rupal Jain, Atharva Institute of Management Studies , Lecturer, August 10th..2008
<>
MBA-Pest Analysis, September 2nd. 2008 < http://www.quickmba.com/strategy/pest/>
MBA-Life Cycle, September 6th. 2008 <http://www.netmba.com/marketing/product/life cycle>
Wikipedia – Cost push inflation August 22nd <http://en.wikipedia.org/wiki/Cost-push_inflation>
Wikipedia – Consumer Confience index 23rd <http://en.wikipedia.org/wiki/Consumer_Confidence_Index >
Nielsen business company report, Consumer Confidence, Concerns, Spending and Attitudes to Recession: A global Nielsen Consumer Report September 21st.2008 < >
International oil price web site <http://www.bloomberg.com/markets/commodities/energyprices.html>
International exchange rate web site < http://stooq.com/q/?s=usdkrw >
- Online article
Kim Tea Jin, “New SUV, QM5” ,Jung-Ang News paper, Seoul, October 2nd,
<> September 22. 2008
Appendix -1 (10.1)
The price tables for SUV Models
Table.1 The prices of QM5 models (RSM)
Table.2 The prices of Hyundai’s SUV models
Table.3 The prices of Kia’s SUV models
Table.4 The prices of Ssangyong’s SUV models
Table.5 The prices of GM Daewoo’s SUV models
Appendix -2 (10.2)
Interview with the manager of RSM
Date - 28th June
Jessica
Q1. When the QM5 was first produced?
A - QM5 was first produced on November of 2007 and it was launched in January 2008.
Q2. What are the main reasons for the failure of QM5?
A - The reasons for failure are pricing, design and decline in the SUV market.
Q3. Price should be considered before launching. Then why has it become a major reason of failure?
A- The price of product is related to the cost of production. When the cost of production increases, the price of the product increases accordingly. The cost of production of QM5 was more than 15% greater than our expectation. This is because of the increase in value of the dollar which was not expected.
Q4. Why does the cost of production of QM5 depend upon the dollar rate?
A- With Nissan, RSM decided to work on global sourcing so we bought in bulk from Japan, Europe and China to reduce their cost of production. RSM and Nissan made a contract to pay in Y, €, $ but then the end of 2007, the Korean currency fell. Thus we were made to pay more money than we had expected.
Q5. Is there any other factor which affects the pricing strategy of RSM?
A- It is related to the fluctuation of global economies. Due to Olympic, most of the raw material, like steel and aluminum etc. were bought in bulk by China. Thus this affected the cost of raw materials globally. Accordingly, it has affected the pricing strategy of RSM.
Q6. Even though the price of the car has increased, there are many customers, so it seems that it won’t affect on the sales much. Is that a correct assumption?
A- Actually QM5 was aimed at people in the age group 20-30, who admire new style of a car but then some problems occurred which we didn’t expect. The price of QM5 was too higher for the aimed customer expected as their average salary was not enough to afford it.
Q7. If QM5 was aimed at a specific age group, then wasn’t the price considered according to the average income of that specific age group? Is it only due to the increased in dollar rate or any other reasons?
A - To emphasize the convenience of the car, QM5 is equipped with electronic settings that may not be used by all customers. Consequently the price of QM5 is higher.
Q8. You said the other major reason is because of design, how did it affect sales?
A- Unfortunately the target group (20-30 age) did not like the design. The consumers think that it is not a very new design contrary to what the company had expected. Actually QM5 is based on product oriented. Moreover, QM5 design is based on European style. It was not in accordance with style appreciated by Koreans. We had not anticipated this.
Q9. What is the reason for the decline in the SUV market in South Korea?
A- The soaring price of petroleum affected on the market average price. The price of diesel rose to the price of gasoline. Hence, the advantage of QM5(SUV), which can save on maintenance cost as it requires diesel does not hold good anymore. This affected not only QM5, but also other models which use diesel so, the decline in market share of SUV was obvious.
Q10. As RSM is launching SUV model for the first time, what is the reaction of other companies which are already holding the major share of SUV market?
A- For all the reasons which I already mentioned RSM had no choice but to increase the price of the product QM5. Other competing companies which lead the SUV market in South Korea decided to offer lower price than QM5. Thus QM5 sales are low.
Q11. Are there any other reasons which possibly affected sales at QM5?
A - The exportation was not up to our expectation due to world inflation. That could be the one reason.
Q12. What was RSM’s first action to increase the sales?
A- To overcome this problem, we have introduced gasoline type of QM5 keeping in mind the soaring price of diesel.
Appendix -3 (10.3)
Questionnaires for the customers/ non-customers of QM5
Date : 21 July ~ 30 July ‘08
Number of people - 50
Q1) Do you own QM5 of RSM?
1. YES - 29
2. NO - 21
Q1-1) ※ Only for the person who has chosen no.1 in the first question.
How is your age group?
- 20~30 age - 17
- 30~40 age - 11
- 40~50 age -1
4. Non-above -0
Q1-2) ※ Only for the person who has chosen no.1 in the first question.
How much is your salary per month?
- 100~150 - 0
- 150~200 - 3
- 200~250 - 12
- 250~300 - 12
- 300~350 - 2
Q2) How you think about the price of QM5?
1. Very expensive - 19
2. Expensive - 25
3. Reasonable - 6
4. Cheap - 0
Q2-1) ※ Only for the person who has chosen no.2 in the first question.
If the price is reasonable, are you willing to purchase QM5?
- YES - 14
- NO - 7
Q2-2) How much did you expect (Or hope) when QM5(Basic model) was launched?
1. 21,000,000 - 0
2. 21,500,000 - 1
3. 22,000,000 - 9
4. 22,500,000 - 28
5. 23,000,000 - 12
Q3) What do you think about the design of QM5?
1. Very new & fresh - 6
2. Similar to other SUV models - 30
3. Under expectation -14
Q3-1) ※ Only for the person who has chosen no.2 & 3 in the third question.
Which part of the car should be modified for the better view of design?
- Front & Rear - 15
- Side - 6
- Inside -10
- Should be redesigned totally - 1
Q4) Does increase in the price of diesel affect your decision of purchasing QM5?
1. Yes, it is really important - 39
2. Yes, but it is not a major problem - 9
3. No, it doesn’t -2
Q4-1) ※ Only for the person who has chosen no.2 in the first question.
If there is QM5 model of gasoline would you buy it?
1. YES -11
2. NO – 10
Q5) What is the general view of SUV models?
1. It is the trend model nowadays - 14
2. Not very different than other models -13
3. It is an old model - 8
4. It depends on the person. There can be no general view -15
Q6) If the electronic equipment is converted as option instead of being in-built, will it be attractive to the people?
1. Yes, the consumer demand will increase as they can choose option which they want
- 43
2. Yes little bit , but it won’t be remarkable - 4
3. No, it won’t help it - 3
Q7) If you judge the quality of QM5, it can be marked as,
1. The high quality model - 6
2. Better than other SUV models - 25
3. The normal quality model -19
4. The low quality model -0
Appendix – 4 (10.4)
Market share and sale revenue tables
Table.6 Market share of SUV model in South Korea in 2008
Table.7 Sales Revenue in 2008
Appendix – 5 (10.5)
The Economic factors tables
Table.8 Change in exchange rate
Table 9. Change in oil price
Table 10. Change in the price of Catalyst
* Pt - Platinum * Pd- Palladium * Rd- Rhodium
Table 11. Change in the price of Steel
Table 12. Change in the price of AL & Copper
Page 13 Chapter. 1 Who can dominate the world, the stars of Samsung CEO. Hong Ha Sang, Jun 2005, published by Vision Korea, (Published in South Korea)
APPENDIX-1 The interview with RSM manger Q.1
APPENDIX-1The interview with RSM manger Q.13
APPENDIX-2 The interview with RSM manger Q.7
APPENDIX-3 Questionnaires for the customers/ non-customers of QM5 Q.2
APPENDIX-2 The interview with RSM manger Q.6
APPENDIX-3 Questionnaires for the customers/ non-customers of QM5 Q.1-1, Q.1-2, Q3
APPENDIX-2 The interview with RSM manger Q.8
APPENDIX-1 Market share and sale revenue tables <Table 9>
“The price of the cars” http: //www.renaultsamsungm.com (Accessed July 25. 2008)
“The price of the cars” http://www.hyundai-motor.com/
“The price of the cars” http://www.kia.co.kr/
“The price of the cars” http://www.smotor.com/
“The price of the cars” http://www.gmdaewoo.co.kr/
APPENDIX -1 Market share and sale revenue tables <Table 8>
Those are The Price leadership, The Predatory pricing and the Going rate pricing.
p 158 Chapter 4.There can be no success without planning, <Follow the marketing guide> Ham Ju Han, Published by Kilbut, 2005 (Published in South Korea)
APPENDIX-2 Questionnaires for the customers/ non-customers of QM5 Q.2
APPENDIX-2 Questionnaires for the customers/ non-customers of QM5 Q.7
Rupal Jain, Lecturer, Atharva Institute of Management Studies (MUMBAI)
APPENDIX-3 Questionnaires for the customers/ non-customers of QM5 Q.3, Q3-1
APPENDIX-2 The interview with RSM manger Q.8
APPENDIX-3 Questionnaires for the customers/ non-customers of QM5 Q.1-1
APPENDIX-3 Questionnaires for the customers/ non-customers of QM5 Q.1-2
The premium car can be BMW, Ferrari, Mercedes-benz, Audi etc.
Page 66 Top sales formula of Top car seller (17 secrets) Yamanoto Kachnori Jang sun young (Translate) Tokyo 2003 (Published in S.Korea 2003)
p. 246 (Chapter .7) New Ideas From Dead Economists, Todd G. Buchholz, U.S 1989(Republished in 2007)
p 75 (Chapter 2) Power Logical Thinking , HR Management, Lee Seung Hwan (Translate) ,Tokyo 2002 (Published by Japan Research Organization)
http://www.netmba.com/marketing/product/life cycle
http://www.netmba.com/marketing/product/life cycle
http://www.quickmba.com/strategy/pest/
P 121, e-business model and Ecrm, Kim Jea Moon, South Korea (Published by Guhreum)
APPENDIX-2 The interview with RSM manger Q.3,4
http://stooq.com/q/?s=usdkrw
http://www.bloomberg.com/markets/commodities/energyprices.html
RSM’s purchasing raw materials guide line
http://en.wikipedia.org/wiki/Cost-push_inflation
Nielsen business company report , <>
http://en.wikipedia.org/wiki/Consumer_Confidence_Index