Executive Summary
There are market entry barriers for new entrants in the car market such as McLaren. The report shows that the industry has grown over the years to become one of the most competitive becoming a struggle for new entrant. The entrants face numerous challenges before they dominate or even penetrate the car market.
The already existing companies in the car market are trying to develop new measures and strategies that will allow them to remain relevant in the market amidst economic slow growth and a decline in demand. These include diversification and investment in other areas to reduce risks. McLaren has been able to overcome most of the entry barriers to become a successful company despite the competiveness of the industry.
Introduction
The automotive industry has both good and tough times, which result to times of growth and decline. The industry is highly competitive which poses a great challenge for new entrants and existing companies. Most of the entry barriers present in the mass car market is relevant to McLaren though they do not indicate a negative impact on the McLaren Group, which continues to establish new companies.
The major challenges for new entrants include enormous upfront costs, high competition and marketing of the new brands. The market is not well-exploited owing to the challenges that face existing and new companies.
It is beyond doubt that McLaren has been able to overcome the various market entry barriers present in the mass car market as evident from its dominance and high returns. Competition is a relevant market entry barrier for the company, which has been keen on identifying strategic groups that have similar business models and similar strategies in the car market.
This is important in identifying its direct competitors and the basis on which they compete and identify any opportunities. The company has been able to keep up with its main competitors such as Ferrari owing to sufficient market research, which identifies major areas of improvement and competitive advantage. For example, the company is making cars that are faster, comfortable and economical in an effort to compete with its main rivals.
It uses product development articulated by Ansoff’s Matrix to introduce new products into existing market to boost competition against its rivals (Kerr 2005, p. 156). The enormous amount of capital to start a car company is another relevant market entry barrier for McLaren. The company was able to amass huge capital from its initial investors such as Bruce McLaren, shareholders and external financial assistance from banks and other financial institutions.
It was able to establish other segments such as Absolute Taste from the huge revenues generated by the racing team. The company, which started as a racing team, has been able to divert its returns to fund and establish new segments such as McLaren Applied Technologies and McLaren Electronic Systems that are a source of huge revenues (Young 2005, p. 58).
Marketing investment is a market entry barrier for McLaren owing to the expense and challenges of marketing a new brand in an existing market. McLaren was able to prioritize its expenditure budget by dedicating a significant amount of money to extensive advertisement to create awareness of the brand.
It was able to advertise itself further by becoming one of the most successful Formula 1 team by recording grand prix victories thus creating more awareness of the brand. The company teams up with other companies such as Mercedes to boost its image and have a competitive advantage (Gray & Gray 2000, p. 32).
The company was able to develop its own manufacturing line and production center to carter for its needs for limited capacity of part suppliers. This ensures that it has access to spare parts that it needs since it has its own manufacturing and production line. Other relevant entry barriers include government regulations and patent protection laws that may prevent use of certain innovations.
McLarens develops its products in accordance to the government regulations regarding safety and fuel efficiency through the development of cars that meet such standards. This is possible owing to use of high and competent employees that are conversant with the regulations.
McLaren Group is not only involved in Formula 1 or sports cars but it is involved in other businesses off the track. It is able to generate around £ 33 million in annual profits from its companies, which constitute its portfolio (www.worksmart.org.uk). It has shown a high level of diversification with the establishment of six separate companies in different markets, which constitute its portfolio.
According to the Ansoff’s matrix, McLaren embraces diversification by developing new products and offer them to new markets (Kerr 2005, p. 159). The company’s diversification is a departure from its initial existing product and market involvement, which is Formula 1 racing. There are six different companies in the portfolio including McLaren racing, McLaren marketing, McLaren Electronic Systems, McLaren Automotive, McLaren Applied Technologies and Absolute taste.
The companies within the Group’s portfolio increase its value through increased returns and market share. The Group has a clear foresight by establishing a portfolio of companies that produce related products and others that produce non-related products. It is able to increase its market value while spreading out the risk and saves costs by utilizing its resources.
The companies within the portfolio enjoy self-governance though there is the overall management, which looks at the management at the Group level. The Group integrates all companies into its management and uses similar development and management strategies (Sadler 2003, p. 14).
McLaren racing is a successful team in the grand prix motor racing with major victories since its establishment in 1966. The McLaren Formula 1 team is the backbone of McLaren Company, which brings in huge revenues.
McLaren Automotive is a state of art automotive production line, which is responsible for the production of the company’s vehicles. McLaren Electronic system is the company, which is responsible for the supply of electronic control unit to the Formula 1 team. It also produces electronic systems for teams and championships especially in North America and Europe.
McLaren Applied Technologies uses Informational Technology and Data management expertise to help Formula 1 team improve on their performance. In addition, the Group has opened a new £40 million production center to boost its production.
Absolute Taste offers both catering and hospitality services to guests in Formula 1 race and specializes in events and party hosting around the world. The Group’s portfolio consists of McLaren Marketing, which is responsible for advertisement and creating awareness of the brand. It is important to note that McLaren diversifies but builds and holds on some products such as racing to increase market share or maintain current market share according to Boston and Ansoff Matrix (Levine & Tyson 1990, p. 16).
There exists either a direct or an indirect relationship between the companies under the McLaren group of companies. The portfolio stretches well with companies indulging in different markets such as food and hospitality though the major companies indulge in the car market and related services. The presence of six companies is a clear indication of the high levels of diversification within the McLaren Group (Gray & Gray 2000, p. 68).
There is a high relatedness rate among the companies, which support each other financially and logistically. The Group concentrates on product development and differentiation to develop companies in its portfolio that provide related products and services. This allows the company to save on huge upfront costs and divert expenditure to develop its own companies. This allows the companies in the portfolio to integrate its activities and offer support..
There are several reasons why McLarens developed the portfolio to include other companies. The main reason is to boost its dominance and achieve synergy by developing related companies and products (Sadler 2003, p. 56). In addition, the company stretched out the portfolio to reduce risks related to economic uncertainties.
The Group aims at achieving strategic fit with complementary marketing, manufacturing and production efforts. The Group’s most companies are directly related where the companies are able offer support to other companies. McLaren group is able to save huge amounts of money, which it would use by seeking external assistance from other companies.
For example, McLaren Electronic systems supply the team members with high-end electronics that aid them in their competition. The diversification allows the company to have a competitive advantage over its competitors by developing new companies and new products. The group benefits by heavily investing in technology and electronics, which is essential in the car market, and racing industry.
The portfolio is possible owing to the Group’s already existing resources and high levels of brand loyalty. The Group finds it important to invest in other non-related markets such as Absolute Taste to spread its risks and try to mitigate the effects of financial, political and other risks. The company, which is not directly related to the car market is source of revenue and increases the Groups asset base.
In addition, McLaren has a safe level of diversification as articulated by the portfolio’s composition or configuration. The companies in the portfolio have a high level of relatedness where it is possible to share assets and resources. The companies are able to share resources such as technology and the Group’s assets to carry out their business endeavors (Levine & Tyson 1990, p. 39).
Most of the companies relate in terms of products and services meaning that there is lots of cooperation between them.However, each company is in an effort to secure its own assets and develop its resources. There is a positive correlation between portfolio of assets and the creation of value for the company.
McLaren group is able to add value by diversifying its businesses making it effective in resource and capital utilization. It increases value by investing its returns on other businesses that have the capacity to grow and contribute to the value of the group.
There is a large value of bundle assets and business compared to independent unit owing to huge asset base, which can attract more financial assistance. McLaren also enjoys large market share and asset dominance.
McLaren has a unique approach to diversification, which is partially different from the historic perspective on corporate diversification. Over the years, there has been a change in the approach of diversification owing to new research and change in strategies. The trends in corporate diversification have been changing due to the change in the economy and continued research on the concepts.
The Group realizes the dynamics in the approach to diversification and the numerous benefits of applying different diversification concepts. In early 1950’s, companies were diversifying mainly due to management competencies through portfolio planning techniques (Goold & Luchs 1993, p. 10). This has been changing as companies concentrate on the effect of diversification on performance.
The companies have a deep thinking and understanding of diversification and its effect on the company’s performance. They are concentrating more on performance measurement after diversification to determine the benefits of diversification. In the late 1980’s companies were using value based planning concepts to scrutinize diversification and make concrete decisions.
Goold & Luchs (1993, p. 20) says that in the early 1990’s companies were diversifying through the establishment of companies that produce related products. This move supported good performance where companies improved on returns and profitability. Later in the years, companies started using core competencies and dominant logics as a driving factor for diversification.
It is important to note that some approaches of the concept of diversification come and go. Companies are going back in time to incorporate strategies of diversification with the current strategies in an effort to come up with the best diversification approach. It is important to note that companies such as McLaren incorporate more than one diversification approach to maximize its benefits.
Consequently, companies are concentrating on performance measurement to determine whether the diversification strategy is beneficial. Although research indicates that diversification leads to higher performance, companies appreciate that unrelated extensively diversified companies have a poor performance.
In the early year, companies were not carrying out performance measurement on diversification since they believed to have high performance. The approach of diversification by McLaren reflects on the historical perspective on corporate diversification where there was focus on the role of corporate headquarters. In the early years, companies did focus on corporate headquarters to determine their role in case of diversification.
This is evident in McLaren scenario where the corporate headquarters have a big role to play in diversification of the company and marketing of products (Reed 2010, p. 2). The historical perspective on corporate diversification insists on sticking to the diversification strategy and executing the outlined strategy.
There is a strong relationship between the historical approach of diversification and that of McLaren. This is because the company insists on performance measurement of the diversification process.
Conclusion
McLaren Group has proven to be one of the most successful companies in the highly competitive car market industry. This is evident from its growth over years and its continued dominance in the industry. It is able to overcome market entry barriers through different mechanisms that ensure its relevance and success in the industry.
McLaren is one of the few companies that have been able to overcome market entry challenges and increase its portfolio of companies as a means of market penetration. The diversification of its business operations are one of the major contributors of its success. McLaren has seen the benefits of relating diversification and performance as proven by Goold and Luchs (1993, p. 45).
It has a review of past diversification concepts to establish the best and outstanding diversification approach. McLaren has a high level of diversification with a Group portfolio consisting of six companies. This is one of the main reasons for the continued growth and success of the Group where it plans to invest £750 million over 5 years (Reed 2010, p. 2).
References
Goold, M & Luchs, K 1993, ‘Why diversify? Four decades of management thinking’, Academy of Management Executive, vol. 7 no. 3, pp.7- 25.
Gray, A & Gray, T 2000, Studies in Economics and Business: Marketing, Heinemann Publishers, New York.
Kerr, J 2005 ‘Diversification strategies and managerial rewards’, Academy of Management Journal, vol. 28 no. 6, pp. 155-179.
Levine, I. & Tyson, D 1990, Participation, productivity, and the firm’s environment, Brookings Institution, Washington, D.C.
Reed, J 2010, ‘McLaren enters sports car market’, Financial Times, vol. 2 no. 4, pp. 1-2.
Sadler, P 2003, Strategic Management, Kogan Page Publishers, Washington.
Young, E 2005, McLaren Memories: A Biography of Bruce McLaren Haynes, Oxford University Press, Oxford, UK.