Strategic Management Assignment

Submitted to: Prof. Arun K. Tripathy

[MERCEDES BENZ CASE]

Mercedes Benz Case: How is their shift to the new strategy justified?
1. Risks:

2. Benefits: Mercedes-Benz suffered from high labour costs that were prevalent in Germany. These costs were almost 33% higher than those in other western European countries like France, about 40% higher than those in the US and about ten times those in the eastern European countries like Czechoslovakia. Therefore, the new strategy of shifting their production outside of Germany would help lower those costs. The German Mark was steadily appreciating because of which the costs of exporting cars out of Germany were rising. It was becoming increasingly difficult for MercedesBenz to compete with the other global auto manufacturers like GM, Ford, Toyota, etc. Hence, it was forced to take a decision on the shifting of production facilities to different locations outside Germany to counter the exchange rate effects and increased transportation costs. Mercedes strategy of entering the small cars, minivan and SUV segments after being present only in the luxury car segment, in order to diversify its product portfolio, was to spread the risk of the overall economic situation in Europe at that time. It also, emphasised on cutting down on the excessive engineering which might have priced Mercedes cars out of the market. Its decision to not go ahead with the setting up of the new Ahrensdorf manufacturing plant was completely in line with the its cost control strategy; it already had other plants which were not being run to their full capacities and did not need a new plant at that stage.

Provide arguments as to why Mercedes Benz should not shift to the new strategy

Mercedes Benz was created initially as a joint venture between two german automobile manufacturers Daimler and Benz. Since its inception, Mercedes Benz has been known as being a manufacturer of high quality automobiles. It has also stood synonymous to being a luxury automobile manufacturer.

Mercedes Benz is changing its strategy from being an export oriented firm to having production facilities closer to its markets. The rationale for doing so has been that the cost of production in Germany is very high and this has made Mercedes Benz unprofitable. However, even after introduction of the new facilities abroad, it has been observed that Mercedes Benz has not been doing well. Some of the risks of the new strategy could be Mercedes Benz does not have enough expertise in manufacturing abroad and it will not be easy for them to deal with the various factors associated with working abroad. Compared to most Japanese manufacturers, Mercedes Benz does not compete on cost. Instead it focuses on providing very high quality and luxury. Focusing on lowering the cost might lead them to compromise on their core benefits Unlike other firms, Mercedes Benz has not gone in for joint ventures or alliances etc. This means that it will not be able to adjust to environmental factors With too much focus on saving cost, Mercedes Benz is making the wrong decisions. This is exemplified by their choosing Alabama for their plant.