Hyundai Attempts to Pursue Two Value Propositions – Can They Manage the Transition?

In my strategic planning fable “Roadmaps and Revelations” one of the four fundamental strategy questions I offer to readers is “How do you sell?” which represents the company’s value proposition, or why customers choose to buy from them. The vast majority of organizations will choose one of three value propositions: low cost (an operational excellence model), best product (product leadership), or best relationship (customer intimacy). Making this selection is vital for any business in order to make decisions on everything from hiring to marketing to resource allocation. The choice of a value proposition also enhances Balanced Scorecard development by facilitating the creation of objectives and measures throughout the framework, particularly in the Customer and Internal Process perspectives.

When faced with this model some organizations insist they must excel at all three value propositions. Given today’s competitive realities this is an understandable reaction, but practically it can cause more headaches and confusion than benefits as companies attempt to be all things to all people and wind up instead offering mediocre service to everyone. Despite the challenges and potential pitfalls, I see more and more companies attempting to balance at least two value propositions. Case in point is the South Korean car company, Hyundai.

What did you think of when you saw the word Hyundai? Chances are you conjured up an image of a small, low priced car that provided good fuel economy but may be prone to problems. That would clearly represent a low cost/operational excellence value proposition. But Hyundai is attempting to change that. This month they’ll introduce the Equus, a luxury sedan with a price tag of around $55,000 U.S. dollars with industry titans BMW and Mercedes clearly in their sights.

Why is Hyundai jumping into the luxury market and competing directly with companies that possess decades of experience and success in the market? For a number of reasons: First, they appear to have overcome their quality woes. Once considered a trouble-prone brand, Hyundai is now a leader in quality surveys. Second, they have little room for growth in their core market of small, fuel-efficient vehicles. Their U.S. market share recently reached 4.7%, up from 1.4% in 2000 and to keep the growth engine revving they must reach a wider audience. Finally, the luxury market, despite dire predictions from industry experts, is actually growing faster than any other segment. BMW’s 7 Series sedans have seen a 44% sales leap, Mercedes E-Class is up 78%, and Audi’s A8 has spiked 34%. These lush ‘land yachts’ offer equally lush profits for manufacturers, a fact not lost on Hyundai’s senior leadership.

Producing a luxury sedan with a price tag north of $55,000, and outfitted with such bells and whistles as electric back massagers and a suede roof seems an unquestionable move towards a product leadership/best product value proposition. The innovative sales model Hyundai is pioneering with the Equus provides further evidence of that trajectory. Interested buyers won’t have to travel to a Hyundai dealership, brushing past $13,000 sub-compacts on their way to the Equus, instead a sales person will visit their home to demonstrate the car’s many features. Additionally, when service is required, a loaner car will be delivered directly to the owner’s home.

But will this strategic gambit pay off, and can the company balance two seemingly competing value propositions? If recent history is any guide, it may be a difficult path. Back in 2003 Volkswagen, another low-cost purveyor, introduced the Phaeton with a sticker of $68,000. Sales failed to take off and the car was pulled from the U.S. in 2005. Other carmakers, rather than attempting to master two value propositions in-house, have chosen to spin off separate brands with their own identity and clear value propositions. For example, Toyota created Lexus to offer luxury cars, rather than build under the Toyota nameplate that had a highly burnished image (until recently) of quality at a relatively low price.

The choice of a value proposition impacts virtually every facet of a company’s operations from manufacturing to distribution, to marketing and promotion to name just a few. The question for Hyundai, and all those companies attempting to pursue two value propositions, is how they will manage the tradeoffs inevitably necessary to achieve success with both. It should be an interesting ride.

Sources:

  1. Mike Ramsey, “Can Hyundai Sell Pragmatic Prestige?” Wall Street Journal, September 20, 2010.
  2. Vanessa Fuhrmans, “Land Yachts Launch Unexpected Revival,” Wall Street Journal, September 23, 2010

By,

Paul Niven

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