Introduction
In times of rapid globalization, technological advancements,
increasing cut throat competition, shortened product lifecycles and volatility
in international markets and politics, among others, it is becoming of chief
importance for managers to take the right decision to save organizations from
bad image and losses. However, managers are often unable to make a perfectly
rational decision due to various factors affecting the decision making process.
For example, the limitations of manager’s own cognitive process, use of
satisficing techniques in decision making process, lack of availability of
proper information or difficulty in filtering through cumbersome overload of
information, thereby often making the decisions arrived at – a victim of
bounded rationality.
In this particular paper we will study some of the decisions
taken by the management at the Hyundai Motors in context of the Indian market,
using the approach of bounded rationality to analyze the decision making
process.
Problem Statement
Mid 2012 Hyundai launched the new variant of the Hyundai
Sonata in the Indian market, especially India, where the company has a strong
hold (cited as the second biggest Indian car manufacturer after Maruti Suzuki)
However, the car failed to make the cash registers jingles and Hyundai is since
seeing ever dropping sales of the model and even planning to pull out the model
from the market to save from further losses.
The decision to launch the fluidic sonata was made by the
top management at Hyundai Motors India. The decision may have been influenced
by the remarkable success of the Fluidic Verna model launched by the company in
2011 and the remarkable success of Hyundai Sonata in the USA market.
However the model failed to attract customers due to rising
fuel prices and lack of brand presence in the D segment in the Asian market.
Therefore the outcome of the decision has been quite disastrous and
unprofitable for the company.
Analyzing the decision making process
Soon after launching in 2000, within the span of a decade, Hyundai
Motors India Limited became the second largest car manufacturer in the country.
With ever increasing car sales and successful launches one after the other the
top management’s confidence in the Indian market increased as they geared up to
invest more in manufacturing facilities and marketing costs incurred in the
country. In 2011, the company launched a new model of the Hyundai Verna (which
was already present in the market), based on its new fluidic design philosophy.
The model was an instant hit among the Indian customers and this gave an
encouragement to the management to think on similar lines aligning future
launches with the same philosophy. In Mid 2012, Hyundai Motors India launched
the Sonata Fluidic model in the Indian market. However the segment D car priced
ex showroom (New Delhi) at Rupees 18.5 lakhs failed to attract any takers.
The sales figures of the car have been the following:
1.
32 units in July 2012
2.
39 units in June 2012
3.
43 units in May 2012
4.
66 units in April 2012
5.
92 units in March 2012
The ever declining dismal figures are the result of 3 key
factors which the decision makers failed to take in account:
1.
The car is offered in 2.0 L and 2.4 L petrol
variant only. Diesel engine option is not available.
2.
Fuel prices are on the rise in India and petrol
rates are at prohibitive highs in the country. Customer in the Indian market
prefers Diesel cars over petrol to save cost.
3.
The company has little presence in the segment D
market; with Hyundai Elantra as the only car apart from Sonata in this segment
(which too is not selling very well).
The theories of bounded rationality can make a reasonable
attempt to explain the failure of Hyundai’s management to make an optimal
decision when launching Sonata Fluidic. The decision in relation to the concept
of bounded rationality is explained below:
1. Application of Heuristics without
supplementary factual information- Hyundai Motors has had a remarkable
success story of Hyundai Sonata in the North American market where almost
2,00,000 copies of the car sold in the first year of launch (2011). Also, the
Hyundai Verna Fluidic had magnificent sales volume in the Indian market in the
same year. The top management must have picked cue from this experience of
success. However, what lacked in their decision making approach is linking of
Heuristics with factual information and situational analysis before making a
generalization to a wider or different environment. In this case the company
evidently, did not study the Indian situation well before launching. The
selective perception shown by the managers by ignoring critical information
such as rise in fuel prices and not making appropriate promotional strategies
for a segment its weak in (segment D) resulted in a poor launch.
2. Limited Cognitive Ability- The top
management has committed two grave mistakes while deciding to launch the
Hyundai Sonata. Firstly, they tried to generalize the success of Verna Fluidic
to the launch of Sonata ignoring the fact that the two cars belong to two
different segments and the fact that Verna is available as a diesel option as
well. Secondly the management committed a mistake by ignoring the need for an
insight into the conditions prevailing in the Indian market. With the country’s
rising middle class ever burdened by increasing fuel prices (especially petrol)
and the recent volatility in the economy and financial markets has left little
money with Indian households to spare for luxury. Hence, limited cognitive
ability and selective perception on part of the management has lead to poor
sales of the luxury petrol guzzler.
3. Unavailability of objective information and
Structural Limitations- Hyundai does not have any diesel variants for
Sonata all around the world. Although the company is working on a four cylinder
diesel engine which can be fitted in the Sonata as well but currently there are
no such options. Hence, Hyundai Motors India Limited did not have any choice
but to launch the petrol variant only. Also, in a market as complex as India,
it is difficult to obtain objective information about demographics, trends and
consumer attitudes, this makes it all the more difficult to arrive at an
optimally rational solution.
Given the three limitations and failures in
the decision making process, the top management made its best attempt at
arriving at a satisficing (or reasonable) solution (rather than an optimal
one).
Alternative Course of Action
Given the analysis of the decision making process that ended
up in a disaster for Hyundai Motors India Limited, I’d suggest two possible
alternatives that the management could have undertaken (had it been aware of
the concept of bounded rationality).
First, the company could’ve withheld from launching the car
until the diesel variant being ready or fuel prices stabilize. Second
alternative would have required the company to consider the following points
before launching:
1. Supplementing Heuristics with market trend
information- True that Sonata has had a remarkable success in the American
market but, attention must also be paid to the reasons behind this success.
With rising fuel prices being a concern around the globe, Sonata an entry level
segment D car, carves itself a niche by having looks which are match to any
premium sedan such as a Jaguar hence being a value proposition to any status
conscious buyer. The Indian middle class has a tendency for conspicuous
consumption and is akin to demonstration effect. Marketing the car as a value
for money ‘big luxury car’ could have turned tables in the Indian market.
2. Factual Information- Top management
should’ve invested in securing reliable factual information about its target
market. This could’ve been done by way of a specialized research agency or by
collecting information from databases present with the various dealerships of
the company. Data about consumer’s willingness to spend, expectations from a
car, financial status, risk propensity and brand preferences would’ve gone a
long way in determining the best approach to place the product.
3. Creative Response- Had the management
accepted and acknowledged the fact that the brand has a lack of visibility in
the segment (Sonata stands in), it could have initiated promotional strategies
to make itself ‘present and preferable’. Hyundai has already won the heart of
the Indian consumer with its small cars and midsized sedans, it wouldn’t have
taken much effort on part of the company’s creative agency to communicate the
same picture of efficiency, reliability and trust to the target consumer’s
mind. Creative responses could’ve been made to communicate the value and status
proposition of the offering thereby negating the petrol variant only issue and
bringing the company’s presence in the segment D to limelight.
Conclusion
The case of Hyundai Motor India Limited has been very
helpful in shedding light over the issue of bounded rationality which often
clots and clogs the decision making process in critical scenarios in day to day
management.
Managers although always pressed for time in this ever
changing volatile business landscape, need to make the ‘right decisions’ on
basis of little information. This makes the task of the manager all the more
challenging. It is of critical importance to managers to have awareness of the
concepts and working of bounded rationality in order to safeguard their
decision making processes from biases and to identify environments which are
unsupportive of healthy decision making. Summing up, awareness and practice are
the only two feasible solutions to save from the adverse effects of
implementing satisficing solutions provided by bounded rationality.
References
2. International Journal of Basic and Applied Sciences, 1
(2) (2012) 53-66 ©Science Publishing Corporation
www.sciencepubco.com/index.php/IJBAS Application of Rationality in Strategic
Decision Making and its Implementation at Branch level: A Case Study of Habib
Bank Limited (HBL) Karachi Ghulam Ali Mashori1, Aftab Ahmed2, Manzoor Ali3
Nadir Ali4 1,3Department
of Management Sciences, BUITEMS, Quetta
12. http://www.dailyfinance.com/2011/02/18/hyundai-kia-us-auto-sales-soar/
