Business 478. Section D 200 STRATEGIC ANALYSIS FOR: Volkswagen

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1 Business 478 Section D 200 STRATEGIC ANALYSIS FOR: Volkswagen Group E: Tao Zhang Manlin Zhao Qun Xiang Hu Wesley Or Submission Date: March 18, 2015

2 INTRODUCTION Germany s Volkswagen (VW), has become a major force in the world s automobile industry since its founding in 1937 (Volkswagen: History, 2015). Today their headquarters in Wolfsburg, Germany coordinates production of not only of of VW vehicles but also brands that include Audi, Bentley, Bugatti, Lamborghini, Porsche, Seat and Skoda automobiles, MAN trucks and busses, Scandia trucks, and Ducati motorcycles. Background in Brief In the early 1930s, automobiles were considered as a luxury good and because of this, very few people were able to own a car. Volkswagen s vision of wanting to create an affordable vehicle so that ordinary people could also own cars, was no simple task. However there were powerful forces at work promoting the company. In 1933, Adolf Hitler and the Nazi party promoted the Volkswagen concept of producing vehicles that would allow the German people to have the same access to cars as Americans did. During this time, Hitler chose Ferdinand Porsche s to design the car. This lead to the development of the prototype of what would be known as the Beetle, as well as the many ties and collaborations between Volkswagen and Porsche. Due to the outbreak of World War II, production of commercial vehicles production was halted and the factory was used to produce military vehicles instead (Volkswagen: History, 2015). With the end of World War II, Volkswagen entered a new era (Volkswagen: History, 2015). As the largest employer with little competition nearby, VW was a crucial employer to ensure the survivability of the local population. The British government with this in mind, along with needing additional means of transport, decided to take over the firm s administration through trusteeship, and let VW continue vehicle production (Volkswagen: History, 2015). By 1946, VW produced over 10,000 vehicles despite difficult production conditions; by 1949, the workforce increased from 276 employees to 597 employees (Volkswagen: History, 2015). Over the next few years, VW continued to grow rapidly and by the 1950s, VW had become a global brand. The Organization Today Volkswagen is one of the world s largest car manufacturers. Being part of the Volkswagen group, the company has over 590,800 employees with production plants in over 31 countries in the world (Volkswagen: 1

3 Key Figures, 2015). The company was able to make over 9.6 billion in sales revenue, with a profit increase of 12.5% in 2014 and over 396,000 vehicles were sold in the past year (Volkswagen: AR, 2015). Today Volkswagen is the core and image brand of the Volkswagen Group. Being the group s top seller (Volkswagen Statistics and Facts, 2013), the company was able to win many rewards for their car designs, as well as being well known for their participation in many classes of motorsports (Geneva, 2015). Volkswagen till this day is still well known for making affordable vehicles and staying true to the meaning behind the company s name: Volkswagen means people s car in German. Mission Volkswagen s mission is to continue providing people all over the world an affordable vehicle that is attractive, safe, and environmentally friendly (Jurevicius, 2013). By following these missions and values, Volkswagen is able to offer its customers a chance to own a German engineered car at an affordable price. CURRENT ENVIRONMENT General Environment Over the years, cars have grown to become a necessity for many people around the world. People from different demographics have more choices available when choosing cars according to price, model, and safety. Volkswagen has become the representative of European cars with lower prices, high selection and high safety performance. In this highly competitive automobile industry, the company s decisionmaking process and sustainable development are strongly rely on the different macro-environmental factors. Political Segment Car policies made by a country s government would directly affect the country s car industry. Thus, the strategic decisions made by the company in Europe should be different from Asian countries, as they consider different vehicle regulations to meet the different standards. Moreover, with the high interest of stimulating the economy through the automobile industry, many emerging countries are willing to welcome foreign automobile companies to establish subsidiaries in their countries. Thus, Volkswagen is able to take the advantage of this opening policy to gain more business opportunities in foreign markets. 2

4 Economic Segment: Due to its high oil tendency, the automobile industry is easily affected by the fluctuation of oil price. In 2008, with the rapid increase in oil prices, the whole automobile industry faced an increasing price pressure as well as a change in purchasing preferences of the consumers. VW, as a car manufacturing company, also experienced a decrease in sales. Additionally, the uncertainty in the economic conditions due to situations such as the European Debt Crisis is also a big problem for car manufacturing companies like Volkswagen. Technological & Socio-cultural Segment: Customers increasing concerns on the environmental production, result in high demands regarding on technological changes needed for automobile manufacturers to produce cars with less environmental pollution with high safety and performance. VW is committed to a Think Blue initiative on reducing the environmental impact of its vehicles during production by 25% from 2010 to 2018 (Think Blue. n.d.). The company also strongly emphasized on R&D to improve efficient driving technologies and reducing carbon emissions. Industry Analysis Below is a table of porter s five forces for the vehicle industry. It indicates the ability of a firm to gain market share in the automobile industry. Once an analysis has been conducted, managers can search for options to influence these forces in the interest of the organization. In the automobile industry, Volkswagen s main objective is to maintain competitive advantage (see Table 1). Table 1: Porter s Five Forces analysis Force Impact Comments Power of Suppliers Low 1. Availability of suppliers is high; 2. Low switching cost for manufacturers. Power of Buyers Medium to High 1. Low switching cost for buyers; 2. Dealers being consumers purchase almost all outputs; 3. Abundance of brand substitutes. Threat of Entry Low Medium Entry Barriers: 1. High entry cost; 2. Ability to reach economies of scale; 3. Ability to access distribution channels. Threat of Substitutes Medium 1. Increased gas prices and concerns of environment cause people to take other modes of transportation. Industry Rivalry High 1. Many competitors. 2. Lack of great differentiation. 3

5 Competitor Analysis Figure 1: U.S. Market Shares Today, the automobile industry is dominated by the principal manufactures General Motors, Ford, Toyota, Honda, Volkswagen, and Fiat. All of these firms operate in a global competitive market. VW and its main competitors in the U.S. are included in Figure 1 (Source: Cain, 2014). Competitors are trying to launch new products more frequently to gain a greater portion of the market as well as the favour of consumer s preferences. Frequent changes in the customers preference, oil prices, and environment awareness increases the challenges for Volkswagen to overcome in order to gain competitive advantages in competitive market. CURRENT SITUATION Current Performance According to the year-end results for 2014, Volkswagen had an operating profit of 2,476 million in As a result of the decreasing market shares in South America and the Ruble crisis in Russia, there was a 14% reduction in operating profit compared to 2013 (Volkswagen: AR, 2015). In contrast, sales in China and the UK grew at 10 percent and 10.8 percent respectively (Volkswagen: AR, 2015). Current Strategy Business Level Strategy Volkswagen follows an integrated cost leadership and differentiation strategy. The company achieves low cost leadership by sharing automotive components among its products and as well as sharing vehicle platforms between the other brands under the Volkswagen group. The company improves product differentiation by focusing on the product quality improvement, innovation and sustainability. This differentiation strategy helps ensure that the customers are satisfied with the products, and that the customers will be willing to pay a premium for the product. 4

6 Corporate Level Strategy Volkswagen has a low level of diversification in its businesses. This is because the company generates most of its profits through the sales of cars. Also, the company has a related constrained moderate level of diversification on its automotive products because these products share the same technology, resources, supply chain operations, and distribution channels. Moreover, the company uses horizontal integration in it range through its range of well-known brands like Porsche, Lamborghini and Skoda (Volkswagen: AR, 2015). By doing this, Volkswagen can archive economies of scale and scope, and strengthen its presence in the market. International Strategy Volkswagen is an active player in the international market since its first established a retail company in Canada in 1952 (Volkswagen: History, 2015). Reasons VW entered the international market included a desire to access a market of larger size, achieve above average returns in new markets and to gain advantages of location in production and transportation cost. Volkswagen applies a transnational corporate level international strategy to address the different needs of customers with different cultural backgrounds, as well as to achieve an economics of scale at same time. The company accomplishes this by slightly adjusting its automotive products size, exterior and interior, along with applying the same technology, production methods, and automotive platforms across markets. Cooperative Strategies Volkswagen has formed a strategic alliance with 16 automotive manufacturers whom are already well established brands in the world. The Volkswagen group currently has 61 shared production plants in fifteen European countries and six countries in Africa, America and the Asia-pacific (Volkswagen: AR, 2015). As a result of this strategy, the Volkswagen group can share and combine their resources, capabilities, and core competencies with its group members to reduce competition and increase competitive advantage. MAIN STRATEGIC CHALLENGES Quality issues Since the expansion of production in China, Volkswagen has faced a series of product recall issues. In 2013, Volkswagen AG recalled over 384,181 vehicles in China in order to replace faulty gearboxes 5

7 that caused loss of acceleration (Bloomberg, 2013). This recall was a blow for the German company in its most important overseas market. Meanwhile, the recall crisis also happened in North America, with over 442,000 vehicles in the United State and 126,000 in Canada being recalled (Reuters, 2014). Emerging Chinese market In China, increasing labour costs have posed certain challenges in sustainable competitiveness in many automobile manufacturing companies like Volkswagen. According to the National Bureau of Statistics of China, urban manufacturing wages rose by 73 percent from 2009 to 2013 (Einhorn, 2015). Due to the increasing labour costs in China, Volkswagen is facing higher production costs in that market. This will affect the company in many ways such as the location of manufacturing plants as well as their products pricing. Furthermore, as China overtook US as the world s biggest vehicle market, Volkswagen is also facing an intense industry competition in China. This would be a long-term challenge for the company to sustain its competitive advantage and stand out from other domestic and foreign competitors. Green Vehicle As concerns for the environment increases, demand for more efficient green vehicles increase (Capgemini, 2010). But the research and development required to reduce environmental impact and increase efficiency is increasingly expensive. Along with the fact other competitors are also trying to improve their own line of green vehicles, the race to innovation is highly competitive. Poor performance in US market Having misjudged the competition as well as consumer s preferences in the US market. Volkswagen has been underperforming in this market, as the company has a low market share of 3.5 percent (Cain, 2014). This has caused more challenges to be overcome in order to reach the company s goal of becoming the world s biggest auto manufacturer by The underperformance can be seen by the decline in car sales of the company s vehicles in the US, despite the market sales trend showing an increase of nine percent. 6

8 REFERENCES Bloomberg. (March 20, 2013). Volkswagen China Recall May Cost More Than $600 Million. Retrieved March 13, 2015, from Cain, T. (2014). US Auto Market Share-July Retrieved March 14, 2015, from Capgemini. (October 1, 2010). Demand for green vehicles continues to grow steadily. Retrieved March 12, 2015, from Einhorn, B. (January 8, 2015). In China, Shirtmaker TAL Uses Data Analysis for Efficiency Boost. Retrieved March 13, 2015, from Geneva. (2015, March 2). Top Three In The World. Retrieved March 13, 2015, from Jurevicius, O. (2013, September 4). Mission statement of Volkswagen. Retrieved March 13, 2015, from Reuters. (Oct 17, 2014). VW Recalls 1.1 Million Cars in North America, China Over Suspension Issue. Retrieved March 13, 2015, from Volkswagen: AR. (2015, February 17). Volkswagen Konzern - AR Moving progress. Retrieved March 11, 2015, from Volkswagen: History. (2015, February 17). History. Retrieved March 12, 2015, from Volkswagen: Key Figures. (2015, February 17). Key Figures. Retrieved March 13, 2015, from Volkswagen - Statistics and Facts. (2013, June 1). Retrieved March 13, 2015, from Volkswagen. (n.d.). Think Blue. Retrived March 13, 2015, from 7