New Business Project by Volkswagen - Essay Example

New Business Project by Volkswagen 0 Introduction Volkswagen is a German car manufacturer and second largest automobile industry in the world afterToyota. Established in 1946 and headquartered in Wolfsburg, it is one of the leading manufacturers in world generating revenue of nearly €198 billion and producing 9,728,000 units annually (Volkswagen, 2015). The company prioritised in production of private cars has produced some of the top selling cars namely Volkswagen Golf, Volkswagen Beetle, and Volkswagen Passat. The company promotes their brand under the slogan ‘Das Auto’ which means people’s cars and that validates their commitment towards Corporate Social Responsibility (CSR) i.e. they follow the principles of sustainability in their operations. It has also implemented some environmental goals involving the protection of climate, reducing health hazards and resource conservation by using alternative fuels and reducing the use of harmful materials. The Volkswagen XL1 was announced as the most fuel efficient car in 2013. However, in 2015 it was engulfed by a diesel emission scandal when it improperly installed ECU (Engine Control Unit) software to evade the environmental regulations (regarding minimum emissions of NOx) (Barrett, 2015). The software was installed on the diesel powered cars which defeated the emission tests. As the CEO, Michael Horn, expressed his non indulgence in such a scam blaming the engineers, this situation resulted in loss of confidence and loyalty of millions of consumers across the world that were attracted by the company’s clean diesel policies of marketing. Thus, aftermath of such damages therefore necessities the development of a new business strategy which will help the company in regaining its brand name and value in the automobile market (Richards and Jones, 2008). 2.0 Changed framework for the new business project The breach of environmental regulations and the fraud case has damaged the brand value and reputation of Volkswagen as a leading car manufacturer. As a high profile company and once built upon trust and confidence of the consumers, had to face successive lawsuits from US and UK environmental audit committees (Marcus, 2015). It was said in the hearings that the cheating on nitrogen oxides emissions was a cheating in the well being of current and future generations (Verchick and Steinzor, 2015). Not only the consumers across the world, but also the suppliers, dealers, workers and the regulators had to deal with the after effects of such betrayal by the company. The company experienced loss in its brand value and status as an automaker as an aftermath of such incident and also faced enormous financial damage which was hard to recover. As the company announced the recall of nearly 9 million cars, it was estimated that an amount of € 6.5 billion was required to cope up with the costs of the scandal (Marcus, 2015). Therefore, there is an urgent need for the company to come up with a new business project with changed framework to regain its brand value and market share in the car industry. As the company’s stocks which reflected the market concerns significantly fell down, it became a toughest challenge for the company to bring back their position and win the loyalty of the consumers. 2.1 Force Field Analysis of Volkswagen When Volkswagen was planning for a business change in order to gain back its hard earned reputation, it is necessary to analyse the major factors forces which will support and hinder such change. In this context, Force Field Analysis is an important decision making tool that can assist it in making the decision for a change within the business. Such an analysis will serve the purposes of i) deciding whether to undertake the change after evaluating the factors; ii) of increasing the chance of success of the change by weakening the forces against the change and by strengthening those in support of the change (Kruglanski et al, 2012). The new business project or the proposed change by Volkswagen is brand enhancement. After involvement in the major emissions scandal, what suffered most is the brand appreciation of the company and its perception to the ones who are related to its product i.e. the consumers, suppliers, dealers, employees and the shareholders. According to Cooper and Kleinschmidt (2011), brand is a fundamental aspect of the company and the damage caused requires immediate plan on the part of the management to enhance or upgrade the brand by introducing new line of product. For example, a model in the industry specially designed for the ones who find it difficult to afford cars can uplift the brand name. Volkswagen planned to manufacture a small compact car with class appearance and in built features at low cost which will make it possible for the company to offer it at affordable price. Force Field Analysis will evaluate the prime forces that will drive such changes as well the forces that are restricting such change. The Force field analysis diagram is shown below where one side shows the positive factors of change and the size of the arrows represents the magnitude of the factor in favour of or against the change (Paquin and Koplyay, 2007). Figure 1: Force Field Analysis The helping factors behind the change are the following: 1. Reach the target segment of the population: By Introducing the cheapest car, Volkswagen has made their first move towards enhancing their brand by making it visible to the low end customers in the market. The affordable price of the car tempted those who could not afford car earlier. The price of the car which is near about the price of a two wheeler attracted the small and nuclear families who generally opt for two wheelers for daily and short distance travelling. The traditional concept that possession of a car raises or uplifts the social strata in the middle income or developing countries like India, China will result in high potential for earnings from such a new venture from the market of those countries. 2. Consumers want new products: As every manufacturer are engaged in innovating and coming up with newer varieties of cars to strive in the growing competitive market for cars, the expectation of the consumers are naturally increasing. They always want new products with distinct look and features from others (Crawford and Di Benedetto, 2008). The small size and compact design of the new car will hence be interesting to those who crave for something different from what others have. While the car market is flooded with big automobiles due to the growing preferences for the large 6 to 8 seated cars among the consumers, introducing this car will hence raise the market appearance of Volkswagen. 3. Low maintenance cost: The smaller size with easy inbuilt features will require much lesser cost for maintenance. The small size will not require a large space for garage and parking. This hence reduces the charges and space of parking it in public complexes and also the maintenance of a large garage. The company stated that the small size will allow the owners to park them even in a lane if they do not have a garage without even congesting it. Apart from this, one more advantage is that it can be cleaned by the owner himself thus eliminating the cost of cleaning it. 4. Fuel economy: Keeping in mind the mishap occurred after the disclosure of emission scandal, this car is being designed with fuel efficiency technology and versatile engine equipped to run on fewer diesels. It is assumed that the new car will rebuild the green credentials of the company after what happened earlier as the engine will deliver an impressive mileage while reducing the emissions, noise and vibration (Whiteman and Hoster, 2015). The hindering factors of the change are: 1. Cost of manufacturing: The promised features and the new design for the car will initially require substantial cost of manufacturing until the production reaches large scale. The factory usually equipped for manufacturing spacious cars with costly features thus are not suited for such cars. Eventually, new and small suppliers who will provide intermediaries at lower cost effective methods of production will be needed so as to maintain a minimum profit margin for the company. 2. Requirement of special experts: Building a compact and small size of the car is like a challenge for the automobiles designer and experts to incorporate all the functions and fuel efficiency equipment within a small engine segment of the car. 3. Impact on the environment: The after effects of the environment scandal of Volkswagen were sever and it impacted the customers, dealers, suppliers, legislators and all others associated with the industry. Thus there will be lots of questions and investigations regarding the fuel efficiency and its impact on the environment. Hence the car should be consciously designed to meet the environmental standards and consecutively pass the emission tests (Ng, 2006). 4. Staff fearful of new technology: The staff of the factory who were habituated with old methods of production and trained to produce spacious cars are fearful of the new equipments and the technology to be used for manufacturing such small sized car. 3.0 Impact on the company 3.1 Potential Reaction of the Shareholders The brand enhancement strategy of product line extension by Volkswagen will influence the decision of the shareholders and will probably win their confidence again. A significant decline in the share prices after the scandal was disclosed was due to the financial damage faced by the company after declaration of recall of 8.5 million cars. The company estimated that it will have to set aside nearly 6.5 million Euros for recovering the cost or recalling. The new project is supposed to raise the share prices of the company and will induce more share purchases as the new model offers wide market and customer’s recognition. The impact of change in brand or the product is anticipated by the investors on the basis of the potential return from the stocks and the risk associated with it (Hadani, Goranova and Khan, 2011). The stocks return depends on the expectations regarding the firm’s future cash flows. The project anticipates greater cash flows because of targeting its low income customer segment in the market. There are some key reasons behind the increase or enhancement of brand image after successive introduction of new model which will result in higher revenues for the company. Firstly, the greater likelihood of the new cars to be purchased due to price affordability will lead to increase in credibility of the brand and will eventually reduce the perceived risk of the customers and the information cost (Song, 2008). Secondly, the cash flows will also increase as the consumers had to pay small price for possessing such high quality branded product. Lastly, as the company will conduct large scale marketing of its new product through advertisements and promotions, it will be effective in augmenting the brand appearance in the domestic as well as international market after the scandal (Bharadwaj, Tuli and Bonfrer, 2011). It was anticipated that with up healing of the brand quality with such new venture will successively increase the cash flows as the product will gain large scale consumer acceptance and hence increasing the returns to the share holders (Thomas and Cotter, 2007). 3.2 Potential Reaction of the Employees Apart from the share holders, it was the employees that were affected by the company’s diesel emission violations in 2015. The company was submerged in high financial costs for reforming and restructuring the cars installed with the fraudulent device. This led to lack of financial strength to continue with their large scale production of the user cars and large cars like before. This affected the employees and staff associated with the organisation as many got unemployed or the salaries were reduced due to vulnerable losses faced by the company. Thus, a new product initiation will not only benefit the company by enhancing its brand image, but also provide new zeal among the employees who lost faith over their association with the company. The new project venture of introducing a product for the common people is quite appreciating to its employees and staff as there will be large scale operations and manufacturing because of high anticipated demand for such cars. The new product will require innovations and adopting of new technologies complementing with the existing ones and hence, there is a need for training the employees with experts and professionals (Shum, Bove and Auh, 2008). Thus, it will provide a new learning experience for the employees and an opportunity to question or challenge and propose the alternatives in the process of change (Lai and Ong, 2010). The employees’ reaction to business change is positive as it aimed at serving finer segment of the market thereby satisfying the desire for ‘something different’ of the consumers. It helped in overhauling the trust of the employees who were devastated and ashamed by the company’s deceitful strategy of evading environmental regulations. They could foresee the potential success of the project and also recovering of the financial losses after the initiation of the change in the product line. 4.0 Designing of a Relevant Change Model for the organisation The introduction of an exceptionally new model in the market by Volkswagen will require an effective planning, resource extraction and creative execution. Therefore, there is a need for a relevant change model for the organisation which will favour and sustain the change. The new model should incorporate the stages of designing, manufacturing and introduction to the market (Gruber, 2007). In the first stage, there is a need for developing a modest but detailed design of the product which will integrate all the pre-specified features and meet the requirements of the consumers. In this process resource planning (i.e. the sources from where raw materials and interiors will be extracted) is to be done followed by a trade off study to identify the potential offshore and outsource opportunities for development (Van Gelderen,Thurik and Bosma, 2005). Before proceeding with the product creation and committing the required resources, it is essential for the company to validate potential product profitability through a proper business plan (Jiao, Simpson and Siddique, 2007). A proposed model for change (in the form of product initiation) is shown in the diagram below which illustrate the basic framework of the designed model of the organisation for the change. Figure 2: New Product Introduction Process Flow (Source: Parametric Technology Corporation (PTC), 2006) The project proposal of a new product launch hence requires the above phases to be integrated while designing a relevant change model for the organisation. As per Self, Armenakis, and Schraeder (2007), the management should devise a proposed plan which would include the cost and benefits of proceeding with the change. Kapferer (2012) stated that the plan must evaluate the business risk, market opportunities and also the technical risk to attain an understanding of the main drivers behind the project. The second stage of the plan describes the steps required for execution of the project. The major development activities begin in this stage when all the key criteria of the project are served and it gets approval for execution (Osterwalder, Pigneur and Tucci, 2005). Main parameters for manufacturing a new variety car are supplier’s network (from where the automobiles part are to collected), logistics costs, cost of installing new equipments or upgrading the existing ones and providing adequate training to the employees (Fixson and Park, 2008). Beside this, the plan also should include strategy of effective management of the required resources in order finish the project within budget. Another step that needs to be incorporated in the plan of product initiation throughout the entire project is ensuring that the pre-defined conditions and the main purpose of the project are achieved. This necessitates holding of business review meetings at all the critical phases of the project to keep a track of the product development and also making the progress of the project visible to all employees and the management (Smith, Collins and Clark, 2005). The last stage involves conducting gate reviews which will determine whether to continue with the business venture or not (Townsend, Busenitz and Arthurs, 2010). The business venture of low priced cars for rebuilding brand perception and consumer retention therefore meant reorganisation of the business framework (Grimaldi and Grandi, 2005). There is even need for changing the essential building blocks of the organisation i.e. the decision making power of the people of the company, adopting new techniques and methods of innovation, new commitments, more allocated responsibility and managing information in the network of major stakeholders of the company (Zott and Amit, 2007). Beside the changed structure of organisational operation, the factors that can influence the business model are the effects that the new methods and techniques of production will have on the environment; customer preferences and probable reaction of other competitive brands in the market (Cummings and Worley, 2014). 5.0 Conclusion The basic idea behind the new project by Volkswagen is to reach that segment of the population those who find difficulty in purchasing a car but requires it on daily basis. It will be hence a family car for 4 to 5 people and the small size would not require much space for garage. Such a product line extension is believed to bring back the lost fame of such an international brand. It further promotes the motto of the company “people’s car” in a new enthusiastic way as it was offered at an exceptional low price and hence, it disapprove the so called notion that rich people owns cars. 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