Strategic Management Theory - Essay Example

? STRATEGIC MANAGEMENT Table of Contents Table of Contents 2 Introduction 3 Market Identification 4 PESTEL Analysis 6 SWOT Analysis 9 Conclusion 12 References 14 Introduction Volkswagen Aktiengesellschaft (AG) is engaged in the business of manufacturing and sales of automobiles all over the world. Volkswagen AG is the parent company of the Volkswagen Group. The company operates its business through four reporting business segments. They are: a) Light commercial vehicles and passenger cars, b) Financial services, c) Power engineering, and d) Buses and trucks (Volkswagen, 2012). The products of the company are sold in the market with various brand names like Audi, Skoda, SEAT, Bentley, Bugatti, Volkswagen Commercial Vehicles, Lamborghini, Bugatti, and so on. The company’s business activities are mainly operated in the geographical locations of North America, Europe, Asia-Pacific, and South America. The organisation is headquartered at Wolfsburg, Germany and was founded in the year 1937 (Yahoo Finance, 2012a). The shares of Volkswagen are publicly traded in the Frankfurt Stock Exchange with the ticker symbol “VOW”. The company is found to have strategic alliances with other leading companies like Porsche AG, Chrystal Group, Daimler AG, etc. At present it is considered to be the market leader in the car manufacturing industry of Europe (Yahoo Finance, 2012b). This study entails about identifying and evaluating the business strategies followed by Volkswagen to maintain its leadership position in the market. Various strategic tools like PESTEL and SWOT analysis have been performed in this study to gain understanding and knowledge about the micro and macro environment factors having an impact on the company and how it has managed to become profitable and sustainable in the given market environment. Market Identification Volkswagen Group operates its business in the global automotive industry and has successfully managed to maintain its leadership position in the market through effective management of available resources in the industry. Porter’s five forces model helps an organization to assess the competitive forces which exists within the industry (Hill & Jones, 2012, p. 49). The forces which help in the process are named as a) threat of new entrants, b) threat from the substitute products or services, c) bargaining power of the suppliers, d) bargaining power of the consumers, and e) competition within the industry (Society for Human Resource Management (U.S.), 2006, p. 38-39). As regards the Volkswagen Group, comprehensive analyses of these market forces existing in the global automotive industry have been discussed as given below: A. Buyer Power: The buyer power in the automotive industry is weak because it is mainly dominated by a small number of car manufacturers like Volkswagen, Ford, and General Motors. The primary buyers are the dealers and they are forced to sell the product brands that are preferred by the consumers in a particular market. Moreover, it is difficult for the dealers to integrate backwards because of different nature of the industry that requires high capital investment to manufacture products that are sold by them to the end customers. B. Supplier Power: The key inputs that are required by the automobile manufacturers like Volkswagen include certain commodities like metals and other fabricated components. These raw materials are sourced by the car manufacturers from outside suppliers who are mostly large multinational companies having a strong presence in the market. This increases the supplier power in the market. However, the supplier power is weakened due to low differentiation of raw materials required by the car manufacturers. Hence, overall the supplier power is moderate in nature. C. Threat of New Entrants: If we speak of the threat of new entrants in the market it can be adjudged as low because brand value plays a vital role in the industry and it is difficult for the new players to establish their brand reputation immediately after entering into the market. Companies like Volkswagen have high brand recognition of their products which is an indication of high sales volume and dominance in the market. D. Threat of Substitutes: The substitutes to cars could be used vehicles. The recent economic downturn had an adverse impact on the automotive manufacturing industry and consumers were found to curtail the purchase of new cars and preferring old used cars. Availing public transports can also be regarded as substitutes. However, with the increasing impact of new emission standards and technological advancements, buying new cars could be more economical for the consumers in the long run. Hence, the threat of substitutes is moderate in the market. E. Rivalry amongst the Competitors: The number of large multinational organisations like Volkswagen that are found to operate in the automotive industry is limited. This intensifies the rivalry amongst the competitors. However, product differentiation helps to lessen this intensity to some extent. Nevertheless, the market players are constantly trying to increase their market share and thus the degree of rivalry is quite high. The analysis of the global automotive industry suggested through the Porter’s five forces framework indicates that Volkswagen is already a leading market player and they have managed to counter the market forces effectively to further strengthen its brand value. The company’s target market is wide depending on the large variety of brands owned by them. Each, of the brands of Volkswagen is designed to cater to specific needs of a particular customer segment. Recently, the company is found to show its intentions to increase their market share in the third world countries of China and India through the introduction of cars of affordable prices manufactured by them (Radu, 2012). All these factors suggest that Volkswagen is all in course towards successful implementation of strategies to expand its market globally and maintain its leadership position. PESTEL Analysis The external environment in which Volkswagen operates its business activities can have a significant impact on its growth and sustainability in future. The various external environmental factors that can have an impact on the company and its corresponding automotive industry can be better understood through the PESTEL analysis. It stands for Political, Economical, Social, Technological, Environmental and Legal factors concerning the organization (Henry, 2008, p. 51). The PESTEL analysis presented here corresponds to the various macro-environmental factors of UK that are having an impact on Volkswagen Group and its business operations in the country. A. Political Factors: The political factors represent the current political scenario of the country. It includes factors such as political changes, tax policies, changes in the restriction of trades, tariffs and the stability of the government. The political system of United Kingdom is a constitutional monarchy and also a parliamentary system (Central Intelligence Agency, 2012). On the whole the country is politically stable. Hence, Volkswagen has favourable political condition in UK to carry on its business activities in an effective manner. However, the company needs to be vigilant about any changes in government rules and regulations that may occur in future so as to minimise its adverse effects on the business operations carried on by the organisation. Consumer demand related to safer cars or environmental concerns has an influence on the political scenario of an economy (Lee, et al., 2009). B. Economical Factors: The economic factors include interest rates, gross domestic product, inflation rate, unemployment rates and growth rate of the economy. The economy of UK is one of the largest economies around the world. The official currency of UK is British pound sterling. It is ranked at the 6th position in the context of world economy. UK is also considered as a country of high production. The other important sectors of UK include agricultural and fishing, tourism and finance. UK is also the first country that introduced the concept of industrialization in the early 18th century. Hence, it is an ideal situation for Volkswagen to expand its business in UK and impart good economies of scale in the country which can help it to maintain its leadership position in the market. However, changes in certain economic factors like the interest rate can have an impact on the cost of capital of the company and the export revenues could be affected through changes in foreign exchange rates. C. Social Factors: The social factors include trends in demographics such as population size, age, cultural factors and consumer activities. The culture of UK refers to the idiosyncratic cultural norms. The native language of the country is English. It is characterized by the existence of different type of consumers in the market. Societal factors plays an important role as it is the only driving factor for the change in the market characteristics. Even the market can be segmented by making use of the societal factors such as gender, age etc. As regards Volkswagen, the increasing aging population in UK could be an area of concern which it needs to address carefully so that it does not have a negative effect on the company. D. Technological Factors: Technological factors include rate of new product development, increase in process automation and other technical infrastructures such as technology inducements, technology transfer, and impact of internet and R & D activity. In UK technology is one of the central parts of any business. They make heavy use of technology in almost every sector. The ‘European innovation scoreboard’ rank UK as the country which incorporates maximum innovation in its business strategies. Hence, it is a great opportunity for Volkswagen to build upon its strengths and manufacture innovative products in the market using the available advanced technologies. E. Environmental Factors: Environmental regulations in the country are tightening up. The UK government is committed towards meeting the targets of greenhouse gas emissions in the country thereby helping to curb the negative impacts of global warming. Volkswagen seems to have reacted to this macro-environmental condition in an effective manner by introducing electric hybrid vehicles in the market. Moreover, the R&D of the company is also quite strong to address concerns related to fuel emissions from cars manufactured by them. F. Legal Factors: The various legal factors prevalent in a country that can have an impact on the automotive industry or on the Volkswagen Group in particular include consumer law, discrimination law, employment law, antitrust law, safety law, etc. All these factors can have an impact on the operational process, product demand and the productions costs of an organisation. As regards United Kingdom, it has a well structured legal framework and well defined guidelines for operating business activities by any organisation. Volkswagen is observed to have complied with all the rules and regulations of the country to effectively manage all its operations. The products manufactured by Volkswagen all go into the patented process and abides by the laws of the country. There are no significant legal issues concerning the company at present. SWOT Analysis SWOT analysis is a strategic tool that could be helpful in evaluating the strengths, opportunities, weaknesses and threats involved in the business operations followed by Volkswagen (USDA, 2008). It could thus help in gaining understanding about the key strengths developed by the company and how it is capitalising on the external opportunities to maintain its leadership in the market. A. Strengths B. Weaknesses Strong portfolio of brands Strong position in the market Extensive focus on research & development (R&D) process Product quality lapses hampering the company’s reputation Cancellation of strategic alliance with Suzuki C. Opportunities D. Threats Strategic acquisition of Porsche Emerging market in Asia Increasing demand of trucks Increasing demand of hybrid electric vehicles Intense competition in the global automotive industry Regulations related to environmental protection A. Strengths: One of the major strengths of Volkswagen is the strong portfolio of brands that it possesses. The product offerings of the company consist of a good blend of different brands of family cars and luxury cars. The Volkswagen Group owns ten brands of cars spread over seven countries in Europe. They are: a) Volkswagen Passenger Cars, b) Skoda, c) Audi, d) Bentley, e) SEAT, f) Scania, g) Volkswagen Commercial Vehicles, h) Bugatti, i) Lamborghini, and j) MAN. Each of these brands have their own identifiable characteristics and has been positioned according to the specific needs and requirements sought by the company’s potential target customers located in different market segments in various countries of the world. The product mix of the company consists of a wide range of cars that have varied price range. Thus, the existing extensive brand portfolio of Volkswagen helps it to reach out all the major target customers in the global automotive industry. Along with its large brand portfolio, the company has also been successful to expand its business globally in an extensive manner. If we look at the global market share it can be found that the company enjoys around 12.3% market share in terms of deliveries. Moreover, it has strong market share in each of the geographies where it operates its business. This helps the company to enhance its brand image and gain competitive advantage in the market. The company is found to have strong focus on R&D that helps to further improve its brand portfolio and improve the quality of their products. This helps the company to have a strong hold on technologies implemented in most of its product segments as well. B. Weaknesses: Volkswagen has already developed a strong brand image for its products in the global automotive market. However, the recent recall of a number of vehicles by the company in the fiscal year 2011 might have had an adverse impact on its reputation in the market. This can even have a negative effect on the confidence levels of its customers and in turn can lead to the reduction of profitability of the organisation. Apart from this, recently in the year 2011, the strategic alliance of Volkswagen with Suzuki got cancelled. This alliance was made with the objective of strengthening the position of Volkswagen in the small car segment of India. Hence, this termination of contract with Suzuki can hinder company’s strategic initiative to capture the growing Indian small car market. C. Opportunities: A series of comprehensive agreements have led to the acquisition of Porsche by Volkswagen and it has been integrated into the company’s business in a planned manner. This is a great opportunity for the company to increase its profitability in a significant manner. This planned integration of Porsche is expected to increase the effectiveness of company operations in both the cost and income sides. The profit margins of Porsche when it worked independently were quite high and thus its acquisition would help Volkswagen to expand its premium cars portfolio, especially with the inclusion of Porsche 911 sports car which offers strong earnings. Next if we look at the global truck industry, it can be found that a consistent growth has been recorded in the market in the recent past and it is expected to grow further at a moderate rate in the forthcoming years. Volkswagen already has a strong presence in this business segment in the form of Scania and MAN branded heavy vehicles. Hence, the growing demand in the trucks industry can be helpful for the company to further increase its market share in this automotive division. Moreover, the growing trends observed in the automobile market of some of the Asian economies like China and India proves to be a great opportunity for Volkswagen to capitalise on these markets and further increase its revenue and profit generation. There has been an increasing global demand for hybrid electric vehicles as well. Hence, it is an added opportunity to lay emphasis on this market segment and develop new hybrid electric vehicles to further strengthen its market position. D. Threats: The major threat for the company is the existing high intensity of rivalry amongst the competitors in the global automotive industry. This competition is expected to get further intensified as a result of the increasing impact of consolidation and globalisation in the automotive industry worldwide. The influential factors responsible for this rising competition include Product features and quality, customer service, reliability, safety, pricing, financing terms and fuel economy. Some of the major competitors of Volkswagen include Hyundai Motor, Toyota Motor, Mitsubishi Motor, Nissan Motors, Fiat, General Motors, etc. Hence, the increased competition can have an impact on the company in reducing its market share and pulling down its current profitability position. Apart from this, Volkswagen’s major threat is the growing regulations related to environmental protection. New emission standards are coming up in many of the countries where Volkswagen operates its business activities and it has to comply with all those standards. This might result in additional costs to be incurred by the company in its product development process which in turn can have an adverse impact on the profit margin of the organisation. Conclusion Volkswagen AG is considered to be the market leader in the global automotive manufacturing industry at present. The findings and analysis of this study indicates that the company has managed to implement its business strategies successfully to maintain its leadership position in the market. The brand value of all the company are quite high and its revenues and profitability has been increasing in the recent years. It has gained competitive advantage through its differentiation strategy wherein it has been able to produce a strong portfolio of products for itself. Each of the branded products of the company is designed to cater to the specific needs and requirements of a particular target customer segment of the company. Moreover, its expansion strategy is also working well as evident from the various successful acquisition and partnership deals made by the organisation. The company is found to have made significant investments in R&D which have resulted in the company being able to develop innovative products using latest technologies thereby differentiating its product offerings. Overall it can be adjudged that Volkswagen Group has a good brand image of its products and a global market leader and has successfully managed all its internal and external environmental factors to be able to utilise its available resources in an effective and efficient manner. References Central Intelligence Agency, 2012. The World Factbook: United Kingdom. [online] Available at: [Accessed 7 December 2012]. Henry, A., 2008. Understanding Strategic Management. New York: Oxford University Press. Hill, C. W. L., & Jones, G. R. (2012). Strategic management theory: An integrated approach. Connecticut: Cengage Learning. Lee, J., et al., 2010. Forcing Technological Change: A Case of Automobile Emissions Control Technology Development in the US. Technovation, 30(4), pp. 249-264. Radu, M., 2012. Volkswagen to Target Emerging Markets with Low-Cost Sub Brand. [online] Available at: [Accessed 7 December 2012]. Society for Human Resource Management (U.S.), 2006. Essentials of strategy. Boston: Harvard Business Press. USDA, 2008. SWOT Analysis: A Tool for Making Better Business Decisions. Washington D. C.: USDA. Volkswagen, 2012. Annual Report 2011. [pdf] Available at: [Accessed 4 December 2012]. Yahoo Finance, 2012a. Volkswagen AG (VOW3.DE): Profile. [online] Available at: [Accessed 4 December 2012]. Yahoo Finance, 2012b. Volkswagen AG Company Profile. [online] Available at: [Accessed 4 December 2012]. Read More