The Strategic Position of Volkswagen - Essay Example

? Volkswagen Executive Summary The objective of this paper is to comprehensively examine the strategic position of Volkswagen, which is one of the foremost automakers in the global arena. In assessing the strategies of the company, the paper categorizes the analysis of the subject in terms of discussing the strategic direction and critically evaluating the company strategy in terms of its suitability, acceptability, feasibility and sustainability. The external analysis is aided by the incorporation of PESTEL analysis, Porter’s five forces analysis and the industry life cycle. Internal strategic capabilities of the business are understood by the implementation of VRIN analysis, value-chain analysis and SWOT analysis. Additionally, the paper also discusses the company’s SBUs and growth strategies to assist the creation of a clearer stance on the development of Volkswagen’s strategic direction. Appraisal of strategic decisions is also conducted to provide direction for further considerations and research. Recommendations focus on the expansion of Volkswagen in developing markets by application of current strategies and the enhancement of its position in the markets of India, China and Brazil. 1. Introduction As one of the key players in its industry, German automobile manufacturer Volkswagen stands as the 14th largest company in the world according to Forbes (2013). Relying on the foundations of advancing corporate social responsibility and sustainability through its operations, Volkswagen’s mission extends to the provision of customer satisfaction, which is a practice that the company hopes would lead to its attainment of the first position in the global automotive industry by the year 2018. For the purposes of realizing its objectives, the company implements and follows what is known as a group strategy across its departments in order to fulfill its aim of recording 10 million sales of automobiles in a year and generating a pre-tax profit margin of 8% (Volkswagen 2011). This report comprehensively covers the aspects of Volkswagen’s strategic position and strategic direction in addition to a critical evaluation of Volkswagen Group’s strategy to highlight the company’s path in meeting its long term objectives effectively. 2. ANALYSIS OF STRATEGIC POSITION 2.1 External Analysis In examining the external position of Volkswagen Group, this section of the report utilizes the evaluations of tools such as the PESTEL analysis, Porter’s Five Forces analysis and the industry life cycle. 2.1.1 PESTEL ANALYSIS POLITICAL The UNECE agreement introduced in 1958 was initiated by the EU to provide an incentive to automakers operating within the political region by diminishing compliance costs. While, the UNECE agreement is critical to enhancing Volkswagen’s cost efficiency the Cars 2020 reform proposed by the EU will allow the company to expand its geographical reach (European Commission 2013). ECONOMIC Following the global economic downturn, analysts such as Pearson (2013) are predicting a gradual and steady recovery in Europe’s demand for automobiles which had diminished to a great extent. Both the consistency in demand for cars outside of the EU and a revival in demand within the EU is a positive sign for Volkswagen Group. SOCIAL The market positioning of Volkswagen’s brands has significantly assisted its aim of catering to the unpredictably of social transitions and changes in consumer preferences. By balancing cars that offer great value and automobiles such as the Phaeton that is designed for the high-end customer, Volkswagen Group is greatly equipped with facing any amendments with regards to social factors. TECHNOLOGICAL Volkswagen has increased its investments in R&D and constant innovation owing to the competitiveness of the automobile industry. The relentless efforts of the company’s R&D and innovations department have led to the development of technologies such as BlueMotion, Assistance systems and TDI. ENVIRONMENTAL Volkswagen’s intensive promotion of its ‘Eco Logical’ concept is reflective of its commitment to the environment and the advancement of sustainable solutions. Development of cars such as e-Golf that reduce CO2 emissions and operate under the E-Mobility program has been undertaken for revamping the concept of hybrids. LEGAL Compliance and obedience of EU regulations with regards to the environment, trade practices and company operations must be undertaken by Volkswagen. The strictness of EU environmental laws has been criticized by various automakers as a response to which a reduction in the carbon emissions fines that is levied against companies is expected by 2015 (Abboud & Taylor 2008). 2.1.2 PORTER’S FIVE FORCES ANALYSIS THREAT OF NEW ENTRANTS The establishment of dominant automakers within the industry such as Honda and Toyota has been present for a substantial period thereby, making the entrance of new companies a difficult task to achieve. Additionally, the incidence of high costs of entry and exit within the industry further reduces the competitive risk of new entrants. THREAT OF SUBSTITUTES Extensive innovation in the development of new technologies provides companies with an unparalleled edge. Volkswagen’s exclusive offerings such as TDI technology and BlueMotion have reduced the threat of substitute products. POWER OF BUYERS Volkswagen’s automobiles are sought by consumers who wish to invest in cars that offer high value. The buyer of power can be categorized as relatively high because they can choose to invest in automobiles being offered by manufacturers such as Toyota and Honda. POWER OF SUPPLIERS Creation of excellent supplier relationships stands as an important procurement strategy of Volkswagen to ensure the effective performance of the production network. According to Volkswagen (2012) the availability of several suppliers in the market is responsible for low bargaining powers of suppliers. 2.1.3 INDUSTRY LIFE CYCLE Examinations on industry life cycle of the automotive industry are suggestive of the observation that automobile industries in various parts of the world are currently standing at different stages of the industry life cycle. According to Orsato and Wells (2007) fundamental rationales into the stages of the automotive industry reflect the significance of technology in the industry and also point towards the possibility of inactivity, revolution and decline. While, the global economic downturn drastically reduced the demand for automobiles in Europe, geographical regions of Brazil, China and India saw a boost in sales of automotives which is suggestive of a growth stage. The industry life cycle of Europe’s automotive industry however, stands at the maturity stage where few, large and dominant firms that are generating revenue from “cash cow” products are visible in the market. 2.2 INTERNAL ANALYSIS Volkswagen Group aims to implement thorough frameworks for addressing the internal operations and issues of the organization. This framework is characterized by features of accountability and risk-taking to effectively address the instability of external changes that are not within the organization’s control (Volkswagen 2007). The Group Internal Audit holds the responsibility of reviewing the decisions that are taken within the company with regards to the incidence of risk factors and ensuring that the management and employees follow standard guidelines in conducting business, this procedure of internal audit is in turn governed by KonTraG while, its financial aspects are regulated by BaFin (Volkswagen 2007). 2.2.1 STRATEGIC CAPABILITIES Resources Competences Threshold Capabilities Manufacturing: Cost efficient production Financial Strength: Outlay in R&D and New product development Innovation and R&D: Technological innovations and inventions – BlueMotion and TDI Threshold Resource Tangible: Financial assets, Production Plants, Research Personnel Intangible: Thorough research into needs of customers Threshold Competencies Volkswagen’s automobiles are manufactured to accommodate unique needs of customers Production of automobiles that deliver best possible performance Strategic Capabilities Manufacturing: Plant relocations for savings in cost Financial Strength: 41% increase in 2012 profits Innovation and R&D: Research bases located in U.S, China and Japan Unique Resource Tangible: Professional groups to promote employee growth Intangible: Taking advantage from industry cooperation in various fields Core Competencies TDI technology helps performance optimization and enhances sustainability Promoting customer satisfaction 2.2.2 VRIN ANALYSIS 2.2.3 VALUE CHAIN ANALYSIS Primary Activity Description Inbound Logistics Raw materials and automobile parts Operations Manufacturing Outbound Logistics Multimodal Logistics Centre, Local dealerships Marketing and Sales B2C Market research to assess customer needs Test drive options Exhibitions and demonstration Service Separate Warranty periods for car body and additional components Maintenance after purchase Secondary Activity Description Procurement -Optimization of manufacturing processes -Ensuring reliability of supply of procured materials on regular basis - Handling supplier relations Human Resource Management -Employee development programs - Launch of ‘Components Academy’ Technology Development Cooperation with researches and trendscouters Technological innovations ‘Research Bases’ in three locations Infrastructure More than 100 manufacturing plants Green logistics network Dealers and Distributors Associations with suppliers 2.2.4 SWOT ANALYSIS STRENGTHS Key automobile manufacturer Wide product portfolio Brand recognition Presence in developing markets Value for money and quality offered WEAKNESSES Weak position in US market Fading position in some markets OPPORTUNITIES Merger with Porsche Developing automobiles for changing customer preferences Revival of demand in Europe THREATS Unstable Economic environment EU laws and regulations for automakers 3. ANALYSIS OF THE STRATEGIC DIRECTION 3.1 STRATEGY CLOCK The proposal of the strategy clock by Bowman and Faulker (1996) provided an effective tool in assessing the strategy of a business on the basis of price and perceived value, thereby, generating a host of selections in examining the strategic direction of the business (Needle 2010). As per the observations into Volkswagen’s operations and adopted strategies, it can be noted that the company’s strategy lies on the region of 3 and 4 thereby, focusing on hybrid and differentiation strategies respectively. Needle (2010) notes that followers of a hybrid strategy charge low prices while emphasizing on differentiation, this view appears to be appropriate with regards to the automobiles manufactured by Volkswagen that offer good value to customers at suitable prices and decent quality. The prices charged by Volkswagen for its automobiles however surpass those of manufacturers such as Chevrolet and Tata which means that the categorization of Volkswagen on the strategy clock is inspired by the provision of overall customer satisfaction and value as Volkswagen also differentiates its products by investing in innovation and exclusive technologies while maintaining suitable price ranges. 3.2 ANSOFF MATRIX Owing to the uncertainty of the European automobile market, Volkswagen Group advanced certain growth strategies in accordance with the application of the Ansoff Matrix to determine the strategic path of the organization. Market Development: According to Volkswagen (2013a), the company extended its deliveries to new markets of China and North America, deliveries of automobiles to China showed significantly positive results in the month of January, 2013 while a reduction was observed in succeeding month. Furthermore, deliveries of orders in North America are improving for the automobile manufacturer. The market development initiative of Volkswagen Group has extended to the region of Asia-Pacific and sales in India have been generating a positive trend as well as a consequence of the market development effort (Volkswagen 2013a). Product Development: Product development in the field of environmentally friendly automobiles has been taken into great consideration at the Wolfsburg plant of Volkswagen; these automobiles efficiently meet the standards of technical development objectives for environmental sustainability (Volkswagen 2013b). Fuel and Powertrain strategies also assist product development. Diversification: Volkswagen Group has diversified into the truck sector by becoming the major shareholder of Swedish truck manufacturing group Scania. 3.3 PORTFOLIO ANALYSIS In assessing the strategic business units (SBUs) of Volkswagen through the Boston consulting group matrix, the brands of Bentley, Scania, Audi, Skoda and Seat will be discussed. The SBUs of Volkswagen Group can be categorized on the basis of star, question mark, cash cow and dog. In accordance with the market analyses the brands can be divided on the basis of market growth rate which is either high or low and the relative market share which is divided as high or low. As one of the brands of Volkswagen Group, Bentley is the star SBU which enjoys a high market growth rate and relative market share. The brands of Scania, Audi and Skoda are question marks for the organization because even though the market growth rate is high the brands have not been able to capture a high market share. For Volkswagen Group, Seat can be categorized as a dog because of low market share and low market growth. 4. CRITICAL EVALUATION OF STRATEGY 4.1 SUITABILITY Volkswagen Group’s strategy is marked by the development of the automaker’s market and expansion into various geographical spheres. The rationale behind the strategy aims to drive Volkswagen’s mission of becoming the foremost automaker on a global scale. Evaluations of the organization’s SWOT analysis suggest that the vast product portfolio of the business and its recognizable brands have the ability to capture significant market share in the developing markets of India, China and Brazil. 4.2 ACCEPTABILITY The strategic plan of Volkswagen must be agreed upon by the stakeholders of the business, an understanding of this would assist the implementation of the proposed framework. Concerns such as outsourcing and relocation must be assessed, such as the relocation of production plant to Tennessee for savings on wages. 4.3 FEASIBILITY Volkswagen recorded a 41% increase in profits for the year 2012 and measures of enhancing cost efficiency were thoroughly practiced. The feasibility of implementing Volkswagen’s strategies would be dependent upon the assessments of its financial position as reflected by company forecasts and projected demanded. Revival of the European market in the next 5 years is a sign of hope for Volkswagen’s strategic feasibility (Pearson 2013). 4.4 SUSTAINABILITY Sustainability is a dominant feature of the strategic direction being undertaken by Volkswagen in meeting its corporate objectives and mission. The development of ‘Eco Logical’ solutions to innovations and automobile manufacturing is the key to addressing the sustainability of strategy at Volkswagen. 5. CONCLUSIONS 5.1 CONCLUSIONS Volkswagen’s Group strategic direction has been praised by several analysts but has also been seen with skepticism by various commentators who assert that its expansion plans in the U.S market do not hold significant credibility. Issues with market penetration in the European market that have arisen as a consequence of a reduction in demand for automobiles and economic instability pose problems for Volkswagen in the achievement of its mission. Nonetheless, Volkswagen’s performance in certain markets is reflective of its strategic success. 5.2 RECOMMENDATIONS Volkswagen Group’s strategic direction has proved to be beneficial for the company’s progress in recent times. The expansion of its operations in developing markets of India, China and Brazil presents several opportunities for the company in achieving its mission of becoming a leader in the global automotive industry and therefore, must be capitalized upon for future success. BIBLIOGRAPHY Abboud, L. Taylor, E. (2008). ‘EU Seen Weakening Emission Laws for EU Automakers’. The Wall Street Journal. Web. Retrieved 17th June, 2013 European Commission (2013). ‘Helping EU car manufacturers going international – Worldwide car approval under preparation’. Enterprise and Industry. Retrieved 17th June, 2013 Forbes (2013). ‘The World’s Biggest Public Companies’ Forbes. Web. Retrieved 17th June, 2013 Needle, D. (2010). Business in Context: An introduction to business and its environment. South Western Educational Publishing. Orsato, R. J., & Wells, P. (2007). U-turn: the rise and demise of the automobile industry. Journal of Cleaner Production, 15(11), 994-1006. Pearson, D. (2013). ‘European Car Makers See Signs of Relief’. The Wall Street Journal. Web. Retrieved 17th June, 2013 Volkswagen (2007). ‘Annual Report 2007’. Volkswagen Group. Web. Retrieved 17th June, 2013. Volkswagen (2011). ‘Annual Report 2011’. Volkswagen Group. Web. Retrieved 17th June, 2013. Volkswagen (2013a). ‘Newsroom’. Volkswagen Group of America. Web. Retrieved 17th June, 2013. Volkswagen (2013b). ‘Company’. Volkswagen Group. Web. Retrieved 17th June, 2013. Volkswagen. (2012). ‘Procurement’. Volkswagen Annual Report. Retrieved 17th June, 2013 Read More