Volkswagen strategy
...stors move their money to companies that deliver higher returns, or of being swallowed up by competitors. While the benefits of scale-driven cost leadership are more easily to understand, the benefits of a strong brand premium can also reach astonishingly high levels. Prices for cars with basically identical features and performance can vary widely depending on the value attached to the brand. For example, in the lower executive segment in the German market, prices range from DM 33,000 for a Daewoo Nubira to DM 51,000 for a Mercedes-Benz C180. Even taking the higher costs of developing and making a quality, premium product into account, profit margins in this segment can outweigh those in the mass market by factors of 3 to 5. Looking at this "game of the 90s" in terms of companies' overall potential to increase investors' long-term expectations, we see that the capital markets clearly reward transformational strategies. Successful volume players, on the other hand, face different challenges. They need to look at the future of their sales networks. Is regional market share still a decisive factor when advanced information technology and the Internet are dramatically transforming the future of sales networks? They also need ask whether significant economies of scale are really possible above 3 million units, assuming that four to five platforms are sufficient to cover all product segments. Opel's advanced production concepts like efficient, easily replicable small-scale factories show that the size imperative in assembly can be reduced. In this perspective, the asian manufacturers are often taken as an example. Strategic Group Map for the Automotive Industry • Mergers, acquisitions, alliances… This kind of strategy enables a firm to acquire a critical size and to posess several brands. Thus it is more easy for the company to face the commercial failure of a model. Moreover, risks are divided thanks to a worldwide presence. If for instance the demand is low on the European market, the company can focus on the American market. Finally, Research and development costs, for example, are paid off over a larger number of cars. This kind of practice leads to the following market repartition (in 2001): Gm + Saab + Isuzu + Subaru + Suzuki + Fiat + Daewoo = 22.8 % global market share Ford + Mazda + Volvo = 16.8% global share VW + Audi + Skoda + Seat = 9.4% share Toyota + Daihatsu = 9.2% share Renault + Nissan = 8.7 % share DaimlerChrysler + Smart = 8.3% share All others = 24.8 % share Exemple of a famous merger : DAIMLER & CHRYSLER Both sides of the Atlantic have almost unanimously welcomed the gigantic merger between the German Daimler-Benz and the American Chrysler. It was the birth of the third largest automobile group after General Motors and Ford. However, in spite of a 20% increase in net profit, the share value has been divided by two in one year. When Jürgen Schrempp presented the company results, he tried to seduce the investors boasting that new surprise acquisitions could happen this year. He also announced proudly that Daimler Chrysler would play an active role in the consolidation process of the world automobile industry. But the sanction was clear: investors were afraid by this race to investments and acquisitions while the group did not even manage to digest its own merger. We can sum up the present situation to the takeover of the Chrysler general staff by the Mercedes top managers. It leads to the resignation of many good American managers, the one that had made the recovery of the firm. The mistake of thinking always bigger – which had already negative effects on Daimler Benz in the past, is hidden by the excellent conjuncture in the automobile sector, in Europe as well as in North America. But many hazards are looming ahead. • Delocalization and globalization First of all, it’s a consequence of the point above. Indeed, mergers, acquisitions, joint ventures, alliances is a way for the firm to grow international. Moreover, delocalization enables car manufacturers to buy pieces at a low price. All they have to do afterwards is to assembly them. It thus leads to cost-savings. II. Internal Analysis II.1. Fundamentals anlysis II.1.1. Identity and history of Volkswagen The "Gesellschaft zur Vorbereitung des Deutschen Volkswagens mbH" is founded on 28 May 1937, and is renamed "Volkswagenwerk GmbH" on 16 September 1938. This firm was marked by the second world war history. After the end of the Second World War, responsibility for what remained of the Volkswagen Company and its facilities is transferred to the British Military Government in mid-June 1945. Within two years, the Dutch importer Pon's Automobielhandel handles the first commercial export of Volkswagen. "Volkswagen-Finanzierungs-Gesellschaft mbH" is founded on 1 June 1949 so as to expand sales on the domestic market. Series production of the Type 2 starts in 1950 and extends the product range. The Volkswagen Transporter or Volkswagen Bus enjoys a rapidly growing popularity thanks to its multifunctionality. The first step in the process of internationalizing the company's operations is taken on 11 September 1952 with the establishment of "Volkswagen Canada Ltd." in Toronto. After the sales of Volkswagen on the US market began increasing by leaps and bounds, "Volkswagen of America, Inc." is formed in 1955. In order to consolidate its position on the South African market, Volkswagenwerk GmbH acquires a minority stake in the general importer "South African Motor Assemblers and Distributors Ltd." (SAMAD) on 8 June 1956. SAMAD is renamed "Volkswagen of South Africa (Pty) Ltd." in January 1966. By acquiring Selbstfahrer-Union, the largest car rental agency in Germany, the Volkswagen Group reinforces its commitment to an up-and-coming new business in March 1970. The subsidiary, renamed "interRent Autovermietung GmbH", is merged in 1988 with Europcar to form "Europcar International S.A.". In 1972, the Beetle breaks the legendary production record of the "Tin Lizzy”. The Passat is produced in May 1973 as the first model in the new Volkswagen. The Passat is closely related to the Audi 80 in its technical design that leads to raionalization thanks to standardized components which can be used in various models. The Volkswagen Group forms a number of companies in East Germany beginning in December 1990, including "Volkswagen Sachsen GmbH" with its new Mosel plant. VOLKSWAGEN AG receives approval by the Czech government for the takeover of the venerable "ŠKODA, automobilová a.s.". Brand recognition promised good access to the car markets of Eastern-central and Eastern Europe. To optimize its organizational structures, VOLKSWAGEN AG merges its financial services in 1991 under the umbrella of "Volkswagen Finanz GmbH", which is transformed into a stock company on 1 January 1994. As a bank, "Volkswagen Financial Services AG" has access to the international financial markets, enabling access to the lowest-cost financing on a world-wide basis. In 1993, the Volkswagen Group counters the slump in its North American business by adopting a comprehensive strategy of restructuring and reorganizing. Following the principle of "quality before quantity", the Group's facilities in Puebla are transformed into an efficient manufacturing facility characterized by "lean production" and a high "local content". II.1.2. Culture As we pointed out above, Volkswagen wants to sell high quality products which respect the environment. The German company spends a lot of money in research and development. Other values are omnipresent in this firm’s culture: - A specific relationship with the consumer: Volkswagen maintains a human relationship with its clients. It develops proximity services and in order to evaluate their satisfaction, they are systematically sounded after a purchase. Their answers will be a way for executives to identify the strengths and weaknesses of the products and to develop loyalty of consumers. - Human resources: Volkswagen develops intern mobility. The group wants to develop intellectual and geographical mobility. The training of the employees in various fields (computers, management, languages…) is significant. - Environment: Besides, probably because of its German origin, Volkswagen leads a dynamic environmental policy. Indeed, Volkswagen was co-organizer of the Earth summit in Rio de Janeiro and its factory in Emdem was the first one to obtain the norm ISO. II.1.3. Volkswagen’s Mission and knowledge The main activity of the group Volkswagen is to build and market cars. Thanks to its different purchases, the group proposes a sizeable range of cars. Moreover, there have been selling commercial vehicles since 1938. Furthermore, in order to face a growing competition, Volkswagen has also diversified its activity. Indeed, the Volkswagen Group is becoming a mobility provider, and its broad spectrum of services includes financing and leasing business through its financial services division. It also provides one of the leading information technology consultancies in Germany. This diversification of the business units aims at increasing the world fame of the company. Nevertheless, the significant decline of the sales revenue of the group in 2002 (- 2.2 %) question the efficiency of this strategy. II.1.4. Volkswagen’s Acquisitions o Audi: Created in 1909 by Horch, Audi is bought by DKW in 1928. In 1932, Audi, Horch, DKW and Wanderer merged and became Auto Union. The four rings, Audi’s current logo symbolised these four firms. In 1958, Daimler-Chrysler bought 88% of the capital of Auto Union and Volkswagen raised it seven years later. In 1969, the group NSU and Auto Union merged in Audi NSU Auto Union, of which Volkswagen owns 59.5% of the capital. o Seat: Seat was created in 1950 under the name of the Sociedad Espanola de Automoviles de Turismo. This Spanish firm made an agreement with Fiat and produced under license. In 1981, it is a state owned company. It then enters progressively into Volkswagen’s group. In 1986, Volkswagen bought 75% of the capital of the Spanish company. o Skoda: At the beginning of the century, Skoda was rather specialised in the production of raw materials. Yet, in 1990, the Czech government authorized Volkswagen to buy some parts in the Czech group. It acquired 31% of the capital of Skoda and took its control in 1991. o Lamborghini: Ferrucio Lamborghini, a modest farmer who was fascinated by mechanics, created his first firm in 1949. After the success of his tractors, he launched his company in the sector of cars of big tourism. It was in 1964 with the marketing of Miura that the name Lamborghini was known all over the world. In 1989, Lee Iaccoca, president of the group Chrysler, bought the group which became in 1978 a public company because of its debts and he launched the model” Diablo”. In 1998, the Volkswagen group acquired Lamborghini and the new Murciélago was commercialised. o Bugatti: The Bugatti family is famous worldwide thanks to its huge artistic talents. And its car construction played a sizeable role in this fame. The Bugatti myth has begun its light decline since Ettore Bugatti’s death in 1947 and since the selling of the Molsheim plant in Hispano-Suiza in 1963. The Italian brand has tempted to bounce with the launching of the Bugatti EB110 in 1988 but the grave financial issues of the firm precipitated the end of the company in 1995. The Volkswagen group, new owner of the brand since 1998, is maintaining the suspense concerning the future of the mark by reporting the launching of the Bugatti Veyron. o Rolls-Royce: Charles Stewart Rolls and Frederick Henry Royce, who came from very different backgrounds joined their forces in 1904 to build and sell motor cars. Two years later, appeared the Rolls Royce Silver Ghost: the car was acclaimed as the "best in the world". The first car was a success; it started easily, ran smoothly and was very reliable. During all the century, Rolls Royce was considered as the jewel of the British car industry and that’s why when it was acquired in 1998 by Volkswagen many people considered that it was the end of the car industry in the United Kingdom. The purchase by the German group in 1998 was rather stormy and expensive because Volkswagen was in competition with another German group, BMW which was really determined to obtain Rolls-Royce. Since last January, BMW is the new owner of the English brand according to an agreement signed in 1998. o Bentley: After its numerous successes in racing since its foundation in 1919, this mythic English brand is acquired in 1931 by Rolls-Royce Ltd. During all the century, the firm has launched numerous famous models such as the Bentley T series or the Bentley Arnage T. As Rolls-Royce was acquired by Volkswagen in 1998, Bentley belongs to this German Group since this date. However, in spite of the purchase by BMW of Rolls-Royce, Bentley still belongs to the Volkswagen group, who wants to develop a “sports” range. General policy Volkswagen was initially created in order to offer cars which more people could afford. Furthermore, the group focuses on making quality cars: Volkswagen’s executives explain that the company aims at democratising excellence by following a low price policy. Volkswagen thus bought Skoda and Seat. Indeed, these two brands propose cars downmarket. Yet Skoda and Seat cars have benefited from the group’s know-how and technology and are now of better quality. As a result, it is possible to buy some cheaper good quality cars. However, the recent purchases in 1998 of the group are not coherent with this general policy. Indeed, by buying Rolls Royce, Bentley or Lamborghini, many specialists consider that Volkswagen departed from its first policy. II.1.5. Business Units Here are more specifications about Volkswagen’s various activities: This table presents the results of the different activities within Volkswagen, and allows us to understand more precisely what the main activities are. What comes up is that, despite the growing diversification of the group, the core activity ( Volkswagen cars) still accounts for more than half of the results. We can analyze results from a geographical point of view. It appears that, even though the automotive sector grows global, Volkswagen still makes most of its sales in Europe. II.2. corporate anlysis II.2.1. Strengths / Weaknesses Strengths Weaknesses VW is a market leader in Western Europe: Volkswagen today is the largest motor vehicle manufacturer in Europe (market share 18.8 %) and ranks third among car producers worldwide. (+++) the “sharing platform” strategy is significantly reducing cost (+++): a production method the Group pioneered in order to cut costs by sharing engineering and parts across brand lines and models. The number of platforms, the basic frames of a car, was reduced from 16 to 4 during the last years. The most important platform is the platform A or Golf platform, which is used for the Golf models, the New Beetle and the Skoda Octavia (Volkswagen AG, 2000). good market position in passenger car market (from Skoda to Bentley) (+++) strong research cooperation among brands (economies of scope): in the financial year 2001, the research and development costs of the Volkswagen Group charged to the income statement in the financial statements to IAS totalled 2,660 million € (- 21.5 %). efficient human resource management VW has long term-contracts with its suppliers who provide up to 60% of its components. From that it can be concluded that VW is pursuing an economy of scope and the goal is to maintain only the assembly line in a few years. extensive environmental management structure and control system which leads to a positive and trustful image dealership and retail sales network is too big and inefficient (---) VW is not good at serving niche demand such as cabrios and coupés (--) VW entered the Asian market without a partner. (--) the most important platform, the Golf platform, can’t support any more models (-) the production is based too much on the German production location and thus too expensive (-) multi-brand strategy and full range market presence is cost-intensive (--) high development costs and the difficulty to predict the market acceptance of the new products. This is mostly implicated in the high dependency of the car industry on customers’ preferences. The more innovative the technology and the more profoundly it changes the conventional concepts the bigger the cost and the respective risks are. (--) high operating costs for environmental protection: in 1998 the operating costs amounted to DM 169 million, with the major part being spend on waste management. Capital investments were concentrated on the prevention of air and water pollution and totaled DM 66 million. (-) (+++ “very strong”, ++ “strong”, + “not so strong”,---“very weak”, -- “weak”, -- “not so weak”) II.2.2. Analysis of the competitive advantages of the supply chain OPERATIONS ANALYSIS OF THE SOURCE OF COMPETITIVE ADVANTAGES Conception Transfer of technology and cost advantages among the individual brands of the group and strong contacts among the research engineers of the different brands. VW knows that a key to be competitive is to be innovative so it tries to launch new models as often as possible (New Beetle, Lupo VW). Human Ressource management Volkswagen employs several flexible working models and considers itself as a company with its own social cycle. Being aware of the importance of Volkswagen as employer for many local communities, they managed to avoid a massive lay-off by introducing the four-day-week. Volkswagen employees are motivated by the same goal (increase sales) and work together in order to reach it. Outsourcing VW has long term-contracts with its suppliers who provide up to 60% of its components. From that it can be concluded that VW is pursuing an economy of scope and the goal is to maintain only the assembly line in a few years. Management of the distribution network and Marketing strategy _ The company has established a huge dealership network all around the Western Europe (and pretty much all around the world) and is quite active in the e-sales field as well. _ Growth in sales, is achieved via new market segments and increasing differentiation (model strategy) _ Multi-brand policy (acquisitions): the VW Group aims to provide the market with a full range of products: from everyday and commodity cars (VW, Skoda, Seat) to very expensive luxury cars (Bugatti, Lamborghini) Management of the product image Environmental policy: Volkswagen takes into consideration and integrates various existing environmental guidelines. This gives Volkswagen’s products a positive image as most customers are nowadays concerned with environmental issues. Risk Management Risk management is well incorporated in the company’s strategy: systematic detection, analysis and control of risk II.2.3 Financial analysis Profitability Consolidated income statement by division Evolution In the financial year 2001 the Volkswagen Group achieved a profit before tax of 4,409 million € (+ 18.6 %). The return on sales rose by 0.5 percentage points to 5.0 %. The adjusted profit before tax totalled 4,532 million €, up 8.1 % on the comparable previous year's result. The adjusted return on sales was 5.1 (5.0) %. After deduction of income tax expenditure, the Group achieved a net profit for the year of 2,926 million € (+ 12.0 %). The effective tax rate increased against the previous year by 3.9 percentage points to 33.6 %. The reason for the low effective tax rate in the previous year was the one-off relief on deferred taxes resulting from the change of tax rate in Germany pursuant to the Act relating to the reduction of taxation dated October 23, 2000. Capacity Shareholder structure and dividend 4,1% of shares are owned by private shareholders; 23,3% by Institutional investors abroad; 13,7% by State of lower Saxony; 12,1% by Institutional investors in Germany; and 9,8% are treasury ordinary shares. II.2.4. Competitive position by Business Units With 2001 sales of 88,5 billion €, the Volkswagen Group is the largest automobile manufacturer in Europe and the fifth largest in the world. Today the Volkswagen Group stands for a wide-ranging brand portfolio – from Audi, Seat, Skoda and Volkswagen, to Bugatti and Lamborghini. Thus VW’s brand portfolio covers 75% of the total auto segments. Indeed Volkswagen follows a multi-brand strategy. This leads firstly to a global orientation of product policy of the brand with the aim of complete market coverage. That’s why the group try to have a distinct positioning of the brands through the creation of brand personalities. Moreover, there has been recently the expansion of the product portfolio. They have convincingly moved into the high-luxury segment of saloons and sports cars with Lamborghini and Bugatti. At the other end of the market, they moved into the mini class with cars such as the Seat Arosa and VW Lupo. Volkswagen has about 10 % market share in this specific sector of the market. Brands are differentiated, not only in terms of size and price classes. Above all it is a matter of emotions. BRAND POSITIONING: • Very high quality, innovation and the passion for perfection to the last detail determine the implementation of the Volkswagen brand guideline by the product. Volkswagen is positioned in the upper range as well as in the volume segments. Volkswagen has achieved a premium position in its traditional competitive environment. This relates to all image dimensions: model innovations, personality and character of the brand, motoring enjoyment and styling. Volkswagen is thus nowadays seen increasingly as a prestige brand. • Audi, with its visionary technology and design, breaks conventions. "Vorsprung durch Technik" is the mission of a great automotive brand positioned on the basis of technological innovations and outstanding design. • Skoda is the brand that offers high-value cars such as the Octavia and the new Fabia at attractive prices, models which are developing into success stories in Europe. • The Seat brand represents a combination of Spanish temperament with German engineering. The mission of the Seat brand „auto emoción", symbolises both the origin of the brand in the Mediterranean region and its claim to offer sporty vehicles. Besides, “Automotive joy of life” also plays an important part in the communication of the Seat brand. • Lamborghini is the sport cars brand of the Volkswagen group. Today , the Diablo GT with its 575-hp 6-litre engine is the fastest production sports car in the world. This car clearly embodies the mission of the Lamborghini brand: "The ultimate sports car". • Bugatti, despite the fact that for more than fifty years practically no vehicles have been produced, is still a brand that triggers excitement among motoring enthusiasts around the world. The Bugatti brand combines aesthetics and perfection with absolute exclusiveness. • Bentley is positioning in various niches of the luxury segment. Bentley offers high-performance coupés and saloons representing a unique combination of sportiness, luxury and comfort. Bugatti represents the top end of the Volkswagen brand. Competitive Position of Volkswagen on the automotive market: Key Factor success Importance proportion Volkswagen (out of 5) GM Ford Toyota Daimler Chrysler Distribution Network Scales of economy Technology / R&D Mastery of the marketing Platform production Environment policy TOTAL 20% 15% 20% 18% 18% 9% 100% 3,5 4 5 3,5 4,5 4 4.1 2 4 5 3 5 3,5 3.75 2,5 3 3,5 4 3,5 3 3.27 4,5 5 3,5 3 4 2,5 3.8 2 4 3,5 2,5 4 2,5 3.1 The Commercial Vehicles Business Unit The Commercial Vehicles sector is integrated as an autonomous business unit alongside the Passenger Cars group. The product range of the Commercial Vehicles extends from leisure and utility vehicles to heavy trucks. The Volkswagen Commercial Vehicles brand group is outstandingly positioned among its global competitors as a technology-leading manufacturer of light trucks and utility vehicles. The Car Rental Business Unit A gain in market share to 16 % again moved the Europcar Group closer to the current market leader. With this increase, Europcar has taken a further major step towards its strategic goal of market leadership in Europe. Europcar International S.A. successfully drove forward its growth plans in 2002 with the scheduled expansion of its franchise network in a current total of 116 countries. Its field of expertise was also expanded significantly by the signing of cooperation agreements with leading international corporations in the tourism and scheduled air travel sectors. Europcar has also enhanced its product portfolio with a worldwide chauffeur service. The Financial Services Business Unit The Financial Services business unit successfully supports the sale of group products by the services it provides. The range includes financing, leasing and insurance, a modern direct banking operation as well as professional fleet management services for private and business customers. This comprehensive range of services is a major factor in assuring customer loyalty to the Volkswagen Group. The Financial Services business unit further expanded its business operations on an international level in 2002. It represents 4,5 millions customers in the world. In addition to supporting the sale of factory-new Volkswagen products, the Financial Services Business Unit also progressed its non Group fleet sales and financing business. For instance, Volkswagen Bank GmbH is setting new standards with the addition of an online current account to its product portfolio: Volkswagen Bank Direct is thus the first specialist motor trade bank to implement the direct banking concept and offer the full range of products of a high-street bank. II.3. Value Chain VW’s structure It used to be a state-owned company. In order to have a better efficiency and responsiveness, the administration of VW group was separated of the one of each branch twelve years ago. VALUE Human Resources VW group focus on strengthening strategic core competencies. VW has thus created its own higher education college “the AutoUni” in Wolfsburg to train its specialist and management staff. VW encourages the commitment of each individual and of groups of employees, by rewarding them. The salaries are quite high in comparison with the automotive industry, which motivates their employees. Technology development VW group develops specifically functional secure products, design and suitable to the environment. The cost of the R&D represents 3.3% of the automotive sales income. There is, also, a more effective administration of the supply chain thanks to the new computerisation system. Suppliers VW has a great amount of suppliers which have a large dependence of the group. This was not an advantage because that generated a high cost, that is why they had created the “VWGroupSupply” system which optimise the process and the cost of the supply chain. Internal Logistics To eliminate all forms of waste and to gain economies of scale, VW has adopted the Lean production philosophy, which is based on the JIT system (Just-In-Time) Production The Group operates 45 production plants in 11 European countries and 8 countries in the Americas, Asia and Africa. Around the world...