Identification of Strategic Issues of The Volkswagen Group: Analytical Essay

Introduction

The Volkswagen Group, with its headquarters in Wolfsburg, is one of the world’s leading automobile manufacturers and the largest carmaker in Europe.

The Group comprises twelve brands from seven European countries: Volkswagen Passenger Cars, Audi, SEAT, ŠKODA, Bentley, Bugatti, Lamborghini, Porsche, Ducati, Volkswagen Commercial Vehicles, Scania and MAN. In the commercial vehicle sector, the products include ranges from pick-ups, buses and heavy trucks.

Key Facts:

• Global market share in 2017 - 12.1%
• Sales Revenue in 2017 - 231 billion euros (217 billion Euros in 2016)
• Earnings after tax - 11.6 billion euros
• Production plants - 123 worldwide
• Employees - 642,292

In addition, the Volkswagen Group offers a wide range of financial services, including dealer and customer financing, leasing, banking and insurance activities, and fleet management.

1.2 Purpose

The purpose of this strategic report is to address the current issues faced by the Volkswagen company and to discuss the strategies that the company implemented after the Diesel emissions scandal in 2015 to attain its goal of becoming the world’s largest automobile manufacturer.

1.3 Scope

The scope of this report is confined to current issues faced by Volkswagen and the strategies for overcoming these challenges. The focus of the report is on R&D to invest on new technologies and innovation for electric and self-driving cars which contributes to the future of Automobile industry and regaining customer trust after the emission scandal.

1.4 Method of investigation

The secondary data presented in this report is from the Volkswagen Annual Reports, Journals and trusted sources. We have used PESTLE and Porter’s 5 forces to analyse the strategic issues. We look at the competencies of Volkswagen and analyse different strategies that the Organization implemented to overcome the strategic issues.

2. Identification of strategic issues

2.1 PESTLE Analysis

2.1.1 Political Factors

• The biggest current issue arising from Volkswagen’s political environment is the current political tensions around trade tariffs between the US and the EU. US president Donald Trump in June 2018 threatened to impose a 20% tariff on all imported cars from the EU, which would raise tariffs from the current 2.5% tariff duty which has been place since the 1960s (Fleming et al., 2018).
• UK Government policy to end the petrol and diesel cars by 2040 (“Road to zero”). The trend among the UK population began to shift away from diesel and petrol cars, which led to an overall 20% decrease in diesel car sales in 2017 (Davies 2017).
• Brexit which has already had an impact on consumer spending as demand for new cars in the UK is scaled back due to the economic impact of Brexit (Bolduc 2017).
• The Volkswagen Group sells its vehicles in 153 countries and it must deal with as many as 153 different political scenarios.

2.1.2 Economic Factors

Political turmoil such as Brexit are often followed by economic impacts. Brexit has already created high inflation and a decline in consumer spending, leading to a decline in demand for new cars (Bolduc 2017). Brexit-led inflation resulted to increase in car prices by 5% making it hard for consumers to purchase new cars (Mulligan 2017).

However, Volkswagen has a decent chance of increasing its market share in growing economies like China and India where the cost of production is comparatively less

2.1.3 Social Factors

The biggest trend in the automobile industry is the increasing use of car sharing platforms such as Uber.The increasing demand for vehicle sharing and ride hailing programs represents a threat for VW due to offering more convenience and cheaper transportation compared to the high cost of car ownership (Gibbs 2017).

2.1.4 Technological Factors

The success of an Automobile company depends upon its technological advancement. VW acquired a stake in German Research Centre for Artificial Intelligence (DFKI). It is investing in technology to bring more eco-friendly and safer cars to the market which is the changing trend of the customers. It has invested a lot in making its manufacturing and distribution processes technologically more efficient than the rivals.

2.1.5 Legal Factors

‘2015 Volkswagen emission Scandal’, Volkswagen paid up to $4.3bn in penalties and fines for violating the environmental regulations in connection with the scandal (McGee and Lynch 2017).

Volkswagen fit their diesel cars with ‘defeat devices’ which ensured their diesel cars would meet emission standards in laboratory settings, but on the road, emissions went more than 40 times of legal standards for NO. Subsequently, VW was forced to recall over 11million vehicles. This ruined the reputation of Volkswagen resulting in decreased sales in the subsequent years.

2.1.6 Environmental Factors

The increasing public demand for electric vehicles, car sharing services and the continued development of self-driving vehicles has created a growth opportunity for Volkswagen. (Silver 2017; Scarpinelli 2017).

That is why Volkswagen has announced it will also launch its own “zero-emission” car-sharing service known as WE in 2019.

2.2 Porter Five Force Analysis

2.2.1 Bargaining Power of Suppliers: LOW

Volkswagen is a large and financially strong company which has a global supply chain and distribution system. Volkswagen has suppliers throughout the world scattered in various regions.

The bargaining power of the suppliers is low because it always has an opportunity to switch to new suppliers.

However, what gives the suppliers slight bargaining power is the company’s requirement for quality raw materials and its dependence on long term partnerships with suppliers.

2.2.2 Bargaining Power of Customers: HIGH

The customers now a days are well informed. There are several options before the customers as there are several brands in the market. Companies are investing vastly on their marketing and advertising strategies to attract every customer and hence the bargaining power of customer is high.

In the case of Volkswagen’s premium cars segment, the customers are insensitive to the prices insensitive because of the differentiated and customised products.

In 2017, VW invested 4.8 Billion Euros in research and development

2.2.3 Threat of Substitute Products: MODERATE

Due to high competition from several brands in the automotive industry, the threat of substitute products for Volkswagen is high. Public transportation such as trains and buses also act as substitutes for Volkswagen products.

The things that mitigate this threat for Volkswagen are its financial strength and brand image. The overall threat of substitute products is moderate.

2.2.4 Threat of New Entrants: LOW/NEGLIGIBLE

Volkswagen group is operating majorly in the Automobile industry. A new market entrant would require huge capital investments, resources and considerably large amounts of time to be able compete with already existing automobiles and market its brand (Parkin et al 2017).

A new entrant in the automobile would have to spend extra to produce few units compared to established companies like Volkswagen that produce in large volumes.

2.2.5 Intensity of Rivalry in Industry: HIGH

Competition intensity is determined by factors such as seller concentration, diversity of competitors and product differentiation.

Volkswagen faces intense but price muted competition because the competitors are trying to grab its market share in the automobile industry. This has led to intense advertising and product innovations.

Example: To oust competitors who use diesel, Volkswagen group invested £ 30bn to start manufacturing electric cars to satisfy consumer needs (Attwood 2017).

3 SWOT Analysis:

3.1 Strength

• Strong international presence in more than 150 countries.
• Strong brand image which is the sole reason that the company recovered from the “emission scandal” and reported growth in the following year.
• Large product portfolio. Volkswagen’s product portfolio is made of 12 automotive brands include Volkswagen, Volkswagen commercial vehicles, Audi, Seat, Skoda, Bentley, Bugatti, Lamborghini, Porsche, Scania, Man and Ducati vehicles. The world’s largest automobile manufacturer, Toyota offers its products under only 4 brands.
• Strong R&D working on continuous innovation and future trends such as auto driving and electric cars.

3.2 Weakness

• Brand reputation of Volkswagen dented by the Emission scandal. The scandal costed VW billions of dollars. This has tarnished the brand’s image inside and outside US.
• Volkswagen has paid around 25 billion in fines due to increased compliance issues in US, which decreased the operating profits of the company.

3.3 Opportunities

Increasing demand for passenger cars in Asia -Pacific region.

Volkswagen is successful in increasing its sales in this market, still China and India are offering vast markets.

· Sustainable technology

Globally, customers are interested in sustainable vehicles and sustainable technology. Apart from sustainable vehicles and supply chain, Volkswagen has an opportunity of research and investment on sustainable innovation.

· Acquisitions and partnerships:

Partnerships in China have turned out to be successful for Volkswagen. More partnerships across the world and in the Asia pacific regions especially can help the brand grow faster. Moreover, the company has been successfully acquiring other companies. The experience and knowledge from the past can be utilized in the future.

3.4 Threats

• Heavy competition from rival brands forcing the company to invest heavily on R&D and marketing.
• Economic fluctuations such as recession and economic instability in developing countries.
• Legal and compliance.

4 Strategic responses

After the broke out of massive “Emission scandal” Volkswagen just did not lose billions but also invaluable customer trust. In 2016 Volkswagen announced, “Together- Strategy 2025” for the lead in Technology, Sustainability and Innovation.

4.1 Corporate Strategy

• Restoring customer Trust
• “We’re Working to Make Things Right”, Volkswagen launched a website www.vwdieselinfo.com to keep their customers updated about the diesel scandal.
• Announcement of “Good will Package” which includes two 500$ gift cards to those who owned or leased an affected diesel car as of November 8, 2015.
• Corporate culture Transformation

The reorganization strategy aims for

• 1.agility.
• 2.stronger entrepreneurial spirit.
• 3.more transparent discussion culture.
• 4.flatter hierarchies and more flexible working models.
• Lead in Connectivity

Volkswagen to develop its own digital platform. By 2025, it is expected to have about 80million active users throughout the world.

• Closer customer relationship
• Wide range of services
• Potential increase in its sales revenue from services related to networked vehicles. (Volkswagen estimates that it will reach about EUR1bn per year by 2025)

4.2 Business Strategy

· Achieving “top of volume” position globally

Volkswagen already achieved its “top of volume” position in Europe and China and aims to expand throughout the world with these strategies. Volkswagen AG sold 6.2 million passenger cars in year 2017. With the increase of customer demand for electric mobility and SUV, VW will launch electric SUV’s by 2020. It has already launched 6 SUV models including T-cross, T-roc and Tiguan in 2018 and expects a 50% SUV share by 2025.

· High Profits, Lower Cost and high sales revenue

The sales revenue of Volkswagen AG went down by 24.3% in 2017 mainly due to the reclassification of other companies in the group but, in the first three months of 2018, the sales revenue rose by 5.6% mainly due to lower production costs and higher volumes which resulted from lowering complexity of production and development to use synergies efficiently. As a result, the operating profits to double from 2% to 4% between 2015-20.

Volkswagen have increased the production capacity and will continue to do so to improve further sales and sales revenue.

4.3 Operational Strategy

• Development of Strategic Capabilities.
• In-house development of self-driving system and artificial intelligence of autonomous vehicles.
• To provide best-in-class user experience across all the brands to customers.
• To develop battery technology as core competency.
• E-mobility

Volkswagen Group is investing heavily in the mobility of the future: over €34 billion have been budgeted up to the end of 2022 for e-mobility, autonomous driving, digital connectivity and new mobility services.

Volkswagen decided to convert its plants in Emden and Hannover to produce electric vehicles form the year 2022.

Production of the Volkswagen I.D., the world’s first series vehicle based on the MEB, will begin in Zwickau at the end of 2019.

Volkswagen aims to produce electric versions of all 300 models by the year 2030.

5 Results

5.1 Critical Success factors (CSF’s) – Volkswagen AG

· Large production infrastructure:

Volkswagen has nearly 123 production plants throughout the world producing around 11 million units each year. Volkswagen’s global production network is its huge strength.

· Brand image and global presence:

The Volkswagen group sells its vehicles in as many as 153 countries. It has a very strong global presence and good brand image. The “Emission scandal” in 2015 dented the company’s reputation but the company returned strongly with the improvement in its revenues. Volkswagen has the largest portfolio in the Automobile industry with 12 brands. It is serving all the segments of the customers such as premium customers and middle-class customers.

· Research and development capabilities:

Volkswagen’s Research and development capacity is strong. It is continuously investing on R and D for innovation and sustainability. In 2017, the R&D costs for VW are 13.3 billion euros.

· Large and extensive supply chain:

Volkswagen established a special network of FAST (Future Automotive Supplier Tracks) Suppliers to implement innovation and globalisation in Supply chain. The Group business platform “ONE”, ONE links more than 300,000 users from the business units of the Volkswagen Group and suppliers, making it one of the largest platforms within the Group.

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5.2 VRIO Analysis of CSFs

Resources

Valuable

Rarity

Inimitable

Organized to capture value

Competitive Advantage

Production Infrastructure

Yes

Yes

Yes

Yes

Permanent

Brand image and global presence

Yes

Yes

No

Yes

Temporary

Research & Development capabilities

Yes

Yes

No

Yes

Temporary

Large Supply chain

Yes

Yes

No

Yes

Temporary

6 Recommendations:

• Since Volkswagen is operating globally, the focus should be on compliance with the operating countries. The company should treat the “Emission scandal” as an eye-opener and should thrive to avoid such scandals in future.
• There is an increase in demand for passenger cars in Asia-Pacific market. Since the partnerships in China turned out to be successful for Volkswagen, it can look for similar strategies in countries like India where the market share of the company is low.
• Volkswagen shifted its gears to E-mobility. Though the electric cars have a market potential in the future, Volkswagen should also consider the risks involved in it. For example, the company should adopt strong marketing and advertising strategies to outperform the competitors.
• Automobile industry is often operated in conditions of immense competition. Although Volkswagen has a very strong R&D it is often required to improve the R&D capabilities to maintain the pace with the competitors.
• (We found from VRIO analysis that R&D of Volkswagen gives only a temporary competitive advantage)

7 Conclusions

“Necessity is the mother of invention.”

Despite of the strong production facilities and R&D capabilities of Volkswagen, it always trailed behind its competitors like BMW and Tesla in the areas of electric and self-driven cars.

However, the Diesel scandal opened the gates of Volkswagen towards innovation and sustainability. The company is forced to reorganize the culture and the Organization.

“A company of this size cannot be guided by the principles of yesterday. The environment in which people and goods move from A to B has significantly changed.” Matthias Müller, Volkswagen CEO

2017

2016

Operating profit

13.8 billion euros

Operating profit

6.7 billion euros

Operating return on sales

6%

Operating return on sales

3.3%

It is evident from the annual report of Volkswagen that the company recovered from the adverse effects of Emission scandal in 2015.

The company is moving close towards “Strategy-Together 2025” with effective utilization of the resources and the critical success factors.

8 Bibliography

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