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Essay: Volkwagen analysis (including Porter’s 5 Forces)

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  • Volkwagen analysis (including Porter's 5 Forces)
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INTRODUCTION

It was dubbed the “Dieselgate” scandal. In September 2015, the Environmental Protection Agency (EPA) discovered that numerous models of Volkwagen cars being sold in America contained “defeat device” software in diesel engines that was able to detect when they were being tested for emissions, changing the drive performance accordingly to improve results (Hotten, 2015). After the EPA made the deception public, the German auto giant admitted to cheating emissions tests in the United States and downplaying carbon dioxide emissions and the use of fuel for about 800,000 vehicles, including those with petrol engines. Reports shows approximately 500,00 vehicles, model years 2009 through 2011 on the road in the United States alone were affected but Volkswagen disclosed that about 11 million diesel cars across the several brands worldwide and about 8.5 million in Europe were also affected with the defeat device (Britt et al., 2016).

QUESTION 1

Before the scandal, Volkswagen group launched a strong and ambitious growth strategy named “Strategy 2018”. The main aim of “Strategy 2018” was to position the company’s group as a worldwide economic and environmental leader that will eventually make them the most sustainable and profitable automobile manufacturer by 2018. It also focused on the goal of having the most satisfied customers, employees and shareholders in the industry. Up to this point, Volkswagen was well on track in accomplishing these goals, though the accomplishment was short lived due to the aftermath of the scandal “Dieselgate”. Hence, effective strategies should be established to move forward and achieve its initial goals “Strategy 2018”.

Here are the strategies recommended to the CEO of Volkswagen to revive VW’s reputation and help to reduce future risks:

  • REVISITING ITS BRAND TRUST STRATEGY: Volkswagen must recognize how the brand ‘touch’ feels and the feeling has been threatened by the scandal’s events. One of the effects of the scandal was major financial concerns faced by the company as a result of recalling millions of vehicles worldwide. An initial charge of €6.7 billion was set aside to cover costs in the third quarter of 2015 which led to posting of its first quarterly loss for 15years of 1.7 billion (Britt et al., 2016). With this type effects, shareholders get concerned by boosting the company’s investment and resilience to meet stakeholder’s expectations which is one of the major steps in resuscitating its reputation.
  • RE-EXAMINING ITS VALUES: Does the company’s values reflect desired behaviors or contemporary behaviors? The company’s structure has been pointed out as one of the causes of the scandal by some critics of Volkswagen whereby a very large few and private shareholders, alongside the executives and supervisory boards made up almost solely of insiders. If this turns out to be a problem, the company needs to change to values-driven leadership (Gibbons, 2016). Every person in the organization including top executives and shareholders must be fluent in its values combined with great leadership that has a clear view of its higher purpose. This could promote transparency in both internal and external communication.
  • REMINDING THE MARKET WHY THEY TRUSTED VOLKSWAGEN: When the company repositioned its markets around clean diesel technology, people recognized them as being a market leader. Due to their inability to fulfill on the CO2 emissions promise or benefit seems to suggest there may be something else wrong either it’s a character flaw, or they don’t have the technological resources to address the problems of a clean energy vehicle (Lyons, 2015). That would have important implications for consumers who are highly eco-friendly and feel that it is an important functional attribute for them during the purchase decision process (NRP). Therefore, Volkswagen needs to recreate the high value of high trust combined with engineering excellence with flair (Gibbons, 2016).
  • RESTAGING ITS PROFILE: A statement was released by the chief executive officer (CEO) at the time, Martin Winterkorn accepting responsibility for the situation and as a result resigned his position. He was replaced by Matthias Mueller, the former boss of Porsche who stated, “My most urgent task is to win back trust for the Volkswagen Group by leaving no stone unturned, and with maximum transparency, as well as drawing the right conclusions from the current situation” upon taking up his new job (Gibbons, 2016). A high profile must be established by senior executives in every market where they address altering the international crisis of distrust.
  • RE-BOOTING CUSTOMER EXPERIENCE: One of the major effects of the scandal was the broken trust of Volkswagen’s customers, employees and dealerships as well as the trust of politicians and the public. Therefore, current car owners should be the company’s primary concern, assuring them their vehicles are safe for use. Secondly, potential car buyers and employees now are caught in the snare. For that reason, financial compensations given out is a first step to restoring the customer trust.

QUESTION 2

An industry life cycle represents different stages where organizations operate, progress, prospect and slump within an industry. The maturity of the automotive industry has fostered the creation of brands with decades of history and strong customer loyalty. The automobile industry is capital intensive, including the retooling of factories and equipment to accommodate for tighter regulations and changing customer demand. (NRP) (if more info is needed, you can add more from the same source (Britt et al., 2016).

The above table shows that Volkswagen is at maturity stage as maximum revenue, profits and cash flows are achieved due to fairly high and consistent customer demands. They are well established in the automobile industry whereby their products have become more popular and common among the general public, and the prices are reasonable compared to new products in this stage. However, in 2015 the company’s group experienced a massive decline in its profits due to the “dieselgate” scandal.

The scandal tarnished its image but not to an extent that could retard its growth or affect it in any other major way. VW is back on growth track and apart from some major financial loss, the scandal has not had much effect on its business growth. This is a Porter’s 5 forces analysis of Volkswagen that analyses how these forces affect its competitive position in the world market.

In the analysis, two main competitors namely Toyota and General Motors will also be used to analyze the challenges and nature of competition in the company.

Porter’s 5 forces

Bargaining Power of Suppliers:

The bargaining power of Volkswagen group’s suppliers is low which is mainly because VW has suppliers throughout the world scattered in various regions. It is the same in the case of Toyota and General Motors. Moreover, suppliers and the subcontractors are required to follow the code of conduct prepared by VW. VW is a large and financially strong company which has a global supply chain and distribution system. The bargaining power of suppliers in the automotive industry is also low because it can always switch to new suppliers (Pratap, 2018) (NRP). The suppliers produce parts for only one or two automakers at once and are heavily reliant on these automakers. It would be devastating for a supplier to lose an automaker contract (NRP). However, what gives the suppliers slight bargaining power is the companies’ need for quality raw materials and VW’s dependence on long term partnership with suppliers who can cater to its needs responsibly (NRP) (Pratap, 2018). In this regard apart from training its suppliers, it also rewards the best ones among them. Overall, the bargaining power of suppliers is low in the automotive industry. Suppliers don’t have a lot of say in what they sell, how they sell it, and how much they charge (NRP) (the article of auto industry).

Bargaining power of Customers:

In the 21st century, the bargaining power of customers has increased because of several factors (NRP). There are several options before the customers as there are several brands in the market (NRP). Apart from that, customers of the 21st century are well-informed. They evaluate every aspect of the product from quality to safety, environment friendliness and fuel efficiency before he buys it (NRP). Moreover, companies are spending so much on marketing and advertising to lure every customer. Competition has increased in the luxury as well as lower end segment and brand are investing in research and development to bring products that deliver better than the customers’ expectations. In 2017, VW invested 4.8 Billion Euros in research and development. All these factors have led to an increase in the bargaining power of the customer. Apart from that the size of individual purchase in the automotive industry matters and is sufficiently large to be considered important. The overall bargaining power of the customers is high in the automotive industry as whole (NRP) (Pratap, 2018).

Threat of Substitute Products:

The threat of substitute products is high because of the high competition from several brands in the automotive industry. Apart from these various brands, there are other options also which work as substitutes for Volkswagen products. Other modes of public travel also act as substitutes for Volkswagen products. The things that mitigate this threat for Volkswagen are its financial strength and brand image. Its products are stylish as well as of good quality which has led to higher trust and therefore less threat from the substitutes. The overall threat of substitute products is moderate (WNRP) (Pratap, 2018).

Threat of New Entrants:

The threat of new entrants in the automotive industry is very low. It is because of the high barriers to entry which make it near impossible for any brand to enter the market. While there is a very large investment in the infrastructure including manufacturing, marketing, supply chain and distribution, apart from it there is a large expenditure related to human resources as well. Moreover, legal regulation also makes it difficult for brands to enter the market. The overall threat from the new brands to enter the market is very low or negligible (WNRP) (Pratap, 2018).

Competitive Rivalry in the Industry:

Growth in the automotive industry is extremely high. Automobiles are becoming less of a luxury and more of a commodity. This increasing demand creates a lot of opportunities. The accelerated growth rate decreases the competitiveness of rivalry. Fixed costs are very high in this industry, which increases rivalry, as there is a need to make more sales in order to make a profit. Product differentiation in the automotive industry is currently low. So far, the qualities that set one automobile apart from another are factors but not always significant to consumers. While automobiles are starting to see more and more differentiation, the pertinent features a consumer requires are more or less the same in every firm. Low product differentiation increases rivalry. Switching costs are low for consumers. It is not difficult to pick another automobile brand if one does not meet your expectations. This increases rivalry as well. Overall, the competitiveness of rivalry is high in the automotive industry. All the competing firms are constantly finding ways to stay profitable, whether by differentiating their product or minimizing the price. The automotive industry is very dynamic and building a large, loyal consumer base is essential to success (Hunt120, 2013) (WNRP).

QUESTION 3

Now, an internal analysis will be focused on by explaining the competitive advantage and core competencies of Volkswagen. Interestingly, Volkswagen is the parent company whereas it has some major brands under its umbrella brand. Audi, Bugatti, Skoda, Bentley, BMW, Lamborghini and Porsche are some of the brands which are independent and yet a hit amongst the classes (Bhasin, 2018) (NRP). The one brand that is the central attraction of VW’s portfolio is the Audi. However, Volkswagen passenger cars are also in demand worldwide. In the recent years, it has increased its presence in China through partnerships. Asia Pacific market is growing in importance for the automotive brands and Volkswagen is working to increase the number of its dealerships there. They also have a very well-structured brand image. Most people know that it produces high engineered super cars as well as passenger cars and bus’s as well. There are endless products in the portfolio of Volkswagen, but the structure is smooth and efficient, with each strategic business unit responsible for its own branding and success (Bhasin, 2018) (WNRP).

Another characteristic of Volkswagen is its excellent brand recognition and well-managed operations. It is a company which produces 26,600 motor vehicles on any given day. Naturally, you cannot product such a quantity of vehicles if there is no demand. The Volkswagen brand is very strong in Europe and USA and it is growing in strength across the world. As of 2016, it is the 57th highest ranked brand in the world. Mind you, this is a solid drop from the previous year, when it was ranked 18th. But the drop is apparent because of the emissions scandal. The brand is valued at 19 Billion dollars. In addition, handling a production of close to 27000 cars a day along with logistics, supply chain and other operations is not easy. Hence, it can be said that the operations management of Volkswagen is excellent. Accenture is the consultancy partner of Volkswagen and handles all its software and hardware requirements. Besides Accenture, Volkswagen has many different partners for accounting, supply chain and others (Bhasin, 2018) (WNRP).

Volkswagen cars are known to have high technology inbuilt and are trusted for their performance. This is one of its distinctive expert skills. They have recently ventured in to Hybrid cars and motorcycles are being added in the portfolio. Besides this, the research and development of all sub brands gives products beyond expectations. As can be seen from the graph below, Volkswagen is the top most contributor to gross revenue in the US against some of the top brands of the world. It is also the top most gross revenue contributor in Germany and European nations.

One of Volkswagen’s core competencies is the high-performance “diesel technology TDI”. BlueTDI is a new concept that makes this technology even cleaner: exhaust aftertreatment reduces nitrogen oxides produced by up to 90%, making the Passat BlueTDI the most environmentally-friendly diesel in its class. Another is “recycling” is indispensable component for enhancing the sustainability of our products. This is not only restricted to the final recycling of vehicles at the end of their lives but also applies both during the development phase of a new car, with the associated selection of materials and their production processes, as well as to aspects in the usage phase such as the treatment and disposal of fluids, lubricants and parts subject to wear. Volkswagen works intensively on the continuous development and refinement of recycling methods, processes and technologies, with the aim of protecting the environment and saving natural resources. The next is “EcoFuel” which is referred to as the technology of the future. Volkswagen offers cars that run on natural gas under the “EcoFuel” label. Compared with a conventional petrol engine, the EcoFuel power plant running in natural gas mode produces around 80 percent less carbon monoxide and around 80 percent less nitrous oxides. CO2 emissions are reduced by 23 percent and are below 129 g/km. EcoFuel technology therefore guarantees access to all environmental zones. Natural gas is currently the cheapest fuel on the market, because the gas price will enjoy tax relief until 2018. There are no limits to the use of bio-natural gas. With EcoFuel technology Volkswagen is responding to the significant increase in demand for eco-friendly and economical cars. “Blue motion technology” is another core competency of the company. With the product label “BlueMotion” Volkswagen has launched a new sustainability initiative. It identifies vehicles with an overall focus in economy in their design. They combine consumption reducing technology with an equally efficient and dynamic powertrain. “BlueMotion” is thus a response to rising fuel prices and increasing demands of the environmental properties and consumption of vehicles (Joseph, 2013) (WNRP). In general, Volkswagen’s main core competency are technology, research and development and environmentally friendly technological development.

Despite all the company’s skills and characteristics which has led to increased productivity and business earnings, there are also causes affecting retention. Different government regulations in different countries can be a cause of retention for VW. All governments want to protect and support their own indigenous car manufacturers over and above international car manufactures. They will like to keep the profits within the country, because of which most countries design policies which are favored to local car manufacturers. As the government policy changes, it affects international car manufacturers like Volkswagen as changes need to be made in design to suit the policy (Bhasin, 2018). Also, economic fluctuations in major markets can lead to decline in sales and loss of revenue. The recession was gone long ago but the economic environment remained difficult for various brands under Volkswagen AG. They faced difficulties in South America because of decline in demand. However, the demand for commercial vehicles kept recovering in Europe. Situation was difficult in the shipping industry. Economic instability in developing countries and emerging markets as well as the low prices of oil were also adding to VW’s difficulties. In this way economic fluctuations in the various markets can pose a major threat to VW’s business. Lastly, there have also been occurrences of bad governance and leadership styles in the company which can possibly lead to losing their title as the one of the largest automotive makers in the world (Pratap, Volkswagen SWOT Analysis , 2018) (WNRP).

High quality training has been provided to all levels of personnel within the Volkswagen plant for the past 25 years. The Volkswagen Learning Academy (VWLA) supports the company’s long-term strategic plan in ensuring that employees on all levels are equipped with the necessary skills to build cars that are globally competitive (not only in terms of cost) but also in terms of quality and schedule adherence. The VWLA aims to be the benchmark in training and development and in the way in which it grows employees’ skills and talents within the various training academies which include Production, Sales, Marketing, Technical and Commercial entities (WNRP) (ARTICLE BELOW- 2). There are several of corporate trainee programs designed to empower employees and improve their skills and competencies through training within various sectors of the company. Most of them are annual full-time initiatives which have a varying intake of trainees (WNRP) (ARTICLE BELOW- 4).

QUESTION 4

Corporate Social Responsibility (CSR) is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders (What is CSR?, n.d.). CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives, while at the same time addressing the expectations of shareholders and stakeholders. For years Volkswagen has focused on what it considered its strength and competitive advantage: an attractive and environmentally friendly range of automobiles. The Company’s 2014 annual report includes initiatives to reduce CO2 gases and to be responsible stewards of the environment. Examples of these initiatives are to increase ride sharing in countries such as China and to increase the number of electric vehicles on the road. The annual report also dedicates sections to corporate and social responsibilities and tout’s management’s commitment to ethical practices. To support its “environmentally friendly” emphasis Volkswagen has aired commercials that claim its vehicles emit less greenhouse-gas emissions while maintaining a satisfactory level of acceleration.

Volkswagen’s code of conduct highlights the company’s responsibility for continuous improvement of the environmental tolerability of our products and for making ecologically efficient technologies available throughout the world. It is a group-wide guideline that outlines the strategy for corporate global and local responsibility and for which each individual is equally responsible for compliance. The Code of Conduct states that to achieve the goal of being number one among the world’s automobile manufacturers, they must act
responsibly, for the benefit of our customers, shareholders and employees. They also must consider obdurate compliance with international conventions, laws and internal rules to be the basis for sustainable and successful economic activities. Finally, they must act in accordance with our declarations and accept responsibility for our actions.

14.1.2019

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