Strategic Management

Critical analysis of internal and external environment of Volkswagen

Internal analysis means identifying and assessing strengths and weaknesses of the organisation. It is specific to a particular firm. On the other hand, identification and evaluation of opportunities and threats in the market are external analysis.

SWOT analysis

Strengths

• The widest brand portfolio among all automotive companies - Volkswagen’s brand portfolio is the largest among all the automotive companies. The company sells its vehicles under 12 different brands. The organization sells its cars under various brands namely Volkswagen, Audi, Skoda, Bentley, Lamborghini, Bugatti (Ashby, Leat and Hudson-Smith, 2012). Its buses, heavy trucks and other commercial vehicles are sold under Scania, Man and Volkswagen’ Commercial Vehicles brands. No other automotive company has so many brands under its management.
• Presence across the world - Company has 70 production plants and it is present in 150 countries across the world.It has been able to expand very fast as its financial stability is high. It is one of the oldest car manufacturers in the world and has well established itself.
• Excellent brand recognition – The average production of the company on a given day is 26,600 motor vehicles which is not possible without heavy demand. Volkswagen brand is very strong in Europe and USA and it is growing all across the world.
• Well managed operations – Volkswagen is huge when it comes to operations. Handling a production of close to 27000 cars a day along with logistics, supply chain management and other operations is not easy. Thus, it can be said that there is excellent operation management of the company.
• Research and development –Organization is known for its high inbuilt technology and it is trusted for its performance. Volkswagen has recently ventured into Hybrid cars and motorcycles are also being added to the portfolio (Reimann, Schilke and Thomas, 2010). Many of Volkswagen’s brands, including Škoda, SEAT and Volkswagen, or Bugatti, Lamborghini and Porsche, share their R&D spending, build technology, access to different markets and customer knowledge to increase sales and decrease costs.
• High gross revenues - Volkswagen’s revenue is spread across different brands, types of products and geographic areas than its rivals’ revenues.It is the topmost contributor to the gross revenue in US.

Weaknesses

• Negative publicity – The emission scandal proved to be a curse for the company. Millions of vehicles were returned to the company. It suffered huge losses as the fines, damages and other losses from the scandal totalled €16.2 billion. Company’s brand image has been severely affected and it will take lot of time to recover it.
• Low market share in US automotive - A high market share in U.S. automotive market would guarantee huge earnings as it is the largest automotive market in the world with over 18 million vehicles sold.
• Little expertise and no competency in battery driven vehicles - Volkswagen has long disregarded the demand for electric vehicles and made little efforts to enter the market (Galliers and Leidner, 2014). The company will have to acquire more patents, new skills and gain more expertise to produce all the electric vehicles. At present, it can barely compete with other electric cars’ automakers.

Opportunities

• Purchasing power is increasing – The purchase of automobile is increasing year on year. They have become a necessity and various schemes such as loan option; finance option has made purchase easier for the customers.
• Acquire skills and competencies through acquisition - In order to fulfil its prospective goals, Volkswagen will have to develop new competence in the battery technology, digitalization and autonomous driving. The cheapest and fast method of doing so is through acquisitions of small start-ups which have already developed the skills and technology needed for Volkswagen (Subramanian and Ramanathan, 2012).
• Fuel prices are expected to rise - The demand for small vehicles always rises when the fuel prices are high. Volkswagen did not invest much into growing its line of light trucks and has opted to compete in the smaller vehicle range which can be an opportunity for the company.
• Worldwide expansion possible – The demand will increase with rising GDP and need of products. More worldwide expansion of the brand is possible if the company tries to tap the emerging countries.
• Hybrid cars / Fuel efficient cars / autonomous cars – All these types of cars are the future of automobile industry and themanufacturers who produces these cars will lead the market.

Threats

• Intense competition – The competition is increasing and company has to face fierce competition from the traditional automotive companies, the new players and saturation of its main markets. Chinese manufacturers are competing by offering lower prices for the similar quality build vehicles. New companies such as Tesla are giving tough competition in the electric cars segment.
• Further, fines and damages that will have to be paid - Volkswagen’s emission scandal has already resulted in huge loss in terms of money, damaged brand reputation and lost consumer confidence (Mohsenian-Rad, Schober and Leon-Garcia, 2010). But this is not the end; the company is still involved in many lawsuits all over the world which will require the organization to pay billions in fines and damages, decreasing its profits for the next few years.
• Increasing government regulations - All government want to protect and support their own indigenous car manufacturers over and above international car manufactures. Also, many governments around the world are committed in reducing the greenhouse gas emissions and are encouraging fuel efficiency initiatives. The international car manufacturers have to make changes in the design which suits the changing government policies.

PESTLE analysis

• Political factors: Various government policies and regulations such as AFTA (Asian Free Trade Area) where there is eradication of trade barriers and National Automobile Policy affects the operations of Volkswagen.
• Economic factors: There is a huge impact of economic factors on the company such as high competition, effect of financial crisis, pure consumer segment.
• Social factors: Growing concern towards environmental issues, increasing population and customer loyalty are some of the major concerns which influence the company.
• Technological factors: The firmis required to increase its competency by developing new technologies (Gawer, 2011). Poor introduction of new technology can have an adverse effect on Volkswagen. It should consider intellectual property and understand its potential for development.
• Legal Factors: Volkswagen has already suffered heavy damages due to emission scandal. The company should commit for safety and environment friendly cars. The statutory requirements like new tariffs needed to be complied.
• Environmental factors: As there is growing concern towards environmental issues, the company should increase its efforts in sustainability. This would also help to regain the trust of its stakeholders.

Assessment of Volkswagen's current relative competitive position and advantage

Porter's Five Forces

One of the important ways of judging the competitive position of Volkswagen is evaluating Porter's five force model, according to which there exist five forces in the industry that determines overall profitability.

• Threat of new entrants : In automobile production business, threat of new entrants is quite low due to advance investment capital, brand equity, regulation and state policies (Lin, 2013). Volkswagen is one of the leading and famous manufacturers of automobile, so they have no threat of entry of new company. Moreover, in case of automobiles, customers usually prefer there trusted brands and companies.
• Vendor's bargaining power : In automobile industry, there are suppliersof spare parts, engine parts, car accessories etc. As Volkswagen's MQB platform is a new reform in automobile industry so suppliers can charge extra amount. To avoid this problem, the company has to look for multiple suppliers for their machinery and raw materials.
• Threat of substitutes : There is a low chance that Volkswagen customers will switch to other cars. It will produce more innovative cars which will reduce the costs (Baker, 2014). These cost effective innovate motor vehicles will persuade customers to buy the Volkswagen products.
• Market competition : The automobile industry is growing rapidly and companies are facing intense competition. Volkswagen is facing tough competition from General Motors and Toyota.
• Negotiating Power of customers : The bargaining power of customers is low. Negotiating potential of customers refer to the actual ability of customers to cut down the price levels charged by companies in the market or raise the firms expense in the market by asking for improved quality and service of goods.

Evaluation of current target market and identification of potential new segments

Current target market

Understanding the target market is key in developing the appropriate product and campaign. Target marketing is done primarily through segmentation which helps Volkswagen in tailoring marketing mix. Market segmentation allows the efficient distribution of products and services to the right consumers (Baker, 2014). It eliminates or mitigates threats, creates opportunities and consolidates a brand or company reputationin the minds of targeted consumers. The four major segmentation groups are :

• Geographic segmentation : Volkswagen has strong worldwide presence. It allows the company to get close to their current and future consumers effectively. It has factories or assemblies lines in many parts of the world, thus, target markets enjoy minimum delay in delivery, implementation and service.
• Demographic segmentation : Demographic factors include age, gender, education, income, occupation, family status etc. In general, all the product lines of Volkswagen are dedicated to customers aged 18-49 years old (Wheelen and Hunger, 2011).
• Psychographic segmentation :It includes values, attitudes and lifestyle. Volkswagen divides car by fuel consumption which are meant for family or utililty purpose. Some other luxury brands like Bugatti and Lamborghini are targetted for consumers who value their status and want to prove this to surrounding audience.
• Behavioural segmentation : Volkswagen differentiates its cars by dividing models in classes, size, engines, and by optional features. The types of engines differentiate from sizes of the very small 1000cm3, to the enormous 6000cm3. This helps to know the usage rate, brand loyalty and benefits sought from the offered products.

Potential new segments

Volkswagen has high potential to enter into new markets such as Asia, South America and Africa. It can access these markets by considering geographic, demographic, psychographic and behavioural segmentation of these regions. Although the competition is intense in automobile industries and to expand in international market, company will have to fierce competition from the local manufacturers as well (Gawer, 2011). The government policies of different countries may also act as a barrier because such policies favour the local manufacturers only. Moreover, there are different policies and regulations in different countries so those will be required to complied by the company. As the pockets of the company are deep and it possesses a strong brand image, it can target new markets and design such products which suit the government policies and satisfy the needs of customers. This will enhance brand loyalty and help to establish long-term relationships with customers and increase brand value in the eyes of targeted consumers. The company cam also target old-age group by producing autonomous cars which are comfortable and easy for them. Volkswagen is trying hard to access the potential segments which will enhance expansion and its brand value.

Strategic options for Volkswagen

The company can adopt various strategic options to achieve a sustainable competitive advantage. Following strategies can be adopted by the company :

• Pricing strategy: Price is the value that is put to a product or service. Pricing strategy of a company consists of set of complex activities aimed at finding optimum price and includes overall marketing objectives, consumer demands, product's attributes, competitors pricing and economic trends (Lin, 2013). Volkswagen prices range from affordable to expensive depending upon the size, level of exclusivity, options and power of engine. However, Volkswagen is a German company, and being a worldwide exporter, there are naturally several cost considerations which makes it less of a value for money product and more of a bit costlier product. For example – price of Volkswagen Polo is high as compared to Hyundai I10 or Maruti Swift. Thus, the company can modify its pricing strategies which will enable people of different economy class to purchase its products. A new pricing strategy should be formed which ensures the Volkswagen's products become affordable for all the segments of society. Also, it can use price skimming for its luxurious and exclusive cars like Lamborghini which are generally demanded by high class section as their status symbol.
• Mergers and Acquisition strategy: The businesses tend to adopt merger and acquisition strategy for satisfying varied range of reasons. Some businesses go for merger and acquisition for expansion purpose. On other hand, other group of organizations adopt acquisition strategy so as to achieve competitive edge (Gilmour, 2013). As there is fierce competition in the automobile industry, Volkswagen can adopt for mergers and acquisition which will help it to combat the ever increasing competition. Moreover, the company wants to expand its business worldwide, so acquiring local smaller start ups with technological competence can prove to be highly beneficial for the company. This would not only reduce the competition from existing rivalry but also help the company to gain skilled and competent employees who have a knowledge base of that particular region. It would enable to understand customer needs and expectations and help to satisfy them. Mergers and acquisitions provide synergy of benefits to the company. It would aid the company to take benefit of individual efficiencies and competitive advantages of two organizations. There are different types of merger and acquisition strategies like conglomerate, cogeneric, horizontal, vertical merger etc. The company can opt any of such strategies according to its business and need of time. This strategy is beneficial as it would reduce the costs, provide synergy benefits, achieve economies of scale, reduce competition and hence, increase the profitability which is main aim of all the businesses (Chen, Duan and Cai, 2011).
• Technological advancement: In the emerging technological world, it is must for an organisation to keep a pace with the technology in all walks of business. Lacking behind in technology can be the biggest barrier in the success of the company. Volkswagen has long disregarded the demand for electric vehicles and made little efforts to enter the market. The company will have to acquire more patents, new skills and gain more expertise to produce all the electric vehicles. At present, it can barely compete with other electric cars’ automakers and is far behind Tesla which is the key rivalry in the industry. Hybrid cars, fuel efficient cars, autonomous cars and electric power-train are the future of automobile industry (Kristal, Huang and Roth, 2010). Volkswagen is required to switch over its single battery design philosophy for electric and hybrid vehicles. Building on its intellectual property and activities in the hybrid and electric vehicle space, VW will be able to take off some heat from the diesel crisis and reposition itself as a leading proponent of low-emission vehicles. The company’s first all-electric e-Golf has been introduced to the market only in 2014. At that time, the market was already captured by many e-cars which came few years early. Up until now, Volkswagen only has 2 all-electric vehicles. Volkswagen e-Golf range is only about 83 miles, compared to Nissan Leaf’s 107 miles at nearly the same price. The company is in dying need to develop strategies for technological advancement to survive in the market and face tough competition. This would help the company to gain competitive edge and increase profitability and enhance its brand value.

The most effective option for achieving sustainable competitive advantage

To face the intense competition, expand the business worldwide and increase brand value, Volkswagen is required to modify its current strategies and adopt new ones that would enable it to achieve its objectives. The major focus the company is required to have is on technological advancement (Taticchi, Tonelli and Cagnazzo, 2010). Volkswagen can position itself as a pioneer in the automobile industry by keeping a pace with technological developments. The current position of company is quite good and it enjoys an excellent brand image. But on the other hand, it is unable to compete its rivalries such as Tesla's electric cars. To combat the tough competition and increase its brand value, the company is required to work on its single battery designs which is outdated. The company should focus on manufacturing hybrid cars, autonomous cars and electric power-trains which are going to be the future of automobile industry. Thus, by manufacturing these products, Volkswagen can lead the market. Moreover, it will help the company to gain the trust of stakeholders if the company tries to produce fuel efficient and emission free cars. This will enhance the brand image and thus, objectives of the company can be achieved (Monczka, Handfield, and Giunipero, 2015). Therefore, technological advancement strategy is the most effective option for achieving sustainable competitive

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