Five Forces Analysis of Volkswagen

                Volkswagen Five Forces Analysis

Volkswagen is among the largest players in the automobile industry.  VW offers an extensive product portfolio that includes passenger cars as well as luxury vehicles like Audi, Porsche, Bentley  and Skoda.  VW has maintained a strong internation footprint with operations across 140 countries. It has 29 manufacturing locations operational across 12 countries. In 2015, VW faced a major challenge to its operations and reputation because of the Diesel scandal but things started returning on track in 2017. The scandal caused the company major financial loss but despite that VW has seen impressive growth in the following years.

VW is planning to bring ten new electric car models by 2026 and has set quite ambitious targets regarding the sales of electric vehicles in the Europe, North America and China regions.

This is a five forces analysis of Volkswagen that analyses how these forces affect its competitive position in the world market. The five forces model was introduced by Michael E Porter and is an analytical tool that the managers can use for planning growth and to make their business more competitive.

Bargaining Power of Suppliers:

The bargaining power of Volkswagen group’s suppliers is low because VW has suppliers throughout the world scattered in various regions. 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 its suppliers is also low because it can always switch to new suppliers. However, what gives the suppliers slight bargaining power is the company’s need for quality raw materials and VW’s dependence on long term partnership with suppliers who can cater to its needs responsibly. In this regard apart from training its suppliers, it also rewards the best ones among them. 

Apart from VW’s financial strength and market leading position, there are some more factors that limit the bargaining strength of VW suppliers. For example, the suppliers are scattered in various corners of the globe. They are smaller firms lacking the ability of forward integration and therefore pose no competitive threat. Overall, the bargaining power of Vw’s suppliers remains low.

Bargaining power of Customers:

In the 21st century, the bargaining power of customers has increased driven by several factors. The role of customers in terms of business is critical and they are at the core of the picture. Companies need to focus on customer service and customer experience to maintain higher customer loyalty. There are several options before customers since there are several brands in the market. The intense competition in the global automobile sector has also increased the bargaining power of customers. Apart from that, the 21st century consumers are well informed consumers. They evaluate every aspect of the product from quality to safety, environment friendliness and fuel efficiency before purchasing. Automobile companies are spending a lot on marketing and advertising to lure customers.

Competition has increased in the luxury as well as lower end segment and brands are investing in research and development so as to bring products that  deliver better than the customers’ expectations. 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 moderately high, moderated to some extent by the strong brand image and focus on innovation by VW.

Threat of Substitute Products:

The threat of substitute products is high for VW because of the high competition from the other 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 focus on product design, safety, innovation, customer experience 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. 

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. There is a large investment in manufacturing, marketing, supply chain and distribution to start an automobile business. Apart from it, the expenses of innovation and human resource management are also very high. Moreover, laws and regulations across various regions also make it difficult for brands to enter the automobile sector. The overall threat from the new brands to enter the market is very low or negligible for Volkswagen. Some more factors that mitigate the threat from new players include the market leading position of Volkswagen, its finanical strength, technical knowhow, innovations and its strong brand image. All these factors have helpd VW reduce the threat from new players entering the automobile sector.

Intensity of Competitive Rivalry in the Industry:

The intensity of competitive rivalry in the automotive industry is very high. It is because while the number of competing brands is large, most of them provide matching products with similar levels of quality and efficiency.  There are several competing players in the market that threaten the market share of Volkswagen and include leading names like Toyota, BMW, Hyundai, KIA, Honda, Nissan and so on. The competing players are also quite aggressive about innovation as well as marketing and invest heavily in product design and safety as well as customer experience. Automobile brands competing with VW also strive to maintain a strong image in the global market. 

There are some factors which help mitigate the competitive threat to some extent. volkswagen has focused on maintaining a strong brand image and invests in innovation to maintain higher customer loyalty and competitiveness. Its financial strength and market leading position as well as investment in marketing also help it maintain its strong competitive position. However, the level of competitive pressure on VW still remains high because of the strong competition from several market leading players.