Strategic Analysis of Volkswagen AG

Volkswagen Strategic Analysis

The VW group is made up of two divisions that include the automotive and the financial division. Passenger cars, commercial business and power engineering business area together comprise the automotive division.  After a tumultuous 2015, Volkswagen set new records in 2016. The Diesel scandal had a bitter effect on the brand’s reputation and business.  2016 remained an year of realignment when the business set new goals before itself and started in a new direction by formulating a new strategy to emerge in a more accountable image. However, the Diesel scandal left behind an important message and that was VW should be extremely careful about compliance or it risks losing both its precious money and reputation. Yet, VW is a strong brand and that showed in its capability to survive the challenge. It made a brave return, however after having paid a major price.  Even amid fierce competition and a challenging business environment globally, the brand set new records in vehicle sales in 2016.  However, the operating profit was again affected by some specific issues including the Diesel issue. Volkswagen AG’s business is divided into two different sections or divisions including automotives and financial divisions.  There has been growth in its vehicle sales in the Asia Pacific region.  However, the investigation in the diesel issue has continued into 2016 increasing the pressure from legal issues.

Audi looks the happiest brand in the entire portfolio of Volkswagen AG and apart from record vehicle sales it also saw release of new models in the year 2016. Volkswagen has an impressively large product portfolio that consists of luxury brands and products as well as average and affordably priced products and services. It makes a very large investment each year in research and development. The reason behind this focus on R&D is that the automotive industry has grown highly competitive and every brand is in a race to stay ahead of the others. Investing in new technologies and innovation enables brands to remain competitive and popular. Volkswagen AG is undergoing a strategy shift which involves both changing culture and business structure. In Fiscal year 2017, VW filed 6566 patent applications globally for employee inventions. Nearly half of these were filed in Germany. The growing number of such patents also highlights the innovative power of VW. Some of the areas where it has bene able to bring major innovations include driver assistance systems and automation, connectivity, alternative drive systems and lightweight construction.

An external analysis of the automotive industry:

The global automotive industry is in a much better shape than it was some years ago during the recession. Especially, in US the sales and profits of automotive brands have recovered faster since the economic recession. In China too the growth of the automotive industry has remained strong. By 2020, the sales and profits of automotive brands are expected to double. However, there are some important trends shaping the automotive industry. The future of the automotive industry lies in autonomous and electric driving. The focus will remain on the user and apart from that the current trends suggest that in future, autonomous and shared mobility will become more important.

As per a report by Euler Hermes Economic Research, the automotive market is on its course to cross the threshold of 100 million units by 2019. In 2018 itself the global sales of automotive units are expected to have exceeded 98 million. However, there are several factors making the market situation challenging for the automotive brands. While it is expected that the current growth rate will continue in China and Russia, recovery is also expected in Russia and Brazil. The market is transitioning faster towards the Electrical vehicles and shared driving and managing this transition will be a key challenge before the automotive brands. To stay competitive, the automotive brands will continuously have to invest in bringing new models including low cost vehicles, premium vehicles and all forms of EVs.  There are some other challenges too to the growth of the industry including increasing legal and regulatory challenges. The growing emission requirements are leading to increased costs for the automotive manufacturers. However, the good news is that demand in the emerging markets will keep increasing. The demand for premium models and large SUVs will also drive the profitability of the automotive brands higher.

SWOT Analysis of Volkswagen AG

Strengths:

 

• International presence – One major strength of VW is its international presence. It is present everywhere from Europe to North America, South America and Asia Pacific. The one brand that is the central attraction of VW’s portfolio is 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.

 

• Brand image – For any major brand, its brand image is one of its biggest strengths. Volkswagen is among one of the most popular automotive brands of this world. While, its brand is mainly related with premium and luxury cars like Audi and Skoda, Porsche, Lamborghini etc, VW also makes passenger cars for the lower end market. Its brand image helped it bear the shock from the diesel scandal. Brand image proves a critical strength in such difficult times and can help retain sales and customers. In 2016 again, its sales picked up and the credit to a large extent goes to its brand image apart from innovation.

 

 

• Large product portfolio – Apart from automotives, Volkswagen sells financial services. Its product portfolio is made of 12 automotive brands. VW has large and controlling stakes in several of these brands. These brands include Volkswagen, Volkswagen commercial vehicles, Audi, Seat, Skoda, Bentley, Bugatti, Lamborghini, Porsche, Scania, Man and Ducati.  They make premium vehicles, sports cars, bikes and commercial vehicles. Apart from these, the brand offers financial services which include Dealer and customer financing, Leasing, Direct bank Insurance, Fleet management and Mobility offerings. A large product portfolio can be beneficial in terms of business and can help bear several types of pressures including changing demand. Sometimes if sales across one brand or product category declines, another category might see higher sales. Moreover, a large product portfolio allows you to cater to a large customer segment and varying tastes of different segments of a global audience.

 

• Increased sales worldwide – In 2016, its sales across the world grew. The following chart offers a comparison of its sales across the various brands for 2015 and 2016.

2016 vehicle sales Figs. In 1000s

 

	VEHICLE SALES	SALES REVENUE
Thousand vehicles	2016	2015	2016	2015
	Figs. In 1000s	Figs. In 1000s	Figs. In Million in Euros	Figs. In Million in Euros
Volkswagen Passenger Cars	4,347	4,424	1,05,651	1,06,240
Audi	1,534	1,529	59,317	58,420
ŠKODA	814	800	13,705	12,486
SEAT	548	544	8,894	8,572
Bentley	11	11	2,031	1,936
Porsche2	239	219	22,318	21,533
Volkswagen Commercial Vehicles	478	456	11,120	10,341
Scania2	83	78	11,303	10,479
MAN Commercial Vehicles	102	102	10,005	9,958
MAN Power Engineering	–	–	3,593	3,775
VW China3	3,873	3,456	–	–
Other	-1,638	-1,608	-58,225	-56,349

Source: Volkswagen Annual Report 2016

• Growth in Asia Pacific – The brand’s sales in Asia Pacific have grown. Asia Pacific is growing in importance because it has some of the world’s fastest growing economies. China is a very important market for the automotive businesses. The following table shows the number of vehicles sold and sales revenue by various markets

	VEHICLE SALES	SALES REVENUE
Thousand vehicles/€ million	2016	2015	2016	2015
Europe/Other markets	4,635	4,524	1,38,079	1,32,535
North America	968	941	35,454	35,384
South America	421	540	7,973	10,148
Asia-Pacific2	4,367	4,005	35,761	35,225
Volkswagen Group2	10,391	10,010	2,17,267	2,13,292

Source: Volkswagen Annual Report 2016

• Focus on technological innovation :– Volkswagen has focused on technological innovation to grow its brand and its sales. It is also investing in research for making autonomous cars. VW acquired a stake in German Research Center for Artificial Intelligence (DFKI). At Audi Business innovation center the focus is on developing ideas for urban mobility of the future. Across all its brands and business segments, the brand is investing in innovation for creating better technologies and higher customer satisfaction.
• Human resource management – VW is among the largest employers of the world with more than 627,000 employees. It also aims to become one of the most attractive employers in the automotive industry. In 2016, it was placed at the top in several employer rankings. Apart from offering a wide array of job opportunities, the brands and companies under Volkswagen AG have created their own tailor made professional development programs.
• Excellent supply chain management: Supply chain management is also a critical strength for any automotive brand and VW has managed its supply chain very effectively. It is digitizing its supply chain so as to acquire higher efficiency and make production more effective.

Weaknesses:

 

• Image and reputation tarnished by diesel scandal: The diesel scandal of 2015 had tarnished the reputation and image of the brand. VW continued to feel the effects of the brand till 2017. Dubbed as diesel dupe or Diesel gate the scandal has cost VW billions of dollars. Millions of cars were affected by the scandal worldwide which VW itself accepted. This has tarnished the brand’s image both in US and other parts of the world. The brand is still feeling the effects of the scandal, however, has been quick to emerge from its pressure.

 

• Reduced operating profits due to increased compliance issues: In US, the brand has paid around 25 Billions in fines, penalties and restitution for the 580,000 tainted vehicles.  This has affected the operating profits of the brand.

 

Opportunities:

• Growing demand for passenger cars in Asia Pacific:– The demand for passenger cars in Asia Pacific has kept growing. This presents a major opportunity for the passenger car makers. While VW has been able to increase its sales in this market, still the Asia pacific and specifically China and India are vast markets offering bigger opportunities.

 

• Sustainable technology – Sustainability also provides a major opportunity for the VW brand. Apart from sustainable vehicles and sustainable supply chain, sustainable innovation offer major opportunities for research and investment. Globally, more and more people are interested in sustainable vehicles and sustainable technology. There sales have grown up and it has created new opportunities for the automotive brands.

 

• Restructuring and partnerships:- Partnerships have helped VW  grow in China. It has struck a similar important partnership in US with Navistar. Similar more partnerships across the world and in the Asia pacific regions can help the brand grow faster. Moreover, a large business is often fraught with management issues. While VW has set ambitious plans for restructuring and reorganizing its business since the diesel scandal, the sooner it does it, the better it will be for the business’ health.

Threats:

• Heavy competition:– The competition across the automotive industry has kept growing more and more intense. It is also the biggest threat leading to higher marketing as well as R&D costs. In every segment including the premium category, the brand is facing heavier competition from rival brands.
• Legal and compliance issues :- Legal and compliance issues are a major trouble for the automotive brands. Recently, VW landed itself into major troubles related to emissions. The legal tussle has cost it more than 25 billion US dollars which shows the level of financial loss a brand might face if it gets into legal issues. Moreover, government and legal oversight has grown across the word causing automotive brands more financial stress.
• Economic fluctuations :- 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. MAN 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.

Five Forces Analysis of Volkswagen

Bargaining Power of Suppliers:

The bargaining power of Volkswagen AG’s suppliers is low. It is because VW has relationship with a  large number of suppliers throughout the world who are scattered in various regions. Moreover, its suppliers and subcontractors must follow the code of conduct prepared by VW. VW is a large and financially strong company with a global supply chain and distribution system. The bargaining power of its suppliers is also low because VW can always switch to new suppliers. However, the suppliers gain slight bargaining power from the fact that company needs high quality raw materials. VW is dependent 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. However, the overall bargaining power of the suppliers is still low.

Bargaining power of Customers:

In the 21st century, the bargaining power of customers has increased due to several factors. There are several options before customers since several brands are selling similar products in the market. The 21st century customer is a well informed customer. He evaluates every aspect of the product from quality to safety, environment friendliness and fuel efficiency before buying the product. Moreover, company’s are spending a lot on marketing and advertising to attracting new customers. Competition has increased in the premium as well as lower end segment. Each brand is investing in research and development  to bring products that  perform better on customers’ expectations. In 2017, VW invested 4.8 Billion Euros in research and development.

There are several factors that are favourable for the customer. Apart from that the size of individual purchase in the automotive industry matters. Each purchase is sufficiently large to be considered important. The overall bargaining power of the customers is high.

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 factors that mitigate this threat are VW’s financial strength and brand image. Its products are stylish as well as of good quality. This has led to higher trust and therefore reduced threat from the substitutes. The overall threat of substitute products for VW 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 making it near impossible for new brands to enter the market. While there is a very large investment in the infrastructure including manufacturing, marketing, supply chain and distribution, apart from it expenses related to human resources are also large. Moreover, legal regulation makes it tough for new brands to enter the market. The overall threat from new brands entering the market is very low or absolutely negligible.

Intensity of Rivalry in the Industry:

The intensity of rivalry in the automotive industry is very high. It is for despite the number of competing brands being very large most of them provide matching products with similar level of quality and efficiency.  It is why most brands invest very large sums in marketing as well as research and development which enables them to bring new and more efficient technologies to the market.  Overall, the intensity of rivalry in the automotive industry is very high.

 

 

Value Chain Analysis of Volkswagen

The value chain includes the entire range of activities from the production to sales and after sales service. At each stage, value is added to the final product or service and managing the value chain well helps at managing productivity and performance of the brand. The value chain includes the primary as well as the support activities. Here is an analysis of the Value chain of Volkswagen Group.

Primary Activities:

Inbound logistics: VW has managed a large and global supply chain where the focus in on quality and fast tracking production.  It is also focusing on sustainability and training its suppliers to adopt sustainable processes. In 2017, it completed training at around 29,000 supplier locations.

Operations: The global production network of Volkswagen consists of around 120 production locations. Europe is the most important production region with 71 locations. In Germany alone, there are 28 production sites. The Asia Pacific region has five production locations and North America has five. Apart from it, there are nine locations in South America and four locations in North America. 

Outbound logistics: The cars produced at the manufacturing locations of Volkswagen are shipped to its dealer network throughout the world for sales.

Marketing & Sales: The brand has created a new sales and marketing strategy to excite its customers that is aimed at exciting the customers on a  wholeness level. Its new marketing slogan is Customer Delight. Apart from  that the brand has also adopted a new sales strategy called “TOGETHER”. 

Supporting Activities:

Technology: Technology is also a key focus at Volkswagen and the brand is considered an innovative company. It spends a lot on innovation as well the creation of new technologies and models. In 2017, it spent 13.13 Billion Euros on research and development.

HRM: By the year end 2017 Volkswagen had 642,300 employees working for it. VW has completely revised its Human resource strategy to align it with its new business strategy. Now the strategy is to empower its employees for a cultural transformation.

Procurement: In 2017, VW set the goal for its procurement team to safeguard the necessary supplies and to create competitive, innovative products and also to optimise cost structures. The brand continued to digitise procurement processes and expand cooperation with its suppliers under the VW FAST (Future Automotive Supply Tracks) initiative.

Firm Infrastructure: The firm has managed a large and global infrastructure that includes its production facilities, R&D facilities and its corporate offices.  Its headquarters are at Wolfsburg, Germany.

Core Competence of Volkswagen AG

The core competencies of Volkswagen include innovation and a diverse product portfolio. Volkswagen has continued to invest in innovative technologies and vehicle models to grow its brand and market share faster. Volkswagen’s product portfolio consists of twelve brands. It has large and controlling stakes in several of these brands. In 2017, it increased its investment in research and development to 4.8 Billion Euros. It has also increased the level of collaboration between the brands it owns in the field of research and development. Its new model of Audi A8 is designed for highly automated driving. VW retains its focus on R&D so as to bring brand defining products and services as well as  forward looking mobility solutions.

VRIO Analysis of Volkswagen:

Resources and Capabilities of Volkswagen Group:

Large production infrastructure:

Volkswagen has maintained a very large production infrastructure. In 2017 it produced 10.9 Million units of vehicles. Its global production network consists of 120 production locations. Out of these, the highest number of production locations are there in Europe. The brand is constantly enhancing its production concepts and aligning them with new technologies. The competitive design of its global production network is one of its main strengths.

Brand image and global presence: 

Volkswagen has maintained a very good brand image and a strong global presence. The diesel scandal might have tarnished its reputation to some extent but the brand has made a great return and that shows the strength of its brand image. The brand is present in most corners of the world and two of its largest markets are Europe and Asia Pacific. Its sales in these two regions have remained the highest.

Research and Development Capabilities:

The brand has managed strong research and development capabilities and spends a large sum on research and development. However, investment in R&D is essential for increasing the value of the organization sustainably. In 2017, its research and development costs amounted 13.13 Billion Euros.

Large and extensive supply chain:

Another major capability of the brand is its large and extensive supply chain. The brand has established a special network of FAST suppliers. FAST is an initiative by VW that  aims to make its supply network future proof. Its goal is to successfully implement innovation and globalization by increasing the participation of suppliers more intensely and at an early stage. The number of FAST suppliers increased from 55 in 2016 to 64 in 2017.

Large product portfolio:

Another major capability of the brand is its large product portfolio which is made up of 12 brands in several of which it has large and controlling stake. They include Volkswagen, Volkswagen commercial vehicles, Audi, Seat, Skoda, Bentley, Bugatti, Lamborghini, Porsche, Scania, Man and Ducati. A large product portfolio allows VW to cater to the needs of a diverse customer group raining from the upper end and premium customers to the mid income (middle class) consumers.

Human Resource Management & Organizational culture:

The focus of VW on HR management has increased during the recent years. It is working to empower its human resources and transfer its organizational culture as per the needs of the 21st century. The total number of employees at VW in 2017 was 642,300.

Resources	Value	Rarity	Inimitable	Exploited	Implication
Production Infrastructure	Yes	Yes	Yes	Yes	Competitive advantage
Brand image/global presence	Yes	Yes	No	Yes	Temporary Competitive advantage
R&D capabilities	Yes	Yes	No	Yes	Temporary Competitive advantage
Supply chain	Yes	Yes	No	Yes	Temporary Competitive advantage
Product portfolio	Yes	Yes	Yes	Yes	Competitive advantage
HR& organisational culture	Yes	Yes	No	Yes	Competitive advantage

Supply Chain Management:

 

The success of a large and global automotive business like VW depends on the success of its supply chain and therefore it has intensified its focus on managing its supply chain successfully. In this regard to make its supply chain highly efficient and agile, the brand started the FAST initiative. FAST stands for Future Automotive Supply Tracks. Its new vision is titled “Together” which has six key goals:

– Access to supplier innovations

– Active cost structures

– Forward looking structures

– People, expertise and attractiveness.

– Supply chain excellence

– Group wide synergies

Some of the main initiatives that VW undertook to achieve these goals are:

– Value sourcing whose aim is to integrate the suppliers into the development process systematically right from an easy stage.

– Optimising component costs through commercial and technical activities referred to as Greenfield Costs.

– Digitisation of the supply chain which includes a central IT system that  integrates all the core procurement processes not a single solution and which will act as the basis for a digital network to include all the procurement partners.

VW had introduced the FAST initiative in 2015 with the aim to future proof its supply chain. these initiatives have enhanced the speed and efficiency of collaboration practices between VW and its supply chain partners. It enables the brand to coordinate the global strategies and implement global projects with higher efficiency. The number of suppliers which are a part of the FAST supply network hags increased to 64 in 2017. The company has introduced a FAST forum where the key decision makers regularly discuss how to make the FAST supply chain initiatives more effectively.  the benefits of implementing these initiatives are already evident and by integrating the suppliers into projects at an early stage, VW has been able to achieve its material cost targets even faster. It has also helped improve the quality from market and customer perspective.

The brand is also working to achieve a completely digitalised supply chain. It is going to help the ensure supply, leverage synergies throughout the group and be a leader in cost and innovation. VW is also creating a shared database and using innovative technologies that enable efficient and networked collaboration in real time.  The brand is now working together with its suppliers on one platform that was released in April 2017 and called ONE KBP. This platform links more than 300,000 users from the business units of VW and supplies making it one of the largest platforms within their group. Another important focus of the brand’s supplier relationships is sustainability.  The supplier have to follow the sustainability standards set by Volkswagen.

Analysis of Financial performance:

Despite the diesel scandal of 2015, VW’s financial performance next year was great. Sales revenue increased by 6.2% in 2017 compared to 2016. In 2017, VW’s sales revenue was 230.7 Billion Euros compared to 217.3 Billion Euros in 2016. Its net profits more than doubled in 2017 with higher margins and revenue because of record sales. VW got ahead of Toyota to become the world’s largest carmaker in 2016 and 2017. Net Income of Volkswagen AG increased by more than 55% reaching 4353 million Euros in 2017, compared to 2016.  Net profit to shareholders also climbed high rising from 5.4 Billion euros in 2016 to 11.4 Billion Euros in 2017. However, Volkswagen is entering the era of self driving cars ad whether it will be able to sustain its momentum or not is the bigger question.

Suggestions:

– A cultural shift at Volkswagen is essential given the damage done by the Diesel scandal. the focus must now be on integrity, ethics and employee empowerment.

– The company is entering an era of shared riding and Electrical vehicles. These are the two areas which hold immense potential but the brand should also ready itself for the risks involved.

–  The Asia Pacific markets have grown especially important and apart from local production, the brand must also focus on better marketing in this region.

– Despite the high level of production and sales, the challenge of competition is quite big and VW should continue to invest in R&D for faster growth.

– Special focus should be paced on compliance globally since it cannot risk another scandal as fines can cause major losses.

Suggested Reading: Samsung Strategic Analysis

Sources:

Volkswagen Annual Report 2016

https://fortune.com/2018/02/06/volkswagen-vw-emissions-scandal-penalties/

https://www.volkswagenag.com/en/career.html

https://www.ft.com/content/d5a3b0b8-18c0-11e8-9376-4a6390addb44

https://www.pwc.at/de/publikationen/branchen-und-wirtschaftsstudien/eascy-five-trends-transforming-the-automotive-industry_2018.pdf