Strategy Paper

Volkswagen

Visal Kim, Soratha Khov

Economic Strategy for Business Decisions

Professor Kelli Mayes-Denker

Strategy Paper

26th November 2017

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Strategy Paper

Volkswagen

I. Background and Introduction

The project topic for this strategy paper is the Volkswagen group, which is a German

multinational automotive manufacturing company. Having existed in the automotive

industry since 1937, Volkswagen empire is getting bigger and bigger as the Volkswagen

Group has taken the global sales crown from Toyota in 2016 with the world breaking a

record of 10.3 million cars sold comparing to Toyota of 10.2 million units in the same year

(Rauwald&Ma, 2017). With a net worth of $72.9 billion (Forbes , 2017), Volkswagen itself

owns 12 famous car brands in total including Volkswagen Passenger Cars, Audi, SEAT,

SKODA, Bentley, Bugatti, Lamborghini, Porsche, Ducati, Volkswagen Commercial Vehicles,

Scania and MAN, making it one of the most recognizable and valuable brands in this era.

With a very strong and committed ambition to be the largest car manufacturer, the

Volkswagen group expanded and operated in 153 countries including Cambodia with 119

factories located globally (Volkswagen, 2017). Volkswagen strives its best to offer its

customers high performance automobiles with the latest advanced technology, focus on

customer safety as well as the luxurious experience of exclusive brands. Among the

automobile industry, Volkswagen is ranked as one of the 20 best brands in the world. The

reason why our team choose Volkswagen as our research topic because we want to look

into one of the biggest automobile companies that operate globally and constantly keeps

pace with the continuously innovative and updated technology in order to see what

strategies they use and how they implement them to achieve competitive advantages,

compete against its rival in a dynamic and ever-changing environment and sustain itself for

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nearly 100 years. Having searched for such an interesting and remarkable company,

Volkswagen proved the best choice.

What’s interesting about Volkswagen is that it has launched its first global strategy in

2008, which was “Strategy 2018”, giving the future roadmap of the group 10 years ahead.

The Volkswagen Group clearly shared its Strategy 2018, which “is to position the

Volkswagen Group as an economic and environmental leader among automobile

manufacturers worldwide” (Volkswagen, 2008). In order to achieve the title of the world

most successful and fascinating automaker by 2018, Volkswagen has set four goals; which it

intends to become a world leader by using intelligent innovations and technologies while at

the same time delivering customer satisfaction and quality, aims to increase unit sales to

more than 10 million vehicles a year, safeguard its financial position and have the ability to

take action to achieve returns on sales before tax of over 8%, and to become the top

employers of all brands, companies and regions in order to build a first-class team. After

Volkswagen’s emission scandal in the U.S in 2015, it has changed its strategy direction in

2016 to “Strategy 2025”, which wanted to create a new Volkswagen by transforming itself

into a globally leading provider of sustainable mobility (Volkswagen, 2016). However, we

will only focus on Volkswagen’s strategy 2018 in this paper due to the appropriate

relationship of the present timeframe. The reason why we emphasize on its strategy 2018

instead of 2025 strategy is that the 2025 strategy has just implemented recently, so we

cannot evaluate if it is successfully implemented based on one-year data. Conversely, its

2018 strategy had started since 2008, so we can exactly look what happened during these

10 years. Thus, it is easier to analyze economic theories and see how they are applied to the

real world as there are a lot of available researches and evidences based on facts to analyze

the case. More interestingly, Volkswagen’s performances and sales seem to dramatically

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increase in this period of time. We will see what Volkswagen does and how it performs since

the public announcement of the 2018 strategy until now. We are going to analyze whether

Volkswagen is successful or fails in implementing its strategy by identifying key factors

involving its strategy and what aspects contribute to Volkswagen Group’s overall successes.

In order to enhance the quality of this economic analysis, we will use some important

strategic tools that are suitable for the content to demonstrate the connection of economic

principles applying to the real world. Additionally, we will study multiples kinds of research

available from credible sources as evidence to investigate the research as well as the

calculation of economic valuation of the Volkswagen Group matrix. At the very end of the

paper, there will be an evaluation of what areas and strategies that drive Volkswagen’s

success as those are competitive advantages that it must continually strengthen as well as

provide information regarding its weakness and poor performance with recommendations

of how it should behave differently to improve and maintain its future legacy.

II. Strategy Tools of Analysis

This paper is designed and organized sequentially, based on a logical economic analysis. In

order to answer the question if Volkswagen Group is successfully implementing its strategy,

we will look at two economic frameworks that we strongly believe are the most important

factors to its overall 2018 strategy and they will be our focuses throughout this paper. The

first approach is the boundaries of firms, focusing on vertical and horizontal boundaries of

Volkswagen Group. We will measure the level of Volkswagen Group’s vertical integration by

looking into areas of its manufacturing processes that are performed by itself within the

vertical chain vs the parts that it buys or outsources from external providers in order to

study the impacts on its performance. Regarding Volkswagen Group’s horizontal

integration, we will look on what scale and range that Volkswagen operates and identify

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what strategies or techniques it uses to continuously expand its size and how that enormous

size enables it to achieve economic of scale and scope. As mentioned in Volkswagen Group

2018 strategy, it wants to be the economic leader among automobile company, so we will

analyze how fast Volkswagen Group is growing in term of revenue by comparing its data in

2013 to 2016 and compare those data to its main competitors, which are Toyota and

General Motors. Furthermore, the second economic factors is the market structure and

competitive analysis. We will determine the market structure in which Volkswagen Group

operates in and also Volkswagen Group’s key competitors involved in the automobile

industry.

Source: Economics of Strategy: sixth edition

By measuring what market structure Volkswagen Group competes in, we will use Herfindahl

index formula as shown above to calculate the sum of squared market shares of all firms in

the automobile industry. We will analyze Volkswagen’s market structure based on HHI index

range derived from Economics of Strategy sixth edition book. HHI range starts from 0 to

10,000 maximum in value, from 0.1 to 1 maximum in percentage. After identifying the

Volkswagen Group market structure, we will use the Porter’s Five Forces Model analysis,

which focus on the five factors including supplier power, buyer power, competitive rivalry,

threat of substitution, and threat of new entry as shown below and we find it significant to

identify where Volkswagen Group is standing in the global automobile industry.

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Source: Harvard Business ReviewJanuary 2008

The last strategic tool that is used in this paper is SWOT analysis, which stands for Strength,

Weakness, Threat, and opportunity as you can see from the visual aid below to determine

Volkswagen Group internal and external forces. We use SWOT because it is a helpful tool to

identify what areas Volkswagen is doing well and how it could take those strengths as

competitive advantages to beat its main competitors as well as making adjustments and

improve its weaknesses, grab the opportunities and take them for granted, and avoid

threats.

III. Strategy Findings

This whole part of the paper is about summarizing the actual data and evidence that we

found to analyze Volkswagen Group based on the fundamental strategic tools we

mentioned in the previous part. Starting with the Vertical Boundary of Volkswagen Group,

there was an old article in 1997, stated that VOLKSWAGEN has stopped trying to outsource

every part it can. In-house operations are winning back business. The speech of Klaus

Volkert, the chairman of VW Works Council during the 1990s, said: “the main aim is to

secure employment but cost reduction is also a factor”. Suppliers provided more than 50%

of the parts and components used by Volkswagen. Horst Koenig added, “VW makes many of

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its own transmissions, exhaust systems, plastic parts, small appliances, steering

mechanisms, and rear and front axles.” Make or buy decision affects the cost of parts and

VW will be more profitable if it produces more of its own parts, said Steven Rietman, an

analyst (Israel, 1997). The car production process in Volkswagen consists of 3 main phases

passing through the Vehicle Body Construction, to modern Paint Shop, and Assembly Room,

which is the final stage of making the finished car. Each of the processes is internally made

in Volkswagen production plants located all around the world (Volkswagen, 2017). Another

article, VW plans to manufacture more car parts itself rather than buying from outside

suppliers as part of a bid to boost productivity. Mentioned by Jochem Heizmann, the

production head, “We are increasingly thinking about insourcing and we will certainly make

more components ourselves” (Staff R. , 2009). Volkswagen sale ratios are one of the highest

among its competitors and it is known as a “manufacturer in-house” with a high level of

vertical integration including the engine, axle, steering and suspension production.

Wolfsburg, the main plant for Volkswagen, assembled 45% of vertical integration

(Lawaspect, 2017). With a strong commitment to being fully vertically integrated,

Volkswagen Group invests 11.5 billion euros in 2014 on research and development every

year, makes it the number one R&D spender in the world. According to Winterkon, the

previous CEO of Volkswagen Group, VW has some 46,000 researchers and developers on

staff as well as more than 10,000 IT experts. While many other auto companies have done

their utmost to become less vertically integrated, Volkswagen is a company that is still

developing and producing lots of elements that go into vehicles, so a nontrivial amount of

the R&D goes into not only electrified powertrains and autonomous systems but into

improving factories for producing everything from connecting rods to gas tanks (Vasilash,

2015). According to Volkswagen Group, the Group operates 120 production plants in 20

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European countries and 11 others in Americas, Asia, Africa, producing 43,000 vehicles every

weekday (Volkswagen, 2017). Comparing to Toyota, Volkswagen’s main competitor, Toyota

has only 53 manufacturing companies by the end of 2016 (Toyota, 2017). By looking at all of

this information and data, it is very obvious that the level that Volkswagen is being vertically

integrated by producing most of its own parts is very high.

Moving on to the Horizontal Integration of Volkswagen Group, it is implementing a

powerful strategy to endlessly expand its empire, known as merger and acquisition by

acquiring automobiles companies that it sees their future potential of increasing

Volkswagen Group’s influences and market shares. Establishing itself in 1937, Berlin-

Germany, Volkswagen Group survives for nearly a century and it is now the largest

Automaker that owns a group of a diversified portfolio of 12 famous automobile brands,

selling more than 10 million vehicles a year globally. The very first VW’s acquisitions was

Audi, which it bought in 1966. Audi is a dominant brand under Volkswagen Group since it is

ranked as the second highest number of vehicles every year among the 12 brands.

Volkswagen successfully acquired Seat, a Spanish automobile manufacturer, in 1990 after

being the major shareholder since 1986. In 1998, it was the year that VW targeted super-

luxury market when the most 3 famous super car brand, Bentley, Lamborghini, and Bugatti,

were acquired by VW at the same time. VW continues to pursue diversification strategy by

ambitiously gaining more brands. Moreover, VW increasingly bought Skoda in 2000.

Volkswagen finished 100% bought of Porsche, the luxurious car brand, and extended its

operation in motorcycle industry by acquiring Ducati, the world well-known brand, in 2012

(Newell, 2017). VW Group also diversifies itself into the truck sector. Volkswagen took a full

control of Scania after owning 90% of the company and forcing the remaining shareholder

to sell the rest, the truck-maker manufacturer, in 2014 (Bray, 2014) as well as getting a

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majority share of Man in 2011 (BBC News, 2011). Due to the extensive portfolio of

Volkswagen Group, this allows VW to operates in 153 countries worldwide and even achieve

economic of scale and scope over its competitors. By having a numerous brand under a

single parent, Volkswagen introduced MQB platform, stands for Modular Transverse Matrix,

which is a set of common parts for different models. The MQB platform will be shared

among many Volkswagen models, from the Polo to the Golf and the Passat. Most models

from Seat and Skoda, two other brands from the Volkswagen group, will also use MQB, the

Audi A1 and A3 as well. Totally, there will be more than 60 different models using the MQB.

This allows Volkswagen Group to build vehicles at a low operational cost and achieve

economic of scale by sharing one platform with different models (MotorNature, n.d).

Volkswagen Group also benefits from the synergies for Volkswagen and Porsche such as

technology sharing and joint R&D, common components/platforms, sale and distribution,

which was estimated to have 700 million euro operating profit improvement (Global

Competitiveness Forum, n.d).

Apart from the vertical and horizontal boundary of the Volkswagen Group, let’s

proceed to the analysis of revenue growth of the Volkswagen Group. For the calculation, we

use revenue growth rate formula Revenue Growth Rate %: [(Revenue Year 2 – Revenue

Year 1)/ Revenue Year 1 x 100)]. According to Volkswagen annual report in 2013, its total

sale revenue was 197,007 million euro (Volkswagen, 2013) and 217,267 million euro in 2016

(Volkswagen, 2016). Comparing to Toyota, it was reported to earn 22,064,192 million yen in

2013 (Toyota, 2013) and 28,403, 118 million yen in 2016 (Toyota, 2016). General Motors

Company’s total revenue was $155,427 million in 2013 (General Motors Company, 2013)

and $166,380 million revenue in 2016 (General Motors Company, 2016).

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Revenue Growth Analysis

Volkswagen Toyota General Motors

Revenue 2013 197,007 millions euro 22,064,192 millions yen $155,427 millions

Revenue 2016 217,267 millions euro

28,403, 118 millions yen $166,380 millions

Calculation(217,267-

197,007)/197007 x 100

(28,403,118-22,064,192)/

22,064,192 x 100

(166,380-155,427)/ 155,427 x 100

Revenue Growth (%) 10.28% 28.72% 7.04%.

As illustrated in the revenue analysis table above, Volkswagen’s revenue growth rate is

more than 50% lower than Toyota’s, and 3.24% higher than General Motors’. The result

shows that Toyota won a title of the most growing car manufacturer in the automobile

industry and Volkswagen has not achieved its goal of becoming an economic leader among

automobile manufacturers worldwide yet. It is standing in the second position on the global

list.

In addition to the boundaries of Volkswagen Group, let’s move on to the second

focus, which is market structure and competitive analysis. In order to understand the type

of market structure in which Volkswagen Group competes in automobile industry, we will

sum the squared market share of the top 10 largest firms in this industry since those 10

firms capture more than 70% of the entire automobile market, so we assume the remaining

small firms market share do not affect the Herfindalh index in determining market structure.

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This table shows the market shares of the 10 largest firms in the automobile industry,

operating on the global scale in 2013 and 2014 but our focus is on the newest possible data.

According to the data, the Herfindahl index (HHI) of global automobile industry equal 11.72 +

112 + 10.72 + 8.92 + 6.72 + 5.72 + 5.42 + 52 + 3.42 + 3.32 equal 605.58 or 0.06. Based on HHI

index range, the result implies that the market structure in which Volkswagen Group

operates in is a type of perfect or monopolistic competition. By thoroughly examining

automobile industry, it is not a type of market that have many individuals selling

homogenous product and there is no free entry and exit. Thus, we conclude that the global

automobile market is monopolistic competition in which each firm provides differentiation

products, has its own loyal customers, and new entrants are a potential threat to firm’s

profit.

In order to understand in what position Volkswagen Group is standing in its market, we

will use Porter’s five forces model to analyze the 5 factors mentioned in the strategic tools

above. For Bargaining Power of buyers, we address a few important factors related to

Volkswagen Group’s customers. Volkswagen Group comprises of 330 car models, each

having different features, serving people of all ages based on their preference and

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exclusivity. Based on data of number vehicle sold by Volkswagen in 2016, China is its biggest

market, accounting for more than 40% of its global car sale +12.2% growth from the

previous year (Volkswagen, 2017). Additionally, there is no data provided for Volkswagen’s

distributors and dealers worldwide; however, it has about 3000 dealers in Europe alone,

each has an average staff of 35 and VW is seeking to reduce size of dealer network by

launching online sales (Staff, 2017). We can see the number of vehicles sold by Volkswagen

Group has increased every year despite its emission scandal in 2015 and it has sold more

than 10 million cars in 2016, which implies the strength of Volkswagen’s buyer is low. For

the bargaining power of Volkswagen’s suppliers, there is no actual data about the total

number of Volkswagen’s suppliers. However, Volkswagen has just presented Group Award

2017 to 19 best suppliers (Volkswagen, 2017). As I have presented a very detailed

elaboration in the vertical boundary of Volkswagen, VW’s level of vertical integration is very

high and it continues to spend billions of dollar in R&D in order to become more vertical

integration as it believes in the cost-saving strategy of manufacturing in-house. Therefore,

Volkswagen does not have to worry at all about its suppliers. It is Volkswagen’s suppliers

that have to be concerned about losing such this gigantic car manufacturer. The bargaining

power of its supplier is low. Moving on to the threat of New Entrants, many experts have

acknowledged that newly entering automobile industry requires a huge amount of fixed and

capital investment, highly advanced technology and the needs of establishing a strong and

recognizable brand. Looking at the brand of global automobile providers such as Toyota,

Volkswagen, General Motors, BMW, they have existed for more than 100 years and it takes

them a very long time and capitals to build such their remarkable brands. It is impossible for

new entrants to enter the market and survive for a longer period (Pratap, 2017). So, the

threat The threat of new entrant for VW is low. The fourth factor is the threat of substitute

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products. The switching cost for customers to use other brands such as Toyota, Ford, GM,

BMW is not high at all. Moreover, Toyota has been well known for the best brand due to its

reliable technology and durability. The objective of buying a car is to travel from one place

to the others. Not much people care about owning the exclusive and cool brand.

Meanwhile, the increase in the fuel prices can also affect the demand of VW’s products

because people prefer to take public transportations or use the electric car, which is a field

that VW is not doing well when the price fuels increase forcefully. Thus, the threat of

substitutes for VW is considered to be moderate. Moving to the final factor, which is Rivalry

among existing competitors. The global automobile industry can be seen as monopolistic

competition with a few dominant players such as Toyota, General Motors, Volkswagen,

BMW, Ford, Hyundai, and Tesla, which will become Volkswagen’s main competitors for

electric cars in the future. The competition is constantly fierce when everyone is competing

to be number one. The exit barriers in the automobile industry are very high as they have to

bear very large losses if they quit. Each brand has a very loyal customer (Pratap, 2017).

Despite the fact that Volkswagen is the current biggest carmakers; however, its market

shares and revenue growth are still behind Toyota. The danger of Rivalry of Existing Firms

can be seen as very strong. To conclude the five forces model of the Volkswagen Group, VW

is standing in a really good position in the car making industry.

In addition to the five forces analysis, let’s take a closer look at Volkswagen’s SWOT

analysis. The S, W, T, O are summarized in a table below and we will only discuss main

important points later.

Volkswagen Group SWOT Analysis

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S The widest brand portfolio among all

automotive companies Strong brand recognition Diversification strategy Synergy between brands The current largest car manufacturer Strong presence in China

W Negative publicity weakening the

whole Volkswagen brand The highest recall rate in the U.S.

market Low market share in the U.S.

automotive market Little expertise and no competence in

making battery driven vehicles

O Acquire skills and competences through

acquisitions Demand for autonomous vehicles Focus on significantly improving

sustainability policies to remedy damaged brand reputation

T Intense competition Further fines and damages that will

have to be paid Increasing government regulations

Source: Strategic Management insight (Jurevicius, 2016).

Volkswagen has many strengths, including the owner of 12 famous automobile brands, a

synergy between brands that enable VW to achieve economic of scale and scope as well as

having a strong presence in China. What’s more important is about its magnificent brand

recognition all over the world and the fact that it is the largest car manufacturer today that

sell more than 10 million vehicles in 2016. Volkswagen has won award every quarter from

January to March, April to June and VW was titled by the Jury for the Plus X Award, one of

the leading innovation award worldwide for technology, as “Most Innovative Brand 2017”

while New Arteon, VW car, received “Best of Best” top ranking in the “Automobile Brand

Contest 2017” (Volkswagen, 2017). Interestingly, VW has successfully achieved the first goal

of Strategy 2018, which it aimed to sell more than 10 million vehicle, since 2015, which is 3

years earlier than it planned (Volkswagen, 2015). However, VW also has many weaknesses.

It is reported that VW has the highest recall rate of 1805 vehicles per 1000 vehicles

produced in the US market comparing to other automakers. Besides, VW only has a few

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electric vehicles with limited capacity, so it can barely compete with its rival, especially Tesla

the key competitor (Jurevicius, 2016). VW’s main weakness is bad images, resulting from

emission scandal in 2015, which VW lost more than $18 billions for all damages including

fines, rapid declining in stock price as well recalling millions of VW car back.

Source: Volkswagen AG, Environmental Protection Agency

Nevertheless, there are many opportunities that VW can grab for a greater good.

Volkswagen Group is able to achieve its new electric vehicle strategy plan by acquiring

smaller startups, which already developed skills in battery technology and autonomous

driving as it always pursued diversification strategy. The demand for autonomous vehicles

by 2025 is estimated to be $45 billion, which is a golden opportunity for Volkswagen to first

step into the market to get a higher market share and increase sales. The Volkswagen Group

can also rebuild its brand and regain public trusts from customers by about acting

sustainably and honestly commit to being the environmental leading company, also make

sure that emission scandal will not happen again. Lastly, it also faces many potential threats

like intense competition. As explained in the five forces analysis, competition in this industry

is very fierce and VW has to be ready all the time for upcoming challenges in the electric

vehicle industry. Also, VW is still involved in many lawsuits all around the world since its

scandal revelation, which it will have to pay more fines and damages. There might be

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increases in different government regulation in 153 countries it operates in especially

greenhouse gas emissions response to the global warming (Jurevicius, 2016).

IV. Recommendation

It is very important for VW to be aware of its strong recognizable brand, that attracts

millions of loyal customer, is the key factor contributes to its overall successes. Therefore, it

must pay a close attention to make its brand more famous in order to attract more

customers. In order to achieve that, VW must ensure that emission scandal in 2015 will not

happen again in the future to avoid suffering from a billions dollar of damages. VW should

also maintain its largest car manufacturer title by expanding its market more in China, VW’s

largest market, as well as areas that it is not strongly presence such as the US. As it

introduced its new Strategy 2025 to be the world leading sustainable electric vehicles, VW

should strongly develop its battery technology by acquiring companies that are good already

or forming alliances with other potential partners in order to compete with its main rival,

Tesla. Despite the fact that Volkswagen Group is one of the most successful companies in

the world; however, there are some imperfections and weaknesses that it should be aware

of. It wanted to be the world economic leading companies, but the revenue growth is still

below Toyota and an environmental leader, but it has just paid a billions dollar of fine for its

emission scandal. Volkswagen Group has to honestly do whatever it takes to regain its bad

public image from customers. Lastly, it should focus on improving its revenue by cutting

unnecessary expenses as its revenue growth rate is 50% slower than Toyota’s.

V. Conclusion

After a long analysis of Volkswagen’s Strategy 2018, it appeared that many of

economic theories are well connected in this research. We have come to a conclusion

that Volkswagen is not doing well during these 10 years to successfully implement its

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global strategy. It has only achieved one of its four goals. However, Volkswagen is a very

vertically integrated company and its gigantic size, operating in 153 countries enables it

to achieve economic of scale and scope. Competing in a monopolistic structure, VW

stands in a really good position comparing to other automakers despite its revenue

growth is still behind Toyota. VW’s SWOT analysis also helps us understand more about

VW’s internal and external forces that it could strengthen and avoid. Volkswagen should

focus on the things it is already doing well and it should avoid and improve areas that it

is performing poorly. If Volkswagen follows my recommendation, I strongly believe it will

achieve more.

Reference:

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