ASSESSMENT POINT ESSAY 2 - R1508D933901

University of South Wales

Business School

Strategic Analysis and Planning (ST4S15-V1)

Masters in Business Administration (MBA)
Instructor: Dr. Selwyn Seymour

Student: R1508D933901

Task: Present a critical strategic analysis of VW group covering the

following areas:

 Resource Audit
 Value Systems
 Product/Service portfolio (BCG Matrix)
 Potential future strategic growth
o Identification of options
o Evaluation of options

Word Count: 2978

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Introduction

Founded in 1937, the Volkswagen Group (VW), known in German as Volkswagen

Aktiengesellschaft, is an automaker industry, with its headquarters located in Wolfsburg,
Germany. This automotive industry is geographically located in 117 countries around the world.
The group consists of 2 divisions: the Automotive Division and the Financial Services Division.
Through the Automotive Division, the company’s activities comprises of “the development of
vehicles and engines, the production and sale of passenger cars, light commercial vehicles,
trucks, busses and motorcycles, as well genuine parts, large-bore diesel engines’,
turbomachinery, special gear units, propulsion components and testing system businesses,”
(Volkswagen, 2015: 21). The second division of Financial Services focuses on combining dealer
and customer financing, leasing, banking and insurance activities, fleet management and
mobility offerings, (ibid.). The main competitors of the VW group include Toyota, General
Motors and Ford amongst others.

Brief strategic position of VW

With the Group’s Production 2018 Strategy, Volkswagen is focused on building “the
world’s most powerful and most fascinating automotive production system” and becoming “the
global economic and environmental leader among automobile manufacturers by 2018,”
(Volkswagen 2014). In order to make this a reality, VW set four core objectives which were
defined focusing on four goals as follows:

 Volkswagen wants to gain a position of the world's leading manufacturer by using

intelligent innovations and technologies to shape customers' satisfaction and
quality
 Sale is expected to exceed 10 million vehicles per year; whereas Volkswagen
wants to rely upon development of large growth markets.
 The profitability of sales before taxation is expected to reach at least 8% thus
guaranteeing financial safety and ability of the group to function in the periods of
economic downturn.

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 Volkswagen wishes to be an excellent employer on all markets, among different

communities and in all regions; this is the prerequisite for creation of great teams
of employees. (Volkswagen 2017).

Strategy 2018 has been argued to carry an ambitious deadline of 2018 but research shows
that some of the objectives have already been achieved. For instance, the strategy of delivering
10 million vehicles, to customers, in sales per year was achieved in 2014 when VW Group
delivered 10.14 million units, (Volkswagen 2015). Some views argue that Strategy 2018 merely
represents a clear challenge to Toyota, the Japanese automobile manufacturer, which has been
acknowledged as the industry leader for many years. VW shares a 1 to 2 ratio with the Toyota
Company in the automotive industry and because the company has a broad range of its portfolio
when compared to the other companies, it seems to be catering to the majority needs of the
shared market. Its brands are based in Europe, and as a result, it is the leading automotive
company across Europe.

An Evaluation of the Resources and Value Systems of the VW Group

A resource can be described as an asset or input to production (tangible and intangible)

that an organization owns, controls, or has access to. Johnson et al (2005) classify resources into
the following categories: physical, technical, financial, human and intellectual resources.
Physical resources for VW include: 47 production plants in eleven European countries and a
further seven countries in the America, Asia and Africa (Volkswagen, 2006). Technical
resources include a diversified range of vehicle brands with high quality standards. Human
resources includes all the employees that VW has and intellectual resources include the
innovation projects that have been providing Volkswagen with potential access to a wider market
variety, therefore, making a noteworthy contribution to the benefits of the product,

Evaluation of the VW resources and value systems was done using the Ansoff Product
Matrix and the following results were achieved. The Ansoff Matrix was developed by H. Igor
Ansoff in 1957. The matrix offers a simple productive way to think about the risks of growth. It
outlines four possible avenues for growth, which vary in risk as shown in the diagram below:

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Fig I: Ansoff Matrix Model used in Evaluating VW Resources and Value Systems

Market Penetration: Extensive brand portfolio

According to Johnson et al (2008: 258), “Market penetration is where an organization

gains market share...by which the organization takes increased share of its existing markets with
its existing product range.” It focuses on expanding sales of existing products in an existing
market as a way to achieve growth and increase market share. VW Group has managed to do so
by establishing an extensive brand portfolio. The company has many brands when compared to
other automotive companies. The firm sells its products in 12 brands. For example, it sells its
passenger cars under Audi, Bentley, Skoda, Bugatti, Seat, Porsche, and Lamborghini brands. The
company's heavy trucks, buses, and other vehicles are sold under Man, Scania and Volkswagen
brands. Also, the company sells its motorcycles under the Ducati Brand. The fact that there is no
other automotive company in the world which has as many brands, means that VW has managed
to achieve growth ascertain a huge percentage share in the market. For example, its main
competitor GM has ten brands while the Toyota Company has 4. As suggested by the Ansoff
matrix, the Volkswagen group extended products are creating new market. In this case, it is
evident that VW is more advantaged than other automotive brands.

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Product Development: The new Together 2025 strategy

Product development focuses on developing and introducing a new product into existing
market segments and implies greater degrees of innovation than market penetration. As an
innovative way of establishing product development VW came up with a new Together 2025
strategy. It is a strategy which the company set after it was struck by the "dieselgate" emission
scandal. According to McGuinness (2016), “the company admitted in September 2015 to using
illegal so-called defeat devices in up to 11 million diesel vehicles worldwide. The software was
installed specifically to cheat emissions tests by enabling cars to appear cleaner in testing than
they really are when driven. As a result some models could be pumping out up to 40 times the
legal limit of the pollutant nitrogen oxide - despite in some cases being marketed as more
environmentally friendly,” (BBC News: 2016). The strategy was therefore set as a way to
resuscitate the VW legacy and lay the foundations for becoming a global leader of sustainable
mobility.

In the Ansoff matrix, this idea is represented under the product expansion square because
it involves numerous market expansion strategies. On the other hand, this approach is also
established to counter the growing market pressure for the company's products (Chen, Song and
Xu, 2010). As a result, the company introduced this strategy so that it could focus well on
delivering its products. To achieve the plan, the company set various objectives. First, it would
introduce electric cars by 2025. Secondly, it is developing competence in making batteries with a
different technology and also digitalizing the driving system. Thirdly, it is also spending a lot of
money in developing and increasing research. All these objectives are geared towards making a
plan which will increase the company's profit and efficiency. The 2015 strategy also ascertains
direction for growth for the company.

Diversification strategy

Diversification focuses on growth by diversifying into new business by developing new

products for new markets. Johnson et al (2008: 262) assert that, “Diversification is strictly a
strategy that takes the organization away from both its existing markets and its existing
products.” It is basically introducing a new, unproven product into an entirely new market that
you may not fully understand. First and foremost, the company has made sure that it spread its

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revenue across a broad range of its brands. According to the Ansoff matrix, this strategy creates
new products and opens up new markets. The company’s brands have also been spread across a
wide geographical area. It has made the company to be more advantaged than its rivals (Hakim
and Brasher, 2015). Moreover, the wide range of different brands has made the company to
target a broad spectrum of consumers hence satisfying their tastes at the same time. The
establishing the Financial Services Division can be viewed as a means, by VW, to diversify its
products. According to Jurevicius (2016), “Only 74.5% of Volkswagen’s income come from the
main ‘Passengers Cars’ segment. ‘Commercial Vehicles’, ‘Power Engineering’ and ‘Financial
Services’ generate the rest 12.4%, 1.9% and 11.2% of the revenue, accordingly.” This shows
that, through diversification, the company has ensured that all of its brands contribute
significantly towards the total revenue of the firm.

The Synergy between Brands

However, the fact that various brands can share everyday things is an important concept
in production and maximization of profits. For example, Lamborghini and Porsche, SEAT and
Volkswagen share common things that include the building technology and Research and
Development (R&D) spending. This this goes on to show that the profits of the company are
being maximized while the costs are decreasing, (Winter; 2010). Furthermore, the synergy
between brands also satisfies consumers’ needs.

Market Development: The Joint Ventures

Market development focuses on seeking growth by targeting existing products to new

market segments. VW employs various techniques to make sure that it forms healthy, successful
joint projects with the world markets. As suggested by the Ansoff matrix, the joint ventures have
developed the market of VW products. Johnson et al (2008: 261-262) note that market
development may take three forms of either new segments or new users or new geographies. VW
has formed active joint ventures with other Chinese automakers because China is its largest
market. As a result, VW has been able to operate in the country through two major ventures. The
two ventures include the FAW- Volkswagen and the SAIC Volkswagen (Doerr, Riva and Žumer,
2012). Through the partnerships, the company has been able to offer more than 150 different
models in the Chinese market. Notably, this step has increased the VW sales significantly

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because it has been able to sell more than 3.5 million units in the Chinese markets. As a result,
the company has been able to capture more than 14.6% of the total market share. This shows that
the VW market development strategy has been successful in establishing products or services
that meet the critical success factors of the new market, in this case - China.

An Evaluation Product Mix

The growth–share matrix or Boston Consulting Group (BCG) matrix is a chart that was
created by Bruce D. Henderson in 1970 in a bid to help corporations analyze their business units
and by so doing enabled corporations to prioritize and allocate resources wisely. The matrix
consists of four main categories which include the stars, the cash cows, question marks and the
dogs. By considering these four categories, BCG Matrix for VW Group can be formed from the
four of them (Lowy and Hood, 2011). In this case, the primary importance of utilizing this
matrix is to ensure that the company develops the best marketing strategy which will outdo the
other automotive companies around the globe.

Fig II: Volkswagen BCG Matrix

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In the BCG matrix, The Stars represent Audi and Volkswagen. A star is a business unit
which has a high market share in a growing market, (Johnson et al, 2008: 278). The two brands
sell more in America and Europe because they are most popular there. However, the VW
Company has been able to deliver various innovative models of the two brands which have been
efficient. As a result, the company has been able to make a lot of sales from the models. Besides,
the company has never been reluctant and it releases a new paradigm of each brand every year
showing that there is heavy investment in the brands. Also, these two brands sell many units than
any other brand in the VW Company.

The cash cows are the other category in the Volkswagen BCG Matrix. The brands in this
category include Lamborghini and Bentley. A cash cow is a business unit with a high market
share in a mature market, (ibid. 279). The two brands are appealing, and they attract their market
in the luxury end of the world. These brands are best recognized and affordable by the rich
people. Besides, the market for these brands stays stagnant, and as a result, there is only a little
growth in their market. The cows are very highly priced vehicles, and as a result, they fetch
much money for the company each year which can be used to fund investments in question
marks.

The Question Mark is the other category in the BCG matrix. A question mark (or problem
child) is a business unit in a growing market, but without a high market share, (ibid. 278). This
category of the vehicle includes the Seat (Fiat 500). This vehicle is new in the market, and it has
been launched in various markets of the world especially in the United States of America. The
market viability of this vehicle has not yet been established although it is bringing cash to the
VW Company each year. The market for this vehicle is projected to increase because there is an
increasing demand of vehicles in the society.

The fourth category of the VW Company in the BCG Matrix is The Dog. Dogs are
business units with a low share in static or declining markets, (ibid. 279). For VW, this category
includes the commercial cars which include buses and trucks. The company has struggled to
manufacture safe commercial vehicles, but the competition is stiff in this category because VW
is not the leading producer of the commercial cars so far.

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A Critical Analysis and Evaluation of the Main Future Directions for Strategic Growth

When the McKinsey's 7-S Framework is used to do a critical analysis and evaluation of
the VW Company, various results are found (Buzan, Griffiths and Harrison, 2014). First and
foremost, the value fuel is expected to rise in the future. As a result, it means that the prices of oil
prices are projected to increase. Notably, when the fuel prices rise people tend to prefer smaller
vehicles (Myrtek, 2012). In this case, the VW has sought to invest more in the smaller cars so
that it will be able to cope with the market change. This will make the firm able to compete
favorably with the other companies.

Fig III: The McKinsey's 7-S Framework Model used in Evaluating VW Future Strategic Growth
of VW Company.

In terms of Strategy - VW is focusing on becoming the Global Automotive Leader by

2018, making use of its Strategy 2018 policy; Shared Values – “it is the group’s goal to offer
attractive, safe and sound environmentally sound vehicles which are competitive on an
increasingly tough market and which set the world standards in their respective classes,
(Schmidt, 2012). Skills – It has invested in technological excellence and global presence in all

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car segments; Style - It has the top performance vehicles and participates in social responsibility;
Staff - it is a top employer with good job security, personal development opportunities and
remuneration in line with performance; Structure – It operates under various divisions e.g.
Automotive Division, Financial Division and Passenger Cars and Light Commercial Vehicles,
Trucks, Buses/Power Engineering, and Systems – includes Volkswagen academies (formerly
VW Coaching GmbH), which focuses on corporate employee development systems.

Moreover, the company is also planning to acquire competencies and skills through
acquisitions. In this case, the company will gain expertise in digitalization, autonomous driving,
and battery technology so that it will be able to fulfill its New Together-2025 Strategy. It will do
this by first buying small startups. Note that acquisitions may be costly, but its rates of interests
are the lowest in history which means that the capital for the startups will be cheaply acquired.

VW is also working towards acquiring autonomous vehicles since the autonomous

vehicle is the next big thing of the industry. As a result, the VW Company has set various
strategies which are working towards the goal earlier than 2015 (Greenhouse, 2013).
Remarkably, the company is also working towards improving sustainable policies which will
remedy the bad reputation of the company's brands. Note that the emission scandal damaged the
company's environment protection reputation. In this regard the company is no longer trusted by
its customers, other businesses and the surrounding communities (Ewing, 2015).

Recommendations

VW Company can be said to have performed well consistently over many years in the
automotive industry. Research shows that the company continues to grow. With the growth of
the enterprise, more risks are expected to come up. This happens in spite of the fact that growth
of an enterprise leads to a greater return on the company's investments. The Volkswagen group
needs to improve on various factors. First, it should improve on establishing more presence in
the already growing markets especially, China. Secondly, it has to persist on generating its value
from different new driving technologies. It will need to establish a stronger leadership in various
areas including the premium-vehicle division. Third, the company already has a solid position
strategically and financially but in order to establish a strong presence in the most affordable
segment of the passenger vehicle market share it needs to re-engage with the low price points.

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Furthermore, to expand its market strategies, VW has to explore new partnerships in order to
continue to be relevant in the future. As a result, it will be interesting to see how the company
will make developments in the automotive industry in future.

Conclusion

Despite being hit by a reputation and financial crisis, VW has been able to adapt its
resources and capabilities to the global situation and managed to recover from this economical
drop. It is therefore evident that the company has a good return on assets (ROA) and a low cash
cycle that produces faster than its competitors. The ability to set and make successful strategies
which work to its advantage makes VW one of the most leading organizations in the automotive
industry.

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