Category: Volkswagen

Executive summary

Strategic Plan analysis of Volkswagen headquartered in Germany, a leading global car manufacturer. The analysis clearly reveals key factors that have gone on to determine the success of the company. From a small start-up to a multinational giant of today unfolds the saga of visionary leadership that brought transformation in the company profile. The strategy has ensured profitability for the company as well as consistently satisfied investors year after year. However, the company needs to focus on a strategy against competitors that are equally getting stronger due to consolidation in the industry. They might slice away the company’s market share and reduce profitability. Several other issues have been analyzed in this strategic plan analysis and conclude that the company is poised for greater growth and expansion (Grant, R. M. 1991).

Introduction

This is the analytical evaluation of the strategies of Volkswagen. The main purpose of this study is to highlight the company’s arrears of strengths and weaknesses as well opportunities and serious threats for the company. This paper has mainly focused on the related years of the case study. At first, the past strategies of the company have been indicated with special reference to the company’s motives and objectives. Then, the new strategies in response to the change in the environment of the auto industry, have been selected for the company to aid in achieving goals and objectives. Then QSPM (Quantitative Strategic Planning Matrix) has been developed to indicate the SWOT matrix after the evaluation of EFE and IEF matrices, which has been discussed to indicate the strengths, weaknesses, opportunities, and threats in the company’s strategies. In addition to indication and selection, all of these strategies have been given specific value to attract the attention of the company to the core and sensitive issues to convince the company for modifying strategies in their areas of weakness. Similarly, the functional, corporate, and competitive strategies have also been indicated in this part of the paper in which SWOT analysis has been drawn for the company to enhance the company for further growth. The basic purpose of this part of the paper is the strategic evaluation of the company in terms of the competitive advantages of the company in the context of SWOT analysis. In part 3 of this paper, the changes in the company and the whole industry have been defined to understand the profile of both. Then, a conclusion has been drawn at the end of the paper in which the comparison of all the strategies of the company has been made based on internal and external analysis.

Past strategic choices of Volkswagen Group

The company’s past strategic choices made include; Developing new state-of-the-art products, increased innovation, enhanced the R & D department, increased partnership, and acquisitions, improved marketing efficiency, and aggressiveness, and expanded to the international market. Volkswagen Group has implemented these strategies to help the company overcome the issues that arise from Porter’s Five Forces. The European market demands smaller, more fuel-efficient vehicles. The company has risen to meet this challenge in its manufacturing facilities. The fifty-percent growth rate in sales Volkswagen Group experienced between 2003 and 2008 precipitated the need to initiate new strategies to maintain and continue growth. Volkswagen group had to face Porter’s force of rivalry among competing firms. One way Volkswagen group was able to overcome a bit of the competition was collaboration and realizing new brands to the market.

Their sales took off significantly between 2003 and 2008. An estimate for the future showed the Volkswagen group was anticipated to reach sales goals as high as 9 million units in 2008. The company’s concern during this period wasn’t so much Porter’s forces of the threat of new entrants or rivalry among competing firms (Ackoff, R. L. 1979). The company was determined to become customer-focused in its efforts to reach a point of dominating ten percent of the global portion of the market by 2010.

During the past five years, Volkswagen group made strides in the European market with its green technology in the production of cars. Much of the competition had only just begun to design hybrid models. They used the emotional impact of customers surrounding beliefs about “green issues” to sell hybrid cars. This gave them little cause to worry about substitute products or services coming in to override their launch into the hybrid market. They were one of the first to launch into the market giving them a competitive advantage. Also, Volkswagen group expanded its manufacturing facilities to ensure growth in sales. The first Volkswagen group manufacturing facility in China was completed over the same period. Within three years of opening the facility, Volkswagen group had expanded plant operations throughout Asia. They had increased production from 200,000 cars produced to 500,000 cars produced by the end of the third year. Also, Volkswagen group had expanded into producing cars in India and Africa by the end of three years. The company has struggled with its image for the large expansion. They have been trying not to appear as a “European invader” in the Asian market.

The company systematically opened a new plant four times between 2003 and 2008. In 2005 a Volkswagen group car plant was opened in China scheduled to produce 500,000 cars per year. Also, three plants were opened before 2007. A petrol engines plant was opened as well. Mini-cars have been another strategic market Volkswagen group has expanded in through Europe, America, Asia, and Africa.

Also, in setting pricing they made efforts to gain interest for young people between 18 to 30 years old. Financing was made fairly easy since interest rates were set according to a buyer’s age. Additional money and effort were put into training sales associates to target this age group. Most sales associates had dealt with a much older crowd.

All of these strategic efforts and collaborations of Volkswagen Group proved to be successful. Since the prices were so low the bargaining power of this group was not an issue since everything had already been provided by the companies. Many incentives were offered to the buyers so they felt they were getting a good deal for their money.

The company established itself successfully as a competitor in foreign markets. The company has successfully become a trusted name throughout Europe and North America. Volkswagen Group has had the time necessary to get to know the foreign market it was branching into. Careful study was used to learn the cultures and lifestyles of customers. Collaboration with established American companies as well as Chinese gave them the competitive edge they needed to prove themselves as a leader in foreign markets. They have projected plans to keep expanding. They keep strategic goals for production and sales in place to meet their goals. Also, they continue to stay up to date by targeting new markets that were once untapped through the hybrid and mini-car markets.

Critical success factors in the industry

The critical success factors for the industry or the sector of the motor vehicle are many. Some of the critical success factors which are mentioned below include:

• Reputed brand – people can rely on the name
• Diversification – providing hybrid cars which have a green effect.
• Targeting all age groups from the age of eighteen to a hundred years old.
• Retaining customers – good customer service
• Joint ventures with other manufacturers and distributors.
• Value for money – the customer gets value for money. The manufacture of cars that can be used by all types of people, able or disabled.
• Bringing new ideas to keep them ahead of the competition.
• Technology

The critical success factors for the industry as mentioned have made some companies a success while others have decided to merge. One of the success factors is the brand name of the car. Most people try to associate themselves with a brand name making them trust a certain brand. Customers usually have a brand relationship probably because they have developed an association for example a customer who is used with the range rovers will find it difficult to use a Volkswagen. Brand reputation can also be described that customers will always have an attitude towards a certain player in the industry and this will affect its profitability. The two combined that is brand image and brand attitude creates brand loyalty and this is what can be called brand reputation.

Differentiation among the industry players has become another success factor in the industry. Most industry players have differentiated their products from their competitors. Take for example the introduction of RAV4, Range rovers, and small sports cars for the youths. Differentiation is what branding is all about. Each company in the industry has its name for its cars (Burgelman, R. A. 1992).

The other factor that has been critical in the success of the industry is the exploitation of technology. Manufacturers of cars have used technology in producing ultra-modern cars which have attracted a segment of customers who move with technology. Some customers have relationships with brands that move with technology. The introduction of automatic cars, cars with swimming pools, moving theaters are getting some specific customers. Customers always will believe that they benefit from a brand that is new, current, and up to date in technology. Innovation is a factor that cannot be forgotten to be mentioned while mentioning critical success factors in the industry. The industry spends millions of dollars on research, development, and engineering in trying to come up with products that will be acceptable in the market.

Strong leadership in most industry players’ management has made the industry a success. Companies have grown from strength to strength due to the strong leadership that is being used in management. For example, the Volkswagen management has definite ideas about what was needed and they moved very fast to realize the goals. One such move made by the Volkswagen Company was to get a strong sales force by changing the compensation structure for the salespeople. They also employed innovative engineers and they were paid good sums of money. The management set up a budget which was determined by goal settings for each department.

Resources used in the last five years

Volkswagen has used many resources that have helped them to be in the position they are occupying in society today. They have evolved from a German company into an international company by using various resources. One of such resources that the company has used in the last five years is human resources. The company has hired the best human resources in the market. Therefore the success of the company both nationally and internationally is due to the intelligence, talent, Rover qualification of middle-level staff and management teams. Their employees’ number is growing year by year. As they innovate a brand new model they attract the highest and effective new employees and retain the old staff by offering them good remunerations as well as giving promotions where necessary. The staff members are required to report their performance regularly for evaluation in terms of achievement of organizational goals. The management control style employed by the company is autocratic that is members are required to report regularly( Burgelman, R. A. 1992).

Another resource that has been employed by the company is the financial ability where the company has used their financial resources generated for expansion. The revenues of the company have been growing at a reasonable rate as compared to other car manufacturers in Germany. The growth in revenue at the moment is at also a pace due to an increase in international competition but the return on capital employed has been maintained. The growth of revenue has been also a result of new investment in form of international diversification which requires little investment as compared to the gains that will be realized (Armstrong G. & Kotler P. 2007).

The other resource that has been used by the company has been the use of technology to generate and sustain profitability. These resources mentioned above have made a company a household name not only in Germany but in many countries. The good financial position of the company has ensured that the company is a success in the international market and remained competitive. Without a strong financial position, the company will lose the market and customers will lose confidence in the products of the company. Intelligent, efficient, and highly qualified employees have helped in branding, marketing, and innovation thereby giving the company a competitive advantage over the competitors.

Current strategies

The key reason for the success of Volkswagen is that they have focused on their weaknesses and threats and trying to minimize them however threats related to the economy and competition remain a major factor in Volkswagen. Therefore it is continuing to offers products and services to consumers at competitive prices and also recruiting new customers to gain market share. Horizontal integration between departments and managers such as moving experts to its underperforming operations to turn it into a profitable business unit (Weitzel, W. & Johnson, E. 1989).

The current strategies that are used by the Volkswagen company in their success include diversification of its products to meet the needs of customers in all the countries they operate. another factor or strategy is the expansion of its product base in the countries they operate in as well as reducing cost by outsourcing their business activities to make them remain competitive. In selecting these strategies the company has the following suitability, feasibility, and acceptability (Johnson G, Scholes K, and Whittington R, 2008).

There is the number of suitable strategies mentioned above which will increase Volkswagen group markets share as well as revenues to maintain return on capital employed. The winning strategies should be Joint Venture, acquisition, and expansion as well as technological investment. This will minimize the risk and meets the criteria of suitability, acceptability, and feasibility (Johnson G, Scholes K,a and Whittington R, 2008).

Volkswagen group have been growing at a faster rate therefore they need to grab the opportunities that will provide them additional benefits. Joint-venture or acquisitions in countries such as India, China, South Africa, and Brazil where the economy is booming will provide long-term benefits.

Although Volkswagen cars have been increasing its customers due to the research and development carried out by the company, their rivals are performing even better therefore they should merge with other manufacturers to increase their profitability and market share. And by implementing this strategy they will not just gain market share but also gain experience in the Indian, Chinese, and African markets which will provide the first step towards a successful future of becoming a successful company in those countries thereby increasing profitability.

These strategies will help Volkswagen group to build an international image by diversifying its range of products and could also help them reduce the costs of their products and keeping them ahead of the competitors and successfully meeting their objective of ability to grow (Rana B. and Mowla M.,2005).

References

1. Ackoff, R. L. (1979). A Concept of Corporate Planning. New York: John Wiley.
2. Ansoff, H. I. (1965). Corporate Strategy: An Analytical Approach to Business Policy for Growth and Expansion New York: McGraw-Hill.
3. Armstrong G. & Kotler P. (2007). Consumer Markets: Influences on consumer behavior, Principles of Marketing.
4. Burgelman, R. A. (1992).corporate Entrepreneurship and strategic management: insights from a process study. Management Science, 29, 1349-1364.
5. Chowdhury, S. D. & Lang, J. R. (1996). Turnaround in small firms: An assessment of efficiency strategies. Journal of Business Research, 36(2), 169-179.
6. Grant, R. M. (1991). Contemporary Strategy Analysis: Concepts, Techniques, Application. Cambridge, MA: Basil Blackwell.
7. Hofer, C. W. & Schendel, D. (1978). Strategy Formulation: Analytical Concepts. St. Paul, MN: West.
8. Johnson G, Scholes K and Whittington R, (2008); Exploring Corporate Strategy, , Prentice Hall, 7th Enhanced Media Edition,
9. Kotler, P. (2005) Principles of Marketing. New York.Melbourne Press
10. Mone, M. McKinley, W. & Barker, V. (1998), Organizational decline and innovation: A contingency framework. Academy of Management Review, 23(1) 115-133.
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12. Ramanujan. V. and Varadarajan. (1989). Research on corporate diversification: A synthesis. Strategic Management Journal, 10, 523-551.
13. Rana B. and Mowla M. (2005); A Long way of Volkswagen,s Internationalization: strategies and Dynamics of capitalism; Pakistan journal of social sciences.
14. Schaik J.L., (2002); The Task of Marketing Management; J.L. van Schaik (Pity) ltd
15. Weitzel, W. & Johnson, E. (1989). Decline in organizations: A literature integration and extension. Administrative Science Quarterly, 34, 91-109.
16. Winer, R.S. (2007). Marketing Management, Prentice Hall, Upper Saddle River, NJ.

Introduction

Fraud is a serious unethical and illegal problem that some individuals or companies have propagated to acquire an edging advantage in the market by avoiding the set legal standards and regulations. In the United States (US), the Clean Air Act empowers the Environmental Protection Agency (EPA) to regulate and set standards for vehicle emissions (Beene, 2016). The regulations and standards are tough for many vehicle manufacturers to comply with. Beene’s (2016) article provides a good case of the violation of the legislation due to the fraud scandal involving an automotive Germany manufacturer. Volkswagen (VW) engineers manipulated vehicle engines to cheat the US on the emission levels of the company vehicles, a move that was revealed, and proper legal action taken to impact the stakeholders and the company as a whole.

The Fraud Scandal, its Cause, and the Culprits

The Violated Law and Underlying Cause of the Scandal

The fraud scandal was done intentionally to violate the EPA regulations and American environmental law. According to Beene (2016), engineer James Robert Liang together with his team deliberately planned to violate the American Clean Air Act. The fraudulent actions further violated the EPA vehicle fuel emission standards and regulations since the authority and the country as a whole were deceived.

The strict and harsh American laws and regulations together with the uncompromising EPA compelled the engineers to think of and implement this illegal and unethical strategy. Liang and his team of engineers realized that the company would not meet the strict US limits on the emission of nitrogen oxide that were implemented since 2007 while increasing the customer demand for the vehicles (Beene, 2016). Consequently, they developed and installed software that could cheat on the emission tests so as to comply with the environmental laws. Mouawad and Jensen (2015) explain that upon testing the car engine emission levels, this software could sense and activate installed equipment to reduce emissions. However, the software could turn the installed equipment down when driving, resulting in high emission rates that surpass the legal limits (Mouawad & Jensen, 2015). This strategy was the only feasible way to ‘complying with the strict laws in the mind of Liang and his engineer colleagues.

The Culprits

Liang, who had worked with the automotive company begun the fraudulent process years early before it was noticed. From the beginning of 2006 to September 2009, this engineer and his colleagues deliberately agreed to defraud the American government, the company customers, and most importantly, violate the Clean Air Act together with deceiving the agencies that enhance its implementation (Beene, 2016). All the victims were deceived about the vehicle complies with the US emission standards. The EA189 2.0-liter diesel was at the center of this case, and Liang was in the team that manufactured it at the diesel engine department in Wolfsburg, the company headquarters (Beene, 2016). This shows that Liang and the team he led were responsible for the fraud involving the EA189 engine.

Liang then moved to the US to launch and start selling the faulty cars with the manipulated engine. Beene (2016) reports that this engineer moved to the US in 2008 to launch the ‘clean diesel’ engine. He attended meetings that comprised personnel from the automotive company, officials from the EPA among others to sell the engine in the US market. In these meetings, the company personnel claimed that the engine complied with the American emission standards and hid the presence of the defeat software that could cheat on emission tests. In fact, Liang and other company personnel met EPA officials in March 2007 and explained the software functions of the engine that affected emission controls without revealing the cheat software (Beene, 2016). These actions defrauded the US because the cheat device was never noticed at this moment.

Scandal Revelation

The cheat device software and its functions were revealed by researchers before EPA confirmed the crisis. In 2015, West Virginia University researchers tested fuel emission from two of the university cars from VW and found that when tested on the road, the cars emitted around 40 times more than the EPA set limits (Mouawad & Jensen, 2015). The research prompted EPA to start investigations for justifying the study findings. The authority found the truth before announcing that VW had cheated the entire nation by distorting emission test results (Mouawad & Jensen, 2015). The revelation put the company into problems.

Consequences of the Scandal

The revelation of the scandal led to legal authorities taking action to punish the offense. Liang was named in a jury indictment in the American District Court of Detroit where he pleaded guilty to have defrauded the US by violating the Clean Air Act (Beene, 2016). Some of the evidence to reveal the deliberate actions to violate the law came from the narration of the engineer and mail communications among the company engineers (Beene, 2016). The court allowed Liang to cooperate with the US government in the ongoing investigation of the scandal involving VW. This would put pressure on company management.

This scandal further affected the company management, customers, and company sales. The scandal made customers lose trust in the company vehicles, which was associated with reduced sales both in the US and other parts of the country. In South America, the sales dropped by 27.6% while Russia experienced a 16.3% decline (Saarinen, 2016). The sales in the US dropped by 5.7% while North America registered a decrease of 2.1% (Saarinen, 2016). The management further committed itself to find a solution through its suggestions. For instance, the company decided to buy back all of its cars from US customers or fix the software problems and offer some compensation (Mouawad & Jensen, 2015). Many engineer suspects were suspended, and the company chief executive officer resigned (Mouawad & Jensen, 2015). Therefore, the scandal affected many stakeholders in different ways.

Conclusion

The unethical and illegal VW’s fuel emission scandal had substantial repercussions to the company, the American judicial and environmental regulatory agencies, the company management and engineers, and most importantly, the customers. The engineering department led by Liang deliberately planned to cheat on the US emission tests by installing a defeat device software. The revelation of the scandal compelled the company to respond by addressing the problem. Furthermore, the losses were incurred mainly because of the poor reputation in customers. The culprit was taken to court and pleaded guilty of the offense in addition to promising cooperation with the US investigative agencies.

References

Mouawad, J. & Jensen C. (2015). The wrath of Volkswagen’s drivers. The New York Times. Web.

Saarinen, M. (2016). VW emissions scandal: everything you need to know. Auto Express. Web.

Beene, R. (2016). VW engineer pleads guilty in U.S. court to a role in the emissions cheating scandal. Automotive News. Web.

Introduction

Volkswagen is a global auto manufacturing company. The firm was founded in 1937. It has its headquarters in Wolfsburg, Lower Saxony, Germany. It has grown exponentially, managing to survive through tough challenges, such as World War II. The company has engaged in product line expansion to increase its market share and value. One of the initiatives is the establishment of a Volkswagen subsidiary in Brazil (Nelson 45). The factors of production proved suitable for the business as they were bound to maximize the profits. The cost of production in Brazil is lower compared to Germany. Brazil also provided a large market for the products, making it suitable for exportation in the South American region (Chambolle and Chiron 20).

The subsidiary was started on March 23^rd, 1953. It was set up in a warehouse in Rua do Manifesto, Sao Paulo. Due to increased sales, an assembly plant was built in Brazil. The aim was to make the subsidiary South America’s export base (Nelson 4). In 1986, overcapacity and the crippling Brazil economy led to a 20% drop in the domestic automotive industry. It led to a decline in domestic sales. For instance, between 1997 and 2003, there was a drop in units sold from 580,000 to 280,000. The company further faced stiff competition from other market firms. The competitors included General Motors, Ford, and Fiat. Exports were also negatively affected as the Brazilian currency strengthened against the US dollar. The company suffered losses for eight years from 1999. The development prompted the management to come up with strategies to revamp the company. Thomas Schmall was appointed as the CEO to lead the firm and reverse its financial losses and a decline in market share (Kaplan and Pinho 4).

In this paper, the author looks into a case study of how the driving strategy and the balanced scorecard put in place by Thomas Schmall affected the performance of Volkswagen in Brazil (VWB). The strategies were aimed at reviving the firm.

Challenges faced by Thomas Schmall

Thomas Schmall had vast experience in the Volkswagen Group. He had held various managerial posts prior to his VWB appointment. One of his memorable achievements was the formulation of new procedures that informed how managers interacted with production lines at Wolfsburg. However, this was a different challenge. He was taking over a company that had recorded financial and market losses in eight consecutive years. The challenges led to low corporate morale. There were also cost-cutting measures and downsizing of the workforce. The threat to close down VWB was imminent, especially among the employees (Kaplan and Pinho 5). The introduction of the driving strategy and the balanced scorecard also posed a challenge as it involved restructuring the whole organization and its key stakeholders. At the time, sales volume slowed down, leading to cuts in production and investments. It had a negative impact on new product development and market share expansion. Managers also needed to be mentored on how to efficiently run the business to improve efficiency and innovation. The strategy was a contradiction to the traditional cost-cutting mechanisms (Landmann 5).

Volkswagen Do Brasil’s Strategy: An Analysis from the Perspective of the OAS Framework

Objective

What the strategy was designed to achieve

The main objective of the strategy was to make VWB the largest producer and seller of vehicles in South America. It was mainly aimed at changing the mindset of the employees and intermediaries of the firm. The vision was to inspire a change from the traditional systems, which had proved to be irrelevant and damaging to the firm. Re-branding had to play a key role to see the company hire and retain highly motivated employees (Kaplan and Pinho 7). The change in culture would have hastened problem solving and elimination of possible defects, leading to improved and reliable performance (Landmann 9). To achieve this, the driving strategy was designed to address the key challenges, while the balanced scorecard was used to monitor the progress.

A quantitative target and a timeframe

The target of the strategy was to develop a new relationship with the key stakeholders in the firm. It was designed to focus on four challenging dimensions. The dimensions included internal processes, finance, customer, and growth and potential. With regards to employees in the internal process, there were to be changed in how the management approached its human resource. There was a shift from the conservative and authoritative culture that has existed for years. The financial objectives aimed at growing the market share of the firm, leading to stable and positive financial returns. In relation to customers, VWB was to rebrand by offering the best quality possible in the market (Kaplan and Pinho 2). The independent dealers were also to be educated on best business practices. The aim was to improve customer experience, leading to increased sales. Growth and potential was to be fuelled by the new a forward-based culture that inspired and accelerated change towards positive working conditions (Collis and Rukstad 5). It was also aimed at producing quality and innovative products with the customer in mind. The initiative was to have a long-term impact on the firm’s overall performance. The strategy was to be implemented within a period of two years (Kaplan and Pinho 4).

Advantage

Achieving the objective

For the desired results to be realized, VWB had to come up with new strategies (Collis and Rukstad 4). The management had to ensure that all the key stakeholders took part in the process. To begin with, the company had to put in place a new management team to oversee the implementation of the strategy. Senn was elected the VP of human resource. He was charged with the responsibility of leading the initiative (Charron and Stewart 5). The executive was introduced to the strategy and the roles of each of its facets. Customer satisfaction was also viewed as a key driver towards the accomplishment of the objectives. As such, VWB came up with ways to involve all stakeholders in the strategy. The dealers, for instance, were educated on how to implement best customer practices by use of efficient management systems (Kaplan and Pinho 9).

Differentiation

The suppliers play a crucial role in the manufacturing of VW vehicles. As such, it was paramount for the management to come up with ways to facilitate the development of competitive and innovative products (Charron and Stewart 5). The quality of the products was also emphasized as VWB branded itself to offer its customers the best value for their money at a relatively low price (Collis and Rukstad 8). The training and assistance offered to the dealers would promote customer experience, which would, in turn, increase the firm’s market share by aggressively taking on its competitors (Kaplan and Pinho 8).

Value proposition

VWB had to look at both the direct and indirect customers to come up with strategies that would help in the attainment of the laid out objectives (Kaplan and Pinho 9). The dealers benefited from the training programs that would attract more customers, boosting its sales revenue and maintaining a good relationship with them. The change in the culture of the management increased the morale of the employees exponentially in the next two years (Collis and Rukstad 4). It led to enhanced production activities and innovations. The result was increased value addition for the customers. Reducing the price index enabled VWB to be competitive in the market (Stevens 90). The customers ended up preferring their cars as they were not only of a higher quality, but also cheaper compared to those of the competitors (Charron and Stewart 55).

Scope

The intended niche market of VWB

Before Thomas joined VWB, the company had primarily focused on exports as opposed to the primary market. The domestic automotive market had been experiencing challenges. The problems included the 20% drop in revenues in 1986 as a result of the weak macroeconomic situations in Brazil (Kaplan and Pinho 8). The company also lost its dominance in the market as it faced stiff competition from such brands as General Motors and Ford. The focus on exports was negatively affected by the economic recession and the strengthening of the Brazilian currency against the US dollar (Collis and Rukstad 8). The strategy aimed at increasing sales locally and globally. The targeted niche market was the South American automotive sector (Kaplan and Pinho 8).

Value chain, product line, customer segment, and technologies employed

To attain the objectives of the strategy, the company intended to increase its customer base. To attract and retain more customers, VWB focused on aggressive rebranding to provide high-quality and reliable vehicles at a competitive price (Collis and Rukstad 4). Customer experience was also to be factored in the form of sales and post-sales services. It was meant to give the company a good image by offering innovative and high-quality products that gave the customers value for money (Kaplan and Pinho 8). For instance, records on repairs would be analyzed to find solutions to the problems, leading to the production of high-quality components. The firm worked with independent dealers. The stakeholders were assigned an executive who was responsible for identifying any defects. The focus was to improve the quality of vehicles supplied to dealers. Consequently, the relationship between VWB and these stakeholders was built and maintained (Charron and Stewart 90).

How the Strategy Map and Balanced Scorecard Helped Schmall and Senn to Implement the New Strategy

Strategy Map

The strategy map acted as the primary management tool. It contained the four major objectives that the firm intended to pursue to attain the goals (Kaplan and Pinho 2). Senn, who was leading the project, came up with a guideline on how to approach these objectives. The goals were dependent on each other. It was comprised of four principle objectives. They included customer, internal process, finance, and potential and growth (Stevens 12). The firm intended to have a satisfied customer base. It had to look into ways of enhancing its impact on both the direct and indirect customers. For example, VWB and the dealers had to engage in best business practices with each other and with the customers to improve the firm’s image (Berger and Berger 88).

With regards to the financial objectives, the firm aimed at achieving growth in market share. It is also intended to realize positive and sustainable financial returns (Kaplan and Pinho 7). The internal processes were focused on achieving a more customer-oriented approach in business processes, leading to the production of high-quality and innovative products at a relatively cheap price. On potential and growth, sustainability was key through the enactment of a high-performance culture and an innovative approach towards product development (Charron and Stewart 34).

Balanced Scorecard

The balance scorecard was used to monitor and measure the implementation of the strategy among the leaders (Kaplan and Pinho 8). It helped VWB’s executive team to improve its relationships with all stakeholders to ensure that all of them were aware of their roles and played them diligently. An executive was to oversee the strategies to be employed in a given objective and monitor its progress dynamically (Charron and Stewart 33). The officer was taken through training to ensure that they were up to the task and fully aware of the strategies to be implemented. To this end, they were taken through a two-day training program. The roles were made clear to them to increase precision. For instance, to achieve the intended growth in market share, the VP of Sales and Market focused on price index strategies as opposed to return on investment (Kaplan and Pinho 11). The return on investment objective was under the finance and corporate VP. Schmall and Snell had an easy time evaluating the performance of the different executives based on their roles in the implementation of the business strategies.

Implementation of the Volkswagen Do Brasil’s Scorecard: Strengths and Weaknesses

Strengths

The VWB’s scorecard was to be implemented at a time when the company was going through a negative growth. The instrument was meant to impact positively on the organization. The strength of the scorecard was made apparent in the two years following its implementation (Kaplan and Pinho 9). The company experienced a positive growth in its business processes. One of its major strengths is that it led to the creation of a new team to improve transparency and efficiency in the firm. Each stakeholder was made aware of their respective roles and their relationship with the driving strategy.

The instrument also motivated the stakeholders through enhanced compensation and remuneration. The end result was improved performance of VWB (Berger and Berger 91). The scorecard was easy to interpret and implement. For example, with a single report, one was able to compare the target value of both the financial and non-financial measures in the organization (Kaplan and Pinho 21). It also provided the organization with predefined expectations, leading to improved sustainability and reliability (Nelson 67).

Weaknesses

In spite of the fact that the VWB’s scorecard was a powerful tool used to change the culture and strategy of the business, it had its shortcomings. For instance, the introduction and implementation of the strategy were time-consuming (Kaplan and Pinho 17). It was a new tool that was introduced to a dying company. There was also the need to change the traditional mentality of the stakeholders. Given that the scorecard was affecting all stakeholders, the company had to engage in a massive educational program. To this end, 200 facilitators were employed to educate 20,000 people. It was a huge financial cost, especially considering that VWB was cutting down on production due to a slump in sales revenue (Chambolle and Chiron 29). The top management was also strained in efforts to pursue and convince all stakeholders to accept and implement the strategy. It posed a financial and physical strain on the firm (Nelson 34).

Actions Taken to Implement the Strategy

Actions Taken on Suppliers

At the time, VWB had 550 suppliers (Kaplan and Pinho 19). The stakeholders played a vital role in the manufacture of the typical VW vehicle. The suppliers provided the company with around 15,800 variable components to make the vehicles (Kaplan and Pinho 10). The coordination of these components was a complex undertaking. As such, VWB had to find reliable systems to improve the quality of the products within the scheduled time. The management also required the suppliers to develop innovative technologies in the shortest time possible. To achieve this, the company embarked on the training and recognition of the suppliers (Kaplan and Pinho 4). The management held consultations with these stakeholders in an effort to improve their components (Charron and Stewart 88). To boost their confidence and competitiveness, a “Supplier Day” was held in 2008. The aim of VWB was to look into ways through which low-performing suppliers could be assisted. The “Supply Award” was started to recognize suppliers based on how well they performed their roles (Berger and Berger 45).

Actions Taken on Dealers

Dealers played a vital role in the company. They ensured that VWB had the largest car dealer network in Brazil. The firm engaged 600 dealers (Kaplan and Pinho 8). Their primary role entailed the provision of sales and after-sales services. It was important to bring these stakeholders on board given that the sales revenues were dropping. The morale of the dealers was also plummeting, especially since they feared possible ‘stock outs’ given that production levels had been downsized.

The strategy incorporated management training through a “Dealer Academy”. The objective was to improve their skills. It was aimed at raising the sales, after-sales, and franchise value of the firm. The overarching goal was a growing and stable market share for VWB (Charron and Stewart 88). To counter defects, The Top 400 Program, which was later named the TOP 500, was introduced. It was used to enhance the relationship between VWB and the dealers and reduce the defects of the products. The program trained the suppliers on best business practices. The company was also able to monitor the levels of customer satisfaction. It monitored the quality of various components based on incidences of repeated repairs (Kaplan and Pinho 16). The data was used to make adjustments to the relevant items, leading to improved customer satisfaction and quality production practices.

Conclusion

The driving strategy and balanced scorecard introduced by Thomas Schmall in VWB was a great success. The company had experienced losses for 8 consecutive years. The strategy was able to revamp its performance within two years. As a result, VWB increased its market share and boosted the morale of the stakeholders. For example, the number of accidents among workers and absenteeism was reduced. The participation of these stakeholders increased exponentially. To this end, the engagement index doubled in the two years of review. However, during the last fourth quarter, the business experienced a slowdown in production. The Brazilian economy was suffering from the global financial crisis. The management had to devise ways to deal with these two challenges at the same time. A correlation was established with previous successful approaches.

Works Cited

Berger, Lance, and Dorothy Berger. The Compensation Handbook: A State-of-the-Art Guide to Compensation Strategy and Design. 5th ed. 2008. New York: McGraw-Hill. Print.

Chambolle, Eric, and Patrick Chiron. Volkswagen, Paris: Eurostaf, 2000. Print.

Charron, Elsie, and Paul Stewart. Work and Employment Relations in the Automobile Industry, New York: Palgrave Macmillan, 2003. Print.

Collis, David, and Michael Rukstad. Strategic Planning: Can You Say What Your Strategy Is?. 2008. Web.

Kaplan, Robert, and Ricardo Pinho. Volkswagen Do Brasil: Driving Strategy with the Balanced Scorecard, Harvard: Harvard Business School, 2010. Print.

Landmann, Ralf. The Future of the Automotive Industry: Challenges and Concepts for the 21^st Century, Warrendale, PA: Society of Automotive Engineers, 2001. Print.

Nelson, Henry. Small Wonder: The Amazing Story of the Volkswagen, Boston: Little & Brown, 1998. Print.

Stevens, David. The Brazilian Motor Industry: Change and Opportunity, London: Economist Publications, 1987. Print.

Introduction

The Volkswagen Group is one of the world’s largest car makers. Specifically, the group is ranked third in the entire world in the automotive industry.

The group has several branches across the world and their marketing communication strategies in these regions are influenced by a unique consumer behaviour culture of each market region.

Besides, the group has proactively rolled successful marketing strategies that classify the targeted market segments and creation of relevant advertisement messages that directly and positively improve their sales.

Several marketing communication tools and different media have been employed by the group across its branches which operate independently of the mother company.

The treatise will attempt to explicitly review different marketing communication policies that the Group has adopted in China and the United Kingdom branches through consumer behaviour and marketing communication theoretical perspectives for the Volkswagen Polo product.

The paper concludes by offering recommendations to make the current marketing communication strategies for the Volkswagen Polo product more effective.

International Marketing Strategies of Volkswagen Polo Product in China

Volkswagen China Group

Market Segmentation strategy

In the product market, life style defines the activities clients are involved in, beliefs, opinion, health aspects, and interests. As defined in the ‘Activities, Interest, and Opinion marketing model’, life style directly dictates purchasing behaviour and preference (Anbu & Mavuso 2012).

Chinese population consists of many middle income families who have continued to be more conscious of costs and sustainability of automobiles they purchase (Fields 2010).

Specifically, the cosmopolitan Shanghai city has a comfortable percentage of high market clients who have fully embraced Volkswagen Polo brand because of its affordability as compared to other automobile models. Besides, they tend to associate with sophistication and have money to spend.

The middle and high social classes of clients are the key target this product. These groups are heavy spenders in automobile, especially those that promise unique aspects and have unique features such as those incorporated in the Chinese Volkswagen models (Ashtiani et al. 2011).

As the issue of the need for safety and green living penetrate automobile industry, Chinese clients have increasingly grown shy from environmental unfriendly automobile to friendly automobiles that are efficient.

The target group has a peculiar buying motive for the Volkswagen Polo product since the company incorporated the aspects of green living in this automobile model that rhyme with the conservative culture of the Chinese (Fornell 2002).

Besides, a good percentage of sales in China are generated by referrals from satisfied customers who acted as marketing agents for the company on the aspects of affordability, efficiency, and reliability of the Volkswagen models.

The introduction of more efficient technologies has enabled construction of lighter, less expensive, and more powerful Volkswagen Polo brands such as the unique Golf brand for the Chinese market.

As a result, there has been a global rise in the hobby of driving the Gold model and the application of a model such as sport utility for the young consumers’ bracket (Farris, Neil, & Pfeifer 2010).

The target market for the new Golf brand in China is individual users, government agencies, and military units. However, it is worth noting that each of the target users mentioned is unique and has different marketing and pricing strategies that can be adjusted in accordance to prevailing market conditions in China.

Selling the Volkswagen brands in China is no longer using the indirect method distribution channel; however, caution has been taken to ensure that middlemen are minimized.

Minimizing the middlemen is essential in ensuring profit maximization and that consumers are not overcharged since every middleman charges an extra profit or commission for the goods they sell (Hardester 2010).

Advertisement messages

Advertisements are very manipulative and use tactics that directly and involuntarily appeal to the mind of the target person. Despite ignorance of the same and disbelief of their effects, advertisements remain complex and significant in the choice of products owned by an individual.

Usually, advertisements appeal to memory or emotional response. As a result, it creates an intrinsic motivation response that triggers the mind to activate affiliation, self-acceptance, and feign community feeling.

In the end, advertisements succeed in appealing to emotions through capitalization on biases and prejudices of people (Freshwater, Sherwood, & Drury 2006). Therefore, the response to an advertisement will emaciate from the bandwagon technique which heaps pressure on the mind to follow the perceive crowd.

Reflectively, the successes of Volkswagen promotion messages are deeply entrenched in the principle of keeping reliable and professional reputation in exchanging ideas and convincing customers.

Therefore, through timely appeal to emotions and self-prejudice, the Volkswagen China Group has realized that the human mind is often skewed towards embracing the ‘perceived goodness’ and need to identify with ‘the ideal’ in the packaging of the Golf model as the third generation green automobile in their television advertisements (Hill & Westbrook 2010).

Interestingly, these aspects are clearly painted as perfect in the various advertisements about products and services through the use of bright and powerful communication themes such as the brands outshining a tiger in a real time race.

These pop up memories will actively reminisce and provoke an involuntary response when noticed in an advertisement. For instance, the Volkswagen China has largely succeeded in implementing this aspect of ‘jumping the queue’ ahead of other competitors through visible and inducing signs all over the Chinese region.

Upon noticing the signs, the mind will perceive them to belong to the Volkswagen Company, irrespective of the physical geography at the moment.

These advertisements erected signs endeavours to cue the visual mental aspect of a person into a particular brand of the different brands of the automobile company (Hill & Ettenson 2005).

Interestingly, this strategy has proven relevant in the case of Volkswagen China Company, which has remained dominant due to perception people associate the advertisement signs with.

Appropriateness of the advertisement messages in China

The advertisement messages are very effective in terms of attention since they are decorated with simple to understand scenes besides the warm red colours common in the Chinese culture.

The strategically placed background red colour in Volkswagen China advertisement messages is an eye catcher associated with pomp, speed, and sophistication (Keller 1998).

In addition, the targeted viewer would immediately develop curiosity to understand the symbolic importance of the Golf model outshining the powerful tiger in a real time race.

As a result, it creates an intrinsic motivation response that triggers the mind to activate affiliation, self-acceptance, and feign community feeling towards the Volkswagen brands.

In the end, these advertisements succeed in appealing to emotions through capitalization on biases and the middle and high income clients in China.

The use of glittering generalities on a product or service aims at influencing the involuntary urge in the mind, to identify with attractiveness or glittery of the product as painted in colourful advertisement. Often, an average mind would easily be influenced by the brightness and attractive presentation.

In the process of decoding this message, mind is actually tuned towards accepting the product as perfect and very attractive (Holt & Quelch 2009). Coupled with proven performance, a customer would purchase such as product based on the influence of the glittery on the mind.

Through the envisioning creation of simultaneous but independently functioning needs to identify with attractiveness, many Chinese customers have been swayed into buying the Volkswagen China’s appeal when purchasing automobiles.

For instance, the Golf and Polo have created authoritative assertion that directly appeals to positive emotions among the target audience of the pitched idea (Bowden 2009).

Reflectively, Volkswagen China Group has capitalized on endorsements through testimonials from outstanding figures to promote sales. Factually, in subtle difference makes image stereotyping a perfect situation in the minds of target persons.

Therefore, when the image of the user as projected in such an advertisement resembles the perceived satisfaction of a customer, such a party would aspire to access the same benefits from use as indicated in the image shown.

In the advertisement, the company has internalised the need for uniqueness in display, space and prominence to easily woe the mind into concentrating on the Volkswagen brands in China (Mangram 2012).

Through advertisement, the Volkswagen China Group has ensured that its probability of salience is doubled, especially on automobile brands that are perceived as important in daily life, such as the Golf model renowned for its unique design, smaller size but very spacious and ideal for daily activities due to its navigational ease.

Promotion has developed to become a significantly influential part of the marketing mix. This has played a significant role in defining the relationship that exists among organizations and their customers. Marketing communications are made up of the specific messages and the media used to communicate them.

The increasing levels of competition among the increasing numbers of products in the markets have forced individuals and organizations to adopt strategies to make them more visible in the market through creating awareness.

The type of media used has varying effects on the way the communication is perceived by the public. The efficacy of the type of media used depends on a variety of factors which should all be analysed in order to ensure that the most applicable choices are made (Hawkins, Mothersbaugh, & Best 2010).

The company has successfully used social media (television advertisement, online advertisement) and print media such as their monthly magazine and billboards on the various Volkswagen Polo brands.

Marketing communication tools and media in Volkswagen China Group

Media has emerged as an important tool for organizations and individuals due to its ability to bridge the gap between producers and consumers in the business metrics.

This is especially true for the written media, which has widely been used by the Volkswagen China to draw attention of the consumer on new or already existing automobile brands that the Group offers in the complex trading arena.

The effects of written media on marketing communication has led to suitability of marketing approaches at times, while at others, the approaches have been praised for their authoritativeness towards informing the public (Karamitsios 2013).

For instance, the Volkswagen China Group’s quarterly magazine about its brands has remained a very effective tool for marketing communication on current modifications, developments and what is new about Volkswagen brands.

Written in Chinese, the magazine has captured the imagination of the conservative Chinese consumers who have actually subscribed to receive every new copy.

Besides, the television advertisements have been christened as the real pride of Chinese roads and have actually swayed thousands of customers to purchase the Volkswagen brands.

For instance, in 2014, the group realized a sales margin of more than 2 million units following the successful re-branding of the promotional marketing of the brands in online media, television, written media, and social media.

Significance of communication activities for the Polo product

According to behavioural psychologists such as Kotler, Adam, Denise, and Armstrong (2009), behaviours and attitudes can be changed through conditioning.

Repetition of an act, for instance, through constant advertisement leads to behavioural changes that may be beneficial or detrimental to a company (Kotler et al. 2009). This indicates how the media can, and has been used to reinforce consumer behaviours.

Communication activities, therefore, are taken to represent the official position of the organization on a product or service by the consumers.

Communicative activities in the two companies have led to doubled sales in the last decade since the products are branded and presented in persuasive ways that easily skew the minds of potential buyers (Menon 2006).

Specifically, through communication strategies, Volkswagen China has expanded its market share and penetrated the competitive automobile industries in the region and beyond.

The different contents of marketing communication, but dealing with similar issues, have an accumulated impact on the individual’s perception about a subject. This means that the more an issue is covered in terms of being published in a marketing medium, the more importance is allocated to the issue (Roth 2008).

Since the public has no frame of reference to base and compare these communications with, the promotion message is taken at a face value. This means that the consumers base their opinions on the products on the messages from the producers.

If an automotive company, for example, came up with a vehicle that did not use the conventional sources of energy, but drew energy from the atmosphere, the information the automotive company would use to advertise their product would be what would be considered as the guideline to form opinions on the new kind of automotive (Motavalli 2013).

The same aspect has promoted growth in the Volkswagen China for its Polo brand since its communication activities have led to the general acceptance of the model in the market.

Challenges of practicing IMC

Although marketing communications have been praised for their long life spans and their ability to be stored for future reference, their use can be detrimental to the organization. This is because of the fact that they can be constant reminders to the public of the failures of a company.

If an organization uses print or social media to extensively promote a service or product, and that service or product turns out to be substandard or defective, the public would have some restraint in engaging in a business relationship with such a company (Jin, Suh, & Donavan 2008).

For instance, the recall of more than 6,000 Polo models within China in the year 2013 due to a defect in the accelerator has affected the credibility of the company. In fact, the company recorded a drop of 13.5% in sales the year 2014 following this incident.

With the evidence of the company’s failure lying around in the form of print or social media, consumers would take a long time in coming to trust such an organization again.

This means that while written communication acts to add confidence to the buyers about a product or service at times, it can also lead to loss of public confidence with a company or product once inconsistencies are identified by the consumers, especially when the business lacks a well-built structure and policies as in the case of large corporations (Saxena 2012).

Recommendations to overcome the IMC challenges

Essentially, the success of a marketing plan depends on proper alignment of a functional team who is responsible for the creation of flexible but quantifiable measurement tracking tools for reviewing results periodically.

Reflectively, this product team should have the essential knowledge in social media and tools used in marketing. Besides quality in service delivery and customer satisfaction depends on the support team.

Therefore, customer retention is achievable through the creation of reliable, informed, and passionate support team. In addition, the plan should include a monitoring matrix that maps out potential competitors and identify online weaknesses and strength of the clients (Rust, Zeithaml, & Lemon 2004).

The Volkswagen China Group will eventually need to embrace more traditional media marketing in order to keep growing, especially when targeting clients for the Polo brand.

In order to effectively reach such audience, the marketing communication plan will suggest the best advertisement strategies to cover its wide market area (Simon 2007). The company will definitely have to branch out beyond its target market due to the brand dynamics and the need to expand market base.

The company will have to decentralize its marketing strategies to meet the specific demands or consumer behaviour if it decides to implement internalisation strategies that will be proposed (Bowden 2009).

These aspects influence the need to carry out a comprehensive marketing communication plan the Volkswagen China Group for the Polo brand.

There is need to design an appropriate communication plan consisting of a simple but well thought message and a complete channel. The communication channel is complete when the decoder and encoder can decipher the communication codes in the form of images and letters that appeal to the client.

Any integrated marketing plan should have a functional model that will cue the mind of a customer towards a product or service.

The functional model comprises of elements such as awareness, interest, desire, and action to ensure that the Polo model’s marketing strategies match the interests and desires of the target market within China. This is referred to as the AIDA Model (Yelkur 2011).

The element of awareness is related to brand knowledge or visibility among other alternatives. The element of interest comes after awareness. Interest is developed out of a need for a product or service. This interest may activate the desire to purchase the product to meet the need because of preference.

In the end, a customer may take the action of purchasing. Therefore, a stratified marketing communication plan should integrate the above elements to easily convince the customer to purchase the Volkswagen Polo product.

This may be achieved through designing a relevant advertisement, critical public relations exercise, and continuous sales promotion.

Besides, it is important to integrate personal selling through referrals and direct marketing, especially for the older customers who depend on product performance history in purchasing an automobile.

Since the world has become a village, the marketing plan for the Volkswagen Polo may adopt an appropriate medium that appeals to the target audience. In the ideal, there should be a mixture of the traditional marketing channels and the modern marketing channels such as online marketing and social media.

It is important to plan for the integrated marketing communication and create success measurement parameters. The parameter is meant to check goal achievement.

In addition, the whole plan should be managed within a predetermined budget range, which is derived through the rule-of-thumb and objective-and-task (Bowden 2009).

To increase credibility and maintain professionalism, the current bomb internet channels used by the Volkswagen China Group, for reaching the youthful consumers, should be tailored to encompass processes and features that flawlessly facilitate a healthy and a lifetime relationship between the airline and its clients.

These will be achieved through the following ways;

Website search engine optimisation (SEO)

The Volkswagen China Group should optimise its search engine to improve on its online brand visibility among the youthful clients in China who are interested in the Polo brand.

Search engine optimisation can be achieved through installing ‘plug-ins that possesses extra features such as page navigation and thumbnail within the company’s website.

Specifically, this proposed system in Google will consist of a multi tab page that will serve different offers and specifications of different brands of the Polo model to online youthful customers.

Thus, recruiting independent ‘bloggers’ to ‘blog’ about the Volkswagen China Group’s Polo brand will give the company a competitive advantage in marketing its products to youthful clients across China.

This promotional strategy has been successfully applied by the Volkswagen UK Group, which has a strong global SEO for its Polo brands.

Besides, optimising the link referral has the potential of making the company’s advertisement website to go viral among the youths within six months because the unique cookie will spread to the phones of primary and secondary users (Bowden 2009).

The SEO may also be tailored to include a unique cookie which is transferable to the visitors of the Volkswagen China Group website. The unique cookie for the website will be transferred to all primary and secondary visitors to this site hence broadening the spread information on this website.

Optimising the SEO has the potential of creating a long term loyalty among young clients. For instance, Volkswagen UK Group’s SEO strategy has successfully increased the percentage of young customers who buy the Polo model by 20% in the last three years.

The potential of the referral link approach is that it will improve the visibility of the company’s products among the targeted clients.

For instance, the Volkswagen China Group’s website should carry out a link reference promotion where the website visitor with the highest number of referral links is rewarded with a free Polo car (Hawkins, Mothersbaugh, & Best 2010).

Social media (Facebook and Twitter)

Through timely appeal to emotions and self-prejudice, a marketing manager is in a position to realize that the mind is often skewed towards embracing the ‘perceived goodness’ and need to identify with ‘the ideal’ in the packaging of a product or service.

Social media, especially Twitter and Facebook, has gained popularity among the potential young customers of the Polo brand in China, who use these sites as interaction models to share flight culture and exchange ideas.

The Tweeter and Facebook fan pages are ideal tools for branding and community following building for the Volkswagen Polo product, especially among the targeted clients.

For instance, the Volkswagen UK Group has grown to its current position due to its successful fan page marketing. This will allow the clients to interact and let users to add content to align to different orientations of the company’s brand (Bowden 2009).

It will help the company to reach the targeted young customers by skipping or bypassing the traditional gatekeepers, such as written magazine publishers, and placing them online so that customers can get to know about the Volkswagen Polo brands directly.

Properly modified fan pages will reassure the young customers of the aspects of affordability and quality of the Volkswagen Polo product within China.

Through massive recruitment of young fans on the Twitter and Facebook pages, the Volkswagen China Group will not only benefit from an increased traffic of online compliments, but also record high rates of customer loyalty as most youthful customers are influenced by reactions from those they perceive as sharing the same youth culture.

This strategy is meant to position the company as a market leader in terms of customer satisfaction tracking and response among the targeted clients for the Polo model (Hawkins, Mothersbaugh, & Best 2010).

Conclusion

Marketing communication strategies are important in aligning a company towards the target market in order to achieve optimal sales. The main determinants of a successful marketing communication plan lie in the proper brand alignment and research on segmentation.

Volkswagen Group in China has successful IMC since their strategies are skewed towards customer Centricity for the dynamic Volkswagen Polo product.

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Introduction

Volkswagen has remained one of the most respected and trusted automobile brands in the world. The corporation produces superior cars despite the existence of an ineffective culture that has led to numerous challenges (Elson, Ferrere, & Goossen, 2015). This discussion describes the major misfortunes and fortunes recorded by Volkswagen within the past few years. The bottlenecks emerging from its top-down corporate structure are analyzed. The paper concludes by proposing an effective structure that can make a difference for the company and increase profitability.

Fortunes and Misfortunes

Volkswagen has faced a number of misfortunes as well as fortunes within the past two years. The strained relationship between the CEO, Martin Winterkorn, and the chairman of the board revealed the managerial challenges affecting the corporation. It is evident that more workers are facing similar hurdles in their places of work (Elson et al., 2015). Volkswagen was associated with various scandals and Clean Air Act violations that forced its CEO to quit his job.

The major fortunes include increased sales and profits due to the ability to innovate and produce high-quality products. After Martin Winterkorn left his position, the company’s stock prices have been increasing slowly. The company’s acquisition of various companies within the past few years has supported its objectives (Elson et al., 2015). These successes explain why new changes in management can promote performance and make Volkswagen successful.

Current Organizational Structure

Volkswagen is a multinational corporation characterized by a top-down organizational structure. This kind of corporate structure is implemented in such a way that decision-making is made by topmost leaders whose insights are acquired from a small number of competent advisers (Elson et al., 2015). Experts believe strongly that the utilization of this structure has disoriented the manner in which information is shared by different stakeholders. The level of control associated with the structure disorients various organizational functions.

Elson et al. (2015) acknowledge that the executive structure has discouraged many employees from pursuing their personal objectives and those of the corporation. Workers who are not empowered find it hard to engage in innovative practices and promote initiatives that can drive performance. The workers do not present their complaints or suggestions to their respective supervisors, thereby affecting the efficiency of different teams. This scenario explains why it has become hard for different workers to prioritize the organization’s needs.

Suggesting a New Organizational Structure

Volkswagen’s corporate structure has catalyzed an ineffective working environment. This issue has led to numerous misfortunes. The workers lack motivation, support, guidance, and empowerment. This information should be utilized to develop a new corporate structure that is less formal and leaner (Robbins & Judge, 2013). A fluid leadership hierarchy will ensure every employee is empowered to focus on emerging challenges, offer evidence-based ideas, and become innovative.

The ineffectiveness of the structure explains why open communication, decision-making, and innovation are not embraced by most of the employees. After implementing this new model, a new organizational culture supported by motivated employees and positive behaviors will make Volkswagen successful. The main assumption is that a fluid hierarchical approach will streamline decision-making processes, empower more individuals, and ensure innovation becomes a reality (Robbins & Judge, 2013).

Summation

Volkswagen’s journey has been defined by numerous challenges, opportunities, and misfortunes (Elson et al., 2015). The current organizational structure has been observed to affect effectiveness and communication. This has led to numerous misfortunes, such as the diesel scandal and loss of brand equity. A less formal arrangement will make a difference for the company by promoting superior practices that can ensure challenges are addressed in a timely manner.

References

Elson, C. M., Ferrere, C. K., & Goossen, N. J. (2015). The bug at Volkswagen: Lessons in co-determination, ownership, and board structure. Journal Applied Corporate Finance, 27(4), 36-43. Web.

Robbins, S. P., & Judge, T. A. (2013). Organizational behavior (15th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.

Introduction

There are different ways in which a company can stimulate growth either internally or internally. External growth as defined by Block, Hirst and Danielson is the growth of firms through amalgamation, mergers or takeovers/acquisitions. The authors define a merger as being ‘the agreed amalgamation between two firms.’ There are different types of mergers namely vertical, horizontal and conglomerate merger (Block et al, 2008).

History of the relationships of the two companies leading up to the final merger in 2009

Volkswagen and Porsche are two firms that are well recognized and established in the automotive industry. Based in Germany, both companies were founded by Ferdinand Porsche in the 1930s and have remained in the Porsche and Piech families to date.

There has been contention and rivalry, some fuelled by family differences between the two firms; in 2005, Porsche, the smaller of the two companies, began a takeover bid that included buying Volkswagen stock. This plan might have worked had Porsche not fallen into financial constraint (Anon, 2009).

Volkswagen had to step in with a merger proposal which Porsche fought off fiercely but finally had to give in to because it would mean an infusion of much needed cash into the latter firm’s fried up coffers. The merger between the two companies, which hit a couple of snags, was finally ironed out in late 2009 (Kingsbury & Dauer, 2009).

A brief description of the firms Volkswagen and Porsche and the automobile industry

The automotive industry is feeling the pinch of the global economic recession. The two auto makers are not the only companies to go the way of the merger. There are other acquisitions that have taken place recently and by all appearances it looks like there are many more on the way. Fiat, the Italian car making firm, has plans to acquire Chrysler as well as Europe’s branch of General Motors.

VW is the biggest carmaker in Europe having annual sales in the excess of US $151 billion and selling up to 6.7 million units a year. Porsche has lower revenue of US $9.3 billion selling about one hundred thousand units annually (Kingsbury & Dauer, 2009).

Porsche and Volkswagen have a long history that goes way before the issue of a merger arose. Ferdinand Piech and Wolfgang Porsche, the respective chairpersons of the two firms, are the grandchildren of Ferdinand Porsche who foundered both companies in the 1930s.

Members of the Porsche and Piech families own between them 50% of Porsche Automobil SE stock. The two firms have even collaborated in the past to put on the market vehicles such as the Porsche Cayene SUV and the Touareg whose parts are manufactured in the same plant (Anon, 2009).

Competition within the automobile industry

The automobile industry is very competitive, more so in the face of the global financial crisis that has shaken even the strongest of giants. The top ten brands on the global market are Toyota, General Motors, Volkswagen, Hyundai, Ford Motor, Company, Peugeot, Honda, Suzuki and Renault.

In the biting recession, the motor industry has been hard hit with major companies such as GM and Chrysler seeking bankruptcy protection from their governments or opting for mergers. The units of sales have declined sharply and profit margins have narrowed. Being in the automobile industry is simply not as lucrative as it was before the recession (carazoo.com, 2009).

Why the Volkswagen-Porsche merger is a vertical merger

There are three different types of mergers namely horizontal, vertical and conglomerate mergers. A conglomerate merger is one between two firms that are in two totally unrelated fields of business while a vertical merger is one that takes place between two firms in a related business but with one being the buyer and the other the seller.

A vertical merger takes place between two firms in the same line of business and who are competitors of each other (Block et al, 2008). Thus, the merger between Porsche and VW is a vertical merger because both firms are in the automotive industry.

Why the Volkswagen-Porsche merger is a ‘friendly’ acquisition and the concerns regarding the acquisition

The merger between VW and Porsche can be termed as a friendly merger because the terms of the merger have been negotiated by directors of the two firms until they have worked out an agreement which both parties find satisfactory. There was a three and a half year tag of war between Volkswagen and Porsche before the two companies finally hammered out a deal that was satisfactory to both. Porsche initially wanted total acquisition of VW, going as far as buying up 75% of VW stock, but had to settle for a merger (Boston, 2009).

What VW plans to do is to take the brand names, along with other brands already under VW, and consolidate them into a holding company which Porsche terms as being an ‘integrated leading company’ (Boston, 2009).
Synergy gains, portfolio effects, taxes, risk and the Volkswagen-Porsche merger

Firms create mergers for a varied number of reasons; these can either be financial or non-financial (Block et al, 2008). The reasons behind the merger between Volkswagen and Porsche fall into both of these categories. One of the motives that can drive firms to form mergers is on a bid cost savings; this is to the cut down on the cost of growth as compared to gearing internal growth.

Taking over from a destabilized firm is more cost effective than trying to generate growth using the resources that are already at the firm’s disposal. Acquisition means that the resources that were available to the acquired firm are now at the disposal of the firm conducting the acquisition (Block et al, 2008).

A non-financial reason for carrying out a merger is for its managerial rewards. A firm may have the aspiration to expand its management and marketing capabilities while at the same time acquire new products to add to its brand. While this can be done through internal growth, it would be more expensive and take a greater deal of innovativeness and the dedication of a more company resources.

Through acquisition, the firm can achieve all of the above in a way that is actually beneficial to itself. Those on the management team of the acquiring firm might be presented with the opportunity to get lucrative management positions that result from the merger (Block et al, 2008).

For a firm like Volkswagen, there is also power play involved. Porsche and VW have been waging a power struggle for years now, with either company trying to outdo the other. Porsche incurred a debt of US $2 billion while covertly buying VW stock in a secret takeover bid. The thrill and prestige of whoever was to get the last laugh has shaped the way the two firms are going about their merger with VW seemingly turning the tables on Porsche at the last moment (Anon, 2009).

The former CEO of Porsche, Wendelin Wiedeking saw the merger between the two firms as a way of making them into a single holding so that there would be created an economy of scale.

Wiedeking’s reasoning was that if Porsche became a part of the VW group, then the former would not face the stiff penalties governing carbon emissions by automobiles that have been put in place in Europe since VW has automobiles that are considered fuel efficient and low-emission. Porsche’s automobiles would then segue in with the VW ones without attracting too much attention (Boston, 2009).

But why would the stockholders be willing for a merger to take place? Stockholders can be motivated to back a merger because for them it means that if the merger transaction is to be conducted in shares, then they will have the chance to acquire stock in the new company (Block et al, 2008).

Stockholders can also get a chance to branch out into new and varied investments if the merger transaction is performed in cash. Taking the example of VW and Porsche, stockholders in the VW firm will be presented with the opportunity to acquire Porsche shares and stock.

Mergers can be good for shareholders because it will mean more value on the shares. Mergers have the potential of raising the earnings per share because of greater confidence of their value on the stock market (Block et al, 2008).

When a large firm acquires a smaller one, the acquiring firm can make a quick profit by asset stripping. For the acquiring firm, a profit can be made by selling off assets brought in by the acquired business (Block et al, 2008).

A firm can be financially inclined to form a merger because of the resulting ‘portfolio effect’. This results when a firm can reap the benefits of economies of scale, cutting down on production costs as output increases on fewer resources, having a more extensive market reach and a broader market segment, as well as building up its tying and bundling techniques (Block et al, 2008).

A merger can also make a firm more attractive to investment bankers who show an interest in financing projects that the firm might run in the future. Mergers may make a firm appear more financially sound and make it more viable to lending institutions. This is probably, another portfolio effect, because of the diversification of risk, without compromising the firm’s rate of returns (Block et al, 2008).

Another non-financial reason for conducting mergers is to create synergy so as to cut down on production costs while at the same time increasing output. It is more profitable to apply a larger production unit to achieve a given task as compared to having smaller units performing the same tasks independently (Block et al, 2008).

Conclusion

As has been illustrated above, mergers can be beneficial to the acquiring firm because it creates room for growth. Mergers also have a portfolio effect in that the acquiring firms can access a larger market segment, spread their risk, capitalize on synergy and add to the value of their stock.

The merger between Volkswagen and Porsche has taken nearly three years to work out. In the end, it will be beneficial to both firms since, being powerhouses on their own, their combined name will be an even more marketable brand. Again, Volkswagen can infuse the cash needed into Porsche to get the ailing firm out of its financial doldrums. Despite the initial hefty taxation costs that Volkswagen will have to pay in its acquisition of Porsche and the added risk of possible suits from hedge funds, the acquisition of Porsche can be considered a feather in VW’s cap.

Bibliography

Anon. (2009, July 20). The World from Berlin: New Hurdles for VW-Porsche Merger. Spiegel Online International. Web.

Block, S., Hirt, G., & Danielsen, B. (2008). Foundations of Financial Management (13th ed.). New York: McGraw HIll.

Boston, W. (2009, May 7). Porsche and VW Agree to a Merger. Time Magazine. Web.

carazoo.com. (2009, October 7). Top 10 Car Makers of the World of 2009, Page 2 of 2 – Associated Content – associatedcontent.com. Automotive.

Kingsbury, K., & Dauer, U. (2009, August 14). VW Seals Deal for Porsche in Reversal of Fortune. WSJ.com. Wall Street Journal. New York. Web.

Introduction

Chinese market is one of the most attractive consumer markets with its high growth and increasing consumer demand. The global recession of 2008-10 succeeded to dampen the China euphoria partially as the country recovered quickly and headed for another upswing. The demand for automobiles, during the recession declined considerably in developed countries like that in the US and UK, however, that of China increased significantly (Shen, 2009). According to reports, US automakers like General Motors (GM) and Chrysler saw a double-digit fall in its sales in the US during the recession but experienced a sales increase in the Chinese market (China Daily, 2009). Other automakers like Honda, Toyota, and Volkswagen too experienced a rise in sales figures amid recessions in China. Apparently, the Chinese market remained almost immune to the recessionary pressure, while the automobile market in developed countries of North America and Europe tumbled down.

This increased the vitality of the China for international automobile makers who wanted to enter the market that was experiencing high growth rate. Therefore, the importance of the Chinese market for multinational automobile manufacturers is apparent. In order to understand this phenomenon better, the paper will undertake a case study analysis of Volkswagen in China and the marketing strategy that it undertook in the country, in the background of the economic recession. The paper will specifically do an analysis of the marketing strategy of Volkswagen in China, especially during the recession in order to understand the importance of the Chinese market and the strategies to be taken during recession. The case study will present an analysis of the Chinese automobile market and the competitive landscape in the country during the recession. Then it will discuss the Volkswagen Company in China, its operations, and marketing strategy that it had undertaken and ascertain the reason behind such strategy.

Company Background – Volkswagen

Volkswagen, literally meaning car of the people in German, was founded in 1937 during the time of Nazi dictatorship in Germany (Volskwagen, 2010). The company is headquartered in Wolfsburg, Germany. The famous Beetle and Volkswagen bus car of the 1950s and 1960s brought international repute for the company (Datamonitor, 2010). Other iconic brands by the company were Golf, Touareg, and Scirocco.

The organization emerged as Volkswagen Group in 1986 when it included Audi and Seat into its stable. Other brands that were launched in 1988 by the company internationally were Bentley, Bugatti, and Lamborghini. The company acquired Skoda in 1986 (Datamonitor, 2010).

Volkswagen is a German automobile company that operates in 15 European, 6 countries in the Americas, Asia, and Africa (Datamonitor, 2010). Volkswagen group manufactures and sells many well-known brands like Volkswagen passenger cars, Audi, Bentley, Scania, Skoda, SEAT, and commercial cars. The company operates into three segments– passenger cars, commercial vehicles, and financial services. Volkswagen started spreading its operations internationally in 1952 with the opening of its operations in Canada and in America in 1955. The company extended its operations in Mexico, Sweden, Brazil, etc (Datamonitor, 2010). The expansion strategy of the company was through acquiring of a local automaker and then capturing the local market. Volkswagen began its China operations in 1982, as then entered into a contract with Shanghai Tractor and Automobile (Datamonitor, 2010). In 2005, the company began two joint ventures in China – Volkswagen FAW Engine and Shanghai Volkswagen Powertrain (Datamonitor, 2010).

The financials of the company are divided into four geographic segments – North America, South America/South Africa, Asia, and Europe (Volskwagen, 2010). The group’s passenger car division is divided under two entities – Audi and Volkswagen (Volskwagen, 2010). These groups are responsible for their respective product portfolio in all their operations. The global market share of the car market that is held by Volkswagen is 10.3 percent in 2008 that increased to 11.3 percent in 2009 (Madslien, 2009; Volkswagen, 2010).

The carmaker essentially had its strongest hold in Western European markets where it enjoyed 18 percent market share. However, its production base is more international than BMW that sells double the number of cars internationally. Volkswagen produced 40 percent of its cars overseas and two thirds of the cars manufactured by them were sold in Germany. The reason for the shift in production abroad was due to the increasing cost of production in Germany that became the costliest place to produce cars. The present case studies Volkswagen operations in China where it had its pioneering presence since the 80s.

Plan of the Paper

The paper is divided into four sections. First is the literature review that studies various literatures related to marketing in cross-cultural context and in recession. Further, the literature review also studies the effect the recession had on the Chinese economy. The second section studies the methodology and provides overview of the research design. This section also presents the aim and objective of conducting the study and the research questions. The third section provides a case study of Volkswagen China with specific reference to the economic recession of 2008-10. The fourth section provides generalization for the analysis done through the case.

Literature Review

The literature review will deal with the impact of the financial crisis on the global economy and that on the automobile industry specially. This will provide a background to the actions of the automobile companies due to recession that will be discussed second. Then the importance of China as an automobile market will be discussed. The literature review, in the end will discuss the marketing strategy that Volkswagen had taken in Chinese market until the recession.

Global Recession and China

The global recession has brought forth a brightening view of the Chinese market to international players. With the recession, when rest of the developed countries have shown reduced consumer confidence and subsequently lower demands, China is a market that has flouted all rules of the recession and has expanded its consumer demand, retail sales and industrial production (Political Risk Services, 2009). During the recession when rest of the developed countries faced a slowdown in GDP, the GDP of China continued to grow.

Figure 1 demonstrates that the Chinese economy during the recession of 2007-09 had been growing at a much faster rate than the US economy. In 2009, the GDP growth rate became negative indicating a shrinking economy, while that of China, though fell substantially, and was still growing at 10.11 percent. The Chinese economy fell in the fourth quarter of 2008 however, it is observed that the figures compared to other developed nations was still better (Balfour, 2009) This huge growth potential that China showed even during the recession changed the focus of the country and helped it to sustain and even increase its industrial production.

A SWOT analysis of the Chinese economy would demonstrate that strengths and weaknesses of the economy that has emerged during the period of recession. The strengths of the Chinese economy lie in its high growth rate. China is the fastest growing economy in the world and the Chinese government has successfully lifted millions of its population out of poverty. The huge trade surplus of the country and large foreign exchange reserve provides a strong cushioning against external shocks like the recent recession. Consequently, the Chinese economy did not face a huge set back due to the aftershocks of the global economic recession of 2007. Further, economic policy taken by the government is lucrative and supports the growth process. A few of the weaknesses of the Chinese economy are related to environmental problems in the country that is a consequence of high growth of the economy. Rapid growth and high level of industrialization has left the environment badly exploited. The export led growth process of China makes it vulnerable to recession. Further, private consumption of the industrial produce remain weak at only 40 percent of the total GDP.

Therefore, a weakening of the market in the developed countries will affect the Chinese economy considerably. Some of the opportunities that the Chinese economy holds is the expected rise in the middle class of the country, with an increase in private consumption. Further rapid urbanization process in China will be a major driver of growth for the less developed rural areas of the country. Further, as the Chinese industry move up in the value chain, China will foster international brands with its own technology and innovations. Some of the threats that the Chinese economy is exposed to global recession of 2007-09 will hinder China’s above 10 percent growth rate. It will also increase unemployment in the country’s export sector creating imbalances. Further high inflation of food prices may become structural due to rapid industrialization and loss of farmland. Therefore, the Chinese economy has been facing risks due to the global recession, and it is expected to hinder the country’s growth process (BMI, 2010).

According to the BMI risk ratings for emerging economies, china holds a position in the top 20 spot securing its growth prospects and buoying its invest prospects. The Chinese economy has already begun to recover from the blow of the recession. However, the Chinese government has brought into place well planned and implemented crisis management policies specifically to counter the global recession (Schuman, 2010). However, there is impending fear of real estate bubble and increasing inflation that is why the Chinese government has tried to constrain money supply in the economy (Yu, 2008; Economist, 2010).

During the recession, the fall in the growth rate of the Chinese economy was due to the global recession. The reason was due to the close connectedness of the economy to the international market. Due to this, the international and local companies operating in china wanted to shift their focus of their trade from developed countries to the Chinese economy. This led to the “brutal fight for domestic market” (Balfour, 2009). Therefore, the recession has brought forth China as the destination for the marketers as all companies want a share of the increasing purchasing power of the buoying Chinese middle class.

Culture and Marketing

Marketing strategy varies with changes in the market of the product. The reason for this is due to the changes in the cultural component of the market. Culture is the inherent character of a society that arises from social norms, standards, and practices. Therefore, the influence of cultural on global marketing and promotion claims special concern for all companies.

In order to understand what the cultural fit marketers look for, it is essential to understand what culture is. Taylor has defined culture as “that complex whole which includes knowledge, beliefs, arts, morals and law, customs and any other capabilities and habits acquired by man as a member of that society” (Taylor, 1891) culture is also defined as an “embodiment of … values, symbols and meanings into material objects and ritualized practices” (Banerjee, 2008, p.313). Hofstede (2001) has mentioned that it is important to understand the nature of national culture as it affects all areas of management practices. Therefore, the cultural differences affect the way a company operates in an economy and how it reacts to the external environmental changes in the market. Therefore, the question related to the action taken by companies in different cultures due to changes in the economy (Deleersnyder et al., 2009).

According to the Deleersnyder et al. (2009) research conducted by study in 37 countries and found that due to changes in the economy, there is a tendency in companies operating in all countries to change their strategic outlook and decisions. They have found in case of advertisements that the “average co-movement elasticity” remains same for all countries; however, some form of media like print is more sensitive to business cycles changes compared to others like radio and television (Deleersnyder et al., 2009, p.634). Therefore, their study reinforces the fact that “companies’ marketing behavior is systematically related to the cultural and economic context in which they operate.” (Deleersnyder et al., 2009, p.634) Therefore it can be intuitively deduced from the study that due to changes in the economic condition, as in case of recession, there is expected to be changes brought in managerial decision making, especially related to marketing, which however, is culturally bound.

Understanding cultural differences in marketing is an important aspect of branding of products in international setting. The dilemma to remain local in marketing strategy or to employ a global, standardised strategy has always been faced by multinational corporations. Hofstede and Mooij (2010) believe that understanding national cultures and their differences is important to point out the different aspects of marketing and advertising of the products in global environment. Therefore, acultarization of the brand and the brand culture becomes a daunting task for global marketers.

Mooij & Hofstede showed that cultural differences may affect the nature of advertisement and promotional campaign as the target segment of customers, their beliefs and values change with change in national culture (Mooij & Hofstede, 2010). Therefore, cultural differences in marketing must be considered while understanding the pulse of a new natural culture. They point out that in a culture where there exists high power distance the need to consume luxury goods is high in order to establish the superior status. In a highly masculine and individualistic society, the need to show off one’s success is high while it may be low in case of collective societies. Therefore, they want to emphasize that with changes in the degree in the dimensions of culture, there is a difference in perception of the people within the culture:

Collectivism is not about subordinating oneself to the group. The latter is the typical description from an individualistic view of the person. The group itself is one’s identity. Power distance is about accepting and expecting inequality – it is a two-way street. Female nudity in advertising should not be confused with sex appeal, as researchers from masculine cultures may assume. There is no relationship with masculinity. (Mooij & Hofstede, 2010)

Cultural differences affect the way a product should be marketed in different countries. For instance in case of Asian market, it is essential to understand the customer demand and requirement as the nature of the society is very different from that of the European or American culture.

Marketing in Recession

Marketing strategy of companies are bound to change with changing environmental conditions, especially during “turbulent times” (Kotler & Caslione, 2009). Therefore a few areas that the marketers must be aware of during recession are that hard times brings forth touch financial situation for consumers who in order to sustain within their disposable income, have a tendency to shift towards lower prices products (Kotler & Caslione, 2009). Further, there is a tendency to postpone discretionary purchase like furniture or automobile, expensive vacations, etc. therefore, it is advised that companies who sell discretionary products are “forced to budget downward, reduce inventory, and possibly lay off workers” (Kotler & Caslione, 2009, p.188). According to Kotler & Caslione (2009) the best strategy that companies in recession must take are to let go of the segments, customers, geographic locations, or products that are losing money in order to streamline their marketing process and increase margins. Therefore, the main idea is to stream line the product portfolio and marketing mix of the company during recession.

Schultz (2009) points out that during times of “limited economic growth” it is not possible to expect a lot out of marketing. He point out that in such times marketing, branding, or market positioning become obsolete concepts and cannot be fully utilized. Therefore, changes in the economy, climate, and other external conditions are expected to change the way marketing is done and is expected to transform it. Therefore, marketing, according to Scultz must come beyond positioning and branding.

Quelch (2007) mentions eight factors that companies in recessionary environment should follow. First, he states that researching the customers during recession is important as the price elastic changes with changing economic environment and crunching of disposable income of consumers. The focus of marketers should shift to family values as recession brings forth hard times when friends and family remain closest. He therefore states, “Look for cozy hearth-and-home family scenes in advertising to replace images of extreme sports, adventure, and rugged individualism. Zany humor and appeals on the basis of fear are out.” (Quelch, 2007) Quelch differs from Kotler, Schultz, and advices the companies to maintain their marketing spending even during recession and not to cut advertisement or promotion cost – “It is well documented that brands that increase advertising during a recession, when competitors are cutting back, can improve market share and return on investment at lower cost than during good economic times.” (Quelch, 2007, p.1) The theory of increasing advertising expenditure during recession finds empirical support through the research of Tellis and Tellis (2009) and Srinivasan, Rangaswamy, and Lilien (2002). These researches support proactive marketing during the recession in order to grab greater market share. Revamping the product portfolio during the recession is necessary such that non-performing brands are pruned, while the best offers can be provided to the customers.

Therefore, it can be concluded that recession is a time to do intelligent marketing rather than remain dormant. Companies must do away with non-performing brands, promotions, segments, targets, etc. they must take a closer look at their marketing mix and decide the best possible options for the recession.

Methodology

Case Study

The reason for research identifiable from the literature review is the marketing strategy that a company takes during recession. The choice of research method is done after the research problem is identified (Baharein & Noor, 2008). The main aim of the research is to create knowledge of the successful marketing tactics during recession. The aim of the paper is to gather facts and then construct various meaning that can be possibly associated with the development of theory. Therefore, for this research a case study method is adopted to gather information regarding the company in recession and then understand the strategy taken to become successful. Thus, the first question that arises is what a case study is. Yin suggested that case represents an event, object, entity, or a unit of analysis (Yin, 1989). Usually a case is a contemporary event or occurrence that is studied in the real life context through empirical enquiry from various sources (Yin, 1989). Further, it must be noted that case study is usually not a study of an entire organization. Instead, it focuses on a particular issue or unit of analysis. This particular research, aims to understand the marketing strategy of Volkswagen China during the recession economic recession.

Many believe that case studies are not suited for scientific research as the scope of generalization is limited. Flyvbjerg (2006) point out that case study is generally believed to be a pilot study used for generation of hypothesis and a case study cannot be of utility in themselves. He points out that case studies can be used for scientific research as well as can be generalized. He points out that generalization is possible for human affairs as well as natural sciences (Flyvbjerg, 2006).

Bonoma (1985) pointed out that case sturdy research is a useful tool that can be adopted by marketers and describes the four steps for case study research. According to his definition of case study, it is “a description of management situation” (1985, p.203). The case study research like other forms of qualitative research can employ both interviews and observation along with other sources of data collection such that it allows “perceptual triangulation” and help to portray a “fuller picture of the business unit under study” (p.203). These data may include financial data, data on region of operation, industry data, market performance data, competitive data, etc. he points out that case basically tries to provide the researcher’s interpretation of the “event, information, and reality” (p.204). Further, mixing of qualitative and quantitative data for analysis within a case study is also possible (Kaplan & Duchon, 1988). Therefore, the interpretation is based more on interpretation of the researcher rather than on “objective reality” (p.204). Therefore, he suggests that the first stage is to understand the background of the research problem that he terms as the “drift stage”. This is when the researcher conceptualizes the problem. Then in the design stage, the events are unraveled. Then in the third stage, the generalization of the research is done wherein predictions or recommendations based on the research is done. The fourth stage explores the limitations of the research conducted and the problems that led to generalization of the research.

Research Design

This section describes the research design that will be adopted for analyzing the case study. The case study will be developed using the four-stage framework presented by Bonoma (1985) in designing a case study research in marketing.

Research Problem Identification

The first stage of the research would be to identify the problem area or the issue to be studied. This is done in the aim and objective section. This will lead to the research questions that will be answered through the case analysis. once the research problem is identified the case will emerge on the second stage.

Data Collection

The second stage of case study research is to collect relevant data for analysis. Data for case study research can be collected from various sources. One major source for case study research is to collect data from the organization under study, especially through their documents and reports. These form the plethora of primary documentations required for the study. Further data can also be collected from newspapers, magazines, company reports, company newsletters, text books, etc. for this research, the data is primarily collected from industry reports, company websites, and company reports like annual reports and financial documentations, government statistical databases, etc. further information is collected from conference reports, newspapers, journals, and magazines. For this research data collection will be done at three levels – (1) macro level data of country and industry, (2) data on the company and competitive data, and (3) company presentations, reports, promotional campaigns, interviews of top management on marketing plans and issues of the company.

Theory Building

This stage will analyze the data and develop a framework for generalization of the research. In this part, the paper will try to point out the specific strategies that companies selling discretionary goods can adopt during recession. Further, the case will also demonstrate the differences in marketing due to changes in cultural setting.

Limitations

This section will demonstrate the limitations of the research and areas that has not been properly analysed. Further, this section will also identify gaps in research and the areas that can be used for further research.

Aim and Objective

Volkswagen started its operations in China at a very early stage when the rest of the automakers did not realise the hidden potential in the country’s market. The paper aims to understand the marketing strategy of Volkswagen in China, especially those taken by the company during the recent economic crisis. The paper is a case study analysis to understand the marketing and operational strategies of Volkswagen taken in China that resulted in the success of the company in the Chinese market. The main aim of the paper is to understand the strategies suited for expansion in an emerging market for a multinational automotive company during the time of recession, when the developed markets of the world are under recession. The research paper will look into the condition of the Chinese market that helped Volkswagen to have high growth and the policy related opportunities that the country provided to the company’s success.

Further, the paper would try to ascertain the strategies that were taken by the company against the competitors in China, and the strategy for marketing and sales used for different brands of the company. During the recessionary period, due to declined market demand in developed countries, the major automakers of the world turned towards the emerging market. One of their main attractions was the Chinese market as it boasted of the fastest growing automotive market. Evidently, there was an increase in competition for Volkswagen during the recession as most of the international players fought for a share of the Chinese pie. Therefore, understanding the competitor strategy of Volkswagen in a market where it had been a dominant player is important. Therefore, the strategy undertaken by Volkswagen to counter increased competition in the Chinese market during recession is done in the paper.

The strategy undertaken by the company to manage its supply chain and manufacturing in china played a vital role in cutting its costs in the Chinese market, and localization of its manufacturing firms. The paper aims to understand the operational strategy undertaken by Volkswagen during the recession that helped it to meet increased demand in China. Further, the paper will also try to understand the sales strategy of Volkswagen.

Broadly, the main objective of the paper will be to understand the marketing strategy taken by Volkswagen in China during recession. On a more precise note, the aim is to ascertain the particular marketing strategy in terms of marketing mix (i.e. 4 Ps), generic strategy, and competitor strategy undertaken by the company in China during the recessionary period of 2007 to 2009. This case study of Volkswagen would help us to understand how growth in China helped Volkswagen to increase its sales figure.

Research Questions

The research questions that the paper aims to answer are as follows:

1. What was the marketing mix adopted by Volkswagen in China during 2007-09?
2. What was the strategy adopted by Volkswagen to counter increased competition in the Chinese market during the period?
3. What was the operational strategy of Volkswagen during the recession?
4. What was the reason for expansion adopted by Volkswagen in China market, when all the rest of the major automobile companies were downsizing their operations?

Case Study Analysis

Automobile Industry in 2008-10 Recession

The automobile industry was severely affected due to the 2008-10 recession (OECD, 2009). During the recession, demand for cars fell significantly, thereby increasing the problem of excess production capacity, a problem that was already faced before crisis, and deepening further after the recession. Automobile industry by nature is capital intensive, and has a high capital to labor ratio. According to the OECD report, the production of automobiles has shifted to Asian countries (OECD, 2009). From 2000 through 2007 the share of the US and Japan in global production of automobile fell from 40 to 30 percent. The recession may help to accelerate and intensify this structural shift in production of the global automobile industry. The reason for the shift is due to market saturation in developed countries and high production cost. The Asian countries with emerging, unexploited market and low production cost pose a lucrative target for companies. Due to the increased concentration of the global players over a few emerging markets, there has been a spur of mergers and acquisitions and joint ventures emerging in order to gain economies of scale.

The automobile sector cycles moves with the traditional business cycle (OECD, 2009). Further there is a high correlation found between car sales figures and private consumption. Therefore, with the recent recession, as private consumption fell sharply in developed nations, sale of cars also reduced. According to OECD: “The correlation coefficient has increased significantly in the past decade in the United States, Germany, and Canada. It was broadly stable in Japan, Italy and the United Kingdom, while it declined markedly in France.” (OECD, 2009, p.92) Therefore, the 2008-10 recession has severely affected the global automobile industry.

The average fall in car sales in all OECD countries was by 20 percent from September 2008 through January 2009 (OECD, 2009). In Europe however, the fall in car sales has been more for big, luxury cars, and the sale of small cars has not been hit so much. Further the production adjustment done by automobile makers in countries making more than 1 million units annually shows that in countries like the US, France, Italy, Spain, and the UK the production of cars fell sharply. In the US, production from 2007 to 2008 fell by 19.4 percent and that in Italy by 23.4 percent. In 2008-09, the production fell further in the US by 33 percent and in UK by 13 percent. However, in emerging markets like India, China, and Brazil car production increased by 6.8, 5.6, and 7.1 percent respectively in 2007-08.

Therefore, the developed countries were in trouble in terms of car sales and shrinking of maturing market. due to low consumer confidence in the US and UK, the demand for automobiles also fell sharply, thereby increasing excess capacity and putting big car makers of US like GM, Chrysler, and Ford in bankruptcy. The recession shifted the focus of the automobile industry from developed countries, which were the largest market for cars to emerging markets as they emerged through the recession as the largest buyers of cars. The importance of China among the emerging countries was greater as it became the largest automobile consumer toppling the US and therefore becoming the apple of the eye for the recession hit auto industry. Further the market for cars in G7 countries have saturated. Developing countries like India, China, Mexico, etc. are expected to rise. As in case of China, the car ownership level was very low. The income levels of the population have risen but the income elasticity of cars is very high compeered to developed nations. This combination of increasing income, low car ownership, and high-income elasticity indicates that the trend of car sale in China is expected to rise. According to OECD data, “Actual sales are also rising rapidly in line with the trend, increasing from approximately 4 million in 2005 to around 7 million in 2008.” (OECD, 2009, p.106) Therefore, the significance of China for auto industry is self-evident.

Country Level Analysis

Political

For the last 59 years, China has been under a single party (Communist Party of China) rule that led to consistent political decisions taken by the government. The success of the government lies in its one party rule, wherein the government need to go through the grind of conventional democratic negotiations. Further, the Chinese government has its focus on equitable growth since 1986, which has helped the government to establish free market policies and gain high growth rate. Further HU Jintao has framed policies that would reduce the income gap between the rich and poor population of China in order to facilitate all round development. Since 2007, the country’s political presence in the international arena has increased as China entered into political ties with Poland, Finland, and few African countries (Datamonitor, 2008). Further, the pre-existing ties between China and the UK, USA, and Russia have been strengthened.

The Chinese political ties with the US has been improving, indicating a more cordial approach for trade, energy, and security issues. Further, China being one of the largest members of APEC (The Asia Pacific Economic Co-operation) is recently aiming for a free-trade agreement between the member countries. Such a free trade agreement will be helpful for China as APEC is mostly a trade-based organization. Free trade agreement between the ASEAN members (coming into force in 2015) will also benefit the Chinese government and trade situation in the country. Therefore, the increase political ties worldwide have helped China to become a more prominent political figure in the world.

There are political problems in the country related to Taiwan due to the boundary issue between Mainland China and Taiwan. Taiwan does not recognize Chinese government and there has been a constant verbal as well as military threat from China to Taiwan. Another volatile situation is Tibet that led to Chinese condemnation from other countries that led to great amount of negative publicity. Further, internally, there is a lack of coordination between the central and local Chinese authorities as there is a clash of interest between the two. This situation has led to higher inventory, unsold products, and rise of inflation in the country. The reason for this is lack of a federal government structure in the country (Datamonitor, 2008).

Economic

China is one of the fastest growing economies in the world and one of the largest potential markets for multinational brands. The GDP growth of the country has been consistently around 10 percent since 2004 through 2008 (see figure 2). Therefore, the Chinese economy remained fundamentally strong even with the adverse effect of the recession. The gross fixed capital formation had started to fall since 2004 as it fell from 3.6 percent in 2004 to 0.8 percent in 2005. It became negative in 2006 at -0.7 percent and -1.5 percent in 2007. However, it again rose in 2008 to 2.6 percent.

The flow of FDI into the economy has been very high, with actual FDI being around $60 billion in 2005 (OECD, 2010). The growth in FDI was maximum in 2007 at 77.2 percent and then fell to 6.8 percent in 2008. The FDI growth was negative in 2006 at -1.3 percent. The country had a positive trade balance with the export exceeding imports $101 billion. Therefore, the country rides a vehicle of high growth rate. China has the largest FDI flow in the world (Datamonitor, 2008).

The GDP growth rate was very high in China and the high growth rate was attributable to large foreign investment. The rate of investment constantly increased relative to the rate of consumption. In 2000, the 73 percent of the production was consumed with investment of just 25 percent and there was no export. In 2005, the situation changed completely, with consumption decreasing to 33 percent and investment increasing to 49 percent and export increased to 18 percent. Therefore, the economy was on a path of high growth rate and a consistent growth rate of around 10 percent is indicative of economic strength of the country.

However, there are areas of concern for the economy. First, is the huge gap in per capita income level of the urban and rural population. In 2005, the FDI growth rate was at 44 percent. The increasing income gap in urban and rural population is a sign of weakness for the economy and indicate a lack in full round development of the country. As observed earlier, the GDP growth was consistent at around 9 percent; however, there is a greater growth in the energy consumption in the country. In 1985-2000, GDP growth was at 9.5 percent and the energy consumption growth was at 4.6 percent. However, in 2001-05, the consumption rate of energy went up to 10.7 percent and the GDP growth rate was at 9.5 percent. Thus, there was an increase in the growth of energy consumption, while GDP growth of the economy remained almost stable.

The Chinese government has encouraged favourable policies that led to economic reforms in 1978 and 1986 that led the country to become of the strongest economic powers in the world. The country is presently a socialist market economy and follows a three-step development program that began in 1987. The first two steps were to doubling and quadrupling the GNP and the third step (yet to be achieved) is to increase the per-capita GNP to the levels of developed countries.

The economic analysis demonstrates that the Chinese economy has been experiencing a very high growth rate. However, it faces certain problems related to income inequality in urban rural population and increased energy consumption that may create certain problems.

Social

One of the major problems of China has been its increasing population. The population of the country has been rising and is the largest populated country in the world. The Chinese government had adopted a one-child policy that officially allowed married couples to have only one child. This policy remarkably reduced the birth rate that was at 3 percent in 1970s to 0.6 percent in 2007 and to 0.6 in 2010 (OECD, 2010). In 1970s there were on an average 5.4 children per family that went down to 1.7 children per family indicating the success of the policy initially undertaken.

The life expectancy of the Chinese population has increased considerably and there has been a decline in infant mortality. The average life expectancy of the country increased from 32 years in 1950s to 74.4 years in 2006 (Datamonitor, 2008). Further infant mortality rate reduced from 32 deaths per 1000 births to 22.12 deaths per 1000 births from 1950 to 2006 (Datamonitor, 2008). Therefore, there has been a betterment in the health care services available to the Chinese population. Poverty has also declined considerably in the country, with the percentage of population below poverty line decreasing from 64 percent in 1970s to 10 percent in 2004 (Datamonitor, 2008). The per capita income of the Chinese population is $1740 that is the highest in Asia. Further, with the Chinese growth plan, the developmental benefits are expected to trickle down further to the bottom of the pyramid.

A few of the problems that the Chinese social system is plagued with are gender differences, migration to urban areas, backwardness of the rural China, aging population, and increasing unemployment among graduate population of the country. The male female gender gap is affecting the social structure of the Chinese community. China has a male female ratio of 128:100, and it is actually higher among the “floating population” i.e. the migratory population of China. This has led the government to ban selective abortion of female fetus and provide cash incentive to only girl child families. The floating population creates a serious concern for social imbalance, as there is a large chunk of the society migrating from rural underdeveloped areas to the more developed urban areas of China. The migration may be attributable to serious lack healthcare amenities in rural areas that have led to the migration. China has a high number of unemployment, especially graduate unemployment. The one child policy of China has created many problems with aging population as well as a gender imbalance in China. In 2007, 7 percent of the Chinese population is over 65 years of age (Datamonitor, 2008).

Technological

Technological changes in China have been ushered through great emphasis laid on research and development by Chinese government. One reason for high emphasis on technology is due to the political leaders coming from technology and research background. The gross domestic expenditure on research and development in China was 1.34 percent of GDP in 2005 that increased to 1.44 percent of GDP in 2007. The number of researchers in the country increased from 1.47 percent of the population in 2005 to 1.85 percent of the population 2007. One reason for such high research outcome in China is due to large number of research and development institutes in the country. However, some hindrances to the process of technological advancement are lack of IPR protection of new inventions.

Government interference in the research and development area may prove to be a major impediment in the technological development of China. As the country has a communist form of government, centralization of all matters related to technology raises government interference in research.

Figure 5: Brief comparison of average annual salaries of researchers (Datamonitor, 2008).

Further low salary provided to researchers in China may become a major hindrance to the development of new technologies in the country. Table 1 demonstrates that the salaries of Chinese researchers are lowest amounting to only $3956 per annual.

Legal

China has a decentralized court system with more than 300 laws that cater to the economic sector. Further mediation committees resolve maximum of civil and minor criminal cases at almost zero cost. Further, there are 800 thousand committees in both rural and urban areas. The Chinese government has a clear and smooth process for the flow of FDI. It takes a new company n90 days at the maximum to enter the Chinese market. There are problems related to maintenance of independence of judges, as there is excessive control over judiciary of senior politicians and bureaucrats. Further, there is a dearth of qualified judges in Chinese courts.

Environmental

China has a high degree of pollution with CO₂ emission from fuel combustion amounting to 6028 and according to OECD; China could surpass the US in its carbon dioxide emission rate (OECD, 2010). Further, OECD study shows that 300 million people in China drink contaminated water and 190 million people have water related illness. Therefore, China is in midst of an economical crisis (OECD, 2010).

PESTLE analysis shows that the Chinese market is lucrative and best for cost effective production. The process of doing business in China is easy and hassle free for multinationals, and the consumer market strength and potential is very high. Further, the economic analysis demonstrates that the recession had minor effect on the Chinese economy and failed to deter its growth streak. Chinese economy continued to grow even during the recessionary period. The stability in the political arena due to one party rule has brought in stability in economic decisions of the government and the government policies even during the recession remained friendly towards multinational corporations.

Industry Level Analysis

Chinese Automobile Industry During Recession

Chinese automotive industry had its inception in 1950s, however, rapid development and modernization was ushered in only in the 1990s. The value added in the Chinese industry by the automobile sector in 2002 was $19.1 billion, an amount that is 50 percent higher than the previous year (Zhu et al., 2007). The global recession created the world’s largest retail market in China (Sullivan, 2010). Chinese auto sales have surpassed the sales of the US during the recessionary period of 2007-09 (Sullivan, 2010). The production and sales data of the Chinese automotive market is shown in figure 6.

Figure 4 demonstrates that the Chinese automotive sales continued to increase from 2000 through 2009. The year on year sales growth was maximum in 2001 at 37 percent and 2002 at 35 percent. Then growth in sales fell to 15 percent and then rose to 25 percent in 2006. However, due to recessionary pressure the sales growth fell to 22 percent in 2007 and 7 percent in 2008, again increasing in 2009 to 45 percent.

Figure 7 provides a comparison in the sales of automobiles in EU (15), China, and the USA. The figure shows that the year on year sales growth in China has been greater than EU and US since 2000. However, during the recent recession, the sales growth of both EU and the US became negative with sales growth falling to -18 percent in the US and -11.8 percent in the EU in 2008, whereas that in China was 7 percent. This indicates that the Chinese automobile market was enjoying growth while the automotive market in developed markets of the world was shrinking.

The Chinese market for automobiles is increasing constantly. This paper analyzes the new passenger car segment of the Chinese market. In 2009 the Chinese new car market generated total revenue of $98.7 billion and it grew at a compound annual growth rate of 17.3 percent from 2005-09 (Datamonitor, 2009). The sales volume increased at a compound annual growth rate of 22.1 percent from 2005-09.

The sales volume in the Chinese market increased at an average annual rate of 23 percent from 2001-06 and it increased by 25 percent in 2007-09. However, the compound annual growth rates in 2001-06 period in the US was -0.7 percent and that in EU by 0.3 percent. The annual growth rate in the US and EU during the period of the recession (2007-09) was negative at -14.3 percent and -11.4 percent respectively. During the recession when the rest of the developed world was facing a decelerated growth in automobile sales, sales in China was increasing at an annual average of 25 percent, making it one of the most attractive automobile markets.

Porter’s Five Forces Analysis of the Chinese Automobile Industry

The Chinese market for automobile has a large number of buyers as the buying power of the Chinese population has been increasing steadily. Even though buyers have very low switching cost, they are highly price sensitive. Further, with high level of innovation and product differentiation in the automobile market provides greater choice to buyers thereby increasing their buying power. Automobile manufacturers in China have invested heavily on building their brands that reduces the buying power of the Chinese customers. Due to global recession, price for raw materials as well as other products has been increasing, therefore increasing supplier power. However, recession had reduced the threat from new entrants. Threat from substitutes had increased, as there has been an increasing demand for used cars and public transport. Further consolidation in the automobile industry of China had left few players in the market, thereby increasing competition among rivals therefore resulting in decline of market share for individual companies. Therefore, the automobile industry in China is highly competitive with buyers and suppliers have high buying and selling power. There is also threat to the market from substitutes and new entrants.

Volkswagen in China

This section is dedicated to understand the company level performance, market, portfolio strategy of the company during 2007-09. In China Volkswagen operates in three entities – Volkswagen Group China, and in joint venture with FAW VW and Shanghai Volkswagen Automotive Company (SVWC). SVWC is headquartered in China and is held by Volkswagen AG, VW, and SAIC (Volskwagen , 2010). This unit produces products like the Passat, Touran, Polo hatchback, Polo saloon, Gol, etc. FAW-Volkswagen produces sedans like Sagitar, Golf, Bora, Jetta, Caddy, and Audi (Volskwagen , 2010). This section will provide overall understanding of the company operations in China.

Background of Volkswagen in China

Volkswagen was the first western automaker that entered the Chinese market. The VW office was first opened in Beijing in 1985. The journey began with successful joint ventures with SAIC was formed Shanghai Volkswagen Automotive (SVW).initially Volkswagen enjoyed almost a monopoly in the taxi and government car demand for almost 20 years. Volkswagen remained the leader in the Chinese car market until 2005 (Som, 2007). The strategy to target the taxis and government cars in China was a lucrative strategy in order to credibility and brand recognition in the Chinese market. This strategy provided high volumes of sales, thus creating economies of scale for the company. The taxis were revamped, thus helping Volkswagen to introduce new cars. In 1988, the taxis were usually made up of red colored VW Santanas. In 2000, the taxis in Shanghai underwent another revamp and now the model has been changed to Passat B5.

Volkswagen China plays a crucial part in garnering a high growth rate of the company in 2008-09. In 2010, Volkswagen has sold more cars than its competitors in China (Soh, 2010). The growth rate of vehicle sales in china increased by 32.4 percent in 2009 (Volskwagen, 2010). Volkswagen brand has a very strong market in china, as it boasts of a 28 percent of its total sales is in China (Soh, 2010). Among the emerging markets, china has a 19 percent share of auto market worldwide, and Volkswagen has a share of 33 percent of the Chinese auto market (Soh, 2010). In 2009, Volkswagen delivered 1,118 thousand units to the Chinese market. It enjoys a dominant market share of 13.2 percent and had the largest sales in 2009 in mainland China (Soh, 2010). In Hong Kong, it has a market share of 10.5 percent (Soh, 2010).

Volkswagen started its china operations in 1978. From 1984 to 2009, the company has invested €7.8 billion (Vahland, 2010). The turnover of the company in 2009 was €20 billion in China. This shows that the financial success of the company in its China operations. Until 2004, it was compulsory for multinational corporations to enter China through joint ventures. For this Volkswagen relied on two partners – FAW and SAIC. The company has a joint venture with two companies in China i.e. FAW Volkswagen Automotive Co. Ltd. (FAW set up in 1990) and Shanghai Volkswagen Automotive (SVW set up in 1984) to look into the china manufacturing operations for the company. SVW is a joint venture with 40 percent share of Volkswagen AG and 10 percent by Volkswagen China Investment Company. At present, there are 19000 employees in SVW plants. FAW-VW has an employee strength of 11,700 and 20 percent of its stakes are with Volkswagen AG, 10 percent with Volkswagen China Investment Company, 10 percent with Audi AG, and 50 percent with FAW.

Volkswagen in China began its operations in 1978. In 1984, the company started doing business in china through a joint venture with Shanghai Automotive Industrial Corporation (SAIC) and formed Shanghai Volkswagen Automotive (SVW). It has many of its manufacturing units spread across different cities in China. In 2009, Volkswagen had joint ventures with 16 companies in the country (Vahland, 2010). It created joint ventures to network supply accessories to the automobile plants. One of the main factors that facilitated the success of Volkswagen in China was its ability to nurture and maintain long-term joint venture relation with its partners.

The company sold cars under three brand categories. First were the Volkswagen group of brands that consisted of Volkswagen, Skoda, Bentley, and Bugatti. Audi brand group has two car brands i.e. Audi and Seat, and the other group is Volkswagen commercial vehicle group. The paper will concentrate only on the Volkswagen brand of cars sold in china. For the Volkswagen brand cars, both FAW and SVW were used as operational and distribution channels in China.

Volkswagen’s Marketing Strategy in China

Volkswagen had aggressively marketed its automobiles in the Chinese market due to its immense potential. However, the company saw a rise in competition in the market due to the increased the fast growth opportunity that attracted other companies. However, Volkswagen continued to concentration the Chinese market with introducing 10 new models in 2007-09 (CSC, 2009). Therefore, there were changes in its strategy during the recession, in order to counter competition, manage external pressure, and market conditions. Unlike many of its competitors, like Toyota who reduced their global production due to recession, Volkswagen continued with its expansion plans, especially for the Chinese market (CSC, 2009). Volkswagen continued with its plans to introduce better technology products into the Chinese market even during the recession. This demonstrates a strategy that is different from other automakers, and therefore, must be studied in order to draw the elements of success in the company’s plans.

Volkswagen China enjoyed undisputed market share until 2000 when it has a market share of 53 percent in China. However, with opening of the market and the lucrative market proposition in China, other international brands entered the market, and the VW market share slipped to 24 percent in 2004 and finally to 16.5 percent in 2009 (See figure 8).

Brand portfolio

The overall brand portfolio of Volkswagen AG is presented in the following figure.

Figure 10 present the brand portfolio of Volkswagen AG. Volkswagen has 8 brands in its world worldwide market. In China, the company has 6 out of these 8 brands. These brands are marked in dark green in the figure – Audi, Lamborgini, Volkswagen, Skoda, Bentley, and Commercial vehicles. In this paper, only Volkswagen brand is discussed.

In China, Volkswagen group works in joint venture with FAW and SVW. Audi operates in alliance with FAW and caters to the luxury, premium market of the country. The target customers are the rich and the brand proposition is “prestige and excellence” (Volskwagen , 2010). The differentiating factor of Audi in the luxury car segment is its sporty appeal and progressive style and sophistication. The distribution in China is through one dealer i.e. FAW.

Volkswagen brand operates in China through two joint ventures – one with FAW and the other with SVW. Through FAW Volkswagen manufactures and distributes original Volkswagen cars, while through SVW it manufactures cars made specifically suited for Asian conditions. The target customers for FAW-VW are prestige and performance, while SVW-VW targets at lifestyle and fun for Chinese populace. The slogan for FAW-VW is “Born to win” indicating the performance panache of the cars. The slogan also indicates at the performance based differentiating factor of the cars. the slogan of SVW-VW is “Enjoy my style”. The core value of the brand lies in its appeal to lifestyle and fun figment in the brand. For Volkswagen, the company operates through dual dealers in China.

The Skoda brand of Volkswagen is distributed through single distribution channel i.e. SVW. The differentiating factor of Skoda cars are based on its functionality and intelligence. The target customers look for efficiency and life in Skoda cars and therefore are called “Smart buy” in the Chinese market. The brand slogan is “Simply Clever” indicating that utility and functional nature of Skoda cars. the company sales channel in China is through single dealer network.

Competition Analysis

Figure 10: Competitor Analysis of Volkswagen in China (Datamonitor, 2009; Datamonitor, 2008; Pricewaterhouse Cooper, 2009; Bloomsberg, 2010).

Table 2 presents a tabular comparison of the performance of top competitors of Volkswagen China. The companies have been chosen from the companies who have the maximum market share after or above Volkswagen China. The comparison shows that the largest automobile company of China is FAW with profit margin of 20.8 percent and 21.8 percent in 2007 and 2008 respectively. It has the largest market share in Chinese passenger car market. The company produces passenger cars, commercial vehicles, luxury coaches, etc. The profit margin of FAW even during the recession (in 2008) was 81 percent higher than that of Volkswagen. Further, the market share of FAW remained constant at 23.6 percent in 2008, whereas that of Volkswagen increased marginally. The other automakers like Toyota and GM who alternately held the third and fourth position in the Chinese automobile market, held only 8.3 and 7.5 percent market share.

Toyota in China produces conventional engine vehicles and hybrid vehicles. The product portfolio of Toyota comprises of small vehicles ranging from mini to compact vehicles, mid-sized cars, luxury, sports, and speciality cars (Datamonitor, 2009). Daihatsu is the subsidiary with which Toyota has alliance to sell compact and mini vehicles in China. The financial performance of Toyota in 2008-09 has been bad with the company reporting a net loss of $4223 million.

General Motors (GM) was one of the largest automakers of the world before the recession hit in 2007. The Asia Pacific operations of the company is one of the most profitable ventures and has different brands of products like the Buick, Cadillac, Chevrolet, Daewoo, Holden, Opel, and Saab (Datamonitor, 2008). In China GM has subsidiary and joint venture with Shanghai GM, CAMI Automotive, Suzuki Motors, New United Motor manufacturing, SAIC-GM-Wuling Automotive Company, and CAMI Automotive (Datamonitor, 2008). Therefore, FAW is the largest competitor of Volkswagen in China where it holds the second largest market share.

Product Portfolio of Volkswagen AG in China

BCG analysis analyzes the three brands under Volkswagen Group China i.e. Volkswagen, Audi, and Skoda. The sales figures for 2007 and 2008 are derived and the rate of change is calculated. The sales growth is then measured relatively on the overall growth of the total market of cars in China. This step provided the related market growth of the brands in China. The BCG analysis of Volkswagen brands in China are discussed further in the next paragraph.

The BCG analysis, shows that of the three brands belonging to the group, Volkswagen (VW) brands have high relative growth and high market share. This shows that the growth VW brand is greater than the growth of the Chinese automobile market. VW is evidently the most profitable product in the portfolio of the company, with little investment required to develop the market as VW market has already matured in China. The market share of Volkswagen is largest in the country in passenger vehicle segment. This however, does not include commercial vehicles. The strategy that Volkswagen must for its VW brand is product development. In case of VW, development of new products has become essential as the market for VW has matured and without new product introduction, there would be a stagnation in the sales growth, and therefore, may reduce market share. Therefore, the best option is to introduce new products using the technology available in the market, therefore, increasing the chance of gaining greater market share in the Chinese market. If new products were not developed, then there would be chances of the brand moving to the fourth quadrant i.e. Dogs, and therefore ruining the brand. As the overall automotive market of China is expected to grow, it would be wise to introduce new products. However, if Chinese market shows any sign of slowdown, then the best option would be to retrench.

Audi brand is in the fourth quadrant marked Dogs. The brand enjoys a low growth as well as low market share in a market. However, analyzing the brand in respect to the overall market will be erroneous as Audi is essentially a luxury car brand and fall in the category of Mercedes Benz and BMW. If the other three luxury car brands producing in china are considered i.e. Mercedes and BMW, Audi has the largest sales in luxury brands car. While considering for the luxury brands in China, Audi falls in the Question Mark quadrant, indicating a very high growth market for luxury cars in China. Further, this indicates that the luxury brand cars is a high growth segment in Chinese market, but the share of luxury brand cars like Audi is low in overall market share. The methods that can be employed for growth of this brands are through greater market penetration, as luxury car brands were growing in the Chinese market even when the developed countries were experiencing recession. Therefore, the market for luxury automobiles must be developed in order to increase the market share.

Skoda is a brand that is observable in the Question mark quadrant of the BCG matrix. Here Skoda is taken to be car belonging to the same category as VW with same product portfolio. The Skoda is a brand that has high growth in the market but has very low market share. Therefore, the only strategy that can be opted for the brand is to increase market penetration. The BCG analysis shows that the best brand in Volkswagen China portfolio is VW that has the largest market share in the passenger car segment. The analysis presents that for VW brand product development is the key for greater success.

Volkswagen Sales and Performance in China

China has been a major market for Volkswagen for many years. In 2009, the geographical segment wise sales figures are presented in the figure below. The sales of Volkswagen vehicles in China only have been 18 percent. This shows that Volkswagen has always concentrated on the Chinese market, while other major automakers like Toyota, GM, and Ford have concentrated on the mature markets like the US.

The sales performance of Volkswagen China has been better than other regions as in China the company increase sales as well as market share even during the recession. In this section, a comparison of growth of Volkswagen in China and that in developed market of the Americas and Europe is done in order to understand the effective growth of the company.

Figure 13: Comparison of Sales in EU, USA, and China.The Chinese market is observed to be growing faster than the developed countries during the recession. Figure 9 demonstrates that the sales growth of Volkswagen in China had fallen in all three geographical areas, however, the sales growth had become negative in the US, and EU whereas in China it still remained positive. Further, the Chinese auto market started to recover from 2008, whereas the automobile markets of the US and EU still showed negative growth that deepened further.

Table 1: Volkswagen Group China Performance.

The sales figure of SVW since 2006 is presented in the following figure. The figure shows that the sales of SVW continued to increase from 2006 through 2009. The sales figure grew from 2006-07 by 30.7 percent. However, the sales growth fell drastically to 7.4 percent in 2008. The reason for the fall in the sales of car sale was probably the fall in export of automobile, increased competition from other international brands like Toyota, GM, and Honda, and global recession. However, sales picked up in 2009 when it grew by 48.6 percent. The half-yearly sales figure of 2010 shows that SVW had already sold 534364 units in China.

The overall performance of Volkswagen group china shown in the above table demonstrates that the group had been enjoying a leap in sales and profit even during the recession. The recessionary phase increase the sales figure by 36.7 percent and the turnover increased by 44 percent. Thus, even though the market share of Volkswagen declined considerably in China, VW remains the market leader in car sales in China mainland.

Brand Portfolio

This section will discuss the different brands of Volkswagen in China and about their positioning in the Chinese market. The Volkswagen brand cars are sold in China through two dealers i.e. SVW and FAW-VW. The two joint ventures of Volkswagen aim at two different segments of customers.

As in case of SVW, Volkswagen makes cars that are more tuned for Chinese conditions. These cars are made specifically keeping in mind the need of the Chinese customers. Therefore the slogan used by SVW is “Enjoy my style” implying the Asian characters imbibed in the cars. The differentiating factor of these cars is their sporty, fun, and lifestyle appeal. On the other hand, the cars made by FWA are cars that keep in mind the more conservative European style. The cars are designed and made in accordance with the European needs and thereof provide a more western feel to it. These cars stress on performance and therefore, the slogan used is “Born to win”.

Volkswagen differentiates between its own brands in order to minimize cannibalization.

The BCG matrix shows in China market, the only brands that is performing successfully during 2008 was Jetta that had a high market share as well as high rate of growth. The other brands like Santana, Bora, Lavida, and Touran were in the question mark quadrant. This implies that the brands are operating in a high growth market as is China, but they have a low market share. Usually a new product that is launched in a high growth market will be considered to be a question marks. In this case, brands like Sagitar, Touran, Bora, and Golf are new brands and therefore, require time to gain market share.

These are in question mark section as the Chinese market is a high growth market, these brands, if not accompanied with proper marketing can become cash sink. The strategies that companies adopt in case of recession are new product development, and market development. Further, it can be observed that the sales for Volkswagen cars are more than that of older models. The development of market is important for Volkswagen in China as the market in the eastern mainland is getting saturated. The aim of the products present in this segment is to increase their market share as they have a high growth potential in a growing market, but without proper marketing, the brands will be swept down to Dogs.

The other brands like GOL, Mogotan, Golf, and Caddy are present in the fourth quadrant i.e. Dogs. These brands typically have low market share and low growth rate. In this case, some brands like GOL have very low market share as well as growth. Such non performing brands should be discontinued. Whereas, others like Polo, Mogotan, or Golf can be revitalized as there is moderately growth high, but they enjoy very low market share. Proper positioning and targeting of the market can help in promoting these brands further in the Chinese market.

Segments and Target Market

The Chinese market segmentation is done on basis of two criteria – value orientation based on traditional to modern values and social status that is segregated into three categories i.e., high, upper, and middle. According to this segmentation, there are seven customer segments in Chinese automotive market. First is the traditional middle class buyer who is price and quality conscious. This segment wants low budget cars that are durable. The second segment are small families with modern values but belonging to middle class status. These customers want versatility and economy in their discretionary purchase. The third group belongs to the traditional value orientation group but belonging to the upper middle class status. These customers look for traditional luxury cars. Then there is a segment of nontraditional but not completely modern segment and belonging to the upper middle class look for prestige and competition in their purchase of automobiles. The fifth segment is modern upper middle class female buyers who look for lifestyle appeal and technology. Then there is the higher-class segment with modern values. These customers look for modern appeal, performance and excellence in their cars. The last segment is the traditional higher income status group who looks for status and comfort in their purchase. Based on this segmentation Volkswagen China targets its customers.

The target market of Volkswagen is decided based on purchasing power of households and characteristics of the Chinese customer group. The target customers of Volkswagen is increasing among the age group of 26 to 35 years and 18 to 25 years. This shift indicates that there would be more young buyers looking for higher sporty, technology, and funk feel in their cars. Then there is an expected increase in female car purchasers in China. The targeted customers mainly look for performance in cars, lower cost, and features and technology in cars. According to research, there is an increasing trend among Chinese buyers for 4-door sedans than hatchbacks (Jian, 2006). Therefore, the target customers for Volkswagen group would show certain shift in term of gender and age as there are more female and younger potential purchasers in the market.

Marketing Mix

The marketing mix of Volkswagen cars is presented in this section. Marketing mix is presented through four Ps i.e. Product, Price, Promotion and Place. This section will discuss the marketing mix of Volkswagen cars in China market and the various ways the company tackles these four Ps.

Product

Volkswagen cars in China are produced by two joint ventures i.e. FAW/VW and SVW/VW. The cars produced by these two companies are differentiated completely in order to prevent overlaps and cannibalization. FAW produces original Volkswagen cars and are responsible for the production and distribution of primarily sedan models of the VW. On the other hand, SVW is responsible for making “Asian Cars”, made specifically for China keeping in mind the Chinese customers and their demands. The differentiating factors for the cars made by these cars are different – for FAW it is Performance status, while that for SVW it is lifestyle and fun. The SVW cars have a competitive cost structure and the brand has a Chinese appeal to it. The SVW presently produces 7 Volkswagen branded cars – Tiguan, Lavida, passat, Polo, Touran, Santana, and Santana Vista (Shanghai Volkswagen, 2010). These products are customized according to the Chinese customer preferences. The highest selling car from SVW stable in 2009 was Santana/Santana Vista, Touran (Soh, 2010). The placing of the products are with high price conscious Chinese customers who want more technology oriented, sporty vehicles. Therefore, the cars made by SVW are characterized by their sporty and fun appeal. The sale of new models like Passat, Toran, Lavida has been higher than older brands like Santana (Soh, 2010).

FAW produced cars are 6 Volkswagen brand cars – Jetta, SAgitar, Bora, Magotan, Golf, and CC. they produce more top end cars who differentiate themselves on performance status. The cars will be having a higher positioning indicating a target segment with higher income. The share of sales of new models like CC, Golf, New Bora, Sagitar has been gradually increasing while that of older model like Jetta has been falling. Even though the share in sale for older car Jetta has been falling, the overall sales figure in 2009 for Jetta is higher than new models like Bora, Sagitar, Magotan, and Golf (Soh, 2010). This clearly demonstrates that the market for older models produced by both SVW and FAW has been reducing and the Chinese customers are gradually moving towards more new designs and technology models.

The main product strategy is to provide diversified product portfolio to the Chinese customers in order to meet their varied requirements. The cars are made to meet different taste and references, and to meet any need. The main marketing strategy of Volkswagen in China was differentiation. By offering a large variety of products, the aim of the group is to target the optimum number of Chinese customers. Further, the products of Volkswagen will cater to more local preferences, with newer models designed for the Chinese taste. Earlier the design of Volkswagen cars was more European in style and essence. However, due to higher competition from Japanese carmakers like Honda and Toyota who are more attuned to Asian preferences, Volkswagen reacted by specifically making cars catering to Chinese taste. The Volkswagen cars compete on basis of quality and style in the Chinese market.

One of the problems with Volkswagen products for Asian market is that their product portfolio has more European style, luxury oriented cars, while Asian customers want smaller cars with good quality and performance. Therefore, the luxury cars of Volkswagen stable were losing against more Asia oriented vehicles of Hyundai and Honda. The product stable of Volkswagen has just one hatchback to offer – Polo and Mini. However, the demand for smaller cars lower than 1-liter engine in China has increased just by 7 percent in 2007 and that for subcompact cars were up by 4 percent, whereas the sale for compact cars and sedans were up by 46 and 35 percent respectively (Roberts & Rowley, 2007). Earlier the sale of bigger car was boosted by a ban on driving of cars with smaller engines in many city centers. However, with lifting of that ban and a new tax on larger engines, and the recession have shifted the demand has predictably shifted to smaller cars.

Price

Till 2005, the prices for Volkswagen cars in China were high (Roberts et al., 2005). Until 2005, most of the auto, sales companies were state owned and the buyers in China did not worry about the prices. However, with liberalization of the sales for automakers, consumers wanted the best deal for their money, and therefore, became highly price conscious. With a buoying middle class, it is the common people who are buying cars in China and therefore they want good branded small cars that are price and quality efficient. Therefore, the demand for smaller cars has increased substantially.

Further, with the recession of 2008-10, and rising increase of inflation in China, there has been a fall in demand of cars in China (Ying et al., 2010). With inflation increasing to 2.9 percent in 2010, the demand for discretionary goods like automobile fell sharply. However, with high production level of the Chinese automakers and low sales, there was excess capacity with the carmakers, and therefore, most of the carmakers started giving price incentives to customers.

The pricing of other brands like Cherry is low at around $4000 making it an accessible price point for many middle class Chinese customers. The demand for smaller cars is high due to their lower pricing and therefore most Chinese companies have become proficient in making smaller cars.

The analysis of Volkswagen Group China sales by segment forecast is shown in the above figure. It demonstrates that the demand for smaller cars like Polo and Mini were expected to increase more than the other bigger higher end cars like Passat and Phaeton. The demand for more compact cars like Golf was also expected to increase considerably. Therefore, the demand for smaller cars and compact cars were expected to increase in the Chinese market and therefore the pricing strategy was done more competitively for the smaller cars while the luxury-oriented cars were targeted towards a more niche customer segment.

Promotion

The promotions of Volkswagen are directly aimed towards their potential customer group. With change in the target, customers from traditional to modern and younger customers there are more promotions to attract this customer group.

As Volkswagen has a car for all age groups, one such car if Golf GTI targeting 25-35 year old men with a tag line “’Are You GTI Enough?”. The styling of the car and the personality is made to suit the target customer group. Even the campaign of Golf GTI is based on an “action-packed plot involving mystery, espionage and a spectacular car vs helicopter chase” (UTalkMarketing.com, 2009)

As there is an increase in female purchasers and customers looking for lifestyle appeal in their cars, Volkswagen has started promoting their Beetle on this appeal in China. The New Beetle was launched as a fashion brand with an appeal towards customers from all time (Fitzsimmons, 2008). Therefore the Beetle campaign was targeted towards plus 30 years consumer group who were style conscious and individualistic. Further Volkswagen also created a Chinese language website for the New Beetle along with other online campaigning methods.

Further, the red carpet launch TV commercial launch of CC put the car in the luxury car segment of China. The slogan of the car is “Glamour Comes Standard” demonstrating the luxury appeal of the car.

Promotional campaigns used by Volkswagen are through TV commercials, print media, online advertising, viral marketing, sporting events like Chinese grand prix, etc. online marketing has been used increasing by Volkswagen marketers in China in to appeal to the growing number of Netizens in China (Tiltman, 2008). In this line, SVW has launched a campaign called “MY SVW Club” where customers can write blogs to join the competition of blog writing (Forbes, 2007). Further, traditional marketing events and pre-sale launches of new brands played a crucial role in product positioning and reaching the target customer. Therefore, Volkswagen has aimed to create a versatile and diversified promotional campaign for its product portfolio.

Place

The production of Chinese Volkswagen through joint venture with FAW and SVW is done trough Changchun and Shanghai. Through this two-dealer network, Volkswagen aims to provide more than 20000 dealerships around the country. With increased synergies and partnership between the two joint ventures, Volkswagen aims to increase their supply chain performance by increasing their coordination. For this, on the production front, Volkswagen has bundled and created a common sourcing process for the company for both FAW and SVW in China. Bundled purchasing volume in china will increase the possibility of one supplier platform in China and for carry over parts. This will reduce competition and increase synergies between the joint ventures. Further, it will also create economies of scale and increase localization of the products. Therefore, the company will have a common sourcing platform, two from each group thereby creating less competition and increasing synergy. This is expected to reduce cost by almost 40 percent (Koch, 2006).

Further Volkswagen initiated its South China Strategy 2018 to expand to he southern districts of China in Hong Kong (Volskwagen, 2009). The aim of targeting Hong Kong is to target the increasing purchasing power in the island. For this Volkswagen has created two new vehicle plants – one in Chengdu with the aim to reach out to western China and other two plants in Guangdong and Nanjing to target the southern China market.

Recommendations

From the above case analysis, it is evident that Volkswagen has been the monopoly leader in Chinese passenger car market till the end of 2000. However, once other competitors entered the market the market share of the company reduced drastically. The case analysis shows a distinct line between the Volkswagen strategy before and after the recession that hit the global economy in 2007. Before 2007, the company was competing with the international brands and trying to make its products relevant in an environment of changing customer preference. Volkswagen till then did not make any constructive effort to change the European car appeal to the Chinese customer who was moving away from the traditional classy European style of the brand to a more Asian style appeal made by Japanese carmakers. It was not until 2009 that Volkswagen unveiled its South China strategy a very lucrative and wealthy market in Asia. The recommendations are divided into three sections – marketing, operational and tactical.

Marketing strategy

Volkswagen should revamp its product portfolio. Even though the company claims that the products are placed differently targeting different customer segments, some of its brands clearly target similar group of customers. For instance, the new CC that targets luxury car market is at competition with the already existing luxury cars of the brand Phaeton and Touareg. These cars are in direct competition with Audi branded cars by Volkswagen group also operating in China. The confusion between the Volkswagen luxury cars and Audi a Volkswagen group brand is still there in the Chinese market with both the brands competing with each other and targeting the same customer group.

Another problem with the lower end and mid segment of the Volkswagen portfolio is that it has not been revamped for long. The style and appeal has become old for cars like Polo, Golf, Jetta, thus resulting in their decreasing appeal and market share. Therefore, before 2007, the product line of Volkswagen was getting old with very new cars in the stable. However, in the post recession phase the company has launched new models of Golf and Beetle in 2008. Further other brands like Santana has become outdated, but is still produced by Volkswagen. Therefore, proper branding and targeting strategy must be put into place in order not to target the same customer segment and start cannibalizing its own products. Further, due to dated models, the sale of Volkswagen has gone down considerably. Therefore, the company must aim to introduce a new model frequently in order to meet changing consumer preference.

Operational Strategy

Volkswagen in China was produced and marketed through two joint ventures – FAW and SVW. However, there were serious overall on the car targets and positioning. Moreover, these companies separately sourced their accessories and other raw materials thus, making them compete of raw material too. However, a joint sourcing initiative would increase the purchasing power of the company with the suppliers. Centralized purchasing effort will reduce costs and increase economies of scale.

Development of new market is essential for Volkswagen to increase its market share in Chinese market. Before the recession, Volkswagen china concentrated their operations in the North and Easter China. However, they left two lucrative zones – east and south with immense potential for car market. Therefore, after the recession, the carmaker must increase its operations in these two zones to develop new markets.

The sales channel of Volkswagen must be revitalized, by utilizing the channel created by both the partners in order to create greater dealership and selling opportunity for the company. Customer-oriented selling structure will help the company to attract more customers.

Conclusions

The strategy of Volkswagen in China before and after recession has changed considerably. Before recession, the company was working with its old product portfolio that was losing its charm on the new-age Chinese customers. The company brought forward models that targeted the same customer segment and were positioned in same manner. This led to cannibalization of the products sold by the company. In essence, the company had gone into a mode of complacency due to their earlier almost monopoly status in Chinese automobile market. The company sold their old products with minor variations and did not try to look at the changing customer preferences. The promotional strategy was dated and they failed to reach out to younger, affluent Chinese.

With the recession and a major fall in their profit marketing worldwide, the company shifted its concentration to the Chinese market with the aim of revamping its marketing strategy in the country. This was initiated with the Olympics plan of 2007 and then continued through the recession. Therefore, during the recession, Volkswagen remained poised and continued to introduce new cars in the market like New Beetle, Golf GTI and CC. there was a clear shift in their strategy and target customers as was observable from the marketing campaigns. New Beetle targeted fashion conscious upper middle class segment and mostly females with its fashion appeal. Golf GTI typically targeted 25 to 35-year-old male consumers while the new CC targeted the higher-class consumers. Even though the company has taken many steps to change its China strategy, go for a makeover, and make cars catering to local preferences, there are a lot to be done in order to retain its number one position in passenger car segment.

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Executive Summary

The case of Volkswagen’s cheating draws people’s attention to such major corporate social responsibility (CSR) issues as the efficacy of self-reporting by companies and the responsibility of customers owning compromised products.

First Concept: Self-Reporting

The way the German carmaker reported some basic features of its products shows that the public cannot rely on companies’ self-reporting because this practice leads to violations and the focus on financial gain. It is clear that the company focused on becoming a leading company in the U.S. market, which made the management less attentive to CSR aspects (Dans, 2015). Top managers, including CSR leaders. were aware of the fact of cheating but chose not to reveal the truth (Neil, 2015). The Volkswagen example should not be seen as an exception because it is a rather common practice.

Numerous scandals involving other carmakers or other companies show that top managers try to conceal some facts and are reluctant to admit their unethical or illegal behavior. For example, Hyundai Motor Co., and another Korean carmaker, Kia Motors Corp., were to pay millions as the penalty for the violation of certain norms (Boston et al., 2015).

Companies provide reports that contain untruthful information to achieve financial gains and create a favorable image (Uvkoff, 2015). Top managers appear to focus on concealing some unpleasant facts rather than try to ensure that their organization uses only responsible practices. Obviously, the reliance on companies’ self-reporting has been compromised as organizations tend to provide reports that include data favorable to their image as well as performance.

Second Concept: Customers’ Responsibility

Another important aspect to take into account is the fact that customers share the companies’ responsibility, which is often forgotten or neglected. Clearly, corporate social responsibility is all about ways companies choose to run their business. At the same time, companies would be likely to avoid any violations if they knew that customers could never buy from them.

Therefore, responsibility has two facets. Customers are often eager to make sure they will not have any legal issues but are reluctant to restrain from buying or giving away products that are associated with some ethical (environmental, social) concern (Gorzelany, 2015). Of course, the company has several ways to regain customers’ trust through paying penalties, repairing affected cars, and so on (Cremer, 2015).

In this way, Volkswagen will show its commitment to the principles of CSR. However, people are likely to use those cars emitting hazardous elements and contaminating the environment. These people will still criticize the carmaker and talk about Volkswagen’s deceit. However, the situation will not change. Companies will provide their self-reports (containing unreliable data), and people will try to avoid paying much attention to details as long as they are satisfied with the product. Therefore, it is clear that customers’ behavior is a critical aspect of CSR, and people should be more responsible when it comes to such controversial issues as environmental pollution, efficiency, and so on.

Conclusion

In sum, it is possible to note that the example of Volkswagen’s irresponsible CSR practices unveils some of the most pertinent issues related to corporate social responsibility because it is critical to reconsider the efficacy of self-reporting and pay more attention to customers’ responsibility. These two aspects can be regarded as two important facets of CSR that are aimed at creating sustainable business practices.

Works Cited

Boston, William, Amy Harder, & Mike Spector. Volkswagen Halts U.S. Sales of Certain Diesel Cars. Wall Street Journal.

Cremer, Andreas. Volkswagen to refit cars affected by the emissions scandal. Reuter’s Business News.

Dans, Enrique. Volkswagen and the Failure of Corporate Social Responsibility. Forbes.

Gorzelany, Jim. Dieselgate: What VW TDI Owners Should Know. Forbes.

Neil, Dan. VW Lost Its Moral Compass in Quest for Growth. The New York Times.

Uvkoff, Liane. 2008: The Year that Drove Volkswagen over the Ethical Cliff. Forbes.

Introduction

Volkswagen (VW) is a German-based automobile company, which manufactures and sells cars in over 153 countries across the globe. Ferdinand Porsche founded the firm in the 1930s with the objective of manufacturing and selling cars in Germany (Buiga, 2012). In its initial period, the company manufactured cars in small scale, which it sold in the local German market. However, following its high quality branding, the company grew rapidly and added trucks and public vehicles to its product list. Before 2015, the company was among the market leaders in the automobile industry despite the high competition in the market. In the mentioned period, the company supplied over 9.7 million vehicles annually to different countries across the globe (Boston & Houston-Waesch, 2015).

VW profits were also high owing to the premium pricing it charged to its customers that matched the quality of its vehicles. For instance, Passat, which was launched in 2010, pushed the company ahead of the competitors owing to its innovative features. However, the company’s turnover took a downward trend in 2015 following the exposure of the emission scandal (Boston & Houston-Waesch, 2015). This paper seeks to establish the impacts of the mentioned scandal on the firm’s brand equity and its overall profits. To achieve the stated objective, the paper shall give a brief overview of the emissions scandal, its effect on the company’s reputation and brand equity, and then explore the ethical issues applicable to the case.

Overview of the VW emission scandal

The infamous VW emission scandal is a controversy revolving around a kind of software fixed in the company’s vehicles with an aim of fraudulently misleading the Environmental Protection Agency (EPA). The software, which was popularly known as the “defeat device”, was fitted in about 11 million vehicles that had already been distributed globally (Lane, 2015). The fixing of the software in the vehicles followed a requirement by the EPA for the automobile industry to regulate the amount of carbon emissions. Under the requirement, EPA would conduct carbon emissions tests before approving any newly designed vehicle (Boston & Houston-Waesch, 2015).

To pass the test, Volkswagen fraudulently fixed a defeat device that would reduce the amount of carbon emissions during such tests. The software could automatically detect when such tests were being carried out and adjust the running of the engine accordingly to minimize the carbon emissions. The fraud was unearthed in 2015 by an independent investigator causing the company great losses in term of brand equity and loss of customers.

Effects of the scandal on VW’s brand equity

Brand equity refers to the perceptions of the customers about a certain product or service. Strong brand equity, therefore, implies that the customers perceive a company’s product as superior to that of the rivals (Helm & Tolsdorf, 2013). Weak brand equity, on the other hand, implies that a company’s product is less superior compared to that of the competitors. Helm and Tolsdorf (2013) argue that strong brand equity could be a great source of a sustainable competitive advantage for the concerned firm.

The assertion is informed by the view that customers tend to procure goods and services from firms with strong brand equity. Besides, a firm with a strong brand name can invoke the premium pricing strategy to maximize the profits.

Before the emissions scandal, VW was among the global leaders in the automobile industry as evidenced by the high profits realized by the firm in the period before the scandal (see Appendix 1). However, following the publicity of the scandal, the firm started recording diminished returns apparently due to the bad public image painted amongst the customers (Farrell, 2015). Typically, the quality of a company’s products and the overall customer satisfaction were the key determinants of brand equity.

However, in the contemporary world, customers are also considering the environmental impact of the products and services when making purchase decisions. The confirmation of the negative impacts VW’s automobiles had on the environment severely damaged its brand equity causing the rivals to outsmart it regarding the turnover (Lane, 2015). The profitability of the company was greatly impacted by the revelation of the scandal, and the company recorded the first ever losses in the first quarter of 2016.

The loss of profits may be attributed in part to the loss of customers’ loyalty due to the confirmation of the pollution allegations. The other possible reason for the loss is the diminished ability of the company to charge a premium price for its products. Before the scandal, the company manufactured different types of vehicles and priced them according to the individual features. The company, for example, charged a premium price for Passat, one of the most selling brands.

Ethical issues surrounding the scandal

De Bettignies and De Cremer (2013) argue that companies are ethically bound to ensure that the environment in which they operate is free of pollution by manufacturing products that minimize the environmental pollution. Most countries across the globe have strict legislations requiring firms to be socially responsible as regards environmental conservation. In the US, the EPA is the body mandated to ensure compliance with the environmental laws. VW failed to observe its environmental conservation corporate philanthropic role by manufacturing vehicles with high nitrogen oxide emissions.

The other ethical issue relevant to this case revolves around fraudulent advertisement. The company’s marketing team colluded with the engineers to paint a picture of environmentally friendly vehicles among the customers (Farrell, 2015). Consequently, the customers purchased more of the products until it was revealed that they were harmful to the environment. The marketing ethics requires companies to give correct and factual information to the customers and refrain from giving wrongful information to increase the turnover. The company’s directors cultivated a corporate culture that promoted fraudulent marketing by failing to assess the suitability of its products before introducing them into the market.

Lastly, the company’s managers violated their fiduciary duty they owed to the company’s shareholders. Buiga (2012) claims that managers are in a principal-agent relationship with the company, and they should, therefore, act in the best interest of their employer. The managers owe the company duty of care, and they are bound to act with due diligence and professionalism to maximize the shareholders’ earnings and avoid losses for the shareholders.

The action by the managers to fix the emissions controllers was shortsighted and ill advised since the risk managers did not consider the long-term effects the exposure of such endeavor would have on the company’s balance sheet. When the scandal became public, the company lost its brand equity resulting in the loss of customers. Additionally, the firm incurred losses in the form of the money spent recalling the vehicles. Therefore, the shareholders’ interests were overlooked when making the decision to fix the defeat tools.

Ethical remedies for VW

To handle the problem effectively, VW needs to accept full responsibility as a company and avoid blame game. The company should apologize to its customers, as an organization, and publicize the measures in place to remedy the situation. Accepting liability as an organization will portray the company as ethical, which may help restore its brand equity (Boston & Houston-Waesch, 2015). The company should set aside funds to facilitate the recalling of the vehicles sold to the customers across the globe. The owners of such vehicles should be compensated monetarily for the loss suffered due to the fraudulent marketing. Alternatively, the company should replace all the vehicles with the compliant ones to facilitate the restoration of its brand reputation.

Lessons and recommendations

Lesson 1: Internal controls are important aspects of business

One of the lessons that firms can learn from the VW’s case is that strong internal controls are inevitable for the success of business. When the emissions scandal was brought to light in 2015, it was blamed on a few irresponsible engineers who were advancing their personal interests at the expense of the company’s shareholders (Farrell, 2015). The successful installation of the device by a few engineers without being detected illustrates the failure of internal controls within the company. If there were a strong internal control system, such irresponsible action would be detected in time and the appropriate measures taken to avert the undesirable consequences.

To remedy the shortfalls in the internal control systems, the firm needs to establish a strong internal risk management department and list all the issues that may substantially affect its balance sheet as potential risks. The risk management department should work closely with the internal quality control auditors to avert the recurrence of a similar problem in the future (Lane, 2015).

Lesson 2: A strong code of ethics is inevitable

The problem that currently befalls VW may be attributed in part to the lack of a strong internal code of conduct coupled with shortfalls in communication. The assertion is informed by the view that the engineers responsible for the defeat device acted outside the scope of the business ethics. If there were a strong ethical code within the company, outlining the scope of the employees’ conduct and the personal liability for deviance, the engineers would consider the repercussions before fixing the devices.

To shield the company from similar problems in the future, the firm’ managers should formulate a strong code of ethics and communicate the same to the entire workforce. De Bettignies and De Cremer (2013) argue that involving employees in devising the ethical code promotes compliance. Therefore, the employees should be involved in the formulation process and allowed to propose the penalties for non-compliance.

Conclusion

The VW emissions scandal is one of the latest controversies to hit the automobile industry in the past few decades. The scandal became known in 2015 when an independent investigation body found that the company’s vehicles emitted a huge volume of the toxic nitrogen oxide gas into the environment. The investigations that followed the allegations found out that about 11 million vehicles from the company had been fitted with a defeat device that would reduce the running of the engine during environment compliance tests. Since its publicity, the controversy has cost the company huge losses in terms of loss of brand equity and the recall fees.

The company has since accepted liability and offered to recall all the non-compliant vehicles distributed across the world. This paper offers recommendations for the company that may help restore its brand equity. Among the recommendations is the establishment of a strong internal control system coupled with the formulation of an actionable code of ethics. The cited recommendations have been discussed in details in this paper.

References

Boston, W., & Houston-Waesch, M. (2015). Volkswagen suspends another top engineer; Berlin orders recall; Transport minister says recall of tainted diesel cars is mandatory. Wall Street Journal. Web.

Buiga, A. (2012). Investigating the role of MQB platform in Volkswagen Group’s strategy and automobile industry. International Journal of Academic Research in Business and Social Sciences, 9(2), 391-399.

De Bettignies, C., & De Cremer, D. (2013). Pragmatic Business Ethics. Business Strategy Review, 24(2), 64-67.

Farrell, S. (2015). Volkswagen loses sales top spot to Toyota after emissions scandal. Web.

Helm, S., & Tolsdorf, J. (2013). How does corporate reputation affect customer loyalty in a corporate crisis? Journal of Contingencies and Crisis Management, 21(3), 144-152.

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Appendices

Appendix 1: A breakdown of the financial performance of VW.