Volkswagen Skoda Strategy

COMPANY REVIEW – VOLKSWAGEN

PROBLEM STATEMENT

Volkswagen acquired Skoda in the early 1990’s and it had problems after the acquisition. The major problem was the strategy adopted in acquiring Skoda. Volkswagen was known for its quality while Skoda was known for its high level of unreliability and poor quality. There were a lot of issues as a result of the acquisition. The deal resulted in loses to Volkswagen and this paper will analyze the various strategies that can be adopted to prevent these problems. (ICMR Case studies, 2007)

PROBLEM EXPLANATION

In the early 1990s, Volkswagen’s sales in the US were less than 100,000 cars a year and the sales were coming down drastically. This forced the company to start looking for new markets to safeguard its long term interests and Volkswagen embarked on its multi-brand strategy in an effort to rationalize its brands. Volkswagen took over Skoda and the two companies had little in common. Volkswagen vehicle brands were distinct in their discipline and the brands include Audi, VW, SEAT and Skoda. Volkswagen made an effort to maintain its brand image and each brand had its own distinct brand identity. The company planned to target different market segments with each of its brands. The Audi brand targeted the rich and it is synonymous with exclusivity, technological superiority and ‘coolness’. When Volkswagen acquired Skoda, Skoda was having a bad reputation in the industry for quality and reliability. There were problems acquiring and transforming Skoda into Volkswagen. The first major problem was the strategy adopted in acquiring Skoda. Some of the other issues include: Human resource problem, Integration problems, new product development, quality improvement and image building etc. (ICMR Case studies, 2007)

STRATEGIC LOGIC BEHIND THE DEAL

The major reasons for acquisition are to expand the market share. When acquisitions occur, companies face challenges impacting the sales and revenue of the organization. Acquisitions take place in terms of the extent to which the business activities of the acquired organization are related to those of the acquirer as falling into four main types according to Francis, Cherunilam (2005):

• Vertical: Organizations combine vertically from successive processes within the same industry, e.g. a producer or wholesaler may acquire a series of retail outlets.

• Horizontal: This happens within similar organizations in the same industry.

• Conglomerate: This refers to the situation where the acquired organization is in completely unrelated field of business activity.

• Concentric: In concentric type of acquisition, the organization acquired is in unfamiliar but related fields into which the acquiring company wishes to expand

The Volkswagen-Skoda deal will come under the Horizontal type of acquisition. The Merger was made as a measure of consolidation in the automobile industry. Volkswagen wanted to become number one in the operating field. The merger is an attacking measure from Volkswagen. Francis, Cherunilam (2005, p 639).
ANALYSIS OF VARIOUS STRATEGIES

Volkswagen adopted a horizontal takeover and it was at once full acquisition without any regards to the Human resource issues, Integration issues, new product development, quality improvement and image building etc. All these issues would never have risen if a combination of the strategies discussed is adopted.

Francis, Cherunilam (2005) states the major strategies of acquisition as:

• Exporting

Exporting is the most traditional mode of entering the foreign markets and it is a quite common one even now. International trade has been growing much faster than the global output resulting in greater old economic integration.

Exporting is the appropriate strategy when one of the more conditions prevails:

• The volume of production is less or at a minimum

• Manufacturing products or the Production Cost in the host nation is high.

• The foreign market is categorized by production bottlenecks like infrastructure problem.

• Strict political or other policies of investment in the foreign country.

• There is no long term business relationship or that there is no guarantee of the market available for a long period.

• Licensing/Franchising

Licensing/Franchising which involves minimal commitments of resources and effort on the part of the international marketer, are easy way of entering the foreign market. A licensing agreement may also be one of cross licensing, wherein there is a mutual exchange of knowledge and patents. In cross licensing a cash payment may or may not be involved.

Firm purchases the right to manufacture or distribute product. e.g., UVA merchandise, Eddie Bauer Explorers

Franchising is a form of licensing in which a parent company (franchiser) grants another independent entity (franchisee) the right to do business in a prescribed manner. This right can take the form of selling the franchisor’s products, using its name, production and marketing techniques are general business approach.

• Contract Manufacturing

Under Contract Manufacturing, a company doing international marketing contracts with firms in foreign countries to manufacture or assemble the products while retaining the responsibility of marketing the product and this is a common practice in international business.

The major characteristics of Contract Manufacturing include:

1.The company provides no funds or resources for setting of production facilities.

2.It frees the company from the risk of investing in foreign countries.

• Management contract

Under the Management contract, the firm providing the management Know-how may not have any equity stake in the enterprise being managed and in short, in a management contract, the supplier brings together a package of skills that will provide an integrated service to the client without enquiring the risks and benefits of ownership. Thus, as Kotler observes, management contracting is a low risk method of getting into a foreign market and it starts yielding income right from the beginning.

• Assembly operations

As Miracle and Album point out, a manufacturer who wants many of the advantages that are associated with overseas manufacturing facilities and yet does not want to go that far may find it desirable to establish overseas assembling facility in selected markets and even products meant to be marketed domestically are assembled abroad.

• Fully owned manufacturing facilities

Companies with a long term and substantial interest in the foreign market normally establish fully whole manufacturing facilities there. As Drucker point out “It is simply not possible to maintain substantial market standing in an important areas unless one has a physical presence as a producer.”

A number of factors like trade barriers, differences in the production and other costs, government policies encourage the establishment of production facilities in the foreign market.

• Joint venture

Joint venture is a very common strategy of entering the foreign market. In the wideset sense, any form of association which implies collaboration for more than a transitory period is joint venture. New legal entity is created for a specific project/product with joint ownership by the partners e.g., NUMMI, Dow Corning

The diverse types of Joint overseas operations include the sharing of ownership and management in an enterprise, Licensing/franchising agreements, Contract manufacturing and Managerial contracts.

• Counter trade

Although the major reason for the substantial growth of counter trade is it is used as a strategy to increase exports, particularly by the developing countries, counter trade has been successfully used by the number of companies as an entry strategy.

• Strategic Alliance

Strategic Alliance has been becoming more and more popular in international business. Also known by such names as entente and coalition, this strategy seeks to enhance the long term competitive advantage of the firm by forming alliance with its competitors, existing in critical areas instead of competing with each other. Firms contract to blend skills (marketing, distribution, R&D) on specific project/product, but no separate entity

• Third country location

Third country location is sometimes used as an entry strategy. When there are no commercial transactions between two nations because of political reasons or when direct transaction between two nations are difficult due to political reasons are the like, a firm in one of these nations which want to enter the other market will have to operate from a third country base.

CONCLUSION AND RECOMMENDATIONS

Acquisitions lead to conflict between nations. There is always resentment among the employees as they fear loss of job and feel insecure and oppose to change. So employee problems will arise due to the culture problems, technology related issues, company policies and procedures etc. some of the vital facts about acquisitions are Mergers and acquisitions can lead to create monopolies in a sector, Mergers and acquisitions lead to cartel formation, Mergers and acquisitions always have the problem of culture and resentment among shareholders. So care must be taken regarding this before takeover, Environmental forces play a vital role in a merger, Mergers and acquisitions can affect the GDP of a nation to a great extent. (Gaurav Sharma, 2007, p 21)

The analysis of Volkswagen-Skoda deal gives a hint of the various strategies that will act as major success factors that are needed for a successful take over. Bent Wessel-Aas, (July 2005) states the critical success factors in a merger as:

(1) Complete and Clear objectives, goals and scope of the project,

(2) Client consultation and acceptance,

(3) Project manager’s competence and commitment,

(4) Project team member’s competence and commitment,

(5) Communication and information sharing and exchange,

(6) Project plan development,

(7) M&A advisory firm’s resource planning,

(8) Time management and tight secrecy,

(9) Price evaluation and financing scheme, and

(10) Risk management

By adopting a combination of these strategies, the problems that arise due to acquisition will be overcome.
REFERENCE

• Francis, Cherunilam, Business Environment – Text and Cases, Fourteenth edition, Himalaya Publishing House Pg. 639 – 652.

• Gaurav Sharma, 2007. Mergers and Acquisitions – Strategies. The Business Line, 5 August, pg 4 – 6.

• ICMR Case studies, 2007. Volkswagen’s Acquisition of Skoda Auto: A Central European Success Story. Available at: http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/BSTR262.htm

• Bent Wessel-Aas, July 2005. German car manufacturer Audi—a Volkswagen Group company acquisition of Skoda will be a cost-effective and high quality hub for procurement. Available at: http://findarticles.com/p/articles/mi_m3012/is_6_185/ai_n16071220