baker_n_ma thesis_marketing strategies in a recession_july 9 2009_with annexii

8/4/2019 BAKER_N_MA Thesis_Marketing Strategies in a Recession_July 9 2009_with AnnexII

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Development of Competitive Marketing Strategies

in a Recession, with a Special Focus on Opportunities

Arising from the Unique Characteristics and Conditions

Pertaining to the Current Global Crisis

Master Thesis International Management (M. A.)

Submitted by

Nadine Sidonie BAKER

Student ID No. 196642

on July 9, 2009

First Examiner: Prof. Dr. Ralf T. Kreutzer

Second Examiner: Karsten Schulz


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Die Wirtschaftskrise aber findet zeitgleich in 6,5 Milliarden Koepfen

statt. Es ist das groesste Psychodrama der Weltgeschichte. Erlebnisse

und Fernsehbilder verdichten sich zu Erwartungen, aus Erwartungen

werden Aengste, diese praegen derzeit das Geschehen auf allen

Maerkten.

Dettmer et al., 2009


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Master Thesis Cover Sheet for the Program

International Management (M. A.)

Family name(s): Baker Student ID No.: 196642First name(s): Nadine Sidonie

Module-no./term: XXXXXXXX SS 2009

Name of class: Master Thesis

First Examiner: Prof. Dr. Ralf T. Kreutzer

Second Examiner: Karsten Schulz

Title of masterthesis:

Development of Competitive Marketing Strategies in

a Recession, with a Special Focus on Opportunities

Arising from the Unique Characteristics and Condi-tions Pertaining to the Current Global Crisis

Day title of master thesis was handedout:

Master thesis is to be turned in by:

April 12, 2009 July 9, 2009

I have completed the master thesis independently and have only used the refer-ences quoted. The text passages that I have quoted from those sources or that Ihave summarised to convey the content are clearly marked as such.

Berlin, July 9, 2009

........................................................

Annotation: The master thesis wasturned in on

July 9, 2009

Grade

Berlin, ............................................ Berlin, ............................................

Signature of first examiner

........................................................

Prof. Dr. Ralf T. Kreutzer

Signature of second examiner

........................................................

Karsten Schulz


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Table of Contents

Statutory Declaration ........................................................................................................II

List of Abbreviations ...................................................................................................... IIIList of Exhibits ................................................................................................................ IV

1 Introduction............................................................................................................... 1

2 Setting the Scene Unique Characteristics of the Global Recession,and Opportunities Arising for the German Automotive Industry............................. 3

2.1 The Scale and Scope of the Global Recession isUnprecedented in Recent History ................................................................. 3

2.2 Government Intervention .............................................................................. 8

3 Analysis of the Strengths, Weaknesses, Opportunities,and Threats Relevant for Volkswagen .................................................................... 10

3.1 Strengths...................................................................................................... 123.2 Weaknesses ................................................................................................. 173.3 Opportunities............................................................................................... 193.4 Threats......................................................................................................... 25

4 Scenario Development and Marketing Strategies ................................................... 29

4.1 Scenario Analysis........................................................................................ 294.2 VWs Strategic Goals and Resulting Key Business Drivers....................... 31

4.2.1 Markets as the Basis of Future Growth............................................. 334.2.2 Technology to Generate Competitive Advantages ........................... 384.2.3 Differentiation from Competitors through Brands............................ 394.2.4 Cooperative Supplier Relationships to Secure Innovativeness......... 40

4.3 Best-Case Scenario Quick Recovery and Growth Strategy..................... 414.4 Most Likely Scenario Slow Recovery and Defensive Strategy ............... 55

4.5 Worst-Case Scenario Stagnation and Survival Strategy.......................... 60

5 Critical Evaluation and Outlook ............................................................................. 64

Bibliography.................................................................................................................... 68

ANNEX I: CD-ROM ....................................................................................................... VANNEX II: Hardcopy of Internet Sources...................................................................... VI


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II

Statutory Declaration

I hereby formally declare that I have written the submitted dissertation en-tirely by myself without anyone elses assistance. Where ever I have drawnon literature or other sources, either in direct quotes, or in paraphrasingsuch material, I have given the reference to the original author or authorsand to the source where it appeared.

I am aware that the use of quotations, or of close paraphrasing, from books,magazines, newspapers, the internet or other sources, which are not markedas such, will be considered as an attempt at deception, and that the thesiswill be graded with a fail.

Berlin, July 9, 2009

..Nadine Sidonie BAKER


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III

List of Abbreviations

ADAC Allgemeiner Deutscher Automobilclub

bln. billion

BRIC Brazil, Russia, India, China

CEO Chief Executive Officer

CLV Customer Lifetime Value

cp. compare

CRM Customer Relationship Management

ed. editor

e.g. exempli gratia for example

ELV End of Life Vehicle

est. estimate

EU European Union

GDP Gross Domestic Product

GM General Motors

HEV Hybrid Electrical Vehicle

HR Human Resources

IMF International Monetary Fund

ibid. ibidem in the same book

i.e. id est that is to say

IT Information Technology

JV Joint Venture

LOHAS Lifestyle of Health and Sustainability

mil. million

MPV Multi Purpose Vehicle

OEM Original Equipment Manufacturer

PEST Political-legal, Economic, Socio-cultural, Technological

R&D Research and Development

SUV Sports Utility Vehicle

SWOT Strengths, Weaknesses, Opportunities, Threats

TUEV Technischer Ueberwachungsverein

UN United Nations

US United States

USP Unique Selling Proposition

VW Volkswagenyrs. years


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IV

List of Exhibits

exhibit 1: Global & Regional Real GDP Growth Rates

(Forecasts for 2009 / 2010) ..................................................................... 2

exhibit 2: Light Vehicle Sales Growth Rates.......................................................... 6

exhibit 3: German OEMs Global First Quarter Sales ............................................ 6

exhibit 4: SWOT Analysis Overview ................................................................... 11

exhibit 5: Vehicle Deliveries of the Volkswagen Passenger Brand

in 2007 and 2008................................................................................... 12

exhibit 6: VW Brand Vehicle Sales 2007 / 2008 .................................................. 14

exhibit 7: Scoring Model Evaluation of Key Leveraging Factors ........................ 32

exhibit 8: TRIAD and BRIC Markets Overview of Key Factors 2008................. 33


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1

Development of Competitive Marketing Strategies in a Recession, with a

Special Focus on Opportunities Arising from the Unique Characteristics and

Conditions Pertaining to the Current Global Crisis

1 Introduction

At the beginning of the economic downturn, I continuously heard that the crisis

should be used as an opportunity. This aroused my curiosity, and I decided to in-

vestigate how this recession can open up new marketing opportunities. As the

sectors of the economy are impacted differently, I had to focus on one industry.

The automotive industry seemed to be particularly hard hit by the crisis. There-

fore, I chose to examine the effects of the recession on original equipment manu-

facturers (OEMs), i.e. companies that manufacture and sell vehicles but purchase

products or product components from other suppliers (cp. Kreutzer, 2008, p. 204).

In order to reduce complexity, the field has been narrowed down further to the

Volkswagen (VW) group (also referred to as the group), with a special emphasis

on the VW passenger brand. The intent of this thesis paper cannot be to present

the ultimate solution of how to deal with a recession. If the optimal solution ex-

isted, certainly someone wiser and more experienced would have already found

and marketed it. Nevertheless, the objective is to identify the most important lev-

ers for the VW group. The majority of the analyses and recommendations are

speculative because at present uncertainty is the only constant. The market envi-

ronment is extremely volatile, with new developments published in the media

almost every day. In an effort to consider current events, I have drawn upon a

wide array of news articles and online publications up until mid-June 2009.

To take the high degree of uncertainty into account the development of the mar-

keting strategies in this thesis is going to be based on a scenario analysis tech-

nique. This tool should help make the strategy development process more plausi-

ble. Initially, the unique characteristics of the current global crisis will be por-

trayed, and the opportunities they pose for the German automotive industry will

be examined to set the scene. Then, the major strengths, weaknesses, opportuni-

ties and threats (SWOT) will be analyzed with a special focus on the VW brand.

The SWOT analysis covers the unique conditions of the current market environ-ment, and serves as the basis for the selection of the four most important business


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drivers designated by the author. Subsequently, certain premises will be made

regarding possible economic developments and their impact on the VW group and

brand within the development of three alternative scenarios from best case to

worst case. In a next step, each scenario will be matched with strategy and strat-

egy implementation suggestions which consider the leverage potential of the busi-

ness drivers. The conclusion consists of recommendations on the optimum course

of action, an evaluation of the scenarios, and an outlook.

The first difficulty I encountered was defining a recession because no universally

accepted definition exists. One definition sees a recession when a nations eco-

nomic growth rate is below its long-term growth potential. Another definition says

a recession takes place as soon as the Gross Domestic Product (GDP) declines

two quarters in a row (cp. N/A, 2009a). However, there also are economists who

believe that the GDP of an entire year has to be below that of the previous year to

speak of a recession (cp. N/A, 2008a). In the United States (US) the National Bu-

reau of Economic Research stipulates that a recession is at hand when there is a

significant decline in economic activity spread across the economy, lasting more

than a few months, normally visible in real GDP, real income, employment, in-

dustrial production, and wholesale-retail sales (NBER, 2008). On a national

level, common definitions can be found, but there is no standardized definition for

a global recession. The International Monetary Funds (IMF) definition, which

sees a global recession when world output growth is less than 3%, when output is

lower than trend growth rates, or when average global per head GDP declines in a

given year, is disputed (cp. N/A, 2008b).

Real GDP

5.2

0 0.0

10.6

4.85.4

8.6

5.54.2

6.3 5.9

3.52.31.9

2.7

-3.8

0.9

6.1

7.7

0.8

-3.7

2.9

-5.1

1.2

5.7

1.6

-1.5

2.55.2

3.9

2.0

6.2

-6.0

-1.0

4.0

9.0

14.0

2007 2008 2009 2010%c

hangefromp

reviousyear

World Advanced Economies

Developing Asia Central & Eastern Europe

Commonwealth of Independent States South America & Mexico

Middle East Africa

exhibit 1: Global & Regional Real GDP Growth Rates (Forecasts for 2009 / 2010)(cp. IMF, 2009, p. 10)


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3

Real GDP has declined between 2007 and 2008, and is likely to contract further

from 2008 to 2009, in all regions of the world (see exhibit 1). Furthermore, the

global GDP growth has been below 3%, and economic activity has been declining

for months. In addition, the gap between the potential and factual output of the

global economic performance is even higher than in the major recession of the

1980s (cp. Dettmer et al., 2009). Drawing on some of the above definitions, in

this thesis paper it is presumed that there currently is a global crisis / recession.

2 Setting the Scene Unique Characteristics of the Global Recession, and

Opportunities Arising for the German Automotive Industry

In a global recession the economic outlook is generally pessimistic and evil tid-

ings rule the public mood. Exactly in what way the crisis opens up opportunities

for the German automotive industry is the topic of this chapters analysis.

2.1 The Scale and Scope of the Global Recession is Unprecedented in Re-

cent History

The current recession is almost unprecedented in terms of its scale and scope.

Scale here refers to the magnitude of negative repercussions, while scope refers to

the extensiveness with which regions, sectors and social classes are affected. Ac-

cording to the IMF the current situation represents the deepest post-World War

II recession by far (IMF, 2009, p. viii). It is not the first global recession, but

macroeconomic indicators comparing past global crises with the current one show

that output contraction, industrial production, total trade, capital flows, and oil

consumption also have almost never sunk while unemployment has never risen

as drastically in the past four decades as currently (cp. ibid., p. 14).

In comparison to the Great Depression, todays degree of indebtedness, global

interconnectedness, and the rapidity of the economic downturn surpass those of

the 1930s. In contrast, unemployment rates, bank insolvencies, and stock market

devaluation have not reached the levels of the Great Depression (yet). Govern-

ments have pumped money into the economy more quickly and extensively, and

thanks to modern social systems people will not be as destitute at least in devel-oped markets as during the 1930s. However, there are various parallels. Indus-


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trial production, world trade activity, consumption based on borrowed money, and

speculation show developments similar to those during the Great Depression (cp.

Dettmer et al., 2009). The extent of value destruction is extreme (cp. IMF, 2009,

p. viii). The scale of the negative impacts the global recession has on economies

is only comparable to the Great Depression and is therefore considered a unique

characteristic.

Many recessions find its origins in national or regional economies (cp. Otte, 2009,

p. 45-47; cp. Naughton, 2009). This time, however, a complete market failure

is at the root of the problem, the source being in the US with highly speculative

transactions on the real estate and financial markets (Naughton, 2009; cp. Otte,

2009, p. 45-50). The credit crunch, sinking real estate and stock prices which have

catapulted the US into a rigorous recession have spread. As a result, economies

around the world are hampered by the difficult access to credit. A slowdown in

capital and aid inflows from the west impacts many regions, particularly East-

ern Europe. Declining commodity and energy prices strike emerging and develop-

ing markets further. Steep declines in demand for manufactured and industrial

products have particularly affected export-oriented economies (cp. IMF, 2009, p.

63). The global per capita output is estimated to decline in three-quarters of the

worlds economy (cp. ibid, 2009, p. 14). The number of countries impacted even

bypasses that of the Great Depression since not as many countries were integrated

in, and dependent on, the global economic system as today (cp. Dettmer et al.,

2009). Summing up, the extent to which all regions around the world are af-

fected by the recession can be considered another unique characteristic of the cur-

rent crisis.

Most notably in comparison to other recessions is that it is a white-collar reces-

sion (cp. Ford, 2008). E.g. in the US, not only low-income families and day labor-

ers, but a large part of the middle class is hit hard by the crisis (cp. Schmitz / Ste-

ingart, 2009). In Germany, many of the highly skilled middle-class workers who

have traditionally relied on their own and would have never considered state sup-

port now fear losing their jobs or are already dependent on the welfare system (cp.

Jung, 2009). While the developed world could see its middle class be degradedinto poverty, the developing world may confront a catastrophe leaving millions in


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depletion and famine (cp. Dettmer et al., 2009). E.g. in Asia, a vast number of

migrant workers have plummeted into poverty and debt (cp. Lee, 2009). The av-

erage net worth of the worlds billionaires has decreased by 23% (cp. Kroll /

Miller / Serafin, 2009). And the richest US Chief Executive Officers (CEOs) have

lost US$20 billion due to the crisis (cp. Kirdahy, 2009). Even wealthy top manag-

ers have seen suicide as the only way out (cp. Dettmer et al., 2009). These exam-

ples show that, to varying degrees, all social classes worldwide are affected by

the recession.

The only reason why not more than a few dozen financial institutions are already

bankrupt is that they are kept alive through state aid (cp. ibid.). The financial

crisis, however, has already spread to other sectors of the economy. Major Euro-

pean companies have reported low profits due to the recession (cp. Wray, 2009).

All across the world, more and more sectors of the economy get entangled in the

downward spiral (cp. Dettmer et al., 2009). The fact that most sectors of the

economy stand in peril is another unique characteristic compared to most reces-

sions of the past.

The current economic slump, pessimistic consumer confidence and limited access

to credit have led to low automotive sales. In addition, the demand for large and

luxurious cars has been particularly dwarfed due to regulations on emissions and

shifting consumer preferences (cp. Roland Berger, 2009a). These developments

have been devastating for the automotive industry with car sales showing the

greatest slump since 1993 in the EU, and the 1970s in the US and Japan respec-

tively. On top of that, the expected growth in Brazil, Russia, India, and China

(BRIC) only marks slightly above or at zero (cp. ACEA, 2009a). In 2009, the light

vehicle sales volume could fall back to the level of 2004 globally, the 2002 level

in Europe, and the level of 1982 in the US, respectively (cp. Lehne, 2009).


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Light Vehicle Sales

8.4

-3.6

0.2

27.4

4.9

-5.6-8.7

5.4

-4.5

-14.5

5.3

-2.2

-16.0-12.6

15.3

20.5

5.51.8

9.7

-4.9 -6.1

11.4

2.6

-3.0

11.2

6.4

-2.7

7.3

1.3

-6.3

4.8 4.0

-20.0

-10.0

0.0

10.0

20.0

30.0

2007 2008 2009* 2010*%c

hangefro

mp

reviousyear

Global Europe N. America Greater China

Japan/Korea S. Asia S. America Middle East/Africa

*CSM Worldwide forecasts for 2009 / 2010

exhibit 2: Light Vehicle Sales Growth Rates(cp. Lehne, 2009; cp. CSM Worldwide, 2009)

As shown in exhibit 2, automobile sales have drastically decreased in nearly all

regions of the world since 2007. Many companies in the industry will probably

require external aid or face bankruptcy. The crisis has triggered extensive changes

in the sector, particularly in terms of supplier industry consolidation (cp. ibid.).

Suppliers face their worst crisis. In Germany, more than 20 suppliers have already

gone bankrupt (cp. Roland Berger, 2009a). In the US, about 500 suppliers are at

the verge of bankruptcy. OEMs production would be deeply disturbed by the

failure of key suppliers (cp. Kiley / Welch, 2009). Additional costs of hundreds of

millions of dollars for could be incurred for OEMs (cp. Sorge, 2009).

The automotive sector is among the most affected industries in Germany, espe-

cially due to low exports. In February 2009, OEMs and suppliers faced a sales

loss of nearly 40% compared to February 2008 (cp. N/A 2009b).

German Car Manufacturers' Sales Q1 2009*

1,404

332

120

3

227

60.0

14.5

-21.2-34.0

-10.7

0

200

400

600

800

1,000

1,200

1,400

1,600

Volkswagen Daimler BMW Opel Porsche

thousandvehicles

-40

-20

0

20

40

60

80

in%

Sales Volume Q1 change compared to Q1 2008

* Includes Opel as traditionally German brand

exhibit 3: German OEMs Global First Quarter Sales

(cp. Volkswagen AG, 2009a, p. 0; cp. Daimler, 2009; cp. BMW Group, 2009; cp. N/A, 2009b;cp. N/A, 2009c)


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As portrayed in exhibit 3, the three major German OEMs, VW, Daimler and

BMW have all shown sales volume losses in the first quarter of this year, com-

pared to the first quarter of 2008. The fact that BMWs and Daimlers figures are

worse than VWs, indicate the above mentioned trend away from large and pre-

mium cars. Although to date still owned by General Motors (GM), among Ger-

man brands Opel has been a great beneficiary of the German scrapping scheme

(cp. ibid.). Porsches sales volume declined by over 26% in the first half of its

fiscal year 2008/2009 (cp. Porsche SE, 2009, p. 4). However, as the only German

premium producer, Porsche managed to increase its first quarter sales by more

than 14% (cp. N/A, 2009c). The situation in Germany is similar elsewhere in the

European Union (EU), the US and Japan (cp. ACEA, 2009a).

The scale and scope of the recession have various implications for German

OEMs. Contrary to regional or national recessions, trying to outweigh lost sales in

one country or region by means of sales generated in another country or region

has become more difficult. The fact that all social classes are impacted, on the one

hand implies that sales in all price categories decrease. On the other hand, it shifts

the remaining sales from large, luxurious and expensive vehicles to smaller, more

affordable ones. While all OEMs around the world are affected, the global reces-

sion is most likely to take the greatest toll on financially weak OEMs as well as

those focusing on large or premium vehicles. Furthermore, it is neither possible to

make up for lost sales to private persons by increasing sales to businesses as most

sectors of the economy need to cut costs. OEMs may further be negatively im-

pacted by the potential failure of suppliers.

Despite the gloomy situation, the crisis may unveil new opportunities for German

OEMs. For one, the fact that all competitors suffer could open the door for Ger-

man brands to increase their market shares. This is the case in the US, e.g.

where German brands have increased their market share by 6.7% in 2008 (cp.

Bongard, 2009). Another opportunity lies in new or extended forms of coopera-

tion, e.g. between BMW and Daimler (cp. N/A, 2009d). Insourcing certain ac-

tivities is another opportunity to utilize free capacities (cp. Sorge, 2009). Acquisi-

tions, e.g. the acquisition of Chrysler through Fiat, could enable a better use ofsynergies (cp. Katzensteiner / Seiwert / Franz, 2009). The planned merger be-


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tween VW and Porsche presents a similar opportunity to profit from diversifica-

tion and volume, and may even attract cash injections through new investors (cp.

Schaefer, 2009). Another opportunity could lie in the acquisition of key suppliers

to strengthen the market position, or in the cooperation with partners in emerging

markets. Although it seems hard to find the silver linings in the overcast horizon,

the unique characteristics of the crisis do pose some opportunities which could be

successfully leveraged.

2.2 Government Intervention

Governments in emerging and mature markets have increased their spending in

the form of stimulus packages to curb the adverse effects of the crisis. The ex-

traordinary scale and scope of the current recession are matched by government

intervention unprecedented in their extent since World War II (cp. IMF, 2009,

p. viii). The 20 richest nations of the world agreed on the largest economic aid

package ever, amounting to US$1.1 trillion, with up to US$5 trillion envisaged by

the end of 2010 (cp. Hanke / Stoelzel, 2009). And the national stimulus packages

equally take on historical dimensions. Through its largest economic aid package

ever, the US government has pumped US$790 billion into the economy (cp. N/A,

2009e). Japans supplementary budgets increase government aid to over US$200

billion (cp. Seager, 2009). Chinas stimulus package amounts to approximately

US$586 billion (14% of GDP) (cp. N/A, 2009f). Germanys 2008 stimulus pack-

age worth 32 billion was amended by a second stimulus package amounting to

50 billion, making it Europes largest recovery package (cp. Tomlinson / Suess,

2009). In most cases these figures of some of the worlds leading economies do

not even include the large amounts of money allocated to bail out banks, for un-

employment benefits, or tax losses. They are mentioned here to exemplify the

extent of government intervention. It is a peculiarity of this recession that risks

normally carried by investors and banks are transferred onto national governments

on a large-scale basis (cp. Welp, 2009).

Countries cater their stimulus packages to their domestic needs (cp. N/A, 2009e;

cp. N/A, 2009f; cp. Tomlinson / Suess, 2009). Despite the varying emphases of

stimulus schemes in different countries, there are some industries which are posi-tively affected across the board at least on a short-term basis. One of these is the


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automotive sector. Twelve European countries already have automobile scrap-

ping schemes in place: Austria, France, Germany, Italy, Portugal, Romania,

Spain, Luxembourg, Cyprus, Slovakia, the Netherlands and the United Kingdom.

Discussions for similar approaches are underway in Belgium, Greece and the

Czech Republic (cp. ACEA, 2009a). In these schemes older vehicles can be

scrapped in return for an incentive ranging between 675 and 6,500, or an inter-

est-free loan for the purchase of a new automobile. In most cases, the new vehi-

cles must adhere to defined emissions or cubic capacity limits. The majority of

schemes are valid till the end of 2009 or until 2010 (cp. ACEA, 2009b). Japan has

implemented subsidies for the purchase of new vehicles with 1,900. In China,

the sales tax cuts of 50% for cars with a cubic capacity of less than 1.6 liters have

been implemented, and the population in rural areas receives additional subsidies

for vehicle purchases. The demand for automobiles is positively influenced by

lowered interest rates for loans and the reduced value added tax in India. The

Brazilian government has effectuated lower prices through a vehicle tax reduction,

and it offers facilitated financing for cars through a budget of 1.3. In Russia, the

manufacturer Avtovaz benefits from a government loan, but other OEMs selling

vehicles below 8,000 could also profit from subsidized car loans made available

through a respective budget of 135 million (cp. VDA, 2009).

Due to the so-called Abwrackpraemie, car orders in Germany have increased by

over 70% from January to February, cushioning the negative impact of the reces-

sion on the industry (cp. ACEA, 2009a). However, the vehicle scrapping incentive

already lost some of its momentum in April. Consequently, car dealers are luring

in customers with additional measures, such as cash discounts and special financ-

ing offers, which sends car prices on a race to the bottom. Producers of small cars,

especially foreign OEMs gain the most ground (cp. Ruhkamp, 2009). Government

subsidies have had an immediate positive effect on the automotive industry. Ger-

man OEMs can benefit from the large-scale government intervention, especially if

they offer vehicles with low fuel consumption and prices. Even Daimler and

BMW have benefited from the vehicle scrapping scheme because the sales of their

smaller models A-Klasse and 1er have been stimulated (cp. N/A, 2009g). To

the same degree that foreign OEMs have increased their sales in Germany, Ger-man OEMs can leverage their market positions abroad. Government purchase


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incentives have already shown positive effects in the form of increased market

shares of German brands, e.g. in Brazil with an increase of 1% to 24%, or in Rus-

sia, where the market share rose by 5% to 19% in the first quarter of 2009 (cp.

VDA, 2009).

Apart from that, OEMs in Germany have the opportunity of keeping valuable

workforce through the state-subsidized short-work program (cp. Tomlinson /

Suess, 2009). The short-work allows German OEMs to avoid layoffs throughout

the months with few incoming orders, and have sufficient workers available when

capacity utilization rates increase (cp. N/A, 2009g). Other opportunities could lie

in the comparably facilitated access to loans backed by government guarantees.

This capital could then be used, e.g. to finance restructuring efforts, research and

development (R&D) activities, acquisitions, personnel training, etc. Apart from

the banking sector, there probably is no other industry that is presented with as

many opportunities as the automotive industry through the substantial government

intervention in the current crisis.

3 Analysis of the Strengths, Weaknesses, Opportunities, and ThreatsRelevant for Volkswagen

In the SWOT analysis the focus shifts from the German automotive industry as a

whole to the VW group, or VW passenger brand when applicable regarding

the strengths and weaknesses. The main reason for this is a reduction of complex-

ity. The VW brand is chosen because it is a long-standing German brand which

serves the important mass market. Furthermore, the fact that vehicles covering

various market segments are included under the umbrella of the VW brand re-

flects a large part of the automotive industry so that the results of the SWOT

analysis can, in many cases, be applied to other OEMs in analogy. Typically, an

analysis of the political-legal, economic, socio-cultural and technological (PEST)

influences help determine market drivers and consumer preferences (cp. Proctor,

2008, p. 4-5). These macroeconomic forces help determine the opportunities and

threats for an industry in this case the automotive industry, and provide an over-

view of the current macroeconomic environments unique conditions. The mostimportant PEST factors are considered in the SWOT analysis.


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Strengths Weaknesses- large production volume

- strong bargaining position

- strong financial position

- diverse product portfolio

- conventional drive fuel efficiency

-extensive R&D investments

- positive brand image in terms of security,quality, technological features

- effective communication campaigns

- worldwide geographical presence

- strong distribution network

- low employee productivity

- low margins

- inefficient operations, asset allocation,inventory handling and cost manage-ment

-high costs

- poor perceived price-performance ratio

- long delivery times

- late introduction of innovative drive sys-tems (HEV)

- perceived product flaws in terms of reli-ability of engines, electronics, gearbox

- negative brand perception in terms ofpersonality, design, comfort

- weak turnover in North America, Russia &India

Opportunities Threatscrisis-related crisis-independent crisis-related crisis-independent

-facilitated mar-ket share gains

- governmentpurchase incen-tives, subsidies& loan guaran-tees

- short-work sys-tem

- demand forsmall, fuel effi-cient cars

- low raw material& energy prices

-insourcing

- M&A

- cooperation withcompetitors &suppliers

-high economicgrowth in emergingmarkets

- regulations favoringlow-consumption ve-hicles

- cost savings due toenergy efficient pro-duction

- platform & modularproduction

- nanotechnology,bionics, information &communication tech-

nology- online marketing

- growing demand forsafe vehicles

- demand for alterna-tive fuel & drive sys-tems

- changing demo-graphics (age, gen-der, urbanization)

- individualization &flexibility needs

- rising motorization

-global slow-down in eco-nomic growth &consumerspending

- protectionism

- difficult accessto credits

- liquidation ofsuppliers

- supplier con-solidation

- political instabil-ity & social un-

rest- market system

failure

-regulations (emis-sions, ELV)

- rising raw material &energy prices

- new entrants (techno-logical outpacing, costadvantages)

- problems regardingHEVs and electric ve-hicles (costs, infra-structure, cruisingranges, safety)

- growing consumerliteracy & price sensi-

tivity- cannibalization

- currency exchangerates

- revolutionary techno-logical innovation

exhibit 4: SWOT Analysis Overview

Own evaluation

In exhibit 4 the key findings of the SWOT analysis are summarized. Some of the

threats and opportunities might have occurred without the crisis. However, if they

are judged to be aggravated or accelerated by the global recession, they are in-

cluded in the crisis-related items.


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3.1 Strengths

The large production volume, diverse portfolio, strong financial and bargain-

ing positions as well as the strong brands of the VW group put it in a favorable

market position. A market share of 20% makes the VW brand the strongest inGermany (cp. Dudenhoeffer / Krueger / Kroher, 2009, p.27). With more than six

million vehicles sold in 151 countries in 2008, and 61 production facilities in 21

countries, the group has a large volume and a strong geographical presence (cp.

Volkswagen AG, 2008a, p. 1).

Volkswagen Pkw - Vehicle Deliveries 2007/2008

3,667,624

1,571,486

929,841

663,458

375,326

86,971

40,542

3,6

63,154

1,621,260

866,563

628,044

393,161

109,762

44,364

0

1,000,000

2,000,000

3,000,000

4,000,000

World Europe Asia-Pacific South

America

North

America

Africa Other

markets

regions

units

2008 2007

exhibit 5: Vehicle Deliveries of the Volkswagen Passenger Brand in 2007 and 2008

(cp. Volkswagen AG, 2009b, p. 26-32; cp. Volkswagen AG, 2009c, slide 5)

As exhibit 5 shows, the VW passenger brand is strongest in Europe, followed by

the Asia-Pacific region and South America. Its most important markets according

to volume are Germany, Brazil and China (cp. Volkswagen AG, 2009b, p. 26-32).

Despite uneven volume distribution, the VW passenger brand is present in all re-

gions of the world. Its large production volume is advantageous as it will grant the

VW group economies of scale. Furthermore, its size puts the group in a strong

bargaining position when it comes to negotiating purchasing agreements with

suppliers.

The groups global production network allows for cost savings, flexibility, and a

better adjustment to local markets (cp. Datamonitor, 2008a, p. 16). For exam-

ple, in its two most important markets abroad, China and Brazil, the VW group

has launched cars which specifically cater to local needs. The Lavida is a sedan

completely developed in China (cp. Pieritz, 2008). The Gol is South Americas

most successful car. It has an integrated flex-fuel technology which enables any


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fuel mixture of petrol and sugarcane-based ethanol (cp. Baehnisch, 2008). In the

first quarter of 2009, the VW Gol was the most sold car in Brazil (cp. Berstenbos-

tel von, 2009). The Routan is an attempt at supplying the US multi purpose vehi-

cles (MPV) market (cp. Volkswagen AG, 2008a, p. 119). In its newly opened

production site in Pune, India, an Indian version of the Polo, the Polo IM, will be

manufactured from 2010 onwards (cp. Volkswagen AG, 2009a, p. 4).

Despite the former position not to introduce cars at a price below 10,000, the

group has entered this market segment as well with the Fox, available at 9,650 in

Germany and the Polo IM to be produced in India and sold for less than

US$10,000 (cp. Volkswagen AG, 2009f; cp. N/A, 2009h). With these prices,

however, there is no direct competition with e.g. Indian Tata Motors Nano sold

for approximately 1,700, or even European competitors such as Renaults Logan

(cp. N/A, 2009h; cp. Katzensteiner / Seiwert / Franz, 2009). However, with R&D

investments pushing the launch of the VW Up! for up to US$6,000 in 2010, the

VW brand will eventually offer a true low-cost car which is produced in emerg-

ing markets under competitive conditions (cp. N/A, 2009h). The Up! is part of the

project named New Small Family with the highest strategic importance for the

VW brand (cp. Volkswagen AG, 2008a, p. 19). It involves the minicar Up! and

the micro-van Space Up! which are particularly designed to meet urban mobility

needs modern design and efficient space use. In addition, there is the zero-

emissions Space Up! Blue (cp. Volkswagen AG, 2009h). It is a van which com-

bines an electric battery-driven engine with a hydrogen fuel cell and a solar cell.

However, production launch of this vehicle is uncertain (cp. Volkswagen AG,

2008a, p. 61).

The groups advantageous market position with a global market share of 9.8%

in the passenger car segment and its diverse product portfolio benefit the

groups investment ratings (cp. Katzensteiner / Seiwert / Franz, 2009). Its reve-

nues, operating and net profits as well as cash flow have steadily increased be-

tween 2004 and 2007, placing it in a good financial position to increase its market

share. The VW brands passenger vehicles make up the majority of all sales, and

can thus be seen as a major pillar of the groups good financial performance (cp.Datamonitor, 2008a, p. 15). With a liquidity of 10 billion the VW group has a


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strong position amidst the recession. Small VW branded vehicles have played a

great part in cushioning the effects of the crisis (cp. Katzensteiner / Seiwert /

Franz, 2009). While the total market has decreased by 20%, VW branded vehicle

sales only sank by 4.8% globally in the first quarter of 2009, compared to that of

2008. Furthermore, VW branded passenger cars have managed a market share

increase to 7.4% worldwide in the same period (cp. Bestenbostel von, 2009). Such

a good performance despite the crisis indicates that the portfolio of the VW brand

is attractive for consumers.

Its models give the VW group a competitive advantage (cp. Katzensteiner / Sei-

wert / Franz, 2009). In 2009, the VW brand performed well with several VW cars

having received high scores at awards (cp. Volkswagen AG, 2009a, p. 3).

Vehicle 2008 2007 Segment Classification

Golf 764,776 763,491 compact middle class

Passat/Santana 764,322 751,764 middle class

Jetta/Bora 616,013 630,355 compact middle class

Polo 408,679 449,602 small car

Gol 388,763 320,604 compact middle class

Fox 170,596 206,125 mini car

Tiguan 150,416 16,272 sports utility vehicle

Touran 148,196 197,941 multi purpose van

Touareg 62,230 72,477 sports utility vehiclePolo Classic/Sedan/Lavida 62,167 86,861 compact middle class

Suran 52,600 45,690 multi purpose van

Eos 43,578 55,560 compact middle class (convertible)

New Beetle 37,893 40,124 compact middle class

Parati 22,874 23,953 middle class

Scirocco 20,442 N/A sports car

Sharan 19,703 23,807 multi purpose van

New Beetle convertible 17,100 26,752 compact middle class

Phaeton 6,189 5,711 premium

Routan N/A N/A multi purpose van

exhibit 6: VW Brand Vehicle Sales 2007 / 2008Source: Volkswagen AG, 2008a, p. 81; Esch, 2008, p. 474

As shown in exhibit 6, 19 different cars are united under the VW umbrella. The

middle-class, small- and mini-car segments show the highest volume. The Gol,

Golf, Scirocco, Jetta, Tiguan and Passat CC are some of the most important driv-

ers (cp. Volkswagen AG, 2008a, p. 80-81). 60 new models are to be launched in

2009 (cp. Berstenbostel von, 2009). In about three years, a further segment will be

covered when the VW group will supposedly launch the roadster Concept Blue


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which fulfils the highest Euro emissions norms and will be sold at a price of ap-

proximately 25,000 (cp. N/A, 2009i).

German consumers perceive the VW brand image as secure, qualitative and en-

vironmentally friendly. According to them, the brand is customer-oriented, en-

joys a good reputation, and offers advanced technological features. In addition,

good and effective communication campaigns are associated with the brand (cp.

Dudenhoeffer / Krueger / Kroher, 2009, p. 7-9, 23). Experts also view the VW

brand as strong, especially considering positive crash-test results and sales figures

(cp. ibid., p. 75, 82-83). The heritage of the VW brand is of considerable impor-

tance, as Germany as a country of origin is often associated with precision, order-

liness, and reliability (cp. Esch, 2008, p. 103, 145).

Between 2005 and 2008, the VW brand has made substantial improvements

regarding its dealership system. In 2005, German dealers gave the brand a weak

ranking and were dissatisfied with the product portfolio (cp. N/A, 2005). In 2008,

however, Toyota dealers were unsatisfied due to quality flaws and product defi-

ciencies, whereas VW vehicles received better rankings (cp. Meinig, 2008). Deal-

ers were especially happy with the product portfolio, vehicle quality, and the

brand image. This is significant because dealers evaluations present an indicator

for future business success (cp. N/A, 2008c). These results also point towards

good dealer relationships. Since 2004, a new distribution structure has been im-

plemented for the VW passenger brand. In order to achieve greater efficiency,

control and market coverage, as well as to facilitate decision-making processes the

distribution system was restructured into new divisions, and sales managers of the

brand have been made directly accountable for sales results (cp. N/A, 2003).

The VW group follows a multi-channel strategy and intends to exploit innovative

distribution possibilities. E.g. via the German corporate website potential custom-

ers have the option of online industrial selling, dealership searches, and being for-

warded to online distributors of new or used cars (cp. Volkswagen AG, 2009e).

The restructuring process of the distribution system is in full swing. Among oth-

ers, the IT-systems with wholesalers and retailers have been reduced and stan-

dardized. The optimization of processes, inventory and logistics operations are in

the focus of the reorganization so that efficiency can be improved and costs can bereduced (cp. Volkswagen AG, 2008a, p. 157).


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The Volkswagen Financial Services AG acts as the link between brand manage-

ment, customers, and dealers. It assists in sales and trade promotions, so that com-

munication, financing, leasing and insurance offerings can be included to offer

customers added value. E.g. customers are offered favorable and diversified insur-

ances terms for special security packages (cp. Volkswagen Financial Services AG,

2008, p. 12, 34). The groups remarketing strategy assists dealers to resell used

cars, it helps secure high residual values, and at the same time the consumer ex-

perience can be guaranteed to keep its quality even in case of used-car purchases

(cp. Volkswagen AG, 2008a, p. 157).

With authorized dealership networks distribution activities are localized. A special

focus is placed on BRIC markets due to anticipated high growth rates in demand

(cp. Volkswagen Financial Services AG, p. 12, 23-26, 34).

Restructuring efforts in the servicing of large-scale customers have been paying

off for the VW group as well. Through the division called Volkswagen Group

Fleet International a centralized platform has been created which addresses the

individual needs of customers on a national level through new transaction systems

(cp. Volkswagen AG, 2008a, p. 157). The increase in the fleet business by 4%

despite difficult economic conditions from 2007 to 2008 shows that the VW

group is successfully implementing its revised distribution strategy for large cus-

tomers (cp. Volkswagen Financial Services AG, 2008, p. 22). All in all, it can thus

be inferred that the VW brand has a strong distribution system.

VW shows strength in the area of fuel efficient conventional drive solutions,

especially due to its clean-diesel TDI engines (cp. Volkswagen AG, 2009a, p. 2;

cp. Katzensteiner / Seiwert / Franz, 2009). Vehicles, power train elements and

lightweight design are in the focus of a more fuel efficient assortment (cp. Volks-

wagen AG, 2008a, p. 180). In Germany, the VW brand offers 6 models with a

CO2-consumption below 120 g/km (cp. Volkswagen AG, 2009b, p. 25). Results of

tests carried out by the Technischer Ueberwachungsverein (TUEV) and the All-

gemeiner Deutscher Automobilclub e.V. (ADAC) show that VW branded vehicles

are technologically strong and reliable, with relatively low break-down rates.

Furthermore, the brand is regarded as strong with respect to its technological

trendsetting capacity, especially in terms of fuel consumption reduction and R&Defforts in hybrid electrical vehicles (HEVs) (cp. Dudenhoeffer / Krueger / Kroher,


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2009, p. 53, 58, 62-63). Just recently, the VW group announced a declaration of

intent for R&D cooperation regarding HEVs and electric vehicles with a Chinese

car producer (cp. N/A, 2009j). From a mid- to long-term perspective, the VW

groups efforts to offer hybrid engines provides for strong growth potential in the

future (cp. Datamonitor, 2008a, p. 19).

3.2 Weaknesses

Despite its strengths, the VW group has some substantial weaknesses. It has low

margins, asset turnover ratios, inventory turnover, returns on assets and equity as

well as weak employee productivity levels. This indicates inefficiency regarding

operational productivity, asset allocation, inventory handling and cost man-

agement (cp. Dudenhoeffer, 2009, p. 85; cp. Datamonitor, 2008a, p. 17). In addi-

tion, high costs are e.g. incurred through the groups complex R&D activities (cp.

Meiners, 2009).

The group shows weak sales in some geographical regions, e.g. North America

and Africa (cp. Datamonitor, 2008a, p. 17; cp. Katzensteimer et al., 2009). The

VW groups sales in North America have been declining from 2006 to 2007 (cp.

Datamonitor, 2008a, p. 17). Despite an increase of 4.3% from fiscal year 2007 to

2008, only 500,000 vehicles were sold in North America (cp. Volkswagen AG,

2008a, p. 78). With an overall sales volume of 15.9 million units in the North

American market in 2008, it is clear that the VW groups performance is below

potential in this market (cp. Lehne, 2009).

The VW brand image also shows some weaknesses. German consumers evaluate

the brand as having a poor price-performance ratio. Moreover, they gave weak

design and personality assessments (cp. Dudenhoeffer / Krueger / Kroher, 2009,

p. 7-10). E.g. one New York Times blogger describes the design of the new VW

Polo as conservative, [it] breaks no new ground and seems to offer little to of-

fend, or inspire (cp. Garrett, 2009). This basically means the design is incon-

spicuous and boring. Many cars e.g. the VW Golf and the Skoda Octavia are

produced on the same platforms (cp. Huettenrauch / Baum, 2008, p. 18). But since

prices of these very similar cars vary, the design and brand should be strong inorder to convince the increasingly informed and critical consumers that it is worth


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paying a price premium. The suboptimal brand identity differentiation within the

VW group leads to cannibalization with customers switching from the higher-

priced cars to the less expensive ones (cp. Esch, 2008, 475-476). Although VW is

designated to set quality standards in the automotive industry and acts as a symbol

for the mobilization of masses, there is some interference with the other brands:

e.g. emotions are supposedly connected with VW and Seat; innovation is part of

the brand core of VW and Audi (cp. ibid., p. 473-476). What may also lead to

cannibalization is that currently the new Polo has the same fuel consumption as

the bigger Golf (cp. Lauter, 2009). In addition, the differentiation from competi-

tors brands does not always seem clear. This might also explain the poor price-

performance ratio perception.

Another faux-pas is the deceptive communication in North America, where the

Routan is advertised with the unique selling proposition (USP) of German engi-

neering, although the car is produced by Chrysler. Thereby, the VW brand risks

losing authenticity in the important American market where it already faces hard-

ships (cp. Alterman, 2009).

Despite favorable TUEV and ADAC test results, consumers satisfaction level

with the technology of VW branded cars is weak in some areas: quality and reli-

ability ofelectronics, gearbox, bodywork and interior workmanship, as well

as vehicle characteristics such as comfort and road handling (cp. Dudenhoeffer /

Krueger / Kroher, 2009, p. 33-34). Moreover, for a brand which stands for quality

technology, engaging in recalls due to technological difficulties could be devas-

tating for the image and consumer trust. However, in 2008, e.g. Passat and Tiguan

vehicles had to be called back from the American market due to software flaws

(cp. ibid., p. 82). Defect technology could also be an indicator for inefficient pro-

duction. Most Western OEMs have not managed to implement the successful Kai-

zen methods pioneered by Toyota into their production processes holistically. A

lack of early flaw-detection systems, mistake avoidance, or quality circles could

be the reason for flawed products put on the market (cp. Huettenrauch / Baum,

2008, p. 21, 23, 25, 30-31).

Another source of grievance for customers are long delivery times. In 2004, de-

livery times for some of VWs popular models were between two and a half to sixmonths (cp. Koehn, 2004). The delivery times for a VW Tiguan reached up to


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eleven months in 2008 (cp. N/A, 2008d). The delivery times of small and lower

middle-segment cars are currently delayed. Obviously, the group was not flexible

enough to meet the demand resulting from the vehicle scrapping scheme (cp. N/A,

2009k).

Contrary to its strength regarding efficient conventional drives, VW vehicles lag

behind competitors regarding truly innovative drive systems (cp. Dudenhoeffer /

Krueger / Kroher, 2009, p. 65). Toyota and Honda are the market leaders in the

HEV domain (cp. Huettenrauch / Baum, 2008, p. 88-89). While the Ren-

ault/Nissan alliance plans to sell comparably large numbers of HEVs by 2011,

GMs Chevrolet Volt HEV will be available from 2010 onwards, and even Daim-

ler is stronger in this area, compared to the late serial production of HEVs not

intended before 2014 by VW (cp. Katzensteiner / Seiwert / Franz, 2009).

3.3 Opportunities

The current political environment is relatively stable in large parts of the world.

The most important political factors are the types of regimes in key markets, the

threat of terrorism and global warming. The political changes of the past two dec-

ades have reduced trade and investment barriers and created a global market

(cp. Hill / Jones, 2008, p. 68). E.g. after the breakdown of the Soviet Union new

markets were opened in Eastern Europe which, at first, were mainly used as

sourcing markets to make use of low factor costs e.g. labor and capital costs.

Meanwhile, the growing economic prosperity has turned Eastern Europe and Rus-

sia into attractive consumer markets with great market potential. Similarly, Indias

and Chinas political regimes have opened up and provide huge untapped market

potential (cp. Huettenrauch / Baum, 2008, p. 33-37, 44).

Terrorism could indirectly be seen as an opportunity with regard to a growing

demand for safer vehicles which results out of the consumers general mindset

of prevailing security threats worldwide (cp. ibid., p. 33-37, 44). In addition, in

urban areas the demand for individual mobility may increase out of fear of terror-

ist attacks on public transportation.

The economic stimulus packages in different countries offer good sales opportu-

nities. E.g. in Brazil, overall car sales increased by 4% in the first quarter of 2009


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due to government incentives, whereas German OEMs sold 9% more cars than in

the first quarter of 2008 and increased their market share (cp. VDA, 2009).

Opportunities lie in the strong political focus on global warming caused by man-

made greenhouse gas emissions and that this has severe consequences on our

natural environment (cp. IPCC, 2007, p. 37). To counter the adverse effects of

climate change, the importance of sustainability has increased in the public

awareness. Sustainable development can be described as a sociopolitical guiding

principle which focuses on inter-generative and intra-generative equality. The

dimensions of sustainability refer to economic, ecological and social dimensions

as a basis for long-term prosperity (cp. Balderjahn, 2004, p. 1, 3). In this paper,

economic sustainability is considered a pre-condition and universal objective for

all profit-oriented businesses. It is acknowledged that the automotive industry

plays a key role in terms of the social dimension, e.g. as so many people are em-

ployed in this industry worldwide. In Germany, the industry employs more than

750,000 people (cp. VDA, 2008b). However, for reasons of simplification and

focus, the social dimension will be neglected. Therefore, in the following, sustain-

ability mainly refers to the ecological dimension, i.e. the long-term oriented pres-

ervation of the natural environment. The establishment of sustainability on the

political agenda can be traced back to the United Nations (UN) Conference on

Environment and Development in Rio de Janeiro in 1992, after which most coun-

tries committed to reduce greenhouse gas emissions (cp. Balderjahn, 2004, p. 2-3;

cp. United Nations, 2008a). At present, sustainability is important because a new

treaty is expected to come out of the UN conference in Copenhagen, Denmark, in

December 2009, and the anticipated policy shift towards sustainability by the cur-

rent US government. Furthermore, environmentally friendly or green in-

vestments are seen as a major contribution to fight the current economic crisis

(United Nations, 2009). The target is to have 20% of all stimulus packages, or at

least 1% of a nations GDP, allotted to investments in sustainability, thus turning

the global recession into an opportunity for the fight against climate change (cp.

Goldenberg, 2009). Therefore, vehicle scrapping schemes are also tied to low CO2

emissions. The sustainability focus is another unique characteristic, and the gen-

eral awareness about climate change a unique condition, of the current global cri-

sis.


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Transportation accounts for approx. 14% of greenhouse gas emissions globally,

nearly 30% in the US, and around 20% in Europe (cp. IPCC, 2007, p.36; cp. US

EPA, 2009; cp. EEA, 2009, p. 6-7). In addition, the demand for vehicles in emerg-

ing markets is expected to increase by 100% between by 2020 compared to 2005

levels (cp. Huettenrauch / Baum, 2008, p. 33). Consequently, vehicles are a major

contributor to climate change. In the EU and a few other countries, emissions

trading systems treating CO2 emissions as a tradable good are intended or already

in place (cp. European Commission, 2008, p. 6, 25). Regulatory pressure towards

more sustainability has already led the VW group to incorporate environmental

considerations in product development and production processes. E.g. A new var-

nish application system for the VW Polo model at a Pamplona plant has reduced

energy consumption and CO2 emissions by 10%. This shows that the sustainabil-

ity focus can lead to substantial cost reductions (cp. Duerand, 2009).

Although not yet exactly stipulated, CO2 emissions are likely to be taxed through-

out the EU automotive sector (cp. Lehne, 2009). From July 1, 2009 onward, a

reformed automotive tax will be in effect in Germany in which vehicle taxation

will consider CO2 emissions. A tax exemption will be granted for emissions of

120 g/km per kilometer or less, this will successively be reduced to 95 g/km by

2014 (cp. Bundesministerium der Finanzen, 2009). These governmental regula-

tions offer the opportunity of outrivaling competitors by generating new profit

sources and competitive advantages through low-emissions cars (PWC, 2008, p.

29). The German automotive association, Verband der Automobilindustrie clearly

sees sustainable development as a main industry priority (cp. VDA, 2008a). Cur-

rently, OEMs focus on the optimization of conventional drive solutions, the adap-

tation of engines for alternative fuels, e.g. biological ethanol or natural gas espe-

cially suitable for hot climates, and alternative drive systems such as HEVs which

combine electric with spark ignition or diesel engines (cp. Huettenrauch / Baum,

2008, p. 88-89). Not only the political agenda demands an increased sustainability

focus, but consumers do so as well. The demand for HEVs e.g. is expected to

reach 4.5 million by 2013 (cp. Datamonitor, 2008a, p. 19). A credible commit-

ment to sustainability, especially with regard to emissions and waste reduction,

may even have a considerable impact on brand strength (cp. Murray, 2008). E.g.

the majority of Germans are highly sensitive to climate change and, among others,expect companies to engage in measures to counter it (cp. BMU, 2008, p. 10-11).


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At the same time, consumers are not ready to pay a substantial price premium for

more environmentally friendly technologies (cp. PWC, 2009). However, they will

want to avoid high gasoline or taxation costs. Europeans have traditionally been

favoring small, efficient cars to save on gas money, but last year even US and

Russian drivers preferences shifted to avoid high fuel prices (cp. Bennhold,

2008). Oil prices are very low at the moment, but they are likely to rise again once

the economy recovers which is why consumers will most likely demand fuel-

efficient and/or smaller cars in the future.

Further opportunities can be derived from technological forces, e.g. in the areas of

nanotechnology, bionics, and information technology (IT). The application of

nanotechnology whereby surface structures are examined in minimal detail

could e.g. enable self-cleaning varnishes or changing colors, structures and forms

of vehicle interiors and exteriors. Bionics is already in use to improve aerody-

namic resistance. It could also be applied for bionic fingerprints to start cars, or

even for neural steering. IT applications pose great potential to improve human-

computer interaction, e.g. through electronic stability control, and electronic flaw

detection. Large amounts of data and applications could be matched with specific

driving situations. The challenge lies in making the innovations user-friendly and

matching them to the brand (cp. Huettenrauch / Baum, 2008, p. 81-87). Commu-

nication technologies must be advanced to meet the needs of the modern knowl-

edge society, e.g. to network different applications such as phones, the Internet,

loudspeakers in one system. Intelligent systems enabling drivers or passengers to

work or learn during the ride, e.g. through three-dimensional projections of pres-

entations, will provide them with higher flexibility and productivity. Networking

between automobiles also presents great opportunities, e.g. regarding traffic man-

agement, active steering or danger warning systems. Close cooperation with

components suppliers and partners from the software and electronics industries

could generate new competitive advantages for OEMs (cp. ibid., p. 71-76).

The platform production meanwhile used by nearly all OEMs enables the ful-

fillment of consumers demand for more individualization in an efficient manner,

as components are standardized, costs are lowered, but value can still be added

through differentiated designs (cp. Huettenrauch / Baum, 2008, p. 18).

IT furthermore offers a myriad of new possibilities regarding online marketing.The Internet allows for companies to better present themselves through corporate


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websites, search engine marketing, online advertisements, newsletters, games,

viral marketing spots, etc. Consumers can, for example, be actively integrated in

the configuration of their cars, enabling companies to generate valuable informa-

tion about consumer habits and preferences (cp. Kreutzer, 2008, p. 260-263). The

Internet is very important because it influences consumers purchasing decision

process to a great extent (cp. N/A, 2006). Although cars are usually purchased via

online distributors, OEMs could also sell their vehicles directly to customers and

reduce distribution costs (cp. Hill / Jones, 2008, p.69).

Understanding the demographic and socio-cultural environment, and satisfying

the demands of todays consumers is a crucial success factor. In most developed

nations aging populations are expected (cp. ibid., p. 69). This presents OEMs

with the opportunity of catering to the needs of senior citizens e.g. through simpli-

fied and intuitively handled applications (cp. Huettenrauch / Baum, 2008, p. 60).

In contrast to most industrialized countries, the population growth rates in emerg-

ing and developing markets are likely to increase, and a generally younger con-

sumer base may require more modern designs and family-oriented features. Fur-

thermore, in all geographic regions but Asia women slightly outnumber men (cp.

United Nations, 2008b). An increasing number of women take up work (cp. Hill /

Jones, 2008, p. 69). This implies that OEMs may have untapped potential with

regard to the demands of female drivers. The majority of people live in urban

areas nowadays. This opens the opportunity to offer flexible, individualized,

space- and fuel-efficient cars to meet the urban mobility needs (cp. Huettenrauch

/ Baum, 2008, p. 60-62).

An important socio-cultural factor is that the majority of purchasing decisions are

made on the basis of emotional stimuli since many products are viewed as ex-

changeable. The emotionalization of brands and products plays a key role in per-

suading and activating consumers (cp. Freundt, 2008, p. 3-5; cp. Kreutzer, 2008,

p. 47). Therefore, besides differentiation through technological innovations, func-

tionality and quality, the emotionalization of brands offers opportunities to in-

crease sales. Many OEMs that stood for rationality in the past, e.g. VW, have

meanwhile incorporated emotions. This can e.g. be done via communication ac-

tivities or via the interior and exterior design of a vehicle. However, there is aneed for stronger differentiation because too many brands are e.g. trying to stand


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for sportiveness. Lost potential lies, e.g. in the lack of incorporating rituals in

marketing activities. An authentic and clearly differentiated, emotionalizing brand

identity, positioning and message are indispensable for long-term success as the

brand is the key for profitability, inciting consumers to pay a price premium for an

irrational added value (cp. Huettenrauch / Baum, 2008, p. 50-52, 67-70).

Closely linked to sustainability is the recent trend towards healthier lifestyles (cp.

Hill / Jones, 2008, p. 70). This movement is reflected particularly well in the tar-

get group of lifestyle of health and sustainability (LOHAS) who represent sub-

stantial market potential due to their high purchasing power and consumption in-

dulgence (cp. Hubert Burda Media, 2007, p. 2-5). The orientation towards health

and harmony offers opportunities to achieve a competitive advantage by offering

healthy and natural materials besides sustainable technologies (cp. Huettenrauch /

Baum, 2008, p. 65).

OEMs face a very heterogeneous customer base which demands choice and indi-

vidualization and the opportunity to express their personality through their cars.

It is a major challenge and opportunity to provide individualized solutions in an

efficient manner (cp. ibid., p. 77, 95). Especially in industrialized nations, the

amount of available leisure time is relatively high. This leads to consumers de-

manding more variability and flexibility and functional concepts, e.g. high load-

ing capacities, trunk carriers, navigation systems, variable and foldable seats. The

demands of hybrid consumers who vary their purchasing behavior in different

situations present opportunities OEMs must take advantage of (cp. ibid., p. 57, 64-

66, 76).

The reduction of trade barriers probably is the most important economic force

which provides growth opportunities (cp. Hill / Jones, 2008, p. 265, 267; cp. Hu-

ettenrauch / Baum, 2008, p. 33-35). Increasing mobility is expected because it is

one of the most important driving factors behind economic activity (cp. Huetten-

rauch / Baum, 2008, p. 57-58). While the growth in demand for cars is estimated

at 8% for the TRIAD zone, the population and economic growth in emerging

markets lead to an expected growth rate of 100% between 2005 and 2020. There

is potential to skim a market with more than four billion inhabitants (cp. ibid.,

2008, p. 33).


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As seen in exhibit 1, emerging markets, particularly in Asia, have contributed

the most to international GDP growth before the crisis, and are estimated to grow

the strongest in 2010 (cp. IMF, 2009, p. 10). exhibit 2 reveals that apart from the

North American market, China, South Asia and South America are expected to

pick up on growth in light vehicles sales the most in 2010 (cp. Lehne, 2009).

Emerging markets present OEMs with growth opportunities, but also bear great

sourcing potential because of the lower factor costs (cp. Huettenrauch / Baum,

2008, p. 38).

With demand likely to pick up in the North America in 2010, this market offers

the highest growth potential among industrialized markets. Considering the above

mentioned gap between cars sold by the VW group and the total market volume in

North America, the weak performance of local OEMs, and the structural change

towards smaller, more efficient cars, this region presents great opportunity for the

VW brand. In addition, the US market offers a cost advantage of approx. 30%

over Europe, which also makes it attractive for local sourcing and assembly (cp.

PWC, 2008, p. 46-47).

Car demand in European markets is expected to increase at a low level in 2010.

OEMs have sales opportunities even in the midst of the crisis due to the many

vehicle scrapping schemes across Europe (cp. ACEA, 2009a).

A major opportunity lies in the launch of low-cost cars which cost less than

10,000. By 2012 the worldwide demand for low-cost cars is projected to reach

15 million units, with Europe (5.8 million), China (2.6 million), India (1.5 mil-

lion) and Brazil (1.5 million) as the most important markets (cp. Huettenrauch /

Baum, 2008, p. 77).

The low energy and raw materials prices have been a temporary positive side

effect of the global recession as costs can be reduced (cp. Volkswagen AG, 2009,

p. 116).

3.4 Threats

Despite the relative political stability in developed and emerging markets, geopo-

litical tensions remain and might be increased due to the crisis (cp. Rhodes / Stel-ter, 2009, p. 3, 12). Political activities posing threats are e.g. to be found in regu-


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lations: E.g. in the EU, the US, Canada, Japan, China, South Korea and Australia,

CO2 emissions regulations are already in place, sometimes tied to tax payments,

road charges, or duties. Government regulations may eventually force the automo-

tive industry to integrate cost-incurring energy-efficient technologies (cp. PWC, p.

23-24, 29-30). The End of Life Vehicle (ELV) directive by the European Union

poses a further challenge, as it requires OEMs to dismantle and recycle vehicles.

Furthermore, it mandates that 95% of vehicle parts must be re-usable or recycla-

ble (cp. Datamonitor, 2008a, p. 21). These regulations force OEMs to invest in

environmentally friendly products. The arising costs could diminish profits, espe-

cially since it is unlikely they can be passed on to the increasingly price sensitive

consumers. Another new challenge is posed by the European Commission regula-

tion 1400/2002 which liberalizes the automotive distribution sector in the EU and

limits OEMs selective selling practices (cp. Volkswagen AG, 2008a, p. 191; cp.

Lowe, 2002, p. 3).

The beginning trend towards protectionism currently poses one of the biggest

political threats. By trying to save their own national economies, governments

might aggravate the global crisis and hamper world trade (cp. Gluesing et al.,

2009). For OEMs protectionist measures could have devastating effects regarding

sales markets abroad. E.g. high import tariffs in India and Russia make foreign

products more expensive and sales in these markets less attractive (cp. Rhodes /

Stelter, 2009, p. 2; cp. Willershausen, 2009).

Currency exchange rates have been challenging German OEMs due to the

strong Euro. E.g. on the US market, profitability has been limited due to the de-

preciated dollar. Even in case of local production, difficulties lie in the fact that

many components are imported from Europe (cp. PWC, 2008, p. 45-46). In the

crisis, depreciated currencies are a means to cushion the effects of the recession in

export-oriented countries which is why China and other Asian nations artificially

reduce their currency values (cp. N/A, 2009l).

If the scale and scope of the crisis continue to magnify, the likelihood ofpolitical

and social turmoil increases (cp. Rhodes / Stelter, 2009, p. 12). This could poten-

tially make all economic activities come to a standstill in the affected regions.

Sustainability also presents a threat for companies which either face high initialinvestments without the matching demand and infrastructure, or do not keep up


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pace with their competitors. With Toyota and Honda as HEV market leaders, and

other European and American OEMs launching alternative drive systems earlier,

VW could have a hard time gaining market share by the time it enters the market.

Other challenges exist in the area of HEVs and electric vehicles: The infrastruc-

ture for battery-charging stations is at an embryonic stage (cp. N/A, 2009h). Fur-

thermore, high production costs, lack of experience with the performance of e.g.

lithium-ion batteries, problems regarding cruising ranges and safety may hamper

the fast diffusion of HEVs and electric vehicles (cp. Volkswagen AG, 2008a, p.

63). Moreover, they will only be truly sustainable if they require are charged via

renewable energy, but the share of renewable energy does not seem sufficient.

Another challenge regarding TDI engines could be the low diesel penetration in

certain countries such as China or the US (cp. Huettenrauch / Baum, 2008, p. 37;

cp. J.D. Power and Associates, 2008).

Furthermore, it must be considered that the rate of technological innovations has

been increasing in the last half century. A revolutionary technology introduced

into the market could potentially render existing technologies obsolete (cp. Hill /

Jones, 2008, p. 68-69).

A general threat lies in new entrants. New entrants can come from completely

different industries, e.g. energy companies, battery producers or suppliers (cp.

N/A, 2009m). Within the next few years, Chinese and/or Indian OEMs could

launch cars which are also competitive in mature markets (cp. Huettenrauch /

Baum, 2008, p. 50). Whereas the strengths of the established OEMs from the

TRIAD have been competencies in design, development, engineering, innovation

and precision OEMs in emerging markets are improving their own competencies

in these areas, and they could catch up with or even outpace established compa-

nies by offering vehicles with similar quality and technological features at costs so

low that established companies may lose their competitiveness (cp. ibid., p. 41).

E.g. the Indian producer Tata Motors already has two models on the German mar-

ket and plans to introduce the Nano in Europe in 2012 (cp. N/A, 2004; cp. N/A,

2008f). The technological outpacing trend could even be accelerated by the global

crisis if e.g. the money out of Western stimulus packages flowed to China, where

more could be invested in technology (cp. Dettmer et al., 2009). OEMs focusing


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on the middle-class segment are additionally threatened because premium OEMs

are downscaling into this market (cp. Huettenrauch / Baum, 2008, p. 51).

The Internet poses a challenge in so far as consumers have the chance to compare

products and prices more easily. Online car purchases, e.g. via Auto Nation, and

detailed comparisons are now possible. This increases their product literacy and

bargaining power. As a result, OEMs face the threat of having to reduce prices

and losing profits (cp. Hill / Jones, 2008, p. 69). In a recession, consumers are

likely to use their comparison possibilities and bargaining power even more than

when economic prospects are good.

Another threat lies in cannibalization. With increasing literacy, and the realiza-

tion that cars of different brands are essentially the same, consumer often opt for

the lower-priced versions which is the negative aspect of platform production (cp.

Huettenrauch / Baum, 2008, p. 32).

With increasing cost pressures, e.g. due to taxes, insurance, fuel prices, or fast

value depreciation, consumers price sensitivity has been rising. Although not as

much, to some extent this even applies to the premium segment. Todays consum-

ers are critical and become less and less willing to pay for technological innova-

tions. This means that special offers and discounts often are needed to achieve

sales, which consequently threatens OEMs profitability (cp. ibid., p. 47, 63).

The general slowdown in GDP growth rates and economic activity due to the

global crisis could have harsh effects on automobile sales, depending on the

length and severity of the global recession. Diminishing sales will increase cost

pressures, reduce profitability and available budgets for investments. This could

restrict innovativeness and technological advances.

Raw materials prices, especially regarding limited resources such as oil, are

likely to increase again once economic growth picks up.

In the past, the automotive supplier industry has already undergone a consolida-

tion process. Nowadays, about 20 large companies cover most of the tier-one

market. Cost pressures are likely to intensify the consolidation trend (cp. ibid., p.

46, 53-56). To a great extent, OEMs are responsible for suppliers bad economic

situation (cp. Wassink, 2009). Integrative and cooperative relationships with sup-pliers have been a success factor of Toyota. European and American OEMs never


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had the same partnership-oriented relations with their suppliers (cp. Huettenrauch

/ Baum, 2008, p. 19-20, 28-29). E.g. the VW group spread the concept of oppres-

sive contracts with, and cost pressure on, suppliers in the 1990s. This has had

negative impacts on the profitability, liquidity and innovativeness of suppliers.

Although even Toyota has adjusted its partnerships with suppliers due to the re-

cession, the pressure most Western OEMs have put on their suppliers, harms their

own interests (cp. Wassink, 2009). The collapse of important suppliers could en-

danger OEMs production (cp. Kiley / Welch, 2009). The supplier consolidation is

accelerated by the crisis and will eventually mean stronger bargaining power vis-

-vis OEMs (cp. Sorge, 2009). Some suppliers are even planning downstream

diversification. E.g. the German supplier Karmann plans to develop a new electric

vehicle in cooperation with an energy company (cp. Wassink, 2009).

Another economic threat largely aggravated by the crisis is the difficult access to

credit financing. Businesses and private consumers alike will no longer drive the

economy through credit-financed consumption and investments (cp. Reeves /

Deimler, 2009, p. 1). Corporate customers are also likely to postpone fleet renew-

als. Private consumers may not want to or be able to finance their vehicle pur-

chases anymore either due to the higher insecurity. The credit crunch threatens the

existence of many suppliers. But it also impacts OEMs. Even those who stand

relatively well could be forced to postpone or cancel planned investments in inno-

vations or market expansion efforts due to a lack of capital access.

4 Scenario Development and Marketing Strategies

This chapter lays out the basic theoretical background for the scenario analysis.

The key industry drivers are derived from a scoring model analysis. Subsequently,

premises will be made for three scenarios from best case to worst case and

their impacts on the key business drivers will be examined. For each scenario

strategy and implementation recommendations will be drawn up.

4.1 Scenario Analysis

A scenario can be defined as a description or representation of a hypotheticalsequence of events showing the alternative decisions at decision points and the


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possible consequences of each decision with their estimated probabilities (Focus

Medialine, 2009a). The technique was popular in the 1970s but has been discred-

ited because many of the forecasts which had been made turned out to be incorrect

or imprecise. Some scholars and consultants believe it will see a revival in light of

the current crisis (cp. Leendertse, 2009). It is used in many large companies, e.g.

in more than half of the Fortune 500 companies (cp. Hill / Jones, 2008, p. 24-

25).

The scenario technique can be seen as a formalized planning methodology which

improves the strategic decision-making process. The merit for managers is that

this technique helps them deal with uncertainty, reduce complexity, make rea-

sonable assumptions about future events (cp. ibid., p. 24-25). The purpose is to

simulate future trends and events using creativity and flexibility. Despite its

speculative nature it helps generate useful insights (cp. Proctor, 2000, p. 139-140).

Usually three or four scenarios are constructed for a defined time frame. Analyz-

ing the impacts of hypothetical PEST developments help determine likely evolu-

tions in an industry or market. The method can e.g. be used to improve risk man-

agement, or evaluate investment plans and sources of competitive advantage (cp.

Grant, 2005, p. 319).

Three general steps form the basis of a scenario analysis: building scenarios based

on plausible uncertainties, relating them to current or potential strategies, and

evaluation of scenario probabilities for a better assessment of strategic options

(cp. Aaker, 2008, p. 91-93). Scenario building comprises the identification of a

companys goals, definition of the planning horizon, de

baker_n_ma thesis_marketing strategies in a recession_july 9 2009_with annexii

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