Porter’s 5 Forces of Auto Industry

1. Bargaining Power of Suppliers: The differentiation of suppliers in the automotive industry is very low because the suppliers are all virtually the same in terms of products and pricing, decreasing their power. Switching costs are low because it’s easy to switch around suppliers, which also decreases their power. There is also a large amount of supplier firms in the automotive industry, providing multiple options to choose from if any one supplier is dissatisfactory. This decreases their power. However there are little to no options for substitute resources because vehicles require specific inputs to operate. This increases the power of suppliers.  Overall, the bargaining power of suppliers is low in the automotive industry. Suppliers don’t have a lot of say in what they sell, how they sell it, and how much they charge. 

2. Bargaining Power of Buyers: The saturated automotive industry features a large number of competitors, which decreases switching costs. This increases the power of buyers. It is also difficult to integrate backwards. The costs would be monumental with no guarantee of a significant improvement in efficiency. This also increases buyer power. Brand identity can provide very dominant competitive advantages in the automotive industry. Consumers will often stay loyal to one brand (if they have an enjoyable experience), and this ultimately decreases the power of buyers. Overall, the bargaining power of buyers is high in the automotive industry. With an abundance of options to choose from and the individuality associated with cars, buyers have a lot of say in this industry.

3. Threat of Substitutes: trains, bikes, busses and cabs are very accessible and affordable in urban areas making the threat high. However, owning a vehicle has become the norm in today’s society, especially in suburbia or less urban areas. On average, most homes will own at least one automobile causing them to become considered a commodity rather than a luxury item. Overall, the threat of substitutes is moderate. 

4. Threat of New Entrants: breaking into the automotive industry would require a substantial amount of capital to finance the startup costs. However, the resources are relatively easy to gain access to and distribute and regulations are not severely restrictive. However, the dominance of bigger names in the automotive industry keeps the threat low. Overall, the threat is low. 

5. Intensity of Rivalry: Growth in the automotive industry is extremely high. Automobiles are becoming less of a luxury and more of a commodity. This increasing demand creates a lot of opportunities. The accelerated growth rate decreases the intensity of rivalry. Fixed costs are very high in this industry, which increases rivalry, as there is a need to make more sells in order to make a profit. Product differentiation in the automotive industry is currently low. So far the qualities that set one automobile apart from another are factors but not always significant to consumers. While automobiles are starting to see more and more differentiation, the pertinent features a consumer requires are more or less the same in every firm. Low product differentiation increases rivalry.  Switching costs are low for consumers. It is not difficult to pick another automobile brand if one does not meet your expectations. This increases rivalry as well. Overall, the intensity of rivalry is high in the automotive industry. All the competing firms are constantly finding ways to stay profitable, whether by differentiating their product or minimizing the price. The automotive industry is very dynamic and building a large, loyal consumer base is essential to success. 

Volkswagen SWOT Analysis

Since my group has been assigned Volkswagen for the final project, I thought it would be wise to do a SWOT analysis on the company based on the information I have learned this semester. 

Strengths:

1. Global Presence: VW operates in 153 countries worldwide and was the third largest automaker in 2012 (behind Toyota and GM). They are currently the number one automaker in Europe. They are especially strong in China which is the largest automotive market. Volkswagen captures 20% of that market share with its Audi and Volkswagen brands. 

2. Several Brands: Volkswagen owns a very large variety of brands that can satisfy all customer needs:  Audi, Bentley, Bugatti, Lamborghini, Porsche, SEAT, Škoda, Volkswagen, MAN, and Scania. Audi and Porsche are especially valuable ($7 billion and $5 billion respectively). 

Weaknesses:

1. Weak presence in America: America is the second largest automotive market and Volkswagen only accounts for 5% of the market. They need to implement better strategies in order to better break into that market and increase revenues. Without a strong presence in the United States, it will be difficult for Volkswagen to be the number one automaker in the world. 

2. SEAT: The SEAT brand in Spain is the only one of Volkswagen’s 5 main passenger car brands to not make a profit. The company fired the CEO which may or not improve the financial stability of the company, though it is speculated that it won’t help conditions much for 2013. 

Opportunities

1. Growing Green Presence: the world is becoming more and more environmentally conscious and Volkswagen has a large opportunity to start manufacturing and selling fuel efficient cars. They are already making hybrid vehicles and are marketing them fairly well. 

2. Acquisitions: Volkswagen is (for the most part) very successful with the competitors it acquires. They can manage all the brands competently and effectively, so they should most likely continue buying up other brands to spread their market share. 

Threats

1. Emission Standards: VW is a vocal opponent to the new regulations for lower emission standards. If the legislation is passed, the company would need to invest a lot of money to alter their cars to emit less CO2. 

 

Volkswagen donates 190 cars to US

The German automaker has donated 190 2012 Passat models to fire squads around the US in an effort to help the fire companies and rescue squads around the country utilize current-generation vehicles instead of outdated models.

This donation will boost the company’s reputation because it is such a charitable donation. Perhaps more importantly, it will create more exposure for their cars in a market the company is not dominating. This is another example of the company’s consistent effort to continuously grow in the US market. 

VW Recall in China

Volkswagen is recalling over 384,000 vehicles in China (models include Golf, Polaris, Jetta and Magotan) after China Central Television criticized the direct shift gearbox transmission on the cars, claiming there was glitch causing the cars to speed up and slow down unexpectedly. The recall will cost the company $6 million in order to replace all the gearboxes, but not only that, they will most likely face further repercussions as far as potential lawsuits for personal injuries and wrongful deaths. Additionally, in 2009, Toyota received a $17.35 million fine for their recall due to faulty breaks. VW may be facing a similar sized fine from the Chinese government, if not higher. 

Perhaps the most damaging consequence of all is the company’s reputation. Consumers in all countries may lose confidence in the reliability and safety of the brand and may be disinclined to purchase the vehicles in the future. Toyota is still suffering the consequences of their recall back in 2009 so there’s no telling how severely VW will be affected by this.   

Best Buy Case Study

I really really preferred the way we discussed the case in class today. It gave everyone who wanted to interact an opportunity and the discussion was far more thought provoking and informative than when we’re broken off into groups. I feel like in group settings, one or two people dominate the whole conversation and it’s always a fight as to who’s going to present for the participation points. I personally don’t do well in those situations, so this was a really refreshing format. 

Volkswagen finally gaining traction in the US Market

In 2012, VW reported 438, 133 vehicles sold (a 35% increase from the previous year). This is huge momentum for the brand that is widely viewed as a “niche” brand in the US with very low sales volume. 

Rainer Michel (Vice President of Product Market and Strategy) said VW needs to produce a family friendly SUV in order to maintain its momentum in North America. It does well with its Jettas and Passats, but this is a very large market segment they have yet to satisfy. The company debuted the CrossBlue at the North American Auto Show in Detroit and the company plans to choose a North American production facility within the next couple of months. 

Michel states an SUV is necessary in order to meet the lofty goal the company has of selling 800,000 VWs and 200,000 Audis in the United States by 2018. 

I think this is a very smart strategy on the part of VW. It seems fairly obvious that the company only sells to a very small and very specific group of customers in the United States and in order to broaden their horizons, an SUV needs to be produced. The business-level strategy of “who are their customers?” can be answered, but I do not think that they have enough customers to make any significant impact in US sales. 

VW cuts bonuses to German workers by 4%

Despite reporting record profits and revenues, Volkswagen announced February 27 that it will be paying bonuses of 7,200 euros ($9,400) which is a 4% decrease from last year. Additionally, the CEO, Martin Winterkorn was paid a measly 14.5 million euros down from 17.5 million last year (what a tragedy–how will he eat?). The company says that it is cutting bonuses for factory workers and executives in order to prepare for stiffer competition this year. It can also be speculated that VW is trying to appease the general public after the outcry they received for giving out excessive bonuses last year.

Hopefully cutting salaries will lead to larger profits this year, but only time will tell.

VW Golf named Europe’s Car of the Year

On the eve of the Geneva Motor Show, the Volkswagen Golf dominated the competition for Car of the Year. It received 414 votes with the Subaru BRZ coming in second with only 202 votes. This is a very important honor for the company to receive because it gives consumer’s an idea of what the experts think of as the “car of the future.” However, the all-new Golf isn’t expected to replace the U.S. version until next year. 

For VW’s business, this could prove to be a huge boost to their profitability for the year. Since the average VW owner may not necessarily be a car expert, its customers will rely heavily on the opinions of those they value. This could bring in more sales at least from the European division. 

 

Tuggle Quote of the Day

“Change is the only thing you can count on.” 

Though not as funny as the previous quote, it was definitely the theme for class today. Lately, I’ve really been made to understand that firms cannot be successful unless they are willing to change and develop to satisfy the rapidly changing society we live in. Competition enters quickly and firms need to be on their toes to stay relevant and profitable. 

Today he spoke mostly about customers and how they are so important to the firm’s success. For the firm, you need to decide:

1. Which customer groups are your targets and which are not

2. What needs are you going to satisfy?

3. How will you satisfy their needs? 

One of the most important things for a firm to be is self aware. Without knowing what it is it’s going to be doing and who it’s going to be doing it for, a business cannot be a success. 

Tuggle quote of the day

“There’s news that there is a merger in the works between OfficeMax and Office Depot. Staples doesn’t care about those–it’s crushing them like an overripe grape.”