A Real-Time Case Analysis: January 2019
A Real-Time Case Analysis: January 2019
A Real-Time Case Analysis: January 2019
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Company Background
Volkswagen Group, is a German multinational automotive manufacturing company
headquartered in Wolfsburg, Lower Saxony, Germany. Following Toyota, Volkswagen is the second
largest automaker in the world. Over 600,000 employees scattered around the globe produce over
28,000 vehicles per day in 2016. Volkswagen currently owns 12 subsidiaries which make up the
Volkswagen Group. These include Volkswagen Passenger Cars, Audi, Seat and Skoda, Bentley,
Bugatti, Lamborghini, Porsche, Ducati, and Volkswagen Commercial Vehicles, Scania and Man
(Bowler, 2015). Currently, the global automaker has 120 production plants spread over 4 continents
with the majority of manufacturing operations in Europe and China (Volkswagen AG, 2017). Its
vehicles are sold in 153 countries (Bowler, 2015). As outlined in Appendix A, the 12 subsidiaries that
make up the Volkswagen Group is composed of an incredible 347 different models.
Historical Context
Volkswagen was founded in Germany on May 28, 1937. At the time, the German
government was under the control of Adolf Hitler, leader of the Nazi Party. Hitler had formed a
state-owned automobile company called Gesellschaft zur Vorbereitung des Deutschen Volkswagens
mbH which eventually became Volkswagenwerk, or “The People’s Car Company.”
In 1938 Hitler commissioned Austrian automotive engineer Ferdinand Porsche to build “the
people’s car.” Hitler declared: “It is for the broad masses that this car has been built. Its purpose is to
answer their transportation needs, and it is intended to give them joy” (History.com Staff, 2009). The
iconic design is characterized by the aerodynamic “beetle” shape. Shortly after the car was revealed
at the Berlin Motor Show in 1939, World War II began, and Volkswagen halted production.
Following the war, most of the factories are in ruins. The Allies decide to make Volkswagen the
centerpiece of their attempts to revitalize the German auto industry and economy. By 1946, with
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production reaching 1,000 vehicles per month, the car company is renamed Volkswagen. Eventually,
Volkswagen ownership returned to the Germans under manager Heinrich Nordhoff. The company
played a critical role in post-war German regeneration. Global production began and by 1955,
Volkswagen sales reached one million vehicles.
Volkswagen sales in the United States (US) were initially slower than in other parts of the
world due to the car’s sordid past as well as its small size and unusual rounded shape. By the early
1960s, Volkswagen became the top-selling auto import in the US. The following year in 1960, the
German government sold 60 percent of Volkswagen’s stock to the public, effectively denationalizing
it. Twelve years later in 1972, the Beetle surpassed the long-standing worldwide production record
of 15 million vehicles, set by Ford Motor Company’s legendary Model T between 1908 and 1927
(History.com Staff, 2009).
From 1975 to 1998, Volkswagen underwent a period of acquisition and expansion.
Volkswagen Group was created and served as a holding company for the growing automaker. Most
recently in 2015, Volkswagen was involved in an international scandal in which the company
admitted to deception and fraud in emissions tests in the US. According to the Environmental
Protection Agency (EPA), certain Volkswagen vehicles sold in America had devices installed in
diesel engines that could detect when they were being tested and could consequently alter the
performance accordingly to improve results.
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Once the news of this scandal went public, Volkswagen’s CEO at the time, Martin
Winterkorn, said his company had "broken the trust of our customers and the public.” Winterkorn
resigned as a direct result of the scandal and was replaced by Matthias Mueller, the former boss of
Porsche. After an internal inquiry was launched the company had to recall over 11 million cars
worldwide the following year. More specifically, Volkswagen recalled 8.5 million cars in Europe,
including 2.4 million in Germany and 1.2 million in the UK, and 500,000 in the US as a result of the
emissions scandal. Over $7 billion was set aside to cover costs. This resulted in the company posting
its first quarterly loss (~$2.7 billion) in 15 years. Just two months following the scandal, the
company’s shares had fallen by about a third. It’s important to note also, that the EPA has the power
to tack on another potential $18 billion in fines (Hotten, 2015).
“From there, all hell broke loose. Volkswagen had pulled its TDIs from the website, tree-
huggers started leaving nasty notes on Volkswagen TDI owners’ windshields, and owners and
dealers alike started suing Volkswagen for damages. It’s been one of the most devastating crises to
happen to any corporation in years” (Tracy, 2016).
Although this scandal started in the U.S., the UK, Italy, France, South Korea, Canada and,
Germany, have opened similar investigations. Throughout the world, politicians, regulators, and
environmental groups are questioning the legitimacy of Volkswagen's emissions testing.
One year later, in October 2016, the U.S. Department of Justice and Volkswagen agreed on a
proposed settlement that will cost the automaker an unprecedented $14.7 billion. An extensive $10
billion buyback and compensation program was rolled out for the customers. Customers can either
have the automaker buy back their vehicles under government negotiated prices or can receive cash
payments for diminished resale value plus a free emissions fix if they wish to keep their vehicles. In
addition, the company created a “Customer Goodwill” package which offered additional cash
payments, visa gift cards, and free 24 hour roadside assistance for three years for all customers who
registered for the program by April 2016 (Atiyeh, 2017).
As if matters were not worse enough already, in early January of 2017, the U.S. Department
of Justice announced an additional $4.3 billion in criminal and civil penalties. Six Volkswagen
executives were arrested for their alleged connection with the scandal. Furthermore, a “corporate
compliance monitor” will be watching Volkswagen for three years into the future under the terms of
its probation. Volkswagen must buy back at least 85% of all cars affected by June 2019 or face even
more federal fines. Additional civil penalties, a criminal settlement, and further state-level fines have
not been determined but could add billions more to Volkswagen’s balance sheet (Atiyeh, 2017).
There is no doubt that Volkswagen hurt its brand image around the world.
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Crafting a Global Response
The scale and geographic breadth of Volkswagen’s emission scandal makes it highly unique.
Usually, large corporate crises were focused on a single market i.e. BPs Gulf of Mexico Spill or
Google’s battle with European regulators over data privacy. Volkswagen though, which includes
international brands such as Audi, Porsche, and Lamborghini, faces a crisis which traverses the
globe, making it difficult to craft a proper response across many national borders and cultures. For
example, although the company has been making good-will payments and effort to American
customers, the company has claimed that the same illegal behavior that got them into this mess was
not in fact illegal under European Union (EU) rules. As a result, Volkswagen is not making similar
good-will payments and efforts to its European customers even though cars are being recalled
throughout the EU (Hakim, 2016).
Hans-Gerd Bode, Volkswagen’s communications chief since September 2016 has had his
hands full doing damage control. Nielsen, a global information, data, and measurement company
conducted a 2016 poll which suggested that although the public is fairly tolerant for recalls and labor
issues, they were least tolerant of lying and misrepresentation and intentional wrongdoing. As a
result of the massive effort that will be required to guide Volkswagen out of their global crisis, the
company has enlisted the help of three public relations firms based in three different countries -
Kekst in the United States, Finsbury in Britain and Hering Schuppener in Germany — to join
Edelman, an American firm already on retainer. Volkswagen has also hired Jones Day, a law firm, to
conduct an internal investigation (Hakim, 2016). Volkswagen needs to come up with a unified
marketing plan that focuses heavily on sustainability and corporate social responsibility in order to
successfully execute their new Strategy 2025 (covered in later sections) and regain the public’s trust.
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has worked in several countries for the carmaker and who requested anonymity for fear of losing his
job: “Be aggressive at all times” (Ewing & Bowley, 2015).
The article then goes on to suggest that the two men who have led Volkswagen and shaped
its culture much of the past 20 years are Ferdinand Piëch, CEO from 1993 until 2002, and
Winterkorn, CEO from 2007 until his resignation following the emissions scandal. Mr. Piëch, a
grandson of Mr. Porsche, is an engineer who became well-known for his design work in shaping the
Audi to take on BMW and Mercedes-Benz. His tenure was characterized by his toughness and
willingness to demote or dismiss people who were not performing well. Critics propose that after 20
years under Mr. Piëch and Mr. Winterkorn, Volkswagen had become a place where subordinates
were fearful of contradicting their superiors and of admitting failure. This is perhaps another classic
example of ethics not holding up under immense pressure. Bernd Osterloh, chairman of the
Volkswagen workers council, wrote a letter to the staff suggesting flaws in company culture. “We
need in the future a climate in which problems aren’t hidden but can be openly communicated to
superiors,”(Ewing & Bowley, 2015).
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profit margin with an input of 600,000 plus workers. Toyota on the other hand realizes a 10% profit
margin with an input of only 300,000 workers (Winton, 2016). Since there is a positive correlation
between quality and productivity, consideration should be given to improving both of these key
performance metrics.
Company Analysis
Stakeholder Analysis
Due to the extensive global operations of Volkswagen, the company has a wide range of
stakeholders. A partial list of potential stakeholders as well as relevant key issues can be found in
Appendix C.
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manufacturer” (Volkswagen Goals and Strategies, 2017). Key elements of this strategy included
innovation, increasing market share, increasing productivity (as measured via return on sales), and
becoming a top employer in order to build a first-class team. This strategy was recently superseded
by Strategy 2025 in response to the emissions scandal.
Volkswagen Group currently oversees twelve different brands. Although each brand has an
individual identity, they are all united around a common goal – mobility. For everyone, all over the
world. Each brand operates as an independent entity in the marketplace. “The product spectrum
ranges from motorcycles to low-consumption small cars and luxury vehicles. In the commercial
vehicle sector, the products include ranges from pick-ups, buses and heavy trucks” (Volkswagen AG
2017). As mentioned previously, the 12 individual groups that make up the Volkswagen Group is
composed of an incredible 347 different models.
Cutting costs in the upcoming years is critical for Volkswagen. In order to execute its new
Strategy 2025 which is examined in the next section, CEO Mueller has suggested significantly
reducing the number of models it makes and slashing almost $9 billion in annual spending (Bomey,
2016). This is a direct result of the need to offset the gigantic $18 billion plus bill to cover the costs
associated with the emissions scandal.
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and Corporate Social Responsibility (CSR), led by the Sustainability Board, which is regularly
informed of issues by the Group CSR & Sustainability steering group. The steering group regularly
meets with stakeholders – sustainability analysts and investors, and suppliers in order to engage
them in forward-looking discussions regarding the industry’s movement toward digitization of the
value chain. Ideally, Volkswagen hopes that this higher level of engagement with its key
stakeholders will increase efficiencies and create synergy around how everyone works together,
forecasts, and plans for major issues looming on the horizon (Corporate Social Responsibility 2015,
2017).
Organizational Structure
Volkswagen Group consists of twelve brands, 119 global production locations, and more
than 610,000 employees. Beginning in 2016, Volkswagen’s organizational structure underwent a
major overhaul. In their Group Model, the management structure is based on its modular toolkit
system, the platform on which all cars are built. This theoretically allows for increased levels of
productivity and flexibility between factories and models. The Groups are broken up by brand
groups accordingly. Key elements of organizational structure are efficiency, future issues,
digitization, business development, and product strategy. Planning initiatives, corporate goals, and
resource allocation related to R&D, production, and sales functions are strategically assigned at the
Group level (Future Organization Structure, 2015) from the board of directors.
Currently the Board of Management of Volkswagen AG comprises nine members. Each Board
Member is responsible for one or more functions within the Volkswagen Group. Matthias Müller is
the Chairman. The company has strong labor unions which hold half the seats on the board (Cremer,
2016).
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of Volkswagen, noting he wants to be surrounded by people “who follow their instincts, and not
merely guided by the possible consequences of impending failure” (Ewing & Bowley, 2015).
Volkswagen’s new Strategy 2025 outlines a progressive Code of Cooperation (Appendix E)
which proclaims values such as mutual trust, equality, and open-mindedness, will need radical
culture change initiatives in order to overhaul the old intense, cutthroat culture.
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Appraisal of Internal Resources and Capabilities
Appendix G lists Volkswagen’s resources and capabilities. Key resources included finance,
technology, plant and equipment, location, distribution network, and brands. Key capabilities
include product development, purchasing, engineering, manufacturing, financial management,
R&D, marketing and sales, government relations, and strategic management. Based on the
company’s current competitive position as well as the continuous and rapid changes occurring in its
industry and institutional environments, the relative importance and strengths of these resources
and capabilities have changed and will no doubt continue to change into the future. Across the
board, Volkswagen will have to more efficiently and effectively utilize its resources in order to
successfully execute Strategy 2025. Product development, R&D, government relations, and strategic
management will be increasingly important capabilities that Volkswagen will have to develop and
cultivate in order to continue to weather the emission scandal storm and rebuild their brand and
image.
Core Competencies
Volkswagen’s has three main core competencies that have helped the company remain
resilient throughout its long history. First, Volkswagen has extensive experience managing a wide
range of products. As mentioned previously, Volkswagen Group boasts a total of 12 different brands
including some well-known luxury brands like Lamborghini, Bentley, and Porsche. No other auto
manufacturer has so many different brands. By comparison, GM has 10 and rival Toyota has only 4.
This wide portfolio enables Volkswagen to cater to a greater variety of consumers globally.
On a related note, Volkswagen has a strong diversification strategy. As shown in Appendix
H, Volkswagen’s revenue is generated through different global markets and the automaker has
further diversified their income sources by leveraging research for electric vehicles, commercial
vehicles, and financial services. In more closed markets like China, Volkswagen has developed two
joint ventures, positioning them to become 2nd largest automaker there.
In regards to the company’s most recent Strategy 2025, Volkswagen plans to transform its
automotive core business by pursuing battery technology and autonomous driving as new core
competencies. It’s important to note here that there will be a steep learning curve when it comes to
becoming a leader in these two new areas since Volkswagen really has had no experience with these
two areas in the past. Perhaps they have some technical expertise from their R&D but they do not
have experience commercializing these two new technologies.
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Last, but certainly not least, Volkswagen has been a leader and pioneer in innovation,
resiliency and innovation, providing the world with ground-breaking ideas and technologies since
the late 1930s ranging from autonomous vehicles to visionary active suspension technologies, to
highly fuel-efficient cars. It’s important to note here that Strategy 2025 aims to transform many
aspects of the company’s core businesses and invest in “major electrification” to develop 30 or more
new electric vehicles by 2025. Whether this initiatives pan out for better or for worse is still yet to be
seen.
Political Institutions
Volkswagen operates 120 production plants all throughout Europe, the Americas, Asia, and
Africa. Keeping abreast of the current political situation and associated policies and regulations
across each of these areas is extremely challenging. In Europe, where the majority of Volkswagen’s
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operations take place, the company needs to be aware of the Italy’s banking crisis, declining German
exports, security issues, namely, Refugees, an increasingly aggressive Russia, and a general overall
weakening of the EU, especially following Brexit (Friedman, 2017). In South Africa, economic
stagnation has led to high levels of unemployment and crime which could strain the country’s
political and economic institutions (BusinessTech, 2016). In China, Volkswagen will have to follow
China’s slowing economy as well as how Sino-US relations will play out in the Trump
Administration (South China Morning Post, 2017).
Perhaps most important for Volkswagen to look out for is what sort of effects the Trump
administration will have on NAFTA. President Trump has made it clear that the terms of the free
trade agreement will be renegotiated. Volkswagen’s second largest production plant is located in
Mexico in the State of Puebla. If import duties are raised, this could be absolutely fatal for
Volkswagen.
Economic Institutions
In terms of acquiring the necessary factors of production like labor, capital, land and raw
materials, Volkswagen dominates the local markets in South America and Europe where it is an
employer of choice. Volkswagen will have to ensure that its procurement and supply chain
management structure be kept lean, agile, and adaptable in order to be able to continue to source
materials and service that provide optimum customer value. Special attention will have to be paid to
the new sourcing materials and requirements that will be necessary to produce electric cars and their
associated battery technology.
Socio-Cultural Institutions
Being cognizant of a given country’s local culture, social norm, values, beliefs, etc. is no
doubt a critical element when it comes to being locally responsive. Currently, Volkswagen manages
a wide range of products and brands. This has allowed Volkswagen to cast a wide net and appeal to
pretty much all consumer age ranges and lifestyles. However, in order to reduce operating costs and
become more profitable, Volkswagen may have to take a more focused approach. This means that
the company will have to learn how to do more targeted marketing and research in order to cater to
these varying cultural norms, values, beliefs, etc.
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2025 places significant emphasis on values such as mutual trust, equality, and open-mindedness.
Bringing about this new culture will be extremely challenging and will require a completely new
type of management approach. Unfortunately for Volkswagen, it will not be so easy to dismiss
adherents of the old culture due to the company’s strong labor unions which hold half the seats on
the board. Initiatives aimed at culture change similar to the “Work-Out” & “Session C” initiatives of
GE need to be carefully developed and implemented throughout Volkswagen’s Global operations..
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and marketing. We recommend that a robust Six Sigma initiative be deployed across the breadth of
Volkswagen’s manufacturing operations in Europe, the Americas, Asia, and Africa. Substantial
research and literature exists today that shows that Six Sigma not only improves both quality and
productivity but increases profit and shareholder value as well. The collaborative, continuous
improvement mindset required to realize Six Sigma benefits would further reinforce the new culture
change initiatives.
In addition, Mueller should press forward with his plans to significantly reduce the number
of models Volkswagen makes. This will free up billions of dollars in annual spending and further
help to improve productivity metrics.
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Appendix A – Volkswagen Group Brands & Models
Brand No. of Models
Volkswagen 66
Audi 52
Seat 26
Škoda 34
Bentley 14
Bugatti 1
Lamborghini 7
Porsche 36
Ducati 24
VW Commercial Vehicles 59
Scania 8
MAN 20
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Appendix B – Volkswagen Recalls
Table 1 - Automaker Recalls Per 1,000 Vehicles Sold
Automaker Recalls per 1,000 sold
Porsche 531
Mercedes-Benz 624
Kia 788
Tesla 936
Mazda 955
BMW 1196
Hyundai 1266
Honda 1307
Chrysler 1422
Volkswagen Group 1805
Table 2 - Automaker Recalls w/Potential for Death, Injuries, Crashes, or Fires (%)
Automaker %
Volvo 71
Mercedes-Benz 75.1
Volkswagen 77.6
Chrysler 83.2
Subaru 84.5
Kia 92.4
Honda 94.3
Nissan 95.2
Hyundai 96.8
Tesla 100.0
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Appendix C: Stakeholder Analysis
Stakeholder Key issue
Customers Recall hassles, costs, embarrassment and anger of owing a less shiny brand that
isn’t environmentally compliant
Employees Dealing with investigations and embarrassment, many to lose jobs, others may
vote with their feet
The works council Loss of prestige, power, ability to influence future outcomes
The town of Wolfsburg (Germany) A company town, Wolfsburg and its economic ecosystem has been built around
Volkswagen
The government of lower Saxony A Volkswagen shareholder and member of its supervisory board
Dealers Recalls and embarrassed to carry the brand, likely to lose substantial future sales
Audi, Seat, Skoda The “brother” auto companies under the Volkswagen umbrella may suffer
collateral damage
Other auto makers the microscope will be trained on other global automakers to find out whether
similar deceitful practices abound
Germany, the brand Much discussion is already under way of whether the stellar German brand for
quality and engineering has been damaged
Banking and Investment Already burned, some may stay away others may play financial games that may
Community not benefit Volkswagen
Environment The diesel toxic emissions are forty times greater than permitted under US law
and arguably much worse for health of living being anywhere
Executives and Management (plus Under the gun and under the microscope of public opinion, Governments,
former executives and regulators and prosecutors for a long time to come
management)
The Supervisory board Under pressure to ramp up more proactive corporate governance and/or engaged
in more wholesale corporate governance reform
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Multinational regulators Likely to ramp up investigation and be engaged in long term investigations,
prosecutions, settlements, and compliance monitor arrangements
Lawyers and consultants Arguably the only who will benefit greatly from this reputational cataclysm
The media and social media Will continue to have a party discussing every possible angle of this scandal,
fanning the fire of this information that may be accurate, inaccurate or
downright malicious
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Figure 2- Strategy 2025 Change Initiatives
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Appendix E: Code of Cooperation
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Appendix F: Financial Analysis
Gross Profit Margin
Gross profit margin is a financial metric used to assess a company's financial health and
business model by revealing the proportion of money left over from revenues after accounting for
the cost of goods sold (COGS). Volkswagen showed a steady gross profit margin of around 18%
since 2012 till 2014. This declined by 3% in 2015 due to lack of sales and tough competition from
other competitors
Operating Margin
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Return on Invested Capital (ROIC)
The return on invested capital (ROIC) is the percentage amount that a company is making
for every percentage point over the Cost of Capital.
Volkswagen had a negative ROIC of -0.01% in 2015. It has shown an uneven trend between
2012 and 2015. This metric was not used till recently in the automotive industry. General Motors
started using it lately to show how efficiently they generated cash from the invested capital.
Return on Assets (ROA)
Return on assets (ROA) is an indicator of how profitable a company is relative to its total
assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings.
Volkswagen reported positive ROA for all years since 2011 except in 2015 it was -0.43% as seen
below.
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Stock Price Analysis
Volkswagen saw its stock price go down by 30% overnight when the Environment
protection Agency announced that they manipulated the software to hide the actual emissions by
the car. This announcement reduced its market cap by $20 billion and its share price dropped from
$170 to $110.
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Appendix G: Key Resources & Capabilities
Resources Capabilities
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Appendix I: Porter’s Five Forces Analysis
Barriers to Entry: HIGH
The automobile industry has large entry barriers which prevents new firms from entering.
Some of the factors responsible for this include, immense start-up costs, extended time periods
required to develop distribution networks and brand image and trust, and a steep learning curve
to achieve economies of scale in order to compete at a competitive price.
Power of Suppliers: LOW - MEDIUM
Supplier specialization is a given in the automobile industry. Suppliers often produce
parts for only one or two automakers at once and often heavily rely on the automakers they
partner with for sales orders and continued business. It would devastating for a supplier to lose a
partnership with a major automaker such as Volkswagen.
However, automakers require a wide variety of precious and in-demand materials e.g.
computer components, copper wiring, and rubber. A growing and increasingly industrial and
globalized world is creating heavier demands on these materials as well as metals, sand, and
silica, leading to rising prices. Suppliers of certain materials determine prices of these materials
based on the demand from many industries, leaving automakers subject to forces in various
unrelated markets and to a certain extent, at the whim of these suppliers.
Power of Consumers: LOW - MEDIUM
Volkswagen has a wide array of models, but there still exist a wide range of brand
substitutes. Nevertheless, the power of individual consumers is low given the capital
intensiveness and frequency of purchase by individual (probably an average of 1 car per
individual every 5 to 10 years). Individuals or small businesses rarely buy cars in large quantities
but large firms or government agencies that regularly buy in bulk do have slightly more power
than average individuals. Furthermore, for a company like Volkswagen with a wide customer
base spread all across the globe, consumer ability to affect company performance (e.g. through
sales, switching to another competitor, etc.) is limited dude to such fragmentation.
Availability of Substitutes: LOW
Increasing gas prices and government initiatives to promote environmentally friendly
transportation indirectly compels more consumers to explore alternatives such as taking public
transits, riding bicycles, commuting, etc. Automakers, however, have managed, to varying
degrees to capture these consumers by producing cars with high fuel efficiencies. Also, logistically
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speaking, there is a certain amount of freedom that comes with having one’s own personal
vehicle. Thus, to giant global automakers, availability of substitutes is low.
Rivalry: HIGH
Oligopoly exists within the US automobile industry and there is stiff hypercompetition
among existing automakers. There is very little to medium brand loyalty from consumers who
mostly buy cars based on reputation or value (quality versus price). The recent 2016 scandal with
Volkswagen’s diesel brand had negative impact on the carmaker’s reputation which caused a
drop in diesel car sales in 2016 (Campbell, 2016). Although Volkswagen launched new strategies
to counter the shortfalls and managed to achieve a significant rise in sales in 2017, Volkswagen’s
competitors, especially Toyota, are likely to capitalize on their weakened competitive position and
ultimately end up taking away more market share from them.
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