The Sources of International Competitive Advantage of Vw free essay sample

Interconnectedness of Resources and Capabilities9 4. Conclusion10 5. 0 Bibliography11 6. 0. Appendix13 1. Introduction: 1. 2 Company Portray: The Volkswagen Group is one of the leading automobile producers in the world, delivering more than 9 million cars, generating sales of â‚ ¬193 billion and profits of â‚ ¬21. 9 billion in 2012 (Volkswagen Group, 2013). The group markets low- consumption small cars, luxury cars, trucks, buses and motorcycles under its 12 brands: Audi, Volkswagen, Skoda, SEAT, MAN, Bentley, Scania, Bugatti, Lamborghini Porsche, Ducati and Volkswagen commercial vehicles. The group employs 550,000 people worldwide and operates 100 production facilities in 27 different countries, while selling its products in 153 countries (Volkswagen Group, 2013). The Group has recently launched â€Å"Strategy 2018†, with the goal of becoming the biggest automotive company in the world in terms of volume, by selling more than 10 million cars and trucks annually. Additionally the group seeks to elevate its profit margin to 8% (Taylor, 2012). Given Volkswagen existing strength and its ambitions for the near term future the firm must be regarded as one of the world’s most potent transnational companies. 1. Method of Analysis: An international competitive advantage can either be derived from the external environment a company resides in, or through its internal strategic and structural orientation (Sitkin and Bowen, 2013). To fully appreciate and understand the formation of the Volkswagen Group’s international competitive advantage it is essential to analyse its external sources first, scrutinize their interplay within Michael Porter’s ‘Diamond’ structure, and subsequently take note of the internal choices and decisions the managers of Volkswagen face in the quest to generate a sustainable international competitive advantage. . 0 External Sources Michael Porter has identified factor conditions, demand conditions and supporting and related industries as the three primary external sources of competitive advantage. Firm strategy, structure and rivalry complement Porter’s ‘Diamond† structure and aim to describe the impact the environment has on the internal orientation and disposition of a firm (Sitkin and Bowen, 2013). Thus it evaluates external circumstances’ direct impact on a company’s structure. Porter’s Diamond of National Competitive Advantage Firm Strategy, Structure, and Rivalry Firm Strategy, Structure, and Rivalry Demand Conditions Demand Conditions Factor Conditions Factor Conditions Related and Supporting Industries Related and Supporting Industries Adapted from (Porter, 1990) 2. 1 Factor Conditions Factors of production at their most basic level constitute labour, land natural resources, capital, and infrastructure. According to traditional trade theories unlimited access to these basic factors marks a substantial advantage for industries (Porter, 1990). Today’s notions however, place significantly more emphasis on highly specialized, productivity-enhancing factors, resulting from sustained and heavy investment, as a source of competitive advantage (Porter, 1990). Germany offers two factors that are particularly appealing to the automotive industry: a highly specialized work force and an internationally renowned infrastructure. Of Germany’s 40 million people strong workforce 80% have enjoyed vocational training or hold an academic degree (Appendix 1). Scientists and engineers constitute around 6. 7% (Appendix 2) of the countries total workforce and 31% of all university level students are engaged in scientific or engineering studies giving further evidence for the workforce’s high compatibility to the needs of the automotive industry (GTAI, 2013a). Germany also offers an internationally unique dual education system, which combines on-the-job and vocational school training, thus guaranteeing industry relevant and specific training (GTAI, 2013b). Volkswagen has also benefited from stable labour costs and gradually falling unit labour cost of roughly 0. 3% a year between 2005 and 2010 (Appendix 3). This trend has led to a considerable competitive cost advantage for all German manufacturers (GTAI, 2013a). Germany’s infrastructure ranks second in the world in terms of quality behind Hong Kong’s (Appendix 4). This state of the art infrastructure allows Volkswagen to quickly and reliably move its in- and outputs. Additionally Volkswagen benefits from its relative proximity to Bremerhaven, the world’s largest carport for vehicle traffic (GTAI, 2013f). 2. 2 Demand Conditions Domestic demand has the potential to be an effective source of competitive advantage. Highly informed and demanding customers will exercise significant pressure on companies to continuously innovate and upgrade their products and services (Porter, 1990). Furthermore, a competitive advantage can arise from a customer base that is indicative of global demand trends, or better, shapes customer needs and wants elsewhere. If these conditions are given a company will be pushed to generate the most advanced products or services prior to demand spreading elsewhere in the world (Porter, 1990) The German consumer is probably the most demanding and sophisticated automobile consumer in the world. German consumers have traditionally set high standards in terms of engineering, design and safety, but due to rising fuel prices and environmental concerns in Germany, the spectrum of demands has grown even wider (The Economist, 2007). These high standards have enticed innovations in the past resulting in developments such as the four-wheel-drive system and continue to push VW ahead of its international competitors (Taylor, 2012). In an effort to tackle environmental concerns the VW Group recently committed to reducing the average emissions of its Volkswagen fleet to just 95 grams of carbon dioxide per kilometre by 2020 (Volkswagen Group, 2013). It has also launched an ambitious project to produce the world’s most fuel-efficient car; the XL1, underlining the impact he German consumer has on Volkswagen’s goals and innovative spirit (Taylor, 2012). 2. 3 Related and Supporting Industries A close relationship with related and supporting industries, which are internationally competitive themselves, can reap rich rewards for firms (Porter, 1990). Through the formation of ‘clusters’, which are interconnected businesses and institutions working in close proximity to one another, firms can source the most cost-effective inputs in an efficient and quick manner (Sitkin and Bowen, 2013). More importantly, companies benefit from a rapid and constant exchange of information over new innovations, technology, and industry and consumer trends. The exchange of information coupled with very close personal relationships existing within clusters greatly improves a company’s prospect of attaining an international competitive advantage (Porter, 1990) The related and supporting network for the automotive industry in Germany is particularly strong. A total of five distinct automotive clusters exist in Germany (Autoanalysis, 2005). It is an international technological leader in crucial supporting industries to the automotive industry including machine building and electronics (GTAI, 2013b). Volkswagen derives particular advantage from the existence of the ‘Silicon Saxony’ cluster, which is located in its neighbouring state and currently ranks among the top five semiconductor clusters in the world (GTAI, 2013c). Furthermore Germany is the unquestionable world leader in machinery and equipment production, compromising almost 6,300 companies along the value chain and accounting for 17% of the world’s global machinery trade share (GTAI, 2013d). The automotive and electronics sector are also two of the biggest customers of the machine and equipment sector, demonstrating the strong cohesion of the German industrial sector (GTAI, 2013d). Volkswagen also derives great benefit from the existence of cutting-edge logistic firms in Germany, which spur the rapid and efficient transport of in-and outputs (GTAI, 2013e). 2. 4 Firm Strategy, Structure and Rivalry The national environment a firm resides in has a significant influence over the firm’s structure, strategy and nature of rivalry. Different cultural backgrounds favour varied managerial approaches and firm structures, which may be suited better to one industry rather than another. A competitive advantage can arise where a firm’s managerial practices, as favoured by the country it resides in, are particularly well suited to respond to the demands of the industry it competes in (Porter, 1990) Domestic competition is arguably the most important factor of Porter’s ‘Diamond’ model, due to the influence it exercises over the remaining facets. Fierce rivalry forces companies to continuously innovate and upgrade to remain in a competitive position nationally. Domestic competition not only toughens companies prior to international expansion, it is frequently the cause for their expansion (Porter, 1990). German culture favours hierarchical organisational structures and technical know-how is widely dispersed throughout top management. In return German companies have traditionally excelled in technically complex industries, where precision is a major determinant of success (Porter, 1990). These set of values and expertise have evidently backed Volkswagen’s path to becoming one of the premiere car manufactures and aided in its accumulation of unique resources and capabilities. Germany has traditionally been home to fierce domestic rivalry in the automotive sector. The Volkswagen Group competes intensively with its Audi and Porsche brands against BMW and Mercedes. The prestige of building the best car in Germany is immense and hence the competition is beyond financials and defiantly carries a personal note. 2. 5. VW ‘Diamond’ System It is critical to assess each of the determinant factors as part of the system of the ‘Diamond’ model. None of the determinants on its own is likely to result in a significant competitive advantage, as the state of one factor depends on the state of another (Porter, 1990). As all the individual determinants for VW are favourable, they perform a self-reinforcing cycle, where the benefits of innovation are spread across the entire automotive cluster. 3. 0. Internal Sources The foundation for developing competitive advantage internally lies with the managers’ ability to generate unique firm-specific resources and capabilities (Duhaime, Stimpert amp; Chesley, 2012b). Performance And Competitive Advantage Performance And Competitive Advantage Market Position, Resources, Capabilities Market Position, Resources, Capabilities Feedback Feedback Decision Making Decision Making Managers’ Mental Models Managers’ Mental Models Adapted from (Duhaime, Stimpert amp; Chesley, 2012) Such resources and capabilities need to be valuable, rare, inimitable and non-substitutable in order to achieve a sustainable competitive advantage. Valuable? Rare? Inimitable? Non-substitutable? Sustainable Competitive Advantage Not a resource Competitive parity Temporary Competitive Advantage Temporary Competitive Advantage No No No No Valuable? Rare? Inimitable? Non-substitutable? Sustainable Competitive Advantage Not a resource Competitive parity Temporary Competitive Advantage Temporary Competitive Advantage No No No No Adapted From (Warner, 2010; Hoskisson amp; Co, 2008) Duhaime, Stimpert and Chesley (2012b) indicate that through the utilization of the factors of time, building on past success, interconnectedness of resources and capabilities, investment and casual ambiguity managers can back the resource accumulation process and support the development of sustainable competitive advantages. Volkswagen’s international success in recent years can be attributed to two primary internal factors: the firm’s unconventional organisational structure and its tremendous interconnectedness of resources and capabilities. 3. 1. Decentralized Structure The Volkswagen Group’s corporate structure is highly decentralized and grants large autonomy to each of its 12 individual brands. Each brand is treated as a stand-alone company with its own board of directors, annual reports and individual design, engineering and manufacturing facilities (McElroy, 2012). While this approach contradicts general corporate notions, which encourage centralization to eliminate duplication of work and cut costs, VW is the world’s most profitable car manufacturer (McElroy, 2012). In fact its structure is strikingly similar to General Motors’ under its illustrious CEO Alfred Sloan. Sloan’s concept was based on offering GM’s various brands at different, yet overlapping price points (Duhaime Stimpert amp; Chesley, 2012b). The idea was to offer an ascending range of cars and allow a customer to gradually mount GM’s product scale over the course of his life (Duhaime, Stimpert amp; Chesley, 2012b). Similarly the Volkswagen Group offers an ascending and differentiated product range that allows consumers to upgrade over the course of their life and still remain customers of the Volkswagen Group. This poses a substantial competitive advantage, as none of VW’s international or domestic competitors offers an equally diverse and differentiated product range. 3. 2. Interconnectedness of Resources and Capabilities The more interconnected the resources of a firm are the more likely it is for the firm to use them in an efficient manner that will enhance the company’s overall performance. Similar to the existence of clusters in the external environment firms benefit from an intensive internal exchange of information and cooperation to foster innovation (Duhaime, Stimpert and Chesley, 2012a) Despite the Volkswagen Group’s decentralised corporate structure its resources and capabilities are highly interconnected and centralized. This interconnection is essentially the key to the company’s significant competitive advantage, and allow for the decentralized structure to work so effectively. Under its ‘toolkit strategy’ VW uses the same basic components for numerous models consequently lowering engineering, procurement and manufacturing costs (Taylor, 2012). Hence the key to its competitive advantage lies in differentiating its brands while using the same components in production and successfully employing economics of scale. As a result of the modular longitudinal matrix (MLB) introduced in 2007, Audi is now able to produce its entire product range with the same basic parts. Moreover VW will launch a new program called the modular transverse matrix (MQB) that will standardize critical parts in more than 40 small cars. When the integration is complete and successful it is estimated that VW could realise annual savings of $3 billion and further boost its scale and cost advantage (Taylor, 2012). 4. Conclusion The Volkswagen Group has been tremendously successful in generating an international competitive advantage over recent years. By productively utilizing Germany’s favourable external environment and through unconventional strategic and structural implementations the Volkswagen Group has become the most profitable automaker in the world. Strategy 2018† and the implementation of the modular transverse matrix (MQB) are bound to enhance VW’s advantage over its competitors even further. Therefore, its goal of becoming the biggest automaker by volume in 2018 seems all but certain. 5. 0 Bibliography AutoAnalysis, 2005, Benchmarking Study of European Automotive Clusters. pp. 16 Duhaime, I. M. , Stimpert, L. amp; Chesley, J. A. (2012)a. Strategic Thinking Todays Business Imperative. Ne w York: Routledge. pp. 29-32. Duhaime, I. M. , Stimpert, L. amp; Chesley, J. A. (2012)b. Strategic Thinking Todays Business Imperative. New York: Routledge. pp. 128. Germany Trade and Invest – Gesellschaft fur Au? enwirtschaft und Standortmarketing mbH . (2013)a. Labor Market Availability. Available at: http://www. gtai. de/GTAI/Navigation/EN/Invest/Business-location-germany/Business-climate/labor-market-availability. html. Last accessed 9 April 2013. Germany Trade and Invest – Gesellschaft fur Au? enwirtschaft und Standortmarketing mbH . (2013)b. Automotive Industry. Available at: http://www. gtai. de/GTAI/Navigation/EN/Invest/Industries/Logistics-mobility/automotive. html. Last accessed 9 April 2013. Germany Trade and Invest – Gesellschaft fur Au? enwirtschaft und Standortmarketing mbH . (2013)c. Electronics amp; Microtechnology. Available at: http://www. gtai. de/GTAI/Navigation/EN/Invest/Industries/electronics-microtechnology. html. Last accessed 9 April 2013. Germany Trade and Invest – Gesellschaft fur Au? enwirtschaft und Standortmarketing mbH . (2013)d. Machinery amp; Equipment. Available at: http://www. gtai. de/GTAI/Navigation/EN/Invest/Industries/machinery-equipment. html. Last accessed 9 April 2013. Germany Trade and Invest – Gesellschaft fur Au? enwirtschaft und Standortmarketing mbH . (2013)e. Logistics amp; Mobility. Available at: http://www. gtai. de/GTAI/Navigation/EN/Invest/Industries/machinery-equipment. html. Last accessed 9 April 2013. Germany Trade and Invest – Gesellschaft fur Au? enwirtschaft und Standortmarketing mbH . (2013)f. Infrastructure. Available at: http://www. gtai. de/GTAI/Navigation/EN/Invest/Business-location-germany/Business-climate/infrastructure. html. Last accessed 8 April 2013. Grant, R. M. (2010). Contemporary Strategy Analysis. 7th ed. Southern Gate: John Wiley amp; Sons Ltd. pp. 217 McElroy, J. (2012). How Volkswagen is run like no other car company. Available at: http://www. autoblog. com/2012/12/06/how-volkswagen-is-run-like-no-other-car-company/. Last accessed 8 April 2013. Porter, E. M. (1990). The Competitive Advantage of Nations, pp. 79-86. Harvard Business Review (online). Available at: http://kkozak. wz. cz/Porter. pdf. Last accessed 9 April 2013. Sitkin, A and Bowen, N (2013). International Business: Challenges and Choices. 2nd ed. Oxford: Oxford University Press. pp. 38-39. Taylor, A. 2012). Volkswagen: Das auto giant. Available at: http://management. fortune. cnn. com/2012/07/10/global-500-volkswagen/. Last accessed 8 April 2013. The Economist. (2007). The big-car problem. Available at: http://www. economist. com/node/8738865. Last accessed 8 April 2013. Volkswagen Group. (2013). The Group. Available at: http://www. volkswagenag. com/content/vwcorp/content/en/the_group. html. Last accessed 8 April 2013. 6. 0. Appendix Appendix 1: (Adapeted from Germany Trade and Invest) Appendix 2: Appendix 3: (Adapted from Germany Trade and Invest) Appendix 4: