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| Case Study* (100 Marks) · This section consists of questions with serial number 1 - 5. · Answer all questions. · Marks are indicated against each question. | | | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | Read the case carefully and answer the following questions: | | | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| “The greater the level of involvement of a company in foreign markets, the greater the need for it to monitor the political climate of the business.” In relation to the effect of a country’s political environment on a company’s performance, analyze how the political environment of Czechoslovakia impacted Skoda? | ( | 18 | marks) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| “In the early 1990s, Volkswagen’s (VW) sales in the US were declining, making it imperative for the company to start looking for new markets to safeguard its long term interests leading to its acquisition of Skoda.” Examine the various reasons for companies to adopt cross-border merger and acquisition. Also, discuss the benefits derived by Volkswagen and Skoda with this acquisition. | ( | 22 | marks) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| “Known over the world for its quality engineering, Volkswagen’s task was to transform the poor image and socialistic policies of Skoda into a customer-oriented, market-focused organization.” In this context, analyze the various Human Resource (HR) issues that companies face at the time of an acquisition and the way VW has tackled these issues. Also, examine how VW has improved the production and quality in the manufacturing plants of Skoda? | ( | 20 | marks) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| In the light of the rise in brand consciousness among customers, analyze the importance of brand building. Discuss the various brand building initiatives adopted by VW to improve Skoda’s image. | ( | 20 | marks) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| “Volkswagen embarked on its multi-brand strategy in an effort to rationalize its brands. It had 4 vehicle brands – Audi, VW, SEAT and Skoda, with each brand maintaining its distinct identity.” Discuss the advantages and disadvantages of a multi branding strategy in competitive markets. How far is the multi-brand strategy of VW justified? Give reasons. | ( | 20 | marks) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Volkswagen’s Acquisition of Skoda Auto:
“Central Europe is not an emerging market, it’s reemerging. And its companies are playing the game of catch-up incredibly fast.” – Justin Jenk, a Principal with McKinsey & Co. in Moscow in 1997.[1] “Skoda was a joke and it should never again be a joke.” – Karl-Gunter Busching, a Production Manager at Skoda, in 2000.[2] “We are one of the three oldest car manufacturers in the world… and we are an example of how a car company can complete a successful transformation from a local producer into a global player.” – Vratislav Kulhanek, Chairman of the Board of Management at Skoda Auto, in 2001.[3] SKODA CROSSES THE HALF MILLION MILESTONE The year 2006 was significant for the Skoda Auto Group (Skoda), an auto manufacturer based in the Czech Republic. That year, the company crossed the 500,000 units mark for the first time, in production as well as in sales of vehicles. Production, at 556,347 units, represented a 12.6 percent increase over 2005, while sales, at 549,667 units, had increased 11.7 percent. Improved sales reflected positively on Skoda’s financial performance as well, and in 2006, the company posted a revenue increase of 8.7 percent and an increase in net profits of 40.2 percent over 2005 (Refer to Exhibit I for the production and sales breakup of Skoda vehicles, and to Exhibit II for Skoda’s Income Statement). Another event of significance for Skoda in 2006 was the launch of a new vehicle called the Skoda Roomster. The Roomster, which was positioned as a leisure activity vehicle, was Skoda’s fourth model line after the Octavia, the Fabia, and the Superb lines. Skoda said that the sales of the Roomster in 2006, at 14,422 units, had been satisfactory. Skoda was the Czech Republic’s best-known company, and in addition to being a major employer, contributed significantly to the country’s exports. It was also one of the oldest car companies in the world along with Mercedes and Peugeot.[4] Skoda was often cited as an example of a company from a country east of the ‘Iron Curtain’[5] that had managed to succeed in the market economy. During the Cold War[6], Skoda cars were widely derided in Western Europe for their unappealing looks and poor performance. However, after Skoda became a part of Volkswagen AG (VW) in 1991, its image was transformed. VW played a significant role in improving Skoda’s reputation and developing its capabilities, and by the late 1990s, the company came to be known for its high quality, sturdy cars, and had established itself as a ‘value for money’ brand. BACKGROUND - SKODA Skoda was set up in 1895, at a place called Mlada Boleslav in what was then a part of the Austro-Hungarian Empire.[7] It was originally called Laurin and Klement Co. (L&K), after the two founders Vaclav Laurin, a mechanic, and Vaclav Klement, a bookkeeper. L&K’s main business was manufacturing and selling bicycles. The firm’s bicycles proved popular, and L&K ventured into making motorcycles in 1899. L&K’s motorcycles participated in several racing events, and won some of them, enhancing the company’s reputation. L&K started manufacturing cars in 1905. When its first model, the Voiturette A, became a commercial success, L&K started expanding, and in 1907, the firm was incorporated as a joint stock company. During the First World War (1914-1919), L&K was involved in arms production. After the War ended, L&K diversified into making trucks, buses, aviation engines and agricultural machinery, in addition to cars. This required additional investments, for which it started looking for a partner. In the early 1920s, after a fire at the L&K factory, the need to find a partner became critical. In 1925, L&K was acquired by Skoda Plzen, the largest industrial enterprise in what was then Czechoslovakia. After the merger, L&K’s vehicles began to be sold under the Skoda name [8]. In the period between the two World Wars, Skoda’s cars were exported across Europe. During that time, the company’s cars were known for their elegant looks and technical superiority. Although sales were affected to some extent by the Great Depression[9], Skoda’s popularity did not diminish significantly. During the Second World War (1939-1945), Skoda came under the control of Nazi Germany, and the company’s production facilities were used to support Germany’s war efforts. After the War, Czechoslovakia came under the influence of Soviet Communism, and all the companies in the country were nationalized. Skoda Plzen’s different business units, including the auto manufacturing unit, were split into seven independent entities.[10] After nationalization, all Skoda’s production and business decisions were subject to centralized planning, and information and technological exchanges with foreign companies were restricted. Consequently, the company soon lost touch with the technological advancements in Western Europe and the US. However, it continued to produce new models like the Skoda 440 Spartak, the 445 Octavia, the Felicia and the Skoda 1000 MB. These cars sold well in Central and Eastern European countries, but were the butt of many jokes in Western Europe because of their ‘ugly’ looks and substandard performance. A turning point of sorts for Skoda came in the late 1980s with the launch of a new car called the Favorit. This car differed from the older Skoda cars in that its design and technology were similar to cars from Western Europe. The Favorit was designed by Bertone, an Italian company, and part of its engine technology was licensed from Western automakers. The car went on to become one of Skoda’s most successful models, and sold very well in Czechoslovakia and other Eastern European countries. It sold reasonably well in Western Europe too, although it was still technologically inferior to comparable cars in those markets. After the Velvet Revolution[11] in Czechoslovakia, the new government put up most of the country’s industries for privatization. The government decided to bring in a strong foreign partner for Skoda to help the company catch up with western automakers. In April 1991, VW acquired a 31 percent stake in Skoda for $416 million. The company also agreed to make two further payments of $260 million each in 1993 and 1994 to eventually raise its stake to 70 percent.[12] BACKGROUND – VOLKSWAGEN VW’s history can be traced back to the early 1930s, when Adolf Hitler (Hitler), the then Chancellor of Germany, approached Ferdinand Porsche (Porsche)[13], an automobile engineer, to design a car for the common man. The car, then unofficially known as the Volkswagen (German for ‘People’s Car’), was to have a top cruising speed of 62 miles per hour, and the capacity to carry five people. Another condition was that the car’s price was not to exceed 1,000 Reich Marks. In 1934, Porsche submitted the design proposal for such a car to the German government and signed an agreement with Reichsverband der Automobilindusrie (RDA, the German Motor Industry Association) to manufacture the car. By October 1935, the prototype of the car was ready. The car had a full steel body and space for five people. It was considerably more economical to own and run than the large cars produced at that time. The initial designs were updated over the next few years and a convertible version was also developed. In 1938, work began on a new factory where the cars were to be manufactured. The factory was called the KdF Wagen factory (KdF Wagen was the official name of the car at the time[14]). The first car was made in 1938. As its shape resembled a beetle, the car began to be called the Beetle, and this became the car’s official name in later years. During the Second World War (1939-1945), the KdF Wagen factory was used for military production. In 1944, most of the factory was destroyed in bombing by the Allied Forces[15]. After the war ended in 1945, the factory was taken over by the British, and rebuilt to be used for making jeep engines and repairing British army jeeps. It was the British who gave the company its new name ‘Volkswagen,’ and the town that was created near it was called Wolfsburg. The British eventually gave up the company to the German government in 1949, and the German government appointed Heinrich Nordhoff, a former senior manager at Adam Opel Gmbh, another German auto company, as the senior executive. During the post Second World War period, VW’s most successful car was the Beetle, although the company had also developed a utility vehicle called the VW Transporter in 1950. Another vehicle called the Kharman Ghia was launched in 1955, using many parts from the Beetle. By the 1950s, VW was already well on its way towards becoming a global company, and had started exporting its vehicles to neighboring European countries like Denmark, Sweden, Luxemburg, Belgium, and Switzerland. It also established factories in England, South Africa and Brazil to make Beetles. An Australian plant was also started in 1960. By the mid 1960s, VW was making more than one million Beetles every year. Over the years, the company had also introduced some variants of the Beetle, including a sedan and a convertible. VW acquired Audi Auto Union (Audi), a German car company known for its technological capabilities, in 1964. In the late 1960s, the demand for the Beetle began declining, and VW realized that it had to bring out an acceptable successor to the car. In the 1970s, VW introduced several new car models that were based on Audi car platforms. Some of the cars introduced by VW in the 1970s were the Passat (known as Dasher in the US), the Polo, and the Golf (known as the Rabbit in the US and Canada). At the same time, the company also started cutting down the production of the Beetle. Over the late 1970s and 1980s, VW’s most popular car was the Golf. The Golf chassis was used for later VW vehicles like the Scirocco sport coupe, the Jetta sedan, the Cabriolet convertible, and the Caddy pickup. During the 1980s, the Rabbit’s (Golf’s) electrical problems harmed the company’s image in the market, and VW’s sales started declining in the US and Canada. Also, several Japanese and American car companies were offering better cars at lower prices. In the late 1980s, VW’s Chairman Carl Hahn decided that it was better for the company to reduce its dependence on established car markets like the US and Western Europe, and explore new markets. The Rabbit factory in Pennsylvania, in the US was closed in 1988. In 1990, VW acquired Spanish car manufacturer SEAT[16]. This was followed by the acquistion of a 30 percent stake in Skoda in 1991. SKODA UNDER VW In the early 1990s, VW’s sales in the US were less than 100,000 cars a year. This made it imperative for the company to start looking for new markets to safeguard its long term interests.[17] Around the same time, VW embarked on its multi-brand strategy in an effort to rationalize its brands. At that time, VW had four distinct vehicle brands – Audi, VW, SEAT and Skoda. Each brand had its own distinct brand identity, which VW made an effort to maintain. The company’s strategy was to target different market segments with each of its brands. The Audi brand was synonymous with exclusivity, technological superiority and ‘coolness’. It was VW’s high-end brand and was reportedly perceived in the market to be in the same league as BMW and Mercedes-Benz. The VW brand, though originally associated with low-end, economical cars, had moved up-market and was associated with high quality and engineering superiority in the early 1990s. The low end of the market was covered by the SEAT and Skoda brands. Although analysts were concerned about VW’s strategy of having two entry level brands, the company said that the two brands made it more competitive at the lower end of the market. It also said that it planned to create two distinct brand personalities for SEAT and Skoda, and would sell them in different markets. VW planned to give SEAT a ‘funky’, youthful image, while Skoda was to stand for economy and competence. Each of the four brands was also managed separately at the company under the overall direction of the Chairman of the VW Group. VW, which had edged out French auto major Renault and Sweden’s Volvo in acquiring the stake in Skoda, announced that it intended to use the Skoda brand to gain access to Central and Eastern European markets, where the brand had a strong presence (Skoda had a 35 percent market share in Eastern Europe at that time[18]). The company also planned to use Skoda’s manufacturing facilities in Czechoslovakia to manufacture low cost cars for western markets. Acquiring Skoda was aimed at helping Volkswagen attack Fiat’s position as the largest car manufacturer in Europe, as well as improving its position in the global auto market.[19] THE TRANSFORMATION OF SKODA When VW took over Skoda, the two companies had little in common. VW was known the world over for the quality of its engineering. Skoda on the other hand, was a peripheral player in the global auto industry, often mocked for its cars’ unreliability and poor quality. The task before VW therefore, was to transform Skoda, which had been dominated by Socialistic policies and systems, into a customer-oriented, market-focused organization. INTEGRATION AND HR ISSUES VW’s approach towards transforming Skoda was gradual and incremental. The company used a collaborative and nurturing strategy in bringing about improvements at Skoda, and reportedly tried to avoid ‘winner-loser’ comparisons. From the beginning, VW made an effort to keep Skoda’s brand identity independent. As one of the first steps towards improving Skoda’s image in the market, VW decided to focus on the company’s heritage as one of the oldest car makers in the world. It also talked about Skoda’s history and past achievements, and encouraged employees to take pride in being a part of the company. It printed new brochures showing pictures of some of Skoda’s best and most successful pre-communist era cars. VW also built a company museum for Skoda, which showcased the major milestones in its history. The idea behind all this was to create a sense of identification and pride in the workers at Skoda. The transition from a state-owned company to a market-oriented one was expected to pose several challenges. When VW took over Skoda, it realized that most of the employees had relatively good engineering competence as well as a high level of professionalism despite the company’s communist background. However, there was a basic lack of economic knowledge and experience, management skills, initiative and responsibility. Because the company had been managed in an authoritarian manner for several years, employees displayed a distinct tendency to shy away from expressing their opinions or taking decisions. VW realized that Skoda employees needed to change their work philosophy. However, it avoided bringing in drastic HR changes. Instead of bringing in teams of ‘experts’ from the parent company, VW choose to develop the skills and competencies of the employees at Skoda, which was expected to be more beneficial in the long run. VW also appointed Ludvik Kalma, a Czech, as the CEO of the company. Knowledge transfer and competency development at Skoda was done through coaching, joint project work and ‘tandem management’. In joint project work, all the key tasks were handled by bi-cultural teams of people from VW as well as Skoda. Each team was led by a manager from Skoda, who had the overall responsibility for the project results. A team of managers from VW was installed at Skoda soon after the acquisition to support the projects, and give any assistance needed to the project teams. The team of expatriates was also responsible for any coaching that might be needed for the successful completion of projects. In tandem management, key management positions at Skoda were shared by one manager from VW and another local manager for a limited period of time (around three years). During this time, it was the responsibility of the VW manager to develop the professional and managerial skills of his local partner, with a view to helping him manage his department independently in future. VW adopted a ‘look and see’ approach towards posting its German employees at Skoda. The idea was to ensure that only people who were comfortable in dealing with the cultural differences were posted there, thus minimizing potential problems. VW took up management development in a major way at Skoda. Previously, Skoda had an apprentice school and an ‘education department’ where management training was provided to a select few employees. Under VW however, human resource development was a more wide-ranging exercise. Language was one of the major hindrances in the VW-Skoda collaborative effort. To overcome language barriers, VW set up a language center near the Skoda factory. All the Czech employees had to learn to speak either German or English to improve their chances of advancement at the company. Groups of managers and production workers from the Skoda factory were also sent to Germany and other places where VW had plants to learn about VW’s production methods. During the transformation, although some positions at Skoda were made redundant, VW chose not to lay off employees. Employees were given the option of taking up jobs in some other part of VW. However, VW divested itself of Skoda’s utility depots, housing, primary schools, libraries and sports stadiums, which the company had maintained as a state-owned entity, in an effort to keep costs in check. Analysts said that VW’s collaborative approach went a long way in making Skoda’s transformation a smooth process. Svatopluk Kvaizar, the mayor of Mlada Boleslav said, “I can’t think of a single decision which was influenced by bad blood between the Germans and the Czechs.”[20] This helped avoid the hostilities that usually prove to be the biggest detriment to the success of any acquisition. According to Jan Kubes, a Professor at IMD, “Volkswagen had the vision and heart to reawaken the dormant expertise of Skoda and its employees.”[21] PRODUCTION AND QUALITY IMPROVEMENT After several decades as a state-owned company, Skoda’s production methods had become outdated, and the company had no well-defined quality management systems. VW therefore had to rationalize the production processes at Skoda to bring them on par with its other plants. VW implemented what it called the Skoda Production System at the company. The System tracked parameters like quality, costs, team cooperation and absenteeism in the factory, and displayed the information on the shop floor. The teams with the best results on these parameters were rewarded periodically. A common reward was a trip to one of VW’s other plants where the teams could benchmark Skoda’s production practices against those of VW. Skoda also implemented VW’s supplier grading system to bring about improvements across the supply chain. Initially when the grading system was implemented, only one percent of Skoda’s suppliers earned the highest ‘A’ grade. Over the years, Skoda and VW personnel worked closely with the suppliers to ensure that the quality and reliability of the components they supplied improved. Supplier motivation to participate in the quality improvement initiatives was kept high with the promise of opportunities to supply not only to Skoda, but to the other VW plants as well. By the end of the 1990s, 71 percent of the suppliers had received the top ‘A’ grade.[22] When Skoda launched its Octavia model in 1996, it set up a new plant at Mlada Boleslav to manufacture the car. The plant incorporated some of the best technologies from VW, and was considered a testimony to how far Skoda had come from its days as a state-owned company. The Octavia plant operated on the fractal concept of manufacturing[23], and used small teams and just-in-time principles. All the employees at the plant were grouped into teams of 8 to 12 members. Each team member had equal responsibility to produce error-free work and for overall quality control. Attempts to conceal faulty work could lead to dismissal. To promote flexibility and reduce repetitive stress injuries, all the team members were cross-trained on different jobs. Most of Skoda’s major suppliers, like Johnson Controls, Siemens, Peguform, and Meritor, set up their own plants in the Octavia factory complex to build a range of components. All the suppliers were linked to the central production control computer system, so that they knew the production sequence, and manufactured to suit the requirements of the moment. This helped streamline processes and control costs. The Octavia plant and other Skoda plants differed from VW plants in the extent to which they were automated. Because labor costs in Czechoslovakia were considerably lower than in Germany and other parts of Western Europe, the Skoda plants were designed to take advantage of manual labor (In the late 1990s, Czech workers earned around 16,000 Czech Koruna, or $6000 a year. This was only 20 percent of what auto industry workers earned in Germany.)[24] At the body shop for instance, only five percent of the work was automated, compared to around 30 percent at similar VW plants in Germany.[25] Automation was used only for tasks where precision was critical to quality. The Octavia plant was originally designed to produce between 300 and 350 cars per day, but was actually producing around 500 cars per day by the late 1990s.[26] The plant was also made flexible enough to produce any other Skoda model if the demand for a model suddenly increased. Between 1991 and 1998, VW reportedly made capital investments exceeding one billion dollars on upgrading Skoda’s factory and rationalizing the production process.[27] NEW PRODUCT DEVELOPMENT The rationalization of production processes at Skoda was taking place even as new and improved models under the Skoda brand were being launched. When VW acquired its stake in Skoda, Skoda’s most popular car was the Favorit which, though it sold reasonably well in Central and Eastern Europe and even had some sales in Western Europe, was very inferior to comparable cars available in the west. The first car launched by Skoda after becoming a part of VW was the Felicia, which debuted in 1994. The Felicia was a small car (known as a supermini), and was a reworked version of the Favorit (production of the Favorit had been stopped by then). The Felicia however, was more modern in appearance and offered a wider range of engines than the Favorit. The name ‘Felicia’ was borrowed from another two-seater Skoda car of the 1960s. The new Felicia was launched in both petrol and diesel versions. It was the first Skoda car to feature several active safety features, and played an important role in changing Skoda’s image in Western Europe. The diesel engine on the car was the same as the one used in VW’s popular Golf and Polo cars, and on SEAT’s Ibiza model. Over the years, Skoda launched several variants of the Felicia, including a hatchback, an estate car, a pickup version and a panel car. The Felicia was followed in 1996 by what was to become one of Skoda’s most successful cars in later years, the Octavia. (The name Octavia was also borrowed from a Skoda model of the 1960s). Skoda made an effort to include the latest developments in terms of design, technology, safety and environmental protection in making the Octavia. The Octavia was well received all over Europe, and analysts said that the car was responsible for finally ridding Skoda of its image of poor quality. The Octavia was a compact car built on the same chassis as the Audi A3 I, VW Golf IV, VW Bora/Jetta IV and SEAT León I/Toledo II. The car was positioned at the lower end of the upper-medium segment of the car market. (Skoda introduced an estate version of the Octavia called the Octavia Combi in 1998, and the Octavia Combi four-wheel version was launched in 1999). Skoda had built the Octavia plant with a production capacity of around 90,000 cars a year, but the car became so successful that the plant eventually produced around 160,000 cars a year.[28] Skoda introduced the Fabia in 1999. The Fabia was another ‘supermini’, and was the first car to use VW’s PQ24 platform[29] (VW planned to use the same platform to build the next generation Polo car). Fabia was intended to replace the Felicia. According to unconfirmed reports, the development costs of the Fabia had been very low. Skoda however, refused to disclose the project cost. “We would be benchmarked. We are too good,” said Wilfried Bockelmann, a Skoda board member who was responsible for technical development.[30] The Fabia became a great success in Europe. Two British car magazines, Auto Express and What Car?, named the Fabia their ‘Car of the Year’ for 2000. In Germany, the Fabia was awarded the Golden Steering Wheel by German newspaper Bild am Sonntag. Additionally, in a survey conducted by Auto 1 magazine, the Fabia was rated #1 among all national cars in both Austria and the Czech Republic in 2000 (It rated #3 in international comparisons in both the countries.)[31] (Refer to Exhibit III for an indicative list of Skoda car prices in 2007). IMAGE-BUILDING The launch of new and better quality cars was supported by an extensive image-building exercise across Europe, and especially in the UK, where Skoda had been the subject of many jokes over the years (Some samples: “What do you call a Skoda convertible? A dumpster.”[32]; “How do you double the value of a Skoda? Fill it with gas.”[33]). Long-time Skoda employees found the jokes annoying. “What you have to remember is that we made the best cars we could under real socialism. What you also have to remember is that we were able to sell those cars in the West,” said Josef Urban (Urban), a production manager at Skoda.[34] In the 1990s, VW made significant efforts towards improving Skoda’s brand image. It introduced new promotions aimed at making Skoda acceptable to customers, and enhancing the positive aspects associated with the Skoda brand. In all the promotions, VW underlined Skoda’s Czech roots. The initial promotional material concentrated in projecting Skoda as a company with a rich history and heritage. For Skoda’s marketing team, changing the company’s image was a major challenge. For years people had been conditioned to associate Skoda with poor quality. The company decided that the best way to tackle the prejudice would be to confront it. Adopting the same approach that VW had taken to popularize the Beetle in the US in the late 1950s and early 1960s, Skoda came up with a series of funny, self-deprecating advertisements. The television advertisements, aired primarily in the UK in the late 1990s, showed people (sometimes employees and at other times visitors) at the Skoda factory having a difficult time trying to equate Skoda with style. They were shown looking at the cars in the factory in some surprise. Later promotions used the tagline “It’s a Skoda. Honest.”[35] Some of the other taglines used were “Skoda. It might earn you more respect than you think” and “It’s a Skoda. Which, for some, is still a problem?”[36] The company also used an aggressive direct marketing campaign in which it sent Skoda badges through the post, and invited potential customers to “live with it” for a while.[37] Analysts said that Skoda’s use of humor to sell cars, while unusual, seemed to have worked. “It’s not the way you normally sell a car; you sell on features, not on humor. But if Skoda had done a typical car ad, talked about its electric windows and whatever, it wouldn’t have (had) the same impact,” said Ray Perry, the director of marketing for the Chartered Institute of Marketing, a British organization.[38] Some analysts also said that displaying a willingness to poke fun at itself showed Skoda in a positive light, and improved customers’ opinions about the company. “What the humor does is own up to this bad image that the brand has, and portrays Skoda as honest and down-to-earth,” said Chris Hirst, a client services director at Fallon, a London-based advertising agency that worked on the Skoda account.[39] Skoda also used celebrity endorsements. In 1998, the company was one of the sponsors of the Czech tennis star Jana Novotna, who won the ladies singles title at Wimbledon that year. In 2000, it also sponsored the Czech ice hockey team, which won the Ice Hockey World Championships.[40] By the end of the 1990s, Skoda’s image had undergone a significant transformation in many of its markets. Skoda was placed at or near the top of the prestigious JD Power & Associates[41] customer satisfaction survey several times in the late 1990s, and the BBC Top Gear magazine said the Fabia “feels like it is in a class above the rest.” [42] By the late 1990s, Skoda had established itself as a mass market car brand in Europe. It was also Central Europe’s biggest car manufacturer, having overtaken the Polish affiliate of Fiat in 1997.[43] Worldwide sales of Skoda cars had improved significantly. In 1991, Skoda sold 172,000 cars. This increased to 385,000 cars in 1999.[44] Skoda’s exports also increased substantially. In 1991, Skoda was exporting 26 percent of its production, to 30 countries. By 2000, exports were 82 percent of production, and Skoda vehicles were sold in 72 countries.[45] The company’s biggest western European market was Germany. The core of the Skoda brand, according to Vratislav Kulhanek, the Chairman of Skoda from 1997 to 2004, was “top positioning in customer values and elegant styling.”[46] Commenting on Skoda’s improvement Urban said, “Things have improved, but what has really improved is that Skoda can expand. We can invest a lot in our future. But nothing is falling from the sky. We earned it by our own hard work.” [47] SKODA IN THE NEW MILLENNIUM In late 1999, the government of the Czech Republic announced that it was ready to divest its remaining 30 percent stake in Skoda. In 2000, VW acquired the 30 percent stake for $320 million.[48] VW however continued to allow Skoda to have an independent identity. By this time, the Skoda brand had its own image, distinct from the VW brand.[49] The Skoda brand’s attributes were enunciated by the company’s three basic values (Refer to Exhibit IV for the Skoda Values). It was estimated that between 1991 and 2000, VW had invested close to €2.6 billion in Skoda.[50] [51] During the same period, Skoda’s revenues had increased from €500 million to €3.7 billion.[52] Production had also increased to 435,000 units by 2000.[53] VW continued with its efforts to improve Skoda’s brand image in the UK and other parts of Western Europe during the early 2000s. The company employed advertising agency Fallon, the London unit of Minneapolis-based Fallon Worldwide, along with another London-based public relations firm, Sputnik Communications, and a direct marketing agency, Archibald Ingall Stretton also of London. Like the 1990s ads, the new ads also showed people in humorous situations in which they assumed that because the cars were so good, they could not possibly be Skodas. These ads coincided with the launch of the Fabia in 1999, and the launch of a retooled version of the Octavia in 2000. At the end of 2000, Skoda announced that it would stop producing its Felicia model by April 2001. The Felicia, though superior to the Skoda cars from the communist period, was not up to the mark in most western car markets, and did not meet the European Union’s environmental standards. At the time of the announcement, Skoda had sold 1.4 million Felicia cars.[54] The Felicia had already been replaced by the Fabia as Skoda’s entry level car. Skoda launched its most luxurious car, the Superb, in 2002. The Superb was an executive car which targeted the same market segment as the BMW 5 series cars and the Mercedes-Benz E Class. In 2002, the Association of Scottish Motoring Writers voted the Superb as the ‘Luxury Car of the Year’. According to analysts, although the Superb still had a long way to go before it could catch up with BMW and Mercedes in terms of sales, the car had considerable potential. They also said that with the launch of the Superb, Skoda had effectively discarded its image as a company that could only make low-end cars. In the early 2000s, Skoda built a handover center in Mlada Boleslav. At the center, Skoda buyers could take possession of their cars directly from the production line and drive them home. Typically this facility was available only for luxury cars like Mercedes Benz and Audi. Skoda’s creation of such a facility was thought to be more evidence of the company’s commitment to create an image of ‘quality’. In the early 2000s VW made further investments in Skoda. The company reportedly invested around $1.7 billion between 2000 and 2003, to set up a new powertrain plant, paint shop and press and welding shops at the Skoda factory. It also set up a parts supply center in the Czech Republic in 2000 to supply parts to world markets. VW used the Skoda brand to enter emerging markets. The Skoda acquisition had given VW a significant market share in Central and Eastern Europe (as of 2006, Skoda had a market share of more than 18 percent in this region)[55], and the company targeted markets like India, China and Russia with the Skoda brand. VW entered India in 2002 with the launch of the Skoda Octavia, which went on to become one of the best selling cars in the super-premium D segment in the country by 2006-2007. This was followed by the launch of the Superb in 2004. Skoda was set to launch the Fabia in the country by the end of 2007. Skoda also set up a plant in Aurangabad in Western India, which was used to assemble the cars. Prior to the launch of Skoda, VW did not have a presence in India, although the company had announced in late 2006, that it planned to launch the Polo in the country by 2009. Skoda also had an important role to play as a VW brand in China. The VW brand was well established in China, where the company’s main product was the Polo. However, in the early 2000s, VW’s market share was being eroded by competitors like General Motors (GM), Toyota and Honda. In 2004, VW announced a new strategy for China, under which it planned, like GM, to introduce multiple brands at different price points. VW announced that it would launch Skoda as its ‘value’ brand in the country (similar to Chevrolet’s position in GM’s brand line-up). In April 2005, Skoda signed a cooperation agreement with Shanghai Volkswagen, the joint venture between VW and China’s Shanghai Automotive Industry Corp., to produce cars in China. C&F Investment, a Shenzen-based company, had been importing Skoda cars into China from 1999. VW entered into talks with C&F in 2006 to buy back the import rights. Skoda also invested in developing the sales and service organization for the Octavia prior to its launch. Skoda announced that the production of the Octavia would commence at the Shanghai-VW plant in mid-2007, followed by the Fabia and Superb Models. Detlef Wittig, who became the Chairman of the Board at Skoda in 2004, said, “We regard China as being one of the strategic markets for the future development of the Skoda brand. With the official presentation of the Octavia model and with the pending production start, a new position for the Skoda brand in China is being created.”[56] Skoda announced that it expected 20 percent of its global sales to come from China by the end of 2009.[57] VW also used the Skoda brand to spearhead its entry into Russia. In mid-2006, VW announced that it would invest €370 million to build an assembly plant near Moscow. The plant was expected to become operational by late 2007, when it would start assembling semi knocked down kits of the Octavia. VW also planned to use the plant to assemble cars like the Passat, and its utility vehicle Touareg by 2008-2009. In 2006, Skoda launched the Roomster, its fourth model line. The Roomster was a five-seat small minivan, which was built on a composite platform borrowed from several other Skoda and VW cars (The front end was based on the small-segment Skoda Fabia, the rear end on the first-generation Octavia, and the center was supplied by the Golf). The Roomster was the first Skoda car to be built using VW’s modular philosophy. Using a modular approach allowed car companies to build several distinct models off the same platform, without any major engineering changes. The Roomster was different from other Skoda cars in that its design was much boldly styled than cars like the Octavia and the Fabia, which were built with classic looks. According to Auto Express, a British magazine, the Roomster was “probably the most innovative car Skoda has produced in its history.”[58] In the first year of its production Skoda produced 25,055 Roomsters. As of 2006, Skoda had a presence in more than 90 countries around the world.[59] The company had three manufacturing/assembly plants in the Czech Republic, in Mlada Boleslav, Vrchlabi and Kvasiny, and one at Aurangabad in India. Partner plants (that were not part of Skoda) were located in Ukraine (Solomonovo), Bosnia and Herzegovina (Sarajevo) and Kazakhstan (Usť Kamenogorsk). THE ROAD AHEAD As of 2006, Skoda was a well established mass market car brand. Analysts said that the main reason behind Skoda’s success was the fact that in most markets, Skoda had the support of the VW brand. Customers reasoned that they were buying a VW car for a lot less (especially as the Skoda cars shared many components with VW). It also helped that Skoda had been able to overcome its quality issues and had built a reputation for good value cars. Skoda’s future plans included developing a leisure vehicle featuring advanced technology. The company showcased a concept car called the Skoda Joyster at the 2006 Auto Salon in Paris. The Joyster was a three door coupe, with several unique design features. The windscreen for instance, was an aeroplane-style wraparound, which went half way around the car. The interior had changeable seat covers, a docking station for a laptop, and a complete CarPC setup with LAN integrated into the dashboard. The Joyster also had an ‘infotainment’ center with a navigation system, radio and a DVD player. The rear hatch door, which opened out downwards had a folding seat, which could be used for picnics. Skoda officials said that the company had long been planning to make a car that would be popular with young urban customers. Jens Manske, the Chief designer for the Joyster project said, “We wanted to create a young person’s car. They are always interested in the latest technology and need practical solutions. The Joyster is very well equipped in that respect.”[60] In the early 2000s, with the traditional car markets of North America, Western Europe and Japan approaching saturation, most major auto manufacturers were looking at new markets to drive growth in the future. French automaker Renault and its Romanian subsidiary Automobile Dacia had launched a low cost car called the Logan in 2004 with a starting price of €5,000. The Logan was a no-frills saloon that had become a major success in Central and Eastern Europe, as well as in parts of Western Europe and Asia. Renault used the Logan to enter emerging markets like Central and Eastern Europe, India, Russia, and Latin America, which placed it in competition with Skoda in these markets. Analysts said that there was also a chance that Renault might use its Dacia subsidiary to produce other cars at lower price points, which could affect Skoda in future. However, as of the early 2000s, Skoda was, in the words of one analyst, “the perfect template of an eastern European firm doing well.”[61] Exhibit I Skoda – Vehicle Production by Model
Source: “Annual Report 2006,” www.skoda-auto.com Skoda – Customer Deliveries by Model
Source: “Annual Report 2006,” www.skoda-auto.com Skoda – Vehicle Customer Deliveries by Region
Source: “Annual Report 2006,” www.skoda-auto.com Exhibit II Skoda – Consolidated Profit and Loss Account (Czk Millions)
Source: “Annual Report 2006,” www.skoda-auto.com Exhibit III Indicative Prices of Skoda Cars as of Mid 2007
Compiled from www.skoda-auto.com Exhibit IV The Three Basic Values of the Skoda Brand
Source: http://www.skoda-auto.com/global/company/perspective
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Suggested Answers
Integrated Case Studies - II (MB3J2): October 2008
| Section A |
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| The impact of political environment on Skoda In short, one would have to search widely to find a viable company today with a political history as turbulent as that of Skoda. It began operations in 1895, making bicycles and motorcycles; in 1905, its first production car, the stately Voiturette, was pushed out of its original workshop. In its early years, the company made luxury cars. Then it survived the collapse of the Austro-Hungarian Empire, the creation and rise of Czechoslovakia, the invasion of Czechoslovakia by Nazi Germany, the 1948 Communist takeover, the 1968 Soviet invasion, the 1989 revolution that overthrew Communism and introduced the free market, the 1993 split of Czechoslovakia into two independent countries (the Czech Republic and Slovakia), and the 2004 entry of the Czech Republic into the European Union. Skoda also survived being swallowed in 1991 by an entirely different type of autocratic regime: Volkswagen. That company, which is partly owned by the provincial government of Lower Saxony, is known for its committee-based management style, its insular culture, its innovative designs, its intimate labor relations, and its long-standing identity as the largest European automaker. The various areas where political environment have impact on a company are: International marketing activities: The political environment in which the firm operates (or plans to operate) will have a significant impact on a company's international marketing activities. The greater the level of involvement in foreign markets, the greater is the need to monitor the political climate of the countries in which the business is conducted. Impact on Skoda · Before the communist era, during world war two, Skoda was allowed to export its product in foreign market and was engaged in marketing activities through out Europe. In its early years, the company made luxury cars. During that time, the company’s cars were known for their elegant looks and technical superiority. · When the soviet-communism ruled Czechoslovakia, the government had nationalized most of the industries of Czechoslovakia. During this period, Skoda exports to Western Europe received a scornful reception. The cars were perceived as smelly, noisy, and only vaguely responsive to their steering wheels and brakes. The brand became a joke, a shorthand for all the inadequacies and failings of the Communist bloc. · After communist era, the new government pulled up the iron curtains of communism from Czechoslovakia and privatized most of the industries in the country. This made the company to go global and increase its marketing activities. Changes in policy and attitude towards foreign business: Changes in government often result in changes in policy and attitude towards foreign business. Bearing in mind that a foreign company operates in a host country at the discretion of the government concerned, the government can either encourage foreign activities by offering attractive opportunities for investment and trade, or discourage its activities by imposing restrictions such as import quotas, etc. Impact on Skoda · During the Second World War (1939-1945), Skoda came under the control of Nazi Germany, and the company’s production facilities were used to support Germany’s war efforts. · The earlier communist government of Czechoslovakia had restricted all foreign businesses by nationalizing the Industry. · But after the Velvet Revolution in Czechoslovakia, the new government put up most of the country’s industries for privatization. The government decided to bring in a strong foreign partner for Skoda to help the company catch up with western automakers. Skoda integrated within Volkswagen’s management structure which followed the established VW formula for success: performance-oriented management, cooperative labor relations, utilitarian marketing and an emphasis on design. Government ownership of economic activities affecting business policies: Nearly all governments today play active roles in their countries' economies. Although evident to a greater or lesser extent in most countries, government ownership of economic activities is still prevalent in the former centrally planned economies, as well as in certain developing countries which lack a sufficiently well developed private sector to support a free market system. Foreign products and investment seen to be vital to the growth and development of the economy often receive favorable treatment from the government in the form of reduced tax, exemption from quotas, etc. On the other hand, products considered by a government to be non-essential, undesirable, or a threat to local industry are frequently subjected to a variety of import restrictions such as quotas and tariffs. Impact on Skoda · Before communist era, Skoda was used by government for military purpose. This was a period when no economic activity was given importance and the company was only used for government motives. Though there were exports in this period but they were of little significance as it were not given any importance by existing government. · After nationalization, all Skoda’s production and business decisions were subject to government discretions and policies, and information and technological exchanges with foreign companies were being restricted. · After communist era, the new government gave up its ownership on the existing industries and opened the doors for privatization and giving right of decision making in the hands of the owner of the companies. As free market policy was adopted, economic activities gain momentum in Czechoslovakia. As Skoda was acquired by Volkswagen , the benefits were two sided, the Western money and know-how met cheap Czechoslovakia labor and market share, Skoda was the first major privatization deal in Eastern Europe. The manner in which the deal was struck was as important as the terms. All the decision makers were in the same room, and because it was the first privatization, the laws could be written as they went along. Attitude towards Foreign Investment: Many nations look upon foreign investment with suspicion. This is true of both developed and developing countries. Developing countries are usually afraid of domination and exploitation by foreign business. In response to national attitudes, these nations’ legislature put a variety of laws and regulations to prescribe the role of foreign investment in their economies. Indirectly, the success of other multinational business in a country indicates a favorable climate. Impact on Skoda Before communist era, as it was a war-like, unstable period, no technological advancement or further investments for the improvement of company was done. The concept of foreign investments was not so popular at those times. · The early communist government of Czechoslovakia has nationalized the company, restricting any kind of foreign collaboration or investments. · The new government after communist era, had opened the gateway for foreign investment after restoring for privatization and seeking a good partner to help company keep pace with technological advancements and go global. Foreign investments from Volkswagen also brought other benefits other than in monetary terms. For example, Slovakians normally would park their vehicles anywhere in the parking. They were parking all over the place, but Czech managers thought it crazy to worry about such a detail when there were production issues to resolve. German decided to bring order to the Skoda plant’s parking lot. The Germans were proved right. First bring order, then comes change. Political risk Political risk is determined differently for different companies, as not all of them will be equally affected by political changes. For example, industries requiring heavy capital investment are generally considered to be more vulnerable to political risk than those requiring less capital investment. Vulnerability stems from the extent of capital invested in the export market, e.g. capital-intensive extracting or energy-related businesses operating in the foreign market are more vulnerable than manufacturing companies. Political risk is of a macro nature when politically inspired environmental changes affect all foreign investment. It is of a micro nature when the environmental changes are intended to affect only selected fields of business activity or foreign firms with specific characteristics. Impact on Skoda · A country like Czechoslovakia has seen a lot of political instability and political jolts for decades. Skoda was badly affected company because of such a political instability. After the communist era, the Skoda was acquired by Volkwagen, a German automaker. There were always a risk of change in government and again change in policies of new government which may be favorable or might be adverse to the benefits of company.
· Volkswagen also had to face the impact of politically instable past on the Skoda. Volkswagen executives found Skoda disoriented, unmotivated, overstaffed, and undercapitalized. After some false starts, with ill-advised proclamations of company values that sounded too much like Communist exhortations, German executives realized that the future of the company lay in its past. “Workers were frustrated with Communist slogans. Volkswagen had to divest Skoda of its immediate past. That meant clearing out managers compromised by Communist Party or secret police connections as well as divesting the utility plants, transport depots, housing, kindergartens, libraries, and sports stadiums that the company had taken care of under Communism. · Volkswagen’s early bets in Eastern Europe were seen as risky — the equivalent of pouring $10 billion into shaky state enterprises in Ukraine today — but the company benefited greatly from them. | ||
| An acquisition, also known as a takeover, is the buying of one company by another. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. Cross-border M&A The rise of globalization has exponentially increased the market for cross border M&A. In 1996 alone there were over 2000 cross border transactions worth a total of approximately $256 billion. This rapid increase has taken many M&A firms by surprise because the majority of them never had to consider acquiring the capabilities or skills required to effectively handle this kind of transaction. However, with the weak dollar in the U.S. and soft economies in a number of countries around the world, we are seeing more cross-border bargain hunting as top companies seek to expand their global footprint and become more agile at creating high-performing businesses and cultures across national boundaries. Even mergers of companies with headquarters in the same country are very much of this type (cross-border Mergers). Motives behind Cross-border M&A: · Economies of scale: This refers to the fact that the combined company can often reduce duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit. · Opportunity for Growth: Given domestic limitations and challenges companies worldwide have undertaken global M&A activities to grow in size by adding manpower, access resources unavailable in domestic regions and facilitate overall expansion. The need for faster growth which arises out of increasing competition has also lead to M&A. · Increased revenue/Increased Market Share: This motive assumes that the company will be absorbing a major competitor and thus increase its power (by capturing increased market share) to set prices. · Cross selling: Cross selling between the two companies can take place by sharing complementary technology platforms. · Synergy: This refers to the fact that the combined company can often reduce duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit. It can better use the complementary resources. · Taxes: A profitable company can buy a loss maker to use the target's tax write-offs. In the United States and many other countries, rules are in place to limit the ability of profitable companies to “shop” for loss making companies, limiting the tax motive of an acquiring company. · Geographical or other diversification: This is designed to smooth the earnings results of a company, which over the long term smoothens the stock price of a company, giving conservative investors more confidence in investing in the company. · Resource transfer: Resources are unevenly distributed across firms (Barney, 1991) and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources. · Vertical integration: Companies acquire part of a supply chain and benefit from the resources. · Increased market share, which can increase market power: In an oligopoly market, increased market share generally allows companies to raise prices. Note that while this may be in the shareholders' interest, it often raises antitrust concerns, and may not be in the public interest. · Diversification: If a firm launches a product that has no relation to its existing portfolio of the products there are lower chances of its success. Thus, in order to diversify, firms would prefer mergers and acquisitions route. · Empire building: Managers have larger companies to manage and hence more power. · Entry into new markets: Setting up businesses from scratch is a tedious process. Benefits derived by Volkswagen through M&A: · Reduced dependence: Volkswagen reduced over dependence on established car markets like U.S and Europe. · Low cost cars: VW also used Skoda’s manufacturing facilities in Czechoslovakia to manufacture low cost cars for western markets. · Competition: Acquisition helped VW in attacking Fiat’s position as the largest car manufacturer in Europe, as well as improving its position in the global market. · Market share: The Skoda acquisition had given VW a significant market share in Central and Eastern Europe. · Emerging markets: VW used the Skoda brand to enter emerging markets the company targeted markets like India, China and Russia. · Labor costs: As the labor costs in Czechoslovakia are very low VW utilized the Skoda plants that are designed to take the advantage of manual labor. · Product length: M&A helped VW to increase its product offerings under different brands. · Bargaining power: The bargaining power of VW increased and the suppliers set up their own plants in the factory complex to build a range of components which helped in streamlining the processes and control costs. Benefits derived by Skoda through M&A: · Capable partner: The Czechoslovakian government’s intention to bring in a strong foreign partner for Skoda to help the company catch up with Western automakers has been fulfilled. · Components sharing: As the Skoda cars shared many components with VW, it had overcome its quality issues and had built a reputation for good value cars. · Image: Skoda’s image had undergone a significant transformation in many of its markets. It was placed at or near the top of the prestigious JD Power & Associates. The M&A helped Skoda to reestablish its image as a best known company in Czech Republic. After Skoda becoming part of Volkswagen its image was transformed from unappealing, poor performer to high quality, sturdy car. · Mass market: Skoda had established as a mass market car brand in Europe. World wide sales of Skoda cars had improved significantly. · Cultural change: Skoda, which had been dominated by Socialistic policies and systems transformed into a customer-oriented, market focused organization. · Technology transfer: The production in the Skoda plants increased with the introduction of new technology. VW made capital investments exceeding one billion dollars on upgrading Skoda’s factory. · Sick company to profit making company: In 2006 Skoda posted a revenue increase of 8.7 percent and increase in net profits of 40.2 percent over the past year. · Separate brand identity: VW created distinct brand personalities for each of its brands; therefore Skoda’s brand was managed separately. · Knowledge transfer: VW chose to develop the skills and competencies of the employees at Skoda. Knowledge transfer and competency development at Skoda was done through coaching, joint project work. | ||
| People management plays a critical role in Merger and Acquisition (M&A). People issues like staffing decision, organizational design, etc., are most sensitive issues in case of M&A negotiations. The ability to succeed in a merger depends entirely on the people who are driving the business - whether they have creativity, capacity to innovate and ability to execute, and more importantly, whether they can do these things collaboratively. To ease the merger transition and make sure the pieces fit together as seamlessly as possible; the HR should take the initiatives in management, recruitment, structure, retention, and managing cultural change. In a merger, the employees should be put in a position to see easily that there was value in their daily work lives. To achieve this, the company’s HR executives require acting as coaches and collaboration consultants. The most critical and challenging HR issues to overcome during a cross-border M&A are: Dovetailing employees: · The focus of employees shifts from productive work to issues related to interpersonal conflicts, layoffs, career growth with the Acquirer Company, compensation, etc. · Employees’ are concerned with how well they will get acquainted with the new colleagues. · Job security is one of the issues in an acquisition bid as it often involves downsizing · Changes in the well defined career paths of employees, as defined by the acquired company. Cultural Integration: The cultural issues that arise on account of the difference in the work culture in the two organizations pose a serious challenge in the integration process. · Each company has its own set of values which may conflict with those of the acquired company. · Culture shock– The employees may not be able to accommodate themselves in a new culture and thus may lead to cultural shock. · Inability to adapt to a new culture increases stress levels among employees and results in low job performance. The need therefore is to follow a structured approach in dealing with cultural differences. · Few organizations may have an open culture, whereas in some other organizations the culture may be a closed one. · As the transition begins, the two cultures should combine to create a unique culture. Employee communication: Whenever there is news of any merger in an organization, anxiety prevails among the employees. · This atmosphere of apprehensions leads to company wide rumors. · The employees lose faith in their organization and tend to become demotivated. · Attrition – Most mergers bring with them downsizing, reallocation of work, change in work profiles, changes in career paths, etc. · Adaptability –Employees face high levels of stress, if they fail to adapt to the new culture and thus end up leaving the organization. · Language barriers – In a cross-border M&A, the one issue that is often encountered is lack of understanding of the language. Differences in organizational structures: · Difference between the organizational structures of the companies results in reorganization of the hierarchy levels. · Since the organizational structures are different, differences in compensation packages and designations can take place. The company has to maintain employees at equal levels. Unable to do so, employees may feel dissatisfied. The transition of Skoda from a state-owned company to a market-oriented one was expected to be more challenging with the workforce coming from two distinct cultural backgrounds, which was effectively dealt by VW. Approach of Volkswagen in dealing with the HR issues: Employees’ motivation: It was important for VW to make the employees of Skoda feel motivated. · It ensured the employees feel motivated by focusing on the company’s heritage as one of the oldest car makers in the world encouraging them to take pride in being a part of the company. · It showcased the major milestones in Skoda’s history with an idea to create a sense of identification and pride in its workers. · VW identified the engineering competence as well as a high level of professionalism of the Skoda’s employees and choose to develop their skills and competencies, which was expected to be more beneficial in the long run. Initiatives to identify the inadequacies: · VW also identified the lack of basic economic knowledge and experience, management skills, initiative and responsibility and worked on improving them among the employees. · VW realized Skoda’s employees’ attitude of shying away from expressing their opinions or taking decisions and that they needed to change their work philosophy. Nurturing and collaborating strategy: · It avoided bringing in drastic HR changes. · In managing the HR issues, VW adopted Knowledge transfer and competency development at Skoda effectively managed through coaching, joint project work and ‘tandem management’. Joint project work Responsibility sharing – In joint project work, all the key tasks were handled by bi-cultural teams of people from VW as well as Skoda making the employees feel being a part of the key tasks. Each team was led by a manager from Skoda, who had the overall responsibility for the project results, enabling that the manager has an idea of the cultural issues of the teams. Coaching and assistance – Coaching and assistance, which form major issues in a cross-border acquisition, were dealt with by VW by providing assistance needed to the project teams from its team of managers and provision of coaching for the successful completion of the projects. Tandem management – Key management positions at Skoda were shared by one manager from VW and another local manager for a limited period of time as an initiative to develop the professional and managerial skills of the local partner and helping him manage his department independently in future. In an attempt to minimize potential problems, only those German employees who were comfortable in dealing with the cultural differences were posted at Skoda. Management development – Skoda had an apprentice school and an ‘education department’ where management training was provided to a select few employees which was developed well. Managing the language barriers – To overcome language barriers, VW set up a language center near the Skoda factory. All the Czech employees had to learn to speak either German or English to improve their chances of advancement at the company. Managing the redundancies – VW chose not to lay off employees, but instead gave them an option of taking up jobs in some other part of VW. Managing the costs – VW divested itself of Skoda’s utility depots, housing, primary schools, libraries and sports stadiums, which the company had maintained as a state-owned entity, in an effort to keep costs in check. Overall, VW’s collaborative approach was considered a key factor in making Skoda’s transformation a smooth process. Production and Quality Improvement Skoda’s production methods had become outdated after several decades due to lack of technological inputs. The company had no well-defined quality management systems. Skoda Production System – VW implemented Skoda Production System at the company that tracked parameters like quality, costs, team cooperation and absenteeism in the factory and made the system more transparent by displaying the information on the shop floor. Rewards – The teams with the best results on the parameters of the Skoda Production System were rewarded periodically. Benchmarking – The teams were given an opportunity to benchmark Skoda’s production practices against those of VW by sending them on a trip to one of VW’s other plants. Improvement across the supply chain – In an attempt to make improvements across the supply chain, VW’s supplier grading system was implemented at Skoda. Supplier Grading System – Due to a meager one percent of Skoda’s suppliers earning the highest ‘A’ grade, Skoda and VW personnel worked closely with the suppliers to ensure that the quality and reliability of the components they supplied improved. Supplier motivation – As part of their supplier motivation efforts, the suppliers were encouraged to participate in the quality improvement initiatives by promising them an opportunity to supply not only to Skoda, but to the other VW plants as well. Technological collaborations – Skoda’s Octavia model incorporated some of the best technologies from VW. Division of work – The division of work among small teams consisting of 8 to 12 members enabled the employees feel more responsible to work and enhanced the quality of their work. Just - in -Time principles – Just-in-time principles were adopted in order to reduce any wastage due to maintenance of high inventory. Transparency – Formation of teams made the system more transparent to identify any faulty work and attempts to conceal such work could lead to dismissal. Stress management – To promote flexibility and reduce the stress on the team members in times of adversity, all the team members were cross-trained on different jobs. Information coordination – All the suppliers were linked to the central production control computer system, so that they knew the production sequence, and manufactured to suit the requirements of the moment. This helped streamline processes and control costs. Effective complementing of the resources – Lower cost of labor in Czechoslovakia was effectively utilized by making maximum use of manual labor at Skoda’s plants. Automation was used only for tasks where precision was critical to quality. Flexible production process – The Octavia plant was originally designed to produce between 300 and 350 cars per day, but was actually producing around 500 cars per day by the late 1990s. The plant was also made flexible enough to produce any other Skoda model if the demand for a model suddenly increased. Safety features – Several active safety features played an important role in changing Skoda’s image in Western Europe. Advancements – Skoda made an effort to include the latest developments in terms of design, technology, safety and environmental protection in making the Octavia. | ||
| Brand: A name, term, phrase, design, symbol, or any combination of these chosen by an individual or organization to distinguish a product/service from competing products/services. Branding: Branding is perhaps the most important facet of any business--beyond product, distribution, pricing, or location. A company's brand is its definition in the world, the name that identifies it to itself and the marketplace. The function and art of branding is a major contributor to the success of a product or service sold by the company that markets it. Brand management should aim to build into customers’ minds a set of perceptions and attitudes relating to an offering, leading to positive buying behavior. To achieve this goal, managers must know a great deal about their customer base. The power of a brand is measured by its effect on buyers. A powerful brand will cause its customer base to either defer or refuse to purchase if the brand is NOT available. Some brands have reached a level of mass acceptance where they are used as action verbs, such as “Xeroxing” a document instead of copying it and “Fedexing” a package rather than mailing or posting it. One brand’s identity is so strong that when we hear Aspirin we immediately think of Bayer. Branding is comprised of two elements— external and internal to the customer. Internal brand elements include the following: Personality, which relates to customers’ description of the brand; Culture, or the social context within which a brand is perceived, as in the case of Mercedes’ “engineering excellence”; and, Self- Image, which encompasses what we feel the brand says about us, for example, the self-image of driving a Jaguar versus a Ford. External elements include the following: · Physique, or the physical characteristics of the brand that makes customers want to know what it does; · Reflection, which relates to the target user or customer being nurtured; and, · Relationship, which says the customer must have an identifying relationship with the brand itself. Branding is an integral part of the business building process. Large corporations spend hundreds of millions of dollars building their brands, and there’s a reason: · Brands enable customers to remember a companies product-service. · Brands build customer loyalty and lead to repeat purchases. · Brands make it easier for current clients or customers to refer to others. · Brands send a message as to what your customers can expect. · Brands convey an emotion. · Brands add value. Brand loyalty is an integral part of building a brand, as consumers usually have a choice of products in the same market segment, and so a successful company will come up with a way to keep consumers re-buying their product or coming back to their location rather than going to a competitor. IMAGE-BUILDING Of SKODA The launch of new and better quality cars was supported by an extensive image-building exercise across Europe, and especially in the UK, where Skoda had been the subject of many jokes over the years. In the 1990s, VW made significant efforts towards improving Skoda’s brand image. It introduced new promotions aimed at making Skoda acceptable to customers, and enhancing the positive aspects associated with the Skoda brand. Projecting Skoda as a company with a rich history and heritage: · In all the promotions, VW underlined Skoda’s Czech roots. The initial promotional material concentrated in projecting Skoda as a company with a rich history and heritage. · For Skoda’s marketing team, changing the company’s image was a major challenge. For years people had been conditioned to associate Skoda with poor quality. · The company decided that the best way to tackle the prejudice would be to confront it. Using humor in advertisements: · Adopting the same approach that VW had taken to popularize the Beetle in the US in the late 1950s and early 1960s, Skoda came up with a series of funny, self-deprecating advertisements. · The television advertisements, aired primarily in the UK in the late 1990s, showed people (sometimes employees and at other times visitors) at the Skoda factory having a difficult time trying to equate Skoda with style. · They were shown looking at the cars in the factory in some surprise. Later promotions used the tagline “It’s a Skoda. Honest.” Some of the other taglines used were “Skoda. It might earn you more respect than you think” and “It’s a Skoda. Which, for some, is still a problem?” · Displaying a willingness to poke fun at itself showed Skoda in a positive light, and improved customers’ opinions about the company. Direct marketing campaign: · The company also used an aggressive direct marketing campaign in which it sent Skoda badges through the post, and invited potential customers to “live with it” for a while. Celebrity endorsements: · Skoda also used celebrity endorsements. In 1998, the company was one of the sponsors of the Czech tennis star Jana Novotna, who won the ladies singles title at Wimbledon that year. · In 2000, it sponsored the Czech ice hockey team, which won the Ice Hockey World Championships. Transformation: · By the end of the 1990s, Skoda’s image had undergone a significant transformation in many of its markets. · Skoda was placed at or near the top of the prestigious JD Power & Associates customer satisfaction survey several times in the late 1990s, and the BBC Top Gear magazine said the Fabia “feels like it is in a class above the rest.” Mass market brand image: · By the late 1990s, Skoda had established itself as a mass market car brand in Europe. · It was also Central Europe’s biggest car manufacturer, having overtaken the Polish affiliate of Fiat in 1997. Worldwide sales of Skoda cars had improved significantly. · In 1991, Skoda sold 172,000 cars. This increased to 385,000 cars in 1999. Skoda’s exports also increased substantially. · In 1991, Skoda was exporting 26 percent of its production, to 30 countries. By 2000, exports were 82 percent of production, and Skoda vehicles were sold in 72 countries. · The company’s biggest western European market was Germany. Brand attributes: · In 2000, VW continued to allow Skoda to have an independent identity. By this time, the Skoda brand had its own image, distinct from the VW brand. · The Skoda brand’s attributes were enunciated by the company’s three basic values: · Intelligence – We continuously seek innovative technical solutions and new ways in which to care for and approach the customers that are most important for us. Our conduct toward the customers is aboveboard and we respect their desires and needs. · Attractiveness – We develop automobiles that are aesthetically and technically of high standard and always constitute an attractive offer for our customers not only in terms of design or technical parameters, but also the wide range of offered services. · Dedication – We are following [in] the steps of [the] founders [of] our company Messrs Laurin and Klement. We are enthusiastically working on the further development of our vehicles; we identify ourselves with our products. Employing agencies: · VW continued with its efforts to improve Skoda’s brand image in the UK and other parts of Western Europe during the early 2000s. · The company employed advertising agency Fallon, the London unit of Minneapolis-based Fallon Worldwide, along with another London-based public relations firm, Sputnik Communications, and a direct marketing agency, Archibald Ingall Stretton also of London. · Like the 1990s ads, the new ads also showed people in humorous situations in which they assumed that because the cars were so good, they could not possibly be Skodas. These ads coincided with the launch of the Fabia in 1999, and the launch of a retooled version of the Octavia in 2000. Purchase of cars: · In the early 2000s, Skoda built a handover center in Mlada Boleslav. At the center, Skoda buyers could take possession of their cars directly from the production line and drive them home. · Typically this facility was available only for luxury cars like Mercedes Benz and Audi. · Skoda’s creation of such a facility was thought to be more evidence of the company’s commitment to create an image of ‘quality’. | ||
| Multiple Branding Strategy: Individual branding, also called multi branding, is the marketing strategy of giving each product in a product portfolio its own unique brand name. Marketers who use a multi brand strategy acquire greater market share than they could with fewer brands, even though one of their brands may somewhat cannibalize another. Multiple brands also enable marketers to acquire more shelf space and to respond to consumer demand for something new. The key is to recognize the optimal number of brands that will deliver more benefit than it costs. There are diminishing returns as the number of brands increase. Cost efficiencies due to economies of scale decrease as production volumes are spread across a greater number of brands, and brand cannibalization increases. Multi-branding is by far the most popular brand strategy, and is used by a very great number of companies and in all types of business. Multi-branding can, in fact, be considered as one of the most effective brand strategies, but it requires professional skills and ongoing management and marketing focus from companies. Branding strategies are always highly important for companies, as brands are regarded as the ultimate business driver. Brands today are acknowledged as the driver for better, more sustainable results and as an internal as well as external source of inspiration, which creates both high recognition and relationships. Advantages: · As a mono brand can’t cover all segments, multibranding is useful to cover different segments that look for different features. · Markets are strongly fragmented. As a market matures there is a need for differentiation and it becomes necessary to offer a wide range as the market is becoming segmented. · Now-a-days people stick to their tastes and they need tailor made products so by using multi branding the manufacturer can meet their needs. · Multiple brands offer a tactical flexibility which also enables one to limit a competitor’s field of extension. · A multi brand policy can stop any new competitors entering a market. A strong entry barrier to a market can be created by offering a complete range to retailers, with a brand name for each sector of the market. · Using multibranding, marketer can target all price segments. The products can be specifically meeting the price desired by the customer. A brand portfolio makes it possible to cover the different price sectors without affecting the reputation of each brand. · Overall company’s financial risk can be minimized. · The brand portfolio risk also can be minimized. The image of one product is not associated with other products, that the company markets. If the product fails, the effect on other products is minimized. · The firm can distance products from other offerings, it markets. All the products can be positioned clearly without any confusion to the customers. · Multibranding can accommodate variety. Disadvantages: · Unless the positioning and targeting are distinct, the brands tend to cannibalize each other. Even though the company may position the brands differently, it has to be perceived by the customers as distinct from the other brands. · A multi brand portfolio only makes sense if, in the long term, each brand has its own territory. · Certain innovations have to go with certain brands only. Distributing an innovation to all brands minimizes the ability to justify a premium price for the top innovative brand. · Use when each brand is intended for a different market segment. · Has become more complex in the global marketplace. · There will be less customer loyalty. · One particular danger threatens all companies which opt for a multi-brand strategy that of over-exposing the commonalities between brands. They may end up generating a common product but with several different brand names. · Cost of advertising and promotion is higher with multi branding. The volume of mass communication in every sector is soaring; it is becoming more and more expensive to successfully get one particular message across. The direct consequence is that only a few brands in a portfolio will be promoted, to gain a significant market share. Multi branding by VW: VW had four distinct vehicle brands – Audi, VW, SEAT and Skoda. Each brand had its own distinct brand identity, which VW made an effort to maintain. The multi-branding strategy of VW was justified because of the following reasons: · All the four brands already had a good brand image in the market. So there was no loss for VW in maintaining their identity individually. · VW will be having more scope to target different markets separately with these brands, where they are strong. · All the brands were catering to different segment, so by individual branding they can continue offering products to the individual target segments. · Focus will be more on individual brands and their respective offerings. · All brands were having strengths in different areas, like Audi in technology and Skoda and SEAT strengths in low end segment, and Volkswagen associated with low-end, economical cars, had moved up-market and was associated with high quality and engineering superiority. · VW can develop the individual brands and enter into other segments of the market. For example, Skoda though was considered to be a low end car brand, it can be developed in such a way that it can cater to other segments like, high end too attracting more business. · VW can increase its overall market share by introducing more brands in the market. · These brands will compete with not only their own brands but also with the brands of other companies. For example Skoda will not only pose competition for SEAT but also reduce the dominance of Feat as a largest car manufacturer. · VW can give more choice for the customers to choose among the brands. For example a customer who wants to by a high end car can choose from AUDI, VW or from Skoda. · VW can use the same components or parts in different cars and sell them under different brands. For example, VW has used same engine in both VW and Skoda models. Otherwise can say that, sell same cars with slight difference under different brands. · VW will not have any affect by the poor performance or bad image of any particular brand on its overall image. For example, Skoda at that time was having a bad image in most of the parts of the Europe. · VW will build entry barriers for new companies wanting to enter the market. As it will be covering all most all the segments in the market making it tough for the new entrants. · Positioning of the brands and their respective products will be a lot easier, as confusion between the products will be reduced. | ||
*The above case is prepared only for the purpose of examination and not to illustrate effective or ineffective performance of the company. The case contains factual information adapted to and combined with other information to enable analysis of the given topics.
[1] “Central Europe’s Best Companies,” The Economist, June 30, 1997.
[2] Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000.
[3] Luca Ciferri, “New Flagship Model will Complete Skoda Rebirth,” Automotive News Europe, July 2, 2001.
[4] “Slav Motown,” The Economist, January 6, 2001.
[5] The ‘Iron Curtain’ was the boundary which symbolically, ideologically, and physically divided Europe into two separate areas from the end of World War II until the end of the Cold War, roughly from 1945 to 1991. The countries that were east of the iron curtain (most of central Europe and all of Eastern Europe) were under the political influence of the erstwhile Soviet Union, and followed Communism. (www.wikipedia.com).
[6] The Cold War was the period of conflict, tension and competition between the United States and the Soviet Union and their respective allies from the mid-1940s until the early 1990s.
[7] Czechoslovakia declared its independence from the Habsburg Empire of Austria- Hungary in 1918. It was further split into the countries of Czech Republic and Slovakia in 1993.
[8] Skoda was a Czech surname, which became the name of the company. Ironically, it also means ‘pity’, ‘shame’ or ‘damage’ in Czech.
[9] The Great Depression was a time of economic downturn, which started after the stock market crash in the US on October 29, 1929, known as Black Tuesday. It began in the United States and quickly spread to Europe and every part of the world, with devastating effects in both the industrialized countries and those which exported raw materials. (www.wikipedia.com).
[10] http://www.skoda-steel.net
[11] The Velvet Revolution (November-December 1989) refers to the non-violent revolution in Czechoslovakia that saw the overthrow of the Marxist-Leninist government there (www.wikipedia.com).
[12] Jonathan Ledgard, “Skoda Leaps to Market,” Strategy + Business, Fall 2005.
[13] Porsche was the founder of Porsche AG, a German sports car company that was set up in 1931. As of 2006, Porsche held a 20 percent stake in VW.
[14] KdF stood for Kraft durch Freude, or “Strength through Joy”. It was also the name of a large state-controlled leisure organization in Nazi Germany.
[15] The Allied Forces of the Second World War were the USSR, the USA and the UK, and their allies. They were officially opposed to the Axis Powers which were formed by Nazi Germany, Italy and Japan.
[16] SEAT stood for Sociedad Española de Automóviles de Turismo (Spanish Corporation of Touring Cars). The company originally produced FIAT cars under license. VW entered into a licensing agreement with the company in the early 1980s, becoming a major shareholder in 1986, and acquiring the full ownership in 1990.
[17] The company made an effort to revive its fortunes in the US market by introducing what it called the New Beetle in 1998. The car was a success in the US, although the sales in Europe were limited.
[18] Jonathan Ledgard, “Skoda Leaps to Market,” Strategy + Business, Fall 2005.
[19] As of 2006, VW was the fifth largest car manufacturer in the world, behind General Motors, Toyota, Ford, and the Renault-Nissan Alliance.
[20] Jonathan Ledgard, “Skoda Leaps to Market,” Strategy + Business, Fall 2005.
[21] Milorad Ajder, “Shall We Dance?” www.brandchannel.com (Accessed on June 2, 2007).
[22] Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000.
[23] In a fractal manufacturing system, the company or factory is composed of smaller independent components or fractal entities that work together as a coherent whole. The main features of fractal manufacturing are: the independence of each fractal entity to choose its own methods of problem solving including self-optimisation that takes care of process improvements; flexibility of the fractal entities to adapt to influences from the environment without any formal hindrance of organizational structure; and a similarity of goals among the fractal entities to conform to the objectives in each unit. (Adapted from http://www.fractal.org/Fractal-Research-and-Products/ Fractal-factory.pdf)
[24] Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000.
[25] Peter Robinson, “Skoda’s on a Whirl,” Auto World, September 1998.
[26] Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000.
[27] Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000.
[28] “Slav Motown,” Economist, January 6, 2001.
[29] An automobile platform is a shared set of components common to a number of different automobiles. It is sometimes referred to as vehicle architecture. It usually includes the chassis and key dimensions, the steering mechanism, the suspension systems, and the choice and placement of engines and other powertrain components.
[30] Edmund Chew, “Fabia Supermini is ‘New to Last Screw’,” Automotive News, November 22, 1999.
[31] Annual Report 2000. www.skoda-auto.com
[32] William Underhill, “How Many Germans Does It Take to Make a Czech Car?” Newsweek International, September, 2001.
[33] http://www.marketingpower.com/content16161S1.php, (Accessed on June 4, 2007).
[34] Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000.
[35] Lucy Aitken “Skoda’s Image gets Clearer,” The Independent (London), March 29, 2005.
[36] Lucy Aitken “Skoda’s Image gets Clearer,” The Independent (London), March 29, 2005.
[37] Lucy Aitken “Skoda’s Image gets Clearer,” The Independent (London), March 29, 2005.
[38] http://www.marketingpower.com/content16161S1.php
[39] http://www.marketingpower.com/content16161S1.php
[40] “Slav Motown,” Economist, January 6, 2001
[41] JD Power & Associates was a global marketing information services firm founded in 1968. The firm conducted independent and unbiased surveys of customer satisfaction, product quality, and buyer behavior for a variety of industries. It was best known for its customer satisfaction research on new-car quality and long-term dependability. (www.wikipedia.com)
[42] Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000.
[43] “Slav Motown,” Economist, January 6, 2001
[44] Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000.
[45] Luca Ciferri, “New Flagship Model will Complete Skoda Rebirth,” Automotive News Europe, July 2, 2001.
[46] Luca Ciferri, “New Flagship Model will Complete Skoda Rebirth,” Automotive News Europe, July 2, 2001.
[47] Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000.
[48] “Slav Motown,” The Economist, January 6, 2001
[49] As of late 2006, the VW Company’s brands were organized under two groups – the Audi group, consisting of the Audi, SEAT and Lamborghini brands, and the VW group consisting of the VW, Skoda, Bentley and Bugatti brands. The VW Group acquired the Lamborghini, Bentley and Bugatti brands in 1998. (From www.theautochannel.com/ news/2006/11/15/028774.html and www.wikipedia.com).
[50] Luca Ciferri, “New Flagship Model will Complete Skoda Rebirth,” Automotive News Europe, July 2, 2001.
[51] As of the end of December 2000, One US Dollar (US$1) was equal to approximately €1.06. (http://www.xe.com)
[52] Luca Ciferri, “New Flagship Model will Complete Skoda Rebirth,” Automotive News Europe, July 2, 2001.
[53] Luca Ciferri, “New Flagship Model will Complete Skoda Rebirth,” Automotive News Europe, July 2, 2001.
[54] “Slav Motown,” The Economist, January 6, 2001
[55] Annual Report 2006, www.skoda-auto.com
[56] “China 2006: Skoda Octavia designed for China,” http://auto.moldova.org, (Accessed on June 6, 2007).
[57] Jason Stein, “Skoda Set for Growth in China,” Automotive News Europe, November 27, 2006.
[58] Lyle Frink, “Skoda Roomster Showcases Modular Car Building,” Automotive News Europe, April 9, 2006.
[59] Annual Report 2006,
[60] Marc Mustard, “Skoda Joyster,” Auto Express, October 4, 2006.
[61] Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000.
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