SKODA

A Strategic Management Case Study Tony Gauvin, UMFK, 2009

2 How do you double the value of a Skoda?

Fill the gas tank What do you call a Skoda convertible? A dumpster What do you call a Skoda with twin exhaust pipes? A wheelbarrow.

Why does a Skoda have a double rear window heater ?

To keep your hands warm, while you push it. A guy goes into his local garage and asks "Do you have a windshield wiper for my Skoda??? "Sounds like a fair swap" replied the man in the garage.
2009, Tony Gauvin, UMFK 5/26/2012

http://web.ukonline.co.uk/k.frost/czech/skoda_jokes.html

Overview
Company Overview
A Brief history of Skoda Existing Mission and Vision Existing Objectives and Strategies Current Issues & Challenges

Strategy Formulation
SWOT Matrix Porter Generic Strgefics Space Matrix IE Matrix Grand Strategy Matrix Matrix Analysis QSPM Matrix

New Mission and Vision External Assessment

Industry analysis Porters Five Forces Opportunities and threats

Strategic Plan for the Future

Implementation Issues Evaluation
Objectives Strategies

Internal Assessment
Strengths and weaknesses Financial Condition IFE Matrix

EFE Matrix

Skoda 2008 Update

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History
1895 Vaclav Laurin and Vaclav Klemnet form bicycle company 1891 laurin and Kelemnt start making motorcycles 1905 The first car, called the Voiturette A, leaves the factory gates and thanks to its quality and attractive appearance soon gains a stable position in the emerging international automobile markets. 1907 Laurin & Klement set up a joint-stock company that goes on to export cars to markets the world over. 1925 The Laurin & Klement automobile factory merges with the koda machinery manufacturing company in Plze. 19391945 During the war years, the factory focuses on producing materials for the military. Just a few days before the war ends, the factory is bombed and sustains considerable damage. The enterprise is nationalized in the autumn of 1945. 1946 The enterprises reconstruction takes place under a new name, AZNP (Automobilov zvody, nrodn podnik Automotive Plants, National Enterprise). 1989 Czech republic formed 1991 April 16 marks the beginning of a new chapter in the Companys history, when it is acquired by the strategic partner Volkswagen. koda becomes the Volkswagen Groups fourth brand. 1996 Production commences of another milestone car model for the Company the koda Octavia.
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Skoda History

http://www.skoda-auto.com/moss/100/home/

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Skoda key facts

Oldest Car Company in Central Europe Largest employer in Czech Republic Produced over half a million cars in 2006 & 630 million in 2007
Just behind Volkswagen and Audi in VAG

Skoda in the Czech language means a shame Czech Republic largest exporter

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Skoda Mission Statement

Three basic values of the Skoda brand
Intelligence We continuously seek technical solutions and new ways in which to care for and approach the customers that are the most important for us. Our conduct towards the customers is aboveboard, and we respect their desires and needs Attractivesness We develop automobiles that are aesthetically and technically of high standard and always constitute and 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 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 out product
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Current Issues and Challenges

Challenges

Companies in the former Soviet Union had not been forced to produce quality goods that can compete in world markets Employees in nationalized companies have been assured of lifetime employment, so they are not motivated to produce a high-quality product Banks are being privatized very slowly so infusions of capital normally Must come from outside the country. In addition, because all of the companies had been owned by the Soviets, there was no private money available to purchase companies offered by the state for sale Most companies have old and obsolete equipment that would take years to replace There is an insufficient infrastructure because the Soviets have never put money into such public goods; in their satellites (occupied states) Lack of development of managerial skills.
Does Skoda become a Global brand or a European Brand ?
Currently sold in Europe (>95%) and Asia (<5%)

Issues
Where to position Skoda
Within Volkswagens portfolio As a European only brand As a global brand

Where to manufacture Sk0das?

Czechoslovakia or seek cheaper labor (China?)
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New Vision

A world leader in high-quality, value-priced automobiles for the 21st century consumer s

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New Mission
Skoda Auto mission is to anticipate consumer needs and provide safe, quality, reliable, and innovative automotive products and services to consumers around the world (1, 2, 3). Meeting and exceeding customers expectations for exceptional quality, cutting-edge technology, and superior customer service will enable us to maximize returns to our shareholders. (4, 5). We are passionately committed to ensure we do the right thing for our customers, our employees, our environment, and our society (6, 9). Skoda is committed to leading all automotive firms in quality and safety in Europe and abroad. Along with our commitment to saving the environment, we can continue to add to our proud heritage (7, 8).
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Global Industry Analysis

5.2% growth in 2006 $1,176.5 Billion 65.7 million units sold in 2006 66.5% of sales are cars US accounts for 38.4 % of global market share Europe accounts for 29.3% Industry leader is GM with 17.3% Market Share CAGR from 2002 t0 2006 was 4.7% Projected CAGR of 4.5% in period from 20062011
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Porter five forces models

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Five Forces Analysis

Threat of Entry Because of the increased buying power of consumers in former Soviet Union countries and in emerging countries, many firms may see this as an opportunity to move plants to Eastern Europe to reduce their costs and compete in that market. In addition, for the first time in 50 years, Eastern European consumers have access to a greater variety of cars than they have had. Both of these factors should heat up the competitive environment.

Bargaining Power of Buyers

With increased competition worldwide in the automobile manufacturing industry, consumers have many more choices from which to select when purchasing a car. In addition, the movement to a global industry from one which had been formerly a monopoly or oligopoly within a country or region, has caused intense price competition to arise. Therefore, this industry could certainly be classified as a buyersmarket today. In less developed countries, buyers are being wooed with lower prices; and in more developed countries, they are being wooed with product differentiation.

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Five Forces Analysis

Bargaining Power of Suppliers With a movement toward just-in-time inventory systems worldwide in the automobile manufacturing industry, there has been greater pressure upon suppliers to move their plants to locations contiguous to the automobile plants they are supplying. Some automobile companies have also begun supplying their own parts and thereby eliminating many of the suppliers they formerly used. Therefore, the bargaining power of suppliers has been greatly weakened. Pressure from Substitute Products There appears to be very little pressure from substitute products in this market because automobiles have actually become the substitute product for other forms of transportation such as bicycles in developing countries. The only true threat of a substitute product in more developed, heavily populated countries is public transportation. This supplies a cheaper, faster means of transportation into large cities where parking is at a premium. This is often a product of choice in many European countries where public transportation has been greatly refined. Rivalry Among Existing Competitors The global automobile manufacturing industry is one of the most competitive in the world. In addition, new car companies are emerging in the developing countries of Asia and Central and Eastern Europe. These companies are all trying to reduce costs by moving to low-cost countries, so Skodas location in such a country will not be a competitive advantage for long.

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Opportunities
1. Growing automobile market in Eastern Europe, China, Africa, India and other emerging economies. 2. Possibility of moving manufacturing and assembly plants to low-cost countries. 3. First mover advantage to those companies using alternative fuels 4. American Markets favor Europeanmanufactured cars
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Threats
1.
2. 3. 4.

5.

Movement of the global automobile manufacturing industry to a monopolistically-competitive structure with increased competition. Costliness of non-renewable energy sources. Higher wage rates in some countries are making it difficult for automobile manufacturers to remain competitive. Decline in sales in Eastern European countries that have become a part of the European Union because of the increased availability of used vehicles from other European countries. There is an insufficient infrastructure because the Soviets have never put money into such public goods; in their satellites (occupied states)

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EFE
External Factor Evaluation Matrix
Key External Factors Opportunities Growing automobile market in Eastern Europe, China, Africa, India and other emerging economies. Possibility of moving manufacturing and assembly plants to low-cost countries. First mover advantage to those companies using alternative fuels American Markets favor European-manufactured cars Threats Movement of the global automobile manufacturing industry to a monopolisticallycompetitive structure with increased competition. Costliness of non-renewable energy sources. Higher wage rates in some countries are making it difficult for automobile manufacturers to remain competitive. Decline in sales in Eastern European countries that have become a part of the European Union because of the increased availability of used vehicles from other European countries. There is an insufficient infrastructure because the Soviets have never put money into such public goods; in their satellites (occupied states) Totals Weights 0.0 to 1.0 Rating 1 to 4 Weighted Score

0.15 0.1 0.15 0.13

4 4 2 2

0.6 0.4 0.3 0.26 0 0.24 0.22 0.6

0.08 0.11 0.15

3 2 4

0.08

0.24

0.05

0.1

1
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Financial Data
1 USD = 0.6790 Euro = 18.11 CZK Dec , 31, 2007

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Financial Data

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Financial Data

1 USD = 0.6790 Euro = 18.11 CZK Dec , 31, 2007

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Financial Ratios Industry Comparison

D&B Top Quartile Current Ratio Quick ratio Liabilities To equity Return on Sales Return on Assets 2.2 1.0 103.3 D&B median 1.5 0.6 167.2 48.1 1.8 4.2 D&B Bottom Quartile 1.1 0.3 345.4 78.0 0.4 0.7 1.478 1.124 1.804 0.516 0.054 0.105

Assets to sales 27.6 5.1 9.5

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Volkswagen Financial Data

KODA BRAND

Deliveries (thousand units) Vehicle sales Production Sales revenue ( million) Operating profit as % of sales revenue

2007 630 620 661 8,004 712 8.9

2006 550 562 556 7,186 515 7.2

+ + + + +

% 14.6 10.2 18.8 11.4 38.4

1 USD = 0.6790 Euro = 18.11 CZK Dec , 31, 2007

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Volkswagen Financial Data

KEY FIGURES BY BRAND AND BUSINESS FIELD Vehicle sales thousand vehicles/ million Volkswagen Passenger Cars Audi koda SEAT Bentley Commercial Vehicles VW China1 Other Automotive Division Financial Services Division Group before special items Special items Volkswagen Group 2007 3,664 1,200 620 411 10 427 930 -1,070 6,192 2006 3,451 1,139 562 419 10 388 694 -943 5,720 Sales revenue 2007 73,944 33,617 8,004 5,899 1,376 9,297 -33,385 98,752 10,145 108,897 6,192 5,720 108,897 2006 70,710 31,720 7,186 5,874 1,340 8,092 Sales to third parties 2007 2006 60,201 58,839 21,078 20,521 5,925 5,378 4,375 4,433 1,294 1,251 6,548 5,732 743 96,897 7,978 104,875 104,875 Operating result 2007 2006 1,940 918 2,705 2,054 712 515 8 -159 155 137 305 138 0-6312 5,194 957 6,151 6,151 0-632 3,540 843 4,383 -2,374 2,009

-28,918 750 96,004 100,171 8,871 8,726 104,875 108,897 104,875 108,897

1 USD = 0.6790 Euro = 18.11 CZK Dec , 31, 2007

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Production Markets

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Strengths
1. 100-year history as a vehicle manufacturer. 2. Capital infusions from Volkswagen. 3. Emphasis on research and development from Volkswagen. 4. Strength of Volkswagens reputation. 5. Highly-skilled work force available in the Czech Republic. 6. Relatively low wages in Czech Republic. 7. Largest employer in the Czech Republic. 8. Synergy with other Volkswagen products.
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Weaknesses
1. Location in a country that must deal with outdated infrastructure. 2. Perception from the past that Skoda produces a low-quality product. 3. Perception by some that their new 4-door limousine is not a limousine at all. 4. Growing unrest of Skodas employees in seeking higher wages which decrease profit margins. 5. Reputation of Skoda may spill over to the Bentley and frighten off buyers.
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IFE
Key Internal Factors Internal Strengths 100-year history as a vehicle manufacturer. Capital infusions from Volkswagen. Emphasis on research and development from Volkswagen. Strength of Volkswagens reputation. Highly-skilled work force available in the Czech Republic. Relatively low wages in Czech Republic. Largest employer in the Czech Republic. Synergy with other Volkswagen products. Internal Weaknesses Location in a country that must deal with outdated infrastructure. Perception from the past that Skoda produces a low-quality product. Perception by some that their new 4-door limousine is not a limousine at all. Growing unrest of Skodas employees in seeking higher wages which decrease profit margins. Reputation of Skoda may spill over to the Bentley and frighten off buyers. Totals Weights Rating 0.0 to 1.0 1, 2, 3 or 4 0.06 0.1 0.08 0.1 0.07 0.06 0.04 0.06 3 4 4 4 3 3 3 4 Weighted Score 0.18 0.4 0.32 0.4 0.21 0.18 0.12 0.24

0.1 0.07 0.08 0.1 0.08 1

1 2 2 1 2

0.1 0.14 0.16 0.1 0.16 2.71

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SWOT MATRIX
SO Strategies ST Strategies

Develop a new car line to use Alternative Fuels for global market (O3, O4, S2, S3, S5) Expand Sales in emerging counties in Eastern Europe, (Near & Far) Asia & Africa (O1, S2, S4, S8) Develop a low cost and economical to operate SUV for American Markets (O4, S1, S2, S3, S4, S5)

Expand collaboration and innovation with other VAG brands (T1, S1, S2, S3, S4, S5, S6, S8 ) Move manufacturing to countries with low wages and demand for value priced automobiles (T3, T4, S1, S2)

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SWOT MATRIX
WO Strategies WT Strategies

Move manufacturing to countries with low wages and demand for value priced automobiles (W1,W2, O1, O2) Rebrand Skoda as a value priced quality built Europe made automobile (W1, W2, O1, O4)

Brand Skoda as a subdivision of VAG, a well know German brand (W2, W1, T1) Develop a new car line to use Alternative Fuels for global market leveraging the VAG brand (T1, T2, T3, W1, W4, W5)

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Porters Generic Strategies

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Alternative Cost leadership Strategies

1. Move production facilities to countries that have a skilled yet relatively inexpensive work force and a stable economic and political environment. 2. Produce automobiles that meet the needs of that particular region. For example, an SUV or truck would be inappropriate in the former Soviet Union countries or developing countries where petroleum prices are high and wages relatively low. 3. In constructing new plants in countries hitherto not utilized, consider such additional factors as energy costs, access to the necessary infrastructure and closeness to important world markets. 4. Consider mergers with other appropriate companies in the target market to achieve economies of scale.
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Space Matrix Data

Financial Strength rating is 1 (worst) to 6 (best) 1 Rerturn on Assets 2 Leverage 3 Net Income growth 4 Income/employee 5 Cash Reserves Industry Strength rating is 1 (worst) to 6 (best) 1 Growth Potential 2 Finacila Stabiliy 3 Ease of Entry in Market 4 Resource Utilazation 5 Profit Potential Environmental Stability rating is -1 (best) to -6 (worst) 1 Rate of Infaltion 2 Technologocal Changes 3 Preice Elasticity of Demand 4 Competiove Pressure 5 Barriers to Entry 6 Globalization Competitive advantage rating is -1 (best) to -6 (worst) 1 Market Share (Czech Republic) 2 Market Share Europe 3 Product Quality 4 Customer Loyally 5 Technological Know How 6 Control over suppliers 7 Market Share Global Ratings 4.0 2.0 4.0 5.0 6.0 FS Total 21.0 5.0 3.0 6.0 4.0 5.0 IS Total 23.0 -3.0 -4.0 -3.0 -6.0 -2.0 ES Total -18.0 -1.0 -4.0 -5.0 -5.0 -1.0 -1.0 -6.0 -23.0

CS total

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SPACE Matrix
Conservative
ES average CA average IS average FS average X Coordinate Y Coordinate -3.60 -3.29 4.60 4.20 1.31 0.60

FS
+6 +5 +4 +3 +2 +1

Aggressive

CA
-6 -5 -4 -3 -2 -1 -1 -2 -3 -4 +1 +2 +3 +4 +5 +6

IS

Defensive

-5 -6

Competitive ES

GSM
1. 2.

RAPID MARKET GROWTH

Quadrant II Market development Market penetration Product development Horizontal integration Divestiture Liquidation
1. 2.

3.
4. 5. 6.

3.
4. 5. 6. 7.

WEAK COMPETITIVE POSITION

1. 2. 3. 4. 5.

Quadrant I Market development Market penetration Product development Forward integration Backward integration Horizontal integration Concentric diversification

Quadrant III Quadrant IV Retrenchment 1. Concentric diversification Concentric diversification 2. Horizontal diversification Horizontal diversification 3. Conglomerate diversification Conglomerate diversification 4. Joint ventures Liquidation SLOW MARKET GROWTH

STRONG COMPETITIVE POSITION

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IE Matrix
Strong 3-4

Hold and Maintain IFE Scores Average 2-2.99

Weak 1-1.99

I
High 3-4

II

III

EFE Scores

IV
Medium 2-2.99

VI

VII
Low 1-1.99

VIII

IX

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Matrix analysis
Alternative Strategies Forward Integration Backward Integration Horizontal Integration Market Penetration Market Development Product Development Concentric Diversification Conglomerate Diversification Horizontal Diversification Joint Venture Retrenchment Divestiture Liquidation
7-Apr-08

IE

SPACE X X X

GRAND (Europe) X X X X X X X

Porters X X

COUNT 3 3 2 3

X X

X X

2 4 2 1 1

X X X X

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Possible Strategies
Develop an alterative fuel car for global marketplace
Product Development, Market development and Market penetration, Porters Type 3

Move Manufacturing to low-cost labor countries with high demand for value priced automobiles (China and India)
Product development, Forward & backwards integrations. Porters type 1

Leverage Volkswagen Auto Groups brand to create a global market for Skoda Cars
Market development, Market Penetration, Joint venture, Porters type 2
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QSPM
Key factors External O1 O2 O3 O4 T1 T2 T3 T4 T5 Internal S1 S2 S3 S4 S5 S6 S7 S8 W1 W2 W3 W4 W5 Weight Move to China/India Alternative Fuel VAG Global Brand AS TAS AS TAS AS TAS 1 to 4 1 to 4 1 to 4 0.15 4 0.6 2 0.3 1 0.15 0.1 4 0.4 2 0.2 1 0.1 0.15 1 0.15 4 0.6 2 0.3 0.13 0 0 0 0 0 0 0.08 2 0.16 1 0.08 4 0.32 0.11 4 0.44 1 0.11 3 0.33 0.15 4 0.6 1 0.15 3 0.45 0.08 4 0.32 1 0.08 2 0.16 0.05 4 0.2 1 0.05 2 0.1 1 1 to 4 1 to 4 1 to 4 0.06 0 0 0 0.1 4 0.4 3 0.3 3 0.3 0.08 2 0.16 4 0.32 4 0.32 0.1 0 0 0 0.07 2 0.14 4 0.28 4 0.28 0.06 1 0.06 2 0.12 3 0.18 0.04 0 0 0 0.06 1 0.06 2 0.12 4 0.24 0 0 0 0.1 4 0.4 1 0.1 1 0.1 0.07 0 0 0 0.08 0 0 0 0.1 3 0.3 1 0.1 1 0.1 0.08 4 0.32 1 0.08 1 0.08 0 0 0 1 4.71 2.99 3.51
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Recommendations
Next 3 years
Move Manufacturing to low-cost labor countries with high demand for value priced automobiles (China and India)

Next 5 to 7 years
Develop an alterative fuel car for global marketplace

Continuing
Leverage Volkswagen Auto Groups brand to create a global market for Skoda Cars
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Annual Objectives
Year one
Get plants up and running in China and India

Year two
Increase Production& Sales
~ 100,000 units in China, 25% export ~ 30,000 units in India, 0% export

Year three
Increase Production& Sales
> 150,000 units in China, 35% export ~ 45,000 units in India, 10% export
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Financial
Cost
2 factories in China @ 30,000,000 each 1 factory in India @ 50,0000,000

Skoda is wholly owned by Volkswagen AG

The Financing decision is to borrow money or fund from extensive cash reserves

No stock so EPS/EBIT is not important

Czech national bank is listing a 1.5% Prime rate making this a nobrainer ---Borrow the cash!

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Management
Skoda Automobile followed the German model of utilizing the members of the Board of Directors as the top management of the company. This is very different from the composition of the top management of large corporations in this country. Boards in the United States are typically composed of more outside directors (those employed by a company other than the company on which they are serving as board members) than inside directors. Most U.S. institutional investors and watchdog groups would prefer a majority of outside directors because it is believed that they can be more objective in making decisions than inside directors. OrganisationStructure.pdf

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IT
Skoda Auto employs a best of Breed Enterprise Resource Planning infrastructure, SAP/R3, allowing for digital optimization across the company.
The difficulty comes in integrating other acquisitions and partner firms in the vale chain.

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Marketing Product Positioning within VAG

Sporty

Value Priced Consevative

Luxury

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Data Sources
Skoda Auto 2007 Case Notes Marlene M. Reed: Baylor University http://new.skoda-auto.com http://en.wikipedia.org/wiki/%C5%A0koda_Auto#Hist ory Datamonitor
Automotive Forecast December 2005, Czech republic, The Economist Intelligence Unit Limited Skoda 2007 Annual Report Skoda 2006 Annual Report Volkswagen 2007 Annual Report
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Global Automobile Manufacturers March 2007 Volkswagen AG 2008