Volkswagen - Developing Strategies for Competitive Advantage

A Real-Time Case Analysis
ABSTRACT
Modern business strategy tools will be employed
to evaluate the strategy and performance of
Volkswagen, the world’s second largest
automaker. In addition, the internal resources
and capabilities, industry environment, and
institutional environment of the company will be
appraised within the context of various
compelling issues, threats, and challenges facing
the company. Recommendations will be made as
to how Volkswagen’s strategy could potentially
be improved in order to increase competitive
advantage.
Rex Magadia, Maha Hanno, Anuja
Kadoo, David Akinsaya, Andrea Carlson
Developing Strategies for Competitive Advantage

Contents
Executive Summary...................................................................................................................................4
Company Background ..............................................................................................................................4
Historical Context ..................................................................................................................................4
Issues, Threats, & Challenges...................................................................................................................5
Emissions Scandal..................................................................................................................................5
Crafting a Global Response ..................................................................................................................7
Flaws in Company Culture...................................................................................................................7
Quality & Productivity..........................................................................................................................8
Doubling Down on Electric Cars .........................................................................................................9
Company Analysis.....................................................................................................................................9
Stakeholder Analysis.............................................................................................................................9
Identification and Evaluation of Current Strategy............................................................................9
Strategy for Competitive Advantage ................................................................................................10
Organizational Structure.....................................................................................................................11
Management & Leadership ................................................................................................................11
Company Performance & Financial Results.....................................................................................12
Appraisal of Internal Resources and Capabilities...............................................................................13
Core Competencies..............................................................................................................................13
Appraisal of the Industry Environment ...............................................................................................14
Porter’s Five Forces Analysis..............................................................................................................14
Appraisal of the Institutional Environment.........................................................................................14
Political Institutions.............................................................................................................................14
Economic Institutions..........................................................................................................................15
Socio-Cultural Institutions..................................................................................................................15
Team’s Recommendations and Strategies............................................................................................15
Recommendation #1 – Develop & Implement Culture Change Initiatives.................................15
Recommendation #2 – Improve Brand Image & Regain Consumer Trust..................................16
Recommendation #3 – Improve Quality and Productivity ...........................................................16
Recommendation #4 – Develop Joint Venture Partnerships to Rapidly Develop Core
Competency in Battery Technology ..................................................................................................17
References .................................................................................................................................................18
Appendix A – Volkswagen Group Brands & Models ........................................................................22

Appendix B – Volkswagen Recalls........................................................................................................23
Appendix C: Stakeholder Analysis .......................................................................................................24
Appendix D: Strategy 2025.....................................................................................................................25
Appendix E: Code of Cooperation ........................................................................................................27
Appendix F: Financial Analysis.............................................................................................................28
Appendix G: Key Resources & Capabilities.........................................................................................31
Appendix H: Global Revenue ................................................................................................................31
Appendix I: Porter’s Five Forces Analysis ...........................................................................................32

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Executive Summary
In order to evaluate the strategy and performance of Volkswagen, the world’s second largest
automaker, internal resources and capabilities, industry environment, and institutional environment
of the company were analyzed. From these analyses, critical issues, threats, and challenges were
identified. Namely, the 2015 emissions scandal, company culture, quality and productivity, and a
new electric car strategy were identified as the primary issues which Volkswagen needs to
proactively address. Four recommendations were developed to not only address these issues but
increase the automaker’s competitive advantage as well. These recommendations are discussed in
greater depth at the end of this paper.
Company Background
Volkswagen Group, is a German multinational automotive manufacturing company
headquartered in Wolfsburg, Lower Saxony, Germany. Following Toyota, Volkswagen is the second
largest automaker in the world. Over 600,000 employees scattered around the globe produce over
28,000 vehicles per day in 2016. Volkswagen currently owns 12 subsidiaries which make up the
Volkswagen Group. These include Volkswagen Passenger Cars, Audi, Seat and Skoda, Bentley,
Bugatti, Lamborghini, Porsche, Ducati, and Volkswagen Commercial Vehicles, Scania and Man
(Bowler, 2015). Currently, the global automaker has 120 production plants spread over 4 continents
with the majority of manufacturing operations in Europe and China (Volkswagen AG, 2017). Its
vehicles are sold in 153 countries (Bowler, 2015). As outlined in Appendix A, the 12 subsidiaries that
make up the Volkswagen Group is composed of an incredible 347 different models.
Historical Context
Volkswagen was founded in Germany on May 28, 1937. At the time, the German
government was under the control of Adolf Hitler, leader of the Nazi Party. Hitler had formed a
state-owned automobile company called Gesellschaft zur Vorbereitung des Deutschen Volkswagens
mbH which eventually became Volkswagenwerk, or “The People’s Car Company.”
In 1938 Hitler commissioned Austrian automotive engineer Ferdinand Porsche to build “the
people’s car.” Hitler declared: “It is for the broad masses that this car has been built. Its purpose is to
answer their transportation needs, and it is intended to give them joy” (History.com Staff, 2009). The
iconic design is characterized by the aerodynamic “beetle” shape. Shortly after the car was revealed
at the Berlin Motor Show in 1939, World War II began, and Volkswagen halted production.
Following the war, most of the factories are in ruins. The Allies decide to make Volkswagen the
centerpiece of their attempts to revitalize the German auto industry and economy. By 1946, with

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production reaching 1,000 vehicles per month, the car company is renamed Volkswagen. Eventually,
Volkswagen ownership returned to the Germans under manager Heinrich Nordhoff. The company
played a critical role in post-war German regeneration. Global production began and by 1955,
Volkswagen sales reached one million vehicles.
Volkswagen sales in the United States (US) were initially slower than in other parts of the
world due to the car’s sordid past as well as its small size and unusual rounded shape. By the early
1960s, Volkswagen became the top-selling auto import in the US. The following year in 1960, the
German government sold 60 percent of Volkswagen’s stock to the public, effectively denationalizing
it. Twelve years later in 1972, the Beetle surpassed the long-standing worldwide production record
of 15 million vehicles, set by Ford Motor Company’s legendary Model T between 1908 and 1927
(History.com Staff, 2009).
From 1975 to 1998, Volkswagen underwent a period of acquisition and expansion.
Volkswagen Group was created and served as a holding company for the growing automaker. Most
recently in 2015, Volkswagen was involved in an international scandal in which the company
admitted to deception and fraud in emissions tests in the US. According to the Environmental
Protection Agency (EPA), certain Volkswagen vehicles sold in America had devices installed in
diesel engines that could detect when they were being tested and could consequently alter the
performance accordingly to improve results.
Issues, Threats, & Challenges
Emissions Scandal
In September 2015, the EPA concluded that certain Volkswagen cars being sold in America
had a "defeat device," a type of software in their diesel engines that could detect when they were
being tested, altering the performance emissions readout accordingly to enhance results. This
emissions scandal has utterly dominated any press regarding Volkswagen and thus represents the
company’s number one, most critical issue. More specifically, according to the EPA, the software
was able to sense test scenarios by monitoring speed, engine operation, air pressure and even the
position of the steering wheel. “When the cars were operating under controlled laboratory
conditions - which typically involve putting them on a stationary test rig - the device appears to
have put the vehicle into a sort of safety mode in which the engine ran below normal power and
performance. Once on the road, the engines switched out of this test mode” (Hotten, 2015). The end
result was that engines emitting nitrogen oxide pollutants up to 40x the permissible limits would be
able to pass emissions tests.

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Once the news of this scandal went public, Volkswagen’s CEO at the time, Martin
Winterkorn, said his company had "broken the trust of our customers and the public.” Winterkorn
resigned as a direct result of the scandal and was replaced by Matthias Mueller, the former boss of
Porsche. After an internal inquiry was launched the company had to recall over 11 million cars
worldwide the following year. More specifically, Volkswagen recalled 8.5 million cars in Europe,
including 2.4 million in Germany and 1.2 million in the UK, and 500,000 in the US as a result of the
emissions scandal. Over $7 billion was set aside to cover costs. This resulted in the company posting
its first quarterly loss (~$2.7 billion) in 15 years. Just two months following the scandal, the
company’s shares had fallen by about a third. It’s important to note also, that the EPA has the power
to tack on another potential $18 billion in fines (Hotten, 2015).
“From there, all hell broke loose. Volkswagen had pulled its TDIs from the website, tree-
huggers started leaving nasty notes on Volkswagen TDI owners’ windshields, and owners and
dealers alike started suing Volkswagen for damages. It’s been one of the most devastating crises to
happen to any corporation in years” (Tracy, 2016).
Although this scandal started in the U.S., the UK, Italy, France, South Korea, Canada and,
Germany, have opened similar investigations. Throughout the world, politicians, regulators, and
environmental groups are questioning the legitimacy of Volkswagen's emissions testing.
One year later, in October 2016, the U.S. Department of Justice and Volkswagen agreed on a
proposed settlement that will cost the automaker an unprecedented $14.7 billion. An extensive $10
billion buyback and compensation program was rolled out for the customers. Customers can either
have the automaker buy back their vehicles under government negotiated prices or can receive cash
payments for diminished resale value plus a free emissions fix if they wish to keep their vehicles. In
addition, the company created a “Customer Goodwill” package which offered additional cash
payments, visa gift cards, and free 24 hour roadside assistance for three years for all customers who
registered for the program by April 2016 (Atiyeh, 2017).
As if matters were not worse enough already, in early January of 2017, the U.S. Department
of Justice announced an additional $4.3 billion in criminal and civil penalties. Six Volkswagen
executives were arrested for their alleged connection with the scandal. Furthermore, a “corporate
compliance monitor” will be watching Volkswagen for three years into the future under the terms of
its probation. Volkswagen must buy back at least 85% of all cars affected by June 2019 or face even
more federal fines. Additional civil penalties, a criminal settlement, and further state-level fines have
not been determined but could add billions more to Volkswagen’s balance sheet (Atiyeh, 2017).
There is no doubt that Volkswagen hurt its brand image around the world.

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Crafting a Global Response
The scale and geographic breadth of Volkswagen’s emission scandal makes it highly unique.
Usually, large corporate crises were focused on a single market i.e. BPs Gulf of Mexico Spill or
Google’s battle with European regulators over data privacy. Volkswagen though, which includes
international brands such as Audi, Porsche, and Lamborghini, faces a crisis which traverses the
globe, making it difficult to craft a proper response across many national borders and cultures. For
example, although the company has been making good-will payments and effort to American
customers, the company has claimed that the same illegal behavior that got them into this mess was
not in fact illegal under European Union (EU) rules. As a result, Volkswagen is not making similar
good-will payments and efforts to its European customers even though cars are being recalled
throughout the EU (Hakim, 2016).
Hans-Gerd Bode, Volkswagen’s communications chief since September 2016 has had his
hands full doing damage control. Nielsen, a global information, data, and measurement company
conducted a 2016 poll which suggested that although the public is fairly tolerant for recalls and labor
issues, they were least tolerant of lying and misrepresentation and intentional wrongdoing. As a
result of the massive effort that will be required to guide Volkswagen out of their global crisis, the
company has enlisted the help of three public relations firms based in three different countries -
Kekst in the United States, Finsbury in Britain and Hering Schuppener in Germany — to join
Edelman, an American firm already on retainer. Volkswagen has also hired Jones Day, a law firm, to
conduct an internal investigation (Hakim, 2016). Volkswagen needs to come up with a unified
marketing plan that focuses heavily on sustainability and corporate social responsibility in order to
successfully execute their new Strategy 2025 (covered in later sections) and regain the public’s trust.
Flaws in Company Culture
As former CEO Martin Winterkorn publicly admitted that Volkswagen had cheated on its
emissions tests, the whole fiasco was attributed to “the mistakes of a few people” (Hakim, 2016).
From an outsider’s viewpoint, this seems unlikely especially considering the fact that the scandal
involved 11 million vehicles and engines developed over the course of several years. Some believe
that the company’s management culture was largely to blame. A 2015 article by The New York Times
described Volkswagen’s management culture as confident, cutthroat, and insular. It further stated
the management was coming under scrutiny as potentially enabling the lawbreaking behavior that
caused the crisis. “They only know one way of management,” said a high-ranking executive who

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has worked in several countries for the carmaker and who requested anonymity for fear of losing his
job: “Be aggressive at all times” (Ewing & Bowley, 2015).
The article then goes on to suggest that the two men who have led Volkswagen and shaped
its culture much of the past 20 years are Ferdinand Piëch, CEO from 1993 until 2002, and
Winterkorn, CEO from 2007 until his resignation following the emissions scandal. Mr. Piëch, a
grandson of Mr. Porsche, is an engineer who became well-known for his design work in shaping the
Audi to take on BMW and Mercedes-Benz. His tenure was characterized by his toughness and
willingness to demote or dismiss people who were not performing well. Critics propose that after 20
years under Mr. Piëch and Mr. Winterkorn, Volkswagen had become a place where subordinates
were fearful of contradicting their superiors and of admitting failure. This is perhaps another classic
example of ethics not holding up under immense pressure. Bernd Osterloh, chairman of the
Volkswagen workers council, wrote a letter to the staff suggesting flaws in company culture. “We
need in the future a climate in which problems aren’t hidden but can be openly communicated to
superiors,”(Ewing & Bowley, 2015).
Quality & Productivity
In a 2016 study by the car shopping website iSeeCars.com, recall data as far back as 1985 was
analyzed to determine which brands historically recalled the lowest percentages of vehicles relative
to those sold in a given year, and which brands’ recalls posed the most dire consequences. “In the
study, Porsche was found to have the lowest recall rate among all automakers in the U.S. at 531 cars
per 1,000 sold, with the Volkswagen Group having the highest recall rate at 1,805 per 1,000 sold
(some of its models were recalled more than once during the period in question). And that doesn’t
yet account for the number of vehicles Volkswagen will have to repair or buy back because of its
ongoing “dieselgate” debacle” (Gorzelany, 2016). These results are tabulated in Table 1 of Appendix
B.
Furthermore, “according to iSeeCars’ data, Volvo recalled the fewest number of its vehicles
over the last three decades because of “severe” defects that could cause death, injury, a crash, or a
fire – and at that it’s still a disturbingly high 71%. At the other end of the list, 100% of all Teslas sold
have been recalled due to a potentially hazardous problem. Volkswagen, which recalled cars at the
highest rate, fares better here, placing third fewest with 77.6% of its vehicles being recalled to
prevent dire consequences” (Gorzelany, 2016). These results are tabulated in Table 2 of Appendix B
and suggests that Volkswagen has significant quality issues which need to be addressed.
On a related note, Volkswagen has significant productivity issues; for example, both
Volkswagen and Toyota produce approximately 10 million cars/year. Volkswagen realizes a ~6%

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profit margin with an input of 600,000 plus workers. Toyota on the other hand realizes a 10% profit
margin with an input of only 300,000 workers (Winton, 2016). Since there is a positive correlation
between quality and productivity, consideration should be given to improving both of these key
performance metrics.
Doubling Down on Electric Cars
Volkswagen has jumped feet-first into the trend of fuel-efficient, electric vehicles. More
specifically, Volkswagen is expected to invest upwards of one billion dollars into electric vehicles to
develop 30 or more new electric vehicles by 2025 even though the electric vehicle market represents
only 0.6% of all global passenger vehicles (Volkswagen’s Strategy 2025, 2016). This bold bet on
electric vehicles will have to be paired with significant investments in battery technology. Industry
analysts are wary because achieving swift cultural changes and dramatic product transformations all
while cutting costs is an extremely tall order.
It’s important to note here that Volkswagen may potentially find itself with split loyalties
between its diesel cars, which are a favorite of European consumers (and some American
consumers) and its newly planned electric cars. Over the past 20 years, automakers, including
Volkswagen have invested a fortune into the production of diesel engines and vehicles, often with
government support, on the premise that they are better and cleaner for the environment. The EPA,
the World Health Organization and the UK Department of Transport have all produced reports in
the last year or two which suggest otherwise. Research suggests that diesel emissions are highly
correlated to an increased numbers of premature deaths, cancers, and respiratory diseases (Duke,
2016). At the time of the scandal, diesel sales were already stagnant so the timing is especially bad
for stakeholders who are invested in the diesel market.
Company Analysis
Stakeholder Analysis
Due to the extensive global operations of Volkswagen, the company has a wide range of
stakeholders. A partial list of potential stakeholders as well as relevant key issues can be found in
Appendix C.
Identification and Evaluation of Current Strategy
Due to Volkswagen’s unscrupulous behavior, intense pressure and attention has been
focused on their strategy for the future. Beyond Volkswagen’s immediate strategy for recovery lies
their long-term strategy. According to their Strategy 2018, originally announced in 2008,
Volkswagen’s strategy was to “become the most successful, fascinating and sustainable automobile

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manufacturer” (Volkswagen Goals and Strategies, 2017). Key elements of this strategy included
innovation, increasing market share, increasing productivity (as measured via return on sales), and
becoming a top employer in order to build a first-class team. This strategy was recently superseded
by Strategy 2025 in response to the emissions scandal.
Volkswagen Group currently oversees twelve different brands. Although each brand has an
individual identity, they are all united around a common goal – mobility. For everyone, all over the
world. Each brand operates as an independent entity in the marketplace. “The product spectrum
ranges from motorcycles to low-consumption small cars and luxury vehicles. In the commercial
vehicle sector, the products include ranges from pick-ups, buses and heavy trucks” (Volkswagen AG
2017). As mentioned previously, the 12 individual groups that make up the Volkswagen Group is
composed of an incredible 347 different models.
Cutting costs in the upcoming years is critical for Volkswagen. In order to execute its new
Strategy 2025 which is examined in the next section, CEO Mueller has suggested significantly
reducing the number of models it makes and slashing almost $9 billion in annual spending (Bomey,
2016). This is a direct result of the need to offset the gigantic $18 billion plus bill to cover the costs
associated with the emissions scandal.
Strategy for Competitive Advantage
In their 2015 Annual Report, Volkswagen outlined its Strategy 2025. The overarching vision
driving this new strategy is to become a world-leading provider of sustainable mobility. 19
initiatives were designed to transform certain areas of Volkswagen’s core business, build mobility
business solutions, strengthen innovative power, and secure funding to increase financial viability.
Figures 1 & 2 in Appendix D outline the functional areas targeted as well as the names and goals of
each of these initiatives.
Perhaps most significant, Volkswagen has jumped feet-first into the trend of fuel-efficient,
electric vehicles (Volkswagen’s Strategy 2025, 2016). No doubt this is an effort to shake the bad press
surrounding the diesel-gate scandal and become known as “environmentally friendly” to
consumers. According to Strategy 2025, Volkswagen is expected to invest upwards of one billion
dollars into electric vehicles in order to develop 30 or more new electric vehicles by 2025. Although
the electric vehicle market represents only 0.6% of all global passenger vehicles, it continues to grow
year-over year, “70%, 53%, and 70% in 2015, 2014, and 2013, respectively” (Volkswagen’s Strategy
2025).
Not surprisingly, in order to double down on their efforts to build a more environmentally
sustainable image, Volkswagen has created a management structure for coordinating sustainability

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and Corporate Social Responsibility (CSR), led by the Sustainability Board, which is regularly
informed of issues by the Group CSR & Sustainability steering group. The steering group regularly
meets with stakeholders – sustainability analysts and investors, and suppliers in order to engage
them in forward-looking discussions regarding the industry’s movement toward digitization of the
value chain. Ideally, Volkswagen hopes that this higher level of engagement with its key
stakeholders will increase efficiencies and create synergy around how everyone works together,
forecasts, and plans for major issues looming on the horizon (Corporate Social Responsibility 2015,
2017).
Organizational Structure
Volkswagen Group consists of twelve brands, 119 global production locations, and more
than 610,000 employees. Beginning in 2016, Volkswagen’s organizational structure underwent a
major overhaul. In their Group Model, the management structure is based on its modular toolkit
system, the platform on which all cars are built. This theoretically allows for increased levels of
productivity and flexibility between factories and models. The Groups are broken up by brand
groups accordingly. Key elements of organizational structure are efficiency, future issues,
digitization, business development, and product strategy. Planning initiatives, corporate goals, and
resource allocation related to R&D, production, and sales functions are strategically assigned at the
Group level (Future Organization Structure, 2015) from the board of directors.
Currently the Board of Management of Volkswagen AG comprises nine members. Each Board
Member is responsible for one or more functions within the Volkswagen Group. Matthias Müller is
the Chairman. The company has strong labor unions which hold half the seats on the board (Cremer,
2016).
Management & Leadership
Volkswagen has been said by some to have an intense, cutthroat culture. Chief Executive
Officer (CEO) from 1993 to 2002, Ferdinand Piëch, whose leadership style was infamously harsh and
subordinates did not question his ideas for fear of job loss or retaliation, said it best himself, “My
need for harmony is limited” (Ewing & Bowley, 2015). Following Piëch, Martin Winterkorn led the
company from 2007 until the diesel scandal became public in 2015, after which he resigned.
Winterkorn embraced the same strict, almost militant leadership as his predecessor. A former
employee described the culture as “special,” noting that “it was like North Korea without labor
camps” (Ewing & Bowley, 2015). Upon taking the reins, Mueller committed to changing the culture

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of Volkswagen, noting he wants to be surrounded by people “who follow their instincts, and not
merely guided by the possible consequences of impending failure” (Ewing & Bowley, 2015).
Volkswagen’s new Strategy 2025 outlines a progressive Code of Cooperation (Appendix E)
which proclaims values such as mutual trust, equality, and open-mindedness, will need radical
culture change initiatives in order to overhaul the old intense, cutthroat culture.
Company Performance & Financial Results
Current CEO Mueller has undoubtedly taken charge of Volkswagen at a time of high
uncertainty and extreme volatility. With the diesel scandal still fresh in the minds of company
employees and stakeholders, Mueller is pressing forward, trying desperately to rebuild Volkswagen
to its position of pre-diesel gate condition. In his letter to the shareholders in the Annual Report
2015, Mueller notes that despite the €16.9 billion set aside for “special items” or the diesel-gate
scandal, the company delivered 9.9 million vehicles and grew sales revenue by five percent to €213.3
billion (Letter, 2015). More recently, 2016 sales revenues increased once again, reaching €217.3
billion. Although this is positive news for the company, it’s important to note that 2016 operating
profits are only at 56% of 2014 levels. No doubt Volkswagen has a lot of work to do in order to
appease stakeholders, particularly their customers, shareholders and investors.
Appendix F details more in-depth financial analyses and metrics including gross profit
margin, operating margin return on invested capital, return on assets, return on equity, and stock
price analysis. Perhaps the most informative insights regarding how Volkswagen is doing
financially comes from a closer examination of operating margin and return on equity. As
mentioned previously, Volkswagen has significant productivity issues. Even though both
Volkswagen and Toyota produce approximately 10 million cars/year, Volkswagen only realizes
~6% profit margin with an input of 600,000 plus workers whereas Toyota on the other hand realizes
a 10% profit margin with an input of only 300,000 workers.
Moreover, Volkswagen ROE shows a negative trend for the period between 2011 and 2015 in
which ROE decreased from 29.77% to -1.78%. The most recent Q4 2016 ROE for Volkswagen
however is 0.82%. Its primary competitor Toyota also showed a negative trend of ROE from 2011 to
2015. However, the most recent Q4 2016 ROE for Toyota is 15.90%. This means that for every $1 of
shareholder’s equity in 2016, Volkswagen is only generating $0.82 of profit whereas Toyota is
generating almost $16 for every $1 of shareholder’s equity. This suggests that Volkswagen is highly
inefficient in utilizing shareholder equity and capital to generate profit which again points to
management and culture issues which need to be remedied.

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Appraisal of Internal Resources and Capabilities
Appendix G lists Volkswagen’s resources and capabilities. Key resources included finance,
technology, plant and equipment, location, distribution network, and brands. Key capabilities
include product development, purchasing, engineering, manufacturing, financial management,
R&D, marketing and sales, government relations, and strategic management. Based on the
company’s current competitive position as well as the continuous and rapid changes occurring in its
industry and institutional environments, the relative importance and strengths of these resources
and capabilities have changed and will no doubt continue to change into the future. Across the
board, Volkswagen will have to more efficiently and effectively utilize its resources in order to
successfully execute Strategy 2025. Product development, R&D, government relations, and strategic
management will be increasingly important capabilities that Volkswagen will have to develop and
cultivate in order to continue to weather the emission scandal storm and rebuild their brand and
image.
Core Competencies
Volkswagen’s has three main core competencies that have helped the company remain
resilient throughout its long history. First, Volkswagen has extensive experience managing a wide
range of products. As mentioned previously, Volkswagen Group boasts a total of 12 different brands
including some well-known luxury brands like Lamborghini, Bentley, and Porsche. No other auto
manufacturer has so many different brands. By comparison, GM has 10 and rival Toyota has only 4.
This wide portfolio enables Volkswagen to cater to a greater variety of consumers globally.
On a related note, Volkswagen has a strong diversification strategy. As shown in Appendix
H, Volkswagen’s revenue is generated through different global markets and the automaker has
further diversified their income sources by leveraging research for electric vehicles, commercial
vehicles, and financial services. In more closed markets like China, Volkswagen has developed two
joint ventures, positioning them to become 2nd largest automaker there.
In regards to the company’s most recent Strategy 2025, Volkswagen plans to transform its
automotive core business by pursuing battery technology and autonomous driving as new core
competencies. It’s important to note here that there will be a steep learning curve when it comes to
becoming a leader in these two new areas since Volkswagen really has had no experience with these
two areas in the past. Perhaps they have some technical expertise from their R&D but they do not
have experience commercializing these two new technologies.

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Last, but certainly not least, Volkswagen has been a leader and pioneer in innovation,
resiliency and innovation, providing the world with ground-breaking ideas and technologies since
the late 1930s ranging from autonomous vehicles to visionary active suspension technologies, to
highly fuel-efficient cars. It’s important to note here that Strategy 2025 aims to transform many
aspects of the company’s core businesses and invest in “major electrification” to develop 30 or more
new electric vehicles by 2025. Whether this initiatives pan out for better or for worse is still yet to be
seen.
Appraisal of the Industry Environment
Throughout its history, Volkswagen has consistently offered an extensive array of attractive,
cutting-edge, high-quality vehicles for all major global markets and customer groups. The Golf,
Beetle, and Passat models are listed in the top 10 best-selling automobiles of all time according to the
Wall Street Journal. In addition, the company is one of the world’s most valuable auto brand
manufacturers. Yet, despite these impressive accolades, recent financial and operational troubles
brought about by the emissions scandal has put Volkswagen in a precarious and vulnerable
competitive position whose future is arguably very volatile and uncertain at this point. Porter’s Five
Force analysis sheds further light on Volkswagen’s industry environment.
Porter’s Five Forces Analysis
An analysis of Porter’s Five Forces reveals that barriers to entry are high, power of suppliers
is low, power of consumer’s ranges from low to medium, availability of substitutes is low, and the
overall competitive rivalry is high. This high level of competitive rivalry indicates an environment of
hypercompetition. A more in-depth analysis of Porter’s Five Forces can be seen in Appendix I.
Appraisal of the Institutional Environment
The institutional environment includes political institutions (e.g. the national structure of
policymaking, regulation and adjudication), economic institutions (e.g. structure of the national
factor markets and how easy it is to facilitate the purchase and sale of services of factors of
production like labor, capital, land and raw materials that are used by a firm to make a finished
product), and socio-cultural institutions (e.g. social norms, values, beliefs, and assumptions
concerning how human behavior should be in a given society) (Henisz, n.d.).
Political Institutions
Volkswagen operates 120 production plants all throughout Europe, the Americas, Asia, and
Africa. Keeping abreast of the current political situation and associated policies and regulations
across each of these areas is extremely challenging. In Europe, where the majority of Volkswagen’s

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operations take place, the company needs to be aware of the Italy’s banking crisis, declining German
exports, security issues, namely, Refugees, an increasingly aggressive Russia, and a general overall
weakening of the EU, especially following Brexit (Friedman, 2017). In South Africa, economic
stagnation has led to high levels of unemployment and crime which could strain the country’s
political and economic institutions (BusinessTech, 2016). In China, Volkswagen will have to follow
China’s slowing economy as well as how Sino-US relations will play out in the Trump
Administration (South China Morning Post, 2017).
Perhaps most important for Volkswagen to look out for is what sort of effects the Trump
administration will have on NAFTA. President Trump has made it clear that the terms of the free
trade agreement will be renegotiated. Volkswagen’s second largest production plant is located in
Mexico in the State of Puebla. If import duties are raised, this could be absolutely fatal for
Volkswagen.
Economic Institutions
In terms of acquiring the necessary factors of production like labor, capital, land and raw
materials, Volkswagen dominates the local markets in South America and Europe where it is an
employer of choice. Volkswagen will have to ensure that its procurement and supply chain
management structure be kept lean, agile, and adaptable in order to be able to continue to source
materials and service that provide optimum customer value. Special attention will have to be paid to
the new sourcing materials and requirements that will be necessary to produce electric cars and their
associated battery technology.
Socio-Cultural Institutions
Being cognizant of a given country’s local culture, social norm, values, beliefs, etc. is no
doubt a critical element when it comes to being locally responsive. Currently, Volkswagen manages
a wide range of products and brands. This has allowed Volkswagen to cast a wide net and appeal to
pretty much all consumer age ranges and lifestyles. However, in order to reduce operating costs and
become more profitable, Volkswagen may have to take a more focused approach. This means that
the company will have to learn how to do more targeted marketing and research in order to cater to
these varying cultural norms, values, beliefs, etc.
Team’s Recommendations and Strategies
Recommendation #1 – Develop & Implement Culture Change Initiatives
In order for Strategy 2025 to be effective and realize the expected benefits, a break from the
old intense, cutthroat Volkswagen culture is imperative. The new culture as outlined in Strategy

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2025 places significant emphasis on values such as mutual trust, equality, and open-mindedness.
Bringing about this new culture will be extremely challenging and will require a completely new
type of management approach. Unfortunately for Volkswagen, it will not be so easy to dismiss
adherents of the old culture due to the company’s strong labor unions which hold half the seats on
the board. Initiatives aimed at culture change similar to the “Work-Out” & “Session C” initiatives of
GE need to be carefully developed and implemented throughout Volkswagen’s Global operations..
Recommendation #2 – Improve Brand Image & Regain Consumer Trust
While Volkswagen works to develop and implement their culture change initiatives, they
need to simultaneously improve their brand image and regain the trust of their customers following
the emissions scandal. We recommend that Volkswagen partners with independent groups such as
the World Business Council for Sustainable Development (WCSBD), a CEO-led organization of
forward-thinking companies that galvanizes the global business community to create a sustainable
future for business, society and the environment or the European Automobile Manufacturers'
Association (ACEA) which represents leading car, van, truck and bus makers and works with a
variety of institutional, non-governmental, research and civil society partners to address the global
challenges of mobility, sustainability and competitiveness. If Volkswagen wants to be a world-
leading provider of sustainable mobility, they need to put their money (and organizational
resources) where their mouth is. Moreover, in order to appease the general public and smooth over
all of the negative publicity they’ve received over the past couple of years, we also recommend that
the automaker engage in extensive advertising while hiring a celebrity to frequently appear in these
ads similar to how Kia is utilizing Lebron James.
Recommendation #3 – Improve Quality and Productivity
High recall rates are indicative of significant quality issues at Volkswagen. These quality
issues are positively correlated with low productivity throughout the company’s global operations.
As mentioned previously, both Volkswagen and Toyota produce approximately 10 million
cars/year. At this production output rate, Volkswagen realizes ~6% profit margin with an input of
600,000 plus workers. Toyota on the other hand realizes a 10% profit margin with an input of only
300,000 workers. Better quality would lead to increased sales, production efficiency, and overall
customer satisfaction. In addition, better quality would lead to fewer defects and reduce
replacement/repair costs. The decrease in defects and repair costs decreases the input cost and
increases the overall productivity. Ultimately, better quality serves as the best advertisement
through word-of-mouth advertising by satisfied customers and decreases the costs incurred in sales

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and marketing. We recommend that a robust Six Sigma initiative be deployed across the breadth of
Volkswagen’s manufacturing operations in Europe, the Americas, Asia, and Africa. Substantial
research and literature exists today that shows that Six Sigma not only improves both quality and
productivity but increases profit and shareholder value as well. The collaborative, continuous
improvement mindset required to realize Six Sigma benefits would further reinforce the new culture
change initiatives.
In addition, Mueller should press forward with his plans to significantly reduce the number
of models Volkswagen makes. This will free up billions of dollars in annual spending and further
help to improve productivity metrics.
Recommendation #4 – Develop Joint Venture Partnerships to Rapidly Develop
Core Competency in Battery Technology
Batteries are the most important component of an electric car (Welch, 2015). Critical battery
related issues that Volkswagen will have to overcome are the size and weight of the batteries the fact
that batteries are large and heavy; however, if a limited capacity to be installed in each car, mileage
range a vehicle can go before needing to be charged will be limited accordingly. In addition, the
charging process is slower than filling gup with gasoline, and the battery itself is very toxic once
used up and currently cannot be recycled economically. Also, overall, the cost to manufacture
electric cars is more expensive than conventional petrol vehicles. Auto companies such as Chevy
usually sell them at a loss or minimal profit to promote their brand. In the U.S., government
subsidies in the form of tax cuts help to promote demand for electric vehicles. This may not be the
case in Volkswagen’s other global markets. Last, and perhaps most significant, the infrastructure,
especially charging stations are not in place to enable consumers to drive electric vehicles. Electric
vehicles have been around since the early 19th century but due to this lack of infrastructure, amongst
the other issues mentioned here, they have not taken off like petrol vehicles have. Each of these
critical issues is an area of electric car production that Volkswagen has no prior experience in. They
will have a steep learning curve to ride initially which is why we recommend that they team up and
develop a joint venture initiative with companies such as Panasonic, LG-Chem, and Tesla who have
core competencies in battery production for electric vehicles.

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Appendix A – Volkswagen Group Brands & Models
Brand No. of Models
Volkswagen 66
Audi 52
Seat 26
Škoda 34
Bentley 14
Bugatti 1
Lamborghini 7
Porsche 36
Ducati 24
VW Commercial Vehicles 59
Scania 8
MAN 20

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Appendix B – Volkswagen Recalls
Table 1 - Automaker Recalls Per 1,000 Vehicles Sold
Automaker Recalls per 1,000 sold
Porsche 531
Mercedes-Benz 624
Kia 788
Tesla 936
Mazda 955
BMW 1196
Hyundai 1266
Honda 1307
Chrysler 1422
Volkswagen Group 1805
Table 2 - Automaker Recalls w/Potential for Death, Injuries, Crashes, or Fires (%)
Automaker %
Volvo 71
Mercedes-Benz 75.1
Volkswagen 77.6
Chrysler 83.2
Subaru 84.5
Kia 92.4
Honda 94.3
Nissan 95.2
Hyundai 96.8
Tesla 100.0

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Appendix C: Stakeholder Analysis
Stakeholder Key issue
Customers Recall hassles, costs, embarrassment and anger of owing a less shiny brand that
isn’t environmentally compliant
Future Customers Many will be lost to competitors
Employees Dealing with investigations and embarrassment, many to lose jobs, others may
vote with their feet
Future employees Many lost to competitors or other industries
The works council Loss of prestige, power, ability to influence future outcomes
The town of Wolfsburg (Germany) A company town, Wolfsburg and its economic ecosystem has been built around
Volkswagen
The government of lower Saxony A Volkswagen shareholder and member of its supervisory board
Dealers Recalls and embarrassed to carry the brand, likely to lose substantial future sales
Audi, Seat, Skoda The “brother” auto companies under the Volkswagen umbrella may suffer
collateral damage
Other auto makers the microscope will be trained on other global automakers to find out whether
similar deceitful practices abound
Germany, the brand Much discussion is already under way of whether the stellar German brand for
quality and engineering has been damaged
Shareholders Already suffering devastating, probably unrecoverable equity losses, preparing
for multiple types of lawsuits in multiple jurisdictions
Banking and Investment
Community
Already burned, some may stay away others may play financial games that may
not benefit Volkswagen
Environment The diesel toxic emissions are forty times greater than permitted under US law
and arguably much worse for health of living being anywhere
Executives and Management (plus
former executives and
management)
Under the gun and under the microscope of public opinion, Governments,
regulators and prosecutors for a long time to come
The Supervisory board Under pressure to ramp up more proactive corporate governance and/or engaged
in more wholesale corporate governance reform

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Multinational regulators Likely to ramp up investigation and be engaged in long term investigations,
prosecutions, settlements, and compliance monitor arrangements
Lawyers and consultants Arguably the only who will benefit greatly from this reputational cataclysm
The media and social media Will continue to have a party discussing every possible angle of this scandal,
fanning the fire of this information that may be accurate, inaccurate or
downright malicious
Commentary | Reputation Risk Reputation Risk | Commentary. (2016).
Appendix D: Strategy 2025
Figure 1- Strategy 2025 Functional Areas Targeted for Improvement

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Figure 2- Strategy 2025 Change Initiatives

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Appendix E: Code of Cooperation

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Appendix F: Financial Analysis
Gross Profit Margin
Gross profit margin is a financial metric used to assess a company's financial health and
business model by revealing the proportion of money left over from revenues after accounting for
the cost of goods sold (COGS). Volkswagen showed a steady gross profit margin of around 18%
since 2012 till 2014. This declined by 3% in 2015 due to lack of sales and tough competition from
other competitors
Operating Margin
Operating margin is a measure of profitability. It indicates how much of each dollar of
revenues is left over after both costs of goods sold and operating expenses are considered.
Volkswagen maintained its operating profit margin between 5% to & 7% between 2011 and
2014. However, as mentioned previously, Volkswagen has significant productivity issues. Even
though Volkswagen and Toyota produce approximately 10 million cars/year, Volkswagen realizes a
~6% profit margin with an input of 600,000 plus workers whereas Toyota on the other hand realizes
a 10% profit margin with an input of only 300,000 workers (Winton, 2016).
In 2015 due to shrinking sales in China and Brazil. Volkswagen reported its first loss in 15
years at the end of the third quarter of 2015. This covered only a part of the losses incurred due to
the emission scandals. It reported a negative operating margin of -1.9% as seen in the graph below. It
was soon able to improve its position in first two quarters of 2016.

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Return on Invested Capital (ROIC)
The return on invested capital (ROIC) is the percentage amount that a company is making
for every percentage point over the Cost of Capital.
Volkswagen had a negative ROIC of -0.01% in 2015. It has shown an uneven trend between
2012 and 2015. This metric was not used till recently in the automotive industry. General Motors
started using it lately to show how efficiently they generated cash from the invested capital.
Return on Assets (ROA)
Return on assets (ROA) is an indicator of how profitable a company is relative to its total
assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings.
Volkswagen reported positive ROA for all years since 2011 except in 2015 it was -0.43% as seen
below.
Return on Equity (ROE)
Return on equity (ROE) is the amount of net income returned as a percentage of
shareholders equity. Return on equity measures a corporation's profitability by revealing how much
profit a company generates with the money shareholders have invested.
Volkswagen ROE shows a negative trend for the period between 2011 and 2015. It decreased
from 29.77% to -1.78%. The most recent Q4 2016 ROE for Volkswagen is 0.82%. Its competitors like
Toyota and Honda also showed a negative trend of ROE from 2011 to 2015. However, General
Motors was able to report highest ROE of 22.22 % in the first quarter of 2016 due to increase in
revenue. Moreover, the most recent Q4 2016 ROE for Toyota is 15.90%. The average ROE for
automotive industry is between 15% and 17% as seen in the graph below.

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Stock Price Analysis
Volkswagen saw its stock price go down by 30% overnight when the Environment
protection Agency announced that they manipulated the software to hide the actual emissions by
the car. This announcement reduced its market cap by $20 billion and its share price dropped from
$170 to $110.

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Appendix G: Key Resources & Capabilities
Resources Capabilities
Tangible 1. Finance
2. Plant & equipment
3. Global locations
4. Distribution network
5. Knowledge workers
1. Product development
2. Purchasing
3. Engineering
4. Manufacturing
5. R&D
6. Marketing & sales
7. Government relations
8. Strategic management
Intangible 1. Technology
2. Wide brand portfolio
3. Synergy among different
brands and groups
Appendix H: Global Revenue

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Appendix I: Porter’s Five Forces Analysis
Barriers to Entry: HIGH
The automobile industry has large entry barriers which prevents new firms from entering.
Some of the factors responsible for this include, immense start-up costs, extended time periods
required to develop distribution networks and brand image and trust, and a steep learning curve
to achieve economies of scale in order to compete at a competitive price.
Power of Suppliers: LOW - MEDIUM
Supplier specialization is a given in the automobile industry. Suppliers often produce
parts for only one or two automakers at once and often heavily rely on the automakers they
partner with for sales orders and continued business. It would devastating for a supplier to lose a
partnership with a major automaker such as Volkswagen.
However, automakers require a wide variety of precious and in-demand materials e.g.
computer components, copper wiring, and rubber. A growing and increasingly industrial and
globalized world is creating heavier demands on these materials as well as metals, sand, and
silica, leading to rising prices. Suppliers of certain materials determine prices of these materials
based on the demand from many industries, leaving automakers subject to forces in various
unrelated markets and to a certain extent, at the whim of these suppliers.
Power of Consumers: LOW - MEDIUM
Volkswagen has a wide array of models, but there still exist a wide range of brand
substitutes. Nevertheless, the power of individual consumers is low given the capital
intensiveness and frequency of purchase by individual (probably an average of 1 car per
individual every 5 to 10 years). Individuals or small businesses rarely buy cars in large quantities
but large firms or government agencies that regularly buy in bulk do have slightly more power
than average individuals. Furthermore, for a company like Volkswagen with a wide customer
base spread all across the globe, consumer ability to affect company performance (e.g. through
sales, switching to another competitor, etc.) is limited dude to such fragmentation.
Availability of Substitutes: LOW
Increasing gas prices and government initiatives to promote environmentally friendly
transportation indirectly compels more consumers to explore alternatives such as taking public
transits, riding bicycles, commuting, etc. Automakers, however, have managed, to varying
degrees to capture these consumers by producing cars with high fuel efficiencies. Also, logistically

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speaking, there is a certain amount of freedom that comes with having one’s own personal
vehicle. Thus, to giant global automakers, availability of substitutes is low.
Rivalry: HIGH
Oligopoly exists within the US automobile industry and there is stiff hypercompetition
among existing automakers. There is very little to medium brand loyalty from consumers who
mostly buy cars based on reputation or value (quality versus price). The recent 2016 scandal with
Volkswagen’s diesel brand had negative impact on the carmaker’s reputation which caused a
drop in diesel car sales in 2016 (Campbell, 2016). Although Volkswagen launched new strategies
to counter the shortfalls and managed to achieve a significant rise in sales in 2017, Volkswagen’s
competitors, especially Toyota, are likely to capitalize on their weakened competitive position and
ultimately end up taking away more market share from them.

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