International Strategy of Audi - Assignment Example

International strategy of Audi Introduction Peter Drucker (1986) the management guru said, "It is the who determines what a business is. For, it is the customer and he alone through being willing to pay for a good or service, converts economic resources into wealth, things into goods." Understanding the market and the buyer behavior is therefore very important for any company. Companies devise business strategies after understanding the respective markets and the customer behavior. The buyer could be individual consumers, or organisations. Buyers are motivated to purchase the product depending on the brand value as well as functional features of the product. Liberalization and globalization has opened newer vistas of trade and business all around the globe. Though Audi has been an international brand even before the liberalization era, but the opening up of economies has now tilted the balance in favor of market forces. Now governments prefer to limit their role in formulating the general guidelines for business and determining the nature of imports and exports. Companies therefore try to cross the boundaries of their strongholds and explore opportunities in other countries. Strategies for tapping the International market Globalization has provided avenues for growth the world over. Unlike earlier times when the local companies/ manufacturers were favored over 'outsiders', globalization has made this practice redundant in almost all major economies, as far as legal provisions are concerned. Therefore companies are quick to respond to the situation. Now the moot question is 'which strategy to opt for, while entering the International arena. In general the strategies could be categorized as; 1. A multi domestic strategy 2. A global or international strategy 3. A transnational strategy A multi domestic strategy enables individual subsidiaries of a multinational firm to compete independently in different domestic markets. The multinational headquarters coordinates financial controls and major marketing policies, and may centralize some R&D and component production. Otherwise subsidiary behaves like a strategic business unit that is expected to contribute earnings and growth proportionate to the market opportunity. In this strategy, resources are dispersed throughout the various countries where the firm is doing the business, decision-making authority is pushed down to the local level, and each business unit is allowed to customize products and market offerings to specific needs. The corporation as a whole foregoes the benefits that could be derived from centralization and coordination of diverse activities. Global strategy seeks competitive advantage with strategic moves that are highly interdependent across countries. This strategy involves a high degree of concentration of resources and capabilities in the central office and centralization of authority in order to exploit potential scale and learning economies. These moves include most or all of the following: A standardized core product that exploits or creates homogenous tastes or performance requirements, Significant participation in all major country markets to build volume, A concentration of value-creating activities such as R&D and manufacturing in a few countries, and A coherent competitive strategy that pits the worldwide capabilities of the business against the competition. In transnational strategy a company often enters into strategic alliances with their customers, suppliers, and other business partners to save time and capital. Such alliances when they become long-term partnerships may bring to the firm specialized competencies, relatively stable and sophisticated market outlets that help in honing its products and services, or stable and flexible supply sources. In such a strategy, nearly all value-adding activities are managed from a global perspective without reference to national borders. This results in a virtual corporation, consisting of several independent firms that collaborate to bring products or services to the market. Any organization can get the due benefits from global expansion when; It can transfer its core competency into the newer market i.e. it retains skills which competitors cannot easily match. It is able to realize the location benefits i.e. while maintaining global standards some local flavor is added into the strategy and company is able to provide best product for lowest price through optimal location. Audi is a well known brand, which won't like to dilute the value of its brand. A multi-domestic strategy implies that subsidiaries are given a free hand, but Audi doesn't believe in that. Though the company has been operating with the help of some of its subsidiaries, but most of the policy decisions are taken from the top. Therefore while on the one hand the company has been using the global strategy, it has also been using taking advantage of localization benefits by shifting some of the manufacturing to places other than Germany. The company manufactures its cars basically under the brands 'Audi' and 'Lamborghini'. It is known for a range of exquisite cars like A2, A3, A4, A6, A8 and TT and the sports models like Audi S4, S6, S6 Avant and Audi S8. The range is very attractive and sophisticated with state of the art technological features. Audi has tried to lead the way with its brand claim of "Vorsprung durch Technik" i.e.'projection/lead by technology'. Volkswagen is the holding company of Audi. Incidentally, Germany happens to be Europe's largest market accounting for 26.5% of the region's volumes (Datamonitor, 2006a). The UK stands at second place with 24.2% of the total European volume. Market leader in terms of volume of production in Germany is Volkswagen Leasing holding a 6.4% market share. Overall, the group recorded revenues of $120,879 million during the fiscal year ended December 2005, an increase of 7.1% over 2004. In the March issue of Autocar (2007), Rupert Stadler, the new Audi chief executive, who took over in January, says "We are the fastest- growing premium brand in the world. This puts us well on our way to becoming the most successful premium car manufacturer in the world by 2015". Industry analysts are indeed keenly watching how things unfold in the coming weeks and months. Core competencies of Audi include; Strong Brand Image: With a history of 100 years behind it, Audi has a strong reputation of being a premium luxury brand. The four circles truly represent the quality and value addition for a premium customer. Formidable Financial Support: Being part of a Volkswagen family gives the company a solid financial support. With good financial backing the company gets enough space for experimenting and maneuvering. Multi-location production facilities: Such an arrangement proves to be very crucial during the times of industrial disturbances, other problems at one or more locations. The short fall can be supplemented to some extent by going for more production targets at other locations. Moreover, in order to cater to markets at different locations worldwide, a centralized distribution system, results in lots of overhead expenses, which makes the final product much more costly, thus reducing the competitive edge. But production and distribution facilities located in different regions can cater easily and with lesser costs within nearby geographical areas. For example the two production facilities in China can cater the markets in Asia-pacific and South-Asian region in a cost effective manner. Industry outlook The automobile industry has been reeling under weak performance in recent years hovering around a CAGR of around 4% during the period 2001-2005. But kept has been able to sustain strong financial performance during this period as well. For the fiscal 2002-2006, Audi recorded an average revenue growth of 7.2% as compared to the industry average of 1.8%. Similarly, the company recorded an average operating margin of 5.5% as compared to the industry average of 2%. Strong revenue growth helps in boosting the investor confidence, reflect strongly on the efficiency of the management and motivate the workforce to achieve even better results. Such motivation becomes all the more crucial if the industry promises growth for the car industry (Datamonitor, 2007). As per a study undertaken by Datamonitor (2006b), the compound annual growth rate of the new car market for the period 2005-2010 is forecast to 4.9%. Table 1: Global New Cars Market Value Forecast: $ billion, 2005-2010 Year $ Billion % growth 2005 839.7 3.10 2006 889.1 5.90 2007 916.5 3.10 2008 956.5 4.60 2009 1011.5 5.50 2010 1066.3 5.40 CAGR (2005-2010) 4.90 Audi's Business Strategy While planning a comprehensive business strategy, a company is to analyze a range of factors, which includes, its HR policies, Production principles, Marketing communication strategy, and of course a well balanced marketing mix. HR policies determine the level of motivation that the company is able to infuse amongst its workforce. Production principles weigh the cost-benefit ratio, economies of scale and the value addition. Marketing communication strategy determines the effectiveness of company in convincing the customer. Marketing mix in general is a combination of marketing tools that a company uses to satisfy customers and take care of company objectives. This mix produces "the offering" for the consumer. Traditional marketing mix concept, first proposed by McCarthy in 1960, consisted of Product, Price, Place and Promotion (better known as the 4Ps). Each particular marketing mix adds up to a certain amount of effort the company is making for the purpose of generating sales. Any plan to develop a competitive advantage must be based on a sound analysis of the company's competitors. Audi has been around for more than 100 years now. Analyzing some of the initiatives taken by the company in recent times, for making it an internationally competitive and revenue earning brand, we can point out some of the key features of the strategy as follows; i. Audi has been maintaining an independent identity even after its takeover by VW. Though Audi AG (Audi), is a 99%-owned subsidiary of Volkswagen, a German based manufacturer and a leading name in car production in Europe, yet VW preferred to keep the brand name 'Audi', to make the maximum out of the well-established brand name. The importance of branding is recognized as one of the key weapons for firms in fiercely competitive markets. Brand investment has been found to contribute to the attainment of positional advantages and hence performance (Matear et al., 2004). This helped the company in establishing the brand equity, reaping the benefits of it and venturing into the markets well known for Audi brand. ii. The company is headquartered in Bavaria, Germany and employs about 52,000 people. It has tried to locate its production facilities at strategic locations around the world to leverage the location advantages. Audi operates through production locations in five countries on three continents1. Such an arrangement results in lowering the labour costs, lesser tax burden and generates a goodwill around the region, as the production facility provides jobs to the local populace, helps in development of the region and pays taxes etc to the local government (which in any case happen to be lower than those prevailing in Germany and other parts of Europe). At present Audi has production facilities in Brazil, Italy, Germany, Hungary and China. iii. In order to firm up its foothold into the country of its production location, Audi entered into strategic alliances with local companies at different production facilities. For example, in Italy, Audi acquired Automobili Lamborghini S.p.A in 1998. Similarly in Brazil the company has firmed up its foothold to such an extent that in 2005, its market share was 41 percent in the premium segment, making it the market leader in Brazil. It operates with FAW (First Automobile Works) in China, which helps the company in studying the market of billions of consumers. Such a strategy not only provides the company a dependable ally in producing a quality products, but the local company also provides Audi a platform for knowing the local market and preparing appropriate marketing strategies. iv. Audi has floated group companies known as Audi Bank and Audi Leasing, which offer Audi customers financial services specific to the brand. A brand can be defined as "a name, term, sign, symbol, or design, or combination of them which is intended to identify the goods and services of one seller or group of sellers and to differentiate them for those of competitors" (Kotler 1991; p. 442). Companies need brand strategies and periodic reviews of the strategy to grow and nurture the brand. By making use of Audi Bank an Audi Leasing, the company can add up its profits. v. Germany is the oldest and most prolific market for Audi. While exploring overseas opportunities, the company has indeed kept its hold over the German market. In fact Germany forms the largest geographical market for Audi (Datamonitor, 2007). During the fiscal year 2006, Germany accounted for over 70.5% of the total revenues, with an increase of 19.4% over 2005. vi. As part of the strategy, the company has preferred to retain its identity has the one catering to the premium segment, without being bothered by the lucre of the growing middle class segment. This has helped the company in retaining a distinct identity and being known as a premium brand. Audi has one of the most impressive product portfolios with an image of one of the most valuable brands in the automotive industry. All the car models coming out of the stable of Audi are of high value. Some of the high image car models of Audi are, Audi TT, Audi A4, Audi A3, Lamborghini Gallardo Coupe, Lamborghini Murcielago LP640 Roadstar etc. Strategically Audi prefers to retain this high prestige design, style and customer confidence, which also gives a unique identity to the customers, thereby fulfilling some of the prestige/ esteem needs of the customer. According to Maslow's hierarchy of needs buyer's needs vary from physiological to self actualization. In general a product like car, is required to fulfill the needs like social needs and esteem needs. Brand image and value plays a very crucial role as a decider in fulfilling such needs. Buyer behavior is deeply rooted in psychology guided by dashes of sociology. A product is therefore priced, placed, promoted depending upon the kind of market the company envisages for the product. A company like Audi will therefore give more thought to the needs of its customers within its most potential markets. Qualities like reliability and prestige, which forms the core of making buying decisions, come with the name called 'Audi'. vii. Before launching new products, a company has to generate a hype for the product, get in touch with maximum number of potential customer, generate curiosity amongst the prospective buyers and analysts. Companies adopt a number of ways and means to be seen or heard during such times. Audi has quite successfully, managed to launch its newer models by making use of the publicity platform when the company was in news or when it was able to generate goodwill amongst the populace in general. For example, in the two recent cases the company has been able to leverage the goodwill quite successfully. in March 2006, the award for Best European Business was conferred upon Audi. The company was judged as one of the nine most competitive companies in Europe. This renowned prize is awarded jointly by Roland Berger Strategy Consultants and the Financial Times. There was lot of talk in the industry and the consumer market about Audi. In the following month Audi introduced eight-cylinder engines for its Audi A6 and A8 model lines. And subsequently in June 2006, the company started production of its second generation of the Audi TT Coup in its production facility in Hungary. (Datamonitor, 2007). Similarly, the British car magazine, Autocar presented Audi with the award for 'Car Company of the year 2006', in November. The company came out with the announcement of the launch of its new model series A5 and S5 in February 2007. viii. Technology has been the forte of Audi. In fact Audi, BMW are considered as leaders in implementation of advanced technologies. These companies have been using technology as a means of enhancing the status of their brands (Mortimer, 2004). Audi is considered a pioneer in the use of robotics in the industry. Mortimer (2005) states that Audi is probably the automotive company with most experience of laser welding aluminium components using robotics. Audi has also used the RFID in a big way. Recently, the company awarded a big contract to Identec Solutions2 for implementing the OIS-P RFID System for the production of its TT range. Based on information stored on the OIS-P tags, robots at about different stations throughout the production process can exercise different options depending upon the programming. ix. Some of the leading competitors for Audi are, Bayerische Motoren Werke AG (BMW), Daihatsu Motor Co., DaimlerChrysler AG, Fiat S.p.A., Ford Motor Company, General Motors Corporation, Honda Motor Co., Ltd., Hyundai Motor Co., Nissan Motor Co., Ltd., Toyota Motor Corporation etc. The company has been facing the heat from its Japanese counterparts like Toyota and Honda. These two companies have in fact been grabbing the market space from the big three (GM, DaimlerChrysler and Ford) in the North American region. Now Honda and Toyota have set their sights on China and Europe, the home ground for Audi. Therefore the company needs to pull up the socks for taking on the competition. In recent days, Audi has taken on its competitors quite sportingly. In the sports circuit, The Audi R8 midsize sports car is giving a tough competition to the best in its category R8 offers 420 horse-power in a V8 FSI engine. Priced competitively between $110,000 and $120,000, R8 can acquire a speed from 0 to 62 in 4.6 seconds (Alleyne, 2007). Similarly, in order to take the advantage off 'minivans' of their third row seats, Audi has come out with the V8 model (Solheim, 2007). x. Audi has been quite consistent in its approach to refurbish its brand identity. In today's market driven economy, the role of media and promotion has also become very crucial. With increasing competition and decreasing profit margins, a balanced marketing communication campaign forms the back-bone of company's marketing strategy. As part of its marketing communication strategy, Audi has been making good use of the online segment. In recent times Audi's iTunes for podcasts have been well appreciated. Audi has 53 segments for download which inform its customers about various technical features in new cars that buyers may not be aware of. Such podcasts work like entertaining user manuals. Verrill has reportedly been downloaded by 5,000 patrons in the first week of March itself (Brandweek, 2007). xi. Audi has planned to introduce a four-door, coupe-styled car and two sporty SUVs as part of a plan to nearly double its model count by 2015 (Krix, 2007). Michel Dick, Audi's product development chief says, "We have 22 vehicles in the lineup already and the other 18 in our heads". Audi is to bring yet another SUV besides the Q5. This ambitious plan and the expanded lineup is stated to be the key to Audi's stated goal of overtaking Mercedes-Benz and BMW to become the world's biggest luxury automaker by 2015. The concept of four-door coupe was pioneered by Mercedes in CLS, but now Audi is ready to take on Mercedes on this count as well. Geist (2007), states that April 2007, can very well prove to be a crucial month for Audi in its efforts to enhance its image amongst the buyers of luxury vehicles in America. The company plans to introduce four new or redesigned models in the United States this year. Besides the TT coupe in April and convertible in May, Audi will roll out the new R8 sports car in September and the new A5 coupe late in the year. xii. But Audi has not been able to come out with catchy slogans and ad lines in recent days. This in turn results in subdued responses to some extent. For example Audi has extensive plans for the US market in coming days, but somehow the former tag line of Audi, "Never Follow", doesn't suit its campaign as it is indeed following Mercedes in the segment. But Patrick Hespen, Audi's spokesman says, there are no immediate plans for a new slogan (Geist, 2007). Geist, reveals that owing to inner pulls and pressures, such efforts of Audi America's efforts in the past were thwarted by the executives of Audi's parent company, Volkswagen AG. The lack of innovative efforts on electronic media was quite apparent last year when Audi used film footage provided by a German ad agency to save money on U.S. TV commercials. But to fill the gap to some extent, the company plans to build an Internet buzz in coming days. xiii. With the increasing awareness amongst the customers about the environmental issues and fuel efficiency, respective government are putting in place legislations for making such an adoption a mandatory feature. The premium segment too has taken notice and more and more cars are going 'green'. This is a big challenge for the car industry, as it involves using cleaner fuels without compromising other features. Audi has taken a lead in implementing the green technology as well. Edmondson (2007) says that another German auto manufacturer, BMW is stepping up efforts to incorporate fuel-saving technologies with an eye on the growing influence of Audi. Audi is giving a tough challenge to BMW because for BMW the biggest task is to convert its fleet of high performance cars. What makes the task of BMW doubly complex is the recent report by Adam Jonas of Morgan Stanley; Audi is positioned to grow nearly twice as fast as the BMW brand through 2015. The Audi A5 coupe is stated to work like an accelerator for the drive of Audi to take on BMW in key segments and markets (Edmondson, 2007). xiv. Europe is a key market for Audi as is evident from the earnings of 2006, when the company generated more than 90% of its revenue from European market. According to a report published by the Organization for Economic Cooperation and Development (OECD) in January 2007, the GDP growth in the Eurozone is expected to slowdown in 2007 with projections of sharper-than-expected slowdown in the United States, jump in oil prices, an abrupt appreciation of the euro if global current account imbalances trigger a realignment of exchange rates. The GDP growth in the Eurozone is forecast to decline from an estimated 2.2% in 2006 to 2.1% in 2007. Such a weak economic outlook for its key market is bound to put pressure on the revenues of the company. Coupled with rising metal prices and other raw materials this slowdown could prove to be detrimental for the company's prospects in near future (Datamonitor, 2007). Company has not made any special arrangements to counter the slowdown, in anticipation that the slowdown might affect all its competitors equally badly. xv. On the other hand, Audi has a big advantage owing to its formidable presence in China. The Chinese market is growing by leaps and bounds in influence. With a market size of billions, the advantage in lower manufacturing costs, adjacent to countries like India provides Audi with a bouquet full of opportunities. After US and Japan, China is the world's third largest car market. Most of this market is still unexplored, because China joined the liberalization bandwagon recently. Passenger vehicle sales in China are expected to grow annually by 15-18% and reach 6 to 7.4 million by 2010. This way China is projected to become the second largest car market in the world by 2010 and may even surpass all others and could well become world's largest by 2015. Audi has been active in China since 1988, and holds a ten percent stake in the joint venture FAW-Volkswagen Automotive Company. By virtue of positioning itself in the Chinese market very early on, Audi will continue to benefit from the continuing boom in cars in China. The strategy of Audi of shifting part of its production facilities to China appears to be paying rich dividends. xvi. Russia too appears to have stabilized, after the hiccups of glasnost and perestroika. With the figures of robust economic growth, the Russian consumer will be able to spare more money for his comforts. The Russian market therefore appears to be well set for a faster car growth, as it is counted by analysts as one of the fastest growing markets with an annual growth of 30% in 2006 (Datamonitor, 2007). The demand for foreign brands is significantly high, as domestic carmakers are yet to match with the technological advancements and features. Moreover the domestic manufactures have to operate with very tight margins of revenue which do not allow them enough maneuvering space. The number of foreign cars assembled in Russia is expected to expand by 300 percent by the year 2010. Audi appears ideally equipped for these opportunities. The company has already started the groundwork in Russia with an expansion of its dealer network and satellite service workshops. By 2010 Audi intends to provide almost 100% area-wide coverage from St. Petersburg to well into Siberia. Strong growth of this nature will no doubt result in increased revenue for the company. xvii. Like the Chinese and Russian markets, the Middle East region is also full of wealthy Sheikhs, who love to drive faster and comfortable cars. Audi takes pride in catering this segment quite well. Though there are regions which have been disturbed for quite a while in the Middle East, but this region also includes places like Dubai, Saudi Arabia, Kuwait and Abu Dhabi. These places are full of oil and people in these areas prefer to live a decent lifestyle. Therefore this is a particularly lucrative market for luxury vehicles. Many Western MNCs and industrial companies have already established their own subsidiaries in these areas and these regions are fast emerging as major trading centres. The luxury car market in the Middle East is expected to grow about 20 per cent per annum for the next three years (Datamonitor, 2007). Through its subsidiary in Dubai Audi has been catering to the Middle East market with premium-segment vehicles since 2005. Company is on its way to further strengthen its brand value and invest further to market its models like the Audi Q7. Strong initiative by Audi, coupled with strong growth projections in the end market would help the company to consolidate its market share in the Middle East. xviii. Audi is hugely dependent on the German and European market, to consolidate its financial revenue figures. This way the company appears primarily dependent on the domestic market. This over-dependence on one particular market or segment makes the company vulnerable to country specific factors resulting in industrial disturbances. With increasing competition and growing business rivalry, at times the rival companies may also assist in disturbing the industrial peace at Audi, which provides direct leverage to the rivals. This may appear to be distinct possibility as of now, but in business parlance such tactics are not unheard of. Conclusions and Recommendations Audi is indeed a well known brand for the generation who love luxury and style. Audi's main concentration for the time being appears to be Germany and the European market. But the growth rate in German car market doesn't appear to be that promising as compared to some other markets like Russia, China, India and Middle East. In Germany the cars market grew by 1.6% in 2005 to reach a volume of 3,801.2 thousand units. And this market is projected to increase to 4003 thousand units, an increase of 5.3% since 2005. On the other hand the car market in China, Russia and middle is forecast to grow by 15-30 percent in coming 3-5 years. Therefore, Audi needs to concentrate more on the markets in these promising areas. Its Chinese production operations need to be further strengthened and efforts must be made to reduce the costs, because the per capita income levels in the Asian region are lesser as compared to those in the Eurozone and other developed nations. Audi has big plans for India, another formidable market for car lovers, but it will do a world of good, if it can pass on the lower costs of production to the consumers in Asian markets. This will help in establishing the brand equity of Audi, and in gaining loyal customers. References: 1. Alleyne, Sonia (2007). On the Fast Track. Black Enterprise, Apr2007, Vol. 37, Issue 9. 2. AutoWeek (2007). 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