Analyse Volkswagen through the lens of Porters five forces to assess how the five forces affect Volkswagen and the Automobile industry in the UK.

• Volkswagen Pestle & Swot Analysis 2016-2017

4.0 Volkswagen Porters Five Forces Analysis 2018

4.1 Bargaining power of Volkswagen buyers

According to Grant (2016), the ability of buyers to drive down the prices they pay is dependent on two factors: their price sensitivity and their bargaining power relative to the firms within the industry. Price sensitivity is normally determined by factors like product differentiation, competition, and significance of the product to the consumer.

However, consumer bargaining power is determined by factors like cost and ease of switching to purchase products from Volkswagen’s competitors like Toyota or Ford, as well as buyer information regarding prices cars in the market. Volkswagen customers have a low bargaining power because of high switching costs that are involved when switching to purchase other products.

In addition, Volkswagen makes premium car products that attracts premium customers that are price insensitive due to its clearly differentiated car products. Its differentiated products have driven high customer loyalty as seen by the increase in its sales even after the Volkswagen emissions scandal (Boston 2017). High customer loyalty gives Volkswagen the power to increase the prices of its products.

4.2 Bargaining power of Volkswagen suppliers

The bargaining power of suppliers has similar determinants like the bargaining power of buyers in an industry, according to Grant (2016). The only difference is that it is now the firms in the industry that are the buyers and the producers of inputs that are the suppliers. The relevant factors are the ease with which the firms in the industry can switch between different input suppliers and the relative bargaining power of each party.

By applying these factors, we can note that the bargaining power of Volkswagens suppliers is low because there are many available suppliers and given a large group like Volkswagen, existing suppliers dread losing their business contracts with the automobile to other suppliers. This gives Volkswagen power to get goods from suppliers at the lowest possible costs to increase their profits (Frankrijk 2017).

For example, Volkswagen cut ties with its Bosnian supplier Prevent which supplied various car parts from gearbox components to seat covers because it suddenly stopped supply that led to delays in VW productions and resulted into losses ranging from $24.6m-$123m hence replacing it with other suppliers (Sullivan 2018).

4.3 Threat of substitutes

According to Grant (2016), the price that consumers are willing to pay for a product depends on the availability of substitutes for the products. The absence of substitutes for a product means that consumers are comparatively insensitive to price. However, the existence of close substitutes means that customers will switch to substitutes in response to price increases for the product (demand is elastic with respect to price). The extent to which substitutes depress prices and profits depends on the propensity of buyers to substitute between alternatives. This, in turn, depends on their price-performance characteristics. Therefore, this can be perceived as a low threat by Volkswagen because there are few substitutes for its products such as trains, motorcycles, bicycles scooters, hover boards, electric skateboards, walking for short distances among others. 

However, substitutes such as trains are associated with some problems like lack of flexibility where its routes and timings cannot be adjusted to individual requirements and their failure to operate in rural areas. Also, bicycles are associated with increased risk of injury and cannot be used as a means of transport during some weather conditions like during heavy rains (Crilly 2017).

4.4 Competitive Rivalry

According to Grant (2016), the major determinant of the state of competition and the general level of profitability is rivalry among the firms within an industry. In some industries, firms compete aggressively to the extent that prices are pushed below the level of costs and industry-wide losses are incurred. Whereas in other industries, price competition is muted, and rivalry focuses on advertising, innovation, and other non-price dimensions.

Competition intensity is determined by factors such as seller concentration, diversity of competitors, product differentiation together with excess capacity and exit barriers according to Grant (2016).

Considering these factors, we can conclude that Volkswagen faces intense but price muted competition because of other automobile companies like Toyota, Ford, Nissan, trying to grab its market share in the automobile industry. This has led to intense advertising and product innovations. For example, to oust competitors who use diesel Volkswagen group invested £ 30bn to start manufacturing electric cars to satisfy consumer needs (Attwood 2017).

In addition, Grant (2016) explains that barriers to exit are costs associated with capacity leaving an industry. Where resources are durable and specialized, and where employees are entitled to job protection, barriers to exit may be substantial. We can note that exit barriers for the automobile industry are very high and exiting the market would lead to extreme losses for the exiting company which has forced some of the automobile companies to stay in business and intensify the competition. For example, Toyota closing its manufacturing plant in Australia led to loss of approximately 2500 jobs, resources, and a potentially wide market (Castro 2017).

However, Volkswagen AG has loyal customers to purchase its cars as seen by the increase of its sales even after the Volkswagen emissions scandal (Boston 2017).

4.5 Threat of entry/barriers to entry

According to Grant (2016), if an industry earns a return on capital in exceeding its cost of capital, it will attract entry from new firms and firms diversifying from other industries which will increase competitiveness in the market and lower its profitability.

However, the ease with which new entrants can access a market depends on barriers to entry and the effectiveness of barriers set my existing companies like Volkswagen, Ford, Chevrolet, among others. The major barriers to market entry across industries are capital requirements, economies of scale, absolute cost advantages, product differentiation, access to channels of distribution, government and legal barriers, retaliation and effectiveness of barriers to entry according to Grant (2016).

Putting these factors into consideration, we can conclude that this is as low threat for Volkswagen because a new automobile company would require huge capital investments, resources and considerably large amounts of time to be able compete with already existing automobiles and market its brand (Parkin et al 2017).

Also, Grant (2016) indicates that industries with high capital requirements for new entrants are also subject to economies of scale. The problem for new entrants is that they typically enter with a low market share and, hence, are forced to accept high unit costs. A major source of scale economies is new product development costs. Thus, a new entrant in the automobile would have to spend extra to produce few units compared to establish companies like Volkswagen that produce in large volumes reducing on the cost of productivity. This would hinder the profit margins of a new entrant.

Grant (2016) also explains that in an industry where products are differentiated, established firms possess the advantages of brand recognition and customer loyalty. And new entrants to such markets must spend disproportionately heavily on advertising and promotion to establish brand awareness. Therefore, high product differentiation by Volkswagen would hinder the profit margins of a new entrant and its chances of prosperity as it would have to spend heavily on advertisements (Cremer 2017).

In addition, new automobiles would suffer heavy taxation especially in the US where there has been an increase of 25% levy on steel and 10% increase on aluminium imports that would lead to high car prices and few sales (Campbell 2018). In Europe, new diesel cars are to face higher taxes such as increase on VAT or new levy in a bid to reduce air pollution (Pickard and Campbell 2017). This totally hinders the development of new automobiles. 

References

Attwood James (2017) “VW Group to invest £ 30bn in electrification, autonomy and future technology” Autocar [online] at https://www.autocar.co.uk/car-news/industry/vw-group-invest-%C2%A330bn-electrification-autonomy-and-future-tech

Bakker, Henk (2018) “2018 (Q1) Europe: Best- selling car manufacturers and brands” Car Sales Statistics [Online] at https://www.best-selling-cars.com/europe/2018-q1-europe-best-selling-car-manufacturers-and-brands/

Boston William (2017) “Volkswagen sales rise in 2016 despite scandal” Market Watch [online] at https://www.marketwatch.com/story/volkswagen-sales-rise-in-2016-despite-scandal-2017-01-09

Campbell Alexia (2017) “Trumps steel tariffs are hated by almost every US industry” Vox [online] at https://www.vox.com/policy-and-politics/2018/3/2/17070816/trump-steel-aluminum-tariffs-businesses

Castro Joe (2017) “More than 2,500 jobs to go as Toyota announces end of Altona production” ABC News [online] at http://www.abc.net.au/news/2017-01-31/toyota-set-to-close-in-melbourne-in-october/8227698

Cremer Andreas (2017) “VW to make brands more distinct to boost efficiency” Reuters [online] at https://www.reuters.com/article/us-volkswagen-strategy/volkswagen-to-make-brands-more-distinct-to-boost-efficiency-idUSKBN1CH2KW

Crilly Meredith (2017) “The disadvantages of a bicycle” Livingstone.com [online] at https://www.livestrong.com/article/482364-the-disadvantages-of-a-bicycle/ 

Frankrijk (2017) “Market Monitor Automotive France 2017” Atradius [online] at https://atradius.nl/rapport/market-monitor-automotive-france-2017.html# 

Grant, Robert (2010) “Contemporary Strategy Analysis” 9^th edition, Wiley

Hook, L., Pickard, J., & Raval, A. (2018) “UK stops short of 2040 ban on petrol and diesel vehicles” Financial Times [Online] at https://www.ft.com/content/30f7e328-8372-11e8-96dd-fa565ec55929

Johnson, G., Scholes, K., and Whittington, R. (2008) “Exploring corporate strategy” 8^th ed., Prentice Hall

Parkin Rich et al (2017) “2017 Automotive Trends” Strategy&[online] at https://www.strategyand.pwc.com/trend/2017-automotive-industry-trends 

Pickard Jim and Campbell Peter (2017) “New diesel cars to face higher taxes in clean air push” Financial Times [online] at https://www.ft.com/content/c04fb1ce-c566-11e7-b2bb-322b2cb39656

Scarpinelli Lujan (2017) “Electric car market races to meet demand” The New Economy [Online] at https://www.theneweconomy.com/technology/electric-car-market-races-to-meet-demand

Sullivan Arthur (2018) “The strange tale of Volkswagen and its Bosnian supplier” DW [online] at http://www.dw.com/en/the-strange-tale-of-volkswagen-and-its-bosnian-supplier/a-43251412