Audi AG Report G2 Team4 PDF

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MGMT102 – Strategy AY17/18 Semester 1 - Section G2 Instructor: Prof Adam Tatarynowicz Team 4 Report on:

By: Celestine Emmanuel (S9438234C) Jonathan Chua Yi Xian (S9447236I) Long Shijian Nicholas (S9308538H) Sek Ru Xin Ophelia (S9447741G) Phua Ying Xue (S9540080I)

TABLE!OF!CONTENTS! 1.!Executive!Summary!!.............................................................................................................................!3! 2.!Company!Overview!!.............................................................................................................................!4! 2.1!Background!.................................................................................................................................!4! 2.1.1!Introduction!to!Audi!....................................................................................................................!4! 2.1.2!Key!Markets!.................................................................................................................................!4! 2.2!Audi!in!the!Chinese!Market!!.........................................................................................................!4! 3.!Industry!Analysis!!!.................................................................................................................................!5! 3.1!PESTEL!Analysis!!..............................................................................................................................!5! 3.2!Porter’s!5!Forces!!.............................................................................................................................!6! 4.!Company!Analysis!.................................................................................................................................!9! 4.1!Internal!Analysis!!!............................................................................................................................!9! 4.1.1!Resource!Based!View!(RBV)!!........................................................................................................!9! 4.1.2!VRIO!Analysis!!............................................................................................................................!11! 4.1.3!SWOT!Analysis!!..........................................................................................................................!12! 4.2!Business!Level!Strategy!!.................................................................................................................!14! 4.2.1!Focused!Differentiation!Strategy!...............................................................................................!14! 4.2.2!Audi’s!Incremental!Innovation!!.................................................................................................!15! 4.3!Financial!Performance!Analysis!!....................................................................................................!16! 4.3.1!Audi’s!Profitability!.....................................................................................................................!16! 5.!Corporate!Strategy!.............................................................................................................................!16! 5.1!Vertical!Integration!!!......................................................................................................................!16! 5.2!Diversification!!!.............................................................................................................................!17! 5.2.1!CNG!Industry!.............................................................................................................................!17! 5.2.2!Electric!Vehicle!Industry!............................................................................................................!18! 5.3!Global!Strategy!in!China!................................................................................................................!18! 5.3.1!Integration!Responsiveness!Framework!...................................................................................!18! 5.4!Strategic!Alliances!.........................................................................................................................!19! 5.4.1!Non-Equity!Alliances!..................................................................................................................!19! 6.!Recommendation!...............................................................................................................................!20! 6.1!Revising!Global!Strategy!in!China!!..................................................................................................!20! 6.2!Investing!more!in!EV!......................................................................................................................!21! 6.3!Car!Sharing!....................................................................................................................................!21! 6.4!Scenario!Planning!for!Crisis!!...........................................................................................................!22! 6.!Conclusion!..........................................................................................................................................!22! ! ! ! ! ! !

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EXECUTIVE!SUMMARY! This!report!looks!into!the!application!of!the!AFI!framework!on!the!strategic!analysis!of!Audi.!To!find!out!more! about!Audi’s!current!strategy!used,!the!team!performed!a!background!research!on!the!company!and!their! standing!in!Chinese!market!as!it!is!one!of!Audi’s!main!revenue!generators.!Internal!and!external!analysis! were!also!carried!out!to!find!out!more!about!the!company.!!! For!the!external!analysis,!the!team!used!the!PESTEL!framework!in!analysing!the!macro-environmental!forces! and! the! Porter’s! Five! Forces! framework! to! understand! the! forces! that! shape! the! competition! in! the! automobile! industry.! The! team! then! analysed! Audi’s! competitive! advantage! by! identifying! its! resources,! capabilities,!core!competency!and!value!chain!activities!which!formed!the!internal!analysis!of!the!company.! A!SWOT! analysis!was! also!performed! to!explore! Audi’s!internal! strengths!and! weakness,!as! well!as! their! external!opportunities!and!threats.!! The!team!then!proceeded!to!identify!Audi’s!business!level!strategy!and!perform!a!financial!analysis!to!see!if! their!current!strategy!helps!to!generate!profit.!Subsequently,!the!team!went!on!to!analyse!their!corporate! level! strategy! in! terms! of! vertical! integration,! diversification,! global! strategy! as! well! as! their! strategic! alliances.!! Finally,!based!on!the!challenges!identified,!the!team!proposed!some!recommendations!that!Audi!can!adopt.! Such!recommendations!include!revising!their!global!strategy!in!China,!investing!more!in!new!energy!vehicle,! enter!the! car! sharing!industry! and! introduce!scenario! planning! for! their!crisis! communications.! Audi!can! consider!adopting!these!recommendation!in!order!to!retain!their!competitive!advantage!in!the!industry!and! once!again!leapfrog!their!fellow!competitors.!!!

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COMPANY!OVERVIEW! 2.1!BACKGROUND! 2.1.1!INTRODUCTION!TO!AUDI!! Audi! AG! is! a! German! automobile! manufacturer! that! involves! themselves! in! designing,! engineering,! producing,! marketing! and! distributing! luxury! vehicles.! The! company! name! is! a! Latin! translation! of! the! founder’s!name!which!becomes!“Audi”.!The!four!rings!of!the!Audi!logo!each!represents!one!of!the!four!car! companies!that!banded!together!–!Audi,!DKW,!Horch!and!Wanderer.!Audi!is!part!of!the!Volkswagen!Group! and! they! have! facilities! producing! vehicles! worldwide.! As! of! 31! December! 2016,! Audi! has! employed! approximately!88,500!people.!

2.1.2!KEY!MARKETS! The!biggest!fuel!to!Audi’s!growth!has!been!its!biggest!market,!China,!which!accounted!for!approximately! 41%!of!sales!in!2016!(Figure!1)i.!However,!the!brand!is!facing!stiff!competition!from!Mercedes!and!BMW!in! the!country!and!these!brands!are!catching!up!to!Audi.!

2.2!AUDI!IN!THE!CHINESE!MARKET!!! After!entering!the!country!in!the!late!1980s,!Audi!started!to!build!an!early!lead!and!enjoyed!lucrative!sales! numbers!for!decades!as! China’s!consumer!economy!took!off.! Audi’s!ascend!was!built! on!reputation!that! made!Audi!the!quasi-official!ride!of!high!ranking!government!officials!and!privileged!businessman.!During! the!year!2000,!Audi!reached!its!peak!in!China!and!the!German!brand!accounted!for!approximately!70%!of! government!and!state-owned!company!fleets.!However,!by!the!end!of!2014!after!consumers!began!seeking! cheaper! and! more! fuel-efficient! cars,! Audi! became! almost! totally! reliant! on! private! buyers.! A! series! of! corruption!with!Audi’s!partner!China!First!Automobile!Works!(FAW)!Group!further!undermined!the!brand! image.!Audi’s!sales!started!to!decline!in!2015!which!was!down!1.4%!compared!to!the!17.7%!jump!they!had! in!the!previous!year.!! As!of!2016,!Audi!still!ranks!as!the!top!luxury!car!brand!in!China,!but!it!is!growing!much!more!slowly!than! competitors!like!BMW!and!Mercedes!Benzii.!Audi’s!slowdown!and!ever!intensifying!competition!from!brands! mean!that!Audi!dealers!are!not!making!money!on!used!car!sales!as!they!used!to.!The!first!half!of!2017!was! not!a!great!year!for!Audi!in!the!China!market!as!it!was!the!first!time!both!BMW!and!Mercedes!Benz!outsold! Audi.!Their!sales!in!China!dropped!by!12.2%!which!is!45,000!cars!fewer!than!during!the!first!half!of!2016.! ! ! !

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INDUSTRY!ANALYSIS! 3.1!PESTEL!ANALYSIS!OF!CHINA!! Political:! China! has! become! the! top! vehicle! superpower! in! the! world! and! this! has! made! the! Chinese! automobile!industry! to! continue!its! fast!growth! and!become! a!key! industry! in!their! economy.!To! attract! foreign!investors,!the!government!provided!sufficient!protection!and!incentives!to!automobile!companies.! These!included!strong!support!for!automaker’s!R&D!projects,!encouragement!for!innovation!capacities!and! protection! for! intellectual! property! rights.! This! provides! Audi! with! an! opportunity! to! use! government’s! incentives!for!continuous!innovation!of!their!cars.!Moreover,!the!joining!of!the!World!Trade!Organization! has!opened!the!Chinese!car!market!even!more!to!the!world.!In!the!recent!years,!many!policies!have!been! relaxed!and!the!tariff!levels!lowered!making!China!extremely!attractive!to!the!big!multinational!companies! in! the! sector.! However,! there! has! been! recent! political! instability iii !in! China! which! may! have! negative! implications!on!consumer!spending.!!Moreover,!Audi’s!investments!in!these!respective!countries!may!be! subjected!to!risks.! Economical:! China’s! fast-growing! economy! will! continue! to! impact! the! development! of! the! automobile! industry!in!several!ways.!Firstly,!research!has!shown!that!the!disposable!incomeiv!of!citizens!have!been!on! the!rise!and!more!people!are!able!to!buy!cars.!This!would!prove!to!be!an!opportunity!for!Audi!and!the!luxury! car! market! as! people! have! more! money! to! spare! which! would! lead! them! to! having! a! higher! chance! of! purchasing! these! luxurious! vehicles.! Oil! prices! also! significantly! impact! sales! on! automobiles.! If! prices! skyrocket!–!and!they!are!currently!on!the!rise!v,!the!demand!for!fuel!inefficient!vehicles!like!Audi!will!take!a! great!hit!and!therefore!poses!as!a!threat!to!them.!However,!is!it!good!to!note!that!Audi!has!already!taken! this!into!consideration!by!expanding!their!product!line!to!electric!cars!through!their!Audi!e-Tron!which!may! in!turn!help!them!to!counter!this!issue.!! Sociocultural:!According!to!KPMG’s!global!automotive!executive!surveyvi,!the!number!one!consumer!trend! is!the!surge!in!demand!for!battery!electric!vehicles.!Audi!have!already!tackled!this!issue!by!developing!3!fully! electric!vehicles!which!is!due!to!launch!in!next!few!years.!However,!this!may!affect!sales!of!their!older!dieselpowered!cars!whose!demand!may!drop!significantly!in!their!coming!years.!Moreover,!with!the!bike!sharing! revolution!on!an!uphill!trend!in!2017vii,!especially!in!China,!the!automobile!companies!may!take!a!hit.!Bike! sharing!companies!worldwide!have!seen!an!increase!in!demand!due!to!people!getting!health!conscious!and! wanting!emission!free!transportation.!Therefore,!automobile!companies!need!to!keep!a!close!eye!on!this!as! it!may!affect!their!profits!in!the!future.!! Technological:!With!regards!to!the!new!technological!trends!in!the!automobile!industry,!the!implementation! of! cleaner! vehicle! technologies! has! become! of! great! importance.! The! Chinese! government! has! already! !

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launched! incentive! policies! for! greener! automobile! productions! and! they! are! making! serious! efforts! in! ensuring! that! the! gap! between! the! desire! for! economic! development! and! environmental! protection! is! reduced!to!an!acceptable!level.!Audi!can!see!this!as!an!opportunity!to!bring!their!green!vehicles!like!the!eTron!into!the!Chinese!market.!However,!technology!in!the!automobile!industry!is!ever!changing!and!Audi! needs!to!make!sure!that!they!can!keep!up!with!the!changes!in!the!environment!if!not!this!might!pose!as!a! threat!to!them.!! Environmental:!China!is!one!of!the! highest!countries!with!the!highest!amount!of!carbon!emission!in!the! world.!Beijing!and!Shanghai!are!looking!to!reduce!this!by!banning!gas!guzzlers!in!hopes!that!these!might! entice!more!electric!vehicle!production.!The!sale!of!new!energy!vehicles!in!China!topped!500,000!in!2016! which! was! over! 50%! more! than! the! previous! years viii .! This! added! with! the! government! subsidies! as! mentioned!before!can!prove!to!be!an!opportunity!for!Audi!to!introduce!their!e-Tron!into!this!market!that!is! seeing!a!huge!potential.! Legal:!As!discussed!above,!there!are!many!legislations!and!regulations!in!the!Chinese!automobile!industry.! In!the!recent!years,!the!Chinese!government!has!tried!to!make!the!legal!and!regulatory!environment!for! foreign!investors!less!complicated.!However,!many!of!the!Chinese!laws!and!regulations!are!still!often!unclear,! confusing! and! difficult! to! understand.! This! many! pose! as! a! threat! to! Audi! as! there! may! be! certain! consequences!if!they!end!up!misunderstanding!certain!policies.!!

3.2!PORTER’S!FIVE!FORCES!ANALYSIS!OF!CHINA! RIVALRY!AMONG!EXISTING!COMPETITORS:!HIGH! !

For!the!luxury!car! industry!in!China,!the!rivalry! among!existing!competitors!is!high! and!can!be!narrowed! down!to!a!few!reasons.!Firstly,!current!players!like!Audi,!BMW!and!Mercedes!Benz!are!competing!hard!to! achieve!market!leadership!and!to!be!recognized!as!the!top!luxury!brand!in!customer’s!eyesix.!The!three!giants! recognize! each! other! as! competitors! and! public! statements! and! advertisements x !make! provocative! comparison!between!their!cars!making!the!competition!even!fiercer.!Exit!barriers!of!this!industry!is!also!high! as! firms! have! already! made! substantial! investments! in! warehouses,! factories! and! in! research! &! development.!Therefore,!the!presence!of!significant!sunk!costs!induces!the!companies!even!in!loss!to!stay! in!the!market!which!further!increases!the!degree!of!competition.! THREAT!OF!NEW!ENTRANTS:!LOW!TO!MEDIUM !

The! entry!barriers! in! the! Chinese! automobile!industry!have! been! significantly! lowered! as! a!result! of! the! attractive!policies!from!the!government!with!regard!to!foreign!direct!investment!in!the!sector.!However,! entry!barriers!are!increased!due!to!high!competition!and!high!amount!of!investment!needed!to!compete!in! !

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the! market.! First! and! foremost,! there! are! strong! consumer! loyalties! to! key! players! like! Audi,! BMW! and! Mercedes!Benz.!Even!though!switching!costs!are!low!when!a!car!is!not!purchased!yet,!a!new!entrant!would! have!to!have!significant!competencies!like!having!a!prestigious!reputation!in!order!to!succeed,!resulting!in! them!being!unlikely!to!undertake!that!kind!of!risk.!Customers!find!this!extremely!important!and!industry! giants!have!a!long!and!glorious!history!to!boast!which!allows!them!to!have!economies!of!scale!further!adding! to! the! point! that! risk! is! high.! Although! there! are! cases! of! Asian! companies! like! the! Kia! Stinger! trying! to! compete!with!the!traditional!European!cars,!it!is!extremely!difficult!for!challengers!to!match!the!prestige!of! companies!with!decades!of!history.!Even!if!new!entrants!would!want!to!enter!the!industry,!a!substantial! amount! of! capital! is! needed! to! set! up! manufacturing! facilities! and! also! in! research! and! development.! However,!it!is!good!to!note!that!there!have!been!cases!of!car!manufacturers!already!in!the!market!entering! the!luxury!car!industry!like!the!Nissan’s!Infiniti.!Nissan!were!able!to!tap!on!their!brand!image!and!use!current! facilities!to!lessen!their!initial!investment!making!the!risk!of!entering!the!market!significantly!lower.!This! shows!that!we!should!not!completely!rule!out!the!possibility!of!new!entrants!emerging.! BARGAINING!POWER!OF!SUPPLIERS:!MEDIUM!TO!HIGH !

The!bargaining!power!of! suppliers!determines!the!flexibility!companies! have!when!they!are!dealing!with! their!suppliers!and!in!the!luxury!car!industry,!suppliers!have!a!moderately!high!amount!of!power.!There!are! large!multinational!suppliers!with!a!strong!presence!not!only!in!China,!but!in!the!global!market!as!well!making! them!independent!and!very!powerful.!In!addition,!luxury!cars!require!exclusive!materials!and!manufactured! parts!made!of!higher!quality!as!compared!to!a!normal!car.!This!would!mean!that!there!are!lesser!substitutes! for!raw!materials!and!a!smaller!size!of!reliable!suppliers!to!choose!from.!This!makes!the!switching!costs!for! luxury!cars!higher!than!that!of!the!mass!market!which!increases!suppliers!bargaining!power.!Moreover,!many! of!these!suppliers!sell!raw!materials!to!not!only!the!automotive!industry!but!to!many!other!producers!from! other!industries.!This!shows!that!they!are!able!to!generate!revenues!from!more!than!one!segment!which! further!increases!their!supplier!power.!However,!suppliers!would!face!extreme!difficulty!if!they!would!want! to!forward!integrate!into!this!industry!as!they!would!have!to!invest!much!capital!into!warehouses,!factories! and!research!&!development!reducing!their!bargaining!power.!All!in!all,!this!makes!the!bargaining!power!of! supplier’s!moderate!in!the!luxury!car!industry.! BARGAINING!POWER!OF!CUSTOMERS:!MEDIUM!TO!HIGH !

The!bargaining!power!of!customers!is!the!pressure!that!customers!can!put!on!companies!and!in!the!luxury! car!industry!in!China,!the!bargaining!power!is!rather!moderate.!The!internet!has!improved!the!customer’s! experience!by!allowing!them!to!compare!prices!of!different!brands!which!allows!them!to!choose!the!car!of! their!preference!freely.!Buyers!also!face!low!switching!costs!to!other!suppliers!if!they!have!not!purchased!a! car!yet.!Furthermore,!due!to!the!high!production!of!cars!and!the!various!platforms!to!purchase!vehicles,! !

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there! is! little! rivalry! among! the! buyers.! However,! what! makes! this! industry! moderate! instead! of! high! in! bargaining! power! is! that! there! are! many! buyers! who! purchase! in! small! quantities! and! therefore! one! customer!switching!over!to!competitors!would!not!make!much!of!a!difference!to!profits.!Moreover,!it!is!hard! for!buyers!to!backward!integrate!into!the!industry!due!to!the!high!capital!needed!making!the!bargaining! power!of!buyers!moderate!in!the!case!of!the!luxury!car!industry. ! THREAT!OF!SUBSTITUTES:!MEDIUM!TO!HIGH !

When!it!comes!to!the!luxury!cars!industry,!the!threat!of!substitute!products!is!fairly!moderate!to!high.!Luxury! cars!basically!fulfil!two!needs!for!customers!–!providing!a!means!of!transportation!and!asserting!a!privileged! status!of!its!owner.!As!for!the!former,!there!is!a!variety!of!products!to!fulfil!it,!such!as!other!cars,!motorbikes,! bicycles!and!public!transportation.!The!most!obvious!substitute!for!luxurious!cars!are!the!less!expensive!cars! such! as! Toyota! and! Geely.! Luxury! items! like! watches,! paintings! and! high-end! houses! fulfil! the! need! of! af...