Marketing Assignment: Business Opportunities & Challenges In China
Question
Task:
Working individually, you will produce a report on entrepreneurship assignment that critically analyses an entrepreneurial or family business with which you are familiar.
Answer
1. Introduction
1.1 Firm Description
The organization that has been selected for the report on entrepreneurship assignment is Volkswagen. This organization was founded in the year 1937. This Germany based organization operates in the automobile industry. This organization has also positioned itself as one of the top 5 family owned business in this world (Sekulich, 2018). The majority of the stake of this organization is indirectly owned by the Porsche-Piech family of Austria. In the year 2006, the founder of Porsche, Ferdinand Porsche owned 25.1% of the stake. In the year 2008, the owner bought 42.6% of the stock of Volkswagen. This family started purchasing more stake of Volkswagen. Later, in the year 2013, the government declared this family the controlling owner of Volkswagen AG (May, 2018). The current CEO of the organization is named as Herbert Diess and is operating in several parts of the world.
1.2 Business Context
The factors that have an impact on the decisions of a business is termed as business context. The impact of quality of service or product on the customers generally depend on the context of a business (Jayawardhena, 2010). The organization is operating in a highly competitive business environment for more than 70 years. The major decisions undertaken by the organization is dependent upon the external and internal factors. In recent years, with the advancement in technology, the organization has focused on integrating technology in improving the quality of the product or service. Currently, the organization is also making major decisions based on sustainability. The production team and the management team are working to neutral the mobility of Carbon-di-oxide (Volkswagen Newsroom, 2021). Moreover, digitalization has become another major business context for Volkswagen. Currently, the organization has focused on forming strategies that can enhance the customer experiences digitally.
1.3 Characteristics
This organization is known for providing high quality product to its customers. The materials that are selected for manufacturing Volkswagen Car are carefully selected. The design of the cars that are sold by this organization is simple with cutting-edge technology. The organization has been successful in providing highly reliable cars to its customers. This has helped the organization to maintain its reputation over several years of operation. Furthermore, diversity and inclusion is considered to be another important element of Volkswagen. It focuses on hiring employees from various parts of the world irrespective of their cultural or linguistic background. There is a diversity management group within Volkswagen. The main objective of this group of people is to cater to the diverse group of people by formulating relevant strategies (Volkswagen, 2021a). This has also helped the organization to deal with the constant change within the market and increase the effectiveness and the productivity of the employees within the workplace. This characteristic also has an impact on the profit optimization of the organization.
2. Detailed Analysis
2.1 Firm Analysis
2.1.1 SWOT Analysis
This strategic analysis tool has been used for analysing the internal and external environment of Volkswagen by identifying its strengths, weaknesses, opportunities and threats (Güreland Tat, 2017).
Strengths- Volkswagen (VW) consists of one of the widest brand portfolio amongst the automotive companies with its high brand recognition all over the world. The brand has a large base of loyal customers because of its wide range of products. Some of the iconic brands in the portfolio are Lamborghini, Audi, Bugatti, Skoda, Porsche and Bentley (Volkswagen, 2021b). VW has displayed strong financial performance with 8th rank in sales revenue, 37th in profitability and 133 in terms of market value as of May 2020 (Forbes, 2021). Besides, it is one of the best employers in the world in terms of both recruitment rate and diversity. Its “TOGETHER-Strategy 2025” future program is expected to initiate a big change in the automotive industry. In addition, the two major divisions under VW are its automotive and financial services divisions.
Weaknesses-Despite its high brand popularity, the emission scandal in 2015 has damaged the brand reputation of VW on a global scale. It was penalized to pay more than € 30 Billion in fines for the damage caused to the customers across various countries (Jolly, 2019). The brand has weak marketing and promotional strategies outside Europe. It mainly collaborates with a company already existing in the foreign market for promoting itself. For example, VW has partnered with Chinese manufacturer JAC for creating low-cost electric cars but it has been experiencing rapid drop in its sales (Hanley, 2020).
Opportunities- The strategy 2025 future program of VW is expected to help the brand emerge as a leading provider of sustainable mobility across the world (Volkswagen, 2021b). The wide range of brand portfolio can enable it to introduce care share, car rental or rideshare services in the future. This will enable the brand to capture the target market of Millennial and Gen Z who do not want to make large capital purchases or face car glitches and burdens but instead prefer ridesharing alternatives (Eliot, 2019). VW has decided to capture the market of eco-friendly cars. It will be increasing its spending on automated driving, electric vehicles and new technologies by 36% (Rauwald, 2019). Its new five-year budget will consist investment for digitization, hybridization and electric mobility.
Threats-VW has been facing various ongoing lawsuits in different courts of UK, US, EU and France. It has to pay around 620 million Euros for which the brand has set aside around 830 million for covering settlement costs (Reuters, 2020). These lawsuits have been threatening the profits of the brands. Furthermore, it has been facing increasing competition from other car brands like Toyota, Nissan, Ford and Hyundai alongside ridesharing companies such as Ola, Uber, Lyft and Didi. VW also has to pay around 3000 Euros per vehicle apart from trade-in incentives for reducing diesel emissions from its vehicles because of various driving bans in major cities across the world (Shalal, 2018).
2.1.2 VRIO Framework
This strategic tool can be used for assessing and evaluating the resources of VW to determine its strategic advantage and competitiveness in the market. The resources are evaluated based on the four characteristics of valuable, rare, inimitable and non-substitutable (Knott, 2015).
Valuable- These competencies of VW enable it to utilize opportunities and neutralize threats present in the internal and external environment to allow the brand to grow and develop in the future (Lin and Tsai, 2016). It has a strong brand image in terms of social responsibility, new and innovative car models, high brand integrity and recognition in the international market. Besides, it also has strong supplier relationships, inclination towards innovation and ability to invest capital.
Rare- The rare resources and competencies of VW that only a few automotive brands possess in the industry are strong international presence operating across multiple regions, skills of problem-solving through teamwork and creativity, adaptability and risk-taking capability (Kim, Leeand Shin, 2015).
Inimitable- These characteristics or competencies adding long-term value to the organization are quality product offerings, location and placement of its stores across the world, marketing communications with customers, unique customer experience and competitive pricing.
Non-substitutable- These include strong financial position and strength, technological advancement, research and development, production capacity and distribution network.
2.2 Challenges Faced
Volkswagen has been facing several problems despite its successful operations as one of the largest automakers of the world. These were some of the most significant reasons for the emission scandal in 2015 (Poier, 2020). The brand manipulated its emission results with the help of a software for meeting the US regulatory requirements. It has been facing corporate governance problems, principal-principal agency conflict and high remuneration packages, all of which were generated from being a family-controlled firm. VW governs the company through an unusual governance form, hybrid family control, labour influence and government ownership (Medium, 2016).
2.1.1 Corporate governance
The corporate governance and culture of the company has often been identified as one of the root causes of its diesel-emission scandal. There has been family and board divisions at the heart of the company (Bryantand Milne, 2015). The Porsche family has been controlling the Board decisions for many years. There has been lack of independent directors for undertaking effective and ethical decisions. The absence of proper corporate governance was evident from the managerial problems giving rise to the emission scandal for making the cars appear less polluting before the regulators (Wright, 2015).It has been opined that the company’s management board and supervisory board created an environment that was a major contributor towards the misbehaviour. The culture, priorities, values, strategies and monitoring and control mechanisms were all directed towards passing the emission test set by US regulatory for emerging as the largest automaker in the region (Crête, 2016). Various corporate governance issues that were identified from the scandal were procedural problems in subdivisions, faulty reporting and monitoring systems, failure to comply with existing regulations and insufficient IT infrastructure. Thus, the lack of monitoring and controlling was inefficient in detecting the fraudulent behaviour of employees within the company. This also raised questions about the directors’ responsibility pointing out to the corporate governance issues (Page and Spira, 2016). Their absence of responsibility in the operational matters and ethical behaviour are the common peripherals of corporate governance that resulted in the scandal.
2.1.2 Principal-principal agency conflict
Another problem that VW has been facing is the conflicts arising between the family owners and other managers or shareholders at the board. The presence of family individuals with majority of controlling stakes in the firms and concentrated ownership often neglect the potential monitoring and control mechanisms of the blockholders (Ali, Boubakerand Magnan, 2020). The Porsche family has always been the majority controlling shareholders in the company because of the two-tier or dual organizational board structure. This power coming from controlling shareholder has further caused struggles between the Porsche and Piech in the VW (Automotive News Europe, 2017). The power struggle between the controlling families has been one of the major reasons for creating problems in the company. These issues have further generated conflicts of interest between the ownership and management. The German system of corporate structure with separate supervisory board consisting of family members, worker representation and another board of independent directors has created imbalance between the VW short and long-term objectives. The parent company controls around 52% of the company’s voting rights, thereby making the ownership structure complicated and generating conflicts of interest (McRae, 2015). This makes it difficult to protect the interest of shareholders, customers and workers along with the profit-adjusted short-term objectives of the management. Thus, boardroom politics often occur in the company. The lack of diverse opinions and expertise of the Board because of major family representation have also led to the principal-principal agency conflict(Bryant and Milne, 2015). With shortage of independence, relevant experience and required skills on the supervisory board, VW faces various internal conflicts that led to its various corporate scandals.
2.1.3 High remuneration packages
It has been observed that there is active participation of family members in family-controlled firms like VW. This family ownership has often been beneficial in reducing agency problems arising between owners and managers from differences in their interests(Suyono, 2016). These family members are often large shareholders with stronger incentives and power for monitoring managerial activities. However, such high incentives and remuneration packages often become the cause for conflicts in the organizations (Sarbahand Xiao, 2015). Along with remuneration and incentives, the pay-out policies for family owners also determine problems in the family firms like VW. The CEO’s salary package increased by 40% in pay and benefits in 2018 despite the new remuneration rules of VW for reducing criticism related to big bonuses being paid to executives as compared to minority shareholders and employees of the firm (Reuters, 2018). However, the group stated how such remuneration chimes was inevitable in profitable times. This asymmetric executive pay has been one of the major problems in family-owned businesses like VW where favouritism exists not only towards relatives but also their close associates while developing compensation structure. It becomes a concern for minority shareholders in the company (Martin, et al., 2017). This often occurs when family ties exist between the owners of the firm and the top management of the company, thereby resulting in decoupling of executive compensation.
3. Recommendations
3.1 Changing corporate culture
Volkswagen should focus on changing its sales-driven culture to people-oriented and customer-driven culture with significant emphasis on mutual trust, honesty, integrity, open-mindedness and equality. The company might face extreme challenges in bringing this new culture as it would also require a new management approach. However, it is essential to make such changes for preventing any further scandals or dishonest behaviour in the organization. In this regard, VW should set up new set of cultural norms, norms and customs in the organization and communicate them clearly to all the members. Furthermore, training can also be provided to both the managers and employees about the cultural changes every week for making them accustomed with the new values. This training should not only be provided in the form of lectures, but the members should also be involved in various discussions, workshops and assessments. The company must make it clear to the members about the ethical obligations and code of conduct present in the new culture that are required to be followed. In this context, honesty, transparency, diversity, integrity and equality must be fostered within the culture so that all the members are encouraged to act ethically in any circumstances. Besides, employees should be treated with respect and dignity that would make them feel valued in the organization. Their concerns and problems should also be frequently addressed in this culture so that none of them is overburdened with unrealistic targets and resort to illegal means for achieving them.
3.2 Adopting good corporate governance
The health of any organization is dependent on its underlying soundness of individual components. It is essential for VW to maintain good corporate governance for gaining sustainable economic development through improved performance and access to outside capital. Ensuring good corporate governance would not only attract more customers but also potential investors from the market. This would further help the brand to expand to various other markets and produce more innovative products with updated technology. For this purpose, VW must undertake some suitable activities as a family-owned business to enhance its corporate governance. It should foster harmonious relations within and outside the family and determine to involve it in the business. VW should develop an ownership structure capable of providing sufficient growth capital alongside giving control of key parts of the business to the family. Dynamic business portfolio, professional management of family’s wealth and charitable foundations for promoting family values should be undertaken. Furthermore, various principles of corporate governance must be inserted into the family business of VW. It must ensure to provide voice to every shareholder at general meetings and encourage them to participate. The company must protect the interest of all stakeholders and establish positive relationship with them. The board members should abide by clearly outlined principles and work towards the vision of the company. A proper code of conduct including ethical decisions should be strictly maintained across the entire organization and all levels of management to avoid any ethical behaviour violations. In addition, business transparency should also be maintained for promoting shareholder trust through display of accurate financial results and earnings reports.
3.3 Decentralized decision-making
The family control in VW business has been fostering centralized decision-making in the organization. It has caused various internal conflicts between the management and board and caused unethical actions because of ineffective culture. Thus, a decentralized decision-making need to be considered in the company for dealing with the persisting issues. This method provide decision rights close as possible to the people who are directly dealing with customers, front-line employees, competitors, suppliers and other stakeholders. With decentralized decision-making, VW would be able to make effective decisions based on the situations and people involved in it. This would help in reducing delays related to retrieval of information, approvals from top management and down the hierarchy level. Department managers have more knowledge of products, customers, employees and competitors, thus, they can utilize their expertise to undertake quick and better decisions. This would consequently provide more time to the top management for dealing with other pressing issues such as change in corporate culture or enhancing the corporate governance of the company. Moreover, lower-level managers and employees would have improved morale and put in extra effort for gaining the targets and objectives of the organization.
4. Self Reflection
From this module, I have gained widespread knowledge about family firms by taking the case study of Volkswagen. At first, I used to think that these firms operate in a similar way as other businesses in the market. However, with the ongoing modules and undertaking the assignment, I came to learn that despite facing similar daily management issues, family businesses are required to undertake specific ways in addressing their significant issues. I have learnt that principal-principal agency conflict is one of the most significant issues in family-owned businesses. Various other problems that I came across through completing this assignment are asymmetric altruism and family firms, corporate governance conflict, executive pay, scapegoating, entrenchment and corporate choices as areas of conflict. With the help of this module on entrepreneurship and family-owned firms, I have been able to enhance my critical thinking ability, analytical skills and problem-solving capability. This is because alongside gaining information about problems and issues in family-owned firms from various journals and articles, I was also able to use them for identifying the problems in Volkswagen. The theoretical portions helped me to better understand the persisting problems in the company, analyse and identify them under specific categories of corporate governance, principal-principal conflict and high remuneration packages. This was possible because of my critical thinking and analytical skills. Lastly, I utilized my problem-solving ability to provide recommendations of changing corporate culture, enhancing governance and undertake decentralized decision-making in the organization. Thus, I think that this module has helped me to better analyse my own capabilities, strength and abilities and apply them effectively in the assignment.
5. Reference list
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