Download Case Overview - Chu Hai College of Higher Education

Skoda Auto - 2008
Marlene M. Reed: Baylor University
Case Overview
This case focuses on the future strategy of Skoda Auto, a 100-year-old
Czechoslovakian (Czech Republic) company that had successfully weathered
privatization after the fall of Communism in 1989. The company was formed
in 1895 to manufacture the Slavia bicycle and had undertaken the production
of automobiles in 1899. Although the company had a reputation for making
quality products in the early years, the half century under Communism did
much to destroy that reputation.
Skoda was purchased by Volkswagen in the early 1990s, and its financial
status progressively improved from 1996 thru 2006. However, Skoda needs a
clearly-defined strategy that will allow it to compete successfully. Some
issues presently facing Skoda are: How to operate in the highly-competitive
automobile industry of the twenty-first century; whether or not to continue the
movement of assembly plants abroad when the Czech Republic has
inexpensive labor; and whether they should move their products into the very
lucrative but competitive United States market.
Specific Teaching Objectives
1. Identify the challenges and opportunities faced by companies in the Czech
Republic as they have moved from being nationalized to privatized
companies.
2. Be able to perform a SWOT analysis on Skoda Auto.
3. Use Michael Porter’s Five Forces Model to explain the global automobile
market in which Skoda is not forced to compete.
4. Identify the competitive strategy that Skoda is presently using.
5. Compare the composition of Skoda’s top management and board to those
of American companies.
6. Describe the change in market structure of the automobile industry in the
Czech Republic.
7. Analyze Skoda’s financial position as of 2006.
8. Identify appropriate strategies for Skoda in the global car manufacturing
industry.
Intended Course and Level and Case Development
This case was developed from interviews with employees at the Skoda plant in
Mlada Boleslav, Czech Republic, by the case writers and from material in secondary
sources.
This case would be well suited for an undergraduate strategic management course
during the portion of the class devoted to corporate strategy. It might also be used in an
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international management course in the portion dealing with strategies of competing in
international markets.
Discussion Questions and Answers
1.
Identify challenges faced and opportunities available to companies in the Czech
Republic as they have moved from nationalized to privatized entities.
Answer: The challenges faced by companies are the following:
A.
Companies in the former Soviet Union had not been forced to produce
quality goods that can compete in world markets;
B.
Employees in nationalized companies have been assured of “lifetime
employment,” so they are not motivated to produce a high-quality
product;
C.
Banks are being privatized very slowly so infusions of capital normally
Must come from outside the country. In addition, because all of the
companies had been owned by the Soviets, there was no private money available to
purchase companies offered by the state for sale;
D.
Most companies have old and obsolete equipment that would take years
to replace;
E.
There is an insufficient infrastructure because the Soviets have never put
money into such “public goods;” in their satellites (occupied states) ; and
F.
Lack of development of managerial skills.
Opportunities afforded the companies are:
A.
Low labor costs could make Skoda more competitive
among other contiguous Eastern European countries (see Table 1,
“Comparison of Wage Rates in Czech Republic, Hungary and Poland”);
B.
A low rate of inflation;
C.
A good financial position relative to other similar Eastern European
countries;
D.
A growing market for consumer goods as the standards of living
increase;
E.
An efficient agriculture market; and
F.
A highly-skilled yet relatively inexpensive labor force.
3.
Perform a SWOT analysis for Skoda:
Answer:
Strengths
100-year history as a vehicle manufacturer.
Capital infusions from Volkswagen.
Emphasis on research and development from Volkswagen.
Strength of Volkswagen’s reputation.
Highly-skilled work force available in the Czech Republic.
Relatively low wages in Czech Republic.
Largest employer in the Czech Republic.
Synergy with other Volkswagen products.
Weaknesses
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Location in a country that must deal with outdated infrastructure.
Perception from the past that Skoda produces a low-quality product.
Perception by some that their new 4-door limousine is not a limousine
at all.
Growing unrest of Skoda’s employees in seeking higher wages which
decrease profit margins.
Reputation of Skoda may spill over to the Bentley and frighten off
buyers.
Opportunities
Growing automobile market in Eastern Europe, China, Africa, India and
other emerging economies.
Possibility of moving manufacturing and assembly plants to low-cost countries.
First mover advantage to those companies using alternative fuels.
Threats
Movement of the global automobile manufacturing industry to a
monopolistically-competitive structure with increased competition.
Costliness of non-renewable energy sources.
Higher wage rates in some countries are making it difficult for automobile
manufacturers to remain competitive.
Decline in sales in Eastern European countries that have become a part of the
European Union because of the increased availability of used vehicles
from other European countries.
4.
Use Michael Porter’s “Five Forces Model” to explain the global automobile
market in which Skoda is now forced to compete. (See next page for model.)
Answer: (See illustration of this model on the next page. This could
be used as a transparency in teaching the case.)
Threat of Entry
Because of the increased buying power of consumers in former Soviet
Union countries and in emerging countries, many firms may see this as an
opportunity to move plants to Eastern Europe to reduce their costs and compete
in that market. In addition, for the first time in 50 years, Eastern European
consumers have access to a greater variety of cars than they have had. Both
of these factors should heat up the competitive environment.
Bargaining Power of Buyers
With increased competition worldwide in the automobile manufacturing
industry, consumers have many more choices from which to select when
purchasing a car. In addition, the movement to a global industry from one which
had been formerly a monopoly or oligopoly within a country or region, has
caused intense price competition to arise.
Therefore, this industry could certainly be classified as a “buyer’s
market” today. In less developed countries, buyers are being wooed with lower
prices; and in more developed countries, they are being wooed with product
differentiation.
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Michael Porter’s Five Forces Model
Threat of
entry
Rivalry among
existing
competitors
Bargaining
power of buyers
Skoda
Auto
Bargaining
power of
suppliers
Pressure from
substitute products
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Bargaining Power of Suppliers
With a movement toward just-in-time inventory systems worldwide
in the automobile manufacturing industry, there has been greater pressure
upon suppliers to move their plants to locations contiguous to the automobile
plants they are supplying. Some automobile companies have also begun
supplying their own parts and thereby eliminating many of the suppliers
they formerly used. Therefore, the bargaining power of suppliers has been
greatly weakened.
Pressure from Substitute Products
There appears to be very little pressure from substitute products in
this market because automobiles have actually become the substitute product
for other forms of transportation such as bicycles in developing countries.
The only true threat of a substitute product in more developed, heavily populated
countries is public transportation. This supplies a cheaper, faster means of
transportation into large cities where parking is at a premium. This is often a
product of choice in many European countries where public transportation has
been greatly refined.
Rivalry Among Existing Competitors
The global automobile manufacturing industry is one of the most competitive in
the world. In addition, new car companies are emerging in the developing countries of
Asia and Central and Eastern Europe. These companies
are all trying to reduce costs by moving to low-cost countries, so Skoda’s location in such
a country will not be a competitive advantage for long.
5.
Analyze how well Skoda fits within the Volkswagen group:
Answer:
There are a number of reasons that the addition of Skoda to Volkswagen’s product
offerings makes sense:
A.
It gives Volkswagen AG a foothold in the Czech Republic and in
Eastern Europe;
B.
The economy of the Czech Republic has fared much better than
many of the former Eastern Bloc countries;
C.
Skoda has a long history within this part of Europe, and the purchase
of this company makes more sense than initiating a new plant without
any background and connection with customers.
D.
There is a stable market for consumer goods in the Czech Republic.
E.
The Czech Republic has a highly-skilled labor force.
F.
More growth in sales are anticipated in this part of the world than
in Western Europe where Volkswagen AG resides.
G.
There are good examples of other automobile companies such as
Ford which have offered products ranging from very inexpensive
to relatively expensive. Such a strategy has worked well for Ford.
6.
Analyze Skoda’s financial position as of 2006 as compared to the American
automobile industry which historically has been the world leader in automobile
sales.
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Answer:
The exhibit on the following page might be handed out to students in advance
to use as a guide in performing the financial analysis.
DUN & BRADSTREET’S INDUSTRY SURVEY FOR 2006
(49 Establishments)
SIC #3711 – MOTOR VEHICLES, CAR BODIES
FINANCIAL RATIOS
Liquidity Ratios
Current Ratio
Quick Ratio
Upper Quartile
2.2
1.0
Median
1.5
0.6
Lower Quartile
1.1
0.3
103.3
167.2
345.4
Efficiency Ratio
Assets to Sales
27.6
48.1
78.0
Profitability Ratios
Return on Sales
Return on Assets
5.1
9.5
1.8
4.2
0.4
0.7
Debt Ratio
Total Liabs. to Equity
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SKODA’S FINANCIAL RATIOS
AS COMPARED TO THE AMERICAN INDUSTRY
Liquidity Ratios:
Current Ratio = Current Assets = 51,142 = 1.478
Current Liabilities
34,594
Industry median = 1.5
Quick Ratio = Current Assets – Inventory = 51,142 – 12,248 = 1.124
Current Liabilities
34,594
Industry median = .60
Analysis: Skoda is about as liquid as the industry. The quick ratio
is a little better than the rest of the industry.
Debt Ratio:
Total liabilities to net worth (equity) = 105,212 = 1.804
58,321
Industry median = 167.2
Analysis: Skoda uses less leverage than American automobile manufacturing companies. This may be because of the infusion of capital
by Volkswagen AG when they bought the company from the Czech
government.
Efficiency Ratio:
Assets to Sales = Total Assets = 105,212 = .516
Sales
203,659
Industry median = 8.0
Analysis: Skoda’s assets are generating more sales than the U.S. average.
Profitability Ratios –
Return on Sales = Net Profit = 11,062 = .054
Sales
203,659
Industry median: 1.8
Return on Assets = Net Profit =
11,062 = .105
Assets
105,212
Industry median = 4.2
Analysis: Skoda is closer to the lower quartile of .70 in this case.
Neither their sales nor their assets are generating as high a return as the American
companies.
7.
Analyze Skoda’s present competitive strategy utilizing Michael Porter’s
Generic Competitive Strategies Matrix.
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Answer:
See model on the next page which could be used as a classroom
illustration. Skoda appears to be operating in the Low Cost Leadership
competitive strategy mode since they have continually moved their manufacturing
and assembling operations to progressively less expensive countries. Although
they have continually developed new models and new options on those models,
they have in essence produced cars that are very much like other cars in the small
car category around the world.
They are also operating in the broad rather than narrow competitive scope
since their automobiles are being shipped to 90 countries of the world at the
present time.
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MICHAEL PORTER’S GENERIC
COMPETITIVE STRATEGIES MATRIX
Broad
Competitive
Scope
Narrow
LOW
COST
LEADER
DIFFERENTIATION
COST
FOCUS
DIFFERENTIATION
FOCUS
Competitive
Strategy
8.
Identify appropriate strategies for a company operating in the global car
manufacturing industry.
Answer:
A.
Move production facilities to countries that have a skilled yet relatively
inexpensive work force and a stable economic and political environment.
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B.
Produce automobiles that meet the needs of that particular region. For
example, an SUV or truck would be inappropriate in the former Soviet
Union countries or developing countries where petroleum prices are high
and wages relatively low.
C.
In constructing new plants in countries hitherto not utilized, consider such
additional factors as energy costs, access to the necessary infrastructure and closeness to
important world markets.
D.
Consider mergers with other appropriate companies in the target market to
achieve economies of scale.
9.
Compare the composition of Skoda’s Board of Directors and top management to
those in large corporations in the United States.
Answer: Skoda Automobile followed the German model of utilizing the
members of the Board of Directors as the top management of the company.
This is very different from the composition of the top management of large
corporations in this country. Boards in the United States are typically composed
of more outside directors (those employed by a company other than the company
on which they are serving as board members) than inside directors. Most U.S.
institutional investors and watchdog groups would prefer a majority of outside
directors because it is believed that they can be more objective in making
decisions than inside directors.
In addition, one of the purposes of a board of directors in the United States is to monitor
the activities of the top management of the company. If, in fact, the board members are
the same individuals as the top management of the company (such as is true at Skoda), it
would be very difficult for them to monitor their own activities.
Therefore, the use of all members of the board of directors as the top managers of the
company would be most unlikely in the United States.
EPILOGUE: On April 14, 2005, Skoda Auto announced that they had completed an
agreement with Shanghai Volkswagen to produce cars in China in the future. Skoda
plans to launch Octavia, the first model that they will jointly build, at the beginning of
2007 in China and then introduce the Fabia and Superb Series into China at a later date.
Sources expect that China’s demand for automobiles could reach 10 million units by
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2010, including 5.05 million passenger cars, which is double the number demanded in
2004. Skoda projects that it could hold 2.5 percent to 3 percent market share, and the
company should increase its sales in China to 120,000 cars at least within 3 years.
(Source: SinoCast China Business Daily News.)
Sales in the Czech Republic: Although the Czech Republic passenger car market
contracted in 2006, new car sales in the country expanded by 6.93 percent in the January
1–October 31, 2008, period. That, along with strong international sales, resulted in a 37.7
percent increase in net profits for Skoda in the first three quarters of 2007.
The most popular Skoda Auto model was the Octavia. A total of 169,000 Octavia
vehicles were sold in the first three quarters of 2007. During the same period, the sales of
Skoda’s small mini van, Roomster, reached 47,183.
Skoda Auto’s investment into new models and innovations to their production
lines totaled 4.9 billion koruna ($259 million). This was up 34 percent from the JanuarySeptember period in 2006. (Source: Skoda Auto’s profit for first 9 months of the year
rises 37.7 percent. Herald Tribune International, October 26, 2007.)
Operations in China: Skoda Auto announced plans to launch Octavia, the first
model that they will jointly build with Shanghai Volkswagen, at the beginning of 2007 in
China and then introduce the Fabia and Superb Series into China at a later date. Sources
expect that China’s demand for automobiles could reach 10 million units by 2010,
including 5.05 million passenger cars, which is double the number demanded in 2004.
Skoda projects that it could hold 2.5 percent to 3 percent market share, and the company
should increase its sales in China to 120,000 cars at least within 3 years. (Source:
SinoCast China Business Daily News.)
Operations in India: In October of 2007, Skoda India announced the launch of
Laura Ambiente, a new variant of its best-selling model, Laura. The new variant comes
in a diesel version as well as a gasoline version. It is also equipped with added safety
features such as two airbags, traction-control system (ABS and ASR), rear-parking
sensors, and automatic wipers with rain sensors. With the addition of the new model, the
fully-owned Indian subsidiary of Czech Republic-based Skoda Auto (Volkswagen
Group) now offers 15 variants in India.
Skoda India Managing Director, Karsten Bogun, said, “The continued growth of
India as a global economic power, increasing disposable incomes, and the rise in India of
automobile sales have created potent opportunities for the automobile industry in India.”
(Source: New variant from Skoda. The Hindu, October 25, 2007.)
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