SKODA

1. SKODA A Strategic Management Case Study Tony Gauvin, UMFK, 2009

2. How do you double the value of a Skoda? Fill the gas tank What do you call a Skoda convertible? A dumpster What do you call a Skoda with twin exhaust pipes? A wheelbarrow. Why does a Skoda have a double rear window heater ? To keep your hands warm, while you push it. A guy goes into his local garage and asks "Do you have a windshield wiper for my Skoda???” "Sounds like a fair swap" replied the man in the garage. © 2009, Tony Gauvin, UMFK http://web.ukonline.co.uk/k.frost/czech/skoda_jokes.html

3. Company Overview A Brief history of Skoda Existing Mission and Vision Existing Objectives and Strategies Current Issues & Challenges New Mission and Vision External Assessment Industry analysis Porter’s Five Forces Opportunities and threats EFE Matrix Internal Assessment Strengths and weaknesses Financial Condition IFE Matrix Strategy Formulation SWOT Matrix Porter Generic Strgefics Space Matrix IE Matrix Grand Strategy Matrix Matrix Analysis QSPM Matrix Strategic Plan for the Future Objectives Strategies Implementation Issues Evaluation Skoda 2008 Update Overview © Tony Gauvin, UMFK, 2009

4. History • 1895 Vaclav Laurin and Vaclav Klemnet form bicycle company1891 laurin and Kelemnt start making motorcycles • 1905 The first car, called the “Voiturette A”, leaves the factory gates and thanks to its quality and attractive appearance soon gains a stable position in the emerging international automobile markets. • 1907 Laurin & Klement set up a joint-stock company that goes on to export cars to markets the world over. • 1925 The Laurin & Klement automobile factory merges with the Škoda machinery manufacturing company in Plzeň. • 1939–1945 During the war years, the factory focuses on producing materials for the military. Just a few days before the war ends, the factory is bombed and sustains considerable damage. The enterprise is nationalized in the autumn of 1945. • 1946 The enterprise’s reconstruction takes place under a new name, AZNP (“Automobilové závody, národní podnik” – Automotive Plants, National Enterprise). • 1989 Czech republic formed • 1991 April 16 marks the beginning of a new chapter in the Company’s history, when it is acquired by the strategic partner Volkswagen. Škoda becomes the Volkswagen Group’s fourth brand. • 1996 Production commences of another milestone car model for the Company – the Škoda Octavia. © 2009, Tony Gauvin, UMFK

5. Skoda History © 2009, Tony Gauvin, UMFK http://www.skoda-auto.com/moss/100/home/

6. (r) 2009, Tony Gauvin, UMFK

7. Skoda key facts • Oldest Car Company in Central Europe • Largest employer in Czech Republic • Produced over half a million cars in 2006 & 630 million in 2007 • Just behind Volkswagen and Audi in VAG • Skoda in the Czech language means “a shame” • Czech Republic largest exporter © 2009, Tony Gauvin, UMFK

8. Skoda Mission Statement • Three basic values of the Skoda brand • Intelligence We continuously seek technical solutions and new ways in which to care for and approach the customers that are the most important for us. Our conduct towards the customers is aboveboard, and we respect their desires and needs • Attractivesness We develop automobiles that are aesthetically and technically of high standard and always constitute and attractive offer for our customers not only in terms of design or technical parameters but also the wide range of offered services • Dedication We are following the steps of the founders of our company; Messrs. Laurin and Klement. We are enthusiastically working on the further development of our vehicles; we identify ourselves with out product © 2009, Tony Gauvin, UMFK

9. Current Issues and Challenges • Challenges • Companies in the former Soviet Union had not been forced to produce quality goods that can compete in world markets • Employees in nationalized companies have been assured of “lifetime employment,” so they are not motivated to produce a high-quality product • 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 • Most companies have old and obsolete equipment that would take years to replace • There is an insufficient infrastructure because the Soviets have never put money into such “public goods;” in their satellites (occupied states) • Lack of development of managerial skills. • Issues • Does Skoda become a Global brand or a European Brand ? • Currently sold in Europe (>95%) and Asia (<5%) • Where to position Skoda • Within Volkswagen’s portfolio • As a European only brand • As a global brand • Where to manufacture Sk0das? • Czechoslovakia or seek cheaper labor (China?) (r) 2009, Tony Gauvin, UMFK

10. New Vision A world leader in high-quality, value-priced automobiles for the 21st century consumer s © 2009, Tony Gauvin, UMFK

11. New Mission Skoda Auto mission is to anticipate consumer needs and provide safe, quality, reliable, and innovative automotive products and services to consumers around the world (1, 2, 3). Meeting and exceeding customer’s expectations for exceptional quality, cutting-edge technology, and superior customer service will enable us to maximize returns to our shareholders. (4, 5). We are passionately committed to ensure we do the right thing for our customers, our employees, our environment, and our society (6, 9). Skoda is committed to leading all automotive firms in quality and safety in Europe and abroad. Along with our commitment to saving the environment, we can continue to add to our proud heritage (7, 8). © 2009, Tony Gauvin, UMFK

12. External Analysis © 2009, Tony Gauvin, UMFK

13. Global Industry Analysis • 5.2% growth in 2006  $1,176.5 Billion • 65.7 million units sold in 2006 • 66.5% of sales are cars • US accounts for 38.4 % of global market share • Europe accounts for 29.3% • Industry leader is GM with 17.3% Market Share • CAGR from 2002 t0 2006 was 4.7% • Projected CAGR of 4.5% in period from 2006-2011 © 2009, Tony Gauvin, UMFK

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17. Porter five forces models © 2009, Tony Gauvin, UMFK

18. Five Forces Analysis • 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’smarket” today. In less developed countries, buyers are being wooed with lower prices; and in more developed countries, they are being wooed with product differentiation. © 2009, Tony Gauvin, UMFK

19. Five Forces Analysis 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. © 2009, Tony Gauvin, UMFK

20. 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 • American Markets favor European-manufactured cars (r) 2009, Tony Gauvin, UMFK

21. 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. • There is an insufficient infrastructure because the Soviets have never put money into such “public goods;” in their satellites (occupied states) (r) 2009, Tony Gauvin, UMFK

22. EFE © 2009, Tony Gauvin, UMFK

23. Internal Analysis © 2009, Tony Gauvin, UMFK

24. Financial Data 1 USD = 0.6790 Euro = 18.11 CZK Dec , 31, 2007 © 2009, Tony Gauvin, UMFK

25. Financial Data © 2009, Tony Gauvin, UMFK

26. Financial Data 1 USD = 0.6790 Euro = 18.11 CZK Dec , 31, 2007 © 2009, Tony Gauvin, UMFK

27. Financial Ratios Industry Comparison © 2009, Tony Gauvin, UMFK

28. Volkswagen Financial Data 1 USD = 0.6790 Euro = 18.11 CZK Dec , 31, 2007 © 2009, Tony Gauvin, UMFK

29. Volkswagen Financial Data 1 USD = 0.6790 Euro = 18.11 CZK Dec , 31, 2007 © 2009, Tony Gauvin, UMFK

30. Production Markets © 2009, Tony Gauvin, UMFK

31. 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. (r) 2009, Tony Gauvin, UMFK

32. Weaknesses • 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. (r) 2009, Tony Gauvin, UMFK

33. IFE © 2009, Tony Gauvin, UMFK

34. Strategic Formulation © 2009, Tony Gauvin, UMFK

35. SWOT MATRIX SO Strategies ST Strategies • Develop a new car line to use Alternative Fuels for global market (O3, O4, S2, S3, S5) • Expand Sales in emerging counties in Eastern Europe, (Near & Far) Asia & Africa (O1, S2, S4, S8) • Develop a low cost and economical to operate SUV for American Markets (O4, S1, S2, S3, S4, S5) • Expand collaboration and innovation with other VAG brands (T1, S1, S2, S3, S4, S5, S6, S8 ) • Move manufacturing to countries with low wages and demand for value priced automobiles (T3, T4, S1, S2) © 2009, Tony Gauvin, UMFK

36. SWOT MATRIX WO Strategies WT Strategies • Move manufacturing to countries with low wages and demand for value priced automobiles (W1,W2, O1, O2) • Rebrand Skoda as a value priced quality built Europe made automobile (W1, W2, O1, O4) • Brand Skoda as a subdivision of VAG, a well know German brand (W2, W1, T1) • Develop a new car line to use Alternative Fuels for global market leveraging the VAG brand (T1, T2, T3, W1, W4, W5) © 2009, Tony Gauvin, UMFK

37. Porter’s Generic Strategies © 2009, Tony Gauvin, UMFK

38. Alternative Cost leadership Strategies • Move production facilities to countries that have a skilled yet relatively inexpensive work force and a stable economic and political environment. • 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. • 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. • Consider mergers with other appropriate companies in the target market to achieve economies of scale. © 2009, Tony Gauvin, UMFK

39. Space Matrix Data © 2009, Tony Gauvin, UMFK

40. SPACE Matrix FS Conservative Aggressive +6 +5 +4 +3 +2 +1 CA IS -6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6 -1 -2 -3 -4 Defensive -5 Competitive -6 ES

41. GSM RAPID MARKET GROWTH • Quadrant II • Market development • Market penetration • Product development • Horizontal integration • Divestiture • Liquidation • Quadrant I • Market development • Market penetration • Product development • Forward integration • Backward integration • Horizontal integration • Concentric diversification WEAK COMPETITIVE POSITION STRONG COMPETITIVE POSITION • Quadrant III • Retrenchment • Concentric diversification • Horizontal diversification • Conglomerate diversification • Liquidation • Quadrant IV • Concentric diversification • Horizontal diversification • Conglomerate diversification • Joint ventures SLOW MARKET GROWTH

42. IE Matrix Hold and Maintain IFE Scores Strong Average Weak 3-4 2-2.99 1-1.99 High 3-4 Medium 2-2.99 Low 1-1.99 EFE Scores © Tony Gauvin, UMFK, 2009

43. Strategic Selection © 2009, Tony Gauvin, UMFK

44. Matrix analysis

45. Possible Strategies • Develop an alterative fuel car for global marketplace • Product Development, Market development and Market penetration, Porter’s Type 3 • Move Manufacturing to low-cost labor countries with high demand for value priced automobiles (China and India) • Product development, Forward & backwards integrations. Porter’s type 1 • Leverage Volkswagen Auto Groups brand to create a global market for Skoda Cars • Market development, Market Penetration, Joint venture, Porter’s type 2 © 2009, Tony Gauvin, UMFK

46. QSPM © 2009, Tony Gauvin, UMFK

47. Recommendations • Next 3 years • Move Manufacturing to low-cost labor countries with high demand for value priced automobiles (China and India) • Next 5 to 7 years • Develop an alterative fuel car for global marketplace • Continuing • Leverage Volkswagen Auto Groups brand to create a global market for Skoda Cars © 2009, Tony Gauvin, UMFK

48. Annual Objectives • Year one • Get plants up and running in China and India • Year two • Increase Production& Sales • ~ 100,000 units in China, 25% export • ~ 30,000 units in India, 0% export • Year three • Increase Production& Sales • > 150,000 units in China, 35% export • ~ 45,000 units in India, 10% export © 2009, Tony Gauvin, UMFK

49. Strategic Implementation © 2009, Tony Gauvin, UMFK

50. Financial • Cost • 2 factories in China @ 30,000,000 each • 1 factory in India @ 50,0000,000 • Skoda is wholly owned by Volkswagen AG • No stock … so EPS/EBIT is not important • The Financing decision is to borrow money or fund from extensive cash reserves • Czech national bank is listing a 1.5% Prime rate making this a “no-brainer” ---Borrow the cash! © 2009, Tony Gauvin, UMFK