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Question Paper Integrated Case Studies - II (MB3J2): October 2008

Case Study∗ (100 Marks)

• This section consists of questions with serial number 1 - 5. • Answer all questions. • Marks are indicated against each question.

Read the case carefully and answer the following questions:

1. “The greater the level of involvement of a company in foreign markets, the greater the need for it to monitor the political climate of the business.” In relation to the effect of a country’s political environment on a company’s performance, analyze how the political environment of Czechoslovakia impacted Skoda? ( 18 marks)

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2. “In the early 1990s, Volkswagen’s (VW) sales in the US were declining, making it imperative for the company to start looking for new markets to safeguard its long term interests leading to its acquisition of Skoda.” Examine the various reasons for companies to adopt cross-border merger and acquisition. Also, discuss the benefits derived by Volkswagen and Skoda with this acquisition. ( 22 marks)

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3. “Known over the world for its quality engineering, Volkswagen’s task was to transform the poor image and socialistic policies of Skoda into a customer-oriented, market-focused organization.” In this context, analyze the various Human Resource (HR) issues that companies face at the time of an acquisition and the way VW has tackled these issues. Also, examine how VW has improved the production and quality in the manufacturing plants of Skoda? ( 20 marks)

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4. In the light of the rise in brand consciousness among customers, analyze the importance of brand building. Discuss the various brand building initiatives adopted by VW to improve Skoda’s image. ( 20 marks)

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5. “Volkswagen embarked on its multi-brand strategy in an effort to rationalize its brands. It had 4 vehicle brands – Audi, VW, SEAT and Skoda, with each brand maintaining its distinct identity.” Discuss the advantages and disadvantages of a multi branding strategy in competitive markets. How far is the multi-brand strategy of VW justified? Give reasons. ( 20 marks)

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Volkswagen’s Acquisition of Skoda Auto: A Central European Success Story

“Central Europe is not an emerging market, it’s reemerging. And its companies are playing the game of catch-up incredibly fast.”

– Justin Jenk, a Principal with McKinsey & Co. in Moscow in 1997.1

“Skoda was a joke and it should never again be a joke.” – Karl-Gunter Busching, a Production Manager at Skoda, in 2000.2

“We are one of the three oldest car manufacturers in the world… and we are an example of how a car company cancomplete a successful transformation from a local producer into a global player.”

– Vratislav Kulhanek, Chairman of the Board of Management at Skoda Auto, in 2001.3

SKODA CROSSES THE HALF MILLION MILESTONE The year 2006 was significant for the Skoda Auto Group (Skoda), an auto manufacturer based in the Czech Republic.That year, the company crossed the 500,000 units mark for the first time, in production as well as in sales of vehicles.Production, at 556,347 units, represented a 12.6 percent increase over 2005, while sales, at 549,667 units, hadincreased 11.7 percent. Improved sales reflected positively on Skoda’s financial performance as well, and in 2006, the company posted a revenue increase of 8.7 percent and an increase in net profits of 40.2 percent over 2005 (Refer to

*The above case is prepared only for the purpose of examination and not to illustrate effective or ineffective performance of the company. The case contains factual information adapted to and combined with other information to enable analysis of the given topics.

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1 “Central Europe’s Best Companies,” The Economist, June 30, 1997. 2 Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000. 3 Luca Ciferri, “New Flagship Model will Complete Skoda Rebirth,” Automotive News Europe, July 2, 2001. 4 “Slav Motown,” The Economist, January 6, 2001. 5 The ‘Iron Curtain’ was the boundary which symbolically, ideologically, and physically divided Europe into two separate areas from

the end of World War II until the end of the Cold War, roughly from 1945 to 1991. The countries that were east of the iron curtain (most of central Europe and all of Eastern Europe) were under the political influence of the erstwhile Soviet Union, and followed Communism. (www.wikipedia.com).

6 The Cold War was the period of conflict, tension and competition between the United States and the Soviet Union and their respective allies from the mid-1940s until the early 1990s.

7 Czechoslovakia declared its independence from the Habsburg Empire of Austria- Hungary in 1918. It was further split into the countries of Czech Republic and Slovakia in 1993.

8 Skoda was a Czech surname, which became the name of the company. Ironically, it also means ‘pity’, ‘shame’ or ‘damage’ in Czech.

9 The Great Depression was a time of economic downturn, which started after the stock market crash in the US on October 29, 1929, known as Black Tuesday. It began in the United States and quickly spread to Europe and every part of the world, with devastating effects in both the industrialized countries and those which exported raw materials. (www.wikipedia.com).

10 http://www.skoda-steel.net 11 The Velvet Revolution (November-December 1989) refers to the non-violent revolution in Czechoslovakia that saw the overthrow of

the Marxist-Leninist government there (www.wikipedia.com). 12 Jonathan Ledgard, “Skoda Leaps to Market,” Strategy + Business, Fall 2005. 13 Porsche was the founder of Porsche AG, a German sports car company that was set up in 1931. As of 2006, Porsche held a 20

percent stake in VW. 14 KdF stood for Kraft durch Freude, or “Strength through Joy”. It was also the name of a large state-controlled leisure organization in

Nazi Germany. 15 The Allied Forces of the Second World War were the USSR, the USA and the UK, and their allies. They were officially opposed to

the Axis Powers which were formed by Nazi Germany, Italy and Japan. 16 SEAT stood for Sociedad Española de Automóviles de Turismo (Spanish Corporation of Touring Cars). The company originally

produced FIAT cars under license. VW entered into a licensing agreement with the company in the early 1980s, becoming a major shareholder in 1986, and acquiring the full ownership in 1990.

17 The company made an effort to revive its fortunes in the US market by introducing what it called the New Beetle in 1998. The car was a success in the US, although the sales in Europe were limited.

18 Jonathan Ledgard, “Skoda Leaps to Market,” Strategy + Business, Fall 2005. 19 As of 2006, VW was the fifth largest car manufacturer in the world, behind General Motors, Toyota, Ford, and the Renault-Nissan

Alliance. 20 Jonathan Ledgard, “Skoda Leaps to Market,” Strategy + Business, Fall 2005. 21 Milorad Ajder, “Shall We Dance?” www.brandchannel.com (Accessed on June 2, 2007). 22 Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000. 23 In a fractal manufacturing system, the company or factory is composed of smaller independent components or fractal entities that

work together as a coherent whole. The main features of fractal manufacturing are: the independence of each fractal entity to choose its own methods of problem solving including self-optimisation that takes care of process improvements; flexibility of the fractal entities to adapt to influences from the environment without any formal hindrance of organizational structure; and a similarity of goals among the fractal entities to conform to the objectives in each unit. (Adapted from http://www.fractal.org/Fractal-Research-and-Products/ Fractal-factory.pdf)

24 Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000. 25 Peter Robinson, “Skoda’s on a Whirl,” Auto World, September 1998. 26 Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000. 27 Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000. 28 “Slav Motown,” Economist, January 6, 2001. 29 An automobile platform is a shared set of components common to a number of different automobiles. It is sometimes referred to as

vehicle architecture. It usually includes the chassis and key dimensions, the steering mechanism, the suspension systems, and the choice and placement of engines and other powertrain components.

30 Edmund Chew, “Fabia Supermini is ‘New to Last Screw’,” Automotive News, November 22, 1999. 31 Annual Report 2000. www.skoda-auto.com 32 William Underhill, “How Many Germans Does It Take to Make a Czech Car?” Newsweek International, September, 2001. 33 http://www.marketingpower.com/content16161S1.php, (Accessed on June 4, 2007). 34 Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000. 35 Lucy Aitken “Skoda’s Image gets Clearer,” The Independent (London), March 29, 2005. 36 Lucy Aitken “Skoda’s Image gets Clearer,” The Independent (London), March 29, 2005. 37 Lucy Aitken “Skoda’s Image gets Clearer,” The Independent (London), March 29, 2005. 38 http://www.marketingpower.com/content16161S1.php

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Exhibit I for the production and sales breakup of Skoda vehicles, and to Exhibit II for Skoda’s Income Statement). Another event of significance for Skoda in 2006 was the launch of a new vehicle called the Skoda Roomster. TheRoomster, which was positioned as a leisure activity vehicle, was Skoda’s fourth model line after the Octavia, the Fabia, and the Superb lines. Skoda said that the sales of the Roomster in 2006, at 14,422 units, had been satisfactory. Skoda was the Czech Republic’s best-known company, and in addition to being a major employer, contributedsignificantly to the country’s exports. It was also one of the oldest car companies in the world along with Mercedesand Peugeot.4 Skoda was often cited as an example of a company from a country east of the ‘Iron Curtain’5 that had managed to succeed in the market economy. During the Cold War6, Skoda cars were widely derided in Western Europe for their unappealing looks and poor performance. However, after Skoda became a part of Volkswagen AG(VW) in 1991, its image was transformed. VW played a significant role in improving Skoda’s reputation and developing its capabilities, and by the late 1990s, the company came to be known for its high quality, sturdy cars, andhad established itself as a ‘value for money’ brand. BACKGROUND - SKODA Skoda was set up in 1895, at a place called Mlada Boleslav in what was then a part of the Austro-Hungarian Empire.7It was originally called Laurin and Klement Co. (L&K), after the two founders Vaclav Laurin, a mechanic, and VaclavKlement, a bookkeeper. L&K’s main business was manufacturing and selling bicycles. The firm’s bicycles proved popular, and L&K ventured into making motorcycles in 1899. L&K’s motorcycles participated in several racingevents, and won some of them, enhancing the company’s reputation. L&K started manufacturing cars in 1905. When its first model, the Voiturette A, became a commercial success, L&Kstarted expanding, and in 1907, the firm was incorporated as a joint stock company. During the First World War(1914-1919), L&K was involved in arms production. After the War ended, L&K diversified into making trucks, buses, aviation engines and agricultural machinery, inaddition to cars. This required additional investments, for which it started looking for a partner. In the early 1920s,after a fire at the L&K factory, the need to find a partner became critical. In 1925, L&K was acquired by Skoda Plzen,the largest industrial enterprise in what was then Czechoslovakia. After the merger, L&K’s vehicles began to be soldunder the Skoda name 8. In the period between the two World Wars, Skoda’s cars were exported across Europe. During that time, the

39 http://www.marketingpower.com/content16161S1.php 40 “Slav Motown,” Economist, January 6, 2001 41 JD Power & Associates was a global marketing information services firm founded in 1968. The firm conducted independent and

unbiased surveys of customer satisfaction, product quality, and buyer behavior for a variety of industries. It was best known for its customer satisfaction research on new-car quality and long-term dependability. (www.wikipedia.com)

42 Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000. 43 “Slav Motown,” Economist, January 6, 2001 44 Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000. 45 Luca Ciferri, “New Flagship Model will Complete Skoda Rebirth,” Automotive News

Europe, July 2, 2001. 46 Luca Ciferri, “New Flagship Model will Complete Skoda Rebirth,” Automotive News Europe, July 2, 2001. 47 Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000. 48 “Slav Motown,” The Economist, January 6, 2001 49 As of late 2006, the VW Company’s brands were organized under two groups – the Audi group, consisting of the Audi, SEAT and

Lamborghini brands, and the VW group consisting of the VW, Skoda, Bentley and Bugatti brands. The VW Group acquired the Lamborghini, Bentley and Bugatti brands in 1998. (From www.theautochannel.com/ news/2006/11/15/028774.html and www.wikipedia.com).

50 Luca Ciferri, “New Flagship Model will Complete Skoda Rebirth,” Automotive News Europe, July 2, 2001. 51 As of the end of December 2000, One US Dollar (US$1) was equal to approximately €1.06. (http://www.xe.com) 52 Luca Ciferri, “New Flagship Model will Complete Skoda Rebirth,” Automotive News Europe, July 2, 2001. 53 Luca Ciferri, “New Flagship Model will Complete Skoda Rebirth,” Automotive News Europe, July 2, 2001. 54 “Slav Motown,” The Economist, January 6, 2001 55 Annual Report 2006, www.skoda-auto.com 56 “China 2006: Skoda Octavia designed for China,” http://auto.moldova.org, (Accessed on June 6, 2007). 57 Jason Stein, “Skoda Set for Growth in China,” Automotive News Europe, November 27, 2006. 58 Lyle Frink, “Skoda Roomster Showcases Modular Car Building,” Automotive News Europe, April 9, 2006. 59 Annual Report 2006, 60 Marc Mustard, “Skoda Joyster,” Auto Express, October 4, 2006. 61 Tom Mudd, “The Last Laugh,” Industry Week, September 18, 2000.

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company’s cars were known for their elegant looks and technical superiority. Although sales were affected to someextent by the Great Depression9, Skoda’s popularity did not diminish significantly. During the Second World War (1939-1945), Skoda came under the control of Nazi Germany, and the company’sproduction facilities were used to support Germany’s war efforts. After the War, Czechoslovakia came under theinfluence of Soviet Communism, and all the companies in the country were nationalized. Skoda Plzen’s differentbusiness units, including the auto manufacturing unit, were split into seven independent entities.10 After nationalization, all Skoda’s production and business decisions were subject to centralized planning, and information and technological exchanges with foreign companies were restricted. Consequently, the company soonlost touch with the technological advancements in Western Europe and the US. However, it continued to produce new models like the Skoda 440 Spartak, the 445 Octavia, the Felicia and the Skoda 1000 MB. These cars sold well inCentral and Eastern European countries, but were the butt of many jokes in Western Europe because of their ‘ugly’looks and substandard performance. A turning point of sorts for Skoda came in the late 1980s with the launch of a new car called the Favorit. This cardiffered from the older Skoda cars in that its design and technology were similar to cars from Western Europe. TheFavorit was designed by Bertone, an Italian company, and part of its engine technology was licensed from Westernautomakers. The car went on to become one of Skoda’s most successful models, and sold very well in Czechoslovakiaand other Eastern European countries. It sold reasonably well in Western Europe too, although it was stilltechnologically inferior to comparable cars in those markets. After the Velvet Revolution11 in Czechoslovakia, the new government put up most of the country’s industries forprivatization. The government decided to bring in a strong foreign partner for Skoda to help the company catch upwith western automakers. In April 1991, VW acquired a 31 percent stake in Skoda for $416 million. The company alsoagreed to make two further payments of $260 million each in 1993 and 1994 to eventually raise its stake to 70percent.12 BACKGROUND – VOLKSWAGEN VW’s history can be traced back to the early 1930s, when Adolf Hitler (Hitler), the then Chancellor of Germany,approached Ferdinand Porsche (Porsche)13, an automobile engineer, to design a car for the common man. The car, thenunofficially known as the Volkswagen (German for ‘People’s Car’), was to have a top cruising speed of 62 miles perhour, and the capacity to carry five people. Another condition was that the car’s price was not to exceed 1,000 ReichMarks. In 1934, Porsche submitted the design proposal for such a car to the German government and signed an agreementwith Reichsverband der Automobilindusrie (RDA, the German Motor Industry Association) to manufacture the car. By October 1935, the prototype of the car was ready. The car had a full steel body and space for five people. It wasconsiderably more economical to own and run than the large cars produced at that time. The initial designs were updated over the next few years and a convertible version was also developed. In 1938, work began on a new factory where the cars were to be manufactured. The factory was called the KdF Wagenfactory (KdF Wagen was the official name of the car at the time14). The first car was made in 1938. As its shape resembled a beetle, the car began to be called the Beetle, and this became the car’s official name in later years. During the Second World War (1939-1945), the KdF Wagen factory was used for military production. In 1944, most of the factory was destroyed in bombing by the Allied Forces15. After the war ended in 1945, the factory was taken over by the British, and rebuilt to be used for making jeep engines and repairing British army jeeps. It was the British who gave the company its new name ‘Volkswagen,’ and the town that was created near it was called Wolfsburg. TheBritish eventually gave up the company to the German government in 1949, and the German government appointedHeinrich Nordhoff, a former senior manager at Adam Opel Gmbh, another German auto company, as the seniorexecutive. During the post Second World War period, VW’s most successful car was the Beetle, although the company had alsodeveloped a utility vehicle called the VW Transporter in 1950. Another vehicle called the Kharman Ghia was launchedin 1955, using many parts from the Beetle. By the 1950s, VW was already well on its way towards becoming a global company, and had started exporting itsvehicles to neighboring European countries like Denmark, Sweden, Luxemburg, Belgium, and Switzerland. It alsoestablished factories in England, South Africa and Brazil to make Beetles. An Australian plant was also started in1960. By the mid 1960s, VW was making more than one million Beetles every year. Over the years, the company had also introduced some variants of the Beetle, including a sedan and a convertible. VW acquired Audi Auto Union(Audi), a German car company known for its technological capabilities, in 1964. In the late 1960s, the demand for the Beetle began declining, and VW realized that it had to bring out an acceptablesuccessor to the car. In the 1970s, VW introduced several new car models that were based on Audi car platforms.Some of the cars introduced by VW in the 1970s were the Passat (known as Dasher in the US), the Polo, and the Golf(known as the Rabbit in the US and Canada). At the same time, the company also started cutting down the production

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of the Beetle. Over the late 1970s and 1980s, VW’s most popular car was the Golf. The Golf chassis was used for later VW vehicles like the Scirocco sport coupe, the Jetta sedan, the Cabriolet convertible, and the Caddy pickup. During the 1980s, the Rabbit’s (Golf’s) electrical problems harmed the company’s image in the market, and VW’s sales started declining in the US and Canada. Also, several Japanese and American car companies were offering bettercars at lower prices. In the late 1980s, VW’s Chairman Carl Hahn decided that it was better for the company to reduceits dependence on established car markets like the US and Western Europe, and explore new markets. The Rabbit factory in Pennsylvania, in the US was closed in 1988. In 1990, VW acquired Spanish car manufacturerSEAT16. This was followed by the acquistion of a 30 percent stake in Skoda in 1991. SKODA UNDER VW In the early 1990s, VW’s sales in the US were less than 100,000 cars a year. This made it imperative for the companyto start looking for new markets to safeguard its long term interests.17 Around the same time, VW embarked on its multi-brand strategy in an effort to rationalize its brands. At that time, VW had four distinct vehicle brands – Audi, VW, SEAT and Skoda. Each brand had its own distinctbrand identity, which VW made an effort to maintain. The company’s strategy was to target different market segments with each of its brands. The Audi brand was synonymous with exclusivity, technological superiority and ‘coolness’. It was VW’s high-end brand and was reportedly perceived in the market to be in the same league as BMW and Mercedes-Benz. The VW brand, though originally associated with low-end, economical cars, had moved up-market and was associated with high quality and engineering superiority in the early 1990s. The low end of the market was covered by the SEAT and Skoda brands. Although analysts were concerned about VW’s strategy of having two entry level brands, the company said that thetwo brands made it more competitive at the lower end of the market. It also said that it planned to create two distinct brand personalities for SEAT and Skoda, and would sell them in different markets. VW planned to give SEAT a‘funky’, youthful image, while Skoda was to stand for economy and competence. Each of the four brands was alsomanaged separately at the company under the overall direction of the Chairman of the VW Group. VW, which had edged out French auto major Renault and Sweden’s Volvo in acquiring the stake in Skoda, announcedthat it intended to use the Skoda brand to gain access to Central and Eastern European markets, where the brand had a strong presence (Skoda had a 35 percent market share in Eastern Europe at that time18). The company also planned to use Skoda’s manufacturing facilities in Czechoslovakia to manufacture low cost cars for western markets. Acquiring Skoda was aimed at helping Volkswagen attack Fiat’s position as the largest car manufacturer in Europe, as well asimproving its position in the global auto market.19 THE TRANSFORMATION OF SKODA When VW took over Skoda, the two companies had little in common. VW was known the world over for the quality ofits engineering. Skoda on the other hand, was a peripheral player in the global auto industry, often mocked for its cars’unreliability and poor quality. The task before VW therefore, was to transform Skoda, which had been dominated by Socialistic policies and systems, into a customer-oriented, market-focused organization. INTEGRATION AND HR ISSUES VW’s approach towards transforming Skoda was gradual and incremental. The company used a collaborative and nurturing strategy in bringing about improvements at Skoda, and reportedly tried to avoid ‘winner-loser’ comparisons. From the beginning, VW made an effort to keep Skoda’s brand identity independent. As one of the first steps towards improving Skoda’s image in the market, VW decided to focus on the company’s heritage as one of the oldest carmakers in the world. It also talked about Skoda’s history and past achievements, and encouraged employees to takepride in being a part of the company. It printed new brochures showing pictures of some of Skoda’s best and mostsuccessful pre-communist era cars. VW also built a company museum for Skoda, which showcased the majormilestones in its history. The idea behind all this was to create a sense of identification and pride in the workers atSkoda. The transition from a state-owned company to a market-oriented one was expected to pose several challenges. When VW took over Skoda, it realized that most of the employees had relatively good engineering competence as well as a high level of professionalism despite the company’s communist background. However, there was a basic lack ofeconomic knowledge and experience, management skills, initiative and responsibility. Because the company had been managed in an authoritarian manner for several years, employees displayed a distinct tendency to shy away fromexpressing their opinions or taking decisions. VW realized that Skoda employees needed to change their work philosophy. However, it avoided bringing in drastic HR changes. Instead of bringing in teams of ‘experts’ from the parent company, VW choose to develop the skills andcompetencies of the employees at Skoda, which was expected to be more beneficial in the long run. VW also

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appointed Ludvik Kalma, a Czech, as the CEO of the company. Knowledge transfer and competency development atSkoda was done through coaching, joint project work and ‘tandem management’. In joint project work, all the key tasks were handled by bi-cultural teams of people from VW as well as Skoda. Each team was led by a manager from Skoda, who had the overall responsibility for the project results. A team of managersfrom VW was installed at Skoda soon after the acquisition to support the projects, and give any assistance needed to the project teams. The team of expatriates was also responsible for any coaching that might be needed for thesuccessful completion of projects. In tandem management, key management positions at Skoda were shared by one manager from VW and another local manager for a limited period of time (around three years). During this time, it was the responsibility of the VWmanager to develop the professional and managerial skills of his local partner, with a view to helping him manage his department independently in future. VW adopted a ‘look and see’ approach towards posting its German employees atSkoda. The idea was to ensure that only people who were comfortable in dealing with the cultural differences wereposted there, thus minimizing potential problems. VW took up management development in a major way at Skoda. Previously, Skoda had an apprentice school and an‘education department’ where management training was provided to a select few employees. Under VW however,human resource development was a more wide-ranging exercise. Language was one of the major hindrances in the VW-Skoda collaborative effort. To overcome language barriers, VW set up a language center near the Skoda factory. All the Czech employees had to learn to speak either German or English to improve their chances of advancement at the company. Groups of managers and production workers fromthe Skoda factory were also sent to Germany and other places where VW had plants to learn about VW’s productionmethods. During the transformation, although some positions at Skoda were made redundant, VW chose not to lay offemployees. Employees were given the option of taking up jobs in some other part of VW. However, VW divesteditself of Skoda’s utility depots, housing, primary schools, libraries and sports stadiums, which the company hadmaintained as a state-owned entity, in an effort to keep costs in check. Analysts said that VW’s collaborative approach went a long way in making Skoda’s transformation a smooth process.Svatopluk Kvaizar, the mayor of Mlada Boleslav said, “I can’t think of a single decision which was influenced by badblood between the Germans and the Czechs.”20 This helped avoid the hostilities that usually prove to be the biggestdetriment to the success of any acquisition. According to Jan Kubes, a Professor at IMD, “Volkswagen had the vision and heart to reawaken the dormant expertise of Skoda and its employees.”21 PRODUCTION AND QUALITY IMPROVEMENT After several decades as a state-owned company, Skoda’s production methods had become outdated, and the company had no well-defined quality management systems. VW therefore had to rationalize the production processes at Skodato bring them on par with its other plants. VW implemented what it called the Skoda Production System at the company. The System tracked parameters likequality, costs, team cooperation and absenteeism in the factory, and displayed the information on the shop floor. Theteams with the best results on these parameters were rewarded periodically. A common reward was a trip to one of VW’s other plants where the teams could benchmark Skoda’s production practices against those of VW. Skoda also implemented VW’s supplier grading system to bring about improvements across the supply chain. Initially when the grading system was implemented, only one percent of Skoda’s suppliers earned the highest ‘A’ grade. Overthe years, Skoda and VW personnel worked closely with the suppliers to ensure that the quality and reliability of thecomponents they supplied improved. Supplier motivation to participate in the quality improvement initiatives was kepthigh with the promise of opportunities to supply not only to Skoda, but to the other VW plants as well. By the end ofthe 1990s, 71 percent of the suppliers had received the top ‘A’ grade.22 When Skoda launched its Octavia model in 1996, it set up a new plant at Mlada Boleslav to manufacture the car. Theplant incorporated some of the best technologies from VW, and was considered a testimony to how far Skoda hadcome from its days as a state-owned company. The Octavia plant operated on the fractal concept of manufacturing23, and used small teams and just-in-time principles. All the employees at the plant were grouped into teams of 8 to 12 members. Each team member had equal responsibility to produce error-free work and for overall quality control. Attempts to conceal faulty work could lead todismissal. To promote flexibility and reduce repetitive stress injuries, all the team members were cross-trained on different jobs. Most of Skoda’s major suppliers, like Johnson Controls, Siemens, Peguform, and Meritor, set up their own plants inthe Octavia factory complex to build a range of components. All the suppliers were linked to the central productioncontrol computer system, so that they knew the production sequence, and manufactured to suit the requirements of themoment. This helped streamline processes and control costs. The Octavia plant and other Skoda plants differed from VW plants in the extent to which they were automated. Because

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labor costs in Czechoslovakia were considerably lower than in Germany and other parts of Western Europe, the Skodaplants were designed to take advantage of manual labor (In the late 1990s, Czech workers earned around 16,000 CzechKoruna, or $6000 a year. This was only 20 percent of what auto industry workers earned in Germany.)24 At the body shop for instance, only five percent of the work was automated, compared to around 30 percent at similar VW plants inGermany.25 Automation was used only for tasks where precision was critical to quality. The Octavia plant was originally designed to produce between 300 and 350 cars per day, but was actually producingaround 500 cars per day by the late 1990s.26 The plant was also made flexible enough to produce any other Skoda model if the demand for a model suddenly increased. Between 1991 and 1998, VW reportedly made capitalinvestments exceeding one billion dollars on upgrading Skoda’s factory and rationalizing the production process.27 NEW PRODUCT DEVELOPMENT The rationalization of production processes at Skoda was taking place even as new and improved models under theSkoda brand were being launched. When VW acquired its stake in Skoda, Skoda’s most popular car was the Favoritwhich, though it sold reasonably well in Central and Eastern Europe and even had some sales in Western Europe, wasvery inferior to comparable cars available in the west. The first car launched by Skoda after becoming a part of VW was the Felicia, which debuted in 1994. The Felicia was a small car (known as a supermini), and was a reworked version of the Favorit (production of the Favorit had beenstopped by then). The Felicia however, was more modern in appearance and offered a wider range of engines than theFavorit. The name ‘Felicia’ was borrowed from another two-seater Skoda car of the 1960s. The new Felicia was launched in both petrol and diesel versions. It was the first Skoda car to feature several activesafety features, and played an important role in changing Skoda’s image in Western Europe. The diesel engine on the car was the same as the one used in VW’s popular Golf and Polo cars, and on SEAT’s Ibiza model. Over the years,Skoda launched several variants of the Felicia, including a hatchback, an estate car, a pickup version and a panel car. The Felicia was followed in 1996 by what was to become one of Skoda’s most successful cars in later years, theOctavia. (The name Octavia was also borrowed from a Skoda model of the 1960s). Skoda made an effort to includethe latest developments in terms of design, technology, safety and environmental protection in making the Octavia. The Octavia was well received all over Europe, and analysts said that the car was responsible for finally ridding Skodaof its image of poor quality. The Octavia was a compact car built on the same chassis as the Audi A3 I, VW Golf IV, VW Bora/Jetta IV and SEAT León I/Toledo II. The car was positioned at the lower end of the upper-medium segment of the car market. (Skoda introduced an estate version of the Octavia called the Octavia Combi in 1998, and theOctavia Combi four-wheel version was launched in 1999). Skoda had built the Octavia plant with a productioncapacity of around 90,000 cars a year, but the car became so successful that the plant eventually produced around 160,000 cars a year.28 Skoda introduced the Fabia in 1999. The Fabia was another ‘supermini’, and was the first car to use VW’s PQ24platform29 (VW planned to use the same platform to build the next generation Polo car). Fabia was intended to replace the Felicia. According to unconfirmed reports, the development costs of the Fabia had been very low. Skoda however,refused to disclose the project cost. “We would be benchmarked. We are too good,” said Wilfried Bockelmann, aSkoda board member who was responsible for technical development.30 The Fabia became a great success in Europe. Two British car magazines, Auto Express and What Car?, named the Fabia their ‘Car of the Year’ for 2000. In Germany, the Fabia was awarded the Golden Steering Wheel by German newspaper Bild am Sonntag. Additionally, in a survey conducted by Auto 1 magazine, the Fabia was rated #1 among all national cars in both Austria and the Czech Republic in 2000 (It rated #3 in international comparisons in both thecountries.)31 (Refer to Exhibit III for an indicative list of Skoda car prices in 2007). IMAGE-BUILDING The launch of new and better quality cars was supported by an extensive image-building exercise across Europe, and especially in the UK, where Skoda had been the subject of many jokes over the years (Some samples: “What do youcall a Skoda convertible? A dumpster.”32; “How do you double the value of a Skoda? Fill it with gas.”33). Long-time Skoda employees found the jokes annoying. “What you have to remember is that we made the best cars we could under real socialism. What you also have to remember is that we were able to sell those cars in the West,” saidJosef Urban (Urban), a production manager at Skoda.34 In the 1990s, VW made significant efforts towards improving Skoda’s brand image. It introduced new promotionsaimed at making Skoda acceptable to customers, and enhancing the positive aspects associated with the Skoda brand. In all the promotions, VW underlined Skoda’s Czech roots. The initial promotional material concentrated in projecting Skoda as a company with a rich history and heritage. For Skoda’s marketing team, changing the company’s image wasa major challenge. For years people had been conditioned to associate Skoda with poor quality. The company decided that the best way to tackle the prejudice would be to confront it. Adopting the same approach that VW had taken to popularize the Beetle in the US in the late 1950s and early 1960s,

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Skoda came up with a series of funny, self-deprecating advertisements. The television advertisements, aired primarilyin the UK in the late 1990s, showed people (sometimes employees and at other times visitors) at the Skoda factoryhaving a difficult time trying to equate Skoda with style. They were shown looking at the cars in the factory in some surprise. Later promotions used the tagline “It’s a Skoda. Honest.”35 Some of the other taglines used were “Skoda. It might earn you more respect than you think” and “It’s a Skoda. Which, for some, is still a problem?”36 The company also used an aggressive direct marketing campaign in which it sent Skoda badges through the post, andinvited potential customers to “live with it” for a while.37 Analysts said that Skoda’s use of humor to sell cars, while unusual, seemed to have worked. “It’s not the way you normally sell a car; you sell on features, not on humor. But ifSkoda had done a typical car ad, talked about its electric windows and whatever, it wouldn’t have (had) the sameimpact,” said Ray Perry, the director of marketing for the Chartered Institute of Marketing, a British organization.38 Some analysts also said that displaying a willingness to poke fun at itself showed Skoda in a positive light, andimproved customers’ opinions about the company. “What the humor does is own up to this bad image that the brandhas, and portrays Skoda as honest and down-to-earth,” said Chris Hirst, a client services director at Fallon, a London-based advertising agency that worked on the Skoda account.39 Skoda also used celebrity endorsements. In 1998, the company was one of the sponsors of the Czech tennis star JanaNovotna, who won the ladies singles title at Wimbledon that year. In 2000, it also sponsored the Czech ice hockeyteam, which won the Ice Hockey World Championships.40 By the end of the 1990s, Skoda’s image had undergone a significant transformation in many of its markets. Skoda wasplaced at or near the top of the prestigious JD Power & Associates41 customer satisfaction survey several times in the late 1990s, and the BBC Top Gear magazine said the Fabia “feels like it is in a class above the rest.” 42 By the late 1990s, Skoda had established itself as a mass market car brand in Europe. It was also Central Europe’sbiggest car manufacturer, having overtaken the Polish affiliate of Fiat in 1997.43 Worldwide sales of Skoda cars had improved significantly. In 1991, Skoda sold 172,000 cars. This increased to 385,000 cars in 1999.44 Skoda’s exports also increased substantially. In 1991, Skoda was exporting 26 percent of its production, to 30 countries. By 2000,exports were 82 percent of production, and Skoda vehicles were sold in 72 countries.45 The company’s biggest western European market was Germany. The core of the Skoda brand, according to Vratislav Kulhanek, the Chairman of Skoda from 1997 to 2004, was “toppositioning in customer values and elegant styling.”46 Commenting on Skoda’s improvement Urban said, “Things haveimproved, but what has really improved is that Skoda can expand. We can invest a lot in our future. But nothing is falling from the sky. We earned it by our own hard work.” 47 SKODA IN THE NEW MILLENNIUM In late 1999, the government of the Czech Republic announced that it was ready to divest its remaining 30 percentstake in Skoda. In 2000, VW acquired the 30 percent stake for $320 million.48 VW however continued to allow Skoda to have an independent identity. By this time, the Skoda brand had its own image, distinct from the VW brand.49 The Skoda brand’s attributes were enunciated by the company’s three basic values (Refer to Exhibit IV for the Skoda Values). It was estimated that between 1991 and 2000, VW had invested close to €2.6 billion in Skoda.50 51 During the same period, Skoda’s revenues had increased from €500 million to €3.7 billion.52 Production had also increased to 435,000 units by 2000.53 VW continued with its efforts to improve Skoda’s brand image in the UK and other parts of Western Europe duringthe early 2000s. The company employed advertising agency Fallon, the London unit of Minneapolis-based Fallon Worldwide, along with another London-based public relations firm, Sputnik Communications, and a direct marketingagency, Archibald Ingall Stretton also of London. Like the 1990s ads, the new ads also showed people in humorous situations in which they assumed that because the cars were so good, they could not possibly be Skodas. These adscoincided with the launch of the Fabia in 1999, and the launch of a retooled version of the Octavia in 2000. At the end of 2000, Skoda announced that it would stop producing its Felicia model by April 2001. The Felicia, thoughsuperior to the Skoda cars from the communist period, was not up to the mark in most western car markets, and did notmeet the European Union’s environmental standards. At the time of the announcement, Skoda had sold 1.4 millionFelicia cars.54 The Felicia had already been replaced by the Fabia as Skoda’s entry level car. Skoda launched its most luxurious car, the Superb, in 2002. The Superb was an executive car which targeted the same market segment as the BMW 5 series cars and the Mercedes-Benz E Class. In 2002, the Association of Scottish Motoring Writers voted the Superb as the ‘Luxury Car of the Year’. According to analysts, although the Superb stillhad a long way to go before it could catch up with BMW and Mercedes in terms of sales, the car had considerablepotential. They also said that with the launch of the Superb, Skoda had effectively discarded its image as a companythat could only make low-end cars. In the early 2000s, Skoda built a handover center in Mlada Boleslav. At the center, Skoda buyers could takepossession of their cars directly from the production line and drive them home. Typically this facility was available

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only for luxury cars like Mercedes Benz and Audi. Skoda’s creation of such a facility was thought to be more evidenceof the company’s commitment to create an image of ‘quality’. In the early 2000s VW made further investments in Skoda. The company reportedly invested around $1.7 billionbetween 2000 and 2003, to set up a new powertrain plant, paint shop and press and welding shops at the Skodafactory. It also set up a parts supply center in the Czech Republic in 2000 to supply parts to world markets. VW used the Skoda brand to enter emerging markets. The Skoda acquisition had given VW a significant market sharein Central and Eastern Europe (as of 2006, Skoda had a market share of more than 18 percent in this region)55, and the company targeted markets like India, China and Russia with the Skoda brand. VW entered India in 2002 with the launch of the Skoda Octavia, which went on to become one of the best selling carsin the super-premium D segment in the country by 2006-2007. This was followed by the launch of the Superb in 2004. Skoda was set to launch the Fabia in the country by the end of 2007. Skoda also set up a plant in Aurangabad inWestern India, which was used to assemble the cars. Prior to the launch of Skoda, VW did not have a presence inIndia, although the company had announced in late 2006, that it planned to launch the Polo in the country by 2009. Skoda also had an important role to play as a VW brand in China. The VW brand was well established in China, wherethe company’s main product was the Polo. However, in the early 2000s, VW’s market share was being eroded by competitors like General Motors (GM), Toyota and Honda. In 2004, VW announced a new strategy for China, underwhich it planned, like GM, to introduce multiple brands at different price points. VW announced that it would launch Skoda as its ‘value’ brand in the country (similar to Chevrolet’s position in GM’s brand line-up). In April 2005, Skoda signed a cooperation agreement with Shanghai Volkswagen, the joint venture between VW andChina’s Shanghai Automotive Industry Corp., to produce cars in China. C&F Investment, a Shenzen-based company, had been importing Skoda cars into China from 1999. VW entered into talks with C&F in 2006 to buy back the importrights. Skoda also invested in developing the sales and service organization for the Octavia prior to its launch. Skoda announced that the production of the Octavia would commence at the Shanghai-VW plant in mid-2007, followed by the Fabia and Superb Models. Detlef Wittig, who became the Chairman of the Board at Skoda in 2004, said, “We regard China as being one of the strategic markets for the future development of the Skoda brand. With the official presentation of the Octavia modeland with the pending production start, a new position for the Skoda brand in China is being created.”56 Skoda announced that it expected 20 percent of its global sales to come from China by the end of 2009.57 VW also used the Skoda brand to spearhead its entry into Russia. In mid-2006, VW announced that it would invest €370 million to build an assembly plant near Moscow. The plant was expected to become operational by late 2007,when it would start assembling semi knocked down kits of the Octavia. VW also planned to use the plant to assemblecars like the Passat, and its utility vehicle Touareg by 2008-2009. In 2006, Skoda launched the Roomster, its fourth model line. The Roomster was a five-seat small minivan, which was built on a composite platform borrowed from several other Skoda and VW cars (The front end was based on the small-segment Skoda Fabia, the rear end on the first-generation Octavia, and the center was supplied by the Golf). The Roomster was the first Skoda car to be built using VW’s modular philosophy. Using a modular approach allowedcar companies to build several distinct models off the same platform, without any major engineering changes. TheRoomster was different from other Skoda cars in that its design was much boldly styled than cars like the Octavia andthe Fabia, which were built with classic looks. According to Auto Express, a British magazine, the Roomster was “probably the most innovative car Skoda has produced in its history.”58 In the first year of its production Skoda produced 25,055 Roomsters. As of 2006, Skoda had a presence in more than 90 countries around the world.59 The company had three manufacturing/assembly plants in the Czech Republic, in Mlada Boleslav, Vrchlabi and Kvasiny, and one atAurangabad in India. Partner plants (that were not part of Skoda) were located in Ukraine (Solomonovo), Bosnia andHerzegovina (Sarajevo) and Kazakhstan (Usť Kamenogorsk). THE ROAD AHEAD As of 2006, Skoda was a well established mass market car brand. Analysts said that the main reason behind Skoda’ssuccess was the fact that in most markets, Skoda had the support of the VW brand. Customers reasoned that they werebuying a VW car for a lot less (especially as the Skoda cars shared many components with VW). It also helped thatSkoda had been able to overcome its quality issues and had built a reputation for good value cars. Skoda’s future plans included developing a leisure vehicle featuring advanced technology. The company showcased aconcept car called the Skoda Joyster at the 2006 Auto Salon in Paris. The Joyster was a three door coupe, with several unique design features. The windscreen for instance, was an aeroplane-style wraparound, which went half way around the car. The interior had changeable seat covers, a docking station for a laptop, and a complete CarPC setup with LAN integrated into the dashboard. The Joyster also had an ‘infotainment’ center with a navigation system, radio and a DVD player. The rear hatch door,which opened out downwards had a folding seat, which could be used for picnics. Skoda officials said that the

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company had long been planning to make a car that would be popular with young urban customers. Jens Manske, theChief designer for the Joyster project said, “We wanted to create a young person’s car. They are always interested inthe latest technology and need practical solutions. The Joyster is very well equipped in that respect.”60 In the early 2000s, with the traditional car markets of North America, Western Europe and Japan approachingsaturation, most major auto manufacturers were looking at new markets to drive growth in the future. French automaker Renault and its Romanian subsidiary Automobile Dacia had launched a low cost car called the Logan in2004 with a starting price of €5,000. The Logan was a no-frills saloon that had become a major success in Central and Eastern Europe, as well as in parts of Western Europe and Asia. Renault used the Logan to enter emerging markets like Central and Eastern Europe, India,Russia, and Latin America, which placed it in competition with Skoda in these markets. Analysts said that there was also a chance that Renault might use its Dacia subsidiary to produce other cars at lower price points, which couldaffect Skoda in future. However, as of the early 2000s, Skoda was, in the words of one analyst, “the perfect template of an eastern European firm doing well.”61

Exhibit I

Skoda – Vehicle Production by Model

Model 2004 2005 2006 2006/2005 Fabia. 124,464. 115,667. 121,506. 5.0% Fabia Combi. 97,103. 94,091. 106,112 12.8% Fabia Praktik. 1,072. 1,174. 1,064. (9.4%) Fabia Sedan. 17,263. 15,232. 12,237. (19.7%) Fabia Successor. – – 196 – Fabia total 239,902 226,164 241,115 6.6% Roomster – – 25,055 – Octavia Tour 70,734 48,131 53,631 11.4% Octavia Combi Tour 51,544 18,188 15,493 (14.8%) Octavia 55,126 94,718 99,840 5.4% Octavia Combi 3,663 85,491 100,810 17.9% Octavia total 181,067 246,528 269,774 9.4% Superb 22,899 21,435 20,403 (4.8%) Total 443,868 494,127 556,347 12.6%

Source: “Annual Report 2006,” www.skoda-auto.com

Skoda – Customer Deliveries by Model

Model 2004 2005 2006 2006/2005 Fabia 132,520 119,485 123,170 3.1% Fabia Combi 97,012 99,637 106,694 7.1% Fabia Sedan 17,036 16,451 12,906 (21.5%) Fabia Praktik 1,032 1,125 1,212 7.7%

Fabia total 247,600 236,698 243,982 3.1% Roomster – – 14,422 – Octavia Tour 82,259 48,999 53,783 9.8% Octavia Combi Tour 58,427 20,802 15,540 (25.3%) Octavia 39,734 90,042 100,584 11.7% Octavia Combi 1,263 73,479 100,367 36.6% Octavia total 181,683 233,322 270,274 15.8% Superb 22,392 22,091 20,989 (5.0%) Total 451,675 492,111 549,667 11.7%

Source: “Annual Report 2006,” www.skoda-auto.com

Skoda – Vehicle Customer Deliveries by Region

2004 2005 2006 2006/2005 Czech Republic 64,676 65,166 65,171 0.0% Central Europe, excluding Czech Republic 87,139 73,855 75,626 2.4% Eastern Europe 31,564 46,692 70,986 52.0% Western Europe 240,672 276,216 301,343 9.1% Overseas and Asia 27,624 30,182 36,541 21.1%

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Total 451,675 492,111 549,667 11.7% Source: “Annual Report 2006,” www.skoda-auto.com

Exhibit II

Skoda – Consolidated Profit and Loss Account (CZK Millions)

2004 2005 2006 2006/2005 Sales 163,665 187,382 203,659 8.7% Cost of goods, sold 144,368 163,738 175,636 7.3% Gross profit 19,297 23,644 28,023 18.5% Distribution expenses 10,278 10,611 11,903 12.2% Administrative expenses 3,513 3,676 3,587 (2.4%) Other operating income 3,514 4,027 4,747 17.9% Other operating expenses 3,125 2,524 2,687 6.1% Operating profit 5,895 10,860 14,602 34.5% Financial result (1,052) (787) (404) 48.7% Profit before income tax 4,843 10,073 14,198 41.0% Income tax expense/income 1,474 2,180 3,136 43.9% Profit after income tax 3,369 7,893 11,062 40.2%

Source: “Annual Report 2006,” www.skoda-auto.com

Exhibit III

Indicative Prices of Skoda Cars as of Mid 2007

Model Price Range (€) Fabia 13,720 – 14,525 Fabia Sedan 14 415 – 23 350 Fabia Combi 14 415 – 23 355 New Octavia 18,615 – 33,190 Octavia Combi 19,820 – 34,390 Superb 28,810 – 42 765 Roomster 16,825 – 24,590

Compiled from www.skoda-auto.com

Exhibit IV

The Three Basic Values of the Skoda Brand

Intelligence – We continuously seek innovative technical solutions and new ways in which to care for and approach the customers that are most important for us. Our conduct toward the customers is aboveboard and we respect their desires and needs.

Attractiveness – We develop automobiles that are aesthetically and technically of high standard and always constitute an 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 [in] 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 our products.

Source: http://www.skoda-auto.com/global/company/perspective

END OF QUESTION PAPER

Suggested Answers Integrated Case Studies - II (MB3J2): October 2008

Section A

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1. The impact of political environment on Skoda In short, one would have to search widely to find a viable company today with a politicalhistory as turbulent as that of Skoda. It began operations in 1895, making bicycles andmotorcycles; in 1905, its first production car, the stately Voiturette, was pushed out of itsoriginal workshop. In its early years, the company made luxury cars. Then it survived thecollapse of the Austro-Hungarian Empire, the creation and rise of Czechoslovakia, theinvasion of Czechoslovakia by Nazi Germany, the 1948 Communist takeover, the 1968Soviet invasion, the 1989 revolution that overthrew Communism and introduced the freemarket, the 1993 split of Czechoslovakia into two independent countries (the CzechRepublic and Slovakia), and the 2004 entry of the Czech Republic into the European Union.Skoda also survived being swallowed in 1991 by an entirely different type of autocraticregime: Volkswagen. That company, which is partly owned by the provincial government ofLower Saxony, is known for its committee-based management style, its insular culture, itsinnovative designs, its intimate labor relations, and its long-standing identity as the largestEuropean automaker. The various areas where political environment have impact on acompany are: International marketing activities: The political environment in which the firm operates(or plans to operate) will have a significant impact on a company's international marketingactivities. The greater the level of involvement in foreign markets, the greater is the need tomonitor the political climate of the countries in which the business is conducted. Impact on Skoda • Before the communist era, during world war two, Skoda was allowed to export its

product in foreign market and was engaged in marketing activities through out Europe.In its early years, the company made luxury cars. During that time, the company’s carswere known for their elegant looks and technical superiority.

• When the soviet-communism ruled Czechoslovakia, the government had nationalizedmost of the industries of Czechoslovakia. During this period, Skoda exports to WesternEurope received a scornful reception. The cars were perceived as smelly, noisy, andonly vaguely responsive to their steering wheels and brakes. The brand became a joke,a shorthand for all the inadequacies and failings of the Communist bloc.

• After communist era, the new government pulled up the iron curtains of communismfrom Czechoslovakia and privatized most of the industries in the country. This madethe company to go global and increase its marketing activities.

Changes in policy and attitude towards foreign business: Changes in government oftenresult in changes in policy and attitude towards foreign business. Bearing in mind that aforeign company operates in a host country at the discretion of the government concerned,the government can either encourage foreign activities by offering attractive opportunitiesfor investment and trade, or discourage its activities by imposing restrictions such as importquotas, etc. Impact on Skoda • During the Second World War (1939-1945), Skoda came under the control of Nazi

Germany, and the company’s production facilities were used to support Germany’s warefforts.

• The earlier communist government of Czechoslovakia had restricted all foreignbusinesses by nationalizing the Industry.

• But after the Velvet Revolution in Czechoslovakia, the new government put up most ofthe country’s industries for privatization. The government decided to bring in a strongforeign partner for Skoda to help the company catch up with western automakers.Skoda integrated within Volkswagen’s management structure which followed theestablished VW formula for success: performance-oriented management, cooperativelabor relations, utilitarian marketing and an emphasis on design.

Government ownership of economic activities affecting business policies: Nearly allgovernments today play active roles in their countries' economies. Although evident to agreater or lesser extent in most countries, government ownership of economic activities isstill prevalent in the former centrally planned economies, as well as in certain developingcountries which lack a sufficiently well developed private sector to support a free market

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system. Foreign products and investment seen to be vital to the growth and development of theeconomy often receive favorable treatment from the government in the form of reduced tax,exemption from quotas, etc. On the other hand, products considered by a government to benon-essential, undesirable, or a threat to local industry are frequently subjected to a varietyof import restrictions such as quotas and tariffs. Impact on Skoda • Before communist era, Skoda was used by government for military purpose. This was a

period when no economic activity was given importance and the company was onlyused for government motives. Though there were exports in this period but they wereof little significance as it were not given any importance by existing government.

• After nationalization, all Skoda’s production and business decisions were subject togovernment discretions and policies, and information and technological exchangeswith foreign companies were being restricted.

• After communist era, the new government gave up its ownership on the existingindustries and opened the doors for privatization and giving right of decision making inthe hands of the owner of the companies. As free market policy was adopted, economicactivities gain momentum in Czechoslovakia. As Skoda was acquired by Volkswagen ,the benefits were two sided, the Western money and know-how met cheapCzechoslovakia labor and market share, Skoda was the first major privatization deal inEastern Europe. The manner in which the deal was struck was as important as theterms. All the decision makers were in the same room, and because it was the firstprivatization, the laws could be written as they went along.

Attitude towards Foreign Investment: Many nations look upon foreign investment withsuspicion. This is true of both developed and developing countries. Developing countries areusually afraid of domination and exploitation by foreign business. In response to nationalattitudes, these nations’ legislature put a variety of laws and regulations to prescribe the roleof foreign investment in their economies. Indirectly, the success of other multinationalbusiness in a country indicates a favorable climate. Impact on Skoda Before communist era, as it was a war-like, unstable period, no technological advancementor further investments for the improvement of company was done. The concept of foreigninvestments was not so popular at those times. • The early communist government of Czechoslovakia has nationalized the company,

restricting any kind of foreign collaboration or investments. • The new government after communist era, had opened the gateway for foreign

investment after restoring for privatization and seeking a good partner to help companykeep pace with technological advancements and go global. Foreign investments fromVolkswagen also brought other benefits other than in monetary terms. For example,Slovakians normally would park their vehicles anywhere in the parking. They wereparking all over the place, but Czech managers thought it crazy to worry about such adetail when there were production issues to resolve. German decided to bring order tothe Skoda plant’s parking lot. The Germans were proved right. First bring order, thencomes change.

Political risk Political risk is determined differently for different companies, as not all of them will beequally affected by political changes. For example, industries requiring heavy capitalinvestment are generally considered to be more vulnerable to political risk than thoserequiring less capital investment. Vulnerability stems from the extent of capital invested inthe export market, e.g. capital-intensive extracting or energy-related businesses operating inthe foreign market are more vulnerable than manufacturing companies. Political risk is of a macro nature when politically inspired environmental changes affect allforeign investment. It is of a micro nature when the environmental changes are intended toaffect only selected fields of business activity or foreign firms with specific characteristics. Impact on Skoda • A country like Czechoslovakia has seen a lot of political instability and political jolts

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for decades. Skoda was badly affected company because of such a political instability.After the communist era, the Skoda was acquired by Volkwagen, a German automaker.There were always a risk of change in government and again change in policies of newgovernment which may be favorable or might be adverse to the benefits of company.

• Volkswagen also had to face the impact of politically instable past on the Skoda.Volkswagen executives found Skoda disoriented, unmotivated, overstaffed, andundercapitalized. After some false starts, with ill-advised proclamations of companyvalues that sounded too much like Communist exhortations, German executivesrealized that the future of the company lay in its past. “Workers were frustrated withCommunist slogans. Volkswagen had to divest Skoda of its immediate past. That meantclearing out managers compromised by Communist Party or secret police connectionsas well as divesting the utility plants, transport depots, housing, kindergartens, libraries,and sports stadiums that the company had taken care of under Communism.

• Volkswagen’s early bets in Eastern Europe were seen as risky — the equivalent ofpouring $10 billion into shaky state enterprises in Ukraine today — but the companybenefited greatly from them.

2. An acquisition, also known as a takeover, is the buying of one company by another. Anacquisition may be friendly or hostile. In the former case, the companies cooperate innegotiations; in the latter case, the takeover target is unwilling to be bought or the target'sboard has no prior knowledge of the offer. Acquisition usually refers to a purchase of asmaller firm by a larger one. Cross-border M&A The rise of globalization has exponentially increased the market for cross border M&A. In1996 alone there were over 2000 cross border transactions worth a total of approximately$256 billion. This rapid increase has taken many M&A firms by surprise because themajority of them never had to consider acquiring the capabilities or skills required toeffectively handle this kind of transaction. However, with the weak dollar in the U.S. and soft economies in a number of countriesaround the world, we are seeing more cross-border bargain hunting as top companies seek toexpand their global footprint and become more agile at creating high-performing businessesand cultures across national boundaries. Even mergers of companies with headquarters in thesame country are very much of this type (cross-border Mergers). Motives behind Cross-border M&A: • Economies of scale: This refers to the fact that the combined company can often reduce

duplicate departments or operations, lowering the costs of the company relative to thesame revenue stream, thus increasing profit.

• Opportunity for Growth: Given domestic limitations and challenges companiesworldwide have undertaken global M&A activities to grow in size by addingmanpower, access resources unavailable in domestic regions and facilitate overallexpansion. The need for faster growth which arises out of increasing competition hasalso lead to M&A.

• Increased revenue/Increased Market Share: This motive assumes that the company willbe absorbing a major competitor and thus increase its power (by capturing increasedmarket share) to set prices.

• Cross selling: Cross selling between the two companies can take place by sharingcomplementary technology platforms.

• Synergy: This refers to the fact that the combined company can often reduce duplicatedepartments or operations, lowering the costs of the company relative to the samerevenue stream, thus increasing profit. It can better use the complementary resources.

• Taxes: A profitable company can buy a loss maker to use the target's tax write-offs. Inthe United States and many other countries, rules are in place to limit the ability ofprofitable companies to “shop” for loss making companies, limiting the tax motive ofan acquiring company.

• Geographical or other diversification: This is designed to smooth the earnings results ofa company, which over the long term smoothens the stock price of a company, giving

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conservative investors more confidence in investing in the company. • Resource transfer: Resources are unevenly distributed across firms (Barney, 1991) and

the interaction of target and acquiring firm resources can create value through eitherovercoming information asymmetry or by combining scarce resources.

• Vertical integration: Companies acquire part of a supply chain and benefit from theresources.

• Increased market share, which can increase market power: In an oligopoly market,increased market share generally allows companies to raise prices. Note that while thismay be in the shareholders' interest, it often raises antitrust concerns, and may not be inthe public interest.

• Diversification: If a firm launches a product that has no relation to its existing portfolioof the products there are lower chances of its success. Thus, in order to diversify, firmswould prefer mergers and acquisitions route.

• Empire building: Managers have larger companies to manage and hence more power. • Entry into new markets: Setting up businesses from scratch is a tedious process. Benefits derived by Volkswagen through M&A: • Reduced dependence:

Volkswagen reduced over dependence on established car markets like U.S and Europe. • Low cost cars:

VW also used Skoda’s manufacturing facilities in Czechoslovakia to manufacture lowcost cars for western markets.

• Competition: Acquisition helped VW in attacking Fiat’s position as the largest car manufacturer inEurope, as well as improving its position in the global market.

• Market share: The Skoda acquisition had given VW a significant market share in Central and Eastern

Europe. • Emerging markets:

VW used the Skoda brand to enter emerging markets the company targeted marketslike India, China and Russia.

• Labor costs: As the labor costs in Czechoslovakia are very low VW utilized the Skoda plants thatare designed to take the advantage of manual labor.

• Product length: M&A helped VW to increase its product offerings under different brands.

• Bargaining power: The bargaining power of VW increased and the suppliers set up their own plants in thefactory complex to build a range of components which helped in streamlining theprocesses and control costs.

Benefits derived by Skoda through M&A: • Capable partner:

The Czechoslovakian government’s intention to bring in a strong foreign partner forSkoda to help the company catch up with Western automakers has been fulfilled.

• Components sharing: As the Skoda cars shared many components with VW, it had overcome its qualityissues and had built a reputation for good value cars.

• Image: Skoda’s image had undergone a significant transformation in many of its markets. Itwas placed at or near the top of the prestigious JD Power & Associates. The M&Ahelped Skoda to reestablish its image as a best known company in Czech Republic.After Skoda becoming part of Volkswagen its image was transformed fromunappealing, poor performer to high quality, sturdy car.

• Mass market:

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Skoda had established as a mass market car brand in Europe. World wide sales ofSkoda cars had improved significantly.

• Cultural change: Skoda, which had been dominated by Socialistic policies and systems transformed intoa customer-oriented, market focused organization.

• Technology transfer: The production in the Skoda plants increased with the introduction of new technology.VW made capital investments exceeding one billion dollars on upgrading Skoda’sfactory.

• Sick company to profit making company: In 2006 Skoda posted a revenue increase of 8.7 percent and increase in net profits of40.2 percent over the past year.

• Separate brand identity: VW created distinct brand personalities for each of its brands; therefore Skoda’s brandwas managed separately.

• Knowledge transfer: VW chose to develop the skills and competencies of the employees at Skoda.Knowledge transfer and competency development at Skoda was done throughcoaching, joint project work.

3. People management plays a critical role in Merger and Acquisition (M&A). People issueslike staffing decision, organizational design, etc., are most sensitive issues in case of M&Anegotiations. The ability to succeed in a merger depends entirely on the people who are driving thebusiness - whether they have creativity, capacity to innovate and ability to execute, and moreimportantly, whether they can do these things collaboratively. To ease the merger transitionand make sure the pieces fit together as seamlessly as possible; the HR should take theinitiatives in management, recruitment, structure, retention, and managing cultural change.In a merger, the employees should be put in a position to see easily that there was value intheir daily work lives. To achieve this, the company’s HR executives require acting ascoaches and collaboration consultants. The most critical and challenging HR issues to overcome during a cross-border M&A are: Dovetailing employees: • The focus of employees shifts from productive work to issues related to interpersonal

conflicts, layoffs, career growth with the Acquirer Company, compensation, etc. • Employees’ are concerned with how well they will get acquainted with the new

colleagues. • Job security is one of the issues in an acquisition bid as it often involves downsizing • Changes in the well defined career paths of employees, as defined by the acquired

company. Cultural Integration: The cultural issues that arise on account of the difference in the workculture in the two organizations pose a serious challenge in the integration process. • Each company has its own set of values which may conflict with those of the acquired

company. • Culture shock– The employees may not be able to accommodate themselves in a new

culture and thus may lead to cultural shock. • Inability to adapt to a new culture increases stress levels among employees and results

in low job performance. The need therefore is to follow a structured approach indealing with cultural differences.

• Few organizations may have an open culture, whereas in some other organizations theculture may be a closed one.

• As the transition begins, the two cultures should combine to create a unique culture. Employee communication: Whenever there is news of any merger in an organization,anxiety prevails among the employees.

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• This atmosphere of apprehensions leads to company wide rumors. • The employees lose faith in their organization and tend to become demotivated. • Attrition – Most mergers bring with them downsizing, reallocation of work, change in

work profiles, changes in career paths, etc. • Adaptability –Employees face high levels of stress, if they fail to adapt to the new

culture and thus end up leaving the organization. • Language barriers – In a cross-border M&A, the one issue that is often encountered is

lack of understanding of the language. Differences in organizational structures: • Difference between the organizational structures of the companies results in

reorganization of the hierarchy levels. • Since the organizational structures are different, differences in compensation packages

and designations can take place. The company has to maintain employees at equallevels. Unable to do so, employees may feel dissatisfied.

The transition of Skoda from a state-owned company to a market-oriented one was expectedto be more challenging with the workforce coming from two distinct cultural backgrounds,which was effectively dealt by VW. Approach of Volkswagen in dealing with the HR issues: Employees’ motivation: It was important for VW to make the employees of Skoda feelmotivated. • It ensured the employees feel motivated by focusing on the company’s heritage as one

of the oldest car makers in the world encouraging them to take pride in being a part ofthe company.

• It showcased the major milestones in Skoda’s history with an idea to create a sense ofidentification and pride in its workers.

• VW identified the engineering competence as well as a high level of professionalism ofthe Skoda’s employees and choose to develop their skills and competencies, which wasexpected to be more beneficial in the long run.

Initiatives to identify the inadequacies: • VW also identified the lack of basic economic knowledge and experience, management

skills, initiative and responsibility and worked on improving them among theemployees.

• VW realized Skoda’s employees’ attitude of shying away from expressing theiropinions or taking decisions and that they needed to change their work philosophy.

Nurturing and collaborating strategy: • It avoided bringing in drastic HR changes. • In managing the HR issues, VW adopted Knowledge transfer and competency

development at Skoda effectively managed through coaching, joint project work and‘tandem management’.

Joint project work Responsibility sharing – In joint project work, all the key tasks were handled by bi-culturalteams of people from VW as well as Skoda making the employees feel being a part of thekey tasks. Each team was led by a manager from Skoda, who had the overall responsibilityfor the project results, enabling that the manager has an idea of the cultural issues of theteams. Coaching and assistance – Coaching and assistance, which form major issues in a cross-border acquisition, were dealt with by VW by providing assistance needed to the projectteams from its team of managers and provision of coaching for the successful completion ofthe projects. Tandem management – Key management positions at Skoda were shared by one managerfrom VW and another local manager for a limited period of time as an initiative to developthe professional and managerial skills of the local partner and helping him manage hisdepartment independently in future. In an attempt to minimize potential problems, only those German employees who were

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comfortable in dealing with the cultural differences were posted at Skoda. Management development – Skoda had an apprentice school and an ‘educationdepartment’ where management training was provided to a select few employees which wasdeveloped well. Managing the language barriers – To overcome language barriers, VW set up a languagecenter near the Skoda factory. All the Czech employees had to learn to speak either Germanor English to improve their chances of advancement at the company. Managing the redundancies – VW chose not to lay off employees, but instead gave theman option of taking up jobs in some other part of VW. Managing the costs – VW divested itself of Skoda’s utility depots, housing, primaryschools, libraries and sports stadiums, which the company had maintained as a state-ownedentity, in an effort to keep costs in check. Overall, VW’s collaborative approach was considered a key factor in making Skoda’stransformation a smooth process. Production and Quality Improvement Skoda’s production methods had become outdated after several decades due to lack oftechnological inputs. The company had no well-defined quality management systems. Skoda Production System – VW implemented Skoda Production System at the companythat tracked parameters like quality, costs, team cooperation and absenteeism in the factoryand made the system more transparent by displaying the information on the shop floor. Rewards – The teams with the best results on the parameters of the Skoda ProductionSystem were rewarded periodically. Benchmarking – The teams were given an opportunity to benchmark Skoda’s productionpractices against those of VW by sending them on a trip to one of VW’s other plants. Improvement across the supply chain – In an attempt to make improvements across thesupply chain, VW’s supplier grading system was implemented at Skoda. Supplier Grading System – Due to a meager one percent of Skoda’s suppliers earning thehighest ‘A’ grade, Skoda and VW personnel worked closely with the suppliers to ensure thatthe quality and reliability of the components they supplied improved. Supplier motivation – As part of their supplier motivation efforts, the suppliers wereencouraged to participate in the quality improvement initiatives by promising them anopportunity to supply not only to Skoda, but to the other VW plants as well. Technological collaborations – Skoda’s Octavia model incorporated some of the besttechnologies from VW. Division of work – The division of work among small teams consisting of 8 to 12 membersenabled the employees feel more responsible to work and enhanced the quality of their work. Just - in -Time principles – Just-in-time principles were adopted in order to reduce anywastage due to maintenance of high inventory. Transparency – Formation of teams made the system more transparent to identify anyfaulty work and attempts to conceal such work could lead to dismissal. Stress management – To promote flexibility and reduce the stress on the team members intimes of adversity, all the team members were cross-trained on different jobs. Information coordination – All the suppliers were linked to the central production controlcomputer system, so that they knew the production sequence, and manufactured to suit therequirements of the moment. This helped streamline processes and control costs. Effective complementing of the resources – Lower cost of labor in Czechoslovakia was effectively utilized by making maximum use ofmanual labor at Skoda’s plants. Automation was used only for tasks where precision was critical to quality. Flexible production process – The Octavia plant was originally designed to producebetween 300 and 350 cars per day, but was actually producing around 500 cars per day bythe late 1990s. The plant was also made flexible enough to produce any other Skoda model ifthe demand for a model suddenly increased. Safety features – Several active safety features played an important role in changingSkoda’s image in Western Europe. Advancements – Skoda made an effort to include the latest developments in terms of

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design, technology, safety and environmental protection in making the Octavia.

4. Brand: A name, term, phrase, design, symbol, or any combination of these chosen by anindividual or organization to distinguish a product/service from competing products/services. Branding: Branding is perhaps the most important facet of any business--beyond product, distribution,pricing, or location. A company's brand is its definition in the world, the name that identifiesit to itself and the marketplace. The function and art of branding is a major contributor to the success of a product or servicesold by the company that markets it. Brand management should aim to build into customers’minds a set of perceptions and attitudes relating to an offering, leading to positive buyingbehavior. To achieve this goal, managers must know a great deal about their customer base.The power of a brand is measured by its effect on buyers. A powerful brand will cause itscustomer base to either defer or refuse to purchase if the brand is NOT available. Somebrands have reached a level of mass acceptance where they are used as action verbs, such as“Xeroxing” a document instead of copying it and “Fedexing” a package rather than mailingor posting it. One brand’s identity is so strong that when we hear Aspirin we immediatelythink of Bayer. Branding is comprised of two elements— external and internal to the customer. Internal brand elements include the following: Personality, which relates to customers’ description of the brand; Culture, or the social context within which a brand is perceived, as in the case of Mercedes’“engineering excellence”; and, Self- Image, which encompasses what we feel the brand says about us, for example, the self-image of driving a Jaguar versus a Ford. External elements include the following: • Physique, or the physical characteristics of the brand that makes customers want to

know what it does; • Reflection, which relates to the target user or customer being nurtured; and, • Relationship, which says the customer must have an identifying relationship with the

brand itself. The Importance of Branding Branding is an integral part of the business building process. Large corporations spendhundreds of millions of dollars building their brands, and there’s a reason: • Brands enable customers to remember a companies product-service. • Brands build customer loyalty and lead to repeat purchases. • Brands make it easier for current clients or customers to refer to others. • Brands send a message as to what your customers can expect. • Brands convey an emotion. • Brands add value. Brand loyalty is an integral part of building a brand, as consumers usually have a choice ofproducts in the same market segment, and so a successful company will come up with a wayto keep consumers re-buying their product or coming back to their location rather than goingto a competitor. IMAGE-BUILDING Of SKODA The launch of new and better quality cars was supported by an extensive image-buildingexercise across Europe, and especially in the UK, where Skoda had been the subject of manyjokes over the years. In the 1990s, VW made significant efforts towards improving Skoda’sbrand image. It introduced new promotions aimed at making Skoda acceptable to customers,and enhancing the positive aspects associated with the Skoda brand. Projecting Skoda as a company with a rich history and heritage: • In all the promotions, VW underlined Skoda’s Czech roots. The initial promotional

material concentrated in projecting Skoda as a company with a rich history andheritage.

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• For Skoda’s marketing team, changing the company’s image was a major challenge.For years people had been conditioned to associate Skoda with poor quality.

• The company decided that the best way to tackle the prejudice would be to confront it. Using humor in advertisements: • Adopting the same approach that VW had taken to popularize the Beetle in the US in

the late 1950s and early 1960s, Skoda came up with a series of funny, self-deprecatingadvertisements.

• The television advertisements, aired primarily in the UK in the late 1990s, showedpeople (sometimes employees and at other times visitors) at the Skoda factory having adifficult time trying to equate Skoda with style.

• They were shown looking at the cars in the factory in some surprise. Later promotionsused the tagline “It’s a Skoda. Honest.” Some of the other taglines used were “Skoda. Itmight earn you more respect than you think” and “It’s a Skoda. Which, for some, is stilla problem?”

• Displaying a willingness to poke fun at itself showed Skoda in a positive light, andimproved customers’ opinions about the company.

Direct marketing campaign: • The company also used an aggressive direct marketing campaign in which it sent Skoda

badges through the post, and invited potential customers to “live with it” for a while. Celebrity endorsements: • Skoda also used celebrity endorsements. In 1998, the company was one of the sponsors

of the Czech tennis star Jana Novotna, who won the ladies singles title at Wimbledonthat year.

• In 2000, it sponsored the Czech ice hockey team, which won the Ice Hockey WorldChampionships.

Transformation: • By the end of the 1990s, Skoda’s image had undergone a significant transformation in

many of its markets. • Skoda was placed at or near the top of the prestigious JD Power & Associates customer

satisfaction survey several times in the late 1990s, and the BBC Top Gear magazinesaid the Fabia “feels like it is in a class above the rest.”

Mass market brand image: • By the late 1990s, Skoda had established itself as a mass market car brand in Europe. • It was also Central Europe’s biggest car manufacturer, having overtaken the Polish

affiliate of Fiat in 1997. Worldwide sales of Skoda cars had improved significantly. • In 1991, Skoda sold 172,000 cars. This increased to 385,000 cars in 1999. Skoda’s

exports also increased substantially. • In 1991, Skoda was exporting 26 percent of its production, to 30 countries. By 2000,

exports were 82 percent of production, and Skoda vehicles were sold in 72 countries. • The company’s biggest western European market was Germany. Brand attributes: • In 2000, VW continued to allow Skoda to have an independent identity. By this time,

the Skoda brand had its own image, distinct from the VW brand. • The Skoda brand’s attributes were enunciated by the company’s three basic values:

• Intelligence – We continuously seek innovative technical solutions and new waysin which to care for and approach the customers that are most important for us.Our conduct toward the customers is aboveboard and we respect their desires andneeds.

• Attractiveness – We develop automobiles that are aesthetically and technically ofhigh standard and always constitute an attractive offer for our customers not onlyin terms of design or technical parameters, but also the wide range of offeredservices.

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• Dedication – We are following [in] the steps of [the] founders [of] our companyMessrs Laurin and Klement. We are enthusiastically working on the furtherdevelopment of our vehicles; we identify ourselves with our products.

Employing agencies: • VW continued with its efforts to improve Skoda’s brand image in the UK and other

parts of Western Europe during the early 2000s. • The company employed advertising agency Fallon, the London unit of Minneapolis-

based Fallon Worldwide, along with another London-based public relations firm,Sputnik Communications, and a direct marketing agency, Archibald Ingall Stretton alsoof London.

• Like the 1990s ads, the new ads also showed people in humorous situations in whichthey assumed that because the cars were so good, they could not possibly be Skodas.These ads coincided with the launch of the Fabia in 1999, and the launch of a retooledversion of the Octavia in 2000.

Purchase of cars: • In the early 2000s, Skoda built a handover center in Mlada Boleslav. At the center,

Skoda buyers could take possession of their cars directly from the production line anddrive them home.

• Typically this facility was available only for luxury cars like Mercedes Benz and Audi. • Skoda’s creation of such a facility was thought to be more evidence of the company’s

commitment to create an image of ‘quality’.

5. Multiple Branding Strategy: Individual branding, also called multi branding, is the marketing strategy of giving eachproduct in a product portfolio its own unique brand name. Marketers who use a multi brandstrategy acquire greater market share than they could with fewer brands, even though one oftheir brands may somewhat cannibalize another. Multiple brands also enable marketers toacquire more shelf space and to respond to consumer demand for something new. The key isto recognize the optimal number of brands that will deliver more benefit than it costs. Thereare diminishing returns as the number of brands increase. Cost efficiencies due to economiesof scale decrease as production volumes are spread across a greater number of brands, andbrand cannibalization increases. Multi-branding is by far the most popular brand strategy, and is used by a very great numberof companies and in all types of business. Multi-branding can, in fact, be considered as oneof the most effective brand strategies, but it requires professional skills and ongoingmanagement and marketing focus from companies. Branding strategies are always highlyimportant for companies, as brands are regarded as the ultimate business driver. Brandstoday are acknowledged as the driver for better, more sustainable results and as an internal aswell as external source of inspiration, which creates both high recognition and relationships. Advantages: • As a mono brand can’t cover all segments, multibranding is useful to cover different

segments that look for different features. • Markets are strongly fragmented. As a market matures there is a need for differentiation

and it becomes necessary to offer a wide range as the market is becoming segmented. • Now-a-days people stick to their tastes and they need tailor made products so by using

multi branding the manufacturer can meet their needs. • Multiple brands offer a tactical flexibility which also enables one to limit a

competitor’s field of extension. • A multi brand policy can stop any new competitors entering a market. A strong entry

barrier to a market can be created by offering a complete range to retailers, with a brandname for each sector of the market.

• Using multibranding, marketer can target all price segments. The products can bespecifically meeting the price desired by the customer. A brand portfolio makes itpossible to cover the different price sectors without affecting the reputation of each

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brand. • Overall company’s financial risk can be minimized. • The brand portfolio risk also can be minimized. The image of one product is not

associated with other products, that the company markets. If the product fails, the effecton other products is minimized.

• The firm can distance products from other offerings, it markets. All the products can bepositioned clearly without any confusion to the customers.

• Multibranding can accommodate variety. Disadvantages: • Unless the positioning and targeting are distinct, the brands tend to cannibalize each

other. Even though the company may position the brands differently, it has to beperceived by the customers as distinct from the other brands.

• A multi brand portfolio only makes sense if, in the long term, each brand has its ownterritory.

• Certain innovations have to go with certain brands only. Distributing an innovation toall brands minimizes the ability to justify a premium price for the top innovative brand.

• Use when each brand is intended for a different market segment. • Has become more complex in the global marketplace. • There will be less customer loyalty. • One particular danger threatens all companies which opt for a multi-brand strategy that

of over-exposing the commonalities between brands. They may end up generating acommon product but with several different brand names.

• Cost of advertising and promotion is higher with multi branding. The volume of masscommunication in every sector is soaring; it is becoming more and more expensive tosuccessfully get one particular message across. The direct consequence is that only afew brands in a portfolio will be promoted, to gain a significant market share.

Multi branding by VW: VW had four distinct vehicle brands – Audi, VW, SEAT and Skoda. Each brand had its owndistinct brand identity, which VW made an effort to maintain. The multi-branding strategy ofVW was justified because of the following reasons: • All the four brands already had a good brand image in the market. So there was no loss

for VW in maintaining their identity individually. • VW will be having more scope to target different markets separately with these brands,

where they are strong. • All the brands were catering to different segment, so by individual branding they can

continue offering products to the individual target segments. • Focus will be more on individual brands and their respective offerings. • All brands were having strengths in different areas, like Audi in technology and Skoda

and SEAT strengths in low end segment, and Volkswagen associated with low-end,economical cars, had moved up-market and was associated with high quality andengineering superiority.

• VW can develop the individual brands and enter into other segments of the market. Forexample, Skoda though was considered to be a low end car brand, it can be developedin such a way that it can cater to other segments like, high end too attracting morebusiness.

• VW can increase its overall market share by introducing more brands in the market. • These brands will compete with not only their own brands but also with the brands of

other companies. For example Skoda will not only pose competition for SEAT but alsoreduce the dominance of Feat as a largest car manufacturer.

• VW can give more choice for the customers to choose among the brands. For examplea customer who wants to by a high end car can choose from AUDI, VW or from Skoda.

• VW can use the same components or parts in different cars and sell them underdifferent brands. For example, VW has used same engine in both VW and Skodamodels. Otherwise can say that, sell same cars with slight difference under differentbrands.

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• VW will not have any affect by the poor performance or bad image of any particularbrand on its overall image. For example, Skoda at that time was having a bad image inmost of the parts of the Europe.

• VW will build entry barriers for new companies wanting to enter the market. As it willbe covering all most all the segments in the market making it tough for the newentrants.

• Positioning of the brands and their respective products will be a lot easier, as confusionbetween the products will be reduced.

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