Analysis of the Macro-Environment Using the PESTLE Framework

Volkswagen is the biggest automobile brand in Europe. The brand consists the Volkswagen Passenger Cars and Volkswagen Commercial Vehicle Brands as its primary segments. The Commercial Vehicles segment engages in the development, production, and sale of light commercial vehicles including buses and trucks, as well as the corresponding accessories and parts (CNN, 2018). The Passenger Car segment includes developing engines and vehicles, producing and selling passenger cars, and the production and sale of the corresponding accessories (CNN, 2018). The Volkswagen brand primarily targets the aspiring middle class despite also owning luxury and heavy commercial vehicles (McGee, 2016). Volkswagen remains the largest car brand in Europe in terms of market share that stood at 10.9 percent in 2017 (Statista, 2018). This is despite losing its market share percentage for the second consecutive year. Its main competitors include Renault, Ford, OPEL, Peugeot, Mercedes, BMW, AUDI, FIAT, and SKODA that respectively make up the top ten vehicle brands in Europe (Bekker, 2018).

Analysis of the macro-environment using the PESTLE framework

Political

            A global brand such as Volkswagen has its supply and distribution network worldwide. In essence, it has its supply chain distributed in different locations across different regions. Political stability in these regions is essential for the successful operation of Volkswagen’s business. In sections that feature political stability and business friendly regimes, the brand’s business is bound to do well. Conversely, unstable political environments and unfriendly regimes work towards hindering the brand’s growth. Instability and the associated chaos, as well as heavy taxation by governments results in business disruption and even loss. For the most part, Europe’s political environment has maintained political stability during recent decades allowing for faster growth of automotive brands like Volkswagen. Some political changes such as Brexit can also have relative adverse impacts on the automobile industry by creating uncertainty. Political oversight, especially concerning emissions control, has increased over recent decades resulting in heavier pressure on the automotive brands such as Volkswagen.

Economic

            Economic factors directly impact business primarily by affecting demand. A decline in economic activity and other adverse fluctuations can result in decreased demand, and ultimately losses for a brand. Europe, like most of the world, has experienced a significant recession period characterized by a declined demand for automobiles. In fact, some major car brands had to ask for government bailout to avoid bankruptcy. Economic fluctuations in different markets coupled with currency exchange rate instabilities have also affected the revenue and net profits for automotive brands, including Volkswagen. This is despite the world economy returning on track (Leggett, 2014). Periods of reduced economic activity experience reduced demand for vehicles hence affecting the brand’s revenue and profit adversely. The recession, for instance, lead to a decline in employment levels hence reducing the consumers’ purchasing power (Peaple, 2013). High economic activity in most of Volkswagen’s European markets, therefore, play an essential role in ensuring its higher sales and profits.

Social-Cultural

            The 21st

century is characterized by increasingly important social forces in the business sector. In essence, sociocultural forces impact on consumers’ preferences and buying habits. These factors also affect a brand’s marketing and sales. Companies must factor in changing social trends that influence consumer preferences. As such, automotive brands such as Volkswagen have had to customize their marketing and sales strategies on the basis of the cultures that characterize different markets in the European region, as well as globally (Volkswagen Group, 2016). The constantly changing trends have also mean that the brands have to update their product and strategies accordingly. For instance, consumers in the contemporary world are apparently more concerned with a product’s sustainability. Accordingly, the sale of hybrid and electric cars has been on the rise.

Technological

            The automotive industry has always prioritized technology. Indeed, the success of an automobile brand is dependent on its technological advancements. Volkswagen and its competitors, therefore, have to invest significantly in research and development to maintain a competitive edge using technological advancements such as automatic driving and the incorporation of artificial intelligence in their products. Volkswagen even bought into the German Research Centre for Artificial Intelligence. The company has also prioritized its focus in developing future-oriented mobility solutions. The brand has invested in innovative technology to attain greater consumer satisfaction while bringing in safer and more eco-friendly products. Volkswagen has also invested significantly in advancing its manufacturing and distribution processes technologically to ensure more efficiency than its industry rivals.

Legal

            The automotive industry has also experienced the growth of the importance of legal factors in recent decades. In essence, the regulatory and legal frameworks in Europe and across the world has become tighter with brands facing higher compliance risks in several areas such as driver safety, labour, and the environment. Volkswagen was, in fact, made to pay billions of dollars in fines due to the brand’s emissions scandal. In this particular case, Volkswagen was culpable of employing cheating devices to pass emission tests. The discovery of such cheating led to the recalling of millions of the brand’s car models and paying of fines. All across the world, governments and legal policies are becoming more stringent towards preventing all forms of violations by automotive brands making non-compliance increasingly risky. 

Environmental

            The laws and government policies concerning pollution have become increasingly stringent across Europe and the world as society becomes more focused on environmental sustainability. Most markets have set up substantial penalties for automotive brands that do not fulfil set criteria. Volkswagen was forced to recall its vehicles and fined due to the brand’s incapacity to meet emission standards. This scandal led to the brand losing billions (Riley, 2017). In addition to the laws and policies, today’s consumers are increasingly aware and concerned about environmental maintenance and sustainability. As such, they have shown more likelihood to demonstrate loyalty to brands that produce environmentally-friendly products. Volkswagen has, therefore, turned its focus on developing and producing more hybrid and electric models as it tries to regain consumers’ trust in its products. Ultimately, global markets, and especially those in developed regions have implemented tough laws associated with emissions and the environment making it mandatory for brands such as Volkswagen to shift towards producing more environmentally-friendly car models.

Analysis of the micro-environment using Porter’s Five Forces

Industry Rivalry

            The European region features numerous automobile companies that offer significant competition for Volkswagen. Many of the top competitors also offer a wide range of products across several market segments. The top five players, including Volkswagen, occupy over 30 percent of the European automobile market (Bekker, 2018). Despite these large players occupying such a significant market share, the automobile industry is highly fragmented. Accordingly, the Volkswagen brand and its main competitors opt towards competitive pricing as they compete for the regional market share. Ultimately, although brand loyalty might offer a particular level of consistency in terms of sales while also mitigating the threat of competitors to some degree, the reduced costs of switching to the competing brands, as well as the high number of competitors available bring rise to the high intensity of rivalry.

Threat of New Entrants

            Although new manufacturers especially from Asia continue to bring in vehicle products into Europe, the threat of new entrants remains low for the Volkswagen brand. This is because the financial costs, for both Research and Development and Manufacturing, as well as the associated legal restrictions create substantial barriers to entry (David, 2017). Entry into the vehicle development, production, and sale sector demands high amounts of capital especially for obtaining raw materials and setting up physical manufacturing plants. Significant human capital is also required adding to the required costs adding to the entry barriers. Many new entrants also have a limited capacity to attain economies of scale essential for attaining long-term sustainability (David, 2017).             Brand equity is also an essentiality with regards differentiation considering the significant involvement nature of automobiles. The Volkswagen brand is generally well established in Europe and has amassed a significant degree of brand loyalty. Accordingly, these significant barriers to entry coupled with a robust brand recognition and an established market share in Europe affords the Volkswagen brand a competitive edge over new entrant hence minimizing their threat.

Threat of Substitutes

            The Volkswagen brand faces a relatively moderate threat of substitutes in the European market. The brand’s top competitors also offer passenger vehicles and light commercial vehicles. Majority of Europe also features well-established and efficient public transportation systems that provide alternatives for consumers (Statista, 2018). However, the existence of these alternatives does not necessarily translate to their extensive usage. Rather, the preference and choice of a particular transportation mode are primarily dependent on the operating costs that are dependent on the financial ability of individuals. Resultantly, the threat of substitutes depends on the region’s economic stability, hence relatively moderate.

Bargaining Power of Suppliers

            Like in other regions where the Volkswagen brand is produced, the European region features suppliers with a moderately low influence in the automobile sector. This low bargaining power amongst suppliers manifests primarily due to their reliance on the automotive manufacturers rather than the other way round. Every manufacturer retains several suppliers for different vehicle components. For instance, Volkswagen has over 40 different suppliers for a single vehicle model (Volkswagen Group, 2016). Manufacturers primarily considers factors such as cost, quality, and product delivery when selecting suppliers. Despite being contracted to engage particular suppliers, the cost of switching suppliers reduces considerably after the expiration of these contracts. Manufacturers usually switch suppliers if they cannot meet these factors (David, 2017). Additionally, the existence of numerous suppliers in the industry further lowers their bargaining power.

Bargaining Power of Buyers

            The upcoming middle-class target market for the Volkswagen brand features buyers that are willing to wait for decreased prices while also maintaining and even increasing their expectation of quality products and services (Volkswagen , 2017). The existence of numerous vehicle manufacturers also affords the buyers a broad range of vehicle models from which to choose. Additionally, the existence of competition has increased the factors that influence purchase decision that includes vehicle design, quality, price, and after-sales services. Accordingly, the similarity in designs and specification of the Volkswagen’s vehicles against other competitor products means that the buyers are not constrained to limited vehicle choices.

This availability of substitute products coupled with the reduced costs of switching brands ultimately affords the buyers a high bargaining power. However, the European market also features a well-established and efficient public transport system that offers a competitive alternative to the brand’s products. In fact, cars are regarded as ‘luxury’ modes of transportation. As such, the buyers’ influence is divided across a fragmented market meaning that no single group of buyers has a substantial influence on the products on sale and the levels of pricing. Consequently, this factor moderates the buyer’s bargaining power.

Key Opportunities and Threats

            Based on the analyses of Volkswagen’s macro and micro environments, the key opportunities and threat are identifiable. For one, Volkswagen continues to possess the highest percentage of the European automobile market. This fact in itself is a clear opportunity for the brand to take advantage of any other possible opportunity that might manifest in this market. For instance, due to the stringent laws and policies regarding the environment and emissions implemented in Europe, as well as a change in consumer preference towards eco-friendly products, there is an increase in the demand for hybrid and electric cars. This is an opportunity for the brand to target its already large market base with such product and also increase this base in the process. In essence, it is an opportunity for the company to increase its brand loyalty, sales, revenue, and profits. Modern consumers have also demonstrated a greater demand for in-car technology. With its vast resources invested in research and development, the Volkswagen brand has the opportunity to offer more technological advancements in its car models than its competitors.

            On the other hand, the key threat facing the brand in the increase in alternative brands and alternative transportation. Indeed, many of Volkswagen’s competitors have worked towards offering similar products. Recent innovations in the passenger transportation sector such as taxi services like Uber have also added to already present alternatives such as the public transportation systems all across Europe. Such developments have eaten into the brand’s customer base and threaten to continue their impact as they attract more and more users.  

Recommendations

            The application of a Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix brings out recommendations on how the Volkswagen brand can take advantage of the key opportunities and overcome key threats. In particular, the strengths-opportunities strategy will point to how the brand can take advantage of the key opportunities while the strength-threats strategy will demonstrate how Volkswagen can overcome the key threat facing it.

The strength-opportunity strategy uses the brand’s strongest internal factor to take advantage of the key opportunities. Volkswagen possesses the highest percentage of the European automobile market and there is an increase in the demand for hybrid and electric cars. The brand should utilize this opportunity to target its already large market base with such new products and also increase this base in the process. In essence. Volkswagen should designate additional efforts towards research, development, and marketing of new models. The company also possesses vast resources and the capacity to produce cars utilizing hybrid and electric technologies that are friendlier to the environment. The increased research and development will also help Volkswagen in incorporating the most recent and future technological advancements in its vehicles taking advantage of the increased demand for in-car technology among contemporary consumers.

The strength-threat strategy, on the other hand, uses the brand’s strengths to reduce or even eliminate the adverse impacts of external threats. An increased spending on research and development by Volkswagen is an obvious strength that can help the brand device new ways of attracting new clients and maintaining current ones keeping them off the alternative forms of transportation. The brand should, for instance, focus its research on after-sales services that make its products more appealing than those of its competitors.

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Appendix 1: SWOT Matrix