Case Analysis 6 - Porsche

CASE ANALYSIS Is Porsche killing the Golden Goose?

By: Audria Adelia Prameswari (29115361) Presdya Nandi Wardhana (29115338) Sekar Wisma Wiridiana (29115360)

Master of Business Administration Program School of Business and Management Institut Teknologi Bandung

CHAPTER 1 CASE SYNOPSIS More than 50 years after its birth, the 911 remaining the heart and soul of Porsche. However, it is no longer the company’s best selling model. The number one spot has been taken by the Cayenne, a five seat sports utility vehicle (SUV) launched by Porsche in 2002. The Cayenne has made Porsche more appealing to people who are not sports car drivers but are happy to own the sportiest SUV on the market and make no idea about Porsche’s true identity as a high-performance sports and race car manufacturer. In the years leading up to the global financial crisis in 2008-2009, Porsche was attempting a hostile takeover of the much larger Volkswagen. Next as the global financial crisis took hold, Porsche collapsed under a heavy debt burden caused by the hostile takeover attempt. Volkswagen turned the tables and took over Porsche and now Porsche now a division of Volkswagen, is clearly gunning for economics of scale as it ramps up unit sales, and VW overall is aiming to be the global leader in sales units. Volkswagen corporate strategy is not without its critics. They are very much concerned about brand dilution, in particular at Porsche but also other VW premium brands, including Audi. However, although VW’s total net income may have increased, the group’s profit margin are too low, which necessitated implementation of company wide cost cutting program. In fall 2015, VW’s CEO was forced to resign in light of an emissions cheating scandal and was replaced by Matthias Muller. Not only must VW now face repercussions of recalling and retrofitting 11 millions vehicle – the world ‘s largest vehicular recall – it must also suffer billion of dollars in law suits and fines throughout the world, from which it may take years to recover.

CHAPTER 2 PROBLEM IDENTIFICATION PORSCHE MARKET SEGMENT Porsche no longer targeted the midsize premium sporty car segment which is prefer to choose a traditional high performance sports car with the best model and no back seat. Nowadays some of Porsche products cayenne and Macan cover over to their main market segment and it become to midsize crossover utility vehicle (CUV) or a five-seat (with a back seat) sports utility vehicle (SUV). It causes the obscurity of Porsche’s true identity as highly-performance sports and as and iconic sports car maker or the CUV and SUV car manufacturer. THE CORPORATE STRATEGY Volkswagen (VW) one of Porsche competitor, known as people’s car with 2 adults and 3 children capacity got 110 billion euro of the market cap over eight times larger than Porsche with 13 billion euro at that time. Next Porsche has break-trough corporate strategies in 2008 – 2009 (at time that very close to the global crisis) to takeover the VW with a heavy debt burden. Shortly after that courageous strategy Porsche collapsed and next in 2012 VW turned the tables and took over the Porsche. VERTICAL INTEGRATION Instead to build excess upstream capacity to ensure that its downstream operations have sufficient supply under all demand conditions, the corporate still to much concerned about brand dilution, in particular at Porsche but also of other VW premium brands, including Audi. Though in the end it could made the VW total income increase but it doesn’t make the group’s profit better than before.

CHAPTER 3 RELATED THEORIES CORPORATE DIVERSIFICATION : EXPANDING BEYOND A SINGLE MARKET Answering the questions about the number of markets to compete in and where to compete relate to broad topic of diversification. Diversification increasing the variety of products or markets in which to compete. A nondiversified company focuses on a single market, whereas a diversified company competes in several different market simultaneously. there are various general diversification strategies : 1. product diversification : a firm that is active in several different product markets 2. geographic diversification strategy : corporate strategy in which a firm is active in several different countries 3. Product-market diversification : corporate strategy in which a firm is active in several different product markets and several different countries. The concept of diversification is yet to be clearly defined and there is no consensus on the precise definition among researchers. Apart from the definitions by scholars like (Turner, 2005; Thompson & Strickland, 2006; Aggarwal & Samwick, 2003), Johnson et al. (2006) says it’s a collection of businesses under one corporate umbrella. Lending support to all the various definitions, for this research diversification is defined in a broad sense as expanding business fields either to new markets, new products or both while retaining strong core businesses. Santalo and Becerra (2008) allude to the fact that a company can diversify when its cash flows become increasingly uncertain. Turner (2005) suggests that when the core business no longer offers the investor the acceptable returns for the risk taken, there is need to diversify. In the words of Barney (2006) if the core business no longer offers growth opportunities, room for increasing sales and profitability then business should diversify.

3.1 Diversification Strategies Diversification strategies are used to expand the firm’s operations by adding markets, products, services or stages or production to the existing business. Kotler (2006) identifies three types of diversification strategies namely, concentric, horizontal and conglomerate. “Horizontal Diversification strategy” occurs where a company seeks new products that could appeal to its current customers even though the new products are technologically unrelated. “Conglomerate Diversification Strategy” takes place where a company seeks new businesses that have no relationship with their present business or market operations (Thompson & Strickland, 2006). Collins and Montgomery (2005) divided diversification into two types related and unrelated diversification. The two are analyzed in-depth, considering their merits and demerits whereas Emms and Kale (2006) describes thevarious ways and strategies adopted by diversifying companies as modes of diversification. Collins and Montgomery (2008) believe that related diversification involves building shareholder value by capturing cross business strategic fits. The combining of resources creates new competitive strengths and capabilities (BCG, 2006). Related diversification may involve use of common sales force to call on customers, advertising related products together, use of same brand names and joint delivery. On the other hand, Thompson and Strickland (2006) believe that many companies decide to diversify into any industry or business that has good profit opportunities. Johnson et al. (2006) noted that in most cases companies that pursue unrelated diversification nearly always enter new businesses by acquiring an established company rather than by forming a start up subsidiary. The basis for this strategy is that, growth by acquisition translates into enhanced shareholder 3.2 Risks and Rewards of Diversification as a Strategy The corporate managers bring both a cost to the combined organizations as well as the opportunity to manage the combined resources of the different businesses (Wan, 2011). According to Collins & Montgomery (2005), a more

meaningful approach is to analyse the costs (risks) and benefits (rewards) under the strategies of related and unrelated diversification. Hoechle et al. (2009) argues that the major advantages of related diversification are that it leads to operational synergies, which in turn develop into long-term competitive advantage. Johnson et al. (2006) argue that most of the advantages of related diversification stem from the fact that it allows the company to enjoy economies of scope. Despite the above advantages related diversification can still fail to reap the originally predicted returns and benefits due to several shortcomings and demerits. Gary (2005) allude to the fact that related diversification analysis at times underestimates the softer issues like change management, and may tend to overestimate synergistic gains. The Boston Consulting Group (BCG) (2006), have noted that business risk is scattered over a set of diverse industries and one can spread risk by spreading businesses with totally different technologies, competitive forces, market features and customer bases. This in line with the Markowitz portfolio theory in finance which suggests that diversification reduces a firm’s exposure to cyclical and seasonal uncertainties and risks. Dos Santos et al. (2008) also pointed out that a company’s financial resources can be employed to maximum advantage by investing in whatever businesses offering the best profit prospects. Campbell, Goold and Alexander (2006) identify that there is a big demand on corporate level management to make sound decisions regarding fundamentally different businesses operating in different industries and competitive environments. This is often difficult to achieve where skills are not readily available which is true of the current Zimbabwean “brain drain” phenomenon. This was also echoed by Pindyck and Rubinfeld (2005). On the same line of thought Shliefer and Vishny (2006) argue that corporate managers have to be shrewd and talented to run many different businesses. 2.5 The Diversification- Performance Relationship The effect of corporate diversification on firm performance has been widely studied (Dimitrov & Tice, 2006; Yan et al., 2010; Hoechle et al., 2009; Hoskisson & Peng, 2005; Wan, 2011; Wright et al., 2005 and others).

While this topic is rich in studies many researchers concurred on the lack of consensus on the precise nature of the relationship between diversification and firm performance. Some studies have shown that diversification improves profitability over time citing a positive relationship (Yan et al., 2010; Hoskisson & Peng, 2005; Wan,2011), whereas others have demonstrated negative relationship and that diversification decreases performance (Ozbas & Scharsfstein, 2010; Maksmovic & Phillip, 2007). Still others have shown that diversification and performance linkage depends on business cycle. Santalo and Becerra (2004) explain conceptually and provide empirical evidence that no relationship exists (positive, negative or even quadratic) between diversification and firm performance. Santalo and Becerra (2008), concurring with Stowe and Xing (2006), broadly conclude, (a) the empirical evidence is inconclusive (b) models perspectives and results differ based on the disciplinary perspective chosen by the researcher and (c) the relationship between diversification and performance is complex and is affected by intervening and contingent variables such as related versus unrelated diversification, and mode of diversification. In the words of Daud, Salamudin and Ahmad (2009), studies in the areas have tended to provide inconclusive results due to inconsistent data, different time frames, different performance measures and moderate variables. Mackey (2006) argues that the contradictory results are related to; different timeframes, various measures of profitability and different measures of diversification. Andreou and Louca (2010) assert that the confusion is partly methodological and partly theoretical. However, the diversification- performance puzzle was summarized in the theoretical models outlined below as the theoretical framework is reviewed.

CHAPTER 4 CASE ANALYSIS & SOLUTIONS From the case, we know that Porsche is trying to enhance its core competence by doing corporate diversification. The type of diversification that Porsche does is product-market differentiation. But, to become a board differentiator is not as easy as it expected. 1. with the same resources, focusing on differentiating one aspect should produce more attracting result than trying to differentiating all aspect does. 2. by being a board differentiator, Porsche might lose its brand recognition because of the unclear positioning. Porsche used to focus on its niche market – Sports car market. However, when Porsche is a car company that produce not just sports car, but also SUVs, sedans, and tracks, how should customers relates this company to Porsche? Car industry as such a high competitive industry, there are a lot strong competitors who are good at producing each kind of cars, like GMC’s tracks. So if Porsche is trying to produce tracks and differentiate them from the others, how much should Porsche spend to compete with GMC? It will be a lot. Finally, Porsche used to produce few cars but with high quality. Now, by expanding production lines, the rapidly increase of quantity somehow will reduce its cars’ quality. Like in the case, VW is experiencing the world’s largest vehicular recall because of quality problems with “diesel emissions cheat software in more than 11 million vehicles worldwide” (Rothaermel, 2015). Having quality problems might destroy a car company. In conclusion, I think Porsche would not be successful in carving out a new strategic position as a broad differentiator. VW is now pursuing the horizontal diversification, which is able to offer products for different markets and different customers. The strength of this strategy is that by attracting customers from the rich who will buy luxury cars like Porsche, to the middle class who can only afford Skoda and Seat, VW will gain more market share, sale volume (in units) and net income. Also, VW can achieve reduction of competition by diversifying its products to different market, so that its own brands will not need to

compete themselves. The disadvantages are increased risks, reduction in flexibility, and losing focus of each division of its portfolio. Since VW’s portfolio covers many different market, it will suffer risks from every markets. Also, by having such a board product portfolio, it is quite hard to change, like getting rid of the unprofitable companies because of the large cost of exit. Losing focus of each division of its portfolio is like what the case said, since VW has such a board portfolio with so many different strategies, it sometimes unable to figure out the right direction for each of them, because each one of them should have a different strategy. For example, pursuing sale volume is not a suitable goal for the luxury brands like Porsche, since they are supposed to focusing on quality development, but not the sales quantity.

CHAPTER 5

CONCLUSION & RECOMMENDATION CONCLUSION In that fable, the famer actually take-away the golden goose’s ability to produce the golden eggs. For Porsche, it risk killing the golden goose, since Porsche is losing focus on what it does best, but shift to a goal that not really fit its brand, which is the units of sales. Porsche is known by its sports and racing car, but now it keeps its focus on the SUVs and sedans because of the larger sales units. Customers might be confused with Porsche’s positioning: is Porsche still “the world’s finest performance car manufacturers”? (Rothaermel, 2015) Sports car should be the one brings the “golden eggs” to Porsche, but now as Porsche keep developing in SUV and sedan, and focus more on units of sales than the quality, it might eventually lose its “golden goose” RECOMMENDATION

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CHAPTER 6 LESSON LEARNED From this case we learned that to be a market leader in the industry, do not ever losing the quality while chasing the unit output. And also do not sacrifice profit to earn unit of sales. A company need to be profitable in order to keep running its business. So reduced price is not a good long term strategy for its goal. Finally, try to keep what the company does best. Do not kill the golden goose.

REFERENCES 1. (Barney, J. (1991), “Firm resources and sustained competitive advantage”; and Barney, J., and W. Hesterly (2009), Strategic Management and Competitive Advantage, 3rd ed.