Khuram » Marketing

Volkswagen’s Art of Profitability

Kam — Wed, 23 Dec 2009 11:19:56 +0000

If you’re familiar with the bell curve that’s used to explain the concept of the mass market, you’ll know that the most profit to be had for a new product is on the left hand side of the bell curve before it’s adopted by the mass market.

This is a trend that we’re currently experiencing with the iPhone, where it was purchased by the early adopters at high prices and is now slowly moving (actually it’s moving quite fast) into the mass market.

The other great insight is to create products for niche markets, where profit margins are high due to little competition, yet the market is large enough to sustain demand for considerable periods of time. So the real question is, if everyone knows this, why isn’t everyone doing this?

Because it’s risky

Creating products for early adopters or niche markets requires a considerable amount of R&D. When successful it pays off the greatest rewards, but if not, it can put a significant economical strain on the business, maybe even putting it completely out of business.

But what if…

You could create products that served different market segments without compromising your core brand products and existing business?

Volkswagen has been playing this game right in front of our eyes for the last 20 years or so, and have been doing it beautifully.

In recent times, Volkswagen has strived to be the world’s largest car manufacturer in terms of production. Drastic changes were made in terms of structure, financial activity and manufacturing, but through all the ups and downs, Volkswagen AG is still soaring high.

In the last 10 years, Volkswagen has managed to increase its revenues by a whopping $100 billion and net profit in excess of $5 billion.^{1 2}

Compared to its two greatest competitors, Ford and GM, Volkswagen has been enjoying the fruits of its labour, despite the economic downturn, while Ford and GM have been largely swept away by the tide.

The figures below show Volkswagen’s performance for the past 10 years compared to its major competitors, Ford Motors and General Motors.

Figure 1. Revenue Comparison of Volkswagen AG

The Art

Volkswagen performed this feat through a number of acquisitions. It addressed every segment of the market by reviving a manufacturer in that space.

Volkswagen not only owns Audi, Skoda Bugatti, and SEAT, but now also Lamborghini and Scania.

Audi was purchased by the group in 1964, when Audi was no big deal to the public.³ Because of economic pressures during that time, Auto Union’s DKW brand was covering 17.9% of the German Market while Audi held only 0.1%. After the acquisition by VAG, the emergence of Audi as a separate brand became visible for the first time since the pre-war area. Audi was introduced to the United States for the 1970 model year.

SEAT was purchased by Volkswagen AG in 1990. Before acquisition, SEAT was facing funding problems. Fiat was unable to provide SEAT with a major capital investment. After Volkswagen AG’s acquisition of SEAT, it has increased its presence in the motorsport world. This was mainly down to VW’s plan on focusing the SEAT brand as ’sporty’, to appeal to the younger generation of drivers.⁴

Skoda Auto has been performing well since the 1980s, especially during the release of the Favorit model. It was very popular in Czechoslovakia and other parts of the Eastern Bloc and also sold fairly well in Western Europe, especially in the UK and Denmark. Skoda even boomed into popularity after the acquisition. Backed by the expertise and investment of Volkswagen AG, the design – both style and engineering – of cars produced by Skoda had greatly improved. Due to the release of Octavia and Fabia, they finally made their way to the demanding European market.⁵

In 1998, Volkswagen AG also acquired Bugatti and Lamborghini and was able to acquire 70.94% of voting rights of Scania on February 2009.⁶ Recently, Volkswagen acquired a 49.9% stake in Porsche AG⁷ and acquired 19.9% stake in Suzuki.⁸

In each of these markets it revived these businesses by bringing unique innovations appealing to the specific market segment. VW was one of the first manufacturers to really push the idea of diesel as a viable and economical alternative to ordinary unleaded, and demonstrated through its TDi models that they were as fast as their ordinary fuel counterparts. With Bugatti, it introduced the Veyron, the first 1000hp road car, while with Audi it made major upgrades to compete with Mercedes and BMW. It kept its customers happy, while optimising its profitability.

Innovative cost cutting

Along with the acquisitions, Volkswagen devised innovative cost-cutting measures. Innovative, because instead of the traditional route of limiting operational costs, Volkswagen thought of other ways that they could earn more profits rather than concentrating on what they can save. Some of these cost-cutting measures have included the following:

Creating a reenergized line-up of models²
1. Volkswagen began building trucks and buses through a radical scheme in which suppliers did much of the assembly work, creating an even closer relationship between automaker and supplier, and in theory a more efficient factory.
2. The second being my favourite of all, and if you are familiar with Slywotzky’s The Art of Profitability book, it’s also known as the “Multi-Component” Profit Model.VW whittled down its platforms to just 16 for its four major company brands: VW, Audi, Seat, and Skoda.
This meant that the core components and parts, used as part of the platform for each of these brands, were the same for all of them. Meaning reduced manufacturing costs and even more improved operational efficiency, since an improvement in one area meant an improvement across all the major brands.

3. In the 1960s, Volkswagen captured the North American market for the small, inexpensive automobile with the original Beetle, and soon established a Beetle assembly plant in Westmorland, Pennsylvania. However, with the rise of the Japanese and other Asian manufacturers in the entry-level market during the 1970s and 1980s, Volkswagen saw its market share in North America fall precipitously. Also facing more stringent environmental and safety standards in the US and Canada, in 1986 Volkswagen decided to cease all assembly operations in the U.S. and Canada, and rely entirely on imports to service the market. Not facing the same constraints in Mexico, production of the Beetle continued at the Puebla plant, just as it does today.

Other innovations
VW also introduced other changes into the business, that while they were not cost-cutting measures, they certainly contributed to the overall health of the business.

From the mid 1980s onwards, Volkswagen’s global strategy hinged on the following:

1. Offering a range of additional services to consumers in addition to the sale of automobiles. I.e. financing, leasing and insurance, modern direct banking operation, and fleet management services for private and businesses customers.
2. Strengthened worldwide production networking and platform strategy.
Changed the global strategic view from production-oriented to consumer-oriented model.
3. Payment of employees was changed to a productivity oriented evaluation every 9 months. Higher salaries and regular wage increases were offered in return for high quality work and commitment to productivity.4. Union politics and structure changed as well from a culture of confrontation and distrust towards a model of productivity, consent and commitment
5. During the last five years, systems of quality management, visual management and of worker participation in product and process improvement were developed and refined.
6.Hierarchy levels were reduced, information flows were accelerated and new forms of interdisciplinary and inter-hierarchical team working and management were developed⁹

The numbers speak for themselves

All this and a healthy dose of persistence, gave rise to unprecedented levels of profitability for the Volkswagen Auto Group.

Figure 2. Profitability comparison of Volkswagen AG

References:

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Did you hear the one about the Elephant and the Rope?

Kam — Wed, 16 Sep 2009 10:44:42 +0000

There’s often an example of elephants cited to demonstrate the power of the subconscious mind, and it goes something like this:

If you tie a baby elephant’s leg to a pole or a tree with a rope, i.e. something that it isn’t yet strong enough to break free from, the elephant will struggle for a while, but will eventually resign itself to the fact that it can’t be done.

Take the same elephant in adulthood and tie its leg to a pole, and even though it has the strength to break free, it won’t even attempt it due to its learned experience.

[By the way, this is a real practice that takes place in circuses around the world. Sorry to break that news to you. I know, its harsh.]

Anyhow, back to humans. This example is relevant, because while we can often know things consciously, it’s the subconscious mind that actually holds our beliefs, and thus drives our behaviour and emotions. You’ve probably heard about affirmations, and possibly even afformations:
Daily exercises designed to help you consciously re-program your subconscious to free yourself of limiting beliefs and behaviours.

For many it’s a proven way of actively programming yourself for a positive outcome.
An interesting point of note, however, is that when you consciously ask your subconscious mind a question (or indeed are asked one), it does in fact provide you with an answer.

Try it for yourself. Ask yourself right now,
“Why is courage so natural for me?” and then just close your eyes, and let your subconscious give you the answer.
It might take a few seconds, but believe me, the answers are there.

Did you notice a difference in how you suddenly felt? Did a calm come over you? Now you have a more affirmed reason for having more courage, just by asking yourself a simple question.
This is how the subconscious works; it gives you a strong reason when asked the right question.

So here is the curious thing.

I posted a status update on Facebook yesterday (as an experiment) and asked a question. You can see the status update and the responses below:

Now, the thing is, while I’m not the greatest fan of Spiders, I wasn’t in fact the one to run first.

Did you notice though, how those that responded to my status update, naturally assumed that I did? That is their subconscious at work.

When you ask your audience the right question, you can leverage the power of their subconscious mind to communicate the desired message (back to them).

(you have to have tried the exercise above to know this actually works).

Of course, this isn’t some Jedi mind trick from Star Wars, it’s just a way of getting the right answers to your audience without spelling it out, with a more lasting result.

Sometimes this technique is used to save you time in terms of copywriting, but often it’s a way of getting your prospects thinking about your product/service or brand.

Isn’t that clever?

Some examples that you probably already know are:

Microsoft: “Where do you want to go today?”

Cadbury’s Creme Egg: “How do you eat yours?”

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Using curiosity to build customer loyalty

Kam — Tue, 11 Aug 2009 16:43:51 +0000

I have been having a debate about the length of the introduction video for a new desktop sharing application that my business partner is currently working on.

He feels it’s too short and doesn’t go far enough into explaining what the product is about, while my argument is that curiosity is an intriguing ‘lock-in’ mechanism.

I had to record the video early last week, and I made a concerted effort in making sure it lasted no more than approximately 1 minute as I don’t feel people have more time than that to invest anymore, especially when you consider how many sites we all browse in a day.

That wasn’t the main reason for keeping it so short however. My reason relates to my observations with Twitter (and Facebook for that matter).

You see, up until March of this year, I had visited the Twitter homepage a few times in the 12 months before it, and browsed a few Twitter homepages of people mentioned in the media. I never signed up though.

I couldn’t understand what Twitter was about, or what value it could provide for me personally.

But in late February, Andrew Warner mentioned an interesting tactic for using Twitter for potentially picking up new leads using search terms and alerts, so I was curious to learn more.

I read a little bit more about using Twitter search for a way to see what people were talking about regarding any given subject, and I came across some interesting blog posts that talked about how Twitter can be used as a valuable marketing tool.

So I decided to give it a try, which invariably meant I had to create a Twitter account. When I first joined, I found the whole experience rather overwhelming, and not to mention confusing, but I decided to persevere.

After all, if Andrew Warner was on there, it must have been serving some higher purpose. He doesn’t strike me as someone that likes to waste time with trivial pursuits.

Suffice to say, in the 4 months up until now, I have only used the search feature a handful of times, but spend at least 1 to 2 hours a day on Twitter.

Twitter ended up creating plenty of value for me in so many ways that I hadn’t even imagined when I first signed up, especially as a platform for meeting very interesting and like-minded people.

But here’s the interesting thing. The value that Twitter has been able to create for me is a discovery that I made for myself, partly by accident, but as a net result it gives me a great sense of accomplishment. This value is not necessarily the same for someone else it serves, but I think that is exactly the point.

It took me quite a few weeks to realise this, that Twitter is rather fluid as a platform and can be used in so many different ways. It all depends on what purpose you want it to serve.

When I first started to discover its real value, I kept thinking to myself “Why don’t the guys behind Twitter create a video that shows the ‘outsiders’ where the real value is?”, but then it occurred to me that if Twitter had indeed put a video on the homepage, firstly it would have ‘made up my mind’ for me, which is never as powerful as if I make the conscious (or unconscious for that matter) decision for myself.

[Our unconscious minds don’t necessarily work the way we all like to think (no pun intended)]

And secondly, the fact that it can serve so many different purposes for so many people, it would be almost impossible to put a video together that shows all the ways in which it can be used. Not only that, but with an ‘official’ video listing the benefits and the current ways in which it is being used, you’re inherently also telling your audience that only what is shown in the video is what is possible with Twitter.

Why limit yourself by giving people pre-conceived ideas about what they can and can’t do?

As long as my need to network with interesting and like-minded people remains, and Twitter continues to serve this purpose for me, I’m going to stick with Twitter.

If it wasn’t for my curiosity, I would never have ‘tinkered’ and achieved a sense of accomplishment, which, for me, is an emotional investment that makes me a loyal ambassador.

Customers need to be given room to exercise their curiosity, in my personal opinion.

This is why, in this introductory video, I’ve demonstrated only the key points and nothing else.

I also think that by making room for the curious, it allows others to create conversation about you or your product, which in itself is excellent for creating a ‘buzz’.

What do you think about the video? Do you think I’m right or do you think my business partner has a point?

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