ITStrategy and Positioning for Volkswagen Financial Services (UK)

| January 11, 2017

Introduction

This assignment is constructed to consider a case study of an existing business and analyse its IT strategy and positioning for competitive advantage. A few hours were spent researching ideals into companies of interest to which I had to make sure it fitted in line with the assignment objective. The organisation that sparked my interest was Volkswagen Financial Services (UK). This was because they are a large organisation which is vastly growing year by year and have a major influence in them motor industry. I also got the privilege of working within their customer experience department as a customer service advisor.

Background

Volkswagen Financial Services is a financial services provider in the Volkswagen Group. The company deals in a broad spectrum of automotive products including financing dealers and customers through leasing, corporate financing, vehicle fleet management to banking and insurance products. According to the 2013 report, the company has experienced a rise in the number of contracts in their portfolio from just under-8 million to over 8.8 million, a 10.9 percent rise. The Management Board Chairman Frank Witter attributes this growth to a 5 percent increase in number of vehicles delivered to more than 9.7 million. The company was also able to attract more customers with their financial services.
As a leading financial provider for all things automotive sales within the umbrella of Volkswagen Financial Services AG, the company has developed key strategies to ensure they achieve their mission, which is “to support the sales of all Volkswagen Group brands worldwide and increase customer loyalty in a sustainable manner along the entire automotive value chain” (VW FS Annual Report, 2013). Volkswagen strategy statement is based on “customer-focus”, “pioneering” and “getting things done”. To ensure sustainable growth, the company pursues its strategy in three fronts: brands, markets and products. That is, developing new brands for Volkswagen Group, establishing new markets, and developing new products in existing markets. Volkswagen Financial Services continue to adopt a consistent customer relationship management (CRM) strategy in its customer care. As such, structures of the company and its processes have been aligned with customer groups and their unique requirements (VW FS Annual Report, 2013).
Johnson et al (2013, p.69) describes strategy as the “long-term direction of an organisation.” A leading strategy theorist Michael Porter would refer to this as a competitive strategy that seeks to be different from competition, by “deliberately choosing a different set of activities to deliver a unique mix of value” to the intended consumers (Porter, 1996, p.31). The Volkswagen Financial Services strategy can be considered to be based on what Porter (1996) describes as variety-based and needs-based positioning.
However, Volkswagen Financial Services continual pursuance of consistent CRM strategy in customer care led the company to rethink its organisation structure and customer groups as aligned by the customer requirements. In attempt to support this organisational restructuring, the organisation required an IT structure to allow the company have a standard of customer data, standard and continuous process support right from customer support to subsequent processing and transaction execution, integrating existing transaction-related banking system without any additional extensive conversions.
In order to meet these requirements, a product and division-oriented IT environment was implemented. Core applications and systems related to transaction-related banking systems where clients’ accounts and contracts could be managed were implemented. The implementations of these applications and systems isolated the various specific client data from each other making an integral view much more complicated and cumbersome.
But the company solved this problem when they installed customer-oriented IT architecture in SAP CRM for a standard customer care and SAP NetWeaverTM as a system integration platform. Although Volkswagen Financial Services may have considered this a triumph in its efforts to strengthen their CRM-oriented strategy in customer service, it’s not a unique strategy that can strengthen their competitive advantage given its ease of adoption by competitors or new entrants.

Le Pest C for Volkswagen Financials Services
In order to comprehensively understand Volkswagen Financial Services strategic capabilities, it is significant to use the Le Pest C model (Brooks and Weatherston, 2002):
LePestC Possible Issues at VW FS (UK)

Legal

Data security and privacy legislations and legal challenges
Economic
Low profitability due to decreased consumer spending power and inability to expand to emerging markets
Political VW Financial Services AG, which inevitable controls its strategic decisions making process
Environment/Ecologic Environmental pressure from regulatory authorities

Social

Change of consumer preferences, e.g. study shows that more consumers in Europe prefer to travel via train rather than personal cars
Technological
New technology that are likely to render the current ones obsolete and requires upgrade regularly
Competitiveness
Competition from financial companies and other auto dealers

Legal: Data security and privacy have become serious challenges to many businesses, raising concerns with rise in big data and cloud computing initiatives. Auto suppliers like Volkswagen Financial Services Company collect and store highly confidential and sensitive customer data that may be at risk from data breaches. It must be noted that the company is networked not only internally but also externally through internet or other telecommunication connectivity. As such, the company needs to have a robust information security practices not only well documented in the form of information security policies but also ensure strict adherence to ethical standards to avoid legal suits. Moreover, the company needs to develop internal ethical standards in line with their business principles and treat it as part and parcel of the CRM strategies (Barreto, 2010). In case the company wants to use big data, it must strive to develop policy that informs the clients in advance to agree or disagree with such plans. Failure to develop such policies may attract legal suits from clients disputing the use of their personal data. The outcome of legal suits may be extremely costly to the company in terms of legal fees, unfavourable strict government regulations and reputation damage.
Economic: Volkswagen Financial Services Company has experience the challenges associated with the economic financial crisis that started at the onset of 2008. Although the company considers rise in sales and number of client subscribed in the latest reports, the reduced disposable income is likely to affect the company negatively in the long run, given financial challenges affecting its major European market.
Environmental/ Ecological: Auto suppliers like Volkswagen Financial Services face various challenges in maintaining extra-regulatory compliance with contractual clauses. Some of these clauses often require them to certify that the car parts of sale are free of asbestos, lead paint, chromium, and blood minerals among other banned elements (Mintzberg, et al., 2002). These regulatory compliance requirements are meant to ensure sustainability and protection of environment. Issues such as greenhouse gases that cause global warming, and waste management increases cost of production.
Socio-cultural: Studies have shown that public transport in Europe is becoming more popular than passenger cars (Tyrinopoulos and Antoniou, 2013). This kind of finding may suggest that the change in trend is more associated with change in social preference. More significantly, the company has not managed to break into Chinese among other emerging markets with its financial services considering that Chinese consumers are cash-buyers rather than credit buyers, as noted by the company’s 2013 Annual Report. This cultural barrier has affected the company’s financial front in terms of sales return.
Technological: there are technological challenges associated with auto and financial industries. The challenge with technology is that it changes every day, with new ideas propping up that may provide fast-moving competitors with better competitive advantage (Maritan and Brush, 2003). VW FS (UK) is one of the companies in this sector that suffers from the technological challenges.
Competitive: competition from other auto suppliers is real. Although the company has gained competitive advantage with multi-brand CRM, there is likelihood that their major competitors will do the same.

Strategic Capabilities of Volkswagen Financial Services (UK)
Strategic capabilities of a firm are those capabilities that lead to a competitive advantage. Mintzberg, et al. (2002) defines strategic Resources and competencies as the two components that define resource capability. Further, resources are those assets that an organisation own or can call upon to aid their progress. Competencies are the ability to deploy those resources effectively or to make use of the available resources to achieve a certain goal (Teece, 2007). In others words, resources are what is available and competencies are the ability to use these resources.
Table: Representation of strategic capability of Volkswagen Financial Services

Resources Competencies

Machines, raw materials, products, patents, database, computer systems Physical The company has the means to achieve utilisation of plant, efficiency, productivity, flexibility, marketing

Balance sheet, cash flow, revenue Financial That company has the means to raise funds and manage cash flow, debtors, creditors, etc.
Managers, employees, partners, suppliers, customers Human The company has experience, skills, knowledge, and ability to build relationships, motivate others and innovate. However, it’s yet to exploit this ability to the maximum.
(Brooks and Weatherston, 2002).
If fully used, the above representation would lead to long term survival of VW FS, and subsequently strengthen their competitive advantage.
Although the strategic capabilities should be dynamic enough, there is a clear indication that Volkswagen Financial Services’ is not as dynamic as required. The company should be able to recreate and renew its strategic capabilities according to the changing business environment. For example, while tangible assets, cost control, and quality maintenance are important capabilities that the company has embraced, there are more long term capabilities such as sensing, seizing and reconfiguring that are significant

Using innovation to spur entrepreneurship

Innovation and entrepreneurship is about creating the new- both new products and services and new business models and organisations (Johnson, et al., 2013). Creating value for firms and customers, innovation and entrepreneurship are fundamental to today’s highly competitive economies. But the decision to innovate and pursue new market leads through innovation can be a hard choice for organisations as has been demonstrated by Volkswagen Financial Services’ attempts to enter Chinese market. The company ought to have asked various fundamental questions such as:
Will it be appropriate if they too pioneer in new technologies or rather be a fast follower (timing and relationship)? innovation dilemma
How should they react to radical innovations that threaten to destroy its existing revenues?
In such a highly competitive industry, entrepreneurship is a significant aspect of any business. In other words, entrepreneurship is fundamental aspect of any business that wants to keep up with the changing business environment. It’s entrepreneurship that drives innovation.

Innovation dilemma

However there are innovation dilemmas that may affect a firm’s decision-making process. Many corporations face strategic dilemma on whether to innovate or note. Johnson et al. (2013,p. 239) describes innovation as the process of converting new knowledge into a new product, process or service and the putting of this new product, process or service into actual use. Another aspect of innovation dilemma facing VW FS is whether to adopt open or closed innovation. Porter (1996) describes open innovation as the process of deliberate importation and exportation of knowledge by a firm in their attempt to speed up and intensify innovation. Open innovation advocates for open exchange of ideas for quick better products to keep ahead of competition. Closed innovation is based on a firms insistence on making every innovative ideas internal, keeping everything secret from outside people. Volkswagen Financial Services Company seems to focus on closed innovation, which inevitably limits their ability to source for ideas. There is likelihood that this limits their ability to attract external skills or innovative ideas.

Technological or business model innovation

Most successful and progressive innovative activities do not necessarily rely on the latest or new science or technology, but involve reorganizing into new business by combining every aspect of a business (Johnson et al., 2013). A business model describes how an organisation manages incomes and costs through the structural arrangements of its activities. For example, when Ryanair decided to adopt the ultra cheap airline tickets, its business model innovation involved the generation of revenues via direct sales through the internet, thereby cutting out intermediary travel agents, while also using cheap secondary airports. Cheap airports and internet sales proved more significant than technological innovation.
There are various ways of analysing a business model innovation, including the use of value chain, value net or activity network frameworks (Johnson et al., 2013). Typically, these frameworks are meant to direct managers and entrepreneurs to two primary frameworks for potential innovations:
The product – a new business model may redefine what the product or service is and how it is produced. This concerns technology in relation to the value chain.
The selling – a new business model may change how an organisation generates its revenue, with implications for selling and distribution.
In the perspective of Volkswagen FS, the company’s value chain in terms of emerging markets has not picked up as anticipated. The emerging markets, unlike the developed markets are generally cash buyers. The company may consider using instalments payment model to establish its value chain within the emerging markets like China and India, with attractive product packages targeting the growing middle class consumers in these countries.
Innovators and followers
There are those who choose to lead innovations and those who follow. Barreto (2010) argue that first-movers often start from a positive note where because they get easy and quick sales early, experience fast growth and have the ability to establish the dominant positions. Examples of first-movers who have succeeded in this line are Coca Cola in soft drinks and Hoover in vacuum cleaners.
However, there are many first-movers that have failed such as the powerful Microsoft which failed with its tablet computer launch in 2001. Nine years later, Apple swept the market with its iPad tablet computer.

First-mover advantages and disadvantages

First-movers are generally temporary monopolies. Their advantage exists where they appear better off than their competitors as a result of being first to market with a new product, process or service (Teece, 2009; Teece, 2007). There are five potentially more robust first-movers advantage:
They can build on experience in a market and benefit from the accrued market knowledge and skills;
They can scale faster and enjoy the early benefits;
They have the opportunity for pre-emption of scarce resources;
They can build early reputation, particularly because consumers have little ‘mind-space’ to recognise new brands that follows;
They can exploit the buyer switching costs, by ensuring that their customers are locked with privileged or sticky relationships that later challengers may find too costly to adopt (Teece, 2009)
However, Mintzberg (2002) observe that there are disadvantages for being first-movers as seen with Microsoft’s earlier failure with tablets. First is the free-riding factor. Late movers may find it easy to imitate first mover’s technology and other innovations at less expense than originally incurred by pioneers. Research indicates that the costs of imitation are only 65% of the cost of innovation (Teece, 2009). In addition, late-movers have the ability to learn from the errors made by first-movers, picking on what worked well and avoiding what did not work for their pioneer competitor. In other words, they may not make so many mistakes and be able to get it right first time unlike their pioneer competitor.

Should Volkswagen Financial Services be a first or second?

Managers and entrepreneurs often find it hard to choose either to be a first-mover or a follower. However, London Business School’s Costas Markides and Paul Geroski argue that the most appropriate response to innovation, especially radical innovation, is often not to be a first mover but to be a ‘fast second’ (Mintzberg, 2002). A first second strategy involves being one of the first to imitate the original innovator. According to Porter (1996) there are three contextual factors to consider in choosing between innovating and imitating:
Capacity for profit capture. If a follower can imitate faster and efficiently, it can capture good profits. It’s more effective where the pioneer is not able to define the boundaries for intellectual property;
Complementary assets. An organisation in possession of the assets or resources have the ability to scale up the production and marketing of the innovation;
Fast-moving arenas. In situations where markets or technologies are moving very fast, and especially where both are highly dynamic, first-movers are unlikely to establish a durable advantage.
The incumbent can respond to new entrants into the market by adopting disruptive innovation. As has been shown earlier, disruptive innovation can create substantial growth by offering a new performance trajectory that, even if “initially inferior to the performance of existing technologies, has the potential to become markedly superior” Winter, 2003). Incumbents can follow two policies to help keep them responsive to potentially disruptive innovation: Develop a portfolio of real options and new venture units.

References

Barreto, I. (2010). Dynamic capabilities: a review of past research and an agenda for the future. Journal of Management, 36 (1): 256-80.
Brooks, I. and Weatherston, J. (2002). The Business Environment: Challenges and Changes. NJ: Prentice Hall.
Johnson, G., Whittington, R., Scholes, K., Angwin, D., and Regner, P. (2013). Exploring Strategy Text & Cases. NJ: Pearson Education.
Maritan, C.A and Brush, T.H. (2003). Heterogeneity and transferring practices: implementing flow practices in multiple plants. Strategic Management Journal, 24 (10): 945-60.
Mintzberg, H.,  Ghoshal, S., Lampel, J., and Quinn, J.B. (2002) “The Strategy Process: Concepts, Context, Cases”,4th Edition, Prentice Hall.
Porter, M. (1996) “What is Strategy?”, Harvard Business Review, November- December: 61-78.
Tyrinopoulos, Y. and Antoniou, C. (2013) Factors affecting modal choice in urban mobility. European Transport Research Review. 5 (1). pp. 27-39.
Teece, D.J. (2009). Dynamic Capabilities and Strategic management- organising for innovation and growth, Oxford: Oxford University Press.
Teece, D.J. (2007). Explicating dynamic capabilities: the nature and microfoundations of sustainable enterprise performance. Strategic Management Journal, 28 (1): 1319-50.
VW FS Annual Report (2013). Volkswagen Financial Services AG: The key to mobility.
Winter, S.G. (2003). Understanding dynamic capabilities. Strategic Management Journal, 24 (10): 991-5.

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