Skoda Auto

Overview of the organization Vaclav Laurin and Vaclav Klement, who started operation by manufacturing bicycles of their own design, founded the company in December 1895. In 1899, the Laurin & Klement Co. started manufacturing motorcycles, which gained several racing victories. Automobiles from 1905 onward, the first car ever produced in Eastern Europe gradually replaced producing of motorcycles. It soon formed a stable position for Company in the developing international automobile market, so that the Company could soon start operating on a wide scale. After 1914, Skoda took part in the production for the armed force. In 1925, fusion with the Pilsen Skoda Co. was accomplished, marking the end of the Laurin & Klement trademark and start using Skoda Group. The German occupation in 1939 to 1945 caused a considerable disruption in the history of the company. Later, under communist regime, the company fell of its standards because of lack of innovation and inefficiency caused by communist government. There was no real incentive to produce a competitive automobile. After the political changes of 1989, the Government decided on cooperation with the German Volkswagen Group. The Skoda Volkswagen joint venture began to operate on 16 April 1991 under the name Skoda, automobilov a.s., becoming the fourth brand of the Volkswagen Group alongside VW, Audi and Seat. Skoda follows a German model for its corporate governance, which utilizes members of the board of directors as members of senior management of the company. The Board of directors consists of Dipl.-Ing. Reinhard Jung, a graduate in production technology of Lemgo Institute of Technology, he joined the VW Group in 1974. He has been Chairman of the Board of Directors of Skoda Auto since October 2007; Klaus Dierkes, he has been with Skoda Auto as the member of the Board of Directors responsible for Human Resources Management since 2008; Dipl.-Ing. Holger Kintscher, he has been the member of the Board of Directors of Skoda Auto responsible for Commercial Affairs since 2005; and Dr.-Ing. Eckhard Scholz, he

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was appointed in April 2007 the member of the Board of Directors of Skoda Auto responsible for Technical Development. Powers and responsibilities are allocated between 6 divisions: CustomersRequirements (concerning product quality and other tasks in this area include planning products, actively communicating with the media and professional circles, and organizing meetings of senior management teams), Commercial Affairs, Production and Logistics, Sales and Marketing, Human Resources Management, and Technical Development. Skoda auto is currently operating in four regions. The company operates in Central Europe, where the company is number one carmaker, Eastern Europe, where the highest growth for Skoda was achieved in 2006 sales, in Western Europe and in Asia, which creates the biggest potential market for the future. In addition to the Czech Republic, Skoda cars are made in Ukraine, India, Bosnia and Herzegovina, Kazakhstan, China and Russia. Cars are assembled here from parts and components exported from the Czech Republic. The company does not manufacture only vehicles, but also produce auto parts and accessories, which they also supply to other Volkswagen companies. The company also provides services such as Assistance 24 hours a day. At the current time, the most cars per year are produced in Solomonovo Ukraine and Aurangabad, India. Skoda Auto models are Skoda Yeti, Skoda Superb, Skoda Octavia, Skoda Fabia, Skoda Roomster, Skoda Praktik, and Skoda Octavia Tour. In addition, Skoda Auto established the Skoda Auto School of Economics in 2000 as the first company-operated university in Czech Republic. Skoda Auto supports significant international sporting events and teams. It is one of the basic pillars of sponsorship for the brand. Support of cycling events has been one of the strategic activities of Skoda Auto since 2004. Skoda Auto Company has become the major partner of the famous Tour de France, Giro dItalia, World Hockey Championships and Czech national and Olympic teams.

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Mission Statement Is to provide quality sales, service and transportation needs for our customers. This is and will be accomplished through a dedicated team of employees whose number one goal is customer satisfaction along with a management team whose responsibility is to ensure employee satisfaction, and customer enthusiasm.

Three basic values of Skoda brand are: 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 continuous 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 the steps of founders our company Messrs. Laurin and Klement. We are enthusiastically working on the further development of our vehicles; we identify ourselves with our products.

Company organizational structure The central management department is responsible for ensuring compliance with customer productquality requirements, global growth and foreign business development. The departments other tasks include strategic product planning, active communication with the media and experts and organization of meetings of senior management panels. The Commercial Affairs department is responsible for financial planning and management, and thus the effective use of financial resources. In addition, its tasks include securing information and systems to meet the needs of the Companys management. The Production and Logistics

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department is responsible for the production of vehicles, genuine parts and accessories, engines and components thereof, as well as logistical operations and production preparation. The Sales and Marketing department is responsible for marketing manufactured vehicles, genuine parts and accessories. The Human Resources Management department is responsible for providing personnel services, ensuring that all of the Companys employees are optimally qualified, motivated and satisfied. It also handles communication with various interest groups. The Technical Development department is responsible for the development of new products, design, construction, testing, care for vehicles in production and ongoing improvement of the entire range of Skoda products. It bears the same responsibility in relation to engines produced for other VW Group brands. The Purchasing department ensures purchases of production and overhead material, services and investment units to meet the needs of Skoda Auto.

Trends in automotive markets The development in global automotive markets in 2010 was strongly impacted by the winding down of the car scrapping scheme aimed to restart economies and mitigate the financial crisis in 2009. Global sales of passenger cars rose by 11.4% year-on-year to a total of 58.7 million vehicles. Car sales climbed significantly especially in the Central European regions and in Asias markets. In the reporting period, global production of automobiles grew by 29.6% to a total of 77.8 million vehicles, of which 63.6 million were passenger cars (2009: 60.0 million/49.4 million vehicles).

Competition The automotive market is one of the most competitive markets in the world, there are many companies try to reduce their costs by moving to low cost countries such as Eastern

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Europe and Asia countries, and try to find new market, so the competitive rivalry is high in the long-run. Main competitors are General Motors, Ford Motor Company, Toyota, and emerging Chinese automakers.

Porters Five Forces Framework: The Threat of Entrants: Eastern Europe countries that were in former Soviet Union attract many competitors who find in these countries new market, new customers, and cheap labors to reduce costs so the threat of entrants is very high. Bargaining Power of Buyers: The power of buyers is high because consumers especially after globalization have many choices from which to select when they purchase a car Bargaining power of suppliers: Many automobile companies move toward Just-In-Time inventory system and that pushes many suppliers to make their plants near these automobile companies, and some of these automobile companies made their own parts, so the power of supplier is very weak. Threat of Substitutes: The threat of substitute will be public transportation in big, crowded, and heavy populated countries, this substitute may be faster and cheaper than driving a car there, because people need to find a parking for their cars and usually it will be with fees. Competitive Rivalry: The automobile market is one of the most competitive markets in the world, in addition, there are many companies try to reduce their costs by moving to low cost countries such as Eastern Europe and Asia countries, and try to find new market, so the competitive rivalry is high in the long run.

Financial Situation In 2010, Skoda Auto Group sold 584,763 vehicles and recorded year-on-year sales growth of 6%. The Groups sales revenues of CZK 220 billion reflected the positive trend in

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sales by the Skoda brand, representing a 17.1% hike year-on-year. Car sales accounted for 84.1% of total revenues; the best-selling models in terms of year-on-year revenue growth were the Skoda Superb and the Skoda Yeti lines. Sales of genuine parts and accessories were also on the upswing, accounting for 7.9% of total revenues. Income from supplying parts to Volkswagen Group companies and other revenues accounted for the remaining 8.0% of total revenues. Cost of sales grew by 13.8% year-on-year to CZK 189.3 billion, whereas the increase stems from growth in the production volume. Material costs (costs of raw materials, production material and purchased goods) represented the largest part at 78%. Gross profit grew by CZK 9.2 billion year-on-year (+42.6%) to CZK 30.7 billion. Gross profit margin (gross profit/ revenue ratio) accounted for 14.0%. In comparison with the previous year, distribution expenses climbed by CZK 1.3 billion (+9.5% year-on-year). Administrative expenses slightly grew by CZK 377 million (+7.8%) to CZK 5.2 billion. Other operating profit dropped by 92.4% year-on-year to CZK 177 billion. This development resulted primarily from a decline in exchange rate gains from currency hedging transactions. In the reporting period, operating profit rose by 91.0% to CZK 11.3 billion. Financial result also developed favorably; total financial loss fell by 42.7% year-on-year. This positive figure is mainly due to lower foreign exchange losses from cash. Consolidate profit before tax totaled CZK 10.6 billion (+125.1% year-on-year). After the income tax deduction, profit after tax amounted to CZK 8.8 billion, representing an increase of 155.3% year-on-year.

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Sales by Region CZECH REPUBLIC: In 2010, koda Autos market share again solidified the Groups leading position in the domestic market with a total of 58,033 sold cars, accounting for a 2.7% year-on-year increase (2009: 56,504 vehicles). CENTRAL EUROPE: In spite of ongoing difficulties in Central European markets, including Czech Republic, koda Auto increased both sales and market share. In 2010, a total of 121,063 cars were sold (+1.0% year-on-year). Aside from the favorable results achieved in the domestic market, sales rose also in Hungary (+9.4%), Slovenia (+15.9%) and Croatia (+2.5%). Due to the winding down of the car scrapping scheme in Slovakia, sales there fell by 6.6% year-on-year, as did in Poland by 1.0%. EASTERN EUROPE: The introduction of car scrapping incentives helped improve the critical situation in Eastern Europe especially in Russia. Car sales in this region rose by

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22.0%. Russia, the largest market of the region, reported outstanding results; due to state subsidies, car sales shot up by 38.1% to 45,577 compared to 2009. Ukraine also saw a significant increase in car sales (+17.1%). Conversely, a decline in car sales was recorded in Romania (-10.3%), Bosnia (-14.5%) and Bulgaria (-8.0%). WESTERN EUROPE: With regard to the winding down of a number of car scrapping incentives, car sales in this region dipped by 3.5% to a total of 333,261 vehicles. This development surpassed the market trend and led to a year-on-year increase in market share from 2.5% to 2.6%. With the exclusion of Germany, which recorded excellent car sales in 2009 due to car scrapping bonuses, sales in Western Europe grew by 20.3%, representing 219,938 vehicles delivered to customers. OVERSEAS/ASIA: Car sales in the Overseas/Asia region jumped up by 47.8% to 234,529 vehicles. Growth was recorded in all markets of the region. China, as the largest market, upped the volume of sold cars by 47.3% to a total of 180,515. Other markets in Overseas/Asia increased sales by 49.6% to 54,014 cars (total overseas sales without China). India, the second largest market in the region, recorded 37.7% growth in sales to 20,019 vehicles.

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Technology and the environment Reduction in emission levels and fuel consumption of Skoda cars and use of alternative energy sources has been one of the long-term priority tasks of Technical development. Across the entire product line, new models of the GreenLine second generation, developed specifically for maximum energy-saving and environmentally-friendly operation, were unveiled at the Paris International Auto Motor Show. An introduction of the Start-Stop system, recuperation of braking energy, installation of a gear recommendation system, reduction in the air resistance coefficient and use of special tires with low rolling resistance and higher prescribed pressure helped further reduce fuel consumption and harmful CO2 emissions. Skoda cars are fitted with the Start-Stop system for the first time ever. Its key benefit stands out in busy city traffic. The system operates automatically, directly after the engine starts. If, after some time, the driver stops the vehicle, engages neutral and releases the clutch pedal, the engine switches off automatically. As soon as the driver presses the clutch, the engine starts again immediately. Stop-start makes it possible to save 0.2 to 0.4 l/100 km (combined) or 0.3 to 0.9 litres/100 km in city traffic. The Skoda Octavia, the Skoda Superb and the Skoda Yeti models, newly added to the GreenLine series, are powered by a 1.6 TDI CR/77 kW engine. As a result, the Skoda Octavia achieves fuel consumption of 3.8 l/100 km and CO2 emissions of 99 g/km. The Skoda Superb achieves fuel consumption of 4.4 l/100 km and CO2 emissions of just 114 g/km. The average fuel consumption of the Skoda Yeti is 4.6 l/100 km and its CO2 emissions reach merely 119 g/km. The new models are fitted with a new three-cylinder engine 1.2 TDI CR DPF/55 kW with the common rail (high-pressure direct injection) system, which achieves fuel consumption of 3.4 l/100 km and CO2 emissions of just 89g/km for the Skoda Fabia, and 4.2 l/100 km and CO2 emissions of 109 g/km for the Skoda Roomster. The absolute top of environment-friendly models Skoda Octavia

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Green-E-Line was unveiled at the Paris Motor Show where it met with a wide positive response. It represents the first car concept with electricity-powered engine in the history of Skoda.

SWOT Analysis Strengths: Skoda won numerous awards for producing a quality automobile. Skoda implements low-cost country sourcing strategy. Skoda is the largest employer in the Czech Republic. Total assets are gradually increasing. Skoda achieves highest growth in 2006 sales in Eastern Europe, number one carmaker in Central Europe, and grew its Western Europe market share to 2.1%. Weaknesses: Poor brand name due to Skoda relates to Eastern Europe origins that in the past the cars had an image of poor vehicle quality, and design. Total Skoda market share is 1.7%. Skoda has problems with their assembly plants outside of the Czech Republic. Opportunities: Growing automobile industry in Middle East by 9%, Southeast Asia by 14%, and Africa by 8%. By 2010, electronics are expected to account for nearly 40 percent of an average vehicles value. The forecast for the market for new passenger cars in Russia is +11%. U.S. small-car demand is outpacing North American capacity. Threats: Highly crowded and competitive environment. Franchised dealerships are free to set vehicle prices, and they may or may not offer customers the discounts that automakers provide.

Risk management organization The risk management structure in koda Auto Group is based on the uniform risk management principle within Volkswagen Group, which complies with the requirements of the German law on control and transparency in business (KonTraG). Risk management, as an

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operating component of the business process, must identify specific risks in detail, assess their scope, define measures to eliminate the risks and acquire evidence of the effectiveness of the measures. The overall risk management is centrally run by the Controlling Department in coordination with the Internal Audit Department. The joint implementation of the risk management system is described in and ensured by the Risk Management operational directive. The risk monitoring system is based on decentralized accountability. On an annual basis, standardized inquires concerning assessment of risk situations are forwarded to staff authorized to cover risks in specific operations units, including subsidiaries. Based on feedback, the complete picture of a potential risk situation is subsequently updated and each identified risk is assigned a qualitative probability of occurrence and a relative scope of damage. Pertinent measures are defined for each risk in the form of regulations and operational directives with the aim to minimize or eliminate the risk. Operational directives, rules and regulations and job descriptions in this field are strictly stipulated and mostly accessible online. Adherence to these measures is ensured by internal controls performed by the head of the relevant organization unit, internal audit, the Quality Control Department and Controlling.

Overview of the operational problems Five main external forces that affect Skoda Autos products, services, and markets are political, economical, social/environmental, technological and legal. Between internal forces which affect Skoda Auto belong challenges concerning marketing, management, expanding to new markets, customer service etc. Skoda Auto faces political forces such as heavy taxes and tariffs in some countries. This force Skoda to increase its automobiles prices, which cause Skoda to become less

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attractive for the potential customers. Other issues are political sanctions, violence and terrorism that create some limitation to expand globally in Asia market. Economical forces especially now in global crisis have significant impact on the automaker industry. Fuel prices are constantly raising, and the fuel prices fluctuations affect the costs and that reflect on the price of automobiles, so that may change the customer behavior toward some types of automobiles such as big trucks and SUVs. Customers will be seeking more fuel-efficient automobiles, which are easy on gas and save customers money. There is also influence of economic unions such as Central European Free-trade Area (CEFTA), which includes Poland, Hungary, Slovakia, Czech Republic, Slovenia, Romania; European Union (EU) etc. Moreover, current global economic crisis affected sales of automobiles all around the world. The sales decreased tremendously, and many countries such as Germany or United Kingdom created incentives for automakers to boost their sales. In addition, Skoda Auto has to cope with currency exchange since the company is conducting transnational business strategy. Most world currencies fluctuate overtime, and it has effect on companys revenue and consolidated income statements. Social forces highly affected Skoda Autos reputation in the past. The company was most known by jokes such as How do you double the value of a Skoda? Fill it with gasoline. This image was created during the communist regime in Czech Republic when it was mainly a mass production of cheap, unreliable and ugly cars. In addition, negative customers perception toward Skoda brand was also caused because of bad images about automobiles industry in Eastern Europe countries as a whole. Other social force is an increase in population in some countries, which make their governments to redesign their traffic and make public transportation more useful. This will be significant effect on automobiles sales in these countries. From the environmental perspective, more people starting to look for more environmentally friendly cars such as hybrid cars. The green movement in the world is

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affecting all industries. Pollution problem and its effect on Ozone is global issue. Customers increasingly favor social responsible companies over the traditional companies, and companies that focus on individual areas such as working environment, working safety, protection of the health of employees, education and personal development of employees or providing social services. Other forces Skoda Auto is facing are of technological character. The technology is quickly developing industry. Especially in technological industry due to fast innovative progress of technological companies and research and development divisions, products such as engine, modern car features, and car parts are becoming quickly obsolete. It is vey significant for Skoda Auto to exploit evolution in technology to introduce new features and options to reposition Skoda brand and to get competitive advantage. Legal external forces are also becoming stricter in recent years since the emergence of global pollution and global warming. Countries are enacting new green marketing laws and laws on environmental issues such as industrial pollution. Big emphasis is being given on waste management and recycling. In some countries, there is a problem with transferring the capital back to the parent country; sometimes they require reinvestment in the country of business. Legal registration of the business differ from country to country as well as laws in particular countries. Sometimes, it can create a challenge for Skoda Auto.

Conclusions/Recommendations Skoda Auto in todays competitive global business environment has many opportunities; they should be used for future strategies. Growing automobile industry in Middle East by 9%, Southeast Asia by 14% and Africa by 8% is creating enormous opportunity for Skoda Auto, and the company should capitalize on this. The company should increase market share by entering new growth market in Middle East, Southeast Asia, and

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Africa. They should increase marketing efforts in these regions to enhance awareness of its brands among the population. By 2011, electronics are expected to account for nearly 40% of an average vehicles value. Skoda Auto could here change the perception of its brand as a poor brand name due to Skoda relation to Eastern Europe origins that in the past the cars had an image of poor vehicle quality, and design. The company will improve automobiles quality by introducing innovative, electronic features, and design. Skoda should also offer 5 years/200,000 kilometer guarantees on all vehicles to increase the customer confidence in the products. Skoda Auto should move toward just-in-time inventory system and use its bargaining power to push many suppliers to make their plants near these automobile companies. Skoda makes own parts, so the power of supplier is very weak. Another big opportunity is the forecast for the market for new passenger cars in Russia, which is +11% for next year. Skoda implements low-cost country sourcing strategy by having its manufacture plants strategically located. Therefore, Skoda should use price as a competitive advantage to concentrate on Russia market. Continuous increase in oil prices also creates an opportunity because it may affect automobiles sales around the world. Especially in United States of America where big cars and trucks used to be very popular, but with the increase in gas price they are now seeking more fuel-efficient cars. However, the U.S. small-car demands are outpacing North American capacity. My suggestion is to open assembly plant in Mexico to feed North American market, and gain new market share. It should be success since Skoda achieves highest growth in 2006 sales in Eastern Europe, number one carmaker in central Europe, and grew its Western Europe market share to 2.1. In addition, Skoda won numerous awards for producing a quality automobile in Europe, and Skoda implements low-cost country sourcing strategy. Americans,

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which already have experience with Skoda vehicles, were very satisfied and are now curious when Skoda will enter this market. Automaker industry is a highly crowded and competitive environment, Skoda Auto should remain innovative and increase marketing efforts to make new repositioning and focus on producing middle, small engine cars and hybrid cars. These cars will be more fuel-efficient and more environmentally friendly. Because of pollution problem and its effect on Ozone, Skoda should develop and concentrate on manufacturing green environmental cars. Furthermore, these models will better meet the green laws enacted by various countries and will save the environment. Skoda Auto should not confine its environmental activities only to its products and own production operations, but also focus on improving the environment, so the company should also monitor dealers attitude to the environment. In addition, Skoda Auto faces problems with franchised dealerships that are free to set vehicle prices, and they may or may not offer customers the discounts that Skoda provides. This could hurt the overall company image, and company could lose competitive advantage. The company should more focus on its direct sales and distribution channels and be more able to influence dealership prices. Skoda should use the benefits from economic unions such as Central European Freetrade Area (CEFTA) and expand heavily there. In conclusion, my main recommendation is to open new assembling plant in Mexico and make it as a base to enter American market and reposition of brand name strategy by increasing marketing efforts. Skoda Auto should also focus heavily on China automobile market, which is the most growing market today. Furthermore, Skoda Auto should implement long-term programs to minimize the consequences of its activities on the environment. One of the priorities should be to maintain a balance between economic, environmental and social aspects; such balance is a fundamental condition for sustainable development.

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CASE STUDY QUESTIONS 1. What impresses you about this company? What accounts for Skoda Autos success over the past years? Is it a great strategy, superb strategy implementation and execution, or great leadership? What aspects of Skoda Auto find unimpressive? 2. Within the next decade, koda Auto aims to double total car sales. Most importantly, it will expand the focus of its business activity to participate in the highly dynamic development of emerging markets in Eastern Europe, particularly Russia, and also in the markets of China and India. What are the key policies, procedures, operating practices, and core values underlying Skoda Autos efforts to implement and execute its new growth strategy? 3. What is competition like in the automobile industry? Which of the five competitive forces is strongest? Which is weakest? What competitive forces seem to have the greatest effect on industry attractiveness? 4. How well is Skoda Auto performing from a financial perspective?? 5. What does a SWOT analysis for Skoda Auto reveal? Does the company have any identiable core and/or distinctive competencies?

REFERENCES Unknown Author (2010) www.skoda-auto.com Unknown Author (2010) www.businessinfo.cz

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