THE PROPOSED SHORT TERM MARKETING STRATEGY FOR AUDI SOUTH AFRICA FOCUSING ON DISTRIBUTION AND AFTER SALES

BY

WIM VAN SCHIE

STUDENT NO: 8418314

SUBMITTED AS PARTIAL FULFILMENT FOR THE REQUIREMENTS OF THE DEGREE

M (TECH) BUSINESS ADMINISTRATION IN THE FACULTY OF BUSINESS MANAGEMENT TECHNIKON WITWATERSRAND

SUPERVISOR: Dr R. Van Der Wal

IMPORTANT

THIS RESEARCH PROJECT SHOULD BE TREATED AS BEING COMMERCIALLY CONFIDENTIAL AND COPIES SHOULD NOT BE PLACED IN THE LIBRARY AT TECHNIKON WITWATERSRAND NOR ANY OTHER LIBRARY NOR BE CIRCULATED TO PERSONS OTHER THAN THE PROJECT SUPERVISOR AND EXTERNAL EXAMINER AT TECHNIKON WITWATERSRAND WITHOUT THE EXPRESS PERMISSION OF THE AUTHOR INDEX

CHAPTER TITLE PAGE

SYNOPSIS IV

CHAPTER 1 INTRODUCTION 1 1.1 BACKGROUND 1 1.2 IMPORTANCE OF STUDY 3 1.3 DELIMITATION 4 1.4 ASSUMPTIONS 4 1.5 AIM OF STUDY 5 1.6 RESEARCH DESIGN AND DATA ANALYSIS 5 1.6.1 SAMPLE SIZE AND DATA COLLECTION METHODS 6 1.7 STRUCTURE OF THE STUDY 7

CHAPTER 2 BACKGROUND OF PRESENT SITUATION 9 2.1 INTRODUCTION 9 2.2 SUMMARY OF RECENT ECONOMIC EVENTS 9 2.3 MOTOR INDUSTRY DEVELOPMENT PLAN 10 2.3.1 THE IMPACT OF THE MIDP IN THE FUTURE 13 2.3.2 SUMMARY OF THE MIDP BETWEEN 1995 AND 1999 15 2.3.3 LATEST DEVELOPMENTS IN THE MIDP 15 2.4 SUMMARY 16

CHAPTER 3 DEVELOPMENT OF THE SOUTH AFRICAN MOTOR INDUSTRY 17 3.1 INTRODUCTION 17 3.2 HISTORICAL OVERVIEW OF SOUTH AFRICAN MANUFACTURERS 17 3.2.1 DAIMLER CHRYSLER 17 3.2.2 VOLKSWAGEN / AUDI 18 3.2.3 NISSAN / FIAT 19 3.2.3.1 ALFA ROMEO 19 3.2.4 BMW 20 3.2.5 TOYOTA 21 3.2.6 FORD 21 3.2.6.1 JAGUAR / LAND ROVER / VOLVO 22 3.2.7 DELTA 23 3.2.7.1 SAAB 24 3.2.8 HYUNDAI 24 3.3 SUMMARY 25

CHAPTER 4 AUDI OF SOUTH AFRICA: A HISTORICAL PERSPECTIVE 26 4.1 INTRODUCTION 26 4.2 DEVELOPMENT OF AUDI SOUTH AFRICA 26 4.3 SEPARATION STRATEGY 28 4.4 SUMMARY 29

CHAPTER 5 DEVELOPING A COMPETITIVE STRATEGY 30 5.1 INTRODUCTION 30 5.2 DETERMINING COMPANY STRATEGY 31 5.2.1 ASSESSING FUTURE STRENGTHS 31 5.2.2 SELECTING COMPANY STRATEGY 38 5.2.3 MATCHING STRATEGY AND ASPIRATIONS 43 5.3 ESTABLISHING A MISSION OF A COMPANY 44 5.3.1 THE EMOTIONAL BOND 46 5.3.2 MISSION AND VISION 47 5.3.3 BENEFITS OF DEFINING A MISSION 47 5.3.4 BENEFITS OF A SENSE OF MISSION 48 5.4 DISCUSSION ON THE MISSION OF VWSA 49 5.5 SUMMARY OF THE MISSION STATEMENT OF VWSA 52 5.6 STRATEGY IMPLEMENTATION 53 5.7 SUMMARY 54

CHAPTER 6 ASSESSING THE EXTERNAL ENVIRONMENT 55 6.1 INTRODUCTION 55 6.2 REMOTE ENVIRONMENT 56 6.2.1 ECONOMIC 57 6.2.2 SOCIAL 60 6.2.3 POLITICAL 62 6.2.4 TECHNOLOGICAL 63 6.3 OPERATING ENVIRONMENT 64 6.3.1 COMPETITIVE POSITION 64 6.3.2 SUPPLIERS 68 6.3.3 LABOUR 69 6.4 INDUSTRY ENVIRONMENT 70 6.4.1 POTENTIAL COMPETITORS 70 6.4.2 RIVALRY AMONGST ESTABLISHED COMPANIES 73 6.4.3 THE BARGAINING POWER OF BUYERS 74 6.4.4 THE BARGAINING POWER OF SUPPLIERS 75 6.4.5 SUBSTITUTE PRODUCTS 77 6.5 THE GLOBAL ENVIRONMENT 77 6.6 SUMMARY 80

CHAPTER 7 ANALYSIS OF AUDI SOUTH AFRICA 81 7.1 INTRODUCTION 81 7.2 SWOT ANALYSIS 81 7.3 SUMMARY 84

CHAPTER 8 CONCLUSIONS AND STRATEGY FORMULATION 85 8.1 INTRODUCTION 85 8.2 CONCLUSIONS 85 8.3 OPERATIONAL STRATEGY 86 8.3.1 THE AUDI CUSTOMER 86 8.3.2 DISTRIBUTION / SALES 87 8.3.3 PRODUCT LINE UP 90 8.3.4 FLEET 93 8.3.5 PRE-OWNED PROGRAMME 94 8.3.6 A-PLUS PROGRAMME 96 8.4 OPERATIONAL STRATEGY: AFTER SALES 100 8.4.1 TEAM CONCEPT 102 8.5 SUMMARY 103

BIBLIOGRAPHY 104

APPENDIX A 107

II LIST OF TABLES AND FIGURES

TABLE TABLE / FIGURE TITLE PAGE FIGURE NO

2.1 TIMETABLE FOR IMPORT DUTY REDUCTION 12 2.2 IMPORT DUTY REDUCTION PROPOSAL 16 6.1 COMPONENTS OF THE EXTERNAL ENVIRONMENT 56 6.2 COMPARATIVE MARKET SHARE FOR AUDI, BMW AND DC IN THE B 65 SEGMENT 1999 6.3 COMPARATIVE MARKET SHARE FOR AUDI, BMW AND DC IN THE C 66 SEGMENT 1999 6.4 COMPARATIVE MARKET SHARE FOR AUDI, BMW AND DC IN THE D 67 SEGMENT 1999 6.5 VEHICLE PRODUCTION CAPACITY AND DEMAND OF THE MAJOR 72 PRODUCERS 6.6 VEHICLE MARKET DEVELOPMENT 79 7.1 SWOT ANALYSIS FOR AUDI SOUTH AFRICA 84

III SYNOPSIS

The motor industry in South Africa, (SA), is experiencing a period of turmoil that will result in its complete restructure.

The globalisation of the industry and the involvement of government with the Motor Industry Development Programme, (MIDP), is forcing the development of strategies that are formulated to equip the local manufacturers to become globally competitive. The MIDP has had a major influence on the development of the industry since 1994, as it has allowed the entrance of new competitors into SA due to the gradual reduction in import tariffs. It also proposes to stimulate the export potential within the industry of vehicles and components by offering a rebate structure with which the manufacturers can offset import duty. It will also force a consolidation of the industry in that amongst others there is more co-operation between vehicle and component manufacturers. A financial consideration of the MIDP is to reduce the industry's use of forex.

The historical background of the industry in South Africa shows a rather proud and colourful past, with most of the major players in the international motor industry having been represented locally at one stage or another. With the disinvestment campaign that preceded the new government, found a core of manufacturers remaining and competing in a fairly 'flat' market. However that has all changed, and although there is no immediate substantial market growth in sight, the influx of new competitors continues, making the market complicated and competitive.

Audi itself has only been represented on the SA market from 1968, however as no focused marketing strategy was developed for it, it never really was in the same league as BMW and Mercedes Benz. In 1994 this all changed as VWSA decided to introduce Audi onto the market competing in all premium market segments. What followed was a focused marketing strategy, which required a separate dealer network and Audi specific staff. The process of selecting dealers was based on market potential and also on the established infrastructure. The new dealer network then started to undergo the process

Iv of conforming to the external corporate identity, CI, requirements, and this should be completed by mid 2001.

In the assessment of the external environment, it was seen that the recent negative economic activity in Asia and more recently Brazil had a huge affect on the motor industry during 1998. The high interest rates that were introduced as part of a programme to protect the value of the Rand, prevented the market from developing to its full potential, while the gradual improvement of the financial markets during 1999 the scene was set for a slow recovery. As the international markets stabilised so did the pressure on the currency, and a gradual relaxing of the strict fiscal controls began. The short term outlook on the economic front looks positive, if all market indicators remain stable, and with the prospect of inflation remaining low.

Social issues were still seen as having a possible impact on the industry, as high unemployment, the resulting crime wave and the inflexibility of the labour market were considered factors preventing potential meaningful investment.

Analysis of the market share of the B, C and D market segments in 1999 showed Audi to be well behind its major rivals BMW and MB. The A4 generally followed the market trend in 3rd place, seemly unable to break the stalemate. The A6 did not manage the penetration hoped for in 1999, however it was seen as poor supply in the first quarter that influenced least the 1st half of the years performance. The A8 performance was well below expectations, and a serious re-look at the sales strategy is needed including the effectiveness of the A8 specialist dealer concept.

The entrance of potential competitors was identified, as there is a overproduction of vehicles in the world, and manufacturers will price their product competitively in order to, firstly move stock, and secondly to buy market share. The competitive advantage that Audi SA presently enjoys with regards to established distribution and dealer network will disappear, as these newcomers will be 'piggy backing' on established dealer networks to accelerate their market penetration. The examples used were Volvo having access to the Ford dealer network, and Alfa Romeo to the Nissan Dealer network and so on.

The low growth in the SA market is a driving force behind local manufacturers to become more globally competitive so that they can utilise their production capacity, and export product. This obviously is dependent on the development of the MIDP programme together with the government.

A simple SWOT analysis indicated that Audi SA found itself in a strong competitive market, and suggests that a defensive and consolidation strategy be considered. However it must be borne in mind that together with a consolidation of its position in the market place as a defensive measure, Audi SA needs to offer product positioned in the market place that will enhance its image, and provide the customer with a quality alternative package.

It is the opinion of the author that in the short term significant sales volume increases will not be easily achieved without major use of financial resources in the form of support packages. Therefore a strategy that will provide product that satisfies the niche market to assist in building the image of the marque should be considered and the product be of a high specification level to reinforce the presence of Audi in the premium segment. As the market volume develops and production volume becomes more freely available more basic specification product can be considered depending on the demands of the market place, and the strategies followed by the competitors.

The Audi Pre-Owned programme is a crucial element of the future sales success of the Audi brand in SA. The ability to trade in a limited market cannot be overemphasised so as to assist in the conquest for new car sales as well supplying the needs for the entry-level customers. As the profit margins for new cars decline this will be the future revenue earner in the sales arena.

VI The product support programmes such as Freeway plan, financial and insurance programmes need to be further developed to provide the customer with a comprehensive package that addresses all his needs.

The after sales strategy will have focus on the development of the technical staff of the dealerships. As the customer is interacting closer with the after sales personnel it is critical that they are able to offer a high level of service. This will have a positive affect on the overall experience the customer receives from a sector of the dealership, which has traditionally been weak in 'soft' people skills.

Audi will have to put in place a unique service strategy that will allow it to cover the entire length and breadth of SA, as there exist vacuum areas where if the customer experiences a breakdown, his expectations could not be met.

The development of a pro-active after sales strategy can not be stressed enough, as it is and will continue to have a major impact on the customer perception of the Audi marque. Secondly as the pressure on new car profit margins continues to be pressurised, after sales offers a potential growth area for the dealer to absorb his overheads.

VII CHAPTER 1 INTRODUCTION

1.1 BACKGROUND

The motor vehicle manufacturing industry is one of the more dynamic industries in South Africa. This dynamism is due to exposure in the international market place since 1994, and the subsequent entry of new competitors together with the government involvement through the Motor Industry Development Plan, (MIDP), in the re-structure of the industry. For this reason, any strategy developed and implemented by an established local manufacturer must in the true sense be fluid, in that it must be able to adapt constantly to the continuos changes in the external environment.

In the past the motor vehicle manufacturing industry enjoyed a protected status under the previous government. With the applicable legislation of the time, local manufacturers enjoyed the protection of high import tariffs on fully build up vehicles, FBU's, brought into the country and as a result had the privilege of having to a certain extent, a captive market. However with the political change in 1994, South Africa was accepted back into the international community, and allowed access to the international markets, as well as foreign manufacturers access into the South African market. With re-admission came the trade agreements such as the General Agreement on Trade and Tariffs, (GATT), which amongst others, requires the dropping of import tariffs over an agreed period of time. The effect of this in particular on the local motor industry is that in certain market segments it is becoming increasingly un-competitive from a production cost point of view relative to fully imported vehicles, and this scenario is expected to worsen as the import tariff protection decreases. (Naamsa, 1998:2) Certain foreign manufacturers are entering the market on a variable cost basis which is the direct result of the over production of vehicles on the world market, and they are prepared to enter the market with a cost structure that simply allows them to, if necessary, recover the cost of manufacture. (de Nysschen, 1995:62). Foreign competitors are together with their products, bringing with them first class service levels, which is redefining the service levels that are presently offered to the

1 local customer, and forcing established local service providers to revisit their present service practices, particularly in respect of after sales. The result of these changes has required local manufacturers to reassess their positioning in the market place and the need for them to become far more competitive in order to survive within the industry. (Audi SA AC Report, 1999:24).

Audi South Africa is a division of Volkswagen of South Africa, (VWSA), who in turn is a wholly owned subsidiary of Volkswagen Aktiengesellschast, (VW A.G.), which has its headquarters in Wolfsburg, Germany. VW A.G. also owns the following motor vehicle manufacturing companies, Audi of Germany, Seat of Spain, Skoda of Czech Republic, Bugatti of France, Lamborghini of Italy, Rolls Royce and Bentley of England, and has major manufacturing plants in China, Mexico, Brazil, South Africa and the Pacific Rim area which all produce a variety of products from either marque. More recently, it is in the process of acquiring the major shareholding of Scania of Sweden, which a specialist commercial vehicle manufacturer. With this brand and product line up, VW A.G. is able to compete in every segment of the passenger and commercial vehicle market world-wide, from the high priced luxury to the low priced high volume passenger segment, as well as the various commercial segments.

VWSA has its administration headquarters at the manufacturing facility in Uitenhage, Eastern Cape, with a marketing division situated in Midrand, Gauteng. VWSA produces six products being the Citi Golf sedan and Pick up, Kombi, Golf /Jetta A4, Polo Classic / Playa and the Audi A4. It also imports fully built up, (FBU), units such as the Passat, Sharan MPV, T4 Transporter, Beetle, Audi A3, Audi A6 and Audi A8. VWSA is able to import these units with export credits it has accumulated through a focused vehicle and component export programme under the Motor Industry Development Plan, MIDP, which is discussed in Chapter 2.

2 1.2 IMPORTANCE OF THE STUDY

The South African, SA, motor industry contributes almost 5.4% of the country's total GDP, and therefore it plays a significant part in the overall economic development thereof It employs approximately 90 000 people in purely the manufacturing and assembly sector, and over 250 000 people when associated industries are taken into account. The investment within the industry amounted to R 2.7 billion for 1999, and has an annual turnover of approximately R120 billion, of which R31 billion is generated by new cars. It ranks 20th in the world, and is presently capable of producing 316 000 units annually. (Naamsa, 1999:1).

With the enormous changes that are occurring within the industry, it is of utmost importance that Audi SA is able to analyse market conditions and implement interventions rapidly if it wants to remain, and importantly further develop its market share in SA. Of the established SA manufacturers, some are finding themselves under extreme pressure to remain not only present in the market place, but also most importantly profitable. The influx of competitors into the market place has been swift, and their ability to establish effective distribution channels has further strengthened their competitiveness. The volume market segments, i.e. the entry level products, have especially been negatively influenced, with international manufacturers 'dumping' excessive production into SA, and being able to price themselves keenly due to a variable cost basis strategy. This means that they are prepared too, in a worse case scenario, sell their product at cost in order to gain market entry and share rather than paying holding costs of unsold stock.

With this aggressive approach the local manufacturers found themselves initially on the back foot, and had to retaliate with equally aggressive tactics so as to slow down the erosion of their market share. The result was a 'price war' which affected all market segments, but was most pronounced in the entry level models, and put further pressure on profitability for the manufacturer as well dealer network. As a consequence of this the used car market was negatively affected as entry level new cars were being priced at

3 a level similar to the corresponding used product, and as these used vehicles in stock had been traded at higher prices, huge operating losses were realised by dealers. (Pretorius, 1996:4).

Together with their products, the international competitors brought with them new approaches in marketing, distribution and customer services. The SA customer was now not only presented with a wide variety of product choices but also the concept that a customer is an integral part of the business. The customer became 'important' in the real sense as manufacturers and importers learnt the value of a customer, and how easily when presented with bad service levels and lack of choice, took their business to the competition.

1.3 DELIMITATION

This study will focus on two main areas of the marketing function of Audi SA, namely distribution / sales and after sales. It will not include the grand strategies concerning specific market penetration, short and long term, human resource rationalisation issues, company purchasing constraints due to the possible continuos devaluation of the Rand currency, the influence of major motor retail groups on the franchise network. It will include data based on the 1998 and 1999 calendar years as these proved to be extremely harsh on the industry due influx of competitors and economic instability.

1.4 ASSUMPTIONS

That the macroeconomic policies of the government do not revert back to a tariff protection for the local motor industry.

The strategy that is discussed in this report is depended on the stability of the influencing factors in the external environment, and obviously the capital commitment to the production and import of competitive products to ensure VWSA, and in particular Audi South Africa, Audi SA, remains a key player in the local industry as well as being integrated into the global strategy of Volkswagen AG.

4 1.5 AIM OF THE STUDY

The purpose of this study is to analyse the strategic position of Audi SA, and in order to do this, this report has been structured so as to be able to relate the relevant theory on strategy to the actual situation experienced by Audi SA. Therefore some chapters will begin with a theoretical discussion, and then move on to see how this relates to Audi SA.

In order for a local manufacturer to be competitive in the face of global competition, this research proposes to study the following aspects with regards to their influence on Audi SA: The effect the entrances of foreign importers have had on the local market. Analyse the present after sales service strategy, and identify the needs if any in the said strategy. Analyse the present distribution strategy, and identify shortcomings in this to effectively maintain the financial viability of the franchised dealer network so as to remain competitive.

At the end it is the purpose of the author to allow the reader to have some insight as to what are the threats and opportunities in the external environment that exist and how Audi SA is taking these factors into account and developing a strategy to allow it to remain a competitive force in the local industry.

1.6 RESEARCH DESIGN AND DATE ANALYSIS

This research will be conducted in the following manner. Firstly a qualitative study will be done to identify the key factors influencing the industry, and secondly to analyse these and propose appropriate strategies to counteract the negative consequences of these.

5 1.6.1 Sample size and data collection methods:

1.6.1.1 Universe

The population for this research will be: The South African motor industry at large, including local manufacturers and importers.

1.6.1.2 Sample

Key decision-makers in VWSA / Audi. Statistics of the South African industry from the National Association of Automobile Manufacturers of South Africa, NAAMSA. Prominent individuals in the economic sector with knowledge of tariff protection and government incentives pertaining to the industry.

1.6.1.3 Data collection methods

Interviews with prominent decision-makers within Audi SA, and role-players in the industry in general. The purpose of this is to gain a fundamental understanding of the effect the changes in the environment and their ultimate effect as seen by these individuals. An analysis of the mass media's assessment of the industry will also be taken into account as a means of identifying further environmental changes. A literature search will be done on all the variables identified in the interviews as well as any variables that emerge during the course of the study.

1.6.1.4 Data Analysis

The results of the interviews and continuos environmental observation will result in the identification of pertinent variables. These will be analysed and compared to the

6 applicable theoretical information identified in the literature survey relevant to the industry • The preparation of practical strategic recommendations / interventions required by Audi SA as seen as necessary to remain a competitive force within the industry.

1.7 STRUCTURE OF THE STUDY

The structure of the study is done in a manner that will firstly give a background of the motor industry in South Africa, secondly discuss the theoretical approach on determining a strategy, and then thirdly apply the relevant theory to Audi SA in order to determine a short term strategy for distribution and after sales.

Chapter 1 Objective To identify the objectives of this study.

Chapter 2 Objective Discuss the background that is relevant to the study, covering the economic and governmental interventions that have a major influence on the local motor industry.

Chapter 3 Objective To briefly discuss the history of local manufacturers, in order to assess their competitive influence.

Chapter 4 Objective To discuss the origins and development of the Audi marque in the South African market place.

7 Chapter 5 Objective To discuss the generic theoretical background of factors that need to be considered in developing an effective strategy for a company.

Chapter 6 Objective To examine the external environment relevant to Audi SA, and identifying influencing factors which will require consideration in the strategy formulation.

Chapter 7 Objective To identify strengths and weaknesses within Audi SA utilising the SWOT analysis technique.

Chapter 8 Objective To utilise the results of the SWOT analysis in the development of a short-term strategy for the distribution and after sales support of Audi products.

8 CHAPTER 2 BACKGROUND OF PRESENT SITUATION

2.1 INTRODUCTION

In this chapter the economic activity for 1998 and 1999 as well as the government intervention plan, the Motor Industry Development Programme will be discussed. The objectives and future possible outcomes of the programme will be dealt in detail, as it is this influencing factor that will determine the short-term survival and growth of the industry.

2.2 SUMMARY OF RECENT ECONOMIC DEVELOPMENTS

2.2.1 1998

The Asian as well as the Brazilian crisis in 1998 influenced the SA economy negatively as it did most 'emerging' market countries. The result was a rapid devaluation of the Rand currency, and the Reserve Bank intervened by permitting interest rates to rise along with market pressures. (SARB, 1998:1). Below is a summary of the economic activities in SA for 1998. (SARB, 1998:3). The Gross Domestic Product declined during 1998. Domestic savings declined further, which affected the investment and development needs of the economy. Foreign reserves declined. Major job losses occurred in 1998 when compared to 1997, and as a result unemployment increased substantially. Inflation increased slightly, but was contained by productivity increases and cost absorption by producers. The Rand regained some lost ground. Monetary policy relaxed somewhat as money supply growth and credit demand slowed down.

9 A relative stabilisation of the markets returned towards the end of 1998, compared to the middle of the year. However the market remained sensitive to any negative economic developments.

2.2.2 1999

The world economy improved materially in 1999 and in particular the economies of the Southeast Asian countries, recovering from the setback they suffered in 1998. As a result of these developments, global economic growth is expected to be stronger over the next two years. Below is a summary of the economic activities in SA for 1999. (SARB, 1999:4). Consumer spending rose faster than household incomes, again putting downward pressure on the savings capacity. Production capacity within the manufacturing industry is sufficient. Job losses continued as a result of the spill over effect of the economy during 1998. Inflation reached its lowest level for the last 30 years. A positive export response due to the improvement in the global economy. The Rand currency began to appreciate. Interest rates declined rapidly The Gross Domestic Product showed good growth as the economy started to recover.

2.3 THE MOTOR INDUSTRY DEVELOPMENT PROGRAMME (MIDP)

The MIDP programme was introduced in 1995 to replace the former Local Content Programme, a legacy from South Africa's protectionism era. It is now gathering momentum and influencing every aspect of the motor industry, as it impacts on manufacturing, sales and marketing, pricing, component supply, and automotive imports and exports. (Pitot, Roger, 1999) The main objectives of the MIDP are:

1 0 To improve the international competitiveness of the SA automotive manufacturing and associated industries. To improve vehicle affordability in the domestic market. To encourage growth in the vehicle and in the component manufacturing industry, particularly in the field of exports. To stabilise employment levels in the industry. To create a better balance between the industry's foreign exchange usage and foreign exchange earnings.

Since the 1960s the former SA government encouraged local vehicle assembly and component manufacture by a variety of local content regulations, coupled to a high customs tariff import duty on imported FBUs. The complex regulations used various weight and value formulae in attempts to stimulate local content in SA produced motor vehicles and penalise imports. Phase VI remained in force until the end of August 1995, with passenger, light commercial, medium commercial, and heavy commercial vehicles being governed by the same regulations. The new SA government, in consultation with various industry interests, drew up a completely different strategy that recognised the country's commitments to move towards free international trade as well as structural differences between the different sectors of the industry. With effect from the 1 8t September 1995, two separate industry development programmes were introduced. One covers passenger and light commercial vehicles, the other is a simpler programme for medium and heavy commercial vehicles including buses.

On passenger / LC vehicles import duty is reduced steadily on built-up vehicles and components. These reductions follow a timetable continuing from the levels of Phase VI of the old Local Content Programme.

11

Table 2.1 Timetable for import duty reduction

BUILT UP VEHICLES PHASE VI 1 September 1994 115% MIDP 1 September 1995 65% 1 January 1996 61% 1 January 1997 57.5% 1 January 1998 54% 1 January 1999 50.5% 1 January 2000 47% 1 January 2001 43.5% 1 January 2002 40%

Source: Naamsa (1998)

Plus there are the following provisions: (Naamsa, 1999) Duty free allowance of 27% of manufacturers ex factory turnover Enabling manufacturers to offset the import duties they pay depending on their export performance will stimulate import and export activities. It is precondition for participation in the programme that domestic vehicle assembly must be based on completely disassembled components. Relatively low levels of protection are given for local suppliers with regards to drive line, tyre cab/body manufacture. Export credits can be generated to offset import duties.

Taking into account the proposals the expected consequences of the MIDP are as follows: The provisions represent a balanced approach to the many challenges facing the SA vehicle manufacturing and associated industries. The final provisions should enable the industry to plan and adapt their operations with a reasonable degree of certainty and should also encourage new investment.

12 The framework will provide the industry with opportunity to rise to the challenge to becoming more internationally competitive over time. The MIDP will progressively expose the domestic vehicle and component manufacturers to the pressures of international competition and the need for efficiency improvements, thereby facilitating greater affordability in the domestic market. It will reinforce the industry's export momentum, thereby providing a better balance between the industry's forex usage and earnings. Structural changes to the industry will be left to free market forces brought by the lowering of protection. Exports of vehicles and components will be encouraged by means of an import rebate credit mechanism and the international trade facilitation agreement.

NAAMSA, (1999:4), defines the following specific long term objectives for the passenger / LC vehicle segment: The industry competitiveness will have to improve so that it will not only survive in the long term, but also increase manufacturing activities with a protection of 40% ad valorem, in the year 2002, for vehicles. (See Table 2.1). Vehicle assemblers will be allowed to import a portion of their components duty free to improve competitiveness through the use of the duty free allowance mechanism. The more competitive manufacture of vehicles and components will address the issue of affordability, as will the continuation of incentives for small vehicles as a consequence of the small vehicle incentive, which is incorporated into the MIDP. This is part of the government's objective to make vehicles more accessible to a larger section of the population.

2.3.1 The Impact of the MIDP in the Future

In the passenger / LC vehicle sector, the introduction of a clear definition for complete knock down, (CKD), components which are used in the assembly of vehicles, will ultimately ensure a consistent and level playing field for all parties. In essence, it is an official requirement that vehicle manufacture in SA will be on the basis of completely

13 disassembled components, which in turn means, that automotive welding and painting operations, amongst others, will be required to be performed locally.

The higher duty rate for imported FBU vehicles versus components, combined with the duty free importation of a portion of components, will ensure that those vehicles assembled locally in sufficient volumes should be more price competitive that imported vehicles. The import rebate credit mechanism will allow assemblers to rationalise local production of low volume, luxury vehicles and import these instead, competitively. This will result in a more focused, and therefore cost efficient assembly process. Exports of vehicles and, in particular, components will in future improve. Local competitiveness will improve through longer production runs and more cost efficient manufacturing processes.

The scrapping of the minimum local content requirement will result in component sourcing being based on purely economics, thereby further lowering the industry's input costs. Vehicle manufacturers and their suppliers will have to work together to reduce the cost gap against world class competitors in the short term. In the longer term, they will have to collaborate closely to achieve sustained net cost reductions to enable the industry to become more competitive internationally, to expand the industry's export business, and to provide more affordable products to the local market.

It was hoped that together with these measures the financial concerns with regards to forex usage will be improved, as there is concern on the side of the Department of Trade and Industry, (DTI), about the trade deficit within the automotive industry. In 1997 the deficit was quoted as being around R 14-billion, this when a record of automotive exports worth R 5-billion was recorded, however the vehicle imports soared to R 18- billion. The DTI indicates that although component exports rose by nearly 50 % in 1999 compared to 1998, as a direct result of the MIDP, the trade is still not sufficiently diversified or adding value to raw materials. Nearly a third of component exports are limited to leather seat covers and other seat parts and 12 % from catalytic converters, with tyres exports representing 7.3 %. A majority of these exports are to Europe, with

14 significant increases in exports of complete vehicles, and an increase of exports of FBU's, CKD kits and value-added components to African markets. (DTI, 1999:3).

2.3.2 Summary of the MIDP between 1995 and 1999

Positive Exports up from R4 to R13 billion. Imports went up from 15 000 vehicles to 65 000 vehicles. Annual investment in assembly grew from R 850m to over R 2.5 billion. Vehicle prices declined by 5% in real terms Small cars amongst the cheapest in the world.

Negative Locally produced cars increased from 18 to 27 models, and imports from 22 to 67. Employment in the assembly and component industry down by more that 10%. Capacity utilisation fell from 80 to 70%.

2.3.3 Latest developments in the MIDP

At present the MIDP programme is under review, and the expected release of the latest structure thereof is due to be published by the end of February 2001 by the Department of Trade and Industry. Below is a table showing the proposals for further tariff reductions on the importation of FBU units that could be included in the latest update. If this proposal is implemented it will have a major impact on the local industry, by further reducing the protection it presently enjoys.

15 Figure 2.2 Import duty reduction proposal

Source: Naamsa (1999:5)

2.4 SUMMARY

The economic review, although brief, sketches the economic activity of SA for 1998 and 1999, and can be used as a gauge of the negative influence it had not only the motor industry but also the entire country's industry sector. It can be seen from the discussion that the MIDP is having and will continue to have a major impact on the industry. It addresses the international requirements of becoming a recognised trading partner, as well as still affording some form of protection so that the local industry is able to gear itself, albeit in a short period, to become globally competitive.

16 CHAPTER 3 DEVELOPMENT OF THE SOUTH AFRICAN MOTOR INDUSTRY

3.1 INTRODUCTION

The history of the motor car in South Africa started with the import of a Benz Velo in 1896, according to Daimler Chrysler South Africa. The market grew slowly, with vehicles being imported fully built up from Europe or America, until the establishment of the first local assembly plant in Port Elizabeth in 1924 by Ford, followed by General Motors also in Port Elizabeth in 1926. Between these two companies they would dominate the local market for many years, with the local assembly of other marques not commencing until the establishment of an assembly plant in Pretoria for Chrysler in 1937. (Duncan, 1997:7).

3.2 HISTORICAL OVERVIEW OF SOUTH AFRICAN MANUFACTURERS

3.2.1 Daimler Chrysler

In 1954 Mercedes-Benz, (MB), established an administrative office in South Africa, and in 1958 Car Distributors Assembly, (CDA) based in East London was contracted to locally assemble Mercedes-Benz products. In 1962 Auto Union South Africa, (which was later to become Audi), acquired the MB franchise and a new company was formed to distribute and market the products throughout SA namely United Car and Diesel Distributors, (UCDD). In 1966 UCDD secured a 100 % interest in CDA, however in the following year Volkswagen AG assumed control over Auto Union in Germany and terminated the association with UCDD in SA in 1967. (Duncan, 1997:22).

In 1982 UCDD entered into a licensing agreement with Honda of Japan, enabling it to manufacture and distribute its products, and this gave it entry into the volume lower markets segments and thus complimenting the MB model range. Mercedes-Benz AG acquired controlling interest of 50.1 % in 1984 and the company was renamed

17 Mercedes-Benz of South Africa (Pty) Ltd. This shareholding was increased to 76.6% in 1992 with the Gohner foundation from Switzerland holding the remaining shares. The merger with Chrysler in 1998, and subsequent name change to Daimler Chrysler South Africa, DCSA, will bring with it further diversification of the product range offered by MB to its dealer network, and utilising the established network for distribution. In 1999, DCSA notified that it would be terminating its license agreement with Honda of Japan for the assembly and distribution of its products. It would however for a specified time offer owners of Honda vehicles after sales backup, until Honda itself was in a position to establish a distribution network. During 2000, Daimler Chrysler became the majority shareholder in Mitsubishi of Japan, and will be taking control of the local distribution of all its products. DCSA will have access to the vast array of products produced by each marque, making it a powerful competitor, as it will be able to compete in all the major market segments with innovative products.

3.2.2 Volkswagen / Audi

Local assembly of Volkswagen products first began in 1951 when the first Volkswagen Beetle was produced at the South African Motor Assemblers and Distributors, (SAMAD), based in Uitenhage. This company also assembled amongst others Studebaker, Austin and Jeep products at various stages, with controlling interest being taken over by Volkswagen AG in 1956. With the dissolution of Studebaker in 1966, SAMAD changed its name to Volkswagen of South Africa. (Duncan, 1997:22). With VWAG acquiring the ailing Auto Union company in 1967 and the subsequent restructuring thereof, the first Audi was introduced onto the SA market in 1968, which was the beginning of the entry by VWAG into the luxury passenger market segment world-wide. (de Nysschen, 1995:18). The last 'foreign product' produced by VWSA was the Volvo which ended in 1975 with the disinvestment of the Swedish company from SA. VWSA has proven to be one of the major forces in the industry offering the market a product mix from both the VW and Audi stables.

18 3.2.3 Nissan (Fiat)

The marque established itself in 1959, and assembly of vehicles began in 1962 in a plant based in Durban to process the imported CKD kits from Japan. In 1965 production was transferred to Rosslyn, Pretoria, where Rosslyn Motor Assemblers, (RMA), also assembled BMW, Peugeot and Renault.

In 1969 Datsun Motor Vehicle Distributors, (DMVD), acquired RMA and merged its automobile interests in 1975, to form Datsun - Nissan South Africa. Datsun - Nissan SA peaked in the following three years, maintaining the number one market share position. From this time onwards its fortunes slumbered, and in 1984 the Sanlam investment arm, Sankorp, acquired control by recapitalising the company and thereby rescuing it from bankruptcy. (Duncan, 1997:9).

Due to trading restrictions with South Africa implemented by the Japanese Government on Japanese companies, Nissan SA entered into an agreement with Fiat of Italy to produce the Uno locally to augment its weak product line-up. Subsequently in 1996 Nissan Japan reinvested into Nissan SA, and boosted its product range, and the agreement with Fiat further developed to a point that Nissan SA will produce the Palio range of vehicles on a commission basis.

During 1999, Renault of France bought a majority shareholding in Nissan Japan, and one can expect that Renault locally will utilise the extensive distribution network of Nissan SA to make their products more accessible to customers. (Motor News, May 1999:4).

3.2.3.1 Alfa Romeo

Together with the return of Fiat to South Africa, in the partnership deal with Nissan SA, Alfa Romeo returned to South Africa after abandoning its loss making operation in 1985, and is positioned as the premium market segment competitor for the Fiat stable.

19 The product is aggressively priced especially against Audi, and has shown that it is a quality product vastly improved upon the models that the SA market was exposed to prior to Alfa quitting SA. (Duncan, 1997:30).

It also piggy backs on the established Nissan dealer network allowing Fiat SA to select distributions outlets in high profile areas, targeted at the premium market segment.

3.2.4 BMW

BMW was the last of the original manufacturers to establish a full manufacturing operation in SA. Although its products had been imported since 1932, it was only in 1968 when a Pretoria based firm obtained the franchise to assemble BMW vehicles locally. Production was initially shared in the same facility that was later to become Nissan SA, however the product used a non BMW styled body with BMW mechanicals and therefore was not well accepted by the market.

BMW AG took over the ailing BMW SA operation in 1974, as a wholly owned subsidiary and immediately introduced the 5 Series onto the market. The cementation of BMW in SA was the introduction of the successful 3 Series in 1983 giving it a desperately needed volume product. (de Nysschen, 1995:22).

However due to its presence in the luxury segment only, it was forced to develop an export programme to sustain its local activities which today has developed into what is becoming the source of all RHD 3 Series world-wide. BMW AG, acquired the British Rover group in the mid 1990's, with the aim of accessing the volume market with the Rover product line-up. However this merger resulted in major financial losses for BMW, and it sold off its interests during 2000, keeping the Mini marque in which it had spent considerable capital on product development.

20 3.2.5 Toyota

Toyota entered the South African market in 1961 with the import of light commercial vehicles, and the assembly of CKD kits beginning in 1966 in Durban. The major shareholder is Wesco Holding, being unique in the South African context, as it is a family owned business.

Since the late 1970s, Toyota's Durban plant has led in implementing aspects in lean management, by reducing stocks and improving quality and productivity in the plant to the point that it is the largest and the most cost effective automotive plant in SA. The success of Toyota SA can be attributed to not only it efficient manufacturing plant but also due to it well accepted product range covering all segments of the passenger, except premium, and commercial markets, as well as to the development of a comprehensive dealer network, consisting of approximately 270 dealers. (de Nysschen, 1995:16).

Recently Toyota Japan has indicated its willingness to acquire a stake in the local operation, which will allow for further improvements in product and manufacturing. Toyota has introduced the Lexus marque into South Africa, to compete in the image building premium segment, initially with the LS 400. Due to it competing in the D segment, has resulted in relatively low volumes. However, one can expect with the introduction of the smaller IS 200 that their market share will start to increase.

3.2.6 Ford of South Africa

The Ford Motor Company of South Africa was founded in 1923, as a subsidiary of Ford Canada. The background to the link with Canada was to take advantage of the favourable import duty on British products and by extension the Dominion of Canada being part of the Commonwealth. Having started in a converted wool shed, they invested heavily in the Port Elizabeth area and built what was then the largest factory on Africa at Neave Township in 1948.

21 Together with GM, Ford enjoyed market leadership until the end of the Second World War, when the smaller British products became popular. (Duncan, 1997:16). In 1985 Ford of Canada merged with an Anglo American subsidiary Amcar, manufacturers of Mazda and Mitsubishi vehicles in South Africa. This was part of Ford international rationalisation programme, and its increasing co-operation with Mazda of Japan, as it had bought a 25 % shareholding during the seventies.

The new company was named South African Motor Corporation, (Samcor), in which Anglo American and Ford of Canada held a 58 % and 42 % shareholding respectively. As a result the vehicle assembly operation was relocated from Port Elizabeth to Silverton, Pretoria, while the engine plant remained. In 1987 due to increasing political pressure Ford of Canada was forced to disinvest from South Africa, and Anglo American increased its shareholding in Samcor to 76 %, while the remaining 24 % was placed into a trust for the employees.

In 1994 Ford bought a 45 % stake in Samcor, and has subsequently invested R 126m in the Port Elizabeth engine plant and developed in as part of its global sourcing programme. In 2000 Ford bought over the controlling interest in Samcor and have renamed the company Ford of South Africa. (Motor News, January 2000:1).

3.2.6.1 Jaguar / Land Rover / Volvo

Ford went on an acquisition trail in the late 80's and early 90's, being flush with money, and needing to augment it presence in all market segments and as a result bought the Jaguar and Aston Martin marques.

Ford has invested heavily in its British subsidiaries since it take over, and the fruits are now beginning to pay off, as Jaguar has released new and well accepted products onto the market. The introduction of the S-Type into the South African opens the C-class market segment to Jaguar, as it traditionally has only been represented in the D-class and the niche sports coupe / convertible segment. There are plans to introduce a B-class

22 product, which will allow the marque, further access to the volume market within the premium segment.

During 1999/2000 Ford acquired two further marques namely Land Rover which it bought from BMW AG which was selling off its Rover interests, and Volvo passenger vehicles after Volvo Sweden decided to concentrate on the commercial side of its business.

It will only be a matter of time before the new Ford of South Africa boosts its ailing image and product line-up locally with some if not all of these fantastic vehicles. Within the SA perspective Jaguar has access, as with the case of Volvo, to a well- developed Ford dealer network, within which selected dealerships in high profile areas can be utilised to distribute the product range.

3.2.7 Delta (GM)

General Motors formally commenced business in South Africa in 1926, also in a converted wool shed which it upgraded as the need arose until it built a purpose built plant on Kempston Rd in 1948 where it is still situated today. In the mid-sixties all products, including Opel, were badged Chevrolet, with the Opel marque reappearing in 1980, and by 1982 the entire passenger line took the name. General Motors followed archrival Ford and disinvested by selling the South African operation to a management buy out in 1987. The name was changed to Delta Motor Corporation and which manufactured Opel products under a licensing agreement. Delta went on to assemble, produce and market other marques in which GM has interests, i.e. Isuzu and Suzuki. (Duncan, 1997:54).

In the late '90s GM bought a minority shareholding in Delta, and created a platform similar to Ford, to introduce various other marques within its stable such as Cadillac and Chevrolet into the South African market.

23 3.2.7.1 SAAB

This marque part of which GM is a major shareholder, has been on the SA market since 1997 however, SAAB does not pose a real short term threat to Audi, as the marque is relatively foreign to the SA customer, together with the fact that, Delta did not, and to date has not committed adequate resources to support its introduction and presence, e.g. high powered marketing campaign.

It also has yet to utilise its dealer network effectively to place SAAB in high profile areas allowing it the needed visibility and accessibility to the potential customer base. Additionally the model range is presently too small to stimulate sufficient public interest.

With General Motors intending to structure a complete take-over of the Swedish manufacturer, one can expect a major change in the product line-up and marketing activities in the not to distant future, as it begins its campaign on capturing a slice of the European premium market segment. This will eventually influence the model mix presented in SA and make it a more competitive force. (Motor News, March 2000:1).

3.2.8 Hyundai

Although not strictly a South African manufacturer, this Korean manufacturer, together with a South African automotive importer, Wheels of Africa, WoA, in 1995 took advantage of custom and excise rulings to establish a rudimentary semi knock down, (SKD), plant in Botswana.

Because of this the author has deemed it fit to briefly discuss the marque as from this springboard they successfully penetrated the SA market with a product that has been well accepted due to its price positioning and ground breaking innovation in customer service.

24 As the sales volume and market penetration improved, together with Hyundai of Korea, a full assembly operation was built in Botswana which commenced production in 1999 producing a variety of Hyundai products as well as the Volvo V40 range, which prior to the Ford take-over of Volvo passenger vehicles, WoA had distribution rights for Southern Africa. This venture eventually failed and the plant has closed down, with the distribution of these vehicles being taken over by the Imperial Group, which is a large motor retail group in SA. Volvo manufacture and distribution as discussed earlier has been taken of by Ford of South Africa.

3.3 SUMMARY

This chapter provides a brief overview and description of the historical development and evolution of the manufacturers currently involved in the manufacturing of passenger cars in South Africa.

The competitive nature of the South African passenger car market has contributed to the local demise of prestigious international manufacturers in the past, and they are now re- entering the market hoping to capitalise on the country's readmittance into the international arena.

These same market forces continue to act and will require skilful management to overcome. As a smaller niche-market manufacturer, Audi SA remains vulnerable to the vagaries of the domestic market.

25 CHAPTER 4 AUDI OF SOUTH AFRICA A HISTORICAL PERSPECTIVE

4.1 INTRODUCTION

The objective of this chapter is to briefly outline the heritage of the Audi marque in the South African market. It will cover the rationale of why VWSA decided to augment the Audi product line-up and compete in the low volume premium segment, and the initial strategy to do this successfully.

4.2 DEVELOPMENT OF AUDI SOUTH AFRICA

As mentioned earlier in Chapter 3, Audi was first introduced onto the South African market in 1968, and represented the first step by VWSA into the luxury market segment. However in the modern history of Audi in SA, the marque was traditionally represented in by a single segment C model / platform, (see appendix A), the 500, known in Europe as the Audi 100. The vehicle was sold off the existing VW dealer showroom floor with little or no differentiation between it and the VW products, even though its primary target market was the premium segment. Unlike the traditional players in this market segment i.e. Mercedes Benz and BMW, there was minimal focused marketing and retail strategies implemented to attract the target customer group.

The marketing that did exist utilised the 'Vorsprung durch Technik' slogan, and further used the success of Audi in motor sport to portray a very clinical, technical product. This did not provide the more subtle and emotional approach that appealed to the affluent target market.

The introduction of the BMW 3 Series onto the SA market, represented a new opportunity within the premium segment which offered relatively high volume potential, and spurred MB to introduce the C-class.

26 This move was necessary for both manufacturers as they were solely represented in the C and D class segments which were showing definite signs of shrinkage.

There came a point in 1994, when senior management of VWSA decided to rethink the Audi business philosophy, and a decision was made that if Audi were to remain, it would have to be represented by a more comprehensive product range. In order to reach its intended target customer a new and focused marketing strategy would have to be put in place, providing a model mix that made it an attractive alternative. It would need to be supported by dedicated personnel and a separate dealer network. (Audi AG, 1997:117).

Additional motivation for this decision included some of the following factors: Take advantage of the market potential. Offer the loyal VW customer a premium alternative, thereby not losing them to competitors as they evolved in their personal status and desire for a more image- enhancing product. Improving the overall image and status of VW group products within SA.

The reintroduction of Audi in South Africa has been a dynamic learning curve for VWSA, because never before had the company competed this comprehensively, in this country, in the luxury car market segment. The restructuring of the dealer network included analysing the market potential in the various designated franchise areas, and then offering the responsible dealer the option of developing together with Audi SA the said franchise area. (Audi AG, 1997:120).

The resultant rationalisation of dealers was often overshadowed with emotion as some dealers found themselves without Audi product after having had an association for many years. However the selection was based primarily on economics and market potential, as the investment costs would be relatively high.

27 4.3 SEPARATION STRATEGY

The first problem facing VWSA was the image perception Audi had with the customer target group. Although the product rated high with regards to technical competency, it lacked the emotional aspect of BMW, and the tradition of MB, It also suffered from a very bad residual value, which was the direct result of no focused marketing support. (Audi AG, 1997:54). The market reintroduction had to address these shortcomings together with upgrading the dealer network to offer the Audi customer at least initially a comparable, but preferable a unique 'Audi experience', when compared to the competitors. Understanding that the Audi customer profile differed from that of the volume market customer was a driving factor in persevering with the separation policy. This fact has always been an issue hotly debated by certain parties with the argumentation that the volume segment customer does not deserve second rate treatment. However the key to accepting this is that the premium customer's expectations are different and based on the service levels provided by the established premium segment competitors. (Olgilvy & Mather, 1999:10).

Due to the projected volumes, and the required investment in corporate identity, CI, tooling and training for the new Audi product range, selection criteria had to be developed to assist in the rationalisation of the dealer network.

The following criteria represent the selection criteria used: (Audi AG, 1997:118). Franchise area volume potential. The potential of each franchise area was based on the present market share of the benchmark competitors i.e. BMW and Mercedes Benz, and the projected conquest potential. Together with a financial assessment, the dealers were presented with a business plan forecasting the expected return of investment, (ROI), and then a business decision was made whether or not the Audi franchise was awarded. Existing infrastructure, not only of dealership but also of surrounding area. To support the Audi product each dealer and its surrounding franchise area would need to provide certain services. This would include stockholding of specific parts and

28 accessories, which require special storage facilities, panelshops that would be in a position to be trained and work on Audi products due to advanced technical innovations such as aluminium body work etc. • Commitment to corporate identity, (CI), and training of Audi specific staff. Audi world-wide has developed a specific architectural design that compliments the product as well creates an environment in which the potential or existing customer feels is an extension of their own image. This obviously is a major investment, and Audi AG, made it clear that all dealers would have to commit to it in order to secure the franchise. The need for specific sales and after sales staff to support the Audi product is paramount in addressing the needs and expectations of the customer. This involves the investment in firstly identifying and hiring staff with skills that enable them to converse with the specific customer, and then extensive product knowledge as well as technical training. The Audi product being substantially different technically from the VW requires special tools for diagnostic purposes as well as repairs and is also a mandatory requirement for the franchise.

4.4 SUMMARY

The development of the Audi marque in South Africa to its present form has taken careful planning, not only from an internal restructuring, but also in the appointment of its distribution network. This process has given the marque a solid foundation from which to compete for growth and prosperity.

29 CHAPTER 5 DEVELOPING A COMPETITIVE STRATEGY

5.1 INTRODUCTION

The concept of strategy is not new, as the word has it origins from the Greek word strategia, which means the art or science of being a general. They recognised the importance of generalship in winning or losing battles, and effective generals understood the purpose of leading an army, holding onto valuable territory such as cities and destroying the enemy. Each objective required a different approach, either defence or attacking and the relevant deployment of resources. These approaches required both a planning and action component, and together these two concepts formed the basis of a strategic plan. (Makridakis, 1990:145).

Strategy is a deliberate search for a plan of action that will develop a business's competitive advantage and compound it. The search is an interactive process that begins with recognition of where you are and what you have now.

The purpose of developing a competitive strategy is to develop a broad formula for a business as to how it will compete, what it goals should be and what policies will be needed to carry out those goals. A company should also evaluate its past strategy as this can help in determining the future direction it should move in. Once the strategy has been developed it needs to be communicated with the stakeholders of the company, and using the company mission statement is an effective means to do this. (Campbell, 1992:41).

This chapter will cover the academic / theoretical aspects that a company should consider in the formulation of a strategy, and then discuss the mission statement of VWSA in particular to illustrate its value.

30 5.2 DETERMINING COMPANY STRATEGY

5.2.1 Assessing Future Strengths

5.2.1.1 Demand for products and / or services The customer provides the key to future demand, and as such companies are limited in the influence they can exercise in increasing a particular industry's size, instead they need to focus their efforts on increasing market share. Once the products and their uses of an industry have been explored it is then important to identify potential customers and competitors. This will prove to be useful in determining the probable demand in the future and form the foundation for sound strategy. (Newman & Logan, 1976:39). a) Stability of demand for products The demand for a product or service may be steady and predictable or it may be volatile and uncertain. The following factors give insight regarding stability. (Newman & Logan, 1976:41). Substitutes The desirability of a particular product or service may be reasonably stable, yet the demand itself may be quite unstable because of an increased or decreased amount of substitutes that render the same satisfaction. In the case of Audi SA, the amount of competitors competing in the same market segment erodes its overall market share. Durability of products Durable products have wide fluctuations in demand, and consequently the demand for such products tends to be greater during periods of original construction than during periods when existing products are merely being replaced. Also, the replacement of durable products can often be postponed for a substantial period of time, and for these reasons the demand for durable products tends to fluctuate over wider ranges than the demand for food and clothing. This one can relate to the specific life cycle of a motor vehicle, when peak demand is at the launch of a new model and then drops off as it matures.

31 Necessity versus luxury Necessities such as food and medical care have come to be regarded as essential to the well being of humans, and as such will enjoy a more stable demand. In South Africa with the relatively poor public transport infrastructure, alternative transport can be considered a necessity, however the level of product that is being considered can be seen as luxury, i.e. A basic motor vehicle as opposed to premium brand product that has additional superior technology that adds little value to the end user.

5.2.1.2 Supply of Products or Services

The outlook for profitable operations in an industry depends not only on the demand for the product or services it provides, but also on its ability to supply and the cost of such products to the market. (Newman & Logan, 1976:43). a) Capacity of the industry In a dynamic business system, some industries are likely to have excess capacity while other will have an inadequate capacity. Significance of under capacity When the capacity of an industry is unlikely to meet the demand, most of the companies operating within it will enjoy profitable operations. Products will find a ready market, pricing will be firm and a high level of operation will allow the spreading of overhead costs over many units. The significance of under capacity is also dependent on the ease of entering the industry. If the cost of entry is relatively low, under capacity will probably be a temporary matter. Effects of excess capacity Excess capacity will have a depressing influence on the outlook for a particular industry, as it may lead to low prices, low margins and a high proportion of expense to maintain a presence. The crucial aspect of excess capacity depends in part upon how large depreciation, interest and other expenses related to the capital investment are in relation to the total costs. Durability of the excess capacity is also important, and the scrapping of existing facilities must sometimes be considered, although the usual pattern is the

32 development of more efficient production methods and machinery to make the operation of older facilities difficult due to high production costs.

Labour Costs This significance to an industry depends on whether it is labour intensive or capital intensive. If value is added primarily through the use of manpower rather than machines, then labour supply, wage rates and labour efficiency become critical factors. Additional labour costs are passed onto the consumer, and in some instances if the additional labour cost can be offset by technological improvement this should be considered. However in some industries where there is a threat of competitive substitution by alternative products, and the demand is comparatively elastic there may not be the opportunity to increase the retail price enough to offset the higher labour cost. In such cases the prediction regarding labour costs is vital regarding the general profitability of the industry.

Material Costs The adequate supply of raw materials is normally a factor in the outlook of most industries. Changes in prices have varying effects on different industries, and a forecast of prices requires a study of historical and present conditions in the raw material supply. Past pricing policies should be reviewed for the purposes of determining any general trend or the typical behaviour of the commodity price. Some raw materials show sharp seasonal fluctuations, others are characterised by very wide and rapid changes in price, while still others are stable or sluggish in their movement.

5.2.1.3 Competitive Conditions in the Industry

As previously discussed in 5.2.1.1 and 5.2.1.2, the focus has been the balance of the various forces that affect the supply demand of products of a particular industry and thereby effecting the outlook thereof Competitive conditions within the industry will often affect the manner and rapidity with which these forces work themselves out. . (Newman & Logan, 1976:46).

33 Nature of companies in the industry Some industries are dominated by a few large companies or conglomerates, and the actions they take are of major importance to the profitability of the entire industry. In contrast to this, other industries are characterised by weak competition, in which each small firm seeks to adjust the current condition as rapidly as possible, this is typical of the fast moving consumer goods, (FMCG), industry. The attitude of management of companies in an industry is influential, in that should they have a short-term point of view, they would be likely to engage in activities that relate to an immediate benefit, irrespective of any future repercussions.

Caution should be taken in industries where size, strength and leadership is so weak that competition is chaotic. On the other hand caution is advised when tackling large, financially strong, well-managed aggressive companies unless the prospect for rapid industry growth is high.

Organisation of the Industry Organised co-operative effort has significant effect upon the outlook for some industries. These are by example trade associations, which act as the central agency for such voluntary type of action. Their function can be as minor as sponsoring trade publications to undertaking research and the compilation of information, lobbing government or unions to the benefit of all members. And it is these intelligently run trade associations that contribute positively to the stability, public image and government relationship of an industry.

Government Regulation of Industry Government can often provide special advantages to specific industries where it is seen as a strategic asset. This can be in the form of unique taxation regulations or high tariffs preventing foreign entry into the country and particular industry. It is often necessary for the industry to conform to certain stipulations and regulations of the government. Such intervention is frankly and deliberately designed to modify the underlying forces of demand and supply and forms the composite picture of the outlook for any industry.

34 5.2.1.4 Market position of the company

Success comes from matching opportunity with capability, and during the process of the industry analysis discussed in 5.2.1.3, the opportunities that exist will have become apparent, and the next step is to examine the particular strengths and weaknesses of a company to take advantage of these. (Porter, 1980:36). Is the company in a position to gain market share? Is it fortified against impending hazards? Does it enjoy a competitive cost position relative to its major competitors? Is management progressive enough to make it a leader in the industry? It is factors such as these that will determine how a particular company will perform, and it is the answers to these questions that will point to particular problems that will become part of the core of the its strategy. Relation of Company performance to those of the Industry and Leading Competitors. The ups and downs of a total industry often obscure how well a specific company is being managed. A filtering mechanism to exclude the cyclic nature of a particular industry is to relate the company's overall market share relative to its major competitors. Although one can argue the statistical base used for such comparisons, the measurement ranking a company's position is highly valuable.

Standing of Company Product / Service The market position of a company is strongly influenced by the quality and distinctiveness of its products. The important characteristics from the user point of view should be determined and the company's products should be appraised in terms of these. Sometimes the past success of a company is attributable to a single product, whereas future success in the industry must be built on the ability to develop new or diverse products.

Strength of Company in Major Markets A company's position in its industry is also affected by its reputation in the major markets, and it can be further broken down to the reputation it has in a particular area and the relevant customer base. Reputation is an intangible thing including, in addition to being known, a prominence for giving service, offering of good accessibility and price

35 of products and for fair dealings. In determining a strategy the problem is to identify those areas or type of trade from which a company will obtain its business and then consider the prospects for such groups on the basis of the outlook for the general industry.

5.2.1.5 Cost Position of the Company

The position of a firm in its industry depends upon its ability to deal with supply factors as well as with demand or market factors. Its relative cost position influences the extent and the direction of company expansion and may be key to survival itself. (Porter, 1980:148).

Comparative location Ready and inexpensive access to raw materials is a major asset for companies using bulky high volume products. Location with respect to labour is sometimes a definite advantage to a company, depending on the skill level required to produce the products. To establish a highly technical production facility that requires highly skilled personnel in a rural area would be counter productive, as the company would have to import these skills at a high cost. Additionally the access to major markets needs to be considered especially if the product is perishable.

Relative Efficiency of Equipment The production facilities of a company may have an important bearing on its future success. A prime consideration is whether the production facility is flexible enough to make products suited to the trends in demand. The overall running costs of the equipment needs to be relatively low in order that the cost of the end product remains competitive.

Unique cost advantages Companies often achieve cost advantages in a variety of ways that may not be available to their competitors for example through patented or secret processes, long term contracts that culminate in unusually low operating costs. It is important to evaluate the

36 reasons why competitors are in a better or worse position in supplying goods that are in demand.

5.2.1.6 Special Competitive Considerations

In addition to market and supply factors, two further considerations that influence the ability of a company to be progressive; namely financial strength and the competence of the company executives. (Porter, 1980:61).

Financial Strength Adequate capital provides one of the necessary means to put plans of the management team into action. A company may enjoy a distinctive product, unusually low cost, or some other advantage over its competitors, but virtually every type of expansion requires additional capital. Additionally if a company is to maintain its position, it must have sufficient financial strength to withstand depressions and aggressive drives from its competitors. If it is not able to meet these capital requirements internally it will have to borrow or secure them from stockholders. The ability to raise new capital will reflect not only the past and probable future earnings, but also the existing debt structure and fixed charges of the company.

Ability of Company Management The most important single factor influencing the position of a company in its industry is its ability of its management. The management of a company is responsible for keeping costs in line, assessing the market conditions and potential threats as well keeping the strategic direction. No single management member should be expected to have all the talents required, but collectively within the management group there should be vision, creativeness, supervisory ability, people skills, diligence and the other qualities essential to planning, direction and control.

37 c) Comparison of Strengths and Needs Each company has particular strengths and weaknesses, however more significant for strategic planning is to think in terms of future requirements in growth areas and linking them to the identified key factors for future success. Rarely will the match between company strengths and key success factors be perfect. Where a mismatch appears and where weaknesses may prevent success, attention then needs to be directed to the feasibility and the cost of overcoming the handicap.

5.2.2 Selecting Company Strategy

Analysis of opportunities by itself is a futile exercise, unless the analysis is used in selecting actual plans of action. This is the next step where management decides how the company can best adapt to the anticipated opportunities and threats, and this collectively culminates in the strategy it chooses to follow. A company strategy should consider the following: (Newman & Logan, 1976:65). Services to be provided Resources Synergy to be exploited Targets / Goals

A strategy should concentrate on key factors necessary for success and on major moves to be taken by a particular company at the current stage of its development.

5.2.2.1 Services to be provided a) Product / Market scope The starting point of most companies is to define the services it will provide. It may chose to design and manufacture a wide variety of physical products or it may only sell advice. But to continue to exist it must provide some service for which some segment in society is prepared to pay.

38 b) Matching company strengths and market needs Identifying growth areas is not suffice, each company must also predict the probable competition and its own strengths and limitations in meeting that competition. Just as assessment of market opportunities often relies on predictions company strengths can also include expected changes. Thus if a company does not already possess the strengths needed to exploit an opportunity, it can focus on acquiring the necessary skills by the time they are needed.

5.2.2.2 Resources

Deciding on services to be provided is only part of a strategic plan, it can be considered the direction, but it does not tell one how to get there. Often the choices made about the way services will be produced spell success or failure. In making these choices management may be dealing with a high degree of future uncertainty and with a need to secure a differential advantage over competitors.

Production of own materials A strategic issue is the control of materials needed to produce services, and therefore the question of vertical or horizontal integration needs to be considered. Within the automobile industry vertical integration is prevalent as manufacturers attempt to control and secure the complete production process, from parts, subassemblies and the possible future distribution of the product. This has an advantage of low capital investment, flexibility in the design and supply of components to the manufacturing plants, as well as maximising the profit margin on the retail of the end product.

Production Technology Technology has ability to expand or contract particular markets. Changing technology also affects the creation of services, to the point that the amount of capital a firm risks in its decisions to adopt a new technology may far exceed the risks of entering a new market.

39 c) Single versus multiple locations This is the consideration of the number and location of production facilities. In the purely manufacturing sector, having multiple locations requires planning the optimum size facility. When heavy and specialised machinery is required the economies of scale dictate large plants. Location becomes more critical when a company moves into a foreign market. In addition to the optimum size of the proposed plant, tariffs, currency controls and a host of unique problems arise.

5.2.2.3 Synergy to be exploited

Synergy arises when two actions performed jointly produce a greater result than they would have if performed independently. When a company grows it may seek two or more markets to participate in, this may be necessary to ensure continued profitability. (Newman & Logan, 1976:71).

Optimum scale of operations Often a strength or asset of a company is not fully utilised, and by entering or developing a new market this excess capacity can be to productive use, and synergy takes place.

Seasonal or cyclical stabilisation Synergy occurs when a company that faces large seasonal or cyclical fluctuations succeeds in finding use for its resources that otherwise would be under utilised during the slack period. Cyclical stabilisation is much more difficult to achieve, especially since the fluctuations are much more irregular and difficult to predict than seasonal.

Expansion matrix The opportunities for synergy occur when a company is expanding, and therefore it is desirable that a framework for thinking about expansion is looked at. It can be surmised that expansion arising from fuller use of productive capability would lead in quite different directions than providing the same services to a wider range of customers.

40 With respect to synergy, as a company moves further away from its present customers and or its present productive capability, the prospects for synergistic benefits diminish.

5.2.2.4 Targets / Goals The final feature of a clear strategy is the expression of targets. The services a company plans to provide, the way these services will be produced are all designed to create a set of desired results — the targets. a) Clear targets and strategy provide a framework for defining the influences of the environment that will have the greatest influence on the company's ability to achieve its objectives, these include the economic, technological, social and political spheres. It is important to identify, solely those factors judged to be truly critical

Translating a strategy into targets serves two important purposes, (Campbell, 1992:54). The targets can be evaluated in terms of more general objectives of management and other interested stakeholders. The targets serve as goals in the more detailed planning of the company.

Setting of detailed goals is probably the most essential step in the strategy formulation process. This is because the chosen goals will govern the activities of the company as well as using the resources at its disposal. A goal is a desired condition, which the company seeks to achieve, and there must be clear distinction between organisational goals and personal goals of the senior management. b) Goals Goals can be divided into 3 functions: Definition of the company in its environment A company needs to justify their existence in order to legitimise themselves to customers and society at large. They therefore state goals to secure their position in their environment and to attract people to work for them that can identify with these.

41 Establishment of relational co-ordination mechanisms. Goals can be used as criteria to relate diverse tasks and to co-ordinate efforts of the company. They stabilise authority, assure continuity of policy and are used as justification for decisions, thereby they can be used to direct the attention of employees to desirable standards of behaviour and performance. The acceptance of goals by all employees will lead to homogeneity of outlook towards the meaning and role of the company and legitimise specific activities. Provision of standards for measurement of results If goals are stated in a quantitative manner they serve as a measuring device of performance. Without specific goals companies can wander on, doing much of what they have been over the last few years until a crisis situation arises that raises the question of objective achievement. c) Establishment of goals Goals can be reached essentially in 3 ways: (Rowe, 1980:87)

Goals are reached set by top management. Goals of company arise from a consensus of the participants or employees i.e. a bottom up approach. Goals arise from complicated power plays involving various stakeholders in the company, that is bargaining that takes place between top management, stockholders, unions etc.

Without the clear definition of goals, companies will tend to spread out vital resources too broadly, and the process of identifying priorities and specific aims enable them to focus their resources effectively. Companies that that are unable to set meaningful goals will be unable to successfully implement the selected strategy. d) Failure to achieve Goals There are some reasons why some senior management hesitate or fail completely to set goals for their company:

42 Unwillingness to give up alternative goals - it may be a difficulty to accept the fact that not all goals are achievable, and as a result there may be reluctance to make a firm commitment to one particular goal because it conflicts with giving up desirable alternatives. Fear of failure - a clear and cut goal involves the risk of failing to achieve it, and it is this fear that prevents some managers from taking the necessary risks and establishing specific goals. Lack of company knowledge - management cannot establish meaningful goals without having a good working knowledge of the company as a whole. This is particularly relevant when organisations such as Audi which has worldwide subsidiaries, do not communicate the generic objectives of the marque clearly and could be the cause of the subsidiaries developing opposing local strategies. Lack of knowledge of the environment - in addition to understanding the company's internal environment, there needs to be a thorough understanding of its external environment - the competition, customers, suppliers and government policies. Lack of confidence - to commit to goals a company must have the ability to achieve them, and there will a hesitance to establish goals if there is a lack of confidence in the company's ability.

5.2.3 Matching strategy and aspirations

The process of deciding whether or not a strategy is well suited to a company should involve: (Newman & Logan, 1976:77). Selecting the criteria for judging the strategy. Translating and communicating the expected results of the strategy in terms of these criteria. Deciding whether the expected results, (targets) meet acceptable minimum levels of achievement and are better than expected results of alternative strategies. a) Several criteria should be used to evaluate a strategy, such as: Return on investment Company growth, (in absolute terms or as a percentage of the market)

43 Stability and security of employment Building a positive image / brand of the company Future control over company decisions Different individuals within a company will focus on different aspects depending on their responsibilities.

Meaningful strategies must be conceived in operational terms — products to sell, market in which to participate and research to be undertaken.

When relating a strategy to the selected criteria a translation is needed and expressed in real terms such as cost and revenues, manpower and employment stability. These anticipated results become the targets, and broken down further become the goals for different departments and or individuals, and it is these that the success of the strategy will be measured against.

5.3 ESTABLISHING THE MISSION OF A COMPANY

Once the strategy has been selected and the targets and goals set, the communication thereof to employees and customers is done through the mission statement of the company, and as example the author has taken the mission statement of VWSA for analysis.

Traditionally the company mission has been seen as a statement that is handed to all employees of a company either as they join it, or when top management has seemingly come up with one. The main perception being that this is a very remote statement, in which the majority of employees have not been involved in, nor do they aspire to it. Whereas the formulation of the mission statement should be the first indicator of how a company views the claims of all the stakeholders. Some view the mission statement as an esoteric and probably irrelevant preoccupation, which haunts senior management, while others see it as the bedrock of the company's strength, identity and success - its personality and character. The latter view obviously

44 is the preferred view as the mission is then accepted as part of the company's culture and everyday life. The result being that employees are clear about what is important and are happy to follow the standards and behaviours their companies ask of them. From this one can expect pride and enthusiasm to develop. (Campbell, 1992:19).

The mission statement defines the business of the company and states basic goals, characteristics, and guiding philosophies. The main purpose thereof is to set the context within which strategic decisions will be made. It is there to give strategic focus and direction.

To give the mission meaning, communication is vital. Senior management must develop trust with employees, and to demonstrate their own commitment to the vision, and act with confidence and positive enthusiasm in carrying it out. Three major factors influence how a mission statement is created, and they are: (Campbell, 1992:26). The assumptions and beliefs of senior management Senior management's own values And the values reflected in the culture of the company.

The strategy will define the business that the company is going to compete in, the position that the company plans to hold in that industry and the distinctive competence or competitive advantage that the company has or plans to create. And the strategy is an important part of the mission statement because it links the purpose of the company's existence to the behaviour of the employees. The purpose and strategy of a company can be seen as empty intellectual thoughts to the employees unless they can be converted into action. The means into which they are converted into action is by creating policy and behavioural guidelines that help the employees to decide on what to do on a day-to-day basis. By translating purpose and strategy into actionable policies and standards, there will be a clear operating guideline given, and the performance of the company will be positively affected. (Campbell, 1992:32).

45 Values are the beliefs and moral principals that lie behind the company's culture, and they give meaning to the norms and behaviour standards in the company. In many companies, corporate values are not explicit and can be understood only by perceiving the rationale that lies behind the behaviour of management. A strong strategy is one where the purpose, strategy, behaviour and values all reinforce one another.

The management philosophy and value system should complement the strategy so that the company's policies and behaviour standards reinforce both the strategy and philosophy. (Campbell, 1992:34). The match between the values of the company and the employee's personal values is the most important part of a sense of mission, because it mainly through values that individuals feel emotional about their company. Commitment to a company strategy does not on its own constitute a sense of mission.

5.3.1 The emotional bond

Managers often discuss the purpose and strategy of their company, and reach some form of agreement. However this agreement does not necessarily translate into an emotional commitment and as a result the strategic plan is not implemented, and is essentially filed away in the archives. The emotional commitment comes when the employees personally identify with the values and behaviours behind the rationale of the plan, turning the strategy into a mission and the intellectual agreement into a sense of mission. (Campbell, 1992:36). Values give meaning, and living up to one's values or joining a company where the employees are successfully following these values helps an individual feel a sense of fulfilment. Work becomes more fulfilling because it is instilled with greater purpose. Work helps the individual achieve something that is personally important and that, therefore, gives him intrinsic motivation.

46 5.3.2 Mission and Vision

In order for senior management to choose a direction for the company they need to firstly develop a mental image of a possible and desirable future state of the company. This image is called the vision, which may be as vague as a broad statement, or as precise as a goal or mission statement. The critical point is that a vision articulates a view of a realistic, credible, attractive future for the company. In other words it describes a condition that is better in some important ways than what now exists. A vision and a mission can be one and the same. A possible and desirable future state of the company can include all the elements of a mission namely, purpose, strategy, behaviour standards and values. A vision is therefore more associated with a goal whereas a mission is more associated with a way of behaving. (Campbell, 1992:39).

In times of continuos change, a new mission will be difficult to distinguish from a vision because the new mission will be a mental image of a desirable future state. Using a vision as a concept has two possible drawbacks. A vision begins to lose its power once it has been achieved. It is no longer a driving force for action and the company can begin to lose its direction. For example if a company is striving for market leadership in its industry, once achieved, the ambition that drove the company and employees drains away, leaving it without direction. If the vision is far too ambitious and it is unlikely to be achieved within the next 5 to 10 years, it loses its power to motivate and stimulate.

5.3.3 Benefits of defining a mission

A company's management team that is capable of defining a clear mission will have advantages over a team that has only defined its strategy. The mission team will have values as well as strategic concepts to guide it through important decisions, whereas the strategy team will have commercial logic only. (Campbell, 1992:63).

47 The mission statement can be described as the concept for a new desirable future reality that can be communicated throughout the company. To achieve this the mission statement should be: Simple, clear and understood be most people. It must be realistic, credible and be able to withstand hypothetical, cause and effect examination. Must be expressed by senior management to gain a solid consensus that it comes across as firstly desirable, and secondly achievable. They must personify the mission and "walk their talk". It should be able to inspire a sense of urgency.

5.3.4 Benefits of a sense of mission

Employees with a sense of mission will be more committed, more disciplined and more open to change than other employees. Their contribution will still depend on their individual ability, but given equal ability, employees with a sense of mission will make a higher - quality contribution. (Campbell, 1992:71)

The following are two types of benefits of having a sense of mission.

5.3.4.1 Loyalty and commitment

A sense of mission is the energy, commitment and enthusiasm that employees feel about their company. This form of emotional commitment leads to a greater dedication and willingness to sacrifice personal interests for the good of the whole. This emotional commitment is also a valuable aid to retaining key employees when they believe that they can get better pay and benefits elsewhere. Employees with a sense of mission are also more likely to accept responsibility, and put in more time on the job. Their ability to identify personally with the company means that anything that reflects badly on the company reflects badly on them, and visa versa. (Campbell, 1992:72)

48 5.3.4.2 Additional guidance for behaviour

Because a company with a strong mission has strong norms and cultures, employees have recourse to clear behavioural standards. These standards encourage co-operation between employees, ensure that clients are treated in a consistent manner by everyone in the company, and help mould managerial styles and behaviours.

If wrongly formulated a mission can become a straitjacket that prevents a company from moving forward. To avoid these pitfalls, senior management need to create well founded missions with values that can stand the test of time. As events change, values can be adjusted and priorities reordered, but the core values should be everlasting as those of a religion. (Campbell, 1992:75)

5.4 DISCUSSION ON THE MISSION STATEMENT OF VWSA

The mission statement for VWSA is the following,

We, at Volkswagen of South Africa are determined that our customers, both internal and external, can rely on us to conform to agreed requirements the first time and every time.

We are striving for an image in the car and component market of a company which delivers outstanding quality, product and customer service, with people well qualified, well motivated and trained to serve the customer.

We are committed to equality of opportunity and the development of our people and suppliers, in order to achieve globally competitive standards in quality, service and value for money.

We commit to a return on investment, which will result in a viable company by pursuing the following: * Conforming to agreed customer requirements all the time. * Maintaining a leading position in the markets in which we compete.

49 Achieving a customer enthusiasm level that becomes a benchmark in the industry. Developing highly motivated and flexible employees. Ensuring that all company processes and products meet local environmental regulations.

5.4.1 Product or service

To manufacture high quality products which are affordable to the motoring public. To provide the customer with a level of service that is a benchmark in the industry, and will make the experience of owning a VW product pleasant. This is in essence what the mission statement is saying, and the sentence which reads as follows "which delivers outstanding quality, product and customer service" focuses on the core business principals that are important to VWSA, that being the product and customer service.

5.4.2 Customer

The customer that the company is focused on is the discerning customer who has value in brand loyalty. He is proud to be associated with the product, and he sees the product as an extension of his self-image. (Olgilvy & Mather, 1999:11)

This covers the soft issues of how VWSA see their external customer as, however the company has recognised the principle that it has internal customers as well. The need to focus on the internal customer comes from the remoteness of the employees in the manufacturing plant not having a sense of urgency or focus on the needs of the end consumer, as their contact with the said is minimal if at all. So to stir a sense of ownership the concept of having the next person in the company reliant on your performance, in order for him to perform his adequately, will hopefully bring the customer principle closer to home. Therefore the statement "that our customers, both internal and external" has been included, and is probably slightly a broader description of the customer than one would expect to see in a mission statement.

50 5.4.3 Market

The market focus in on the passenger car market predominately, starting at the low priced entry level models that Volkswagen provides, to the top end of the market with the high priced executive products that Audi provides. Although the mission does not define the specific market boundaries, it does state that the company wants to maintain a leadership position in the markets segments that it competes in. In so stating VWSA allows for the possibility to enter into additional markets as it sees opportunities arise. It does indicate that VWSA wants to achieve "globally competitive standard", recognising the existence of the global market place, both at the same time being a possible threat and an opportunity in which to compete.

5.4.4 Technology

To utilise the latest and most economical production techniques, in order to provide the customer with a competitively priced, quality built product. Again the definition of exactly what technology is utilised by VWSA is not defined, but the continuos mention of quality of the product is a certain indicator that the technology to be utilised is to be of the most modern in order to provide the required quality at a competitive cost. Also the type of technology used will have an affect on the level of service VWSA is able to provide both the external and internal customer with. This is covered in 6.2.4.

5.4.5 Company goals

To achieve market leadership not only in sales volume, but also in customer satisfaction. This will result in a long-term profitable relationship between VWSA, its franchised dealer network and its customer base. This will include where the company sees itself in the future, what it wants to achieve, with what resources. (Pearce & Robinson, 1994:35).

51 These criteria have been meet with the present mission statement in so far as it states that VWSA wants to maintain a market leadership position, customer enthusiasm as a industry benchmark, and with well motivated employees. Also VWSA wants to achieve global competitiveness in the areas of quality, service and value for money, which are all measurable.

5.4.6 Public image

To be seen by all the stakeholders, as a company affording all its employees the possibility of self-actualisation by making development programs accessible to all. A company has a social responsibility in that it has a responsibility to the area from which it draws its labour force, to see that it does not harm or damage the environment, and that the standard of living is of a reasonable standard. That it has a caring attitude towards its customers, and sees them as an extension of the company. This can include aspects of social responsibility, controlled use of natural resources, taking into account the expectations of the public that is affected by the activities of the company.

These criteria again have been addressed by the statements in the mission such as, "all company processes and products meet local environmental regulations", "developing highly motivated and flexible employees" and realising that customer satisfaction is an important factor in the overall vision of VWSA.

5.5 SUMMARY OF THE MISSION STATEMENT OF VWSA

The mission statement of VWSA does not pretend to be an all-encompassing statement that describes the manufacturing and businesses processes necessary to manufacture and distribute its products. Instead it contains a purpose that is timeless, and thereby avoiding the need to reassess the company's direction every time its objectives are achieved, unlike its strategy that will continuously change to environmental inputs. A mission is a larger concept than strategy, as it covers strategy and culture. The strategy

52 element states what is important to the commercial future of VWSA, while the value element states what is important to the culture of the company. (Campbell, 1992:41).

5.6 STRATEGY IMPLEMENTATION

Once the strategy has been determined it needs to be incorporated into the daily operation of the company. This is the process of translating intermediate plans and policies into results. It is the combining of the activities in which the employees utilise other resources to accomplish the objectives of the strategy. Proper implementation is dependent on two primary factors: (Pearce & Robinson, 1994:384). Integrative planning and control systems must be utilised. These function to insure that all implementation activities are conforming to the strategy. Therefore it is essential that the objectives are clear, and all employees know the plans and policies of how to achieve these objectives. Operational planning is especially critical, since this defines the exact actions to be taken by employees. It is the operational plans that give substance to strategy. They have the most specific activity requirements of any of the plans. They specify the exact resources needed and the precise manner in which they are to be obtained and utilised.

Once the human and financial resources are committed, they must be managed properly. Once the company is committed to a course of action, it is the motivation and leadership, which will assure successful implementation. Critical to this process are the actions of the personnel division as it obtains human resources for the company and provides systems to aid the individual manger in his motivation and leadership efforts.

53 5.7 SUMMARY

As mentioned earlier in the introduction, apart from the discussion on the mission of VWSA, the remainder of the chapter is purely a review of the academic theories that exist and considerations that should be undertaken during the process of establishing and implementing a strategic plan.

54 CHAPTER 6 ASSESSING THE EXTERNAL ENVIRONMENT

6.1 INTRODUCTION

For a company to succeed, its strategy must be consistent with the current external environment. To achieve a good fit, management must first of all understand the factors that shape competition in the external environment. This understanding enables them to identify external environment threats and to respond by adopting appropriate strategies. In other words, they make the correct strategic choices in relation to the environment, thereby maximising the company's capabilities and ensuring its profitability. Companies who's management fail to see the forces that shape the competition are unfortunately bound to lose their competitive position. These factors can be divided into three interrelated subcategories: factors in the remote environment, factors in the industry environment and factors in the operating environment. Figure 6.1, suggests the interrelationship between the company and its remote, operating and industry environments. (Pearce & Robinson, 1994:62)

These will in turn be discussed on pages 59, 66 and 73 respectively, and at the same time a direct assessment of Audi SA to the relevant theory will be done.

55 Figure 6.1. Components of the External Environment

REMOTE ENVIRONMENT: (Global & Domestic) Economic Social Political Technological

INDUSTRY ENVIRONMENT: Entry Barriers Supplier Power Buyer Power Substitute Availability Competitive Rivalry

OPERATING ENVIRONMENT: Competitors Creditors Customers Labour Suppliers

COMPANY

Source: Pearce & Robinson, 1994:63

6.2 REMOTE ENVIRONMENT

The remote environment contains elements, which represent threats or opportunities to the company, and it is important that the dynamic nature of the components of the external environment is recognised and constantly monitored, analysed and interpreted. This is necessary to identify potential threats early and enable focused strategies to be formulated to counter any possible negative impact. The identification of potential threats also affords a company the early identification of potential opportunities which

56 when taken into account with the formulation of an appropriate strategy will allow it to take advantage of any revenue generating developments in the external environment.

The motor industry is particularly susceptible to the impact of developments located in the remote environment and largely beyond its sphere of influence. This is due to the huge amounts of capital investment needed not only for production, but also in research and development of new products. The commitment to certain development ideals, and life-cycle periods make it extremely difficult for the industry to respond quickly to unforeseen major changes in the remote environment.

6.2.1 Economic

The economy is still recovering from the international isolation during the "Apartheid" era. Many of the structural constraints resulting from forced investment in non-viable strategic industries in order to facilitate self-sufficiency will continue to hamper economic growth in the medium term. The continued high crime rate is also seen as a deterrent to foreign investment from flowing into the country and boosting the economy. Interest rates are under pressure, in response to the possible upward movement of the inflation rate, (SARB, 2000:10). The biggest inflationary threat, particularly as far as the motor industry is concerned, is the continued deterioration of the exchange rate. This will put tremendous pressures on the already eroded margins on the products, as manufacturers will endeavour to absorb much of the increase in imported components, and fully built up units, in order to remain competitive in the industry.

The South African economy was affected by the turmoil of the past 2 years in the global financial markets. This situation created, and still does, frustration for the monetary authorities who have an understanding for the desperately needed stimulation of domestic demand, but who also have the responsibility to protect the overall financial stability in a volatile international financial environment. (Mboweni, 2000:2).

The strong link between the South African economy and changes in the international situation was clearly illustrated when the global financial markets stabilised towards the

57 end of 1998 and the beginning of 1999. The result was the easing up of the strained South African financial situation to the extent the Rand appreciated from R6.30 in August '98 to R5.70 to the American dollar in January '99, (SARB Review, 1999).

The Growth, Employment and Redistribution (GEAR) strategy announced by the government in 1996, provides a long-term macro-economic framework with stated economic policy parameters and assumptions. The macro-economy is a summarised result of all activities of individuals, businesses and government. On trade and industrial policy the approach has shifted from an inward-orientated import substitution to outward-orientated international competition.

In the GEAR document, first published in June 1996, the Government recognised that the most important economic problem facing SA is the large and growing unemployment. This problem not only provides a serious economic challenge for macroeconomic policy, but also contributes to adverse socio-political developments, e.g. serious disrupting crime and violence can be linked directly to the growing unemployment. The country is therefore in the danger of being trapped in a vicious circle of growing unemployment, more crime and violence, lower economic growth, and therefore, more unemployment. GEAR supports the development of the supply side of the economy, to meet the legitimate needs of millions of South Africans that still live in poverty, and therefore the production of goods and services needs to be stimulated.

GEAR has set the following targets, (Stahls, 1999:3). 6% real economic growth by the end of 2000, this however will not be realised. 400 000 new jobs per year after 2000 7,5 % inflation non-gold exports to grow by 10 % in real terms real private sector investment to increase by 17 %

These targets are subject to adhering to the following policy guidelines: tight fiscal policy stance

58 control of inflation stable effective exchange rate abolition of exchange controls further tariff reductions to levels agreed with the World Trade Organisation, (WTO)

The Government remains committed to the gradual restructuring of the economy with the objective of raising the economic growth potential to at least 5 % over a six-year period. It has admitted that some of the strategies provided for in the 1996 GEAR document may need some revision in light of recent economic developments, but the essence of the strategy must be retained and must be pursued and implemented.

At present it appears that although some objectives of GEAR may be achieved, there are critical gaps within the macro economy, which will prevent it from reaching some of the goals in the short to medium term: no meaningful inflow of foreign capital in the form of direct investment law and order situation is viewed as a major risk factor new labour legislation is not conducive to flexible labour market it also appears that certain perceived differences between government, labour and business have not been resolved, resulting in all objectives not being reached in time or in the correct sequence

6.2.1.1 Short Term Economic Prospects

Assuming the following: The Government continues with the implementation of GEAR, and retains a disciplined fiscal and monetary policy. South Africa is able to attract a fairly substantial amount of foreign investment, preferably direct instead of portfolio, over the next 5 years. On these assumptions, and that existing advantages in the SA economy such as infrastructure, well develop financial institutions, highly developed skills in engineering, architecture, legal profession, medical care and business management are protected and

59 further expanded, the following developments in the SA economy over the next 5 years do not seem unrealistic. (Stahls, 1999:5).

The capacity of the economy to produce goods and services to gradually rise to a level of 5 % by 2004. This will average to an annual growth of 3 % over the next 5 years. For the year 2000, it is estimated to be approximately 2.7%, according to the Minister of Finances mid year report back to parliament held in October 2000. Inflation will decline gradually and come in line with the major industrial countries. The continuation of the removal of exchange controls, which will make SA even more integrated into the world economy. South Africa's leading economic role in Southern Africa will be further established, and will gradually expand beyond this region.

The traditionally high inflationary trends were shattered in 1999, following a year in which the Consumer Price Index, (CPI), averaged 6.9 % for 1998 which was the lowest since 1973 when it was 6.5 %. The SARB allowed interest rates to rise in 1998 as a counter weight to the runaway Rand depreciation. The Rand reached $ 6.85 in August 1998 and the corresponding prime interest rate topped out at 25.5 %. During 1999 the Rand strengthened and, after taking into account the recessionary condition of the economy, warrant the prime rate of 14.5%, at which it is presently pegged. Unfortunately the effect of the higher oil price during 2000, as well as the devaluation of the Rand will cause an increase in inflation as well the prime rate in the short term. (SARB, 2000:4).

6.2.2 Social

The industry that ignores the social issues and trends does so at risk. The motor industry in particular is subjected to increasingly critical appraisal by communities who are concerned about environmental issues, excessive consumption of natural resources, traffic congestion and safety. As governments are becoming more and more sensitive to these social concerns, they are resorting increasingly to restrictive and even prescriptive legislation affecting the motor industry. (de Nysschen 1995:96).

60 The results of these pressures is that manufacturers are becoming pro-active in their development of 'environment friendly' products that limit their use of natural resources and these range from the commercialisation of the electric powered motor vehicle to the ceramic engines that are fuel efficient as well as limiting the use of harmful materials. Owning a luxury car is becoming to be regarded as the excessive consumption of resources and socially unacceptable in certain developed countries. The introduction of compact, lighter, economical and recyclable vehicles competing in market segments previously ignored by luxury car manufacturers therefore is inevitable. The use of alternative fuel will also have a profound effect on the industry, as this will require the development of a new "refuelling" infrastructure to accommodate for example, electric recharging stations.

The nature of the social considerations prevailing in more mature markets such as in North America, Japan and Europe are far more influential, whereas these issues are of a more mundane level in South Africa. Now that the opportunity for legitimate political expression is now accessible to the majority of the populace, and the disparity of income levels characteristic of developing countries, it can be expected that the primary social issues will take precedence in South Africa. The relevant social issues impacting on the South African motor industry include the following: (de Nysschen, 1995:96). Implementation of affirmative action programmes Lack of trained skills relevant to the industry High crime rate High unemployment Inflexibility and demands of the organised labour movements

The challenge posed by the above factors, in conjunction with the need to meet the social aspiration of all South Africans will be a difficult task. The real short-term need is to stimulate the economy, so as to first of all create job opportunities to address the high unemployment situation, which in turn will assist in the addressing of the other social issues. As mentioned under the economic discussion, if there is not a rapid,

61 sustainable and visible movement towards greater social and economic equality, the present destabilising and disruptive influences will not only continue, but also escalate, effectively preventing economic development. However any indiscriminate redistribution of wealth, which does not support long term economic growth will inevitably erode the living standards and reduce the disposable income of the more affluent sector of the population in the medium term, and the implication of this on the motor industry is obvious.

6.2.3 Political

The role of government in creating an environment within which free enterprise can flourish and business prosper cannot be over emphasised. It is interesting to notice that governments of leading world economies that support business and facilitate the economic prosperity through the provision of infrastructure for in particular scientific and technical education, are stable in economic policies, which in turn propagate trust and confidence in local and international industry. (de Nysschen, 1995:95).

As South African manufactures gain access to previously inaccessible markets, it has become apparent that pricing constraints resulting from the high costs of manufacture are a serious obstacle.

The opening up of the market place to international competitors has resulted in a very difficult and painful transition for the South African motor industry. It has had to change very rapidly from being a highly protected industry, to becoming globally competitive with low-cost and highly productive countries such as South Korea, Indonesia, Brazil and Mexico.

An example of political intervention, is the governments bid to force the local industry to become more competitive in the global sense, with the introduction of the Motor Industry Development Plan, (MIDP), which is discussed in Chapter 2.

62 6.2.4 Technological

Due to the rapid development of technology, and the use thereof in the design of the modern motor vehicle, it is becoming increasingly difficult for motor manufacturers to achieve and maintain a significant competitive advantage over the competitors. Every motor manufacturer today invests large amounts of capital into research and development, trying to gain that competitive advantage. However the advancements in technologies employed such as computer aided design, superior manufacturing techniques have dramatically reduced not only cost but also product development time. The use of technology by manufactures has consequently broadened to include the development of more cost effective production techniques and efficient company structures.

The result of this is that sophisticated technology is found in even low-cost economy cars, whereas in the past this was predominantly the domain of the high priced luxury cars.

New technological innovations give a manufacturer a marginal competitive advantage over its competitors, as it is only a matter of time before these are duplicated and incorporated into their existing products. This has had the result that there is a far greater degree of product parity amongst competitors than in the past.

The subsequent erosion of product differentiation, has now focused the emphasis on the augmentation of the core product, by presenting the customer with a package which adds value to his purchasing decision, and this is a area were the competitive advantage will be realised. This is where the marketing of the product plays such an important role within the motor industry.

63 6.3 OPERATING ENVIRONMENT

The factors in the remote environment are largely beyond the influence and the control of the individual business companies, however the operating environment has a more direct impact, and subsequently individual companies can therefore act and react more readily to exert an influence on their operating environment.

It comprises of factors in the competitive situation that affect a firm's success in acquiring needed resources or in profitably marketing its goods and services. Among the most important of these factors are the firm's competitive position, the composition of its customers, its reputation among suppliers and creditors, and its ability to attract capable employees. (Pearce and Robinson 1994: 89).

6.3.1 Competitive position

Two main attributes can be used to determine the strength of a company's relative competitive position. Firstly market share, the greater the market share an company enjoys the better its competitive position becomes. This is essentially due to the fact that the potential returns on future investments are far more certain, and a large market share suggests that the company has developed a brand loyalty. The need to conquest market share, and the potential failure thereof is reduced, as the existing customer base exists.

Secondly the company's unique or distinctive competencies are also a measure of it competitive position. It is difficult for competitors to imitate a company's particular expertise in marketing and manufacturing skills, knowledge of a particular customer segment, or the reputation of a brand name. These two attributes obviously reinforce one another and explain why certain companies continue to grow stronger over time. A distinctive competence that a company enjoys leads to a higher demand for its product, and then together with a relatively large market share, the company can then invest in developing its distinctive competence. (Makridakis, 1990:106).

64

6.3.1.1 Market share

Figure 6.1 shows the market penetration by Audi SA in the local market for 1999 in each of the following market segments B, C and D, against its major competitors, i.e. BMW and Mercedes Benz. However Lexus and Jaguar have been included in the D segment as they represent formidable future competition.

Figure 6.2 COMPARATIVE MARKET SHARE FOR AUDI, BMW AND MB IN B SEGMENT 1999 (percentage)

50

45 -

40 -

35 -

30 - El AUDI 25 - ■ BMW D MB 20 -

15 -

10 -

5 -

0 /t) eft, g 434 05-'1 tts" I I I 1

Source: Naamsa (1999)

The following products and the variants thereof compete in this segment: Audi A4 BMW 3 Series Mercedes Benz C Class

It can be clearly seen that BMW was the market leader in the B segment for 1999, and this mainly due to the introduction of the new 3 series. As BMW will produce the 3 Series for the entire world RHD market in SA, they have a commitment to volume, which allows them to be extremely aggressive with their pricing as well as support in the

65 form of incentive programs. A indication of their aggressive approach is, with the launch of the new 3 Series, they managed to price the entry models below that of Audi and MB equivalent, this indicates that they intend to utilise their position of having the latest product as a means to make conquest sales and to increase their customer base and market share.

Figure 6.3 COMPARATIVE MARKET SHARE FOR AUDI, BMW AND MB IN C SEGMENT 1999 (percentage)

Source: Naamsa (1999)

The following products and the variants thereof compete in this segment: Audi A6 BMW 5 Series Mercedes Benz E Class

As can be seen by Figure 6.2, in the C segment MB was the overall leader, however BMW came through as a worthy challenger. The performance of Audi may seem to be disappointing, especially as it has the newest product amongst the contenders. It is the author's personal experience that in the first 3 months of 1999 Audi SA had a significant

66 order bank, however experienced tremendous supply shortages and was unable to deliver, and subsequently losing sales to the opposition. In the middle of the year the economic downturn affected the demand and resulted in a massive build up of stock, which put a burden on the financial resources of Audi SA and the dealer network. BMW and MB managed together with massive financial support to create sale opportunities during this period, with Audi initiating incentives for the dealer and customer mid-year, and only managing a turnaround in sales performance from August onwards. This segment will remain tough in 2000, but it is important for Audi SA to improve its performance, as the A6 is a major image builder for the marque.

Figure 6.4 COMPARATIVE MARKET SHARE FOR AUDI, BMW, MB, LEXUS AND JAGUAR IN D SEGMENT 1999 (percentage)

Source: Naamsa (1999)

The following products and the variants thereof compete in this segment: Audi A8 BMW 7 Series

67 Mercedes Benz S Class Lexus LS 400 Jaguar S Type

Traditionally MB have been the market leaders in this market segment, and their continued success therein is testimony to the value of an existing customer base and market share. (Refer Figure 6.3)

The large fluctuations seen in the graph are as a result of its very low volume, and small changes in volume represent significant market share differences. From a representation and brand building aspect, this segment is the most important. In this segment the image of a brand can be negatively affected if a manufacturer fails to make significant inroads. The performance of Lexus and Jaguar has been included in the graph as they represent a major threat, and in the case of Jaguar has challenged the traditional participants and succeeded in taking substantial market share in a very short time period.

Audi SA's failure to perform well in this segment is a contributing factor to its image rating not being as strong as BMW and MB, and for this reason alone a focused effort needs to be take place to improve this trend.

Jaguar has succeeded under difficult economic conditions to realise sales by pricing their product aggressively to gain market share, and in top to bottom approach, prepare the market place for the entrance of product to compete in the other segments.

6.3.2 Suppliers

The suppliers to the South African car manufacturing industry face constraints and challenges of a similar nature to those of their customers. The component supply industry evolved in South Africa as a direct consequence of the local content programme, which forced manufacturers to source components locally, irrespective of the financial viability of such substitution.

68 This has to some extent resulted in strained relationships between the automotive assembly industry and component manufacturers, who were virtually assured of business and enjoy high levels of protection from imports. If the local motor industry is to survive, the common need to become globally competitive will result in strategic alliances developing between car manufacturing and component suppliers.

The necessity for local car manufacturers to create lean companies will result in outsourcing to suppliers of non-core activities, while new production techniques and systems will force close working relationships between the parties. Suppliers are likely to become involved in the assembly process as responsibility for installation of sub- assemblies on the production line is out-sourced to the component manufacturer.

6.3.3 Labour

The South African labour market has in recent years been characterised by endemic conflict and work disruption. Debilitating industrial action has affected almost all sectors of industry, but the automotive industry has been particularly severely affected in the past. The underlying reason for this instability is that labour unrest formed part of the "struggle" by the politically disenfranchised, who then resorted to industrial action as an alternative avenue for political expression. Presently the focus of organised labour has shifted to economic and social issues, with the potential danger that worker frustration, due to unfulfilled expectations since the political empowerment of the majority of the work force, will once again become a source of instability. (de Nysschen, 1995:110).

Union demands for higher remuneration contrast with unprecedented levels of unemployment and relative poor productivity set the scene for a period of intense negotiation between themselves the industry and most importantly the government.

69 6.4 INDUSTRY ENVIRONMENT

A company's industry environment consists of the elements that directly affect the company, such as competitors, customers, and suppliers. An industry can be defined as a group of companies offering products or services that are close substitutes for each other. Close substitutes are products or services that satisfy the same basic consumer needs. The strategic decision-makers have to analyse competitive forces in the industry environment in order to identify the opportunities and threats that confront the company. Porter 1979, pp. 137 — 145 developed a framework that helps managers do just this. It focuses on five forces that shape the competition within an industry: The risk of new entry by potential competitors. The degree of rivalry amongst established companies within the industry. The bargaining power of buyers. The bargaining power of suppliers. The closeness of substitutes to the company's products.

Porter argued that the stronger each of these forces is, the more established companies are limited in their ability to raise prices and earn greater profits. Within this framework, a strong competitive force can be regarded as a threat, since it negatively affects profits, and a weak competitive force can be regarded as an opportunity, since it positively affects profits. The strength of the forces may vary with time due to factors beyond the company's direct control, such as industry evolution. In such circumstances it is up to the strategic decision-makers to recognise the relevant opportunities and threats, and formulate the required strategic responses. It is also possible for a company through its strategic choice, to alter the strength of one or more of the five forces to its advantage.

6.4.1 Potential competitors

Potential competitors are companies that currently are not competing in the industry but have the capability to do so if they choose. Obviously established companies try to discourage potential competitors from entering, since the more companies enter a

70 industry, the more difficult it becomes for the established companies to hold their share of the market and to generate profits. Therefore a high risk of entry by potential competitors represents a threat to the profitability of established companies. On the other hand if the risk were low, established companies can take advantage of this opportunity to raise prices and as a result earn greater returns.

The strength of the competitive force of potential newcomers to the industry is a function of the barriers to entry to the particular industry. High entry barriers keep potential competitors out of an industry, even when the returns are high. Following are some entry barriers to new entry: (Pearce & Robinson, 1994:79).

Brand loyalty — This refers to the preference of buyers for the products of established companies. A company can create brand loyalty through the continuos advertising of brand and company names, product innovation, emphasis on product quality, and good after sales service. If an established company enjoys a significant brand loyalty, it makes it difficult for new entrants to take market away, as they see the task of breaking down well-established consumers preferences as too costly. Absolute cost advantages — These can arise from superior production techniques as a result of past experience, secret processes for example. Again if an established company has an absolute cost advantage, then the threat of entry is again reduced. Economies of scale — This refers to the cost advantages associated with a large company size. These include cost reductions gained through mass producing a standardised output, discounts on bulk purchasing of raw materials and component parts. If these cost savings are significant, a potential new entrant to the industry faces the dilemma of either entering on a small scale and suffering a cost disadvantage, or taking a very bold risk by entering on a large scale and bearing substantial capital costs. Subsequently the new entrants risks losing the large capital investment if the venture is not a success.

71 The potential competitors in the case of Audi SA are all the manufacturers and importers who position their product in the premium segment in South Africa, and as the import duty continues to fall so does the entry barrier into the market.

One may argue that South Africa in terms of volume cannot be defined as a volume market, however this country is still seen as a gateway to the rest of Africa and an attractive distribution point to the Pacific rim, South America and Australasia, which do qualify for volume status markets.

Figure 6.5 VEHICLE PRODUCTION CAPACITY AND DEMAND OF THE MAJOR PRODUCERS

Source Naamsa (1998)

There is a world-wide over production of motor vehicles, as can be seen by Figure 6.4, and certain manufacturers are looking for markets to "dump" their overproduction, additionally they are only concerned with, in the worst scenario, to recover their costs of production and shipment. The result is that they are operating on a variable cost basis

72 and able to adapt their pricing structure more aggressively than many of the local manufacturers. The term 'buying market share' comes to mind.

Audi SA and the other local manufactures have an advantage presently, because they have established a customer base for the product and they have an established distribution network, which are both very capital intensive for new entrants to establish. This however is not as much as an entry barrier as in the past, as large conglomerates in the industry are forming and have access to each others infrastructure, e.g. Ford and Volvo.

6.4.2 Rivalry amongst established companies

If this competitive force is weak, companies have the opportunities to raise prices and tailor their profit margins. However if it is strong there will be significant price competition, including price wars if the rivalry is intense. Price competition limits profitability by reducing the margins that can be earned. The extent of the rivalry amongst established companies is largely related to three factors: (Pearce & Robinson, 1994:82). Competitive structure — This refers to the number and size of companies in an industry. A fragmented industry contains large number of small or medium sized companies, where not one is in a position to dominate the industry. A consolidated industry is one dominated by a small number of large companies, or in extreme cases, by just one company. Demand conditions — Growing demand tends to moderate competition by providing greater room for expansion. Demand grows when a market as a whole is growing through the addition of new consumers, or when new consumers are purchasing more of the industry's product. When demand is growing, companies can increase revenues without taking market share away from other companies. Thus growing demand gives a company a major opportunity to expand operations. Exit barriers — These are a serious competitive threat when the industry demand is declining. They can be economic, strategic and even emotional in nature, and they

73 keep companies competing in an industry even when returns are low. If exit barriers are high, companies can become locked into an unfavourable industry, and if there is an excess of productive capacity the resulting excess capacity leads to a even further intense price war, as they try to utilise or move excess production and stock.

In the local industry the rivalry between al the players is extremely intense. As can be seen by the projected market growth in South Africa, in the passenger car market, as shown later on this chapter under the Global Environment, Figure 6.5, it shows a relatively marginal increase in the overall growth from a low base expected this year to the year 2003. Together with the increased number on foreign entrants into the industry, the piece of cake each can have is getting smaller and smaller.

The result of this has been the emergence of a price war in all segments of the market, this is especially evident in the high volume low-priced entry-level market, e.g. Chico from VWSA, Uno from Automakers, Midge & Tracer from Samcor and Tazz from Toyota. The price war is evident in the premium segment as each manufacturer attempts to maintain market share. However indiscriminate trading practices based purely on price positioning could have a negative impact on the entire brand image, as it will affect the residual values of the product in the long term, and disrupt the used car market. This calls for strict trading policies by the dealers, so as to protect their own franchise market, gross profit margins and ultimate survival in the long term.

6.4.3 The bargaining powers of buyers

Buyers can be viewed as competitive threat when they force down prices or when they demand higher quality and better services, which have the effect of increasing operating costs. Alternatively, weak buyers allow companies to almost dictate prices. Whether buyers are able to make demands depends on their power relative to the company they are dealing with. Buyers are most powerful in the following circumstances. (Pearce & Robinson, 1994:81).

74 When the supply industry is composed of many small companies, and the buyers are few and large. When they purchase in large quantities, giving them leverage to bargain for price reductions. When they can switch orders between supply companies at a low cost, thereby playing suppliers against one another. When it is economical feasible for them to purchase the input from several companies at once. When they can threaten to supply their own needs by vertical integration, as a device for forcing down prices. The above points represent the broad theoretical concept and consequently not all of these factors can be related to a customer purchasing a motor vehicle. The buyer or the consumer in the South African motor industry has of recent become far more powerful in the eyes of the manufacturers. All of a sudden the consumer has the choice of literally dozens of products which he previously did not have. If the one manufacturer cannot provide him with the product that he requires, at a quality level he finds acceptable, and at the right price, he will simply go to the next manufacturer. This is assuming there is a limited involvement of brand loyalty in his decision-making criteria. And as mentioned in the previous point, discussing rivalry amongst the competitors, the market is of a finite size, not increasing substantially in the near future, and each customer is seen to be a crucial conquest by the manufacturer.

The consumer today enjoys a status that he has never had the privilege of experiencing previously, and is definitely regarded as very powerful.

6.4.4 The bargaining power of suppliers

This aspect has been covered in order to give understanding to some of the concept contained in the MIDP. They can be considered a threat when they are able to force prices a company must pay for input materials up, or reduce the quality of the goods supplied. In both cases they negatively affect a company's profitability. As with buyers, the ability of suppliers to

75 make demands on a company depends on their power relative to the company. Suppliers are most powerful in the following circumstances: (Pearce & Robinson 1994:80) When the product they sell has few substitutes and is seen as important to the company. When the company's industry is not an important customer to the supplier. The supplier's fortune is not decided by the particular industry, and as a result has little incentive to reduce prices or improve quality. When the required product is so specialised, that it is too costly for a company to swap suppliers, and thereby also unable to play suppliers off against one another. When they can use the threat of vertical integration forward to compete with the company as a way to raise prices. When buying companies are unable to use the threat of vertically integrating backwards to reduce the prices.

The suppliers of the local component industry are experiencing the same "wake-up call" that the motor manufacturers are experiencing. The number of customers that they have is also finite, and the technology that they utilise in certain instances to produce components is to a large extent unique. The result of this is that some are 'locked' into the supply of components to the motor industry, unless they invest huge amounts of capital to diversify.

As the motor industry is going through a transition stage, and having to become a far leaner in all operational aspects, they are putting the pressure on the suppliers of components to cut down their margins.

With the governments MIDP each manufacturer receives export credits for the amount of exporting it does of either motor vehicles or related components. It is in the interests of VWSA to become part of the world sourcing concept and receive the export credits to offset the costs of importing FBU's to supplement its model mix. As part of the VWAG group it has the possibility of becoming the worldwide supplier of either a vehicle model and or selected componentry. Presently VWSA produces the RHD Golf 4 for the British

76 market, and exports a number of components, such catalytic converters and leather back to the various production plants in Germany.

6.4.5 Substitute products

These are the products of companies in industries serving similar consumer needs. The existence of close substitutes constitutes a strong competitive threat, limiting the price a company can charge and thus its profitability. (Pearce & Robinson, 1994:82) In the motor vehicle industry it is quite apparent that there is a substitute product for every market segment that Audi SA competes in. Therefore there exists a strong competitive threat, and the aggressive positioning of products in each market segment. The customer is wooed by each competitor, offering a similar basic product, the difference being what he perceives the product as, and how does it augment his personal status.

6.5 THE GLOBAL ENVIRONMENT

Changes in the global environment can create both opportunities for market expansion and serious threats to a company's domestic and international market share. An important factor in the global environment is the stage of economic development of nations, as this will determine whether or not they can be viewed as an opportunity or a threat. (Pearce & Robinson, 1994:107).

Developing countries in Africa and the Pacific Rim offer South African companies opportunities to expand their international operations. At the same time the emergence of capable competitors in these nations, specifically the Pacific Rim, threatens the domestic and prospective international market position of South African companies.

Previously South Africa was not part of the global environment due to economic sanctions imposed by the international community as punitive measures of protest against the policies of the previous government. Therefore there was no real need for local companies to take this concept into consideration during the planning of strategic

77 objectives. This all changed in 1994 with the inauguration of the new government, and all of a sudden South Africa was readmitted into the international community with open arms, and opening up of the markets was common place. With this re-admittance came the inclusion of trade agreements such as GATT which together with the MIDP, see 2.3, have had and will continue to do, the affect of lowering the import duties for one. This has allowed a host of foreign manufacturers to enter the local market and compete for market share.

The continued deterioration of the Rand on the monetary market will severely effect the global policies of local motor vehicle manufacturers in the manner that although the product becomes reasonably priced to export, the cost of importing certain components becomes higher. There exist a real danger that even with a low Rand value, we will still remain un-competitive with regards to exports in the international market place due to the industry's present dependence to import high value components, and the present 'inefficiency' of the industry as a whole.

As VW and Audi SA are part of the VWA.G. group, they naturally form part of its overall global policy. VWAG has manufacturing plants throughout the world, and as will be covered later in this chapter it has a strategy of world sourcing. With the domestic market becoming increasingly competitive due to the entry of foreign manufactures, there is limited growth potential, and as a result an anticipated degree of saturation will occur. If one looks at the projected growth of the passenger car market of the domestic market to the year 2003, Figure 6.5, the anticipated growth is approximately 19% over the 1999 projection. This may sound substantial, but one must remember the continuos entry of new competitors and as a result will not relate to any real growth for existing manufacturers.

78 Figure 6.6 VEHICLE MARKET DEVELOPMENT

300

43 250 - 236 240 237 238 240 225 - - - 0 1994 204 195 0 1995 200 - 9 gi 0 1996 I. 0 al 0 1997 150 - 0 1998 0 1999 100 - 0 2000 0 2001 0 2002 50 - 0 2003

0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: Audi SA (1999)

This anticipated small growth in the domestic market ensures that local manufacturers will have to look at outside the borders of the country, or in other words become a player in the global market. The global strategy is essentially dictated to VWSA by the parent company, as it forms part of their global infrastructure, and it takes the form of 'world sourcing'.

The world-sourcing concept boils down to the following. The various subsidiaries will be responsible for a certain model / platform production, and the supply of that model to the designated markets of responsibility. This will allow for the required economies scale to be attained in each subsidiary, and decentralise the concentration of manufacturing infrastructure. At VWSA / Audi SA there are certain responsibilities towards the world sourcing concept, and they are to supply the A4 Golf to England, and some minimal volume of A4 Audi to Australia. There is also some leeway to export some of the other products to RHD markets in Africa, however this volume at present is

79 negligible. Also there is a parcel of components that VWSA exports to the various plants around the world.

6.6 SUMMARY

This chapter analysed the situation of Audi SA focusing on the external environment. South Africa is emerging from a period of instability and turmoil that has taken a heavy toll on economic growth. The process of political empowerment has created high expectations that could potentially erupt into instability as economic realities cause disappointment.

The industry is under severe pressure to become more competitive, due to the proposed changes in the legislation. The domestic market has become accessible to foreign manufacturers with excess manufacturing capacity and lower cost base. A concern is the disproportionate relationship between disposable income and vehicle prices, depressing sales and contributing towards a shift in the purchase of less expensive vehicles in the lower volume market segment.

The instability of the labour market and poor productivity levels continue to be a constraint to the South African motor industry achieving global competitiveness.

80 CHAPTER 7 ANALYSIS OF AUDI SOUTH AFRICA

7.1 INTRODUCTION

To analyse the situation of Audi SA, the SWOT analysis method will be used to help determine which strategy will be appropriate. Although it can be argued that the use of the SWOT analysis method, (an acronym derived from the process of identifying Strengths, Weaknesses, Opportunities and Threats), is subject to individual interpretation of market conditions, it is not the exact numerical positioning that interests the author, rather the general area or quadrant that Audi SA finds itself. This will then be used as a basis for the development of a general short-term strategy, based on the author's own experience relative to the industry together with research done by the author while based at Audi AG Headquarters in Ingolstadt, Germany during the period May 1998 to May 1999.

7.2 SWOT ANALYSIS

While the process utilised is seemingly elementary, it sets the scene for the final integration of external and internal analysis. Pearce and Robinson, (1994:175) describe SWOT analysis, as a systematic identification of the above-mentioned factors, providing a framework for selecting the strategy that reflects the best match between them. The factors identified in this SWOT analysis are as a result of the research work done by the author during secondment from Audi SA to Audi AG in 1998 / 1999 while participating in a management development programme. Together with Mr Michael Renz, Regional Sales Manager Audi AG, responsible for the Southern Europe, Middle East and African markets, Michael Weber, Sales Manager Audi AG, responsible for the development of the South African market, focus was placed on factors that would benefit the Audi brand in South Africa in the short term, however not at the expense of the longer term objectives. In order to make an objective evaluation, the structure and influencing factors of the South African market were analysed and are recorded in the previous chapters:

81 Chapter 2 - wherein the recent economic events were discussed and the effect of the MIDP on the local industry was analysed. Chapter 3 - a historical look at the development of the local industry and the competitors therein in order to assess their strength and commitment to the South African market. Chapter 4 - a brief look at the development of the Audi brand in South Africa. Chapter 6 – possibly the most important aspect of the evaluation, where all the environmental issues were discussed to ascertain their influence on the proposed development of the Audi marque in South Africa. Once the analysis had been done, the factors relevant to the process were placed in the SWOT categories, and then a discussion was held to determine which factors were relevant to the research and a value put to them. The factors included in the SWOT categories below are as a result of this process.

For the sake of convenience a range of-10 to +10 will be assigned to each of the two axes.

Strengths Established dealer network and infrastructure 6 Distinctive Corporate Identity and international branding 7 Well-received product - technological innovation styling 9 Attractive dealer margins 5 Competitive model range 8 Audi AG support — financial and product development support 6 TOTAL 41

Weaknesses Image rating not as high as main segment competitors, -2 (expensive VW) Corporate Identity not fully implemented - dealer image not high -6 Commitment from some dealers / groups still forthcoming. -4

82 Brand separation not complete. -7 Conquest level of main competitors not high -9 Representation in D-Class minimal. -3 Long delivery delay for FBU products. -5 No structured retention programme -6 TOTAL -42

Net Result -1

Opportunities Placement of product with high profile decision makers, C and D 9 class RHD A4 production / component export 8 Entry in premium A-class segment, no competitors. 10 Additional models available for possible market introduction. 6 TOTAL 33

Threats Entry of new competitors, i.e. Lexus, Jaguar etc. -6 Economic situation, which will influence premium segment volume. -5 MIDP, rebate situation. -4 A4 under pressure with new BMW 3 Series, and expected launch of -6 C-class MB in 2000. Buy down threat / trend. -3 Declining disposable income -2 Rationalisation of motor industry — MIPD -2 Dealer profitability under threat due to market proliferation -7 TOTAL -35

Net Result -2

83 FIGURE 7.1 SWOT ANALYSIS FOR AUDI SOUTH AFRICA

OPPORTUNITIES 10 Supports a turnaround Supports an orientated strategy 3 1 aggressive strategy

WEAKNESSES TRENGTHS

-10 10 ■

AUDI SA Supports a Supports a defensive strategy 4 2 diversification strategy

-10

7.2 SUMMARY

The fact that Audi SA finds itself in the 4 th quadrant reflects the market conditions in the SA motor industry, i.e. a strong competitive environment. The theory suggests that if a company finds itself in this quadrant it should implement a strategy that has defensive and consolidation element to it. Although, albeit, through the interpretation of the author and the colleagues from Audi AG, the positioning of Audi does not reflect a critical situation, it does however highlight major environmental threats as discussed in chapter 6, together with some internal weaknesses that need to be addressed.

84 CHAPTER 8 CONCLUSIONS AND STRATEGY FORMULATION

8.1 INTRODUCTION

It is necessary to match the external assessment and internal analysis in order to identify and generate a viable business strategy. The interpretation of influencing factors and the identification and selection of appropriate alternatives involves a process of rationalisation and decision making.

The objective of this chapter is to utilise the findings generated from the previous chapters to formulate strategies, which will optimise the competitive position of Audi SA. The tactical plans proposed herein are meant to be practical and that the process may culminate in purposeful action.

8.2 CONCLUSIONS

From the SWOT analysis it suggests that Audi SA should follow a strategy that contains a defensive element. This does not suggest a fortress approach rather a consolidation of certain market segments and the exploitation of others.

On a macro scale the dominant factor in the industry's growth and development will remain dependent on the course of government policy, such as the MIDP. This was identified as a threat in the SWOT analysis. Foreign and local investment has always tended to follow the various stages of government policy in the past, and at the same time it has reflected shifts in the global motor industry, reflecting to a greater or lesser extent the strategies of the mother company with regards to production and export of motor vehicles.

Investment decisions have also not always been governed by economic rationales in the past, rather they have been based on a wide range of influencing factors, i.e. globalisation, internal strategies and competitor threat. Since 1994, a number of major

85 players have either reinvested or indicated their interest in investing in SA, which may be a double-edged sword. On the one hand it will incorporate the SA industry back into the global strategies of these companies and the spin-off may be the creation job opportunities, or alternatively it may increase fragmentation in the local motor sector at a time when there is a need for consolidation, and rationalisation.

The size of the dealer network will continue and needs to be rationalised, and this will have affect on both sales and after sales of Audi products, in so much that the strategies for both will have to be adapted to take into account a diminished distribution and service network.

This is due to the changing nature of the business as a whole, requiring high investment commitment for CI, tooling and training, together with pressure on the profit margins because of competitive market conditions. The result will be that some market areas where the premium segment accounts for a small percentage of the overall market size, the ROI will not be realised and the closure of the dealer or resignation of the franchise will occur.

8.3 OPERATIONAL STRATEGY

8.3.1 The Audi Customer

It is extremely important before the operational strategy is discussed that a profile of the Audi customer is given, due to the fact that the end user is crucial to the continued profitability of the company and therefore an integral part of any proposed strategy. A brand audit study was commissioned by Audi SA through its advertising and brand building partner, Olgilvy & Mather Rightford Searle-Tripp & Makin in 1999 to be used as a basis for understanding the Audi customer and then to develop a focused communication message.

86 The results of this audit presented the following profile of the Audi customer:

Audi owners are family orientated people, who strive to achieve the best for themselves and their families. They are focused on achieving their goals, and are thus rational, sensible and analytical people. They are confident in their abilities and prepared to take calculated risks. Audi owners are hard working and have already achieved a certain level of success, which is ahead of their peer group, and the Audi product is seen to reflect this level of success and makes a statement about the owner. They seek recognition of their status, but not in an overt way, and they are not interested in impressing everyone around them, but only those people that can recognise their status. The car they drive reflects that they do not indulge in excess, but are also not prepared to compromise their taste, values and status. During the SWOT analysis it was recognised that as a strength the product was well received from a point of view of technology and styling, however it was considered weak in its image ratings relevant to its main competitors.

8.3.2 Distribution / Sales

The sales volume for the passenger car market slumped by 7% in 1999 over the volumes of 1998, representing the worst year since the decline in the total passenger market started in 1997. (See Figure 6.5). As expected the first half of 1999 continued to be nd difficult, with a relatively easier 2 half, as the economic indicators discussed previously in 6.2.2.1, prompted activity within the economy. As a result of the extremely competitive market there has been a change in the product mix offered by manufacturers, and this has had significant impact on dealer profitability. In an effort to enhance price competitiveness, all manufacturers have cut dealer margins on entry level vehicles, this holds true for the volume as well as the premium segment. This has put pressure on the average gross margin contribution for the sale of new cars of dealerships. (See 6.4.2). The gross margins of the Audi products was seen to be a

87 strength during the SWOT analysis, as it helped the dealers weather the storm and prevent them from entering into the price war.

A further factor to consider is that in some cases the dealer margin has purposely been reduced by the manufacturer, as an incentive for dealer to achieve sales targets, customer satisfaction levels or CI standards. Once the prescribed target has been reached the dealer is then paid out the remainder of his margin by the manufacturer on a quarterly or half-yearly basis retrospectively. (See 6.3.1.1).

With the slow down in the economic situation in SA during 1998 and 1999, the inventory holding of many dealers was in a state of 'over stocked', which resulted in Audi SA's yard stock levels rising, and having to invest financial resources in incentive programmes to create a movement of thereof This took the form of rebates paid to the dealer per unit on each unit they took over and above their normal stock holding level, and the dealers did this by taking certain slow moving units into the dealers demonstrator fleet. Also a conquest rebate was paid out on specific competitors such as BMW and Mercedes Benz traded in on any Audi model.

The stock management aspect remained a key focus area in 1999, during the recovery of the economy, in conjunction with strict management of dealers commitment to agreed sales targets. This proved to be a positive intervention as both Audi SA and the dealer network obtained on average acceptable sales volume and stock holding levels. With the A4 and A8 entering the end of their life cycle, continued financial incentives will have to be initiated to ensure correct stocking levels.

An important factor is the continuos implementation of the CI standards, so as to reinforce the separation of the VW and Audi brands. Although this may seem to be a waste of already stretched financial resources, it is critical to insure the brand positioning in the mind of the premium segment customer, or the very real danger exists that he will take his business to where he feels the brand image enhances his own. Again this follows on the discussion in 8.3.1, where it was identified as both a strength

88 and a weakness in the SWOT analysis in this case due to the partial implementation thereof.

Within the dealerships, product focused sales training needs to continue, thereby familiarising the sales people with their target customer, and which will allow them to understand his needs and behaviour traits. The value of product training cannot be over stressed, as it is critical for the sales people to be completely familiar with their product, as well as that of the competitors, in order to present the customer with a balanced and informed sales experience. This is especially true with products in the end phase of their life cycle such as A4 and A8, where the product knowledge and presentation of the sales person will be an important factor in the final buying decision of the customer.

The concept of relationship marketing needs to be incorporated in the overall dealings with the existing customer base, as it will maintain contact, and provide the dealer and Audi SA with important demographics. If you know whom your customer is the better the chance you have of building a relationship and communicating to their needs on a regular basis. The cost of maintaining existing customers and a customer base is more cost effective than trying to obtain new customers. In the finite market with slow growth potential facing all vehicle manufacturers in South Africa the ownership of their present customer base is critical, and possibly more important that trying to increase market share in the short term. However have said that, relationship marketing does also offer the opportunity to make contact with potential customers, thereby effectively enhancing the possibility of making a 'conquest' sale. The conquest of competitor customers was identified as a weakness in the SWOT analysis, as the financial backup from Audi SA and stock shortages prevented Audi dealers from taking potential customers out of their present vehicles and offering them a comparative Audi product.

There are many potential software packages that are commercially available in the market place that claim a customer relationship focus, but the following facets should be present to form the foundation of an effective system.

89 Uniform integrated operating standard must be adopted across Audi SA and its distribution network. User friendly, so as to overcome resistance by frontline staff to adopt. Must provide important information to the Audi SA and the dealer about 'who is our customer?' Provide dealership management with a tool to measure the effectiveness of frontline staff, i.e. provide on demand an activity report for example sales staff, of how many contacts have been made and quotes processed. A good basic prospecting system which fits dealerships of all sizes and is flexible enough to adapt to specific requirements. Uses a standardised Audi process as a basis, which ensures that the customer is presented with an international standard during his contact with the dealer.

It should be introduced as a pilot within dealerships situated in the major retail centres such as Sandton, Cape Town and Durban. Once the operating parameters of the system have been established and proven it should be introduced throughout the dealer network and implemented as a standard.

8.3.3 Product line-up

The product that Audi SA offers its dealers and customer is the core of the sales business, and it is this, which represents one of its strengths. Following is a short discussion on each model, taking into account the customer profile discussed in 8.2.1.

8.3.3.1 A3

From introduction in 1998, until recently Audi was the only premium brand in this market segment, being classified as the A segment. In September 2000, Mercedes Benz launched their A class competitor, called the A class. However the intended target market for both products is very different, Audi target the young executive while MB is

90 targeting the utility market. This was identified as an opportunity in the SWOT analysis. The A3 needs to be positioned as follows: (Audi AG, 1997) A change of value, first class not flashy, class instead of mass, more fact less fiction In the compact car segment an overall car concept that is forward looking and superior Target single and young couples who enjoy an active lifestyle, and the car they drive relates to this image The danger does exist of diluting the brand image by competing in the so-called volume segment, the model mix should therefore be of a high specification to satisfy the niche market, and priced accordingly. This product is important for image building with the younger customer target group, as serves as an entry into the Audi brand and as such develops a future customer base for the other Audi products as the customer matures and requirements change.

8.3.3.2 A4

This is the product that Audi SA used to reintroduce the brand into the South Africa market. The success of this product has resulted in the general acceptance of Audi as a serious contender in the premium segment. The present A4 is in the end phase of its life cycle, due to be replaced locally by its successor in the second half of 2001. Both BMW and Mercedes Benz have launched their successors in this segment so the thrust of the sales and communication strategy needs to focus on the fundamental attributes of this product. This was identified as a threat in the SWOT analysis. The price positioning will have to become extremely competitive against it major rivals. Support programs will have to be initiated to ensure continuation of sales and residual values during this period. These need to be in the form of financial packages, trade in support for existing A4 owners allowing them to upgrade their present vehicle, specification level to be high and at no additional cost. Value for money!

91 Strong communication campaigns will have to bring across the basic integrity of the product, focusing on the technological advantages, design and quality.

8.3.3.3 A6

The present A6 is the successor to the vehicle that was traditionally marketed in South Africa prior to the re-launch of the brand in 1995. Due to its marketing heritage it has had a low profile in the C segment, and the challenge is to increase the conquest rate so that the presence is felt in the marketplace in this all important image conscious segment. Again the communication and positioning needs to be focused. (Audi AG, 1997). Redefine the prestige, leaving behind the traditional, old fashioned past. The new product represents progressive, self-confident image. Design and engineering that goes beyond the obvious needs of the driver, passenger and environment. New product, emphasis on penetration necessary. First time since the reintroduction of Audi in SA that it has a 'modern' competitor in this segment. Continued trade-in support for the older A6 models. Support existing customer base, builds a high confidence level and enhances marque image. Trade-in support for conquest sales of competitors. Models must be of a high specification, as predicted sales targets are relatively low. Need to expand quality image. Models such as 2.7T and V8 are important as in the case of the 2.7T it is unique, and will create enthusiasm, as well on presenting the market with the technological advancement of the Audi brand.

8.3.3.4 A8

As with the A4, the present A8 is in the end phase of its life cycle, and as it is the premium product in the present line-up of Audi SA, it requires an extremely focused positioning and communication strategy. This was identified as a weakness in the SWOT analysis. Although, as mentioned a very mature product it still remains

92 technologically advanced amongst its peers. The vehicle is constructed completely out of aluminium for the body shell, and the remainder constructed of advanced aluminium alloys. Communication that points out it innovative, superior technology and well balanced design. Due to its positioning in the market it is important as image builder for the entire marque in SA. Dedicated sales staff need to be trained to deal with potential high profile customer. An A8 specialist dealer concept needs to be actively promoted and developed. This involves using key dealers in affluent areas and providing them with support to identify potential customers. This will also require a different sales approach as well as after sales facility to the other products. Concentrated sales training within these designated dealers. Development of a marketing program to place A8 with prominent decision makers and high profile people, together with Audi SA and the specialised A8 dealer network. Due to the low volume projection in this market segment, support programs need to focus on retention of residual values, as Audi SA cannot afford this model to be perceived as not holding its value, as it will have a ripple effect on the entire marque.

8.3.4 Fleet

The traditional fleet market in the premium segment has all but disappeared. It is very seldom that one deals with a central purchasing agent, as the potential customers in the premium segment are mostly on vehicle allowance programs, or financial lease packages which are outsourced to specialised fleet management companies, so as to take advantage of preferential income tax rebates. The approach to the fleet business needs to be decentralised from Audi SA, and instead a support function should be provided to the dealers within their franchise areas. The dealers would then be in a position to make contact with companies in their area of responsibility, whereby they create a forum for the potential customer to have an opportunity to discuss their motoring needs. The involvement of the dealer is paramount in this instance as they would then become a

93 direct service provider to the fleet company, and offer personalised service to the actual driver of the motor vehicle. This was identified as an opportunity in the SWOT analysis, for Audi to increase its market share in this all important market. The support function that Audi SA should provide would be to develop communication material that can be utilised by the dealer during these contacts. Secondly as the cost of a demonstration fleet is high, especially in the premium segment, that Audi SA provide a pool of high value vehicles representative of the product line-up on which the dealer could draw for specific promotional activities. Additionally Audi SA through their national database can provide each dealer with the details of existing fleets in their area so that these can be maintained and further develop as well as presenting an overall professional approach. The information gathered by either Audi SA and the dealer then needs to be updated so that there is an accurate and current database which can be used actively for the relationship marketing aspect mentioned in 8.3.2.

8.3.5 Pre-owned Car Programme

Due to the present stagnant and often cyclic nature of the market with regards to new car sales, an integrated pre-owned programme is necessary to provide the dealer network with an additional revenue-generating alternative. However this is secondary to providing the potential customer with a professional sales experience. Market studies have indicated that the potential Audi pre-owned customer has a similar profile, if not the same, to the new car customer. One can imagine a person who is in the market for a new A6 for example, may have his needs better addressed by a pre-owned A8 for a minimal price increase. This person is certainly not going accept an approach which requires him being bustled out to a pre-owned lot that is crowded with volume segment products, and a sales person providing the traditional used car basic service and information. There is another important factor to be taken into account when looking at the development of a used car operation, and that is the ability to trade. A large percentage of new car deals have the customer offering their present vehicle as a trade-in on the potential new vehicle. If a dealer does not have a developed used car market to dispose

94 of the vehicle, it will be very difficult for them to offer the customer a market or above market related price. This potentially means that the customer will take their business to a dealer that can offer or trade at market related prices. Audi as an international brand has far more integrity than a private concern, and thus it would benefit the dealer organisation if a used car programme backed by Audi SA was initiated and made available to Audi specific dealers. In order for the used car brand to be successful it would have to comply with similar standards as with new vehicles, i.e. a specific used car CI, specific training and a parcel of products such as an extensive transparent reconditioning policy so that the vehicles are thoroughly checked over before being sold, warranty, exchange plan which would give the potential customer the peace of mind when purchasing a used car.

Potential markets are the so-called emerging market segment in which the used car market offer attractive entry levels for new customers. The present trend to 'buy down', as customers do not want to appear to ostentatious is also a opportunity, this is to try and limited their exposure to the reality of South Africa, a target for vehicle crime in all its guises. Although this was seen to be threat in relation to new car sales, in the SWOT analysis, it represents opportunity when considering the used car market on its own.

Short term objectives for pre-owned cars should be: Support the residual value of Audi products by a co-ordinated effort to support trade values offered to the industry. Develop and implement approved CI standards with all participating Audi dealers. Develop a range of products such as warranty, insurance etc that will add value and protection to the potential customer. Develop a pre-owned training programme that will cover all aspects of marketing, customer service etc. to elevate the service and professional levels traditionally offered by used car operations. Develop business plans for all Audi dealers, which would quantify the potential used car business in their franchise area and the level of investment required to meet the set standard criteria.

95 With a programme that is developed correctly, and fully integrated into the dealership sales process, the pre-owned department can not only support new car sales by providing realistic values for trade-in's, it also offers the service department additional revenue for the reconditioning done in-house. Each dealer should be targeted a new to used ratio, which will stimulate this sector of the business, and prevent the present trend of selling good potential stock to independent traders for undervalued prices. If Audi SA and the dealers managed the entire life cycle of the vehicle effectively, it will create confidence in the market place.

8.3.6 Audi A-Plus programme

This programme was initiated to offer the Audi customer a range of products that would enhance the ownership experience. Essentially the rationale is that when a customer purchases a new or used Audi, they are offered a complete package that satisfies any need in relation to the purchase. For example arranging Audi specific financing, insurance and maintenance, a 'one stop' purchasing process. The products that are under development need to be competitive against similar commercially available products, and because they are associated with the Audi brand, they have to meet the expectations of the Audi customer. The core business of Audi SA is the manufacture, sale and after sales support of their products, and as such the expertise to develop and manage the value-added products has to be outsourced, and a strategic partnership developed with the service provider. The support for financial and product development from Audi AG was seen as a strength in the SWOT analysis. The various products under this programme have the potential to generate relatively high revenue, which in turn can be used for the further development and communication of the said programmes. Not only is this a business opportunity for Audi SA, but also the dealer network as it is able to generate additional income from commission earned on the sale of these products.

96 8.3.6.1 Freeway Plan

This is the maintenance product offered with each Audi purchased, new or used. Apart from the entry level A3 and A4, each new Audi sold comes standard with a 50 000 km or 5 year, which ever comes first, maintenance programme. This covers all services and repair costs for the vehicle, excluding glass, which is covered by insurance. The customer is able to extend the cover to a maximum of 150 000 km or 5 years, depending on their motoring requirements during the ownership period. The initial cost is relatively low, however due the time value of money aspect should the customer decide to extend the maintenance at some point after purchase, the lost interest is calculated into the extension cost. This is a disincentive to the customer, especially when purchasing a used vehicle, and therefore an average flat rate needs to be calculated, in which neither the customer nor the integrity of the maintenance fund is disadvantaged. Not only is this a benefit to the customer in that there is a fixed cost to their motoring expenses, but also Audi SA and the dealer network, because it keeps the Audi owner within the dealer network. This in turn generates wholesale parts business and labour sales making the after sales aspect of the dealers business more profitable. Some focus areas for the near future for Freeway Plan product are: Development of the administrators of the programme, giving them increased technical knowledge of product, and further integration of them within Audi SA and the dealer network to ensure smooth problem resolution. Monitor 'burn rate' — that is that a real cost of maintenance needs to be closely monitored, so that any potential out of the ordinary costs are identified early and do not expose the fund to unnecessary high risk. Develop the system to identify any trends in repairs, which potentially could identify product problems, and advise the relevant parties in Audi SA to investigate and resolve. Actively promote the advantages to the customer through direct communication channels in order to increase the level of extensions to the plan.

97 8.3.6.2 Audi Assist

To address the 'peace of mind' issue for the Audi customer, each vehicle sold comes with a 3 year roadside assistance product. This offers the customer access to a 24-hour toll free number where the following support services can be delivered dependant on the circumstances. The dispatch of an Audi technician to assist with minor mechanical problems. Recovery vehicle to transport the customer vehicle to the nearest dealer. Hire car arrangements to facilitate repatriation should the customer be away from home, alternatively accommodation costs for a specified time while the customer waits for repairs to be completed. Medical advice or assistance in the form of paramedic, ambulance etc. Legal advice for minor inquires. Unfortunately at the present moment, when the vehicle reaches 3 years of age there is no proactive follow up offering the customer the option of a extension, and this does cause huge aggravation when a customer requests assistance once outside the 3 year period. Audi SA needs to actively canvass those customers coming to the end of the product life and offer extension packages. This will ensure better customer relations as well as keeping the customer within the Audi support network thereby generating additional revenues.

8.3.6.3 Audisure

This product offers the Audi customer specific insurance on any Audi product. Because it is product specific, from an underwriting point, it is possible to obtain preferential rates due to the fact that there is no need to cover potential risk exposure by loading the premiums as with generic insurance products. As the profile of the Audi customer is generally lower risk in insurance terms with regards to age, income etc. and that the vehicle security systems are very high, a very competitive product has been developed. The short term development for Audisure with the existing customer database, is to expand the product base to include additional short term insurance products such household and contents. Although this is considered high risk insurance, the potential

98 exposure can be limited by selecting present low risk customers through the track record that has been built up on the database.

8.3.6.4 Audi finance

The majority of vehicles bought in South Africa are financed in some form or another. The structure of the financing of a vehicle has the potential to successfully conclude a sale or send the customer to a competitor who offers a better option. In order to be competitive any in-house financing needs to be extremely flexible giving the customer a variety of options to choose from which suits the individual needs. As many customers have a standing relationship with one or another banking institution for their private or business needs to sell a 'foreign' finance product relies on the association with the Audi brand and aggressively structured packages. The revenue that can be generated out of this venture for both Audi SA and the dealer network is enormous which then can be ploughed back into developing or subsidising further specialised financial products.

The success of these programmes depends solely on their ability to compete with products already established in the market place. Audi SA needs to constantly monitor the movements and latest trends and adapt rapidly to remain competitive. The dealers should also be incentivised to utilise these products to create a greater take off rate.

This is a concept of making the Audi brand a part of as many aspects of the customer's lifestyle, so that there is continuous brand reinforcement and subsequently optimising customer retention.

99 8.4 Operational Strategy: After Sales

The basis of an operational strategy for After Sales should attempt to address not only the issues relating to the customer and the service they receive, but also the development of the dealer. A dealer can no longer afford to base his profitability on purely the turnover from new car sales. Together with tough trading conditions, the gross profit margin on the sale of a new car is reducing and the dealer is being forced to develop previously 'not so important' departments to increase the absorption costs of its operating overheads. Obviously this previous statement does not mean that all dealers relied purely on new car sales for their success, but generally the emphasis for generating profit has always been the sale of new cars.

The Audi customer due to their profile, not only demands, but expects all dealings with a dealership to be professional, and the chances are that when purchasing a vehicle the service levels were as expected.

However, based on feedback from customers, traditionally the service levels received when the vehicle is brought in for a service are less that acceptable. The fact that Audi products have the access to an established dealer network and a supportive infrastructure was seen as a strength in the SWOT analysis. Typically the profile of the staff in the service department is that they are normally technically proficient, however lacking in people skills. This has often resulted in a confrontational situation in which there is no winner. The dealer loses potential after sales income as well as repeat new /used vehicle business as the customer moves to another dealer. If the expectations are not met at the new dealer the chances are that the customer will leave the Audi brand and go to a competitor.

Audi SA needs to address this issue urgently, as it is a contributing element to the overall development of the brand image. To do this, firstly there needs to buy-in from the dealer network in which they acknowledge that this is a problem area and that it is

100 affecting their business potential, then secondly, target front line service staff for training and development in people communications and relationship building.

The whole concept of relationship marketing as discussed in 8.3.2, needs to be integrated into the after sales strategy, in order to keep in contact with the customer on a regular basis, and keep them abreast of offers and developments within this sphere of the business. This will also alleviate the cyclic nature of the service business and ensuring better utilisation of capacity.

As discussed in 8.3.6.1, presently the dealer network enjoys a 'captive customer' for the first 50 000 km or 5 years, with the standard maintenance product offered on all Audi vehicles. The service interval for all Audi vehicles is currently 15 000 km which ensures that the dealer network will have the benefit of service and maintaining the vehicle for a minimum of 3 occasions. With the 30 000 km service interval on the cards for SA, it is important to extend this basic maintenance product to keep the customer within the dealer network for at least the same period or longer, to give Audi SA and the dealer an opportunity to generate revenue.

The main advantages will be: Low ownership cost in terms of service and maintenance for customer. High retention of customer at dealership and tracking by Audi SA. Higher turnover of the parts and accessory business. Supports the residual value of Audi products. This will in turn support the Pre-Owned programme. Support development of overall brand image.

The objectives of the overall After Sales strategy should hope to achieve the following: Strive to achieve a high level of customer retention. Target 'leadership' levels of customer satisfaction. Increase workshop and part and accessory contributions to levels that positively influence absorption costs. Develop a technical expertise base within the dealer network.

101 Develop front line service staff to offer professional service. Integrate the 'Relationship Marketing' concept in the overall service business.

These together will add value to the overall product, and ensure that the customer is constant contact with the dealer and most importantly the product.

The rationalisation of the dealer network will affect the service coverage Audi SA will be able to provide, together with the fact that there exist 'vacuum areas' where there is no dealer representation at all. This situation as far as the customer is concerned is unacceptable, and a unique strategy will have to be developed. This will take the form of a 'Service Only' dealer, where the market volume does not support the establishment of a full franchise dealer operation. In most cases this situation affects VWSA as well, and it is therefore possible to explore the option of amortising the implementation costs between the Audi and Volkswagen brands. An important element of this strategy is that is must not dilute the brand image of the marque by having a non-descript outlet not conforming to CI standards, and creating an impression with the customer that a 2 nd rate service level will be provided.

Because of the sensitive nature and the unique aspect thereof, the strategy will have to be carefully prepared, considering firstly the investment costs, and secondly the integration of the 'Service Only' dealers into the established dealer network.

8.4.1 Team Concept

Within the dealership there exist the opportunity to restructure the traditional departmental structure so as to offer a far more effective interaction with the customer, and the author has labelled it as the Team Concept. Within a dealer, a team or teams, depending on dealer size, consisting of members from each of the sales, after sales, parts and accessories departments will operate as a unit. The structure and operation of the team will be determined by the members as they will have complete autonomy on how they will operate as a unit. The main objective is to be able to attend to a customer will be able to be attended to regardless of what their

102 particular needs are, as each member through a process of multi-skilling, be in a position to deal with issues outside of their own portfolio. This does not imply that a sales consultant will be able to deal with for example with all after sales issues, but failing a specialist being available, the customer will be able to be 'processed' without having to wait or have to make a return trip. The enquiry will then be passed on to the relevant specialist as soon as he is able to deal with it. This requires trust amongst the members and a good understanding of each portfolio, and the important aspects is that the team assumes responsibility for the resolution of any customer contact that a member may have had.

The development of the teams begins with a training program that familiarises the participants with the team concept and objectives thereof, and then moves onto developing trust and unity in the teams that have voluntary joined. The importance of the training phase cannot be over emphasised, as it is the laying of good foundations that determines the success not only of the teams but also the concept. The 'buying in' of the dealers into this concept requires an approach from Audi SA that exhibits a full understanding and commitment, as it foreign to the present normal working structure and culture in a majority of the dealers.

8.5 SUMMARY

In this concluding chapter a practical and achievable strategy for the distribution and after sales success for Audi SA has been proposed. In doing so the author has taken the theoretical knowledge researched and applied it to the everyday operations that occur during the interface with the customer, being the dealer and the purchaser of the Audi product.

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106 APPENDIX A BASES FOR SEGMENTATION OF THE SOUTH AFRICAN PASSENGER CAR MARKET In order to facilitate analysis conducted in this study, the South African passenger car market was segmented on the basis of vehicle sales categories determined according to the following criteria.

1. Segmentation Criteria The following factors are considered in determining into which segment a particular vehicle model derivative is grouped: Price Physical size Engine capacity and number of cylinders Configuration, (sedan, hatchback, 2 doors, 3 doors, 4 doors, 5 doors). Equipment specification level. Relative position in the manufacturer's model range

The following are guidelines for the 4 segments identified in this study

Segment A Light cars at lower end, (entry level), of market. This class is generally restricted to hatchbacks or 3 door derivatives of base model ranges. Engine capacity ranges from 1300cc to 1800 cc.

Segment B Higher specification light to medium sized base model derivative sedans, station wagons and hatchbacks, with engine capacity ranging from 1800cc to 2800cc, depending on the equipment level of the vehicle.

107 Segment C Higher specification medium sized and base model derivatives of larger vehicles, with sedan and station wagon variants included. Engine capacity ranges from 2000cc to 4200cc.

Segment D Luxury specification, medium to large sized sedans, including station wagons and sports cars. Engine capacity ranges from 2800cc to 6000cc.

108