Analysis: Skoda's Potential Expansion Into US Or India

Discuss whether Skoda should consider expansion into either India or United States.

Skoda is Czech automobile manufacturer company. The company was founded in 1895. It was later acquired by Volkswagen. Skoda is known for its high-quality cars. The design of Skoda’s car is unmatched and people love the interiors of the car.

The purpose of the report is to see whether Skoda should consider expansion into either India or United States. It carries all the internationalization aspect. The company is renowned company and present in large number of countries. Entering into any country or internationalization aspect is very important for the growth of countries. Skoda enters into new market to gain new customers, to exploit its core competencies, to spread the risk of business in a wider market area, to achieve low economies of scale and to utilize resources of other countries. But the companies need to think strategically and consider a wider market research before entering into new market. Entering into market involves huge monetary and non-monetary investments. The brand value is at risk. So the following report conducts analysis for Skoda to choose either United States or India for internationalization. The company is also looking forward to reduce its manufacturing cost by opening its assembly plants in countries like India.

Skoda Auto is Czech automobile manufacturer. In Czechoslovakia, it was the only company who used to make cars (Machková & Collin, 2015). The company is founded in 1895. The headquarters of company are in Mladá Boleslav (Czech Republic). The company was initially founded as Laurin & Klement but later it was acquired by Skoda Works which is an industrial conglomerate. In 2000, Skoda became the subsidiary of Volkswagen group (Latif, 2017). The company is present in almost 100 countries (Parment, 2014). The aim of the company was to bring affordable and reasonable price of cars. The company looks forward for the partners who will help in making brand strong and better. Some of the models include Felicia, Octavia and SPARTAK etc. However there is shift in company’s aim. Now it started looking for luxury car segments which are reliable. The sports version like Rapid and Estelle has increased the sales of Skoda.

The report analyses the multiple aspects to come up to decision of choosing either India or U.S. The report analyses target and multiple factors like Economic, Social, Legal and cultural factors for India and United States with respect to Skoda. Some theories and literature review is done to apply frameworks. Various international strategy modes like Greenfield projects, strategic alliances etc. are considered before coming on any consensus. Frameworks like Hofstede cultural model, Porter’s Diamond Model etc. are considered in the study.

• The report is limited for the analysis of Skoda and not any other car manufacturing company.
• The research is limited to United States and India. Thus, it cannot be applied to any other developing and developed countries.
• The data and analysis are based on secondary research. No primary data analysis is done. So conclusion is based on secondary research.
• The analysis is done for current scenario. The external factors of any country are volatile. Thus analysis may not be valid for future scenario.

Skoda Auto: Brief history and company profile

The main body of report is divided into three sections: Target Market, International Strategy and Entry Mode.

The tag line of Skoda is “Emotionalizing the brand and give it a sharper profile in international markets". One of the main aims of the company is to take care of existing customers and attracts the new customers. The company looks forward to continue upgrade production processes and technologies. Skoda looks forward in producing quality products. It aims to sources its material from low cost producing countries. The company wants to use price as cost advantage in international countries. Skoda wants to increase its market share. Innovations in design, features and electronics can improve its automobile’s quality.

The following section will discuss the 4 factors of Diamond Model in context of India and United states to understand where Skoda could have competitive advantage over World competitors (Riasi, 2015).

This attribute of Diamond Model can be analyzed through PESTLE Analysis

Political: Indian government is favoring low emission or electric vehicles. Thus Skoda needs to strategies to bring the vehicles that have low environmental impact.

Economic Factors: Economic crisis in developed countries like United States has increased significantly which has affected the sales of automobile (Wood, 2016). So it is very difficult for Skoda to expand in United States. However, increase in income of developing countries like India will help in boosting its sale (Ramamurti, 2016). The sale of automobiles is stagnant in United States and other developed countries (Deyo, 2016). The main criteria required to approach developed country is innovation, which needs high capital investment from firm’s end.

Social and Cultural: Countries like United States generally prefer cycling and other pollution free mode of transport. In India, people consider vehicles as a status of symbol and there is growing demand forward. Thus Skoda should expand the market opportunity and expand it into India primarily because there is more opportunity lined up here.

In order to understand the cultural aspect, Hofstede Model is applied (Rallapalli & Montgomery,2015):

1. Power Distance: India has more power holder for direction as compared to United States. High power distance countries have more management directs. Communication is from top to down in the ladder and leadership style is directive. Here control seems to be familiar. The home country for Skoda i.e. Czech also has high power distance. Thus power distance is almost same for India and Czechoslovakia.
2. Individualism: It depicts the degree of interdependence in the society (Saleem & Larimo, 2017). In case of United States, it is expected that people look after themselves. India is both individualistic and collective society. The family is given importance and individuals are expected to take care of themselves and families. Thus Skoda needs to design a car in a way that meets not only Indian needs but family needs as well in Indian Scenario.
3. Masculinity: Both India and United States are considered to be Masculine because society is directed by competition, success and performance. Skoda is more than 100 year old company so in order to meet the expectation in both the countries; it needs to deliver high performance in terms of mileage, speed, design and innovation.
4. Uncertainty Avoidance: Countries like United States and India give fair acceptance to new ideas and innovative products. The people in these countries are ready to try new technology. However, India scores low on uncertainty avoidance so amount of regulations on meeting the security compliance is more in case of United States. Thus Skoda needs to have additional parameters when entering into U.S. Market.
5. Long Term Orientation: American businessman sees their businesses in short term where as Indian businessman lies in the middle of scale. Americans thrive for quicker result. So this makes strategic alliance difficult for Skoda in case of United States because Skoda still needs to form brand image in United States and that will take time (Beneke & Rozum, 2018).
6. Indulgence: United States is high indulgent society as compared to India. People in United States believe that work hard and play hard. So it is difficult for them to control their desires. Skoda products are more general. They are not exclusive. So it needs to bring desired and innovative product for U.S. market.

Technological Factors: India is considered to be excellent when it comes to technological advancement. Not only technical workers are highly skilled and smart but also the technological infrastructure of India is improving. In case of United States, technology advancement is better than India but the U.S. market is already saturated and thus affordable but innovative advancement can be done only in Indian Market.

Legal: There are more regulations, rules and quality standards in United States for Automobile Sector as compared to India. Skoda would be under pressure to comply these rules. Countries have different laws which makes difficult for international players to enter and start new businesses (Penrose, 2017). The FDI laws are stringent in case of both U.S. and India. Import and export laws vary across different nations. This particular framework makes Skoda or for that matter any automobile company to remain competitive globally.

Factors analysis for choosing between India and US

Environmental: The development countries like United States are more concerned about the harmful effect on environment. Also in United States people are more educated and thus take several steps in Environmental protection. However, in case like India such concerns are still at backend. So firm like Skoda need not to change much of its strategy and structure for expansion.

The Indian automobile industry has grown stronger from the global downturn. Sales across automobile segments have seen excellent numbers in the past. Due to high growth in both export and domestic markets, Indian industry has much to look forward to some clear challenges accompanying the opportunities in greener vehicles and alternative mobility. But these challenges are more in case of United States market. Skoda can leverage the opportunities through its capabilities and technologies. Skoda aims to develop product meet future market needs. As compared to United States, Economically and Demographically, India’s automotive industry is better positioned for growth which is servicing both domestic and export demands. There is predicted increase in working-age of Indian population. This stimulates the growing market for vehicles in India. Easier access to capital as compared to United States is expected to see passenger vehicles gaining volumes.

Some alliances or coordination are expected in order to enter Indian Market. Skoda can have   better access to manufacturing facilities, technology, distribution networks and service sector. The components sector holds stronger position to India’s profitability, cost-effectiveness and world renowned engineering capabilities. There are huge benefits in collaborations. The investment requirement is more favorable in Indian Scenario. Skoda can easily promote standardization in India and meet customer demands (Cavusgil & Rose, 2014). Indians OEMs have enough access to global technology and experience (Rugman & Verbeke, 2017). This permits Skoda to expand their range with few financial risks.

Inputs which are used as factors of production such as land, labor, capital, natural resources and infrastructure are factor inputs. India is favorable for Skoda expansion because of low wages in manufacturing, low labor rates which are less as compared to developed countries like U.S. The lower wages can provide more competitive advantage in the industry. India has a cost advantage over United States in terms of cost of manufacturing.

The United States government has stringent regulation to improve compliance of existing environmental standard as compared to Indian Government.

Global Integration- nation responsive framework

The framework will describe the main factors for internationalization strategy. The 4 types of integration strategy will depend on two factors: integration and differentiation. With these companies can follow any of 4 types of strategies i.e. multi-domestic where pressure to integrate with other companies is less and there is high requirement for differentiated products. Second is International Strategy where there is low pressure to integrate with supply chain home country partners (Balon & Barua, 2016). This is based on home country expertise. The requirement for differentiated product is low. The third strategy is global strategy where there is high pressure for integration. The full value chain is in the other nation where company is planning to expand. There is less requirements for innovative products. Transnational strategy is the last strategy which describes high pressure for both integration and differentiation (Meyer & Estrin, 2014). Skoda can follow global strategy in India where it can provide generalized and standardized products to Indian market. The need of differentiated product is less unless the product is meeting expectation in terms of mileage and other attributes. Also Skoda must leverage India’s value chain in order to bring economies of scale etc.

Hofstede Cultural Model and Porter's Diamond Model

Dunning OLI’s Framework

The framework is development of the internalization theory (Brouthers & Werner, 2015). It consists of following attributes

Ownership Advantage:

Skoda focuses on building car that owners enjoy. It mainly focuses on providing value to customer. Its unique selling proposition is motor industry. The company offers cars in all ranges. It provides basic, luxurious and family product. Thus expansion into international market will provide greater advantage in terms of catering all kind of audience. The competitive nature of Skoda is also reflected by pricing. Skoda products are designed environment friendly.

Location Advantages:

According to New Trade Theory, We see that both Network Effect and Economies of Scale attribute can play an important role in Skoda’s success. Skoda can leverage high economies of scale in India because of increasing demand of vehicles, lower production cost. Also, with increase in demand of vehicles in India, it is necessary for India to stop bandwagon effect and allow other companies to come and make price competitive.

Internationalization Advantage

Skoda should do FDI in terms of Wholly Owned subsidiaries or Exporting for further expansion. Skoda has merged with Volkswagen longtime back. Now Skoda can increase its efficiency by technology, transfer capital, management skills through its own networks. The establishment of operations helps in foreign country (Panibratov & Veselova, 2016). FDI is better for Skoda than licensing because than company can control its operation. Along with this maintain good relations with value chain partners can help in reduction in manufacturing cost and achieving economies of scale (Singh, 2016). In addition to this, company can understand Indian market through these suppliers and provide localized products (Verbeke & Asmussen, 2016).

Conclusion

The analysis above shows that Skoda which is acquired by Volkswagen should expand its operation in India rather than U.S. currently (Pavlínek, 2015). Skoda’s image of initial times is not prevalent in India. Many attributes like factors of production, culture, economic, market analysis support India over United States. The company should follow Global strategy to enter into Indian Market. It should have its own subsidiaries as mode of entry or expansion. This is in regard to leverage supply chain

References

Balon, V., Sharma, A. K., & Barua, M. K. (2016). Assessment of barriers in green supply chain management using ISM: A case study of the automobile industry in India. Global Business Review, 17(1), 116-135.

Beneke, J., & Rozum, K. (2018). Brand perception across cultures: A comparative study of Skoda’s brand characteristics in Poland and the United Kingdom. Journal of Business and Retail Management Research, 12(2).

Brouthers, L. E., Brouthers, K. D., & Werner, S. (2015). Is Dunning’s Eclectic Framework Descriptive or Normative?. In The Eclectic Paradigm (pp. 143-156). Palgrave Macmillan, London.

Cavusgil, S. T., Knight, G., Riesenberger, J. R., Rammal, H. G., & Rose, E. L. (2014). International business. Pearson Australia.

Deyo, F. C. (Ed.). (2016). Social reconstructions of the world automobile industry: Competition, power and industrial flexibility. Springer.

Latif, A. A. (2017). Volkswagen brand: the fall of an auto empire. Journal for Global Business Advancement, 10(3), 281-304.

Machková, H., & Collin, P. M. (2015). Market entry strategies of passenger carmakers-the case study of the czech republic. Central European Business Review, 4(3).

Meyer, K. E., & Estrin, S. (2014). Local context and global strategy: extending the integration responsiveness framework to subsidiary strategy. Global Strategy Journal, 4(1), 1-19.

Panibratov, A. Y., Dikova, D., & Veselova, A. S. (2016). Foreign Investment Motives of Russian Acquirers: An Extended OLI Perspective. In Graduate School of Management, St. Petersburg State University Conference Papers (No. 8686).

Parment, A. (2014). Auto brand: Building successful car brands for the future. Kogan Page Publishers.

Pavlínek, P. (2015). 22. Škoda Auto: the transformation from a domestic to a Tier Two lead firm. Handbook of Manufacturing Industries in the World Economy, 345.

Penrose, E. T. (2017). Foreign Investment and the Growth of the Firm 1. In International Business (pp. 33-48). Routledge.

Rallapalli, K. C., & Montgomery, C. D. (2015). Marketing strategies for Asian-Americans: guidelines based on Hofstede's Cultural Dimensions. In Minority marketing: Research perspectives for the 1990s (pp. 73-77). Springer, Cham.

Ramamurti, R. (2016). Internationalization and innovation in emerging markets. Strategic Management Journal, 37(13), E74-E83.

Riasi, A. (2015). Competitive advantages of shadow banking industry: An analysis using Porter diamond model. Business Management and Strategy, 6(2), 15-27.

Rugman, A., & Verbeke, A. (2017). Global corporate strategy and trade policy. Routledge.

Saleem, S., & Larimo, J. (2017). Hofstede cultural framework and advertising research: An assessment of the literature. In Advances in Advertising Research (Vol. VII) (pp. 247-263). Springer Gabler, Wiesbaden.

Singh, N. (2016). Outward FDI Type and Ownership Mode: The Effect on Home Country Exports. FOCUS: Journal of International Business, 3(2), 11-34.

Verbeke, A., & Asmussen, C. G. (2016). Global, local, or regional? The locus of MNE strategies. Journal of Management Studies, 53(6), 1051-1075.

Wood, E. M. (2016). Global capital, national states. Historical materialism and globalization.