The Investigation of Volkswagen's Entry Strategy in China's Car Market

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MA MANAGEMENT DISSERTATION XIAOFENG WEN operation with fully depreciated assets. • Government policy, such as the protection of intellectual property, which requires patents and licenses in the industry. In this situation, the entry barrier is high. Furthermore, the entry barrier is also high when • The brand loyalty of customers is very high, or the existing players have close customer relations, e.g. from long-term service contracts. Threat of Substitutes: Substitute exists as an alternative choice for customer in the market, with lower prices or better performance parameters for the same purpose of the existing products. It means a threat for the existing firms as taking their customers, reducing their potential sales volume. Similarly to the threat of new entrants, the treat of substitutes is determined by factors like: • Brand loyalty of customers. • Close customer relationships. • Switching costs for customers. • The relative price for performance of substitutes. • Current trends. Competitive Rivalry between Existing Players: This force describes the intensity of competition between existing firms in an industry. High competitive rivalry may due to the competition on prices, products and service, promotions, margins, technology R&D etc. Competition between existing players is likely to be high when: • There are many players in the industry of about the same size, which means no firm dominates the market over others. - 31 -
MA MANAGEMENT DISSERTATION XIAOFENG WEN • Players have similar strategies. • There is not much differentiation between players and their products; hence, there is much price competition. • Low market growth rates (growth of a particular company is possible only at the expense of a competitor). • Barriers for exit are high (e.g. expensive and highly specialized equipment). Generic Competitive Strategies: In order to coping with the five competitive forces, Porter (1985) identified three main potentially successful generic strategic approaches to outperforming other firms in an industry, which include cost leadership, differentiation and focus (Barney 2007). Firms either can focus on: • Cost leadership: the attainment of the lowest unit cost base in the industry • Differentiation: the ability to charge a premium price for offering some perceived added value to the customer – e.g., improved quality. Note that it's the customer's perception that differentiates the product, not the product itself (Taylor, 2005). • Focus: firms should consider the degree of focus they wish to apply to their cost leadership or differentiation strategy. Porter (1980) suggests that an organization should concentrate on one type of generic strategy and should not mix each of the strategy together, as each generic strategy demands different and dedicated, resource base. If a firm intends to combine different generic strategies, the organization will end up being “being stuck in the middle” and not have the capabilities to compete effectively (Wickham, 2002). As a summary, the five forces collectively determine the profitability of the industry, which helps companies understand the opportunity and threat of an industry, and - 32 -
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The Investigation of Volkswagen's Entry Strategy in China's Car Market

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