CASE ANALYSIS

Is Porsche killing the Golden Goose?

By:
Audria Adelia Prameswari (29115361)
Presdya Nandi Wardhana (29115338)
Sekar Wisma Wiridiana (29115360)

Master of Business Administration Program

School of Business and Management
Institut Teknologi Bandung
 CHAPTER 1
CASE SYNOPSIS

More than 50 years after its birth, the 911 remaining the heart and soul of
Porsche. However, it is no longer the companys best selling model. The
number one spot has been taken by the Cayenne, a five seat sports utility
vehicle (SUV) launched by Porsche in 2002. The Cayenne has made Porsche
more appealing to people who are not sports car drivers but are happy to own
the sportiest SUV on the market and make no idea about Porsches true
identity as a high-performance sports and race car manufacturer.
In the years leading up to the global financial crisis in 2008-2009, Porsche was
attempting a hostile takeover of the much larger Volkswagen. Next as the
global financial crisis took hold, Porsche collapsed under a heavy debt burden
caused by the hostile takeover attempt. Volkswagen turned the tables and took
over Porsche and now Porsche now a division of Volkswagen, is clearly
gunning for economics of scale as it ramps up unit sales, and VW overall is
aiming to be the global leader in sales units.
Volkswagen corporate strategy is not without its critics. They are very much
concerned about brand dilution, in particular at Porsche but also other VW
premium brands, including Audi. However, although VWs total net income
may have increased, the groups profit margin are too low, which necessitated
implementation of company wide cost cutting program.
In fall 2015, VWs CEO was forced to resign in light of an emissions cheating
scandal and was replaced by Matthias Muller. Not only must VW now face
repercussions of recalling and retrofitting 11 millions vehicle the world s
largest vehicular recall it must also suffer billion of dollars in law suits and
fines throughout the world, from which it may take years to recover.
 CHAPTER 2
PROBLEM IDENTIFICATION

PORSCHE MARKET SEGMENT

Porsche no longer targeted the midsize premium sporty car segment which is
prefer to choose a traditional high performance sports car with the best model
and no back seat. Nowadays some of Porsche products cayenne and Macan
cover over to their main market segment and it become to midsize crossover
utility vehicle (CUV) or a five-seat (with a back seat) sports utility vehicle
(SUV). It causes the obscurity of Porsches true identity as highly-performance
sports and as and iconic sports car maker or the CUV and SUV car
manufacturer.
THE CORPORATE STRATEGY
Volkswagen (VW) one of Porsche competitor, known as peoples car with 2
adults and 3 children capacity got 110 billion euro of the market cap over eight
times larger than Porsche with 13 billion euro at that time. Next Porsche has
break-trough corporate strategies in 2008 2009 (at time that very close to the
global crisis) to takeover the VW with a heavy debt burden. Shortly after that
courageous strategy Porsche collapsed and next in 2012 VW turned the tables
and took over the Porsche.
VERTICAL INTEGRATION
Instead to build excess upstream capacity to ensure that its downstream
operations have sufficient supply under all demand conditions, the corporate
still to much concerned about brand dilution, in particular at Porsche but also
of other VW premium brands, including Audi. Though in the end it could
made the VW total income increase but it doesnt make the groups profit
better than before.
 CHAPTER 3
RELATED THEORIES

CORPORATE DIVERSIFICATION : EXPANDING BEYOND A

SINGLE MARKET

Answering the questions about the number of markets to compete in and

where to compete relate to broad topic of diversification. Diversification
increasing the variety of products or markets in which to compete. A non-
diversified company focuses on a single market, whereas a diversified
company competes in several different market simultaneously. there are
various general diversification strategies :
1. product diversification : a firm that is active in several different product
markets
2. geographic diversification strategy : corporate strategy in which a firm is
active in several different countries
3. Product-market diversification : corporate strategy in which a firm is
active in several different product markets and several different countries.
The concept of diversification is yet to be clearly defined and there is no
consensus on the precise definition among researchers. Apart from the
definitions by scholars like (Turner, 2005; Thompson & Strickland, 2006;
Aggarwal & Samwick, 2003), Johnson et al. (2006) says its a collection of
businesses under one corporate umbrella. Lending support to all the various
definitions, for this research diversification is defined in a broad sense as
expanding business fields either to new markets, new products or both while
retaining strong core businesses.
Santalo and Becerra (2008) allude to the fact that a company can diversify
when its cash flows become increasingly uncertain. Turner (2005) suggests
that when the core business no longer offers the investor the acceptable returns
for the risk taken, there is need to diversify. In the words of Barney (2006) if
the core business no longer offers growth opportunities, room for increasing
sales and profitability then business should diversify.
3.1 Diversification Strategies

Diversification strategies are used to expand the firms operations by adding

markets, products, services or stages or production to the existing business.
Kotler (2006) identifies three types of diversification strategies namely,
concentric, horizontal and conglomerate. Horizontal Diversification strategy
occurs where a company seeks new products that could appeal to its current
customers even though the new products are technologically unrelated.
Conglomerate Diversification Strategy takes place where a company seeks
new businesses that have no relationship with their present business or market
operations (Thompson & Strickland, 2006).
Collins and Montgomery (2005) divided diversification into two types related
and unrelated diversification. The two are analyzed in-depth, considering their
merits and demerits whereas Emms and Kale (2006) describes thevarious
ways and strategies adopted by diversifying companies as modes of
diversification.
Collins and Montgomery (2008) believe that related diversification involves
building shareholder value by capturing cross business strategic fits. The
combining of resources creates new competitive strengths and capabilities
(BCG, 2006). Related diversification may involve use of common sales force
to call on customers, advertising related products together, use of same brand
names and joint delivery. On the other hand, Thompson and Strickland (2006)
believe that many companies decide to diversify into any industry or business
that has
good profit opportunities. Johnson et al. (2006) noted that in most cases
companies that pursue unrelated diversification nearly always enter new
businesses by acquiring an established company rather than by forming a
start up subsidiary. The basis for this strategy is that, growth by acquisition
translates into enhanced shareholder

3.2 Risks and Rewards of Diversification as a Strategy

The corporate managers bring both a cost to the combined organizations as
well as the opportunity to manage the combined resources of the different
businesses (Wan, 2011). According to Collins & Montgomery (2005), a more
meaningful approach is to analyse the costs (risks) and benefits (rewards)
under the strategies of related and unrelated diversification.
Hoechle et al. (2009) argues that the major advantages of related
diversification are that it leads to operational synergies, which in turn develop
into long-term competitive advantage. Johnson et al. (2006) argue that most of
the advantages of related diversification stem from the fact that it allows the
company to enjoy economies of scope. Despite the above advantages related
diversification can still fail to reap the originally predicted returns and benefits
due to several shortcomings and demerits. Gary (2005) allude to the fact that
related diversification analysis at times underestimates the softer issues like
change management, and may tend to overestimate synergistic gains.
The Boston Consulting Group (BCG) (2006), have noted that business risk is
scattered over a set of diverse industries and one can spread risk by spreading
businesses with totally different technologies, competitive forces,
market features and customer bases. This in line with the Markowitz portfolio
theory in finance which suggests that diversification reduces a firms exposure
to cyclical and seasonal uncertainties and risks. Dos Santos et al.
(2008) also pointed out that a companys financial resources can be employed
to maximum advantage by investing in whatever businesses offering the best
profit prospects.
Campbell, Goold and Alexander (2006) identify that there is a big demand on
corporate level management to make sound decisions regarding fundamentally
different businesses operating in different industries and competitive
environments. This is often difficult to achieve where skills are not readily
available which is true of the current Zimbabwean brain drain phenomenon.
This was also echoed by Pindyck and Rubinfeld (2005). On the same line of
thought Shliefer and Vishny (2006) argue that corporate managers have to be
shrewd and talented to run many different businesses.

2.5 The Diversification- Performance Relationship

The effect of corporate diversification on firm performance has been widely

studied (Dimitrov & Tice, 2006; Yan et al., 2010; Hoechle et al., 2009;
Hoskisson & Peng, 2005; Wan, 2011; Wright et al., 2005 and others).
While this topic is rich in studies many researchers concurred on the lack of
consensus on the precise nature of the relationship between diversification and
firm performance. Some studies have shown that diversification
improves profitability over time citing a positive relationship (Yan et al., 2010;
Hoskisson & Peng, 2005; Wan,2011), whereas others have demonstrated
negative relationship and that diversification decreases performance

(Ozbas & Scharsfstein, 2010; Maksmovic & Phillip, 2007). Still others have
shown that diversification and
performance linkage depends on business cycle. Santalo and Becerra (2004)
explain conceptually and provide empirical evidence that no relationship
exists (positive, negative or even quadratic) between diversification and
firm performance. Santalo and Becerra (2008), concurring with Stowe and
Xing (2006), broadly conclude, (a) the empirical
evidence is inconclusive (b) models perspectives and results differ based on
the disciplinary perspective chosen by the researcher and (c) the relationship
between diversification and performance is complex and is affected by
intervening and contingent variables such as related versus unrelated
diversification, and mode of diversification.

In the words of Daud, Salamudin and Ahmad (2009), studies in the areas have
tended to provide inconclusive results due to inconsistent data, different time
frames, different performance measures and moderate variables. Mackey
(2006) argues that the contradictory results are related to; different timeframes,
various measures of profitability and different measures of diversification.
Andreou and Louca (2010) assert that the confusion is partly methodological
and partly theoretical. However, the diversification- performance puzzle was
summarized in the theoretical models outlined below as the theoretical
framework is reviewed.
 CHAPTER 4
CASE ANALYSIS & SOLUTIONS

From the case, we know that Porsche is trying to enhance its core competence by
doing corporate diversification. The type of diversification that Porsche does is
product-market differentiation. But, to become a board differentiator is not as easy as
it expected.

1. with the same resources, focusing on differentiating one aspect should produce
more attracting result than trying to differentiating all aspect does.
2. by being a board differentiator, Porsche might lose its brand recognition because
of the unclear positioning. Porsche used to focus on its niche market Sports car
market. However, when Porsche is a car company that produce not just sports car,
but also SUVs, sedans, and tracks, how should customers relates this company to
Porsche? Car industry as such a high competitive industry, there are a lot strong
competitors who are good at producing each kind of cars, like GMCs tracks.

So if Porsche is trying to produce tracks and differentiate them from the others, how
much should Porsche spend to compete with GMC? It will be a lot. Finally, Porsche
used to produce few cars but with high quality. Now, by expanding production lines,
the rapidly increase of quantity somehow will reduce its cars quality. Like in the case,
VW is experiencing the worlds largest vehicular recall because of quality problems
with diesel emissions cheat software in more than 11 million vehicles worldwide
(Rothaermel, 2015). Having quality problems might destroy a car company. In
conclusion, I think Porsche would not be successful in carving out a new strategic
position as a broad differentiator.

VW is now pursuing the horizontal diversification, which is able to offer products for
different markets and different customers. The strength of this strategy is that by
attracting customers from the rich who will buy luxury cars like Porsche, to the
middle class who can only afford Skoda and Seat, VW will gain more market share,
sale volume (in units) and net income. Also, VW can achieve reduction of competition
by diversifying its products to different market, so that its own brands will not need to
compete themselves. The disadvantages are increased risks, reduction in flexibility,
and losing focus of each division of its portfolio. Since VWs portfolio covers many
different market, it will suffer risks from every markets. Also, by having such a board
product portfolio, it is quite hard to change, like getting rid of the unprofitable
companies because of the large cost of exit. Losing focus of each division of its
portfolio is like what the case said, since VW has such a board portfolio with so many
different strategies, it sometimes unable to figure out the right direction for each of
them, because each one of them should have a different strategy. For example,
pursuing sale volume is not a suitable goal for the luxury brands like Porsche, since
they are supposed to focusing on quality development, but not the sales quantity.

CHAPTER 5
 CONCLUSION & RECOMMENDATION

CONCLUSION
In that fable, the famer actually take-away the golden gooses ability to produce the
golden eggs. For Porsche, it risk killing the golden goose, since Porsche is losing
focus on what it does best, but shift to a goal that not really fit its brand, which is the
units of sales. Porsche is known by its sports and racing car, but now it keeps its focus
on the SUVs and sedans because of the larger sales units. Customers might be
confused with Porsches positioning: is Porsche still the worlds finest performance
car manufacturers? (Rothaermel, 2015) Sports car should be the one brings the
golden eggs to Porsche, but now as Porsche keep developing in SUV and sedan,
and focus more on units of sales than the quality, it might eventually lose its golden
goose

RECOMMENDATION

 CHAPTER 6
LESSON LEARNED

From this case we learned that to be a market leader in the industry, do not
ever losing the quality while chasing the unit output. And also do not sacrifice
profit to earn unit of sales. A company need to be profitable in order to keep
running its business. So reduced price is not a good long term strategy for its
goal. Finally, try to keep what the company does best. Do not kill the golden
goose.
 REFERENCES

1. (Barney, J. (1991), Firm resources and sustained competitive advantage; and

Barney, J., and W. Hesterly (2009), Strategic Management and Competitive
Advantage, 3rd ed.