Case 4- Porchecase 4 Porche

Brandon B o atcallie, Austin

Texas A&M University

Chase, Bobby Salehi, Ivo Skrisovsky, Alfredo Volio

I couldn't find the sports car of my dreams, so I built itmyself.

Frn-onraryo Ponscrr.e

IntroductionAfter over 100 years as an independent and highly suc-cessful car maker, in 2008, Porsche fell victim to thefinancial crisis when it failed to secure the capital neededto acquire a controlling stake in VW Auto Group (VW).During a reverse takeover in 2010, Porsche was forcedto hand over its keys to VW. Subsequently, VW man-agement, eager to use Porsche's expertise to assist otherbrands under the VW umbrella, began moving Porscheexecutives into key roles with other automotive brands.

As part of the Porsche corporate restructuring ini-tiative, VW appointed former Audi executive MatthiasMueiler as Porsche's new CEO. Mueller had consider-able experience with Vw-the world's third largestautomobile manufacturer controliing the Audi, Bentley,Bugatti, Lamborghini, Scania, Seat, Skoda, VW, andnow Porsche brands. Mueller's mission was straightfor-ward: integrate Porsche into the VW family, extend thePorsche product line, and increase production.

However, because of Porsche's successful trackrecord, there were many things to consider in the tran-sition of Porsche. Should Porsche diversif' and extendits product line while expanding production? How couldPorsche effectively combat possible brand dilution?Should Porsche acknowledge the trade-offs and focuson its pure play products-sports cars? How would themarket react to multiple sports cars offerings from Audi,Lamborghini, and Porsche?

HistoryFerdinand Porsche, the engineering genius and founderof Porsche, began carving his name in car history earlyon. In 1900, at the age of 25, Ferdinand introduced the

336

world to not only the first hybrid (petrol/electric) vehi-cle but an all-wheel-drive racecar as well. This splashl-introduction was merely the beginning of porsche'sunprecedented success. 1

Ferdinand had what seemed to be the perfect ratio ofbrains to passion when it came to designing sports cars.The German citizen, born and educated in the Czechtown of Liberec, not only engineered but aiso raced hisown models. In 1910, an Austro-Daimler sports car ofhis design won the prestigious Prince Henry Trials-with Ferdinand behind the wheel.

On April 25, 1931, Ferdinand porsche opened anotfice for "engineering and consultation on engine andvehicle design" in Stuttgart, Germany. The compan1.,Dr. Ing. h.c. F. Porsche KG, did not have to wait long forcontracts to build vehicles for German manufacturerssuch as Auto Union, Zindapp, NSU, and Wanderer. Inperhaps a bit of irony, Ferdinand's company designed andsent into mass production the "Ur Beetle"-the first V\4."Bug" and the basis for a design that has not lost its appealsome 75 years later. Ferdinand clearly possessed the abilitr.to anticipate and envision the future, maintain organizational flexibility, and empower others to create one of theworld's most valuable car brands. He was a racecar driverat heart, an engineer by trade, and employed his entrepre-neurial spirit on a daily basis in a growing company thatproudly carried his name. Ferdinand's son, known by allas Ferry, began running the company tn 1946 and, uponhis father's death in 1951 and with his own son at his side.officially took the wheel.

Without question, Porsche was a powerhouse in rac-ing, collecting victories in virtually all major racing eventsthroughout the world including the Can-Am racing series,Paris-Dakar Rally, Pharaoh's Rally, Rally Monte Cario,24 Hours of Le Mans, and the World Championship ofMakes. On the consumer side, in 1964, Porsche beganproducing what would become its most famous sportscar-the 911. Throughout the 70s and 80s, the 911 (andvariations ot) kept Porsche in the black.

In i.ts efforts to provide variety in both design and

:rice, in 1996, Porsche introduced the Boxster' The

3oxster was the first mid-engine production sports car

?orsche had ever manufactured and a big hit-selling as

r.rany in its first year as the entire 911 line-up combined'

.r.2002, Porsche surprised many purists by presenting a

sports-utiiityvehicle-the Cayenne' Once again' Porsche's

rewest offering outsoid al1 other models in its first two

.,'ears. In 200S, the Cayman was launched as a hard-top

..'ersion of the successfui Boxster and Porsche once again

.urprised the automotive world in 2010 by introducing

.he first four-door Porsche sedan ever-the Panamera'

By 2011, the company produced five models with a

:ombined total of 40 different trim levels' This increased

liversification brought higher shareholder returns-one

of Porsche's main objectives.

Economic and Political Challenges

-\s it was for most automakers, the economic climate

beginning in 2007 was challenging for Porsche' Oil prices

,vele at record highs, topping $100 a barrel' For every

ten cents that gasoline prices rose, approximately 1'000

trucking companies went bankrupt'2 The global econ-

omy strirggled to step out of the deepest recession the

US and Europe had experienced in decades' Consumers

rr.ere extremely price sensitive and unemployment in the

US hovered around 10 percent' Of particular concern

to Porsche were gasoline prices: as a sports car manu-

t-acturer, it was fighting the stereotype of a gas-guzzling

automobile segment.

Consequently, Porsche re-engineered many of its

offerings to provide (relatively) higher gasoline effi-

ciency.lor example, the 911 Turbo had an EPA estimate

of 18 miles per gallon (mpg) throughout most of the 90s;

however, the 2010 estimate was 24 to 25 mpg (depend-

ing on cylinders and auto/manual) and, as a bonus' came

u,iih roughly 75 percent more horsepower' In addition'

the hight soughi after Carrera (a 911 variation) offered

2+ toiZ '-pg,

tn. Boxster 26 to 29 mpg' and even the

four-wheel diive SUV Cayenne boasted 22 to 23 mpg'3

Unaccustomed to traiiing the pack, Porsche rekindled

its hybrid roots by engineering a hybrid Ca1'enne and

Panamera S with mpg ratings of 25 and 35' respectively'a

And yet, even with Porsche's efforts toward fuel

efficiency, US government actions have put even more

pressurs on the Bavarian carmaker' Under the direc-

iio,-, of President Obama, the National Highway Traffic

Safety Administration and the EPA increased the mpg

requirements for ali cars in the US through an old emis-

sions policy known as Corporate Average Fuel Economy

(CAF-E). In the past, CAFE had levied small fines on

carmakers with mpg ratings that didn't meet specified

regulations and Porsche and other high-performance

G obe: @ Jan Rysavy/iStockphoto com

car makers simplv absorbed the reiatir-elv minor fee'

However, the 2009 legislation rmposes not only a sig-

nificantly higher mpg requiren-rent, but a significantly

higher penalty as well: CAFE mandates that, by 2020,

automobile manufacturers and importers must have an

average mpg rating of 39 for cars end -10 ior trucks or

pay $35,700 for each individual car in violation' Upon

pur.ng., Porsche commented that if the 2020 C'\FE poli-

ii., n.. enforced, it simply won't be able to sell cars in

the US.

On a more positive note, economic support tor

Porsche is strong in its German homeland' Germanv is

the third largest exporter in the world.T Union workers

are protected by strong labor laws and wide support'

and approximately 93 percent.cif the German workforce

is unionized.s Manufacturing employees constitute

approximately 30 percent of the nation's workforce'e

Though Germany has not been immune to the global

recession, Porsche has continued to enjoy a supportive

manufacturing infrastructure.

I nd ustry CharacteristicsThe sports car industry faced its share of economic

woes throughout the latter half of the 20th century with

many sports car makers experiencing fatal cash flows'

Lamborghini declared bankruptcy in 1978' It was later

revived and sold to Chrysler only to then be sold to the

Suharto family in 1994 and sold again to Audi in 1998'10

In that same year Bentley, Bugatti, and Audi (and thus

Lamborghini) were acquired by VW. Aston Martin'

which had sold a controlling share to Ford in 1987, was

bought outright by Ford in 1994 and then sold again in

200i." Jaguar was also bought and sold by Ford in 1990

and 2007, respectively. Getting out ofthe gate even ear-

lier, Fiat acquired Ferrari in 1969, Alfa Romeo in 1986'

and Maserati in 1993.1'] Even so, through it all, Porsche

managed to not only stay independent but, more impor-

tantly, financially buoYant.

Porsche competes in a market segment where rel-

atively few can iompete. Manufacturing a car of any

caliber-no less the caliber of Porsche-requires size-

able capital investments. Additionally, the engineering

expertise required to design a car capable ofcompeting

wiih famboighini, Ferrari, Aston Martin, Porsche' and

others keeps utt Uot the truly intent from entering the

field.Though there seem to be several supercarloptions

like the Mclaren MP4' Ferrari FXX, and Ferrari Enzo

that cost more than $500,000, consumers have few

A supercar is typically an exotic or rare sPorts care whose perfomance is hiqhly

super ative to contemPorary spotls cars (Supercars/Exotic Cars TopSpeed com

http:,/,/www.topspeed.com/ca rslsu percars-exotic cars/ke 1 77 htm l)'

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alternatives-if any-for a mid to low g100,000 carlike the Porsche 911 Turbo_particularly one thatloutl: r1.- supercar pe.formar.ce. Co-pa.ri., includ_ing BMW, Nissan, and GM have each produced one ortwo cars comparable in price and performance to thePorsche line, but their offerings do not present the pres_tige or variety of porsche,s emblem or firll lineup.,,

Sports car enthusiasts are few and fickle; trend con_scious buyers are inherent to lurury and high_end mar_kets. That means porsche must constantly innovate tokeep up with trends. As evidenced by the short lifetimesof independent sports car manufacturers over the last30 years, sutviving in this tlpe of a market is extremelychalle-nging. Despite this, porsche's greatest challengewould appear to lie in the impending CAEE regulations_regulations that could spell an end io porsche saies in itsnumber one market, the US.ra

$l:!l_Ire_nd Toward Emers insECOnOmies

Many automotive firms have sought international expo_sure to increase their market share. In 2010, porschesold 14 percent of its volume in Germany and, over 26percent of its volume in the US. Given the possibility ofCAFE regulation enforcement, porsche hai been diver_si$zing its international scope. China, for example, hasbecome an area ofextraordinary expansion for porsche,accounting for approximately 15.6 percent of overalisales (see Exhibits lA and 1B). Curient management

Exhibit 1A Units Sold per Multi_Geographic Market: 2OO9 to 2O1O

believes China will be the largest consumer segmentfor Porsche within two or thre-e years.ts To encouragethis new market, porsche has even begun building racetracks for Porsche drivers on the ma"inland of China.Depending on this level and pace of expansion in Chinais not without risk, howev... Th" Chinese governmenthas increased scrutiny of foreign operation's within itsborders and firms investing in China face uncertaintywfren dealing with the undervalued yuan.i6 yet, withplans to alloW a gradual increase ir, ,ralue of local cur_rency and boasting the most rapid economic growth ofany country at the time, China has too much potential asan export market to ignore.

Typrcally, in a capital-intensive industry, efficientinternational expansion of productior-, yi.iJ, greatereconomies of scale and increases markei penetration.Other automakers, such as VW and GM, .-ptoy a trans_national strategy by modifying current -od.l, accordingto the demands in international regions. porsche, how-ever, employs a global strategy whereby it offers the samemodels for the whole world. This lower risk trade_ofThelps protect the porsche brand from international diiu_tion and enables porsche to remain consistent with regardto costs in its strategy forged in Germany.

. Porsche has always expanded to international mar_kets exclusively through exportation_a Iess expensiveoption as compared to greenfield ventures or establish_ing new bases of operation. Inherent to multinationalexpansion are increasingiy complex economic andpolitical risks. Porsche's strategy hedges against such

United States

Lhrna

Germany

Olher European Countries

Middle East/Africa

United Kingdom

Italy

Japan

France

Canada

As a Dacific

-a:i^ Anrerica (excluding Brazil)

Russia

Austraiia/New Zealand

Total

18,958

7,708

12,506

6,7 49

5,941

4,926

3,930

2,915

2,010

1,622

1 ,116

z,tlJ

1,278

1,076

n/a

72,858

22,181

13,254

11,911

8,407

6,27 5

6,157

3,655

2,775

2,432

1,823

1,660

1,441

1,302

1,148ao4

85,202

17.0%

7 2.0"/o

-4.8%24.6%

5.6%

25.0%

-4.8%21 .0%

12.4%

48.7%

1.g%

6.7"/"

n/a

16.9%Sou -ce l::a adaoted from http:/,/quote.morn in gstar.com

=

i

i

United States

China

Germany

Other European Countries

Middle East/Africa

Un'ted Kingdom

Italy

Japan

France

Canada

Asia Pacific

Latin America (excluding Brazil)

Russia

Australia/New Zealand

Brazil

26.0"/o

10.6%

17 .2"/"

9.3"/o

8.2"/" .

6.8"/"

5.4%

4.0"/"

a oo,l

L,a /o

1.5%

2.9%

1 00/

4 trO/

n/a

26.0"/"

15.6%

14.0o/"

9.9%

4.3%

J.J /O

2.9%

1. | /O

1.9"/"

1.7%

1 trO/

4 )O/t.J/o

o.9%

Source: Data adapted from http://quote.morningstar.com

Exhibit 1B Percentage of Sales per Multi-Geographic Market: 2009 to 2010

complexity by focusing solely on exportation rather

than manufacturing expansion, acquisition, and licens-

ing. With the exception of its contract with Valmet inAustria for the Boxster/Cayman, Porsche produces all

of its cars within its labor union dominated, Bavarian

borders.

Product OualityPorsche. There is no substitute.

Totw CnursnRrsrv Busnsrss, 1983

High-performance sports cars are generaily high-maintenance, low-reliability vehicles. To consistently

perform as intended, most sports cars need frequent

and expensive attention and maintenance. In March

2010, J. D. Power and Associates ranked Porsche as

providing the best long-term reiiability of any brand inthe US.17 What makes this designation truly exceptional

is that the comparison was not made solely within the

high-performance sports car segment, but was extended

to all automobile lines including sedans, SUVs, trucks,

etc., offered by such reputable brands as Toyota' Ford,

BMW, and Honda: truly an extraordinary accomplish-

ment for any vehicle within any segment, but even

more so for one within the notoriously temperamen-

tal high-performance sports car segment. Additionally,

|. D. Power and Associates market researchers hailed

the Porsche production plant in Stuttgart as "the best

car factory in the world."t8

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To

Jo

lnnovationPorsche iargely generates innovative technologiesthrough its racing programs. According to Porsche

Motorsports, Porsche "is the most successful manufac-turer by far in the history ofinternational sports cat rac-

ing."L With over 50 years of racing experience, Porsche

has accumulated a wealth of technological expertiseand employs some of the brightest engineering minds

in the world. Porsche has consistently developed class-

leading technologies that competitors find diffi-cult to imitate. For example, the seven-gear Porsche

Doppelkupplung (PDK) system allows drivers to shiftbetween gears without interrupting the flow of power.

The Porsche Torque Vectoring (PTV) system can sense

the vehicle steering angle and speed, accelerator pedal

position, yaw rate, and vehicle speed to vary the torque

distribution to rear wheels to ensure more predictable

and stable vehicle maneuvers at all speeds. Ceramic com-

posites are utilized in various vehicle components, such

as brakes and clutch piates, to provide lightweight, dura-

b1e performance.20 The technology Porsche has devel-

oped-and continues to develop-produces exception-ally reliable performance at comparatively low prices.

Porsche Strategic PartnersClearly, depending on racecar technology for the lion'sshare of innovation can serye a car maker well in many

ways. Nevertheless, Porsche is neither above nor hesitant

to develop strategic alliances as needed when particular

o

(-)

+

L

technologies are not within its immediate grasp. Whether

through its highly seiective paid internship program2'

or alliances formed with other automakers to receive a

crash course in hybrid technology,22 Porsche has forged

partnerships to keep its business on the cutting edge.

In one of its more forward-thinking moves, in 1999,

Porsche bought a 49 percent interest in Miseschke

Hofmann und Partner (MHP), a specialty IT technol-

ogy and process improvement group and SAP (Systems,

Applications, and Products in Data Processing)

Implementation and Service Partner. Initially, the ven-

ture was an equity strategic alliance in which MHP sub-

contracted to consult and improve Porsche processes.

This vertical complementary alliance helped Porsche

Iearn new business techniques and technologies.

Subsequently, Porsche bought a controlling interest ofMHP (74.S percent) and MHP served as the exclusive

provider of IT improvements and process engineering

for Porsche23while continuing to serwe outside clients-mostly in the automotive industry. In 2001, SAP AGnamed MHP as the first Special Expertise Partner SAP

for the automotive category. MHP was also rated SAP

Silver Partner Service and SAP Channel Partner Gold.

MHP's contributions to the Porsche manufacturing pro-cess allow several manufacturing advantages, includingthe ability to produce the Cayenne, Carrera GT, and

Panamera at the same plant and on the same line inLeipzig, Germany.2a

Porsche also engages in alliances not requiring equity

ownership. Concurrent with its launch of the Boxster

in 1996, Porsche announced it would sub-contract pro-duction to a non-German manufacturer for the firsttime. With Porsche building the engines and various

other components in its main factory in Zuffenhausen,

the state-owned Finnish manufacturer-Valmet-produced the majority of the Boxster line, adding pro-

duction of the Cayman in 2005. In 2008, and with the

Cayman/Boxster production contract set to expire in2012, Valmet announced it would begin production on

the Fisker Karma piug-in hybrid sports car beginning in2012.25 Porsche's Deputy Chairman, Holger P. Haerter,

confirmed the Valmet contract would end in 2012, and

announced that Magna Steyr Fahrzeugtechnik (MSF) of

Graz, Austria would take over production of the Boxster

and Cayman.26 A year later, Porsche paid MSF an undis-

closed sum to cancel the contract and it is now expected

that production will move to the factories of bankruptKarmann Ghia-now the property of VW.27

Diversification: SUVs and Sedans

While the Porsche brand name and product quality

never wavered, in the mid to late 90s it became clear that

customer preferences were changing' Particularly in the

US-Porsche's biggest export market-the SUV began

to dominate the road. Porsche had to decide if it wouldcontinue focusing on its traditional two-door sports car

models or further diversi$' its product line by offeringnew models that departed from the historic Porsche

image. Purists argued that extending the product linewould dilute the Porsche brand name and ultimatelydbstroy the distinct Porsche image. Others argued thateconomic growth made it worth the risk, as existingproduct sales were flat. In the end, Porsche decided to

extend its product line to include a SUV-the Cayenne.

Despite the radical departure from its niche, the 2002

introduction of the Cayenne was extremely profitableand helped fuel Porsche's growth for several years. As

for its reception in the auto world,

On one level it is the world's best 4x4, on another it is

the cynical exploitation of a glorious brand that risks

long-term damage to that brand's very identity in the

pursuit of easy money.. . So 1 applaud the extraordinaryCayenne and wish it every success while at the same

time still wishing, in part at least, that it had never been

built."

Having weathered the stigma of introducing a SUV,

in 2009, Porsche offered another first: the four-doorPanamera sedan. With global economic tensions increas-

ing in 2008 and 2009, consumer tastes for Porsche's tra-ditional high-performance two-door models flattened.Nevertheiess, sales of the Panamera and Cayenne mod-

els grew significantly.

LoyaltyWhen Porsche decided to enter the SUV market withits luxury Cayenne model, it surprised the auto industryby locating its new assembly plant in Leipzig, Germany.

Many observers believed Porsche should iocate the

plant in either central or eastern Europe where labor

costs were very low, or even perhaps in the US (as had

Mercedes and BMW) where it could be close to its majormarket. The critical issue driving Porsche's Leipzig plantdecision appeared to be the primacy of Porsche's strat-

egy of quaiity, craftsmanship, and engineering excel-

ience. Ultimately, maintaining brand image (while, par-

adoxically, simultaneously upsetting that brand image)

was much more important to Porsche than saving onlabor costs-especially when assembly costs compriseonly a small portion of overall vehicle cost.2e In the end,

Porsche emphasized design, research and technologydevelopment, and marketing to maintain its reputation

for a commitment to excellence.to

In North America, Porsche aficionados tend to be

college-educated men between 36 to 55 years of age

with an annual gross income in excess of $380,000 per

ffili"

'

year. They value innovation and independence andare often senior executives, medical professionals, andentrepreneurs.3r This customer segment buys Porschebecause of its innovative features, exceptional styling,and European origin.

Introduction ofnew features and innovative technol-ogyby BMW, Mercedes, and Lexus prompted Porsche toimplement lean production practices. However, becausePorsche produces a limited number of models, its switchto lean production practices was somewhat easier thanthat of its competitors. In addition, Porsche engineershave been able to keep vehicle performance and han-dling of their vehicles at the forefront of the sports carsegment. As a result, Porsche has enjoyed record sales

and profit (see Exhibits 2A and 2B). In early 2010,

with only a handful of focused car-making companiesremaining, Porsche led the pack.

The Prestigious CompetitionThe sports car manufacturing segment faces a compli-cated, competitive environment. Changing industry

-dynamics frequently present Porsche's managementteam witl-r rigorous obstacles to overcome. Porscheoffers several product lines of sports cars available inmany geographic markets. Porsche focuses on qualityand not quantity and as a resuit and fully B0 years afterits founding, Porsche only offers five different car mod-els: the Boxster, the Cayman, the 911, the Panamera, andthe Cayenne.

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to

Exhibit 2A Income Statement of Porsche Automobi/ Holdinq SE

Source: Data adapted from http://quote.mornlngstar.com

Revenue

Other operaLing income

Personnel expenses

Other ooerating expenses

lncome from investments

lnterest result

lncome from ordinary activities

Taxes

Profit/loss after tax

Withdrawals fro.n retained earnings

Transfer to retained earnings

Net profit available for distribution

0

641

,18

oJt

9,850

-8518,991

0

8,991

0

-L LAq

4,496

5

52,790

-77*55,407

2 aa)

-7 46

-443trtrt

-9961,004

O

8

Exhibit 28 Balance Sheet of Porsche Automobil Holdlng SE

24,171

4,348

230

B87

F)

30,289

16,977

1,572

7,000

4,7 40

30,289

24,838

2,703

1,202

2,164

263

31 ,170

7,993a 241

10,561

9,245

31 ,170

Source: Data adapted from http://quote.morningstar.com

Assets

Financial assets

l-(ecerva bles

Olher receivabres ano assets

Cash and cash equivalents

Prepaid expenses

Equity and liabilities

Equity

Provisions

Liabilities to banks

Other liabilities

,,-ffirm

year. They value innovation and independence and

are often senior executives, medical professionals, and

entrepreneurs.3l This customer segment buys Porsche

because of its innovative features, exceptional styling,

and European origin.Introduction ofnew features and innovative technol-

ogy by BMW, Mercedes, and Lexus prompted Porsche to

implement lean production practices. However, because

Porsche produces a limited number of models, its switch

to lean production practices was somewhat easier than

that of its competitors. In addition, Porsche engineers

have been able to keep vehicle performance and han-

dling of their vehicles at the forefront of the sports car

segment. As a result, Porsche has enjoyed record sales

and profit (see Exhibits 2A and 28). In early 2010'

with only a handful of focused car-making companies

remaining, Porsche led the pack.

The Prestigious CompetitionThe sports car manufacturing segment faces a compli-cated, competitive environment. Changing industrydynamics frequently present Porsche's management

team with rigorous obstacles to overcome. Porsche

offers several product lines of sports cars available inmany geographic markets. Porsche focuses on qualityand not quantity and as a result and fully 80 years after

its founding, Porsche only offers five different car mod-

els: the Boxster, the Cayman, the 911, the Panamera, and

the Cavenne.

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Exhibit 2A Income Statement of Porsche Automobil Holding SE

Revenue

Other operating income

Personnel expenses

Other operating exPenses

lncome from investments

lnterest result

lncome from ordinarY activities

Taxes

Profit/loss after tax

Withdrawals from retained earnings

Transfer to relained earnings

Net profit available for distribution

0

641

-to_.631

9,850

-of, I

8,991

0

8,991

0

-4,4954,496

5

52,790

-77

-55,4072,992

-7 46

-443tr82

-9961,004

0

8

Source: Data adapted from http://quote.morningstar.com

Exhibit 28 Balance Sheet o{ Porsche Automobil Holding SE

24,838

2,703

1,202

2,164

lb3

31 ,'1707 002

3,371

'10,561

9,245

31 ,170

24,771

4,348

230

BB7

5J

30,289

16,97 7

1,572

7,000

4,7 40

30,289

:l!rce: Data adapted from http://quote morntngstar.com

Assets

F nancral assets

Receivables

Other receivables and assets

Cash and cash equivalents

Prepaid expenses

Equity and liabilities

Eou ity

Provisions

-;abilities to banks

Other liabilities

Two of Porsche's three most recent additions, theCayenne and Panamera models introduced rn 2002 and2009 respectively, compete mainiy with other prestigebrands.i'The Cayenne is offered in four different modelsranging from the stock Cayenne to the Cayenne TurboS. Its main competitors are the BMW X6 M, Mercedes-Benz ML63 AMG, and Audi Q7, among others.32 TheBMW X6 M is slightly faster than the Cayenne TurboS with a 0-60 of 4.0 compared to 4.1 for the porsche.33

The Mercedes-Benz ML63 AMG is less expensive thanthe Cayenne but siower with a 0-60 of 4.6 seconds. TheAudi Q7 is the slowest of the pack but has more interiorspace and torque than the Mercedes.3l Each model hasdistinct advantages and disadvantages when comparedto the Cayenne, making it a very competitive arena.

The Panamera is offered in seven different modelsranging from stock to the Turbo S. The panamera wasintroduced in 2009 to compete against the BMW M5,Mercedes-Benz 565 AMG, and Audi S8, among others.35The BMW M5 is a sporfy luxury sedan but significantlyslower than the Panamera Turbo S with a 0-60 of 4.4compared to 4.0 for the Porsche. However, only the M5offers a standard gear box. The Mercedes 565 AMGoffers the smoothest ride of the four and garners higherrankings on spaciousness and comfort. The Audi Sg isagain the slowest of the group but offers exceptionalinterior quality. The Panamera competes directly againstthese models and has been touted to be the fastest luxurvsedan in the world.36

The Boxster and Cayman are also relativeiy recentadditions to the company's offerings. The Boxster wasfirst introduced as a roadster in 1996, the same yearBMW launched lames Bond's 23. The Cayman waslaunched ten years later, in 2006, as a coup6 derivedfrom Porsche's second-generation Boxster convertible.Today, the Boxster is offered in four different models:Boxster, Boxster S, Boxster Black Edition, and BoxsterSpyder. The Cayman is only offered in three differentmodels: Cayman, Cayman S, and Cayman R. TheseBoxster and Cayman models compete against the BMW24, Mercedes-Benz SLK models, and Audi TT, amongothers.rT The 24 is considered to have a more luxuriousangle when compared to the Boxster or Cayman. The-\lercedes offering in this roadster class has significantlyless horsepower and fewer sport options. Overall, theBo\ster and Cayman models compete well against theircompetitors, most notably in reliability as, in 2010, theBorster rvas rated the most reliable car, regardiess of:rtrdel. in the world3s (see Exhibit 3).

i-:::,:: :-:^:s are rve 1 estab ished as status symbols, represent the high-::: ': -- :' :-::s-a-shlc, and command a loya consumer fo/lowing that: -:: :-::::: :r :':-is {Roume/iotis, J.D. eA11, February 10). Defining. -. :-:-:,. :-: -::s ,/,/ClV /ns,ght. http:,//www.whitefieidconsulting.com/

Porsche's fifth and most recognized offering is theiconic Porsche 91 1. The 9l I was introduced in 1963 andboasted an air-cooled rear-engine design, independentrear suspension, and a swing axle pioneered by porsche.Over its aimost SO-year lifetime, the 911 had undergonecontinuous development, though the basic concept hadremained mostly unchanged. Among its many awards,the 911 ranked fifth in the 1999 international poll forthe Car of the Century award. Today, the 911 is offeredin over 20 stock models. Most models are variations ofthe Carrera, Targa, Turbo, Black Edition, or GT. ThePorsche 911 competes with the Ferrari Enzo, AstonMartin V12 Vanquish, Lamborghini Murcielago, andBentley Continental GT, among others.3e These super-cars offer outstanding performance but are extremelr.expensive with price tags in the range of $250,000 to$400,000. Porsche on the other hand has been able toproduce equal performance and prestige, yet at moreaffordabie prices ranging from $130,000 to $145,000for the Turbo trims and up to $245,000 for the GT2 RS.In addition to the supercars, the 911 competes againstthe BMW M6, Mercedes-Benz SL-Class, and Audi Rg,among others. These competitors have similar brandprestige as Porsche but lack in some aspects of sportperformance. Furthermore, the 911 faces competitionfrom less prestigious brands that deliver comparableperformance. The Nissan GT-R and Dodge Viper, forexample, both boast excellent performance figures andlower price tags than the 91 I but lack the pedigree of thePorsche line.at)

The price range and performance varies greatlvamong the five model lines and their respective trimlevels. Boxster, Cayman, and 911 models target sportscar enthusiasts, whereas Panamera and Cayenne targetluxury vehicle and SUV market segments, respectively.Each model not only meets but with additional sportsperformance, exceeds the standards of their respectiveautomobile class. In addition to the five productionmodels, Porsche also manufactures track-ready race-cars. Taken together, Porsche's model offerings providea wide selection for many needs and different stages ofliie.

lnfluence of the VolkswagenGroupIn 2010, VW employed about 400,000 employees, oper_ated 62 production facilities worldwide, produced 200different vehicle models at a rate of 30,000 vehicles perday, and was active in more than 150 countries. VWconsists of two main divisions: the automotive division(VW Group) and the financiai services division. Theautomotive division is comprised of 10 different auto-motive brands: VW passenger cars, Audi, Skoda, SEAT,

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Exhibit 3 Porsche Awards and Accolades

Sou'ce: Dara adaplod'ron r-tp://q -ote.no'ni.gsrar.com

201 1

201 1

2o1o

2010

2010

2010

2O10

2010

2010

2010

2010

2010

2009

2009

2009

2009

2008

2008

2008

2008

2007

2001

2007

911

911

Boxster

Boxster/Cayman

91 B Spyder

Cayenne

Panamera

Panamera

Porsche Brand

Porsche Brand

Porsche Brand

Porsche Brand

Panamera

Cayman

911

911

Boxster/Cayman

911

Porsche Brand

Porsche Brand

Porsche Brand

Boxster/Cayman

Boxster/Cayman

Auto P acifi c Best Sportscar-Veh icle Satisfacti on Awa rds [VSA)

Car and Driver Editor! Choice

Car and Driver Best Handling Car in America

Car and Driver Editor's Choice

Edmunds.com Insideline Most Wanted

MotorTrendSUV ol the Year

About.com Cars-Best New Cars of 2O1O

Car and Driver Editor's Choice

Kelly Blue Book Brand lmage Awards-Coolest Brand

J.D. Power and Assoclates #1 : lnitial Quality Survey

Auto Pacific ldeal Vehicle Awards (lVA) #1

J.D. Power and Associates APEAL Study-#1

Bloomberg Car of the Year

Motor Trend Best Drivers Car

Automobile Magazine'sAll-Stars Award

Robb Reporf Best ol the Best

Car and Driver Magazine's 10 Best Cars Sold in America

Edmunds Edilors' Most Wanted Award

Luxury Institute! Top Luxury Automotive Brand

J.D. Power lst in lnitial Ouality Survey

J.D. Power and Associates APEAL Study-#1

J.D. Power and Associates Best Premium Sports Cars

Car and Driver's "Ten Best"

Bentley, VW commercial vehicles, Scania, Bugatti,Lamborghini, and Porsche. Each brand within the auto-motive division is led by a brand CEO and Board ofManagement. The financial selices division is the larg-est automotive financial services provider in Europe and

offers dealer and customer financing, leasing, bankingactivities, insurance activities, and fleet management.

At the corporate level, VW is charged with becom-

ing the "leading automotive group globally." VW'sStrategy 2018 sets forth the roadmap to achieve this goal

using its unrivaled distribution capabilities, best-in-ciass

manufacturing and technology, and superior quality.Best practices are leveraged across brands, and purchas-ing, production, and distribution synergies develop as

brands work together.While the VW brands compete in a number of con-

sumer markets and segments, VW's flexible engineer-

ing design and architecture processes allow its brandsto share compatible components to customize vehicles

and meet regional customer preferences. To promote

local customization, production facilities are locatedin various markets including China, Russia, the SlovakRepublic, the Ukraine, Kazakhstan, Spain, France, theUS, Brazil, and Argentina.

The Porsche brand will play a key role within theVW family in various global markets. VW's execu-tive team plans to fully integrate the Porsche brandinto the group by the end of 2011 via a muiti-stagetransaction. It is expected that Porsche will contrib-ute to the group synergy and help other group brandsimprove in innovation, manufacturing, and qualityby sharing technology, research and development,components, and platforms. Product line extensionsare planned to produce new Porsche vehicles that rvi1l

meet emerging customer demands in various markets.Production goals are aimed at increasing Porsche production from 80,000 units to 150,000 units annuallr'within five years. VW's distribution network will be

leveraged to introduce the Porsche brand into ner'markets.al

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Overview of Strategic ChallengesVW's Strategy 2018 calls for the company to become"the most successful and fascinating automaker by2018." Over the past 15 years, VW Group has acquiredmore than half a dozen brands including Porsche,

Lamborghini, and Bentley. Porsche wiil help VWachieve its goals by sharing its technology with otherVW brands, increasing production, and diversifyingthe Porsche product line. For example, VW has already

announced its plans for Porsche to launch the Cajun(pronounced CAY-OON) a smaller, more fuel-efficientversion of the Cayenne SUV. Also, rumors have been

circulating that an even smaller version of the Boxster

will begin production by 2013. VW has seen the success

of Porsche's recent diversification and is looking for an

even broader offering.

However, Porsche has traditionally been a top-tiersports car company, producing variations of the leg-endary 911 platform. Its newest product offerings-theCayenne and Panamera-were the hands-down sporti-est options within their respective segments. For exam-ple, the Panamera Turbo S was the fastest sedan in theworld after less than two years of production. Furtherextension of the sedan or SUV lines could lead to per-formance dilution.

By complying with VW's Strategy 2018, the Porschebrand would evolve from a focused approach to a

broader brand of car segments. Porsche would no ion-ger solely focus on its traditional target customer butwould instead be forced to appeal to multiple consumersegments. As such, Porsche faces the risk of dilutingits brand, alienating its customer base, and potentiallydestroying its competitive advantage.

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Milestones - Porsche History. Porsche.com. http://www.porsche.com/usa/a boutporsche,/porscheh istory/mi estones/Hoskisson, R. E., Hltt, M. A., and lreland, R. D. (2008). Competingfor Advantage. Mason, OH: Thomson South-Western.Find a Car. FuelEconomy.gov. http://www.{ueleconomy.gov/fegl{i ndacar. htmWelsh, J. (2011, Feb 16). ls the Panamera hybrid the most fuel-efficient Porsche ever? The Wall Street Journal. http://blogs.wsl.com/drivers-seaI/ 201 1 /02/ 1 6/is the panamera-hybrid-the-most-fuel-eff icient-porsche-ever/Allen, M., and Javers, E. QOA?, May 18). Obama announces newfuel standards. Polittco.com. http://www.politico.com/news/stories/0509/22650. htm I

Schmitt, B. (2010, Feb 22). Ol>ama will take away your Porsche.

T h eT ruthAboutCars. com http://www.thetruthaboutca rs

.com / 201 O / 02/ obama-wi I l-take-away-you r-porsche/The Wor d Factbook. Cl A. co m. https://www.cia. g ov / li5rary /pub ications/the-world-factbook/geos/gm. htm 1

German labor unions. Photius.com. http://www.photius.com/countries/germany/government/germany government abor-un ions. htm I

Germany trade, Germany exports, Germany imports.EconomyW atch.com. http://www.economywatch.com/world-economy/germany/export-im port.htm I

Ferruccio Lamborghini. LamboWeb.com. http://www.lamboweb.com/H istory. htmHistory Timeline. AstonMartin.com http;/,/site.astonmadin.com/eng/thecompany/historytimelineFerrari S.p.A. F undingUniverse.com. http://www.fundinguniverse.com/company-h istories/Ferrari-SpA-Com pa ny-H istory. htmlPorsche enjoyes unsurpassed prestige in US. (2006, f,/ay 5).

P o rsche. com. http://www. porsche.com/usa/a boutporsch e/pressreleases,/pag/?pool:international de&id:2006-05-05Porsche Annual Report 2009/2010. Porsche-se.com. http://www.porsche-se.com/pho/en/investorrelations/mandatorypu bl ications/annua report-09-1 0/downloadr'ELLlott, H. 12011, Jan '13). Porsche plans small 'calun' SUV,

new sports car under Boxster. http://blogs.forbes.com/hannahe tofi/ 201 1 /01 / 1 3 /porsche-plans-sma I cajun-suv-new-

sports-car-u nder-boxster./Batson, A., and Fong, lV. (2006, Aug 30). China hits foreign

investors with new hurdles. Wali Street Journal via Pittsburgh

P ost-G azette. co m. http://www. post-gazette.com/pg/ 0 6242/7 1 7 522 28stm

17. J.D. Power vehicle dependability study: Porsche ranked number1. (2010, Mar 1B). Porsche.com. http://www2l.porsche.com/usa/aboutporsche/pressreleases/pcna/?lang:none&pool:international-de&id:201 0-03-'l B 2

18. J. D. Power and Associates names Porsche 91'1 the most rellablesports car. (201 1, Mar 22). OnEightTurbo.com. http://www.oneighturbo.com/porsche/j-d-power and-associates-names-porsche-91 1 -the-most-reliable-sports-car/#more-1 6557

19. Motorsports. Porsche.com. http://press.porsche.com/motorsport/2A. Technology Glossary. Porsche.com. http://www.porsche.com,/usa/

aboutporsche/porschetechnologyglossary/21. Harryson, S., and Lorange, P. (2005, Dec). Bringing the college

inside. Harvard Buslness Review. httg:/ /hbr.org/2005/ 1 2/bringing-the-co ege-inside/arl1

22. World's automakers embracing hybrid vehicles. (2005, Sep 14).

Autos on msnbc. com. http://www.msnbc.msn.com/idl9338664/ns/business-autos/t/worlds-automakers embracing-hybrid-vehicles/

23. Porsche subsidiary MHP enjoys strong turnover growth onceagain. (2008, Oct 9). Porsche.com. http://www.porsche.com/I nternationa l/aboutporsche/pressreleases/a rchive20OS/quarter4/?pool:international-de&id:2008-1 0-09

24. Company. Mieschke Hofmann und Paftner (MHP)

- the process supp/ier.de. http://www.mh p.de/Company. l0+ M5519f 1 87cad.0.html#/tabs-6)

25. Abuelsamid, S. (2010, May 27). Report: Fisker Karma full production

delayed to February 2011. Green.Autoblog.com. http://green.a utob og.com/2 010/05/27 /Iisker-karma-fu ll-prod uction-delayedto-february 201 1 /)

26. Valmet Automotive's current assembly contract with Porsche tocome to an end in 2A12. {2008, Jun 26). Valmet Automotive.com.http://www.va met-automotive.com/automotive/bu letin.nsf/PEBD/B B EA6EBAD367 D2C5C2257 47 4A03900DF?opendocument

27. Schmitt, B. (2009, Dec 1 B). Porsche to N4agna: Take the moneyand run. fheTruthAboutCars.com. http://www.thetruthaboutcars.com/2009 / 1 2/ porsche to magna-take-the-money-and-run/

28. Frankel, A. (2002, Nov 1 7). Porsche Cayenne. Ihe Sunday limes.http:/,/www.timesonline.co.uk,/tol/driving/new_car reviews/article823701.ece

29. Contemporary Strategy Analysis (6th edition) - Notesand suggestions on self-study questions. (2007, Jun 1B).

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