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 / Fall 2005 / Issue 40(originally published by Booz & Company)


Skoda Leaps to Market

But Volkswagen executives make a point of not talking publicly about their thinking, so it isn’t clear whether they deliberately designed “leapfrogging,” the business strategy that made Skoda successful, or stumbled into it by accident.

Leapfrogging into Competitiveness
Skoda currently has three cultural identities. First, it is the industrial flagship of the Czech Republic and a vehicle of national pride — a role that its German owners are careful to cultivate. Five percent of the working Czech population is employed directly by Skoda or indirectly by its suppliers. Skodas account for 8 percent of Czech exports, departing the landlocked country on rail transports stacked three decks high. Skoda still has a 48 percent market share at home. The green winged-arrow Skoda logo predominates on Czech roads. Almost every Czech institution of emotional resonance, from the state ballet to the national ice hockey team, is sponsored in some way by Skoda. Moreover, it has become the core company in a growing Eastern European automotive cluster that produces more than 3 million passenger vehicles per year. Factor in car production in Poland, Hungary, Romania, Bosnia, and Ukraine, and the former Communist bloc begins to look like a European “motor city”: a cluster of manufacturers and suppliers on the scale of Detroit or Toyota City.

Skoda’s second identity — a transition it has now completed — is as a profitable division of Volkswagen. If Skoda’s heart is Czech, its head is German. Integrated within Volkswagen’s management structure, the company follows the established VW formula for success: performance-oriented management, cooperative labor relations, utilitarian marketing (the famous “Think Small” ads developed by Doyle Dane Bernbach in the 1960s set a pattern for highlighting value that continues to this day), and an emphasis on design. And although Volkswagen has struggled visibly in recent years to maintain earnings, Skoda’s results since the acquisition have exceeded the business’s wildest expectations. In 2004, the company’s pretax profits doubled to $209 million on sales of $6.65 billion. Since 1991, production has increased from 170,000 poor-quality cars to 451,000 award-winning cars. In Germany, Skoda has successfully competed against sales of Volkswagen’s own branded models. Within the parent company, that is seen as a small price to pay for building a brand capable of growing Volkswagen’s total sales while allowing the more established Volkswagen brand to migrate up-market in search of bigger margins.

The third identity, just now emerging, is as a global brand, leapfrogging past the more mainstream brands from countries with longer capitalist histories. Leapfrogging is the term increasingly used to describe the competitive play made by developing nations (and some companies within them) in wholesale implementation of the latest technologies and working practices. For an emerging economy, leapfrogging provides a more consequential platform for growth than mere outsourcing, because it paves the way not just for current growth, but also for future competitive advantage. Mobile phone penetration and computer-based government services, for example, are more prevalent in Eastern Europe than in the rest of the European Union, which is burdened by its legacy infrastructure.

“Our model should be Finland,” says Martin Jahn, the head of CzechInvest, the government’s agency for attracting foreign investment. He argues that the Czech Republic, with its industrial heritage and high-quality engineering schools, can become a center of motor vehicle and transportation innovation — in the same way that Finland, a relatively small European country, has advanced in the global economy by investing in education and telecommunications.

Skoda has done its own share of leapfrogging, building a supply and distribution network for its cars that is leaner and more intelligent than the supply chain networks of most carmakers in Western Europe. Using large plots of land left over from Communist-era dealerships, Skoda commissioned architects to design state-of-the-art buildings, at costs far below those of other dealerships Volkswagen was obliged to maintain. Skoda’s new factories were designed, from the start, to accommodate self-organizing work teams (known at Skoda as “fractals”), which made productivity goals and rewards easily attainable. Skoda also brought supplier staff directly onto its assembly line in Mladá Boleslav — a manufacturing innovation that allowed the auto manufacturer to cut its inventory costs to almost nothing, improve quality through closer integration with its suppliers, and earn rental income from the same suppliers (who would otherwise have had to build their own factories).

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  1. Alfred D. Chandler Jr. and Bruce Mazlish, Leviathans: Multinational Corporations and the New Global History (Cambridge University Press, 2005): The global rise of multinational corporations, cowritten by Harvard’s eminent historian.
  2. Graeme Maxton and John Wormald, Time for a Model Change: Re-engineering the Global Automotive Industry (Cambridge University Press, 2004): A definitive overview of the changing global context.
  3. Dennis Pamlin, editor, Sustainability at the Speed of Light (World Wildlife Fund, 2002): Online book contains a powerful chapter on leapfrogging for environmental sustainability. Click here.
  4. Dave Randle, The True Story of Skoda (Sutton, 2002): Illustrated chronicle of Skoda’s history from its 1895 origins to the Octavia.
  5. Horacio Rozanski, Allen Baum, and Bradley Wolfsen, “Brand Zealots: Realizing the Full Value of Emotional Brand Loyalty,” s+b, Fourth Quarter 1999: How Volkswagen originally “leaped to market” with its Beetle. Click here.
  6. Skoda’s Web site: Includes financials, automotive history, sports sponsorship, and current models. Click here.
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