Distance Learning Project

Cooperative activities and innovative

forms of value net organisation in the automobile industry

Paper: Topic 3

What are the characteristics of automotive distribution in 2020?

Authors:

Stefanie Goede (University of Flensburg) Tim Schlüter (University of Flensburg) Rafal Borowicki (University of Flensburg) Özkan Hayta (University of Flensburg) Bas van den Dungen (Radboud University Nijmegen) Iwona Kloskowska (University of Lodz) Jakub Nawrocki (University of Lodz)

II

Table of content

Table of content ....................................................................................................II

Table of figures .................................................................................................... IV

1. Introduction ................................................................................................... 1

2. Problem Statement ......................................................................................... 1

3. The Car Distribution in Europe.......................................................................... 2

3.1 The Independent Model: ........................................................................... 3

3.2 Franchise Model:...................................................................................... 4

3.3 Direct distribution .................................................................................... 5

4. Environmental triggers and their impacts ....................................................... 6

4.1 PEST: Germany ....................................................................................... 6

4.1.1 Political and legal issues ..................................................................... 6

4.1.2 Economic issues ................................................................................ 7

4.1.3 Socio-cultural issues .......................................................................... 8

4.1.4 Technological issues........................................................................... 9

4.2 PEST: Poland ........................................................................................... 9

4.2.1 Political and legal issues ....................................................................11

4.2.2 Economic issues ...............................................................................12

4.2.3 Socio-cultural issues .........................................................................12

4.2.4 Technological issues..........................................................................13

5. Comparing automobile distribution...................................................................13

5.1 Germany................................................................................................13

5.1.1 The threat of substitute products........................................................13

5.1.2 The intensity of competitive rivalry .....................................................14

5.1.3 The bargaining power of customers ....................................................15

5.1.4 The bargaining power of supplier........................................................16

5.1.5 The threat of entry of new competitors................................................16

5.1.6 Main distribution model in Germany....................................................17

5.2 Poland ...................................................................................................17

5.2.1 The threat of substitute products........................................................17

5.2.2 The intensity of competitive rivalry .....................................................18

5.2.3 The bargaining power of customers ....................................................18

5.2.4 The bargaining power of supplier........................................................19

5.2.5 The threat of entry of new competitors................................................19

5.2.6 Main distribution model in Poland .......................................................19

III

6. Future outlook...............................................................................................21

6.1 Poland ...................................................................................................21

6.2 Germany................................................................................................22

6.2.1 Direct distribution.............................................................................22

6.2.2 Independent Model – Americanisation .................................................23

6.2.3 Importance of Internet......................................................................23

7. Conclusion ....................................................................................................26

8. References....................................................................................................28

9. Appendix ......................................................................................................31

Case Study Inditex.........................................................................................31

Case Study Dell .............................................................................................32

Commission Regulation (EC) No 1400/2002 ......................................................33

IV

Table of figures

Figure 1 A Spectrum of distribution models 3

Figure 2 GDP pro capita in purchasing power parity for the EU countries 7

Figure 3 Market Share of different car brands in Germany 9

Figure 4 Dynamic of GDP growth in Poland in years 2000 – 2006 10

Figure 5 Value of motor vehicles export from Poland in years 2004-2007 11

Figure 6 Use of Internet in car purchasing 14

Figure 7 Automotive industry structure in Germany 15

Figure 8 Customer Structure Germany 16

Figure 9 New and used cars and used car ratios 20

Figure 10 Sources of used cars bought in Poland in 2007 20

Figure 11 Automotive industry structure in Germany 23

Figure 12 Reasons for problems in car dealing from the dealer’s point of view 24

Figure 13 Use of Internet – new-car sales 25

Figure 14 Use of Internet – used-car sales 26

1

1. Introduction

The automotive industry is still one of the most important industries in Europe and will be

important in the future. One of the main fields of the automotive market is the car

distribution, which deals with the problem of how the cars reach the customer (Ahlert,

1991, p.10). It describes the relationship between the manufacturer and the retailer, i.e.

contractual regulations, ownership or level of vertical integration (Chieux et al., 2007,

p.1).

Different strategies and approaches exist to manage and coordinate the relationship

between the manufacturer and the retailer, ranging from a totally independent approach

where the retailer has no contractual relationship with the manufacturer or a hierarchical

approach where the manufacturer owns and controls the outlets. Selecting the right

distribution strategy is important for succeeding in the car market. The manufacturer has

to choose the best way to bring his car to the customer.

Today the automotive industry, like any industry, has to deal with new challenges

because of changing markets. Drivers for change include the continuing

internationalisation, growing competition in the market, changing consumer demands

and the growing importance of the Internet. To manage these new challenges car

distribution channels will change. Both the manufacturer and the retailer groups have to

select the proper strategy to be close to the market and to fulfil the new consumer

demands, because in the end, the customer decides who will succeed.

This paper analyses what models dominate the car distribution market and how these

models will be affected by the before mentioned changes. For motives of convenience the

car distribution markets in Germany and Poland, one developed and one developing

country, have been selected as focus for this paper.

2. Problem Statement

“What are the characteristics of automotive distribution in 2020?”

In order to answer this question this paper will analyse what models dominate the car

distribution market today, look for changes in trends and determine how these changes

will affect the distribution models success in the future. To this end three sub questions

have been formulated that together should answer the main research question:

1) What are the core characteristics of automobile distribution today and which different

distribution models can be identified?

2

2) What political, economic, socio-cultural and technical trends can in identified in the

investigated markets?

3) How do these trends influence the car distribution models’ success?

The paper is structured according to these questions. Chapter 3 describes the three main

models of car distribution in Europe and how the relationship between the manufacturer

and the retailer is managed. Chapter 4 gives a PEST analysis for Poland and Germany,

showing the differences between these two countries and the trends that can be

recognized there. The fifth chapter is a comparison of the Polish and the German

automotive market by applying Porter’s Five Forces. It shows the distribution models that

are currently dominating in the investigated markets. The sixth chapter will than

conclude with answering our main research question and explain which distribution model

will, based on their characteristics and the appropriate changes, be dominant in the

future. The last chapter builds a short conclusion of the paper.

3. The Car Distribution in Europe

There are different approaches and models for car distribution in Europe. These models

describe the organization of car retailing and the relation between the vehicle

manufacturer (VM) and its dealers. One definition given for distribution models is “The

manner in which goods move from the manufacturer to the outlet where the consumer

purchases them; in some marketplaces, it's a very complex channel, including

distributors, wholesaler, jobbers and brokers” (www.entrepreneur.com)

This paper will concentrate on the three main models in car distribution, being “The

Independent Model”, “The Franchise Model” and “The Direct Distribution Model”. Other

models exist, but are adaptations or mixtures of these main models. Including all of

these models would exceed the scope of this paper.

3

Figure 1 A Spectrum of distribution models (S. Royer et al., 2008, p. 2)

3.1 The Independent Model:

One of the three main car distribution models is the “Independent Model”. This approach

is characterized by a very low level of integration. For the complete independent

approach you can even say that there is at all no integration. That means the retail

organization is fully independent of the manufacturer. The retail organization does not

have to fulfil any standards or regulations that are written down in any kind of contract,

providing the retailer with a freedom of choice regarding the source and sale of its

vehicles (T.Chieux et al., 2007, p.10). The “Independent Model” therefore has a

wholesale orientation and is mostly used for providing used cars. This model can be

compared to a “supermarket” that sells a range of nearly new cars (T.Chieux et al.,

2007, p.10). Therefore in the new-car market the “Independent Model” includes a higher

level of integration of the manufacturer. In this context you can talk about an “efficient

delegation”. This way of car distribution shows a bit more of vertical integration. That

means that the retailer is still very independent of the manufacturer but there are at

least some restrictions or standards given by the manufacturer like following the right

use of its brand or salesmen’s training when there are new car models. But at all the

relationship still focus on the division of labour that the manufacturer produces and the

retail organization distributes (T.Chieux et al., 2007, p.5). On the one hand that lowers

the costs for the manufacturer because the retailer is in charge of selling the cars and

communicates with its customers. On the other hand it gives more independence to the

retailer because he isn’t bound to a lot of standards and requirements of the

manufacturer. The contract between both parties mainly consists of results. That could

mean that both parties negotiate in advance which amount of cars the retailer will order

4

and that he would guarantee a minimum of sold cars to the manufacturer (T.Chieux et

al., 2007, p. 6). In other words: it is coordinated by the market. This approach is more

useful and used in the new car-car market.

3.2 Franchise Model:

The Franchise Model is a form of vertical cooperation (D.Ahlert, 1991, p. 216). “The

franchiser gives a right to the franchisee against payment, e.g. a right to use a total

business concept/system, including use of trade marks [brands], against some agreed

royalty.” (S.Hollensen, 2007, p. 335) The franchise system offered by the franchiser

combines advantages of economies of scale, achieved through a large number of outlets

following the same concept and the local knowledge of the franchisee (S.Hollensen,

2007, p.337). This is especially of advantage when it is a company’s aim to expand

across national borders. A strong cooperative relationship based on mutual loyalty and

trust between the vehicle manufacturer and the franchisee is essential for the success of

this model. The franchiser provides the business concept containing, among other things,

trade marks, support services, design of the outlet, business know-how and marketing

resources, whereas the franchisee brings in capital and “the motivation to operate a

successful independent business” (S.Hollensen, 2007, p.338). Ownership in this sense,

i.e. the franchisee’s status of being economically independent, serves as an incentive for

the entrepreneur and as a guarantee for the business’ effectiveness and efficiency but at

the same time requires a certain ability to invest from the potential franchisee (T.Chieux

et al., 2007, p.7). The vehicle manufacturer provides a certain business framework to its

franchisee in order to assure the high quality standards required, leaving room for minor

adjustments that enable the franchisee to respond to the local customer needs in a

flexible manner and inform the franchiser about changes in e.g. customer demands

(T.Chieux et al., 2007, p.7). A disadvantage for the franchiser is the lack of direct control

over the operation. The VM is dependent on the franchisee as interface between the

franchiser and the end-user. Problems concerning the cooperative relationship, quality

control and the protection of the company’s as well as the product’s image might result.

If his performance lacks efficiency or consistency with the corporate headquarters, this

will probably affect the franchise system as a whole. Here it becomes obvious that

recruiting a competent franchisee can be time consuming and also expensive

(S.Hollensen, 2007, p. 349). Apart from the risks the franchiser has to bear there is also

a certain risk for the franchisee involved. The franchiser cannot be sure ex ante that the

provided concept is successful or that the product will be accepted. If the franchiser does

not provide the level of guidance needed due to wide-ranging obligations he has to meet,

5

the franchisee might ex post end up in a locked-in situation, being held-up by its

franchiser.

The Franchise Model can be categorized between the independent and integrated models.

The chosen level of integration, ranging from hard to soft, and the selection of franchise

standards determine the intensity of the relationship (S.Royer, U. Stratmann, 2007,

p.53).

With regards to automotive distribution the franchise system can either be the traditional

franchise, regional groups – specialized on one brand family or large multi-franchised

groups (S.Royer, U.Stratmann, 2008, p.7).

According to the “Mehrmarkenvertrieb und –service Study 2003” Multi-Branding

Strategies will increase in popularity. While in 2001 the majority of the dealer groups

sold mainly the brand of one manufacturer, today most of the groups (73%) have

franchise contracts with more than one manufacturer. This multi-brand strategy is

preferred by dealers that concentrate on volume brands, whereas premium brand dealers

“fear it would jeopardize existing relationships with their manufacturers” (P. Soliman et

al., 2003).

For further information see Case Study “Inditex” in the appendix.

3.3 Direct distribution

This model describes the hierarchical strategy where the VM completely owns and

controls its outlets. The VM can either build up an outlet or acquire a partner by means of

vertical integration (S.Hollensen, 2007, p.364). The VM remains in full control of the

ongoing operations, thus he can make sure that the image of the brand as well as that of

the company itself stays consistent with the whole business concept (S.Royer,

U.Stratmann, 2008, p.1). Compared to franchising, this strategy requires immense

financial resources and is less flexible (S.Hollensen, 2007, p.364). By means of

standardized processes and systems economies of scale can be generated (T.Chieux et

al., 2007, p.8). In Germany this strategy is mainly used by premium brand

manufacturers, although an increase in volume brand manufacturers setting up own

outlets can be observed (L.Bozon, 2005, p. 23). Between 1999 and 2004 the amount of

manufacturer owned outlets increased from 197 to 340 (L.Bozon, 2005, p. 23).

Another model that is applied in automotive distribution is the agency model. The main

objective of this model is to cope with the lack of dealers’ incentive concerning his effort.

A possible solution to this problem is a co-ownership where e.g. the manufacturer owns

60% of the company and the partner 40% (T.Chieux et al., 2007, p.11). A combination

of manufacturer owned outlets and franchise outlets are another possible solution to this

problem. For further information see Case Study “Dell” in the appendix

6

4. Environmental triggers and their impacts

In the following paragraph political/legal, economic, socio-cultural and technological

triggers in the macro-environment of the investigated markets shall be identified in order

to be able to assess their impacts on future car distribution strategies in the next step.

4.1 PEST: Germany

In general, Germany is the leading car manufacturing country in the EU and concerns like

Daimler Chrysler, Volkswagen and BMW have their domicile here and accounted for 36

plants in 2004. The car industry employed about 945,100 people in 2004 (Institut der

deutschen Wirtschaft, 2005, ”Deutschland in Zahlen 2005”, p. 34) and in the same time

it accounted for a turnover of EUR 280 billions, 12.33% of GDP. The car manufacturing

industry is most important for export and in 2004 accounted for EUR 155 billions or

20.5% of exports (Institut der deutschen Wirtschaft, 2005, ”Deutschland in Zahlen

2005”, p. 40). The import of vehicles accounted for EUR 72,175 billion so Germany is

clearly net exporting country in this sector (Institut der deutschen Wirtschaft, 2005,

”Deutschland in Zahlen 2005”, p. 40).

4.1.1 Political and legal issues

Germany is one of the six founding states of the EC, the predecessor of the EU. The EC

was set up to avoid conflicts through the empowerment of trade and through even closer

integration of the countries. Germany is a well-developed country with many institutions

that guard the democracy. The country has a federal structure, consisting of 16 states

that experience some degree of autonomy, but law considering environmental issues and

competition is made on a federal level. In general the political system is very stable with

very low corruption and low legal entry barriers exist, in general as well as for the

automotive distribution market.

The EU legislation affects the German market as well. The block exemption for the car

industry is set out in a June 1995 regulation, “distribution of motor vehicles” (no:

1475/95), which expired at the end of September 2002 but the clause came into effect in

October 2005 (www.berr.gov.uk). The effect of this regulation is to prevent dealership

franchises from selling more then one make of car. It also stops dealers based in

different EU countries from trading with each other.

7

After the block exemption regulation, dealers can exhibit cars of different brands in the

same showroom but in separate sales areas. Furthermore, dealers now have to choose

between two distribution methods:

• Selective, where they may sell actively to consumers in any location and in any

EU country, but not to independent resellers.

• Exclusive, where they are still allocated exclusive distribution areas, though they

will also be free to sell to independent resellers and customers from outside the

area who contact them directly.

4.1.2 Economic issues

Economic factors are very important for car distribution, because they affect it directly.

Germany belongs to the highly developed and industrialized countries with a GDP on the

upper scale in international comparison – in fact with a nominal GDP of over 3.322 billion

USD Germany occupies the 3rd position among the richest countries in the world. The

GDP growth is stable. Since Germany is a developed country, no rapid growth rates can

be expected – for 2008 the prognosticated GDP growth amounts to 2.7%. The

aggregated GDP does not indicate much about the individual purchasing possibilities.

Taking into account Germany has 82 millions inhabitants in the country, the nominal GDP

per capita, according to the WORLD BANK, amounts to USD 40,000 or measured in

purchasing power parity 35,000 according to the IMF, which corresponds respectively to

EUR 28.000 and EUR 24.500 per capita. This positions Germany on rank 19 and 17

respectively, but still on the upper scale in international comparison. Figure 2 shows the

GDP per capita in purchasing power parity for the EU countries.

Figure 2 GDP per capita in purchasing power parity for the EU countries

(http://europa.eu)

8

There are about 45.350.000 cars in Germany (www.kfz-auskunft.de) and 95,9% of 4

person households in West and 96,9% in the East had a car in 2004. Disposable income

is defined as current money reserves, savings, borrowing opportunities, money transfers

from state, deprived of taxes, rents and current obligations (Blanchard, O., 2003, p. 48

f). German households in 2004 used on average 9.3% of their overall spending on the

purchase of cars, repairs and the costs of upholding including fuel (Institut der deutschen

Wirtschaft, 2005, ”Deutschland in Zahlen 2005”, p. 62). This means that the average

household spent about EUR 2.940 on cars in 2004. The current trend of increasing fuel

prices will probably affect the spending, since a larger portion will be allocated to fuel so

less money is available for spending on the purchase of new cars. This is one of the

reasons cars in Germany are older now than ever, averaging at 8.1 years old.

(http://213.77.105.135/winfoniemcy/5_baza/9_raporty_i_analizy/Wywiad_Meinig.asp?na

vid=342, 21.05.2008, 18:32). The ratio of used to new cars is about 2.0 meaning that

twice as much used car are changing owner as new car are being sold(Workshop

22.05.2008, Presentation by Dr. Głodek about Used Cars Soraya Document 080422

_DLP_Used Cars.pdf). The decrease in sales of new cars has many reasons. Not only the

increase of VAT, which the German government decided to increase with three

percentage points (or 18,75%) from 16 to 19% caused the decrease of demand for new

cars. Other causes include the increasing costs of upholding a car due to e.g. increasing

oil prices and increasing prices of spare parts and service. Furthermore, many potential

buyers consider whether buying an almost new car, e.g. one year old car (German:

“Jahreswagen”) or two year old car in good condition for a good price is better than

buying a new one. Discounts and extra frills like air condition offered by car dealers on

new cars will not solve this situation on its own.

(http://213.77.105.135/winfoniemcy/5_baza/9_raporty_i_analizy/Wywiad_Meinig.asp?na

vid=342). Therefore stagnation in German automotive distribution of new cars can be

expected but on the other hand the amount of cases where the used car shifts its owner

will increase.

4.1.3 Socio-cultural issues

For many Germans, the car is very important. It symbolizes mobility, independence,

freedom and individualism. Therefore, for many Germans the car is one of the most

important status symbol as said in the sentence “The car is the Germans favourite child”.

Another significant issue is that in Germany most sold cars are German Brands. This

results in an extra entry barrier for international brands when trying to establish

themselves in the German Market. Figure 3 shows the market share for car brands in

Germany.

9

Position Brand

Market

share

Units in

millions

1 Volkswagen 21,30% 9,66

2 Opel 14,90% 6,76 4 Ford 9,20% 2,81 5 Mercedes 9,00% 4,08

6 BMW, MINI 6,40% 2,9

7 Audi 6,20% 2,81 8 Renault 5,30% 2,4 9 Fiat 2,80% 1,27 10 Toyota 2,70% 1,23 11 Peugeot 2,60% 1,18 10 Nissan 2,50% 1,13 11 Mazda 2,40% 1,09 3 other 14,70% 6,67 Figure 3 Market Share of different car brands in Germany

(www.kfz-auskunft.de)

4.1.4 Technological issues

Especially the development of communication technologies has to been mentioned here.

Those technological developments have provided advantages to distributors in order to

provide information for consumers and their rival actors in the sector. There are Internet

platforms providing information about cars so the information is to be seen as invitatio ad

offerendum (Keenan, D., Riches, S., 2005, P. 244) an invitation to treat. One example

for this kind of Internet use is mobile.de where buyers can find information about used

cars and prices and contact information, but the site is not trading in cars directly like

motors.ebay.de. Technological changes combined with the impact of globalization on the

industry undermined car distribution sector for a link between sales and service of cars.

4.2 PEST: Poland

Poland has an old and rich motoring tradition (the first cars were produced by FIAT

already in the 30s) and today its domestic car market is the largest and one of the most

promising among the new EU Member States: the presence of almost all the major

carmakers, along with its leading role in the manufacturing of components make Poland

one of the most attractive countries in Europe for the global automotive sector. The

automotive industry, one of the first to be privatised in the early 1990s, plays a more

and more important role in the national economy: its share in the GDP creation was

around 4% in 2006, whereas its share in the total production of the Polish industry was

10.2%. The snowball effect following investments in the automotive sector brings along

10

4,2

1,1 1,4

3,85,3

3,5

5,8

4,25,3

6,7

10,5

15,8

19,3

25,1

0,0

5,0

10,0

15,0

20,0

25,0

30,0

2000 2001 2002 2003 2004 2005 2006

increase year to year GDP Growth(1999 = 0%)

benefits for companies in several sectors and creation of new jobs in the whole national

economy.

Poland as one of the former communistic countries has a market condition different from

west European countries. Poland is one of the biggest potential markets in Europe where

the demand for luxurious goods, especially for new cars, could be very large in the

nearest future. Currently approximately 38 125 000 people live in Poland (Polish Main

Statistical Office 2006). Their average salary amounts to 2786.29 zł and has been

continuously growing for the last few years. The Polish economy, where GDP (figure 4)

in the last few years has been dynamically increasing, is doing very well. Along with the

growing economy, employment and general consumption are increasing.

Figure 4 Dynamic of GDP growth in Poland in years 2000 – 2006

(Departament Rachunków Narodowych i Finansów GUS)

These positive macro economical factors have a direct leverage on the condition of

automotive market. According to SAMAR in the first quarter of 2007, 198.6 thousand

passenger cars and delivery vans were manufactured in the 5 main car factories in

Poland, approximately 11% more than a year before. Export demand is one of the most

significant factors that drive the output numbers up; almost 96% of Polish car production

is assigned for export (Cezary Pytlos “Rynek aut: świetny rok, ale tylko dzięki

eksporterom”; Gazeta Prawna 14.XI 2006). In the overall Polish export, the car export

value is very high and has the largest contribution to the country’s total export. The

value of the Polish motor vehicle export in the years 2004-2007 is shown in chart 2.

11

40

42

56

61,6

30

35

40

45

50

55

60

65

2004 2005 2006* 2007*

Figure 5 Value of motor vehicles export from Poland in years 2004-2007

4.2.1 Political and legal issues

Poland is a democratic republic. Its current constitution dates from 1997. The former

constitution was based on a communist version from 1952. Thus indicating Poland’s

transition from a socialist people’s republic to a parliamentary republic with a social

market economy (www.wirtschaft-polen.de). Since Poland’s political transformation from

socialism to capitalism in 1989/1990, together with a liberalization of international trade

and Poland’s entry into the European Union in May 2004, it is one of Germany’s most

important trading partners located in East- and Central Europe. The bilateral trade

between these countries amounted to EUR 60,2 billion in the last year (exports to

Poland: EUR 36.1 billion; exports from Poland: EUR 24.1 billion) (www.auswaertiges-

amt.de).

The EU legislation affects the German market as well as the Polish market. “The new EC

Cars Block Exemption should help reduce prices by increasing competition and providing

greater freedom to import cars from other member states” (www.berr.gov.uk). This

affects the car distribution in a significant manner, considering that personal import is the

main distribution channel of used car purchases in Poland (P. Glodek, 2008, p.3). Only

one out of ten cars sold in Poland is a new car (P. Glodek, 2008, p.3). Moreover, the

Block Exemption Regulation 1400/2002 shall loosen the restrictions imposed on dealers

enabling them to sell more than one brand at the same outlet (www.berr.gov.uk). The

cross-border trade between Germany and Poland will visibly increase with Poland’s entry

into the Schengen Group in 2007 enabling Polish citizens to travel freely within the

Schengen area without border checks (www.poland.gov.pl).

12

4.2.2 Economic issues

Poland is considered to have one of the healthiest economies of the post-communist

countries, with GDP growing by 6.5% in 2007 (www.auswaertiges-amt.de). Since the fall

of communism, Poland has steadfastly pursued a policy of liberalizing the economy and

today stands out as a successful example of the transition from a state-directed economy

to a primarily privately owned market economy.

Restructuring and privatisation of "sensitive sectors" such as coal, steel, railways, and

energy has continued since 1990. Between 2007 and 2010, the government plans to float

twenty public companies on the Polish stock market, including parts of the coal industry.

Although the Polish economy is currently undergoing economic development, there are

many challenges ahead. The most notable task on the horizon is the preparation of the

economy (through continuing deep structural reforms) to allow Poland to meet the strict

economic criteria for entry into the European Single Currency (Euro).

Average salaries in the enterprise sector in January 2008 were around 3000PLN (which

equals to 840 euro or 1300 US dollars) and growing sharply. Salaries vary between the

regions: median wage in the capital city Warsaw was 4600 PLN (1200 euro or 2000 US

dollars) while in Bialystok it was only 2400 (670 euro or 1000 US dollars)

(www.auswaertiges-amt.de).

Since joining the European Union, many workers have left to work in other EU countries

(particularly Ireland and the UK) because of the high unemployment in Poland, the

second highest in the EU (14.2% in May 2006). However, with the rapid growth of the

salaries, booming economy, strong value of Polish currency, and quickly decreasing

unemployment (8% in March 2008) the exodus of Polish workers seems to be over. In

2008, people returning to Poland outnumbered those that were leaving the country.

4.2.3 Socio-cultural issues

Poland is a country where you will not find mass immigrant movement compared to

western countries. However, more and more companies are trying to get employees from

abroad, especially from Ukraine, Belarus and from the Far East like China and North

Korea. This situation is caused by the lack of employees on the current Polish market

because of the unattractive salaries. According to EU forecasts there will be more

immigrants from Eastern Europe in the nearest future.

In the purchasing behaviour of Polish citizens, price is the critical criterion, including car

purchases. The Internet as a source of information enables potential buyers to compare

car prices online or as a means of marketplace supporting the P2P-sales of used cars

(Bednarek, 2008).

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4.2.4 Technological issues

Technology in Poland is improving very fast. The development of Internet connections

has a huge impact on selling cars. An increasing number of households have access to

the Internet. The Internet has become one of the main information sources concerning

price and product information. Moreover, online communities and recessions give the

potential purchaser additional information. It can also be used as means of direct

marketing. VM therefore push their dealers to make use of it. Conservative thinking of

dealers’ sometimes limits the usage of Internet with all its advantages (G. Wójcik,

presentation Lodz).

5. Comparing automobile distribution

Having analysed the macro-environment in Germany and Poland, Porter’s Five Forces

shall be applied to assess the prevailing competitive situation of automotive distribution

in the investigated countries.

According to Porter’s model “the state of competition and profit potential in an industry

depends on five basic competitive forces: new entrants, suppliers, buyers, substitutes

and market competitors” (S.Hollensen, 2007, p.102). In this chapter the competitive

situation of the existing distribution channels within the car industry shall be assessed.

The aim of this analysis is to find a right position or the right distribution strategy in the

automotive industry that enables a company to defend itself against the competitive

forces or to find position where the forces are weakest (M.E.,Porter, 2008, p.89).

5.1 Germany

5.1.1 The threat of substitute products

The main substitute product to the common car distribution models is the Internet.

Consumers are increasingly using the Internet when considering a purchase. Besides

price information the Internet also offers a great variety of technical information

concerning a car’s features and its equipment even beyond national borders (W.Diez,

2001, p.351). The customer is not bound to certain opening hours but able to find the

information he needs whenever he wants with marginal expenses and minimal time

exposure. According to figure 6 German car purchasers are most likely to use the

Internet when it comes to buying a new or used car (W.Diez, 2001, p.415).

14

In the future online sellers could be a substitute product and danger for the retailer and

their common way of car distribution. Already pages like www.autoscout.de or

www.mobile.de exist, where the consumer can look for cars as well for new ones as for

used ones. These pages are especially used in the used car market. The next step could

be an online retailer who has no store and is selling his car only and direct via the

Internet. Consumers already have the possibility to choose or to assemble their

personalized car (Gromer, 2006, p. 72).

Do you use the internet to buy the next car?

25

22

20

17

9

22

1314

15

5

0

5

10

15

20

25

30

Germany USA UK Holland Frankreich

% a

nsw

ering "

abso

lute

ly"

or

"pro

bably

"

new-car used-car

Figure 6 (Source: Cap Gemini, 2000, in W.Diez, 2001, p.415)

5.1.2 The intensity of competitive rivalry

The competition in the area of car distribution and in the car market at all is getting more

intense. The main reason for this development is the continuing stagnation of the car

market in Germany and a fierce price competition (IfA, 2007, p.3). Car manufacturers, as

well as car retailers, have to deal with this problem. Another main reason leading to an

increase of rivalry is the Internet as main information tool for potential car buyers. Prices

become more transparent reducing VM and dealers profit margins (W.Diez, 2001, p.415).

On the one hand the threat of the Internet seller and on the other hand the use of the

Internet to reach the costumer directly could lead to the conclusion that online

competition already exists.

Another reason enhancing the competitive rivalry in the car distribution market is the

ongoing consolidation process, meaning that VMs are forced to extend their product

15

range and expand at the same time. Hence an increasing number of mergers,

acquisitions and strategic alliances lead to the rise of few big sellers that define the car

industry in Germany letting the competitive situation become more intense (IfA, 2007,

p.3). At the same time a decrease in the number of single dealers can be observed, due

to the fact that it becomes more difficult for smaller dealers to exist and survive in the

market. According to the IfA Institute the number of car dealers in the German car

market decreased from 18.000 in the year 2000 to 9.800 in 2006 (IfA, 2007, p.3).

18.000

25.800

9.800

23.500

0

5.000

10.000

15.000

20.000

25.000

30.000

35.000

40.000

45.000

2000 2006

Automotive industry structure in Germany

companies commercial units

Figure 7 Automotive industry structures in Germany (IfA, 2007)

5.1.3 The bargaining power of customers

The power of a single customer in the car market is relatively small. With the rising

importance of the Internet in car distribution the customer gains access to new

information sources and can compare prices or find important information about the

quality and reputation of brands. Because of that a single customer might be able to get

a better price for a car minimizing the profit margin for the dealer and VM respectively.

Profit margins generated from new-car sales become less important. Within the

customer-based approach it is the value added services that maximize the profit (G.

Wójcik, 2008). On the other hand a growing number of business customers can be

16

observed. Due to the fact the these customers purchase a high amount of cars, so called

fleets, their bargaining power might be higher depending on the amount of cars they are

purchasing. According to figure 8 54% of the new cars sold in the German market are

business cars of which 59,8% are fleets ranging between 1 to 100 and more cars per

fleet (S.Royer, U.Stratmann, 2008, p.4).

Figure 8 Customer Structure Germany – profitable private customers in decline (Source:

ICDP and national sources in S.Royer, U.Stratmann, 2008, p.4)

5.1.4 The bargaining power of supplier

The manufacturer has a large bargaining power; it can choose his distribution model and

its retailers. Therefore he has the stronger negotiation power. The contracts between the

manufacturer and the appointed dealer often include clear restrictions and regulations

like the use of the brand, the customer communication as well as the design of the

stores. Another issue to be considered is that the manufacturer has the chance to

distribute his cars on his own and use that as a threat to the appointed dealer.

5.1.5 The threat of entry of new competitors

The entry barriers of the German car distribution industry are reputation, established

customer relationship as well as the cooperation between the manufacturer and the

retailer. These factors could make the entry more difficult for new entrants into the

market. But there is still a threat of new entrants. Big dealer groups, especially foreign

dealer groups, are entering the German market (IfA, 2007, p.2). These dealer groups are

17

a threat for smaller dealer because of their available capital and human resources. In

2006 the automotive trade group Kroyman from Netherlands was number one in terms of

growth, increasing its new-car sales by 75% to 8.774 units. (IfA, 2007, p.2)

Furthermore it has to be stated that there are differences to be identified regarding the

threat of new entrants that are strongly depended on the local environment. In huge

cities, price competition among the existing competitors might be so fierce, that it

prevents new entrants from entering into the market whereas in rural areas the

conditions might be more favourable for a new entrant. This also applies to prices of

business premises that vary a lot across Germany depending on the exclusivity of the

location.

Another threat for new entrants could be seen with the emergence of the Internet as

direct distribution channel following Dell’s former concept of success. It is possible that

during the next years more manufacturer or retailer will make use of the Internet to

provide their cars (Diez, 2001, p. 344).

5.1.6 Main distribution model in Germany

In Germany the used car market is mainly regulated by “P2P” selling and by the

independent approach (supermarket). The new car market in Germany is dominated by

two approaches, the franchise model and the direct distribution model. The most

common approach is the franchise model where the VM regulates the car distribution by

appointed dealer (retailer). The main car manufacturers, like BMW, Ford or Opel, are

using this distribution model. (Gromer, 2006, p. 65) Many of the retailers are, however,

offering more then one brand in their stores. Today, almost 60 % of the car retailers

offer more then two brands in their stores (Institut für Verkehr und Umwelt (IVU),

Präsentation “Herausforderungen für Automobil-Handel”, 2006, Slide 8). The direct

distribution model exists in Germany, it is used e.g. by Daimler Chrysler, but it plays a

rather insignificant role. (Gromer, 2006, p. 61).

5.2 Poland

5.2.1 The threat of substitute products

Nowadays the main threat to dealers in the Polish car distribution market is the import of

cars, especially used cars and the closely connected P2P market for used cars in Poland.

The used car market has become an ever-growing threat for the new car market and the

distributor since Poland joined European Union in 2004. With this step most of the

restrictions concerning the import of used cars from foreign countries were lifted. As the

18

government did not introduce any new regulations, the European market of used cars

opened for Polish people in an instant, and was affordable for those who had not been

able to afford a new car before. Around 870,000 used cars were imported into Poland in

2005. Most of them were older than 10 years. According to the latest TNS OBOP’s

research 96% of those who bought a car in the last year chose a second-hand vehicle.

This is hardly surprising considering the fact that individual importers did not have to pay

a 22% VAT charged before. They paid only an excise tax depending on the car age (up to

65% of the imported car value). The government tried fruitlessly to limit the excessive

car imports.

The second substitution threat is the Internet. (Researches done by Capgemini “CAR

ONLINE”). Poland is going through the same process as Germany, the Internet becomes

increasingly more important and is affecting the Polish car market as well. Just as in

Germany the Internet is used as a source of information and a potential buying place for

cars.

5.2.2 The intensity of competitive rivalry

The Polish market is characterized by a high amount of small dealers, often family

businesses. However, most of them are starting to realize that having one small car

showroom can be unprofitable. Another problem in the Polish market is intra-brand

competition, describing rivalry between small dealers in one city selling the same brand.

This problem exists especially in big cities like Warsaw. Another notable issue is the

consolidation process, an increasing amount of big dealer groups with a high level of

control replacing the smaller dealers. This process will intensify the competition in the

market especially for small dealers. The last point is, as mentioned before, the increasing

importation of used cars to Poland. The car distributors have to compete with the P2P

market or independent used car dealers, but also more and more dealers will make use

of the opportunity which lies in the selling of used cars (PriceWaterCoopers & Samar,

2007, p. 15). Already 88% of all car dealers are selling used cars today. 84% of the

dealers buy used cars from their customers in exchange for a new car. 44% of the

dealers operate as intermediaries, selling a used car on the behalf of the customer. 29%

of the car dealers buy used cars at the polish car market and 14% are imported from

abroad (PriceWaterCoopers, 2007, p. 19)

5.2.3 The bargaining power of customers

The barging power of customers is rather high in the Polish market. Especially since the

customers have a choice where they want to buy and which car they want to buy. The

19

market is open and if somebody wants to buy car in a different country, he can go even

abroad to buy it or event import it by the Internet (not from car distributors but from

manufacturers). So the car distributors have to care for their customers and have to

develop motives for customers to buy a car at their dealership, rather than elsewhere.

5.2.4 The bargaining power of supplier

The bargaining power of suppliers, in this case the manufacturer, is rather high, since the

VMs are rather consolidated but the dealerships are numerous and scattered. The

manufacturer has the possibility to choose between lots of dealer that would like to

corporate with the manufacturer. This allows the VMs to develop strict contractual

regulations. Within the franchise system the manufacturer gives strict regulations to the

dealer that he must fulfil, including use of the brand, design of the outlet and training of

the employees.

5.2.5 The threat of entry of new competitors

Like in most markets the danger of new competitors exists, but in Poland, the entry

barriers for new dealers in the car distribution market are quite high. The main reason

being the high initial capital required to start a distributor. Another entry barrier is the

benefit importers get from their already existing networks. In Poland, as well as in

Germany, there are differences to be identified to terms of level of competition

depending on the local environment that might have an impact on the price structure. In

cities like Warsaw prices are lower than in Lodz so that the high level of rivalry impedes

new companies from entering.

5.2.6 Main distribution model in Poland

The Polish car distribution market is organized quite differently from west European car

markets. According to the results of the PEST analysis (compare chapter 4.2.2)

concerning economic issues in Poland the average person in Poland still lacks the

economic purchasing possibilities compared to his western neighbours. The car market in

Poland is not as big as in Germany. Of course the population is only half that of

Germany, but there are further factors to concentrate on: Mainly, the distinctive

characteristic of the market is that in Poland the amount of used cars being sold is much

higher in relation to new cars being sold. This is called new to old ratio and is illustrated

in figure 9.

20

Figure 9 New and used cars and used car ratios

(Glodek, P., 2008)

This figure shows that for every new car sold more than 9 used cars are being sold. This

is the absolute highest ratio compared to the other listed countries.

Therefore by analysing the car distribution in Poland it is important to take a look at the

used car market as well as the new car market.

Figure 10 Sources of used cars bought in Poland in 2007 (personal users)

(Glodek, P., 2008)

The Polish car distribution market for used cars is very widespread. The most important

sources are the personal import with 26 %, the P2P with 19 %, the Internet

advertisement with 15 % and the independent retailer with 14 %. For the personal

import is important to know that there are two kinds of imports; import for personal use

or import for reselling.

The car distribution within the new car market in Poland is very different to the used car

market. Here the market is more characterized by small dealers most often using the

franchise model. The direct and independent model play an insignificant role in the Polish

car distribution market.

21

6. Future outlook

Having assessed the macro-environment of Poland and Germany as well as the

competitive structure of its respective automotive distribution industries, in the following

paragraph an attempt will be made to give an outlook on what car distribution will look

like in 2020.

6.1 Poland

Because of the continuing consolidation process the competition in the market will keep

increasing and it will become very difficult for small dealers to survive in the car

distribution market. Big dealer groups have better financial and human resources at their

disposal. Therefore it is easier for them to get into the market or to negotiate with

manufactures. Because of this many small dealers, but also dealer groups, will change to

the multi-brand franchise model. By providing more brands the chance to reach the

customer and to fulfil there demand will be bigger. Summarized it can be said that the

Polish new car market will be dominated by big dealer groups which use the multi-brand

franchise. The use of the Internet, as shown before in the paper, will also continue to

increase. Today, the searching process concerning the selection of a new car based on

Internet research has become the most used source of information for the Polish

consumers. The use of the web has grown by 400% from 2000 to 2007 and is now the

primary information source over information coming from friends, family or even car

dealers: over 60% of respondents used Internet in 2005 for information research,

compared to only 20% in 2002 (www.pl.capgemini.com). It is therefore essential that the

dealers, the small dealers as well as the big dealers, are well presented on the Internet

to provide information about their cars and offers to the customers. Selling new cars

directly over the Internet will only be a niche market in the near future, the physical

distribution is still too important for a purchase this large for many consumers to

consider going through the whole process online.

Another trend is that the used car market will decrease in importance over the next

years. A new car is increasingly seen as an important status symbol in Poland and, with

the increased GDP and wealth in Poland, becoming increasingly affordable, causing the

demand for new cars to rise at the expense of used cars. But, since this process requires

time, in the nearest future the used car market and especially the import of cars from the

western countries will still have an impact on the new car dealers.

22

6.2 Germany

Trying to give an outlook on what car distribution in Germany two models will compete

for the market. On the one hand there is the direct distribution model and on the other

hand there are Mega-Dealers following the American example. In 2020 the Internet will

also be of importance in automotive distribution. An approach to describe of how the

Internet can be applied in 2020 concerning car distribution will be explained below in

detail.

6.2.1 Direct distribution

Since the regulation 1400/2002 manufacturers are no longer able to combine selective

with exclusive distribution. As a result most manufacturers chose to concentrate on

selective distribution (F. Verboven, 2007, p.9). Through selective distribution the VM can

impose quantitative (set a limit to the total number of dealers in the country) as well as

qualitative criteria (minimal staff, advertising, stock levels, showrooms etc.) on the

dealer. The VM can require that the dealer sells at least 30% of its brands, but is no

longer able to tell the multi-brand dealer to operate multi-brands as separate legal

entities (F. Verboven, 2007, p.11). Furthermore, the dealer no longer has to provide

sales and after-sales service to its customers, allowing authorized repairers to focus on

repairing and no longer having to sell cars as well (F. Verboven, 2007, p.10).

After the reforms in 2002 most dealers stuck to the strategy of combining sales and

after-sales service (F. Verboven, 2007, p.13). This is in favour of the VM because it

contributes to brand reputation and customers’ loyalty (F. Verboven, 2007, p.18). VMs

want to achieve an optimal level of dealer service. Dealers do not take into account the

VM’s benefits and therefore lack an incentive to provide a high level of service (F.

Verboven, 2007, p.18). Selective distribution comes in as a solution to this incentive

problem enabling the VM to impose qualitative service criteria on to its dealers securing a

higher profit forcing the dealer to buy parts from him (F. Verboven, 2007, p.28). Thus

creating extra gains for the VM. 50% of the manufacturer’s profits are made in the after-

sales market. As a result, the VM will try to keep as much control on their outlets as

possible. Another reason is the customer structure. Segments get smaller and smaller

and thus it becomes harder to respond to the emerging customer demands on an

individual basis. A higher level of control over his outlets enables the VM to learn about

customer’s demands and respond directly. The increasing product and quality similarity

in the car industry increases the importance of responsiveness to customer’s demands.

An example e.g. is the cooperation of two companies using the same platform for

different cars of different brands. With the cars becoming more similar, it is the image

the brand projects that makes the difference (W.Diez, 2001, p.413). In order to have an

23

optimal level of control over its dealers it is of manufacturer’s interest to establish direct

distribution outlets.

6.2.2 Independent Model – Americanisation

The second approach to automotive distribution in 2020 is the independent model

following the American model of huge Mega-Dealers (IfA, 2007,p.4). According to IfA-

Institute a continuation of the consolidation process is to be expected, together with a

power shift in favour of big dealerships, as already can be seen in the USA where the

automotive distribution is dominated by few Mega-Dealers.

18.000

25.800

9.800

23.500

8.000

21.000

0

5.000

10.000

15.000

20.000

25.000

30.000

35.000

40.000

45.000

2000 2006 2010

Automotive industry structure in Germany

companies commercial units

Figure 11 Automotive industry structure in Germany (IfA, 2007)

6.2.3 Importance of Internet

The Internet as a main threat to traditional distribution channels makes information

cheap, enabling customers to compare prices of cars and thereby reducing the profit

margin of dealer and hence of manufacturers.

24

Figure 12 Reasons for problems in car dealing from the dealer’s point of view

The new electronic market spaces will change the structure of value chains increasing the

number of intermediaries. There are two different kinds of “cybermediaries” to be

identified when talking about the increasing use of online car market spaces. There are

automotive service brokers and automotive information brokers. These brokers allow for

easier and cheaper comparison of prices and products and reduce the market power of

VM and car distributors. They are seen as serious competitors to the exclusive

distribution channel, although not being able to substitute the dealers (D.Selz, S.Klein,

1998, p.592).

The process will look as follows: 1. The customer recognizes he needs a new car,

2. The customer looks online for the available choices,

3. The customer compares the attributes and prices of the interesting cars,

Here there are two different scenarios; the customer can decide to purchase the car

based on the information on the web or the customer can decide to go to the dealer for a

test-drive and purchase the car from the dealer.

25

In 2007 50% of new-car-purchasers got information via the Internet (Quelle, DAT),

whereas 90% preferred to get the information by talking to a dealer. In the future these

numbers will change in favour of the Internet, since more customers will be acquainted

with the Internet and online purchases.

Information sources of new-car buyers

84%

63%

48%

51%

42%

41%

21%

1%

90%

67%

51%

50%

44%

50%

21%

1%

conversations with dealers

test drive

test report

conversations withcolleagues/friends

borchures

internet

advertisement

other

2006 2007

Figure 13 Use of Internet – new-car sales (source: DAT 2008)

When analyzing the used car market, 79% of the customer collected information using

the Internet whereas only 67% preferred to direct the dealer directly (DAT 2008).

Purchase online Purchase at the dealer

4. The customer purchases the car

of his choice.

5. The customer picks the car up at

the nearby dealer.

The profit is for the website, the dealer receives a fee for physically distributing the car.

4. The customer selects a few and

goes to the large, multi-brand

centre to make a few test-

drives.

5. The customer purchases the

car of his choice from the

dealer. The profit is for the dealer, the website receives the money for advertising on the site.

26

Information sources of used-cars buyers

70%

74%

65%

46%

20%

20%

67%

79%

68%

49%

21%

19%

visiting new-car and used-cardealer sites

internet

conversation withcolleagues/friends

test report/advertisement inprint media

information from after-salesagent

other

2006 2007

Figure 14 Use of Internet – used-car sales (source: DAT 2008)

The Internet is not exclusively a threat for the VM, but can also be a tool for the VM.

Using the Internet, customers can be included into the development process (compare

example Dell in chapter 3.3.1). Ducati, on their website www.ducati.com, integrates its

customers in the product development process by making use of its fans affinity with

maintaining and personalizing their motorcycles, showing a high level of technical

knowledge (S.Hollensen, 2007, p.456). This helps Ducati to enhance their customer

loyalty, “because its fans are more motivated to buy products they helped to create”

(S.Hollensen, 2007, p.456).

7. Conclusion

This paper shows that the automotive industry and as well the car distribution in Europe

is changing. In the future the independent as well as the direct distribution model will be

of importance in the German market. The Polish market is assimilating with the German

market that is already applying the multi-brand franchise model (compare chapter

5.1.6). The dealers understood that it is useful to provide more than just one brand.

Using this strategy, they can reach more customers and offer a bigger variety. Another

trend is the consolidation process. There are more big dealer groups entering into the

market. Therefore it will be harder for small dealers like family businesses in the future.

Another really important issue is the increasing importance in the Internet as described

in chapter 4 and 5. The Internet will be used as platform for proving information about

27

cars and prices. The manufacturer and dealer have participated in this trend. But selling

cars directly via the Internet will still be a niche market in the nearest future, as

described in chapter 6.

The last aspect which has to be mentioned is the comparison of the Polish and German

car market and car distribution market. Since Poland joined the European Union they are

catching up the western countries of the European Union. The polish economy and the

wealth of the population is increasing as described in part 4.2.2. But it takes times to

overcome all the differences to the western countries. But the PEST analysis of Germany

and Poland (see chapter 4) and the Five Forces analysis regarding to the car distribution

market in Germany and Poland (see chapter 5) have shown that there are still big

differences between these two countries. One example is the fact that in Poland the used

car market is still so important. It’s importance will decrease a little bit but in these days

and in the nearest future it will be still very important and a problem for the new car

market and the car distribution in Poland.

28

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Sabow, G. (2006) “Herausforderungen für Automobil-Handel”, Institut für Verkehr und Umwelt, (http://www.ivu- bw.de/Vortraege/2006/061110_Harms_Automobilhandel.PDF) Selz, D. and Klein, S. (1998) „The changing landscape of auto distribution“, Proceedings of the Thirty-First Hawaii International Conference on System Sciences, 1998 Soliman, P., Schick, S., de Miroschedji, S. and Port, B. (2003), „Multi-Branding Strategies

in the German Automotive Market“ (http://www.boozallen.com/capabilities/Industries/industries_article/658766?lpid=827466)

Verboven, F. (2007) “Efficiency enhancing or anti-competitve vertical restraints? Selective and exclusive cars distribution in Europe” (http://soraya.uni- flensburg.de/bscw/bscw.cgi/d336696/Verboven%202007.pdf) Wójcik G. (2008), presentation Lodz

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9. Appendix

Case Study Inditex

Inditex, Industria de Diseño Textil, the owner of the Zara franchise and seven other

brands, counts 3,245 outlets worldwide. Further expansion on a worldwide basis is

planned (www.news.bbc.co.uk).

“Its unique management model, based on innovation and flexibility, and its vision of

fashion (creativity and quality design, together with a rapid response to market

demands) has resulted in fast international expansion and an excellent response to its

sales concepts.”(Inditex, 2005) The Inditex business model shows a high degree of

vertical integration, thus creating flexibility that enables the company to respond to

changing customer demands in a short period of time. This is of great importance

especially concerning the continual changes in fashion. (Inditex, 2005) The time span

from creation of a design to the selling of the good in the store is about 4-5 weeks. New

articles reach each shop twice a week coming directly from each chains central

distribution centre in Spain. (P.Ghemawat, J.L. Nueno, 2003, p.9) Inditex’ “stores act as

market information gathering terminals, providing feedback to the design teams and

reporting the trends demanded by customers.” (Inditex, 2005) Inditex main strategy is

opening stores that are managed as well as owned by the company (sole or majority

shareholder). Regarding Inditex’ international expansion the company extends its “store

network” through franchise agreements with leading local retail companies. “At the end

of the 2004 financial year, there were 263 franchised shops out of a total of 2.244

stores.” (Inditex, 2005) Inditex’ franchise model is based on “the total integration of

franchised stores with company-managed stores in terms of window-dressing, product,

human resources, training, logistical optimisation” etc., ensuring a uniform image around

the world. (Inditex, 2005) Each of Inditex’ eight fashion distribution chains follows the

mission, that is “to be leaders in their segment through a flexible business model and an

international vision” and share central corporate services, e.g. “administration, the use of

logistics technology, the general HR policy, legal issues, and financial capacity, among

others”, while management team of each chain has the freedom to make commercial

decision independently and as well in terms of resource allocation. (Inditex, 2005) The

franchise fee Inditex charges the franchisee is between 5-10% of their sales.

(P.Ghemawat, J.L. Nueno, 2003, p.17) In larger and more important markets Inditex

uses the strategy of joint ventures in order to overcome barriers to direct entry and to

obtain “prime retail space in city centres”. (P.Ghemawat, J.L. Nueno, 2003, p.17) Zara’s

German joint-venture partner is Otto-Versand. Their relationship is based on a 50:50

ownership split. However Zara remains management control, operating the shops as

“company-managed”. (P.Ghemawat, J.L. Nueno, 2003, p.17)

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Case Study Dell

Dell is the world’s second biggest maker of personal computers, after Hewlett-Packard -

but still remains number one in the American market. (www.economist.com) In the first

quarter of 2008 Dell owned a global market share of 15,7%, an increase of 0,9% from

2007 (www.economist.com).

Dell’s success is based on its direct selling model, which allows “clients to choose the

features they wanted, but keep costs down by selling only online, using generic parts and

maintaining an impossibly lean supply chain” (www.dell.com).

For Dell the “most efficient path to the customer is through a direct relationship, with no

intermediaries to add confusion and cost”. This enables Dell to individualize their

computers and tailor them to the customers’ specific needs (S.Hollensen, 2007, p. 455).

Dell’s business model rests upon five main principles: 1. Most Efficient Path to the

Customer, 2. Single Point of Accountability, 3. Build-to-Order, 4. Low-Cost Leader, 5.

Standards-Based Technology (Dell, 2008).

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