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Škoda Auto (A): Rebuilding the Brand

SkodaAuto: On the move.


Past. Present. Future.

09/2006-5161
This case was written by Swati Srivastava, Research Associate, under the guidance of Prashant Malaviya, Associate
Professor of Marketing, INSEAD, Fontainebleau, France. It is intended to be used as a basis for class discussion
rather than to illustrate effective or ineffective handling of a marketing situation. The information in this case was
obtained from Škoda Auto and from public sources.
Copyright © 2003 INSEAD
N.B. PLEASE NOTE THAT DETAILS OF ORDERING INSEAD CASES ARE FOUND ON THE BACK COVER. COPIES MAY NOT BE MADE WITHOUT PERMISSION.
“It didn’t matter how good the cars were, they were still Škodas and the vast
majority of the public wouldn’t be seen dead in one. People buy brands, and ours
was worthless. Our brand is much weaker than our product since around 60% to
70% of car buyers do not accept our brand. We have got to change their minds
and make them reappraise the brand.”
Chris Hawken, Head of Marketing, Škoda UK

It was January 2000. Rob Tracey, Managing Director, and Chris Hawken, Head of Marketing
at Škoda UK, a wholly owned subsidiary of Volkswagen AG, were faced with an enormous
challenge – to successfully launch the new Škoda model, the Fabia, in the UK market in
February. The UK was Škoda’s fifth largest market in terms of its sales contribution to overall
turnover, and an important market for future growth. Volkswagen had set sales goals for
Škoda Auto that called for the company to increase world-wide volume to more than 500,000
cars annually by the end of 2002, which meant far more aggressive targets for it in the UK.

Tracey and Hawken believed that the key to achieving this goal was to reverse Škoda’s
shoddy brand image in the UK – that of a worthless, low-end car, universally shunned by
British consumers. In a recent survey, 60% of UK respondents had said they would never
consider buying a Škoda. The Czech word Škoda means pity or shame and so when noticing a
Škoda (named after its founder Emil Škoda) people would say, ‘There goes a shame.’ Škoda’s
reputation had spawned Škoda joke books, joke websites and joke collectors, many of them
from Western Europe. For western motorists, the Czech car was a rare export commodity that
ranked barely ahead of the clunky Russian Lada or the East German Trabant for aesthetics or
reliability. According to one industry expert, Peter Schmidt of Automotive Industry Data,
“People in the West didn’t buy Škodas because they liked them; they bought them because
they couldn’t afford anything else.” It was the car once described by a marketing magazine as
“the brand from hell.”

Tracey and Hawken had taken on the challenge of overturning this image using the launch of
the new Škoda Fabia as the vehicle for change. However, several key marketing decisions
related to the launch had to be resolved first. Who should be the target market for the Fabia
and of Škoda in general? What should be the positioning of the Škoda brand? And what
would be the most effective advertising strategy for communicating the new targeting and
positioning, and ultimately achieving an image transformation?

Company Background
Škoda Auto is the third oldest car manufacturer in the world after Mercedes-Benz and
Peugeot. Its history can be traced as far back as the 1890s when a Czech bookseller, Vaclav
Klement, began manufacturing bicycles with Vaclav Laurin as a partner. In 1895, the bicycle
manufacturer, Laurin & Klement, was established in the Czech town of Mlada Boleslav, 40
miles north-east of Prague. Plans to expand soon followed and before the turn of the century
the company was producing and exporting its own motorcycles. Despite the production
difficulties of the First World War, Laurin & Klement made steady progress in expanding
their business, from the first experimental four-wheeler developed in 1901 to the popular and
technically advanced Faeton cars of the post-war era. In 1925, they sought a merger with
Škoda, Bohemia’s largest industrial machine company, as a means of injecting capital to

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invest in more advanced and efficient production technology. After successful talks, the
merger went ahead and the first Škoda car appeared in 1926. The company went from
strength to strength becoming the lynchpin of Czechoslovakia’s inter-war industrial heyday. It
manufactured a string of elegant and luxurious cars including a competitor to the Rolls-
Royce, the Škoda 860, in 1929. Known as “the Rolls-Royce of Central Europe,” the 860
became the car of choice for presidents, archdukes and aristocrats. The Škoda Superb of the
1930s was a sleek, powerful car and, at that time, more desirable and expensive than the
luxury BMW brand.

When Hitler occupied Czechoslovakia in 1939, Škoda was made part of the German group
Hermann Goring Werke. Car production ceased during the Second World War and the Škoda
factories were used to produce military vehicles. On the last day of the war, 9 May 1945, the
Škoda factory was bombed and almost completely destroyed.

After the war, the original Superb was discontinued and the carmaker’s luxury days faded
under communist rule. A period of over 40 years of Czech nationalised manufacturing
followed with the inevitable loss of contact with automotive trends in the rest of the world. It
was the lowest point in Škoda’s history – no money was available and new models required
the approval of planners in Moscow. Škoda began churning out cheap, humble cars for the
masses and exported a few to Western Europe. The compromises associated with this period
were the source of its latter-day reputation: Škodas were shoddy, unreliable, style-less cars
bought by those who couldn’t afford anything else.

However, even under communist control, the company never quite lost its engineering
reputation. Says Alfredo Filippone of the Association of European Motor Manufacturers,
“Certainly they were behind everyone else, but at least they kept the flame alive.”

Acquisition by Volkswagen
It was this “flame” that caught the attention of the leading German auto manufacturer,
Volkswagen (VW), when in 1989, soon after the formation of the Czech Republic, Škoda
went looking for a strong partner to assist in improving efficiency and aiding development.
Although interest was keen among several car manufacturers, notably Renault, the VW
proposal was selected by the Czech government. Volkswagen’s guarantee to preserve the
independence and self-reliance of the factory, and preserve the Škoda brand, proved to be the
deciding factors in accepting the proposal.

On 16 April 1991, Škoda became the fourth brand in the VW Group, alongside VW, Audi and
SEAT. At that time, Škoda’s model range included the Favorit, introduced in 1987, and its
1990 derivative, the Forman station wagon. When VW took over, Škoda was selling about
170,000 cars worldwide. Of these, 120,000 were sold in the former Czechoslovakia and the
rest were exported to 30 countries: about 10,000 to Central Europe, 20,000 to Western
Europe, and 20,000 to various other countries.

The decision by VW to invest in Škoda raised more than a few eyebrows. What could the
German giant want with a failing, ailing business? How could VW afford to be associated
with a brand so infamous in the West? But VW was embarking on a global expansion strategy
and its first target was Central and Eastern Europe. The strategy called for increasing low cost

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capacity and penetrating new markets. Central Europe was particularly attractive because of
its large untapped market with low levels of car ownership. For VW, Škoda’s low labour
costs, access to the Central European market and a strong history of engineering skills were
key reasons for the acquisition. Meanwhile, Škoda could retain its own identity and dealers
throughout Europe and also benefit from VW’s purchasing and parts network. The joint
objective was to transform the company into a customer-oriented, learning organisation and
reach the “best-in-class” level. The brand objective was to shift Škoda from a price position to
a value-for-money position.

Brand Transition: Phase 1 – Production and Product Quality


Volkswagen understood that a strong brand could be built and sustained only if the product
itself was of the highest quality, comparable to the best in its class. A decision was made that
new Škoda models would be built using VW designs and, when possible, VW model
platforms to ensure quality standards. Consequently, the first step in rebuilding the brand was
to transform the Czech carmaker’s production facilities and product line with German
engineering and management. VW made massive investments in all aspects of Škoda
operations, from plant, R&D and technical development, to management, marketing and
sales. VW made an initial investment of DM300 million in Škoda (30% stake), and in
addition paid off DM120 million of Škoda’s debt. Over the following years, VW increased its
investment in Škoda to 60% in 1994, 70% in 1997, and 100% by the year 2000.

In 1991, Škoda’s workforce was over 16,000 and it increased to almost 19,000 by 1997. All
Škoda workers were trained and educated to German standards of engineering quality. VW
transferred its knowledge and processes of product development, planning, quality
measurement and production scheduling. Numerous production processes were rationalised to
be consistent with the other VW plants and production capacity was increased. Škoda
production personnel visited other plants to observe VW’s production methods so they could
benchmark against them. One outcome of this was the implementation of a Škoda Production
System to monitor quality. The system tracked costs, rejection rates, team co-operation and
absenteeism and the results were publicly displayed on the shop floor.

In 1991, Škoda worked with 280 different parts suppliers – 186 of them in the Czech
Republic, 25 in Slovakia and 69 in other countries. Bringing suppliers up to standard was the
biggest wave of change. In 1993, just three of Škoda’s largest 140 suppliers were rated “A”
on VW’s supplier quality scale. Škoda personnel worked closely with the suppliers to help
them improve quality and reliability so that the cars bearing the company’s name had no
defects. Czech component manufacturers were moved closer to the Škoda factories to reduce
inventory and transport costs, and VW encouraged 106 western suppliers to establish joint
ventures with Czech suppliers or to build green-field plants.

The transition was not easy. VW had to overcome fears dating back decades: Czech concerns
about German take-overs and German worries about poor workmanship. A big challenge was
cost control. While labour costs in Central Europe were about 25% of those in Germany,
productivity was also lower. Consequently, managers could not simply raise salaries to
western levels, which precipitated a number of pay strikes. The Czech workforce had
difficulty adapting from working for a state-owned company to working for a firm that was

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serious about competing in the global marketplace. The work philosophy and mindset had to
change significantly to inculcate quality as a critical success factor.

The ultimate concern, of course, was that Škoda cars were below the technological standards
of the auto industry. The Favorit, the last Škoda vehicle to be designed under communist rule,
had been launched in 1987 and produced until 1994. Its successor had to be given a major
facelift to make it more appealing to western Europeans. The new model, Felicia, took a year
to design. The effects of the injection of capital, technical expertise and quality control under
VW became evident with the international launch of the Felicia in October 1994. It was the
first Škoda car to reach a level of quality that was standard among western European cars and
marked an important step in Škoda’s recovery.

Škoda began production of the Felicia in September 1994 at its plant in Vrchlabi, and in
Mlada Boleslav the following month. In June 1995, the company introduced the Felicia
Combi model and in August 1995 began production of the utility models, Felicia Pick-up and
Van Plus. Felicia was well received by the automotive press and reached worldwide sales of
131,201 in its first year.

Brand Transition: Phase 2 – Product Range


After successfully transforming production processes and improving product quality, the next
strategic initiative in re-building the Škoda brand was to introduce value-added models and
expand the product line. Management recognized that in order to be considered a global car
brand, Škoda had to offer a range of models in different categories at different price points.
This was considered essential for improving the brand image, along with increasing brand
awareness and customer loyalty. With these objectives in mind, the Octavia model was
launched in 1996. This gave Škoda a presence in the all-important C-class, or medium-sized
segment, the largest of the European market.

The Octavia was the first Škoda vehicle to be built using the “platform strategy” introduced
by VW CEO Ferdinand Piech. It shared the VW Golf Group platform, using the basic
building blocks of the Golf like the chassis, axle and engine design. The goal of the platform
strategy was to differentiate each VW brand by the features that interacted with the
customer’s senses – look, feel, touch and smell – while everything else remained the same
across all brands. The platform strategy further improved quality because the German
engineering that in the past had been reserved for the more up-scale and sophisticated brands,
VW and Audi, was now available in Škoda (as well as SEAT) cars.

VW spent about $1 billion in capital investment between 1991 and 1996. Škoda financed the
rest of the multi-billion dollar investment itself from profits and loans. The dominant factor in
Škoda’s history had always been the Bohemian town of Mlada Boleslav, home of the
principal plant. Its greatest asset now became the Octavia assembly plant. This plant was
designed on the concept of the ‘Fractal Factory’ in which individual work units concentrate
on the overall production task rather than on small, single parts of the task. This work pattern
is repeated throughout the manufacturing process, and it guarantees that the individual task
objectives are aligned with the overall manufacturing objective. Another unique aspect of the
factory was that, unlike other European car factories of that time, four key suppliers built
production facilities within the plant manned by their own staff.

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The Octavia was a crucial addition to the Škoda product line as it reinforced the company’s
ability to produce top-quality vehicles at reasonable prices. It was seen as a brand-defining
vehicle for the company and its modern construction, design and quality won acceptance
across Europe. By the end of 1997, the Octavia had helped Škoda achieve total revenues of
over 90 billion CZK and pre-tax profits of almost 3 billion CZK.1

Brand Transition: Phase 3 – Retail Experience


With the launch of the Octavia, Škoda Auto had achieved a dramatic transformation from a
single-model manufacturer sold mostly in Eastern Europe, to a global brand sold in 62
markets by 1996. A critical element in achieving this global presence was the development of
a worldwide dealer network. In 1993, a new dealer network was created in Western Europe
consisting mainly of multi-franchise dealers in order to increase Škoda’s acceptability in these
markets. The primary objective was to penetrate as many markets as possible and increase
Škoda awareness in a short period of time. Škoda cars started to appear in the showrooms of
existing dealers who sold Škoda in addition to other brands on the same retail site.

However, with the 1996 launch of the Octavia, this retail strategy changed dramatically.
Emphasis shifted to representing the brand in an exclusive way. Managing the retail
experience was seen as critical to delivering the brand promise and ensuring customer
satisfaction. Exclusive Škoda dealerships were established, which displayed only Škoda cars
in their showrooms. Multi-brand dealers were included in the network only if they were
willing to separate Škoda from other brands on site. All dealers were expected to provide both
sales and after-sales services. The retail network strategy was to cover big cities and areas
with high potential through franchise dealers, and to cover distant locations through “satellite
partners” who operated in the area of market responsibility of a franchise dealer. A targeted
break-even sales volume was set at 120 new vehicles per franchise dealer per year.

Brand Transition: Phase 4 – Brand Communication


While a high quality retail experience is important to delivering the brand promise, it is more
likely to succeed if accompanied by an effort to drive customer traffic to the showroom. To
this end, a strong communication strategy was implemented to encourage target customers to
feel compelled to consider a Škoda for their next purchase and visit the showroom. Brand
image communication proved to be a major challenge despite the significant investment
already made in production, product and retail improvements. Consumer perceptions of Škoda
remained tainted by the past and its image as a producer of poor quality, cheap cars was
proving difficult to dislodge. The challenge was further compounded by the fact that while
Škoda enjoyed reasonably high status in Eastern Europe, its image in the West was a joke.
This meant that the global brand communication strategy had to follow distinct and dissonant
objectives in different parts of Europe.

The Škoda team identified two main reasons for its poor image in the West. In the words of
one sales and marketing director, “In the 1970s, Škoda was voted the worst car in Britain.
That tag stuck.” The second problem was that Škodas were just too inexpensive. According to

1
1 USD = 34.5 CZK (as on Dec. 31st, 1997).

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the same director, “They were so cheaply priced that people thought, ‘There’s got to be
something wrong with them.’”

In 1997, Škoda began to reinvent its image across Europe with a pan-European ad campaign
for the launch of the new Octavia model. In recognition of the differing perceptions of Škoda
in Europe, the new Octavia was marketed to two distinct audiences: business users in Eastern
Europe and families on low-to-middle incomes in the West. The ad, featuring the slogan
“Škoda s Novou Tvari” (The new face of Škoda), was created by Grey Advertising’s
European network, based in London. The campaign focused on Škoda’s craftsmanship and
the modernisation of its plant. It was felt that any improvement in image would come from
highlighting the fact that Škoda was based on VW engineering. Although the new model and
ad campaign further strengthened the Škoda brand in Eastern European countries, the results
in Western Europe were mixed. In Germany, for instance, the VW association seemed to have
a positive influence on the brand image by alleviating concerns of potential buyers about the
car’s quality. However, in some countries, notably the UK, the strategy did not yield the
hoped-for results: consumer perceptions and behaviour changed minimally.

By 1998, Škoda’s major markets were the Czech Republic, Poland, Slovakia, Germany, Italy
and the UK (see Exhibit 1 for Škoda markets). That year it exported 77.5% of its production
and had worldwide sales of 363,500 (see Exhibit 2 for sales by model). It was the dominant
player in the Czech Republic and Slovakia but growth in other countries such as the UK,
where Škoda had less than 1% market share, remained anaemic (see Exhibit 3 for Škoda
market share).

The UK Market
The automobile industry had been undergoing rapid change throughout the world (see Exhibit
4 for more information on the worldwide auto industry in the 1990s). Passenger car
registrations in UK had reached their second highest level in 1998 with sales of just over 2.2
million units. But with the high penetration rates, congestion, pollution, unfriendly tax regime
and rising cost of ownership, the outlook for UK car retailers was far from bright. Not
surprisingly, these trends fuelled the development of small and lower-medium sized cars.
Moreover, fleet buyers (rental agencies and corporations), who had typically bought bigger
cars, now preferred smaller vehicles. As a result, the largest fleet manufacturers, Rover,
Vauxhall (GM) and Ford, had suffered heavily. In 1989, the three companies had had over
56% of UK market share but by 1998 this had fallen to just 39%, equivalent to a loss of
400,000 cars a year. In contrast, the companies that had gained were those that offered
smaller, better-branded, higher quality vehicles such as Renault, BMW, DaimlerChrysler,
Honda and Toyota.

Škoda in UK

Though Škodas were sold throughout Western Europe, they had a uniquely egregious
reputation among UK consumers. Škoda cars had made their debut in the UK market at the
London Motor Show in 1954. The Czech Export Agency, Motokov, took over the task of
importing Škodas into the UK in 1958, and later became known as Škoda GB Ltd.

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Škoda GB sold the cars without the Škoda logo as the “cheapest new car” on the market. This
price position offered the importer the opportunity to dispose of excess stock, provide a
limited range and sell high volumes at low prices. Not surprisingly, this positioning attracted
the poorer segments of the population – blue-collar workers who wanted a new car but could
not afford any other brand. The image of Škoda as the poor man’s car took hold.

This downmarket image of Škoda crystallized in the minds of British drivers when in the late
70s the Automobile Association, a respected motoring organisation in the UK, gave a very
negative report on the Škoda Estelle, the rear engine car. The report was quoted in several
leading national newspapers and captured the imagination of the British population in a
relatively short time. Soon after this, Škoda became the butt of every comedian’s jokes,
although the other Škoda models were quite safe and durable, with a good rally history.

The irony of this public humiliation was that while Škoda had unaided brand awareness
(“When you think of cars, what brands come to mind?”) of just 9% – compared to 85%
awareness of Ford, the highest in UK – its prompted brand awareness (“Have you heard of the
brand Škoda?”) was 92%. (By some estimates, it would have required an investment
equivalent to £200 million to reach this level of awareness). However, the majority of
respondents who could recognize the Škoda name were unable to associate it with a car
(“What is it (Škoda)?”). Škoda had lost control of its brand, its image and how this image was
being shaped.

In order to wrest control of the marketing of the Škoda brand, a new company, Škoda UK,
was established to replace Škoda GB. Robin Woolcock, Managing Director, and Rob Tracey,
Finance Director, took over the reigns. This wholly-owned subsidiary of Škoda Auto had little
existing infrastructure, a low budget and no existing distribution network (the dealers were
contracted to Škoda GB who wished to retain control over them and develop their own
independent franchise).

The first challenge for Messrs Woolcock and Tracey was to face the customer reality.
Although, it was generally accepted that Škoda’s low market share in the UK was due to its
image problem, a market research study was commissioned in 1993 to thoroughly analyse the
situation. What it revealed was surprising only in how bad the situation really was: Škoda was
voted as having the “worst image of ANY product or service in UK.” UK consumers would
dub any product from behind the iron curtain and of dubious quality “a Škoda”. Indeed, the
darkest day for the UK team came when The Sun tabloid published the results of a consumer
test on sports bras: the worst bra had a rating of 3 out of 10 and was described as the “Škoda
of all sports bras”!

It was on this day that the team sat down to define a new vision for the brand. They
recognized that they were not simply dealing with a car brand with a negative image but a
deep-seated consumer prejudice against the Škoda name itself. They christened this
prejudiced consumer mindset “Škoda craphead” and took on the challenge of changing the
negative perceptions into a positive brand image. One of the early steps the team took was to
start selling Škodas with the logo on, as “Hiding could not be a strategy for building a
successful brand.” Another observation was the need to be more customer-oriented. Although
there had been significant and positive changes at Škoda in the factories, production, product
quality and model range, these efforts were focused on the product rather than the customer. It
was felt by the UK team that the next step was to connect with customers by building a strong

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brand identity and re-positioning Škoda as a positive, attractive brand with a competitive
advantage that could deliver both market share and margin, neither of which the Škoda brand
provided in western markets.

The team did not set concrete sales targets. Instead, success was defined when a new car
prospect would include Škoda among the five most ‘acceptable’ cars that he might consider
buying. The target consumer, or ‘Škoda susceptible’, was defined as someone who wanted to
be dealt with honestly, treated with respect and not as a ‘punter’ (that is, a showroom
customer “worth having a go at”); a person who wanted a car that would be functional, fulfil
their daily needs and represent an honest, straightforward lifestyle.

To appeal to this target consumer and build a positive brand image, the Škoda brand had to
move away from its price position and towards a value position. To support this shift in
strategy, it was decided that the Škoda brand should be personified by three brand values:
honest, straightforward, and personal care. Honesty was signalled as one of the brand’s value
by advertising on-the-road prices for all its models. The straightforward, personal care values
were delivered through the close relationship that the exclusive dealerships built with their
customers, offering comprehensive and personalized customer care.

Competitive Situation in the UK Auto Market

Several competitive considerations had also to be kept in mind when developing the brand’s
positioning. Škoda’s brand values – honest, straightforward, personal care – were likewise
being communicated by the Korean brands Daewoo and Hyundai. These competitors had one
critical advantage: they were entering the UK market as new brands with no prior image.
Škoda was at a disadvantage because existing negative consumer perceptions had to be
reversed, a significantly more difficult task.

To further complicate matters, the various improvements in production and product quality
significantly pushed up production costs, and consequently the price of the cars. Škoda was
no longer the cheapest car on the market (see Exhibit 5 for pricing information) and needed to
convince consumers that the higher price was worth paying. The marketing team labelled this
the “price-value” position for the brand, an idea that was more difficult to communicate to
consumers than the simple price position of previous years. Nevertheless, the new models,
Felicia and Octavia, were launched with the “price-value” position as they offered the same
(if not better) performance and quality, for a lower (but not the lowest) price than their
competitors.

The Octavia was successful in attracting buyers who had previously bought a Rover,
Vauxhall, Renault, Citroen, Ford or VW2 but lost a significant number of former Škoda
buyers to one of the Korean brands. It became apparent that due to the emphasis on value in
the brand’s positioning, Škoda was operating in a crowded market and attracting competition
from the Korean brands that between them made up 2.5% of the UK market compared to
Škoda’s 0.9% (see Exhibit 6 for market shares of key competitors in UK).

2
An additional consideration for developing the Škoda positioning was to not jeopardise the sales of other
brands within the VW product portfolio, especially SEAT, VW and Audi.

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Consumer Behaviour in the UK Auto Market

The new Škoda models, Felicia and Octavia, were well received by motoring journalists and
the trade press. More importantly, Octavia owners in the UK ranked their Škoda at or near the
top of the prestigious J.D. Powers & Associates New Car Owner Customer Satisfaction
Survey for three consecutive years after the launch. Škoda’s poor quality reputation was no
longer justifiable; owners loved their cars and were extremely loyal to their dealer. However,
despite having one of the highest levels of brand loyalty in the industry (82.4%) in 1997, by
1999 loyalty to Škoda had decreased to about 75% (though still above the UK industry
average of about 50%). It appeared Škoda was paying the price of adopting the new value
position which was necessary to attract new customers for revenue and market share growth.
Current owners, who had previously been attracted by Škoda’s low prices, were unhappy
about the “new” Škoda.

Further, while new owners and media had reacted favourably to the new brand, convincing
non-Škoda drivers to try the car proved more challenging. According to research agency
Quadrangle, non-owners thought the Škoda brand was old, unfashionable and out of sync
with the times, and its owners were perceived as “nerds and anoraks”. Positive press coverage
of the new Felicia and Octavia models did not help with non-owners, possibly because this
information spoke only to their rational side while the prejudices against the brand had an
emotional underpinning and were not based upon any obvious logic. According to Chris
Hirst, Client Services Director at the Škoda UK advertising agency, Fallon, “Škoda was
facing a massive perception/reality gap – the general public had a bad perception of the brand
but the product was better than most of the competition.”

Communicating the Škoda brand in UK

This dichotomy between the positive perception among Škoda owners and the trade press on
the one hand, and the negative public image of Škoda on the other hand, was the result of
decades of poor product quality plus years of ridicule from comedians and other public
commentators. While in the past Škoda might have accepted this negative image as a natural
consequence of its price position and gone about its business selling the cheapest cars to the
poorest customers, this was no longer possible with the move to a value position. Chipping
away at the negative mindset was proving to be a difficult and slow communication task.

Initially, Škoda UK had used the advertising campaign introduced in other European
countries. However, this had met with little success and in 1997 it was decided that a new ad
campaign developed for the UK market would be launched to specifically tackle the negative
brand image. The objective was to inform UK consumers that Škoda had changed and provide
evidence in the form of the many changes within the organization, including the VW
relationship (“We’ve changed the company, can you change your mind?”). However, the
campaign had limited success in changing consumer perceptions and purchasing behavior.

The next opportunity to tackle the “Škoda craphead” came in 1998 with the launch of the new
mid-sized Octavia. The C-class Octavia was targeted at two segments: existing owners, who
were expected to trade up to the larger, better car, and non-owners who might be attracted to
the image and lifestyle represented by a “price-value” brand. The challenge was to convince
these lifestyle-oriented consumers, who did not want to be associated with the stereotypical

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Škoda brand, to accept the Octavia. The ad campaign showed off the car’s best features and
sounded a confident, if serious, note: “The new Škoda Octavia. The way things should be.”

The general public’s perception of Škoda shifted from ‘It’s crap and I don’t know what they
look like’ to ‘I understand they are good cars but it’s not for me’. The overwhelming emotion
people still felt with respect to owning a Škoda was one of embarrassment. This was a serious
problem for a model that was competing in a consumer segment where social and lifestyle
considerations were important and where for many consumers their car was a public statement
of who they were. It became apparent from the consumer response to the Octavia campaign
that the reason it did not achieve its objective was because the message did not address the
image problem effectively and failed to disconnect the brand from its past.

Thus, despite a much-improved product, Škoda UK’s largest marketing budget ever (£10
million), and a whole range of other promotional activities, the Octavia campaign generated
an increase in overall Škoda sales of just 6% over the previous year. Only 6,154 Octavia cars
were sold over the 12 months following the car’s launch – an unacceptable performance for a
car that had achieved almost unanimously good product reviews. Škoda continued to fare
badly in the UK market with a measly 0.9% market share.

The Fabia Launch

In December 1999, the Škoda Fabia was launched in the Czech Republic and Slovakia. It was
the next step in VW’s campaign to reposition Škoda as a modern, global brand that could
compete with the world’s leading mass-market automakers. It won 19 international awards
including ‘Car of the Year’ by the UK’s leading What Car? magazine.

The Fabia was due to be launched in UK in February 2000. A survey conducted around that
time by Millward Brown, an independent research agency, showed that 60% of the people in
UK would not even consider buying a Škoda. A writer at The Mirror captured the persisting
consumer discomfort with Škoda in the UK when he wrote: “I see that the Škoda Fabia has
been named Car of the Year but I somehow don’t think I am ready to drive one yet ... it’s
slightly less embarrassing to be seen getting out of the back of a sheep.” Overcoming Škoda’s
image crisis, it appeared, would require tackling the irrational emotional objections non-
owners had to owning a Škoda.

It was crucial for Rob Tracey and Chris Hawken to achieve an image turnaround with the
Fabia as the next new model was not due to be launched for another three years. The brief
given to the advertising agency was: “Increase sales and successfully launch the new Fabia;
drive more people to consider buying a Škoda; improve the image of the Škoda brand.” One
option was to adopt the campaign used by Škoda Auto for the European launch of the Fabia,
which focused on the value-added features and new design of the car. The UK team felt that
this traditional approach to car advertising should be discarded in favour of a more radical
approach that could tackle the emotional and social objections of the public. An argument put
forward was that the UK car buyer must be different from buyers in other countries, or else
the earlier ad campaigns that had worked in these countries would have worked in the UK too.

The group agreed that strong emotional objections were unlikely to be overcome with a
message that simply talked about the car and its features, but what the alternative approach
should be was not clear. Some car brands appeal to the status and achievement emotions of

Copyright © 2003 INSEAD 10 09/2006-5161


car owners, but these mostly belong in the luxury or sports segments of the market. Other
brands, notably Volvo, had relied on a form of ‘fear appeal’, making safety an important
consideration in car purchase. It was not immediately apparent if either of these, or some
other emotional appeal, was appropriate for communicating the Škoda brand positioning and
addressing the particular image problem faced by Škoda. In addition to the advertising
campaign, thought had also to be given to other potential communication and promotion
approaches, such as direct mail and Internet advertising when introducing the Fabia in the
UK.

As the launch date drew closer, the marketing team wanted to make sure they had given
adequate thought to all the key strategic elements of their marketing plan. The key issues
included the following: Was the negative Škoda brand image so deeply entrenched that it was
virtually impossible to reposition it as a value-for-money brand? Was it possible to change
widespread consumer prejudice against a brand? Should Škoda adopt a narrow, niche target
and not bother about the broader social prejudice against the brand? Even if the brand’s image
could be changed, would this make people start to consider a Škoda as their next new car?
Was it folly to use expensive TV advertising for a brand with a miniscule market share that
was likely to stay small? Time was slowly ticking away for Rob Tracey and Chris Hawken.
It was January 2000.

Copyright © 2003 INSEAD 11 09/2006-5161


Exhibit 1
Škoda Markets – Percent Contribution

Markenprofil

Škoda – Sales Contribution by Major Markets


% 1996 1997 1998 1999
Germany 8,2 8,7 11,9 14,7
Great Britain 5,0 4,7 5,7 5,6
France 3,3 2,4 2,6 2,9
Italy 2,9 6,3 7,6 4,7
Spain 1,2 1,0 2,2 3,6
Czech Republic 33,5 29,9 22,5 19,7
Slovakei 8,4 8,2 8,2 7,9
Poland 5,9 7,5 8,5 11,1
Hungary 0,8 0,8 1,0 1,5
Denmark 2,1 1,9 1,8 1,6
The Netherlands 0,4 0,3 0,6 0,8
Austria 3,4 3,2 4,0 3,9
Sweden 1,0 2,0 2,9 3,6

Škoda TOTAL- World 261.067 336.334 363.500 385.330

Copyright © 2003 INSEAD 12 09/2006-5161


Exhibit 2
Sales Volume Škoda Models

Markenprofil

UK Sales volumesŠkoda Models 1995- 1999


1995 1996 1997 1998 1999 2000 2001
Favorit 3 603

Forman 3 441 18

Fav. Pickup/ Van … 51

Felicia 5 829 8 476 11 700 13 486 12 415 7 339 188

Felicia Combi 222 4 523 4 131 4 416 3 031 2 609 36

Felicia Pickup 329 806 1 492 1 516 1 155 53

Fabia 11 406 16 717

Fabia Sedan 394

Fabia Combi 5 374

Octavia 2 2 061 4 412 5 621 8 877

Octavia Combi 551 1 771 2 379 4 409


TOTAL 13 146 13 346 16 639 22 006 23 145 30 509 36 048

Markenprofil

Worldwide Sales volumesŠkoda Models 1995-1999


1995 1996 1997 1998 1999 2000 2001

Favorit 9 607 57

Forman 18 554 379

Fav. Pickup/ Van … 16 488 869

Felicia 131 201 154 704 181 642 166 822 163 547 91 439 29 920

Felicia Combi 32 312 83 847 77 634 64 595 51 880 35 155 8 472

Felicia Pickup 1 429 20 270 29 182 29 710 25 829 21 434 6 571

Fabia 823 124 064 152 578

Fabia Sedan 16 767

Fabia Combi 4 808 82 521

Fabia Praktik 4

Octavia 941 47 876 87 127 90 733 96 253 97 925

Octavia Combi 15 246 52 518 62 250 67 386

Superb 177
TOTAL 209 591 261 067 336 334 363 500 385 330 435 403 462 321

Copyright © 2003 INSEAD 13 09/2006-5161


Exhibit 3
Market Share

Markenprofil

Market SharesŠkoda 1996- 1999


in % Germany, GB, France, Italy, Spain
1,6
1,5

1,4
1,2 1,2
1,2
1 1
1,0 0,9 0,9
0,8
0,8
0,8 0,7 0,7
0,6 0,6
0,6 0,5 0,5 0,5
0,4 0,4
0,4 0,3 0,3

0,2

0,0
19 9 6 19 9 7 19 9 8 19 9 9

Germany Great Britain France Italy Spain

Markenprofil
Market SharesŠkoda 1996- 1999
Czech Republic, Slovakia
in %
60,0
54,0 54,7 53,8
54,9

50,0 49,6
44,3 43,9

40,0
29,5
30,0

20,0

10,0

0,0
19 9 6 19 9 7 19 9 8 19 9 9

Czech Republic Slovakia

Copyright © 2003 INSEAD 14 09/2006-5161


Exhibit 4
Worldwide Auto Industry in the 1990’s

The automobile industry has been an amazingly dominant and important industry in the world since
World War II. Around the time when Volkswagen formed a joint venture with Škoda, the market size
for all cars and trucks was approximately 47.6 million new cars or about 2% of the world’s industrial
output and represented about $800 billion in revenues. The industry was composed of 30 large
manufacturers that accounted for over 90% of production. In 1998, the top carmakers in the world
were General Motors, Ford/Mazda, Volkswagen, Toyota/Daihatsu and Fiat. Together these five firms
accounted for more than half of the world’s production. The next five were Honda, Nissan, Renault,
DaimlerChrysler and PSA. Combined, the top 10 companies accounted for 81% of total car
production. Behind them came Mitsubishi, BMW, Suzuki, Daewoo and then Hyundai. While the
largest company, GM, made 5 million cars annually, the fifteenth largest, Hyundai, made less than
700,000. VW was the world’s fifth largest automaker by revenue, but ranked eighth in terms of market
capitalisation because of its weak share price. GM (35% of the market) and Ford (21%) dominated the
US but were experiencing declines in their US and European market shares due to competition from
imports and aggressive moves of companies like VW.

Automobile markets were segmented by type of vehicle, size, price range, and geography. Demand
was primarily based on replacement in the developed markets. The nature of the product was such that
the purchase could be deferred and was sensitive to macroeconomic conditions because of the size of
the purchase decision. Buyers were extremely demanding and had many substitutes to choose from,
yet were extremely brand sensitive and brand loyal. The car companies realised that the cost of a first-
time buyer was at least five times as expensive as a repeat customer. Also, the move to smaller, more
efficient cars had caused a general shift to less expensive, more functional vehicles that were also
comfortable and of high quality.

The barriers to entry and exit were quite high. The cost of constructing a new car plant was more than
$200 million and the cost of building an engine plant, transmission plant, parts and components plant
and final assembly exceeded $1 billion. The largest companies spent over $2 billion on advertising
their vehicles. In addition, advertising contracts, acquisitions of rental car agencies, dealer
relationships were significant barriers to entry.

The industry had grown modestly with some segments such as minivans and sports utility vehicles
showing rapid growth in the last five years. Overall it was experiencing a global overcapacity. It was
mature and was expected to show modest growth in the future. The emerging markets presented
significant opportunities for growth but were fiercely competitive. The rivalry amongst car companies
centred on product quality, brand character, design and style, product attributes, safety, price and after-
sales service. The opening of emerging markets, new technologies, fragmentation of markets and
sensitivity to ecological issues drove major industry changes.

With a drop in sales volumes coming at a time when new production facilities had come on stream, the
car industry’s overcapacity problems intensified. The world’s vehicle industry had the capacity to
make 77 million cars and commercial vehicles a year but sales of only 47 million. With supply likely
to exceed demand by a high margin, car makers were under pressure to cut prices, cut costs, merge or
close. There had been a flurry of mergers and acquisitions since the overcapacity problem had
increased the pressure on the industry to consolidate. Daimler and Chrysler had joined forces,
Ssangyong and Samsung had been absorbed by Daewoo, Kia and Asia motors had gone to Hyundai,
Ford had acquired Volvo’s car operations and Renault had taken a controlling stake in Nissan.

Source: Motor business Europe.

Copyright © 2003 INSEAD 15 09/2006-5161


Exhibit 5
Pricing Information

Average UK Prices 1996 - 1999


A v e ra g e N e w C a r P ric e (£ ) 19 9 6 1997 1998 1999
T o ta l M a rk e t 1 34 4 2 14 1 4 3 14667 14583
S e g m e n t A 0 - T o ta l M a rk e t 85 9 6 9006 9352 9544
S e g m e n t A - T o ta l M a rk e t 1 25 1 4 12 8 7 3 13302 13615
Š ko d a 75 0 3 7951 8168 10197
A0
F e lic ia (Tot a l) 75 0 3 7951 8168 8627
F e lic ia C o m bi 87 2 3 8956 9469 10075
A
O c t a via (To t al) 14653
O c t a via C o m b i 15535
F ia t 89 3 3 9683 10641 9823
A0
Uno 66 3 7
P u n to 9021 8671
A
B ra va 1 14 3 9 12 1 5 0 12816 12321
B ra vo 1 13 5 8 11 7 6 5 12639 12272
M a re a 14 3 9 4 14369 14954
F o rd 1 17 2 6 11 7 7 4 12415 12289
A0
F ie s t a 86 3 8 9553 9560
A
F oc us 13919
E s c o rt 1 29 2 2 12 4 4 3 12449 11722
V a u x h a ll 1 20 8 5 12 6 3 4 12677 12671
A0
C o rs a 90 1 0 9172 9069 9091
A
A s t ra 1 23 5 2 12 5 6 2 13464 13432
Re n a u lt 1 13 2 4 11 5 4 0 12316 12414
A0
C lio 92 4 6 8967 9505
A
M egane 1 25 1 1 12 6 4 7 13685 13810
Pe uge ot 1 11 5 1 11 8 0 5 12527 11874
A0
206 10645
205
A
306 1 26 0 7 12 9 2 8 13547 13717
Hyu n d a i 1 05 2 1 10 5 0 6 11151 10440
A
A c c ent 8853 8990 8575
V o lvo 1 93 8 6 20 8 4 4 22267 21503

Copyright © 2003 INSEAD 16 09/2006-5161


Exhibit 6
Competition in the UK Market – Market Share

Markenprofil

UK Market Shares1996- 1999

1996 1997 1998 1999


Total Market 2 025 450 2 170 725 2 247 402 2 197 615
Fiat 85 948 88 328 92 256 77 080
MShare 4,2% 4,1% 4,1% 3,5%
Renault 132 374 159 235 180 319 165 144
MShare 6,5% 7,3% 8,0% 7,5%
Volvo 33 737 40 485 37 585 39 217
MShare 1,7% 1,9% 1,7% 1,8%
Skoda 13 017 15 750 20 564 21 738
MShare 0,6% 0,7% 0,9% 1,0%
Ford 394 425 392 432 400 280 379 816
MShare 19,5% 18,1% 17,8% 17,3%
Vauxhall 283 982 294 550 282 560 291 598
MShare 14,0% 13,6% 12,6% 13,3%

Copyright © 2003 INSEAD 17 09/2006-5161


List of Accompanying Advertisements on CD

1. 1992 – Škoda Forman ads (2)

2. 1995 – Škoda Umbrella ads (VW-Škoda association) (2)

3. 1996 – Felicia re-launch in UK ad (1)

4. 1997 – Octavia “The new face of Škoda” ads + Škoda Heritage ad (3)

5. 1998 – Octavia new campaign ads (Global, CZ, France, Italy) (5)

6. 1998 – Octavia UK “The way things should be” (1)

7. 2000 – Fabia Europe launch (Germany, France, not UK) (3)

Copyright © 2003 INSEAD 18 09/2006-5161


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