A Case on Volkswagen do Brasil: Brasil: Driving Strategy with the Balance Balance Scorecard
August 19, 2014
I.
Introduction Volkswagen do Brasil Ltda. (VWB) is a subsidiary of Volkswagen Group (“VWAG”)
established in 1953. In 1969, VWB had earned a 61% share of Brazil’s car production by using a strategy of producing reliable and inexpensive cars. In 1970, VWB launched medium-sized cars for export in the international market earning them 40% of Brazil’s auto exports and shipping vehicles to other parts of the world. In 1986, the company overproduced that led to 20% decline in the domestic automotive market. From years 19942008, the automotive industry is highly volatile. With a market share in Brazil of more than 30% in 1994-1997, it drop to 21% share in 2003, as the lowest. By the end of 2007, VWB managed to recover and held a percentage higher than General Motors, Ford, and other automotive companies. The meltdown of subprime mortgage market due to valuation issues led to the financial crisis in 2007. In 2008, VWB’s market share position started to decline and dropped to the third spot with a share lower than other automotive companies. On the other hand, VWB export and domestic sales increased in years 2007-2008 and so did the revenue. The use of Balance Scorecard by VWB may have helped the growth in 2007 and 2008 despite the financial crisis. It was also introduced to help them reverse the consecutive years of decline in market share and financial losses. Only at the beginning of 2009, Thomas Schmall, CEO of Volkswagen, saw the impact of the global financial crisis. A decline in sales and stagnant turnover of newlyproduced vehicles were evident during those times. In order to reduce the negative effects to the company’s operations, VWB decided to cut back production by 15% and further reduce its costs.
II.
Statement of the Problem The purpose of this case study is to identify effects of the 2008 global financial crisis
on the automotive industry in Brazil, specifically VWB. We will be analyzing the different alternatives and will choose one that best fits the vision, mission and strategies set by the company. Hence, we have formulated a question to guide us in achieving our goal: Given the aftermath of the financial crisis, is it the right time for VWB to immediately restore production levels and spending on discretionary programs or wait until sales recover?
III.
SWOT Analysis
Strengths
Weaknesses
- Global Presence
- Most cars are not environment-friendly
-Largest network of dealers in Brazil
- Increased labor and raw materials cost
- Makes use of both financial and nonfinancial
- Unstable forecast of demand
measures (BSC) - Effective Communication (employees, suppliers, dealers) - Compensation and recognition of employees tied to achievement of targeted performance - Measures, targets, and proposals are reviewed and updated annually; action plans, quarterly - Limited number of objectives are representative of the strategy - Has assigned executive per objective - Administrative offices are relocated near production lines - Extended trainings and recognition programs to its external partners Opportunities
Threats
- Resources found in Brazil (hydrocarbon and
- Global financial crisis
minerals)
- Growing competition
- Buying power of the households in Brazil
- Oversupply of automobiles in the market
- Changing customer needs (demand for more
- Increasing fuel prices
fuel-efficient cars)
Employing 370,000 people and generating revenues of 113 billion in the year 2008, the Volkswagen group is considered the third largest automotive company in the world with a 10.3% global market share. Of the 6,300,000 vehicles that was sold across 10 brands to arrive at such revenue, 3,600,000 is from Volkswagen, thus, proving its remarkable global
presence. In order to sustain the level of sales, Volkswagen, specifically Volkswagen do Brasil, makes use of a balance scorecard to assess the current performance of the company. This takes into consideration both the financial and non-financial measures which brings greater chances of having better products, higher customer and employee satisfaction, and higher market shares than the traditional financial measures. It plans to do this by meeting customers’ expectations, improving company image, improving the quality of suppliers, providing more service-oriented culture to dealers, and improving the cost efficiency and flexibility of the production department. In order to do so, VWB makes use of a limited number of objectives that is representative of the whole key strategy of the company. The management also assigns an executive per objective, whose office is placed near the production lines to provide an easy access to communication, so as to ensure that each strategy is met accordingly. To assure the competence of the assigned executives, the company sees to it that the same executives undergo a 2-day training program focused on understanding the new strategy, its role and proper execution. These are beneficial to the company to prevent the employees from getting lost. In order to keep up with the changing environment, the top management also sees to it that action plans are reviewed and updated quarterly, and measures, targets, and proposals annually to increase effectiveness. The importance of understanding the company’s strategy, however, does not rely solely on the executives, thus, the move of VWB to improve communication among all employees, suppliers, and dealers. Relaying information creates awareness among those who are involved in the production, thus, increasing their capability of contributing more to the process in terms of better performance and increased suggestions. To achieve this, VWB makes use of communication programs like trainings, special events, competitions, group discussions, publishing of company’s papers, electronic newspapers and portals, as well as posting strategy maps on the wall of every room. Among those that were considered successful include Giga, a hand shaking robot which asks employees questions about the company’s strategy, and a board game which allows advancement based on the employee’s knowledge of the strategy map. These ensure that employees are constantly reminded of what they should do to bring the company towards its goals. In exchange, employee compensation has been tied up with the achievement of these organizational goals. Acknowledgement of high-performing employees are also done for purposes of promotion, job rotation, and international training. These not only keeps employees motivated and satisfied, but this also assures that the all of the company’s goals are
achieved. Effective communication is also evident among suppliers and dealers which received trainings and coaching from the executives, respectively. Despite such strengths, however, the company also faces some feebleness in the form increased labor and raw materials cost, and unstable forecast demand. Despite the strong brand portfolio that the company offers, the fact that the vehicles emit gasses that bring harm to the environment may cause the company’s growth to be unsustainable. The growing awareness in terms of global warming and greenhouse effects may cause the company to cease operations due to either the government’s or the customer’s decision to stop patronizing Volkswagen’s products. Another weakness of VWB lies in the fact that the export-led market strategy can no longer offset the increase in cost of labor and raw materials. Such increase in cost would mean less profit on the part of the company since it can only give way to a small amount of mark-up. Given the current financial problem of some consumers, the company may have to face losses in the form of high costs or no sales. The fact that VWB was not able to foresee the negative effects and prepare for the cost of the impact of the global financial crisis is another downfall to the company. Apart from these weaknesses, the company also faces threats which they need to attend to. On the top of this list the growing number of competition in the automobile industry in Brazil. Ford, General Motors and Fiat are no longer the only competition of Volkswagen do Brasil for French, Japanese, Korean, and Chinese producers have also invaded the Brazilian market. This threat has been evident in the sudden decrease in the market share of the former 4 companies from 97% to 77% in the year 2008. The impact of global financial crisis on consumers along with the increase in fuel prices also threatens the company as it may lead to a total halt in sales. Given that some of consumer spending capability is reduced, consumers may opt to temporarily deprive themselves of buying cars in order to also save on fuel consumption. Because of this, VWB’s supply may lead to a su rplus and run the risk of obsolescence in the near future. Much opportunity, however, still awaits VWB. Since Brazil is blessed with rich natural resources like minerals and hydrocarbons, the company may explore more of these in order to sustain its growth. Given the increase in fuel prices, Volkswagen may venture on the innovation and production of fuel-efficient cars or those that can make use of fuel that is cheaper than what is ordinarily used; something that the company is not alien to given their production of ethanol-fueled cars in the 1970’s. This can lead to an increase in sale of the
company’s automobiles among those price-sensitive consumers of the Northern region and the non-price sensitive consumers of the Southern region.
IV.
Alternative Courses of Action Three alternatives are provided to answer the problem at hand. These alternatives
are as follows:
First Alternative: Sustain the momentum of change initiated prior to the crisis but refocus efforts on engaging the customers
Second Alternative: Evaluate the economic situation of Brazil in terms of the manufacturing sector’s contribution to GDP.
Third Alternative: Benchmark, by conducting cost analysis and value engine ering, with the leading automotive company in Brazil such as Fiat.
V.
Analysis of Alternative Courses of Action
First Alternative: Sustain the momentum of change initiated prior to the crisis but refocus efforts on engaging the customers Volkswagen do Brazil’s management team has successfully laid the foundation of a stable internal structure. Their combined effort to completely “re-brand” the company has been paying off and Volkswagen do Brazil has started to gain ground in its quest to be back on top of Brazil’s automotive industry. Executing their carefully crafted plan has paid dividends for Volkswagen do Brazil. It has strengthened Volkswagen do Brazil’s relationships with suppliers, employees, and dealers. In the case of Volkswagen do Brazil, maintaining a close professional relationship with suppliers has ensured the quality of inputs, timeliness of deliveries, and continued innovation on supplier products. On the part of dealers, Volkswagen do Brazil’s initiative of establishing a “Dealer Academy” where dealers are trained in the areas of sales, post-sales service, and franchise management training allowed dealers to be more equipped in dealing with customers. Aside from all these things, Volkswagen do Brazil’s efforts to increase overall employee morale, streamline communication between top management to middle management to the assembly line have made Volkswagen do Brazil one of the best places to work in Brazil.
Amidst all this, however, car inventories were increasing faster than consumer sales even prior to the onset of the crisis. This clearly indicates a decreasing demand for Volkswagen vehicles. Prior to the actions taken by Volkswagen do Brazil’s management to “re-brand” the company, the organization was in limbo and a negative image is still imprinted in the minds of consumers. Volkswagen do Brazil suffered consecutive losses prior to the changes implemented. This and other circumstances regarding employee turnover have affected Volkswagen do Brazil’s image to consumers.
The company must maintain its initiative of internal change but it needs to refocus its efforts to engaging consumers and communicating the new Volkswagen do Brazil. Stunting the growth brought upon by the changes implemented will bring no good to the company. It will only affect the performance of the company and its future. Refocusing its efforts towards engaging consumers will help Volkswagen do Brazil introduce its newly overhauled image and structure. The VP for Sales & Marketing must come up with ways to establish a relationship with consumers and communicate the changes made to bring a high quality product to the consumers.
Second Alternative: Evaluate the economic situation of Brazil in terms of the manufacturing sector’s contribution to GDP. Brazil was not critically hit by the global financial crisis because of its relatively closed economy and diversified export mar kets and products. The economy of Brazil sho ws resilience, given massive adjustments among the developed economies. The GDP data of Brazil in the first quarter of 2009 show signs of robust consumption despite the contraction in investment and the collapse of the industrial sector. Throughout the second quarter, the manufacturing industry showed a continuous weak performance, in contrast with the level of performance in 2008. Nevertheless, the manufacturing sector has shown tentative signs of improvement on a monthly basis (Roubini, 2009). With this, the company can increase production levels despite the effects of the global financial crisis in the manufacturing sector. The company should develop new products that can meet the demands of the market and find ways to attract new customers. VWB might experience a slow growth but it will eventually rise, as the benefits from the increase in research and development expense will be realized in the long run. In addition,
if the company focused on developing and producing more fuel-efficient cars in the market, this will meet new customer demands of environment friendly cars. Reducing the CO
2
emission on its entire automotive brand will also increase the brand reputation. Thus, increasing the market share of VWB in Brazil.
Third Alternative: Benchmark, by conducting cost analysis and value engineering, with the leading automotive company in Brazil such as Fiat. Fiat Group Automobiles had been one of the market leaders in the automotive industry in the Brazilian market since 1991. The company defeated VWB’s ranking in 2001 by holding the highest market share in Brazil for selling cars and light vehicles (Refer to Exhibit 2-A). Applying benchmarking may help VWB to decide the restoration of the production level is needed and spending money for further improvements should be advised. An attempt to improve the component’s quality and product design to lower overa ll costs without reducing the required key performance in producing a product is called value engineering activity. Before it can be done, a cost analysis between two companies must be observed. VWB must determine the list of product components and functions that they perform and the current estimated cost. There should be a determination of the relative importance of customers’ requirements where in VWB will conduct a formal survey of prospective customers to rank the relative importance of the product’s features. The last step is to develop relative functional rankings in order to determine the percentage that each component will contribute to a customer feature. After conducting the cost analysis, VWB can start the value engineering (VE) activity. During value engineering, the company must then identify the components for cost reductions by computing for the value index. Once the components have been identified, VWB can proceed to provide cost reduction ideas to improve the function and quality of the products at the lowest possible cost. Finally, these ideas should be evaluated to ensure it’s feasible and acceptable to consumers.
MATRIX: Criteria
Alternative 1 Alternative 2 Alternative 3
1 Increase market share growth (10%)
9%
9%
9%
2 Achieve sustainability (10%)
9%
8%
9%
3 Customer satisfaction (15%)
15%
10%
13%
4 Improve company reputation (15%)
14%
13%
11%
5 Robust production volume strategy (25%)
22%
18%
18%
6 Attractive and Innovative (25%)
20%
24%
24%
89%
82%
84%
Total
VI.
Conclusion VWB is considered as one of the top-performing companies in terms of the
automobiles, along with Ford, General Motors and Fiat. The company used to dominate Brazil with high level of sales and market share before experiencing eight consecutive years of downfall. From being the top ranking automotive manufacturer, it ranked third in terms of market share in Brazil. In an attempt to answer this problem, VWB employed the use of a Balance Scorecard which is considered to be one of VWB’s major strengths. This reversed the situation of VWB, a proof of the employment of quality and effective strategy, until the advent of the global financial crisis with its negative effect becoming evident to Thomas Schmall only two years after. In assessing the current position and making appropriate decisions, management must consider internal and external factors which could affect the business operations and its overall performance. Opportunities for further growth and improvement must fully be maximized in order to expand m arket position in the industry. Amidst the continuous decline in market share and slow sales turnover, VWB’s global presence remains to be intact. Managements must then keep in mind that the decisions they make should be aligned with
the current market opportunities which can generate more sales for the company. The company’s current loopholes in the system as well as other external detrimental factors must be addressed in order to hinder the company from further worsening its current state and incurring more losses. These external factors must be actively faced and dealt with by the management so as to sustain the value of the company to its consumers and the industry as a whole.
VII.
Recommendation Given the three alternatives presented above, the group recommends that the first
alternative be taken; that is, to sustain the momentum of change initiated prior to the crisis but to refocus efforts on engaging customers. Although VWB has made efforts to communicate with and encourage the involvement of employees, suppliers, and dealers, much has not been done to engage another important source of the company’s sales and profits--the customers. Given the fact that the Southern region of Brazil’s spending ability was not affected by the crisis, VWB can greatly target them to reverse the current situation of the company. The Southern region has twice the spending power of those from Northern region, thus, capable of buying new cars despite the increase in fuel prices. VWB may spend more on marketing and advertisement of the vehicles in order to attract these target customers and inform them of the beauty of the company’s products. VWB may gather customers through product launching wherein customers may put the cars into the test. T he company can also make use of promos and discounts for the first few customers who commit to buy. Given the fact that the company will continue incurring discretionary spending, the company may also venture on innovating its vehicles and dominate the market for more fuel efficient cars. This can attract not only those from the southern region, but also, those from the northern who wish to save. The product launching can definitely be of help in raising the awareness of the customers in terms of the environment and how VWB’s products cater to the sustainability of such. Discerning which alternative to employ played part on the arrival of the acceptance decision. The decision was made through the identification of the relevant information needed and used the Balance Scorecard as a guide for the individual analysis of each alternative. However, some external factors such as the political, economic and social aspects were not considered in some of the alternatives established in the case study. We
suggest that a more comprehensive data is necessary to further analyze and evaluate the different alternatives, and to arrive at the decision that best fits the overall strategy of the company. Moreover, measuring the risks involved against the potential benefits of each alternative is crucial in order for Volkswagen do Brazil to have an integrated decision.
VIII.
References
Kaplan, R. S., & De Pinho, R. (2010). Volkswagen do Brasil: Driving Strategy with the Balanced Scorecard. Harvard Business School . Lobato, F.S. (2011). Shale gas, oil, minerals processing offer synergies in Brazil's Amazon basins. Oil & Gas Journal. Retrieved from http://www.ogj.com/articles/print/volume-109/ issue-10/exploration-development/shale-gas-oil-minerals-processing-offersynergies.html Roubini, N. (2009, August 6). Are there bright spots amid the global recession? Retrieved from
Forbes:
http://www.forbes.com/2009/08/05/recession-china-india-qatar-poland-
brazil-opinions-columnists-nouriel-roubini.html
