Case 8 Netflix Versus Blockbuster Versus Video-on-Demand

Executive Summary
With the autocratic management style of Ferdinand Piëch, VW was able to expand and grow during a time when there were increasing cost pressures on automakers world wide. Innovations in the manufacturing process through integration and redesign of the value chain helped VW group reduce set up costs, manufacturing costs and labour costs while significantly reducing development times and costs of new models. Although Piëch was basically a one man band having control of the R & D, Quality, Production and Purchasing departments, his direction has left the incoming CEO with a solid base to further develop and grow the VW group. His vision and drive have placed VW in the position of number one automaker in Europe with market share well ahead of the nearest competitor.

He has also globalised the brand with construction of plants in Asia, South America and Eastern Europe. These strategies have helped reduce labour costs at home and develop a more flexible work force. In purchasing high profile, luxury brand car makers in Lamborghini, Bugatti and Bentley and turning around the fortunes of the lower end models in the group, Piëch has created a brand that is able to position itself in most markets and defend its territory from competitors by having the ability to be able to change the focus to these markets as required. This has been achieved through streamlining the VW groups manufacturing processes.

Volkswagen AG is about to begin the next chapter in its long history as a leading European auto maker as CEO Ferdinand Piëch prepares to stand aside after nine years and three months in office. It is agreed that during his tenure he turned VW around and made it one of the most innovative and productive manufacturers in Europe. As the new CEO prepares to step in he will be faced with new challenges and hurdles. This paper will offer some recommendations on what Piëch’s successor should be concerned about. In achieving this the Piëch years will be reviewed with the key success factors of his tenure highlighted. Volkswagen Pre-1993

In 1993 when Dr Ferdinand Piëch was named CEO of Volkswagen Group, he stepped in to a company in dire straits. Customers were unhappy with the automakers offerings and complained about high prices. Manufacturing costs were high and processes were inefficient, the main factory in Wolfsburg, Germany, was only breaking even at utilisation rates above 100 percent and there was an estimated 30,000 surplus staff. There was stiff competition from the Japanese competitors who enjoyed a cost advantage of up to E2,500 per car in their newly built plants in the UK. In addition to these, in 1992, profits were down 85 percent (Gamble, Strickland, Thompson, 2006: p. C-429). The root cause of Volkswagen’s problems can be traced back to a number of factors. Firstly, consumers at the time were increasingly influential on the market.

They were ‘increasingly looking for innovation in products and processes. Customers were increasingly looking for lifestyle/niche models’ (Gamble, et. Al: p. C-430). From my analysis of this situation, it would seem that Volkswagen were out of touch with consumers. They were happy to continue with production of their successful Polo and Golf models and were not producing automobiles that appealed to customers. Thus the significant decrease in profit at the end of 1992. My analysis also suggests that Volkswagen had serious production and manufacturing process issues. The statement that ‘the main factory in Germany was only breaking even at utilisation rates above 100 percent’ suggests that it was using out dated production processes. The costs of maintaining these out dated processes would be considerable and have a direct impact on the group’s profits.

The cause of this could be partly contributed to the fact that they had 40 percent government ownership with members sitting on the Board of Directors. In light of this situation, it would have been relatively difficult to implement major changes in order to arrest the spiraling manufacturing costs. It is suggested that there were 30,000 surplus staff in the company. While major cost savings could be achieved with the review of labour levels, the political situation faced by the group was not contingent to allowing mass lay-offs or redundancies. There would have been considerable pressure from the government of the time to avoid any political backlash to them that would result from mass redundancies. Volkswagen had a history of strong loyalty to workers and had never laid staff off.

This no doubt allowed for a strong union and heavily unionised workforce to develop. Any plans for the future would have to have included a strategy to negotiate major acceptable changes with the union representatives. In terms of the market place, Volkswagen was having an image problem. They were renowned for their vehicle reliability, but they were also renowned for stodgy, boring vehicles (Woodruff and Naughton, 1998). This had developed as a result of their mass production, mass market image created by the long-run success of the Beetle. There was little product differentiation and few models to choose from. While this model may have suited the Chinese market where VW had a strong presence, it was not suited to the European and U.S. markets where consumers were increasingly looking for lifestyle/niche models. Issues facing the auto industry and Volkswagen AG in the 1990’s The 1990’s were a decade of major changes for the auto manufacturing industry. From the Industry Analysis in Appendix A and the PEST analysis in Appendix B the following conclusions have been drawn. Companies were finding that they had to improve production processes drastically to reduce costs sufficiently to keep up with the Japanese automakers.

Studies at the time showed that the Japanese auto makers were 35 percent more efficient than their U.S. and European counter parts (Gamble et. Al., 2006: p. 430). This allowed them to take market share off of their competitors and increase profits. The period also saw a shift away from the core business of vehicle manufacturing and diversification into products associated with them (Gamble, et. Al, 2006: p. C431). Low growth and low consumer demand, coupled with an increase in competition saw the automakers pursue other avenues for profit. In order to increase profits and satisfy investor expectations there had to review their businesses and move outside their cores. This saw a move into car finance, leasing, insurance and a greater focus on providing end user services. This proved successful for the automakers who were able to maintain cash flow despite the decrease in demand for their vehicles.

The 1990’s also saw a significant decrease in the number of independent automakers. There were a number of mergers of the ‘big’ automakers as they pursued better practices and differentiation. They realised that by merging with competitors or acquiring them, they could learn from each other and implement improvements to increase profitability. The period was an era of high innovation in products and processes. By merging, companies could take advantage of the acquired companies strengths in these areas as well as reduce overall costs. This also gave them access to more segments of the market, as there were able to offer a wider product range. It was also a period of reduced development times. The efficiencies that the Japanese automakers were finding was not just in vehicle manufacturing, it flowed through the whole manufacturing process. They were able to introduce new models more quickly than competitors as result of decreased development times. This affected all of the automakers accordingly. Financial performance between 1993 and 2001

Appendix D and E and F provide detailed information on the performance of the Volkswagen group during the period of Ferdinand Piëch’s era as CEO. To summarise the key points:

Sales doubled during the period as a result of strong foreign sales results. Cost of materials remained stable despite more technologically advanced cars – result of better practices

Although workforce numbers increased, labour cost as a percentage of sales declined significantly as a result of increased production overseas with a cheaper labour force Diversification into other auto industry related ventures with strong growth, i.e. financial services Other Key points summarized from Gamble, et. Al, 2006

Investment in prestigious brands and turnaround of former loser brands Cut costly duplication of investment
Cut down of parts proliferation within the group
Rationalized the production of different models of vehicles Made each model responsible for its own success

I have also drawn the following assumptions after discussions with my colleagues, Rodney Chadwick and Peter Hickey: Combination of reduced costs through improved labour practices Increased sales turnover – repositioning of products

Market capitalization increased essentially share price
Assuming no shares issued
In 2000 did a buy back of shares resulting in decrease of capitalisation Loss of market confidence from 1998 to 99

These results were essentially achieved by changing the company’s cost
structure and value chain after 1994. It is apparent from the information provided that significant savings were made from an increased focus on their manufacturing processes. There was a comprehensive review done of utilisation of plants, labour and research and development. In addition, the group was rationalized and more cooperation among the brands in was pursued. Although Audi and VW were marketed around the world as separate identities, in the background there was significant cross utilisation of core competencies and technologies. Value chain reconfiguration at VW played an important role in its’ turnaround strategy.

All business divisions were reviewed and changes made accordingly. There were significant inefficiencies across the value chain that had been allowed to develop over the company’s history. Purchasing improvements were achieved through close work with suppliers. Following in the steps of the Japanese automakers, VW was able to achieve cost savings through their materials and components Production methods were where the biggest savings and quality improvements were achieved.

Utilisation of current platforms lead to shorter development times, lower development costs and economies of scale in procurement (Gamble, et. Al, 2006: C443). At a time when R & D costs were high, savings made here were significant for the turn around strategy. Some of the innovative approaches Piëch implemented include (Gamble, et. A, 2006: p. C446): 1.Audi engine plant – went from Audi engine plant to component supplier for the group 2.Skoda – supplier integration

3.Brazil plant – pioneered production processes
4.Modular manufacturing system – increase in some components 5.Flexible production schedule in Germany
Supported in Gamble, et al. (2006) is the fact that the changes implemented here allowed for under utilised plants to pick up production from other plants. This effectively increased productivity across the group. In terms of R & D, the increased cooperation between Audi and VW led to a strategic fit in R & D and technology activities. Technology introduced on one side could be cross-utilised on the other. Up until Piëch tookover it appears that these activities were independent of each other. For Sales and Marketing, VW and Audi dealerships were kept separate and distinct (Gamble, et. Al. 2006: p.C449).

This allowed for differentiation of the brands and avoided dilution of them. Consumers were able to clearly see the different models and services available to them and make choice based on this. VW had the ability to leverage use of a well-known and competitively powerful brand name (Gamble, et. Al. 2006: p. 233). Their strategy appears to have focussed around this with the revamping of the Beetle brand. Following the success of this, an increased or returned consumer awareness of the VW brand allowed for interest to be generated when new models were introduced. Labour policies

VW’s global expansion and internationalisation has impacted on its labour policies, none more so than at home in Germany. As discussed earlier, VW was synonymous with having surplus staff and it was a well known fact that they had never made staff redundant since foundation in 1943, a fact that the group was proud of. In the face of a decline in market share and market demand some serious decisions needed to be made. Rather than resort to making staff redundant Piëch sat down with Unions and negotiated a change to the labour agreement in Germany. He implemented a flexible production schedule implemented to reduce peaks and troughs (Gamble, et. Al. 2006: p. C466). The effects of this can been seen in the labour cost figures in Appendix E. Interntaionalisation of the labour force led to a weakening of the power of the unions in Germany. As a result of the integration of their production processes, VW were able to achieve bargaining power with the unions.

From my analysis I believe that the ability to move production away from plants threatening strike action would have significantly reduced unions desire to persue strike action. In effect the unions action would not achieve the disruptions that had previously been experienced in the past. The internationalization of its labour force also allows VW to use location to build competitive advantage. Essentially it can develop technology at home with its highly skilled workers. Once this has been successful and any issues and problems have been resolved with the production process they would be able to transfer the technology to a cheaper area and mass produce it. This allows them to offer technological advancements at a cheaper cost to lower priced car models in their range. Leadership

The above discussion offers an idea of the success that VW has achieved over the past decade. This success could not have been achieved without a strong leader who had drive and passion. Dr. Ferdinand Piëch’s leadership style as CEO of Volkswagen Group has been best summed up as autocratic (Woodruff and Naughton 1998) As the CEO he made himself responsible for R & D, Quality, Production and Purchasing departments. This is practically unheard of in the industry. The destiny and power of probably the most important departments of an auto maker, and what would normally be covered by 4 other Executives, was put in the hands of one person.

By having control of these departments he effectively has control over the destiny of the entire Group. In addition to this, as CEO he quickly reduced the Board of Directors from 9 to 5. The ensuing Board being personally hand picked by Piëch himself. Discussions in the readings suggest he was quick to remove any manager who questioned his authority or decisions. In light of this leadership style, it is my conclusion that with his retirement, VW has been put in a precarious position. His departure is effectively seeing the departure of 4 persons experience. It would appear that there were no successor plans put in place for his retirement leaving a large experience gap. While there would be experienced staff in the VW group itself, Piëch’s leadership style would not have allowed them to gain the necessary management and leadership skills necessary to keep VW moving forward along the successful path it has come.

This leads to a discussion of what Piëch’s successor will have to be concerned about. As when any new CEO takes over after a successful CEO, especially one who has turned a company around the way Ferdinand Piëch has, there are the usual questions of will they be able to live up to expectations. Will they continue moving the VW group ahead. How will they maintain the growth and profitability that the stakeholders have become accustomed to? Recommendations

In offering recommendations I have conducted a number of analysis, refer to Appendix C and H. The strategies recommended here-in are to exploit and invest based on strengths and foreseeable opportunities and to defend against rising threats and apparent weaknesses. Offensive strategy

Leverage brand name recognition with more sponsorship of sporting events – with special focus on emerging markets of China and South America Negotiate a sponsorship deal for the 2008 Beijing Olympics with the aim at becoming ‘Official Vehicle’ of the Olympics – VW is already internationally recognised and the Olympics being the biggest sporting event in the world would further expose the VW name Test new technology in high end models with vision to introduce in lower end models after proving – take advantage of cost efficiencies and technological ability of production centres to reduce the cost of expensive technology and be market leader in introducing to lower end models Defensive Strategy

Increase R & D into fuel cell technology – follow on from Piëch’s vision and research into producing vehicles that can travel 100km on 1 litre of fuel. Focus on TDI engine technology – the above fuel cell technology could be developed and tested here. Recruit leading industry specialists to fill the gaps left by Piëch’s departure and implement a strong successor planning program to avoid a repeat of the situation. Build on model range of higher end brands namely Audi to fend of Lexus. Conclusion

In conclusion, while it would appear that the successor to Ferdinand Piëch would have a tough time ahead of him to emulate the success that he has achieved during his time at Volkswagen AG, a solid base has been set for them to build on. Piech reinvented the group and has provided a wide product range for his successor to exploit. With the auto industry continuosly changing I believe that VW is positioned with its resources and key competencies to be able to forge ahead with the success that Piëch achieved. References:

Thompson, A. A, Gamble, J. E. and Stickland, A. J., 2006, Strategy – Winning in the Marketplace, 2nd edn, McGraw-Hill/Irwin, Boston Volkswagen, 2000, Annual Report, Volkswagen AG, Finanz-Analytik und-Publitzität, Wolfsburg, pp. 108 – 111 Woodruff, D and Naughton, K., 1998, “Hard Driving Boss” in Business Week, Issue 3598, 10/05/98, pp.82-90

Volkswagen AG PEST Analysis

Political factors
-ownership structure of VW heavily influenced by Government due to 40% ownership by Federal and local government -local workforce highly unionized
Economic factors
-European automakers facing worst recession in 30 years
-Resultant 13% decline in production in Europe
-In US, sales had fallen from 600,000 units in 1970 to 50,000 units in 1993 -Had less than 2% market share in Asia
-Further international expansion could possibly leave VW in a difficult financial position -Low profitability, high cost of R & D
-Japanese automakers efficiency
-General skills shortage internationally
-Increased market demand for low priced vehicles across the industry Social Factors
-In 1991 VW provided 20% of employment and 50% of exports to Lower Saxony economy -Customers complained about high prices of the VW group
-High sick leave rate amongst employees
-Estimated 30,000 surplus staff
-Factories located in poorly developed areas
-Had never made staff redundant in company’s history
-Low choice of car models
-Compete and cooperate work culture rising among competitors -Market maturing worldwide wanting niche products
-Globalisation of industry
Technological Factors
-had 30 models on 16 platforms resulting in high production costs – only make money when plant running on overtime -little integration between Audi and VW – e.g. 2 different V6 engines -High R & D costs in motor industry

-Need for efficient engines
-Inefficient manufacturing processes

Leave a Reply

Your email address will not be published. Required fields are marked *