Tiffin Volkswagen do Brasil Driving Strategy with Balanced Scorecard Discussion Please answer the questions (only write two pages please or less, NO MORE T

Tiffin Volkswagen do Brasil Driving Strategy with Balanced Scorecard Discussion Please answer the questions (only write two pages please or less, NO MORE THAN 2 PAGES) with at least 1 reference .please find the attached files for more details .Thanks 9 -1 1 1 -0 4 9
REV: JUNE 24, 2014
ROBERT S. KAPLAN
RICARDO REISEN DE PINHO
Volkswagen do Brasil: Driving Strategy with the
Balanced Scorecard
Thomas Schmall, CEO of Volkswagen do Brasil (VWB), studied the color-coded charts and
indicators on his wall. The data showed financial, customer, process, and employee performance
through end-of-year 2008. Schmall and his management team had introduced the Balanced Scorecard
in 2007 as part of a program to reverse eight consecutive years of market share declines and financial
losses. So far, the turnaround had been successful. The new enthusiasm among the workforce,
consumers, suppliers, and dealers had led to strong sales increases and a return to profitability.
But Schmall, in January 2009, could now see the impact of the global financial crisis. Sales had
plummeted in the fourth quarter, and newly produced vehicles were parked around VWB’s plants
waiting for consumers to begin spending again. (See Exhibit 1 for VWB’s monthly sales.) Many of the
previously green marks on sales and profitability on Schmall’s scorecard had turned yellow and red.
During the previous two months VWB had responded quickly to the slowdown in consumer
purchasing by cutting back production and reducing spending.
Schmall was cautious about whether it was time to restore funding or wait until sales recovered
before gearing up production schedules and resuming the spending on discretionary programs.
Further cutbacks in production schedules and investment would jeopardize plans for market share
expansion and new product development. VWB, located far from the company headquarters in
Wolfsburg, Germany, had considerable discretion for local, short-term decisions. The general rule
from corporate headquarters came from a German expression whose English translation was “Drive
as fast as you can see.” Schmall wondered whether the VWB Balanced Scorecard, which had helped
drive growth in 2007 and 2008, could guide his executive team as they made the difficult decisions
ahead.
The Automotive Landscape in Brazil
Brazil had the fifth-largest land area and population in the world. It enjoyed abundant natural
resources, including minerals, water, and large quantities of cultivated and unused fertile land. Brazil
was an attractive consumer market as well as an export platform for commodities and manufactured
goods. Approximately 85% of its 53 million households lived in urban areas, half in the more
developed and industrialized Southeast region, where the per capita income was nearly twice that of
the Northern region.
________________________________________________________________________________________________________________
Professor Robert S. Kaplan and Senior Researcher Ricardo Reisen de Pinho of the Latin America Research Center prepared this case with
guidance and assistance from Professor Krishna Palepu. The authors wish to acknowledge the support and work done on this project by
Christopher Davies Junior. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements,
sources of primary data, or illustrations of effective or ineffective management.
Copyright © 2010, 2014 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be
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111-049
Volkswagen do Brasil: Driving Strategy with the Balanced Scorecard
Brazil’s recent global presence came only after multiple internal and external economic crises. In
1994, the government launched an economic stabilization plan that reduced inflation to single digits
and helped the country become the largest and most diversified economy in Latin America. With
gross domestic product doubling from 1994 to 2008, Brazil now had the world’s ninth-largest
economy.1
Competition in Brazil
The automotive sector produced 19% of Brazilian industrial GDP. The sector employed, directly
or indirectly, more than 1.5 million people in more than 200,000 companies. North American and
European automobile manufacturers had entered Brazil in the first half of the 20th century by
assembling vehicles from completely or semi-knocked-down imported kits. In 1955, the Brazilian
government mandated that the multinational companies either abandon the Brazilian market or
begin producing vehicles with 90% to 95% local content within five years.2
By 2008, Brazil had 25 automotive assemblers producing cars, light commercial vehicles, trucks,
and tractors in 49 industrial plants. Brazil’s automotive industry had a total installed production
capacity of 4.0 million vehicles per year and total revenue of $74.0 billion.3 Globally, Brazil was the
sixth largest producer of passenger vehicles and the fifth largest consumer market.4
VW, Ford, General Motors, and Fiat had been the market leaders for decades. In 1991, these four
manufacturers held a 97% share of the Brazilian market, but by 2008 their share had declined to 77%
as French producers expanded their presence and strong companies from Japan, Korea, and China
entered. Much of the increased share for these new competitors had come from VWB, but Schmall
still saw opportunities for growth in the country’s market:
The Brazilian auto market has 6.9 inhabitants per vehicle compared to a ratio between 1 and
2 in the U.S. and Germany, about 3 in South Korea, and 4 in Mexico. We should catch up by
2015, and then Brazil will shift to a replacement-type market.
Volkswagen do Brasil
In 2008, Volkswagen Group (VWAG) had a global market share of 10.3%, making it the thirdlargest automotive company in the world. It employed 370,000 people and generated revenues of
€113 billion from sales of 6.3 million vehicles across 10 different brands, including 3.6 million under
the VW brand.5 In July 2008, VWAG announced an ambitious 10-year vision for the VW brand: “By
2018, we aim to sell 6.6 million [VW] vehicles per year, achieve a 21% return on investment, be
viewed as the top employer, and earn the industry’s top ratings for customer satisfaction and process
quality.”6
VWAG’s Brazilian subsidiary, VWB, was the third-largest in the VWAG system, behind China and
Germany. It operated four plants, produced revenues of €7.04 billion, and employed about 22,000
people. While focused on small and midsize vehicles, such as the Gol, Fox, and Polo, VWB had the
most complete car portfolio within the Brazilian market. It offered 22 different models, 9 of which
had been designed and developed within a modern product design prototype center located at the
São Paulo headquarters plant.
In 1953, VWAG had opened its first production plant outside Germany when 12 employees began
assembling the popular “Beetle” sedan from imported parts in a rented warehouse in São Paulo.7 In
1956, VWB introduced a van with 50% of parts and components produced in Brazil. By 1969, VWB’s
2
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Volkswagen do Brasil: Driving Strategy with the Balanced Scorecard
111-049
strategy of producing reliable and inexpensive cars had earned it a 61% share of Brazil’s car
production.8
In the 1970s, VWB launched medium-sized cars, such as the Passat, for export into the
international market and created the first ethanol-fueled vehicle.9 By the end of the decade, the
company accounted for 40% of Brazil’s auto exports, shipping vehicles to Europe, North America,
Africa, and the Middle East.
In 1986, overcapacity and Brazil’s dire macroeconomic situation led to a 20% decline in the
domestic automotive market.10 From that point, the industry was highly volatile. During the first
years of the 1990s, the market expanded rapidly and total Brazilian production output exceeded 1.1
million vehicles in 1993, peaking at 1.6 million units in 1997.11 Then Brazil experienced several
regional and global crises12 and production levels fell back to 1.1 million units in 1999, returning to
the previous peak level only by 2003.
VWB’s domestic sales dropped from 580,000 vehicles in 1997 to 280,000 units in 2003. From its
No. 1 market share position of more than 30%, it dropped to No. 2 in 2001 and to No. 3 in 2003 with
a 21% share. VWB attempted to maintain minimum production levels by emphasizing exports, which
increased from 45,000 vehicles in 1997 to 164,000 in 2003. 13 (Exhibits 2a and 2b show recent history of
VWB’s market share, sales, and revenues.) Schmall commented on the dilemma faced by VWB
during this period:
The appreciation of the Brazilian currency, relative to the dollar and euro, along with
increases in the local labor and raw materials costs ended up defeating VWB’s export-led
market strategy. Because of intense competition in global markets, VWB could not raise prices
on products shipped and export margins failed to cover the company’s excess capacity costs.
Adjusting to its new market position, VWB, in 2003, began the first phase of a restructuring plan.
While some progress occurred, VWB still posted its eighth consecutive year of losses in 2006, and two
key consumer indicators, “Things Gone Wrong” (TGW) and “Customer Satisfaction Index” (CSI), fell
short of management objectives.
The New VWB Management Team
In 2007, VWAG appointed Thomas Schmall as CEO of VWB. Schmall had started his career as an
assembly-line supervisor; he subsequently held various managerial positions at VWAG plants in
South Africa, China, and Mexico. He attracted corporate attention when he introduced new
procedures in the way managers interacted with production lines at Wolfsburg, the largest VWAG
plant in Germany. Schmall recalled:
Traditionally, administrative offices were located far from production lines. I moved
managers inside manufacturing units where they could plan, set targets, align objectives with
all personnel and teams, implement actions and measure their impacts. In 1999, Ferdinand
Piëch, then VWAG’s CEO, asked me to reorganize VWB’s plant in Curitiba, Brazil. After four
challenging years, I moved to Slovakia, where I was responsible for three different VW brands
and 12,000 employees. The success of the Slovakian plant led to my return to Brazil as CEO.
Schmall, now 45 years old, did not want to continue VWB’s reliance on cost reduction, employee
layoffs, and capacity downsizing. Inheriting a company known for using good German technology to
produce small, reliable vehicles, he had an ambitious vision to “build a high performance team that
would drive VWB to become the South American automotive industry’s leader in quality,
3
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111-049
Volkswagen do Brasil: Driving Strategy with the Balanced Scorecard
innovation, sales, and profitability on a sustainable basis.” He wanted to aggressively “re-brand”
VWB into a company with enthusiastic and highly motivated employees who continually introduced
high-performance, innovatively designed cars and light vehicles.
Josef-Fidelis Senn, 53, had been appointed VWB’s vice president of human resources in 2006. Senn
combined initial training as an economist with a doctoral degree in ecology and sustainability.
VWAG recruited him in 1998, from his position at the powerful German Steel Association, to become
human resources manager at one of its largest plants. Senn soon moved on to head global HR
coordination and helped introduce the Balanced Scorecard within this function. His first task for
VWB involved difficult negotiations to restructure a contract with the powerful local workers’ union.
Senn commented on the state of VWB’s employee relations:
The difficult years had made VWB bureaucratic and conservative and created an
atmosphere of apprehension and instability among the workers. A 2005 Gallup survey showed
a low score for employee commitment and satisfaction. In our 2006 labor negotiations, we
reached an impasse that could have triggered a long and harmful series of strikes at a crucial
point in the company’s turnaround strategy. At the end, we had only a few shutdowns and
were able to reduce our workforce through buyouts and early retirement plans, and to
introduce a new compensation structure and more flexible work arrangements.
The change in our management approach for working with employees was crucial to
establishing a new culture that could sustain improved financial performance. Before 2007, if a
tension existed between volume and quality, the culture tilted towards maintaining production
volumes. We wanted to instill a new culture for employees to solve problems as they arose,
eliminate defects, and reduce health and safety incidents even if these actions cost money and
decreased short-run production output.
Carsteen Isensee, 50, became VWB’s CFO in 2007. He had worked in planning and finance
throughout his VW career, including joint venture projects in China and as plant controller in
Slovakia and South Africa. Isensee commented on VWB’s situation when he arrived:
It was a period of cost cutting and workforce reduction, low corporate morale, and the
constant threat of having its unprofitable operations shut down by the German head office. We
had to reeducate the VWB management team to spend money wisely so that we could afford
to enlarge markets, improve processes, and innovate on new products.
Schmall included Senn and Isensee within an 11-person Executive Committee that would lead
VWB’s transformation (see Exhibit 3).
Using a Strategy Map and Balanced Scorecard for Cultural and Strategic
Change
The Executive Committee understood that to change VWB’s bureaucratic and slow-moving
company culture required new relationships with key stakeholders: employees, suppliers, and
dealers. Schmall and Senn had prior experience with the Balanced Scorecard (BSC) and believed its
introduction into VWB would accelerate the adoption of the new strategy and culture. Senn
commented:
We needed a tool that could change the mind-set of the company, something that could
help us communicate our objectives down to the factory floor. This would require a new
4
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Volkswagen do Brasil: Driving Strategy with the Balanced Scorecard
111-049
approach from top management, and a dedicated and empowered team responsible for
implementing and controlling this effort.
Schmall wanted the tool to become VWB’s primary management system. He appointed Senn’s
department to lead the project with Isensee’s Financial and Planning departments providing analytic
support. The initial task force, called the Strategy/BSC Committee, developed a strategy map based
on four Challenging Dimensions: Finance, Customer, Internal Process, and Potential and Growth.
(Exhibit 4 shows VWB’s Strategic Map for 2009, unchanged from the initial 2007 map, except for the
addition of a sustainability objective in the Potential and Growth dimension.)
The strategy map’s Customer objective, “Satisfy the Customer’s Expectations,” encompassed
dealers, VWB’s immediate customer, and consumers, the ultimate purchasers of VWB’s vehicles. The
second Customer objective, “Improve Company Image,” signaled the importance of rebranding VWB
as an innovative producer of high-quality vehicles. The Process objectives stressed developing a more
service-oriented culture among dealers, reducing costs while improving the quality and delivery
performance of suppliers, and, especially, improving the efficiency, cost, and flexibility of the
workforce and production system. The foundational Potential and Growth Challenge objectives
emphasized achieving a high-performance culture, developing an attractive and innovative mix of
products, and making a long-term commitment to sustainability. Collectively, the executive team
expected that achieving the objectives in the four challenge areas would enable the company to
regain its No. 1 market position in Brazil.
Schmall commented on the reasons for developing the strategy map:
The map describes the strategy in a consistent and clear manner. The cause and effect
relations defined in the map clearly demonstrate how intangible assets, such as our employees,
get converted into tangible financial results. The map also translates the strategy into a
language that everyone can understand. It has the power to decode high-level objectives into
operational terms that mobilize our employee teams and enable them to monitor their results.
It establishes a direct relationship from the CEO to shop floor employees.
He added:
We started by identifying, within the four BSC dimensions, the limited number of
objectives that would reflect the company’s strategic priorities. More than 20 would make the
map look like a forest and our employees would get lost. Developing the right metrics to
translate the strategic objectives was as important as defining the objectives themselves. And
we had to establish challenging, yet attainable, targets for each metric to motivate every area in
the company to achieve excellent results.
VWB’s Executive Committee translated each strategy map objective into specific indicators and
assigned an executive to each objective (see Exhibit 5). The objective owner had the responsibility for
monitoring and achieving the performance targets for each of the objective’s metrics. The executive
owner also helped to select and guide the strategic initiatives that would drive performance for the
objective, and oversee the periodic data collection and reporting for the metrics and initiatives.
The executives developed action plans, detailing which department would be responsible for a
specific achievement, the milestones to be accomplished during a certain period of time, and, finally,
a description of the necessary resources to be allocated to carry out that target. Top management
revised these action plans quarterly and thoroughly discussed them with middle and front-line
management levels.
5
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Volkswagen do Brasil: Driving Strategy with the Balanced Scorecard
With the senior executive team on board for the strategic direction, Schmall, Senn, and Isensee
then presented the map and accompanying scorecard to the next level of 400 VWB executives as the
first milestone in the new transformation program, called Act to Win. “It had an impressive impact
on us,” said Flávio Ramalho, a senior manufacturing manager. “With the CEO leading the event,
supported by all the top management, everyone clearly understood that something big and
important had just been launched.”
Following this initial presentation, all VWB executives went through a two-day training program
on the new strategy and the role of the strategy map and scorecard to help execute it.
Communicating the Balanced Scorecard
Th…
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