A CONSULTANCY REPORT ON HOW TO IMPROVE VOLKSWAGEN’S COMPETITIVE ADVANTAGE AND CREATE SUSTAINABLE GROWTH THROUGH RESPONSIBLE MANAGEMENT AND REDUCED PRICE
TABLE OF CONTENT
EXECUTIVE SUMMARY 3
THE COMPANY REPORT 4
1.0 Introduction of the Company 4
1.1 Terms of Reference 7
1.2 SITUATIONAL ANALYSIS 8
1.3 INADEQUACIES & RISK ASSESSMENT 15
1.4 VALUE-BASED INADEQUACIES to be ADDRESSED 17
1.5 EXTERNAL/internal ENVIRONMENT 19
1.5 ANALYSIS Proposal for Value Chain Based Solution to Capture Incremental Value for Actual and Future Shareholders & Stakeholders 23
1.6 Impact of these Initiatives on Strategic Positioning and Future Business Sustainability 27
1.7 RISK FOR NOT IMPLEMENTING THE PROPOSALS 28
EVIDENCE REVIEW 28
2.0 INTRODUCTION TO THE BUSINESS MARKET ENVIRONMENT 28
2.1 THE STRATEGY ROAD MAP METHODOLOGY 28
2.2 BENEFITS OF STRATEGY ROADMAP 31
2.3 IMPLEMENTING AND UPDATING THE STRATEGY MAP 32
2.4 LIMITATIONS OF THE STRATEGY ROADMAPS 32
2.5 THE BALANCED SCORE CARD (BSC) METHODOLOGY 32
2.6 BSC AS A MANAGEMENT SYSTEM 34
2.7 WHY DO COMPANIES NEED A BSC? 34
2.8 CORE ASPECTS OF THE BSC 35
2.9 BENEFITS OF THE BSC 37
2.10 LIMITATIONS OF THE BSC 37
PART 2 OF 2 CONCEPTUAL FRAMEWORK FOR VALUE CREATION 38
2.11 How the Concepts were Applied to Analyse the Problem 46
2.12 Potential DBA Perspectives for Next Stage 47
3.0 REFLECTION FOR EMPLOYABILITY ENHANCEMENT 47
The U.S. Environmental Protection Agency (EPA) triggered Volkswagen’s emission scandal after alleging that Volkswagen Group of America (VW) flouted operational guidelines under Clean Air Act (CAA) by secretly introducing emission control gadgets in all 2-liter diesel engine models produced between 2009 to 2015. The German automaker admitted to developing and installing “defeat devices” for on-road emissions testing to reduce in-use NOₓ emissions by an average of 4 to 10 ratio above standard set by the EPA. Initial reports said an estimated 500,000 vehicles were affected by the device, but as the global drama unfolded, over 11 million VW brands were recalled for replacement and financial compensations worth billions of dollars (Mays., 2015).
This report is written as an internal consultant for VW’s echelon in consideration of its volatile business environment, and to offer effective leadership solutions that also tackle issues on sales and marketing, development and research as well as affordable consumer-friendly innovations.
This study is presented in three parts. First, a situational assessment of VW’s history, current business performance, productivity level, position against competitors in the markets, and value/profits created for both organization and its shareholders. This section includes a comprehensive discourse on “dieselgate” (Siciliano., 2015) together with assessments conducted using proper modules such as SWOT, PESTEL and 5 Forces Analysis to identify VW’s strengths and weaknesses and make recommendations via workable strategies (Strategy Road Map and BSC) toward achieving sustainable growth and increasing shareholder value. This report will also highlight implications for ignoring the consultant’s proposals.
The second section is an evidence review of reports on VW’s shareholder value creation, including whether applied business strategies have been effective and regularly reviewed for improvement.
In conclusion, the last part presents a self-reflection of the consultant’s competence in module-building and implementation.
THE COMPANY REPORT
1.1.0 Introduction of the Company
Established by Adolf Hitler and the German Labour Front in 1937 with head office in Wolfsburg, Germany, Volkswagen became a leading automaker through its Golf model before 1980, following a dramatic fall in global car prices, particularly in the U.S. and Canada. Notwithstanding the huge successes, VW faced aggressive price-based strategies from a group of Japanese and American car manufacturers. The volatile business environment necessitated Chairman Carl Hahn’s decision to shut down factories located in Pennsylvania and New Stanton. Development plans were, however, initiated for expansion to developing countries such as China, Mexico, Portugal, Belgium, Malaysia, and Brazil.
Radical changes in VW’s leadership and innovation strategies have been rewarding in the years preceding 2015. Among the company’s numerous awards are a Consumer Reports first-place award for the Top Sporty Car under $25,000, and top 10 from Car and Driver magazine’s selection (2007) for the GTI models. It’s mid-size Passat model, in 2008, also won Automobile Magazine’s Car of the Year and earned another recognition from Motor Trend which ranked it as best in its class. In addition, the Passat model won Our 10 Best Car awards for 12 consecutive years in December 2017, having held position as North America’s Car of the Year 2015 (Annie., 2007; Joe., 2015; Bertel., 2017).
Despite Volkswagen’s landmark achievements, the EPA’s strict emissions regulation compelled it to end its flagship diesel engines in 2009 and roll out new mechanisms that are within American standards but limited to functioning on only 5 percent bio-diesel, a decision taken by the German carmaker to maintain its consumer warranty.
But the 2015 scandal was a major setback on VW’s competitiveness in the global market, where it recorded a decline of 2.7% by April 2016 as its 16th drop within 18 months (Fortune., 2016). The company also experienced slash in sales volume (1.3% or an approximated 1.46 million cars) in the first quarter of that year and demand for VW brand models plummeted by a small margin in Western Europe, South America, and Asia-Pacific. Although 10% decline in sales was recorded for the U.S. market, the company said in its annual report that sales in North America was static while Central and Eastern Europe soared by up to 3.3% (Yahoo Inc., 2015).
An overview of the Volkswagen Group shows the company documented unprecedented global sales by the end of 2016 and retained its position as one of the biggest brands with excellent R&D, market-savvy designs, and a team of experienced engineers, marketers, distributors and dealerships. Notably, an external analysis on VW shows the impact of negative publicity which was responsible for stunted growth in 2017. This trend, if left unchecked, can cause more devastating outcomes (Sean., 2015; Fox., 2015; Loana., 2017)
While efforts have been made to identify strategic changes that can transform VW business operations for profitability, including positive tangible and intangible capabilities required to st afloat in the highly competitive industry, this report aims at answering the following questions:
- Is value creation an important part of VW’s existence?
- What are the benefits of managing viability?
- In which ways can VW identify and maximize competitive advantage?
- What activities, decisions and culture are required to keep a company in business?
1.1.1 Aim of the Report
Using a mix of business model review and other investigative methods which highlight competitor engagement, this research aims at conducting a thorough analysis of VW’s position in the car-making business to ascertain practicable approaches for competitive advantage, value creation and sustained growth.
1.1.2 Terms of Reference
- To conduct a thorough assessment of VW’s current situation using a business model framework.
- To determine pitfalls in VW and make recommendations using internal and external analytic models such as SWOT, PESTEL and 5 Forces analysis.
- To identify present value-based inadequacies to be addressed over a future-specified time together with a statement of risks to be encountered if no action is taken.
- To suggest important changes to the business model with the aim of achieving new routes to value creation and value delivery for financial value capture.
- To suggest a value chain-based solution with the capacity to attain incremental value-added results for all existing and potential shareholders as well as key stakeholder groups.
- Present a forecast on how the intended tangible outcomes from this strategic initiative will strategically reposition VW and guarantee future business sustainability.
1.1.3 List of Abbreviations
BMW: Bayerische Motoren Werke
BSC: Business Score Card
CSR: Corporate Social Responsibility
EPA: Environmental Protection Agency
HR: Human Resource
VW: Volkswagen or Volkswagen Group of America
1.2 SITUATIONAL ANALYSIS
Volkswagen is considered the most successful multi-brand group in the car manufacturing sector. It has huge stakes from automakers in 7 European countries: Volkswagen Passenger Cars, Audi, SEAT, SKODA, Bugatti, Bentley, Porsche, Volkswagen Commercial Vehicles, Ducati, Scania and MAN. The brands operate as different entities in their different market segments to create value and achieve consumer satisfaction in all market segments. Volkswagen Group is segmented into Commercial Vehicles and Power Engineering, Passenger Cars, and Financial Services (Volkswagen., 2013).
In January 2018 VW’s financial statement showed it surpassed Toyota Motor as the world’s largest car manufacturer, a landmark achievement which the German carmaker attributed to booming sales and massive earnings from its Chinese market, but having achieved the feat, with strategies for 2020 still viable, VW’s recent agreement to pay $22 billion in fines accruing from its dieselgate lawsuit shows there may be no festive celebration in sight. This is more so because companies that make most vehicles don’t actually have to be the most profitable (USA Today., 2017).
A total of 10.31 million vehicles were sold worldwide in 2016, and the record is 3.8% higher from the previous year. Toyota said late January 2018 that it sold 10.18 million vehicles, a decline of about 0.2%, to confirm its slip from the top spot – a position it held in seven out of the last eight years since toppling GM in 2008.
Image 1: Volkswagen Global Supplies (Source: Volkswagen AG)
Image 2: VW Global Growth Rates (Source: Volkswagen AG)
VW in 2016 sold a total of 3.98 million cars (12% increase) in China while 591,100-unit sales in the U.S. show a decline by 2.6%. By 2017, the Asian country surpassed Europe as VW’s largest market for new cars although sales in Eurozone rose by 4% in 2016 (VW AG., 2018) thanks to the company’s 2015 diversification strategy which significantly spread risks to safeguard against further setbacks caused by the emissions scandal. However, many temporary staff were laid off and short-time jobs were introduced at some plants. Importantly, government stimulus packages aided VW’s emergence from the crisis and has served as a guarantee for the company’s financial services division.
This study uses horizontal analysis to establish Volkswagen’s yearly growth in comparison to its competitors. A horizontal assessment helps a company to identify growth patterns and cyclicality whereas the vertical analysis aims at collating and measuring relative changes in costs structure and margins against contenders in the market. Graphical presentations of VW and BMW’s horizontal and vertical analysis are found below:
Table 1: Horizontal Analysis of VW
Table 2: Horizontal Analysis of BMW
Allude to appendix 3 for horizontal analysis findings
Table 4: Vertical Analysis of VW
Table 5: Vertical Analysis of BMW
A comparison of Volkswagen Groups’ revenues and gross profit measured against market rival BMW shows wide discrepancies. VW maintained a front position as the highest volume automaker in the world as of 2016, having recorded around 10.4 million-unit sales vehicles and amassed nearly $230 billion US dollars in revenue. As the tables show, VW recorded higher earnings in the years between 2012 to 2016 despite declining by 7.2% in 2015 and on the other hand, its competitor BMW experienced slow but incremental growth.
Image 4: VW’s Stock Price against Competitors 2015 (Source: Statistica)
By December 2015, VW Group’s market share dropped to 24.5% from 26.8% in the previous year, and the brand share tumbled to 12.2% from 13.5% despite a 4.2% increase in sales. The mark was lashed for falling below expectations in the wider market, which rose steeply 13.7%, totalling around 1.12 million.
According to a statistical interpretation released by the European Automobile Manufacturers Associations, sales at BMW increased by 11% (Bloomberg., 2016).
1.2.3 The Balanced Score Card Solution
Volkswagen AG understands that solvency, liquidity, and profitability are every company’s key factors for business survival but BMW’s high debt/equity ratio generally shows the company achieved success by aggressively financing its growth with debt. It is therefore feasible for companies to increase earnings through additional interest expenses.
BMW’s accounts receivables suggest it either functions on a cash basis or has an efficient method of credit extension and/or collection of accounts receivable whereas Volkswagen’s low accounts receivables turnover ratio identified the importance of re-assessing its current credit policies to create room for an efficient and timely collection of imparted credit, which has been stagnant in terms of interest earnings.
1.3 Strategic Analysis to Ascertain the Current Business Model
Volkswagen holds a central role in the automobile industry and has made contributed to the world economy through strategic changes and continuous structural adjustments to keep pace with changing market conditions. The challenges posed by factors such as rigid government regulations, economic volatility, unyielding competition, and customer preferences cannot be overlooked.
Goldman Sachs, in its financial performance survey conducted to differentiate automakers according to their ratio of profits and expenditure, confirmed that BMW, Mercedes Benz of Daimler Chrysler, Porsche, Peugeot, Honda, Nissan, Kia and Hyundai earn more than their cost of production whereas Volkswagen, alongside other brands like Renault, Fiat, Mazda and Mitsubishi were crowned champions in value damage (The Economist., 2004). Notwithstanding these shortcomings, VW has been able to exploit its competitive advantage through innovative engineering and appealing style to continuously roll out specialized products and offer technical solutions to several design requirements that suit unique customer demands. These viable strategies were enhanced by VW’s internal capabilities, strategic alliances, and sub-contracts with suppliers which sustains its longstanding acquisition of a larger market shares than competitors and maintain its competitive position against domestic and international players.
Although VW recorded an increased output of 6.073 million units in 2016 despite setbacks from the gas emissions scandal and a resultant decline in profits, by September 2017 the company reported marked $3 billion for repurchasing all affected cars in North America, an amount which summed its deficits at an estimated $30 billion (Statistica., 2017).
The company’s decision to quit diesel engines shows commitment to its goal of reducing air pollution and cutting down on the rate of premature deaths. Diesel-powered vehicles are now considered outdated, and VW says its efforts are also geared towards producing hybrid and electric vehicles, with an estimated investment value of $60b for battery cells that will electrify over 300 models by 2030. “Transform 2025+” focuses on launching between 2 to 3 million sales of VW-EVs by 2025 and providing 9,000 new jobs to aid production (Barrett et all., 2015).
The U.S. Federal Trade Commission sued VW in March 2016 for false advertising, making reference to the auto manufacturer’s self-acclaimed “clean diesel trailers.” The financial costs led to an agreement with its labour unions that a total of 30,000 employees would be downscaled through a gradual process until 2021. The company pled guilty on 11 January, 2017 and subsequently, six top executives were charged. VW agreed to pay $4.3 billion in penalties and CEO Martin Winterkorn resigned from his position while top management staff Heinz-Jakob Neusser (Head of Branch Development), Ulrich Hackenberg (Audi Research & Development Head) and Wolfgang Hatz (Porsche Research & Development Head) were suspended (Landler., 2016).
Three reputable German news outlets Bild, Süddeutsche Zeitung, and Der Spiegel claimed more than 30 members of VW Board Members were aware of the “deceit devices” but turned blind eye on the violation for many years. The automaker maintained its denial, having done so in 2014 after they were confronted with evidence saying the alleged discrepancies in gas emissions were a common technical glitch. Mr. Winterkom, who later accepted their violation of the law, said it was a “wrong decision” from few persons, adding that the board discovered the issue shortly before the media did.
Adam Vaughan’s peer-reviewed finding (2016) confirmed that approximately 59 people died in the U.S. from air pollution from cars equipped with the defeat device between 2008 and 2015, with a forecast that over 130 similar deaths would be recorded the following year – excluding over 50,000 non-fatal deaths linked to respiratory ailments. The value of life lost, according to the survey, stood at about $39 billion. The legal issues and resultant effects on VW global businesses caused Qatar, one of the company’s biggest investors with 17% stakes, to lose over $5 billion in the stock market. Still below 30%, VW’s market share is yet to improve.
VW has tendered public apologies for its illegal business decisions and promised to learn from the mistakes by establishing an open, value-driving, and integrity-rooted open culture. However, the company is still vulnerable to some formidable risks (internal and external) which should be addressed immediately to forestall further damage. They are as follows:
- Recruitment of quality, innovative engineers
- Local and Foreign Direct Investments (FDI)
- Social responsibility
- Global marketing experts
- Business excellence
- Responsible leaders with great vision
The listed risk factors include Volkswagen’s tangible and intangible assets plus capabilities which can be maximized to achieve sustainable growth, competitive advantage, value creation and value delivery.
- Recruitment of quality, innovative engineers:
Volkswagen needs highly-skilled automotive engineers with abilities to transform its business through legally acceptable low-cost productions with maximum earnings. The company lost billions of U.S. dollars in fines, repairs and low sales, with most customers feeling disenchanted – an overly expensive mistake that could have been avoided by recruiting a team of enthused, wiz technicians.
Although the automaker has taken precaution to avoid such occurrence in the future and increase sales, now is the time to invest in electric cars productions, cut down on CO2 emissions by at least 25%, as demanded by global environmental laws, and utilize around 75% of recycled aluminium in its upcoming models’ makeup.
- Local/Foreign Direct Investments:
Volkswagen should establish its manufacturing plants in developing and underdeveloped countries to expand its global market outreach as well as increase customer base and profit margins.
- Social Responsibility:
Managing customer loyalty is a big challenge which should not be ignored considering that this factor has become increasingly important since the 2015 operational glitch. Social responsibility will bourgeon the company’s development objectives against its market-smart competitors. Competitive advantage can be achieved by establishing proactive consumer advisory boards, offering more appealing products, and increasing community-focused development programs to win back people’s trust.
- Global Marketing Experts:
Functional websites and social media platforms are essential as responsive avenues to encourage consumer feedback and enhance image-building plans for unwavering loyalty, consumer satisfaction and increased awareness of products and services, but hiring global marketing experts is beneficial. Marketers bridge the communication gap between producers and end users, and apart from rendering financial services and improving sales tally, they are useful for innovation, research and technology design.
- Business Excellence:
All low-price luxury consumers and high-end luxury buyers should be taken into consideration and as part of VW’s obligation in its aim to re-build a solid global customer base. Producing vehicles with low CO2 emission, trendy styles, maximum safety devices, fuel-efficient innovations, affordable prices, quality/standard products in all segments, and offering reliable after sales services are a few ways this objective can be achieved.
- Responsible Leadership:
VW’s monumental setback was blamed on its leadership, and this highlights the role of high-quality management staff in strategic decision-making areas. Competent administrators who are committed to protecting the brand’s reputation and overall business growth in line with host countries’ environmental laws should be selected. In addition, appointments should be strictly on merit, with consequences for neglect of the company’s ethics through sheer incompetence or corruption.
Volkswagen’s emissions scandal emphasizes that board members and top executives are not enrolling for enlightenment lectures on conduct expectations and compliance rules as before. NAVEX Global Data confirmed in its publication that the time for top-rank executive compliance lessons was reduced by 90 minutes after 2014 and board members also had their time slashed by a third, a situation which links the failure to an incompetent leadership. This is why they neglected consequences of their actions when the violation was noticed by employees and reported for proper actions. Nonetheless, some “disloyal” workers have been slammed for betraying the company’s “ethics” by going public with the news (Battistela., 2012; Ryan., 2015).
1.6 External Environment Analysis
1.5.1 PESTEL for VOLKSWAGEN
Several factors in the macro-economic environment have different effects on companies and play crucial roles in decision-making. The automobile industry has the following as its external factors: legal, social, political, economic, technological and environmental factors. We have conducted a PESTEL analysis on Volkswagen, with concentration on the listed key areas.
Image 5: PESTEL for Volkswagen
1.5.2 Porter’s 5 Forces Analysis for VOLKSWAGEN
Porter’s 5 forces analysis has been used to show the overall impact of the automobile industry’s success, particularly as it affects Volkswagen. The results appear in image 5.
Image 5: Result of Porter’s 5 Forces Analysis of Volkswagen
1.5.3 Internal Analysis
To examine VW’s ability to fully exploit available resources for efficiency and profitability purposes, the value chain analysis has been applied in this study.
220.127.116.11 Value Chain Analysis for VW
Porter explains that all bureaucratic activities are made up of two unique categories: the essential events and support services, which are explained below.
Image 6: Value Chain Analysis for Volkswagen
Image 6 shows the primary activities undertaken by VW as a major multinational enterprise established with the objectives of achieving far-reaching, socio-economic and environmental outcomes. The graphic explains Volkswagen’s four key stages of value chain, and identifies key impacts, stakeholders, and some of the values created in each activity.
VW’s “Strategy 2025” says it is committed to achieving overall excellence in all business activities and the company relies on four-input factors to achieve this – Procurement, Technology Development, Human Resource Management, and Firm Infrastructure. With revenue in 2015 valued at €213.292 billion, a 5.4% increase over €202.458 billion recorded in 2014, the Volkswagen Group is treading previously untouched grounds and its recent investment on electric cars and batteries is worth a massive $10 billion, as it plans to flood the market with 300 electric car models by 2030 (Lambert., 2017). Interestingly, the company assures that it has improved its group-wide whistle-blower system to increase confidence, awareness, acceptance and transparency, with new reporting channels established, risk management systems updated, and modalities organized for additional quarterly reports on top-risks. In furtherance, the group confirmed that mitigating activities have been established to encourage open and interactive discussion of threats among all stakeholders and interest parties (Bryan., 2016).
Identifying customers’ needs and providing corresponding value through primary activities which include Inbound Logistics, Operations, Outbound Logistics, Marketing and Sales and Service, have been Volkswagen AG’s main objectives. A three-fold result: Sustainable Profitable Growth, Stronger Communities and Positive Environmental Impact, are expected outcomes of the primary activities and support activities, which are explained below:
The German carmaker had 610,076 employees across the globe as of 2016, and the number includes workers in all departments such as designers, suppliers, and engineers. To repossess its position as “the global economic and environmental leader among automobile manufacturers” by 2018, Volkswagen AG set four major goals: to deploy intelligent innovations for customer satisfaction and quality; to generate over 10 million-unit sales on yearly basis; increase returns through sales before tax by 8 percent; and, in the long-run, become “the most attractive employer in the automobile industry by 2018” (Penman., 2016).
Over the years, VW has approached its competitive market environment with diversified product lines and is a one of the reputable brands, before 2015, but its solid financial base, competent legal department, committed workforce, several operational manufacturing plants spread across continents, and newly established administrative setup geared towards rejuvenating business potentials, have repositioned the company among frontline automakers. VW is China’s market leader and efforts are in progress to topple fierce competitors in North America.
Having won numerous awards for its technological achievements, the German carmaker has focus on new inventions such as its InControl Touch Pro infotainment system, Wi-Fi, Bluetooth connectivity, high-definition audio radio, and increasingly autonomous driving capabilities, among others. These include the ability of VW vehicles to parallel park without driver intervention (Axel., 2017).
PART 2 (OF 1)
PROPOSAL FOR VALUE CHAIN BASED SOLUTION TO CAPTURE INCREMENTAL VALUE FOR ACTUAL AND FUTURE SHAREHOLDERS AND STAKEHOLDERS.
Demands from customers, expectations from shareholders, and environmental groups’ agitations for corporate responsibility have improved performance in the auto-manufacturing industry over the years, and this trend requires dynamism on the part of management together with a speak-up culture from all organizational arms, including end-users of consumer products. Regrettably, too many organizations learn the hard way, and Volkswagen just joined the ranks after its emissions scandal. As daunting as it is, even for a company that carved a niche for itself as a leading automaker since its founding and has performed competitively well in all segments, value creation is the foundation of business (Charles et al., 2016).
Image: 7 Volkswagen Supply Chain
VW will maintain competitive advantage by focusing on the following strategies:
- Additional Safety Features:
Environmental-friendly vehicles with minimal fuel consumption are in high demand and automobile companies producing models with reliable safety features have higher potentials of capturing incremental value for existing/future shareholders and stakeholders. Adding improved safety features as standard products on new models will add value. Moreover, this has become necessary in most modern cities where specific regulations have been institutionalized to determine speed. This practice replaces the existing focus on regional regulations and has triggered high demand for digitized vehicles with automatic driving capability, internet connectivity, entertainment and a variety of dependable safety features. VW needs advanced technology in line with its government regulations and consumer tastes. Engaging a team of expert designers and engineers will provide competitive advantage.
- Increased Investment in Online Car Sales:
Most consumers now prefer making online purchases in the comfort of their homes, and this trend demands that an automaker provides a responsive and dependable online marketing platform for higher profits. VW needs to operate a global website where all the necessary information needed to purchase a car are available and means of delivery is devoid of difficulties. Importantly, the website should be hack-proof and constantly updated with new products/information.
- Philanthropic Giving:
Organizations that employ effective Corporate Social Responsibility (CSR) through coherent strategies are sure to sustain grown, value, and brand loyalty. VW should concentrate on a CSR program predetermined by its core competencies, value chain, philanthropic ability, and institutional capacity, and make effort to aid preservation of the ecosystem. The company should also understand that CSR programs are not intended to yield immediate profits either at the local or global level (Roger., 2002).
Volkswagen’s first CSR theatre is to start donating funds to non-profit, community service organizations as well as offering free products to the groups and general public. This includes organizing employee community service projects. There is no doubt that such bold expression of commitment to social and environmental priorities by the company’s employees, executive board and founders, without considerations for gains or losses, will present VW’s logical motivation to re-integrate itself into the society and subsequently attract direct benefits. Ultimately, CSR programs provide protection from some unanticipated risks (Nadine., 2016).
Volkswagen should borrow a leaf from the Coca-Cola Company, for its philanthropic funding of a variety of humanitarian, environmental and educational organizations through direct donations. The beverage drinks maker also has foundations separate from the corporate entity such as The Coca-Cola Foundation, and invests an estimated $88.1 million on charity every year (Coca-Cola., 2011). Other examples include IBM’s donation of computers through its Kid Smart Early Learning program around the world, and Microsoft’s $300m gift offered in form of software products to nongovernmental organizations (NGOs) around the world. (IBM., 2011; Rangan and Bell., 2009)
- Re-engineering the Value Chain:
VW can increase its earnings and business opportunities by creating social/environmental benefits for the local/global community. To achieve this target, the company needs to elevate its operational effectiveness throughout the value chain by employing unique technological innovations that not only enhance output methods but reduce operating costs and minimize environmental hazards. Creating this business value requires collaboration from the operations manager in supplies, to the marketing manager on the demand side, including decision makers and employees who should receive fair compensations according to governmental guidelines. Workers should also be protected from discrimination and unethical treatments in their job, offered backup medical cares to serve as shield from the government-provided health plan and/or provide financial assistance for all employees’ dependents (PWC., 2013). A broad social and environmental CSR initiatives championed by VW for its workers will enforce a dedicated workforce and robust supply chain to lead the company’s resurgence.
- New business opportunities generated
- Improved social standing
- Improved brand reputation
- Positive impact on employee motivation
- Enhanced environmental impact
- Aids philanthropic priorities/ Initiatives
- Improved supply chain performance
- Low operating costs
- Protection of company’s human/material resources
1.8 Risk of not implementing the proposals above
Volkswagen’s decision to side-step environmental compliance standards is a result of poor enterprise risk management. An analysis of “dieselgate” shows the company’s initial investment in the “cheat device” was poorly calculated and without an effective risk mitigation strategy. This turned out to be their second risk management failure, leading to a chaotic situation which could have been avoided if the engineers and management were foresighted.
Importantly, VW should understand that every member of the executive team, boards and internal audit groups has a responsibility to know the company’s major risks, as well as disclose them to their investors, shareholders and employees. Here are some possible consequences for neglecting the proposals provided from this study:
- Competitors will most likely occupy greater share of the market
- Loss of customer confidence
- Unfavourable exposure to intense global competition from other brands
- Financial instability causes steep downfall in premium car segment
- Exposure to the effects of Brexit and tariffs
- Exposure to the negative impacts of the global geopolitical and economic environment
- May fall prey to product liability and recalls
- Payment of high legal cost as a result of flouting environmental industry regulations and standards
- Exposure to foreign exchange rate fluctuation
2.0 Introduction to the Business Market Environment
This section presents a summary of the conceptual framework with potentials for value creation; it throws shade on the literature of analytical tools used in generating data applied in assessing Volkswagen’s current situation. A review of the value chain model and SWOT analysis framework are included. In addition, the Consultant presents a horizontal and vertical analysis of financial statements and resource-based view of the company and its competitor. This review also highlights the DBA research perspectives of the Value Creation Business (VCB) module.
2.1 The Strategy Road Map Methodology
Strategy refers to a carefully mapped-out plan which provides an organization with a competitive edge, according to Luecke (2005). It includes a structure that supports the firm’s core values and missions, and as such, requires constant appraisal to ascertain its feasibility. This ensures that obsolete strategies are not utilized where advanced methods are available and proven to be more productive, or where new ideas are required for sustaining growth and staying ahead of competition.
Kaplan and Norton described strategy as a procedure employed by an organization to create value for customers, stakeholders and the society. In this context, strategy therefore implies a “design of creativities” directed at achieving the company’s objectives. A strategic roadmap refers to a plan of what actions are required to help an organization achieve its long-term goals; it explains the business position, directs how daily duties are to be performed in line with the organization’s vision of where it expects to be in the future (Martinuzzi., 2015).
Image 8: The Strategy Map Framework (Source: Six Sigma)
A well-designed strategic roadmap can be compared to a car’s GPS, which presents drivers with a minimum of detours in unfamiliar pathways; it offers investors an insight into how a company’s immaterial resources can be best utilized through a clear approach which is easily understood and implemented by all employees. These activities are, importantly, appraised to ascertain how the strategy was applied, and the success of this verification process largely depends on the Balances Score Card accepted by an organization. The BSC and strategy map are utilized in displaying, discussing and linking a company’s intangible and tangible resources to its set goals as well as demonstration how HR and the organizational innovation affect value-creation process, consumer satisfaction and profit earnings.
Image 9: Five Phases of the Roadmap (Source: Six Sigma)
The strategy map aids organizations in defining links between its intangible assets and value creation so that all methods/inputs play adopted roles that promises sustainable value. These approaches are better understood through the following standards:
- Strategy finetunes the organization’s opposing powers of short-tern monetary goals for maximised profits and price reduction; and, in the long run, concentrates on productive income development.
- Strategy is dependent on differentiated client offer since catering for customers’ needs is the foundation of achievable value creation.
- Strategy is made up of synchronized complementary ideas of inner process which delivers profits at different times.
- Strategic alignment determines the usefulness of material resources; the learning process is made of three parts namely: human, information, and organization capital.
The management of every organization can achieve significant progress through its organized design by carefully taking steps that enhance inward procedures, for example, operations identify and sustain relationships with suppliers and customers; provide products and services; offer delivery services to customers; and control threats; identify new business lines; design and develop new products; and maximise competitive advantage from intangible resources – data capital, human capital and organizational capital. To create an actionable strategy using these methods, an organization needs a suitable and convenient approach.
2.2. Benefits of Strategy Roadmap
Eden and Ackerman (2011) explained that a strategic roadmap has potentials to improve workers’ productivity and inspire teamwork as well as unite board members towards achieving organizational goals. Other benefits include;
- It is a confirmed tool/procedure for unifying groups of individuals.
- It supports different objectives which contains the company’s business statement and unique approaches.
- It focuses on critical issues such as assets (time, money, ability), which is channelled to identified activities that offer greatest advantage.
- Assesses the company’s philosophy and par it with performance.
- Identify and investigate the organization’s prospects and threats, which are weighed in the decision-making process for a possible adjustment or change of direction.
Strategy and BSC have to highlight what differentiates a company from competitors in the business environment and showcase the links between the organization’s intangible assets and inward workings which provide its sustainable competitive advantage.
2.3 Implementing and Updating the Strategy Map
While a strategic design concentrates on the “what” and “why” of business activities, implementation waggles between where, who, when and how. Results from the improvement stage drives the execution period of the guide and, considering that this plan is constantly in process (Brewer et al., 2005), Chiang (2018) suggested that regular changes are required for enhanced growth. The roadmap should, however, play a role in helping to solve puzzles and thus contribute in proposing the organization’s future activities and, where possible, transform them into end values.
2.4 Limitations of the Strategy Roadmaps
According to Brewer et al, strategy maps are not clear about the choices an organization makes or why such decisions are taken. It simply does not ask questions about assumptions.
2.5 The Balanced Score Card (BSC) Methodology
Organizations function with distinct management, placement and communication procedures but their BSC remains a workable path which defines value-creation methodologies. In their performance assessment study, Kaplan R. S. and David Norton (2005) opined that successful firms don’t just examine operations with monetary measurements but use other assessment tools such as clients, internal processes, together with learning and development. The researchers suggested four measurement tools made up of finance, customers, the internal business activities as well as development and learning. Furthermore, the purpose and yardstick of any measurement framework are found in the organizations missions and strategies whereas performance is evaluated with vision. The application of this technique in contemporary societies has triggered concentration on companies’ intangible properties, necessitating thorough reviews on the value of its intangible asset to weigh its contributions, identify shortcomings and apply remedies.
Image 10: VW Balanced Score Card (Source: Kaplan and Norton)
BSC as a measurement tool looks into the company’s activities as far as ideas and current approaches, to provide management with an insight of business performance; it also encourages organizations to clarify their strategy and vision and transform them into profits (Bremser & Wagner., 2013). BSC is considered by Kaplan and Norton (1996) as a descent model that provides stability amongst strategies and procedures.
BSC concentrates is strategy-oriented; with regards to its performance assessment function, BSC proffer flawless solutions to organizational problems and questions. Developing this analytical tool requires careful use of company strategies and a far-reaching structure which covers all activities for better assessment of performance.
2.6 BSC as a Management System
Most companies used performance assessment tools that incorporate monetary and nonfinancial criteria, but BSC is beyond all previously common estimation framework. According to Simons (1988), innovative companies apply the scorecard as a central system for sieving administration processes. While organizations are encouraged to choose initial BSC with few realistic goals to promote clarity of vision, inspire commonness of purpose, present unified focus on strategy, and ensure that the goals are regularly explained to all workers, Kaplan and Norton said companies experience the real strength of BSC only when it is transformed from a measurement structure to a management framework.
2.7 Why do Companies need a BSC?
The impact of an organization’s assessment system on individuals within and outside its business environment cannot be overlooked in this 21st century. There is need to utilize effective management and assessment frameworks selected from client-based strategies as well as the company’s core abilities while inspiring and evaluating performance using only monetary yardsticks.
BSC applies monetary valuations in its initial rundown of performance from both management and business activities although it utilizes a broader and integrated measurement structure that links existing customers, internal process, workers and system performance for long-term monetary achievement.
Scorecards prove meaningful in identifying unproductive strategies, including those that need to be adjusted, and the key-achieving measures that should be added into the framework (Stewart., 1991; 1994).
Image 11: Sample Balance Score Card
2.8 Core Aspects of the BSC
Core aspects of the Balanced Score Card are differentiated into customer perspective, financial perspective, internal business perspective and, innovation and learning perspective.
The financial perspective refers to roles played by finances in an organization’s daily activities, strategies and outcomes. It explains the need for informed financial management aimed at achieving organizational goals (Kaplan and Norton., 1992).
Customer perspective focuses on “what must be,” with emphasis on “what is most vital” from the viewpoint of customers. It strives to accomplish set objectives, particularly consumer happiness, in a volatile business environment where stiff competition threatens customers’ loyalty (Roy and Wetter., 1999).
Image 12: Translating Strategy into Action (Source: Kaplan and Norton)
Internal process perspective concentrates on “what an organization should be doing well” to provide consumer satisfaction; it explains the viability of business to managers and advise on how inner procedures can be arranged to achieve growth. This can be divided into mission-oriented procedures and support processes, accordin to Kaplan and Norton (1996).
Learning and growth focuses on how an organization maximises its tangible and intangible assets to invent and develop strategies through which internal operations are conducted for value creation. It includes staff training on corporate culture, knowledge-sharing activities among workers, teamwork etc. Kaplan and Norton (2012) analysed said each of these four perspectives operate with a set of variables: measures, targets and initiatives, to achieve vital goals.
2.9 Benefits of the BSC
These are some of the advantages from BSC as presented in written works from Lawrence and Sharma (2002), Chen et al (2006) and Stroh (2014):
- It offers an efficient management process through a whole and applied framework of strategies.
- It provides a more complete and accurate data from using monetary and nonfinancial assessment methods.
- It enhances performance and builds trust among workers and management for customer satisfaction as well as growth.
- It yields profits from utilizing an organization’s tangible and intangible resources.
- It ensures uniformity in achieving organizational goals.
- It encourages firms to concentrate on activities and issues that can be improved to achieve goals.
2.10 Limitations of the BSC
Most managers using monetary and nonfinancial measures understand that BSC is more than a mere assemblage of key achievement factors. All assessments to be conducted on well-built BSCs should include an organized line of objectives that must be jointly supportive and reliable. The scorecard should maximise the unpredictable structure of relationships between “cause and effect” among other variables such as leads, lags and feedback circles that directs the employed approach.
A few limitations to the BSC are as follows:
- The relationship between cause and effect does not include the time it takes to set up measures or how long it would take for results to be achieved as Hume suggested.
- The external environment and interest groups are excluded in the BSC unlike other strategic management and investigation methods which consider groups such as suppliers, co-operative societies and competitors except customers and investors. Neely (2002) admits that BSC neglects the daily activities of contenders.
- In addition, most scholars see BSC as merely a calculated model that is not easy to explain or improve in terms of ideas from Kaplan and Norton without good background knowledge.
PART 2 (OF 2)
CONCEPTUAL FRAMEWORK FOR VALUE CREATION
2.0 Value Creation
Innovation has been identified as the most relevant element in fuelling corporations’ competitive advantage and ultimate value creation. Corporations no longer rely on a single, linear structure of innovation; the new paradigm of open innovation opens up new possibilities of organization innovation within the ecosystem, thus giving rise to new drivers for value creation. These value drivers have an impact on the strategic position of the firm and have the ability to create superior financial performance (Stein., 2009). The automotive industry has faced an unprecedented need to manage an extremely broad innovation agenda, but balancing innovation will make the difference between moving ahead and falling behind the competition (Anders., 2013)
Image 13: Conceptual Framework for Value Creation
The value creation conceptual framework as shown in the image above, focuses on an assertion that all points raised in the SWOT analysis, RBV analysis, Porter’s 5 Forces analysis, and competitive advantage analysis will create immense value for Volkswagen if properly organised and applied. They are as follows:
- Philanthropic Giving
- More Safety Feature
- Increased Investment in Online Sale of Cars
- Re-engineering the Value Chain
Image 14: Value Creation Framework for Volkswagen
2.3 Porter’s 5 Forces Analysis
This competitive analysis tool is often used for strategy development in companies within an industry. It highlights the importance of profit accumulation for firms in any industry.
Porter’s 5 Forces Analysis determines a company’s potentials by looking into the following areas:
- The strength of established competitors and potential entrants
- Suppliers’ bargaining power
- Buyers’ bargaining power
- Competition among existing players
- Threat posed by substitutes
Image 15: Core Areas of Porter’s Analysis
Winterkorn earlier announced Volkswagen Group’s ultimate mission to achieve increased sales and outperform Toyota, the world leader, in 2018 by launching a variety of vans, pick-ups and SUVs as well as extend its global market reach. These objectives, rated in terms customer satisfaction, quality, and smooth delivery, have been achieved but not without costs. A collective effort of the bulleted points above either improves a company’s profit potential or drags it to losses.
Porter admits that the potential entry of new competitors poses a threat to every company’s dominant share of the market although the economies of scale held by existing players in the industry has capabilities of cushioning the effects. James Wilkinson (2013) argues that a profitable industry will attract more competitors looking to achieve profits, adding that if it is easy for these new entrants to join the competition, especially if entry barriers are low, the existing firms will face added threats. However, new entrants in the competitive market are often overwhelmed by product differentiation, limited access to distribution channels, high switching cost, huge capital requirements, and product differentiation (Investment Bank., 2016).
The suppliers’ bargaining power enhances growth through increased sales achieved by additional prices for supplied goods and lack of substitutes. The existence of no single market price except some minor variations like discounts, makes supply very competitive (Mat Lingblad., 2013) and, on the other hand, purchase of poor quality raw materials or services, over concentration on suppliers rather than buyers, and disregard for consumers are other critical forces identified to have devastating effects on business growth. Suppliers are therefore an indispensable group for VW’s market projections.
The bargaining power of buyers plays an important role in persuading producers to reduce price or improve quality of goods and services. This can be can be achieved through credible threat of backward integration and broadened knowledge about price of substitute goods (Essays UK., 2013).
Threat of substitute products forms the fourth force factor identified in Porter’s analysis. It affects company and industry profitability and is one of the forces that affect competitive structure. A company’s profit objectives are challenged when buyers discover other products which offer similar satisfaction at a lower price and would impulsively switch to save money when this happens (Martin., 2014).
Rivalry among established firms can either inspire innovation or force them out of competition. This breeds healthy competition, counters the nature of pricing, offers product differentiation and increased benefits for both producers and buyers, especially when the competing companies are equally balanced. However, slow industry growth, large increase in manufacturing ability, and high fixed cost tend to affect the expected results because, as the price-performance alternative offered by substitutes becomes more attractive, it becomes even more difficult for those firms to make a profit (Porter, M., 1998; Nadine Wiese., 2016; Georgousopoulos., 2013).
Horizontal analysis refers to a technique used in assessing a company’s financial statement with emphasis on current trends, changes in products, and performance within a given period. A base year is often used in horizontal analysis. These types of analysis help a financial statement reader compare companies of different sizes although this can be difficult when exchange rates are unstable. Importantly, the amount of each item listed in the financial statement for subsequent years is converted to a percentage of the base year amount whereas vertical analysis concentrates on entries for three major categories: liabilities, assets and equities. On the other hand, vertical analysis presents a balance sheet with proportional representations of the total amount. Its highlights include: a comprehensive presentation of balance sheets and income statements, as well as a relative yearly change in an organization’s financial reports (Putra., 2009).
SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats; it is also an analytic framework applied to identify an organization’s strong/weak points which can be maximized in producing goods and services, improving customer base, and exploiting both opportunities. It involves the collection and portrayal of information about internal and external factors which have, or may have, an impact on business (Pickton, D.W. and Wright, S., 1998.
Image 11: SWOT Analysis Framework
Image 12: SWOT Analysis between Volkswagen and BMW
An organization’s strengths and weaknesses include all internal factors such as employees’ quantity and quality, infrastructure, financial base, brand reputation, market share, and product range technology, among others. A mix of these factors can either enhance a company’s growth or create loopholes for failure. It is impossible to accurately map out a small business’s future without first evaluating strategies, opportunities and threats, including strengths and weaknesses, from all perspectives (Nike Inc., 2011; Bonnie Taylor., 2017).
SWOT is flexible, simple and easy to use, and its implementation does not require users to have expert knowledge or training, but the analytic method has been criticized for not being objective. It also brings a conflict of interest whereby it tends to classify an organizational culture as a strength or weakness. Another remarkable shortcoming is that it doesn’t provide any limit for what is and is not relevant (Mind Tools., 2010; Investopedia., 2011; Alyssa Gregory., 2017).
While critics of SWOT argue that it doesn’t provide any limit for what is and is not relevant, the methodology can be used for information-gathering on a product or brand, an acquisition or partnership, or the outsourcing of a business function, as well as prove beneficial in evaluating a supply source, business process, product market or the implementation of a particular technology, and the results can become a strategic advantage when strengths are merged with opportunities, or threats matched with weakness and converted to strength and opportunities. SWOT analysis is best used for brainstorming and not as a problem solver (Management Study Guide., 2011; Queensland Government., 2009; Michael Firth., 2010).
The resource-based view advises managers to exploit external opportunities with internally identified resources instead of employing new hands for select opportunities. The RBV model, as a key to superior firm performance and an approach to achieving competitive advantage (Rothaermel., 2012) categorized organizational resources into two categories – tangible and intangible assets.
Physical assets include machines, office building, capital equipment and computers, among others which are also available to competitors in the market and are therefore not considered as long-term investments for sustainable competitive advantage.
Other assets considered as intangible investments are an organization’s trademarks, image, intellectual property, copywrite ownership and brand reputation, among others, including all non-physical items owned by the company are also included. These investments provide sustainable competitive advantage because of their durability.
A company’s capabilities to maximise both its tangible and intangible assets prove decisive in determining its competitive advantage (Rothaermel., op. cit.)
Competitive advantage refers to every condition which gives a company an edge over competitors in its efficient production process and/or provision of low-cost services, which are also more appealing to a variety of customers in the market (Barney, B. J., 1995). These conditions enhance an organization’s profit margins over its rivals. Factors which play important roles in competitive advantage include: product quality, affordable pricing, efficient distribution network, after sales service, and intellectual property etc. Competitive advantage, rather than a company’s competitiveness, decides its success and sustainability. According to Ovidijus Jurevicius (2013), every company must possess at least one advantage to successfully compete in the market because if managers can’t identify one or just doesn’t possess it, there comes a great chance that competitors will soon outperform and force the business to leave the market.
As explained above, the conceptual framework SWOT, RBV, and Competitive Advantage assessed Volkswagen’s current situation. Porter’s 5 forces focused VW’s competitive analysis within the volatile and fast-expanding automobile industry (Nike Inc., 2011; Volkswagen., 2015) whereas the horizontal and vertical analysis of financial statements compared successes and pitfalls recorded against rivals, BMW. Notably, the value chain looked into Volkswagen’s internal strengths and weaknesses while the RBV concentrated on an organization’s internal resources, including tangible/intangible resources and capabilities.
In recent years, the academia has shown great interest in the value creation module, a reason I found it appealing as a choice research topic. I hope to delve into uncovering the effects of business model review on value creation, making ample use of Porter’s 5 forces, SWOT analysis, Value chain analysis, among others, during the next research stage.
Apart from the listed areas on interest, other specifics under value creation include a comparison of value creation in selected companies and value network assessment, I may be doing a research to finding out if value-based management is a way to managing the value created by firms and if corporate venture capital investment is able to create firm’s value.
While this literature review has honed my referencing knowledge and ideas on originality, I must admit that the importance of this module is not restricted to the subject matter, but the skills I have acquired. This critical analysis will be handy in my DBA program’s next research stage.
REFLECTION FOR EMPLOYABILITY ENHANCEMENT
3.1 Critical Thinking and Core Capacities Needed to Achieve this Consultancy Task
There are a variety of capacities that is required by a Consultant to effectively execute assignment of such nature which requires the capacity to analyse the industry operations and the level of competition within the industry for a basic knowledge of buyers and suppliers’ level of bargaining power, types of barriers to new entrants, and types of barriers to exit the industry. The Consultant understands the policies, legal provisions, regulatory framework and mandated institutions that govern the industry in addition to compliance standards is a required capacity. The capacity to identify and analyse both primary and support activities is also crucial since the former offer the Consultant the opportunity to whether to adopt cost advantage strategies or product differentiation strategies.
In my objective assessment therefore, I found that it is common for firms to achieve continuous marketing, but Volkswagen can achieve competitive advantage and customer-oriented values by adapting to workable strategies with minimal threats in its operations.
3.2 Current Knowledge, Skills and Competencies and an Assessment of my Ability for Completing this Consultancy Task
I have no prior knowledge about Value Creation for Businesses so this subject matter was new to me at the beginning of the module as I was introduced to terms such as value chain analysis, business model, competitive advantage, value network. However, I now have good knowledge and skills in the use of SWOT analysis, Business Model Canvas, VRIO, PESTEL and Porter’s 5 forces analysis.
Again, going through the module has deepened my knowledge and skills in the use of these tools. I had never used the Resources Based View to identify the key tangible or intangible resources and capacities of an organization but can do so now. I was also introduced to horizontal and vertical analysis for the first time and have made great progress in the knowledge and use of the analytic tool. I can now make analysis of financial statements of different companies using the horizontal and vertical analysis revenues, gross profit and EBITDA and compare the results and interpret it. I practically studied the financial statements of VW and BMW and was able to analyse them.
My capacity to identify key activities that can be improved or eliminated to create value for the organization under study has greatly improved. The use of the VRIO and the Business Model Canvas has deepened my knowledge and skills that results in the identification of competitive advantage activities and eventual value creation strategies.
3.3 Review of the Related Leadership Skills Required for Future Personal Development and Career Accession
It is important for managers to have good vision. Through this module, I have learned how responsible leadership influences a company’s design and implementation of strategies to achieve value for all stakeholders in both short and long terms. One of the leadership skill required is delegation and coordination, which refers to assigning various aspect of assignments to specialist in the area and coordinate overall activities to harmonize outcomes.
I believe that the leadership I require, can be acquired through regular execution of such assignments and other class presentations because it will build my confidence and competence on the global stage. To achieve this aim, I plan to also enroll in an internship programme with the International Development Associates (IDA), a consultancy management organization, later this year to acquaint myself through the execution of similar assignments.
In addition, examining financial statements of different organizations and comparing them demands leadership qualities of meticulousness, objectivity, and concentration on details – some of the management skills I need to improve on.
This consultancy assignment has honed my understanding that marketing is only an aspect of business and has improved my leaderships skills through understanding that value is only created when strategies are clarified and realistic.
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