A Case on Volkswagen do Brasil: Driving Strategy with the Balance Scorecard

August 19, 2014

I. Introduction
Volkswagen do Brasil Ltda. (VWB) is a subsidiary of Volkswagen Group (VWAG)
established in 1953. In 1969, VWB had earned a 61% share of Brazils car production by
using a strategy of producing reliable and inexpensive cars. In 1970, VWB launched
medium-sized cars for export in the international market earning them 40% of Brazils auto
exports and shipping vehicles to other parts of the world. In 1986, the company
overproduced that led to 20% decline in the domestic automotive market. From years 1994-
2008, the automotive industry is highly volatile. With a market share in Brazil of more than
30% in 1994-1997, it drop to 21% share in 2003, as the lowest. By the end of 2007, VWB
managed to recover and held a percentage higher than General Motors, Ford, and other
automotive companies. The meltdown of subprime mortgage market due to valuation issues
led to the financial crisis in 2007. In 2008, VWBs market share position started to decline
and dropped to the third spot with a share lower than other automotive companies. On the
other hand, VWB export and domestic sales increased in years 2007-2008 and so did the
revenue. The use of Balance Scorecard by VWB may have helped the growth in 2007 and
2008 despite the financial crisis. It was also introduced to help them reverse the
consecutive years of decline in market share and financial losses.
Only at the beginning of 2009, Thomas Schmall, CEO of Volkswagen, saw the
impact of the global financial crisis. A decline in sales and stagnant turnover of newly-
produced vehicles were evident during those times. In order to reduce the negative effects
to the companys operations, VWB decided to cut back production by 15% and further
reduce its costs.

II. Statement of the Problem
The purpose of this case study is to identify effects of the 2008 global financial crisis
on the automotive industry in Brazil, specifically VWB. We will be analyzing the different
alternatives and will choose one that best fits the vision, mission and strategies set by the
company. Hence, we have formulated a question to guide us in achieving our goal:
Given the aftermath of the financial crisis, is it the right time for VWB to immediately
restore production levels and spending on discretionary programs or wait until sales
recover?

III. SWOT Analysis
Strengths
- Global Presence
-Largest network of dealers in Brazil
- Makes use of both financial and nonfinancial
measures (BSC)
- Effective Communication (employees,
suppliers, dealers)
- Compensation and recognition of employees
tied to achievement of targeted performance
- Measures, targets, and proposals are
reviewed and updated annually; action
plans, quarterly
- Limited number of objectives are
representative of the strategy
- Has assigned executive per objective
- Administrative offices are relocated near
production lines
- Extended trainings and recognition programs
to its external partners
Weaknesses
- Most cars are not environment-friendly
- Increased labor and raw materials cost
- Unstable forecast of demand

Opportunities
- Resources found in Brazil (hydrocarbon and
minerals)
- Buying power of the households in Brazil
- Changing customer needs (demand for more
fuel-efficient cars)
Threats
- Global financial crisis
- Growing competition
- Oversupply of automobiles in the market
- Increasing fuel prices

Employing 370,000 people and generating revenues of 113 billion in the year 2008,
the Volkswagen group is considered the third largest automotive company in the world with
a 10.3% global market share. Of the 6,300,000 vehicles that was sold across 10 brands to
arrive at such revenue, 3,600,000 is from Volkswagen, thus, proving its remarkable global
presence. In order to sustain the level of sales, Volkswagen, specifically Volkswagen do
Brasil, makes use of a balance scorecard to assess the current performance of the
company. This takes into consideration both the financial and non-financial measures which
brings greater chances of having better products, higher customer and employee
satisfaction, and higher market shares than the traditional financial measures. It plans to do
this by meeting customers expectations, improving company image, improving the quality
of suppliers, providing more service-oriented culture to dealers, and improving the cost
efficiency and flexibility of the production department. In order to do so, VWB makes use of
a limited number of objectives that is representative of the whole key strategy of the
company. The management also assigns an executive per objective, whose office is placed
near the production lines to provide an easy access to communication, so as to ensure that
each strategy is met accordingly. To assure the competence of the assigned executives, the
company sees to it that the same executives undergo a 2-day training program focused on
understanding the new strategy, its role and proper execution. These are beneficial to the
company to prevent the employees from getting lost. In order to keep up with the changing
environment, the top management also sees to it that action plans are reviewed and
updated quarterly, and measures, targets, and proposals annually to increase effectiveness.
The importance of understanding the companys strategy, however, does not rely
solely on the executives, thus, the move of VWB to improve communication among all
employees, suppliers, and dealers. Relaying information creates awareness among those
who are involved in the production, thus, increasing their capability of contributing more to
the process in terms of better performance and increased suggestions. To achieve this,
VWB makes use of communication programs like trainings, special events, competitions,
group discussions, publishing of companys papers, electronic newspapers and portals, as
well as posting strategy maps on the wall of every room. Among those that were considered
successful include Giga, a hand shaking robot which asks employees questions about the
companys strategy, and a board game which allows advancement based on the
employees knowledge of the strategy map. These ensure that employees are constantly
reminded of what they should do to bring the company towards its goals. In exchange,
employee compensation has been tied up with the achievement of these organizational
goals. Acknowledgement of high-performing employees are also done for purposes of
promotion, job rotation, and international training. These not only keeps employees
motivated and satisfied, but this also assures that the all of the companys goals are
achieved. Effective communication is also evident among suppliers and dealers which
received trainings and coaching from the executives, respectively.
Despite such strengths, however, the company also faces some feebleness in the
form increased labor and raw materials cost, and unstable forecast demand. Despite the
strong brand portfolio that the company offers, the fact that the vehicles emit gasses that
bring harm to the environment may cause the companys growth to be unsustainable. The
growing awareness in terms of global warming and greenhouse effects may cause the
company to cease operations due to either the governments or the customers decision to
stop patronizing Volkswagens products. Another weakness of VWB lies in the fact that the
export-led market strategy can no longer offset the increase in cost of labor and raw
materials. Such increase in cost would mean less profit on the part of the company since it
can only give way to a small amount of mark-up. Given the current financial problem of
some consumers, the company may have to face losses in the form of high costs or no
sales. The fact that VWB was not able to foresee the negative effects and prepare for the
cost of the impact of the global financial crisis is another downfall to the company. Apart
from these weaknesses, the company also faces threats which they need to attend to. On
the top of this list the growing number of competition in the automobile industry in Brazil.
Ford, General Motors and Fiat are no longer the only competition of Volkswagen do Brasil
for French, Japanese, Korean, and Chinese producers have also invaded the Brazilian
market. This threat has been evident in the sudden decrease in the market share of the
former 4 companies from 97% to 77% in the year 2008. The impact of global financial crisis
on consumers along with the increase in fuel prices also threatens the company as it may
lead to a total halt in sales. Given that some of consumer spending capability is reduced,
consumers may opt to temporarily deprive themselves of buying cars in order to also save
on fuel consumption. Because of this, VWBs supply may lead to a surplus and run the risk
of obsolescence in the near future.
Much opportunity, however, still awaits VWB. Since Brazil is blessed with rich natural
resources like minerals and hydrocarbons, the company may explore more of these in order
to sustain its growth. Given the increase in fuel prices, Volkswagen may venture on the
innovation and production of fuel-efficient cars or those that can make use of fuel that is
cheaper than what is ordinarily used; something that the company is not alien to given their
production of ethanol-fueled cars in the 1970s. This can lead to an increase in sale of the
companys automobiles among those price-sensitive consumers of the Northern region and
the non-price sensitive consumers of the Southern region.

IV. Alternative Courses of Action
Three alternatives are provided to answer the problem at hand. These alternatives
are as follows:
First Alternative: Sustain the momentum of change initiated prior to the crisis but
refocus efforts on engaging the customers
Second Alternative: Evaluate the economic situation of Brazil in terms of the
manufacturing sectors contribution to GDP.
Third Alternative: Benchmark, by conducting cost analysis and value engineering,
with the leading automotive company in Brazil such as Fiat.

V. Analysis of Alternative Courses of Action
First Alternative: Sustain the momentum of change initiated prior to the crisis but
refocus efforts on engaging the customers
Volkswagen do Brazils management team has successfully laid the foundation of a
stable internal structure. Their combined effort to completely re-brand the company has
been paying off and Volkswagen do Brazil has started to gain ground in its quest to be back
on top of Brazils automotive industry. Executing their carefully crafted plan has paid
dividends for Volkswagen do Brazil. It has strengthened Volkswagen do Brazils
relationships with suppliers, employees, and dealers. In the case of Volkswagen do Brazil,
maintaining a close professional relationship with suppliers has ensured the quality of
inputs, timeliness of deliveries, and continued innovation on supplier products. On the part
of dealers, Volkswagen do Brazils initiative of establishing a Dealer Academy where
dealers are trained in the areas of sales, post-sales service, and franchise management
training allowed dealers to be more equipped in dealing with customers. Aside from all
these things, Volkswagen do Brazils efforts to increase overall employee morale,
streamline communication between top management to middle management to the
assembly line have made Volkswagen do Brazil one of the best places to work in Brazil.

Amidst all this, however, car inventories were increasing faster than consumer sales
even prior to the onset of the crisis. This clearly indicates a decreasing demand for
Volkswagen vehicles. Prior to the actions taken by Volkswagen do Brazils management to
re-brand the company, the organization was in limbo and a negative image is still
imprinted in the minds of consumers. Volkswagen do Brazil suffered consecutive losses
prior to the changes implemented. This and other circumstances regarding employee
turnover have affected Volkswagen do Brazils image to consumers.

The company must maintain its initiative of internal change but it needs to refocus its
efforts to engaging consumers and communicating the new Volkswagen do Brazil. Stunting
the growth brought upon by the changes implemented will bring no good to the company. It
will only affect the performance of the company and its future. Refocusing its efforts towards
engaging consumers will help Volkswagen do Brazil introduce its newly overhauled image
and structure. The VP for Sales & Marketing must come up with ways to establish a
relationship with consumers and communicate the changes made to bring a high quality
product to the consumers.

Second Alternative: Evaluate the economic situation of Brazil in terms of the
manufacturing sectors contribution to GDP.
Brazil was not critically hit by the global financial crisis because of its relatively
closed economy and diversified export markets and products. The economy of Brazil shows
resilience, given massive adjustments among the developed economies. The GDP data of
Brazil in the first quarter of 2009 show signs of robust consumption despite the contraction
in investment and the collapse of the industrial sector. Throughout the second quarter, the
manufacturing industry showed a continuous weak performance, in contrast with the level of
performance in 2008. Nevertheless, the manufacturing sector has shown tentative signs of
improvement on a monthly basis (Roubini, 2009).
With this, the company can increase production levels despite the effects of the
global financial crisis in the manufacturing sector. The company should develop new
products that can meet the demands of the market and find ways to attract new customers.
VWB might experience a slow growth but it will eventually rise, as the benefits from the
increase in research and development expense will be realized in the long run. In addition,
if the company focused on developing and producing more fuel-efficient cars in the market,
this will meet new customer demands of environment friendly cars. Reducing the CO2
emission on its entire automotive brand will also increase the brand reputation. Thus,
increasing the market share of VWB in Brazil.

Third Alternative: Benchmark, by conducting cost analysis and value engineering,
with the leading automotive company in Brazil such as Fiat.
Fiat Group Automobiles had been one of the market leaders in the automotive
industry in the Brazilian market since 1991. The company defeated VWBs ranking in 2001
by holding the highest market share in Brazil for selling cars and light vehicles (Refer to
Exhibit 2-A).
Applying benchmarking may help VWB to decide the restoration of the production
level is needed and spending money for further improvements should be advised. An
attempt to improve the components quality and product design to lower overall costs
without reducing the required key performance in producing a product is called value
engineering activity. Before it can be done, a cost analysis between two companies must be
observed. VWB must determine the list of product components and functions that they
perform and the current estimated cost. There should be a determination of the relative
importance of customers requirements where in VWB will conduct a formal survey of
prospective customers to rank the relative importance of the products features. The last
step is to develop relative functional rankings in order to determine the percentage that
each component will contribute to a customer feature.
After conducting the cost analysis, VWB can start the value engineering (VE)
activity. During value engineering, the company must then identify the components for cost
reductions by computing for the value index. Once the components have been identified,
VWB can proceed to provide cost reduction ideas to improve the function and quality of the
products at the lowest possible cost. Finally, these ideas should be evaluated to ensure its
feasible and acceptable to consumers.


MATRIX:

Criteria Alternative 1 Alternative 2 Alternative 3
1 Increase market share growth (10%) 9% 9% 9%
2 Achieve sustainability (10%) 9% 8% 9%
3 Customer satisfaction (15%) 15% 10% 13%
4 Improve company reputation (15%) 14% 13% 11%
5 Robust production volume strategy (25%) 22% 18% 18%
6 Attractive and Innovative (25%) 20% 24% 24%

Total 89% 82% 84%

VI. Conclusion
VWB is considered as one of the top-performing companies in terms of the
automobiles, along with Ford, General Motors and Fiat. The company used to dominate
Brazil with high level of sales and market share before experiencing eight consecutive years
of downfall. From being the top ranking automotive manufacturer, it ranked third in terms of
market share in Brazil. In an attempt to answer this problem, VWB employed the use of a
Balance Scorecard which is considered to be one of VWBs major strengths. This reversed
the situation of VWB, a proof of the employment of quality and effective strategy, until the
advent of the global financial crisis with its negative effect becoming evident to Thomas
Schmall only two years after.
In assessing the current position and making appropriate decisions, management
must consider internal and external factors which could affect the business operations and
its overall performance. Opportunities for further growth and improvement must fully be
maximized in order to expand market position in the industry. Amidst the continuous decline
in market share and slow sales turnover, VWBs global presence remains to be intact.
Managements must then keep in mind that the decisions they make should be aligned with
the current market opportunities which can generate more sales for the company. The
companys current loopholes in the system as well as other external detrimental factors
must be addressed in order to hinder the company from further worsening its current state
and incurring more losses. These external factors must be actively faced and dealt with by
the management so as to sustain the value of the company to its consumers and the
industry as a whole.

VII. Recommendation
Given the three alternatives presented above, the group recommends that the first
alternative be taken; that is, to sustain the momentum of change initiated prior to the crisis
but to refocus efforts on engaging customers. Although VWB has made efforts to
communicate with and encourage the involvement of employees, suppliers, and dealers,
much has not been done to engage another important source of the companys sales and
profits--the customers. Given the fact that the Southern region of Brazils spending ability
was not affected by the crisis, VWB can greatly target them to reverse the current situation
of the company. The Southern region has twice the spending power of those from Northern
region, thus, capable of buying new cars despite the increase in fuel prices. VWB may
spend more on marketing and advertisement of the vehicles in order to attract these target
customers and inform them of the beauty of the companys products. VWB may gather
customers through product launching wherein customers may put the cars into the test. The
company can also make use of promos and discounts for the first few customers who
commit to buy. Given the fact that the company will continue incurring discretionary
spending, the company may also venture on innovating its vehicles and dominate the
market for more fuel efficient cars. This can attract not only those from the southern region,
but also, those from the northern who wish to save. The product launching can definitely be
of help in raising the awareness of the customers in terms of the environment and how
VWBs products cater to the sustainability of such.
Discerning which alternative to employ played part on the arrival of the acceptance
decision. The decision was made through the identification of the relevant information
needed and used the Balance Scorecard as a guide for the individual analysis of each
alternative. However, some external factors such as the political, economic and social
aspects were not considered in some of the alternatives established in the case study. We
suggest that a more comprehensive data is necessary to further analyze and evaluate the
different alternatives, and to arrive at the decision that best fits the overall strategy of the
company. Moreover, measuring the risks involved against the potential benefits of each
alternative is crucial in order for Volkswagen do Brazil to have an integrated decision.


VIII. References
Kaplan, R. S., & De Pinho, R. (2010). Volkswagen do Brasil: Driving Strategy with the
Balanced Scorecard. Harvard Business School.
Lobato, F.S. (2011). Shale gas, oil, minerals processing offer synergies in Brazil's Amazon
basins. Oil & Gas Journal. Retrieved from http://www.ogj.com/articles/print/volume-109/
issue-10/exploration-development/shale-gas-oil-minerals-processing-offer-
synergies.html
Roubini, N. (2009, August 6). Are there bright spots amid the global recession? Retrieved
from Forbes: http://www.forbes.com/2009/08/05/recession-china-india-qatar-poland-
brazil-opinions-columnists-nouriel-roubini.html