Kaplan and Senior Researche Ricardo Reisen de Pinho of the

9-111-049ROBERT S. KAPLANRICARDO REISEN DE PINHOVolkswagen do Brrasil: Driving Strategy with theBalanced Scorecarddkswagen do Brasil (VWB), studied the color-coded charts anddThomas Schmall, CEO of Volkindicators on his wall. The data shhowed financial, customer, process, and employee pperformancethrough end-of-year 2008. Schmall a his management team had introduced the Balance Scorecardandedin 2007 as part of a program to reveerse eight consecutive years of market share declines a financialandlosses. So far, the turnaround had been successful. The new enthusiasm among the workforce,deconsumers, suppliers, and dealers h led to strong sales increases and a return to profitahadability.But Schmall, in January 2009, ccould now see the impact of the global financial crisi Sales hadis.thplummeted in the 4 quarter and newly-produced vehicles were parked around VWB’s plantsdwaiting for consumers to begin spennding again (see Exhibit 1 for VWB’s monthly sales). Many of thepreviously green marks on sales and profitability on Schmall’s scorecard had turned yelldlow and red.During the previous two months VWB had responded quickly to the slowdown i consumerinionpurchasing by cutting back producti and reducing spending.Schmall was cautious about wheether it was time to restore funding or wait until sale recoveredesbefore gearing up production scheedules and resuming the spending on discretionary programs.yFurther cutbacks in production schhedules and investment would jeopardize plans for mmarket shareexpansion and new product devellopment. VWB, located far from the company headdquarters inWolfsburg, Germany, had considerrable discretion for local, short-term decisions. The general rulefrom corporate headquarters came ffrom a German expression, whose English translation was, “Drivenas fast as you can see.” Schmall woondered whether the VWB Balanced Scorecard, which had helpedhdrive growth in 2007 and 2008, cou guide his executive team as they made the difficu decisionsuldultahead.The Automotive Landscape in BrazileBrazil had the fifth largest land area and population in the world. It enjoyed abundddant naturalresources including minerals, water and large quantities of cultivated and unused fertile land. Brazilr,ewas an attractive consumer market as well as an export platform for commodities and mmanufacturedsgoods. Approximately 85% of its 53 million households lived in urban areas, half in the moredeveloped and industrialized Southheast region, where the per capita income was nearly twice that ofthe Northern region.__________________________________________________________________________________________________________________Professor Robert S. Kaplan and Senior Researche Ricardo Reisen de Pinho of the Latin America Research Center preparerred this case withguidance and assistance from Professor Krishna Palepu. The authors wish to acknowledge the support and work done o this project byonpedChristopher Davies Junior. HBS cases are develop 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 President and Fellows of Harvar College. To order copies or request permission to reproduce materials, ca 1-800-545-7685,rdallwrite Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized,yphotocopied, or otherwise reproduced, posted, or trransmitted, without the permission of Harvard Business School.Authorized for use only in the course Performance Management at University of Ottawa taught by Rajesh Tyagi from Nov 07, 2015 to Dec 11, 2015.Use outside these parameters is a copyright violation.REV: DECEMBER 20, 2010Volkswagen do Brasil: Driving Strategy with the Balanced ScorecardBrazil’s recent global presence came only after multiple internal and external economic crises. In1994, the government launched an economic stabilization plan that reduced inflation to single digitsand helped the country become the largest and most diversified economy in Latin America. Withgross domestic product doubling from 1994 to 2008, Brazil now had the world’s ninth largesteconomy.1Competition in BrazilThe automotive sector produced 19% of Brazilian industrial GDP. The sector employed, directlyor indirectly, more than 1.5 million people in more than 200,000 companies. North American andthEuropean automobile manufacturers had entered Brazil in the first half of the 20 century byassembling vehicles from completely or semi-knocked down imported kits. In 1955, the Braziliangovernment mandated that the multi-national companies either abandon the Brazilian market orbegin producing vehicles with 90% to 95% local content within five years.2By 2008, Brazil had 25 automotive assemblers producing cars, light commercial vehicles, trucksand tractors in 49 industrial plants. Brazil’s automotive industry had a total installed productionthcapacity of 4.0 million vehicles per year and total revenue of $74.0 billion.3 Globally, Brazil was the 6thlargest producer of passenger vehicles and the 5 largest consumer market.4VW, Ford, General Motors and Fiat had been the market leaders for decades. In 1991, these fourmanufacturers 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 Chinaentered. Much of the increased share for these new competitors had come from VWB, but Schmallstill 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 and2 in the US and Germany, about 3 in South Korea, and 4 in Mexico. We should catch up by2015 and then Brazil will shift to a replacement-type market.Volkswagen do BrasilIn 2008, Volkswagen Group (“VWAG”), had a global market share of 10.3%, making it the thirdlargest automotive company in the world. It employed 370 thousand people, and generated revenuesof €113 billion from sales of 6.3 million vehicles across 10 different brands including 3.6 million underthe VW brand.5 In July 2008, VWAG announced an ambitious 10-year vision for the VW brand: “By2018, we aim to sell 6.6 million [VW] vehicles per year, achieve a 21% return on investment, beviewed as the top employer, and earn the industry’s top ratings for customer satisfaction and processquality.”6rdVWAG’s Brazilian subsidiary, VWB, was the 3 largest in the VWAG system, behind China andGermany. It operated four plants, produced revenues of €7.04 billion, and employed about 22,000people. While focused on small and middle size vehicles, such as the Gol, Fox and Polo, VWB hadthe most complete car portfolio within the Brazilian market. It offered 22 different models, 9 of whichhad been designed and developed within a modern product design prototype center located at theSão Paulo headquarters plant.In 1953, VWAG had opened its first production plant outside Germany when 12 employees beganassembling the popular “Beetle” sedan from imported parts in a rented warehouse in São Paulo.7 In1956, VWB introduced a van with fifty percent of parts and components produced in Brazil. By 1969,2Authorized for use only in the course Performance Management at University of Ottawa taught by Rajesh Tyagi from Nov 07, 2015 to Dec 11, 2015.Use outside these parameters is a copyright violation.111-049Volkswagen do Brasil: Driving Strategy with the Balanced Scorecard111-049In the 1970s, VWB launched medium-sized cars, such as the Passat, for export into theinternational market and created the first ethanol-fueled vehicle9. By the end of the decade, thecompany 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 thedomestic automotive market.10 From that point, the industry was highly volatile. During the firstyears of the 1990s, the market expanded rapidly and total Brazilian production output exceeded 1.1million vehicles in 1993, peaking at 1.6 million units in 1997.11 Then Brazil experienced severalregional and global crises12 and production levels fell back to 1.1 million units in 1999, returning tothe 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 #1market share position of more than 30%, it dropped to #2 in 2001 and to #3 in 2003 with a 21% share.VWB attempted to maintain minimum production levels by emphasizing exports, which increasedfrom 45,000 vehicles in 1997 to 164,000 in 2003. 13 (Exhibits 2A and 2B show recent history of VWB’smarket share, sales, and revenues.) Schmall commented on the dilemma faced by VWB during thisperiod:The appreciation of the Brazilian currency, relative to the dollar and euro, along withincreases in the local labor and raw materials costs ended up defeating VWB’s export-ledmarket strategy. Because of intense competition in global markets, VWB could not raise priceson 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 twokey consumer indicators, “Things Gone Wrong” (TGW) and “Customer Satisfaction Index” (CSI) fellshort of management objectives.The New VWB Management TeamIn 2007, VWAG appointed Thomas Schmall as CEO of VWB. Schmall had started his career as anassembly line supervisor; he subsequently held various managerial positions at VWAG plants inSouth Africa, China and Mexico. He attracted corporate attention when he introduced newprocedures in the way managers interacted with production lines at Wolfsburg, the largest VWAGplant in Germany. Schmall recalled:Traditionally, administrative offices were located far from production lines. I movedmanagers inside manufacturing units where they could plan, set targets, align objectives withall personnel and teams, implement actions and measure their impacts. In 1999, FerdinandPiëch, then VWAG’s CEO, asked me to reorganize VWB’s plant in Curitiba, Brazil. After fourchallenging years, I moved to Slovakia where I was responsible for three different VW brandsand 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, employeelayoffs, and capacity downsizing. Inheriting a company known for using good German technology toproduce small, reliable vehicles, he had an ambitious vision to “build a high performance team thatwould drive VWB to become the South American automotive industry’s leader in quality,innovation, sales, and profitability on a sustainable basis.” He wanted to aggressively “re-brand”3Authorized for use only in the course Performance Management at University of Ottawa taught by Rajesh Tyagi from Nov 07, 2015 to Dec 11, 2015.Use outside these parameters is a copyright violation.VWB’s strategy of producing reliable and inexpensive cars had earned it a 61% share of Brazil’s carproduction.8111-049Volkswagen do Brasil: Driving Strategy with the Balanced ScorecardJosef-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 becomehuman resources manager at one of its largest plants. Senn soon moved on to head global HRcoordination and helped introduce the Balanced Scorecard within this function. His first task forVWB 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 anatmosphere of apprehension and instability among the workers. A 2005 Gallup survey showeda low score for employee commitment and satisfaction. In our 2006 labor negotiations, wereached an impasse that could have triggered a long and harmful series of strikes at a crucialpoint in the company’s turnaround strategy. At the end, we had only a few shutdowns andwere able to reduce our workforce through buyouts and early retirement plans, and tointroduce a new compensation structure and more flexible work arrangements.The change in our management approach for working with employees was crucial toestablishing a new culture that could sustain improved financial performance. Before 2007, if atension existed between volume and quality, the culture tilted towards maintaining productionvolumes. 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 anddecreased short-run production output.Carsteen Isensee, 50, became VWB’s CFO in 2007. He had worked in planning and financethroughout his VW career, including joint venture projects in China and as plant controller inSlovakia 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 theconstant threat of having its unprofitable operations shut down by the German head office. Wehad to reeducate the VWB management team to spend money wisely so that we could affordto enlarge markets, improve processes and innovate on new products.Schmall included Senn and Isensee within an 11 person Executive Committee that would leadVWB’s transformation (see Exhibit 3).Using a Strategy Map and Balanced Scorecard for Cultural and StrategicChangeThe Executive Committee understood that to change VWB’s bureaucratic and slow movingcompany culture required new relationships with key stakeholders: employees, suppliers anddealers. Schmall and Senn had prior experience with the Balanced Scorecard and believed itsintroduction into VWB would accelerate the adoption of the new strategy and culture. Senncommented:We needed a tool that could change the mindset of the company, something that couldhelp us communicate our objectives down to the factory floor. This would require a newapproach from top management, and a dedicated and empowered team responsible forimplementing and controlling this effort.4Authorized for use only in the course Performance Management at University of Ottawa taught by Rajesh Tyagi from Nov 07, 2015 to Dec 11, 2015.Use outside these parameters is a copyright violation.VWB into one with enthusiastic and highly-motivated employees who continually introduced highperformance, innovatively-designed cars and light vehicles.111-049Schmall wanted the tool to become VWB’s primary management system. He appointed Senn’sdepartment to lead the project with Isensee’s Financial and Planning departments providing analyticsupport. The initial task force, called the Strategy/BSC Committee, developed a strategy map basedon 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 theaddition of a sustainability objective in the Potential and Growth dimension.)The strategy map’s Customer objective, “Satisfy the Customer’s Expectations,” encompasseddealers, VWB’s immediate customer, and consumers, the ultimate purchasers of VWB’s vehicles. Thesecond Customer objective, “Improve Company Image,” signaled the importance of rebranding VWBas an innovative producer of high-quality vehicles. The Process objectives stressed developing a moreservice-oriented culture among dealers, reducing costs while improving the quality and deliveryperformance of suppliers, and, especially, improving the efficiency, cost, and flexibility of theworkforce and production system. The foundational Potential and Growth Challenge objectivesemphasized achieving a high-performance culture, developing an attractive and innovative mix ofproducts and a long-term commitment to sustainability. Collectively, the executive team expectedthat achieving the objectives in the four challenge areas would enable the company to regain its #1market 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 effectrelations 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 alanguage that everyone can understand. It has the power to decode high-level objectives intooperational 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 ofobjectives that would reflect the company’s strategic priorities. More than 20 would make themap look like a forest and our employees would get lost. Developing the right metrics totranslate 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 inthe company to achieve excellent results.VWB’s Executive Committee translated each strategy map objective into specific indicators andassigned an executive to each objective (see Exhibit 5). The objective owner had the responsibility formonitoring and achieving the performance targets for each of the objective’s metrics. The executiveowner also helped to select and guide the strategic initiatives that would drive performance for theobjective, 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 aspecific achievement, the milestones to be accomplished during a certain period of time, and finally, adescription of the necessary resources to be allocated to carry out that target. Top managementrevised these action plans quarterly and thoroughly discussed them with middle and front-linemanagement levels.With the senior executive team on board for the strategic direction, Schmall, Senn and Isenseethen presented the map and accompanying scorecard to the next level of 400 VWB executives as thefirst milestone in the new transformation program, called Act to Win. “It had an impressive impacton us,” said Flávio Ramalho, a senior manufacturing manager. “With the CEO leading the event,5Authorized for use only in the course Performance Management at University of Ottawa taught by Rajesh Tyagi from Nov 07, 2015 to Dec 11, 2015.Use outside these parameters is a copyright violation.Volkswagen do Brasil: Driving Strategy with the Balanced Scorecard111-049Volkswagen do Brasil: Driving Strategy with the Balanced ScorecardFollowing this initial presentation, all VWB executives went through a two-day training programon the new strategy and the role of the strategy map and scorecard to help execute it.Communicating the Balanced ScorecardThe executive team established an Office of Strategy Management (OSM) to coordinate all thework required to roll the strategy execution program out throughout the company. The OSMconsisted of two groups: Strategy Formulation and BSC Management. (See Exhibit 6 for VWB’s BSCOrganizational Chart)The Strategy Formulation group, supervised by Isensee, supported strategic analysis and strategyformulation and funding. Senn oversaw the BSC Management Group, headed by Christopher Davies,37, an administrator who formerly worked at VWB’s finance subsidiary. The BSC ManagementGroup included a representative from each area in VWB. The representatives organized the rollout ofthe strategy across their business area and coordinated the initiatives that would be executed withinit. This group also led the communication of the strategy, strategy maps, and scorecards to allemployees. Davies commented on the importance of extensive communication:To accomplish a transformation of this magnitude, you need a clear, comprehensive, andrelentless communication process. Otherwise, the change will sound like a restructuringprocess, and the person in my position will be viewed as the messenger for headcountreductions. Information on the BSC metrics and initiatives had to be reliable, on-time, andcontinuous.Senn concurred that communication would be key for the success of the transformation program,“Communication is the backbone of cultural change and you should do it by constantly injectingenergy into the system via campaigns and competition.”Senn launched multiple communication programs including special events, discussions andtraining at regular work meetings, and internal competitions among the workforce to generate ideasfor translating strategic concepts into shop floor actions. The message was continually reinforced inthe company’s paper and electronic newspapers and intranet portal. The BSC Management Groupposted the strategy map on the wall of every room and location as a constant reinforcement of thecompany’s direction.6Authorized for use only in the course Performance Management at University of Ottawa taught by Rajesh Tyagi from Nov 07, 2015 to Dec 11, 2015.Use outside these parameters is a copyright violation.supported by all the top management, everyone clearly understood that something big andimportant had just been launched.”111-049Among the more successful communication initiatives wasan internal contest to choose a mascot that could symbolizeand communicate the new strategy. The winning entry led toGiga, a 1 meter tall sympathetic and futurist robotic character,evocative of the 1960’s VW Beetle (see picture aside14). Gigaappeared at events to shake hands and ask questions toemployees about the strategy. He appeared on the internalIntranet portal, and was featured in widely-read comic strips(see Exhibit 7) in the VWB internal newspaper.One manufacturing cell leader had recently asked for aboard game in which employees could advance their tokensby correctly answering questions about the strategy map.Davies and his group helped design and produce this boardgame, which would be deployed soon.Davies also introduced a new communications tool, an interactive role play game based on acustomized Learning Map, a visual representation of VWB’s history, current competitiveenvironment, and strategy (see Exhibit 8). During a 90 minute session with a group of 10employees, a facilitator led a training exercise on how to win a rally whose endpoint wasachieving the leading market position in Brazil. During the rally, the facilitator and the teamdiscussed the company’s history and heritage, the current competition in the Brazilian automotivemarket, consumer preferences, and the external environment. The team made suggestions on thestrategy VWB should follow to win, and how individual employees could contribute to thestrategy’s success. The final part of the rally’s journey traversed color-coded sections representingemployee capabilities and company culture, critical operating and support processes, success withdealers and consumers, and financial performance. The BSC Management Group had trainedmore than 200 facilitators to lead Learning Map exercise with a goal of having all 20,000+employees participate in the game.A novel communications medium had recently been introduced directly in the production line byinserting, in place of a partially assembled automobile, a large electronic display containing thestrategy map (see Exhibit 9) accompanied by a short tutorial on some aspect of the map. Theproduction workers at the station watched and listened to the tutorial during the short break whilethe display traversed down the assembly line.Davies commented on the importance of the extensive communications program:To create a new high performance culture, we wanted to capture the employees’ hearts andminds. The Balanced Scorecard provided us with the tool for this cultural change. We aimedeach communication mechanism at a target group: management reports for the company’sexecutives, weekly announcements to white collar employees, and articles attached to bulletinboards for shop floor and back office workers. We ran workshops at which employees coulddiscuss what the new strategy and culture meant to them.

 

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