Address | · PDF fileAddress | Contact: Bertelsmann Stiftung Carl-Bertelsmann-Straße 256 33311 Gütersloh Germany Phone +49 5241 81-0 ... sales and procurement as well as to labor

Stefan Schmid, Philipp Grosche

Strategy, Structure, and Culture

Managing the International Value Chain in the Automotive Industry

Address | Contact:

Bertelsmann Stiftung

Carl-Bertelsmann-Straße 256

33311 Gütersloh

Germany

Phone +49 5241 81-0

Fax +49 5241 81-81999

www.bertelsmann-stiftung.de

Stefanie Sohm

Phone +49 5241 81-81295

[email protected]


Man

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Table of contents

Foreword� 6�

Authors� 8

Acknowledgments� 9�

International value chains: Current trends and future needs, as exemplified 10

by the automotive industry

1.� Internationalization�of�the�value�chain�in�the�automotive�industry� 11

2.� Configuration�and�coordination�as�crucial�dimensions�in�shaping�international� 17�

� value�chains

3.� Best�practices�and�options�for�managing�the�international�value�chain� 24

Glocal value creation in the Volkswagen Group: Moving toward greater 30

decentralization of production and development

1.� The�Volkswagen�Group’s�new�global�strategy� 31

2.� The�configuration�of�production�activities�within�the�Volkswagen�Group� 35

3.� The�configuration�of�R&D�activities�within�the�Volkswagen�Group� 40

4.� The�consequences�of�decentralizing�value�activities� 51

Speaking with Ralf Kalmbach, Roland Berger 60

“The�coordination�of�international�value�activities�is�a�crucial�factor�in�achieving�success.”

Decentralized centralization: Romania as a focus of value creation 66

for Renault’s Logan

1.� The�Renault�Group�as�a�leader�in�the�low-cost�car�sector� 67

2.� The�configuration�of�value�activities�for�the�Logan� 77

3.� The�competitive�advantages�offered�by�emerging�markets� 90

4

5

Speaking with Coimbatore K. Prahalad, Ross School of Business, 98

University of Michigan

“We�are�moving�away�from�a�firm-�and�product-centric�view�of�value�to�a�network-

centric�and�co-created�view�of�value.”

From assembly plant to center of excellence: The rise of Audi’s 104

subsidiary in Györ, Hungary

1.� Establishing�Audi�Hungaria�as�a�subsidiary�of�Audi�AG� 105

2.� Developing�Audi�Hungaria�as�a�center�of�excellence�within�the�Volkswagen�Group� 110

3.� Challenges�in�managing�centers�of�excellence� 120

Speaking with Matthias Wissmann, President of the VDA 128

“Production�sites�in�foreign�countries�and�growth�at�home,�with�stable�or�even�higher��

employment,�are�not�mutually�exclusive.�Indeed,�they�are�both�essential�for�successful��

growth.”

Global networks and decentralized configuration strategies: Strategic, 134

structural, and cultural implications

1.� Restructuring�international�value�creation� 135

2.� Necessary�changes�in�the�management�of�international�companies� 141

Glossary� 148

Project�publications� 157

Publishing�information� 158

Foreword

The�ever-changing�global�network�of�economic�

ties�calls�for�a�new�approach�to�leadership�–��one�

that�requires�both�management�and�personnel�

to�show�greater�ability�to�cooperate.�If�compa-

nies�hope�to�meet�the�challenges�of�international�

competition,�they�need�to�recognize�and�seize�

the�opportunities�offered�by�the�global�economic�

system.�However,�the�competitive�position�of�an�

internationally�active�company�is�not�determined�

solely�by�such�factors�as�cost-saving�produc-

tion,�lean�process�design�or�innovative�capac-

ity.�In�order�to�profit�from�the�global�market,�a�

company�must�be�able�to�create�and�manage�an�

international�value�network�and�delegate�value�

functions�to�the�proper�sites.�This�applies�to�

sales�and�procurement�as�well�as�to�labor�and�

capital�markets.�

Despite�predictions�that�globalization�would�lead�

to�a�homogeneous�world�market�with�barely�dif-

ferentiated�products,�it�has�become�clear�that�

cultural�differences�still�play�a�major�role�in�

customers’�purchasing�decisions�and�in�the�com-

mitment�of�a�company’s�employees.�Moreover,�

there�are�substantial�differences�in�the�produc-

tion�and�quality-related�processes�needed�in�the�

emerging�markets�relative�to�the�industrialized�

countries,�and�this�affects�everything�from�prod-

uct�use,�pricing�and�development�potential�to�

distribution�and�communications�channels.�

The need for leadership in international value creation

The�changes�that�have�taken�place�in�operations,�

production,�communications�and�decision�mak-

ing�are�particularly�evident�in�the�automotive�

industry.�There�is�no�such�thing�as�a�“world�car”;�

particularly�in�the�mass�market,�manufacturers�

need�to�adapt�their�products�to�suit�each�indi-

vidual�country.�This�is�not�a�new�insight.�But�so�

far�companies�have�had�little�success�in�finding�

the�right�balance�between�centralization�and�

decentralization,�between�cutting�costs�through�

standardization�and�taking�advantage�of�greater�

market�potential�by�adapting�their�products�to�

local�needs.�

The�competitive�position�of�automobile�manu-

facturers�is�of�enormous�consequence�for�the�

economy.�In�Germany,�one�job�in�seven�is�

dependent�on�the�automotive�industry;�in�the�

United�States�it�is�one�in�ten,�and�this�industry�

is�becoming�increasingly�crucial�in�the�emerg-

ing�economies�as�well.�India�and�China�are�well�

on�their�way�to�becoming�leading�centers�of�

production�and�technology.�Their�companies�are�

entering�the�global�arena�as�serious�competitors�

just�as�American�manufacturers�are�showing�

alarming�weakness,�having�rested�for�too�long�

on�the�laurels�of�their�earlier�successes�and�fail-

ing�to�recognize�changes�that�were�taking�place�

in�the�market.�

Martin�Spilker

Program director

Stefanie�Sohm

Project manager

6

Today,�the�challenge�for�a�company�competing�

on�the�international�stage�is�to�adjust�quickly�to�

local�circumstances�while�simultaneously�inte-

grating�its�divisions�and�sites�worldwide,�based�

on�identical�principles�and�a�shared�understand-

ing�of�the�company’s�purpose�and�objectives.�

Integrating�the�various�sites�into�corporate�

strategy,�across�national�and�divisional�bound-

aries,�requires�allowing�and�empowering�each�

site�to�play�an�important�role�in�the�organization.�

A�company�that�views�itself�as�a�value�network�

is�better�able�to�achieve�this�goal�than�one�that�

maintains�the�pyramid�structure�of�a�traditional�

hierarchy.�

The�strength�of�a�company�lies�in�its�network�

of�internal�and�external�cooperation,�and�thus�

also�in�mutual�trust.�Only�when�management�

respects�its�employees�and�allows�them�the�

leeway�to�act�and�grow�will�it�be�able�to�place�

its�confidence�in�them,�as�well�as�in�its�vari-

ous�divisions�and�sites.�In�many�cases,�a�fear�of�

losing�power�and�control�leads�management�to�

choose�a�strongly�hierarchical�structure�and�a�

centralized�organization,�and�this�in�itself�cre-

ates�obstacles�to�international�success.

The�study�“Managing�the�International�Value�

Chain�in�the�Automotive�Industry”�looks�at�

selected�automobile�manufacturers�to�demon-

strate�how�companies�can�compete�interna-

tionally�through�the�proper�organization�and�

management�of�their�value�structures.�It�shows�

how�these�companies�can�develop�the�special�

strengths�of�individual�sites�for�the�benefit�of�

the�entire�company,�and�how�they�can�integrate�

emerging�economies�into�their�activities�in�order�

to�accommodate�local�needs�and�develop�new�

market�opportunities.�It�looks�from�a�new�per-

spective�at�the�question�of�how�best�to�achieve�a�

balance�between�centralization�and�decentraliza-

tion,�focusing�on�determining�which�value�func-

tions�require�a�differentiated�approach�in�their�

organization�and�management.

Every�company’s�management�can�take�advan-

tage�of�such�opportunities.�The�groundwork�is�

laid�by�establishing�a�corporate�culture�based�

on�shared�values�and�convictions�at�every�level�

of�the�organization,�showing�confidence�in�the�

company’s�employees�and�offering�them�the�nec-

essary�room�to�maneuver.

This study originated as part of the project

“Corporate Cultures in Global Interaction –

People, Strategies, and Success,” which seeks

to promote international and intercultural

cooperation within and among companies.

In addition to international value creation, its

focus areas include cooperation competence,

cultural diversity within companies, German-

Chinese cooperation, mergers and acquisi-

tions and corporate culture, as well as virtual

cooperation. An overview of the project’s

publications can be found at the end of this

brochure.

7

Authors

8

Stefan Schmid

Prof.�Stefan�Schmid�holds�the�Chair�of��

International�Management�and�Strategic�Man-

agement�at�ESCP-EAP�European�School�of��

Management�Berlin.�His�research�focuses�on�

internationalization�strategies,�the�management�

of�foreign�subsidiaries,�and�international��

corporate�governance.�He�teaches�courses�in�

master’s,�MBA,�executive�education�and�doctoral�

programs.�Professor�Schmid�is�the�Academic�

Dean�of�the�Master’s�in�European�Business�

(MEB)�program�at�ESCP-EAP�and�Chairman�of�

the�International�Management�Division�within�

the�German�Academic�Association�for�Business�

Research�(VHB).

Philipp Grosche

Philipp�Grosche�holds�a�graduate�degree�in�busi-

ness�administration�and�is�currently�a�research�

assistant�and�doctoral�candidate�at�the�Chair�of�

International�Management�and�Strategic�Man-

agement�at�ESCP-EAP�European�School�of�Man-

agement�Berlin.�His�research�focuses�on�the�

management�of�international�value�chains�and�

the�internationalization�strategies�of�companies�

from�emerging�markets.

9

Acknowledgments

The�authors�would�like�to�thank�Bertelsmann�

Stiftung�for�its�initiative�and�cooperation�in�car-

rying�out�this�project,�especially�Stefanie�Sohm�

and�Martin�Spilker�for�their�excellent�collabo-

ration.�Thanks�go�also�to�Manuela�Geipel�and�

Cornelia�Graf-Chmiel�for�their�active�support�

with�respect�to�data�collection�and�data�analysis,�

as�well�as�to�the�staff�of�the�Chair�of�Interna-

tional�Management�and�Strategic�Management�

at�ESCP-EAP�European�School�of�Management�

Berlin�and�particularly�to�Thomas�Kotulla�and�

Renate�Ramlau�for�their�valuable�comments�on�

earlier�versions�of�this�publication.��The�original�

text�was�written�in�German.�It�was�translated�by�

ZV�Mediengestaltung�&�Sprachdienstleistungen,�

to�whom�the�authors�would�like�to�express�their�

sincere�appreciation.

1. Internationalizationofthevaluechainintheautomotiveindustry 11

2. Configurationandcoordinationascrucialdimensionsinshapinginternational 17

valuechains

3. Bestpracticesandoptionsformanagingtheinternationalvaluechain 25

References 28

International value chains

Current trends and future needs, as exemplified by the

automotive industry

10

Theexpansionofcompaniesintoforeignmar-

ketscontinues,andthisisparticularlytruein

theautomotiveindustry.Longago,however,

automobilemanufacturersstoppedfocusing

exclusivelyon➔ exports.Insteadofmerely

exportingvehiclesandsellingtheminforeign

markets,companiesbegancarryingoutawide

rangeof➔ valueactivitiesabroad.Theseactivi-

tiesarelocatedinornearpromisingtargetmar-

kets.Sometimes,forexample,companiesbegin

producinganalreadypopularmodelonsite.The

resultisthedevelopmentofinternational➔

valuechains,whichposefurtherchallenges,for

example,forinterculturalissues.

Whatfactorscontributetotheinternational-

izationofvaluecreation?Positiveeconomic

developmentsin➔ emergingmarkets,suchas

theso-called➔ BRICcountries(Brazil,Russia,

IndiaandChina),haverecentlyledautomobile

manufacturerstoimplementanextensivearray

ofvalueactivitiesinthesecountries.Similarly,

macroeconomicfactorsplayaroleinwhere

companiesdecidetolocate,sincefactorssuchas

exchangeratesaffectthesalespricesandprofit-

abilityofvehicleexports,andhigheroilprices

raisethecostoftransport.Otherfactorsthat

intensifycompetitionintheautomotiveindustry,

andthataffecttheinternationalvaluechain,

includenewcompetitorsfromemergingmarkets

andincreasingcostpressures.Forexample,

companiesmaytendtoavoidmarketswitha

particularlyhighlevelofcompetition.Inshap-

ingthevaluechain,itisimportanttotakeinto

accountthespecificneedsoftheindustry.For

instance,companiesneedaccesstoinnovative

researchclustersiftheyaretodevelopnewcon-

ceptssuchascarswithenvironmentallyfriendly

engines.Figure1showsanumberofexternal

factorsthatarecurrentlyexertingastronginflu-

enceoncompanies’internationalvaluechains.

11

1. Internationalization of the value chain in the automotive industry

Find out more about successful international cooperation in ”Corporate Cultures in Global Interaction”

aVWproductionsiteinChattanooga,Tennessee,

in2008,andreportsindicatethatVolkswagen’s

➔ subsidiaryAudiisalsoreviewingthepossi-

bilityofproducingvehiclesintheUnitedStates.

Trendsinexchangeratesalsoinfluencemore

thanjustproduction.AlthoughBMWestablished

aproductionsiteinSpartanburg,SouthCarolina,

in1992,manyofitscomponentscontinueto

bemanufacturedinEurope.Seekingtofurther

reduceitsvulnerabilitytocurrencyfluctuations,

BMWisplanningtoincreaseprocurementfrom

suppliersthatinvoiceindollars(Oesterleetal.

2008:252).

Thecomplicatedinteractionsbetweenthese

externalfactorsandtheshapingofinterna-

tionalvaluechainsareevidentwhenlooking

atexchangerates.Betweenearly2006and

mid-2008,thestrengthoftheeurorelativeto

thedollarcompelledanumberofnon-American

automobilemanufacturerstoconsiderestab-

lishingproductionsitesintheUnitedStates.

AsKutschker/Schmidshow(2008:28),the

highexchangerateforcedthesecompaniesto

strugglewithdecliningsalesortakelosseson

theirvehicleexportstotheUnitedStates.One

responseoftheVolkswagenGroupwastosetup

12

Overall economic situation

Fluctuating exchange rates Business cycle Oil price development ...

Industry-specific requirementsExample: New car concepts

Low-cost cars Environmentally friendly

technologies ...

Emergence of new markets

China India Russia ...

Competition Continuing

cost pressure New competitors

from emerging countries

...

Value Configuration

Home Country

Host Country 1

Host Country 2

Host Country 3

Figure 1: Selected external factors that affect the configuration of international value chains

Source: The authors, based on VDA (2008: 34-42).

Procurement

R & D

Production

Sales

Legend:

Anumberofinternalfactorsalsoplayanimpor-

tantroleinthegeographicaldistributionof

valueactivities.Ascompaniesinternationalize,

their➔ marketentrystrategiesareofparticular

significanceforlocatingcertainvalueactivi-

tiesonsite.Forexample,theexportstrategyof

manycompanies,astheybegintheprocessof

internationalization,istokeep(nearly)allvalue

activitieswithinthehomecountry.However,

theestablishmentor➔ acquisitionofaforeign

13

subsidiarycreatesaneedforinternationalization

inareassuchassales,production,orresearch

anddevelopment.Todaycompaniesemploya

widevarietyofmarketentrystrategies(Schmid

2002,Schmid2007:16f.).AsshowninFigure

2,thesestrategicoptionsaretypicallydistin-

guishedbythecompany’slevelofcommitment

(i.e.,thetiesthatitestablishes)intheforeign

marketaswellasbythemanagementworkthat

takesplacethere.1

Figure 2: Strategic options for market entry

Source: The authors, adapted from Schmid (2007: 16), Meissner/Gerber (1980: 224).

Export

Contract production

Licensing

Minority stake

Strategic alliance

Joint venture

Subsidiary

Merger

high

low

low high

Management work in the

foreign market

Commitment to the foreign market

1 Figure 2 shows the relative significance of various market entry strategies, based on particularly common real-world cases. However, as a strategy’s position is largely determined by how it is implemented by the individual company, this figure can only provide a rough estimate. Note that an influential➔ minority stake of 49% may result in more management activities taking place in the given foreign country, as well as a greater commitment to the foreign market, than a loose strategic alliance. This would change the order shown above. There are a number of possible ways to systematize market-entry strategies, but all of them are problematic in some way (Kutschker/Schmid 2008: 848-853).

companiessothattheyareallowed,underChi-

neselaw,toproducevehiclesinChinaforthat

country’srapidlygrowingmarket.

Inmanycases,automobilemanufacturerscreate

foreignsubsidiariesasawayofestablishingpro-

ductionandsalesunitsinlocalmarkets.Though

foreigndistributioncompaniesasalternatives

toexclusiveimportershavelongbeenanormal

partofthemarketandhaverarelyattracted

muchmediaattention,therehasbeenagreat

dealofpublicinterestinnewforeignproduc-

tioncompanies.Daimler,forexample,decided

inthesummerof2008toestablishasubsidiary

inHungary,whichwillproduceAandBclass

vehiclesinthecityofKecskemét.Acquisitions

alsocanbefound.Withthepurchaseofthe

renownedEnglishcompaniesJaguarandLand

RoverfromitscompetitorFordinthespring

of2008,TataMotorsisnowinpossessionof

extensivevalueresourcesoutsideofIndia.Such

acquisitionsarenotalwayssuccessful,however.

Afteritspurchase

ofRoverin1994,

BMWfounditself

unabletohandle

severalproblemsthattheBritishmanufacturer

wasexperiencing,includingqualityissues,and

itsevereditstieswiththatcompanysixyears

later(Kutschker/Schmid2008:920).➔ Mergers

arelesscommonthanacquisitions.Manufactur-

ersmostoftentakeacautiousapproach,and

thiswastrueevenbeforethe1998mergerof

DaimlerandChryslerprovedunsuccessfuland

wasdismantledin2007withthesaleoftherel-

evantcompanyholdings.

Thechoiceofan➔ internationalizationstrategy

isdirectlyrelatedtothe➔ configurationofthe

internationalvaluechain.Thechosenstrategy

andthevalueactivitiesinvolvedproducediffer-

entvaluestructures,asshownbytheexamples

citedabove.Differencesinvaluestructuresare

alsoreflectedindomesticandforeignsales,or

inthe➔ foreignshareoftotalsales(Figures

3and4).Manufacturersdifferintheirpropor-

tionofdomesticrelativetoforeignsales,which

reflectsdifferentlevelsofinternationalization

invaluecreation,inthiscaseprimarilyin

sales.ItisparticularlystrikingthatAmerican

Numerouscasesillustratethemarketentry

strategiesemployedintheautomotiveindustry,

alongwiththeexportofgoods.Aprominentfea-

tureofthe➔ strategychosenbythesportscar

manufacturerPorscheis➔ contractproduction.

Since1997and2005,respectively,themajority

ofitsBoxsterandCaymanmodelshavebeen

manufacturedbytheFinnishcompanyValmet.

Beginningin2012,Austriancontractmanufac-

turerMagnaSteyrwilltakeonthisrole.Large

portionsofPorsche’sCayennemodelaremanu-

facturedbyVolkswageninBratislava,Slovakia,

andthensenttothePorscheplantinLeipzig

forfinalassembly.International➔ licensing

isacommonindustrystrategyforproducing

individualvehiclecomponents.Forexample,

theAsianSuzukicompanyislicensedtomanu-

facturedieselenginesdevelopedbytheItalian

manufacturerFiat.

International➔ minoritystakesarecommonin

theautomotiveindustry.Premiummanufacturer

Daimlercontrolsnearlysevenpercentofshares

inIndia’sTataMotors,whichhasrecently

attractedattentionwithits➔ ultralow-cost

Nanocar.RenaultandNissanarelinkedby

crossownership:Renaultholds44.3percentof

Nissan,andNissanowns15percentofRenault

shares.Thisallowsthetwocompetingcompa-

niestostrengthentheircooperationonopera-

tionalissuesandstrategywithintheframework

ofthe➔ strategicalliancethattheyformedin

1999(cf.alsoSchmid/Hartmann2007).BMW,

DaimlerandGeneralMotors–competitorsin

otheraspectsofthemarket–haveaninter-

nationalstrategicalliancetodevelopahybrid

car,amongotherthings,asawayofsharing

thehighcostsofdevelopmentassociatedwith

suchaproject.CompetitorsPeugeot-Citroënand

Toyotaarealsoworkingcloselytogether.They

jointlydevelopedthenearlyidenticalcompact

carsCitroënC1,Peugeot107andToyotaAygo,

andhavebeenmanufacturingthemsince2005

intheCzechcityofKolin,withintheframework

oftheinternational➔ jointventureToyotaPeu-

geotCitroënAutomobile(TPCA).Inaddition,all

ofthemajorautomo-

bilemanufacturers

haveestablishedjoint

ventureswithChinese

14

Find out more about successful partnerships with the Toolbox ”Cooperation Competence”

Find out more about the merger of corporate cultures in ”Post-Merger Integration and Corporate Culture”

15

Figure 3: Domestic and foreign sales of the 22 largest automobile manufacturers in 2007

Source: The authors, based on annual reports for fiscal years 2007 and 2007/2008.

GM

(USA

)

Toyo

ta1) (J

)

Ford

(USA

)

Volk

swag

en (D

)

Hon

da1) (J

)

Nis

san1)

(J)

Peug

eot

(F)

Chry

sler

(USA

)

Rena

ult

(F)

Suzu

ki1) (J

)

Fiat

(I)

Dai

mle

r2) (D

)

Hyu

ndai

(RO

K)

BMW

(D)

Mit

subi

shi1)

(J)

Kia

(RO

K)

Maz

da1) (J

)

Avto

vaz

(RU

S)

FAW

(CN

)

Tata

1) (I

ND

)

Isuz

u1) (J

)

Cher

y (C

N)

As of 2007.1) The fiscal year ended on March 31, 2008.2) Not including ”vans, buses, other.“Domestic sales Foreign sales

Legend:

Total sales(vehicles sold, in millions)

0

1

2

3

4

5

6

7

8

9

109.4

8.4

6.66.2

3.93.7

3.4

2.72.5 2.4 2.3

1.8 1.71.5 1.3 1.3 1.2

0.8 0.6 0.6 0.5 0.4

manufacturerscontinuetosellarelativelylarge

shareoftheirvehiclesintheirdomesticmarket.

In2007,up-and-comingmanufacturersfrom

emergingmarkets,suchasAvtoVazinRussia,

FirstAutomobileWorks(FAW)inChinaandTata

inIndia,soldtheirvehiclesalmostexclusively

athome.ThisisnottrueofmostEuropeanand

Japanesemanufacturers.

companytocompetewithitsrivals.Atthesame

time,theinternationalnatureofvalueactivi-

tiesmeansthattheyneedtobecoordinated

andintegratedintothecorporatenetworkasa

whole.Asthelevelofglobalizationincreases,

automobilemanufacturersarethereforefaced

withthechallengeofconfiguringandcoordi-

natingtheirinternationalvaluechainstotheir

bestadvantage.Thefollowingchapterfocuses

onthesetwocrucialdimensionsofthemanage-

mentoftheinternationalvaluechain.

The design of the international value chain is an important com-petitive factor.

Intheglobalautomobilemarket,thecompeti-

tivepositionofanindividualmanufacturerno

longerdependssolelyonsuchtraditionalfactors

asproductivityorinnovativecapacity.Instead,

thecompetitivepositionisalsoafunctionofthe

designoftheinternationalvaluechain.Acen-

tralquestion,therefore,ishowvalueactivities

shouldbedistributedgeographicallytoenablea

16

Figure 4: Foreign share relative to total sales for the 22 largest automobile manufacturers in 2007

Source: The authors, based on annual reports for fiscal years 2007 and 2007/2008.

Hon

da1) (J

)

Mit

subi

shi1)

(J)

Isuz

u1) (J

)

Volk

swag

en (D

)

Nis

san1)

(J)

BMW

(D)

Toyo

ta1) (J

)

Kia

(RO

K)

Dai

mle

r2) (D

)

Peug

eot

(F)

Maz

da1) (J

)

Rena

ult

(F)

Suzu

ki1) (J

)

Hyu

ndai

(RO

K)

Fiat

(I)

GM

(USA

)

Ford

(USA

)

Cher

y (C

N)

Chry

sler

(USA

)

Avto

vaz

(RU

S)

Tata

1) (I

ND

)

FAW

(CN

)

As of 2007.1) The fiscal year ended on March 31, 2008.2) Not including ”vans, buses, other.“

Foreign share relative to total sales(in percent)

0

10

20

30

40

50

60

70

80

90

100

84 84 84 8381 81 81

79 78 78 7874

72

63 6359

57

31

22

149

0

17

Value configuration is the distri-bution of value activities among different countries.

Thevalueactivitiesofacompany,whetherthey

areprimaryorsecondary,canbedistributed

amongdifferentcountries.Thegeographical

distributionofsuchactivitiesiscalled➔ value

configuration.Itcharacterizesthedegreeof

theirgeographicaldispersion(decentralization)

orconcentration(centralization).Centralization

existsifcomparableactivitiesarecarriedout

onlyatacertaincentrallocation;decentraliza-

tionmeansthatcomparableactivitiesaregeo-

graphicallydispersedandtakeplaceparallel

tooneanotheratavarietyofcorporateunits

(Porter1986a:25,Kutschker/Schmid2008:

996).Figure5showsthevalueconfigurationof

ahypotheticalcompanyheadquarteredinGer-

many.

Acompany’svaluechainencompassesvalue

activitiesintheorderoftheiroperationalimple-

mentation.ThevaluechainshowninFigure

5istakenfromMichaelPorter,aprofessorat

HarvardBusinessSchoolandanexpertonbusi-

nessstrategy.Porterdistinguishesbetween➔

primaryand➔ secondaryactivities.Primary

activitiesincludeinboundlogistics,operations,

outboundlogistics,marketingandsales,and

service.Secondaryactivitiesareprocurement,

researchanddevelopment,humanresource

managementandinfrastructure(Porter1986a:

29-32).2Thisdetaileddescriptionofthevalue

chainisusefulforanalyzing➔ competitive

advantages.Breakingdownacompanyintoits

individualvalueactivitiesmakesitpossibleto

identifythecurrentandpotentialcontributionof

eachactivitytothecompany’scompetitiveposi-

tion(Porter1986a:19).

2. Configuration and coordination as crucial dimensions in shaping international value chains

2 This allocation of value-adding activities represents one of many recommendations; the precise designation of the activities in various branches may therefore vary (Porter 1986a: 20) and arguments may also be found in favor of classifying research and development as well as procurement as primary activities rather than as secondary activities (Bäurle/Schmid 1994: 4-5).

Figure 5: Value chain and value configuration according to Porter

Value chain

Value configuration

Seco

ndar

y ac

tiviti

es

Primary activities

Upstream primary activities Downstream primary activities

Infrastructure (e.g. accounting system)

Inboundlogistics

Operations Outbound logistics

Marketing and sales

Prof

it m

argi

n

Profit margin

Service

Human resource management

Research and development

Procurement

Source: Based on Porter (1986a: 21, 24f.) and Kutschker/Schmid (2008: 997).

Activities D F UK USA J

Inbound logistics • • •Operations

Production • • • •Assembly • •Testing • •

Outbound logistics

Order processing • • • • •Distribution • • • • •

Marketing and sales

Advertising • • • • •Sales organization • • • • •

Service • • • • •Procurement •Research and development • •Human resource management • • • • •Infrastructure •

18

19

carriedoutcentrallywhileothersaredispersed.

Finally,acompanythatfollowsastrategyof

strictdecentralizationimplementsallactivities

thatarepartofthevaluechainineverycountry,

whichmayproduce➔ miniaturereplicasinthe

hostcountries.

Itisclearfromacloserexaminationofcompa-

nies’valueconfigurationsthat,inmanycases,

➔ valuefunctionsarenotcarriedoutintheir

entiretyatforeignsites.Instead,suchsiteshan-

dleonlycertainsub-processes.Oneexampleis

thevaluefunctionofproductionintheautomo-

tiveindustry,whichcanbebrokendownintothe

stampingofsheetmetalcomponents,bodycon-

struction,paintingofthevehiclebody,produc-

tionofcomponentsandfinalvehicleassembly,

asshowninFigure7.Theseproductionstages

donotnecessarilyneedtobeconfinedtoone

plantbutcanbeperformedinvariousdifferent

countries.

Whenhepublishedhisconceptionofthevalue

chain,Porterpointedoutthatso-calleddown-

streamprimaryactivitiessuchasmarketing

andservice,whichpresumeacertainproxim-

itytothecustomer,tendtobecarriedoutina

decentralizedfashionintherespectivemarkets.

Upstreamprimaryandsecondaryactivities,

withtheexceptionofhumanresourcemanage-

ment,arefrequentlycentralizedatonesiteor

restrictedtoonlyafewlocations(Porter1986a:

23,Kutschker/Schmid2008:998,1003f.).Inthis

sense,thehypotheticalGermancompanyshown

inFigure5representsatypicalexample.

Inprinciple,therearethreebasictypesof➔

configurationstrategies,asshowninFigure

6.Underastrategyofcentralization–which,

strictlyspeaking,wouldonlybepossibleby

exportingindirectlyandusingdomestictrade

intermediaries–allofthecompany’svalue

activitiesremaininthehomecountry.Acom-

binedstrategymeansthatsomeactivitiesare

Centralization strategy

Combined strategy

Decentralization strategy

Home country

Host country 1

Host country 2

Host country 3

Figure 6: Basic types of configuration strategies

Source: Kutschker/Schmid (2008: 999).

Procurement R & D Production SalesLegend:

meanthatallproductionstagesaredecentral-

ized.Amanufacturerthatusesitsforeignsites

merelytoassembleSKDorCKDsetsthathave

beenprefabricatedinitshomecountryhasa

lowerlevelofforeignvalueaddedthanonethat

carriesoutallofitsproductionstagesatforeign

plants.

Thereareanumberofadvantagestodecentral-

izingvalueactivities,butcentralizationoffers

otherbenefits.Figure8providesanoverview

ofthemostimportantreasonswhycompanies

mightchoosetoeithercentralizeordecentral-

izetheseactivities.3Notethatthearguments

forcentralizationordecentralizationarenotthe

sameforeachactivity.Companiesdetermineon

acase-by-casebasiswhetherconcentrationor

dispersalispreferable,asshownbythestudies

includedinthispublication.

Particularlyintheautomotiveindustry,numer-

ousassemblyplantsaredevotedexclusivelyto

theassemblyofvehiclekitsproducedatother

sites.Adistinctionismadebetween➔ semi

knockeddown(SKD)production,whenthevehi-

clekitcontainselementsthatalreadyhavebeen

assembled,suchastheautobody,and➔ com-

pletelyknockeddown(CKD)production,when

noneofthepartshavebeenassembled(Meyer

2008:81f.).DaimlerhasfourplantsinSoutheast

Asia(Thailand,Vietnam,MalaysiaandIndo-

nesia)thatassembleCKDkitsmanufactured

inGermany.Thisallowsthecompanytoavoid

payingimportduties.InVietnam,forexample,

theseimportdutiesamountto50percentofthe

valueoftheimportedgoods(Huster2006).Thus,

thefactthatproductionplantsexistinavariety

ofgeographicallocationsdoesnotautomatically

20

Figure 7: An automobile manufacturer’s typical production stages

Source: The authors, based on VDA (2004a, pp. 45-50), and company data.

Production of other components

Production of engine components

Stamping vehicle body parts

Building vehicle bodies

Painting vehicle bodies

Engine assembly

Vehicle assembly

3 Cf. Porter (1986a: 25-27), Porter (1986b: 17-19), Schlüchtermann (1999: 54), Zentes et al. (2004: 229), Kutschker/Schmid (2008: 1003).

21

Figure 8: Selected motives for centralizing or decentralizing value activities

Source: The authors, adapted from Porter (1986a: 29), Schmid (2000: 2-7), Zentes et al. (2004: 229-240), Kutschker/Schmid (2008: 1000-1003).

_ Accesstoscarceproductionfactors,e.g.,

qualifiedpersonnel

_ Totakeadvantageofcomparativecost

advantageswithrespecttoproductionfac-

tors

_ Todistributeriskandincreaseflexibility

andinnovativecapacity,forexamplebycon-

sciouslyduplicatingormultiplyingactivities

_ Tomakeuseofcomplementaryresources,

competenciesandskills

_ Bettercoordinationwithvalueactivitiesthat

havealreadybeencarriedoutonsite

_ Toavoidlegalrestrictions,forexample,regu-

latoryrequirementsorimportrestrictions

_ Toensuremarketaccessandcomplywith

governmentregulations,forexample➔

local-contentrequirements

_ Totakeadvantageofdirectorindirectsup-

portprovidedbythegovernmentofahost

country

_ Preventsduplicationofeffort,as,inmost

cases,morerelevantinformationisavailable

onsitethaninothercorporateunits

_ Easiertomaintainconfidentialitybecause

informationremainswithinonesite

_ Transferofinformationwithinthecompany

iseasierbecauseitdoesnotinvolvecross-

ingborders

_ Possibletoestablishalargelyuniform

➔ culture

_ Toavoidconflictsbetweenemployeesat

differentsites

_ Greateracceptanceofthecompanywithin

thehostcountry,forexamplebyestablish-

ingitselfasalocalmanufacturer

_ Toopenupmarketsthatofferlittlecompeti-

tion

_ Toovercomelogisticbarriers,e.g.,toreduce

transportcosts

_ Betteradaptationofproductsorservicesto

theneedsoflocalcustomers

_ Totakeadvantageofculturalproximity,e.g.,

tosupplyorsalesmarkets

_ Tosetupoutpostsinstrategicallyrelevant

markets,particularlyininnovativeclusters

orinthehomemarketsofimportantcom-

petitors

_ Totapintolocalinformationandcommuni-

cationnetworks

_ Proximitytoscientificfacilities,whichfacili-

tatesaccesstoknowledgeandexpertise

_ Acquisitionofinternationalexperienceby

goingabroad

Motives for

decentralization

Motives for

centralization

_ Toachieveacriticalmass

_ Totakeadvantageof➔ economiesofscale

and➔ learningeffects

_ Totakeadvantageof➔ economiesofscope

_ Simplifiedorganization,noprocessesinvolv-

ingmorethanonecountry

_ Simplifiedmanagement,face-to-facecontact

ispossible

_ Tofacilitate➔ coordinationofvalueactivi-

ties,aslittleornodistanceexists

_ Easieraccesstoinformationandcommuni-

cation,amongotherthings,becausecultural

andlanguagebarriersarenotafactor

_ Projectscanbecompletedmorequickly;for

example,thereislessneedforcoordination

notspecificallylinkedtoindividuals.Person-

orientedtoolsdirectlyinvolvetheemployees

ofacompanywhoareengagedincoordination

efforts(Kutschker/Schmid2008:1031).

Theconfigurationofvalueactivities,suchas

theirgeographicaldistribution,andthecoordina-

tionoftheseactivitiesconstitutethetwofactors

thatcompaniescanusetoshapetheirinterna-

tionalvaluechains.Ifconfigurationandcoor-

dinationareviewedasdimensionsofamatrix,

thisproducestheso-calledconfigurationmatrix

(Porter1986a:27),whichprovidesinsightintoa

company’sapproachtointernationalvaluecre-

ationandshowsitsoptionswithrespecttothe

geographicaldistributionofvalueactivitiesas

wellastheir➔ integration.Porterdemonstrated

thismatrix,asshowninFigure10,usingthe

AmericanautomobilemanufacturersGeneral

MotorsandFord,alongwiththeirJapanesecom-

petitorToyota.Thematrixshowsthepositions

ofthethreecompaniesduringthe1970sand

thedirectioninwhichtheyweremovinginthe

1980s,asobservedbyPorter(Porter1986a:27).

A decentralized configuration of value activities implies the need for specific approaches to coordination.

Adecentralizedconfigurationofvalueactivities

requiresahighlevelofintegrativeskillsfrom

thoseincorporatemanagement.Suchactivities

needtobeintegratedintothecorporatenetwork

andcoordinated.Afunctioningvaluenetwork

canonlybeachievedbyproperlycoordinating

centrallyordecentrallyconfiguredactivities

(Martinez/Jarillo1991:431).Accordingly,in

dealingwithvalueactivitiesthataremoreor

lessgeographicallydispersed,companiesuse

varioustoolstointegratethemtoagreateror

lesserdegreeintothecorporategroup.Forthe

mostpart,theavailable➔ coordinationtoolsare

structural,technocraticorperson-oriented,as

outlinedinFigure9.Structural➔ coordination

toolsarebasedonorganizationalfeaturesand

representanessentialpartoftheformalorgani-

zational➔ structure.Technocratictoolsinclude

allofthearrangementsandprovisionsthatare

22

Figure 9: Overview of selected approaches to coordination

Source: Adapted from Kutschker/Schmid (2008: 1033).

Structural coordination

Technocratic coordination

Person-oriented coordination Other

_ Forms of organizational structure

_ Departments

_ Staffs, corporate departments, corporate divisions, types of project organization

_ Centralization or decentraliza-tion of decision making

_ Guidelines

_ Programs

_ Plans

_ Budgets

_ Reporting systems

_ Formalization

_ Personal directives

_ Mutual adjustment

_ Personal visits

_ Transfer of management personnel

_ Standardizing roles

_ Culture-oriented coordination

_ Transfer prices

_ Transfer of information

_ Self-organization

_ ...

23

enhancedcoordinationacrossnationalbound-

aries.However,noonesincePorterhasupdated

thepositionofthesecompaniesontheconfigu-

ration-coordinationmatrix,soonlylimitedcon-

clusionscanbedrawnaboutthechangesthat

havetakenplace.

Furthermore,Porter’sconfiguration-coordination

matrix(1986a)hasundergonelittlecriticalscru-

tiny.4Itisclearthatthismatrixhasonestriking

weakness:Althoughitprovidesaclearpicture

ofacompany’svaluestructures,itisimprecise.

Porterhimselfhasconcededthatitiscrucialto

determinetheconfigurationandcoordinationof

eachindividualvaluefunctionseparately(Porter

1986a:25-27,Porter1986b:17-19).Theexamples

thatheshowsonthematrix,though,areentire

companies,whichmeansthatPorterassumes

Atthattime,Toyota,likeotherJapaneseautomo-

bilemanufacturers,wascentralizingitsvalue

activitiesinordertolowercosts,sothatitcould

sellitsvehiclesatanattractiveprice.Today,

manyofToyota’svalueactivitiesaredecentral-

ized,butthecompanyisstillrecognizedforits

highlycoordinatednetwork.Largelybecauseof

itsacquisition-basedapproach,GeneralMotors

pursuedacountry-specificstrategywithanum-

berofdifferentsubsidiaries(brands)andwidely

dispersedvalueactivities.However,itssubsid-

iaries,suchasOpelinGermanyandVauxhallin

GreatBritain,werestillrelativelyautonomous

untiltheendofthe1970s,sincecoordination

wasminimal.Inthe1970s,Fordwasdivided

intoseveralregionalunitsthatwerecoordinated

atmid-level.Sincethen,bothcompanieshave

centralizedanumberofselectedactivitiesand

Figure 10: Configuration-coordination matrix according to Porter

Source: Based on Porter (1986a: 27f.).

high

low

decentralized centralized

Configuration of value activities

Coordination of value activities

Toyota

GeneralMotors

4 Some other writers have pointed out the weaknesses of the configuration-coordination matrix and attempted to expand (cf. Moon 1994) or revise it by taking into account various value activities (cf. Roth 1992). These efforts have provided valuable insights for a possible expansion of the matrix, but they have not led to a revision of Porter’s concept that has gained equal support from theoreticians and practitioners.

Ford

mainlocation.Consequently,therearelimits

totheconclusionsthatcanbedrawnaboutthe

degreeofanautomobilemanufacturer’soverall

centralizationordecentralization.Forthese

reasons–andbecauseoffindingsfromthecase

studiesofVW,RenaultandAudi–theconfigura-

tion-coordinationmatrixisonlyoflimitedvalue

inmakingmanagementdecisions.

ofstrategicmanagement.Thereisvirtuallyno

literatureforpractitionersthataddressesthe

issueoftheconfigurationandcoordinationof

valueactivities.Thisstudyisintendedtofillthis

gap.

Theobjectiveofthestudyisasfollows:

_ todeterminethestatusquoofinternational

valuecreationamongcompaniesintheauto-

motiveindustry;

_ toidentifybestpracticesintheconfiguration

andcoordinationofvaluecreation;

_ toidentifyneedsandoptionsfordeveloping

sustainableinternationalvaluechains;and

_ tocriticallyreviewandexpandPorter’sconfig-

uration-coordinationmatrix(1986a).

thatanoverallconfiguration-coordinationprofile

existsforeachcompany.Inprinciple,however,

eachvaluefunctioninitselfcanbeconfigured

centrallyordecentrallyandmaymanifestahigh

orlowlevelofcoordination,withinthesame

company.Thus,anumberofautomobilemanu-

facturershavedecentralizedtheirproduction

andsales,whiletheirresearchanddevelopment

areoftencarriedoutcentrallyatthecompany’s

Inrecentyears,numerousstudies–manyof

themconductedbytradeassociationsorman-

agementconsultingfirms–havefocusedon

structuralchangeintheautomotiveindustryand

thesubsequentreconfigurationofvaluechains.5

Thefocushasoftenbeenoncooperation

betweenmanufacturersandsuppliersand,par-

ticularly,onthescopeofthevalueactivitiescar-

riedoutbyeachside(e.g.,Sonnenborn2009).

Theconfigurationandcoordinationofsuch

activitieshavebeenlargelyignored.Mostnota-

bly,therehasbeenlittleexaminationoftherole

oftheconfigurationandcoordinationofvalue

activitiesingeneratingcompetitiveadvantages.

Forthemostpart,theacademicliteratureon

thistopic(e.g.,Roth1992,Holtbrügge2005)has

failedtoconsiderthedecision-makingapproach

24

3. Best practices and options for managing the international value chain

5 Cf. VDA (2004a, VDA 2004b), Wildemann (2004), Accenture (2005), Dannenberg/Kleinhans (2005), Dietl et al (2007), BDI et al. (2008), Roland Berger (2008).

developmentofnewmarketsplaysacentralrole

inthecasestudyoftheVolkswagen Group.

TheVolkswagenGroupisengagedinoneofthe

mostambitiousgrowthinitiativesintheindustry

inseekingtoovertakeToyota,theworld’scur-

rentmarketleaderintermsofsalesandprofit-

ability,bytheyear2018.Thesestrategicgoals

cannotbeachievedwithoutopeningupnew

salesmarketsandpermeatingthecompany’s

existingmarkets.Itisimportanttoremember

thatcertaincrucialrequirementsmustalso

bemetwithrespecttotheconfigurationand

coordinationofvalueactivitiesifcompaniesare

tobeinternationallysuccessful.Wetherefore

particularlyfocusonthequestionofhowcompa-

niescanmarkettheirproductsworldwidewhile

adaptingtodifferentcustomerdemandsata

locallevel.Weanalyzethevalueconfigurationof

theVolkswagengroupandcompareitwiththat

ofVolkswagen’scompetitorToyota.Thiscase

studyoutlineswaysinwhichcompaniescan

resolvethetensionbetweenstandardizationand

differentiationbydecentralizingtheirdevelop-

mentactivities,toadapttheirproductstolocal

markets,whilealsodecentralizingtherelevant

decision-makingcompetencies.Iftheysucceed

indoingso,theycanbecometrueglobalplayers.

How is it possible to balance the need for worldwide supply and adaptation to the local market?

The configuration and coordina-tion of value activities have been given too little attention.

Alloftheexamplesandconclusionsoutlined

herehavebeenchosennotonlyfortheirrel-

evancetocompaniesintheautomotiveindustry

butalsobecausetheycanprovideinsightsthat

maybeusefultootherindustries.Oneofour

concernsistoshowhowcompetitiveadvantages

canbegenerated,consolidatedandexpanded

bymeansofanappropriateconfigurationand

coordinationofvalueactivities,andwhatthis

requiresofmanagement.Asweintendtodem-

onstrate,companieswithinthesameindustry

oftenchooseentirelydifferentapproaches

toconfigurationandcoordinationinorderto

ensurecompetitivepositions.

Wefocusontheautomotiveindustrybecause

itisofparticularimportancetoGermanyand

manyothercountries.Withabout744,500

peopleemployedbymanufacturersandsuppli-

ers,theautomotiveindustryisoneofGermany’s

largestemployers.Ifwealsoincludethosewho

workinupstreamanddownstreamindustries,

suchastheelectricalindustryandvehiclesales,

roughly5.3millionjobsinGermanydepend

ontheautomotiveindustry.Thisaccounts

forapproximately13percentofallemployed

individualsinGermany(Destatis2007).The

automotiveindustrywasalsoresponsiblefor

aforeigntradesurplusof105billioneurosin

2007,whichunderscoresitsenormousimpor-

tanceintheareaofforeigntrade(VDA2008:5).

Clearly,then,structuralchangesintheinterna-

tionalvaluechainsofautomobilemanufacturers

canhaveasubstantialimpactontheemploy-

mentandeconomicsituationinGermany.Itis

importanttonote,however,thatmovingvalue

activitiesabroaddoesnotnecessarilymeana

declineinthenumberofjobsinGermany.By

internationalizingvaluecreation,Germanauto-

mobilemanufacturersalsohaveanopportunity

togeneratedomesticgrowth.

Thethreecompaniesconsideredinthisstudy,

Volkswagen,RenaultandAudi,wereselected

partlytoincludevariousexternalinfluences

inouranalysis(cf.alsoFigure1,p.12).The

25

timeofitsestablishmentin1993uptothepres-

entday.Ouranalysishasshownthatupgrading

foreignsubsidiariestocentersofexcellenceby

assigningthemadditionalvalueactivitiesand

developingspecificskillsproducescrucialben-

efitsforthecompanyasawhole,andthusfor

itsdomesticsites.Thishappens,forexample,by

increasingthenumberofdomesticjobs.How-

ever,successinestablishing➔ centersofexcel-

lenceisonlypossiblewiththehelpofaflexible

styleofmanagementthattakesintoaccountthe

specificactivities,rolesandareasofcompetence

oftherespectivesubsidiaries.

How should one go about moving value activities abroad in order to generate positive effects for domestic sites?

Inourconcludingsection,wesummarizethe

mainresultsderivedfromthecasestudiesand

outlinetheirimplicationsformanaginginter-

nationalvaluecreation.Itisclearthatchanges

invaluecreationnotonlyhavestrategicand

structuralconsequencesforcompaniesbutalso

haveimportantimplicationsfor➔ corporate

culture.

UsingthecasestudyoftheFrenchautomobile

manufacturerRenault,weexaminethenew➔

low-costcarconcept.Wefocusondetermining

theaspectsofvalueconfigurationthatarenec-

essarytosucceedinmeetingtheneedsofmar-

ketsegmentsthatareunderagreatdealofcost

pressure.Accordingly,weconductedathorough

analysisofRenault’svalueconfigurationforits

Loganmodel,soldinEuropeunderthenameof

Renault’sRumaniansubsidiary,Dacia.Wealso

identifyimplicationsforthecoordinationand

managementofvalueactivities.Thecasestudy

clearlydemonstratesthataconceptaimedat

achievingalow-costcarrequiresmuchmore

thanmerelyeconomicalvehicleconstructionor

productioninalow-wagecountry.Indeed,the

overallvaluestructureneedstobeadjusted.Pro-

ductionactivitiesneedtobecentralized,butitis

alsoimportanttoachieveahighleveloflocaliza-

tioninthefieldofprocurement.Moreover,the

configurationstrategyfordevelopmentactivities

needstobeadaptedovertime.Althoughacen-

tralizedapproachisadvantageouswheninitially

developingalow-costcar,itmakessenseto

decentralizedevelopmentactivitiesoverthe

longterm.Atthemacroeconomiclevel,low-cost

carsandotherproductsaimedatthelow-price

segmentofthemarketmeanthatemerging

marketsarebecomingcentersofvaluecreation

thatcanoffercompaniescompetitiveadvantages

worldwide.

How do value activitities need to be configured in order to be successful in serving market segments that are under considerable cost pressure?

ThecasestudyoftheHungariansubsidiaryof

Audi AGfocusesontheissueofshiftingpro-

ductioncapacitiesabroad,amuch-discussed

phenomenoninthe➔ industrializedcountries

thatisgenerallydefendedbypointingtothe

needtoimproveacompany’scompetitiveposi-

tion.Inthiscase,theprimaryquestionishow

toundertakesuchashiftofvalueactivitiesto

anothercountryinordertogeneratepositive

effectsforthecompany’sdomesticsites.Inorder

toanswerthisquestion,weanalyzedthedevel-

opmentofAudi’sHungariansubsidiaryfromthe

26

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Roland Berger (2008): TheNextWave.Emerg-

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2007,3-34.

29

1. TheVolkswagenGroup’snewglobalstrategy 31

1.1 Strategy2018:CompetitorToyotaasthestandard 31

1.2 BenchmarkingwithToyota 32

2 TheconfigurationofproductionactivitieswithintheVolkswagenGroup 35

2.1 Highlydecentralizedproductionactivities 35

2.2 Competitivedisadvantagesarisingfromalackofproductionsites 37

2.3 Openingupmarketsbyestablishinglocalproductionsites 38

3 TheconfigurationofR&DactivitieswithintheVolkswagenGroup 40

3.1 AconcentrationofR&Dactivitiesinthecompany’shomeregionofEurope 40

3.2 Inadequatedecentralizationofdevelopmentasanimpedimenttogrowth 43

3.3 Decentralizingdevelopmentforgreatermarketsuccess 45

3.4 Decentralizeddecision-makingresponsibilitiesasaprerequisiteforsuccessful 48

localdevelopment

4 Theconsequencesofdecentralizingvalueactivities 51

References 54

Glocal value creation in the Volkswagen Group

Moving toward greater decentralization of production

and development

30

TheVolkswagenGroupintroducedacomprehen-

sivenewstrategyinDecember2007,aimedat

achievingglobalmarketleadershipintheauto-

motiveindustrybytheyear2018.TheStrategy

2018plan,drawnupundertheleadershipof

VolkswagenCEOMartinWinterkorn,represents

themostambitiousgrowthinitiativeinthehis-

toryoftheWolfsburgmanufacturer.Withinthe

nexttenyears,Volkswagenintendstobecome

notonlyaslarge,butalsoasprofitableasits

JapanesecompetitorToyotaMotorCorporation.

By2018itsgoalistoincreaseannualvehicle

salesfrom6to11million,whichmeansnearly

doublingtoday’ssales.Thecompanyseeksto

raiseitsannualpre-taxprofitmarginfromthe

currentlevelof5.6percentto10percentby

2018.Toyotanearlyachievedthislevelinfiscal

year2006/2007,whenitrecordedaprofitmar-

ginof9.3percent,anddespitelaggingsalesit

iscurrentlyclosertoreachingthatgoalthanthe

VolkswagenGroup.

Strategy2018representsaclearchallengeto

theJapaneseautomobilemanufacturerToyota,

whichhasbeenacknowledgedformanyyears

astheindustryleader.Winterkornunderscores

hiscompany’sambitions:“TheVolkswagen

Groupisontheattack.Andwearenotaimingto

comeinsecondorthird.Weareinthistowin!”

(Ritter2008).ByusingToyotaasastandard,

Winterkornisadoptingamethodthatproved

successfulduringhistimeatAudi,wherehe

waschairmanoftheBoardofManagementfrom

2002to2006.Foryears,Audi’semployeeswere

motivatedbytheslogan“BeyondBMW”toover-

taketheirBavariancompetitor.GivenToyota’s

preeminence,isthiscurrentgoalevenmore

ambitious?

31

1. The Volkswagen Group’s new global strategy

1.1 Strategy 2018: Competitor Toyota as the standard

Figure 1: The main features of Strategy 2018

Source: The authors’ summary of Hillebrand (2007: 23f.), “Volkswagen schafft 8500 Jobs” (2008), Volkswagen (2008a, 2008b).

_ Greater customer satisfaction:Gaining

recognitionby2018asoneoftheautomo-

bilemanufacturerswiththehighestlevelof

customersatisfactionworldwide

_ Improving quality:Achievingthehighest

levelsofqualityintheworldby2018

_ Promoting sustainability:Implementing

environmentalprotectionmeasuresinits

products,materials,technologiesandpro-

cessesby2018

_ Sales growth:Increasingvehiclesalesfrom

6.2millionin2007to11millionin2018

_ Optimizing rate of return:Increasingthe

pre-taxprofitmarginfrom5.6percentin

2007to10percentin2018

The goals of

Strategy 2018

tomakegainsintheAmericanmarket,the

world’slargestwithannualtotalsalesofsome

17millionvehicles.Toyotasellsover2.5million

vehicleseachyearintheUnitedStates,putting

itaheadofVolkswagenbynearly2.2million

units;thisdifferenceamountsto20percentof

Winterkorn’stargetfor2018oftotalGroupsales

of11millionvehicles.Tobesure,Volkswagen

hasalargermarketsharethanToyotaincer-

tainmarkets,forexampleinSouthAmerica,

whereVolkswagenaccountsfor17.8percent

ofthemarketascomparedwith4percentfor

itscompetitor.However,thevolumeofsales

intheSouthAmericancountriesisnotlarge

enougheventobegintoclosetheoverallgap.

AndVolkswagen’sdominanceinEuropeisoffset

byToyota’spreeminenceinitshomemarkets

ofJapanandAsiaingeneral.Toyota’ssizeable

advantageintotalsalesisthereforelargely

duetoitsstrongmarketpositionintheUnited

States.“TheUnitedStatesisourmostserious

Achilles’heel,”saysWinterkornindiscussing

thegrowthneededtoachievethecompany’s

goals(Hillebrand2007:30).

Achievingthesechallenginggoalsrequirestak-

ingstepstoincreaseefficiency.Theseinclude

outsourcingcertainaspectsofthevaluecreation

processtosuppliers,increasingproductioneffi-

ciencyandusingstandardized➔ platformsto

produceseveraldifferentvehicles.Inthefuture,

forexample,allofthemodelsproducedbythe

Groupwillbebasedononlythreeplatformsto

whichdifferentbutmutuallycompatiblemod-

ulesareadded.Volkswagenalsoneedstocom-

peteonthemarketside,whichmeansachieving

growthinavarietyofmarkets,particularly

outsideEurope.“Volkswagen'smarketsharein

Europecan'tgetanybetter.Thecompanyhasto

lookoutsidetheEUforgrowth,”explainsAdam

Jones,analystforinvestmentbankMorganStan-

ley(Edmondson2007).

Inordertoachieveitsgrowthtargets,Volkswa-

genneedstoconcentrateontwothings:First,it

needstoestablishitselfintheemergingecono-

mies(suchasRussia,IndiaandSoutheastAsia).

Itiscurrentlylaggingbehinditscompetitors

inthesemarkets.Second,Volkswagenneeds

Volkswagenhassetitselfahighbar.Overthe

yearsithasbecomeclearthatJapan’sToyota

companyrepresentstheindustrystandardin

numerousareas.Whetherwelookatintegrated

suppliernetworks,leanproductionmethods,

highqualitystandards,thedevelopmentofnew

technologiesorfinancialperformancefigures,

Toyotaoutperformsmostofitscompetitorsin

nearlyeveryrespect.Evenpremiummanufac-

turerslikeDaimlerandPorschefrequentlyview

high-volumemanufacturerToyotaasaso-called

➔ benchmarkforidentifyingpotentialimprove-

mentsintheirowncompanies.Figure2com-

paresthemostimportantperformancefigures

forVolkswagenandToyotaandthesalestrends

forbothcompaniesinthepastfewyears.

ToyotaisparticularlywellknownfortheToyota

ProductionSystem(TPS),whichhasrevolution-

izedautomotiveproduction.Todayitsproduction

andmanagementmethodsareusednotonlyby

nearlyeveryautomobilemanufacturer,butalso

byotherindustriesandorganizations,including

theAmericanaluminumproducerAlcoaandthe

UniversityofPittsburghMedicalCenter.TPSis

basedonthejust-in-timeapproach(JIT)andthe

Jidokaprincipleofongoingqualityassurance

duringeverystageofproduction.Asexplained

byTaiichiOhne,oneofthesystem’screators,

themaingoalsindevelopingTPSwereto

increaseproductivityandreducecosts.

Thisproductionsystemisparticularlynotable

inthatitnotonlyachieveslean➔ structures

andprocesses,butitfocusesonindividual

employeesandchallengesthemtobeconstantly

strivingtoimproveworkprocessesandproduct

quality(Japanese:Kaizen).Manyaspectsofthe

system,suchasitsrecognitionofemployeesasa

company’smostimportantresourcesanditsKai-

zenprinciple,arealsofirmlyrootedinToyota’s

➔ corporateculture.Thus,TPSisanintegral

partofthecompany.“Toyotaemployeesalways

talkasifthecompanywoulddeclarebankruptcy

thenextday.Theyareneversatisfiedwith

whattheyhavedonethedaybefore,”explained

32

1.2 Benchmarking with Toyota

33

Figure 2: Comparison of the most important performance figures and sales trends for Volkswagen and Toyota

As of fiscal year 2007 or December 31, 2007. As of fiscal year 2006/2007 or March 31, 2007.Exchange rate as of March 31, 2007.

Sales E 108.9 billion Foreign share 75.3 %Pre-tax earnings E 6,543 millionPre-tax profit margin 5.6 %

Employees 328,594Foreign share 46.7 %

Production (thousands of vehicles) 6,213Foreign share 66.4 %

Sales by brand (thousands of vehicles)VW 3,662.6Audi 964.2Škoda 630.0 VW commercial vehicles 488.7SEAT 431.0 Bentley 10.0 Lamborghini 2.4Bugati 0.1 Total sales (thousands of vehicles) 6,189

Selected equity holdings (capital interest)_ MAN AG (28.7 %)_ Scania AB (37.7 %)

Sales E 153.7 billionForeign share 53.0 %Pre-tax earnings E 15,289 millionPre-tax profit margin 9.3 %

Employees 299,394Foreign share 66.2 %

Production (thousands of vehicles) 8,180Foreign share 48.2 %

Sales by brand (thousands of vehicles)Toyota (incl. Scion) 7,005.1 Daihatsu 928.7Lexus 490.0 Hino 100.2

Total sales (thousands of vehicles) 8,524

Selected equity holdings (capital interest)_ Fuji Heavy Industries Ltd. (Subaru) (16.5 %)_ Isuzu Motors Ltd. (5.7 %)

Volkswagen AG Toyota Motor Corporation

Source: The authors, based on annual reports.

2000 2001 2002 2003 2004 2005 2006 2007

Note: Toyota’s fiscal year ends on March 31. In the interest of comparability, sales figures for one fiscal year were included with the preceding calendar year. Example: Data from fiscal year 2006/2007 are listed under 2006.

Total sales(vehicles sold, in millions)

0

1

2

3

4

5

6

7

8

9

10

5.25.5

5.15.5

5.0

6.1

5.0

6.7

5.1

7.4

5.2

8.0

8.5

5.76.2

8.9

Toyota Motor CorporationVolkswagen AG

Legend:

resultofanorganicexpansionoftheJapanese

companyintoforeigncountries,whichwas

accompaniedbyacomparativelylargerincrease

initsworkforceoutsideJapan.Asforsales,

Volkswagen’sforeignshareisconsiderably

higherthanToyota’s:75.3percentrelativeto53

percent.Thesituationissimilarforthenumber

ofvehiclesproduced;Volkswagen’sforeignpro-

ductionmakesup66.4percentofthetotal,sub-

stantiallyhigherthanthecorrespondingfigure

forToyota,whichisonly48.2percent.

Whilethemajorautomobilemanufacturersnow

regardthedecentralizationoftheirmarketing

andsalesasself-evidentandmaintainsalessub-

sidiaries(includingassociatedsalesoffices)and

dealernetworksinalloftheirimportantinterna-

tionalmarkets,ithasnotyetbecomecommon

practicetodecentralizetheorganizationofthe

➔ valuefunctionsofproductionandR&D.In

thebattleforworldwidemarketshares,however,

thedecentralizationofthesevalueactivities

representsakeytosuccess.Withthisinmind,

wefocusourfurtheranalysisonproduction

(Chapter2)andR&D(Chapter3).

RonHarbour,founderoftheproductivitystudy

TheHarbourReportandpartnerintheOliver

Wymanconsultingfirm,ashediscussedToyo-

ta’scorporatecultureattheCapitalAutomobile

SummitheldinBerlininSeptember2008.

Toyota’ssuccessisusuallyattributedtoits

efficiencyindevelopmentandproduction,as

wellastothehighqualityofitsvehicles.Volks-

wagenoftenlookstoitsJapanesecompetitor

asamodelintermsofthetimerequiredfor

developinganewvehicle,theproductivityof

individualplants,salesfigures,profitmargins

andcustomersatisfaction.Thereisnoquestion

thatVolkswagenneedstoimproveifitisto

catchupwithToyotaintheseareas.Infocus-

ingontheseaspects,however,thefactisoften

overlookedthatToyotaalsorepresentsaunique

globalvaluenetworkthatwascreatedbydistrib-

utingvarious➔ valueactivitiesthroughoutthe

world.Manyofthe➔ competitiveadvantages

thattheJapanesecompanyenjoystodayarethe

resultnotonlyofitsleadershipinproduction

andmanagementmethods,whichareoftenthe

subjectofdiscussionamongboththeoreticians

andpractitioners,butalsoofthedecentralized

➔ configurationofitsvalueactivities.

Toyota’s competitive advantages are also a result of the decentral-ized configuration of the com-pany’s global value chain.

Figure3showsacomparisonofVolkswagenand

Toyotawithrespecttothetwocompanies’➔

foreignshareofemployees,salesandvehicles

produced,whichhighlightsdifferencesinthese

companies’➔ valueconfigurations.AtVolkswa-

gen,46.7percentofemployeesareforeign,as

comparedwith66.2percentatToyota.Incon-

trasttoToyota,atVolkswagenmostemployees

stillworkinthehomecountry.Thisisparticu-

larlynotablebecauseVolkswagenacquiredtwo

foreigncompanies–Spain’sSEATin1968and

theSkodacompanyfromtheformerCzechand

SlovakFederativeRepublicin1991–thatstill

maintainalargeportionoftheirvalueactivi-

tiesintheircountriesoforigin.Toyota,onthe

otherhand,acquiredonlyJapanesecompanies,

DaihatsuandHino.Thedifference,then,isthe

34

ofthecurrentproductionofVolkswagenand

Toyotarelativetotheirinternationalsales.

Itisclearfromcomparingthesetwocompanies

thattheirregionalfocusesaredifferentbecause

ofdifferencesintheirrespectivehomecoun-

tries.BothVolkswagenandToyotaproduceand

sellmostoftheirvehiclesintheirhomeregions.

UnlikeToyota,Volkswagendoesnotmaintaina

plantineveryregion;ithasnoproductionfacili-

tiesintheNorthAmericanmarket(theUnited

StatesandCanada).Furthermore,thenumberof

VolkswagenssoldinNorthAmericaisrelatively

small.ForToyota,ontheotherhand,North

Americaisafocusofitsbusinessefforts,along

withthecompany’shomeregion.

Thedecisiontolocateproductionabroad

maybemotivatedbyavarietyofbusiness

TheVolkswagenGrouphaslongbeenactivein

theinternationalarena.Thecompany’sinterna-

tionalizationbeganin1952withtheestablish-

mentofasalescompanyinCanada.Thenext

yearmarkedthebeginningofvehiclesalesin

SouthAmerica,asthecompany’ssubsidiary

VolkswagendoBrasilwasfounded.TodayVolk-

swagendistributesitsvehiclesinmorethan150

countriesandmaintains48productionfacilities

in19differentcountries.NotlongafterVolkswa-

gen,ToyotaMotorCorporationventuredabroad

aswellandfoundeditsAmericansubsidiary

ToyotaMotorSalesUSAin1957.ABrazilian

salescompany,ToyotadoBrasil,followedin

1958.TodayToyotasellsitsvehiclesinover170

countries,andithasanevenlargerandmore

decentralizedproductionnetworkthanVolkswa-

gen,with74productionsitesin27countries.

Figure4providesaninternationaloverview

35

Figure 3: Comparison of foreign share of employees, sales and production of Volkswagen and Toyota

Source: The authors, based on Toyota (2007a), Volkswagen (2008a).

As of fiscal year 2007 or December 31, 2007. As of fiscal year 2006/2007 or March 31, 2007.

Foreign shares of Volkswagen AG

Vehicle production

66.4 %

48.2 %

46.7 %75.3 %

Employees Sales Employees Sales

Vehicle production

Foreign shares of Toyota Motor Corporation

53.0 %66.2 %

2. The configuration of production activities within the Volkswagen Group

2.1 Highly decentralized production activities

36

Figure 4: The international production of Volkswagen and Toyota relative to international sales

1,014,2002,900,200

1,242,700 932,000

374,400 496,4003,111,800

852,300 184,000 1,122,000

North America

No production sites

Vehicles per year

Produced

Sold

Western Europe

20 production sites:

_ 8 for vehicles (4 in Germany)

_ 6 for vehicles, engines and components (3 in Germany)

_ 6 for engines and components (4 in Germany)

Vehicles per year

Produced

Sold

Latin America

8 production sites:

_ 6 for vehicles

_ 2 for vehicles, engines and components

Vehicles per year

Produced

Sold

Africa

1 production site:


Vehicles per year

Produced

Sold

Asia/Pacific

6 production sites:


_ 3 for engines and components

Vehicles per year

Produced

Sold

Eastern Europe




Vehicles per year

Produced

Sold

Source: The authors, based on Toyota (2007a), Volkswagen (2008a, 2008c).

As of fiscal year 2006/2007 or March 31, 2007. Note: Eastern Europe includes all of the European nations from the former Eastern Bloc; Western Europe includes all of the remaining European countries. Mexico is included as part of Latin America.

North America


_ 5 for vehicles


_ 1 for contract production

Vehicles per year

Produced

Sold

Western Europe

3 production sites:

_ 1 for vehicles

_ 2 for vehicles and engines

Vehicles per year

Produced

Sold

Latin America

5 production sites:

_ 3 for vehicles

_ 2 for vehicles and components

Vehicles per year

Produced

Sold

Africa

3 production sites:

_ 2 for vehicles


Vehicles per year

Produced

Sold

Asia/Pacific


_ 25 for vehicles (5 in Japan)

_ 23 for engines and components (10 in Japan)

Vehicles per year

Produced

Sold

Eastern Europe

4 production sites:

_ 2 for vehicles


Vehicles per year

Produced

Sold

5,443,500

3,330,000

143,800

744,000284,000

2,942,000

177,900

1,519,300 377,000532,000

379,000845,000

Volkswagen AG

Toyota Motor

Corporation

0

124,300

considerationsandlocationfactors.Inchoos-

ingtheirsitesinBratislava(Slovakia)andKolin

(CzechRepublic),respectively,Volkswagenand

Toyotahavebeenabletotakeadvantageofcost

differences.Thesesites,inwhatcanstillbe

consideredlow-wagecountries,producevehicles

fortheentireEuropeanmarket.Decentralized

sitescanalsobeawayofgettingaroundimport

restrictions.BothcompanieshaveRussiansites,

forexample,allowingthemtoavoidpaying

the25percentimportdutyleviedinRussiaon

importsoffinishedvehicles.InKaluga,Volkswa-

genassembles➔ SKD(semiknockeddown)kits

producedinZwickau(VWPassat)andinthe

CzechcityofMladáBoleslav(SkodaOctavia);

sinceDecember2007Toyotahasbeenoperat-

inganassemblyplantinSt.Petersburg,where

theToyotaCamryisassembledfortheRussian

market.

ForyearsVolkswagenhashaddifficultyinthe

Americanmarket.Afteraperiodofsuccessin

the1970s,ithasneverreallybeenabletoregain

afootholdintheUnitedStates.In1978Volkswa-

genopenedanassemblyplantinWestmoreland,

Pennsylvania,whichproducedtheRabbit,the

AmericanversionoftheVWGolf,butonlyten

yearslaterthecompany’sBoardofManagement

decidedtoshutdownthatsite.Itscapacitywas

notbeingadequatelyutilized,whichhadledto

financiallosses.FromthenontheVWplantin

Puebla,Mexico,suppliedmostoftheVWGolfs

andJettasfortheNorthAmericanmarket;these

wereVolkswagen’sbest-sellingmodelsinthe

region.TodaytheVWbrandisstillunableto

attractasatisfactorynumberofcustomersinthe

UnitedStates,whichhashadaneffectonthe

company’soverallearnings.Accordingtoexpert

estimates,theGroupispostingannuallossesin

thehundredsofmillionsforallofitsbrandscom-

bined.Andthesenumbersaddup:“Since2002,

Volkswagen’slossesinthelargestautomobile

marketintheworldhavegoneintothebillions,”

saysEngelbertWimmer,automotiveexpertfor

thePAConsultingGroup(Schneider2008a).

Ananalysisoftheproductionconfigurations

ofVolkswagenandToyotashowsthatthere

maybeseveraldifferentmotivatingfactorsfor

a➔ directinvestment.1PlantsinRussia,for

example,alsoprovideanopportunitytoopenup

andsupplytheRussianmarket,since“Russiais

likelytobecomethesecondlargestsalesmarket

inEurope,”accordingtoFrankSchwope,analyst

forNordLB(Schneider2007c).ThisiswhyVolk-

swagenisplanningtoexpanditsSKDassembly

plantinKalugaintoafacilityforallaspectsof

themanufacturingprocess(includingautobody

construction)thatcanhandle115,000unitsby

2009.Forsimilarreasons,Volkswagen–likeits

Japanesecompetitor–hasalreadyestablished

productionsitesinothergrowthmarketssuch

asBrazil,IndiaandChina.Thishasallowed

Volkswagentoachievearelativelyhighlevelof

decentralizationinitsproductionactivities.

Local production as a sales argu-ment: Patriotic American custom-ers often regard Toyota’s vehicles as American products.

Incontrast,theAmericanmarkethasplayeda

criticalroleinToyota’ssuccess.TheJapanese

companyhasachievedimpressivesalesresults

intheUnitedStateslargelybecauseofitspro-

ductionsitesthere.Toyotavehicleshavebeen

builtintheUSsincethe1980s,whenimport

restrictionswereimposedonJapaneseautomo-

bilemanufacturers,andpatrioticcustomersare

oftenfavorablydisposedtothesecarsbecause

theyconsiderthemtobeAmericanproducts.

WhileToyotaisrecognizedasaJapanesebrand,

itisassociatedwithlocalproduction,whichis

astrongsalesargumentintheUnitedStates.

ThisiswhereToyotalaidthegroundworkforits

competitiveedgeintheworldmarket:Infiscal

year2006/2007,theJapanesemanufacturersold

morethan2.9millionvehiclesintheUnited

StatesandCanada–nearly35percentofits

totalsales–outperformingtheVolkswagen

Groupbyover2.5millionvehiclessold.

37

1 An extensive discussion of motives for direct investment can be found in the case study of Audi on p. 104 of this publication.

2.2 Competitive disadvantages arising from a lack of production sites

Fluctuationsinexchangeratesarecurrently

makingitevenmoredifficultforVolkswagento

➔ exportvehiclestotheUnitedStates.Because

oftheweakdollar,Volkswageneitherhasto

chargehigherpricesforitsvehicles,whichare

manufacturedinEurope,thanitsAmericanand

Japanesecompetitorschargeforthevehicles

theyproduceintheUnitedStates,orthepriceof

itsvehiclesisinadequatetocovermanufactur-

ingandtransportcosts.Becauseoftheexchange

rate,thecompanyendsuptakingalossevenon

Intheyear2018,theVolkswagenGrouphopes

tosell1.2millionvehicles(800,000ofthem

undertheVWbrand)intheUnitedStates,

CanadaandMexico;in2007itsoldonlyabout

530,000(230,000VWvehicles).Theideawas

rejectedthatthecompany’sMexicanplantin

thecityofPuebla,whichislocatedintheNorth

AmericanFreeTraderegion,mightbeused

toachievethisgrowth.ThePueblaplantwas

designedforamaximumof500,000vehicles,

andin2007itwasalreadyproducingroughly

410,000,includingtheVWNewBeetleforthe

Europeanmarket.Moreover,unlessVolkswagen

hasaplantintheUSitwillnotbeabletopro-

duceenoughvehiclesfortheAmericanmarket

withoutbeingaffectedbycurrencyfluctuations.

Thiswouldmakeitimpossibletoachievethe

company’sgoalsforthismarket–anditsglobal

goalsaswell.IftheVolkswagenGroupisto

reachitsgrowthtargets,itwillhavetohavea

productionsiteintheUnitedStates.

EstablishinganAmericanplantwouldmake

vehiclesalesintheUSlessvulnerableto

changesintheexchangerate.Atleastthecom-

pany’sAmerican-madevehiclescouldbesold

atcompetitivepriceswhilealsocoveringcosts.

Borrowingatermfrominvestmentbanking,

theindustryrefersto“naturalhedging”when

plantsareestablishedtopreventlossesresult-

ingfromexchangeratefluctuations.However,

thisrequiresthatasmanyproductionstagesas

possiblearecarriedoutatthatplant,including

suchthingsasvehiclebodyconstructionand

painting,producingahigherlevelof➔ local

content.Aplantthatwasdevotedexclusivelyto

thesaleofsuchpopularandhigh-statusmodels

astheVWTiguanSUV.“Toyotaismuchmore

successfulintheAmericanmarketthanweare,”

saysDetlefWittig,headofmarketingandsales

forVolkswagenAG,indescribingthecurrent

situation(Schneider2008a).Byestablishinga

plantintheUnitedStates,Volkswagenwould

earnpointswithAmericanbuyers,reducethe

company’svulnerabilitytofluctuatingexchange

ratesandavoidtransportcosts,whichwould

helpclosethegaptoToyota.

theassemblyofSKDor➔ CKDkitsproduced

outsideoftheUnitedStateswouldonlyslightly

reducethecompany’sdependenceonthevalue

ofthedollaranddecreaseitsforeignexchange

lossesonlyminimally.Ideally,evenenginesand

gearboxcomponentsshouldbeproducedinthe

UnitedStates,accordingtoEngelbertWimmer,

anautomotiveexpertwiththePAConsulting

Group:“Itisverydifficulttolaunchacampaign

intheUnitedStateswhilespendingvaluable

eurosonimportingenginesandparts”(Herz/

Schneider2008a).

Inaddition,itiscrucialtoincreaselocaliza-

tionintheareaofprocurement,bypurchasing

thesystems,modulesandcomponentsusedat

Volkswagen’sAmericanplantfromsuppliersin

theUnitedStatesoratleastpayingforthemin

dollars.Intheautomotiveindustry,unlikethe

aircraftindustry,itisnotcustomaryforinterna-

tionaltransactionstobecarriedoutinAmerican

dollars.ThismeansthattheVolkswagenGroup

needstoestablishcontactswithsuppliersin

theUnitedStatesorpersuadecompaniesfrom

othercountriestoestablishsitesintheUSas

well.ThisisanareawhereVWcanlearnfrom

themistakesofitscompetitors:AlthoughBMW

hasanAmericanproductionsiteinSpartanburg,

SouthCarolina,itisstillverymuchaffectedby

negativecurrencyeffectsbecauseitsprocure-

menthasalocalizationrateofonly30percent.

38

2.3 Opening up markets by establishing local production sites

smallerandmorefuel-efficientthanthoseof

itscompetitors,intheAmericanmarket.Larger

cars,particularlythoseproducedbyAmerican

companies,arebecominglessandlessattrac-

tive.Volkswagenwillhaveanespeciallygood

chanceofwinningmarketsharescurrentlyheld

byAmericanmanufacturers,whicharelag-

gingbehindindevelopingfuel-savingcars.But

Toyota,too,isstillsellinglarge,gas-guzzling

vehiclesintheUnitedStates,suchasthe

SequoiaandFJCruiserSUVsanditsTundra

pickuptruck.Alongwithacommitmenttopro-

ductionintheUS,thisoffersVolkswagenagood

opportunitytomakeinroadsintotheAmerican

market.Accordingly,theexpansionplansout-

linedbytheBoardofManagementhavegained

thesupportofBerndOsterloh,headofthe

VolkswagenWorksCouncilandmemberofthe

SupervisoryBoard:“IfirmlybelievethatVW

cansucceedintheUS.[…]Theproblemsinthe

Americanmarket[Authors’ note:Financialcrisis,

highoilprices,threatofrecession]canevenbe

viewedasanopportunityfortheVWGroupand

itsfuel-efficientengines”(Schneider2008b).

However,theadvantagesofdecentralizedpro-

ductionintheUnitedStatescanonlypartially

solvetheproblemsVolkswagenisfacing.All

overtheworld,itstillfindsitselfunabletomeet

theneedsofitscustomerstotheirfullsatisfac-

tion,andthishaskeptitfromachievinghigher

salesinforeignmarkets.Asolutiontothisprob-

lemwillhavetoinclude,amongotherthings,a

changeinthecompany’sR&Dconfiguration.

Inthespringof2008,Volkswagen’sBoardof

Managementofficiallydecidedtoopenaplantin

theUnitedStates,withproductionscheduledto

beginin2010.TheSupervisoryBoardapproved

theproposalinJuly2008.Shortlythereafter,

VolkswagenchoseChattanooga,Tennessee,as

thelocationforthenewplant.Accordingto

sourceswithinthecompany,theselectionpro-

cessfocusedoncitiesinMichigan,Alabamaand

Tennessee,allofwhichofferedtheadvantageof

existingsuppliernetworks.TheDetroit,Michi-

gan,region,forexample,isthecenterofthe

Americanautomotiveindustryandhometothe

headquartersofthe“BigThree”Americanman-

ufacturers:GeneralMotors,FordandChrysler.

Daimler’sAmericanplantislocatedinTusca-

loosa,Alabama.NissanhasitsNorthAmerican

headquartersandtwoproductionsitesinTen-

nessee.Factorsfavoringthesouthernstatesof

AlabamaandTennessee,fromVolkswagen’s

perspective,wererelativelylowwagesandthe

comparativelyinsignificantroleoftheunions.

TheVolkswagenGroupisplanningtoinvest

about620millioneurosinthenewplant,which

isexpectedtoproduce150,000vehiclesperyear

initsinitialphase.

DespitetheeconomicdownturnintheUnited

States,thetimeseemsrightforamarketoffen-

sivebytheVolkswagenGroup,sincehigheroil

priceshavemadefuelefficiencyanincreasingly

importantconsiderationforAmericancustom-

ers.ThisisagoodopportunityfortheWolfsburg

companytopositionitsvehicles,whichare

39

IftheVolkswagenGroupistoachieveits

ambitiousgrowthtargets,itisessential

toestablishaplantintheUnitedStates.

Additionalmeasuresarenecessaryforthat

growthtobeefficientandprofitable:

_ Theplantneedstoattainahighlevelof

localcontentinitsproduction;inother

words,asmanyvalue-addedstepsaspos-

sibleshouldbecarriedoutonsite.

_ Theplant’sprocurementneedstobe

highlylocalized,focusingonsuppliers

withproductionintheUnitedStates.

Summary

asmarketswithsophisticatedcustomersorthe

homemarketsofstrongcompetitors.

TheresearchcarriedoutbytheVolkswagen

Grouphasalwaysbeenlargelycentralized,with

thecorporateresearchdivisionatthecompany’s

Wolfsburgheadquartersprovidingsupportfor

alloftheVolkswagenbrands.Theindividual

brandsalsomaintainsmallerresearchdepart-

mentswhichtogetherformaresearchnetwork,

withheadquartersinWolfsburgasitshub.In

addition,theElectronicResearchLab(ERL)in

PaloAlto,California,carriesoutresearchinthe

fieldofelectronicsystemsandmakestheresults

availabletoallofthecorporatebrands.

TheR&Dactivitiesofthevariousbrandsconcen-

tratemainlyondevelopmentefforts.Eachbrand

hasitsowndevelopmentdepartments–VWin

Wolfsburg,withadesignbranchinPotsdam;

AdetailedanalysisoftheR&Dconfigurationof

theVolkswagenGrouprequiresadifferentiated

lookatitsvariousactivities.Theliteraturedis-

tinguishesbetweenresearch,whichfocuseson

gainingnewinsights,anddevelopment,which

putsthoseinsightsintopracticeinnewproducts

orprocesses.Researchactivitiesincludebasic

andappliedresearch;developmentactivities

canbedividedintobasicdevelopment,which

involvesnewproductsorprocesses,andadap-

tivedevelopment,inwhichexistingproducts

orprocessesaremodified.Inpractice,market

observationactivitiesareoftenintegratedinto

theR&Dorganization;informationaboutcurrent

markettrendsandtechnologicaldevelopments

isgatheredandpassedontotheresearchand

developmentdepartmentstoaidinthedecision-

makingprocess.Marketobservationunitsare

alsoreferredtoasoutposts.Theyaregenerally

foundinstrategicallyimportantlocations,such

40

3. The configuration of R&D activities within the Volkswagen Group

Figure 5: Configuration of the Volkswagen Group’s R&D activities

Source: The authors, based on “Volkswagen kämpft um chinesische Kunden” (2006), Volkswagen (2008f).

Crewe (GB) R D

Wolfsburg (D) R D

Neckarsulm (D) R D

Ingolstadt (D) R D

Sant´ Agata Bolognese (I)R D

Mladá Boleslav (CZ) R D

Györ (HU) D

Tokyo (J)

Martorell (E) R D

Molsheim (F) R D

Palo Alto (USA) R M

Shanghai (CN) D M

M

Legend:

R Research Development Market observationD M As of December 31, 2007.

3.1 A concentration of R&D activities in the company’s home region of Europe

division,attheToyotaCentralResearch&

DevelopmentLaboratories,islocatedinNaga-

kute,Japan,nearheadquartersinToyotaCity.

ResearchisconductedinNagakutefortheentire

ToyotaGroup,whichisactivenotonlyinthe

automotiveindustry,butforexampleinthecon-

structionindustryandinbiotechnologyaswell.

AlsolocatedinJapanaretheTokyoTechnical

Center,whichconductsresearchonelectronic

systems,andtheHigashi-FujiTechnicalCen-

terinSusono,whichfocusesonresearchand

developmentintheareasofinnovativevehicle

conceptsanddrivetechnologies.

TheHeadOfficeTechnicalCenterinToyotaCity

istheheadquartersforvehicledevelopment

anddesign,anditjoinstogetherwithfiveother

internationaldevelopmentunitstoformaworld-

widedevelopmentnetwork.ToyotaMotorEurope

hastwodevelopmentdivisions,locatedin

Zaventem,Belgium,andBurnaston,GreatBrit-

ain.AmericansubsidiaryToyotaEngineering&

ManufacturingNorthAmericacarriesoutdevel-

opmentworkatitsheadquartersinAnnArbor,

Michigan,andatthreeaffiliatedsites.Also

activeindevelopmentareToyota’ssubsidiaries

AudiinIngolstadt(theelectronicscenter)and

Neckarsulm(thelightweightvehicleconstruc-

tioncenter);SkodainMladáBoleslav,Czech

Republic;andSEATinMartorell,nearBarcelona,

Spain.TheSVWTechnical&DesignCenterin

Shanghai,China,hasbeendevelopingmodels

fortheChinesemarketforseveralyears.The

Shanghaisite,thetechnologicalcenterinTokyo

(VTT),Japan,andtheElectronicResearchLab

(ERL)inPaloAltoalsoserveasoutpostsand

passoninformationtothecorporateresearch

divisioninWolfsburg.

Figure5showstheelementsthatmakeupthe

internationalR&DnetworkoftheVolkswagen

Group.WhileVolkswagenhasseveralinterna-

tionalR&Dsites,mostofitsactivitiesinthecore

areasofresearchanddevelopmentcontinueto

takeplaceinGermanyorEurope.Thebottom

line,then,isthatVolkswagendoesnothavea

globalR&Dorganizationthatisactiveinallof

theworld’simportantmarkets.

Toyota’sresearchactivitiesareevenmorecen-

tralizedthanthoseoftheVolkswagenGroup.

TheJapanesecompany’scorporateresearch

41

Figure 6: Configuration of Toyota’s R&D activities

Source: The authors, based on Toyota (2007a, 2007b, 2008d, 2008f).

Nizza (F) D

Tokyo (J)D

Nagakute (J)R

Toyota (J)D

Susono (J) R D

Torrance (USA) D M

Newport Beach (USA) D M

Ann Arbor (USA) D M

Derby (GB) D M

Brussels (B) D M

Samutprakarn (THA)D M

Melbourne (AUS) D M

Washington (USA) D M

Wittmann (USA) D M

Legend:

R D MResearch Development Market observation As of December 31, 2007.

necessarytomakechangesif,forexample,new

innovationclusterswereestablishedelsewhere

orproblemsarosethatmadeitdifficulttocarry

outresearchinGermany.However,thatwould

onlybethecaseiflegalrestrictionswereplaced

oncertainresearchactivitiesorinnovationwere

impossiblebecauseofalackofsufficientlyquali-

fiedpersonnel.

ToyotaandVolkswagenhavealsochosensimi-

lar➔ configurationstrategiesintheirmarket

observationunits,whichare,ofcourse,widely

scatteredgeographically.Outpostsmustbe

decentralizedinordertofulfilltheirmission

ofmonitoringinternationalmarkets.Bothcom-

panieshaveoutpostsinthesameregions,but

Toyota’snetworkissomewhatdenser,which

canbeadvantageousinidentifyingtheneedsof

specificcustomergroupswithinaheterogeneous

regionalmarket.

Intermsofdevelopmentactivities,however,

therearemarkeddifferencesbetweenthetwo

companies.Withtheexceptionofitsrelatively

newdevelopmentlaboratoryinChina,Volks-

wagen’seffortsareconcentratedinEurope.

ItsJapanesecompetitortakesaquitedifferent

approach:Toyotahasdecentralizeditsdevelop-

mentorganizationandestablishedanumber

ofsitesaroundtheworld.Fordevelopment,

unlikeresearchandmarketobservation,neither

centralizationnordecentralizationisclearly

superior.Argumentscanbemadeforcentral-

izingdevelopment,similartothereasonsgiven

forcentralizingresearch,butdecentralization

hasitsadvantagesaswell.Thefollowingsection

examinesindetailtheconfigurationofVolkswa-

gen’sdevelopmentactivitiesandtheeffectsof

thatconfigurationonthecompany’scompetitive

position.

Itisclearfromthiscomparisonofvalueconfigu-

rationsthatresearch,developmentandmarket

observation,oftenlumpedtogetherunderthe

headingofR&D,areconfiguredindifferent

ways.Theseactivitiesthereforehavetobe

treatedseparatelyintermsofvalueconfigura-

tion.

AsiaPacificEngineering&Manufacturingin

Samutprakarn,Thailand,andtheToyotaTechni-

calCenterAsiaPacificinMelbourne,Australia.

Completingthisglobalnetworkaretwodevelop-

mentcentersthatspecializeinvehicledesign:

TheToyotaEuropeDesignDevelopmentCenter

(ED2)inNice,France,andthesubsidiaryCalty

DesignResearchinNewportBeach,California,

handleinternal,externalandcolordesign.Most

ofthesesitesalsoserveasoutposts.Figure6

showshowR&Dactivitiesareconfiguredat

Toyota.

A centralized configuration is preferable for research, in con-trast to development.

Acomparativeanalysisshowsthatbothcom-

panieshavelargelycentralizedtheirresearch

activitieswithintheirhomeregions–Volkswa-

geninEuropeandToyotainJapan.Centraliza-

tiontendstobebeneficialforresearch,sinceit

makesiteasiertodiscovernewinsights,apro-

cessthatisnotalwayssmoothorcertain.Advan-

tagesincludeachievingacriticalmassand➔

size-relatedeffects.Centralizationalsopromotes

➔ economiesofscope,forexamplebypermit-

tingdirectcommunicationbetweenemployees.

Itisalsohelpfultohavepersonal,face-to-face

contactswhenorganizingandmonitoring

researchactivities.Thisspeedsupresearch

projectsandmakesiteasiertosecureknowl-

edgeandmaintainconfidentiality.Furthermore,

thegoalofgroup-wideresearch–which,by

definition,encompassesallcomponentsofthe

companyandalloftherelevantsubjects–can

onlybeachievedbybringingtogetherallofthe

variousresearchactivitiesunderoneumbrella.

Thelogicalconclusionistocarryoutresearch

atonelocation,oftenatornearthecompany’s

headquarters.

Affiliateddecentralizedsites,suchasVolkswa-

gen’sElectronicsResearchLaboratory(ERL)in

SiliconValley,whichisoneoftheworld’smost

innovativeresearchclusters,areaveryuse-

fulsupplementtothecompany’scentralized

researchactivities.Overall,therefore,thereis

nourgentneedforachangeintheVolkswagen

Group’sresearchconfiguration.Itwouldonlybe

42

Atitsdecentralizeddevelopmentsites,Toyota

generallyfocusesonmodifyingitsvehiclesfor

localmarkets,aneffortthatisreferredtoas

adaptivedevelopment.Itsdevelopmentsites

aroundtheworldaregenerallyresponsiblefor

aspecificregion.Inaddition,however,they

maydevelopanewmodelfromthegroundup

andtherebyassumeaninternationalmandate.2

WhentheToyotaCorollawasdeveloped,for

example,theEuropeandesigncenterinNice

wasinchargeoftheentiredevelopmentprocess,

andnotonlytheEuropeanversion.

Volkswagen’sconcentrationofitsdevelopment

activitiesinEuropedeprivesitofcertainpoten-

tialadvantagesforitsinternationalcompetitive

position.Decentralizeddevelopmentmeanshav-

ingaccesstolocalinformationnetworks.Itis

alsoawayofcounteracting➔ not-invented-here

syndromeandproducinga➔ country-of-origin

effect.3Finally,itfacilitatescoordinationwith

othervaluefunctions,andparticularlywithpro-

ductionsitesindifferentlocations.

Mostimportant,however,isthis:Becauseits

developmentdivisionsarelimitedtoacertain

geographicarea,Volkswagenislessabletopro-

duceregion-specificvehiclestoaccommodate

thepreferencesandneedsofitscustomersin

differentcountries.Localdevelopersarebetter

abletodesigncarsforlocalcustomers,since

theyaremorefamiliarwiththe➔ cultureand

livingconditionsinthatregion.Decentralized

developmentdepartmentsandlocaldevelopers

increaseacompany’s➔ responsivenesstoa

givenmarket,leadinginturntohighersales.

Particularlyinthetoptierofthehigh-volume

segmentoftheVWandToyotabrands,alack

ofsensitivitytolocalcustomerpreferencesis

aseriousdisadvantage.Theirvehiclescompete

forcustomersbasednotonlyonprice,butalso

onvehiclefeaturesanddesign.Thissegment

ofthemarkethasbeguntocombinePorter’s

traditional➔ costleadershipstrategywitha➔

differentiationstrategy,whichresultsinaso-

called➔ outpacingstrategy.

Too often, Volkswagen – whose corporate culture is still strongly tied to the home country – applies German standards when developing its vehicles.

Volkswagen’sdifficultiesinforeignmarketsare

dueinparttothecompany’sfailuretodecen-

tralizeitsdevelopmentactivities.Itscorporate

cultureisstronglytiedtoGermany,andtoooften

itappliesGermanstandardswhendevelopingits

vehicles.This,alongwithalackoflocalproduc-

tionsites,isanotherreasonwhyithasnotbeen

moresuccessfulintheUnitedStates.Volkswa-

genhasnotpaidenoughattentiontothefact

thattheUnitedStateshasadifferentkindofcar

culture:“ThereisnoquestionthatVWhasfailed

tounderstandwhatAmericancustomerswant,”

saysCatherineMadden,analystwiththemarket

researchfirmGlobalInsight(Eberle/Schneider

2007).ThatfailureisalsoreflectedinVolkswa-

gen’stinymarketshare:only2.1percent.

VWdealersintheUnitedStateshavealready

voicedtheirdissatisfactionwiththevehicles

thatareavailable,andtheyarepushingforcars

thatarespecificallydesignedfortheAmeri-

canmarket.Itwillnotbeuntil2010and2011,

however,thatVWwillintroducethesuccessors

tothecurrentVWJettaandVWPassat,which

willbethefirstmodelsdesignedspecifically

withthepreferencesofAmericancustomers

inmind–althoughthey,too,arebeingdevel-

opedinWolfsburg.Uptonow,thecompany

hasAmericanizeditsvehiclesonlyslightly,for

examplebyofferingdifferentenginesorequip-

mentpackages.Sincenoothernewdesignsare

onthehorizon,thiskindofhalfheartedattempt

toaccommodatethewishesofAmericancustom-

erswillcontinuetobetheruleratherthanthe

exception.

43

2 For a detailed discussion of the mandates of R&D units, see Ambos (2002: 45-75).3 For a detailed discussion of the advantages of decentralization, see Schmid (2000: 5f.) and Kutschker/Schmid (2008: 1002f.).

3.2 Inadequate decentralization of development as an impediment to growth

toprovidesimplecomponentsatreasonable

prices.ButthehighstandardsoftheVolkswagen

Grouphavealwayspreventeditfrommaking

useofcheaperoptions.Inotherwords:German

enthusiasmfortechnologyoftenmissesthe

markintheemergingmarkets.

TheVolkswagenGroupmaintainsmarketobser-

vationunitsintoday’skeymarkets–theUnited

States,ChinaandJapan–andappearstobewell

positionedatthemoment.Volkswagen’sfailure

toaddresstheneedsofAmericanconsumers

cannotbeattributedtothefactthatithasfewer

outposts(Toyotadoesindeedhavemoresites

devotedtomarketobservationintheUnited

States)orthatthoseoutpostsprovideinadequate

information,althoughthatmighttheoretically

bepossible.Rather,theinformationgatheredby

itsoutpostsisnotusedappropriately,notleast

becauseofdifferentculturalstandards.Volkswa-

genneedstomakechangesnotintheconfigu-

rationofitsmarketobservation,butinhowit

dealswithprocessesandculturalaspectswithin

thecorporatenetwork.Givenitsambitious

growthtargets,however,theVolkswagenGroup

wouldbewisetoconsiderproactivelyestablish-

ingoutpostsinotherpromisingmarketsover

themediumterm.

Companies will only be successful globally if they adapt their prod-ucts to the needs of the respec-tive markets.

Theconsequencesofacentralizedandcultur-

allyprovincialapproachtodevelopmentarealso

evidentinthe➔ emergingmarkets.Thecars

producedbytheVolkswagenGrouphaveoften

beentoosophisticatedandtooexpensivefor

thosemarkets.Tociteoneexample,headquar-

tersinWolfsburgdecidedthatvehiclesintended

fortheIndianmarketshouldbeequippedwith

atwelve-yearanti-corrosionfinish–ignoring

thefactthatcorrosionprotectionisnotthemain

concernofIndiancustomers,whoarejustbegin-

ningtobecomemoremobileandarelooking

foranaffordablevehicle.Suchdecisionsmake

Volkswagen’scarsunnecessarilyexpensive,put-

tingthemoutofreachformanyIndians.This

isaproblemthatthecompany’ssuppliershave

encounteredbefore.ThechairmanofVolkswa-

gen’sBoardofManagement,MartinWinterkorn,

recentlyexpressedhispuzzlementoverthefact

thattheTataNano,theworld’scheapestcar,

containssomuchapparentlyexpensiveBosch

technology.BoschchairmanFranzFehrenbach

pointedoutinresponsethatBoschisquiteable

44

Toyota’svehicles,ultimatelytailoredtodifferent

regions,aremanufacturedonasharedplatform

thatisappropriateforallofToyota’smarkets.

Thecompany’s➔ standardization/adaptation

strategyisbasednotsolelyonthestandardiza-

tionofitsvehicles,noronadaptation,buton

acombinationofbothapproaches.Thisallows

Toyotatoadaptitsvehiclestolocalcustomer

preferenceswhilealsoproducinglargenumbers

ofitsbasicmodules,whichlowersunitcosts.4

TheJapanesemanufacturercallsthisprinciple

“Globalbest,localbest.”

By combining a standardized plat-form with regional or country-specific adaptations, companies can accommodate local customer preferences while also lowering unit costs.

Thisprinciple,developedinthe1990s,is

appliedtoallthreecoreglobalmodelsmanu-

facturedbytheToyotaGroup–theCorolla,the

CamryandtheYaris–aswellastotheIMV

(InternationalMultipurposeVehicles)series

oflightcommercialvehicles.Allofthem,and

theirregionalversions,aredevelopedwithinthe

company’sglobalnetwork.Thesuccessofthe

ToyotaCorolla,theworld’sbest-sellingvehicle,

wasmadepossiblebytheuseofthisprinciple.

Since1997theCorollahasbeenbuiltonaplat-

formthatisstandardizedworldwide,withthree

differentversionsforcustomersinthethree

targetmarkets:theUnitedStates,Japanand

Europe.“Wecombinedeverythingthatisgood

fromtheUnitedStates,JapanandEurope.And

weeliminatedeverythingthatisbad,”saidFujio

Cho,chairmanofToyota,indescribinghowthe

“Globalbest,localbest”approachwasappliedto

thedevelopmentoftheToyotaCorolla(Grauelet

al.2003:68).

Inordertoachievethesalesgrowthenvis-

agedinStrategy2018,Volkswagenwillhaveto

winnewcustomersworldwide.Thiscannotbe

accomplishedwithoutincreasedeffortstoadapt

itsvehiclestospecificregionsandcountries.

Sincethisrequiresabetterunderstandingof

localcustomerneeds,Volkswagenwillneedto

undertakefurtherdecentralizationofitsdevel-

opmentactivities.

A decentralized development network and local developers are among the keys to global success.

Toyotaprovidesamodelforhowadecentral-

izeddevelopmentstrategyworks:Itadjuststhe

appearanceofitsvehiclesanditssalesstrategy

totheregionorcountryinquestion.Keytothis

effortareadecentralizeddevelopmentnetwork

andlocaldevelopers,whichmakethecompany

moresensitivetolocalcustomerpreferences

andallowforthedevelopmentofmodelsthat

meetlocalneeds.Toyota’sfirstsuccesseswith

thisapproachcameinthelate1980s,whenits

luxurybrandLexus,whichwastargetedspecifi-

callytotheAmericanmarket,quicklygaineda

largeshareofthepremiummarket.

OneofthelessonsforVolkswagenisthatits

newproductionsiteintheUnitedStatesshould

immediatelybeentrustedwiththetaskof

designingmodelstailoredtotheAmericanmar-

ket.Unfortunately,thisplantwillnotcommence

operationsuntilatleast2010.Untilthenthe

Pueblaplant,whichistomanufacturethenew

VWJettafortheUnitedStates,shouldbeused

asanintermediatestationforvehicledevelop-

mentsothatUS-specificmodelscanbemade

availableasquicklyaspossible.Engineersfrom

Mexicoarecurrentlyundergoingtrainingin

Wolfsburg,andthismayrepresentaninitialstep

towardlocatingdevelopmentactivitiesinthe

vicinityoftheAmericanmarket.

45

4 For a more extensive discussion ofstandardization strategies, see Kutschker/Schmid (2008: 1007-1012).

3.3 Decentralizing development for greater market success

movingforwardwithglobalization…byfurther

enhancingthelocalizationandindependenceof

ouroperationsineachregion,”explainsFujio

Cho,ChairmanofToyota(Ghemawat2007:139).

AsimilarstrategywouldallowVolkswagento

solvetheproblemofalackofregionaladapta-

tion,promotingsalesgrowthwhilealsoreducing

thecostofthebasicmodulebyproducinglarger

quantities.Bothoftheseeffectswouldbehighly

welcomeunderStrategy2018.Asalinktothe

localmarkets,theforeigndevelopmentsites

wouldautomaticallycarryoutmarketobserva-

tionaswell.ThisistrueofToyota’sdevelopment

network,inwhichtheforeignsitesassumethis

dualfunction(again,seeFigure6,p.41).Atthe

sametime,suchoutpostscouldbeafirststep

towarddecentralizingdevelopmentactivitiesand

creatingaglobaldevelopmentorganization.The

establishmentofoutpostsinemergingmarkets

suchasBrazil,IndiaorRussia,discussedabove,

wouldbehelpful.ItwouldprovideVolkswagen

withacompetitiveadvantageoverToyota,which

doesnotyethaveoutpostsordevelopmentunits

inthesemarkets,andallowVolkswagentostage

apreventiveattackasitseekstomakeinroads

intoToyota’sestablishedmarketpositioninthe

UnitedStates.

Thedevelopmentprocessisgenerallymanaged

bythedevelopmentcenterlocatedatJapanese

headquarters.KenichiroFuse,chiefdeveloper

attheHeadOfficeTechnicalCenterinToyota,

andhisJapaneseteamhandledthebasicdevel-

opmentofthenewestgenerationoftheToyota

Camry.Fusewasalsoinchargeofcoordinating

threeotherregionaldevelopmentteams:one

intheUnitedStates,oneinThailand,China

andTaiwan,andoneinAustralia.Eachofthese

teamsdesignedtheversionforitsrespective

region.InaccordancewithToyota’sphilosophy,

vehicleproductionalsotakesplaceinthose

regions.TheToyotaCamryisnowproduced

throughouttheworld,ineightdifferentplants

(oneeachinJapan,Taiwan,China,Thailand,

AustraliaandRussia,aswellasintwoplants

intheUnitedStates)servingthesurrounding

markets.

Toyota’sorganizationalstructurereflectsthis

regionalorientation.Regionalorganizations

takeoncertainresponsibilitiesintheareas

ofdevelopment,productionandsales.Both

oftheseaspects–regionalorganizationsand

regionaladaptations–areanessentialpartof

Toyota’sinternationalizationefforts,whichseek

toachieve“glocalization,”oradaptationworld-

widetolocalconditions.“Weintendtocontinue

46

Figure 7: Toyota’s “Global best, local best” principle

Source: Toyota (2006: 18).

togivesuperiorqualityandoutstandingcost

performancetocustomersbuyingToyota

vehiclesthroughouttheworld.Ontheother

hand,“localbest”expressesacommitment

toaccuratelyreflectingtheneedsandval-

uesofcustomersindifferentregions.Toyota

enhancesthevalueofitscoreglobalmodels

bymarryingitscommitmentstobeingglobal

bestandlocalbest.”

“Globalbest,localbest–thesecommitments

rulethedevelopmentofToyota’smainstay

globalmodels.By“globalbest”wemeanbuild-

ingcarswithcommonvalueworldwidewhile

pursuingtheworld’shighestlevelsofquality

andperformance.Theglobalbestconceptis

fundamentaltotheToyotamind-set.Wewant

The “Global best,

local best” principle

47

Figure 8: Regional adaptation of the Toyota Corolla

Source: The authors, based on Grauel et al. (2003), Zielke (2003), The Associated Press (2007), “Toyota Unit Signs Contract to Build Plant near Sendai” (2008g), Toyota (2008g, 2008h).

Region-specific models

ThekeytotheCorolla’ssuccessliesinits

region-specificversions,whichhavebeenbuilt

onasingleplatformsince1997.“TheVWGolf

looksjustthesameeverywhereintheworld.

Wetrytoappealtoawidevarietyoftastesin

differentmarkets,”explainsSoichiroOkudaira,

chiefdeveloperofthecurrentToyotaCorolla.

Thebasicplatformforthecurrentmodelwas

developedbytheEuropeandesigncenterin

Nizza,France,whichalsodesignedtheEuro-

peanversion.Toyota’ssitesinAnnArbor,

Michigan,andToyotaCity,Japan,designed

theothertwoversions.Ninety-fivepercentof

thevehicle’spartsareidentical;theremain-

ingfivepercentvaryaccordingtotheregional

preferencesoftherelevantcustomerbase.

InEurope,thismeansaddingsuchthings

asmoresolidbumpers,headlightsthatare

integratedintothecarbodyandalargeToyota

logointheradiatorgrille–primarilytoaccom-

modatethepreferencesofGermancustomers.

IntheUnitedStatesthevehiclehasamore

streamlinedappearanceandsofterseats.In

JapantheToyotalogoisreplacedbyaCorolla

logo,andseveraldrinkholdersareadded.

Worldwide production

Inaddition,productionofregion-specificmod-

elstakesplaceintherespectivemarkets.The

EuropeanCorolla(orAuris)ismanufactured

inBurnaston,England,andAdapazan,Turkey.

TheNorthAmericanversionisproducedin

Fremont,California,andintheCanadiancity

ofCambridge,Ontario.InJapan,theCorolla

ismanufacturedinTakaoka,Kanegasakiand

Sagamihara.Alltold,thismodelisproducedin

16differentcountries.

The world’s best-selling vehicle

Withoveramillionvehiclessoldperyear,and

over30millionsoldsinceitwasintroducedto

themarketin1966,theToyotaCorollaisnot

onlytheJapaneseequivalentoftheVWBeetle,

butthebest-sellingcarintheworld.Mostof

itspurchasersliveinJapan,theUnitedStates

andEurope(where,withtheexceptionofthe

MPVcalledtheCorollaVerso,ithasbeen

knownastheAurissince2007).Itissoldina

totalof140countries.

Customers with very different preferences

ThesuccessoftheCorollaisastounding,given

howmuchcustomerpreferencesvaryindif-

ferentmarkets.TheJapanese,forexample,

focusonfuelefficiency,moderndesignand

practicaldetails,suchasenoughdrinkholders.

Thebrandofthecarislessimportanttothem

thanthemodel.Americansviewtheircars

asanexpressionoftheirlifestyle:Theywant

themtoprojectayouthfulimageandhavesoft

seatsandsoftsteeringforrelaxedcruisingon

thehighway.Germancustomers,fortheirpart,

attachgreatimportancetosafety,whichmeans

thattheyappreciatesuchfeaturesasmore

soliddoors.Theywanttheircarstobestable

ontheroadandacceleratequicklyinthelow

gears.Consumersinallthreecountriesfind

theToyotaCorollaattractive,despitetheirdif-

ferentpriorities.

Toyota Corolla:

Regional versions based

on a global platform

Asacompanydecentralizesitsdevelopment

activities,itshouldnotlosesightofthefact

thatdecision-makingresponsibilitiesneedtobe

decentralizedaswell.Thisisclearfromacase

thatoccurredanumberofyearsago:Volkswa-

genhadlongshownnointerestinmodifying

itsvehiclestoappealtothemarketinChina.

Severalyearsago,Chinesedevelopersfrom

SAIC(ShanghaiAutomotiveIndustryCorpora-

tion)suggestedthatChinesecustomerswould

preferamodificationofthetaillightsoftheVW

Polo.HeadquartersinWolfsburgrespondedby

simplyrejectingthisidea.Ifalldecisionsaffect-

ingvehicledevelopmentcontinuetobemadein

Wolfsburg,thebenefitsofdecentralizeddevelop-

mentmaywellbeentirelylost.

TheexperiencesofVolkswagen’sAmericancom-

petitorsareacautionarytaleaswell.General

MotorsandFord,whosevalueactivitieshave

longbeendecentralized,decidedinthe1990s

tolimitmostoftheirstrategicdecisionmaking

totheUnitedStates.Theyhavesincereversed

course,havingrealizedthatcentralizationhad

beenamajorfactorintheirvehicles’failureto

appealtotheEuropeanmarket.Bothmanufac-

turerssubsequently“re-decentralized”their

decision-makingstructures,givingmoreauthor-

itytotheirEuropean➔ subsidiaries.Itholds

trueforVolkswagen,aswellasforallother

high-volumemanufacturers:Companiesmust

domorethanmerelyestablishdevelopment

facilitiesatforeignsites;theymustalsoequip

suchunitswiththenecessarydecision-making

powers.Localdeveloperscannottakeadvantage

oftheirknowledgeofthelocalmarketifthey

havenoinputintodesigndecisions.Although

Toyota’smanagementcontinuestoberelatively

centralized,theJapanesecompanyhastrans-

ferredcertaindecision-makingresponsibilities

toitsdecentralizeddevelopmentunits;thisis

crucialfortheprincipleof“Globalbest,local

best”tofunction.

Volkswagen’ssubsidiaryinChinaisnowrecog-

nizedasanexampleofthesuccessfuldecentral-

izationofacompany’sdevelopmentactivities

anddecision-makingresponsibilities.

In order to take advantage of local expertise, companies need to equip local personnel with the necessary decision-making powers.

AfterdramaticdeclinesinVolkswagensalesin

Chinaatthebeginningofthiscentury,because

itsvehicleswerenottailoredtotheChinese

market,thecompany’sChinesesubsidiarywas

giventheauthoritytodesignmodelstoappealto

Chinesecustomers.Uptothatpointitsactivities

werelimitedtothemodificationofexistingmod-

els,andindeed–asmentionedabove–ithad

sometimesbeenthwartedinthateffortbyhead-

quartersinWolfsburg.Thesubsidiary’stwonew

modelsarescheduledtogoonthemarketbefore

theendof2008;oneofthemistheVWLavida,

longknownas“ModelY.”Volkswagen’svehicles

arefinallybeingadaptedtosuitthepreferences

ofChinesecustomers.

Inviewoftheprogressthathasbeenmade,the

plansofVolkswagen’sdevelopmenthead,Ulrich

Hackenberg,todevelopaChineseversionofthe

VWPoloinWolfsburgwouldbeastepbackward.

Chinesesalespersonnelarealreadyconcerned

thatsuchavehiclemightnotbesuitedtothe

market,ashasoftenbeentrueinthepast.“Chi-

nesedesignersarebetterabletodesigncarsfor

Chinesepeople,”explainsStefanFritschi,head

ofthedevelopmentcenterinShanghai,thesite

ofVolkswagen’sChinesesubsidiary(“Volkswa-

genkämpftumchinesischeKunden”2006).

Thatispreciselywhylocaldesignersneedthe

authoritytomakedecisionsthatconcerntheir

designs–forexampleaboutavehicle’stail

lights.Figure9summarizessuggestedmeasures

fordecentralizingdevelopmentactivitiesand

decision-makingresponsibilitiesbypresentinga

comparisonofVolkswagenandToyota.

48

3.4 Decentralized decision-making responsibilities as a prerequisite for successful local development

49

WinfriedVahland,presidentandCEOofVolks-

wagenGroupChina,whobuiltupthedevelop-

mentcenterinShanghai,intendstoexpand

thesite’sresponsibilitiesstillfurther.Heis

alsoconsideringthepossibilityofdeveloping

vehiclesfortheAmericanmarketinChina,

sincecustomerpreferencesinthetwocountries

arerelativelysimilar.Statusandcomfortare

importantcriteriaforChinesecarbuyersas

wellasforAmericans;bothgroupspreferlarge,

luxurioussedansbutattachlessimportanceto

thenewesttechnologiesandsafetythanGerman

customers,forexample.Chineseengineersare

alreadyworkinginWolfsburgonaversionofthe

VWPassatfortheAmericanmarket.Thiscould

beaninitialstepinestablishingtheShanghai

developmentcenterasa➔ centerofexcellence

withintheVolkswagenGroup.Acenterofexcel-

lencespecializesincertainactivities,products

orprocesses,basedonspecificexpertise,and

assumesresponsibilityforthemthroughout

thecompany.Decentralizingdevelopment

activitiesnotonlymakesitpossibletogenerate

localknowledgeandapplythatknowledgeto

thevehiclesproducedonsite;italsoprovides

anopportunitytomakesuchknowledgemore

widelyavailableforpracticalusewithinthe

entireorganization.Centersofexcellenceare

essentialforthebestpossiblereconfigurationof

developmentactivities.

Inordertoachieveworldwidesuccess,ahigh-

volumemanufacturerliketheVolkswagen

Groupneedstoadaptitsvehiclemodelsto

thepreferencesofcustomersinlocalmarkets.

Thiscanbeaccomplishedbymeansof

_ thedecentralizationofselecteddevelop-

mentactivities,aimedatadaptingvehicles

totheneedsofcustomersinaspecific

regionorcountry,

_ region-orcountry-specificmodeladapta-

tionsthatuseidenticalplatformsworld-

wide,whichproducesscaleeffects,

_ grantingdecentralizeddevelopmentunits

thenecessarydecision-makingauthorityto

puttheirlocalexpertiseintopractice,

_ theinstallationofoutpostsinothergrowth

marketstopromotethecompany’slocal

responsiveness,and

_ theestablishmentofcentersofexcellence,

whichtakeoncertainmanagementrespon-

sibilitiesandmakelocalknowledgeavail-

abletootherunitsofthecompany.

Summary

50

Figure 9: Options for reconfiguring R&D activities within the Volkswagen Group

Legend:

Toyota Volkswagen R: Research, BD: Basic development, AD: Adaptive development, M: Market observation

Recommendations for action by the Volkswagen Group

Source: The authors, based on interviews with experts.

Note: Market observation units have no decision-making authority, since they are upstream from decisions in the area of development. They are normally steered by R&D headquarters, which is why market observation units are shown here with centralized decision-making responsibilities.

decentral-ized

central-ized

centralized decentralized

Decision-making responsibilities

regarding activities

Configuration of activities

BD

R M

AD

R

BD AD

M

fartheVolkswagenGrouphasarelativelylow

levelofinternationalization,forexampleinits

BoardofManagementandSupervisoryBoard,

comparedwithotherDAX30companies.

Toyota’scorporatecultureiswellsuitedtothe

company’sinternationalactivitiesandserves

asamodelforothergloballyactiveenterprises.

Respectforallofitsstakeholders–also,and

especially,inhostcountries–isanintegralpart

ofToyota’sculture.Thisrespectisthefounda-

tionofitsfocusonthecustomeranditsefforts

toadaptitsvehiclestolocalpreferences.Itis

alsoreflectedinasenseofsocialresponsibility.

OneofToyota’sstatedgoalsistopromotehigher

ratesofvehicleownershipintheemerging

markets.“Toyotaseesitselfasaglobalcom-

panythatwantstogaintherespectandtrustof

peopleeverywhereintheworld,”notesSonja

Sackmann,professorofindustrialandorganiza-

tionalpsychologyandexpertonthecorporate

cultureoftheJapaneseautomobilemanufac-

turer(Sackmann2005:21).Thisefforttobe

responsiveisrootedinJapaneseculture;indeed,

Toyota’scorporateculturecanstillbedescribed

as“fundamentallyJapanese,”“Japan-based”and

“centralistic.”

In order to achieve global suc-cess over the long term, a com-pany must gain the confidence of stakeholders all over the world.

Becausetheyinvolvemanagementstructures

andcorporateculture,thepresentstudy’s

recommendationsfordecentralizingvalue

activities,derivedfromtheexampleofthe

VolkswagenGroup,cannotbeputintoeffect

quickly.Leadershipstructures,whichalsohave

consequencesformanagementstyle,andcor-

porateculturecannotbetransformedovernight.

Thepathleadingto2018willnotbeeasyfor

theVolkswagenGroup,andwhetherornotit

willachieveitsambitiousgoalswilldependon

itsdedicationtothateffort.Toyotaiscurrently

experiencingdecliningsalesandprofits,but

Volkswagen,too,willbeaffectedbyadecrease

indemandinaweakeningglobaleconomy.“The

Ein Konzern, der lang-fristig global erfolgreich sein will, muss das Ver-trauen der Stakeholder auf der ganzen Welt gewinnen.

TheobservationbyMichaelFreitag,editorof

themanager magazin periodical,stillholds

true:“The[Volkswagen]Grouplacksacoherent

globalconcept”(Freitag2007:20).Thestruc-

turesarestillmissingthatwouldallowVolkswa-

gentobenefitfromaworldwidedistributionand

networkofvalueactivities,inordertoachieve

thegoalsofStrategy2018.Toyotahasshown

howadecentralizedconfigurationofbothpro-

ductionanddevelopmentcanleadtocompetitive

advantages.

A decentralization of value activi-ties and decision-making respon-sibilities also requires changes in the company’s management struc-tures.

Asouranalyseshavedemonstrated,thedecision

bytheVolkswagenGrouptoopenaplantinthe

UnitedStatesisawelcomesteptowardgain-

ingafootholdintheworld’slargestautomobile

market.Butmorelocalcontentinproduction

andgreaterlocalizationinprocurementarealso

importantifthecompanyistobelessvulnerable

tofluctuatingexchangerates.Asforthecon-

figurationofR&Dactivities,itwillbecrucialto

decentralizeadaptivedevelopment.Thismakes

itpossibletodevelopregion-orcountry-specific

models,usinggloballyidenticalplatforms.How-

ever,allofthesemeasuresareinterconnected:

Ifeffortstoadapttolocalmarketsareunsuc-

cessful,saleswillnotincrease–andexpanded

productioncapacitieswillnotbefullyutilized.

Excesscapacity,inturn,makesitimpossibleto

achievetargetyields–andthiswouldspellthe

failureofStrategy2018.

Thedecentralizationofdecision-makingrespon-

sibilitiesalsorequireschangesinthecompany’s

managementstructures.Decentralizedunits

shouldbegivengreaterresponsibility,which

meansmodifyingthecurrentsystemofconcen-

tratingdecision-makingauthorityatheadquar-

tersinWolfsburg.Asdecisionmakingisdecen-

tralized,itfollowsthatforeignexecutives,with

theirownuniqueculturalbackgrounds,should

begivenmorecentralrolesinthecompany.So

51

4. The consequences of decentralizing value activities

lessoverwhelming.“Asothermanufacturers

copyToyota,itsmethodsandsystemslosetheir

uniquesuperiority.Itssuccessinthepasthas

beenduelesstoToyota’sexceptionalperfor-

manceandmoretothefactthatitscompetitors

haveperformedpoorly,”explainsRalfKalmbach,

anautomotiveexpertattheconsultingfirm

RolandBerger(seealsotheinterviewwithRalf

Kalmbachfollowingthiscasestudy).

Therecommendationswehavedevelopedbased

ontheexampleoftheVolkswagenGroupcan

easilybeappliedtoothercompanies.Ingen-

eral,theyarehelpfulifacompanyneedsto

standardizeitsactivitieswhilealsodifferentiat-

ingitsproductsorprocesses.Glocalization,or

increasinglocalizationwithintheframeworkof

globalization,willcontinuetobeanimportant

phenomenon.Companiescannotassumethat

everythingisgloballythesameinaso-called

globalworld.

momentumisright,butVolkswagenhasalong,

longwaytogotogetwheretheyneedtobe,”

saysAdamJones,analystforMorganStanley,

seekingtolowerexpectations(Edmondson

2007).FalkFrey,automobileanalystfortherat-

ingagencyMoody’s,alsodoubtsthatVolkswa-

genwillbeabletocatchupwithToyota:“Toyota

isnotstandingstill;thecompanyiscontinu-

ingwithitsgrowthstrategy”(Herz/Schneider

2008a).Toyota’sPresidentKatsuakiWatanabe

hasalreadyannouncedthattheJapanesemanu-

facturerwillmakefurthereffortstotailorits

vehiclestoregionalmarketssothatcustomers

everywherewillhaveacompleterangeofspe-

cificallyadaptedToyotamodelstochoosefrom.

ThiswouldagainputToyotaastepaheadofthe

VolkswagenGroup.

DoesthismeanthatVolkswagenshouldstop

viewingToyotaasitsmodel,becausethegoal

istooambitious?Theanswerisno.Themost

importantthingisnotforVolkswagentoover-

takeToyotaasthemarketandprofitability

leader;instead,identifyingToyotaasthestan-

dardtoliveuptoisawayofmotivatingthe

Volkswagenorganizationanditsstakeholders,

modernizingmanagementstructuresandadapt-

ingthecorporateculturetomeetglobalchal-

lenges.Thislaysthegroundworkforasolidcom-

petitivepositiongoingforward.Itshouldalso

benotedthatToyota’sdominanceisbecoming

52

Thedecentralizationofproductionand

developmentactivitiesrequiresdeparting

fromacentralizedmanagementstructure

andcautiouslychangingacompany’scor-

porateculture.

Summary

Intheinterestofreadabilitywehavereduced

thenumberofreferencescontainedinthis

versionofthestudy.Acompletelistofrefer-

encesisfoundinthebibliography.AGerman

versionofthestudycanbeobtainedinprinted

formasanacademicworkingpaperby

contactingtheofficeoftheauthors

([email protected]);itmayalsobe

downloadedfromthewebsiteoftheChairof

InternationalManagementundStrategic

ManagementatESCP-EAPEuropeanSchoolof

ManagementBerlin(www.escp-eap.de/imsm).

53

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Speaking with Ralf Kalmbach

Partner and Head of Automotive at Roland Berger

Strategy Consultants

60

Interview

Other manufacturers do not centralize control

of value activities to the same degree. General

Motors (GM), for example, does not harmonize

its value activities in the United States with

those in Asia or Europe to any appreciable

extent. There is little coordination between its

regional subsidiaries. In other words, Toyota and

Hyundai control their international production

networks much more stringently than GM does,

and they do a better job of coordinating their

various locations and activities with one another.

Volkswagen has begun to take an approach

to the coordination of its international value

network that is similar to Toyota’s. However, it

will take some time before Volkswagen achieves

the kind of management structure found today

at Toyota. Among high-volume manufacturers,

Toyota and Hyundai are leaders in coordinating

their overall value networks. Premium manu-

facturers as well show an impressive degree of

coordination, but this is generally due to the fact

that their production activities are much more

centralized geographically.

Mr. Kalmbach, as more and more value

activities are being carried out at different

locations around the world, it is becoming

increasingly important to coordinate and

manage them. Based on your experience as

a consultant, are there differences in how

automobile manufacturers coordinate their

widespread value activities?

The Japanese manufacturer Toyota is an excel-

lent example when it comes to the coordination

of value activities worldwide. Toyota has produc-

tion sites all over the world, often manufacturing

models targeted to specific regions. Such aspects

as component production, however, are con-

trolled by headquarters in Toyota City. The cen-

tral office determines how the company’s vari-

ous production activities are to be distributed

worldwide – where plants are to be located and

where certain components will be produced –

and undertakes the necessary coordination. The

South Korean manufacturer Hyundai takes a

similar approach.

“The coordination of international value activities is a

crucial factor in achieving success.”

61

The geographical distribution of value creation

is a central topic in discussions of the demands

globalization places on companies. Another cru-

cial factor, however, is how value activities are

managed worldwide, and in practice this issue is

all too frequently neglected.

How do manufacturers coordinate and con-

trol their activities?

An important aspect of global management is to

introduce production systems worldwide, so that

it is not necessary for every plant to reinvent

them. Again, Toyota provides a model: If you

visit one of its plants today, anywhere in the

world, you will find the same processes – wher-

ever you happen to be, and whatever models are

being manufactured at that location. General

Motors and Volkswagen have a long way to go

to reach the same level of standardization. The

processes that are in place in a VW plant in Bra-

zil are quite different from what you will find in

China or at Volkswagen’s main production facil-

ity in Wolfsburg. Both General Motors and Volks-

wagen will have to make substantial changes in

order to catch up with Toyota in terms of com-

pany-wide coordination. They will need to make

great strides in standardizing their production

systems and the relevant technologies.

Uniform structures are crucial for global coordi-

nation, and this requires, among other things,

identical management principles worldwide.

Every Toyota plant uses approximately 20 key

performance indicators (KPI), and they are the

same whether the plant is located in Toyota City

or elsewhere. Thus a Toyota manager who moves

from one plant to another will immediately be

able to get his bearings. In contrast, if you are

transferred from VW’s main production facil-

ity in Wolfsburg to a plant in Brazil, it will take

you three months – assuming you are a quick

learner – to begin to understand how the plant

functions. It is hard enough for an automobile

manufacturer to adjust to country-specific con-

ditions; it is important not to allow differences

between plants to complicate matters further.

Toyota is very aware of this – and it is good at

solving the problem.

A distinction is often made between struc-

tural, technocratic and person-oriented coor-

dination. In your opinion, how much impor-

tance do automobile manufacturers attach

to a person-oriented type of coordination,

which takes into account the human factor?

It varies a great deal. Again, I see the Japanese

manufacturer Toyota as the leader in this area.

Toyota understands the potential of each human

being and makes sure to develop that potential

62

differently at Toyota than in Western industrial

culture, and that has a critical effect on all

aspects of corporate management.

You describe Toyota as a model in its

approach to coordination. What tools for

person-oriented coordination does it empha-

size most strongly?

Toyota attaches a great deal of importance to

employee exchanges. Employees are trans-

ferred regularly, which allows them to become

acquainted with different departments on an

ongoing basis and helps them develop a holistic

view of the company. I think this is a sensible

approach, and one that Western manufacturers

fail to practice consistently.

Furthermore, Toyota does a good job of cultur-

ally integrating its employees in its plants all

over the world. The company has exported its

corporate culture, originally Japanese in nature,

to all of its plants and adapted it to suit local

conditions. Essentially, therefore, that culture is

the same at every site. Workers and supervisors

speak a common cultural language wherever

they happen to be, and they see themselves as

part of an international community.

to the fullest. Every Toyota plant has a perma-

nent training center for all personnel levels.

Each employee is required to participate in a

training session every two weeks to familiarize

himself with the company’s newest procedures,

methods and processes. Toyota attaches an enor-

mous amount of importance to training. Western

manufacturers, in contrast, often fail to provide

systematic training for their employees.

Furthermore, Toyota is a model in showing

respect for its workforce. Assume, for example,

that an employee has discovered a problem

and stopped the assembly line. In our Western

culture, someone who took such a step would be

treated harshly. But Toyota’s response is to rec-

ognize that the employee was paying attention

and believed that an error had occurred; he was

doing his job. At that point, whether or not an

error has actually occurred is not important. This

attitude of respect for human beings and their

potential is exceptional. In Western countries,

employees are regarded primarily as productiv-

ity factors: They are assigned to a job, given

information and told the rules.

Japanese culture also plays a significant role in

such contexts, and it has a favorable effect on

the issues discussed above. People are viewed

63

What approaches do automobile manufac-

turers take to the issue of structural coordi-

nation? How do company headquarters show

leadership in managing value activities that

are widely dispersed?

Manufacturers take different approaches, par-

ticularly in managing their regional companies.

Take, for example, General Motors Europe,

GM’s European subsidiary. The primary means

by which its American parent company exerts

control is through the budget. The parent com-

pany does not influence what the subsidiary

does with the money it receives – the technolo-

gies it chooses to develop or the components

it purchases. GM Europe can act more or less

autonomously.

Toyota takes a different approach. Its regional

subsidiaries also have a certain degree of auton-

omy, for example in designing products for local

markets or structuring distribution channels. But

basic issues, such as where a certain model is

to be built, which components are to be used or

how the production process is to be carried out,

are decided by headquarters in Japan. Provid-

ing leadership for the company’s subsidiaries

does not mean drawing up their budgets, but

making decisions about concrete activities and

processes. For instance, approval is required

from headquarters in Japan if a subsidiary Ralf Kalmbach – Partner and Head of Automotive at Roland Berger Strategy Consultants

64

You have described Toyota as a model of

organization and coordination, while oth-

ers have concluded that it is the standard of

excellence in other areas as well. Does this

mean that Toyota as a whole represents the

model for success in the automotive indus-

try?

We need to put these things in perspective.

Toyo ta’s model has been very successful in the

past. But as competitors copy Toyota’s system

and achieve similar effects, for example in

quality management, its inherent superiority

is declining. When Volkswagen opens a plant

in the United States and develops products

intended specifically for the American market,

as other manufacturers are doing as well, then

Toyota’s advantages are fewer than in the past.

Looking back, it is clear that Toyota’s perfor-

mance has been extremely impressive, particu-

larly when compared with an American auto-

mobile industry that has been asleep, and has

failed to recognize the writing on the wall. But

the more its competitors wake up and adopt its

system, the more Toyota’s advantage declines.

At the same time, it is important to keep in

mind that Toyota’s entire method of operation

is based on a different cultural understanding.

Culture has played a significant role in the

wants to use a different air conditioning module

for a vehicle in Europe. The discussions and

documentation this entails are extensive and

time-consuming; it is not only a matter of deter-

mining whether such a change makes sense in

Europe, but also whether it would represent an

improvement for the company as a whole, and

should be considered in Japan as well.

Based on your experience, why does Toyota

take this approach? Why does it put so

much effort into coordination?

Toyota realizes that something like a different

air conditioning module means an increase

in complexity and therefore involves a critical

decision, affecting aspects such as costs. At GM

Europe, on the other hand, people simply decide

to do things – and eventually every subsidiary

finds itself doing one thing differently, then

another and another. But these concerns are not

GM’s focus; instead, it is looking at the financial

numbers. Toyota’s financial numbers, in con-

trast, tend to follow from the company’s convic-

tion that things must be done properly from

the ground up. The main difference, therefore,

lies in the degree to which a manufacturer pays

attention to the details of its subsidiaries’ activi-

ties and processes – in other words, whether its

leadership is a matter of substance or finances.

65

company’s success, and that is something that

is not so easy to copy. Twenty years ago, Ger-

man manufacturers were already sending plane

after plane filled with executives who wanted to

take a look at Toyota’s production system. Aside

from production methods, however, nothing has

fundamentally changed since that time. Toyota’s

success is also rooted in its corporate culture.

Toyota believes that every small improvement

will ultimately have a major effect; and it is

remarkably consistent and steadfast in acting

accordingly. This applies not only to the com-

pany itself, but also to its dealings with sup-

pliers, who are closely integrated into Toyota’s

systems and enjoy open cooperation and mutual

trust. Western manufacturers still have a lot to

learn from Toyota in this respect. My prognosis,

therefore, is this: Toyota will lose some of its

predominance, but it will continue to be one of

the best manufacturers in the world.

Ralf Kalmbach

Ralf Kalmbach is a partner with Roland

Berger Strategy Consultants and head of the

Global Automotive Competence Center.

Before joining Roland Berger in 2004, he

served as a managing director and senior

partner at Mercer Management Consulting,

based in the firm’s Munich office.

He was responsible for Mercer´s automotive

consulting activities and head of Mercer´s

Global Automotive Team.

With more than 20 years in consulting

and two years at an automotive OEM, Mr.

Kalmbach has extensive experience in the

automotive industry.

Mr.Kalmbach has advised major European,

U.S., and Asian corporations on various

aspects of their strategy and operations in

response to major challenges such as global-

ization and customer-driven value shifts. He

is focused on helping companies to develop

and implement value-driven strategies and

innovative business designs in the automo-

tive industry.

1. TheRenaultGroupasaleaderinthelow-costcarsector 67

1.1 TheLoganconcept 67

1.2 TheminimizationofcostsinmanufacturingtheLogan 68

1.3 ThemarketsuccessoftheLogan 70

1.4 TheLoganintheinternationalmarketforlow-costcars 74

2. TheconfigurationofvalueactivitiesfortheLogan 77

2.1 Production:Centralizedmainfacilitywithdecentralizedassemblyplants 77

2.2 Procurement:Achievingahighleveloflocalizationthroughsuppliertraining 83

2.3 Development:Increasingdecentralizationintargetmarkets 86

2.4 Logistics:Backboneofthehub-and-spokeproductionnetwork 88

3. Thecompetitiveadvantagesofferedbyemergingmarkets 90

References 93

Decentralized centralization

Romania as a focus of value creation

for Renault’s Logan

66

WhentheFrenchmanufacturerRenaultintro-

ducedits➔ low-costcar,theLogan,in2004,

itssuccessattractedagreatdealofattention

intheautomotiveindustry.Thisvehicle,which

cancostevenlessthan6,500eurosandissold

inmostcountriesunderthebrandofRenault’s

Romanian➔ subsidiary,Dacia,soonbecame

oneofthecompany’smostsuccessfulmodels.

Withthisvehicle,Renaultwasabletomake

inroadsintoanewsegmentofthemarketthat

noothermanufacturerhaddiscoveredforitself

tothesamedegree.Indeed,manyhadconcluded

thatitwasimpossibletoproducea“decent”car

inthispricebracketthatwascapableofgaining

widespreadmarketacceptance.SinceRenault’s

successwiththeLoganhasprovedthedoubters

wrong,however,low-costcars(LCC),orvehicles

sellingforlessthanabout10,000USdollars

(approximately7,500euros),havecometobe

recognizedasamajoropportunityforfuture

growth.“Loganisaspectacularexamplethat

reallyrattledtheindustry.Loganhasreallyset

thetermsofthedebate,”notedGlennMercer,

automotiveexpertfortheSwissbankUBS(Guil-

ford2007).

With the Logan, Renault opened up a new market segment that no other manufacturer had been able to claim.

AtRenault,thedevelopmentofthelow-costcar

canbetracedbacktothecompany’sformer

chairman,LouisSchweitzer,whorecognized

backinthemid-1990stheextentofhiscom-

pany’sdependenceonthesaturatedWestern

Europeanmarkets.“SeekingtoensureRenault’s

profitablegrowth,Ideterminedin1995that

weshouldexpandintonon-Europeanmarkets,”

Schweitzerexplained(Dacia2004:1).His

centralgoalwastotapintothe➔ emerging

markets.Fewpeopleinthosecountriescould

affordtobuyacar,butRenaultrecognizedthat

higherincomeswouldprovidefuturemarket

opportunities.

The low-cost car is based on the principle of simplicity.

RenaultCEOSchweitzerinstructedtheengi-

neersatthecompany’sR&Dheadquarters,the

TechnocentreinGuyancourt,nearParis,to

designamodelwithabasepriceof5,000euros.

Thiswasfollowedin1998bythelaunchofthe

X90projectaimedatbuildingthislow-cost

model.Strictadherencetotheprincipleofsim-

plicitywasessentialtokeepthepriceatthedes-

ignatedlevel,whichmeantthatthis“cheapcar”

couldnotofferextensiveoptionsorthenewest

designfeatures.UnlikeRenault’searliermod-

els,itwasspecificallydesignednotforthe➔

industrializedcountries,buttomeettheneeds

ofemergingeconomies.Ithadtobeeconomical

notonlyinitspurchaseprice,butalsotorun

andmaintain.

Theendof2004broughtthemarketlaunchof

afive-doornotchbacksedanunderthename

DaciaLogan.Basedonthesame➔ platform,

theLoganMCV(Multi-ConvivialVehicle)station

wagonwasintroducedin2006,followedbythe

Loganvan(basedontheLoganMCV)andthe

Loganpickupin2007.ItssistermodelSandero,

acompacthatchbackwithcomponentsthatare

70percentidenticaltothoseoftheLogan,was

launchedin2008.Renaulthasalsoannounced

thatitisdevelopingaLoganSUV.

67

1. The Renault Group as a leader in the low-cost car sector

1.1 The Logan concept

68

Inordertolowerthecostsofproducingthisnew

vehicle,Renault’sengineersusedthreemethods:

design-to-cost,carry-overandcomputer-aided

engineering.Thedesign-to-costmethodfocused

onminimizingcostsduringthedevelopment

phase.Vehicleunitcostswerereducedbyusing

ordinarycomponentsandeconomicalmateri-

alsandbyomittingpurelyvisualelements.

Forexample,usinganidenticalexteriorrear

viewmirroronthevehicle’sleftandrightsides

resultedinsavingsofabouttwoeurospercar.

Cost reductions have an effect on the configuration of the entire value chain.

Effortstoincreaseefficiencyincludedfocusing

notonlyonthevehicle’sdirectcosts,butalso

onpotentialindirectsavingsduringtheproduc-

tionandprocurementprocesses.Choosingbody

typesthatareeasytomanufactureandlimit-

ingthenumberofavailablefeaturesmakesthe

productionprocesslesscomplicated,whichalso

reducescosts.Toolingcostscanbeloweredif

thefrontandrearwindowsofthevehicleare

onlyslightlycurved,whichmakesthemeasierto

install.Finally,sincetheLoganwastobemanu-

facturedintheemergingmarkets,adecision

wasmadetousetraditionalsteelformostcom-

ponents,sincesteelisnotonlymoreeconomical,

butalsoeasiertoobtaininthosecountriesthan

materialslikealuminum.

Thecarry-overmethoddictatedtheuseofexist-

ingcomponentsandconstructionmethodsbor-

rowedfromothervehicles,astheircostshad

usuallybeenamortizedandtheirqualityand

reliabilityhadalreadybeendemonstrated.This

meantadditionalsavingsindevelopmentand

production,aswellasreducedmaintenance

costs.Logancomponentsweretakenfromother

modelsmanufacturedbytheRenaultGroup

anditspartner,Nissan;RenaultandNissanhad

enteredintoa➔ strategicalliancein1999,and

eachhasaminoritystakeintheother.They

worktogetherinanumberofareas,asshown

inFigure1,andthishasbeenbeneficialforthe

Loganproject.1

TheLoganisbuiltontheBplatform,whichwas

developedjointlybyRenaultandNissanforthe

RenaultClio,RenaultModus,NissanMicraand

NissanCube.TheLogan’srearaxlewastaken

fromthisplatform,butthefrontaxleistaken

fromtheversionprecedingthecurrentRenault

Clio.Theelectroniccentralprocessingunitand

theheatingsystemwerealsooriginallyusedin

otherRenaultvehicles.In2007alone,some1.9

millionvehiclesworldwidewerebuiltontheB

platform,whichisnearlyone-thirdofthe6.2

millionvehiclessoldbybothRenaultandNis-

san.Thishasallowedthemtoachievesynergies

inthedevelopmentprocessand➔ scaleeffects

inproduction.Bothofthesefactorshavereduced

thecostsoftheLogan.Fromacustomer’sper-

spective,itisalsoimportanttonotethatthe

competitiveadvantageofalowpurchaseprice

mightbenegated(tosomedegree)byexpen-

sivemaintenance–if,forexample,thevehicle

requiresfrequentmaintenanceandrepairs.The

carry-overmethodhelpstoreducethisriskwith

theuseofprovencomponents.

High maintenance costs would negate some of the competitive advantage of a low purchase price.

Finally,computermodelsandsimulations

broughtfurthersavingsindevelopingthe

vehicleanditsproductiontools.Whilecomputer-

assistedmethodshavelongbeencommonin

vehicledevelopment,theyhadneverbeen

appliedtothisdegree.Theuseofavirtual

simulationofeverydevelopmentstage,includ-

ingnoisetests,madeitpossibletoeliminatethe

expensiveconstructionofLoganprototypes.The

computer-aidedengineeringmethodallowedthe

companytosave20millioneurosinengineer-

ingcostsrelativetotraditionaldevelopment

1.2 The minimization of costs in manufacturing the Logan

1 For a more extensive discussion and explanation of the strategic alliance between Renault and Nissan, see Schmid/Hartmann (2007).

69

toattractcustomersinthefiercelycompetitive

compactcarsectorwithalowpurchaseprice.

LessonslearnedintheTwingoprojectaided

inthedevelopmentoftheLogan.“Therewasa

significantimprovementinthedesign-to-cost

method,introducedinthedevelopmentofthe

Twingoin1992,whentheX90programwas

launched,”explainsOdilePaciatici,headof

developmentfortheX90project(Dacia2004:3).

Inretrospect,thedevelopmentoftherelatively

inexpensiveTwingowasakindoftestrunfor

developingtheLoganlow-costcar.

methods.Renaultspentonly360millioneuros

todeveloptheLogan,whichisroughlyhalfwhat

isnormallyrequiredtolaunchanewvehicle.

IntheX90project,thesemethodswereaccom-

paniedbyaperson-orientedapproachto➔

coordination;alargenumberofemployeeswere

assignedtotheprojectwhohadalreadybeen

involvedindevelopingtheRenaultTwingo.

Renaultfirstadoptedastrictpolicyofminimiz-

ingcostswhenitbuilttheTwingo,whichwas

introducedtothemarketin1992.Thegoalwas

Figure 1: The Renault Group’s financial ties and the organizational structure of its strategic alliance with Nissan

Source: The authors, based on Renault (2005: 4, 8), Schmid/Hartmann (2007: 351f.), Renault (2008b: 4).

As of March 31, 2008.

The Renault Group’s financial ties

Joint venturesRNPO

(Renault-Nissan Purchasing Organization)

RNIS (Renault-Nissan Information Services)

SC Dacia Automobile

Joint ventures_ Joint procurement (RNPO)

_ Joint IT systems (RNIS)

Responsibility for business operations is held by the

respective company

Project teams_ Identification of synergies

along the value chain

_ Initiation and coordination of joint projects

Strategic management

Control

Strategic management

Renault Samsung Motors

AvtoVaz

AB Volvo

Organizational structure of the strategic alliance between Renault and Nissan

99.4 %

80.1 %

20.7 %

50 %

44.3 %

100 %

50 %

Renault

Rena

ult

Nis

san

Renault-Nissan B.V.

Alliance BoardNissan

25,0 %

15.0 %

70

TheLoganwasintroducedtothemarketatthe

endof2004inRomania,theCzechRepublic,

Morocco,AlgeriaandTurkey.Beforelongitwas

alsobeingsoldinneighboringcountries,includ-

ingtheBalticstates(Estonia,Latvia,Lithuania),

Russia,Poland,Slovakia,Hungary,Slovenia,

CroatiaandTunisia.Demandwasunexpectedly

highintheWesternEuropeancountries.After

RenaultdealersinGermany,FranceandItaly

hadbeguntoimporttheLoganfortheircustom-

ersontheirown,Renaultrespondedin2005by

startingtoselltheDaciaLoganinFrance,Bel-

gium,Luxembourg,theNetherlands,Germany,

Switzerland,ItalyandSpainaswell.Todaythe

Loganismarketedinatotalof59countries.Ger-

manywasthefifthlargestsalesmarketforthe

Loganin2007,with17,500vehiclessold,after

Romania(101,800units),Russia(67,844),France

(32,600)andIndia(17,706).

Intermsoftiming,Renault’s➔ internationaliza-

tionstrategyfortheLoganmightbetermeda

combined➔ “waterfall-sprinkler”strategy.The

vehiclewasintroducedinaseriesofphases

inthevariousforeignmarkets,buteachphase

includedseveralmarkets.2Onlythefirsttwo

phaseswentasplanned;Renaulthadnot

expectedthedemandthatdevelopedinWestern

Europe,anditrespondedwithathirdphaseof

internationalizationefforts.TheLoganprovides

strikingconfirmationthatinternationalization

doesnotneedtooccurpreciselyasoriginally

planned;theprocesscanbeadjustedtoaccom-

modateunforeseenevents.3Companiesneedto

bealerttosignalsfromsurroundingmarketsso

thattheycanquicklytakeadvantageofopportu-

nitiesthatarise.

Whencompaniesenternewmarkets,group-wide

considerationsshapetheirbrandstrategies.

HencetheLoganissoldin50countriesunder

theDaciabrandandinsevenundertheRenault

brand.ThenameDaciaisusedincountries

whereRenaultalreadyhasareputationasa

design-oriented,high-volumebrand,forexample

inCentralEurope,TurkeyandNorthAfrica.

OfferingasecondbrandexpandsRenault’sprod-

uctrangeandappealstonewcustomergroups.

IncountrieswhereRenaultdoesnotyethavea

strongpresence,theRenaultisusedasawayof

openingupthemarket–inIran,aswellasin

Russia,Argentina,BrazilandMexico.TheLogan

isnowalsoavailableundertheNissanbrandas

partofNissan’sproductrangeinMexicoand

SouthAfrica.Thecompanyisthereforepursu-

inga➔ strategyof(largely)standardizingthe

productwhiledifferentiatingthebrand,depend-

ingontheextenttowhichtheRenaultbrand

isalreadyestablishedandhowthecompany

intendstopositionitselfinthemarket.

The brand under which the low-cost Logan is sold depends on how established the Renault brand is in the given market and how the company intends to posi-tion its main brand.

Figure2providesanoverviewofselected

markets,thebrandsunderwhichtheLoganis

soldanditsbaseprice.ItisevidentthatLouis

Schweitzer’sproposedbasepriceof5,000euros

hasnotbeenachieved,althoughafewcountries,

suchasRomaniaandMorocco,comecloseif

taxesarenotincluded.TheLoganisstillalow-

costcar,however,sinceitislessexpensivethan

traditionalvehicles.Itissoldforconsiderably

morethan10,000eurosonlyinBrazilandVen-

ezuela,whereitispositionedasoneofRenault’s

mid-levelvehiclesratherthanamoreaffordable

alternative.

InWesternEurope,othermanufacturerssell

certainmodelsinthepricerangeof9,000to

10,000euros,whichiswhattheLogancosts

withadditionalfeatures(e.g.powersteering,air

1.3 The market success of the Logan

2 For an overview oftiming strategies, see Kutschker/Schmid (2008: 984-995). Note, however, that the matter at issue here is not Renault’s entry into a market as a whole, but its initial entry into a specific market segment.

3 For an explanation of the various initial forces of internationalization, see for example Aharoni (1966) and Kutschker/Schmid (2008: 425-431). The distinction between planned and unplanned (emergent) strategies was made by Mintzberg (1978) and Mintzberg/Waters (1985).

71

conditioning,sideairbags).Theseincludethe

CitroënC1(baseprice9,190euros),theToyota

Aygo(baseprice9,350euros)andtheFordKa

(baseprice9,600euros).Butallofthemare

compacts;theLoganislarger,inthesameclass

astheGolf.Renault’sprimarytargetgroup

includesfamilieswantingmoreroom,whichthe

Loganprovidesatanunusuallylowprice.Com-

mercialcustomersfindtheMCV,vanandpickup

modelsappealing.

Formanycustomers,forexampleinEastern

Europe,theLoganisthefirstvehiclethatthey

havebeenabletoafford.Marketsurveyshave

shownthatotherLoganbuyers,inEuropeand

elsewhere,hadpreviouslybeenmorelikelyto

purchaseusedratherthannewvehicles.Still

othershavechosentheLoganasaneconomical

secondvehicle.Forthisreasontherehasbeen

noindicationof➔ cannibalizationeffectsaffect-

ingRenaultmodels,accordingtoRenaultdealers

inGermany,wheretheLoganissoldatthebase

priceof7,200euros.

Figure 2: Marketing the Logan in selected countries

Source: The authors, based on research in the relevant countries.

As of the 1st half of 2008 (list prices) or December 31, 2007 (units sold).1) In parentheses: Local variation of the low-cost car’s name.2) Price of the Nissan Bakkie 1400, to be replaced by the Logan pickup in October 2008.Note: Conversion into euros was based on the average exchange rate at the end of the respective month during the first half of 2008 (exchange rate statistics from the German Central Bank). Price comparisons were based on the model with the least expensive equipment options.

Brand under which the Logan is sold

CountryList price (incl. taxes) Units sold

(2007)Local currency Euros

Dacia Romania 22,656 Lei 6,150 102,062

Dacia Morocco 72,200 Dirhams 6,326 12,639

Dacia Germany 7,200 Euros 7,200 17,301

Dacia Algeria 719,000 DA 7,224 9,090

Dacia Ukraine 11,390 US Dollars 7,368 9,350

Dacia France 7,600 Euros 7,600 32,688

Dacia Turkey 15,800 New Lira 8,363 8,951

Renault India 425,186 Rupees 6,793 17,706

Renault (Tondar)1) Iran approx. 97,500,000 Rials approx. 6,900 10,657

Renault Russia 272,450 Rubles 7,419 67,844

Renault Colombia 26,390,000 Dollars 9,272 not available

Renault Brazil 29,490 Reals 11,344 14,764

Renault Venezuela 41,000,000 Bolívares Fuertes 12,369 13,379

Nissan (Aprio)1) Mexico 114,900 Mex-Dollars 7,050 not available

Nissan (NP200)1) South Africa 89,100 Rands 2) 7,605 not available

72

The Logan’s success has made Renault’s Romanian subsidiary a mainstay of the Group.

ThesuccessoftheLoganhasmadeRenault’s

RomaniansubsidiaryDaciaamainstayofthe

RenaultGroup.WhileRenaulthasexperienced

decliningsalesandalossofmarketsharein

WesternEurope,itssaleshaveincreasedsub-

stantiallyinothermarkets.Infiscalyear2007,

RenaultrecordedanincreaseinLogansalesof

nearly120,000vehicles,orbymorethan48per-

cent.Totalsales,includingDaciaandallRenault

models,rosebyonlyabout50,000vehicles–

twopercentagepoints–duringthesameperiod.

ClearlytheLoganisdrivingRenault’sgrowth;

withoutit,totalsaleswouldhavedeclinedagain

in2007.Figure3showstrendsinsalessincethe

Loganwasintroduced.

Withover350,000vehiclessoldin2007,the

LogannowranksthirdamongRenault’sbest-

sellingmodels,aftertheMéganeandtheClio.

Indeed,demandsoexceededRenault’sexpecta-

tionsin2008thatitwasunabletoincreasepro-

ductionsufficientlytokeepup.Theresultwas

waitingperiodsofseveralmonthstopurchase

aLoganoraSandero.Asignificantfactorwas

thatRenaulthadnotexpectedsuchahighlevel

ofinterestinthesevehiclesinWesternEurope.

Furthermore,low-costcarscompetewithused

cars,anditwasdifficulttopredicthowmany

usedcarbuyerswouldoptinsteadtopurchase

anewLogan.Sincethen,however,Renaulthas

adjusteditspredictionsandcapacities.Itplans

toproduceandsellsome500,000Logansand

Sanderosin2008,andsubstantialincreasesin

capacitywillbringthisfigureupto900,000in

2009.

Figure 3: Sales figures for the Renault Group and the Logan

Source: The authors, based on financial statements and corporate data.

1) Passenger vehicles and light commercial vehicles. 2) Projected figures provided by the company. 3) Includes the Sandero.Logan3) Renault Group

Legend:

Vehicles sold1)

(in thousands)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2004

2,490

+ 2 % - 4 %+ 2 %

+ 10 %

+ 10 %

+ 80 %

+ 36 %+ 48 %

+ 71 %23

145248

367

500

900

2,5332,434 2,484

2,733

3,000

2005 20072006 20092)20082)

73

TheLoganisnotonlydrivingRenault’ssales

growth;itisalsoincreasingthecompany’sprof-

itability.Renault’sprofitmarginoneveryLogan

thatissoldinWesternEuropeisroughly15

percent.Theonlyotherautomobilecompanyto

achieveasimilarprofitmarginispremiumman-

ufacturerPorschewithits911Carreramodel.

Internationally,Dacia’saverageprofitmarginon

theLoganwasaboutsixpercentin2007.Con-

sequently,theLoganhasbecomecrucialinthe

company’seffortstoachievethegoalslaidout

byRenault’sCEO,CarlosGhosn,inaFebruary

2006,strategypaperentitled“Contrat2009.”In

additiontosettingasalesgoalofthreemillion

vehicles–whichwasoriginallyevenhigher,

at3.3million–theplanalsocallsfornearly

doublingtheprofitmarginin2009,anincrease

from3.3percentto6percent,thelevelDacia

hasalreadyachieved.ClearlyitisnotDacia’s

faultthatRenaulthasbeenforcedtoreviseits

salesgoalsandmaywellfallshortofitstarget

profitmargin.Accordingtomanyexperts,the

problemliesmainlyintheoutdatedmodelsthat

werestillbeingsoldundertheRenaultbrandas

recentlyas2007.

Dacia’s success is very important to the Romanian economy.

Daciahascometoplayacriticalrolewithin

RenaultGroup,butithasalsobroughtgreat

benefits,primarilyeconomic,tothecountry

ofRomania.Daciaprovides14,400jobsatits

plants,buttodaytherearealso4,000jobswith

suppliercompaniesinthePitestiindustrialpark,

6,500jobsintheDaciadistributionnetworkand

150,000otherjobsinRomaniathatarelinkedin

somewaytoDacia.BothRenaultandDaciaare

contributingtothecountry’seconomicdevelop-

ment.Daciaaloneaccountedfortwopercentof

Romania’sgrossnationalproductin2007.The

country’sinternationalreputationhasbenefited

aswell.AsFrançoisFourmont,GeneralDirec-

torofDacia,pointsout,“[…]itisclearthat

nowadaysthereisanassociationbetweenLogan-

Dacia-RomaniaandthatLogandepictsagood

imageofDaciaand,atthesametime,ofRoma-

nia”(Radoslavescu2005).RomanianPrimeMin-

isterCalinPopescuTariceanuassertsthatthe

Loganis“thebestambassadorRomaniahasever

had”(Kuntz2008).TheRomanianpeople,too,

areproudofDacia.Theunexpectedlyimpressive

salesoftheLoganinWesternEuropehavegiven

aparticularboosttotheirself-esteem.

74

Risingearningsintheemergingmarkets,along

withgreaterprice-consciousnessandhigher

vehiclemaintenancecostsintheindustrialized

countries,arecreatingtheconditionsneces-

saryforlow-costcarstosucceed.TheLoganhas

alsodemonstratedthatalow-costcarcanmake

aprofit.Accordingly,anumberofestablished

companiesaswellasup-and-comingautomobile

manufacturersfromtheemergingmarketshave

announcedplanstodesigntheirownlow-cost

vehicles.InJanuary2008,theIndianautomobile

manufacturerTataMotorssetanewstandardfor

affordabilitywhenitintroduceditsTataNanoin

NewDelhi.This➔ “ultra-low-costcar”(ULCC)

willbeavailableinIndiain2009fortheequiva-

lentof1,700euros.Sincethiscorrespondsto

100,000rupees,termedlakhinHindi,theNano

hasbeendubbedthe“one-lakhcar.”Other

automobilemanufacturersareseeingjusthow

muchthepriceofacarmightbereduced.“The

RenaultLoganshowedthemauniquedesignis

possible.AndtheTataNanoshowedthemhow

farthatcouldgo,”saysNigelGriffiths,managing

directoroftheautomotivesectionofthemarket

researchfirmGlobalInsight(Snyder2008).

Worldwidedemandforlow-costcarscomes

mainlyfromtheemergingmarkets,particularly

China,IndiaandRussia.Earningsarerising,

andpeopleareeagerforgreatermobility.Mobil-

ityforthemasseshasbeenincreasingforsome

timenowinChinaandRussia,andthetrendis

justbeginninginIndia.India’sboomingmarket

formotorcyclesisstillbenefitingfromapushfor

greatermobility,sinceeventhecountry’smiddle

classishardpressedtoaffordthecarsthatare

currentlyonthemarket.Companiesproducing

low-costcarsarenowseekingtobridgethisgap.

Forinstance,theTataNanoisseekingtoappeal

toIndia’smiddleclass,forwhichthismodel

isbynomeansasaffordableastheterm“low-

cost,”usedintheindustrializedcountries,would

suggest.

Low-cost cars represent a growth sector in the automotive industry.

Figure4showsforecastsforvehiclesalesinthe

low-pricesector(sellingforlessthan10,000US

dollars)invariouscountriesin2012andcom-

paresthemwiththefiguresfor2006.Annual

growthratesintheemergingmarketsbetween

2006and2012areexpectedtorangebetween

3.9percentand16.3percent.Forexample,

forecastsindicatethattheChinesemarketfor

low-costcarswillgrowby13.4percenteachyear

upto2012.Clearly,thelow-costcarsectorisa

growthmarket.

However,individualautomobilemanufacturers

aretargetingverydifferentsegmentsofthe

low-costmarket,asFigure5shows.Whilethe

Logan,pricedatabout7,500euros,iscurrently

themostaffordablecaravailableinWestern

Europe,inIndiaitismoreexpensivethansev-

eralcompetingmodelsdespiteitslowerbase

priceof6,800euros.Shortlyaftertheintroduc-

tionoftheTataNano,Renaultannouncedthatit

willbeworkingwithBajajAuto,India’slargest

manufacturerofautomobilesandmotorcycles,

todevelopanultra-low-costcarfortheIndian

market.IncontrasttotheLogan,whichwas

developedatRenaultheadquartersinFrance,

thisvehicleistobedesignedonsitebya

French-IndiandevelopmentteaminIndia,which

willenableittobetterfocusontheneedsof

localcustomers.4

1.4 The Logan in the international market for low-cost cars

4 A detailed discussion of the advantages of decentralizing development activities can be found in the case study of the Volkswagen Group con-tained in this publication

75

Figure 4: Sales forecasts for low-cost cars in 2012 and annual growth rates for the period from 2006 to 2012 in various markets

Source: Based on Uludag (2007: 6).

Legend:

+ 4.2 % p.a. CAGR2)

2012

2006Note: All figures given in thousands.1) Estimates for Russia refer to 2014 rather than 2012.2) CAGR: Compound Annual Growth Rate.

+ 8.7 % p.a.

705

428

United States

+ 4.2 % p.a.

582

455

Mexico+ 3.9 % p.a.

1,513

1,204

Brazil

+ 0.8 % p.a.

5,756

5,471

Western Europe

+ 7.8 % p.a.

1,138

726

Eastern Europe

+ 4.1 % p.a.

17,685

13,935

worldwide

+ 0.6 % p.a.

2,599

2,508

Japan

+ 6.4 % p.a.

385

265

Malaysia

+ 8.4 % p.a.

216

133

South Korea

+ 8.7 % p.a.

441

226

Russia1)

+ 16.3 % p.a.

104

42

Thailand

+ 13.4 % p.a.

2,640

1,243

China

+ 7.6 % p.a.

1,519

980

India

Thelow-costcarsegmentofferssubstantial

opportunitiesforgrowthinboththedevel-

opedandemergingcountries.Established

high-volumemanufacturersthatareintroduc-

ingtheirownlow-costmodelsneedtotakea

verydifferentapproachtodevelopment:

_ Thedesignofalow-costcarneedstobe

simpleandrobusttosucceed,particularly

intheemergingmarkets.

_ Design-to-cost,carry-overandcomputer-

assistedengineeringareeffectivemethods

forachievingthesegoals.

Summary

76

Figure 5: Selected existing or planned low-cost cars

Target markets in the industrialized countries

Target markets in the emerging nations

Source: The authors, based on corporate data and press reports.

E2,000 E 3,000 E 4,000 E 5,000 E 6,000 E 7,000 E 8,000

Legend:

Planned modelsExisting models

As of August 2008.

Up!

Approx. E 8,000

Western Europe

About 2010

VW

Indica

Approx. E 6,200

Spain, GB

About 2010

Tata

Up!

Approx. E 6,000

India

About 2012

VW

Approx. E 5,000

India

About 2010

Toyota/Daihatsu

Approx. E 1,600

India

About 2011

Renault & Bajaj

Nano

Approx. E 1,700

India

2009

Tata

QQ

Approx. E 5,000

Western Europe

About 2009

CheryLogan (incl. Sandero)

Approx. E 7,500

Western Europe

2004 (2008)

DaciaKalina

Approx. E 8,000

Western Europe

2007

Lada

Matiz

Approx. E 8,000

Among others, Asia, Eastern Europe

1998

Chevrolet

C1

Approx. E 8,400

Among others, Eastern Europe

2005

CitroënPalio

Approx. E 7,000

Eastern Europe, South America

1996

Fiat

Indica

Approx. E 5,600

India

2008

TataHQ

Approx. E 3,800

China

1998

GeelyQQ

Approx. E 3,200

China, Malaysia

2003

Chery

800

Approx. E 3,300

India

1983

Maruti-Suzuki

Logan (incl. Sandero)

Approx. E 7,000 E

Eastern Europe, India

2004 (2008)

Dacia

77

2. The configuration of value activities for the Logan

2.1 Production: Centralized main facility with decentralized assembly plants

Makingthelow-costLoganarealityrequired

simpleconstruction,inexpensivematerials

andtheuseofexistingcomponents.However,

Renault’ssuccessinkeepingcostslow,set-

tinganaffordablepriceandgainingcustomer

acceptancewasnotdueonlytothesetechnical

aspects.AlsoessentialintheLogan’smarket

successweretheappropriate➔ configuration

andcoordinationoftheentire➔ valuechain.

Mostproductionstageswereconcentratedin

Romania,wherelaborcostsareconsiderably

lowerthaninFrance.Inaddition,Renaulttooka

In1999,aspartofitsstrategytomarketalow-

costcar,theRenaultGrouppaid50millionUS

dollarstoacquireamajoritystakeof51percent

intheRomanianautomobilemanufacturerSC

DaciaAutomobileSA,previouslyastate-owned

company.Overthesubsequentthreeyears

Renaultgraduallyincreaseditsshareto99.3

percent,andtodayitownsnearlyallofDacia.

Astheailingstate-runcompanywasbeing

privatized,Renaultwastheonlypartytoshow

interest,anditwasalreadyfamiliarwithDacia

fromyearsofworkingtogether:From1968until

thefalloftheIronCurtain,Daciawaslicensed

tomanufacturetheRenault8andtheRenault12

fortheEasternEuropeanmarkets.Inadditionto

Dacia,whichwaswell-knowninEasternEurope,

Renaultwasinterestedinacquiringthetwo

vehicleandenginemanufacturingplantslocated

inthetownofMioveni,nearPitesti,whichis

some120kilometerswestofRomania’scapital

cityofBucharest.

AfterpurchasingDacia,Renaultcarriedoutan

extensiverehabilitationprogramaimedatmod-

ernizingthecompany’snearly40-year-oldpro-

ductionfacilities.Intermsofproductionquality

andefficiency,theplantslaggedfarbehind

modernstandardsandwerenolongercapable

ofmanufacturingvehiclesthatcouldcompete

inthemarket.Renaultinvestedatotalofnearly

500millioneuros,ortentimeswhatithadpaid

toacquirethecompany,toupdateitsfacilities,

redefinethevariousdepartmentsandoptimize

Nach der erfolgre-ichen Sanierung konnte Dacia sich international etablieren.

newapproachtoconfigurationandcoordination

intheareasofprocurement,developmentand

logistics.Thiswasinstrumentalinallowingthe

companytokeepthevehicle’spricelowwhile

takingintoaccounttheneedsofitscustomers.

Thefollowingsectionsdescribethedetailsof

Renault’sapproach.

The proper configuration and coordination of the value chain have been essential factors in the Logan’s success.

procedures.Thecompanyalsosoughttoshow

sensitivityininterculturalmatters.These

measuresquicklyprovedeffective:Between

1999and2002,therewasa50percentdropin

thenumberofbreakdownsintheproduction

oftheoldDaciamodelsthatwerestillonthe

market.TodaythetwoDaciaplants,whichnow

manufactureonlyLoganmodels(includingthe

Sandero),areamongthemostefficientfacilities

intheentireRenaultGroup.WithoutRenault’s

successfulrehabilitationefforts,thevenerable

Daciabrand,whichhadproducedtheso-called

“people’scars”ofRomaniaandenjoyedgreat

prestigeinsuchcountriesasEastGermany,

wouldhavedisappearedwithoutatrace.Its➔

acquisitionbyRenaultmeantthesurvivalof

Romania’sonlyautomobilemanufacturerand

allowedittoestablishitselfinternationally.

After successful rehabilitation Dacia was able to establish itself internationally.

Renault’sapproachtomodernizationsoughtto

achieveonlyminimalautomationofLoganpro-

duction;manuallaborwastoplayaprominent

role.Evenovertheverylongterm,itisconsid-

eredmoreeconomicaltoinvestinmanpowerin

Romaniathantoputagreatdealofmoneyinto

automation,owingtothecountry’slowlabor

costs.Moreover,manuallaboriscapableof

producinghigh-qualitygoods,makingvehicles

morereliableandhelpingtoachieveRenault’s

78

goalofkeepingmaintenancecostslow.Even

today,workersrunstampingmachinesand

carryoutspotweldingbyhandinproducing

theLogananditssistermodel,theSandero.

Elsewhereintheautomotiveindustry,thislevel

ofmanuallaborisfoundonlyintheproduction

ofabsolutetop-of-the-linemodels,suchasthe

AudiR8.Figure6describestheinstallationof

thesparewheelpaninthevehicletoillustrate

Renault’sapproachtocuttingcosts.

Inaddition,Daciaexhibitsahighlevelofverti-

cal➔ integration,sincealloftheLogan’spro-

ductionstagesarecarriedoutatthetwoplants

inMioveni.Thevehicleproductionplantnot

onlycarriesoutfinalassembly;italsocontainsa

pressingplantforstampingtheindividualparts

ofthevehiclebody,abodyshopforweldingthe

partstogether,andapaintshopforpaintingthe

finishedvehiclebodies.Thenearbyengineand

gearboxplantproducesenginesandgearbox

parts,oilpans,cylinderheadcoversandsub-

carriers.ThisallowsRenaulttoachieveahigh

levelof➔ localcontentinitsDaciaplants,and

itbenefitsduringeachproductionstagefrom

Romania’slowercostsforlaborandotherpro-

ductionfactors.

Theabovecommentsshowhowimportantlow

laborcostsareindeterminingwherealow-cost

caristobeproduced.TheLoganisnowmanu-

facturednotonlyinRomania,butalsoinColom-

bia,Brazil,Morocco,SouthAfrica,Russia,Iran

andIndia–allcountrieswithlowlaborcosts

aswellastargetmarketsforthistypeofcar.

ByproducingthisvehicleinRomania,Renault

isabletoreducecostsby92percentrelativeto

France,asshowninFigure7.

Thedecisionagainstahighlevelofautoma-

tionresultedinthecreationofadditionaljobs

inMioveni.WhileRenaultcutthenumberof

employeesfrom28,600,thelevelatthetimeof

theacquisition,to11,000(today14,400),this

isstillroughlytwiceasmanypeopleasare

employedattheFrenchcompany’sotherEuro-

peanproductionsiteswithasimilarcapacity.

Inotherwords,twiceasmanyjobswerepre-

servedattheDaciaplantsaswouldhavebeen

thecaseattheusuallevelofautomationwithin

theindustry.AlthoughRomanianlawrequires

anoticeperiodofonlytwomonths,Renault

workedwiththeunionstodrawupamulti-year

downsizingplanthatincludedearlyretirement

provisions,retrainingoptionsandassistancein

startingupnewbusinesses.Accordingly,Dacia

isregardedinRomaniaasamodelforasocially

responsibleapproachtoprivatization.Overall,a

varietyofstakeholdershavebenefitedfromthe

Daciaplants’relativelylowlevelofautomation:

Figure 6: Comparison of the costs of automated and manual vehicle production, as exemplified by the assembly of a spare wheel pan

Source: Based on Liebeck et al. (2008: 208); data from ILO Laborsta (2008).

1) Including capital costs, depreciation and maintenance.

Automated assembly Manual assembly

Production steps_ Laying out the spare wheel pans_ Applying the adhesive_ Pressing in the spare wheel pan

Volume of investment in facilities

200,000 euros 10,000 euros

Direct labor – 1 worker

Takt time 60 seconds 60 seconds

Cost per vehicle_ Two-shift operation_ Labor costs 2.49 euros/hour

0.18 euros machine costs1) 0.01 euros machine costs1)

0.05 euros labor costs

79

Renaultbenefitsfromgreatercost-effectiveness,

Dacia’semployeesfromadditionaljobs,custom-

ersfromthehighqualityofDacia’svehicles,

andtheRomanianstatefromacompanythatis

(again)prospering.

However,theselectionofaproductionsitemust

notbedeterminedsolelybycostconsiderations;

allofthefactorsrelatedtothesitemustbe

takenintoaccount.5Intheautomotiveindustry,

laborcostsmakeuponly15to25percentofall

productioncosts,sotheadvantageoflowlabor

costscaneasilybeoffsetbyhigherexpensesin

otherareas.Thesemightresultfromlowerpro-

ductivity,inferiorquality,higherfinishedvehicle

transportcostsorgreaterdifficultyinprocuring

components.Romaniaisanexcellentchoiceas

acenterforLoganproduction,sinceitoffers

notonlycostadvantages,butahighlevelof

productivityandquality.“Romaniaiscurrently

undergoingashiftfromsimplewagelaborto

technicallysophisticated,high-qualityproduc-

tion,”DirkRütze,headoftheGerman-Romanian

ChamberofIndustryandCommerceinBucha-

rest,pointsout(Mick2004).Furthermore,the

“transportargument”isrefutedbythefactthat

on-siteproductionmakesiteveneasiertotrans-

portvehiclestotheemergingmarkets.

Anefficientconfigurationofproductionactivi-

tiesrequiresnotonlyalow-costsite,butalso

thatproductionstagesbedistributedwithina

networkinordertotakeadvantageoffurther

costsavings-independentoflaborcosts.Inits

Loganproductionnetwork,whichwillencom-

passeightsitesworldwidebytheendof2008,

Renaulthascentralizedalargeportionof➔

valueactivitiesinMioveni,asshowninFigure

8.ThetwoRomanianplantsaretheLogan’s

mainproductionsitesandmanufactureallofthe

Figure 7: Comparison of labor costs in selected countries where the Logan is manufactured

Source: The authors, based on ILO Laborsta (2008).

India France3)BrazilSouth Africa2)ColombiaRussiaRomania

1.22.5 2.5

4.0 4.66.2

32.9

As of 2005.1) Labor costs = wages and salaries as well as fringe benefits (compensation for days off, special payments, benefits, other additional personnel costs).2) Wages not including fringe benefits, rather than labor costs.3) Figures for 2004.Note: No current data are available for Morocco and Iran, two other countries where the Logan is manufactured.

Labor costs1)

(in euros/hour)

0

5

10

15

20

25

30

35

40

- 92.4 %

5 A comprehensive discussion of various location factors can be found in the case study of Audi contained in this publication.

80

vehiclekitsrequiredbythecompanyworldwide.

Thismakesitpossibletoproducelargequanti-

ties,whichleadstoscaleeffects.Theseinclude

➔ size-relatedeffects,suchasincreasedreturns

toscaleandgreater➔ economiesofscale,as

wellas➔ learningeffects,which,givenhigher

volume,allowforgreaterspeedandfactor-saving

production,thusincreasingefficiency.Bothof

theseeffectsarecrucialtoensuretheLogan’s

lowpurchaseprice.

Thecentrallymanufacturedkitsareassembled

attheRomanianplantiftheyareintendedfor

distributionintheEuropeanmarkets.Otherwise

theyareshippedas➔ CKD(completelyknocked

down)kitstoplantslocatedinavarietyofdif-

ferentregions,wheretheyareassembledand

deliveredtothesurroundingmarkets.Assem-

blingthekitsonsitehastheadvantageofavoid-

ingimportrestrictionsonfinishedvehicles.An

importdutyof25percentoncompletelyassem-

bledvehicles,asiscurrentlyinforceinRussia,

wouldeliminatetheLogan’spriceadvantage.In

somecasestheassemblysitesalsomanufacture

engineandgearboxpartstocompletethekits.

However,theMiovenisiteistheonlyonethat

boastsapressingplantandapaintshop.

The hub-and-spoke configuration is advantageous when economies of scale and learning effects are important and different versions of the product are sold.

Figure 8: The hub-and-spoke network for producing Logan models

Source: The authors, based on Dacia (2004), Renault (2008b: 21), Dacia (2008e) and press reports.

As of December 12, 2007.Note: Output and capacity in vehicle units per year.

Casablanca (MA)

Moscow (RUS)

Teheran (IR)

Nashik (IND)

_ Since 2005_ Output:

18,856 (2007)_ Capacity:

70,000 (2009)


72,700 (2007)_ Capacity:

160,000 (2009)


15,520 (2007)_ Capacity:

300,000 (2009)


18,100 (2007)_ Capacity:

50,000 (2009)

Envigado (CO)

Rosslyn (SA)


24,643 (2007)_ Capacity:

40,000 (2009)

_ From the end of 2008_ Planned output:

unavailable_ Planned capacity:

unavailable

Curitiba (BR)


47,391 (2007)_ Capacity:

110,000 (2009)

Mioveni (RO)


222,854 (2007)_ Capacity:

400,000 (2009)

Legend:

Production of vehicle body parts

Production of engines and gearboxes

Assembly of CKD kits

81

ThevehicleandengineplantsintheRomanian

cityofMioveniserveasthehuboftheproduc-

tionnetwork,whiletheassociatedassembly

plantscarryoutthefinalstageofproductionand

establishcontacttothelocalmarkets.Thiscon-

figurationofproductionactivitiesisreferredto

asahub-and-spokeconfiguration,6anditallows

companiestotakeadvantageofeconomiesof

scalewhilealsoensuringalocalpresence.It

isadvantageouswheneconomiesofscaleand

learningeffectsareimportantanddifferentver-

sionsoftheproductaretobesoldworldwide.

WhiletheLoganisnotcurrentlymanufactured

indifferentversions,RenaultandDaciaare

alreadyconsideringdoingsointheinterestof

targetingthevehicleevenmorecloselytolocal

conditionsandcustomerpreferences.Thisis

expectedtoleadtostillhighersalesfiguresand,

inturn,togreaterefficiency,thankstoadditional

economiesofscaleandlearningeffects.

Renaultisemployingavarietyof➔ market

entrystrategiesasitestablishesitsinternational

Loganassemblyplants.Ratherthanopening

newassemblyfacilitiesintheregionalmarkets,

RenaulthaseitherintegratedtheLoganintopro-

ductionatexistingplantsorbeguntocollaborate

withinternationalpartners,includingcompeti-

tors.Suchcooperationwithcompetitorsistypi-

calofthetransnationalnetworksanddiverse

internationalrelation-

shipsfoundinthe

automotiveindustry,

inwhichcompetition

andcooperationgoonsimultaneously(➔ “coo-

petition”).TheAvtoframosplantinMoscow,Rus-

sia,developedoutofa➔ jointventurebetween

RenaultandthecityofMoscowandiscurrently

manufacturingtheLogan;beginninginlate

2009itwillproducetheSanderoaswell.This

jointventurewilleventuallyincludenotonly

avehicleassemblyplant,butalsosheetmetal

processingandpaintingfacilities.Therearealso

planstohaveothervehicleproductionactivities

handledbyRussiansubcontractors.Thisexisting

assemblyplantcouldbecomeacompleteproduc-

tionfacilityfortheLoganandSanderomodels.

Verweis Kooperationskom-petenz

InCasablanca,Morocco,Renaulthascontracted

tohavetheLoganmanufacturedbyitspartner

SOMACA(SociétéMarocainedeConstruction

Automobile),inwhichRenaultholdsaninterest

of54percent;FiatandPeugeothaveholdings

aswell.SOMACAassemblestheLoganforall

NorthAfricanmarkets,andthesameplant

alsomanufacturestheRenaultKangoo,among

others,forthisregion.InColombia,Renault

acquired60percentoftheColombianautomo-

bilemanufacturerSofasaSA,whichassembles

Logankits.ThevehiclesproducedinColombia

arealsoexportedtootherCentralandSouth

Americancountries.RenaultalsohasitsTwingo,

ClioandMéganemodelsassembledthere.

Sofasaisinvolvedinworkforothermanufactur-

ersaswell;forexample,itproduceslight-duty

commercialvehiclesforJapan’sToyotacompany,

whichowns28percentofSofasa.

InIran,RenaultisworkingtogetherwithIDRO

(IndustrialDevelopment&RenovationOrganiza-

tion),thestateauthorityinchargeofthecoun-

try’sindustrialdevelopment.Thetwopartners

operatethejointventureRenaultPars,which

marketstheTondar,astheLoganiscalledin

Iran.RenaultParsmanufacturesenginesand

gearboxes,whicharethenassembledinto

finishedvehiclesbytheIranianautomobile

manufacturersIranKhodroandSAIPAusing

CKDkitsfromRomania.TheRenaultplantin

theBraziliancityofCuritibaalsoassembles

CKDkitsfortheLogan,alongwithotherRenault

models,usingenginesandgearboxesproduced

onsite.InIndia,Renaultislaunchingajoint

venturewiththelargestIndianautomobile

manufacturer,Mahindra&Mahindra,whichisto

produceCKDkitsfortheLoganattheMahindra

plantinNashik,some180kilometerstothe

northeastofMumbai.Underitsstrategicalliance

withRenault,Nissanwillbegininlate2008to

assembleCKDkitsfortheLoganpickupatits

plantinRosslyn,SouthAfrica,anddistributethe

vehiclesthereundertheNissanbrand.

Find out more about successful partnerships with the Toolbox “Cooperation Competence”

6 For an overview of the various types of production networks, see for example Meyer/Jacob (2008: 164-167).

82

The competitive strategy of cost leadership also affects a compa-ny’s internationalization strategy, including its strategy for entering new markets.

Cooperationwithpartnercompaniesandthe

useofexistingRenaultsitesmakeitpossibleto

keepinitialinvestmentslow,ascomparedwith

establishingnewplants.Manufacturingother

modelsatthesamesiteproducessynergies

insuchareasastheprocurementofoperating

suppliesandauxiliarymaterials.Cooperative

arrangements,suchasjointproductionven-

tureswithcompetitors,canfurtherreducecosts

througheconomiesofscale.Theyalsolower

capitalrequirements,sincecostsaresharedby

thepartnersinvolved.TheexampleoftheLogan

demonstratesthatacompetitivestrategyof➔

costleadershipalsoaffectsacompany’s➔ inter-

nationalizationstrategies,suchasitsstrategyfor

enteringamarketwhilealsopursuinggreater

centralization.7

Initself,theselectionofalow-wagesite

doesnotguaranteesuccessinmanufactur-

ingalow-costcar.

_ Anefficientproductionconfiguration

requiresthatnumerousproductionstages

becentralizedatonelocationsothatthe

companycanbenefitfromeconomiesof

scaleandlearningeffects.

_ Atthesametime,additionaldecentral-

izedsiteswithspecializedproduction

responsibilities,e.g.assemblyplants,can

establishcontacttotheindividualmar-

kets.

_ Asdecentralizationtakesplace,itis

advisabletoestablishnewnetworksor

takeadvantageofexistingones,since

cooperationwithpartnersproducessyn-

ergiesandallowsforsharingrisks.

Summary

7 Extensive comments on the advantages and disadvantages of cooperative arrangements, particularly joint ventures, can be found in Kutschker/Schmid (2008: 889-891).

83

2.2 Procurement: Achieving a high level of localization through supplier training

Intheautomotiveindustry,procurementcosts

accountforanaverageof60percentoftotal

vehiclemanufacturingcosts.Consequently,

Renaulthasbeenseekingtoreducethecosts

ofpurchasingcomponentsfortheLoganand

Sandero.Itssuccessindoingsoisduelargely

tothefactthatprocurementattheDaciaplants

ishighlylocalized.AsFigure9shows,some

80percentofprocurement,intermsofvalue,

occursinRomania.Sinceproductionislargely

centralizedinMioveni,althoughCKDassembly

takesplaceworldwide,Renaultisabletotake

advantageofRomania’slowlabor,rawmaterial

andtechnologycostsglobally.Shortdistances

alsomeanlowertransportcosts.Indeed,50

percentofthematerialsformanufacturingthe

LoganareobtainedinthePitestiindustrialpark

thathassprungupintheimmediatevicinity

oftheDaciaplants,andthisfactoralonehas

reducedcostsby100eurospermanufactured

vehicleascomparedwithtraditionalprocure-

ment➔ structures.

ThenumbersaresimilarfortheLogan’ssister

model,theSandero.Sixtypercentofitsparts

comefromRomania.Another30percentare

purchasedintheneighboringcountriesof

PolandandHungary.Bycomparison,thelocal-

izationlevelofpremiummanufacturerBMW’s

plantinSpartanburg,SouthCarolina,wasonly

30percentin2007.Mostofitspartsstillcome

fromEurope.Accordingly,BMWhasbeenhard

Figure 9: Localization of procurement for Logan production

Logan suppliersVolume of procurement

for the Logan (value)

6

48

1410

110

As of December 31, 2007.1) Including Turkey.

Number of suppliers (Total: 188 suppliers)

Pite

sti

Rest

of

Rom

ania

Rest

of C

entr

al/

East

ern

Euro

pe1)

Wes

tern

Eur

ope

Rest

of w

orld

0

20

40

60

80

100

120 Other countries 20 %

Pitesti50 %

Rest of Romania 30 %

Source: The authors, based on Roland Berger (2008: 52).

6 suppliers in Pitesti industrial park: _ Auto Chassis Int. _ Johnson Controls_ Cor-Tubi _ Valeo_ Euro APS _ Valeo Climate

84

hitbytheincreaseinthevalueoftheeurorela-

tivetothedollar,despitehavingaplantinthe

UnitedStates.

Theconcentrationofprocurementinthe

Romanianregionisalsoreflectedinsupplier

numbers:Ofthe188suppliersthatprovide

componentsforLoganproductioninMioveni,54

(about29percent)producethosepartsinRoma-

niaandanotherfiveinthesurroundingCentral

andEasternEuropeancountries.Ninesuppliers

fortheDaciaplantsoperatefromTurkeyand10

fromWesternEurope.Theremaining110compa-

nies–whoseshareinthetotalvalueofprocured

goodsismuchlowerthantheirnumberwould

indicate–arelocatedelsewhereintheworld.

ThesuppliercompaniesthatareactiveinRoma-

niaarenotonlyRomaniancompaniessuchas

theup-and-comingEuroAutoPlasticSystems

(EuroAPS);thesixautomotivesuppliersthat

manufactureLogancomponentsinthePitesti

industrialparkalsoincludecompanieslikethe

AmericansupplierJohnsonControlsandits

FrenchcompetitorValeo.

Othersupplierswillfollowtheirlead.Another

Americancompany,ArvinMeritor,isinthepro-

cessofmovingitsproductionofLogandoorpan-

elstoPitesti.Daciasuppliersarecurrentlyopen-

ingmorethan20newplantsinRomania.Half

ofthemareentirelynewproductionfacilities

(greenfieldinvestments),whilehalfareexpan-

sionsofexistingplants.Daciafullyexpectsto

benefitdirectlyfromafurtherdeclineinproduc-

tionandtransportcosts.Thiswillalsoproduce

morejobsinRomania.

IfRenaultandDaciaaretoachievethehigh

levelofprocurementlocalizationtheyareaim-

ingfor,theirRomaniansupplierswillneedto

beefficientintheirproduction,providehigh-

qualitygoodsandensurereliabledeliveries.

UndertheAllianceSuppliersImprovement

Program(ASIP),akindofacademyforsuppliers,

Renaultsendssomeofitsemployeestosupplier

companiestoassistinoptimizingprocurement

andqualityassuranceandtotransferthenec-

essarykeytechnologies.Inaddition,Renault

providesadviceongeneralbusinessissuessuch

asorganizationandcorporatemanagement.

Some1,800employeesfromsuppliercompanies

weretrainedbythisprogrambetween2000

and2004,foratotalofroughly20,000hoursof

training.Theseadvisoryservicesarenotfree;

everycompanythatreceivessupportunderASIP

andissubsequentlyacceptedintotheranksof

Renaultsupplierspaysapro-ratatrainingfeeto

Renaultforeachcomponentthatisdelivered.

Thesetrainingeffortsarepayingoff:Whilethe

DaciaplantsinMiovenirecorded5,750faulty

partspermillionin2000(0.58percent),that

numberhaddroppedto35(0.0035percent)by

2007.Inthiscategory,theDaciaplantsrank

thirdwithintheRenaultGroup.

Daciaisalsobenefitingfromthefactthatthe

purchasingorganizationRNPO(Renault-Nissan

PurchasingOrganization),whichwasestab-

lishedaspartofthestrategicalliancebetween

RenaultandNissan,carriesoutalargeshareof

procurementforallofthebrandsincludedin

theallianceandmakesimportantdecisionsin

relatedmatters.Itcomparessuppliersworldwide

andselectsthosethatofferthebestvaluefor

themoney.In2007ithandled83percentof

thetwocompanies’procurementvolume,which

correspondstoatotalvalueof51billioneuros.

Itsbargainingpowermadeitpossibletoachieve

substantialsynergies,whicharereflectedinthe

purchasepriceoftheLoganandtheSandero

aswell.Ifreasonsofeconomyorqualityargue

againstprocuringapartonsite,itispurchased

somewhereelse.Thusthegroup’s➔ global

sourcingcombineswithlocalprocurementto

achievethebestpossiblebalanceofprocure-

mentfortheLoganfamilyofvehicles.

85

Manufacturingalow-costcarinanemerging

marketrequiresahighleveloflocalizationin

theareaofprocurement.

_ Amajorityofpartsneedtobeobtainednear

theproductionsite,firstinordertobenefit

fromcostadvantages,andsecondtoavoid

transportcosts.

_ Ahighleveloflocalizationcanonlybe

achievediflocalsuppliersareabletomeet

certainqualityandreliabilityrequirements.

Thismeansthatthemanufacturerneedsto

providesupportforthedevelopmentofsup-

pliersintheemergingmarkets.

Summary

atrainingprogramliketheoneRenaultcon-

ductedinRomania.Thereisnootheroption.

Over the long term, will the local suppli-

ers from the emerging markets that are

springing up near low-cost car production

centers become international companies?

Yes,absolutely.Themajorautomotivecompa-

niesarebuildingabridgeforlocalsuppliers,

sotospeak.Theirpurchasingdepartments

havesetcertaininternaltargetsforprocure-

mentfromtheso-calledlow-costcountries,

rangingbetween20and30percentoftotal

volume.Atpresent,however,noneofthese

manufacturershavebeenabletomeetthese

targets.Butifalocalsupplier,forexamplein

RussiaorIndia,isqualifiedandhasproduced

goodresults,apurchasingdepartmentwill

considerusingitasasupplierforthecompany

asawhole.

Ofcourse,thisonlyappliestocertainparts.

Nooneisgoingtotransportapaintedbumper

fromIndiatoEurope,butshippingcertain

forgedpartsmightmakesense.Manufacturers’

purchasingdepartmentswillmakesurethat

localsuppliersbecomeseriouscompetitorsin

allofthecoremarketsrelativelyquickly.Fur-

thermore,thesesuppliers–forexampleIndian

small-andmedium-sizedbusinesses–are

alreadyshowingthenecessaryentrepreneurial

commitmenttoexpandinternationally.

TheinterviewwasconductedbyStefanSchmid

andPhilippGrosche.

Ralf Kalmbach, Partner and Head of

Automotive, Roland Berger Strategy

Consultants, discusses suppliers from

emerging economies as they move toward

becoming international enterprises

Mr. Kalmbach, which suppliers are auto-

mobile manufacturers likely to use when

producing a low-cost model? Can local sup-

pliers in the emerging markets compete

with established, globally active compa-

nies?

Ofcourse,theestablishedinternationalauto-

motivesupplierswillbeabletoclaimacertain

shareoftheprocurementvolumeforlow-cost

vehicles;look,forexample,atBosch’sinvolve-

mentintheTataNanoandValeo’sparticipa-

tionintheDaciaLogan.Butthissharewill

remainlimited.Foronething,everycountry

hascertainlocalcontentregulationsthatmust

befollowed,andforanother,nolow-costmanu-

facturercanignorethecostadvantagesoffered

bylocalresources.Somanufacturersneedto

procurealargepercentageoftheirmaterials

locally.

Thisiscertainlypossible,butitmaysome-

timesbedifficult.Usuallymanufacturerswill

firsthavetotrainlocalsuppliers.InRussia,

forexample,Volkswageniscurrentlyfacing

amajorproblem:Ithasnotbeenabletofind

enoughlocalsuppliersthatarecapableof

meetingitsqualitystandardsandthatoffer

thelogisticalcapabilitiesnecessarytosupport

seriesproduction.Theonlysolutionwillbe

Interview

86

Centralizingdevelopmentactivitiesisadvanta-

geousforanewproductliketheLogan,since

shortdistancesfacilitatebothorganizationand

coordination.Whendevelopmentislocatedat

headquarters,itiseasiertotakeadvantageof

theknowledgethatisavailablethroughoutthe

company.InthecaseoftheLogan,thishas

meantusingexistingconstructionplansand

partsaswellasassigningemployeestothe

X90projectwhohadalreadybeeninvolvedin

designingthecompany’sfirstdesign-to-costcar,

theRenaultTwingo,inordertobenefitfrom

theirexperienceindesigningtheLogan.

“I wanted to do more than sim-ply rely on market studies to become familiar with the expecta-tions of future Logan customers. As the project began, I went to potential markets for the Logan.”

Note,however,thattheLoganwasintendedfor

emergingmarketswithverydifferentliving

conditionsandconsumerpreferencesthanthose

foundinWesternEurope.Differencesbetween

onecountryandanotherareacommonreason

fordecentralizingdevelopmentactivities.The

employeeswhodesignedtheLoganwerecon-

sciousofthatfact,andsoughtfromthevery

beginningtotakeconditionsintheemerging

economiesintoaccount.Theyvisitedtargetmar-

ketstogatherrelevantinformation.AsPierre-

EdouardSorel,productmanagerfortheLogan,

reports,“Iwantedtodomorethansimplyrely

onmarketstudiestotellmeabouttheexpecta-

tionsoffutureLogancustomers.Astheproject

began,Iwenttopotentialmarketstolearnmore

aboutlocalhabitsandcustoms”(Dacia2004:

6).Throughamixtureofcentralizeddevelop-

mentandlocalidentificationofcustomerneeds,

Renaultcombinedtheadvantagesofcentraliza-

tion,suchasthe➔ networkeffectsdescribed

above,withtheadvantagesofferedbydecentral-

ization,suchasaccesstolocalinformation.

WiththegrowingsuccessoftheLoganina

widevarietyofmarkets,Renaultalsocame

torecognizethatgreaterattentiontolocal

customerpreferencesandvehicleusagecould

leadtoevenhighersales.Thisisaconflictthat

frequentlyarisesininternationalmanagement:

Whileinternationalstandardizationcangener-

atecostadvantages,ontheotherhandregional

orlocaldifferentiationcanhelptoincrease

sales–which,inturn,leadstolowerunitcosts.

Highsalesnumbersandlowunitcostsarecru-

cialinkeepingtheLogan’spurchasepricelow

andensuringitseconomicsuccess.Whileso

farthisvehiclehasbeensoldinthesameform

worldwide,Renaultrecentlyannouncedthat

itisdevelopingmodeladaptationstailoredto

selectedsalesregions,whichwilldifferintheir

interiordesignandfeatures.However,thesedif-

ferenceswillberelativelyminorcomparedwith

modeladaptationscarriedoutbyothercompa-

nies,somostoftheadvantagesofstandardiza-

tionwillstillapply.8

Thefactthatmoreattentionisbeingpaidto

regionaldifferencesincustomerpreferences

andvehicleuseisevidenceofacompany-wide

reassessmentatRenault.Overthepastfew

years,thecompanyhasbeguntorethinkits

configurationofresearchanddevelopmentand

toestablishdecentralizeddevelopmentcenters

throughouttheworld.InadditiontoitsR&D

headquartersattheTechnocentreinGuyancourt,

itnowhasninedecentralizeddevelopment

sitesworldwide(inPortugal,Romania,Spain,

Argentina,Brazil,Chile,Mexico,Colombia,India

andSouthKorea)thatcarryoutdesignand

constructionwork.Oneofthemistheconstruc-

tionanddesigncenterRenaultTechnologies

Romania(RTR),withlocationsinBucharestund

Pitesti,whichopenedin2007.Thesedecentral-

izedfacilities,staffedbylocalemployees,arethe

keytotranslatinglocalcustomerpreferences

intoattractivevehiclemodels.Accordingtoan

officialpressreleasefromtheRenaultGroup,

2.3 Development: Increasing decentralization in target markets

8 Toyota, for example, makes considerably more changes in its region-specific Corolla or Camry models, including external design features. See also the case study of the Volkswagen Group in this publication.

87

“[C]ompetitiveperformancecallsforclosercon-

tactwithlocalcustomers.Regionalengineering

teamswillhaveabetterunderstandingofcus-

tomer’sneedsandvehicleusageconditionson

localmarkets”(Renault2007c).

Development activities are located in target markets in order to better understand local cus-tomer preferences.

RenaultTechnologiesRomania(RTR)will

eventuallyemploy3,000workers(itscurrent

workforcenumbersroughly1,700),makingit

theRenaultGroup’slargestdevelopmentcenter

outsideofFrance.Itisunderthesupervision

oftheTechnocentreinGuyancourtandisto

designandtestnewvehicles–andinparticular

todevelopaLoganmodelspecificallyintended

forCentralandEasternEurope,Russia,Turkey

andNorthAfrica.ThiswaswhyRenaultchose

asitelocatednearDaciaheadquartersandthe

EasternEuropeansalesmarkets.Inaddition,

RTRwasgivenfoursatellitesitesinRussia,Slo-

venia,TurkeyandMorocco.Overthelongterm

itwillassumeadditionaltasks,aswellastaking

overfromtheTechnocentreinGuyancourtsole

responsibilityforalloftheprojectsbasedonthe

Logan.Thus,theRenaultGrouphasreassessed

notonlytheconfigurationofdevelopmentactivi-

ties,butalsotheircoordinationandmanage-

ment.Approximatelyhalfofthedevelopment

workfortheLoganpickupaswellasthecon-

structionofSanderoprototypeshasalreadybeen

carriedoutbyRTR.

DevelopmentheadquartersinFrancewillcon-

tinuetobeinchargeofdevelopingthevarious

LoganmodelsdestinedfortheWesternEuropean

market.Renault’sexistingregionaldevelopment

centersinBrazilandIndiawouldbealogical

choicefordevelopingotherregionalmodels

meantforSouthAmericaandAsia.These

regionalcentersareresponsiblenotonlyfor

developing(region-specific)vehiclesanddrive

traincomponents,butalsoforprovidingtechni-

calsupporttolocalproductionsites,aidingin

theprocurementofpartsfromlocalsuppliers

andmonitoringthemarket.Inaddition,these

centersassistlocalsuppliers,startingwiththe

designofcomponentsforRenault.Shorterdis-

tancestoproductionsitesandsuppliersallow

forbettercoordination,whichcan,inturn,lead

tohigherquality.

ForacompanylikeRenault,whichcomesfroma

countrywithatraditionofcentralizationandis

still15.1percentstate-owned,successindecen-

tralizingcertainaspectsofdevelopment–and

thusalsothecompany’sownexpertise–isan

impressiveachievement.Itremainstobeseento

whatextentdecision-makingresponsibilitiesas

wellwillbedecentralized–forexample,permit-

tingRTRtotakechargeofallLoganprojects.

ThiswouldbodewellfortheLogan’slong-term

success,sinceitwouldmakeiteasiertoadapt

thevehicletolocalcustomerpreferences.More-

over,abandoningthemodelofasingledecision-

makingcenterwouldresultinamoreopen➔

corporatecultureandgreaterattentiontothe

culturalinfluencesfoundthroughoutthewhole

company.ThiswouldtrulyputRenaultonthe

pathofbecominga“globalplayer,”asitalready

describesitselfonitswebsite.

Developingalow-costcarrequiresattention

tovehicleusageandcustomerpreferences

intheemergingmarkets,whichmaydiffer

dramaticallyfromthedevelopedcountries.

_ Theadvantagesofcentralizationarepara-

mountintheinitialdesignofalow-cost

car,sinceitiscrucialtotakeadvantageof

existingconceptsandcomponents.

_ Astimegoesby,itmakessensetoestab-

lishdecentralizeddevelopmentsites,

sincethisallowsthecompanytolearn

moreaboutlocalmarketsandtotailorits

vehiclesmorecloselytolocalcustomer

preferences.

_ Inordertoadaptavehiclesuccessfully

totheneedsoflocalcustomers,theman-

agementofdevelopmentactivitiesmust

beadaptedaswell.Assuchactivities

aredecentralized,therelevantdecision-

makingresponsibilitiesalsoneedtobe

decentralized.

Summary

88

Benefiting from the advantages of hub-and-spoke production requires effective and efficient logistics.

Bytransportingitsvehiclesbyshipratherthan

land,Renaultisabletosave20percentofthe

relevantcosts.About80percentofitsvehicles

intendedfortheWesternEuropeanmarkets

arebroughttotheirintendedmarketsbywater,

eveniflandtransportwouldbefaster.Finished

vehiclesdestinedforsouthernEuropeandCKD

kitstobeassembledinMorocco,Braziland

Colombiaarealsotransportedbyship.Thelogis-

ticssubsidiary,Gefco,ofRenault’sFrenchcom-

petitorPeugeottransportsthembytrainfrom

MiovenitotheRomanianportofConstantaon

theBlackSea,wheretheyareloadedontoships;

Renaultisclearlywillingtocooperatewithits

competitorsinordertocutcosts.However,since

transportingvehiclesbyshiptakeslonger,itis

essentialtoplanaheadsothatfluctuationsin

productionanddemanddonotleadtolongwait-

ingperiodsfordealersandcustomers.

Ahub-and-spokeconfigurationoftheproduction

networkrequiresanefficientlogisticalsystem,

aimedatsupplyingtheassemblyplantsinthe

regionalmarketswithCKDkitsproducedatthe

mainplantinMioveni.Realizingthecostbene-

fitsofcentralizedproductionatthehubrequires

effectiveandefficientdistribution,whichiswhy

Renaultopenedastate-of-the-artlogisticscenter

inMioveniin2005.Itisoneofsevensitesofthe

company’sInternationalLogisticsNetwork(ILN),

whichorganizesandcontrolstheflowofgoods

withintheRenaultGroup,frominboundtoout-

boundlogistics.

TheILNcenterinMioveniservesasthecentral

hubandbackboneofLoganproductionworld-

wide.AsshowninFigure11,thiscenteris

responsibleforreceivingallofthecomponents

manufacturedbythe188suppliers,organiz-

ingtheshipmentofCKDkitstothevarious

assemblyplantsandtakingchargeofshipping

thevehiclesproducedinMiovenitodistributors

intheEuropeanmarkets.With297employees

andavolumeof872,243cubicmetersofcompo-

nentsshippedin2007,whichamountstomore

than23,000standardcontainers,theMioveni

logisticscenterisnotonlythelargestsuch

centerintheRenaultGroup,butthelargestof

itskindintheentireinternationalautomotive

industry.

Thedistributionofnewvehiclesisalsostrictly

governedbycostconsiderations,inorderto

maintainthecostadvantageoftheLoganand

Sandero.Incontrasttomanyofitscompetitors,

Renaultusuallytransportsitsvehiclesbyship,

whichisthemosteconomicalalternative.Most

distributionfortheGermanmarketishandled

bytheGermanshippingcompanyWilliBetz.

Thevehiclesaretransportedbytruckfrom

MiovenitotheDanubeportofVidin,adistance

of200kilometers,wheretheyareloadedonto

oneoftheBetzcompany’sships.The1,440

kilometertripbyrivertoPassautakesaboutfive

days.FromthereBetzcarcarriersdeliverthe

vehiclestoGermanRenaultdealerswithaDacia

showroom.

2.4 Logistics: Backbone of the hub-and-spoke production network

89

Figure 10: The logistics network for the Logan’s hub-and-spoke production

Source: The authors, based on Dacia (2008e), Mannschatz (2008).

International assembly plants

Suppliers

Intermediate products

Intermediate products

CKD kits

Vehicles

CKD kits

Vehicles

Dacia Mioveni

Independent importers or distributors in various countries

Renault sales subsidiariesthroughout the world

Logistics center Mioveni

Awell-designedlogisticsnetworkisessen-

tialtoreapthebenefitsofahub-and-spoke

productionnetwork.

_ Itiscrucialtohaveanefficientlogistics

platformatthecentralproductionsite,

whichservesasthehubofinternational

production.

_ Togainthedesiredpriceadvantage,

companiesneedtoemphasizeefficiency

whenchoosingameansoftransporting

kitstodecentralizedassemblysites(if

applicable)orfinishedvehiclestotheir

destinationmarkets.

_ Itshouldbekeptinmindduringtheplan-

ningphasethatlessexpensivetransport

alternativesrequiremoretime,sothat

waitingperiodsforcustomersanddealers

canbekepttoaminimum.

Summary

90

3. The competitive advantages offered by emerging markets

TheexampleoftheLoganshowsthatittakes

morethanaproductionsitewithlowlaborcosts

toproducealow-costcar.Upstreamanddown-

stream➔ valuefunctionsneedtobepartofthe

calculationaswell,justastheyareimportant

foracostleadershipstrategy,asPorterpoints

out.TheRenaultGroupfocusesonthe“low-cost

idea”throughoutitsvaluechain,whichhas

allowedittokeepthepriceoftheLoganand

Sanderolow.Itisalsoclearthatacostorienta-

tionisanecessary,butnotsufficient,condition

forthesuccessofalow-costcar.Whilecostcon-

siderationshaveplayedasignificantroleinthe

geographicaldistributionoftherelevantvalue

activities,theyhavenotbeentheonlyfactorsin

theLogan’ssuccess.Theconfiguration-to-cost

modelalonedoesnotguaranteesuccess.Other

importantfactorsincludetrainingsuppliers

inemergingmarkets,whichpromotesahigh

leveloflocalizationinprocurement,andtaking

intoaccountlocalconditionsbydecentralizing

developmentactivities.Furthermore,itiscru-

cialnotonlytomakechangesinthe➔ value

configuration,butalsotoundertakenecessary

adjustmentsinthecoordinationandmanage-

mentofvalueactivities,asisclearfromthe

needtodecentralizedecisionmakinginthearea

ofdevelopment.

Low-costcarsrepresentanewkindofproduct

inthevehiclemarket,andtheyrequireanew

configurationofthevaluechain.Asthetarget

marketsfortheseproducts,emergingnations

playacentralrole.Figure12summarizesonce

morethestepsthatRenaulthasalreadytaken.

Thesemeasuresapplynotonlytotheautomo-

tiveindustry,butalsotomanyotherindustries

aswell.ThechangesRenaulthasmadeinthe

valuechainprovideamodelforothercompanies

astheyconfigureandcoordinatetheirvalue

activitiesrelatingtootherlow-costproducts.

Itisessentialthattheentirevaluechainbe

appropriatelyconfigured,andnotonlybychoos-

ingafavorableproductionsite,sincethecost

advantageofalow-wagelocationcandisappear

fairlyquickly.Ifacompany’sbusinessmodel

isbasedsolelyonlowlaborcostsduringthe

productionstage,itscompetitiveadvantagecan

easilyerodeastimegoesby.Notethatlabor

costsintheemergingmarketshaverisendra-

maticallyoverthepastfewyears.In2007,labor

costsinRomaniaincreasedby30.2percent,

comparedwith3.3percentinFranceand1per-

centinGermany.Earlyin2008,Renaultendured

athree-weekstrikebyDaciaworkers,withthe

unionsdemandinga33percentincreasein

wages.Thetwosidesultimatelyagreedtoan

averagewagehikeofabout27percent.

Emerging economies can become important sources of knowledge and expertise.

Moreover,ouranalysisofRenault’svaluecon-

figurationshowsthatcompaniesfromtheindus-

trializedcountriescangeneratecompetitive

advantagesbyintegratingemergingeconomies

intotheirvaluechains.Thiscanbedone,for

example,bycarryingoutdevelopmentactivities

inthosecountries.Knowledgeandinnovations

developedinemergingeconomiescanbeused

tocompetitiveadvantageworldwide–inacom-

pany’sdomesticmarketaswell.Accordingly,

theroleplayedbytheemergingmarketsisno

longersimplythatofacheapproductionsite.

Instead,theyshouldbeviewedasasourceof

knowledgeandexpertisethatcanhelpestablish

astrongcompetitivepositionthroughoutthe

world,asourconversationwithCoimbatoreK.

Prahalad(p.98)indicates.Sincelow-costcars

areprimarilyintendedfortheemergingmar-

kets,itonlymakessensetocarryoutrelevant

valueactivitiesinthoselocationsaswell.Fur-

thermore,bylocatinghigh-levelvalueactivities

in➔ developingcountries,companiesfrom

theindustrializedcountrieshelptopromote

economicdevelopmentinotherpartsofthe

world.

91

Figure 11: Overview of the configuration of the value chain for low-cost products

Development

_ Centralizingthedevelopmentoflow-cost

productstoallowfortheuseofpartsand

conceptsthatarealreadyavailablewithin

thecompany.

_ Astimegoesby,decentralizingthedevelop-

mentofcountry-orregion-specificmodels

thatreflectcustomerpreferences.

_ Decentralizingdecision-makingresponsibili-

tiesrelatedtomodeladaptations,toensure

thatcustomerpreferencesaretakeninto

account.

Logistics

_ Establishingasuitableinternallogisticsnet-

worktoensurethatcentrallymanufactured

goodsaredistributedeffectivelyandeffi-

cientlywithintheproductionnetwork.

_ Makingconsistenteffortstochoosetheleast

expensivemeansoftransportinggoodsto

dealersandcustomerstomaintaintheprice

advantageofalow-costproduct.

_ Takinglongertransporttimesintoaccount

duringproductionplanningsothatwaiting

periodsfordealersandcustomerscanbe

kepttoaminimum.

Production

_ Centralizingmostproductionactivitiesto

achievemaximumeconomiesofscale.

_ Creatingsupplementary“productionsatel-

lites”toestablishcontacttotargetmarkets.

_ Cooperatingwithpartnerstoachievesyner-

giesandsharerisks.

Procurement

_ Achievingahighleveloflocalizationatthe

centralproductionsitetotakeadvantageof

differencesinthecostofproductionfactors

andavoidtransportcosts.

_ Advisingandtraininglocalsuppliersto

achievethehighestpossibleleveloflocaliza-

tion.

Renault’s configuration and

coordination for the Logan: A model

for low-cost products in general

_ Manufacturingalow-costproductrequires

notonlycertainproductandprocessinnova-

tions,butalsoareconfigurationofthevalue

chainandchangesinthemanagementof

valueactivities.Costoptimizationisonly

onefactoramongmany.

_ Low-costproductshavemacroeconomic

implications:Emergingnationsarenolon-

gersimplyan“extendedworkbench”for

internationalvaluecreation.Rather,they

canbeasourceofinnovation.

Summary

92













93

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http://www.spiegel.de/wirtschaft/0,1518,174406,00.html

Speaking with Coimbatore K. Prahalad

Professor of Corporate Strategy at The University

of Michigan's Ross School of Business

98

Interview

ally and locally. That implies that managers

cannot make a one-time choice on which of the

two dimensions to leverage. They must simulta-

neously focus their attention on aspects of the

business that require both global integration

and aspects that demand local responsiveness,

and on varying degrees of strategic coordination.

This need for multiple focal points for managing

suggests that managers must reflect the need

for multiple points of view — the need to inte-

grate and be responsive at the same time — in

the way the business is organized. That requires

the organization to be multifocal or matrix” (pg.

25-26).

The spirit of the book was clear. While the

extremes in the I-R framework are appealing,

a wide variety of factors, including the action

of governments, does not allow for either pure

form. We must learn to manage both. The ten-

sion between GI and LR is real and it is not a

trade-off. The I-R Grid provided a basis not just

for understanding where a business stood at a

Mr. Prahalad, 20 years ago you published —

together with Yves Doz — the Integration-

Responsiveness Grid. In it you argued that

companies have the choice between global

integration and local responsiveness. Would

you say that the I-R Grid still holds true

today?

Managing Global Integration (GI) and Local

Responsiveness (LR) is more critical today than

it was 25 years ago. If you recall, the basic

thesis of the book was that a business simulta-

neously faces the need for GI and LR. As we out-

lined in the first chapter, few if any businesses

are at either extreme in the I-R Grid. Most of

them are in between.

To quote: “In the case of the TV business, the

strategic choice is not all that clear-cut. Some

elements of strategy, like plant size and technol-

ogy, may have to be managed centrally. On the

other hand, deliveries, competitors, and some

key customers may have to be managed region-

“We are moving away from a firm- and product-centric

view of value to a network-centric and co-created view

of value.”

99

given point in time, but also how it is likely to

change. Further, it showed vividly why the busi-

nesses within a corporate portfolio may be dif-

ferent. The message was: “Don’t use one system

to manage all businesses.” Further, it provided

managers a road map on how to create a “multi-

focal organization” to manage the tensions in

the second half of the book.

Much discussion of managing the global firm

has taken place since then. New acronyms

have come and gone. Ideas such as the Trans-

national Firm and “glocal” gained currency. In

the I-R framework, we said we have to think

and act both globally and locally — depending

on the functions and tasks within the business.

It was not “Think Global and Act Local.” The

basic concepts of Global Integration and Local

Responsiveness, I believe, have stood the test of

time. Further, the idea of continually managing

the tension between the two and not making a

trade-off has been vindicated. Most importantly,

the need for creating a “multifocal” organization

has gained currency.

With the focus on emerging markets, the I-R

framework and the associated organizational

ideas become more relevant. Needless to say the

Internet and [other] collaborative tools make the

creation of practice communities and multifocal

people and organizations easier.

Figure 1: Integration-Responsiveness Grid

Source: Prahalad/Doz (1987: 27).

GlobalBusinesses

Locally ResponsiveBusinesses

MultifocalBusinesses

High

Low

Low High

Pressures for Global Integration

Pressures for Local Responsiveness

100

ket prices, paying for small transactions through

text messaging, or calling for medical help in

an emergency — has created a new opportunity

for developing unique applications. The poor

represent not only an emerging market, but —

increasingly — a source of innovations.

Not just Nokia and Samsung, Motorola, and

LM Ericcson get this message. MNCs such as

Unilever, Danone, DSM, P&G, Microsoft, Intel,

and AMD are learning very rapidly that not par-

ticipating in these markets is not an option. It is

very critical for them to learn how to build low

cost, world quality products and services.

In your book ”The New Age of Innovation”

you focus on value creation in networks.

To what extent do you see networks as an

appropriate organizational structure for cre-

ating value?

The basic ideas of network-based innovation

can be traced back to the book “The Future of

Competition” and to an extent to “The Fortune

at the Bottom of the Pyramid.” In “The New Age

of Innovation,” we tried to make this not just a

concept, but also to provide a road map on how

to build the capabilities to make it work.

The core drivers of this change are globaliza-

tion, ubiquitous connectivity (3 billion people

A major topic in your publications is your

interest in developing countries. Has the

role of developing countries for multina-

tional corporations (MNCs) changed during

the last years?

Yes. Most MNCs focused on the top of the global

economic pyramid — 1.5 billion out of the 6.5 bil-

lion people in the world. I called attention to the

5 billion underserved — the bottom of the pyra-

mid, if you will. As the Berlin Wall fell and bil-

lions wanted to join the global economy, it was

obvious that by creating the preconditions for

the active participation of the “poor” as micro-

consumers and micro-producers, micro-investors

and micro-innovators, a new wave of growth will

result.

Consider what has happened in just a short

period of seven years. For the first time in

human history, 3 billion people are connected

through the cell phone. The poor have become

the source of growth and wealth creation. Just

the wireless carriers in China, India, South

Africa, and Brazil have a market capitalization

in excess of 500 billion US dollars. This wealth

was created by catering to the poor. India alone

sells more than 8 million new subscriptions

per month. More importantly, it is changing the

lives of the poor. Their ability to transact busi-

nesses — be it selling fish or vegetables at mar-

101

connected), digitization, and the consistent drop

in prices (e.g. a 30 US dollar cell phone and a

0.01 US dollar long-distance call), convergence

of technology and industry boundaries (e.g. a

cell phone today is a phone, a computer, a cam-

era, a map, a calendar, a watch, a radio and a

TV), and the emergence of social networks (e.g.

Facebook). These, coupled with globalization, are

changing the very dynamic of innovation -- the

basic relationships between consumers and con-

sumer communities and the firm. We are mov-

ing away from a firm- and product-centric

view of value to a network-centric and co-created

view of value. Let us take a popular example:

Apple. It does not create its content. It does not

manufacture its product. It designs it. Resources

are sourced from a wide variety of vendors — big

and small — around the world. Resources are

based on global access. Let us call this R=G.

However, Apple allows each one of us to create

his or her own playlists. This provides a per-

sonalized, co-created experience — one person,

one experience, created by the consumer with

the help of Apple. Let us call this N=1; one co-

created experience at a time. Apple is not alone.

The same pattern applies to Google, Netflix,

OnStar (automotive telematics), Medtronics

(pacemakers), or Build-a-Bear Workshop (toys).

This is a 180-degree departure from the tradi-

tional industrial system-logic initiated by Henry

Ford with Model T — undifferentiated consumers

Coimbatore K. Prahalad – Professor of Corporate Strategy at The University of Michigan's

Ross School of Business

102

done — or acquire technology, management,

design and brands to expand — as Tata has done

with the Jaguar/Rover deal. Simultaneously,

Tata announced the Tata Nano, a car for 2,500

US dollars (originally 2,000 US dollars at the

exchange rates prevailing at that time). Tata

Nano is an inflection point in the industry. It

can open a market of millions of new custom-

ers all over the world. So what has Tata done?

At one end opened up a new market segment

with Tata Nano, and on the other end secured

a position, tentative as it may be, in the world

luxury segment. They have the low-end cars in

India called Indica. They are also in commercial

vehicles, from ACE to Tata trucks. They have

a global manufacturing presence, from South

Korea (Daewoo trucks) to India and Europe. They

have access to world-class design and engineer-

ing capabilities. They have access to managerial

talent that is not confined to India.

How firms like Tata will knit together these

diverse acquisitions with so many micro-cul-

tures is of great interest to those who follow the

firm. But the fact is that in a very short period

of five years they have emerged as an innovator

(Tata Nano) and a credible global player. They

straddle the pyramid — luxury-end to the low-

end. They are also a commercial, recreational,

and traditional auto-maker. It is time to keep

them on your radar screen.

(“You can have any color you want as long as it

is black.”) and total Vertical Integration (River

Rouge Plant).

Co-creation and a network-based view of access

to resources is the wave of the future.

The automotive industry is seeing the rise

of new players, such as Tata from India

or Brilliance from China. What could be

their role in the automotive industry of the

future? Which internalization strategies

might be appropriate for them?

Every major nation seeks to have a piece of the

automotive pie. U.S. and European industry sat

quietly by when the Japanese firms built their

automotive capabilities — both in motorcycles

and cars. Now they are credible players, with

Toyota being number 2 in vehicles and number

1 in profitability. Incumbents also waited for

Hyundai to emerge as a major player. Now, we

should ask whether India and China will leave

this market untouched.

The process of building a global auto pres-

ence seems to follow a clear path. First, cater

to the emerging domestic market. Hone your

skills, build scale, and build credibility. Then,

either export from a strong domestic base — as

traditionally Japanese and Korean firms have

103

Coimbatore K. Prahalad

C.K. Prahalad, the Paul and Ruth McCracken

Distinguished University Professor at The

University of Michigan's Ross School of

Business, specializes in corporate strategy.

His books include Multinational Mission:

Balancing Local Demands and Global Vision

(1987), co-authored with Yves Doz, The

Fortune at the Bottom of the Pyramid: Eradi-

cating Poverty through Profit (2004), and The

New Age of Innovation: Driving Co-created

Value Through Global Networks (2008), co-

authored with M.S. Krishnan.

A prominent world-class figure, Profes-

sor Prahalad has consulted with the top

management of many of the world’s fore-

most companies. He serves on the Board

of Directors of NCR Corporation, Hindustan

Lever Limited and the World Resources Insti-

tute. He is the chairman and founder of The

Next Practice. C.K. Prahalad was voted the

most influential business thinker in 2007.

References

C.K. Prahalad and Yves Doz (1987): The

Multinational Mission: Balancing Local Demands

and Global Vision; The Free Press, a division of

MacMillan.

Gary Hamel and C.K. Prahalad (1994):

Competing for the Future; Harvard Business

School Press.

C.K. Prahalad and Venkat Ramaswamy

(2004): The Future of Competition: Co-creating

Unique Value with Customers; Harvard Business

School Press.

C.K. Prahalad (2004): The Fortune at the

Bottom of the Pyramid: Eradicating Poverty

through Profits; Wharton School Publishing.

C.K. Prahalad and M.S. Krishnan (2008):

The New Age of Innovation: Driving Co-created

Value through Global Networks; McGraw-Hill.

From assembly plant to center of excellence

The rise of Audi’s subsidiary in Györ, Hungary

104

1. EstablishingAudiHungariaasasubsidiaryofAudiAG 105

1.1 VariousreasonsfordirectinvestmentinGyör 105

1.2 InnovativestructuresandprocessesforAudiHungaria 108

2. DevelopingAudiHungariaasacenterofexcellencewithintheVolkswagenGroup 110

2.1 Ongoingdevelopmentasacenterofexcellenceforengineproduction 110

2.2 Simultaneousexpansionasacenterofexcellenceinconvertibleassembly 113

2.3 Upgradingthecenterofexcellenceforengineproductionbyaddingdevelopment 115

responsibilities

2.4 Ongoingacquisitionofadditionalcapabilities–expansionasacenterofexcellence 116

forvehicleproduction?

2.5 AudiHungariaasagrowthdriverwithintheVolkswagenGroup 118

3. Challengesinmanagingcentersofexcellence 120

References 123

InFebruary1993theBavaria-basedcompany

AudiAG,whichispartoftheVolkswagenGroup,

establishedawhollyowned➔ subsidiarycalled

AudiHungariaMotorKft.intheHungariancity

ofGyör.Afterabout18monthsofplanningand

constructionwork,anengineassemblyplant

beganoperationsinGyörinOctober1994.This

representedachangeinAudi’sproductionstrat-

egy;forthefirsttimeinthecompany’shistory,it

wasmovingsomeofitsproductionabroad.Until

thenallofAudi’sproductionhadbeencarried

outattwolocationsinGermany:inthecityof

IngolstadtinUpperBavaria,hometocompany

headquarters,andinNeckarsulmintheWürt-

tembergregion,justover200kilometersaway.

EstablishingasubsidiaryinGyörwaspartof

astrategicreorientationoftheentirecompany.

Audibegananextensiveexpansionandrework-

ingofitsvehiclerangein1994,introducingthe

reengineeredA4andA6modelsandlaunching

theA8luxurysedan.Thiswasanefforttocoun-

teractweaksalesofexistingvehiclescausedby

the1992economicslump,whilealsostructur-

allygeneratingnewsalesgrowth–especiallyin

thecaseoftheA8.

Thisreorientationrequiredanewproduction

strategy.TheAudiA4,whichreplacedthesuc-

cessfulbutagingAudi80,wasamodelwithan

innovativefour-cylinderengineandfive-valve

technologythattheexistingfacilitiesinIngol-

stadtundNeckarsulmwerenotequippedtopro-

duce.Inaddition,expectedsalesgrowthwould

requirenewengineassemblylinestoexpand

capacity.Intheinterestoflong-termcompetitive-

ness,Audiwaslookingforasitethatwouldpro-

videdistinctcostandproductivityadvantages.

Inaneight-monthselectionprocess,Audi

reviewedmorethan180possiblesitesallover

Europeaspotentiallocationsforanewengine

assemblyplant,themajorityoftheminCentral

andEasternEurope.Amongthefinalistswere

theGermancitiesofMagdeburg,Chemnitz

andIngolstadtandtheCzechcitiesofBroumov

andMladàBoleslav.TheindustrialcityofGyör

(knownasRaabinGerman)wasfinallyselected

in1992.Györ,withapopulationof130,000,is

thesixthlargestcityinHungaryandlocated

betweenViennaandBudapest,about120kilo-

metersfromeach.

GyörisalsorelativelyclosetoAudiAGhead-

quartersinIngolstadt–only610kilometers

away.Companyheadquarters,theGerman

productionsitesandtheexistingsuppliers

arethereforeallwithinareasonabledistance.

Moreover,Györhastheadvantageofbeingwell

connectedtothetransportationinfrastructure.

ThisisevidentfromFigure1,whichshowsAudi

headquartersinIngolstadtandtheotherEuro-

peanproductionsites,aswellasAudiplantsin

IndiaandChina.Györislocatedontherailway

linebetweenViennaandBudapestandhasa

directhighwayconnectiontoGermany,making

iteasytoreachbyrailorroad.Thesereasons

alone,however,wouldnothavetippedthebal-

anceinGyör’sfavor.

AnothermajorfactorinselectingGyörwaslabor

costs,whichwereconsiderablylowerthanat

home.Whenthedecisionwasmade,laborcosts

(wagesandsalaries,alongwithfringebenefits)

wereonlyone-eighthashighinHungaryasin

Germany.1Hungarianlaborlawwasalsoconsid-

eredmoreemployer-friendly,becausetheunions

105

1. Establishing Audi Hungaria as a subsidiary of Audi AG

1.1 Various reasons for direct investment in Györ

1 Labor costs in Hungary have risen since that time, but they are still considerably lower than in Germany. In 2007 labor costs per hour amounted to 7.70 euros in Hungary, compared with 29.20 euros in Germany. While such comparisons are problematic, we can conclude that the ratio is roughly one to four (Destatis 2008).

106

hadlessinfluence.Bothoftheseadvantages

stillholdtrue.Furthermore,the40-hourweek

was,andremains,thenormforworkersinGyör,

andcompaniesareallowedtooperateuptofour

shifts,sevendaysaweek.Shiftscanbecalled

orcanceledatshortnoticewithouttheneedfor

lengthynegotiationswiththeworkscouncil.

ThisallowedAudinotonlytocutcosts,butalso

tomakeproductionmuchmoreflexible,lead-

ingtofurthersavings.Otherproductionfactors

offeredsavingsaswell;energy,cleaning,trans-

portandsecurityinparticulararelessexpen-

sivethaninWesternEurope.

Moreover,anunfinishedproductionhallmeasur-

ing100,000squaremeterswasavailableinGyör

atalowpricefromtheindustrialconglomerate

Rába,arelicfromthepre-1989era.Rába’scom-

mercialvehicledivisionhadbeenplanningto

producedieselenginesfortheEasternEuropean

marketsincooperationwithitsGermancompeti-

torMAN.AftertheopeningoftheformerEast-

ernbloc,however,thisprojectwasabandoned.

ForAudi,thismeantinvestingonlyone-thirdas

muchassuchaplantwouldhavecostinGer-

many.Inaddition,theplotoflandonwhichthe

buildingwaslocatedwasrelativelylarge,offer-

ingroomforexpansion.Auditookadvantageof

thisopportunitytobuildontotheexistingparts

ofthestructure.Sixteenmonthsafteranagree-

mentwassignedwiththecityofGyör,engine

assemblycouldfinallybegin.

HungarygrantedAudifullexemptionfrom

businessandearningstaxesforaperiodoffive

years,asiscustomaryforforeigninvestmentsin

thecountry.Theexemptioncouldbeextended

foranadditionalfiveyearsifAudiweretorein-

vestallofitsprofitsfromtheGyörsiteduring

theinitialfive-yearperiod.Fromtheoutset,the

Györplantwastreatedasaduty-freezone;in

otherwords,Audiisnotrequiredtopayduty

whenimportingsupplierparts,norwhen➔

exportingfinishedengines.

Alongwiththesefinancialadvantages,thehigh

levelofeducationandtrainingoftheHungarian

workforcearguedinfavorofinvestinginthat

country.Györinparticularofferedsufficient

numbersofwell-trainedpotentialemployees,

includingbothskilledworkersanduniversity

graduates.ShortlybeforeAudi’sdecision,the

Figure 1: Audi AG production sites

Source: The authors, based on Audi (2008e).

Europe

India

ChinaAurangabad (IND)

Changchun (CN)Neckarsulm (D)

Ingolstadt (D)

Györ (HU)

Brussels (B)

Legend:

Production sites

Company headquarters (also production site)

107

Rábaconglomeratehadbeenforcedtoelimi-

nateover20,000jobsinGyör,manyofthem

initscommercialvehicledivision.Thismeant

thatalargenumberofpeoplewitharelevant

vocationalbackgroundwerelookingforwork

intheregion.Inaddition,thelocalInstituteof

TransportationandTelecommunications,which

hasenjoyeduniversitystatussince2002,iscon-

tinuallytrainingengineersandotherspecialists,

includingeconomists.InGyör,Audicouldcount

onanongoingsupplyofwell-trainedworkers

andexperiencedjobcandidateswhowouldbe

abletostartimmediatelywhenthenewsite

commencedoperations.

Audi’sdecisiontoopenaplantinGyörwas

thereforebasedlargelyonissuesofefficiency.

TotalcostsofinvestmentinGyörwerebetween

30and40percentlowerthanthecostofestab-

lishinganewplantinGermany,andatthattime

ongoingproductionwasroughly60percent

lessexpensivethanathome.Itwasclearfrom

itsconsiderationoftheselocationfactorsthat

Audi’smanagementwasseekingtomakethe

companymorecompetitiveinitscoststructure.

Procurementissueswerealsoimportant;suit-

ablepersonnelhadtobeavailableandthenew

siteneededtoprovideeasyaccesstotheexist-

ingsupplyandproductionnetworks.Strategic

considerationsplayedasignificantroleaswell;

thenewassemblyplantinGyörwasclearlyan

importantpartofAudi’sstrategicreorientation

andessentialforreachingitsgrowthtargets.

Companies that base their loca-tion decisions primarily on low costs, ignoring other factors, may encounter problems.

AnanalysisofAudi’sdecisionregardingaplant

siteshowsthat➔ directinvestmentisnotmoti-

vatedbyasinglefactor,butbyavarietyofcon-

siderations.Layingthegroundworkforthesuc-

cessfuldevelopmentofAudiHungariarequired

givingseriousthoughttoanumberoflocation

factors.Othercompaniestodayfindthemselves

strugglingwithlowproductivitybecausethey

choseforeignlocationsmainlyonthebasisof

costadvantages,ignoringsuchpotentialprob-

lemsasalackofwell-trainedworkers.“When

locationdecisionsarestronglycost-driven,it

appearsthatotherrelevantfactorsaregiventoo

littleattention,”explainsSteffenKinkel,expert

onsiteplanningattheFraunhoferInstitutein

Karlsruhe(Kinkel2006:12).VW,Audi’ssister

brandwithintheVolkswagenGroup,iscurrently

experiencingdifficultiesbecauseitcannotfind

enoughsuitableworkerstostaffitsnewplant

inKaluga,Russia.ThusVWismakingonly

slowprogresstowardachievingitsoriginalgoal,

whichwastousethisplanttohelpopenupthe

promisingRussianmarket.

_ Inmakingdecisionsaboutforeignloca-

tions,companiesneedtobeclearon

theirgoalsinmakingadirectinvestment

inaforeigncountry.Successrequiresa

comprehensiveandholisticevaluationof

alllocationfactors.

_ Itisparticularlyimportanttoundertake

adynamicassessmentofthepotential

investment.Ifthedecisionisbasedtoo

muchoncostadvantages,forexample,

changesinrelativecostsovertimemay

offsetthesite’sadvantages.Insome

casesthismayleadtoanexpensiverelo-

cation.

Summary

108

Thefirstinnovationconcernedorganizational

structure.Audiimmediatelyestablishedanew

kindofleadershipcultureinGyör,aimedatpro-

motingentrepreneurshipwithinthecompany.

Onlytwolevelsofmanagementwereinstituted,

intheinterestofcreatingunbureaucraticand

flexible➔ structures.Incontrasttothesitu-

ationatthecompany’sGermanplants,where

theorganizationalsystemwasstillbasedona

traditionaldivisionoflaborwithfixedresponsi-

bilities,workersattheHungarianplantimmedi-

atelybeganworkinginflexibleteams–muchas

isthecaseatToyota,theindustrymodel.2

Skilled workers assume responsi-bility for their tasks and are given the necessary authority, since they are the ones who are most famil-iar with their work.

Theteamsconsistofseveralskilledworkerswho

areinchargeofoperations,facilitymaintenance

andqualityassurance.Teammembershandle

operationalandorganizationalissuesrelatedto

specificproductionstages,anarrangementthat

makesitpossibletostreamlinedecisionmaking.

Theteamsalsoplayacentralroleinoptimizing

production.Ataconventionalautomotiveplant,

executivesareresponsibleforsolvingproblems

andimprovingprocesses,butinGyörthese

tasksareperformedbyskilledworkers.They

areexpectedtobeconstantlylookingforwaysto

optimizeworkprocessesandcontinuallyoffer-

ingsuggestions,notjustwhenaconcreteprob-

lemarises–anothersimilaritytoToyotaandits

continuousimprovementapproach(knownas

“kaizen”inJapanese).“Theassociateswhoper-

formthevalue-addedjobsarethemostfamiliar

withtheactualworkandtheactualproblems

thataffectthework,”notesJeffreyLiker,Profes-

sorofIndustrialandOperationalEngineering

attheUniversityofMichiganandanexperton

Toyota’smanagementmethod,inexplainingthe

advantagesofassigningresponsibilitytoskilled

workers(Liker2006:273).

Teamleaders,whofirstserveasoperational

membersoftheteam,areinchargeofmaking

surethatthereisanadequatesupplyofparts,

carryingoutqualityinspections,substitutingas

neededforabsentteammembersandtraining

theircolleagues.Althoughtheyarenotofficially

consideredpartofmanagement,theyassume

responsibilitiesthatwouldbeassignedtothe

managementoftraditionalorganizations.The

roleofteamleadersandskilledworkersisone

ofthemainreasonswhyAudiHungariahas

beenabletolimititselftotwolevelsofmanage-

ment.JürgenHoffmann,formerChairmanofthe

BoardofManagementofAudiHungaria,points

outtheadvantageofa“lean”organization:No

employeecanshirkhisresponsibilities,since

otherswouldimmediatelynotice.Theworkforce

atAudiHungariahasacceptedthisarrangement

withoutobjection.

OnlyafewHungarianemployeeswereintroduced

totheoperationalmethodsinplaceatAudi’s

GermanplantsinIngolstadtandNeckarsulm;it

wasfeltthatlimitingexposuretothosemethods

wouldmakeiteasiertoestablishanewsystemin

Györ.JürgenGebhardt,formerheadofproduction

atAudiAG,knewfromhisexperienceatOpel

thatwhennewemployeesfallbackontraditional

methods,itismuchmoredifficulttoputupdated

structuresandprocessesinplaceatanewsite.

Anotherinnovationinvolvedlogistics,withAudi

takinganewapproachtointegratingtheGyör

plantintoitsoperations.TheHungarianplant

is➔ integratedintothevaluenetworkofAudi

AGthroughasophisticatedexternallogistics

systemthatismanagedandimplementedby

Schenker,asubsidiaryofDeutscheBahn,Ger-

many’snationalrailwaycompany.Freighttrains

transportthesome3,000individualpartsthat

areneededtoassembletheengines(e.g.intake

andexhaustvalvesandsparkplugs)fromIngol-

stadttoGyörandreturnthefinishedenginesto

Ingolstadt.Fromthere,theenginesassembledin

Györaredistributedtotheirdestinations.

1.2 Innovative structures and processes for Audi Hungaria

2 Further information on Toyota’s production system can be found in the case study of the Volkswagen Group contained in this publication.

109

Itwasimportanttostructuretheinternallogis-

ticssystemsinGyörinasimilarlyinnovative

way.Ataplantofthissize,internallogisticsis

crucialforachievingahighlevelofefficiency.

First,theplantwasdesignedtoensurethat

distancesbetweenthedeliverysitesforengine

partsandtheassemblylines,aswellasbetween

thevariousassemblystations,wereasshortas

possible.Second,allinternalplantlogisticswere

➔ outsourced.AsproductionbeganinGyör,

RudolphLogistikKft.,theHungariansubsid-

iaryoftheGermanlogisticsspecialistRudolph

LogistikGruppe,tookoverresponsibilityfor

themovementofgoodswithintheAudiplant,

includingintheproductionhallsandbetween

thevariousassemblystations.Rudolphemploy-

eeshandleeverythingassociatedwithincoming

goods,goodsinspection,inventorymanagement,

assemblylinesuppliesandtheshipmentof

assembledenginestootherAudiplants.Since

Audiemployeesarenotinvolvedinmoving

goods,theycanconcentrateexclusivelyonthe

productionprocess.

Innovative organizational and management methods lead to flexibility and ongoing optimiza-tion, which puts the Györ site at the top in terms of productivity and quality.

Itislargelyduetothemodernorganizational

andmanagementmethodsdescribedabove

thattheGyörsitetodayranksatthetopamong

AudiAGlocationsintermsofproductivityand

productquality.ThomasFaustmann,current

ChairmanoftheBoardofManagementofAudi

Hungaria,pointsout,“Ourcompany’ssuccessis

basedonflexibilityandanongoingoptimization

ofourcoreprocesses”(Audi2008f).Today,the

Hungariansubsidiaryisa➔ centerofexcel-

lenceandanimportantstrategicpillarofAudi

AG,aswellastheentireVolkswagenGroup.

_Whenacompanyestablishesanew

plantinaforeigncountry,itderives

advantagesthataredirectlyrelatedto

theplant’slocation,butitalsohasan

opportunitytointroduceinnovativeorga-

nizationalstructuresinthecompanyasa

whole.Thiscanbedonefromtheground

up,withoutinterferencefromoldand

time-wornwaysofdoingthings.

_ Particularlywhenitislocatedinadiffer-

entenvironment,anewsitecanprovide

feedbackthatcanchangethecultureof

theoverallorganization.

Summary

110

AudiHungariafulfilledtheexpectationsofits

parentcompanyandquicklyassumedanimpor-

tantrolewithinAudiAG.Exceptfortheplant

inSant’AgataBolognese,whichisexclusively

devotedtoproducingenginesforAudi’sLambor-

ghinisubsidiary,theHungarianplantisAudi’s

onlyengineproductionplant.Thishasmadeita

group-widecenterofexcellence,atermusedfor

asubsidiarythat

_ hasexpertiseinoneormore➔ valuefunc-

tionsoroneormoreproducts,

_ isresponsibleforseveral(country)marketsin

theabove-mentionedarea(s)and

_ iswellintegratedintothecorporatenetwork

sothattheentirecompanycanbenefitfrom

itsexpertise.

Figure2showsstrategicoptionsforcentersof

excellence,dependingontheirexpertiseand

geographicareaofresponsibility.3Functional

centersofexcellencehavespecialcapabilities

withrespecttoavaluefunctionsuchasprocure-

ment,productionorsales.Theymayalsospe-

cializeincertainaspectsofavaluefunction,for

exampletheproductionofselectedpartsorthe

assemblyoftheendproduct.Theexpertiseofa

product-orientedcenterofexcellencerelatesto

aspecificproduct,andthecenterofexcellence

carriesoutallofthe➔ valueactivitiesassoci-

atedwiththatproduct,suchastheprocurement

ofintermediateproducts,themanufactureofthe

productanditsmarketinganddistribution.4

Originally,theGyörsitewastobebuiltand

expandedbasedonathree-stageinvestment

plantotaling409millioneuros.Thefirststage,

carriedoutin1993and1994,includedthebasic

constructionoftheplantanditsproductionfacil-

ities.Uponcompletionofthisstage,theplant

hadanassemblycapacityofupto750engines

perday,anditstaskwasexclusivelytoassemble

four-cylinderenginesfortheAudiA4.Allofthe

necessaryenginepartswerebroughtinbytrain

fromGermany.

Duringthesecondstage,completedin1996,

Audidoubledtheplant’scapacityto1,500

enginesperday.Accordingtoplan,theGyörsite

alsobeganmanufacturingthecylinderhousing

forthefour-cylinderenginesassembledthere.

Departingfromtheoriginalplans,however,the

BoardofManagementofAudiAGdecidedthat

sameyeartohaveAudi’sentirerangeofengines

producedinGyör.5TheintroductionoftheA4,

A6andA8modelstwoyearsearlierhadledto

salesgrowth,asthecompanyhadhoped,which

meantthatengineandvehicleproductioncapac-

ityhadtobeincreased.Sincethecompanywas

pleasedwiththeenginesmanufacturedinGyör

andwiththeplant’sproductivity,itseemedonly

logicaltomoveallengineproductiontoHun-

gary.Thisfreedupcapacityforvehicleproduc-

tionattheGermanplantsandmadegooduseof

theHungariansubsidiary’sexpertiseinbuilding

engines.ThispavedthewayforAudiHungaria

tobecomeacenterofexcellenceinenginepro-

duction.

Thethirdstageoftheoriginalinvestmentplan

followedin1997and1998withtheexpansion

ofproductioncapacityto2,200enginesperday.

Productionofcrankshaftsandpistonrodswas

alsomovedtoGyör.AudiHungariaeventually

tookoverresponsibilitynotonlyforallaspects

ofAudi’sengineassembly,butalsoforproduc-

ingthoseenginecomponentsthatwerenot

obtainedfromoutsidesuppliers.Allofthevalue

activitiesrelatedtoengineproductionwere

2.1 Ongoing development as a center of excellence for engine production

2. Developing Audi Hungaria as a center of excellence within the Volkswagen Group

3 This paper provides a simplified overview, distinguishing only between functional and product-oriented centers of excellence. We are not con-cerned here with those that are process-oriented. For a comprehensive look at all three types, see Schmid (2003).

4 For more information on the development of subsidiaries’ capabilities, see Schmid/Schurig (2003).5 Engine production in Ingolstadt was gradually moved to Györ. Production volume in Ingolstadt continued to drop until engine production was

suspended there entirely in 2000 (Audi 2001: 57f., Audi 2002a: 60).

111

nowconcentratedinGyör,andAudiHungaria

hadbecomeafunctionalcenterofexcellencein

engineproduction.SincetheGyörsiteisAudi’s

onlyengineproductionplantintheworld,itcan

besaidtohaveaworldwidefunctionalmandate.

TheincreaseinAudiHungaria’sresponsibili-

tiesandgrowthinAudi’ssalesledtoasteady

increaseinthenumberofenginesproduced

eachyear,asshowninFigure3.By1999,five

yearsaftertheHungarianplanthadopened,its

annualengineproductionhadalreadyexceeded

theone-millionmark.Inthe14yearssincethe

plantcommencedoperations,atotalof14.8mil-

lionengineshavebeenproducedinGyör.This

wasmadepossiblebyfurtherexpansionsthat

graduallyincreasedproductioncapacityfrom

750to6,900enginesdaily.TodayAudiHungaria

produceseightdifferentengines:theR4Otto

andTDIengines(fourcylinders),theV6Otto

andTDIengines(sixcylinders),theV8Otto

andTDIengines(eightcylinders),theV10Otto

engine(tencylinders)andtheV12TDIengine

(twelvecylinders).6

The production system estab-lished in Györ became the model for the production system that has now been implemented at all of Audi’s sites.

AudiHungariahasdemonstratedinanumberof

waysthatcentersofexcellencehaveapositive

effectonthecompanyasawhole,andnotjust

ontheirlocalmarkets.Theproductionsystem

implementedinGyör,whichincreasedefficiency

(forexamplebyoutsourcinginternallogistics)

andintroducedinnovativeprocedures(suchasa

state-of-the-artorganizationalstructure),became

themodelfortheproductionsystemthatwas

putinplaceatallAudiAGsitesin1999.The

transferofknowledgewentbothways,notonly

fromtheGermanplantstoHungary,butalso

intheotherdirection,andtheentirecompany

benefited.TheAudiplantinGyörservesasa

company-wide➔ benchmarkformeasuring

theefficiency,productivityandqualityofother

sites,andthishasbroughtadditionalpositive

feedbackeffects.Internalcompetitionbetween

siteshasalsoboostedproductivityattheGer-

manplants,asJürgenGebhardt,formerheadof

productionatAudiAG,haspointedout.

Inbecomingacenterofexcellence,AudiHun-

gariahasnotonlycontributedtotheinterna-

tionalgrowthofitsparentcompany,AudiAG;

itisnowaleaderinengineproductionforthe

entireVolkswagenGroup.Only37percentof

theenginesproducedinGyörin2007were

intendedforvehiclessoldundertheAudibrand

name.Theremaining63percentwenttoother

customerswithintheVolkswagenGroup,as

showninFigure4.TheVWbrandnowuses

nearlyasmanyenginesproducedinGyöras

AudiAGdoes.

Figure 2: Types of centers of excellence and their areas of responsibility

Source: Based on Schmid (2003: 276).

Geographic area of responsibility

Functional center of excellence

Product-oriented center of excellence

Worldwide responsibility Worldwide functional mandate Worldwide product mandate

Regional responsibility Regional functional mandate Regional product mandate

Responsibility for selected countries

Functional mandate for selected countries

Product mandate for selected countries

6 TDI stands for “turbocharged direct injection“ and refers to Volkswagen’s diesel engines that use direct fuel injection coupled with a turbo-charger (Volkswagen 2008b).

112

Figure 3: Annual engine production at Audi Hungaria

Source: The authors, based on Audi (2007a: 1), Audi (2008g: 9).

1995 1996 1997 1998 1999 2000 2001 2003 2004 20062005 20072002

Engines produced(in thousands)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

104196

585

987 1,0021,061

1,2201,280

1,335

1,481

1,694

1,894 1,913

113

In1998therewasafurtherincreaseinthe

valueactivitiescarriedoutatAudiHungaria:

TheHungariansubsidiarytookoverallassembly

workfortheAudiTTmodel,whichwasavailable

asacoupéandasaroadster(convertible).As

withtheproductionofengines,vehicleassem-

blywasintegratedintoAudi’sexistingvalue

network,inkeepingwiththenetworkprinciple.

Vehiclebodiesarestillweldedtogetherand

paintedinIngolstadt,thentransportedbyrailto

Györforfinalassembly;theassembledvehicles

arethenreturnedtoIngolstadtbyrail.Network-

basedproductionallowsAuditobenefitfrom

theadvantagesofferedbybothsites:Theuse

ofexistingfacilitiesinIngolstadteliminatesthe

needforfurtherinvestments,whilelowerwages

inGyörleadtosavingsonlabor-intensiveassem-

blywork.

AudiHungariawasquicklyabletoestablish

itselfasaseriousalternativetoAudi’sother

sitesintheareaofvehicleassembly.Since

officialsatcompanyheadquartersinIngolstadt

werepleasedwiththequalityofassemblyin

Györ,between2001and2003theplantwas

alsochosentoassembletheA3modelandits

sportscarversion,theS3.Sincetheendof

2007theGyörplanthasalsoassembledtheA3

Figure 4: Engine production by Audi Hungaria and customers within the Volkswagen Group

Customers for engines produced

Customers in 2007 by brand

6

1) In 1996 Audi Hungaria began to produce engines for other brands within the Volkswagen Group

Legend: Audi Other brands within the Volkswagen Group

Number of engines purchased (in thousands)

19961) 2001 20070

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1,073

555

29

167

665 693

Seat19510 %

VW60232 %

Other2)

1106 %

Audi69337 %

Source: The authors, based on Audi (1997: 10), Audi (2002a: 61), Audi (2008i: 75).

Skoda27715 %

2) Wilhelm Karmann GmbH, which manufactures the Audi A4 convertible, as well as customers outside the Group.

2.2 Simultaneous expansion as a center of excellence in convertible assembly

114

convertible,alongwiththetwoversionsofthe

AudiTT.ItistheonlyAudifacilitythatcurrently

assemblesconvertibles–theAudiTTroadster

andtheAudiA3convertible.TheAudiA4con-

vertible,thethird“open”modelsoldunderthe

Audiname,isnotmanufacturedbythecompany

itself,butisproducedintheWestphaliancity

ofRheineundera➔ contractmanufacturing

arrangementwithproductionservicecompany

WilhelmKarmannGmbH.

Producingaconvertibleinvolvescertainspecial

requirementsduringthemanufacturingpro-

cess,forexamplebecausetheprocessisless

automated.Moreover,farfewerofthemarebuilt

ascomparedwithconventionalvehicles.This

makesitdifficulttointegrateconvertiblemanu-

factureintoatraditionalframework,andmany

companiesoutsourceproductiontoexternalpro-

ductionservicecompanies.Audidecidedtotake

advantageoftheGyörsite,asAudiHungariahas

thenecessaryflexibilityandtheexpertisefor

convertibleassembly.Indeed,theAudiTTcoupé,

theAudiTTroadsterandtheAudiA3convert-

iblecanbeassembledonthesameproduction

line.Audi’sHungariansubsidiarycantherefore

becalledafunctionalcenterofexcellenceinthe

areaofconvertibleassembly,againwithaworld-

widemandate.

However,theplant’sspecialcompetencein

assemblyislimitedtoconvertibles.Itassembled

slightlyfewerthan57,000vehiclesin2007,

whichaccountsforonlysixpercentofAudi’s

totalvehicleproduction.Consequently,Audi

Hungariacannotbeconsideredafunctional

centerofexcellenceforassemblyingeneral.Its

expertiseisnotgreatenoughtodistinguishit

fromothersitesthatalsocarryouttheseactivi-

tiessuccessfully.

Nevertheless,RupertStadler,Chairmanofthe

BoardofManagementofAudiAG,expects

theHungariansubsidiarytocontinuetobean

essentialpartofthecompany’svehicleproduc-

tion:“AudiHungaria’svehicleproductionhas

beenoutstandinginthelastfewyears,starting

withtheAudiTTcoupéandtheTTroadster.

WeareconfidentthatourHungarianplant,in

producingthenewAudiA3convertible,will

playanimportantroleinachievingourstrategic

goalofmanufacturing1.5millionvehiclesinthe

year2015”(Audi2007b).Overthelongterm,

itwouldbeagoodideatoproducetheAudiA5

convertible,whichistotaketheplaceoftheA4

convertiblein2009,inGyöraswell.According

topressreports,Audiisconsideringtakingover

themanufactureoftheA5convertiblerather

thanhavingitproducedbyKarmanninRheine,

astheprecedingmodelhasbeen.Fromtheper-

spectiveofAudiAG,itwouldmakesensetouse

theGyörsite.Thiswouldnotonlytakeadvan-

tageofresourceswithinthecompany;itwould

alsohelptoutilizeandexpandthespecialized

expertiseofAudi’sHungariansubsidiary.

115

Atitsowninitiative,ratherthanatthesugges-

tionofheadquartersinIngolstadt,AudiHun-

gariawasgivenresponsibilityfordevelopment

activitiesrelatedtoseriesproduction.These

involveongoingproductionandincludeproduc-

tionsupport(whenbeginningproductionof

newengines),enginetesting,adaptivedevelop-

ment,solvingtechnicalproblemsduringthe

productionprocess,minimizingproductcosts

andredesigningenginesduringtheirlifecycle.

AudiHungariahasgainedadditionalexpertise

intheseareasandisnowabletosolveproduc-

tionproblemsindependently,withouthelpfrom

theGermanplants.Thishasalsoincreasedits

autonomy,whichisessentialforasuccessful

centerofexcellence.

Originally,thisideawasmetwithskepticismat

companyheadquarters.Whilethecapabilities

oftheHungarianengineerswerenotindoubt,

therewasanxietyaboutanunchecked“knowl-

edgedrain”andalossofpower.“Wespent

twoyearstryingtoconvincethoseincharge,”

observedJürgenHoffmann,formerChairmanof

theBoardofManagementofAudiHungaria,at

theopeningofthedevelopmentcenter(Sailer

2000).NorbertPauli,headofenginedevelop-

mentattheGyörsite,added,“Therewassuch

skepticisminIngolstadtthatwegaveourproj-

ectthecodenameofCsárdás[Authors’ note:

Hungariannationaldance]”(Sailer2000).But

ultimatelytheHungariansubsidiaryprevailed,

anditbegantoexpanditsdevelopmentworkin

2001.

From that time on, the Györ site was more than an “extended workbench” for the German sites; its value activities now included more than just production.

AudiAGfundedthisprojectintwostages,

investing18millioneurosin2001and8million

eurosin2004.Atotalinvestmentvolumeof26

millioneurosmayseeminsignificant,butithad

amarkedeffectonquality.Thesitewasnow

morethanjustan“extendedworkbench”forthe

Germansites;itsvalueactivitieshadexpanded

toincludemorethanproductionalone.

TodayAudiAGhasbenefitedgreatlyfromits

Hungariansubsidiary’senhancedcompetence

andautonomy,whichhaveledtogreatereffi-

ciencyandproductivityinthenetwork’spro-

duction.Before,problemsarisingduringthe

engineproductionprocessthatrequiredinput

fromadevelopmentengineer–duringtesting,

forexample–usuallymeantatime-intensive

processofshippingtheenginesbackandforth

betweenHungaryandGermanyandrequired

coordinationbetweentherespectiveemployees.

Thisadditionaleffortisnolongernecessary.

Overthelongterm,itwouldbewiseforAudi

Hungariatobeinchargeofallaspectsofengine

development.Thiswouldgreatlysimplifyinter-

actionsbetweendevelopmentandproduction

andamongtheworkersconcerned.AudiHun-

gariacouldthenbecomeacenterofexcellence

intheareaofenginedevelopmentaswell.

Thedevelopmentcenterrepresentedoneofthe

firstprojectsinwhichHungarywasviewednot

simplyasaproductionsite,butalsoasaplace

wheredevelopmentworkcouldtakeplace.This

wasparticularlygratifyingfortheHungarian

government,andtheMinistryofEducationpro-

vidednearly1millioneurosinsupport.Audiis

nottheonlycompanytoconductresearchand

developmentinHungary;thecellphonemanu-

facturerNokia,thenetworkequipmentmanu-

facturerEricssonandthetechnologycompany

Siemenshavefacilitiesthereaswell.Clearly,

Hungaryisbecomingasiteforhigh-quality

valuecreation.ThetradepublicationCorporate

Locationconcluded:“Theindicatorssuggestthat

Hungaryismovingupthevaluechain.[…]Itis

timelythatHungaryisattemptingtotransform

itselffromjustamanufacturingbaseintoades-

tinationforinvestorssearchingforvalue-added

locations”(“NoLongerthePoorManofEurope”

2000).

2.3 Upgrading the center of excellence for engine production by adding development responsibilities

116

Theopeningoftoolproductionfacilitiesatthe

Györsitein2005,atacostof40millioneuros,

wasthefinalstep,sofar,inthedevelopment

oftheHungariansubsidiary.Thisroundedout

AudiHungaria’sproductioncapabilities.Györ

wonoutovertheotherAudiAGsitesinEurope

(Brussels,IngolstadtandNeckarsulm)inanin-

companyselectionprocess.Toolsandequipment

forvehicleseriesproductionarenowbeing

producedinHungary,includingstampingequip-

ment,drawing,cuttingandcopyingtoolsaswell

astheso-calledgrippersthatareusedtojoin

vehiclebodyparts.

Thecenterfortoolmanufacturealsoproduces

vehiclebodypartsforAudi’ssmall-batchseries,

anewfeatureatthatsite.TodaytheGyörplant

suppliesvehiclebodypartsforAudi’stop-of-

the-lineRS4,S6,RS6andR8,whicharesoldin

considerablylowernumbersthanthecompany’s

regularseriesmodels.Productionincludesouter

skinpanels,doorsandhatchbacks,partsthat

requireacomplexcuttingandjoiningtechnique

andagreatdealofmanuallabortoachievethe

superiorqualityofferedbythesepremiumvehi-

cles.The➔ valuechainattheGyörsiteincludes

allofthestepsshowninFigure5.

2.4 Ongoing acquisition of additional capabilities – expansion as a center of excellence for vehicle production?

Figure 5: Value chain at the Györ site

Vehi

cles

Engi

nes

Personnel management

Infrastructure

Inbound logistics

Production of engine

components

Inbound logistics

Inbound logistics

Vehicle assembly (large-batch series)

Outbound logistics

Engine assembly

Production of vehicle body parts (small-batch series)

Outbound logistics

Outbound logistics

Prof

it m

argi

n

Profit margin

Procurement of engine and vehicle components

Carried out by Audi Hungaria Outsourcing to service companiesLegend:

Development activities related to engine series production

Tool manufacture for vehicle production

Source: The authors, based on Porter (1986: 21).

117

Alookatlimited-lotseriesproductionishelpful

indeterminingwhetherAudiHungariamightbe

capableoftakingonadditionalvehicleproduc-

tiontasks.Twooptionsareconceivable:First,

theGyörsitecouldexpandtoincludenotonly

assembly,butalsoproductionofitscurrent

models.IfAudiHungaria’slimited-lotseries

productionprovedtobeassatisfactoryasits

vehicleassembly,theGyörsitemighttakeover

theentireprocessofmanufacturingtheAudi

TTcoupéandroadstermodelsaswellasthe

AudiA3convertible–includingbuildingvehicle

bodies.Thiswouldupgradeitsroleasacenter

ofexcellencetoincludeconvertibleproduction

aswellasassembly.Anotherpossibilitywould

befortheHungariansubsidiarytoproducea

specifichigher-volumemodel,suchastheAudi

A3,whichwasassembledthereforalimited

periodoftimeinthepast.ThiswouldmakeAudi

Hungariaafunctionalcenterofexcellenceinthe

productionofthatmodel.

Figure6showstheincreaseinAudiHungaria’s

valueactivitiesandthecurrentvaluechainat

theGyörsite.Itsresponsibilitiesarelikelyto

continuetogrow.

Figure 6: Audi Hungaria’s areas of competence

Source: The authors, based on Audi (2008d, 2008g).

1994 1996 1998 2001 2005

Areas of competence Step 5

Step 4

Step 3

Step 2

Step 1

Production of tools and production of vehicle body parts for small-batch series

Development activities related to engine series production

Vehicle assembly_ Audi TT coupé/roadster_ Audi A3 and S3_ Audi A3 convertible

Production of engine components_ cylinder housing_ crankshaft_ piston rodEngine

assembly Year

118

AudiAGandparticularlytheGermansiteshave

benefitedinavarietyofwaysfromtheHungar-

iansubsidiaryasacenterofexcellence,andnot

leastfromthetransferofknowledgefromHun-

garytoGermany.Thisisreflectedincompany-

widefigures.FearsthatAudiHungariaandits

expansionwouldleadtoalossofjobsinGer-

manyhavenotbeenborneout.Onthecontrary:

Therehasbeenasteadyincreaseinthenumber

ofemployeesattheGermanplantssincethe

mid-1990s,asshowninFigure7.Themuch

discussed“jobdrain”hasnotoccurred.The

GyörsitehashelpedAudiinpursuingitsstrong

growthstrategy(seealsotheinterviewwith

RupertStadleronp.118).Asamultiplecenter

ofexcellence,AudiHungariahasprovidedAudi

AGwithcertain➔ competitiveadvantagesin

thiscontext.“For[innovative]companies,glo-

balizationisusuallyawin-winsituation,”says

MatthiasWissmann,PresidentoftheGerman

AssociationoftheAutomotiveIndustryVDA

(“FürGlobalisierunggerüstet”2008;seealsothe

conversationwithMatthiasWissmannfollowing

thiscasestudy).

The Györ site has helped Audi to pursue a strong growth strategy.

Manyotherstakeholdershavealsobenefited

fromthedevelopmentofAudiHungaria.In

termsofsalesvolume,AudiHungariaiscur-

rentlyHungary’ssecondlargestcompany,after

2.5 Audi Hungaria as a growth driver within the Volkswagen Group

Figure 7: Employees of Audi AG in Hungary, Germany and other countries

Source: The authors, based on annual reports.

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

1) Only countries consolidated in the annual report.

Employees (in thousands)

25

30

35

40

45

50

55

Germany Györ/Hungary Other countries

Legend: 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

D 32,013 32,558 33,805 36,001 38,097 40,736 43,118 44,374 44,261 45,316 45,511 44,902 44,701 44,698

Györ (HU)

202 265 724 1,760 2,914 4,312 4,831 4,857 4,767 4,939 5,146 5,046 5,204 5,623

Other Countries1) 0 0 0 0 0 752 1,447 1,910 2,170 2,434 2,487 2,464 2,392 3,026

Total 32,215 32,823 34,529 37,761 41,011 45,800 49,396 51,141 51,198 52,689 53,144 52,412 52,297 53,3471994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

1) Only countries consolidated in the annual report.

Employees (in thousands)

25

30

35

40

45

50

55

Germany Györ/Hungary Other countries

Legend:

119

theoilandgascompanyMOL,aswellasits

secondlargestexporter,accountingforabout

ninepercentofthecountry’sexportvolume.The

Györregioninparticularhasbenefitedgreatly

fromtheAudiplant.AudiAG–alongwithother

automobilemanufacturers–hastriggeredan

economicboombylocatingsomeofitsvalue

activitiesthere.Todaythereareelevenother

automotiveplantsattheintersectionofHungary,

Austria,SlovakiaandtheCzechRepublic,which

iswhythisregionhasbeendubbedthe“Detroit

ofEasternEurope.”AndtheadvantagesHun-

garyoffersgofarbeyondlowlaborcosts.“The

Hungarianshaveshownthattheycanproduce

high-qualityautomobiles,”saysStefanMenzel,

DeputyHeadofCompaniesandMarketsfor

thenewspaperHandelsblatt,underscoringthe

country’simportancetotheautomotiveindustry

(Menzel2008).Indeed,Daimlerrecentlychose

Hungaryasthesiteforitsnewcompactvehicle

plant,overanumberofcheaperalternatives.

andwearelookingtorecruitanother800.In

thefuture,too,wewillhiremorepersonnel

whereitisnecessary.Expertiseisparamount.

AndI,personally,feelverycomfortablewith

whatGermanyhastooffer.Butouremployees

inGermanyareawarethattheyaretakingon

acertainresponsibilitywhentheycometo

workforus.

I gather that you think you will be able to

maintain an 80-20 ratio of German to for-

eign sites by increasing productivity ...

Audidecided15yearsagotomoveengine

productiontoHungary.Itwasadifficultdeci-

sion,andtherewerenaturalconcernsthatthis

stepwouldleadtoamassivelossofjobsin

Germany.Butwhathappened?Wenowemploy

5,800peopleinHungary,andwehavealso

hired10,000newemployeesinGermany–a

clearwin-winsituation.Overthelongtermwe

willneedtohirenewworkersinareaswhere

weexpecttoseegrowth.”

Source:Götz(2008).

Rupert Stadler, Chairman of the Board of

Management of Audi AG, discussing the

role of domestic and foreign sites in safe-

guarding jobs

“Over 80 percent of Audi’s workforce is

still employed in Germany ...

Giventhecomplexproductswearedealing

with,corecompetenceisessentialandclearly

farfromatrivialmatter.Oneexampleisthe

designofthetailgateonourSUVmodels.

Itrequirescompetenceintoolmanufacture,

developmentandproduction,aspectsthatare

bynomeansstandardinmodernautomotive

engineering.InGermany,weareabletofind

thebestworkersforeachcorecompetence,

notleastthankstoourexcellenteducational

system.

So you are more likely to increase the

number of employees in Germany in the

coming years than to cut jobs ...

Wearecurrentlyexpandingourworkforce.

Lastyearwehired600universitygraduates,

Interview

120

Asourresearchhasshown,theroleofacen-

terofexcellencerequiresacertainamountof

autonomy;thesubsidiarymustbeallowedto

takeadvantageofitsspecificcapabilities.Audi

Hungariahasbeenabletoassumeleadership

responsibilitieswithinAudiAGinitsareas

ofexpertise.Itmakesalloftherelevantdeci-

sionsonissuesofmaintainingandincreasing

efficiencyandqualityinengineproduction.Its

leadershippositionhasbeenenhancedbytak-

ingonrelateddevelopmentactivitiesinseries

production.

Moreover,centersofexcellenceneedtobewell

integratedintothecorporatenetworksothat

theentireorganizationcanbenefitfromtheir

expertise.Companiesthataresuccessfulin

theiruseofcentersofexcellencearecomplex

network-basedenterprisescharacterizedbya

varietyofverticalandhorizontalflowsofinfor-

mationbetweenthecorporateunits.Theparent

companyneedstomakesurethatitscentersof

excellencehaveacertaindegreeofautonomy

butarealsowellintegratedintothenetwork.

Thetaskofintegratingcentersofexcellence

intothecorporatenetwork,whilealsoensur-

ingnecessaryautonomy,isaccomplishedby

usingcertain➔ coordinationtools.Inanetwork

enterprise,person-orientedtoolsareparticu-

larlyimportantforintegratingthecompany’s

variousunits.TheyarethesubjectofFigure

8,whichwasalreadydealtwithbrieflyinour

introductorychapter.Suchtoolsincludepersonal

instructions,regularvisitstotheparentandsis-

tercompaniesbycenterofexcellencestaff(and

viceversa),theestablishmentofinternational

projectteams,andthetransferofmanagement

personnel.Sincethemanagementofcenters

ofexcellenceisstronglyperson-oriented,the

“humanfactor”iscentraltothemanagement

ofthecompanyasawhole.Oneexampleofthe

roleofperson-oriented➔ coordinationininte-

gratingAudiHungariaintothelargerorganiza-

tionisthatexecutivesfromtheGermansitesare

senttohelpmanageAudiHungaria.Localman-

agersreceiveagreatdealofsupportfromtheir

Germancolleagues.Frequentpersonalvisitsin

bothdirectionsandmixed-nationalityproject

teamsarealsoimportantinintegratingthesite

intothecorporatenetwork.

Centers of excellence require both autonomy and integration at the same time.

Whileperson-orientedcoordinationtoolsare

veryimportantinanetworkenterprise,theyare

notenough.Structuralandtechnocraticinstru-

mentsareneededaswell,andinmostcases

theyareusedincombinationwithoneanother.

Therealsoneedstobebothverticalcoordina-

tion,betweentheparentcompanyandthesub-

sidiary,andhorizontalcoordinationbetweenthe

varioussubsidiaries,forexamplebetweencen-

tersofexcellencewhosevalueactivitiesbuildon

eachother.

3. Challenges in managing centers of excellence

Parentcompaniesshouldnotregardtheir

foreignsubsidiariesasmere“extendedwork-

benches”iftheywanttotakeadvantageof

theirfullpotential.

_ Instead,theycancultivatetheirforeignsub-

sidiariesbygivingthemadditionalrespon-

sibilitiesinthevaluechain,forexamplefor

R&Dorhigh-valueproductionactivities.

_ Foreignsubsidiariescandevelopintocen-

tersofexcellencethatassumealeadership

roleinthecorporatenetworkandmake

gooduseoftheiruniquestrengthsbeyond

theirownlocation.

_ Westerncompaniesshouldnotlimittheir

subsidiariestotheindustrializedcountries,

butalsoconsiderthepotentialofferedby

subsidiariesinup-and-comingeconomies,

forexampleintheemergingmarkets.

Summary

121

Becausecentersofexcellencehavetheirown

specificareasofexpertise,responsibilitiesand

leadershiproles,itisimpossibletoprovide

generalrecommendationsaboutappropriate

coordinationtools.“Theindividualstrategicrole

ofasubsidiaryplaysacrucialroleindetermin-

ingwhattypeofcoordinationwillmaximize

thesubsidiary’scontributiontothesuccessof

thecompanyasawhole,”explainsKatharina

Kretschmer,managementconsultantforThe

BostonConsultingGroup.Itisimportantto

rememberthatcentersofexcellenceneedto

bemanagedonahighlyindividualbasis.If,for

example,AudiweretodevelopitsBrusselsplant

intoacenterofexcellence,itsmanagementand

coordinationwouldneedtobeadjustedaccord-

ingly.Simplycopyingthemethodsusedatthe

Györsitewouldhardlybesuccessful.

Scientificstudiesofcoordinationwithininter-

nationalcompanieshaveprovidedsomeinitial

insights:Forinstance,thevariousvalueactivi-

tiesneedtobemanagedinanindividualized

way.Person-orientedcoordinationtoolshave

beenshowntobeeffectiveintheareaof

researchanddevelopment,andtendtobe

preferabletostructuralortechnocraticinstru-

ments.Inproduction,technocraticinstruments

areeffective,asareperson-orientedmethods,

butstructuralinstrumentsarelesssuccessful.

Theseareonlypreliminaryresults,sincemuch

researchremainstobedoneonhowbestto

coordinatevaluefunctions.Itappears,however,

thattheactivitiescarriedoutbyacenterof

excellenceareimportantfordetermininghowits

managementshouldbeorganized.

Changing a hierarchical company to a network-based enterprise that includes centers of excellence requires a change in its approach to management and in its corpo-rate culture.

Ifahierarchicalcompanyistobecomeanet-

work-styleenterprisewithcentersofexcellence,

thiswillrequireachangeinits➔ corporate

culture.Thishasimplicationsforthecompany’s

Figure 8: Overview of approaches to coordination in network enterprises

Source: Based on Kutschker/Schmid (2008: 1033).

Structural coordination

_ Types of organizational structure

_ Departments

_ Staffs, corporate departments, corporate divisions, types of project organization

_ Centralization or decentralization of decision making

Technocratic coordination

_ Guidelines

_ Programs

_ Plans

_ Budgets

_ Reporting Systems

_ Formalization

Other tools

_ Transfer prices

_ Transfer of information

_ Self-organization

_ ...Person-orientedcoordination

_ Personal directives

_ Mutual adjustments

_ Personal visits

_ International project teams

_ Transfer of management personnel

_ Standardization of roles

_ Culture-oriented coordination

122

managementculture,sinceitrequiresbalancing

thecompetingdemandsofautonomyandinte-

grationandrecognizingsubsidiariesassources

ofexpertiseandskills.Culturalelementsof

hostcountriesalsoneedtobeincorporatedinto

thecompany’scorporateculture.Astrategic

decisiontoupgradesubsidiariesintocentersof

excellencerequiresnotonlyastructuralreorga-

nizationofthecompany,butalsoacarefuleffort

toreshapeitsculture.

Establishingcentersofexcellencehascertain

implicationsforthemanagementofthesub-

sidiariesconcerned.Companiesthatfailto

takethisintoaccountwillnotbeabletoreap

thebenefitssuchcentersoffer.

_ Centersofexcellenceneedtohaveacertain

degreeofautonomyintheirareasofcom-

petencesothattheycanputtheirexpertise

intopractice.

_ Atthesametime,theymustbewellinte-

gratedintothecorporatenetworksothat

theentirecompanycanbenefitfromtheir

expertise.

_ Becauseofdifferencesintheiractivities,

expertiseandroles,individualcentersof

excellenceneedtobemanagedindifferent

ways.Theexecutivesinvolvedareincharge

ofchoosingtheappropriatecoordination

instruments.

_ Theintegrationofallofacompany’scen-

tersofexcellencerequiresthatculturalele-

mentsfromhostcountriesbeincorporated

intothecorporatecultureofthecompany

asawhole.

Summary













123

Audi (2007c): KarosserieteilefürAudiRS6aus

Györ.Pressrelease,websiteofAudiAG,2007.

URL:http://www.audi.hu/deu/hirek/hir.php?hir_

id=127(asofJuly2,2008).

Audi (2008a): ProduktionsstandortUngarnin

Györ.WebsiteofAudiAG,2008.URL:http://

www.audi.de/audi/de/de2/unternehmen/

produktionsstandorte/ungarn.html(asofJuly2,

2008).

Audi (2008b): Produktionsstandorteweltweit.

WebsiteofAudiAG,2008.URL:http://www.

audi.de/audi/de/de2/unternehmen/produktions-

standorte.html(asofJuly2,2008).

Audi (2008c): AudiModelleder90erJahre.


audi.de/audi/de/de2/unternehmen/historie/

letzte_jahrzehnte/90er_jahre_bis_heute.html(as

ofJuly2,2008).

Audi (2008d): Produkte:Motoren.Websiteof

AudiAG,2008.URL:http://www.audi.hu/deu/

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Speaking with Matthias Wissmann

President of the German Association of the Automotive

Industry (VDA)

128

Interview

share of Germany’s overall business volume

nearly doubled during the same period, reach-

ing a level of 21 percent. Clearly, the automotive

industry is by far the most important branch of

Germany’s economy. Owing to the international

crisis in the financial and real estate markets,

however, automobile manufacturers are having

an increasingly hard time selling their products.

Despite its current problems, the automotive

industry remains committed to maintaining

its production sites and safeguarding jobs in

Germany. In 2007 the industry employed nearly

744,500 people, 72,300 more than ten years ear-

lier. The proportion of all jobs in Germany that

are associated with the automotive industry has

increased from 9 to 14 percent since 1991. In

other words, one in seven jobs depends on this

key industry. Counting those who are employed

indirectly by the automotive industry, this adds

up to over five million German jobs.

Mr. Wissmann, value activities in the auto-

motive industry are becoming increasingly

internationalized, particularly in the areas

of production and development. What chal-

lenges do you see facing German manufac-

turers as they compete on a global scale?

The automotive industry is one of the most

important pillars of Germany’s economy. With

annual sales amounting to 290 billion euros, it

accounts for more than one-fifth of the country’s

total business volume. The worldwide trend

toward premium vehicles and clean diesel cars

has had a positive effect on qualitative growth

over the past few years. Attractive new models

from German manufacturers, an increase in

features and – not least – the strong sales of

commercial vehicles we have seen for a number

of years have also contributed to this positive

trend. The German automotive industry has

tripled its sales since the early 1990s, and its

“Production sites in foreign countries and growth at

home, with stable or even higher employment, are not

mutually exclusive. Indeed, they are both essential for

successful growth.”

129

One factor in the success of Germany’s automo-

tive industry is its ongoing efforts toward inter-

nationalization. Over the past ten years, German

manufacturers have doubled their passenger

vehicle production in other countries, exports

have increased by 50 percent and domestic

production has risen by about 25 percent. This

shows that production has increased much more

dramatically in growth markets – China, India,

Russia, Latin America – than at home. A world-

wide production network, including suppliers,

is essential for opening up and maintaining new

markets over the long term. Exports alone are

not enough. Global engineering is indispensable

for ensuring that all of a company’s expertise is

available to its employees in every country, as

this drives innovation. These two trends, inter-

nationalization and innovation, are two sides of

the same coin.

General Motors and Ford currently find

themselves in considerable difficulty

throughout their organizations, while their

European subsidiaries are still in relatively

good shape. What role could or should Opel

and Ford Germany play in their corpora-

tions’ value chains?

Fortunately, the automotive industry is doing

better in Germany than in other countries in this

difficult environment, with declining markets in

Western Europe and North America. The exper-

tise of the European subsidiaries in the area of

development is reflected in the demand we are

seeing in the United States for CO2- and fuel-

efficient models developed in Europe.

The automotive industry is of critical impor-

tance to Germany and its economy today.

Given increasing globalization, what will its

significance be in 20 years? And what role

does German politics play in the automotive

industry?

Thanks to its commitment to research and devel-

opment, the German automotive industry has an

excellent chance of maintaining its prominent

role in world markets. One of its strategic trump

cards is its expertise in CO2-efficient clean

diesel, which continues to show a great deal of

potential, particularly in the growth markets of

India and China, as well as Russia.

130

By founding its Hungarian subsidiary,

Audi has shown that internationalization

can generate competitive advantages for a

company as a whole. Since the Györ plant

was opened in 1994, jobs have increased

substantially not only in Hungary, but also

at the German plants. Can this serve as a

model for the German automotive industry?

Györ is one of many examples of the success-

ful internationalization strategy pursued by

German manufacturers and suppliers. The

automotive industry is one of the few German

industries that have grown at home while also

taking advantage of production and market

opportunities abroad.

The dramatic expansion of foreign production

by German manufacturers during the past few

years has also brought changes in various seg-

ments of the markets. The traditional notchback

sedan has lost some of its predominance in favor

of new models and vehicle concepts that are

tailored to certain customer preferences, such as

family vans, city cars and convertibles.

The mixture of innovative, future-oriented

production sites at home, which offer increas-

ing development capabilities, and economical

production sites abroad, has made it possible for

The political sphere is particularly important

right now. Efforts are being made to pass a

CO2-based motor vehicle tax quickly, so that

potential customers have an incentive to pur-

chase an environmentally friendly new car. This

would serve two purposes: promoting climate

protection while also stimulating car sales. In

view of the increasingly difficult economic situa-

tion, policymakers should do everything in their

power to prevent a further increase in the cost

of mobility for individual consumers. It should

also be pointed out that companies need to have

room to invest in research and development.

The overly rigid, penalty-based regulations cur-

rently under consideration in Brussels to curb

CO2 emissions are not the answer. We need CO2

regulations with a sense of proportion.

Finally, it is crucial to invest more in our traffic

infrastructure. After adjustment for inflation,

resources spent on maintaining and expanding

roads and highways have declined by one-third

relative to the mid-1990s – despite the fact that

traffic has increased dramatically, not least

because of the eastern expansion of the EU.

Moreover, not all of the increased income from

toll charges is being used for the appropriate

purposes. So we are still struggling with the

costs of traffic congestion, which also produces

an unnecessary increase in CO2 emissions.

131

German automobile manufacturers to improve

their position and gain a larger share of impor-

tant foreign markets. There is considerable

demand for more and more sophisticated vehicle

equipment, but also, and in particular, for intel-

ligent solutions for increasing fuel efficiency.

Moreover, the example of the Györ site has

shown that production sites in foreign countries

and growth at home, with stable or even higher

employment, are not mutually exclusive. Indeed,

they are both essential for successful growth.

Automobile manufacturers are becoming

increasingly internationalized, not only by

exporting their products, but also by estab-

lishing their own subsidiaries in produc-

tion and other areas. What does it mean for

German automotive suppliers that value

creation is increasingly part of a worldwide

network?

German suppliers have usually moved into new

growth markets along with vehicle manufactur-

ers, and in many cases they have even preceded

them in establishing themselves abroad. More

than 2,000 foreign production sites are currently

in operation in some 80 countries. Small- and

medium-sized enterprises in particular have

expanded their foreign activities. They are inte-

grated into the international value structures

of German automobile manufacturers, but their

Matthias Wissmann – President of the German Association of the Automotive

Industry (VDA)

132

presence in foreign markets also helps them win

new customers. The picture is certainly a posi-

tive one.

Our experiences at foreign automobile shows –

whether in Beijing, Shanghai, Moscow, Tokyo,

New Delhi or Sao Paulo – indicate that it would

be a good strategic move for the German Asso-

ciation of the Automotive Industry (VDA) to set

up a joint stand for small and medium-sized

supplier companies; this would facilitate new

contacts between manufacturers and suppliers

in these markets. Long-term success requires

that suppliers be present in growth markets.

The VDA supports its members in this context,

particularly by providing advice. In addition,

new concepts such as the low-cost Tata Nano

vehicle represent opportunities for German com-

panies, which are supplying a large share of the

materials for this new model.

A network approach to value creation – in other

words, a change in existing supply chains, with

much-needed variety – offers a real opportunity

for the German supply industry. Suppliers need

to keep their strengths in mind: innovative lead-

ership, high quality standards, cost leadership

and the highly regarded selling points “Made in

Germany” and “Research in Germany.”

133

Matthias Wissmann

Matthias Wissmann is President of the Ger-

man Association of the Automotive Industry

(Verband der Automobilindustrie VDA) and

Vice President of the Federation of German

Industries (Bundesverband der Deutschen

Industrie BDI). He began his political career

as National Chairman of the Christian Demo-

cratic youth organization Junge Union and

member of the Federal Executive Board of the

Christian Democratic Union (CDU). From 1976

to 2007 he was a directly elected member of

the German Bundestag. During that period he

served as spokesman for the CDU/CSU parlia-

mentary group on economic policy and held

the offices of Federal Minister of Research and

Technology (1993) and Federal Minister of

Transport (1993–1998), among other respon-

sibilities. Until 2007 he was Chairman of the

Bundestag European Union Affairs Committee.

Matthias Wissmann is the author of several

books, including “Deutsche Perspektiven”

(German Perspectives) and “Die Soziale

Markt wirtschaft” (Social Market Economy).

He also serves in a voluntary capacity on the

boards of Philharmonia of the Nations and

the Ludwigsburg Castle Festival.

1. Restructuringinternationalvaluecreation 135

2. Necessarychangesinthemanagementofinternationalcompanies 141

References 144

Global networks and decentralized configuration strategies

Strategic, structural and cultural implications

134

Ourexaminationofcasestudiesofautomotive

companieshasallowedustoidentifytrendsin

themanagementofinternationalvaluecreation

andtooutlinemeasuresforstructuringthecor-

responding➔ valuechainstomeettheneedsof

thefuture.Wehaveidentifiedimportantlevers

thatwillallowcompaniestoachievelong-term

successinglobalcompetition.Theseinclude,in

particular,thestrategicand➔ structuraldimen-

sionsofvaluecreation.Atthesametime,com-

paniesneedtomakeinternalculturalchanges,

especiallyregardingthemanagementof➔

valueactivities.

Allthreecasestudieshaveshownthatgreater

decentralizationofvalueactivitiesisimperative

ifcompaniesaretoremaincompetitivebeyond

theirnationalborders.Moreover,increasing

valuecreationinthevariousmarketsinvolves

notonlyindividual➔ valuefunctions,but

virtuallytheentirevaluechain.Whilemany

companieshavelongbeenseekingtodecen-

tralizesales(andinsomecasesmarketingas

well)–ofteninverydifferentways(Quelch/

Hoff1986)–thecurrentfocusisincreasingly

ondecentralizingvalueactivitiesinthefieldsof

procurement,productionanddevelopment.As

wehavedemonstrated,however,thegoalisnot

tocarryouteveryvalueactivityineverymarket

andthus(again)toestablish➔ subsidiariesall

overtheworldas➔ miniaturereplicasofthe

parentcompany(White/Poynter1984,1989).

Instead,weneedwhatmightbetermed“decen-

tralizedcentralization,”inwhichavarietyof

activitiesarebundledtogetherindifferentcoun-

tries.Followingthemodelsof➔ transnational

organization(Bartlett1986,Bartlett/Ghoshal

1987a,1987b,Bäurle/Schmid1994)and➔ het-

erarchy(Hedlund1986,1993)thatareoutlined

intheinternationalmanagementliterature,itis

importanttoactgloballyaswellaslocally,and

centrallyaswellasdecentrally,asCoimbatoreK.

Prahaladpointedoutinourinterview.

Thereareavarietyofreasonswhysuchdecen-

tralizedcentralizationisimportant.Forexample,

decentralizedplantsneedtohaveahighlevel

oflocalizationinsuchareasasprocurement,

whichinsulatesthecompanyfromexchangerate

fluctuations,asshownparticularlybythecase

studyoftheVolkswagenGroup;theyalsooffer

theopportunitytobenefitfromdifferencesin

thecostsofproductionfactors,asdemonstrated

bytheRenaultandAudicasestudies;and

theyallowcompaniestotakeadvantageofthe

resourcesoflocalsuppliers,asreflectedinthe

casestudyofRenault.However,ahighlevelof

localizationdoesnotmeanthatallprocurement

activitiesarehighlydecentralized.Rather,using

theadvantagesof➔ globalsourcingwhenever

thebenefitsofcentralizationoutweighthedisad-

vantagesisimportant(Corsten1993,Mair1995).

Centralizationdoesnotnecessarilyneedtotake

placeinthecountrywherethecompanyhasits

headquarters,butratherwhereaninternational

comparisonsuggeststhatthebenefitswouldbe

greatest.

Carryingoutproductionactivitiesinlocalmar-

ketscanbeawisedecision,notleastbecause

customersincertaincountriesandsegmentsof

themarketareincreasinglyinterestedinpur-

chasingavehiclethathasbeenmanufactured

locally.Thisisanimportantconsideration,one

thatwasevidentinourcasestudyoftheVolk-

swagenGroupandunderscoredbyCarl-Peter

Forster,PresidentofGeneralMotorsEurope,at

theCapitalAutomobileSummitheldinBerlin

inSeptember2008,whenhenoted,“Productiv-

ityinproductionnolongeroffersadecisive➔

competitiveadvantageordisadvantage.Instead,

beingalocalmanufacturer–producingonsite

–isincreasinglybecomingasalesargument.”

135

1. Restructuring international value creation

adaptationsforalocalmarket,thendevelopment

activitieswillhavetobelocatedthereaswell,”

explainsHaraldRudolph,DirectorofStrategy

atDaimler.Hecontinues,“InChina,thereis

nowaytoavoidcarryingoutdevelopmentwork

withinthecountry.Thismightinvolvedifferent

chassisrequirementsorequipmentfeatures,for

example.”

Ouranalyseshavealsoshownthatsimply

decentralizingvalueactivitiesisnotenough.It

isespeciallyimportantto➔ integrateindividual

corporateunitseffectivelyinordertocreate

globalnetworkenterprises.Thisalsorequires

thedecentralizationofcertainmanagement

functionsanddecision-makingresponsibilities.

Decentralizeddecision-making➔ structures

areclearlyrequiredinthelocaldevelopmentof

region-orcountry-specificmodels,forexample.

Ifadaptationistobesuccessful,adecentralized

developmentunitmustbeinvolvedinrelevant

decisions;otherwisethecompanyreapsno

benefitfromitsexpertise.Thisisclearfrom

thecasestudiesontheVolkswagenGroupand

Renault,andRalfKalmbachalsoemphasized

thispointinourconversation.

Nomatterwhichspecificvalueactivitiesarecar-

riedoutbyaforeign➔ subsidiary,itsresources

andexpertisewillnotbefullyutilizeduntilit

becomesaspecialized➔ centerofexcellence

(Schmid2003).1Asisabundantlyclearfromthe

Audicasestudy,thisallowsforeignsubsidiaries

togeneratecompetitiveadvantagesfortheentire

companythatarehelpfulnotonlyinthelocal

marketbutworldwide,andthiscanhavevery

Furthermore,lawsinthegrowthmarketsofthe

➔ emergingcountriesoftenfavorlocalproduc-

tion,asshownbythecasestudiesofVolkswa-

genandRenault.Sincemanyofthesecountries

wantvalueactivitiestobecarriedoutwithin

theirborderswhentheyrelatetoproductssold

there,theyhaveintroducedsuchmeasuresas

➔ localcontentrequirementsandimportduties

onfullyassembledvehicles.Thesestepsare

intendedtoensurethatthe(rising)earningsof

thelocalpopulationarenotsiphonedoffabroad,

butinsteadhelptofurtherthecountry’seco-

nomicdevelopment(Petersen2004:3,149,311).

Decentralizingdevelopmentactivitiesisalso

becomingincreasinglyimportant.Owingtostiff

competitionintheautomotiveindustry,high-vol-

umemanufacturersinparticularneedtofocus

moreattentiononadaptingtheirvehiclestothe

circumstancesandpreferencesoftheircustom-

ersintheirtargetmarkets–asisclearfromthe

casestudiesofVolkswagenandRenault.“The

conceptofastandardizedworldcar,onethat

canbesoldinpreciselythesameforminevery

globalmarket,doesnotworkinthehigh-volume

segment,”observesRalfKalmbach,anautomo-

tiveexpertwiththeRolandBergerconsulting

firm.Thusdecentralizeddevelopmentsites

havetheresponsibilityofmakinguseoflocal

resourcesandadaptingspecificallydesigned

modelstotheneedsoflocalcustomers.

High-volumemanufacturers,inparticular,need

toadjusttheirvehiclestoindividualregionsor

countries;theymustcompetetodaynotonlyon

pricing,butbasedonproductfeatures,forexam-

plebyofferingattractivevehicleequipmentand

design.Theycannotpursueasingle-minded

➔ cost-leadershipstrategy(Porter1999:38-40,

97-164).However,premiummanufacturersas

wellcanderivecrucialcompetitiveadvantages

fromadaptingtheirvehiclestoagivenregionor

country–eveniftheir➔ differentiationstrate-

giesarebasedprimarilyontheirbrandimageor

oncertainproductfeaturessuchasinnovative

technologies.Thisiswhypremiummanufacturer

Daimlerhassignificantlyexpandeditsadaptive

developmentactivitiesinrecentyears,andis

alsoconsideringdecentralizingsuchactivities.

“Ifitmakessensetodevelopcertainmodel

136

Increasingly,high-volumeautomobile

manufacturersneedtotakeadecentralized

approachtovaluecreationwithintheir

corporatenetworks.Thisdoesnotmean

thateveryactivitytakesplaceateverysite;

rather,itrequiresso-called“decentralized

centralization.”Thisistheonlywayfor

automobilemanufacturerstoachievecon-

tinuedsuccessintheglobalmarketandto

benefitfromnewgrowthopportunities.

Glocalizing value creation

decliningsalesfigures,emergingnationsoffer

opportunitiesforsalesgrowth,andtheyalso

representpossiblesitesforfurthervalueactivi-

ties.Consequently,locatingawiderangeofsuch

activitiesanddecision-makingresponsibilities

intheemergingmarketsisacentralcomponent

inthestrategiesofautomobilemanufacturers

tomeettheneedsofthefuture.Thesecountries

willincreasinglybethesiteofvaluecreation

thatcanproducesignificantinnovations.The

casestudiesonRenaultandAudiareinforma-

tiveinthiscontext,asistheconversationwith

CoimbatoreK.Prahalad.

Thedecentralizationofvalueactivitiesanddeci-

sion-makingresponsibilities,ascalledforinthis

publication,neednotmeanlosingjobsinthe

automobilemanufacturers’homecountries.On

thecontrary:Thecaseswehaveexamineddem-

onstratethatcompaniescangenerategrowth

fortheiroverallorganizations–andthusalso

fortheirdomesticsites–byrelocatingcertain

valueactivitiesabroad.Thecasestudyoutlining

thesuccessfuldevelopmentofAudi’sHungarian

subsidiaryprovidesaparticularlystrikingillus-

trationofthispoint.Fortheirpart,companies

thatfailtorespondtotheneedtodecentralize

valueactivitiesandcreateglobalnetworkswill

findthemselvesfacingdecliningsalesfigures

andhencealossofjobs,attheirdomesticloca-

tionsaswell.

positiveramificationsforthedomesticmarket.

Therefore,promotingthedevelopmentofforeign

subsidiariesandassigningcertainresponsibili-

tiestothosesubsidiaries,inaccordancewith

theirrespectiveareasofexpertise,isimportant.

Inglobalnetworks,competitiveadvantagesare

generatednotonlybycorporateheadquartersin

thedomesticmarket,butalsobyforeignsubsid-

iaries,andparticularlybycentersofexcellence.

Withthedecentralizedcentralizationofmanage-

mentfunctions,suchcentersofexcellencecan

takeonleadershiprolesthroughoutacompany

intheirareasofcompetence.

Aftertheintroductionofmassproductioninthe

automotiveindustryatFordandGeneralMotors

backinthe1920sandthedevelopmentofthe

leanmanufacturingconceptatToyotabeginning

inthe1950s(Womacketal.1991:18),thenext

profoundchangeinthevaluestructuresofthe

automobileindustryislikelytoinvolveachieving

aglobalbalancebetweenthecentralizationand

decentralizationofvalueactivitiesanddecision-

makingresponsibilities.Borrowingtheterminol-

ogyusedbyWomacketal.(1999),wemight

callthisthe“thirdrevolution”intheautomotive

industry.

Ourinvestigationshavealsoshownthatthe

➔ emergingmarketswillplayamajorrolein

creatingsustainable➔ valueconfigurationsin

thefuture.Theywereafocusofallthreecase

studies.Whileautomobilemanufacturersinthe

establishedmarketsarefacedwithstagnatingor

137

Adecentralizedconfigurationofvalue

activitiesneedstobeaccompaniedbythe

decentralizationofmanagementfunctions

anddecision-makingresponsibilities.For-

eigncorporateunitstakeoncertainman-

agementfunctionssothattheycancontrib-

utetheirlocalresourcesandexpertisefor

thebenefitofthecompanyasawhole.

Decentralizing management functions

Inthefuture,theroleoftheemerging

marketswillnolongerbelimitedtoserving

ascheapproductionsitesfortheindustri-

alizedcountries.Theywillalsotakeover

moresignificantvalueactivities,whichwill

offercompaniescompetitiveadvantages

throughouttheworld.Itisthereforecru-

cialtoensurethatsiteslocatedinthese

countriesareanintegralpartofcompanies’

valuechains.

Involving the emerging markets

1 For a more complete discussion of companies’ resources and expertise, see Barney (1986, 1991), Wernerfelt (1984) and Gouthier/Schmid (2001).

adaptivedevelopmentactivitiesoffersclear

advantages,whileitmaybewisetocontinueto

choosealargelycentralizedconfigurationfor

basicdevelopment,andevenmoresointhecase

ofresearch.

Ourcasestudiesalsodemonstratethatforeign

subsidiaries,withtheirspecificvalueactivities,

areintegratedintothecorporatenetworkin

differentwaysandshouldbemanagedindividu-

ally.Thisalsomeansaneedfordifferentsetsof

➔ coordinationinstruments.Inthecaseofthe

VolkswagenGroup,forexample,werecommend

decentralizingdecision-makingresponsibilities

intheareaofadaptivedevelopment,intheinter-

estofgreaterautonomyfortheunitsinvolved.

ThecasestudyofAudiAGanditsHungarian

subsidiaryexplainsindetailhowanindividual

subsidiarycanassumealeadershiprolewithin

theoverallcompanyinitsvaluecompetencies,

andhowthenatureandintensityof➔ coordina-

tionactivitiesneedtobeadjustedaccordingly.

This,too,arguesagainsttheconclusionsdrawn

byPorter(1986:27),whopresumesthatallcor-

porateunitsaretobecoordinatedinthesame

way.

Overall,itcannotbeassumedthatasingle

configuration-coordinationprofileappliestoan

entirecompany.Instead,acompany’soverall

profileencompassesalloftheconfiguration-

coordinationprofilesrelatedtothecompany’s

variousvaluefunctions.Wethereforearguein

favorofadifferentiatedapproachtosuchfunc-

tionsandtheuseofanexpandedconfiguration-

coordinationmatrix,asshowninFigure2.For

purposesofillustration,thevaluefunctions

ofresearch,developmentandproductionare

enteredintothematrixindividually,takinginto

accountthatindividualvaluestagescanexhibit

differentconfiguration-coordinationprofilesin

theirfunctions.

Itshouldalsobenotedthattheinternationaliza-

tionofGermanautomobilemanufacturersand

automotivesuppliersthathasalreadyoccurred

hasnotbroughtwithitadeclineinemployment

intheGermanautomotiveindustry,asFigure1

showsinitscomparisonofemploymentstatistics

in1997and2007(jobswithmanufacturersand

suppliers).Indeed,duringthisperiod,employ-

mentincreasedbynearly11percent(VDA2008:

5),atatimewhenGermanmanufacturersand

supplierswereestablishinganumberofinterna-

tionalproductionsites,thus➔ internationaliz-

ingtheirvaluenetworkstoagreaterdegree.

Otherstudieshavealsoshownapositiverela-

tionshipbetweentheinternationalizationof

valueactivitiesandincreaseddomesticemploy-

ment(Klodt2007:138,Klodt/Christensen

2007).Expertspredictasimilartrendforthe

future;worldwidedemandforcarsproduced

byGermanmanufacturersisexpectedto

increasebyroughly1.8millionunitsbythe

year2020.Some700,000oftheseadditional

vehicleswilllikelybeproducedatGermansites

(“Deutschland2020.Zukunftsperspektivenfür

diedeutscheWirtschaft”2008:9).However,this

kindofsalesgrowthcanonlyoccurifcompa-

niesimplementthemeasuresoutlinedabove

fordecentralizingvalueactivitiesanddecision-

makingresponsibilities.

Thecasestudiescontainedinthispublication

havealsoshowntheneedtolookcriticallyat

frequentlycitedideasfromthestrategicand

internationalmanagementliterature.Forexam-

ple,theaggregatedconfiguration-coordination

profilesofentirecompaniespresentedby

MichaelPorter(Porter1986:27)arenotanaccu-

ratereflectionofreality.Ourcasestudiesshow

thateachvaluefunctioninvolvesadifferent➔

configurationstrategy.Forinstance,whilethe➔

configurationofproductionactivitiesisalready

somewhatdecentralizedintheVolkswagen

Group,aswellasatRenaultandAudi,research

anddevelopmentactivitieshavebeenstrongly

centralizedinallofthesecompanies,atleastin

thepast.Andevenwithinasinglevaluefunc-

tiontheremaybegoodreasonsforemploying

differentconfigurationstrategies.Thuswesee

–withreferencetoToyota–thatdecentralizing

138

139

Figure 1: Establishment of international sites by German automobile manufacturers and increase in the number of jobs in the German automotive industry

Source: The authors, based on VDA (2008:5), press reports and corporate data.

Establishment of international sites by German automobile manufacturers1)

Jobs in the German automotive industry2)

1) Selected examples of production sites, followed in parentheses by the year production began. Most are new facilities, but in some cases these refer to acquisitions or shares in existing plants (e.g., Audi acquired a plant in Brussels from VW).2) Automobile manufacturers and suppliers.

Europe_ VW: Sarajevo, BIH (1997)_ Daimler: Hambach, F (1998)_ VW: Polkowice, PL (1998)_ BMW: Swindon, GB (2000)_ BMW: Hams Hall, GB (2001)_ Audi: Brussels, B (2007)

Latin America_ VW: Curitiba, BR (1999)_ Daimler: Juiz de Fora, BR (1999)

Asia_ Audi: Changchun, CN (2003)_ BMW: Shenyang, CN (2003)_ VW: Shanghai, CN (2003)_ VW: Aurangabad, IND (2004)_ VW: Dalian, CN (2005)_ VW: Pune, IND (2006)_ VW: Kaluga, RUS (2007

1997

672,200

744,500

2007

+ 10.8 %

Therecanbenoconfiguration-coordination

profileforacompanyasawhole,sincethe

individualvaluefunctionswithinacom-

panydiffersubstantiallyintheirgeographic

distributionandinthewaytheiractivities

arecoordinated.Eachvaluefunctionhasits

ownprofileandshouldbeconfiguredand

coordinatedindividually.

Function-specific configuration and coordination

1997-2007(production only)

140

Figure 2: Expanded configuration-coordination matrix for a hypothetical company

1) The term "complete production" includes the basic production stages of an automobile manufacturer: stamping the parts of the vehicle body, building the vehicle body, painting vehicle bodies and assembling the vehicles.

Basicresearch

ResearchComponentproduction

Appliedresearch

Development

Completeproduction1)

Production

Adaptivedevelopment

Assembly

Market observation

Basicdevelopment

high

low

geographicallydispersed

geographicallyconcentrated

Coordination of value activities

Configuration of value activities

theircapabilities,subsidiariescanbecomefunc-

tionalorproduct-orientedcentersofexcellence

(Schmidetal.1999,Schmid2003).Thismeans

thatdecisionsarenolongermadeexclusivelyat

headquarters,butinsteadweseethedecentral-

izedcentralizationthatwasdescribedabove–in

thecaseofAudi,intheareaofengineproduc-

tion.

Ifforeignunitsaretogainthesignificancethey

deserve,theremustbeachangeinmanagement

style.Insteadofa“top-down”approach,inwhich

foreignsubsidiariesaresimplyrequiredtofol-

lowordersfromheadquarters,a“bottom-up”

managementstyleshouldbeintroducedthat

allowsforeignunitstohaveavoiceandpartici-

pateindecisionmaking.Figure3summarizes

thechangesthatareneededinthemanagement

ofinternationalcompanies.

Companiesclearlyneedtotakeactionwith

respecttotheircorporateculture.Neitherpurely

➔ ethnocentricnorpurelypolycentric➔ cul-

turesareneeded.Instead,companiesshould

movetowarda➔ geocentricculturetodevelop

acommonculturalunderstandingsharedby

theparentcompanyanditssubsidiaries,and

toaccountforchangesinthestrategiesand

structuresofvaluecreation(Perlmutter1969:

13,Kutschker/Schmid2008:287).Automobile

manufacturers,particularlywithinthehigh-

volumesector,mustestablishthemselveslocally

whilealsomaintainingaglobalorientation.This

alsoappliestotheirbasicassumptions,values,

norms,attitudesandconvictions,aswellasto

therelevantbehaviorsandartifacts(formoreon

thisunderstandingofculture,seeSchmid1996:

137andKutschker/Schmid2008:672).Carl-Pe-

terForster,PresidentofGeneralMotorsEurope,

madethefollowingcommentsattheCapital

Changesrelatingtovalueconfigurationaffect

notonlycorporatestrategiesandstructures,but

also➔ corporate,andparticularlymanagement

culture.Asvalueactivitiesanddecision-making

responsibilitiesbecomeincreasinglydecentral-

ized,companiesmovefrombeingstrictlyhierar-

chicalstructurestonetwork-likeorganizations.

Inthatsortofnetwork-basedcompany,foreign

subsidiariesgaininfluencerelativetothe

domesticparentcompany.Accordingly,upper

managementoftheparentcompanyshouldno

longerassumethatallofthecompany’sprimary

competitiveadvantagesaregeneratedathome,

asmanyhavebelievedinthepast(e.g.Hymer

1972,1976).Instead,itmustberecognizedthat

boththeparentcompanyandthesubsidiaries

contributetothecompany’sportfolioofcompeti-

tiveadvantages(Hedlund/Kogut1993).Because

theyareembeddedinanumberofdifferent

contextswithinthehostcountry,subsidiaries

areabletotapintovarioussourcesofinnovation

(Schmid/Schurig2003).2

Thismeansthatinternationalcompaniesneed

torethinktherolesplayedbytheirsubsidiaries.

Inthepast,foreignsubsidiarieswereoftensim-

plyaskedtoimplementintherespectivelocal

marketwhathadbeendevelopedanddecided

bytheparentcompany;today,incontrast,we

canassumethatforeignsubsidiariesareableto

offersignificantstrategiccontributionsandact

ascentersofexcellencewithleadershiproles

withinthecorporatenetwork.

AsthecasestudyofAudihasshown,subsidiar-

iesinforeigncountriesarenolongerrespon-

sibleonlyfortheirrespectivelocalmarkets,as

iscommoninthecaseof➔ polycentric(Perl-

mutter1969:12f.)andmultinationalcompanies

(Bartlett/Ghoshal1988:64f.).Dependingon

141

2. Necessary changes in the management of international companies

2 For more on the role of the “embeddedness” of subsidiaries in their environments, see Pahlberg (1996), Andersson et al. (2001a, 2001b) and Forsgren et al. (2005).

seetoitthattheiremployeesgainmoreknowl-

edgeofotherculturesandlearntointeract

appropriatelyandworktogethereffectivelywith

colleaguesorbusinesspartnersfromdifferent

culturalbackgrounds(Müller/Gelbrich1999:32,

35f.).3Accordingly,thereisaneedfordiversity

managementamongupperandmiddlemanage-

mentandoperationalstaff.Thishelpstoachieve

abalancebetweenglobalizationandlocalization

intheculturalsphere.

AutomobileSummitheldinBerlininSeptember

2008:“Automobilemanufacturerscannotstay

local.Theyneedtoincreasetheirglobalpres-

ence.Thebigchallengeinthisregardwillbeto

keeptheentirecompanytogether,whileatthe

sametimemaintainingasenseofsolidarityat

thelocallevel.”

Asvalueactivitiesbecomemoreinternation-

allydispersed,andasthemanagementofthose

activitiesisassumedbyawiderarrayofunits,

itisincreasinglyimportanttohandlecultural

differencesproperly,whichinvolvesacquiring

culturalcompetencewithrespecttoanumber

ofdimensions.Inparticular,companiesneedto

142

Traditional view Modern view

Type of organization Strictly hierarchical Network

Source of competitive advantages

Country of origin Country of origin and host countries

Role of subsidiaries ImplementationImportant strategic contributions,

centers of excellence

Responsibilities of subsidiaries

Domestic marketTranscending domestic market

(product or function)

Decisions Centralized at headquarters Decentralized centralization

Management style Top-down Top-down and bottom-up

Corporate cultureEthnocentric (shaped by country of origin) or polycentric (shaped by host countries)

Moving toward a geocentric approach (elements from country of origin and host countries)

Figure 3: Change in the perspective of international management as a result of the decentralization of value creation

Source: The authors, based on Schmid (2003: 278).

3 Regarding intercultural and multicultural management, see Adler (2002), Schneider/Barsoux (2003) and Schneider/Hirt (2007).

Find out more about Diversity Management in “Synergy by Diversity”

alsobeingintegrativeenoughtobindtogethera

globalnetworkofcorporateunits.

Changesinvalueconfigurationsrepresent

changesinthesurfacestructuresofacompany,

whichneedtobereflectedinitsdeepstructures

(cf.Schmid1996:115-130,Kutschker/Schmid

2008:690-692).Itisclearthatstrategic,struc-

turalandculturalmeasuresforreorganizing

internationalvaluecreationandcreatingacom-

petitivenetworkenterpriseareallintertwined,

anditisonlytogetherthattheycanachieve

theirfulleffect.Thesecomplexchangescannot

bemadeovernight.Companiesaretherefore

welladvisedtomovequicklytoadoptthe

perspectiveoutlinedinthispublication,and

especiallytoinitiatethenecessarycultural

changes.

Atthesametime,corporateculturehasan

importantfunctioninintegratingthevarious

corporateunitsintothecompanynetwork;it

alsoservesasaninstrumentofcoordination

(cf.Hedlund1986:24,Bartlett/Ghoshal1988:

55f.).However,concludingthatmoreatten-

tionshouldbepaidtocorporatecultureshould

notbemisinterpretedasfavoringacompletely

homogeneousculture.Rather,itisimportantto

createaframeworkwithinwhichtheindividual

divisions,functionsandsubsidiariescancom-

fortablyexist.Theaimistofindanoptimalway

tobringtogetherthevarioussubcultures,with-

outseekingtomakethemcompletelyuniform.

Suchculturaldiversityisalsoimportantinthe

lightofthebranddiversityfoundinanetwork

enterprise.Think,forexample,ofAudi,Bent-

ley,Lamborghini,Seat,SkodaandVWwithin

theVolkswagenGroup;Dacia,Renaultand

RenaultSamsungwithintheRenaultGroup;and

Daihatsu,Hino,Lexus,ScionandToyotawithin

theToyotaGroup.4

Changesintheconfigurationandmanagement

ofvalueactivitiesmustbeaccompaniedbya

changeincorporateculture.Inordertorespond

appropriatelytothedecentralizationofvalue

activitiesanddecision-makingresponsibilities,

companiesneedtoachieveunitywithindiver-

sity.Theymustdevelopaculturethatisflexible

enoughtoadjusttolocalcircumstances,while

143

4 For more on the brand management of international companies, see Bieling (2005), Meffert/Perrey (2005), Giersch (2007) and Schmid/Kotulla (2007, 2008).

Changesintheconfigurationandcoordina-

tionofvalueactivitiesmustbeaccompa-

niedbyachangeincorporateculture.In

ordertorespondappropriatelytothedecen-

tralizationofvalueactivitiesanddecision-

makingresponsibilities,companiesneedto

achieveunitywithindiversity.Theymust

developaculturethatisflexibleenough

toadjusttolocalcircumstances,whilealso

beingintegrativeenoughtobindtogethera

globalnetworkofcorporateunits.

Geocentric corporate culture

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147

BRIC countries. The acronym BRIC is derived

from the first letters of the countries Brazil, Rus-

sia, India and China – the ➔ emerging markets

that have experienced particularly dramatic

economic growth over the past few years, and

have thus provided companies with substantial

growth opportunities. The term was coined by

Jim O’Neill, chief economist for the Goldman

Sachs investment bank.

Cannibalization effect. The term cannibaliza-

tion effect refers to the negative impact one

brand of a company may have on the sales of

another brand of the same company. In this case

an increase in market share by one brand leads

to a loss of market share for the other brand; the

two brands are in competition with each other. A

cannibalization effect occurs particularly when

customers do not perceive the various brands of

a given company to be adequately differentiated

from one other.

Center of excellence. A center of excellence is

a ➔ subsidiary that has specific expertise in one

or more ➔ value functions or in one or more

products. Within this area or these areas, it is

responsible for several (country) markets and is

characterized by a high level of ➔ integration

within the corporate network. This allows the

entire company to benefit from its expertise.

A distinction is made between functional and

Glossary

Acquisition. The term acquisition refers to

the takeover of a company (the object of the

acquisition) by another company (the subject of

the acquisition, or purchaser), in which all or

at least the majority (over 50 percent) of shares

are purchased (in terms of voting rights and/or

capital interests). The purchase of less than 50

percent of shares in a company is referred to not

as an acquisition, but as the purchase of a ➔

minority stake.

Allocation strategies. A company’s allocation

strategies include ➔ configuration strategies

and ➔ standardization/adaptation strategies.

Allocation strategies determine how a company

navigates between globalization and localization.

Benchmark. Benchmarking is a procedure used

in the strategic analysis of companies with the

goal of making improvements. This term refers

to an ongoing assessment of certain factors

and their target values that are of relevance to

a company. Possible factors include processes,

products, methods and functions. Factors

relating to a competitor may be assessed, or

a comparison may be made between different

corporate divisions or involving companies from

different industries. In that case benchmarks

are specific target values or objectives to be

achieved.

148

product-oriented centers of excellence. Func-

tional centers of excellence have particular

expertise with respect to a ➔ value function or

individual tasks within a value function. Prod-

uct-oriented centers of excellence, on the other

hand, have specific expertise with respect to a

product and carry out all ➔ value activities that

are associated with that product.

CKD. CKD stands for “completely knocked

down” and refers to a common process in the

automotive industry in which kits are produced

at a given site, then taken to another site for

assembly into finished vehicles. The assembly

site is usually located in the target market where

the vehicles are to be sold. In contrast to the

➔ SKD process, in the CKD process vehicles

remain disassembled in their component parts.

This allows automobile manufacturers to avoid

customs duties on finished vehicles, for example.

Competitive advantage. Competitive advan-

tages are advantages one company has over its

competitors. Since they need to be viewed in

the context of the company’s competitors and

other aspects of its environment, they are not

absolute, but relative advantages. Competitive

advantages arise from a company’s ➔ poten-

tial for success, derived from such factors as

superior resources, capabilities and expertise.

If an advantage in resources, capabilities and

expertise is to become a competitive advantage,

it needs to involve aspects of the product or

service that are somewhat permanent as well

as relevant to and recognized by the company’s

customers.

Competitive strategy. Michael Porter identifies

two basic types of competitive strategies: a ➔

cost leadership strategy and a ➔ differentiation

strategy. He also introduces a strategy involv-

ing a concentration on focal points, in which a

company concentrates on a particular customer

group and offers products tailored specifically

to that group. This focus strategy also seeks to

achieve an advantage in terms of cost or dif-

ferentiation. When companies combine the cost

leadership and differentiation strategies, this is

termed an ➔ “outpacing” strategy.

149

Configuration. In the field of international

management, the term configuration refers to

the degree of geographic dispersion or geo-

graphic concentration of ➔ value activities.

Different value activities can be dispersed

(decentralization) or concentrated (centraliza-

tion) to differing degrees. Centralization means

that similar value activities are carried out only

at a certain center, for example at company

headquarters. Decentralization means that simi-

lar value activities are carried out at the same

time in different locations by different corporate

units, for example by various foreign ➔ subsid-

iaries.

Configuration strategies. Configuration

strategies include all of the ➔ options for the

geographic distribution of ➔ value activities.

The chosen configuration can lead to ➔ competi-

tive advantages, so configuration has not only a

structural, but also a strategic dimension.

Contract production. Contract production is

another option for entering new markets, in

which a company assigns one or several stages

of production to a contractual partner rather

than completing them itself. This might involve

having preproduction, finishing or the entire

production process carried out abroad.

Coopetition. The term coopetition is used to

describe cooperative competition, in which com-

panies that are normally competitors in the mar-

ket cooperate on certain ➔ value activities. Such

cooperation usually occurs within the framework

of precisely defined projects.

Coordination. Coordination is the adjustment

of elements within a system for the purpose of

optimizing that system. In the field of interna-

tional management, coordination means fine-

tuning the individual units of an international

company, which are often scattered around the

world. Coordination requires the use of numer-

ous ➔ coordination tools.

Coordination strategies. Coordination strate-

gies include all types of ➔ coordination tools

used by a company to coordinate its corporate

units. Appropriate coordination can lead to ➔

Culture. Culture refers to the totality of the

basic assumptions, values, norms, attitudes

and convictions of a social unit, which manifest

themselves in a variety of behaviors and arti-

facts and have developed over time in response

to the manifold demands that have been placed

on that social unit. Culture can relate to a wide

variety of entities, including countries, indus-

tries and companies.

Differentiation strategy. Porter distinguishes

between two basic types of ➔ competitive strate-

gies: a ➔ cost leadership strategy and a differ-

entiation strategy. In pursuing a differentiation

strategy, a company seeks to differentiate itself

from competitors based on its unique charac-

teristics. If customers recognize and appreciate

such unique qualities, the company may be able

to charge higher prices than its competitors, for

example.

Direct investment. The term direct investment

refers to transnational investments with an

inherent control motive: The investor is seek-

ing to gain a certain amount of control over an

economic unit in another country. While both

natural persons and legal entities can be inves-

tors in this context, the objects of investment

are normally companies. The investor can be

assumed to have a long-term interest in the

direct investment.

Economies of scale. ➔ Size-related effects.

Economies of scope. The term economies of

scope refers to synergy effects that result from

combining certain ➔ value activities of one or

more than one company (or of other organiza-

tions or parts of organizations). Economies of

scope may occur, for example, if a company is

able to manufacture two different products using

the same facilities or if it can use components

developed for one product in manufacturing

another.

Emerging markets. There is no generally

accepted classification of countries based

on their economic development. Relying on

the categories identified by the International

Monetary Fund (IMF), we distinguish in this

competitive advantages, so coordination has not

only a structural, but also a strategic dimension.

Coordination tools. A distinction can be made

between structural, technocratic and person-

oriented coordination tools. Structural coordina-

tion tools include all of the tools that build on

explicit organizational arrangements and can

be considered part of the formal organizational

structure. They involve the design of organiza-

tional structures, departments, staffs, corporate

divisions, corporate functions and types of

project organization as well as the centraliza-

tion or decentralization of decision making.

Technocratic coordination tools include all

arrangements and regulations that are not asso-

ciated with persons. Their goal is to standard-

ize approaches to solving problems that arise

repeatedly in the same or similar form. Such

standardization occurs primarily through rules

and programs, plans, budgets and reporting

systems, and in most cases also by formalizing

the appropriate arrangements. Person-oriented

coordination mechanisms relate to the people

within an organization and make them the focus

of coordination efforts. The main person-oriented

coordination mechanisms are personal instruc-

tions, mutual adjustments, visits, transfers of

management personnel, the standardization of

roles and culture-oriented coordination.

Corporate culture. ➔ Culture.

Cost leadership strategy. Michael Porter distin-

guishes between two basic types of ➔ competi-

tive strategies: a cost leadership strategy and a

➔ differentiation strategy. If a company chooses

a cost leadership strategy, it seeks to manufac-

ture the given product or service as cheaply as

possible so that it can sell it at the lowest price

in the competitive arena.

Country-of-origin effect. The term country-

of-origin effect refers to the fact that customers

often attribute certain qualities to a product or

service because it originated in a specific coun-

try. The product or service therefore takes on

specific image advantages or disadvantages. For

example, customers in some countries associate

“Made in Germany” with high quality.

150

publication between ➔ industrialized countries

and emerging markets. The classification of a

given country depends on a number of economic

criteria, including gross national income. Among

the countries generally regarded as emerging

markets are the nations of Eastern Europe, the

former Soviet Union, Brazil, India and China.

Ethnocentric. An internationally active com-

pany can be described as having an ethnocentric

orientation if it acts on the assumption that the

parent company is generally superior to its ➔

subsidiaries or that the home country is supe-

rior to host countries with respect to important

strategies and measures. Howard Perlmutter also

calls this a “home country attitude.” As a matter

of principle, decisions are made at headquarters

and key positions in the subsidiaries are filled

by managerial staff from the parent company’s

home country. One result is that the ➔ corpo-

rate culture is primarily shaped by the culture of

the parent company’s country of origin. See also

➔ geocentric and ➔ polycentric.

Export. Exports are goods or services originat-

ing in one country and delivered to another. A

distinction is made between indirect and direct

exports. It is an indirect export if a company

does not export such goods or services itself,

but via trade intermediaries in the home coun-

try, for example domestic export companies or

foreign trade companies. In the case of direct

exports, goods or services are exported to a for-

eign country in two different ways: first, without

the help of an intermediary in the host country

(e.g. directly to the end consumer), or second,

through intermediaries in the host country, for

example through an exclusive importer in the

foreign country.

Foreign share. The foreign share is determined

by comparing absolute numbers for foreign

aspects of a company with the corresponding

figures for the company as a whole. It can be

calculated for sales, number of employees or a

company’s profits, for example. The resulting

numbers are also referred to as FTO ratios (for-

eign to total operations ratios).

151

Geocentric. A company with a geocentric ori-

entation, which Howard Perlmutter refers to

as a “world-oriented orientation,” considers a

parent company and its ➔ subsidiaries to be

a global entity. It develops a character that is

largely independent of the individual countries’

➔ cultures and the specific features of the par-

ent company and its subsidiaries. Decisions

are made jointly by the relevant units of the

company. Nationality plays no role in the recruit-

ment of executives. See also ➔ ethnocentric and

➔ polycentric.

Global sourcing. The term global sourcing

refers to procurement that is carried out on a

worldwide basis. A company-wide determination

is made of which goods are to be procured from

the parent company and which from individual

➔ subsidiaries. Global sourcing is a way for

companies to take advantage of differences in

the cost of goods or to obtain goods that are not

available in certain markets, for example.

Heterarchy. The term heterarchy was coined

by Gunnar Hedlund to describe a certain type

of international company. Characteristic of a

heterarchy are a large number of ➔ centers of

excellence that are established not only by the

parent company, but also by its ➔ subsidiaries.

These centers of excellence can vary; depending

on the area in question, corporate units may be

simultaneously subordinate and superordinate

to other units. Lateral communication is an

essential characteristic of a heterarchy: Informa-

tion is exchanged throughout the company. A

large number of ➔ coordination tools are used

to maintain an international company as a heter-

archy. Culture-oriented coordination (an aspect

of person-oriented coordination) is a particularly

important ➔ coordination tool in the heterarchy.

Industrialized countries. There is no gener-

ally accepted classification of countries based

on their economic development. Relying on the

categories identified by the International Mon-

etary Fund (IMF), we distinguish in this publi-

cation between industrialized countries and ➔

emerging markets. The classification of a given

country depends on a number of economic crite-

ria, including gross national income. Generally

Licensing arrangements. Licensing arrange-

ments are contractual agreements through

which the licensor grants to the licensee cer-

tain intangible assets, such as patents, brands,

copyrights or expertise under certain stipulated

conditions. The licensee pays a licensing fee to

the licensor for the use of such intangible assets.

Local content. The term local content refers to

the share of total value added that originates at

a certain location. For example, many ➔ emerg-

ing markets pass local content regulations stipu-

lating that a certain share of the value added

required for a product or service must be pro-

duced within the country. Because of such local

content regulations, automobile manufacturers

frequently choose to use the ➔ SKD or ➔ CKD

process.

Low-cost car. Low-cost cars (LCC) is the term

used in the automotive industry to refer to

vehicles that are manufactured at unusually low

cost and can therefore be sold at a particularly

low price. Generally it is applied to automobiles

sold for about 10,000 dollars (roughly 7,500

euros) or less, but there is no fixed definition.

The term was coined in the ➔ industrialized

countries, where most vehicles sold today are

considerably more expensive than low-cost cars,

especially because of their many technological

features. From the perspective of the ➔ emerg-

ing markets, however, for which these low-cost

cars are primarily intended, the term is not

accurate. Rather, these reasonably priced cars

are often the first vehicles that are affordable for

large segments of the population. A few manu-

facturers have recently announced that they are

coming out with vehicles that will be available

for under 2,000 euros. Because of the even lower

manufacturing cost and price of these vehicles,

they are sometimes called ultra-low-cost cars

(ULCC).

Market entry strategies. Market entry strate-

gies are the measures companies use to enter

and develop a foreign market. Among the vari-

ous market entry strategies are ➔ exports, ➔

contract production, ➔ licensing arrangements,

➔ minority stakes, ➔ strategic alliances, ➔

joint ventures, ➔ subsidiaries and ➔ mergers.

included in the category of industrialized coun-

tries are countries with a high level of economic

development, particularly the Western and

Central European countries, the United States,

Canada, Japan, Australia and New Zealand. How-

ever, Hong Kong, Singapore, South Korea and

Taiwan may also be classified as industrialized

countries.

Integration. Integration refers to the act of

making an element part of an existing whole

or an existing order. In the present context,

it means making a corporate unit part of the

international corporate network. Integration

occurs with the help of ➔ coordination tools.

It is important to note that the coordination of

corporate units is an ongoing task, while inte-

gration usually occurs only on certain occasions,

for example when a new partner becomes part

of a ➔ strategic alliance or in the ➔ acquisition

of a ➔ subsidiary. In the field of international

management, integration is significant mainly

because of the increasing decentralization of ➔

value activities.

Internationalization strategies. International-

ization strategies have five dimensions: first, ➔

market entry strategies; second, ➔ target mar-

ket strategies; third, ➔ timing strategies; fourth,

➔ allocation strategies; and fifth, ➔ coordina-

tion strategies.

Joint venture. A joint venture is an entity that

is formed by two or more companies and pos-

sesses its own legal personality. The companies

involved contribute capital, knowledge and per-

sonnel to the newly established enterprise.

Learning effects. Learning effects are ➔ scale

effects that result from what employees have

learned. Workers learn something new with

every additional unit they produce. Activities

can then be carried out more quickly, better and

in an increasingly factor-saving way, which pro-

duces cost savings. In contrast to ➔ size-related

effects, which can lead to fixed-cost degression,

among other things, learning effects result in a

decrease in variable costs.

152

Merger. When two companies join together to

increase their market presence, this is referred

to as a merger. Each company gives up its own

independence; the merger results in a new com-

pany. A distinction is made between mergers of

equal and of unequal partners. The line between

mergers and ➔ acquisitions is often blurred. If

one of the partners is clearly predominant, the

arrangement is more likely, from an economic

perspective, to be termed an acquisition rather

than a merger.

Miniature replica. Roderick White and Thomas

Poynter use the term miniature replica to

describe a ➔ subsidiary that is a copy of the

parent company. In its own market, the subsid-

iary carries out ➔ value activities that are simi-

lar to those of the parent company in its country

of origin, but on a smaller scale. A miniature

replica’s area of responsibility is limited to the

respective country market. Miniature replicas

can be found in industries with substantial

import barriers or high transport costs, or in

sectors that allow for only limited ➔ size-related

effects.

Minority stake. It is called a minority stake

when a company acquires an interest of no more

than 49.9 percent in another company. A minor-

ity stake can be a first step to an ➔ acquisition.

Not-invented-here syndrome. In the context

of international management, not-invented-here

syndrome refers to a phenomenon in which

products or services that were developed in a

certain corporate unit (for example within the

parent company) are not taken up by other units

(for example by a ➔ subsidiary) or are rejected

entirely because they originated elsewhere.

The term is also used to describe a reserved or

negative response by customers to products or

services that were not invented or produced in

their own country.

Outpacing strategy. Michael Porter makes

a distinction between two basic types of ➔

competitive strategies: a ➔ cost leadership

strategy and a ➔ differentiation strategy. When

a company chooses not to limit itself to either a

cost leadership or a differentiation strategy but

153

instead combines both of these ➔ competitive

strategies, this is referred to as an outpacing

strategy. For example, a company may be able

to sell its product at the most affordable price

while also offering the best quality.

Platform. A platform is the technical founda-

tion of an automobile to which other parts are

added. Which components are considered part

of the platform differs from one manufacturer to

another. Along with the floor pan, it generally

includes the drive train, chassis components

and wiring harness. Some manufacturers also

include the engine and gearbox. Platforms allow

the company to use as many identical com-

ponents as possible in several models, which

reduces complexity and costs, for example

through ➔ size-related effects. In most cases

it is hardly noticeable to the customer when

several models are built on the same platform

because they continue to have their own unique

appearance.

Polycentric. If an internationally active com-

pany has a polycentric orientation, which

Howard Perlmutter refers to as a “host country

orientation,” then it accepts the many differ-

ences between the home and host countries,

for example in terms of culture. It realizes that

there are different patterns of thinking within

the corporate network, and none is given prior-

ity. Most decisions are made by local ➔ subsid-

iaries. Local personnel fill managerial positions

and are considered best able to deal with the

local market. See also ➔ ethnocentric and ➔

geocentric.

Potential for success. A company’s potential

for success includes its resources, capabilities

and competencies that can lead to ➔ competi-

tive advantages and help achieve its long-term

goals. Companies may make good use of their

potential for success – but they may also let it

go to waste. Resources, capabilities and compe-

tencies are not effective on their own; companies

need to activate and exploit them.

Primary activity. ➔ Value activity.

Strategic alliance. A strategic alliance is a

cooperative arrangement between at least two

and usually more than two companies. Partners

in a strategic alliance work together in precisely

defined areas, but in contrast to a ➔ joint ven-

ture this does not result in the establishment

of a separate new enterprise. The goal of the

companies involved is to achieve their objectives

more easily or more quickly.

Strategy. The term strategy refers both to the

planned set of measures chosen by a company

to achieve its long-term goals and to unplanned

(emergent) patterns of decision making and

action. Strategies include decisions and actions

that take into account a company’s characteris-

tics, such as its resources, as well as character-

istics of the environment, for example the com-

petition within the given industry. Companies

use their strategies to achieve ➔ competitive

advantages.

Structure. In the field of management, the term

structure includes all of the arrangements that

help to organize the company’s activities. Such

arrangements focus particularly on the division

of labor and the company’s ➔ configuration, ➔

coordination, management and control.

Subsidiary. Subsidiaries are legally inde-

pendent units of a company. In terms of their

structure, a distinction can be made between

newly founded companies, so-called “greenfield

investments,” and ➔ acquisitions. In terms of

ownership, we can distinguish between majority

holdings (between 50.1 percent and 99.9 per-

cent of capital shares and/or voting rights) and

wholly owned subsidiaries. In addition, there are

subsidiaries with a complete ➔ value chain as

well as specialized subsidiaries (e.g. production

plants or sales companies).

Target market strategies. Just as companies

need to decide how to enter a given market

(➔ market entry strategies), they also need to

determine which market or markets they are

aiming for. Target market strategies determine

the number of countries and the geographi-

cal regions in which the company wants to do

business (market presence), which specific

Responsiveness. The term responsiveness

refers to a company’s ability to adapt to the

needs and wishes of its stakeholders. Local

responsiveness, or companies’ responsiveness to

the needs and wishes of their local stakeholders,

is becoming increasingly important in the con-

text of international business. This often leads to

a decentralization of ➔ value activities, which in

turn results in a need for ➔ integration.

Scale effects. Scale effects include ➔ size-

related effects and ➔ learning effects.

Secondary activity. ➔ Value activity.

Size-related effects. Size-related effects can

result when a company succeeds in increasing

output during a given period. This allows fixed

costs to be distributed over a larger amount

of output and lowers unit costs. If unit costs

are lowered by increasing plant capacity (for

example by eliminating underemployment), this

is termed fixed cost degression or higher returns

to scale. If unit costs are reduced by expanding

the size of the plant, this is called economies of

scale.

SKD. Acronym for “semi knocked down.” This

refers to a common procedure in the automotive

industry: First, modular vehicle components are

manufactured, after which they are assembled

at another site, in most cases in the target

market for the finished vehicles. In contrast to

the ➔ CKD procedure, with the SKD approach

these vehicles are not completely broken down

into their individual parts, but instead into pre-

assembled units, for example the finished vehi-

cle body. The SKD procedure allows automobile

manufacturers to avoid paying import duties on

finished vehicles, for example.

Standardization/adaptation strategies. Com-

panies can market their products or services in

identical or different forms worldwide; in other

words, they can either standardize or adapt

them. Between the extremes of standardization

and adaptation there is also the possibility of

carrying out partial differentiation.

154

country markets the company will enter (market

selection), and to which segments within those

country markets it wants to appeal (market seg-

mentation).

Timing strategies. Companies need to coor-

dinate the timing of their entry into various

(country) markets. They may enter several dif-

ferent markets successively (waterfall strategy)

or at the same time (sprinkler strategy), or they

may choose a combination of both approaches

(waterfall-sprinkler strategy). In addition, when

entering a specific country, companies need to

make the strategic decision of whether to act as

pioneers or followers.

Transnational organization. A transnational

organization or a transnational company seeks to

combine global efficiency, local adaptability and

worldwide learning capabilities. The aim is to

use a network organization to take advantage of

widely scattered and interdependent values and

resources. Note that ➔ subsidiaries are assigned

differentiated and specialized roles, for example

as ➔ centers of excellence. The term transna-

tional organization is particularly associated

with Christopher Bartlett and Sumantra Ghoshal.

Ultra-low-cost car. ➔ Low-cost car.

Value activity. A company’s activities aimed

at creating value are called value activities.

Michael Porter divides value activities into pri-

mary and secondary activities. Primary activities

include activities in the areas of inbound logis-

tics, production, outbound logistics, marketing/

sales and service. Porter identifies procurement,

research, development, human resource man-

agement and infrastructure (e.g. the accounting

system) as secondary activities, also known as

support activities.

Value chain. A company’s value chain is made

up of its various ➔ value activities as compo-

nents of the company-wide process of value

creation. The model of the value chain developed

by Michael Porter is particularly well known.

It is primarily intended to serve as a tool for

analyzing the role of individual ➔ value activi-

ties in a company’s overall value creation and

155

their contribution to producing ➔ competitive

advantages.

Value configuration. ➔ Configuration.

Value function. ➔ Value activity.

Waterfall-sprinkler strategy. ➔ Timing strate-

gies.

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Dorow, Wolfgang/Reber, Gerhard:

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Project publications

Corporate cultures in global interaction

157

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Translation and editing:

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Strategy, Structure, and Culture

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