Description
The complicated interactions between these external factors and the shaping of international value chains are evident when looking at exchange rates. Between early 2006 and mid-2008, the strength of the euro relative to the dollar compelled a number of non-American automobile manufacturers to consider establishing production sites in the United States. As Kutschker/Schmid show.
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]
www.bertelsmann-stiftung.de
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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. 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 25
References 28
International value chains
Current trends and future needs, as exemplified by the
automotive industry
10
The expansion of companies into foreign mar-
kets continues, and this is particularly true in
the automotive industry. Long ago, however,
automobile manufacturers stopped focusing
exclusively on ?exports. Instead of merely
exporting vehicles and selling them in foreign
markets, companies began carrying out a wide
range of ?value activities abroad. These activi-
ties are located in or near promising target mar-
kets. Sometimes, for example, companies begin
producing an already popular model on site. The
result is the development of international ?
value chains, which pose further challenges, for
example, for intercultural issues.
What factors contribute to the international-
ization of value creation? Positive economic
developments in ?emerging markets, such as
the so-called ?BRIC countries (Brazil, Russia,
India and China), have recently led automobile
manufacturers to implement an extensive array
of value activities in these countries. Similarly,
macroeconomic factors play a role in where
companies decide to locate, since factors such as
exchange rates affect the sales prices and profit-
ability of vehicle exports, and higher oil prices
raise the cost of transport. Other factors that
intensify competition in the automotive industry,
and that affect the international value chain,
include new competitors from emerging markets
and increasing cost pressures. For example,
companies may tend to avoid markets with a
particularly high level of competition. In shap-
ing the value chain, it is important to take into
account the specific needs of the industry. For
instance, companies need access to innovative
research clusters if they are to develop new con-
cepts such as cars with environmentally friendly
engines. Figure 1 shows a number of external
factors that are currently exerting a strong influ-
ence on companies’ international value chains.
11
1. Internationalization of the value chain in the automotive
industry
Find out more about
successful international
cooperation in
”Corporate Cultures
in Global Interaction”
a VW production site in Chattanooga, Tennessee,
in 2008, and reports indicate that Volkswagen’s
?subsidiary Audi is also reviewing the possi-
bility of producing vehicles in the United States.
Trends in exchange rates also influence more
than just production. Although BMW established
a production site in Spartanburg, South Carolina,
in 1992, many of its components continue to
be manufactured in Europe. Seeking to further
reduce its vulnerability to currency fluctuations,
BMW is planning to increase procurement from
suppliers that invoice in dollars (Oesterle et al.
2008: 252).
The complicated interactions between these
external factors and the shaping of interna-
tional value chains are evident when looking
at exchange rates. Between early 2006 and
mid-2008, the strength of the euro relative to
the dollar compelled a number of non-American
automobile manufacturers to consider estab-
lishing production sites in the United States.
As Kutschker/Schmid show (2008: 28), the
high exchange rate forced these companies to
struggle with declining sales or take losses on
their vehicle exports to the United States. One
response of the Volkswagen Group was to set up
12
Overall economic
situation
Fluctuating exchange rates
Business cycle
Oil price development
...
Industry-speci?c
requirements
Example: 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 Con?guration
Home Country
Host Country 1
Host Country 2
Host Country 3
Figure 1: Selected external factors that affect the con?guration of
international value chains
Source: The authors, based on VDA (2008: 34-42).
Procurement
R & D
Production
Sales
Legend:
A number of internal factors also play an impor-
tant role in the geographical distribution of
value activities. As companies internationalize,
their ?market entry strategies are of particular
significance for locating certain value activi-
ties on site. For example, the export strategy of
many companies, as they begin the process of
internationalization, is to keep (nearly) all value
activities within the home country. However,
the establishment or ?acquisition of a foreign
13
subsidiary creates a need for internationalization
in areas such as sales, production, or research
and development. Today companies employ a
wide variety of market entry strategies (Schmid
2002, Schmid 2007: 16f.). As shown in Figure
2, these strategic options are typically distin-
guished by the company’s level of commitment
(i.e., the ties that it establishes) in the foreign
market as well as by the management work that
takes place there.
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).
companies so that they are allowed, under Chi-
nese law, to produce vehicles in China for that
country’s rapidly growing market.
In many cases, automobile manufacturers create
foreign subsidiaries as a way of establishing pro-
duction and sales units in local markets. Though
foreign distribution companies as alternatives
to exclusive importers have long been a normal
part of the market and have rarely attracted
much media attention, there has been a great
deal of public interest in new foreign produc-
tion companies. Daimler, for example, decided
in the summer of 2008 to establish a subsidiary
in Hungary, which will produce A and B class
vehicles in the city of Kecskemét. Acquisitions
also can be found. With the purchase of the
renowned English companies Jaguar and Land
Rover from its competitor Ford in the spring
of 2008, Tata Motors is now in possession of
extensive value resources outside of India. Such
acquisitions are not always successful, however.
After its purchase
of Rover in 1994,
BMW found itself
unable to handle
several problems that the British manufacturer
was experiencing, including quality issues, and
it severed its ties with that company six years
later (Kutschker/Schmid 2008: 920). ?Mergers
are less common than acquisitions. Manufactur-
ers most often take a cautious approach, and
this was true even before the 1998 merger of
Daimler and Chrysler proved unsuccessful and
was dismantled in 2007 with the sale of the rel-
evant company holdings.
The choice of an ?internationalization strategy
is directly related to the ?configuration of the
international value chain. The chosen strategy
and the value activities involved produce differ-
ent value structures, as shown by the examples
cited above. Differences in value structures are
also reflected in domestic and foreign sales, or
in the ?foreign share of total sales (Figures
3 and 4). Manufacturers differ in their propor-
tion of domestic relative to foreign sales, which
reflects different levels of internationalization
in value creation, in this case primarily in
sales. It is particularly striking that American
Numerous cases illustrate the market entry
strategies employed in the automotive industry,
along with the export of goods. A prominent fea-
ture of the ?strategy chosen by the sports car
manufacturer Porsche is ?contract production.
Since 1997 and 2005, respectively, the majority
of its Boxster and Cayman models have been
manufactured by the Finnish company Valmet.
Beginning in 2012, Austrian contract manufac-
turer Magna Steyr will take on this role. Large
portions of Porsche’s Cayenne model are manu-
factured by Volkswagen in Bratislava, Slovakia,
and then sent to the Porsche plant in Leipzig
for final assembly. International ?licensing
is a common industry strategy for producing
individual vehicle components. For example,
the Asian Suzuki company is licensed to manu-
facture diesel engines developed by the Italian
manufacturer Fiat.
International ?minority stakes are common in
the automotive industry. Premium manufacturer
Daimler controls nearly seven percent of shares
in India’s Tata Motors, which has recently
attracted attention with its ?ultra low-cost
Nano car. Renault and Nissan are linked by
cross ownership: Renault holds 44.3 percent of
Nissan, and Nissan owns 15 percent of Renault
shares. This allows the two competing compa-
nies to strengthen their cooperation on opera-
tional issues and strategy within the framework
of the ?strategic alliance that they formed in
1999 (cf. also Schmid/Hartmann 2007). BMW,
Daimler and General Motors – competitors in
other aspects of the market – have an inter-
national strategic alliance to develop a hybrid
car, among other things, as a way of sharing
the high costs of development associated with
such a project. Competitors Peugeot-Citroën and
Toyota are also working closely together. They
jointly developed the nearly identical compact
cars Citroën C1, Peugeot 107 and Toyota Aygo,
and have been manufacturing them since 2005
in the Czech city of Kolin, within the framework
of the international ?joint venture Toyota Peu-
geot Citroën Automobile (TPCA). In addition, all
of the major automo-
bile manufacturers
have established joint
ventures with Chinese
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 ?scal years 2007 and 2007/2008.
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As of 2007.
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2) Not including ”vans, buses, other.“ Domestic sales Foreign sales
Legend:
Total sales
(vehicles sold, in millions)
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manufacturers continue to sell a relatively large
share of their vehicles in their domestic market.
In 2007, up-and-coming manufacturers from
emerging markets, such as AvtoVaz in Russia,
First Automobile Works (FAW) in China and Tata
in India, sold their vehicles almost exclusively
at home. This is not true of most European and
Japanese manufacturers.
company to compete with its rivals. At the same
time, the international nature of value activi-
ties means that they need to be coordinated
and integrated into the corporate network as a
whole. As the level of globalization increases,
automobile manufacturers are therefore faced
with the challenge of configuring and coordi-
nating their international value chains to their
best advantage. The following chapter focuses
on these two crucial dimensions of the manage-
ment of the international value chain.
The design of the international
value chain is an important com-
petitive factor.
In the global automobile market, the competi-
tive position of an individual manufacturer no
longer depends solely on such traditional factors
as productivity or innovative capacity. Instead,
the competitive position is also a function of the
design of the international value chain. A cen-
tral question, therefore, is how value activities
should be distributed geographically to enable a
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 ?scal years 2007 and 2007/2008.
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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
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30
40
50
60
70
80
90
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84 84 84
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81 81 81
79
78 78 78
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17
Value configuration is the distri-
bution of value activities among
different countries.
The value activities of a company, whether they
are primary or secondary, can be distributed
among different countries. The geographical
distribution of such activities is called ?value
configuration. It characterizes the degree of
their geographical dispersion (decentralization)
or concentration (centralization). Centralization
exists if comparable activities are carried out
only at a certain central location; decentraliza-
tion means that comparable activities are geo-
graphically dispersed and take place parallel
to one another at a variety of corporate units
(Porter 1986a: 25, Kutschker/Schmid 2008:
996). Figure 5 shows the value configuration of
a hypothetical company headquartered in Ger-
many.
A company’s value chain encompasses value
activities in the order of their operational imple-
mentation. The value chain shown in Figure
5 is taken from Michael Porter, a professor at
Harvard Business School and an expert on busi-
ness strategy. Porter distinguishes between ?
primary and ?secondary activities. Primary
activities include inbound logistics, operations,
outbound logistics, marketing and sales, and
service. Secondary activities are procurement,
research and development, human resource
management and infrastructure (Porter 1986a:
29-32).
2
This detailed description of the value
chain is useful for analyzing ?competitive
advantages. Breaking down a company into its
individual value activities makes it possible to
identify the current and potential contribution of
each activity to the company’s competitive posi-
tion (Porter 1986a: 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 con?guration according to Porter
Value chain
Value con?guration
S
e
c
o
n
d
a
r
y
a
c
t
i
v
i
t
i
e
s
Primary activities
Upstream primary activities Downstream primary activities
Infrastructure (e.g. accounting system)
Inbound
logistics
Operations Outbound
logistics
Marketing
and sales
P
r
o
f
i
t
m
a
r
g
i
n
P
r
o
f
i
t
m
a
r
g
i
n
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
carried out centrally while others are dispersed.
Finally, a company that follows a strategy of
strict decentralization implements all activities
that are part of the value chain in every country,
which may produce ?miniature replicas in the
host countries.
It is clear from a closer examination of compa-
nies’ value configurations that, in many cases,
?value functions are not carried out in their
entirety at foreign sites. Instead, such sites han-
dle only certain sub-processes. One example is
the value function of production in the automo-
tive industry, which can be broken down into the
stamping of sheet metal components, body con-
struction, painting of the vehicle body, produc-
tion of components and final vehicle assembly,
as shown in Figure 7. These production stages
do not necessarily need to be confined to one
plant but can be performed in various different
countries.
When he published his conception of the value
chain, Porter pointed out that so-called down-
stream primary activities such as marketing
and service, which presume a certain proxim-
ity to the customer, tend to be carried out in a
decentralized fashion in the respective markets.
Upstream primary and secondary activities,
with the exception of human resource manage-
ment, are frequently centralized at one site or
restricted to only a few locations (Porter 1986a:
23, Kutschker/Schmid 2008: 998, 1003f.). In this
sense, the hypothetical German company shown
in Figure 5 represents a typical example.
In principle, there are three basic types of ?
configuration strategies, as shown in Figure
6. Under a strategy of centralization – which,
strictly speaking, would only be possible by
exporting indirectly and using domestic trade
intermediaries – all of the company’s value
activities remain in the home country. A com-
bined strategy means that some activities are
Centralization
strategy
Combined
strategy
Decentralization
strategy
Home country
Host country 1
Host country 2
Host country 3
Figure 6: Basic types of con?guration strategies
Source: Kutschker/Schmid (2008: 999).
Procurement R & D Production Sales Legend:
mean that all production stages are decentral-
ized. A manufacturer that uses its foreign sites
merely to assemble SKD or CKD sets that have
been prefabricated in its home country has a
lower level of foreign value added than one that
carries out all of its production stages at foreign
plants.
There are a number of advantages to decentral-
izing value activities, but centralization offers
other benefits. Figure 8 provides an overview
of the most important reasons why companies
might choose to either centralize or decentral-
ize these activities.
3
Note that the arguments
for centralization or decentralization are not the
same for each activity. Companies determine on
a case-by-case basis whether concentration or
dispersal is preferable, as shown by the studies
included in this publication.
Particularly in the automotive industry, numer-
ous assembly plants are devoted exclusively to
the assembly of vehicle kits produced at other
sites. A distinction is made between ?semi
knocked down (SKD) production, when the vehi-
cle kit contains elements that already have been
assembled, such as the auto body, and ?com-
pletely knocked down (CKD) production, when
none of the parts have been assembled (Meyer
2008: 81f.). Daimler has four plants in Southeast
Asia (Thailand, Vietnam, Malaysia and Indo-
nesia) that assemble CKD kits manufactured
in Germany. This allows the company to avoid
paying import duties. In Vietnam, for example,
these import duties amount to 50 percent of the
value of the imported goods (Huster 2006). Thus,
the fact that production plants exist in a variety
of geographical locations does not automatically
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).
_ Access to scarce production factors, e.g.,
qualified personnel
_ To take advantage of comparative cost
advantages with respect to production fac-
tors
_ To distribute risk and increase flexibility
and innovative capacity, for example by con-
sciously duplicating or multiplying activities
_ To make use of complementary resources,
competencies and skills
_ Better coordination with value activities that
have already been carried out on site
_ To avoid legal restrictions, for example, regu-
latory requirements or import restrictions
_ To ensure market access and comply with
government regulations, for example ?
local-content requirements
_ To take advantage of direct or indirect sup-
port provided by the government of a host
country
_ Prevents duplication of effort, as, in most
cases, more relevant information is available
on site than in other corporate units
_ Easier to maintain confidentiality because
information remains within one site
_ Transfer of information within the company
is easier because it does not involve cross-
ing borders
_ Possible to establish a largely uniform
?culture
_ To avoid conflicts between employees at
different sites
_ Greater acceptance of the company within
the host country, for example by establish-
ing itself as a local manufacturer
_ To open up markets that offer little competi-
tion
_ To overcome logistic barriers, e.g., to reduce
transport costs
_ Better adaptation of products or services to
the needs of local customers
_ To take advantage of cultural proximity, e.g.,
to supply or sales markets
_ To set up outposts in strategically relevant
markets, particularly in innovative clusters
or in the home markets of important com-
petitors
_ To tap into local information and communi-
cation networks
_ Proximity to scientific facilities, which facili-
tates access to knowledge and expertise
_ Acquisition of international experience by
going abroad
Motives for
decentralization
Motives for
centralization
_ To achieve a critical mass
_ To take advantage of ?economies of scale
and ?learning effects
_ To take advantage of ?economies of scope
_ Simplified organization, no processes involv-
ing more than one country
_ Simplified management, face-to-face contact
is possible
_ To facilitate ?coordination of value activi-
ties, as little or no distance exists
_ Easier access to information and communi-
cation, among other things, because cultural
and language barriers are not a factor
_ Projects can be completed more quickly; for
example, there is less need for coordination
not specifically linked to individuals. Person-
oriented tools directly involve the employees
of a company who are engaged in coordination
efforts (Kutschker/Schmid 2008: 1031).
The configuration of value activities, such as
their geographical distribution, and the coordina-
tion of these activities constitute the two factors
that companies can use to shape their interna-
tional value chains. If configuration and coor-
dination are viewed as dimensions of a matrix,
this produces the so-called configuration matrix
(Porter 1986a: 27), which provides insight into a
company’s approach to international value cre-
ation and shows its options with respect to the
geographical distribution of value activities as
well as their ?integration. Porter demonstrated
this matrix, as shown in Figure 10, using the
American automobile manufacturers General
Motors and Ford, along with their Japanese com-
petitor Toyota. The matrix shows the positions
of the three companies during the 1970s and
the direction in which they were moving in the
1980s, as observed by Porter (Porter 1986a: 27).
A decentralized configuration
of value activities implies the
need for specific approaches to
coordination.
A decentralized configuration of value activities
requires a high level of integrative skills from
those in corporate management. Such activities
need to be integrated into the corporate network
and coordinated. A functioning value network
can only be achieved by properly coordinating
centrally or decentrally configured activities
(Martinez/Jarillo 1991: 431). Accordingly, in
dealing with value activities that are more or
less geographically dispersed, companies use
various tools to integrate them to a greater or
lesser degree into the corporate group. For the
most part, the available ?coordination tools are
structural, technocratic or person-oriented, as
outlined in Figure 9. Structural ?coordination
tools are based on organizational features and
represent an essential part of the formal organi-
zational ?structure. Technocratic tools include
all of the arrangements and provisions that are
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
enhanced coordination across national bound-
aries. However, no one since Porter has updated
the position of these companies on the configu-
ration-coordination matrix, so only limited con-
clusions can be drawn about the changes that
have taken place.
Furthermore, Porter’s configuration-coordination
matrix (1986a) has undergone little critical scru-
tiny.
4
It is clear that this matrix has one striking
weakness: Although it provides a clear picture
of a company’s value structures, it is imprecise.
Porter himself has conceded that it is crucial to
determine the configuration and coordination of
each individual value function separately (Porter
1986a: 25-27, Porter 1986b: 17-19). The examples
that he shows on the matrix, though, are entire
companies, which means that Porter assumes
At that time, Toyota, like other Japanese automo-
bile manufacturers, was centralizing its value
activities in order to lower costs, so that it could
sell its vehicles at an attractive price. Today,
many of Toyota’s value activities are decentral-
ized, but the company is still recognized for its
highly coordinated network. Largely because of
its acquisition-based approach, General Motors
pursued a country-specific strategy with a num-
ber of different subsidiaries (brands) and widely
dispersed value activities. However, its subsid-
iaries, such as Opel in Germany and Vauxhall in
Great Britain, were still relatively autonomous
until the end of the 1970s, since coordination
was minimal. In the 1970s, Ford was divided
into several regional units that were coordinated
at mid-level. Since then, both companies have
centralized a number of selected activities and
Figure 10: Con?guration-coordination matrix according to Porter
Source: Based on Porter (1986a: 27f.).
high
low
decentralized centralized
Con?guration
of value
activities
Coordination
of value
activities
Toyota
General
Motors
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
main location. Consequently, there are limits
to the conclusions that can be drawn about the
degree of an automobile manufacturer’s overall
centralization or decentralization. For these
reasons – and because of findings from the case
studies of VW, Renault and Audi – the configura-
tion-coordination matrix is only of limited value
in making management decisions.
of strategic management. There is virtually no
literature for practitioners that addresses the
issue of the configuration and coordination of
value activities. This study is intended to fill this
gap.
The objective of the study is as follows:
_ to determine the status quo of international
value creation among companies in the auto-
motive industry;
_ to identify best practices in the configuration
and coordination of value creation;
_ to identify needs and options for developing
sustainable international value chains; and
_ to critically review and expand Porter’s config-
uration-coordination matrix (1986a).
that an overall configuration-coordination profile
exists for each company. In principle, however,
each value function in itself can be configured
centrally or decentrally and may manifest a high
or low level of coordination, within the same
company. Thus, a number of automobile manu-
facturers have decentralized their production
and sales, while their research and development
are often carried out centrally at the company’s
In recent years, numerous studies – many of
them conducted by trade associations or man-
agement consulting firms – have focused on
structural change in the automotive industry and
the subsequent reconfiguration of value chains.
5
The focus has often been on cooperation
between manufacturers and suppliers and, par-
ticularly, on the scope of the value activities car-
ried out by each side (e.g., Sonnenborn 2009).
The configuration and coordination of such
activities have been largely ignored. Most nota-
bly, there has been little examination of the role
of the configuration and coordination of value
activities in generating competitive advantages.
For the most part, the academic literature on
this topic (e.g., Roth 1992, Holtbrügge 2005) has
failed to consider the decision-making approach
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).
development of new markets plays a central role
in the case study of the Volkswagen Group.
The Volkswagen Group is engaged in one of the
most ambitious growth initiatives in the industry
in seeking to overtake Toyota, the world’s cur-
rent market leader in terms of sales and profit-
ability, by the year 2018. These strategic goals
cannot be achieved without opening up new
sales markets and permeating the company’s
existing markets. It is important to remember
that certain crucial requirements must also
be met with respect to the configuration and
coordination of value activities if companies are
to be internationally successful. We therefore
particularly focus on the question of how compa-
nies can market their products worldwide while
adapting to different customer demands at a
local level. We analyze the value configuration of
the Volkswagen group and compare it with that
of Volkswagen’s competitor Toyota. This case
study outlines ways in which companies can
resolve the tension between standardization and
differentiation by decentralizing their develop-
ment activities, to adapt their products to local
markets, while also decentralizing the relevant
decision-making competencies. If they succeed
in doing so, they can become true global players.
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.
All of the examples and conclusions outlined
here have been chosen not only for their rel-
evance to companies in the automotive industry
but also because they can provide insights that
may be useful to other industries. One of our
concerns is to show how competitive advantages
can be generated, consolidated and expanded
by means of an appropriate configuration and
coordination of value activities, and what this
requires of management. As we intend to dem-
onstrate, companies within the same industry
often choose entirely different approaches
to configuration and coordination in order to
ensure competitive positions.
We focus on the automotive industry because
it is of particular importance to Germany and
many other countries. With about 744,500
people employed by manufacturers and suppli-
ers, the automotive industry is one of Germany’s
largest employers. If we also include those who
work in upstream and downstream industries,
such as the electrical industry and vehicle sales,
roughly 5.3 million jobs in Germany depend
on the automotive industry. This accounts
for approximately 13 percent of all employed
individuals in Germany (Destatis 2007). The
automotive industry was also responsible for
a foreign trade surplus of 105 billion euros in
2007, which underscores its enormous impor-
tance in the area of foreign trade (VDA 2008: 5).
Clearly, then, structural changes in the interna-
tional value chains of automobile manufacturers
can have a substantial impact on the employ-
ment and economic situation in Germany. It is
important to note, however, that moving value
activities abroad does not necessarily mean a
decline in the number of jobs in Germany. By
internationalizing value creation, German auto-
mobile manufacturers also have an opportunity
to generate domestic growth.
The three companies considered in this study,
Volkswagen, Renault and Audi, were selected
partly to include various external influences
in our analysis (cf. also Figure 1, p. 12). The
25
time of its establishment in 1993 up to the pres-
ent day. Our analysis has shown that upgrading
foreign subsidiaries to centers of excellence by
assigning them additional value activities and
developing specific skills produces crucial ben-
efits for the company as a whole, and thus for
its domestic sites. This happens, for example, by
increasing the number of domestic jobs. How-
ever, success in establishing ?centers of excel-
lence is only possible with the help of a flexible
style of management that takes into account the
specific activities, roles and areas of competence
of the respective subsidiaries.
How should one go about moving
value activities abroad in order
to generate positive effects for
domestic sites?
In our concluding section, we summarize the
main results derived from the case studies and
outline their implications for managing inter-
national value creation. It is clear that changes
in value creation not only have strategic and
structural consequences for companies but also
have important implications for ?corporate
culture.
Using the case study of the French automobile
manufacturer Renault, we examine the new ?
low-cost car concept. We focus on determining
the aspects of value configuration that are nec-
essary to succeed in meeting the needs of mar-
ket segments that are under a great deal of cost
pressure. Accordingly, we conducted a thorough
analysis of Renault’s value configuration for its
Logan model, sold in Europe under the name of
Renault’s Rumanian subsidiary, Dacia. We also
identify implications for the coordination and
management of value activities. The case study
clearly demonstrates that a concept aimed at
achieving a low-cost car requires much more
than merely economical vehicle construction or
production in a low-wage country. Indeed, the
overall value structure needs to be adjusted. Pro-
duction activities need to be centralized, but it is
also important to achieve a high level of localiza-
tion in the field of procurement. Moreover, the
configuration strategy for development activities
needs to be adapted over time. Although a cen-
tralized approach is advantageous when initially
developing a low-cost car, it makes sense to
decentralize development activities over the
long term. At the macroeconomic level, low-cost
cars and other products aimed at the low-price
segment of the market mean that emerging
markets are becoming centers of value creation
that can offer companies competitive advantages
worldwide.
How do value activitities need
to be configured in order to
be successful in serving market
segments that are under
considerable cost pressure?
The case study of the Hungarian subsidiary of
Audi AG focuses on the issue of shifting pro-
duction capacities abroad, a much-discussed
phenomenon in the ?industrialized countries
that is generally defended by pointing to the
need to improve a company’s competitive posi-
tion. In this case, the primary question is how
to undertake such a shift of value activities to
another country in order to generate positive
effects for the company’s domestic sites. In order
to answer this question, we analyzed the devel-
opment of Audi’s Hungarian subsidiary from the
26
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29
1. The Volkswagen Group’s new global strategy 31
1.1 Strategy 2018: Competitor Toyota as the standard 31
1.2 Benchmarking with Toyota 32
2 The configuration of production activities within the Volkswagen Group 35
2.1 Highly decentralized production activities 35
2.2 Competitive disadvantages arising from a lack of production sites 37
2.3 Opening up markets by establishing local production sites 38
3 The configuration of R&D activities within the Volkswagen Group 40
3.1 A concentration of R&D activities in the company’s home region of Europe 40
3.2 Inadequate decentralization of development as an impediment to growth 43
3.3 Decentralizing development for greater market success 45
3.4 Decentralized decision-making responsibilities as a prerequisite for successful 48
local development
4 The consequences of decentralizing value activities 51
References 54
Glocal value creation in the Volkswagen Group
Moving toward greater decentralization of production
and development
30
The Volkswagen Group introduced a comprehen-
sive new strategy in December 2007, aimed at
achieving global market leadership in the auto-
motive industry by the year 2018. The Strategy
2018 plan, drawn up under the leadership of
Volkswagen CEO Martin Winterkorn, represents
the most ambitious growth initiative in the his-
tory of the Wolfsburg manufacturer. Within the
next ten years, Volkswagen intends to become
not only as large, but also as profitable as its
Japanese competitor Toyota Motor Corporation.
By 2018 its goal is to increase annual vehicle
sales from 6 to 11 million, which means nearly
doubling today’s sales. The company seeks to
raise its annual pre-tax profit margin from the
current level of 5.6 percent to 10 percent by
2018. Toyota nearly achieved this level in fiscal
year 2006/2007, when it recorded a profit mar-
gin of 9.3 percent, and despite lagging sales it
is currently closer to reaching that goal than the
Volkswagen Group.
Strategy 2018 represents a clear challenge to
the Japanese automobile manufacturer Toyota,
which has been acknowledged for many years
as the industry leader. Winterkorn underscores
his company’s ambitions: “The Volkswagen
Group is on the attack. And we are not aiming to
come in second or third. We are in this to win!”
(Ritter 2008). By using Toyota as a standard,
Winterkorn is adopting a method that proved
successful during his time at Audi, where he
was chairman of the Board of Management from
2002 to 2006. For years, Audi’s employees were
motivated by the slogan “Beyond BMW” to over-
take their Bavarian competitor. Given Toyota’s
preeminence, is this current goal even more
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
recognition by 2018 as one of the automo-
bile manufacturers with the highest level of
customer satisfaction worldwide
_ Improving quality: Achieving the highest
levels of quality in the world by 2018
_ Promoting sustainability: Implementing
environmental protection measures in its
products, materials, technologies and pro-
cesses by 2018
_ Sales growth: Increasing vehicle sales from
6.2 million in 2007 to 11 million in 2018
_ Optimizing rate of return: Increasing the
pre-tax profit margin from 5.6 percent in
2007 to 10 percent in 2018
The goals of
Strategy 2018
to make gains in the American market, the
world’s largest with annual total sales of some
17 million vehicles. Toyota sells over 2.5 million
vehicles each year in the United States, putting
it ahead of Volkswagen by nearly 2.2 million
units; this difference amounts to 20 percent of
Winterkorn’s target for 2018 of total Group sales
of 11 million vehicles. To be sure, Volkswagen
has a larger market share than Toyota in cer-
tain markets, for example in South America,
where Volks wagen accounts for 17.8 percent
of the market as compared with 4 percent for
its competitor. However, the volume of sales
in the South American countries is not large
enough even to begin to close the overall gap.
And Volkswagen’s dominance in Europe is offset
by Toyota’s preeminence in its home markets
of Japan and Asia in general. Toyota’s sizeable
advantage in total sales is therefore largely
due to its strong market position in the United
States. “The United States is our most serious
Achilles’ heel,” says Winterkorn in discussing
the growth needed to achieve the company’s
goals (Hillebrand 2007: 30).
Achieving these challenging goals requires tak-
ing steps to increase efficiency. These include
outsourcing certain aspects of the value creation
process to suppliers, increasing production effi-
ciency and using standardized ?platforms to
produce several different vehicles. In the future,
for example, all of the models produced by the
Group will be based on only three platforms to
which different but mutually compatible mod-
ules are added. Volkswagen also needs to com-
pete on the market side, which means achieving
growth in a variety of markets, particularly
outside Europe. “Volkswagen's market share in
Europe can't get any better. The company has to
look outside the EU for growth,” explains Adam
Jones, analyst for investment bank Morgan Stan-
ley (Edmondson 2007).
In order to achieve its growth targets, Volkswa-
gen needs to concentrate on two things: First, it
needs to establish itself in the emerging econo-
mies (such as Russia, India and Southeast Asia).
It is currently lagging behind its competitors
in these markets. Second, Volkswagen needs
Volkswagen has set itself a high bar. Over the
years it has become clear that Japan’s Toyota
company represents the industry standard in
numerous areas. Whether we look at integrated
supplier networks, lean production methods,
high quality standards, the development of new
technologies or financial performance figures,
Toyota outperforms most of its competitors in
nearly every respect. Even premium manufac-
turers like Daimler and Porsche frequently view
high-volume manufacturer Toyota as a so-called
?benchmark for identifying potential improve-
ments in their own companies. Figure 2 com-
pares the most important performance figures
for Volkswagen and Toyota and the sales trends
for both companies in the past few years.
Toyota is particularly well known for the Toyota
Production System (TPS), which has revolution-
ized automotive production. Today its production
and management methods are used not only by
nearly every automobile manufacturer, but also
by other industries and organizations, including
the American aluminum producer Alcoa and the
University of Pittsburgh Medical Center. TPS is
based on the just-in-time approach (JIT) and the
Jidoka principle of ongoing quality assurance
during every stage of production. As explained
by Taiichi Ohne, one of the system’s creators,
the main goals in developing TPS were to
increase productivity and reduce costs.
This production system is particularly notable
in that it not only achieves lean ?structures
and processes, but it focuses on individual
employees and challenges them to be constantly
striving to improve work processes and product
quality (Japanese: Kaizen). Many aspects of the
system, such as its recognition of employees as a
company’s most important resources and its Kai-
zen principle, are also firmly rooted in Toyota’s
?corporate culture. Thus, TPS is an integral
part of the company. “Toyota employees always
talk as if the company would declare bankruptcy
the next day. They are never satisfied with
what they have done the day before,” explained
32
1.2 Benchmarking with Toyota
33
Figure 2: Comparison of the most important performance ?gures and sales
trends for Volkswagen and Toyota
As of ?scal year 2007 or December 31, 2007. As of ?scal 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 million
Pre-tax pro?t margin 5.6 %
Employees 328,594
Foreign share 46.7 %
Production (thousands of vehicles) 6,213
Foreign share 66.4 %
Sales by brand (thousands of vehicles)
VW 3,662.6
Audi 964.2
Škoda 630.0
VW commercial vehicles 488.7
SEAT 431.0
Bentley 10.0
Lamborghini 2.4
Bugati 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 billion
Foreign share 53.0 %
Pre-tax earnings E 15,289 million
Pre-tax pro?t margin 9.3 %
Employees 299,394
Foreign share 66.2 %
Production (thousands of vehicles) 8,180
Foreign share 48.2 %
Sales by brand (thousands of vehicles)
Toyota (incl. Scion) 7,005.1
Daihatsu 928.7
Lexus 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
5.2
5.5
5.1
5.5
5.0
6.1
5.0
6.7
5.1
7.4
5.2
8.0
8.5
5.7
6.2
8.9
Toyota Motor Corporation Volkswagen AG
Legend:
result of an organic expansion of the Japanese
company into foreign countries, which was
accompanied by a comparatively larger increase
in its workforce outside Japan. As for sales,
Volks wagen’s foreign share is considerably
higher than Toyota’s: 75.3 percent relative to 53
percent. The situation is similar for the number
of vehicles produced; Volkswagen’s foreign pro-
duction makes up 66.4 percent of the total, sub-
stantially higher than the corresponding figure
for Toyota, which is only 48.2 percent.
While the major automobile manufacturers now
regard the decentralization of their marketing
and sales as self-evident and maintain sales sub-
sidiaries (including associated sales offices) and
dealer networks in all of their important interna-
tional markets, it has not yet become common
practice to decentralize the organization of the
?value functions of production and R&D. In
the battle for worldwide market shares, however,
the decentralization of these value activities
re presents a key to success. With this in mind,
we focus our further analysis on production
(Chapter 2) and R&D (Chapter 3).
Ron Harbour, founder of the productivity study
The Harbour Report and partner in the Oliver
Wyman consulting firm, as he discussed Toyo-
ta’s corporate culture at the Capital Automobile
Summit held in Berlin in September 2008.
Toyota’s success is usually attributed to its
efficiency in development and production, as
well as to the high quality of its vehicles. Volks-
wagen often looks to its Japanese competitor
as a model in terms of the time required for
developing a new vehicle, the productivity of
individual plants, sales figures, profit margins
and customer satisfaction. There is no question
that Volkswagen needs to improve if it is to
catch up with Toyota in these areas. In focus-
ing on these aspects, however, the fact is often
overlooked that Toyota also represents a unique
global value network that was created by distrib-
uting various ?value activities throughout the
world. Many of the ?competitive advantages
that the Japanese company enjoys today are the
result not only of its leadership in production
and management methods, which are often the
subject of discussion among both theoreticians
and practitioners, but also of the decentralized
?configuration of its value activities.
Toyota’s competitive advantages
are also a result of the decentral-
ized configuration of the com-
pany’s global value chain.
Figure 3 shows a comparison of Volkswagen and
Toyota with respect to the two companies’ ?
foreign share of employees, sales and vehicles
produced, which highlights differences in these
companies’ ?value configurations. At Volkswa-
gen, 46.7 percent of employees are foreign, as
compared with 66.2 percent at Toyota. In con-
trast to Toyota, at Volkswagen most employees
still work in the home country. This is particu-
larly notable because Volkswagen acquired two
foreign companies – Spain’s SEAT in 1968 and
the S
?
koda company from the former Czech and
Slovak Federative Republic in 1991 – that still
maintain a large portion of their value activi-
ties in their countries of origin. Toyota, on the
other hand, acquired only Japanese companies,
Daihatsu and Hino. The difference, then, is the
34
of the current production of Volkswagen and
Toyota relative to their international sales.
It is clear from comparing these two companies
that their regional focuses are different because
of differences in their respective home coun-
tries. Both Volkswagen and Toyota produce and
sell most of their vehicles in their home regions.
Unlike Toyota, Volkswagen does not maintain a
plant in every region; it has no production facili-
ties in the North American market (the United
States and Canada). Furthermore, the number of
Volkswagens sold in North America is relatively
small. For Toyota, on the other hand, North
America is a focus of its business efforts, along
with the company’s home region.
The decision to locate production abroad
may be motivated by a variety of business
The Volkswagen Group has long been active in
the international arena. The company’s interna-
tionalization began in 1952 with the establish-
ment of a sales company in Canada. The next
year marked the beginning of vehicle sales in
South America, as the company’s subsidiary
Volkswagen do Brasil was founded. Today Volk-
swagen distributes its vehicles in more than 150
countries and maintains 48 production facilities
in 19 different countries. Not long after Volkswa-
gen, Toyota Motor Corporation ventured abroad
as well and founded its American subsidiary
Toyota Motor Sales USA in 1957. A Brazilian
sales company, Toyota do Brasil, followed in
1958. Today Toyota sells its vehicles in over 170
countries, and it has an even larger and more
decentralized production network than Volkswa-
gen, with 74 production sites in 27 countries.
Figure 4 provides an international overview
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 ?scal year 2007 or December 31, 2007. As of ?scal 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
1,014,200 2,900,200
1,242,700 932,000
374,400 496,400 3,111,800
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:
_ 1 for vehicles, engines
and components
Vehicles per year
Produced
Sold
Asia/Paci?c
6 production sites:
_ 3 for vehicles, engines
and components
_ 3 for engines and components
Vehicles per year
Produced
Sold
Eastern Europe
10 production sites:
_ 8 for vehicles, engines
and components
_ 2 for engines and
components
Vehicles per year
Produced
Sold
Source: The authors, based on Toyota (2007a), Volkswagen (2008a, 2008c).
As of ?scal 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
11 production sites:
_ 5 for vehicles
_ 5 for engines and components
_ 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
_ 1 for engines and components
Vehicles per year
Produced
Sold
Asia/Paci?c
48 production sites:
_ 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
_ 2 for engines and components
Vehicles per year
Produced
Sold
5,443,500
3,330,000
143,800
744,000 284,000
2,942,000
177,900
1,519,300 377,000 532,000
379,000 845,000
Volkswagen AG
Toyota Motor
Corporation
0
124,300
considerations and location factors. In choos-
ing their sites in Bratislava (Slovakia) and Kolin
(Czech Republic), respectively, Volkswagen and
Toyota have been able to take advantage of cost
differences. These sites, in what can still be
considered low-wage countries, produce vehicles
for the entire European market. Decentralized
sites can also be a way of getting around import
restrictions. Both companies have Russian sites,
for example, allowing them to avoid paying
the 25 percent import duty levied in Russia on
imports of finished vehicles. In Kaluga, Volkswa-
gen assembles ?SKD (semi knocked down) kits
produced in Zwickau (VW Passat) and in the
Czech city of Mladá Boleslav (S
?
koda Octavia);
since December 2007 Toyota has been operat-
ing an assembly plant in St. Petersburg, where
the Toyota Camry is assembled for the Russian
market.
For years Volkswagen has had difficulty in the
American market. After a period of success in
the 1970s, it has never really been able to regain
a foothold in the United States. In 1978 Volkswa-
gen opened an assembly plant in Westmoreland,
Pennsylvania, which produced the Rabbit, the
American version of the VW Golf, but only ten
years later the company’s Board of Management
decided to shut down that site. Its capacity was
not being adequately utilized, which had led to
financial losses. From then on the VW plant in
Puebla, Mexico, supplied most of the VW Golfs
and Jettas for the North American market; these
were Volkswagen’s best-selling models in the
region. Today the VW brand is still unable to
attract a satisfactory number of customers in the
United States, which has had an effect on the
company’s overall earnings. According to expert
estimates, the Group is posting annual losses in
the hundreds of millions for all of its brands com-
bined. And these numbers add up: “Since 2002,
Volkswagen’s losses in the largest automobile
market in the world have gone into the billions,”
says Engelbert Wimmer, automotive expert for
the PA Consulting Group (Schneider 2008a).
An analysis of the production configurations
of Volkswagen and Toyota shows that there
may be several different motivating factors for
a ?direct investment.
1
Plants in Russia, for
example, also provide an opportunity to open up
and supply the Russian market, since “Russia is
likely to become the second largest sales market
in Europe,” according to Frank Schwope, analyst
for Nord LB (Schneider 2007c). This is why Volk-
swagen is planning to expand its SKD assembly
plant in Kaluga into a facility for all aspects of
the manufacturing process (including auto body
construction) that can handle 115,000 units by
2009. For similar reasons, Volkswagen – like its
Japanese competitor – has already established
production sites in other growth markets such
as Brazil, India and China. This has allowed
Volkswagen to achieve a relatively high level of
decentralization in its production activities.
Local production as a sales argu-
ment: Patriotic American custom-
ers often regard Toyota’s vehicles
as American products.
In contrast, the American market has played a
critical role in Toyota’s success. The Japanese
company has achieved impressive sales results
in the United States largely because of its pro-
duction sites there. Toyota vehicles have been
built in the US since the 1980s, when import
restrictions were imposed on Japanese automo-
bile manufacturers, and patriotic customers are
often favorably disposed to these cars because
they consider them to be American products.
While Toyota is recognized as a Japanese brand,
it is associated with local production, which is
a strong sales argument in the United States.
This is where Toyota laid the groundwork for its
competitive edge in the world market: In fiscal
year 2006/2007, the Japanese manufacturer sold
more than 2.9 million vehicles in the United
States and Canada – nearly 35 percent of its
total sales – outperforming the Volkswagen
Group by over 2.5 million vehicles sold.
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
Fluctuations in exchange rates are currently
making it even more difficult for Volkswagen to
?export vehicles to the United States. Because
of the weak dollar, Volkswagen either has to
charge higher prices for its vehicles, which are
manufactured in Europe, than its American and
Japanese competitors charge for the vehicles
they produce in the United States, or the price of
its vehicles is inadequate to cover manufactur-
ing and transport costs. Because of the exchange
rate, the company ends up taking a loss even on
In the year 2018, the Volkswagen Group hopes
to sell 1.2 million vehicles (800,000 of them
under the VW brand) in the United States,
Canada and Mexico; in 2007 it sold only about
530,000 (230,000 VW vehicles).
The idea was
rejected that the company’s Mexican plant in
the city of Puebla, which is located in the North
American Free Trade region, might be used
to achieve this growth. The Puebla plant was
designed for a maximum of 500,000 vehicles,
and in 2007 it was already producing roughly
410,000, including the VW New Beetle for the
European market. Moreover, unless Volkswagen
has a plant in the US it will not be able to pro-
duce enough vehicles for the American market
without being affected by currency fluctuations.
This would make it impossible to achieve the
company’s goals for this market – and its global
goals as well. If the Volkswagen Group is to
reach its growth targets, it will have to have a
production site in the United States.
Establishing an American plant would make
vehicle sales in the US less vulnerable to
changes in the exchange rate. At least the com-
pany’s American-made vehicles could be sold
at competitive prices while also covering costs.
Borrowing a term from investment banking,
the industry refers to “natural hedging” when
plants are established to prevent losses result-
ing from exchange rate fluctuations. However,
this requires that as many production stages as
possible are carried out at that plant, including
such things as vehicle body construction and
painting, producing a higher level of ?local
content. A plant that was devoted exclusively to
the sale of such popular and high-status models
as the VW Tiguan SUV. “Toyota is much more
successful in the American market than we are,”
says Detlef Wittig, head of marketing and sales
for Volkswagen AG, in describing the current
situation (Schneider 2008a). By establishing a
plant in the United States, Volkswagen would
earn points with American buyers, reduce the
company’s vulnerability to fluctuating exchange
rates and avoid transport costs, which would
help close the gap to Toyota.
the assembly of SKD or ?CKD kits produced
outside of the United States would only slightly
reduce the company’s dependence on the value
of the dollar and decrease its foreign exchange
losses only minimally. Ideally, even engines and
gearbox components should be produced in the
United States, according to Engelbert Wimmer,
an automotive expert with the PA Consulting
Group: “It is very difficult to launch a campaign
in the United States while spending valuable
euros on importing engines and parts” (Herz/
Schneider 2008a).
In addition, it is crucial to increase localiza-
tion in the area of procurement, by purchasing
the systems, modules and components used at
Volkswagen’s American plant from suppliers in
the United States or at least paying for them in
dollars. In the automotive industry, unlike the
aircraft industry, it is not customary for interna-
tional transactions to be carried out in American
dollars. This means that the Volkswagen Group
needs to establish contacts with suppliers in
the United States or persuade companies from
other countries to establish sites in the US as
well. This is an area where VW can learn from
the mistakes of its competitors: Although BMW
has an American production site in Spartanburg,
South Carolina, it is still very much affected by
negative currency effects because its procure-
ment has a localization rate of only 30 percent.
38
2.3 Opening up markets by establishing local production sites
smaller and more fuel-efficient than those of
its competitors, in the American market. Larger
cars, particularly those produced by American
companies, are becoming less and less attrac-
tive. Volkswagen will have an especially good
chance of winning market shares currently held
by American manufacturers, which are lag-
ging behind in developing fuel-saving cars. But
Toyota, too, is still selling large, gas-guzzling
vehicles in the United States, such as the
Sequoia and FJ Cruiser SUVs and its Tundra
pickup truck. Along with a commitment to pro-
duction in the US, this offers Volkswagen a good
opportunity to make inroads into the American
market. Accordingly, the expansion plans out-
lined by the Board of Management have gained
the support of Bernd Osterloh, head of the
Volkswagen Works Council and member of the
Supervisory Board: “I firmly believe that VW
can succeed in the US. […] The problems in the
American market [Authors’ note: Financial crisis,
high oil prices, threat of recession] can even be
viewed as an opportunity for the VW Group and
its fuel-efficient engines” (Schneider 2008b).
However, the advantages of decentralized pro-
duction in the United States can only partially
solve the problems Volkswagen is facing. All
over the world, it still finds itself unable to meet
the needs of its customers to their full satisfac-
tion, and this has kept it from achieving higher
sales in foreign markets. A solution to this prob-
lem will have to include, among other things, a
change in the company’s R&D configuration.
In the spring of 2008, Volkswagen’s Board of
Management officially decided to open a plant in
the United States, with production scheduled to
begin in 2010. The Supervisory Board approved
the proposal in July 2008. Shortly thereafter,
Volkswagen chose Chattanooga, Tennessee, as
the location for the new plant. According to
sources within the company, the selection pro-
cess focused on cities in Michigan, Alabama and
Tennessee, all of which offered the advantage of
existing supplier networks. The Detroit, Michi-
gan, region, for example, is the center of the
American automotive industry and home to the
headquarters of the “Big Three” American man-
ufacturers: General Motors, Ford and Chrysler.
Daimler’s American plant is located in Tusca-
loosa, Alabama. Nissan has its North American
headquarters and two production sites in Ten-
nessee. Factors favoring the southern states of
Alabama and Tennessee, from Volkswagen’s
perspective, were relatively low wages and the
comparatively insignificant role of the unions.
The Volkswagen Group is planning to invest
about 620 million euros in the new plant, which
is expected to produce 150,000 vehicles per year
in its initial phase.
Despite the economic downturn in the United
States, the time seems right for a market offen-
sive by the Volkswagen Group, since higher oil
prices have made fuel efficiency an increasingly
important consideration for American custom-
ers. This is a good opportunity for the Wolfsburg
company to position its vehicles, which are
39
If the Volkswagen Group is to achieve its
ambitious growth targets, it is essential
to establish a plant in the United States.
Additional measures are necessary for that
growth to be efficient and profitable:
_ The plant needs to attain a high level of
local content in its production; in other
words, as many value-added steps as pos-
sible should be carried out on site.
_ The plant’s procurement needs to be
highly localized, focusing on suppliers
with production in the United States.
Summary
as markets with sophisticated customers or the
home markets of strong competitors.
The research carried out by the Volkswagen
Group has always been largely centralized, with
the corporate research division at the company’s
Wolfsburg headquarters providing support for
all of the Volkswagen brands. The individual
brands also maintain smaller research depart-
ments which together form a research network,
with headquarters in Wolfsburg as its hub. In
addition, the Electronic Research Lab (ERL) in
Palo Alto, California, carries out research in the
field of electronic systems and makes the results
available to all of the corporate brands.
The R&D activities of the various brands concen-
trate mainly on development efforts. Each brand
has its own development departments – VW in
Wolfsburg, with a design branch in Potsdam;
A detailed analysis of the R&D configuration of
the Volkswagen Group requires a differentiated
look at its various activities. The literature dis-
tinguishes between research, which focuses on
gaining new insights, and development, which
puts those insights into practice in new products
or processes. Research activities include basic
and applied research; development activities
can be divided into basic development, which
involves new products or processes, and adap-
tive development, in which existing products
or processes are modified. In practice, market
observation activities are often integrated into
the R&D organization; information about current
market trends and technological developments
is gathered and passed on to the research and
development departments to aid in the decision-
making process. Market observation units are
also referred to as outposts. They are generally
found in strategically important locations, such
40
3. The configuration of R&D activities within the
Volkswagen Group
Figure 5: Con?guration 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 observation D M As of December 31, 2007.
3.1 A concentration of R&D activities in the company’s home region
of Europe
division, at the Toyota Central Research &
Development Laboratories, is located in Naga-
kute, Japan, near headquarters in Toyota City.
Research is conducted in Nagakute for the entire
Toyota Group, which is active not only in the
automotive industry, but for example in the con-
struction industry and in biotechnology as well.
Also located in Japan are the Tokyo Technical
Center, which conducts research on electronic
systems, and the Higashi-Fuji Technical Cen-
ter in Susono, which focuses on research and
development in the areas of innovative vehicle
concepts and drive technologies.
The Head Office Technical Center in Toyota City
is the headquarters for vehicle development
and design, and it joins together with five other
international development units to form a world-
wide development network. Toyota Motor Europe
has two development divisions, located in
Zaventem, Belgium, and Burnaston, Great Brit-
ain. American subsidiary Toyota Engineering &
Manufacturing North America carries out devel-
opment work at its headquarters in Ann Arbor,
Michigan, and at three affiliated sites. Also
active in development are Toyota’s subsidiaries
Audi in Ingolstadt (the electronics center) and
Neckarsulm (the lightweight vehicle construc-
tion center); S
?
koda in Mladá Boleslav, Czech
Republic; and SEAT in Martorell, near Barcelona,
Spain. The SVW Technical & Design Center in
Shanghai, China, has been developing models
for the Chinese market for several years. The
Shanghai site, the technological center in Tokyo
(VTT), Japan, and the Electronic Research Lab
(ERL) in Palo Alto also serve as outposts and
pass on information to the corporate research
division in Wolfsburg.
Figure 5 shows the elements that make up the
international R&D network of the Volkswagen
Group. While Volkswagen has several interna-
tional R&D sites, most of its activities in the core
areas of research and development continue to
take place in Germany or Europe. The bottom
line, then, is that Volkswagen does not have a
global R&D organization that is active in all of
the world’s important markets.
Toyota’s research activities are even more cen-
tralized than those of the Volkswagen Group.
The Japanese company’s corporate research
41
Figure 6: Con?guration 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 M Research Development Market observation As of December 31, 2007.
necessary to make changes if, for example, new
innovation clusters were established elsewhere
or problems arose that made it difficult to carry
out research in Germany. However, that would
only be the case if legal restrictions were placed
on certain research activities or innovation were
impossible because of a lack of sufficiently quali-
fied personnel.
Toyota and Volkswagen have also chosen simi-
lar ?configuration strategies in their market
observation units, which are, of course, widely
scattered geographically. Outposts must be
decentralized in order to fulfill their mission
of monitoring international markets. Both com-
panies have outposts in the same regions, but
Toyota’s network is somewhat denser, which
can be advantageous in identifying the needs of
specific customer groups within a heterogeneous
regional market.
In terms of development activities, however,
there are marked differences between the two
companies. With the exception of its relatively
new development laboratory in China, Volks-
wagen’s efforts are concentrated in Europe.
Its Japanese competitor takes a quite different
approach: Toyota has decentralized its develop-
ment organization and established a number
of sites around the world. For development,
unlike research and market observation, neither
centralization nor decentralization is clearly
superior. Arguments can be made for central-
izing development, similar to the reasons given
for centralizing research, but decentralization
has its advantages as well. The following section
examines in detail the configuration of Volkswa-
gen’s development activities and the effects of
that configuration on the company’s competitive
position.
It is clear from this comparison of value configu-
rations that research, development and market
observation, often lumped together under the
heading of R&D, are configured in different
ways. These activities therefore have to be
treated separately in terms of value configura-
tion.
Asia Pacific Engineering & Manufacturing in
Samutprakarn, Thailand, and the Toyota Techni-
cal Center Asia Pacific in Melbourne, Australia.
Completing this global network are two develop-
ment centers that specialize in vehicle design:
The Toyota Europe Design Development Center
(ED
2
) in Nice, France, and the subsidiary Calty
Design Research in Newport Beach, California,
handle internal, external and color design. Most
of these sites also serve as outposts. Figure 6
shows how R&D activities are configured at
Toyota.
A centralized configuration is
preferable for research, in con-
trast to development.
A comparative analysis shows that both com-
panies have largely centralized their research
activities within their home regions – Volkswa-
gen in Europe and Toyota in Japan. Centraliza-
tion tends to be beneficial for research, since it
makes it easier to discover new insights, a pro-
cess that is not always smooth or certain. Advan-
tages include achieving a critical mass and ?
size-related effects. Centralization also promotes
?economies of scope, for example by permit-
ting direct communication between employees.
It is also helpful to have personal, face-to-face
contacts when organizing and monitoring
research activities. This speeds up research
projects and makes it easier to secure knowl-
edge and maintain confidentiality. Furthermore,
the goal of group-wide research – which, by
definition, encompasses all components of the
company and all of the relevant subjects – can
only be achieved by bringing together all of the
various research activities under one umbrella.
The logical conclusion is to carry out research
at one location, often at or near the company’s
headquarters.
Affiliated decentralized sites, such as Volkswa-
gen’s Electronics Research Laboratory (ERL) in
Silicon Valley, which is one of the world’s most
innovative research clusters, are a very use-
ful supplement to the company’s centralized
research activities. Overall, therefore, there is
no urgent need for a change in the Volkswagen
Group’s research configuration. It would only be
42
At its decentralized development sites, Toyota
generally focuses on modifying its vehicles for
local markets, an effort that is referred to as
adaptive development. Its development sites
around the world are generally responsible for
a specific region. In addition, however, they
may develop a new model from the ground up
and thereby assume an international mandate.
2
When the Toyota Corolla was developed, for
example, the European design center in Nice
was in charge of the entire development process,
and not only the European version.
Volkswagen’s concentration of its development
activities in Europe deprives it of certain poten-
tial advantages for its international competitive
position. Decentralized development means hav-
ing access to local information networks. It is
also a way of counteracting ?not-invented-here
syndrome and producing a ?country-of-origin
effect.
3
Finally, it facilitates coordination with
other value functions, and particularly with pro-
duction sites in different locations.
Most important, however, is this: Because its
development divisions are limited to a certain
geographic area, Volkswagen is less able to pro-
duce region-specific vehicles to accommodate
the preferences and needs of its customers in
different countries. Local developers are better
able to design cars for local customers, since
they are more familiar with the ?culture and
living conditions in that region. Decentralized
development departments and local developers
increase a company’s ?responsiveness to a
given market, leading in turn to higher sales.
Particularly in the top tier of the high-volume
segment of the VW and Toyota brands, a lack
of sensitivity to local customer preferences is
a serious disadvantage. Their vehicles compete
for customers based not only on price, but also
on vehicle features and design.
This segment
of the market has begun to combine Porter’s
traditional ?cost leadership strategy with a ?
differentiation strategy, which results in a so-
called ?outpacing strategy.
Too often, Volkswagen – whose
corporate culture is still strongly
tied to the home country –
applies German standards when
developing its vehicles.
Volkswagen’s difficulties in foreign markets are
due in part to the company’s failure to decen-
tralize its development activities. Its corporate
culture is strongly tied to Germany, and too often
it applies German standards when developing its
vehicles. This, along with a lack of local produc-
tion sites, is another reason why it has not been
more successful in the United States. Volkswa-
gen has not paid enough attention to the fact
that the United States has a different kind of car
culture: “There is no question that VW has failed
to understand what American customers want,”
says Catherine Madden, analyst with the market
research firm Global Insight (Eberle/Schneider
2007). That failure is also reflected in Volkswa-
gen’s tiny market share: only 2.1 percent.
VW dealers in the United States have already
voiced their dissatisfaction with the vehicles
that are available, and they are pushing for cars
that are specifically designed for the Ameri-
can market. It will not be until 2010 and 2011,
however, that VW will introduce the successors
to the current VW Jetta and VW Passat, which
will be the first models designed specifically
with the preferences of American customers
in mind – although they, too, are being devel-
oped in Wolfsburg. Up to now, the company
has Americanized its vehicles only slightly, for
example by offering different engines or equip-
ment packages. Since no other new designs are
on the horizon, this kind of halfhearted attempt
to accommodate the wishes of American custom-
ers will continue to be the rule rather than the
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
to provide simple components at reasonable
prices. But the high standards of the Volkswagen
Group have always prevented it from making
use of cheaper options. In other words: German
enthusiasm for technology often misses the
mark in the emerging markets.
The Volkswagen Group maintains market obser-
vation units in today’s key markets – the United
States, China and Japan – and appears to be well
positioned at the moment. Volkswagen’s failure
to address the needs of American consumers
cannot be attributed to the fact that it has fewer
outposts (Toyota does indeed have more sites
devoted to market observation in the United
States) or that those outposts provide inadequate
information, although that might theoretically
be possible. Rather, the information gathered by
its outposts is not used appropriately, not least
because of different cultural standards. Volkswa-
gen needs to make changes not in the configu-
ration of its market observation, but in how it
deals with processes and cultural aspects within
the corporate network. Given its ambitious
growth targets, however, the Volkswagen Group
would be wise to consider proactively establish-
ing outposts in other promising markets over
the medium term.
Companies will only be successful
globally if they adapt their prod-
ucts to the needs of the respec-
tive markets.
The consequences of a centralized and cultur-
ally provincial approach to development are also
evident in the ?emerging markets. The cars
produced by the Volkswagen Group have often
been too sophisticated and too expensive for
those markets. To cite one example, headquar-
ters in Wolfsburg decided that vehicles intended
for the Indian market should be equipped with
a twelve-year anti-corrosion finish – ignoring
the fact that corrosion protection is not the main
concern of Indian customers, who are just begin-
ning to become more mobile and are looking
for an affordable vehicle. Such decisions make
Volkswagen’s cars unnecessarily expensive, put-
ting them out of reach for many Indians. This
is a problem that the company’s suppliers have
encountered before. The chairman of Volkswa-
gen’s Board of Management, Martin Winterkorn,
recently expressed his puzzlement over the fact
that the Tata Nano, the world’s cheapest car,
contains so much apparently expensive Bosch
technology. Bosch chairman Franz Fehrenbach
pointed out in response that Bosch is quite able
44
Toyota’s vehicles, ultimately tailored to different
regions, are manufactured on a shared platform
that is appropriate for all of Toyota’s markets.
The company’s ?standardization/adaptation
strategy is based not solely on the standardiza-
tion of its vehicles, nor on adaptation, but on
a combination of both approaches. This allows
Toyota to adapt its vehicles to local customer
preferences while also producing large numbers
of its basic modules, which lowers unit costs.
4
The Japanese manufacturer calls this principle
“Global best, local best.”
By combining a standardized plat-
form with regional or country-
specific adaptations, companies
can accommodate local customer
preferences while also lowering
unit costs.
This principle, developed in the 1990s, is
applied to all three core global models manu-
factured by the Toyota Group – the Corolla, the
Camry and the Yaris – as well as to the IMV
(International Multipurpose Vehicles) series
of light commercial vehicles. All of them, and
their regional versions, are developed within the
company’s global network. The success of the
Toyota Corolla, the world’s best-selling vehicle,
was made possible by the use of this principle.
Since 1997 the Corolla has been built on a plat-
form that is standardized worldwide, with three
different versions for customers in the three
target markets: the United States, Japan and
Europe. “We combined everything that is good
from the United States, Japan and Europe. And
we eliminated everything that is bad,” said Fujio
Cho, chairman of Toyota, in describing how the
“Global best, local best” approach was applied to
the development of the Toyota Corolla (Grauel et
al. 2003: 68).
In order to achieve the sales growth envis-
aged in Strategy 2018, Volkswagen will have to
win new customers worldwide. This cannot be
accomplished without increased efforts to adapt
its vehicles to specific regions and countries.
Since this requires a better understanding of
local customer needs, Volkswagen will need to
undertake further decentralization of its devel-
opment activities.
A decentralized development
network and local developers are
among the keys to global success.
Toyota provides a model for how a decentral-
ized development strategy works: It adjusts the
appearance of its vehicles and its sales strategy
to the region or country in question. Key to this
effort are a decentralized development network
and local developers, which make the company
more sensitive to local customer preferences
and allow for the development of models that
meet local needs. Toyota’s first successes with
this approach came in the late 1980s, when its
luxury brand Lexus, which was targeted specifi-
cally to the American market, quickly gained a
large share of the premium market.
One of the lessons for Volkswagen is that its
new production site in the United States should
immediately be entrusted with the task of
designing models tailored to the American mar-
ket. Unfortunately, this plant will not commence
operations until at least 2010. Until then the
Puebla plant, which is to manufacture the new
VW Jetta for the United States, should be used
as an intermediate station for vehicle develop-
ment so that US-specific models can be made
available as quickly as possible. Engineers from
Mexico are currently undergoing training in
Wolfsburg, and this may represent an initial step
toward locating development activities in the
vicinity of the American market.
45
4
For a more extensive discussion of standardization strategies, see Kutschker/Schmid (2008: 1007-1012).
3.3 Decentralizing development for greater market success
moving forward with globalization… by further
enhancing the localization and independence of
our operations in each region,” explains Fujio
Cho, Chairman of Toyota (Ghemawat 2007: 139).
A similar strategy would allow Volkswagen to
solve the problem of a lack of regional adapta-
tion, promoting sales growth while also reducing
the cost of the basic module by producing larger
quantities. Both of these effects would be highly
welcome under Strategy 2018. As a link to the
local markets, the foreign development sites
would automatically carry out market observa-
tion as well. This is true of Toyota’s development
network, in which the foreign sites assume this
dual function (again, see Figure 6, p. 41). At the
same time, such outposts could be a first step
toward decentralizing development activities and
creating a global development organization. The
establishment of outposts in emerging markets
such as Brazil, India or Russia, discussed above,
would be helpful. It would provide Volkswagen
with a competitive advantage over Toyota, which
does not yet have outposts or development units
in these markets, and allow Volkswagen to stage
a preventive attack as it seeks to make inroads
into Toyota’s established market position in the
United States.
The development process is generally managed
by the development center located at Japanese
headquarters. Kenichiro Fuse, chief developer
at the Head Office Technical Center in Toyota,
and his Japanese team handled the basic devel-
opment of the newest generation of the Toyota
Camry. Fuse was also in charge of coordinating
three other regional development teams: one
in the United States, one in Thailand, China
and Taiwan, and one in Australia. Each of these
teams designed the version for its respective
region. In accordance with Toyota’s philosophy,
vehicle production also takes place in those
regions. The Toyota Camry is now produced
throughout the world, in eight different plants
(one each in Japan, Taiwan, China, Thailand,
Australia and Russia, as well as in two plants
in the United States) serving the surrounding
markets.
Toyota’s organizational structure reflects this
regional orientation. Regional organizations
take on certain responsibilities in the areas
of development, production and sales. Both
of these aspects – regional organizations and
regional adaptations – are an essential part of
Toyota’s internationalization efforts, which seek
to achieve “glocalization,” or adaptation world-
wide to local conditions. “We intend to continue
46
Figure 7: Toyota’s “Global best, local best” principle
Source: Toyota (2006: 18).
to give superior quality and outstanding cost
performance to customers buying Toyota
vehicles throughout the world. On the other
hand, “local best” expresses a commitment
to accurately reflecting the needs and val-
ues of customers in different regions. Toyota
enhances the value of its core global models
by marrying its commitments to being global
best and local best.”
“Global best, local best – these commitments
rule the development of Toyota’s mainstay
global models. By “global best” we mean build-
ing cars with common value worldwide while
pursuing the world’s highest levels of quality
and performance. The global best concept is
fundamental to the Toyota mind-set. We want
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
The key to the Corolla’s success lies in its
region-specific versions, which have been built
on a single platform since 1997. “The VW Golf
looks just the same everywhere in the world.
We try to appeal to a wide variety of tastes in
different markets,” explains Soichiro Okudaira,
chief developer of the current Toyota Corolla.
The basic platform for the current model was
developed by the European design center in
Nizza, France, which also designed the Euro-
pean version. Toyota’s sites in Ann Arbor,
Michigan, and Toyota City, Japan, designed
the other two versions. Ninety-five percent of
the vehicle’s parts are identical; the remain-
ing five percent vary according to the regional
preferences of the relevant customer base.
In Europe, this means adding such things
as more solid bumpers, headlights that are
integrated into the car body and a large Toyota
logo in the radiator grille – primarily to accom-
modate the preferences of German customers.
In the United States the vehicle has a more
streamlined appearance and softer seats. In
Japan the Toyota logo is replaced by a Corolla
logo, and several drink holders are added.
Worldwide production
In addition, production of region-specific mod-
els takes place in the respective markets. The
European Corolla (or Auris) is manufactured
in Burnaston, England, and Adapazan, Turkey.
The North American version is produced in
Fremont, California, and in the Canadian city
of Cambridge, Ontario. In Japan, the Corolla
is manufactured in Takaoka, Kanegasaki and
Sagamihara. All told, this model is produced in
16 different countries.
The world’s best-selling vehicle
With over a million vehicles sold per year, and
over 30 million sold since it was introduced to
the market in 1966, the Toyota Corolla is not
only the Japanese equivalent of the VW Beetle,
but the best-selling car in the world. Most of
its purchasers live in Japan, the United States
and Europe (where, with the exception of the
MPV called the Corolla Verso, it has been
known as the Auris since 2007). It is sold in a
total of 140 countries.
Customers with very different preferences
The success of the Corolla is astounding, given
how much customer preferences vary in dif-
ferent markets. The Japanese, for example,
focus on fuel efficiency, modern design and
practical details, such as enough drink holders.
The brand of the car is less important to them
than the model. Americans view their cars
as an expression of their lifestyle: They want
them to project a youthful image and have soft
seats and soft steering for relaxed cruising on
the highway. German customers, for their part,
attach great importance to safety, which means
that they appreciate such features as more
solid doors. They want their cars to be stable
on the road and accelerate quickly in the low
gears. Consumers in all three countries find
the Toyota Corolla attractive, despite their dif-
ferent priorities.
Toyota Corolla:
Regional versions based
on a global platform
As a company decentralizes its development
activities, it should not lose sight of the fact
that decision-making responsibilities need to be
decentralized as well. This is clear from a case
that occurred a number of years ago: Volkswa-
gen had long shown no interest in modifying
its vehicles to appeal to the market in China.
Several years ago, Chinese developers from
SAIC (Shanghai Automotive Industry Corpora-
tion) suggested that Chinese customers would
prefer a modification of the tail lights of the VW
Polo. Headquarters in Wolfsburg responded by
simply rejecting this idea. If all decisions affect-
ing vehicle development continue to be made in
Wolfsburg, the benefits of decentralized develop-
ment may well be entirely lost.
The experiences of Volkswagen’s American com-
petitors are a cautionary tale as well. General
Motors and Ford, whose value activities have
long been decentralized, decided in the 1990s
to limit most of their strategic decision making
to the United States. They have since reversed
course, having realized that centralization had
been a major factor in their vehicles’ failure to
appeal to the European market. Both manufac-
turers subsequently “re-decentralized” their
decision-making structures, giving more author-
ity to their European ?subsidiaries. It holds
true for Volkswagen, as well as for all other
high-volume manufacturers: Companies must
do more than merely establish development
facilities at foreign sites; they must also equip
such units with the necessary decision-making
powers. Local developers cannot take advantage
of their knowledge of the local market if they
have no input into design decisions. Although
Toyota’s management continues to be relatively
centralized, the Japanese company has trans-
ferred certain decision-making responsibilities
to its decentralized development units; this is
crucial for the principle of “Global best, local
best” to function.
Volkswagen’s subsidiary in China is now recog-
nized as an example of the successful decentral-
ization of a company’s development activities
and decision-making responsibilities.
In order to take advantage of
local expertise, companies need
to equip local personnel with
the necessary decision-making
powers.
After dramatic declines in Volkswagen sales in
China at the beginning of this century, because
its vehicles were not tailored to the Chinese
market, the company’s Chinese subsidiary was
given the authority to design models to appeal to
Chinese customers. Up to that point its activities
were limited to the modification of existing mod-
els, and indeed – as mentioned above – it had
sometimes been thwarted in that effort by head-
quarters in Wolfsburg. The subsidiary’s two new
models are scheduled to go on the market before
the end of 2008; one of them is the VW Lavida,
long known as “Model Y.” Volkswagen’s vehicles
are finally being adapted to suit the preferences
of Chinese customers.
In view of the progress that has been made, the
plans of Volkswagen’s development head, Ulrich
Hackenberg, to develop a Chinese version of the
VW Polo in Wolfsburg would be a step backward.
Chinese sales personnel are already concerned
that such a vehicle might not be suited to the
market, as has often been true in the past. “Chi-
nese designers are better able to design cars for
Chinese people,” explains Stefan Fritschi, head
of the development center in Shanghai, the site
of Volkswagen’s Chinese subsidiary (“Volkswa-
gen kämpft um chinesische Kunden” 2006).
That is precisely why local designers need the
authority to make decisions that concern their
designs – for example about a vehicle’s tail
lights. Figure 9 summarizes suggested measures
for decentralizing development activities and
decision-making responsibilities by presenting a
comparison of Volkswagen and Toyota.
48
3.4 Decentralized decision-making responsibilities as a prerequisite
for successful local development
49
Winfried Vahland, president and CEO of Volks-
wagen Group China, who built up the develop-
ment center in Shanghai, intends to expand
the site’s responsibilities still further. He is
also considering the possibility of developing
vehicles for the American market in China,
since customer preferences in the two countries
are relatively similar. Status and comfort are
important criteria for Chinese car buyers as
well as for Americans; both groups prefer large,
luxurious sedans but attach less importance to
the newest technologies and safety than German
customers, for example. Chinese engineers are
already working in Wolfsburg on a version of the
VW Passat for the American market. This could
be an initial step in establishing the Shanghai
development center as a ?center of excellence
within the Volkswagen Group. A center of excel-
lence specializes in certain activities, products
or processes, based on specific expertise, and
assumes responsibility for them throughout
the company. Decentralizing development
activities not only makes it possible to generate
local knowledge and apply that knowledge to
the vehicles produced on site; it also provides
an opportunity to make such knowledge more
widely available for practical use within the
entire organization. Centers of excellence are
essential for the best possible reconfiguration of
development activities.
In order to achieve worldwide success, a high-
volume manufacturer like the Volkswagen
Group needs to adapt its vehicle models to
the preferences of customers in local markets.
This can be accomplished by means of
_ the decentralization of selected develop-
ment activities, aimed at adapting vehicles
to the needs of customers in a specific
region or country,
_ region- or country-specific model adapta-
tions that use identical platforms world-
wide, which produces scale effects,
_ granting decentralized development units
the necessary decision-making authority to
put their local expertise into practice,
_ the installation of outposts in other growth
markets to promote the company’s local
responsiveness, and
_ the establishment of centers of excellence,
which take on certain management respon-
sibilities and make local knowledge avail-
able to other units of the company.
Summary
50
Figure 9: Options for recon?guring 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
Con?guration
of activities
BD
R M
AD
R
BD AD
M
far the Volkswagen Group has a relatively low
level of internationalization, for example in its
Board of Management and Supervisory Board,
compared with other DAX30 companies.
Toyota’s corporate culture is well suited to the
company’s international activities and serves
as a model for other globally active enterprises.
Respect for all of its stakeholders – also, and
especially, in host countries – is an integral part
of Toyota’s culture. This respect is the founda-
tion of its focus on the customer and its efforts
to adapt its vehicles to local preferences. It is
also reflected in a sense of social responsibility.
One of Toyota’s stated goals is to promote higher
rates of vehicle ownership in the emerging
markets. “Toyota sees itself as a global com-
pany that wants to gain the respect and trust of
people everywhere in the world,” notes Sonja
Sackmann, professor of industrial and organiza-
tional psychology and expert on the corporate
culture of the Japanese automobile manufac-
turer (Sackmann 2005: 21). This effort to be
responsive is rooted in Japanese culture; indeed,
Toyota’s corporate culture can still be described
as “fundamentally Japanese,” “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.
Because they involve management structures
and corporate culture, the present study’s
recommendations for decentralizing value
activities, derived from the example of the
Volkswagen Group, cannot be put into effect
quickly. Leadership structures, which also have
consequences for management style, and cor-
porate culture cannot be transformed overnight.
The path leading to 2018 will not be easy for
the Volkswagen Group, and whether or not it
will achieve its ambitious goals will depend on
its dedication to that effort. Toyota is currently
experiencing declining sales and profits, but
Volkswagen, too, will be affected by a decrease
in demand in a weakening global economy. “The
Ein Konzern, der lang-
fristig global erfolgreich
sein will, muss das Ver-
trauen der Stakeholder
auf der ganzen Welt
gewinnen.
The observation by Michael Freitag, editor of
the manager magazin periodical, still holds
true: “The [Volkswagen] Group lacks a coherent
global concept” (Freitag 2007: 20). The struc-
tures are still missing that would allow Volkswa-
gen to benefit from a worldwide distribution and
network of value activities, in order to achieve
the goals of Strategy 2018. Toyota has shown
how a decentralized configuration of both pro-
duction and development can lead to competitive
advantages.
A decentralization of value activi-
ties and decision-making respon-
sibilities also requires changes in
the company’s management struc-
tures.
As our analyses have demonstrated, the decision
by the Volkswagen Group to open a plant in the
United States is a welcome step toward gain-
ing a foothold in the world’s largest automobile
market. But more local content in production
and greater localization in procurement are also
important if the company is to be less vulnerable
to fluctuating exchange rates. As for the con-
figuration of R&D activities, it will be crucial to
decentralize adaptive development. This makes
it possible to develop region- or country-specific
models, using globally identical platforms. How-
ever, all of these measures are interconnected:
If efforts to adapt to local markets are unsuc-
cessful, sales will not increase – and expanded
production capacities will not be fully utilized.
Excess capacity, in turn, makes it impossible to
achieve target yields – and this would spell the
failure of Strategy 2018.
The decentralization of decision-making respon-
sibilities also requires changes in the company’s
management structures. Decentralized units
should be given greater responsibility, which
means modifying the current system of concen-
trating decision-making authority at headquar-
ters in Wolfsburg. As decision making is decen-
tralized, it follows that foreign executives, with
their own unique cultural backgrounds, should
be given more central roles in the company. So
51
4. The consequences of decentralizing value activities
less overwhelming. “As other manufacturers
copy Toyota, its methods and systems lose their
unique superiority. Its success in the past has
been due less to Toyota’s exceptional perfor-
mance and more to the fact that its competitors
have performed poorly,” explains Ralf Kalmbach,
an automotive expert at the consulting firm
Roland Berger (see also the interview with Ralf
Kalmbach following this case study).
The recommendations we have developed based
on the example of the Volkswagen Group can
easily be applied to other companies. In gen-
eral, they are helpful if a company needs to
standardize its activities while also differentiat-
ing its products or processes. Glocalization, or
increasing localization within the framework of
globalization, will continue to be an important
phenomenon. Companies cannot assume that
everything is globally the same in a so-called
global world.
momentum is right, but Volkswagen has a long,
long way to go to get where they need to be,”
says Adam Jones, analyst for Morgan Stanley,
seeking to lower expectations (Edmondson
2007). Falk Frey, automobile analyst for the rat-
ing agency Moody’s, also doubts that Volkswa-
gen will be able to catch up with Toyota: “Toyota
is not standing still; the company is continu-
ing with its growth strategy” (Herz/Schneider
2008a). Toyota’s President Katsuaki Watanabe
has already announced that the Japanese manu-
facturer will make further efforts to tailor its
vehicles to regional markets so that customers
everywhere will have a complete range of spe-
cifically adapted Toyota models to choose from.
This would again put Toyota a step ahead of the
Volkswagen Group.
Does this mean that Volkswagen should stop
viewing Toyota as its model, because the goal
is too ambitious? The answer is no. The most
important thing is not for Volkswagen to over-
take Toyota as the market and profitability
leader; instead, identifying Toyota as the stan-
dard to live up to is a way of motivating the
Volkswagen organization and its stakeholders,
modernizing management structures and adapt-
ing the corporate culture to meet global chal-
lenges. This lays the groundwork for a solid com-
petitive position going forward. It should also
be noted that Toyota’s dominance is becoming
52
The decentralization of production and
development activities requires departing
from a centralized management structure
and cautiously changing a company’s cor-
porate culture.
Summary
In the interest of readability we have reduced
the number of references contained in this
version of the study. A complete list of refer-
ences is found in the bibliography. A German
version of the study can be obtained in printed
form as an academic working paper by
contacting the office of the authors
([email protected]); it may also be
downloaded from the website of the Chair of
International Management und Strategic
Management at ESCP-EAP European School of
Management Berlin (www.escp-eap.de/imsm).
53
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59
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. The Renault Group as a leader in the low-cost car sector 67
1.1 The Logan concept 67
1.2 The minimization of costs in manufacturing the Logan 68
1.3 The market success of the Logan 70
1.4 The Logan in the international market for low-cost cars 74
2. The configuration of value activities for the Logan 77
2.1 Production: Centralized main facility with decentralized assembly plants 77
2.2 Procurement: Achieving a high level of localization through supplier training 83
2.3 Development: Increasing decentralization in target markets 86
2.4 Logistics: Backbone of the hub-and-spoke production network 88
3. The competitive advantages offered by emerging markets 90
References 93
Decentralized centralization
Romania as a focus of value creation
for Renault’s Logan
66
When the French manufacturer Renault intro-
duced its ?low-cost car, the Logan, in 2004,
its success attracted a great deal of attention
in the automotive industry. This vehicle, which
can cost even less than 6,500 euros and is sold
in most countries under the brand of Renault’s
Romanian ?subsidiary, Dacia, soon became
one of the company’s most successful models.
With this vehicle, Renault was able to make
inroads into a new segment of the market that
no other manufacturer had discovered for itself
to the same degree. Indeed, many had concluded
that it was impossible to produce a “decent” car
in this price bracket that was capable of gaining
widespread market acceptance. Since Renault’s
success with the Logan has proved the doubters
wrong, however, low-cost cars (LCC), or vehicles
selling for less than about 10,000 US dollars
(approximately 7,500 euros), have come to be
recognized as a major opportunity for future
growth. “Logan is a spectacular example that
really rattled the industry. Logan has really set
the terms of the debate,” noted Glenn Mercer,
automotive expert for the Swiss bank UBS (Guil-
ford 2007).
With the Logan, Renault opened
up a new market segment that
no other manufacturer had been
able to claim.
At Renault, the development of the low-cost car
can be traced back to the company’s former
chairman, Louis Schweitzer, who recognized
back in the mid-1990s the extent of his com-
pany’s dependence on the saturated Western
European markets. “Seeking to ensure Renault’s
profitable growth, I determined in 1995 that
we should expand into non-European markets,”
Schweitzer explained (Dacia 2004: 1). His
central goal was to tap into the ?emerging
markets.
Few people in those countries could
afford to buy a car, but Renault recognized that
higher incomes would provide future market
opportunities.
The low-cost car is based on the
principle of simplicity.
Renault CEO Schweitzer instructed the engi-
neers at the company’s R&D headquarters, the
Technocentre in Guyancourt, near Paris, to
design a model with a base price of 5,000 euros.
This was followed in 1998 by the launch of the
X90 project aimed at building this low-cost
model. Strict adherence to the principle of sim-
plicity was essential to keep the price at the des-
ignated level, which meant that this “cheap car”
could not offer extensive options or the newest
design features. Unlike Renault’s earlier mod-
els, it was specifically designed not for the ?
industrialized countries, but to meet the needs
of emerging economies. It had to be economical
not only in its purchase price, but also to run
and maintain.
The end of 2004 brought the market launch of
a five-door notchback sedan under the name
Dacia Logan. Based on the same ?platform,
the Logan MCV (Multi-Convivial Vehicle) station
wagon was introduced in 2006, followed by the
Logan van (based on the Logan MCV) and the
Logan pickup in 2007. Its sister model Sandero,
a compact hatchback with components that are
70 percent identical to those of the Logan, was
launched in 2008. Renault has also announced
that it is developing a Logan SUV.
67
1. The Renault Group as a leader in the low-cost car sector
1.1 The Logan concept
68
In order to lower the costs of producing this new
vehicle, Renault’s engineers used three methods:
design-to-cost, carry-over and computer-aided
engineering. The design-to-cost method focused
on minimizing costs during the development
phase. Vehicle unit costs were reduced by using
ordinary components and economical materi-
als and by omitting purely visual elements.
For example, using an identical exterior rear
view mirror on the vehicle’s left and right sides
resulted in savings of about two euros per car.
Cost reductions have an effect on
the configuration of the entire
value chain.
Efforts to increase efficiency included focusing
not only on the vehicle’s direct costs, but also
on potential indirect savings during the produc-
tion and procurement processes. Choosing body
types that are easy to manufacture and limit-
ing the number of available features makes the
production process less complicated, which also
reduces costs. Tooling costs can be lowered if
the front and rear windows of the vehicle are
only slightly curved, which makes them easier to
install. Finally, since the Logan was to be manu-
factured in the emerging markets, a decision
was made to use traditional steel for most com-
ponents, since steel is not only more economical,
but also easier to obtain in those countries than
materials like aluminum.
The carry-over method dictated the use of exist-
ing components and construction methods bor-
rowed from other vehicles, as their costs had
usually been amortized and their quality and
reliability had already been demonstrated. This
meant additional savings in development and
production, as well as reduced maintenance
costs. Logan components were taken from other
models manufactured by the Renault Group
and its partner, Nissan; Renault and Nissan had
entered into a ?strategic alliance in 1999, and
each has a minority stake in the other. They
work together in a number of areas, as shown
in Figure 1, and this has been beneficial for the
Logan project.
1
The Logan is built on the B platform, which was
developed jointly by Renault and Nissan for the
Renault Clio, Renault Modus, Nissan Micra and
Nissan Cube. The Logan’s rear axle was taken
from this platform, but the front axle is taken
from the version preceding the current Renault
Clio. The electronic central processing unit and
the heating system were also originally used in
other Renault vehicles. In 2007 alone, some 1.9
million vehicles worldwide were built on the B
platform, which is nearly one-third of the 6.2
million vehicles sold by both Renault and Nis-
san. This has allowed them to achieve synergies
in the development process and ?scale effects
in production. Both of these factors have reduced
the costs of the Logan. From a customer’s per-
spective, it is also important to note that the
competitive advantage of a low purchase price
might be negated (to some degree) by expen-
sive maintenance – if, for example, the vehicle
requires frequent maintenance and repairs. The
carry-over method helps to reduce this risk with
the use of proven components.
High maintenance costs would
negate some of the competitive
advantage of a low purchase
price.
Finally, computer models and simulations
brought further savings in developing the
vehicle and its production tools. While computer-
assisted methods have long been common in
vehicle development, they had never been
applied to this degree. The use of a virtual
simulation of every development stage, includ-
ing noise tests, made it possible to eliminate the
expensive construction of Logan prototypes. The
computer-aided engineering method allowed the
company to save 20 million euros in engineer-
ing costs relative to traditional development
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
to attract customers in the fiercely competitive
compact car sector with a low purchase price.
Lessons learned in the Twingo project aided
in the development of the Logan. “There was a
significant improvement in the design-to-cost
method, introduced in the development of the
Twingo in 1992, when the X90 program was
launched,” explains Odile Paciatici, head of
development for the X90 project (Dacia 2004: 3).
In retrospect, the development of the relatively
inexpensive Twingo was a kind of test run for
developing the Logan low-cost car.
methods. Renault spent only 360 million euros
to develop the Logan, which is roughly half what
is normally required to launch a new vehicle.
In the X90 project, these methods were accom-
panied by a person-oriented approach to ?
coordination; a large number of employees were
assigned to the project who had already been
involved in developing the Renault Twingo.
Renault first adopted a strict policy of minimiz-
ing costs when it built the Twingo, which was
introduced to the market in 1992. The goal was
Figure 1: The Renault Group’s ?nancial 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 ?nancial ties
Joint ventures
RNPO
(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
_ Identi?cation 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
R
e
n
a
u
l
t
N
i
s
s
a
n
Renault-Nissan B.V.
Alliance Board Nissan
25,0 %
15.0 %
70
The Logan was introduced to the market at the
end of 2004 in Romania, the Czech Republic,
Morocco, Algeria and Turkey. Before long it was
also being sold in neighboring countries, includ-
ing the Baltic states (Estonia, Latvia, Lithuania),
Russia, Poland, Slovakia, Hungary, Slovenia,
Croatia and Tunisia. Demand was unexpectedly
high in the Western European countries. After
Renault dealers in Germany, France and Italy
had begun to import the Logan for their custom-
ers on their own, Renault responded in 2005 by
starting to sell the Dacia Logan in France, Bel-
gium, Luxembourg, the Netherlands, Germany,
Switzerland, Italy and Spain as well. Today the
Logan is marketed in a total of 59 countries. Ger-
many was the fifth largest sales market for the
Logan in 2007, with 17,500 vehicles sold, after
Romania (101,800 units), Russia (67,844), France
(32,600) and India (17,706).
In terms of timing, Renault’s ?internationaliza-
tion strategy for the Logan might be termed a
combined ?“waterfall-sprinkler” strategy. The
vehicle was introduced in a series of phases
in the various foreign markets, but each phase
included several markets.
2
Only the first two
phases went as planned; Renault had not
expected the demand that developed in Western
Europe, and it responded with a third phase of
internationalization efforts. The Logan provides
striking confirmation that internationalization
does not need to occur precisely as originally
planned; the process can be adjusted to accom-
modate unforeseen events.
3
Companies need to
be alert to signals from surrounding markets so
that they can quickly take advantage of opportu-
nities that arise.
When companies enter new markets, group-wide
considerations shape their brand strategies.
Hence the Logan is sold in 50 countries under
the Dacia brand and in seven under the Renault
brand. The name Dacia is used in countries
where Renault already has a reputation as a
design-oriented, high-volume brand, for example
in Central Europe, Turkey and North Africa.
Offering a second brand expands Renault’s prod-
uct range and appeals to new customer groups.
In countries where Renault does not yet have a
strong presence, the Renault is used as a way of
opening up the market – in Iran, as well as in
Russia, Argentina, Brazil and Mexico. The Logan
is now also available under the Nissan brand as
part of Nissan’s product range in Mexico and
South Africa. The company is therefore pursu-
ing a ?strategy of (largely) standardizing the
product while differentiating the brand, depend-
ing on the extent to which the Renault brand
is already established and how the company
intends to position itself in the market.
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.
Figure 2 provides an overview of selected
markets, the brands under which the Logan is
sold and its base price. It is evident that Louis
Schweitzer’s proposed base price of 5,000 euros
has not been achieved, although a few countries,
such as Romania and Morocco, come close if
taxes are not included. The Logan is still a low-
cost car, however, since it is less expensive than
traditional vehicles. It is sold for considerably
more than 10,000 euros only in Brazil and Ven-
ezuela, where it is positioned as one of Renault’s
mid-level vehicles rather than a more affordable
alternative.
In Western Europe, other manufacturers sell
certain models in the price range of 9,000 to
10,000 euros, which is what the Logan costs
with additional features (e.g. power steering, air
1.3 The market success of the Logan
2
For an overview of timing 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, side airbags). These include the
Citroën C1 (base price 9,190 euros), the Toyota
Aygo (base price 9,350 euros) and the Ford Ka
(base price 9,600 euros). But all of them are
compacts; the Logan is larger, in the same class
as the Golf. Renault’s primary target group
includes families wanting more room, which the
Logan provides at an unusually low price. Com-
mercial customers find the MCV, van and pickup
models appealing.
For many customers, for example in Eastern
Europe, the Logan is the first vehicle that they
have been able to afford. Market surveys have
shown that other Logan buyers, in Europe and
elsewhere, had previously been more likely to
purchase used rather than new vehicles. Still
others have chosen the Logan as an economical
second vehicle. For this reason there has been
no indication of ?cannibalization effects affect-
ing Renault models, according to Renault dealers
in Germany, where the Logan is sold at the base
price of 7,200 euros.
Figure 2: Marketing the Logan in selected countries
Source: The authors, based on research in the relevant countries.
As of the 1
st
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 ?rst 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
Country
List 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.
The success of the Logan has made Renault’s
Romanian subsidiary Dacia a mainstay of the
Renault Group. While Renault has experienced
declining sales and a loss of market share in
Western Europe, its sales have increased sub-
stantially in other markets. In fiscal year 2007,
Renault recorded an increase in Logan sales of
nearly 120,000 vehicles, or by more than 48 per-
cent. Total sales, including Dacia and all Renault
models, rose by only about 50,000 vehicles –
two percentage points – during the same period.
Clearly the Logan is driving Renault’s growth;
without it, total sales would have declined again
in 2007. Figure 3 shows trends in sales since the
Logan was introduced.
With over 350,000 vehicles sold in 2007, the
Logan now ranks third among Renault’s best-
selling models, after the Mégane and the Clio.
Indeed, demand so exceeded Renault’s expecta-
tions in 2008 that it was unable to increase pro-
duction sufficiently to keep up. The result was
waiting periods of several months to purchase
a Logan or a Sandero. A significant factor was
that Renault had not expected such a high level
of interest in these vehicles in Western Europe.
Furthermore, low-cost cars compete with used
cars, and it was difficult to predict how many
used car buyers would opt instead to purchase
a new Logan. Since then, however, Renault has
adjusted its predictions and capacities. It plans
to produce and sell some 500,000 Logans and
Sanderos in 2008, and substantial increases in
capacity will bring this figure up to 900,000 in
2009.
Figure 3: Sales ?gures for the Renault Group and the Logan
Source: The authors, based on ?nancial statements and corporate data.
1) Passenger vehicles and light commercial vehicles.
2) Projected figures provided by the company.
3) Includes the Sandero. Logan
3)
Renault Group
Legend:
Vehicles sold
1)
(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
145
248
367
500
900
2,533
2,434
2,484
2,733
3,000
2005 2007 2006 2009
2)
2008
2)
73
The Logan is not only driving Renault’s sales
growth; it is also increasing the company’s prof-
itability. Renault’s profit margin on every Logan
that is sold in Western Europe is roughly 15
percent. The only other automobile company to
achieve a similar profit margin is premium man-
ufacturer Porsche with its 911 Carrera model.
Internationally, Dacia’s average profit margin on
the Logan was about six percent in 2007. Con-
sequently, the Logan has become crucial in the
company’s efforts to achieve the goals laid out
by Renault’s CEO, Carlos Ghosn, in a February
2006, strategy paper entitled “Contrat 2009.” In
addition to setting a sales goal of three million
vehicles – which was originally even higher,
at 3.3 million – the plan also calls for nearly
doubling the profit margin in 2009, an increase
from 3.3 percent to 6 percent, the level Dacia
has already achieved. Clearly it is not Dacia’s
fault that Renault has been forced to revise its
sales goals and may well fall short of its target
profit margin. According to many experts, the
problem lies mainly in the outdated models that
were still being sold under the Renault brand as
recently as 2007.
Dacia’s success is very important
to the Romanian economy.
Dacia has come to play a critical role within
Renault Group, but it has also brought great
benefits, primarily economic, to the country
of Romania. Dacia provides 14,400 jobs at its
plants, but today there are also 4,000 jobs with
supplier companies in the Pites ¸ti industrial park,
6,500 jobs in the Dacia distribution network and
150,000 other jobs in Romania that are linked in
some way to Dacia. Both Renault and Dacia are
contributing to the country’s economic develop-
ment. Dacia alone accounted for two percent of
Romania’s gross national product in 2007. The
country’s international reputation has benefited
as well. As François Fourmont, General Direc-
tor of Dacia, points out, “[…] it is clear that
nowadays there is an association between Logan-
Dacia-Romania and that Logan depicts a good
image of Dacia and, at the same time, of Roma-
nia” (Radoslavescu 2005). Romanian Prime Min-
ister Ca ?lin Popescu Ta ?riceanu asserts that the
Logan is “the best ambassador Romania has ever
had” (Kuntz 2008). The Romanian people, too,
are proud of Dacia. The unexpectedly impressive
sales of the Logan in Western Europe have given
a particular boost to their self-esteem.
74
Rising earnings in the emerging markets, along
with greater price-consciousness and higher
vehicle maintenance costs in the industrialized
countries, are creating the conditions neces-
sary for low-cost cars to succeed. The Logan has
also demonstrated that a low-cost car can make
a profit. Accordingly, a number of established
companies as well as up-and-coming automobile
manufacturers from the emerging markets have
announced plans to design their own low-cost
vehicles. In January 2008, the Indian automobile
manufacturer Tata Motors set a new standard for
affordability when it introduced its Tata Nano in
New Delhi. This ?“ultra-low-cost car” (ULCC)
will be available in India in 2009 for the equiva-
lent of 1,700 euros. Since this corresponds to
100,000 rupees, termed lakh in Hindi, the Nano
has been dubbed the “one-lakh car.” Other
automobile manufacturers are seeing just how
much the price of a car might be reduced. “The
Renault Logan showed them a unique design is
possible. And the Tata Nano showed them how
far that could go,” says Nigel Griffiths, managing
director of the automotive section of the market
research firm Global Insight (Snyder 2008).
Worldwide demand for low-cost cars comes
mainly from the emerging markets, particularly
China, India and Russia. Earnings are rising,
and people are eager for greater mobility. Mobil-
ity for the masses has been increasing for some
time now in China and Russia, and the trend is
just beginning in India. India’s booming market
for motorcycles is still benefiting from a push for
greater mobility, since even the country’s middle
class is hard pressed to afford the cars that are
currently on the market. Companies producing
low-cost cars are now seeking to bridge this gap.
For instance, the Tata Nano is seeking to appeal
to India’s middle class, for which this model
is by no means as affordable as the term “low-
cost,” used in the industrialized countries, would
suggest.
Low-cost cars represent a growth
sector in the automotive industry.
Figure 4 shows forecasts for vehicle sales in the
low-price sector (selling for less than 10,000 US
dollars) in various countries in 2012 and com-
pares them with the figures for 2006. Annual
growth rates in the emerging markets between
2006 and 2012 are expected to range between
3.9 percent and 16.3 percent. For example,
forecasts indicate that the Chinese market for
low-cost cars will grow by 13.4 percent each year
up to 2012. Clearly, the low-cost car sector is a
growth market.
However, individual automobile manufacturers
are targeting very different segments of the
low-cost market, as Figure 5 shows. While the
Logan, priced at about 7,500 euros, is currently
the most affordable car available in Western
Europe, in India it is more expensive than sev-
eral competing models despite its lower base
price of 6,800 euros. Shortly after the introduc-
tion of the Tata Nano, Renault announced that it
will be working with Bajaj Auto, India’s largest
manufacturer of automobiles and motorcycles,
to develop an ultra-low-cost car for the Indian
market. In contrast to the Logan, which was
developed at Renault headquarters in France,
this vehicle is to be designed on site by a
French-Indian development team in India, which
will enable it to better focus on the needs of
local customers.
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. CAGR
2)
2012
2006
Note: All ?gures 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
Russia
1)
+ 16.3 % p.a.
104
42
Thailand
+ 13.4 % p.a.
2,640
1,243
China
+ 7.6 % p.a.
1,519
980
India
The low-cost car segment offers substantial
opportunities for growth in both the devel-
oped and emerging countries. Established
high-volume manufacturers that are introduc-
ing their own low-cost models need to take a
very different approach to development:
_ The design of a low-cost car needs to be
simple and robust to succeed, particularly
in the emerging markets.
_ Design-to-cost, carry-over and computer-
assisted engineering are effective methods
for achieving these goals.
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.
E 2,000 E3,000 E4,000 E5,000 E6,000 E7,000 E8,000
Legend:
Planned models Existing 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
Chery
Logan (incl. Sandero)
Approx. E 7,500
Western Europe
2004 (2008)
Dacia
Kalina
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
Citroën
Palio
Approx. E 7,000
Eastern Europe,
South America
1996
Fiat
Indica
Approx. E 5,600
India
2008
Tata
HQ
Approx. E 3,800
China
1998
Geely
QQ
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
Making the low-cost Logan a reality required
simple construction, inexpensive materials
and the use of existing components. However,
Renault’s success in keeping costs low, set-
ting an affordable price and gaining customer
acceptance was not due only to these technical
aspects. Also essential in the Logan’s market
success were the appropriate ?configuration
and coordination of the entire ?value chain.
Most production stages were concentrated in
Romania, where labor costs are considerably
lower than in France. In addition, Renault took a
In 1999, as part of its strategy to market a low-
cost car, the Renault Group paid 50 million US
dollars to acquire a majority stake of 51 percent
in the Romanian automobile manufacturer SC
Dacia Automobile SA, previously a state-owned
company. Over the subsequent three years
Renault gradually increased its share to 99.3
percent, and today it owns nearly all of Dacia.
As the ailing state-run company was being
privatized, Renault was the only party to show
interest, and it was already familiar with Dacia
from years of working together:
From 1968 until
the fall of the Iron Curtain, Dacia was licensed
to manufacture the Renault 8 and the Renault 12
for the Eastern European markets. In addition to
Dacia, which was well-known in Eastern Europe,
Renault was interested in acquiring the two
vehicle and engine manufacturing plants located
in the town of Mioveni, near Pites ¸ti, which is
some 120 kilometers west of Romania’s capital
city of Bucharest.
After purchasing Dacia, Renault carried out an
extensive rehabilitation program aimed at mod-
ernizing the company’s nearly 40-year-old pro-
duction facilities. In terms of production quality
and efficiency, the plants lagged far behind
modern standards and were no longer capable
of manufacturing vehicles that could compete
in the market. Renault invested a total of nearly
500 million euros, or ten times what it had paid
to acquire the company, to update its facilities,
redefine the various departments and optimize
Nach der erfolgre-
ichen Sanierung konnte
Dacia sich international
etablieren.
new approach to configuration and coordination
in the areas of procurement, development and
logistics. This was instrumental in allowing the
company to keep the vehicle’s price low while
taking into account the needs of its customers.
The following sections describe the details of
Renault’s approach.
The proper configuration and
coordination of the value chain
have been essential factors in the
Logan’s success.
procedures. The company also sought to show
sensitivity in intercultural matters. These
measures quickly proved effective: Between
1999 and 2002, there was a 50 percent drop in
the number of breakdowns in the production
of the old Dacia models that were still on the
market. Today the two Dacia plants, which now
manufacture only Logan models (including the
Sandero), are among the most efficient facilities
in the entire Renault Group. Without Renault’s
successful rehabilitation efforts, the venerable
Dacia brand, which had produced the so-called
“people’s cars” of Romania and enjoyed great
prestige in such countries as East Germany,
would have disappeared without a trace. Its ?
acquisition by Renault meant the survival of
Romania’s only automobile manufacturer and
allowed it to establish itself internationally.
After successful rehabilitation
Dacia was able to establish itself
internationally.
Renault’s approach to modernization sought to
achieve only minimal automation of Logan pro-
duction; manual labor was to play a prominent
role. Even over the very long term, it is consid-
ered more economical to invest in manpower in
Romania than to put a great deal of money into
automation, owing to the country’s low labor
costs. Moreover, manual labor is capable of
producing high-quality goods, making vehicles
more reliable and helping to achieve Renault’s
78
goal of keeping maintenance costs low. Even
today, workers run stamping machines and
carry out spot welding by hand in producing
the Logan and its sister model, the Sandero.
Elsewhere in the automotive industry, this level
of manual labor is found only in the production
of absolute top-of-the-line models, such as the
Audi R8. Figure 6 describes the installation of
the spare wheel pan in the vehicle to illustrate
Renault’s approach to cutting costs.
In addition, Dacia exhibits a high level of verti-
cal ?integration, since all of the Logan’s pro-
duction stages are carried out at the two plants
in Mioveni. The vehicle production plant not
only carries out final assembly; it also contains a
pressing plant for stamping the individual parts
of the vehicle body, a body shop for welding the
parts together, and a paint shop for painting the
finished vehicle bodies. The nearby engine and
gearbox plant produces engines and gearbox
parts, oil pans, cylinder head covers and sub-
carriers. This allows Renault to achieve a high
level of ?local content in its Dacia plants, and
it benefits during each production stage from
Romania’s lower costs for labor and other pro-
duction factors.
The above comments show how important low
labor costs are in determining where a low-cost
car is to be produced. The Logan is now manu-
factured not only in Romania, but also in Colom-
bia, Brazil, Morocco, South Africa, Russia, Iran
and India – all countries with low labor costs
as well as target markets for this type of car.
By producing this vehicle in Romania, Renault
is able to reduce costs by 92 percent relative to
France, as shown in Figure 7.
The decision against a high level of automa-
tion resulted in the creation of additional jobs
in Mioveni. While Renault cut the number of
employees from 28,600, the level at the time of
the acquisition, to 11,000 (today 14,400), this
is still roughly twice as many people as are
employed at the French company’s other Euro-
pean production sites with a similar capacity.
In other words, twice as many jobs were pre-
served at the Dacia plants as would have been
the case at the usual level of automation within
the industry. Although Romanian law requires
a notice period of only two months, Renault
worked with the unions to draw up a multi-year
downsizing plan that included early retirement
provisions, retraining options and assistance in
starting up new businesses. Accordingly, Dacia
is regarded in Romania as a model for a socially
responsible approach to privatization. Overall, a
variety of stakeholders have benefited from the
Dacia plants’ relatively low level of automation:
Figure 6: Comparison of the costs of automated and manual vehicle
production, as exempli?ed 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 costs
1)
0.01 euros machine costs
1)
0.05 euros labor costs
79
Renault benefits from greater cost-effectiveness,
Dacia’s employees from additional jobs, custom-
ers from the high quality of Dacia’s vehicles,
and the Romanian state from a company that is
(again) prospering.
However, the selection of a production site must
not be determined solely by cost considerations;
all of the factors related to the site must be
taken into account.
5
In the automotive industry,
labor costs make up only 15 to 25 percent of all
production costs, so the advantage of low labor
costs can easily be offset by higher expenses in
other areas. These might result from lower pro-
ductivity, inferior quality, higher finished vehicle
transport costs or greater difficulty in procuring
components. Romania is an excellent choice as
a center for Logan production, since it offers
not only cost advantages, but a high level of
productivity and quality. “Romania is currently
undergoing a shift from simple wage labor to
technically sophisticated, high-quality produc-
tion,” Dirk Rütze, head of the German-Romanian
Chamber of Industry and Commerce in Bucha-
rest, points out (Mick 2004). Furthermore, the
“transport argument” is refuted by the fact that
on-site production makes it even easier to trans-
port vehicles to the emerging markets.
An efficient configuration of production activi-
ties requires not only a low-cost site, but also
that production stages be distributed within a
network in order to take advantage of further
cost savings - independent of labor costs. In its
Logan production network, which will encom-
pass eight sites worldwide by the end of 2008,
Renault has centralized a large portion of ?
value activities in Mioveni, as shown in Figure
8. The two Romanian plants are the Logan’s
main production sites and manufacture all of the
Figure 7: Comparison of labor costs in selected countries where the Logan
is manufactured
Source: The authors, based on ILO Laborsta (2008).
India France
3)
Brazil South Africa
2)
Colombia Russia Romania
1.2
2.5 2.5
4.0
4.6
6.2
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 costs
1)
(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
vehicle kits required by the company worldwide.
This makes it possible to produce large quanti-
ties, which leads to scale effects. These include
?size-related effects, such as increased returns
to scale and greater ?economies of scale, as
well as ?learning effects, which, given higher
volume, allow for greater speed and factor-saving
production, thus increasing efficiency. Both of
these effects are crucial to ensure the Logan’s
low purchase price.
The centrally manufactured kits are assembled
at the Romanian plant if they are intended for
distribution in the European markets. Otherwise
they are shipped as ?CKD (completely knocked
down) kits to plants located in a variety of dif-
ferent regions, where they are assembled and
delivered to the surrounding markets. Assem-
bling the kits on site has the advantage of avoid-
ing import restrictions on finished vehicles. An
import duty of 25 percent on completely assem-
bled vehicles, as is currently in force in Russia,
would eliminate the Logan’s price advantage. In
some cases the assembly sites also manufacture
engine and gearbox parts to complete the kits.
However, the Mioveni site is the only one that
boasts a pressing plant and a paint shop.
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)
_ Since 2005
_ Output:
72,700 (2007)
_ Capacity:
160,000 (2009)
_ Since 2006
_ Output:
15,520 (2007)
_ Capacity:
300,000 (2009)
_ Since 2007
_ Output:
18,100 (2007)
_ Capacity:
50,000 (2009)
Envigado (CO)
Rosslyn (SA)
_ Since 2005
_ Output:
24,643 (2007)
_ Capacity:
40,000 (2009)
_ From the end of 2008
_ Planned output:
unavailable
_ Planned capacity:
unavailable
Curitiba (BR)
_ Since 2007
_ Output:
47,391 (2007)
_ Capacity:
110,000 (2009)
Mioveni (RO)
_ Since 2004
_ Output:
222,854 (2007)
_ Capacity:
400,000 (2009)
Legend:
Production of vehicle
body parts
Production of engines
and gearboxes
Assembly
of CKD kits
81
The vehicle and engine plants in the Romanian
city of Mioveni serve as the hub of the produc-
tion network, while the associated assembly
plants carry out the final stage of production and
establish contact to the local markets. This con-
figuration of production activities is referred to
as a hub-and-spoke configuration,
6
and it allows
companies to take advantage of economies of
scale while also ensuring a local presence. It
is advantageous when economies of scale and
learning effects are important and different ver-
sions of the product are to be sold worldwide.
While the Logan is not currently manufactured
in different versions, Renault and Dacia are
already considering doing so in the interest of
targeting the vehicle even more closely to local
conditions and customer preferences. This is
expected to lead to still higher sales figures and,
in turn, to greater efficiency, thanks to additional
economies of scale and learning effects.
Renault is employing a variety of ?market
entry strategies as it establishes its international
Logan assembly plants. Rather than opening
new assembly facilities in the regional markets,
Renault has either integrated the Logan into pro-
duction at existing plants or begun to collaborate
with international partners, including competi-
tors. Such cooperation with competitors is typi-
cal of the transnational networks and diverse
international relation-
ships found in the
automotive industry,
in which competition
and cooperation go on simultaneously (?“coo-
petition”). The Avtoframos plant in Moscow, Rus-
sia, developed out of a ?joint venture between
Renault and the city of Moscow and is currently
manufacturing the Logan; beginning in late
2009 it will produce the Sandero as well. This
joint venture will eventually include not only
a vehicle assembly plant, but also sheet metal
processing and painting facilities. There are also
plans to have other vehicle production activities
handled by Russian subcontractors. This existing
assembly plant could become a complete produc-
tion facility for the Logan and Sandero models.
Verweis Kooperationskom-
petenz
In Casablanca, Morocco, Renault has contracted
to have the Logan manufactured by its partner
SOMACA (Société Marocaine de Construction
Automobile), in which Renault holds an interest
of 54 percent; Fiat and Peugeot have holdings
as well. SOMACA assembles the Logan for all
North African markets, and the same plant
also manufactures the Renault Kangoo, among
others, for this region. In Colombia, Renault
acquired 60 percent of the Colombian automo-
bile manufacturer Sofasa SA, which assembles
Logan kits. The vehicles produced in Colombia
are also exported to other Central and South
American countries. Renault also has its Twingo,
Clio and Mégane models assembled there.
Sofasa is involved in work for other manufactur-
ers as well; for example, it produces light-duty
commercial vehicles for Japan’s Toyota company,
which owns 28 percent of Sofasa.
In Iran, Renault is working together with IDRO
(Industrial Development & Renovation Organiza-
tion), the state authority in charge of the coun-
try’s industrial development. The two partners
operate the joint venture Renault Pars, which
markets the Tondar, as the Logan is called in
Iran. Renault Pars manufactures engines and
gearboxes, which are then assembled into
finished vehicles by the Iranian automobile
manufacturers Iran Khodro and SAIPA using
CKD kits from Romania. The Renault plant in
the Brazilian city of Curitiba also assembles
CKD kits for the Logan, along with other Renault
models, using engines and gearboxes produced
on site. In India, Renault is launching a joint
venture with the largest Indian automobile
manufacturer, Mahindra & Mahindra, which is to
produce CKD kits for the Logan at the Mahindra
plant in Nashik, some 180 kilometers to the
northeast of Mumbai. Under its strategic alliance
with Renault, Nissan will begin in late 2008 to
assemble CKD kits for the Logan pickup at its
plant in Rosslyn, South Africa, and distribute the
vehicles there under the Nissan brand.
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.
Cooperation with partner companies and the
use of existing Renault sites make it possible to
keep initial investments low, as compared with
establishing new plants. Manufacturing other
models at the same site produces synergies
in such areas as the procurement of operating
supplies and auxiliary materials. Cooperative
arrangements, such as joint production ven-
tures with competitors, can further reduce costs
through economies of scale. They also lower
capital requirements, since costs are shared by
the partners involved. The example of the Logan
demonstrates that a competitive strategy of ?
cost leadership also affects a company’s ?inter-
nationalization strategies, such as its strategy for
entering a market while also pursuing greater
centralization.
7
In itself, the selection of a low-wage site
does not guarantee success in manufactur-
ing a low-cost car.
_ An efficient production configuration
requires that numerous production stages
be centralized at one location so that the
company can benefit from economies of
scale and learning effects.
_ At the same time, additional decentral-
ized sites with specialized production
responsibilities, e.g. assembly plants, can
establish contact to the individual mar-
kets.
_ As decentralization takes place, it is
advisable to establish new networks or
take advantage of existing ones, since
cooperation with partners produces syn-
ergies and allows for sharing risks.
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
In the automotive industry, procurement costs
account for an average of 60 percent of total
vehicle manufacturing costs. Consequently,
Renault has been seeking to reduce the costs
of purchasing components for the Logan and
Sandero. Its success in doing so is due largely
to the fact that procurement at the Dacia plants
is highly localized. As Figure 9 shows, some
80 percent of procurement, in terms of value,
occurs in Romania. Since production is largely
centralized in Mioveni, although CKD assembly
takes place worldwide, Renault is able to take
advantage of Romania’s low labor, raw material
and technology costs globally. Short distances
also mean lower transport costs. Indeed, 50
percent of the materials for manufacturing the
Logan are obtained in the Pites ¸ti industrial park
that has sprung up in the immediate vicinity
of the Dacia plants, and this factor alone has
reduced costs by 100 euros per manufactured
vehicle as compared with traditional procure-
ment ?structures.
The numbers are similar for the Logan’s sister
model, the Sandero. Sixty percent of its parts
come from Romania. Another 30 percent are
purchased in the neighboring countries of
Poland and Hungary. By comparison, the local-
ization level of premium manufacturer BMW’s
plant in Spartanburg, South Carolina, was only
30 percent in 2007. Most of its parts still come
from Europe. Accordingly, BMW has been hard
Figure 9: Localization of procurement for Logan production
Logan suppliers
Volume of procurement
for the Logan (value)
6
48
14
10
110
As of December 31, 2007.
1) Including Turkey.
Number of suppliers
(Total: 188 suppliers)
P
i
t
e
s¸
t
i
R
e
s
t
o
f
R
o
m
a
n
i
a
R
e
s
t
o
f
C
e
n
t
r
a
l
/
E
a
s
t
e
r
n
E
u
r
o
p
e
1
)
W
e
s
t
e
r
n
E
u
r
o
p
e
R
e
s
t
o
f
w
o
r
l
d
0
20
40
60
80
100
120 Other countries
20 %
Pites? ti
50 %
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
hit by the increase in the value of the euro rela-
tive to the dollar, despite having a plant in the
United States.
The concentration of procurement in the
Romanian region is also reflected in supplier
numbers: Of the 188 suppliers that provide
components for Logan production in Mioveni, 54
(about 29 percent) produce those parts in Roma-
nia and another five in the surrounding Central
and Eastern European countries. Nine suppliers
for the Dacia plants operate from Turkey and 10
from Western Europe. The remaining 110 compa-
nies – whose share in the total value of procured
goods is much lower than their number would
indicate – are located elsewhere in the world.
The supplier companies that are active in Roma-
nia are not only Romanian companies such as
the up-and-coming Euro Auto Plastic Systems
(Euro APS); the six automotive suppliers that
manufacture Logan components in the Pites ¸ti
industrial park also include companies like the
American supplier Johnson Controls and its
French competitor Valeo.
Other suppliers will follow their lead. Another
American company, ArvinMeritor, is in the pro-
cess of moving its production of Logan door pan-
els to Pites ¸ti. Dacia suppliers are currently open-
ing more than 20 new plants in Romania. Half
of them are entirely new production facilities
(greenfield investments), while half are expan-
sions of existing plants. Dacia fully expects to
benefit directly from a further decline in produc-
tion and transport costs. This will also produce
more jobs in Romania.
If Renault and Dacia are to achieve the high
level of procurement localization they are aim-
ing for, their Romanian suppliers will need to
be efficient in their production, provide high-
quality goods and ensure reliable deliveries.
Under the Alliance Suppliers Improvement
Program (ASIP), a kind of academy for suppliers,
Renault sends some of its employees to supplier
companies to assist in optimizing procurement
and quality assurance and to transfer the nec-
essary key technologies. In addition, Renault
provides advice on general business issues such
as organization and corporate management.
Some 1,800 employees from supplier companies
were trained by this program between 2000
and 2004, for a total of roughly 20,000 hours of
training. These advisory services are not free;
every company that receives support under ASIP
and is subsequently accepted into the ranks of
Renault suppliers pays a pro-rata training fee to
Renault for each component that is delivered.
These training efforts are paying off: While the
Dacia plants in Mioveni recorded 5,750 faulty
parts per million in 2000 (0.58 percent), that
number had dropped to 35 (0.0035 percent) by
2007. In this category, the Dacia plants rank
third within the Renault Group.
Dacia is also benefiting from the fact that the
purchasing organization RNPO (Renault-Nissan
Purchasing Organization), which was estab-
lished as part of the strategic alliance between
Renault and Nissan, carries out a large share of
procurement for all of the brands included in
the alliance and makes important decisions in
related matters. It compares suppliers worldwide
and selects those that offer the best value for
the money. In 2007 it handled 83 percent of
the two companies’ procurement volume, which
corresponds to a total value of 51 billion euros.
Its bargaining power made it possible to achieve
substantial synergies, which are reflected in the
purchase price of the Logan and the Sandero
as well. If reasons of economy or quality argue
against procuring a part on site, it is purchased
somewhere else. Thus the group’s ?global
sourcing combines with local procurement to
achieve the best possible balance of procure-
ment for the Logan family of vehicles.
85
Manufacturing a low-cost car in an emerging
market requires a high level of localization in
the area of procurement.
_ A majority of parts need to be obtained near
the production site, first in order to benefit
from cost advantages, and second to avoid
transport costs.
_ A high level of localization can only be
achieved if local suppliers are able to meet
certain quality and reliability requirements.
This means that the manufacturer needs to
provide support for the development of sup-
pliers in the emerging markets.
Summary
a training program like the one Renault con-
ducted in Romania. There is no other option.
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. The major automotive compa-
nies are building a bridge for local suppliers,
so to speak. Their purchasing departments
have set certain internal targets for procure-
ment from the so-called low-cost countries,
ranging between 20 and 30 percent of total
volume. At present, however, none of these
manufacturers have been able to meet these
targets. But if a local supplier, for example in
Russia or India, is qualified and has produced
good results, a purchasing department will
consider using it as a supplier for the company
as a whole.
Of course, this only applies to certain parts.
No one is going to transport a painted bumper
from India to Europe, but shipping certain
forged parts might make sense. Manufacturers’
purchasing departments will make sure that
local suppliers become serious competitors in
all of the core markets relatively quickly. Fur-
thermore, these suppliers – for example Indian
small- and medium-sized businesses – are
already showing the necessary entrepreneurial
commitment to expand internationally.
The interview was conducted by Stefan Schmid
and Philipp Grosche.
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?
Of course, the established international auto-
motive suppliers will be able to claim a certain
share of the procurement volume for low-cost
vehicles; look, for example, at Bosch’s involve-
ment in the Tata Nano and Valeo’s participa-
tion in the Dacia Logan. But this share will
remain limited. For one thing, every country
has certain local content regulations that must
be followed, and for another, no low-cost manu-
facturer can ignore the cost advantages offered
by local resources. So manufacturers need to
procure a large percentage of their materials
locally.
This is certainly possible, but it may some-
times be difficult. Usually manufacturers will
first have to train local suppliers. In Russia,
for example, Volkswagen is currently facing
a major problem: It has not been able to find
enough local suppliers that are capable of
meeting its quality standards and that offer
the logistical capabilities necessary to support
series production. The only solution will be
Interview
86
Centralizing development activities is advanta-
geous for a new product like the Logan, since
short distances facilitate both organization and
coordination. When development is located at
headquarters, it is easier to take advantage of
the knowledge that is available throughout the
company. In the case of the Logan, this has
meant using existing construction plans and
parts as well as assigning employees to the
X90 project who had already been involved in
designing the company’s first design-to-cost car,
the Renault Twingo, in order to benefit from
their experience in designing the Logan.
“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, that the Logan was intended for
emerging markets with very different living
conditions and consumer preferences than those
found in Western Europe. Differences between
one country and another are a common reason
for decentralizing development activities. The
employees who designed the Logan were con-
scious of that fact, and sought from the very
beginning to take conditions in the emerging
economies into account. They visited target mar-
kets to gather relevant information. As Pierre-
Edouard Sorel, product manager for the Logan,
reports, “I wanted to do more than simply rely
on market studies to tell me about the expecta-
tions of future Logan customers. As the project
began, I went to potential markets to learn more
about local habits and customs” (Dacia 2004:
6). Through a mixture of centralized develop-
ment and local identification of customer needs,
Renault combined the advantages of centraliza-
tion, such as the ?network effects described
above, with the advantages offered by decentral-
ization, such as access to local information.
With the growing success of the Logan in a
wide variety of markets, Renault also came
to recognize that greater attention to local
customer preferences and vehicle usage could
lead to even higher sales. This is a conflict that
frequently arises in international management:
While international standardization can gener-
ate cost advantages, on the other hand regional
or local differentiation can help to increase
sales – which, in turn, leads to lower unit costs.
High sales numbers and low unit costs are cru-
cial in keeping the Logan’s purchase price low
and ensuring its economic success. While so
far this vehicle has been sold in the same form
worldwide, Renault recently announced that
it is developing model adaptations tailored to
selected sales regions, which will differ in their
interior design and features. However, these dif-
ferences will be relatively minor compared with
model adaptations carried out by other compa-
nies, so most of the advantages of standardiza-
tion will still apply.
8
The fact that more attention is being paid to
regional differences in customer preferences
and vehicle use is evidence of a company-wide
reassessment at Renault. Over the past few
years, the company has begun to rethink its
configuration of research and development and
to establish decentralized development centers
throughout the world. In addition to its R&D
headquarters at the Technocentre in Guyancourt,
it now has nine decentralized development
sites worldwide (in Portugal, Romania, Spain,
Argentina, Brazil, Chile, Mexico, Colombia, India
and South Korea) that carry out design and
construction work. One of them is the construc-
tion and design center Renault Technologies
Romania (RTR), with locations in Bucharest und
Pites ¸ti, which opened in 2007. These decentral-
ized facilities, staffed by local employees, are the
key to translating local customer preferences
into attractive vehicle models. According to an
official press release from the Renault Group,
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]ompetitive performance calls for closer con-
tact with local customers. Regional engineering
teams will have a better understanding of cus-
tomer’s needs and vehicle usage conditions on
local markets” (Renault 2007c).
Development activities are
located in target markets in order
to better understand local cus-
tomer preferences.
Renault Technologies Romania (RTR) will
eventually employ 3,000 workers (its current
workforce numbers roughly 1,700), making it
the Renault Group’s largest development center
outside of France. It is under the supervision
of the Technocentre in Guyancourt and is to
design and test new vehicles – and in particular
to develop a Logan model specifically intended
for Central and Eastern Europe, Russia, Turkey
and North Africa. This was why Renault chose
a site located near Dacia headquarters and the
Eastern European sales markets. In addition,
RTR was given four satellite sites in Russia, Slo-
venia, Turkey and Morocco. Over the long term
it will assume additional tasks, as well as taking
over from the Technocentre in Guyancourt sole
responsibility for all of the projects based on the
Logan.
Thus, the Renault Group has reassessed
not only the configuration of development activi-
ties, but also their coordination and manage-
ment. Approximately half of the development
work for the Logan pickup as well as the con-
struction of Sandero prototypes has already been
carried out by RTR.
Development headquarters in France will con-
tinue to be in charge of developing the various
Logan models destined for the Western European
market. Renault’s existing regional development
centers in Brazil and India would be a logical
choice for developing other regional models
meant for South America and Asia. These
regional centers are responsible not only for
developing (region-specific) vehicles and drive
train components, but also for providing techni-
cal support to local production sites, aiding in
the procurement of parts from local suppliers
and monitoring the market. In addition, these
centers assist local suppliers, starting with the
design of components for Renault. Shorter dis-
tances to production sites and suppliers allow
for better coordination, which can, in turn, lead
to higher quality.
For a company like Renault, which comes from a
country with a tradition of centralization and is
still 15.1 percent state-owned, success in decen-
tralizing certain aspects of development – and
thus also the company’s own expertise – is an
impressive achievement. It remains to be seen to
what extent decision-making responsibilities as
well will be decentralized – for example, permit-
ting RTR to take charge of all Logan projects.
This would bode well for the Logan’s long-term
success, since it would make it easier to adapt
the vehicle to local customer preferences. More-
over, abandoning the model of a single decision-
making center would result in a more open ?
corporate culture and greater attention to the
cultural influences found throughout the whole
company. This would truly put Renault on the
path of becoming a “global player,” as it already
describes itself on its website.
Developing a low-cost car requires attention
to vehicle usage and customer preferences
in the emerging markets, which may differ
dramatically from the developed countries.
_ The advantages of centralization are para-
mount in the initial design of a low-cost
car, since it is crucial to take advantage of
existing concepts and components.
_ As time goes by, it makes sense to estab-
lish decentralized development sites,
since this allows the company to learn
more about local markets and to tailor its
vehicles more closely to local customer
preferences.
_ In order to adapt a vehicle successfully
to the needs of local customers, the man-
agement of development activities must
be adapted as well. As such activities
are decentralized, the relevant decision-
making responsibilities also need to be
decentralized.
Summary
88
Benefiting from the advantages
of hub-and-spoke production
requires effective and efficient
logistics.
By transporting its vehicles by ship rather than
land, Renault is able to save 20 percent of the
relevant costs. About 80 percent of its vehicles
intended for the Western European markets
are brought to their intended markets by water,
even if land transport would be faster. Finished
vehicles destined for southern Europe and CKD
kits to be assembled in Morocco, Brazil and
Colombia are also transported by ship. The logis-
tics subsidiary, Gefco, of Renault’s French com-
petitor Peugeot transports them by train from
Mioveni to the Romanian port of Constanta on
the Black Sea, where they are loaded onto ships;
Renault is clearly willing to cooperate with its
competitors in order to cut costs. However, since
transporting vehicles by ship takes longer, it is
essential to plan ahead so that fluctuations in
production and demand do not lead to long wait-
ing periods for dealers and customers.
A hub-and-spoke configuration of the production
network requires an efficient logistical system,
aimed at supplying the assembly plants in the
regional markets with CKD kits produced at the
main plant in Mioveni. Realizing the cost bene-
fits of centralized production at the hub requires
effective and efficient distribution, which is why
Renault opened a state-of-the-art logistics center
in Mioveni in 2005. It is one of seven sites of the
company’s International Logistics Network (ILN),
which organizes and controls the flow of goods
within the Renault Group, from inbound to out-
bound logistics.
The ILN center in Mioveni serves as the central
hub and backbone of Logan production world-
wide. As shown in Figure 11, this center is
responsible for receiving all of the components
manufactured by the 188 suppliers, organiz-
ing the shipment of CKD kits to the various
assembly plants and taking charge of shipping
the vehicles produced in Mioveni to distributors
in the European markets. With 297 employees
and a volume of 872,243 cubic meters of compo-
nents shipped in 2007, which amounts to more
than 23,000 standard containers, the Mioveni
logistics center is not only the largest such
center in the Renault Group, but the largest of
its kind in the entire international automotive
industry.
The distribution of new vehicles is also strictly
governed by cost considerations, in order to
maintain the cost advantage of the Logan and
Sandero. In contrast to many of its competitors,
Renault usually transports its vehicles by ship,
which is the most economical alternative. Most
distribution for the German market is handled
by the German shipping company Willi Betz.
The vehicles are transported by truck from
Mioveni to the Danube port of Vidin, a distance
of 200 kilometers, where they are loaded onto
one of the Betz company’s ships. The 1,440
kilometer trip by river to Passau takes about five
days. From there Betz car carriers deliver the
vehicles to German Renault dealers with a Dacia
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 subsidiaries
throughout the world
Logistics center
Mioveni
A well-designed logistics network is essen-
tial to reap the benefits of a hub-and-spoke
production network.
_ It is crucial to have an efficient logistics
platform at the central production site,
which serves as the hub of international
production.
_ To gain the desired price advantage,
companies need to emphasize efficiency
when choosing a means of transporting
kits to decentralized assembly sites (if
applicable) or finished vehicles to their
destination markets.
_ It should be kept in mind during the plan-
ning phase that less expensive transport
alternatives require more time, so that
waiting periods for customers and dealers
can be kept to a minimum.
Summary
90
3. The competitive advantages offered by emerging markets
The example of the Logan shows that it takes
more than a production site with low labor costs
to produce a low-cost car. Upstream and down-
stream ?value functions need to be part of the
calculation as well, just as they are important
for a cost leadership strategy, as Porter points
out. The Renault Group focuses on the “low-cost
idea” throughout its value chain, which has
allowed it to keep the price of the Logan and
Sandero low. It is also clear that a cost orienta-
tion is a necessary, but not sufficient, condition
for the success of a low-cost car. While cost con-
siderations have played a significant role in the
geographical distribution of the relevant value
activities, they have not been the only factors in
the Logan’s success. The configuration-to-cost
model alone does not guarantee success. Other
important factors include training suppliers
in emerging markets, which promotes a high
level of localization in procurement, and taking
into account local conditions by decentralizing
development activities. Furthermore, it is cru-
cial not only to make changes in the ?value
configuration, but also to undertake necessary
adjustments in the coordination and manage-
ment of value activities, as is clear from the
need to decentralize decision making in the area
of development.
Low-cost cars represent a new kind of product
in the vehicle market, and they require a new
configuration of the value chain. As the target
markets for these products, emerging nations
play a central role. Figure 12 summarizes once
more the steps that Renault has already taken.
These measures apply not only to the automo-
tive industry, but also to many other industries
as well. The changes Renault has made in the
value chain provide a model for other companies
as they configure and coordinate their value
activities relating to other low-cost products.
It is essential that the entire value chain be
appropriately configured, and not only by choos-
ing a favorable production site, since the cost
advantage of a low-wage location can disappear
fairly quickly. If a company’s business model
is based solely on low labor costs during the
production stage, its competitive advantage can
easily erode as time goes by. Note that labor
costs in the emerging markets have risen dra-
matically over the past few years. In 2007, labor
costs in Romania increased by 30.2 percent,
compared with 3.3 percent in France and 1 per-
cent in Germany. Early in 2008, Renault endured
a three-week strike by Dacia workers, with the
unions demanding a 33 percent increase in
wages. The two sides ultimately agreed to an
average wage hike of about 27 percent.
Emerging economies can become
important sources of knowledge
and expertise.
Moreover, our analysis of Renault’s value con-
figuration shows that companies from the indus-
trialized countries can generate competitive
advantages by integrating emerging economies
into their value chains. This can be done, for
example, by carrying out development activities
in those countries. Knowledge and innovations
developed in emerging economies can be used
to competitive advantage worldwide – in a com-
pany’s domestic market as well. Accordingly,
the role played by the emerging markets is no
longer simply that of a cheap production site.
Instead, they should be viewed as a source of
knowledge and expertise that can help establish
a strong competitive position throughout the
world, as our conversation with Coimbatore K.
Prahalad (p. 98) indicates. Since low-cost cars
are primarily intended for the emerging mar-
kets, it only makes sense to carry out relevant
value activities in those locations as well. Fur-
thermore, by locating high-level value activities
in ?developing countries, companies from
the industrialized countries help to promote
economic development in other parts of the
world.
91
Figure 11: Overview of the con?guration of the value chain for low-cost
products
Development
_ Centralizing the development of low-cost
products to allow for the use of parts and
concepts that are already available within
the company.
_ As time goes by, decentralizing the develop-
ment of country- or region-specific models
that reflect customer preferences.
_ Decentralizing decision-making responsibili-
ties related to model adaptations, to ensure
that customer preferences are taken into
account.
Logistics
_ Establishing a suitable internal logistics net-
work to ensure that centrally manufactured
goods are distributed effectively and effi-
ciently within the production network.
_ Making consistent efforts to choose the least
expensive means of transporting goods to
dealers and customers to maintain the price
advantage of a low-cost product.
_ Taking longer transport times into account
during production planning so that waiting
periods for dealers and customers can be
kept to a minimum.
Production
_ Centralizing most production activities to
achieve maximum economies of scale.
_ Creating supplementary “production satel-
lites” to establish contact to target markets.
_ Cooperating with partners to achieve syner-
gies and share risks.
Procurement
_ Achieving a high level of localization at the
central production site to take advantage of
differences in the cost of production factors
and avoid transport costs.
_ Advising and training local suppliers to
achieve the highest possible level of localiza-
tion.
Renault’s configuration and
coordination for the Logan: A model
for low-cost products in general
_ Manufacturing a low-cost product requires
not only certain product and process innova-
tions, but also a reconfiguration of the value
chain and changes in the management of
value activities. Cost optimization is only
one factor among many.
_ Low-cost products have macroeconomic
implications: Emerging nations are no lon-
ger simply an “extended workbench” for
international value creation. Rather, they
can be a source of innovation.
Summary
92
In the interest of readability we have reduced
the number of references contained in this
version of the study. A complete list of refer-
ences is found in the bibliography. A German
version of the study can be obtained in printed
form as an academic working paper by
contacting the office of the authors
([email protected]); it may also be
downloaded from the website of the Chair of
International Management und Strategic
Management at ESCP-EAP European School of
Management Berlin (www.escp-eap.de/imsm).
93
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97
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).
Global
Businesses
Locally Responsive
Businesses
Multifocal
Businesses
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. Establishing Audi Hungaria as a subsidiary of Audi AG 105
1.1 Various reasons for direct investment in Györ 105
1.2 Innovative structures and processes for Audi Hungaria 108
2. Developing Audi Hungaria as a center of excellence within the Volkswagen Group 110
2.1 Ongoing development as a center of excellence for engine production 110
2.2 Simultaneous expansion as a center of excellence in convertible assembly 113
2.3 Upgrading the center of excellence for engine production by adding development 115
responsibilities
2.4 Ongoing acquisition of additional capabilities – expansion as a center of excellence 116
for vehicle production?
2.5 Audi Hungaria as a growth driver within the Volkswagen Group 118
3. Challenges in managing centers of excellence 120
References 123
In February 1993 the Bavaria-based company
Audi AG, which is part of the Volkswagen Group,
established a wholly owned ?subsidiary called
Audi Hungaria Motor Kft. in the Hungarian city
of Györ. After about 18 months of planning and
construction work, an engine assembly plant
began operations in Györ in October 1994. This
represented a change in Audi’s production strat-
egy; for the first time in the company’s history, it
was moving some of its production abroad. Until
then all of Audi’s production had been carried
out at two locations in Germany: in the city of
Ingolstadt in Upper Bavaria, home to company
headquarters, and in Neckarsulm in the Würt-
temberg region, just over 200 kilometers away.
Establishing a subsidiary in Györ was part of
a strategic reorientation of the entire company.
Audi began an extensive expansion and rework-
ing of its vehicle range in 1994, introducing the
reengineered A4 and A6 models and launching
the A8 luxury sedan. This was an effort to coun-
teract weak sales of existing vehicles caused by
the 1992 economic slump, while also structur-
ally generating new sales growth – especially in
the case of the A8.
This reorientation required a new production
strategy. The Audi A4, which replaced the suc-
cessful but aging Audi 80, was a model with an
innovative four-cylinder engine and five-valve
technology that the existing facilities in Ingol-
stadt und Neckarsulm were not equipped to pro-
duce. In addition, expected sales growth would
require new engine assembly lines to expand
capacity. In the interest of long-term competitive-
ness, Audi was looking for a site that would pro-
vide distinct cost and productivity advantages.
In an eight-month selection process, Audi
reviewed more than 180 possible sites all over
Europe as potential locations for a new engine
assembly plant, the majority of them in Central
and Eastern Europe. Among the finalists were
the German cities of Magdeburg, Chemnitz
and Ingolstadt and the Czech cities of Broumov
and Mladà Boleslav. The industrial city of Györ
(known as Raab in German) was finally selected
in 1992. Györ, with a population of 130,000, is
the sixth largest city in Hungary and located
between Vienna and Budapest, about 120 kilo-
meters from each.
Györ is also relatively close to Audi AG head-
quarters in Ingolstadt – only 610 kilometers
away. Company headquarters, the German
production sites and the existing suppliers
are therefore all within a reasonable distance.
Moreover, Györ has the advantage of being well
connected to the transportation infrastructure.
This is evident from Figure 1, which shows Audi
headquarters in Ingolstadt and the other Euro-
pean production sites, as well as Audi plants in
India and China. Györ is located on the railway
line between Vienna and Budapest and has a
direct highway connection to Germany, making
it easy to reach by rail or road. These reasons
alone, however, would not have tipped the bal-
ance in Györ’s favor.
Another major factor in selecting Györ was labor
costs, which were considerably lower than at
home. When the decision was made, labor costs
(wages and salaries, along with fringe benefits)
were only one-eighth as high in Hungary as in
Germany.
1
Hungarian labor law was also consid-
ered more employer-friendly, because the unions
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
had less influence. Both of these advantages
still hold true. Furthermore, the 40-hour week
was, and remains, the norm for workers in Györ,
and companies are allowed to operate up to four
shifts, seven days a week. Shifts can be called
or canceled at short notice without the need for
lengthy negotiations with the works council.
This allowed Audi not only to cut costs, but also
to make production much more flexible, lead-
ing to further savings. Other production factors
offered savings as well; energy, cleaning, trans-
port and security in particular are less expen-
sive than in Western Europe.
Moreover, an unfinished production hall measur-
ing 100,000 square meters was available in Györ
at a low price from the industrial conglomerate
Rába, a relic from the pre-1989 era. Rába’s com-
mercial vehicle division had been planning to
produce diesel engines for the Eastern European
markets in cooperation with its German competi-
tor MAN. After the opening of the former East-
ern bloc, however, this project was abandoned.
For Audi, this meant investing only one-third as
much as such a plant would have cost in Ger-
many. In addition, the plot of land on which the
building was located was relatively large, offer-
ing room for expansion. Audi took advantage of
this opportunity to build onto the existing parts
of the structure. Sixteen months after an agree-
ment was signed with the city of Györ, engine
assembly could finally begin.
Hungary granted Audi full exemption from
business and earnings taxes for a period of five
years, as is customary for foreign investments in
the country. The exemption could be extended
for an additional five years if Audi were to rein-
vest all of its profits from the Györ site during
the initial five-year period. From the outset, the
Györ plant was treated as a duty-free zone; in
other words, Audi is not required to pay duty
when importing supplier parts, nor when ?
exporting finished engines.
Along with these financial advantages, the high
level of education and training of the Hungarian
workforce argued in favor of investing in that
country. Györ in particular offered sufficient
numbers of well-trained potential employees,
including both skilled workers and university
graduates. Shortly before Audi’s decision, the
Figure 1: Audi AG production sites
Source: The authors, based on Audi (2008e).
Europe
India
China
Aurangabad (IND)
Changchun (CN)
Neckarsulm (D)
Ingolstadt (D)
Györ (HU)
Brussels (B)
Legend:
Production sites
Company
headquarters (also
production site)
107
Rába conglomerate had been forced to elimi-
nate over 20,000 jobs in Györ, many of them
in its commercial vehicle division. This meant
that a large number of people with a relevant
vocational background were looking for work
in the region. In addition, the local Institute of
Transportation and Telecommunications, which
has enjoyed university status since 2002, is con-
tinually training engineers and other specialists,
including economists. In Györ, Audi could count
on an ongoing supply of well-trained workers
and experienced job candidates who would be
able to start immediately when the new site
commenced operations.
Audi’s decision to open a plant in Györ was
therefore based largely on issues of efficiency.
Total costs of investment in Györ were between
30 and 40 percent lower than the cost of estab-
lishing a new plant in Germany, and at that time
ongoing production was roughly 60 percent
less expensive than at home. It was clear from
its consideration of these location factors that
Audi’s management was seeking to make the
company more competitive in its cost structure.
Procurement issues were also important; suit-
able personnel had to be available and the new
site needed to provide easy access to the exist-
ing supply and production networks. Strategic
considerations played a significant role as well;
the new assembly plant in Györ was clearly an
important part of Audi’s strategic reorientation
and essential for reaching its growth targets.
Companies that base their loca-
tion decisions primarily on low
costs, ignoring other factors, may
encounter problems.
An analysis of Audi’s decision regarding a plant
site shows that ?direct investment is not moti-
vated by a single factor, but by a variety of con-
siderations. Laying the groundwork for the suc-
cessful development of Audi Hungaria required
giving serious thought to a number of location
factors. Other companies today find themselves
struggling with low productivity because they
chose foreign locations mainly on the basis of
cost advantages, ignoring such potential prob-
lems as a lack of well-trained workers. “When
location decisions are strongly cost-driven, it
appears that other relevant factors are given too
little attention,” explains Steffen Kinkel, expert
on site planning at the Fraunhofer Institute in
Karlsruhe (Kinkel 2006: 12). VW, Audi’s sister
brand within the Volkswagen Group, is currently
experiencing difficulties because it cannot find
enough suitable workers to staff its new plant
in Kaluga, Russia. Thus VW is making only
slow progress toward achieving its original goal,
which was to use this plant to help open up the
promising Russian market.
_ In making decisions about foreign loca-
tions, companies need to be clear on
their goals in making a direct investment
in a foreign country. Success requires a
comprehensive and holistic evaluation of
all location factors.
_ It is particularly important to undertake
a dynamic assessment of the potential
investment. If the decision is based too
much on cost advantages, for example,
changes in relative costs over time may
offset the site’s advantages. In some
cases this may lead to an expensive relo-
cation.
Summary
108
The first innovation concerned organizational
structure. Audi immediately established a new
kind of leadership culture in Györ, aimed at pro-
moting entrepreneurship within the company.
Only two levels of management were instituted,
in the interest of creating unbureaucratic and
flexible ?structures. In contrast to the situ-
ation at the company’s German plants, where
the organizational system was still based on a
traditional division of labor with fixed responsi-
bilities, workers at the Hungarian plant immedi-
ately began working in flexible teams – much as
is the case at Toyota, the industry model.
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.
The teams consist of several skilled workers who
are in charge of operations, facility maintenance
and quality assurance. Team members handle
operational and organizational issues related to
specific production stages, an arrangement that
makes it possible to streamline decision making.
The teams also play a central role in optimizing
production. At a conventional automotive plant,
executives are responsible for solving problems
and improving processes, but in Györ these
tasks are performed by skilled workers. They
are expected to be constantly looking for ways to
optimize work processes and continually offer-
ing suggestions, not just when a concrete prob-
lem arises – another similarity to Toyota and its
continuous improvement approach (known as
“kaizen” in Japanese). “The associates who per-
form the value-added jobs are the most familiar
with the actual work and the actual problems
that affect the work,” notes Jeffrey Liker, Profes-
sor of Industrial and Operational Engineering
at the University of Michigan and an expert on
Toyota’s management method, in explaining the
advantages of assigning responsibility to skilled
workers (Liker 2006: 273).
Team leaders, who first serve as operational
members of the team, are in charge of making
sure that there is an adequate supply of parts,
carrying out quality inspections, substituting as
needed for absent team members and training
their colleagues. Although they are not officially
considered part of management, they assume
responsibilities that would be assigned to the
management of traditional organizations. The
role of team leaders and skilled workers is one
of the main reasons why Audi Hungaria has
been able to limit itself to two levels of manage-
ment. Jürgen Hoffmann, former Chairman of the
Board of Management of Audi Hungaria, points
out the advantage of a “lean” organization: No
employee can shirk his responsibilities, since
others would immediately notice. The workforce
at Audi Hungaria has accepted this arrangement
without objection.
Only a few Hungarian employees were introduced
to the operational methods in place at Audi’s
German plants in Ingolstadt and Neckarsulm; it
was felt that limiting exposure to those methods
would make it easier to establish a new system in
Györ. Jürgen Gebhardt, former head of production
at Audi AG, knew from his experience at Opel
that when new employees fall back on traditional
methods, it is much more difficult to put updated
structures and processes in place at a new site.
Another innovation involved logistics, with Audi
taking a new approach to integrating the Györ
plant into its operations. The Hungarian plant
is ?integrated into the value network of Audi
AG through a sophisticated external logistics
system that is managed and implemented by
Schenker, a subsidiary of Deutsche Bahn, Ger-
many’s national railway company. Freight trains
transport the some 3,000 individual parts that
are needed to assemble the engines (e.g. intake
and exhaust valves and spark plugs) from Ingol-
stadt to Györ and return the finished engines to
Ingolstadt. From there, the engines assembled in
Györ are distributed to their destinations.
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
It was important to structure the internal logis-
tics systems in Györ in a similarly innovative
way. At a plant of this size, internal logistics is
crucial for achieving a high level of efficiency.
First, the plant was designed to ensure that
distances between the delivery sites for engine
parts and the assembly lines, as well as between
the various assembly stations, were as short as
possible. Second, all internal plant logistics were
?outsourced. As production began in Györ,
Rudolph Logistik Kft., the Hungarian subsid-
iary of the German logistics specialist Rudolph
Logistik Gruppe, took over responsibility for
the movement of goods within the Audi plant,
including in the production halls and between
the various assembly stations. Rudolph employ-
ees handle everything associated with incoming
goods, goods inspection, inventory management,
assembly line supplies and the shipment of
assembled engines to other Audi plants. Since
Audi employees are not involved in moving
goods, they can concentrate exclusively on the
production process.
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.
It is largely due to the modern organizational
and management methods described above
that the Györ site today ranks at the top among
Audi AG locations in terms of productivity and
product quality. Thomas Faustmann, current
Chairman of the Board of Management of Audi
Hungaria, points out, “Our company’s success is
based on flexibility and an ongoing optimization
of our core processes” (Audi 2008f). Today, the
Hungarian subsidiary is a ?center of excel-
lence and an important strategic pillar of Audi
AG, as well as the entire Volkswagen Group.
_ When a company establishes a new
plant in a foreign country, it derives
advantages that are directly related to
the plant’s location, but it also has an
opportunity to introduce innovative orga-
nizational structures in the company as a
whole. This can be done from the ground
up, without interference from old and
time-worn ways of doing things.
_ Particularly when it is located in a differ-
ent environment, a new site can provide
feedback that can change the culture of
the overall organization.
Summary
110
Audi Hungaria fulfilled the expectations of its
parent company and quickly assumed an impor-
tant role within Audi AG. Except for the plant
in Sant’ Agata Bolognese, which is exclusively
devoted to producing engines for Audi’s Lambor-
ghini subsidiary, the Hungarian plant is Audi’s
only engine production plant. This has made it a
group-wide center of excellence, a term used for
a subsidiary that
_ has expertise in one or more ?value func-
tions or one or more products,
_ is responsible for several (country) markets in
the above-mentioned area(s) and
_ is well integrated into the corporate network
so that the entire company can benefit from
its expertise.
Figure 2 shows strategic options for centers of
excellence, depending on their expertise and
geographic area of responsibility.
3
Functional
centers of excellence have special capabilities
with respect to a value function such as procure-
ment, production or sales. They may also spe-
cialize in certain aspects of a value function, for
example the production of selected parts or the
assembly of the end product. The expertise of a
product-oriented center of excellence relates to
a specific product, and the center of excellence
carries out all of the ?value activities associ-
ated with that product, such as the procurement
of intermediate products, the manufacture of the
product and its marketing and distribution.
4
Originally, the Györ site was to be built and
expanded based on a three-stage investment
plan totaling 409 million euros. The first stage,
carried out in 1993 and 1994, included the basic
construction of the plant and its production facil-
ities. Upon completion of this stage, the plant
had an assembly capacity of up to 750 engines
per day, and its task was exclusively to assemble
four-cylinder engines for the Audi A4. All of the
necessary engine parts were brought in by train
from Germany.
During the second stage, completed in 1996,
Audi doubled the plant’s capacity to 1,500
engines per day. According to plan, the Györ site
also began manufacturing the cylinder housing
for the four-cylinder engines assembled there.
Departing from the original plans, however, the
Board of Management of Audi AG decided that
same year to have Audi’s entire range of engines
produced in Györ.
5
The introduction of the A4,
A6 and A8 models two years earlier had led to
sales growth, as the company had hoped, which
meant that engine and vehicle production capac-
ity had to be increased. Since the company was
pleased with the engines manufactured in Györ
and with the plant’s productivity, it seemed only
logical to move all engine production to Hun-
gary. This freed up capacity for vehicle produc-
tion at the German plants and made good use of
the Hungarian subsidiary’s expertise in building
engines. This paved the way for Audi Hungaria
to become a center of excellence in engine pro-
duction.
The third stage of the original investment plan
followed in 1997 and 1998 with the expansion
of production capacity to 2,200 engines per day.
Production of crankshafts and piston rods was
also moved to Györ. Audi Hungaria eventually
took over responsibility not only for all aspects
of Audi’s engine assembly, but also for produc-
ing those engine components that were not
obtained from outside suppliers. All of the value
activities related to engine production were
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
now concentrated in Györ, and Audi Hungaria
had become a functional center of excellence in
engine production. Since the Györ site is Audi’s
only engine production plant in the world, it can
be said to have a worldwide functional mandate.
The increase in Audi Hungaria’s responsibili-
ties and growth in Audi’s sales led to a steady
increase in the number of engines produced
each year, as shown in Figure 3. By 1999, five
years after the Hungarian plant had opened, its
annual engine production had already exceeded
the one-million mark. In the 14 years since the
plant commenced operations, a total of 14.8 mil-
lion engines have been produced in Györ. This
was made possible by further expansions that
gradually increased production capacity from
750 to 6,900 engines daily. Today Audi Hungaria
produces eight different engines: the R4 Otto
and TDI engines (four cylinders), the V6 Otto
and TDI engines (six cylinders), the V8 Otto
and TDI engines (eight cylinders), the V10 Otto
engine (ten cylinders) and the V12 TDI engine
(twelve cylinders).
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.
Audi Hungaria has demonstrated in a number of
ways that centers of excellence have a positive
effect on the company as a whole, and not just
on their local markets. The production system
implemented in Györ, which increased efficiency
(for example by outsourcing internal logistics)
and introduced innovative procedures (such as a
state-of-the-art organizational structure), became
the model for the production system that was
put in place at all Audi AG sites in 1999. The
transfer of knowledge went both ways, not only
from the German plants to Hungary, but also
in the other direction, and the entire company
benefited. The Audi plant in Györ serves as a
company-wide ?benchmark for measuring
the efficiency, productivity and quality of other
sites, and this has brought additional positive
feedback effects. Internal competition between
sites has also boosted productivity at the Ger-
man plants, as Jürgen Gebhardt, former head of
production at Audi AG, has pointed out.
In becoming a center of excellence, Audi Hun-
garia has not only contributed to the interna-
tional growth of its parent company, Audi AG;
it is now a leader in engine production for the
entire Volkswagen Group. Only 37 percent of
the engines produced in Györ in 2007 were
intended for vehicles sold under the Audi brand
name. The remaining 63 percent went to other
customers within the Volkswagen Group, as
shown in Figure 4. The VW brand now uses
nearly as many engines produced in Györ as
Audi AG does.
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 2006 2005 2007 2002
Engines produced
(in thousands)
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
104
196
585
987
1,002
1,061
1,220
1,280
1,335
1,481
1,694
1,894
1,913
113
In 1998 there was a further increase in the
value activities carried out at Audi Hungaria:
The Hungarian subsidiary took over all assembly
work for the Audi TT model, which was available
as a coupé and as a roadster (convertible). As
with the production of engines, vehicle assem-
bly was integrated into Audi’s existing value
network, in keeping with the network principle.
Vehicle bodies are still welded together and
painted in Ingolstadt, then transported by rail to
Györ for final assembly; the assembled vehicles
are then returned to Ingolstadt by rail. Network-
based production allows Audi to benefit from
the advantages offered by both sites: The use
of existing facilities in Ingolstadt eliminates the
need for further investments, while lower wages
in Györ lead to savings on labor-intensive assem-
bly work.
Audi Hungaria was quickly able to establish
itself as a serious alternative to Audi’s other
sites in the area of vehicle assembly. Since
officials at company headquarters in Ingolstadt
were pleased with the quality of assembly in
Györ, between 2001 and 2003 the plant was
also chosen to assemble the A3 model and its
sports car version, the S3. Since the end of
2007 the Györ plant has also assembled the A3
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)
1996
1)
2001 2007
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
1,073
555
29
167
665
693
Seat
195
10 %
VW
602
32 %
Other
2)
110
6 %
Audi
693
37 %
Source: The authors, based on Audi (1997: 10), Audi (2002a: 61), Audi (2008i: 75).
S
?
koda
277
15 %
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, along with the two versions of the
Audi TT. It is the only Audi facility that currently
assembles convertibles – the Audi TT roadster
and the Audi A3 convertible. The Audi A4 con-
vertible, the third “open” model sold under the
Audi name, is not manufactured by the company
itself, but is produced in the Westphalian city
of Rheine under a ?contract manufacturing
arrangement with production service company
Wilhelm Karmann GmbH.
Producing a convertible involves certain special
requirements during the manufacturing pro-
cess, for example because the process is less
automated. Moreover, far fewer of them are built
as compared with conventional vehicles. This
makes it difficult to integrate convertible manu-
facture into a traditional framework, and many
companies outsource production to external pro-
duction service companies. Audi decided to take
advantage of the Györ site, as Audi Hungaria has
the necessary flexibility and the expertise for
convertible assembly. Indeed, the Audi TT coupé,
the Audi TT roadster and the Audi A3 convert-
ible can be assembled on the same production
line. Audi’s Hungarian subsidiary can therefore
be called a functional center of excellence in the
area of convertible assembly, again with a world-
wide mandate.
However, the plant’s special competence in
assembly is limited to convertibles. It assembled
slightly fewer than 57,000 vehicles in 2007,
which accounts for only six percent of Audi’s
total vehicle production. Consequently, Audi
Hungaria cannot be considered a functional
center of excellence for assembly in general. Its
expertise is not great enough to distinguish it
from other sites that also carry out these activi-
ties successfully.
Nevertheless, Rupert Stadler, Chairman of the
Board of Management of Audi AG, expects
the Hungarian subsidiary to continue to be an
essential part of the company’s vehicle produc-
tion: “Audi Hungaria’s vehicle production has
been outstanding in the last few years, starting
with the Audi TT coupé and the TT roadster.
We are confident that our Hungarian plant, in
producing the new Audi A3 convertible, will
play an important role in achieving our strategic
goal of manufacturing 1.5 million vehicles in the
year 2015” (Audi 2007b). Over the long term,
it would be a good idea to produce the Audi A5
convertible, which is to take the place of the A4
convertible in 2009, in Györ as well. According
to press reports, Audi is considering taking over
the manufacture of the A5 convertible rather
than having it produced by Karmann in Rheine,
as the preceding model has been. From the per-
spective of Audi AG, it would make sense to use
the Györ site. This would not only take advan-
tage of resources within the company; it would
also help to utilize and expand the specialized
expertise of Audi’s Hungarian subsidiary.
115
At its own initiative, rather than at the sugges-
tion of headquarters in Ingolstadt, Audi Hun-
garia was given responsibility for development
activities related to series production. These
involve ongoing production and include produc-
tion support (when beginning production of
new engines), engine testing, adaptive develop-
ment, solving technical problems during the
production process, minimizing product costs
and redesigning engines during their life cycle.
Audi Hungaria has gained additional expertise
in these areas and is now able to solve produc-
tion problems independently, without help from
the German plants. This has also increased its
autonomy, which is essential for a successful
center of excellence.
Originally, this idea was met with skepticism at
company headquarters. While the capabilities
of the Hungarian engineers were not in doubt,
there was anxiety about an unchecked “knowl-
edge drain” and a loss of power. “We spent
two years trying to convince those in charge,”
observed Jürgen Hoffmann, former Chairman of
the Board of Management of Audi Hungaria, at
the opening of the development center (Sailer
2000). Norbert Pauli, head of engine develop-
ment at the Györ site, added, “There was such
skepticism in Ingolstadt that we gave our proj-
ect the code name of Csárdás [Authors’ note:
Hungarian national dance]” (Sailer 2000). But
ultimately the Hungarian subsidiary prevailed,
and it began to expand its development work in
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.
Audi AG funded this project in two stages,
investing 18 million euros in 2001 and 8 million
euros in 2004. A total investment volume of 26
million euros may seem insignificant, but it had
a marked effect on quality. The site was now
more than just an “extended workbench” for the
German sites; its value activities had expanded
to include more than production alone.
Today Audi AG has benefited greatly from its
Hungarian subsidiary’s enhanced competence
and autonomy, which have led to greater effi-
ciency and productivity in the network’s pro-
duction. Before, problems arising during the
engine production process that required input
from a development engineer – during testing,
for example – usually meant a time-intensive
process of shipping the engines back and forth
between Hungary and Germany and required
coordination between the respective employees.
This additional effort is no longer necessary.
Over the long term, it would be wise for Audi
Hungaria to be in charge of all aspects of engine
development. This would greatly simplify inter-
actions between development and production
and among the workers concerned. Audi Hun-
garia could then become a center of excellence
in the area of engine development as well.
The development center represented one of the
first projects in which Hungary was viewed not
simply as a production site, but also as a place
where development work could take place. This
was particularly gratifying for the Hungarian
government, and the Ministry of Education pro-
vided nearly 1 million euros in support. Audi is
not the only company to conduct research and
development in Hungary; the cell phone manu-
facturer Nokia, the network equipment manu-
facturer Ericsson and the technology company
Siemens have facilities there as well. Clearly,
Hungary is becoming a site for high-quality
value creation. The trade publication Corporate
Location concluded: “The indicators suggest that
Hungary is moving up the value chain. […] It is
timely that Hungary is attempting to transform
itself from just a manufacturing base into a des-
tination for investors searching for value-added
locations” (“No Longer the Poor Man of Europe”
2000).
2.3 Upgrading the center of excellence for engine production by adding
development responsibilities
116
The opening of tool production facilities at the
Györ site in 2005, at a cost of 40 million euros,
was the final step, so far, in the development
of the Hungarian subsidiary. This rounded out
Audi Hungaria’s production capabilities. Györ
won out over the other Audi AG sites in Europe
(Brussels, Ingolstadt and Neckarsulm) in an in-
company selection process. Tools and equipment
for vehicle series production are now being
produced in Hungary, including stamping equip-
ment, drawing, cutting and copying tools as well
as the so-called grippers that are used to join
vehicle body parts.
The center for tool manufacture also produces
vehicle body parts for Audi’s small-batch series,
a new feature at that site. Today the Györ plant
supplies vehicle body parts for Audi’s top-of-
the-line RS4, S6, RS6 and R8, which are sold in
considerably lower numbers than the company’s
regular series models. Production includes outer
skin panels, doors and hatchbacks, parts that
require a complex cutting and joining technique
and a great deal of manual labor to achieve the
superior quality offered by these premium vehi-
cles. The ?value chain at the Györ site includes
all of the steps shown in Figure 5.
2.4 Ongoing acquisition of additional capabilities – expansion as a center
of excellence for vehicle production?
Figure 5: Value chain at the Györ site
V
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h
i
c
l
e
s
E
n
g
i
n
e
s
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
P
r
o
f
i
t
m
a
r
g
i
n
P
r
o
f
i
t
m
a
r
g
i
n
Procurement of engine and vehicle components
Carried out by Audi Hungaria Outsourcing to service companies Legend:
Development activities related to engine series production
Tool manufacture for vehicle production
Source: The authors, based on Porter (1986: 21).
117
A look at limited-lot series production is helpful
in determining whether Audi Hungaria might be
capable of taking on additional vehicle produc-
tion tasks. Two options are conceivable: First,
the Györ site could expand to include not only
assembly, but also production of its current
models. If Audi Hungaria’s limited-lot series
production proved to be as satisfactory as its
vehicle assembly, the Györ site might take over
the entire process of manufacturing the Audi
TT coupé and roadster models as well as the
Audi A3 convertible – including building vehicle
bodies. This would upgrade its role as a center
of excellence to include convertible production
as well as assembly. Another possibility would
be for the Hungarian subsidiary to produce a
specific higher-volume model, such as the Audi
A3, which was assembled there for a limited
period of time in the past. This would make Audi
Hungaria a functional center of excellence in the
production of that model.
Figure 6 shows the increase in Audi Hungaria’s
value activities and the current value chain at
the Györ site. Its responsibilities are likely to
continue to grow.
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 rod
Engine
assembly
Year
118
Audi AG and particularly the German sites have
benefited in a variety of ways from the Hungar-
ian subsidiary as a center of excellence, and not
least from the transfer of knowledge from Hun-
gary to Germany. This is reflected in company-
wide figures. Fears that Audi Hungaria and its
expansion would lead to a loss of jobs in Ger-
many have not been borne out. On the contrary:
There has been a steady increase in the number
of employees at the German plants since the
mid-1990s, as shown in Figure 7. The much
discussed “job drain” has not occurred. The
Györ site has helped Audi in pursuing its strong
growth strategy (see also the interview with
Rupert Stadler on p. 118). As a multiple center
of excellence, Audi Hungaria has provided Audi
AG with certain ?competitive advantages in
this context. “For [innovative] companies, glo-
balization is usually a win-win situation,” says
Matthias Wissmann, President of the German
Association of the Automotive Industry VDA
(“Für Globalisierung gerüstet” 2008; see also the
conversation with Matthias Wissmann following
this case study).
The Györ site has helped Audi to
pursue a strong growth strategy.
Many other stakeholders have also benefited
from the development of Audi Hungaria. In
terms of sales volume, Audi Hungaria is cur-
rently Hungary’s second largest company, 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
Countries
1)
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 53,347
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:
119
the oil and gas company MOL, as well as its
second largest exporter, accounting for about
nine percent of the country’s export volume. The
Györ region in particular has benefited greatly
from the Audi plant. Audi AG – along with other
automobile manufacturers – has triggered an
economic boom by locating some of its value
activities there. Today there are eleven other
automotive plants at the intersection of Hungary,
Austria, Slovakia and the Czech Republic, which
is why this region has been dubbed the “Detroit
of Eastern Europe.” And the advantages Hun-
gary offers go far beyond low labor costs. “The
Hungarians have shown that they can produce
high-quality automobiles,” says Stefan Menzel,
Deputy Head of Companies and Markets for
the newspaper Handelsblatt, underscoring the
country’s importance to the automotive industry
(Menzel 2008). Indeed, Daimler recently chose
Hungary as the site for its new compact vehicle
plant, over a number of cheaper alternatives.
and we are looking to recruit another 800. In
the future, too, we will hire more personnel
where it is necessary. Expertise is paramount.
And I, personally, feel very comfortable with
what Germany has to offer. But our employees
in Germany are aware that they are taking on
a certain responsibility when they come to
work for us.
I gather that you think you will be able to
maintain an 80-20 ratio of German to for-
eign sites by increasing productivity ...
Audi decided 15 years ago to move engine
production to Hungary. It was a difficult deci-
sion, and there were natural concerns that this
step would lead to a massive loss of jobs in
Germany. But what happened? We now employ
5,800 people in Hungary, and we have also
hired 10,000 new employees in Germany – a
clear win-win situation. Over the long term we
will need to hire new workers in areas where
we expect to see growth.”
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 ...
Given the complex products we are dealing
with, core competence is essential and clearly
far from a trivial matter. One example is the
design of the tailgate on our SUV models.
It requires competence in tool manufacture,
development and production, aspects that are
by no means standard in modern automotive
engineering. In Germany, we are able to find
the best workers for each core competence,
not least thanks to our excellent educational
system.
So you are more likely to increase the
number of employees in Germany in the
coming years than to cut jobs ...
We are currently expanding our workforce.
Last year we hired 600 university graduates,
Interview
120
As our research has shown, the role of a cen-
ter of excellence requires a certain amount of
autonomy; the subsidiary must be allowed to
take advantage of its specific capabilities. Audi
Hungaria has been able to assume leadership
responsibilities within Audi AG in its areas
of expertise. It makes all of the relevant deci-
sions on issues of maintaining and increasing
efficiency and quality in engine production. Its
leadership position has been enhanced by tak-
ing on related development activities in series
production.
Moreover, centers of excellence need to be well
integrated into the corporate network so that
the entire organization can benefit from their
expertise. Companies that are successful in
their use of centers of excellence are complex
network-based enterprises characterized by a
variety of vertical and horizontal flows of infor-
mation between the corporate units. The parent
company needs to make sure that its centers of
excellence have a certain degree of autonomy
but are also well integrated into the network.
The task of integrating centers of excellence
into the corporate network, while also ensur-
ing necessary autonomy, is accomplished by
using certain ?coordination tools. In a network
enterprise, person-oriented tools are particu-
larly important for integrating the company’s
various units. They are the subject of Figure
8, which was already dealt with briefly in our
introductory chapter. Such tools include personal
instructions, regular visits to the parent and sis-
ter companies by center of excellence staff (and
vice versa), the establishment of international
project teams, and the transfer of management
personnel. Since the management of centers
of excellence is strongly person-oriented, the
“human factor” is central to the management
of the company as a whole. One example of the
role of person-oriented ?coordination in inte-
grating Audi Hungaria into the larger organiza-
tion is that executives from the German sites are
sent to help manage Audi Hungaria. Local man-
agers receive a great deal of support from their
German colleagues. Frequent personal visits in
both directions and mixed-nationality project
teams are also important in integrating the site
into the corporate network.
Centers of excellence require both
autonomy and integration at the
same time.
While person-oriented coordination tools are
very important in a network enterprise, they are
not enough. Structural and technocratic instru-
ments are needed as well, and in most cases
they are used in combination with one another.
There also needs to be both vertical coordina-
tion, between the parent company and the sub-
sidiary, and horizontal coordination between the
various subsidiaries, for example between cen-
ters of excellence whose value activities build on
each other.
3. Challenges in managing centers of excellence
Parent companies should not regard their
foreign subsidiaries as mere “extended work-
benches” if they want to take advantage of
their full potential.
_ Instead, they can cultivate their foreign sub-
sidiaries by giving them additional respon-
sibilities in the value chain, for example for
R&D or high-value production activities.
_ Foreign subsidiaries can develop into cen-
ters of excellence that assume a leadership
role in the corporate network and make
good use of their unique strengths beyond
their own location.
_ Western companies should not limit their
subsidiaries to the industrialized countries,
but also consider the potential offered by
subsidiaries in up-and-coming economies,
for example in the emerging markets.
Summary
121
Because centers of excellence have their own
specific areas of expertise, responsibilities and
leadership roles, it is impossible to provide
general recommendations about appropriate
coordination tools. “The individual strategic role
of a subsidiary plays a crucial role in determin-
ing what type of coordination will maximize
the subsidiary’s contribution to the success of
the company as a whole,” explains Katharina
Kretschmer, management consultant for The
Boston Consulting Group. It is important to
remember that centers of excellence need to
be managed on a highly individual basis. If, for
example, Audi were to develop its Brussels plant
into a center of excellence, its management and
coordination would need to be adjusted accord-
ingly. Simply copying the methods used at the
Györ site would hardly be successful.
Scientific studies of coordination within inter-
national companies have provided some initial
insights: For instance, the various value activi-
ties need to be managed in an individualized
way. Person-oriented coordination tools have
been shown to be effective in the area of
research and development, and tend to be
preferable to structural or technocratic instru-
ments. In production, technocratic instruments
are effective, as are person-oriented methods,
but structural instruments are less successful.
These are only preliminary results, since much
research remains to be done on how best to
coordinate value functions. It appears, however,
that the activities carried out by a center of
excellence are important for determining how its
management should be organized.
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.
If a hierarchical company is to become a net-
work-style enterprise with centers of excellence,
this will require a change in its ?corporate
culture. This has implications for the company’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-oriented
coordination
_ Personal directives
_ Mutual adjustments
_ Personal visits
_ International project teams
_ Transfer of management
personnel
_ Standardization of roles
_ Culture-oriented coordination
122
management culture, since it requires balancing
the competing demands of autonomy and inte-
gration and recognizing subsidiaries as sources
of expertise and skills. Cultural elements of
host countries also need to be incorporated into
the company’s corporate culture. A strategic
decision to upgrade subsidiaries into centers of
excellence requires not only a structural reorga-
nization of the company, but also a careful effort
to reshape its culture.
Establishing centers of excellence has certain
implications for the management of the sub-
sidiaries concerned. Companies that fail to
take this into account will not be able to reap
the benefits such centers offer.
_ Centers of excellence need to have a certain
degree of autonomy in their areas of com-
petence so that they can put their expertise
into practice.
_ At the same time, they must be well inte-
grated into the corporate network so that
the entire company can benefit from their
expertise.
_ Because of differences in their activities,
expertise and roles, individual centers of
excellence need to be managed in different
ways. The executives involved are in charge
of choosing the appropriate coordination
instruments.
_ The integration of all of a company’s cen-
ters of excellence requires that cultural ele-
ments from host countries be incorporated
into the corporate culture of the company
as a whole.
Summary
In the interest of readability we have reduced
the number of references contained in this
version of the study. A complete list of refer-
ences is found in the bibliography. A German
version of the study can be obtained in printed
form as an academic working paper by
contacting the office of the authors
([email protected]); it may also be
downloaded from the website of the Chair of
International Management und Strategic
Management at ESCP-EAP European School of
Management Berlin (www.escp-eap.de/imsm).
123
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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 CO
2
- 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 CO
2
-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
CO
2
-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
CO
2
emissions are not the answer. We need CO
2
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 CO
2
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. Restructuring international value creation 135
2. Necessary changes in the management of international companies 141
References 144
Global networks and decentralized
configuration strategies
Strategic, structural and cultural implications
134
Our examination of case studies of automotive
companies has allowed us to identify trends in
the management of international value creation
and to outline measures for structuring the cor-
responding ?value chains to meet the needs of
the future. We have identified important levers
that will allow companies to achieve long-term
success in global competition. These include, in
particular, the strategic and ?structural dimen-
sions of value creation. At the same time, com-
panies need to make internal cultural changes,
especially regarding the management of ?
value activities.
All three case studies have shown that greater
decentralization of value activities is imperative
if companies are to remain competitive beyond
their national borders. Moreover, increasing
value creation in the various markets involves
not only individual ?value functions, but
virtually the entire value chain. While many
companies have long been seeking to decen-
tralize sales (and in some cases marketing as
well) – often in very different ways (Quelch/
Hoff 1986) – the current focus is increasingly
on decentralizing value activities in the fields of
procurement, production and development. As
we have demonstrated, however, the goal is not
to carry out every value activity in every market
and thus (again) to establish ?subsidiaries all
over the world as ?miniature replicas of the
parent company (White/Poynter 1984, 1989).
Instead, we need what might be termed “decen-
tralized centralization,” in which a variety of
activities are bundled together in different coun-
tries. Following the models of ?transnational
organization (Bartlett 1986, Bartlett/Ghoshal
1987a, 1987b, Bäurle/Schmid 1994) and ?het-
erarchy (Hedlund 1986, 1993) that are outlined
in the international management literature, it is
important to act globally as well as locally, and
centrally as well as decentrally, as Coimbatore K.
Prahalad pointed out in our interview.
There are a variety of reasons why such decen-
tralized centralization is important. For example,
decentralized plants need to have a high level
of localization in such areas as procurement,
which insulates the company from exchange rate
fluctuations, as shown particularly by the case
study of the Volkswagen Group; they also offer
the opportunity to benefit from differences in
the costs of production factors, as demonstrated
by the Renault and Audi case studies; and
they allow companies to take advantage of the
resources of local suppliers, as reflected in the
case study of Renault. However, a high level of
localization does not mean that all procurement
activities are highly decentralized. Rather, using
the advantages of ?global sourcing whenever
the benefits of centralization outweigh the disad-
vantages is important (Corsten 1993, Mair 1995).
Centralization does not necessarily need to take
place in the country where the company has its
headquarters, but rather where an international
comparison suggests that the benefits would be
greatest.
Carrying out production activities in local mar-
kets can be a wise decision, not least because
customers in certain countries and segments of
the market are increasingly interested in pur-
chasing a vehicle that has been manufactured
locally. This is an important consideration, one
that was evident in our case study of the Volk-
swagen Group and underscored by Carl-Peter
Forster, President of General Motors Europe, at
the Capital Automobile Summit held in Berlin
in September 2008, when he noted, “Productiv-
ity in production no longer offers a decisive ?
competitive advantage or disadvantage. Instead,
being a local manufacturer – producing on site
– is increasingly becoming a sales argument.”
135
1. Restructuring international value creation
adaptations for a local market, then development
activities will have to be located there as well,”
explains Harald Rudolph, Director of Strategy
at Daimler. He continues, “In China, there is
no way to avoid carrying out development work
within the country. This might involve different
chassis requirements or equipment features, for
example.”
Our analyses have also shown that simply
decentralizing value activities is not enough. It
is especially important to ?integrate individual
corporate units effectively in order to create
global network enterprises. This also requires
the decentralization of certain management
functions and decision-making responsibilities.
Decentralized decision-making ?structures
are clearly required in the local development of
region- or country-specific models, for example.
If adaptation is to be successful, a decentralized
development unit must be involved in relevant
decisions; otherwise the company reaps no
benefit from its expertise. This is clear from
the case studies on the Volkswagen Group and
Renault, and Ralf Kalmbach also emphasized
this point in our conversation.
No matter which specific value activities are car-
ried out by a foreign ?subsidiary, its resources
and expertise will not be fully utilized until it
becomes a specialized ?center of excellence
(Schmid 2003).
1
As is abundantly clear from the
Audi case study, this allows foreign subsidiaries
to generate competitive advantages for the entire
company that are helpful not only in the local
market but worldwide, and this can have very
Furthermore, laws in the growth markets of the
?emerging countries often favor local produc-
tion, as shown by the case studies of Volkswa-
gen and Renault. Since many of these countries
want value activities to be carried out within
their borders when they relate to products sold
there, they have introduced such measures as
?local content requirements and import duties
on fully assembled vehicles. These steps are
intended to ensure that the (rising) earnings of
the local population are not siphoned off abroad,
but instead help to further the country’s eco-
nomic development (Petersen 2004: 3, 149, 311).
Decentralizing development activities is also
becoming increasingly important. Owing to stiff
competition in the automotive industry, high-vol-
ume manufacturers in particular need to focus
more attention on adapting their vehicles to the
circumstances and preferences of their custom-
ers in their target markets – as is clear from the
case studies of Volkswagen and Renault. “The
concept of a standardized world car, one that
can be sold in precisely the same form in every
global market, does not work in the high-volume
segment,” observes Ralf Kalmbach, an automo-
tive expert with the Roland Berger consulting
firm. Thus decentralized development sites
have the responsibility of making use of local
resources and adapting specifically designed
models to the needs of local customers.
High-volume manufacturers, in particular, need
to adjust their vehicles to individual regions or
countries; they must compete today not only on
pricing, but based on product features, for exam-
ple by offering attractive vehicle equipment and
design. They cannot pursue a single-minded
?cost-leadership strategy (Porter 1999: 38-40,
97-164). However, premium manufacturers as
well can derive crucial competitive advantages
from adapting their vehicles to a given region or
country – even if their ?differentiation strate-
gies are based primarily on their brand image or
on certain product features such as innovative
technologies. This is why premium manufacturer
Daimler has significantly expanded its adaptive
development activities in recent years, and is
also considering decentralizing such activities.
“If it makes sense to develop certain model
136
Increasingly, high-volume automobile
manufacturers need to take a decentralized
approach to value creation within their
corporate networks. This does not mean
that every activity takes place at every site;
rather, it requires so-called “decentralized
centralization.” This is the only way for
automobile manufacturers to achieve con-
tinued success in the global market and to
benefit from new growth opportunities.
Glocalizing value creation
declining sales figures, emerging nations offer
opportunities for sales growth, and they also
represent possible sites for further value activi-
ties. Consequently, locating a wide range of such
activities and decision-making responsibilities
in the emerging markets is a central component
in the strategies of automobile manufacturers
to meet the needs of the future. These countries
will increasingly be the site of value creation
that can produce significant innovations. The
case studies on Renault and Audi are informa-
tive in this context, as is the conversation with
Coimbatore K. Prahalad.
The decentralization of value activities and deci-
sion-making responsibilities, as called for in this
publication, need not mean losing jobs in the
automobile manufacturers’ home countries. On
the contrary: The cases we have examined dem-
onstrate that companies can generate growth
for their overall organizations – and thus also
for their domestic sites – by relocating certain
value activities abroad. The case study outlining
the successful development of Audi’s Hungarian
subsidiary provides a particularly striking illus-
tration of this point. For their part, companies
that fail to respond to the need to decentralize
value activities and create global networks will
find themselves facing declining sales figures
and hence a loss of jobs, at their domestic loca-
tions as well.
positive ramifications for the domestic market.
Therefore, promoting the development of foreign
subsidiaries and assigning certain responsibili-
ties to those subsidiaries, in accordance with
their respective areas of expertise, is important.
In global networks, competitive advantages are
generated not only by corporate headquarters in
the domestic market, but also by foreign subsid-
iaries, and particularly by centers of excellence.
With the decentralized centralization of manage-
ment functions, such centers of excellence can
take on leadership roles throughout a company
in their areas of competence.
After the introduction of mass production in the
automotive industry at Ford and General Motors
back in the 1920s and the development of the
lean manufacturing concept at Toyota beginning
in the 1950s (Womack et al. 1991: 18), the next
profound change in the value structures of the
automobile industry is likely to involve achieving
a global balance between the centralization and
decentralization of value activities and decision-
making responsibilities. Borrowing the terminol-
ogy used by Womack et al. (1999), we might
call this the “third revolution” in the automotive
industry.
Our investigations have also shown that the
?emerging markets will play a major role in
creating sustainable ?value configurations in
the future. They were a focus of all three case
studies. While automobile manufacturers in the
established markets are faced with stagnating or
137
A decentralized configuration of value
activities needs to be accompanied by the
decentralization of management functions
and decision-making responsibilities. For-
eign corporate units take on certain man-
agement functions so that they can contrib-
ute their local resources and expertise for
the benefit of the company as a whole.
Decentralizing management functions
In the future, the role of the emerging
markets will no longer be limited to serving
as cheap production sites for the industri-
alized countries. They will also take over
more significant value activities, which will
offer companies competitive advantages
throughout the world. It is therefore cru-
cial to ensure that sites located in these
countries are an integral part of companies’
value chains.
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).
adaptive development activities offers clear
advantages, while it may be wise to continue to
choose a largely centralized configuration for
basic development, and even more so in the case
of research.
Our case studies also demonstrate that foreign
subsidiaries, with their specific value activities,
are integrated into the corporate network in
different ways and should be managed individu-
ally. This also means a need for different sets of
?coordination instruments. In the case of the
Volkswagen Group, for example, we recommend
decentralizing decision-making responsibilities
in the area of adaptive development, in the inter-
est of greater autonomy for the units involved.
The case study of Audi AG and its Hungarian
subsidiary explains in detail how an individual
subsidiary can assume a leadership role within
the overall company in its value competencies,
and how the nature and intensity of ?coordina-
tion activities need to be adjusted accordingly.
This, too, argues against the conclusions drawn
by Porter (1986: 27), who presumes that all cor-
porate units are to be coordinated in the same
way.
Overall, it cannot be assumed that a single
configuration-coordination profile applies to an
entire company. Instead, a company’s overall
profile encompasses all of the configuration-
coordination profiles related to the company’s
various value functions. We therefore argue in
favor of a differentiated approach to such func-
tions and the use of an expanded configuration-
coordination matrix, as shown in Figure 2. For
purposes of illustration, the value functions
of research, development and production are
entered into the matrix individually, taking into
account that individual value stages can exhibit
different configuration-coordination profiles in
their functions.
It should also be noted that the internationaliza-
tion of German automobile manufacturers and
automotive suppliers that has already occurred
has not brought with it a decline in employment
in the German automotive industry, as Figure 1
shows in its comparison of employment statistics
in 1997 and 2007 (jobs with manufacturers and
suppliers). Indeed, during this period, employ-
ment increased by nearly 11 percent (VDA 2008:
5), at a time when German manufacturers and
suppliers were establishing a number of interna-
tional production sites, thus ?internationaliz-
ing their value networks to a greater degree.
Other studies have also shown a positive rela-
tionship between the internationalization of
value activities and increased domestic employ-
ment (Klodt 2007: 138, Klodt/Christensen
2007). Experts predict a similar trend for the
future; worldwide demand for cars produced
by German manufacturers is expected to
increase by roughly 1.8 million units by the
year 2020. Some 700,000 of these additional
vehicles will likely be produced at German sites
(“Deutschland 2020. Zukunftsperspektiven für
die deutsche Wirtschaft” 2008: 9). However, this
kind of sales growth can only occur if compa-
nies implement the measures outlined above
for decentralizing value activities and decision-
making responsibilities.
The case studies contained in this publication
have also shown the need to look critically at
frequently cited ideas from the strategic and
international management literature. For exam-
ple, the aggregated configuration-coordination
profiles of entire companies presented by
Michael Porter (Porter 1986: 27) are not an accu-
rate reflection of reality. Our case studies show
that each value function involves a different ?
configuration strategy. For instance, while the ?
configuration of production activities is already
somewhat decentralized in the Volkswagen
Group, as well as at Renault and Audi, research
and development activities have been strongly
centralized in all of these companies, at least in
the past. And even within a single value func-
tion there may be good reasons for employing
different configuration strategies. Thus we see
– with reference to Toyota – that decentralizing
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 manufacturers
1)
Jobs in the German
automotive industry
2)
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 %
There can be no configuration-coordination
profile for a company as a whole, since the
individual value functions within a com-
pany differ substantially in their geographic
distribution and in the way their activities
are coordinated. Each value function has its
own profile and should be configured and
coordinated individually.
Function-specific configuration
and coordination
1997-2007
(production only)
140
Figure 2: Expanded con?guration-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.
Basic
research
Research Component
production
Applied
research
Development
Complete
production
1)
Production
Adaptive
development
Assembly
Market
observation
Basic
development
high
low
geographically
dispersed
geographically
concentrated
Coordination of
value activities
Con?guration of
value activities
their capabilities, subsidiaries can become func-
tional or product-oriented centers of excellence
(Schmid et al. 1999, Schmid 2003). This means
that decisions are no longer made exclusively at
headquarters, but instead we see the decentral-
ized centralization that was described above – in
the case of Audi, in the area of engine produc-
tion.
If foreign units are to gain the significance they
deserve, there must be a change in management
style. Instead of a “top-down” approach, in which
foreign subsidiaries are simply required to fol-
low orders from headquarters, a “bottom-up”
management style should be introduced that
allows foreign units to have a voice and partici-
pate in decision making. Figure 3 summarizes
the changes that are needed in the management
of international companies.
Companies clearly need to take action with
respect to their corporate culture. Neither purely
?ethnocentric nor purely polycentric ?cul-
tures are needed. Instead, companies should
move toward a ?geocentric culture to develop
a common cultural understanding shared by
the parent company and its subsidiaries, and
to account for changes in the strategies and
structures of value creation (Perlmutter 1969:
13, Kutschker/Schmid 2008: 287). Automobile
manufacturers, particularly within the high-
volume sector, must establish themselves locally
while also maintaining a global orientation. This
also applies to their basic assumptions, values,
norms, attitudes and convictions, as well as to
the relevant behaviors and artifacts (for more on
this understanding of culture, see Schmid 1996:
137 and Kutschker/Schmid 2008: 672). Carl-Pe-
ter Forster, President of General Motors Europe,
made the following comments at the Capital
Changes relating to value configuration affect
not only corporate strategies and structures, but
also ?corporate, and particularly management
culture. As value activities and decision-making
responsibilities become increasingly decentral-
ized, companies move from being strictly hierar-
chical structures to network-like organizations.
In that sort of network-based company, foreign
subsidiaries gain influence relative to the
domestic parent company. Accordingly, upper
management of the parent company should no
longer assume that all of the company’s primary
competitive advantages are generated at home,
as many have believed in the past (e.g. Hymer
1972, 1976). Instead, it must be recognized that
both the parent company and the subsidiaries
contribute to the company’s portfolio of competi-
tive advantages (Hedlund/Kogut 1993). Because
they are embedded in a number of different
contexts within the host country, subsidiaries
are able to tap into various sources of innovation
(Schmid/Schurig 2003).
2
This means that international companies need
to rethink the roles played by their subsidiaries.
In the past, foreign subsidiaries were often sim-
ply asked to implement in the respective local
market what had been developed and decided
by the parent company; today, in contrast, we
can assume that foreign subsidiaries are able to
offer significant strategic contributions and act
as centers of excellence with leadership roles
within the corporate network.
As the case study of Audi has shown, subsidiar-
ies in foreign countries are no longer respon-
sible only for their respective local markets, as
is common in the case of ?polycentric (Perl-
mutter 1969: 12f.) and multinational companies
(Bartlett/Ghoshal 1988: 64f.). Depending on
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).
see to it that their employees gain more knowl-
edge of other cultures and learn to interact
appropriately and work together effectively with
colleagues or business partners from different
cultural backgrounds (Müller/Gelbrich 1999: 32,
35f.).
3
Accordingly, there is a need for diversity
management among upper and middle manage-
ment and operational staff. This helps to achieve
a balance between globalization and localization
in the cultural sphere.
Automobile Summit held in Berlin in September
2008: “Automobile manufacturers cannot stay
local. They need to increase their global pres-
ence. The big challenge in this regard will be to
keep the entire company together, while at the
same time maintaining a sense of solidarity at
the local level.”
As value activities become more internation-
ally dispersed, and as the management of those
activities is assumed by a wider array of units,
it is increasingly important to handle cultural
differences properly, which involves acquiring
cultural competence with respect to a number
of dimensions. In particular, companies need to
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 Implementation
Important strategic contributions,
centers of excellence
Responsibilities
of subsidiaries
Domestic market
Transcending domestic market
(product or function)
Decisions Centralized at headquarters Decentralized centralization
Management style Top-down Top-down and bottom-up
Corporate culture
Ethnocentric (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”
also being integrative enough to bind together a
global network of corporate units.
Changes in value configurations represent
changes in the surface structures of a company,
which need to be reflected in its deep structures
(cf. Schmid 1996: 115-130, Kutschker/Schmid
2008: 690-692). It is clear that strategic, struc-
tural and cultural measures for reorganizing
international value creation and creating a com-
petitive network enterprise are all intertwined,
and it is only together that they can achieve
their full effect. These complex changes cannot
be made overnight. Companies are therefore
well advised to move quickly to adopt the
perspective outlined in this publication, and
especially to initiate the necessary cultural
changes.
At the same time, corporate culture has an
important function in integrating the various
corporate units into the company network; it
also serves as an instrument of coordination
(cf. Hedlund 1986: 24, Bartlett/Ghoshal 1988:
55f.). However, concluding that more atten-
tion should be paid to corporate culture should
not be misinterpreted as favoring a completely
homogeneous culture. Rather, it is important to
create a framework within which the individual
divisions, functions and subsidiaries can com-
fortably exist. The aim is to find an optimal way
to bring together the various subcultures, with-
out seeking to make them completely uniform.
Such cultural diversity is also important in the
light of the brand diversity found in a network
enterprise. Think, for example, of Audi, Bent-
ley, Lamborghini, Seat, S
?
koda and VW within
the Volkswagen Group; Dacia, Renault and
Renault Samsung within the Renault Group; and
Daihatsu, Hino, Lexus, Scion and Toyota within
the Toyota Group.
4
Changes in the configuration and management
of value activities must be accompanied by a
change in corporate culture. In order to respond
appropriately to the decentralization of value
activities and decision-making responsibilities,
companies need to achieve unity within diver-
sity. They must develop a culture that is flexible
enough to adjust to local circumstances, 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).
Changes in the configuration and coordina-
tion of value activities must be accompa-
nied by a change in corporate culture. In
order to respond appropriately to the decen-
tralization of value activities and decision-
making responsibilities, companies need to
achieve unity within diversity. They must
develop a culture that is flexible enough
to adjust to local circumstances, while also
being integrative enough to bind together a
global network of corporate units.
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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Köppel, Petra/Yan, Junchen/Lüdicke, Jörg:
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Diversity in Corporations. Gütersloh 2008.
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Project publications
Corporate cultures in global interaction
157
158 158
Bertelsmann Stiftung
Carl-Bertelsmann-Straße 256
33311 Gütersloh
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Responsible:
Martin Spilker, director
Corporate Culture
in a Globalized World, and
personal assistant to Liz Mohn
Project manager:
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Phone +49 5241 81-81295
[email protected]
Translation and editing:
ZV | Mediengestaltung
& Sprachdienstleistungen, Gütersloh
Design and typesetting:
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Illustration credits:
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Publishing information
Stefan Schmid, Philipp Grosche
Strategy, Structure, and Culture
Managing the International Value Chain
in the Automotive Industry
Address | Contact:
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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]
www.bertelsmann-stiftung.de
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The complicated interactions between these external factors and the shaping of international value chains are evident when looking at exchange rates. Between early 2006 and mid-2008, the strength of the euro relative to the dollar compelled a number of non-American automobile manufacturers to consider establishing production sites in the United States. As Kutschker/Schmid show.
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]
www.bertelsmann-stiftung.de
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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. 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 25
References 28
International value chains
Current trends and future needs, as exemplified by the
automotive industry
10
The expansion of companies into foreign mar-
kets continues, and this is particularly true in
the automotive industry. Long ago, however,
automobile manufacturers stopped focusing
exclusively on ?exports. Instead of merely
exporting vehicles and selling them in foreign
markets, companies began carrying out a wide
range of ?value activities abroad. These activi-
ties are located in or near promising target mar-
kets. Sometimes, for example, companies begin
producing an already popular model on site. The
result is the development of international ?
value chains, which pose further challenges, for
example, for intercultural issues.
What factors contribute to the international-
ization of value creation? Positive economic
developments in ?emerging markets, such as
the so-called ?BRIC countries (Brazil, Russia,
India and China), have recently led automobile
manufacturers to implement an extensive array
of value activities in these countries. Similarly,
macroeconomic factors play a role in where
companies decide to locate, since factors such as
exchange rates affect the sales prices and profit-
ability of vehicle exports, and higher oil prices
raise the cost of transport. Other factors that
intensify competition in the automotive industry,
and that affect the international value chain,
include new competitors from emerging markets
and increasing cost pressures. For example,
companies may tend to avoid markets with a
particularly high level of competition. In shap-
ing the value chain, it is important to take into
account the specific needs of the industry. For
instance, companies need access to innovative
research clusters if they are to develop new con-
cepts such as cars with environmentally friendly
engines. Figure 1 shows a number of external
factors that are currently exerting a strong influ-
ence on companies’ international value chains.
11
1. Internationalization of the value chain in the automotive
industry
Find out more about
successful international
cooperation in
”Corporate Cultures
in Global Interaction”
a VW production site in Chattanooga, Tennessee,
in 2008, and reports indicate that Volkswagen’s
?subsidiary Audi is also reviewing the possi-
bility of producing vehicles in the United States.
Trends in exchange rates also influence more
than just production. Although BMW established
a production site in Spartanburg, South Carolina,
in 1992, many of its components continue to
be manufactured in Europe. Seeking to further
reduce its vulnerability to currency fluctuations,
BMW is planning to increase procurement from
suppliers that invoice in dollars (Oesterle et al.
2008: 252).
The complicated interactions between these
external factors and the shaping of interna-
tional value chains are evident when looking
at exchange rates. Between early 2006 and
mid-2008, the strength of the euro relative to
the dollar compelled a number of non-American
automobile manufacturers to consider estab-
lishing production sites in the United States.
As Kutschker/Schmid show (2008: 28), the
high exchange rate forced these companies to
struggle with declining sales or take losses on
their vehicle exports to the United States. One
response of the Volkswagen Group was to set up
12
Overall economic
situation
Fluctuating exchange rates
Business cycle
Oil price development
...
Industry-speci?c
requirements
Example: 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 Con?guration
Home Country
Host Country 1
Host Country 2
Host Country 3
Figure 1: Selected external factors that affect the con?guration of
international value chains
Source: The authors, based on VDA (2008: 34-42).
Procurement
R & D
Production
Sales
Legend:
A number of internal factors also play an impor-
tant role in the geographical distribution of
value activities. As companies internationalize,
their ?market entry strategies are of particular
significance for locating certain value activi-
ties on site. For example, the export strategy of
many companies, as they begin the process of
internationalization, is to keep (nearly) all value
activities within the home country. However,
the establishment or ?acquisition of a foreign
13
subsidiary creates a need for internationalization
in areas such as sales, production, or research
and development. Today companies employ a
wide variety of market entry strategies (Schmid
2002, Schmid 2007: 16f.). As shown in Figure
2, these strategic options are typically distin-
guished by the company’s level of commitment
(i.e., the ties that it establishes) in the foreign
market as well as by the management work that
takes place there.
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).
companies so that they are allowed, under Chi-
nese law, to produce vehicles in China for that
country’s rapidly growing market.
In many cases, automobile manufacturers create
foreign subsidiaries as a way of establishing pro-
duction and sales units in local markets. Though
foreign distribution companies as alternatives
to exclusive importers have long been a normal
part of the market and have rarely attracted
much media attention, there has been a great
deal of public interest in new foreign produc-
tion companies. Daimler, for example, decided
in the summer of 2008 to establish a subsidiary
in Hungary, which will produce A and B class
vehicles in the city of Kecskemét. Acquisitions
also can be found. With the purchase of the
renowned English companies Jaguar and Land
Rover from its competitor Ford in the spring
of 2008, Tata Motors is now in possession of
extensive value resources outside of India. Such
acquisitions are not always successful, however.
After its purchase
of Rover in 1994,
BMW found itself
unable to handle
several problems that the British manufacturer
was experiencing, including quality issues, and
it severed its ties with that company six years
later (Kutschker/Schmid 2008: 920). ?Mergers
are less common than acquisitions. Manufactur-
ers most often take a cautious approach, and
this was true even before the 1998 merger of
Daimler and Chrysler proved unsuccessful and
was dismantled in 2007 with the sale of the rel-
evant company holdings.
The choice of an ?internationalization strategy
is directly related to the ?configuration of the
international value chain. The chosen strategy
and the value activities involved produce differ-
ent value structures, as shown by the examples
cited above. Differences in value structures are
also reflected in domestic and foreign sales, or
in the ?foreign share of total sales (Figures
3 and 4). Manufacturers differ in their propor-
tion of domestic relative to foreign sales, which
reflects different levels of internationalization
in value creation, in this case primarily in
sales. It is particularly striking that American
Numerous cases illustrate the market entry
strategies employed in the automotive industry,
along with the export of goods. A prominent fea-
ture of the ?strategy chosen by the sports car
manufacturer Porsche is ?contract production.
Since 1997 and 2005, respectively, the majority
of its Boxster and Cayman models have been
manufactured by the Finnish company Valmet.
Beginning in 2012, Austrian contract manufac-
turer Magna Steyr will take on this role. Large
portions of Porsche’s Cayenne model are manu-
factured by Volkswagen in Bratislava, Slovakia,
and then sent to the Porsche plant in Leipzig
for final assembly. International ?licensing
is a common industry strategy for producing
individual vehicle components. For example,
the Asian Suzuki company is licensed to manu-
facture diesel engines developed by the Italian
manufacturer Fiat.
International ?minority stakes are common in
the automotive industry. Premium manufacturer
Daimler controls nearly seven percent of shares
in India’s Tata Motors, which has recently
attracted attention with its ?ultra low-cost
Nano car. Renault and Nissan are linked by
cross ownership: Renault holds 44.3 percent of
Nissan, and Nissan owns 15 percent of Renault
shares. This allows the two competing compa-
nies to strengthen their cooperation on opera-
tional issues and strategy within the framework
of the ?strategic alliance that they formed in
1999 (cf. also Schmid/Hartmann 2007). BMW,
Daimler and General Motors – competitors in
other aspects of the market – have an inter-
national strategic alliance to develop a hybrid
car, among other things, as a way of sharing
the high costs of development associated with
such a project. Competitors Peugeot-Citroën and
Toyota are also working closely together. They
jointly developed the nearly identical compact
cars Citroën C1, Peugeot 107 and Toyota Aygo,
and have been manufacturing them since 2005
in the Czech city of Kolin, within the framework
of the international ?joint venture Toyota Peu-
geot Citroën Automobile (TPCA). In addition, all
of the major automo-
bile manufacturers
have established joint
ventures with Chinese
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 ?scal years 2007 and 2007/2008.
G
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2) Not including ”vans, buses, other.“ Domestic sales Foreign sales
Legend:
Total sales
(vehicles sold, in millions)
0
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manufacturers continue to sell a relatively large
share of their vehicles in their domestic market.
In 2007, up-and-coming manufacturers from
emerging markets, such as AvtoVaz in Russia,
First Automobile Works (FAW) in China and Tata
in India, sold their vehicles almost exclusively
at home. This is not true of most European and
Japanese manufacturers.
company to compete with its rivals. At the same
time, the international nature of value activi-
ties means that they need to be coordinated
and integrated into the corporate network as a
whole. As the level of globalization increases,
automobile manufacturers are therefore faced
with the challenge of configuring and coordi-
nating their international value chains to their
best advantage. The following chapter focuses
on these two crucial dimensions of the manage-
ment of the international value chain.
The design of the international
value chain is an important com-
petitive factor.
In the global automobile market, the competi-
tive position of an individual manufacturer no
longer depends solely on such traditional factors
as productivity or innovative capacity. Instead,
the competitive position is also a function of the
design of the international value chain. A cen-
tral question, therefore, is how value activities
should be distributed geographically to enable a
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 ?scal years 2007 and 2007/2008.
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(
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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
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50
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80
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84 84 84
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81 81 81
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78 78 78
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9
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17
Value configuration is the distri-
bution of value activities among
different countries.
The value activities of a company, whether they
are primary or secondary, can be distributed
among different countries. The geographical
distribution of such activities is called ?value
configuration. It characterizes the degree of
their geographical dispersion (decentralization)
or concentration (centralization). Centralization
exists if comparable activities are carried out
only at a certain central location; decentraliza-
tion means that comparable activities are geo-
graphically dispersed and take place parallel
to one another at a variety of corporate units
(Porter 1986a: 25, Kutschker/Schmid 2008:
996). Figure 5 shows the value configuration of
a hypothetical company headquartered in Ger-
many.
A company’s value chain encompasses value
activities in the order of their operational imple-
mentation. The value chain shown in Figure
5 is taken from Michael Porter, a professor at
Harvard Business School and an expert on busi-
ness strategy. Porter distinguishes between ?
primary and ?secondary activities. Primary
activities include inbound logistics, operations,
outbound logistics, marketing and sales, and
service. Secondary activities are procurement,
research and development, human resource
management and infrastructure (Porter 1986a:
29-32).
2
This detailed description of the value
chain is useful for analyzing ?competitive
advantages. Breaking down a company into its
individual value activities makes it possible to
identify the current and potential contribution of
each activity to the company’s competitive posi-
tion (Porter 1986a: 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 con?guration according to Porter
Value chain
Value con?guration
S
e
c
o
n
d
a
r
y
a
c
t
i
v
i
t
i
e
s
Primary activities
Upstream primary activities Downstream primary activities
Infrastructure (e.g. accounting system)
Inbound
logistics
Operations Outbound
logistics
Marketing
and sales
P
r
o
f
i
t
m
a
r
g
i
n
P
r
o
f
i
t
m
a
r
g
i
n
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
carried out centrally while others are dispersed.
Finally, a company that follows a strategy of
strict decentralization implements all activities
that are part of the value chain in every country,
which may produce ?miniature replicas in the
host countries.
It is clear from a closer examination of compa-
nies’ value configurations that, in many cases,
?value functions are not carried out in their
entirety at foreign sites. Instead, such sites han-
dle only certain sub-processes. One example is
the value function of production in the automo-
tive industry, which can be broken down into the
stamping of sheet metal components, body con-
struction, painting of the vehicle body, produc-
tion of components and final vehicle assembly,
as shown in Figure 7. These production stages
do not necessarily need to be confined to one
plant but can be performed in various different
countries.
When he published his conception of the value
chain, Porter pointed out that so-called down-
stream primary activities such as marketing
and service, which presume a certain proxim-
ity to the customer, tend to be carried out in a
decentralized fashion in the respective markets.
Upstream primary and secondary activities,
with the exception of human resource manage-
ment, are frequently centralized at one site or
restricted to only a few locations (Porter 1986a:
23, Kutschker/Schmid 2008: 998, 1003f.). In this
sense, the hypothetical German company shown
in Figure 5 represents a typical example.
In principle, there are three basic types of ?
configuration strategies, as shown in Figure
6. Under a strategy of centralization – which,
strictly speaking, would only be possible by
exporting indirectly and using domestic trade
intermediaries – all of the company’s value
activities remain in the home country. A com-
bined strategy means that some activities are
Centralization
strategy
Combined
strategy
Decentralization
strategy
Home country
Host country 1
Host country 2
Host country 3
Figure 6: Basic types of con?guration strategies
Source: Kutschker/Schmid (2008: 999).
Procurement R & D Production Sales Legend:
mean that all production stages are decentral-
ized. A manufacturer that uses its foreign sites
merely to assemble SKD or CKD sets that have
been prefabricated in its home country has a
lower level of foreign value added than one that
carries out all of its production stages at foreign
plants.
There are a number of advantages to decentral-
izing value activities, but centralization offers
other benefits. Figure 8 provides an overview
of the most important reasons why companies
might choose to either centralize or decentral-
ize these activities.
3
Note that the arguments
for centralization or decentralization are not the
same for each activity. Companies determine on
a case-by-case basis whether concentration or
dispersal is preferable, as shown by the studies
included in this publication.
Particularly in the automotive industry, numer-
ous assembly plants are devoted exclusively to
the assembly of vehicle kits produced at other
sites. A distinction is made between ?semi
knocked down (SKD) production, when the vehi-
cle kit contains elements that already have been
assembled, such as the auto body, and ?com-
pletely knocked down (CKD) production, when
none of the parts have been assembled (Meyer
2008: 81f.). Daimler has four plants in Southeast
Asia (Thailand, Vietnam, Malaysia and Indo-
nesia) that assemble CKD kits manufactured
in Germany. This allows the company to avoid
paying import duties. In Vietnam, for example,
these import duties amount to 50 percent of the
value of the imported goods (Huster 2006). Thus,
the fact that production plants exist in a variety
of geographical locations does not automatically
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).
_ Access to scarce production factors, e.g.,
qualified personnel
_ To take advantage of comparative cost
advantages with respect to production fac-
tors
_ To distribute risk and increase flexibility
and innovative capacity, for example by con-
sciously duplicating or multiplying activities
_ To make use of complementary resources,
competencies and skills
_ Better coordination with value activities that
have already been carried out on site
_ To avoid legal restrictions, for example, regu-
latory requirements or import restrictions
_ To ensure market access and comply with
government regulations, for example ?
local-content requirements
_ To take advantage of direct or indirect sup-
port provided by the government of a host
country
_ Prevents duplication of effort, as, in most
cases, more relevant information is available
on site than in other corporate units
_ Easier to maintain confidentiality because
information remains within one site
_ Transfer of information within the company
is easier because it does not involve cross-
ing borders
_ Possible to establish a largely uniform
?culture
_ To avoid conflicts between employees at
different sites
_ Greater acceptance of the company within
the host country, for example by establish-
ing itself as a local manufacturer
_ To open up markets that offer little competi-
tion
_ To overcome logistic barriers, e.g., to reduce
transport costs
_ Better adaptation of products or services to
the needs of local customers
_ To take advantage of cultural proximity, e.g.,
to supply or sales markets
_ To set up outposts in strategically relevant
markets, particularly in innovative clusters
or in the home markets of important com-
petitors
_ To tap into local information and communi-
cation networks
_ Proximity to scientific facilities, which facili-
tates access to knowledge and expertise
_ Acquisition of international experience by
going abroad
Motives for
decentralization
Motives for
centralization
_ To achieve a critical mass
_ To take advantage of ?economies of scale
and ?learning effects
_ To take advantage of ?economies of scope
_ Simplified organization, no processes involv-
ing more than one country
_ Simplified management, face-to-face contact
is possible
_ To facilitate ?coordination of value activi-
ties, as little or no distance exists
_ Easier access to information and communi-
cation, among other things, because cultural
and language barriers are not a factor
_ Projects can be completed more quickly; for
example, there is less need for coordination
not specifically linked to individuals. Person-
oriented tools directly involve the employees
of a company who are engaged in coordination
efforts (Kutschker/Schmid 2008: 1031).
The configuration of value activities, such as
their geographical distribution, and the coordina-
tion of these activities constitute the two factors
that companies can use to shape their interna-
tional value chains. If configuration and coor-
dination are viewed as dimensions of a matrix,
this produces the so-called configuration matrix
(Porter 1986a: 27), which provides insight into a
company’s approach to international value cre-
ation and shows its options with respect to the
geographical distribution of value activities as
well as their ?integration. Porter demonstrated
this matrix, as shown in Figure 10, using the
American automobile manufacturers General
Motors and Ford, along with their Japanese com-
petitor Toyota. The matrix shows the positions
of the three companies during the 1970s and
the direction in which they were moving in the
1980s, as observed by Porter (Porter 1986a: 27).
A decentralized configuration
of value activities implies the
need for specific approaches to
coordination.
A decentralized configuration of value activities
requires a high level of integrative skills from
those in corporate management. Such activities
need to be integrated into the corporate network
and coordinated. A functioning value network
can only be achieved by properly coordinating
centrally or decentrally configured activities
(Martinez/Jarillo 1991: 431). Accordingly, in
dealing with value activities that are more or
less geographically dispersed, companies use
various tools to integrate them to a greater or
lesser degree into the corporate group. For the
most part, the available ?coordination tools are
structural, technocratic or person-oriented, as
outlined in Figure 9. Structural ?coordination
tools are based on organizational features and
represent an essential part of the formal organi-
zational ?structure. Technocratic tools include
all of the arrangements and provisions that are
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
enhanced coordination across national bound-
aries. However, no one since Porter has updated
the position of these companies on the configu-
ration-coordination matrix, so only limited con-
clusions can be drawn about the changes that
have taken place.
Furthermore, Porter’s configuration-coordination
matrix (1986a) has undergone little critical scru-
tiny.
4
It is clear that this matrix has one striking
weakness: Although it provides a clear picture
of a company’s value structures, it is imprecise.
Porter himself has conceded that it is crucial to
determine the configuration and coordination of
each individual value function separately (Porter
1986a: 25-27, Porter 1986b: 17-19). The examples
that he shows on the matrix, though, are entire
companies, which means that Porter assumes
At that time, Toyota, like other Japanese automo-
bile manufacturers, was centralizing its value
activities in order to lower costs, so that it could
sell its vehicles at an attractive price. Today,
many of Toyota’s value activities are decentral-
ized, but the company is still recognized for its
highly coordinated network. Largely because of
its acquisition-based approach, General Motors
pursued a country-specific strategy with a num-
ber of different subsidiaries (brands) and widely
dispersed value activities. However, its subsid-
iaries, such as Opel in Germany and Vauxhall in
Great Britain, were still relatively autonomous
until the end of the 1970s, since coordination
was minimal. In the 1970s, Ford was divided
into several regional units that were coordinated
at mid-level. Since then, both companies have
centralized a number of selected activities and
Figure 10: Con?guration-coordination matrix according to Porter
Source: Based on Porter (1986a: 27f.).
high
low
decentralized centralized
Con?guration
of value
activities
Coordination
of value
activities
Toyota
General
Motors
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
main location. Consequently, there are limits
to the conclusions that can be drawn about the
degree of an automobile manufacturer’s overall
centralization or decentralization. For these
reasons – and because of findings from the case
studies of VW, Renault and Audi – the configura-
tion-coordination matrix is only of limited value
in making management decisions.
of strategic management. There is virtually no
literature for practitioners that addresses the
issue of the configuration and coordination of
value activities. This study is intended to fill this
gap.
The objective of the study is as follows:
_ to determine the status quo of international
value creation among companies in the auto-
motive industry;
_ to identify best practices in the configuration
and coordination of value creation;
_ to identify needs and options for developing
sustainable international value chains; and
_ to critically review and expand Porter’s config-
uration-coordination matrix (1986a).
that an overall configuration-coordination profile
exists for each company. In principle, however,
each value function in itself can be configured
centrally or decentrally and may manifest a high
or low level of coordination, within the same
company. Thus, a number of automobile manu-
facturers have decentralized their production
and sales, while their research and development
are often carried out centrally at the company’s
In recent years, numerous studies – many of
them conducted by trade associations or man-
agement consulting firms – have focused on
structural change in the automotive industry and
the subsequent reconfiguration of value chains.
5
The focus has often been on cooperation
between manufacturers and suppliers and, par-
ticularly, on the scope of the value activities car-
ried out by each side (e.g., Sonnenborn 2009).
The configuration and coordination of such
activities have been largely ignored. Most nota-
bly, there has been little examination of the role
of the configuration and coordination of value
activities in generating competitive advantages.
For the most part, the academic literature on
this topic (e.g., Roth 1992, Holtbrügge 2005) has
failed to consider the decision-making approach
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).
development of new markets plays a central role
in the case study of the Volkswagen Group.
The Volkswagen Group is engaged in one of the
most ambitious growth initiatives in the industry
in seeking to overtake Toyota, the world’s cur-
rent market leader in terms of sales and profit-
ability, by the year 2018. These strategic goals
cannot be achieved without opening up new
sales markets and permeating the company’s
existing markets. It is important to remember
that certain crucial requirements must also
be met with respect to the configuration and
coordination of value activities if companies are
to be internationally successful. We therefore
particularly focus on the question of how compa-
nies can market their products worldwide while
adapting to different customer demands at a
local level. We analyze the value configuration of
the Volkswagen group and compare it with that
of Volkswagen’s competitor Toyota. This case
study outlines ways in which companies can
resolve the tension between standardization and
differentiation by decentralizing their develop-
ment activities, to adapt their products to local
markets, while also decentralizing the relevant
decision-making competencies. If they succeed
in doing so, they can become true global players.
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.
All of the examples and conclusions outlined
here have been chosen not only for their rel-
evance to companies in the automotive industry
but also because they can provide insights that
may be useful to other industries. One of our
concerns is to show how competitive advantages
can be generated, consolidated and expanded
by means of an appropriate configuration and
coordination of value activities, and what this
requires of management. As we intend to dem-
onstrate, companies within the same industry
often choose entirely different approaches
to configuration and coordination in order to
ensure competitive positions.
We focus on the automotive industry because
it is of particular importance to Germany and
many other countries. With about 744,500
people employed by manufacturers and suppli-
ers, the automotive industry is one of Germany’s
largest employers. If we also include those who
work in upstream and downstream industries,
such as the electrical industry and vehicle sales,
roughly 5.3 million jobs in Germany depend
on the automotive industry. This accounts
for approximately 13 percent of all employed
individuals in Germany (Destatis 2007). The
automotive industry was also responsible for
a foreign trade surplus of 105 billion euros in
2007, which underscores its enormous impor-
tance in the area of foreign trade (VDA 2008: 5).
Clearly, then, structural changes in the interna-
tional value chains of automobile manufacturers
can have a substantial impact on the employ-
ment and economic situation in Germany. It is
important to note, however, that moving value
activities abroad does not necessarily mean a
decline in the number of jobs in Germany. By
internationalizing value creation, German auto-
mobile manufacturers also have an opportunity
to generate domestic growth.
The three companies considered in this study,
Volkswagen, Renault and Audi, were selected
partly to include various external influences
in our analysis (cf. also Figure 1, p. 12). The
25
time of its establishment in 1993 up to the pres-
ent day. Our analysis has shown that upgrading
foreign subsidiaries to centers of excellence by
assigning them additional value activities and
developing specific skills produces crucial ben-
efits for the company as a whole, and thus for
its domestic sites. This happens, for example, by
increasing the number of domestic jobs. How-
ever, success in establishing ?centers of excel-
lence is only possible with the help of a flexible
style of management that takes into account the
specific activities, roles and areas of competence
of the respective subsidiaries.
How should one go about moving
value activities abroad in order
to generate positive effects for
domestic sites?
In our concluding section, we summarize the
main results derived from the case studies and
outline their implications for managing inter-
national value creation. It is clear that changes
in value creation not only have strategic and
structural consequences for companies but also
have important implications for ?corporate
culture.
Using the case study of the French automobile
manufacturer Renault, we examine the new ?
low-cost car concept. We focus on determining
the aspects of value configuration that are nec-
essary to succeed in meeting the needs of mar-
ket segments that are under a great deal of cost
pressure. Accordingly, we conducted a thorough
analysis of Renault’s value configuration for its
Logan model, sold in Europe under the name of
Renault’s Rumanian subsidiary, Dacia. We also
identify implications for the coordination and
management of value activities. The case study
clearly demonstrates that a concept aimed at
achieving a low-cost car requires much more
than merely economical vehicle construction or
production in a low-wage country. Indeed, the
overall value structure needs to be adjusted. Pro-
duction activities need to be centralized, but it is
also important to achieve a high level of localiza-
tion in the field of procurement. Moreover, the
configuration strategy for development activities
needs to be adapted over time. Although a cen-
tralized approach is advantageous when initially
developing a low-cost car, it makes sense to
decentralize development activities over the
long term. At the macroeconomic level, low-cost
cars and other products aimed at the low-price
segment of the market mean that emerging
markets are becoming centers of value creation
that can offer companies competitive advantages
worldwide.
How do value activitities need
to be configured in order to
be successful in serving market
segments that are under
considerable cost pressure?
The case study of the Hungarian subsidiary of
Audi AG focuses on the issue of shifting pro-
duction capacities abroad, a much-discussed
phenomenon in the ?industrialized countries
that is generally defended by pointing to the
need to improve a company’s competitive posi-
tion. In this case, the primary question is how
to undertake such a shift of value activities to
another country in order to generate positive
effects for the company’s domestic sites. In order
to answer this question, we analyzed the devel-
opment of Audi’s Hungarian subsidiary from the
26
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29
1. The Volkswagen Group’s new global strategy 31
1.1 Strategy 2018: Competitor Toyota as the standard 31
1.2 Benchmarking with Toyota 32
2 The configuration of production activities within the Volkswagen Group 35
2.1 Highly decentralized production activities 35
2.2 Competitive disadvantages arising from a lack of production sites 37
2.3 Opening up markets by establishing local production sites 38
3 The configuration of R&D activities within the Volkswagen Group 40
3.1 A concentration of R&D activities in the company’s home region of Europe 40
3.2 Inadequate decentralization of development as an impediment to growth 43
3.3 Decentralizing development for greater market success 45
3.4 Decentralized decision-making responsibilities as a prerequisite for successful 48
local development
4 The consequences of decentralizing value activities 51
References 54
Glocal value creation in the Volkswagen Group
Moving toward greater decentralization of production
and development
30
The Volkswagen Group introduced a comprehen-
sive new strategy in December 2007, aimed at
achieving global market leadership in the auto-
motive industry by the year 2018. The Strategy
2018 plan, drawn up under the leadership of
Volkswagen CEO Martin Winterkorn, represents
the most ambitious growth initiative in the his-
tory of the Wolfsburg manufacturer. Within the
next ten years, Volkswagen intends to become
not only as large, but also as profitable as its
Japanese competitor Toyota Motor Corporation.
By 2018 its goal is to increase annual vehicle
sales from 6 to 11 million, which means nearly
doubling today’s sales. The company seeks to
raise its annual pre-tax profit margin from the
current level of 5.6 percent to 10 percent by
2018. Toyota nearly achieved this level in fiscal
year 2006/2007, when it recorded a profit mar-
gin of 9.3 percent, and despite lagging sales it
is currently closer to reaching that goal than the
Volkswagen Group.
Strategy 2018 represents a clear challenge to
the Japanese automobile manufacturer Toyota,
which has been acknowledged for many years
as the industry leader. Winterkorn underscores
his company’s ambitions: “The Volkswagen
Group is on the attack. And we are not aiming to
come in second or third. We are in this to win!”
(Ritter 2008). By using Toyota as a standard,
Winterkorn is adopting a method that proved
successful during his time at Audi, where he
was chairman of the Board of Management from
2002 to 2006. For years, Audi’s employees were
motivated by the slogan “Beyond BMW” to over-
take their Bavarian competitor. Given Toyota’s
preeminence, is this current goal even more
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
recognition by 2018 as one of the automo-
bile manufacturers with the highest level of
customer satisfaction worldwide
_ Improving quality: Achieving the highest
levels of quality in the world by 2018
_ Promoting sustainability: Implementing
environmental protection measures in its
products, materials, technologies and pro-
cesses by 2018
_ Sales growth: Increasing vehicle sales from
6.2 million in 2007 to 11 million in 2018
_ Optimizing rate of return: Increasing the
pre-tax profit margin from 5.6 percent in
2007 to 10 percent in 2018
The goals of
Strategy 2018
to make gains in the American market, the
world’s largest with annual total sales of some
17 million vehicles. Toyota sells over 2.5 million
vehicles each year in the United States, putting
it ahead of Volkswagen by nearly 2.2 million
units; this difference amounts to 20 percent of
Winterkorn’s target for 2018 of total Group sales
of 11 million vehicles. To be sure, Volkswagen
has a larger market share than Toyota in cer-
tain markets, for example in South America,
where Volks wagen accounts for 17.8 percent
of the market as compared with 4 percent for
its competitor. However, the volume of sales
in the South American countries is not large
enough even to begin to close the overall gap.
And Volkswagen’s dominance in Europe is offset
by Toyota’s preeminence in its home markets
of Japan and Asia in general. Toyota’s sizeable
advantage in total sales is therefore largely
due to its strong market position in the United
States. “The United States is our most serious
Achilles’ heel,” says Winterkorn in discussing
the growth needed to achieve the company’s
goals (Hillebrand 2007: 30).
Achieving these challenging goals requires tak-
ing steps to increase efficiency. These include
outsourcing certain aspects of the value creation
process to suppliers, increasing production effi-
ciency and using standardized ?platforms to
produce several different vehicles. In the future,
for example, all of the models produced by the
Group will be based on only three platforms to
which different but mutually compatible mod-
ules are added. Volkswagen also needs to com-
pete on the market side, which means achieving
growth in a variety of markets, particularly
outside Europe. “Volkswagen's market share in
Europe can't get any better. The company has to
look outside the EU for growth,” explains Adam
Jones, analyst for investment bank Morgan Stan-
ley (Edmondson 2007).
In order to achieve its growth targets, Volkswa-
gen needs to concentrate on two things: First, it
needs to establish itself in the emerging econo-
mies (such as Russia, India and Southeast Asia).
It is currently lagging behind its competitors
in these markets. Second, Volkswagen needs
Volkswagen has set itself a high bar. Over the
years it has become clear that Japan’s Toyota
company represents the industry standard in
numerous areas. Whether we look at integrated
supplier networks, lean production methods,
high quality standards, the development of new
technologies or financial performance figures,
Toyota outperforms most of its competitors in
nearly every respect. Even premium manufac-
turers like Daimler and Porsche frequently view
high-volume manufacturer Toyota as a so-called
?benchmark for identifying potential improve-
ments in their own companies. Figure 2 com-
pares the most important performance figures
for Volkswagen and Toyota and the sales trends
for both companies in the past few years.
Toyota is particularly well known for the Toyota
Production System (TPS), which has revolution-
ized automotive production. Today its production
and management methods are used not only by
nearly every automobile manufacturer, but also
by other industries and organizations, including
the American aluminum producer Alcoa and the
University of Pittsburgh Medical Center. TPS is
based on the just-in-time approach (JIT) and the
Jidoka principle of ongoing quality assurance
during every stage of production. As explained
by Taiichi Ohne, one of the system’s creators,
the main goals in developing TPS were to
increase productivity and reduce costs.
This production system is particularly notable
in that it not only achieves lean ?structures
and processes, but it focuses on individual
employees and challenges them to be constantly
striving to improve work processes and product
quality (Japanese: Kaizen). Many aspects of the
system, such as its recognition of employees as a
company’s most important resources and its Kai-
zen principle, are also firmly rooted in Toyota’s
?corporate culture. Thus, TPS is an integral
part of the company. “Toyota employees always
talk as if the company would declare bankruptcy
the next day. They are never satisfied with
what they have done the day before,” explained
32
1.2 Benchmarking with Toyota
33
Figure 2: Comparison of the most important performance ?gures and sales
trends for Volkswagen and Toyota
As of ?scal year 2007 or December 31, 2007. As of ?scal 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 million
Pre-tax pro?t margin 5.6 %
Employees 328,594
Foreign share 46.7 %
Production (thousands of vehicles) 6,213
Foreign share 66.4 %
Sales by brand (thousands of vehicles)
VW 3,662.6
Audi 964.2
Škoda 630.0
VW commercial vehicles 488.7
SEAT 431.0
Bentley 10.0
Lamborghini 2.4
Bugati 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 billion
Foreign share 53.0 %
Pre-tax earnings E 15,289 million
Pre-tax pro?t margin 9.3 %
Employees 299,394
Foreign share 66.2 %
Production (thousands of vehicles) 8,180
Foreign share 48.2 %
Sales by brand (thousands of vehicles)
Toyota (incl. Scion) 7,005.1
Daihatsu 928.7
Lexus 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
5.2
5.5
5.1
5.5
5.0
6.1
5.0
6.7
5.1
7.4
5.2
8.0
8.5
5.7
6.2
8.9
Toyota Motor Corporation Volkswagen AG
Legend:
result of an organic expansion of the Japanese
company into foreign countries, which was
accompanied by a comparatively larger increase
in its workforce outside Japan. As for sales,
Volks wagen’s foreign share is considerably
higher than Toyota’s: 75.3 percent relative to 53
percent. The situation is similar for the number
of vehicles produced; Volkswagen’s foreign pro-
duction makes up 66.4 percent of the total, sub-
stantially higher than the corresponding figure
for Toyota, which is only 48.2 percent.
While the major automobile manufacturers now
regard the decentralization of their marketing
and sales as self-evident and maintain sales sub-
sidiaries (including associated sales offices) and
dealer networks in all of their important interna-
tional markets, it has not yet become common
practice to decentralize the organization of the
?value functions of production and R&D. In
the battle for worldwide market shares, however,
the decentralization of these value activities
re presents a key to success. With this in mind,
we focus our further analysis on production
(Chapter 2) and R&D (Chapter 3).
Ron Harbour, founder of the productivity study
The Harbour Report and partner in the Oliver
Wyman consulting firm, as he discussed Toyo-
ta’s corporate culture at the Capital Automobile
Summit held in Berlin in September 2008.
Toyota’s success is usually attributed to its
efficiency in development and production, as
well as to the high quality of its vehicles. Volks-
wagen often looks to its Japanese competitor
as a model in terms of the time required for
developing a new vehicle, the productivity of
individual plants, sales figures, profit margins
and customer satisfaction. There is no question
that Volkswagen needs to improve if it is to
catch up with Toyota in these areas. In focus-
ing on these aspects, however, the fact is often
overlooked that Toyota also represents a unique
global value network that was created by distrib-
uting various ?value activities throughout the
world. Many of the ?competitive advantages
that the Japanese company enjoys today are the
result not only of its leadership in production
and management methods, which are often the
subject of discussion among both theoreticians
and practitioners, but also of the decentralized
?configuration of its value activities.
Toyota’s competitive advantages
are also a result of the decentral-
ized configuration of the com-
pany’s global value chain.
Figure 3 shows a comparison of Volkswagen and
Toyota with respect to the two companies’ ?
foreign share of employees, sales and vehicles
produced, which highlights differences in these
companies’ ?value configurations. At Volkswa-
gen, 46.7 percent of employees are foreign, as
compared with 66.2 percent at Toyota. In con-
trast to Toyota, at Volkswagen most employees
still work in the home country. This is particu-
larly notable because Volkswagen acquired two
foreign companies – Spain’s SEAT in 1968 and
the S
?
koda company from the former Czech and
Slovak Federative Republic in 1991 – that still
maintain a large portion of their value activi-
ties in their countries of origin. Toyota, on the
other hand, acquired only Japanese companies,
Daihatsu and Hino. The difference, then, is the
34
of the current production of Volkswagen and
Toyota relative to their international sales.
It is clear from comparing these two companies
that their regional focuses are different because
of differences in their respective home coun-
tries. Both Volkswagen and Toyota produce and
sell most of their vehicles in their home regions.
Unlike Toyota, Volkswagen does not maintain a
plant in every region; it has no production facili-
ties in the North American market (the United
States and Canada). Furthermore, the number of
Volkswagens sold in North America is relatively
small. For Toyota, on the other hand, North
America is a focus of its business efforts, along
with the company’s home region.
The decision to locate production abroad
may be motivated by a variety of business
The Volkswagen Group has long been active in
the international arena. The company’s interna-
tionalization began in 1952 with the establish-
ment of a sales company in Canada. The next
year marked the beginning of vehicle sales in
South America, as the company’s subsidiary
Volkswagen do Brasil was founded. Today Volk-
swagen distributes its vehicles in more than 150
countries and maintains 48 production facilities
in 19 different countries. Not long after Volkswa-
gen, Toyota Motor Corporation ventured abroad
as well and founded its American subsidiary
Toyota Motor Sales USA in 1957. A Brazilian
sales company, Toyota do Brasil, followed in
1958. Today Toyota sells its vehicles in over 170
countries, and it has an even larger and more
decentralized production network than Volkswa-
gen, with 74 production sites in 27 countries.
Figure 4 provides an international overview
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 ?scal year 2007 or December 31, 2007. As of ?scal 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
1,014,200 2,900,200
1,242,700 932,000
374,400 496,400 3,111,800
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:
_ 1 for vehicles, engines
and components
Vehicles per year
Produced
Sold
Asia/Paci?c
6 production sites:
_ 3 for vehicles, engines
and components
_ 3 for engines and components
Vehicles per year
Produced
Sold
Eastern Europe
10 production sites:
_ 8 for vehicles, engines
and components
_ 2 for engines and
components
Vehicles per year
Produced
Sold
Source: The authors, based on Toyota (2007a), Volkswagen (2008a, 2008c).
As of ?scal 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
11 production sites:
_ 5 for vehicles
_ 5 for engines and components
_ 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
_ 1 for engines and components
Vehicles per year
Produced
Sold
Asia/Paci?c
48 production sites:
_ 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
_ 2 for engines and components
Vehicles per year
Produced
Sold
5,443,500
3,330,000
143,800
744,000 284,000
2,942,000
177,900
1,519,300 377,000 532,000
379,000 845,000
Volkswagen AG
Toyota Motor
Corporation
0
124,300
considerations and location factors. In choos-
ing their sites in Bratislava (Slovakia) and Kolin
(Czech Republic), respectively, Volkswagen and
Toyota have been able to take advantage of cost
differences. These sites, in what can still be
considered low-wage countries, produce vehicles
for the entire European market. Decentralized
sites can also be a way of getting around import
restrictions. Both companies have Russian sites,
for example, allowing them to avoid paying
the 25 percent import duty levied in Russia on
imports of finished vehicles. In Kaluga, Volkswa-
gen assembles ?SKD (semi knocked down) kits
produced in Zwickau (VW Passat) and in the
Czech city of Mladá Boleslav (S
?
koda Octavia);
since December 2007 Toyota has been operat-
ing an assembly plant in St. Petersburg, where
the Toyota Camry is assembled for the Russian
market.
For years Volkswagen has had difficulty in the
American market. After a period of success in
the 1970s, it has never really been able to regain
a foothold in the United States. In 1978 Volkswa-
gen opened an assembly plant in Westmoreland,
Pennsylvania, which produced the Rabbit, the
American version of the VW Golf, but only ten
years later the company’s Board of Management
decided to shut down that site. Its capacity was
not being adequately utilized, which had led to
financial losses. From then on the VW plant in
Puebla, Mexico, supplied most of the VW Golfs
and Jettas for the North American market; these
were Volkswagen’s best-selling models in the
region. Today the VW brand is still unable to
attract a satisfactory number of customers in the
United States, which has had an effect on the
company’s overall earnings. According to expert
estimates, the Group is posting annual losses in
the hundreds of millions for all of its brands com-
bined. And these numbers add up: “Since 2002,
Volkswagen’s losses in the largest automobile
market in the world have gone into the billions,”
says Engelbert Wimmer, automotive expert for
the PA Consulting Group (Schneider 2008a).
An analysis of the production configurations
of Volkswagen and Toyota shows that there
may be several different motivating factors for
a ?direct investment.
1
Plants in Russia, for
example, also provide an opportunity to open up
and supply the Russian market, since “Russia is
likely to become the second largest sales market
in Europe,” according to Frank Schwope, analyst
for Nord LB (Schneider 2007c). This is why Volk-
swagen is planning to expand its SKD assembly
plant in Kaluga into a facility for all aspects of
the manufacturing process (including auto body
construction) that can handle 115,000 units by
2009. For similar reasons, Volkswagen – like its
Japanese competitor – has already established
production sites in other growth markets such
as Brazil, India and China. This has allowed
Volkswagen to achieve a relatively high level of
decentralization in its production activities.
Local production as a sales argu-
ment: Patriotic American custom-
ers often regard Toyota’s vehicles
as American products.
In contrast, the American market has played a
critical role in Toyota’s success. The Japanese
company has achieved impressive sales results
in the United States largely because of its pro-
duction sites there. Toyota vehicles have been
built in the US since the 1980s, when import
restrictions were imposed on Japanese automo-
bile manufacturers, and patriotic customers are
often favorably disposed to these cars because
they consider them to be American products.
While Toyota is recognized as a Japanese brand,
it is associated with local production, which is
a strong sales argument in the United States.
This is where Toyota laid the groundwork for its
competitive edge in the world market: In fiscal
year 2006/2007, the Japanese manufacturer sold
more than 2.9 million vehicles in the United
States and Canada – nearly 35 percent of its
total sales – outperforming the Volkswagen
Group by over 2.5 million vehicles sold.
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
Fluctuations in exchange rates are currently
making it even more difficult for Volkswagen to
?export vehicles to the United States. Because
of the weak dollar, Volkswagen either has to
charge higher prices for its vehicles, which are
manufactured in Europe, than its American and
Japanese competitors charge for the vehicles
they produce in the United States, or the price of
its vehicles is inadequate to cover manufactur-
ing and transport costs. Because of the exchange
rate, the company ends up taking a loss even on
In the year 2018, the Volkswagen Group hopes
to sell 1.2 million vehicles (800,000 of them
under the VW brand) in the United States,
Canada and Mexico; in 2007 it sold only about
530,000 (230,000 VW vehicles).
The idea was
rejected that the company’s Mexican plant in
the city of Puebla, which is located in the North
American Free Trade region, might be used
to achieve this growth. The Puebla plant was
designed for a maximum of 500,000 vehicles,
and in 2007 it was already producing roughly
410,000, including the VW New Beetle for the
European market. Moreover, unless Volkswagen
has a plant in the US it will not be able to pro-
duce enough vehicles for the American market
without being affected by currency fluctuations.
This would make it impossible to achieve the
company’s goals for this market – and its global
goals as well. If the Volkswagen Group is to
reach its growth targets, it will have to have a
production site in the United States.
Establishing an American plant would make
vehicle sales in the US less vulnerable to
changes in the exchange rate. At least the com-
pany’s American-made vehicles could be sold
at competitive prices while also covering costs.
Borrowing a term from investment banking,
the industry refers to “natural hedging” when
plants are established to prevent losses result-
ing from exchange rate fluctuations. However,
this requires that as many production stages as
possible are carried out at that plant, including
such things as vehicle body construction and
painting, producing a higher level of ?local
content. A plant that was devoted exclusively to
the sale of such popular and high-status models
as the VW Tiguan SUV. “Toyota is much more
successful in the American market than we are,”
says Detlef Wittig, head of marketing and sales
for Volkswagen AG, in describing the current
situation (Schneider 2008a). By establishing a
plant in the United States, Volkswagen would
earn points with American buyers, reduce the
company’s vulnerability to fluctuating exchange
rates and avoid transport costs, which would
help close the gap to Toyota.
the assembly of SKD or ?CKD kits produced
outside of the United States would only slightly
reduce the company’s dependence on the value
of the dollar and decrease its foreign exchange
losses only minimally. Ideally, even engines and
gearbox components should be produced in the
United States, according to Engelbert Wimmer,
an automotive expert with the PA Consulting
Group: “It is very difficult to launch a campaign
in the United States while spending valuable
euros on importing engines and parts” (Herz/
Schneider 2008a).
In addition, it is crucial to increase localiza-
tion in the area of procurement, by purchasing
the systems, modules and components used at
Volkswagen’s American plant from suppliers in
the United States or at least paying for them in
dollars. In the automotive industry, unlike the
aircraft industry, it is not customary for interna-
tional transactions to be carried out in American
dollars. This means that the Volkswagen Group
needs to establish contacts with suppliers in
the United States or persuade companies from
other countries to establish sites in the US as
well. This is an area where VW can learn from
the mistakes of its competitors: Although BMW
has an American production site in Spartanburg,
South Carolina, it is still very much affected by
negative currency effects because its procure-
ment has a localization rate of only 30 percent.
38
2.3 Opening up markets by establishing local production sites
smaller and more fuel-efficient than those of
its competitors, in the American market. Larger
cars, particularly those produced by American
companies, are becoming less and less attrac-
tive. Volkswagen will have an especially good
chance of winning market shares currently held
by American manufacturers, which are lag-
ging behind in developing fuel-saving cars. But
Toyota, too, is still selling large, gas-guzzling
vehicles in the United States, such as the
Sequoia and FJ Cruiser SUVs and its Tundra
pickup truck. Along with a commitment to pro-
duction in the US, this offers Volkswagen a good
opportunity to make inroads into the American
market. Accordingly, the expansion plans out-
lined by the Board of Management have gained
the support of Bernd Osterloh, head of the
Volkswagen Works Council and member of the
Supervisory Board: “I firmly believe that VW
can succeed in the US. […] The problems in the
American market [Authors’ note: Financial crisis,
high oil prices, threat of recession] can even be
viewed as an opportunity for the VW Group and
its fuel-efficient engines” (Schneider 2008b).
However, the advantages of decentralized pro-
duction in the United States can only partially
solve the problems Volkswagen is facing. All
over the world, it still finds itself unable to meet
the needs of its customers to their full satisfac-
tion, and this has kept it from achieving higher
sales in foreign markets. A solution to this prob-
lem will have to include, among other things, a
change in the company’s R&D configuration.
In the spring of 2008, Volkswagen’s Board of
Management officially decided to open a plant in
the United States, with production scheduled to
begin in 2010. The Supervisory Board approved
the proposal in July 2008. Shortly thereafter,
Volkswagen chose Chattanooga, Tennessee, as
the location for the new plant. According to
sources within the company, the selection pro-
cess focused on cities in Michigan, Alabama and
Tennessee, all of which offered the advantage of
existing supplier networks. The Detroit, Michi-
gan, region, for example, is the center of the
American automotive industry and home to the
headquarters of the “Big Three” American man-
ufacturers: General Motors, Ford and Chrysler.
Daimler’s American plant is located in Tusca-
loosa, Alabama. Nissan has its North American
headquarters and two production sites in Ten-
nessee. Factors favoring the southern states of
Alabama and Tennessee, from Volkswagen’s
perspective, were relatively low wages and the
comparatively insignificant role of the unions.
The Volkswagen Group is planning to invest
about 620 million euros in the new plant, which
is expected to produce 150,000 vehicles per year
in its initial phase.
Despite the economic downturn in the United
States, the time seems right for a market offen-
sive by the Volkswagen Group, since higher oil
prices have made fuel efficiency an increasingly
important consideration for American custom-
ers. This is a good opportunity for the Wolfsburg
company to position its vehicles, which are
39
If the Volkswagen Group is to achieve its
ambitious growth targets, it is essential
to establish a plant in the United States.
Additional measures are necessary for that
growth to be efficient and profitable:
_ The plant needs to attain a high level of
local content in its production; in other
words, as many value-added steps as pos-
sible should be carried out on site.
_ The plant’s procurement needs to be
highly localized, focusing on suppliers
with production in the United States.
Summary
as markets with sophisticated customers or the
home markets of strong competitors.
The research carried out by the Volkswagen
Group has always been largely centralized, with
the corporate research division at the company’s
Wolfsburg headquarters providing support for
all of the Volkswagen brands. The individual
brands also maintain smaller research depart-
ments which together form a research network,
with headquarters in Wolfsburg as its hub. In
addition, the Electronic Research Lab (ERL) in
Palo Alto, California, carries out research in the
field of electronic systems and makes the results
available to all of the corporate brands.
The R&D activities of the various brands concen-
trate mainly on development efforts. Each brand
has its own development departments – VW in
Wolfsburg, with a design branch in Potsdam;
A detailed analysis of the R&D configuration of
the Volkswagen Group requires a differentiated
look at its various activities. The literature dis-
tinguishes between research, which focuses on
gaining new insights, and development, which
puts those insights into practice in new products
or processes. Research activities include basic
and applied research; development activities
can be divided into basic development, which
involves new products or processes, and adap-
tive development, in which existing products
or processes are modified. In practice, market
observation activities are often integrated into
the R&D organization; information about current
market trends and technological developments
is gathered and passed on to the research and
development departments to aid in the decision-
making process. Market observation units are
also referred to as outposts. They are generally
found in strategically important locations, such
40
3. The configuration of R&D activities within the
Volkswagen Group
Figure 5: Con?guration 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 observation D M As of December 31, 2007.
3.1 A concentration of R&D activities in the company’s home region
of Europe
division, at the Toyota Central Research &
Development Laboratories, is located in Naga-
kute, Japan, near headquarters in Toyota City.
Research is conducted in Nagakute for the entire
Toyota Group, which is active not only in the
automotive industry, but for example in the con-
struction industry and in biotechnology as well.
Also located in Japan are the Tokyo Technical
Center, which conducts research on electronic
systems, and the Higashi-Fuji Technical Cen-
ter in Susono, which focuses on research and
development in the areas of innovative vehicle
concepts and drive technologies.
The Head Office Technical Center in Toyota City
is the headquarters for vehicle development
and design, and it joins together with five other
international development units to form a world-
wide development network. Toyota Motor Europe
has two development divisions, located in
Zaventem, Belgium, and Burnaston, Great Brit-
ain. American subsidiary Toyota Engineering &
Manufacturing North America carries out devel-
opment work at its headquarters in Ann Arbor,
Michigan, and at three affiliated sites. Also
active in development are Toyota’s subsidiaries
Audi in Ingolstadt (the electronics center) and
Neckarsulm (the lightweight vehicle construc-
tion center); S
?
koda in Mladá Boleslav, Czech
Republic; and SEAT in Martorell, near Barcelona,
Spain. The SVW Technical & Design Center in
Shanghai, China, has been developing models
for the Chinese market for several years. The
Shanghai site, the technological center in Tokyo
(VTT), Japan, and the Electronic Research Lab
(ERL) in Palo Alto also serve as outposts and
pass on information to the corporate research
division in Wolfsburg.
Figure 5 shows the elements that make up the
international R&D network of the Volkswagen
Group. While Volkswagen has several interna-
tional R&D sites, most of its activities in the core
areas of research and development continue to
take place in Germany or Europe. The bottom
line, then, is that Volkswagen does not have a
global R&D organization that is active in all of
the world’s important markets.
Toyota’s research activities are even more cen-
tralized than those of the Volkswagen Group.
The Japanese company’s corporate research
41
Figure 6: Con?guration 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 M Research Development Market observation As of December 31, 2007.
necessary to make changes if, for example, new
innovation clusters were established elsewhere
or problems arose that made it difficult to carry
out research in Germany. However, that would
only be the case if legal restrictions were placed
on certain research activities or innovation were
impossible because of a lack of sufficiently quali-
fied personnel.
Toyota and Volkswagen have also chosen simi-
lar ?configuration strategies in their market
observation units, which are, of course, widely
scattered geographically. Outposts must be
decentralized in order to fulfill their mission
of monitoring international markets. Both com-
panies have outposts in the same regions, but
Toyota’s network is somewhat denser, which
can be advantageous in identifying the needs of
specific customer groups within a heterogeneous
regional market.
In terms of development activities, however,
there are marked differences between the two
companies. With the exception of its relatively
new development laboratory in China, Volks-
wagen’s efforts are concentrated in Europe.
Its Japanese competitor takes a quite different
approach: Toyota has decentralized its develop-
ment organization and established a number
of sites around the world. For development,
unlike research and market observation, neither
centralization nor decentralization is clearly
superior. Arguments can be made for central-
izing development, similar to the reasons given
for centralizing research, but decentralization
has its advantages as well. The following section
examines in detail the configuration of Volkswa-
gen’s development activities and the effects of
that configuration on the company’s competitive
position.
It is clear from this comparison of value configu-
rations that research, development and market
observation, often lumped together under the
heading of R&D, are configured in different
ways. These activities therefore have to be
treated separately in terms of value configura-
tion.
Asia Pacific Engineering & Manufacturing in
Samutprakarn, Thailand, and the Toyota Techni-
cal Center Asia Pacific in Melbourne, Australia.
Completing this global network are two develop-
ment centers that specialize in vehicle design:
The Toyota Europe Design Development Center
(ED
2
) in Nice, France, and the subsidiary Calty
Design Research in Newport Beach, California,
handle internal, external and color design. Most
of these sites also serve as outposts. Figure 6
shows how R&D activities are configured at
Toyota.
A centralized configuration is
preferable for research, in con-
trast to development.
A comparative analysis shows that both com-
panies have largely centralized their research
activities within their home regions – Volkswa-
gen in Europe and Toyota in Japan. Centraliza-
tion tends to be beneficial for research, since it
makes it easier to discover new insights, a pro-
cess that is not always smooth or certain. Advan-
tages include achieving a critical mass and ?
size-related effects. Centralization also promotes
?economies of scope, for example by permit-
ting direct communication between employees.
It is also helpful to have personal, face-to-face
contacts when organizing and monitoring
research activities. This speeds up research
projects and makes it easier to secure knowl-
edge and maintain confidentiality. Furthermore,
the goal of group-wide research – which, by
definition, encompasses all components of the
company and all of the relevant subjects – can
only be achieved by bringing together all of the
various research activities under one umbrella.
The logical conclusion is to carry out research
at one location, often at or near the company’s
headquarters.
Affiliated decentralized sites, such as Volkswa-
gen’s Electronics Research Laboratory (ERL) in
Silicon Valley, which is one of the world’s most
innovative research clusters, are a very use-
ful supplement to the company’s centralized
research activities. Overall, therefore, there is
no urgent need for a change in the Volkswagen
Group’s research configuration. It would only be
42
At its decentralized development sites, Toyota
generally focuses on modifying its vehicles for
local markets, an effort that is referred to as
adaptive development. Its development sites
around the world are generally responsible for
a specific region. In addition, however, they
may develop a new model from the ground up
and thereby assume an international mandate.
2
When the Toyota Corolla was developed, for
example, the European design center in Nice
was in charge of the entire development process,
and not only the European version.
Volkswagen’s concentration of its development
activities in Europe deprives it of certain poten-
tial advantages for its international competitive
position. Decentralized development means hav-
ing access to local information networks. It is
also a way of counteracting ?not-invented-here
syndrome and producing a ?country-of-origin
effect.
3
Finally, it facilitates coordination with
other value functions, and particularly with pro-
duction sites in different locations.
Most important, however, is this: Because its
development divisions are limited to a certain
geographic area, Volkswagen is less able to pro-
duce region-specific vehicles to accommodate
the preferences and needs of its customers in
different countries. Local developers are better
able to design cars for local customers, since
they are more familiar with the ?culture and
living conditions in that region. Decentralized
development departments and local developers
increase a company’s ?responsiveness to a
given market, leading in turn to higher sales.
Particularly in the top tier of the high-volume
segment of the VW and Toyota brands, a lack
of sensitivity to local customer preferences is
a serious disadvantage. Their vehicles compete
for customers based not only on price, but also
on vehicle features and design.
This segment
of the market has begun to combine Porter’s
traditional ?cost leadership strategy with a ?
differentiation strategy, which results in a so-
called ?outpacing strategy.
Too often, Volkswagen – whose
corporate culture is still strongly
tied to the home country –
applies German standards when
developing its vehicles.
Volkswagen’s difficulties in foreign markets are
due in part to the company’s failure to decen-
tralize its development activities. Its corporate
culture is strongly tied to Germany, and too often
it applies German standards when developing its
vehicles. This, along with a lack of local produc-
tion sites, is another reason why it has not been
more successful in the United States. Volkswa-
gen has not paid enough attention to the fact
that the United States has a different kind of car
culture: “There is no question that VW has failed
to understand what American customers want,”
says Catherine Madden, analyst with the market
research firm Global Insight (Eberle/Schneider
2007). That failure is also reflected in Volkswa-
gen’s tiny market share: only 2.1 percent.
VW dealers in the United States have already
voiced their dissatisfaction with the vehicles
that are available, and they are pushing for cars
that are specifically designed for the Ameri-
can market. It will not be until 2010 and 2011,
however, that VW will introduce the successors
to the current VW Jetta and VW Passat, which
will be the first models designed specifically
with the preferences of American customers
in mind – although they, too, are being devel-
oped in Wolfsburg. Up to now, the company
has Americanized its vehicles only slightly, for
example by offering different engines or equip-
ment packages. Since no other new designs are
on the horizon, this kind of halfhearted attempt
to accommodate the wishes of American custom-
ers will continue to be the rule rather than the
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
to provide simple components at reasonable
prices. But the high standards of the Volkswagen
Group have always prevented it from making
use of cheaper options. In other words: German
enthusiasm for technology often misses the
mark in the emerging markets.
The Volkswagen Group maintains market obser-
vation units in today’s key markets – the United
States, China and Japan – and appears to be well
positioned at the moment. Volkswagen’s failure
to address the needs of American consumers
cannot be attributed to the fact that it has fewer
outposts (Toyota does indeed have more sites
devoted to market observation in the United
States) or that those outposts provide inadequate
information, although that might theoretically
be possible. Rather, the information gathered by
its outposts is not used appropriately, not least
because of different cultural standards. Volkswa-
gen needs to make changes not in the configu-
ration of its market observation, but in how it
deals with processes and cultural aspects within
the corporate network. Given its ambitious
growth targets, however, the Volkswagen Group
would be wise to consider proactively establish-
ing outposts in other promising markets over
the medium term.
Companies will only be successful
globally if they adapt their prod-
ucts to the needs of the respec-
tive markets.
The consequences of a centralized and cultur-
ally provincial approach to development are also
evident in the ?emerging markets. The cars
produced by the Volkswagen Group have often
been too sophisticated and too expensive for
those markets. To cite one example, headquar-
ters in Wolfsburg decided that vehicles intended
for the Indian market should be equipped with
a twelve-year anti-corrosion finish – ignoring
the fact that corrosion protection is not the main
concern of Indian customers, who are just begin-
ning to become more mobile and are looking
for an affordable vehicle. Such decisions make
Volkswagen’s cars unnecessarily expensive, put-
ting them out of reach for many Indians. This
is a problem that the company’s suppliers have
encountered before. The chairman of Volkswa-
gen’s Board of Management, Martin Winterkorn,
recently expressed his puzzlement over the fact
that the Tata Nano, the world’s cheapest car,
contains so much apparently expensive Bosch
technology. Bosch chairman Franz Fehrenbach
pointed out in response that Bosch is quite able
44
Toyota’s vehicles, ultimately tailored to different
regions, are manufactured on a shared platform
that is appropriate for all of Toyota’s markets.
The company’s ?standardization/adaptation
strategy is based not solely on the standardiza-
tion of its vehicles, nor on adaptation, but on
a combination of both approaches. This allows
Toyota to adapt its vehicles to local customer
preferences while also producing large numbers
of its basic modules, which lowers unit costs.
4
The Japanese manufacturer calls this principle
“Global best, local best.”
By combining a standardized plat-
form with regional or country-
specific adaptations, companies
can accommodate local customer
preferences while also lowering
unit costs.
This principle, developed in the 1990s, is
applied to all three core global models manu-
factured by the Toyota Group – the Corolla, the
Camry and the Yaris – as well as to the IMV
(International Multipurpose Vehicles) series
of light commercial vehicles. All of them, and
their regional versions, are developed within the
company’s global network. The success of the
Toyota Corolla, the world’s best-selling vehicle,
was made possible by the use of this principle.
Since 1997 the Corolla has been built on a plat-
form that is standardized worldwide, with three
different versions for customers in the three
target markets: the United States, Japan and
Europe. “We combined everything that is good
from the United States, Japan and Europe. And
we eliminated everything that is bad,” said Fujio
Cho, chairman of Toyota, in describing how the
“Global best, local best” approach was applied to
the development of the Toyota Corolla (Grauel et
al. 2003: 68).
In order to achieve the sales growth envis-
aged in Strategy 2018, Volkswagen will have to
win new customers worldwide. This cannot be
accomplished without increased efforts to adapt
its vehicles to specific regions and countries.
Since this requires a better understanding of
local customer needs, Volkswagen will need to
undertake further decentralization of its devel-
opment activities.
A decentralized development
network and local developers are
among the keys to global success.
Toyota provides a model for how a decentral-
ized development strategy works: It adjusts the
appearance of its vehicles and its sales strategy
to the region or country in question. Key to this
effort are a decentralized development network
and local developers, which make the company
more sensitive to local customer preferences
and allow for the development of models that
meet local needs. Toyota’s first successes with
this approach came in the late 1980s, when its
luxury brand Lexus, which was targeted specifi-
cally to the American market, quickly gained a
large share of the premium market.
One of the lessons for Volkswagen is that its
new production site in the United States should
immediately be entrusted with the task of
designing models tailored to the American mar-
ket. Unfortunately, this plant will not commence
operations until at least 2010. Until then the
Puebla plant, which is to manufacture the new
VW Jetta for the United States, should be used
as an intermediate station for vehicle develop-
ment so that US-specific models can be made
available as quickly as possible. Engineers from
Mexico are currently undergoing training in
Wolfsburg, and this may represent an initial step
toward locating development activities in the
vicinity of the American market.
45
4
For a more extensive discussion of standardization strategies, see Kutschker/Schmid (2008: 1007-1012).
3.3 Decentralizing development for greater market success
moving forward with globalization… by further
enhancing the localization and independence of
our operations in each region,” explains Fujio
Cho, Chairman of Toyota (Ghemawat 2007: 139).
A similar strategy would allow Volkswagen to
solve the problem of a lack of regional adapta-
tion, promoting sales growth while also reducing
the cost of the basic module by producing larger
quantities. Both of these effects would be highly
welcome under Strategy 2018. As a link to the
local markets, the foreign development sites
would automatically carry out market observa-
tion as well. This is true of Toyota’s development
network, in which the foreign sites assume this
dual function (again, see Figure 6, p. 41). At the
same time, such outposts could be a first step
toward decentralizing development activities and
creating a global development organization. The
establishment of outposts in emerging markets
such as Brazil, India or Russia, discussed above,
would be helpful. It would provide Volkswagen
with a competitive advantage over Toyota, which
does not yet have outposts or development units
in these markets, and allow Volkswagen to stage
a preventive attack as it seeks to make inroads
into Toyota’s established market position in the
United States.
The development process is generally managed
by the development center located at Japanese
headquarters. Kenichiro Fuse, chief developer
at the Head Office Technical Center in Toyota,
and his Japanese team handled the basic devel-
opment of the newest generation of the Toyota
Camry. Fuse was also in charge of coordinating
three other regional development teams: one
in the United States, one in Thailand, China
and Taiwan, and one in Australia. Each of these
teams designed the version for its respective
region. In accordance with Toyota’s philosophy,
vehicle production also takes place in those
regions. The Toyota Camry is now produced
throughout the world, in eight different plants
(one each in Japan, Taiwan, China, Thailand,
Australia and Russia, as well as in two plants
in the United States) serving the surrounding
markets.
Toyota’s organizational structure reflects this
regional orientation. Regional organizations
take on certain responsibilities in the areas
of development, production and sales. Both
of these aspects – regional organizations and
regional adaptations – are an essential part of
Toyota’s internationalization efforts, which seek
to achieve “glocalization,” or adaptation world-
wide to local conditions. “We intend to continue
46
Figure 7: Toyota’s “Global best, local best” principle
Source: Toyota (2006: 18).
to give superior quality and outstanding cost
performance to customers buying Toyota
vehicles throughout the world. On the other
hand, “local best” expresses a commitment
to accurately reflecting the needs and val-
ues of customers in different regions. Toyota
enhances the value of its core global models
by marrying its commitments to being global
best and local best.”
“Global best, local best – these commitments
rule the development of Toyota’s mainstay
global models. By “global best” we mean build-
ing cars with common value worldwide while
pursuing the world’s highest levels of quality
and performance. The global best concept is
fundamental to the Toyota mind-set. We want
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
The key to the Corolla’s success lies in its
region-specific versions, which have been built
on a single platform since 1997. “The VW Golf
looks just the same everywhere in the world.
We try to appeal to a wide variety of tastes in
different markets,” explains Soichiro Okudaira,
chief developer of the current Toyota Corolla.
The basic platform for the current model was
developed by the European design center in
Nizza, France, which also designed the Euro-
pean version. Toyota’s sites in Ann Arbor,
Michigan, and Toyota City, Japan, designed
the other two versions. Ninety-five percent of
the vehicle’s parts are identical; the remain-
ing five percent vary according to the regional
preferences of the relevant customer base.
In Europe, this means adding such things
as more solid bumpers, headlights that are
integrated into the car body and a large Toyota
logo in the radiator grille – primarily to accom-
modate the preferences of German customers.
In the United States the vehicle has a more
streamlined appearance and softer seats. In
Japan the Toyota logo is replaced by a Corolla
logo, and several drink holders are added.
Worldwide production
In addition, production of region-specific mod-
els takes place in the respective markets. The
European Corolla (or Auris) is manufactured
in Burnaston, England, and Adapazan, Turkey.
The North American version is produced in
Fremont, California, and in the Canadian city
of Cambridge, Ontario. In Japan, the Corolla
is manufactured in Takaoka, Kanegasaki and
Sagamihara. All told, this model is produced in
16 different countries.
The world’s best-selling vehicle
With over a million vehicles sold per year, and
over 30 million sold since it was introduced to
the market in 1966, the Toyota Corolla is not
only the Japanese equivalent of the VW Beetle,
but the best-selling car in the world. Most of
its purchasers live in Japan, the United States
and Europe (where, with the exception of the
MPV called the Corolla Verso, it has been
known as the Auris since 2007). It is sold in a
total of 140 countries.
Customers with very different preferences
The success of the Corolla is astounding, given
how much customer preferences vary in dif-
ferent markets. The Japanese, for example,
focus on fuel efficiency, modern design and
practical details, such as enough drink holders.
The brand of the car is less important to them
than the model. Americans view their cars
as an expression of their lifestyle: They want
them to project a youthful image and have soft
seats and soft steering for relaxed cruising on
the highway. German customers, for their part,
attach great importance to safety, which means
that they appreciate such features as more
solid doors. They want their cars to be stable
on the road and accelerate quickly in the low
gears. Consumers in all three countries find
the Toyota Corolla attractive, despite their dif-
ferent priorities.
Toyota Corolla:
Regional versions based
on a global platform
As a company decentralizes its development
activities, it should not lose sight of the fact
that decision-making responsibilities need to be
decentralized as well. This is clear from a case
that occurred a number of years ago: Volkswa-
gen had long shown no interest in modifying
its vehicles to appeal to the market in China.
Several years ago, Chinese developers from
SAIC (Shanghai Automotive Industry Corpora-
tion) suggested that Chinese customers would
prefer a modification of the tail lights of the VW
Polo. Headquarters in Wolfsburg responded by
simply rejecting this idea. If all decisions affect-
ing vehicle development continue to be made in
Wolfsburg, the benefits of decentralized develop-
ment may well be entirely lost.
The experiences of Volkswagen’s American com-
petitors are a cautionary tale as well. General
Motors and Ford, whose value activities have
long been decentralized, decided in the 1990s
to limit most of their strategic decision making
to the United States. They have since reversed
course, having realized that centralization had
been a major factor in their vehicles’ failure to
appeal to the European market. Both manufac-
turers subsequently “re-decentralized” their
decision-making structures, giving more author-
ity to their European ?subsidiaries. It holds
true for Volkswagen, as well as for all other
high-volume manufacturers: Companies must
do more than merely establish development
facilities at foreign sites; they must also equip
such units with the necessary decision-making
powers. Local developers cannot take advantage
of their knowledge of the local market if they
have no input into design decisions. Although
Toyota’s management continues to be relatively
centralized, the Japanese company has trans-
ferred certain decision-making responsibilities
to its decentralized development units; this is
crucial for the principle of “Global best, local
best” to function.
Volkswagen’s subsidiary in China is now recog-
nized as an example of the successful decentral-
ization of a company’s development activities
and decision-making responsibilities.
In order to take advantage of
local expertise, companies need
to equip local personnel with
the necessary decision-making
powers.
After dramatic declines in Volkswagen sales in
China at the beginning of this century, because
its vehicles were not tailored to the Chinese
market, the company’s Chinese subsidiary was
given the authority to design models to appeal to
Chinese customers. Up to that point its activities
were limited to the modification of existing mod-
els, and indeed – as mentioned above – it had
sometimes been thwarted in that effort by head-
quarters in Wolfsburg. The subsidiary’s two new
models are scheduled to go on the market before
the end of 2008; one of them is the VW Lavida,
long known as “Model Y.” Volkswagen’s vehicles
are finally being adapted to suit the preferences
of Chinese customers.
In view of the progress that has been made, the
plans of Volkswagen’s development head, Ulrich
Hackenberg, to develop a Chinese version of the
VW Polo in Wolfsburg would be a step backward.
Chinese sales personnel are already concerned
that such a vehicle might not be suited to the
market, as has often been true in the past. “Chi-
nese designers are better able to design cars for
Chinese people,” explains Stefan Fritschi, head
of the development center in Shanghai, the site
of Volkswagen’s Chinese subsidiary (“Volkswa-
gen kämpft um chinesische Kunden” 2006).
That is precisely why local designers need the
authority to make decisions that concern their
designs – for example about a vehicle’s tail
lights. Figure 9 summarizes suggested measures
for decentralizing development activities and
decision-making responsibilities by presenting a
comparison of Volkswagen and Toyota.
48
3.4 Decentralized decision-making responsibilities as a prerequisite
for successful local development
49
Winfried Vahland, president and CEO of Volks-
wagen Group China, who built up the develop-
ment center in Shanghai, intends to expand
the site’s responsibilities still further. He is
also considering the possibility of developing
vehicles for the American market in China,
since customer preferences in the two countries
are relatively similar. Status and comfort are
important criteria for Chinese car buyers as
well as for Americans; both groups prefer large,
luxurious sedans but attach less importance to
the newest technologies and safety than German
customers, for example. Chinese engineers are
already working in Wolfsburg on a version of the
VW Passat for the American market. This could
be an initial step in establishing the Shanghai
development center as a ?center of excellence
within the Volkswagen Group. A center of excel-
lence specializes in certain activities, products
or processes, based on specific expertise, and
assumes responsibility for them throughout
the company. Decentralizing development
activities not only makes it possible to generate
local knowledge and apply that knowledge to
the vehicles produced on site; it also provides
an opportunity to make such knowledge more
widely available for practical use within the
entire organization. Centers of excellence are
essential for the best possible reconfiguration of
development activities.
In order to achieve worldwide success, a high-
volume manufacturer like the Volkswagen
Group needs to adapt its vehicle models to
the preferences of customers in local markets.
This can be accomplished by means of
_ the decentralization of selected develop-
ment activities, aimed at adapting vehicles
to the needs of customers in a specific
region or country,
_ region- or country-specific model adapta-
tions that use identical platforms world-
wide, which produces scale effects,
_ granting decentralized development units
the necessary decision-making authority to
put their local expertise into practice,
_ the installation of outposts in other growth
markets to promote the company’s local
responsiveness, and
_ the establishment of centers of excellence,
which take on certain management respon-
sibilities and make local knowledge avail-
able to other units of the company.
Summary
50
Figure 9: Options for recon?guring 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
Con?guration
of activities
BD
R M
AD
R
BD AD
M
far the Volkswagen Group has a relatively low
level of internationalization, for example in its
Board of Management and Supervisory Board,
compared with other DAX30 companies.
Toyota’s corporate culture is well suited to the
company’s international activities and serves
as a model for other globally active enterprises.
Respect for all of its stakeholders – also, and
especially, in host countries – is an integral part
of Toyota’s culture. This respect is the founda-
tion of its focus on the customer and its efforts
to adapt its vehicles to local preferences. It is
also reflected in a sense of social responsibility.
One of Toyota’s stated goals is to promote higher
rates of vehicle ownership in the emerging
markets. “Toyota sees itself as a global com-
pany that wants to gain the respect and trust of
people everywhere in the world,” notes Sonja
Sackmann, professor of industrial and organiza-
tional psychology and expert on the corporate
culture of the Japanese automobile manufac-
turer (Sackmann 2005: 21). This effort to be
responsive is rooted in Japanese culture; indeed,
Toyota’s corporate culture can still be described
as “fundamentally Japanese,” “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.
Because they involve management structures
and corporate culture, the present study’s
recommendations for decentralizing value
activities, derived from the example of the
Volkswagen Group, cannot be put into effect
quickly. Leadership structures, which also have
consequences for management style, and cor-
porate culture cannot be transformed overnight.
The path leading to 2018 will not be easy for
the Volkswagen Group, and whether or not it
will achieve its ambitious goals will depend on
its dedication to that effort. Toyota is currently
experiencing declining sales and profits, but
Volkswagen, too, will be affected by a decrease
in demand in a weakening global economy. “The
Ein Konzern, der lang-
fristig global erfolgreich
sein will, muss das Ver-
trauen der Stakeholder
auf der ganzen Welt
gewinnen.
The observation by Michael Freitag, editor of
the manager magazin periodical, still holds
true: “The [Volkswagen] Group lacks a coherent
global concept” (Freitag 2007: 20). The struc-
tures are still missing that would allow Volkswa-
gen to benefit from a worldwide distribution and
network of value activities, in order to achieve
the goals of Strategy 2018. Toyota has shown
how a decentralized configuration of both pro-
duction and development can lead to competitive
advantages.
A decentralization of value activi-
ties and decision-making respon-
sibilities also requires changes in
the company’s management struc-
tures.
As our analyses have demonstrated, the decision
by the Volkswagen Group to open a plant in the
United States is a welcome step toward gain-
ing a foothold in the world’s largest automobile
market. But more local content in production
and greater localization in procurement are also
important if the company is to be less vulnerable
to fluctuating exchange rates. As for the con-
figuration of R&D activities, it will be crucial to
decentralize adaptive development. This makes
it possible to develop region- or country-specific
models, using globally identical platforms. How-
ever, all of these measures are interconnected:
If efforts to adapt to local markets are unsuc-
cessful, sales will not increase – and expanded
production capacities will not be fully utilized.
Excess capacity, in turn, makes it impossible to
achieve target yields – and this would spell the
failure of Strategy 2018.
The decentralization of decision-making respon-
sibilities also requires changes in the company’s
management structures. Decentralized units
should be given greater responsibility, which
means modifying the current system of concen-
trating decision-making authority at headquar-
ters in Wolfsburg. As decision making is decen-
tralized, it follows that foreign executives, with
their own unique cultural backgrounds, should
be given more central roles in the company. So
51
4. The consequences of decentralizing value activities
less overwhelming. “As other manufacturers
copy Toyota, its methods and systems lose their
unique superiority. Its success in the past has
been due less to Toyota’s exceptional perfor-
mance and more to the fact that its competitors
have performed poorly,” explains Ralf Kalmbach,
an automotive expert at the consulting firm
Roland Berger (see also the interview with Ralf
Kalmbach following this case study).
The recommendations we have developed based
on the example of the Volkswagen Group can
easily be applied to other companies. In gen-
eral, they are helpful if a company needs to
standardize its activities while also differentiat-
ing its products or processes. Glocalization, or
increasing localization within the framework of
globalization, will continue to be an important
phenomenon. Companies cannot assume that
everything is globally the same in a so-called
global world.
momentum is right, but Volkswagen has a long,
long way to go to get where they need to be,”
says Adam Jones, analyst for Morgan Stanley,
seeking to lower expectations (Edmondson
2007). Falk Frey, automobile analyst for the rat-
ing agency Moody’s, also doubts that Volkswa-
gen will be able to catch up with Toyota: “Toyota
is not standing still; the company is continu-
ing with its growth strategy” (Herz/Schneider
2008a). Toyota’s President Katsuaki Watanabe
has already announced that the Japanese manu-
facturer will make further efforts to tailor its
vehicles to regional markets so that customers
everywhere will have a complete range of spe-
cifically adapted Toyota models to choose from.
This would again put Toyota a step ahead of the
Volkswagen Group.
Does this mean that Volkswagen should stop
viewing Toyota as its model, because the goal
is too ambitious? The answer is no. The most
important thing is not for Volkswagen to over-
take Toyota as the market and profitability
leader; instead, identifying Toyota as the stan-
dard to live up to is a way of motivating the
Volkswagen organization and its stakeholders,
modernizing management structures and adapt-
ing the corporate culture to meet global chal-
lenges. This lays the groundwork for a solid com-
petitive position going forward. It should also
be noted that Toyota’s dominance is becoming
52
The decentralization of production and
development activities requires departing
from a centralized management structure
and cautiously changing a company’s cor-
porate culture.
Summary
In the interest of readability we have reduced
the number of references contained in this
version of the study. A complete list of refer-
ences is found in the bibliography. A German
version of the study can be obtained in printed
form as an academic working paper by
contacting the office of the authors
([email protected]); it may also be
downloaded from the website of the Chair of
International Management und Strategic
Management at ESCP-EAP European School of
Management Berlin (www.escp-eap.de/imsm).
53
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59
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. The Renault Group as a leader in the low-cost car sector 67
1.1 The Logan concept 67
1.2 The minimization of costs in manufacturing the Logan 68
1.3 The market success of the Logan 70
1.4 The Logan in the international market for low-cost cars 74
2. The configuration of value activities for the Logan 77
2.1 Production: Centralized main facility with decentralized assembly plants 77
2.2 Procurement: Achieving a high level of localization through supplier training 83
2.3 Development: Increasing decentralization in target markets 86
2.4 Logistics: Backbone of the hub-and-spoke production network 88
3. The competitive advantages offered by emerging markets 90
References 93
Decentralized centralization
Romania as a focus of value creation
for Renault’s Logan
66
When the French manufacturer Renault intro-
duced its ?low-cost car, the Logan, in 2004,
its success attracted a great deal of attention
in the automotive industry. This vehicle, which
can cost even less than 6,500 euros and is sold
in most countries under the brand of Renault’s
Romanian ?subsidiary, Dacia, soon became
one of the company’s most successful models.
With this vehicle, Renault was able to make
inroads into a new segment of the market that
no other manufacturer had discovered for itself
to the same degree. Indeed, many had concluded
that it was impossible to produce a “decent” car
in this price bracket that was capable of gaining
widespread market acceptance. Since Renault’s
success with the Logan has proved the doubters
wrong, however, low-cost cars (LCC), or vehicles
selling for less than about 10,000 US dollars
(approximately 7,500 euros), have come to be
recognized as a major opportunity for future
growth. “Logan is a spectacular example that
really rattled the industry. Logan has really set
the terms of the debate,” noted Glenn Mercer,
automotive expert for the Swiss bank UBS (Guil-
ford 2007).
With the Logan, Renault opened
up a new market segment that
no other manufacturer had been
able to claim.
At Renault, the development of the low-cost car
can be traced back to the company’s former
chairman, Louis Schweitzer, who recognized
back in the mid-1990s the extent of his com-
pany’s dependence on the saturated Western
European markets. “Seeking to ensure Renault’s
profitable growth, I determined in 1995 that
we should expand into non-European markets,”
Schweitzer explained (Dacia 2004: 1). His
central goal was to tap into the ?emerging
markets.
Few people in those countries could
afford to buy a car, but Renault recognized that
higher incomes would provide future market
opportunities.
The low-cost car is based on the
principle of simplicity.
Renault CEO Schweitzer instructed the engi-
neers at the company’s R&D headquarters, the
Technocentre in Guyancourt, near Paris, to
design a model with a base price of 5,000 euros.
This was followed in 1998 by the launch of the
X90 project aimed at building this low-cost
model. Strict adherence to the principle of sim-
plicity was essential to keep the price at the des-
ignated level, which meant that this “cheap car”
could not offer extensive options or the newest
design features. Unlike Renault’s earlier mod-
els, it was specifically designed not for the ?
industrialized countries, but to meet the needs
of emerging economies. It had to be economical
not only in its purchase price, but also to run
and maintain.
The end of 2004 brought the market launch of
a five-door notchback sedan under the name
Dacia Logan. Based on the same ?platform,
the Logan MCV (Multi-Convivial Vehicle) station
wagon was introduced in 2006, followed by the
Logan van (based on the Logan MCV) and the
Logan pickup in 2007. Its sister model Sandero,
a compact hatchback with components that are
70 percent identical to those of the Logan, was
launched in 2008. Renault has also announced
that it is developing a Logan SUV.
67
1. The Renault Group as a leader in the low-cost car sector
1.1 The Logan concept
68
In order to lower the costs of producing this new
vehicle, Renault’s engineers used three methods:
design-to-cost, carry-over and computer-aided
engineering. The design-to-cost method focused
on minimizing costs during the development
phase. Vehicle unit costs were reduced by using
ordinary components and economical materi-
als and by omitting purely visual elements.
For example, using an identical exterior rear
view mirror on the vehicle’s left and right sides
resulted in savings of about two euros per car.
Cost reductions have an effect on
the configuration of the entire
value chain.
Efforts to increase efficiency included focusing
not only on the vehicle’s direct costs, but also
on potential indirect savings during the produc-
tion and procurement processes. Choosing body
types that are easy to manufacture and limit-
ing the number of available features makes the
production process less complicated, which also
reduces costs. Tooling costs can be lowered if
the front and rear windows of the vehicle are
only slightly curved, which makes them easier to
install. Finally, since the Logan was to be manu-
factured in the emerging markets, a decision
was made to use traditional steel for most com-
ponents, since steel is not only more economical,
but also easier to obtain in those countries than
materials like aluminum.
The carry-over method dictated the use of exist-
ing components and construction methods bor-
rowed from other vehicles, as their costs had
usually been amortized and their quality and
reliability had already been demonstrated. This
meant additional savings in development and
production, as well as reduced maintenance
costs. Logan components were taken from other
models manufactured by the Renault Group
and its partner, Nissan; Renault and Nissan had
entered into a ?strategic alliance in 1999, and
each has a minority stake in the other. They
work together in a number of areas, as shown
in Figure 1, and this has been beneficial for the
Logan project.
1
The Logan is built on the B platform, which was
developed jointly by Renault and Nissan for the
Renault Clio, Renault Modus, Nissan Micra and
Nissan Cube. The Logan’s rear axle was taken
from this platform, but the front axle is taken
from the version preceding the current Renault
Clio. The electronic central processing unit and
the heating system were also originally used in
other Renault vehicles. In 2007 alone, some 1.9
million vehicles worldwide were built on the B
platform, which is nearly one-third of the 6.2
million vehicles sold by both Renault and Nis-
san. This has allowed them to achieve synergies
in the development process and ?scale effects
in production. Both of these factors have reduced
the costs of the Logan. From a customer’s per-
spective, it is also important to note that the
competitive advantage of a low purchase price
might be negated (to some degree) by expen-
sive maintenance – if, for example, the vehicle
requires frequent maintenance and repairs. The
carry-over method helps to reduce this risk with
the use of proven components.
High maintenance costs would
negate some of the competitive
advantage of a low purchase
price.
Finally, computer models and simulations
brought further savings in developing the
vehicle and its production tools. While computer-
assisted methods have long been common in
vehicle development, they had never been
applied to this degree. The use of a virtual
simulation of every development stage, includ-
ing noise tests, made it possible to eliminate the
expensive construction of Logan prototypes. The
computer-aided engineering method allowed the
company to save 20 million euros in engineer-
ing costs relative to traditional development
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
to attract customers in the fiercely competitive
compact car sector with a low purchase price.
Lessons learned in the Twingo project aided
in the development of the Logan. “There was a
significant improvement in the design-to-cost
method, introduced in the development of the
Twingo in 1992, when the X90 program was
launched,” explains Odile Paciatici, head of
development for the X90 project (Dacia 2004: 3).
In retrospect, the development of the relatively
inexpensive Twingo was a kind of test run for
developing the Logan low-cost car.
methods. Renault spent only 360 million euros
to develop the Logan, which is roughly half what
is normally required to launch a new vehicle.
In the X90 project, these methods were accom-
panied by a person-oriented approach to ?
coordination; a large number of employees were
assigned to the project who had already been
involved in developing the Renault Twingo.
Renault first adopted a strict policy of minimiz-
ing costs when it built the Twingo, which was
introduced to the market in 1992. The goal was
Figure 1: The Renault Group’s ?nancial 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 ?nancial ties
Joint ventures
RNPO
(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
_ Identi?cation 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
R
e
n
a
u
l
t
N
i
s
s
a
n
Renault-Nissan B.V.
Alliance Board Nissan
25,0 %
15.0 %
70
The Logan was introduced to the market at the
end of 2004 in Romania, the Czech Republic,
Morocco, Algeria and Turkey. Before long it was
also being sold in neighboring countries, includ-
ing the Baltic states (Estonia, Latvia, Lithuania),
Russia, Poland, Slovakia, Hungary, Slovenia,
Croatia and Tunisia. Demand was unexpectedly
high in the Western European countries. After
Renault dealers in Germany, France and Italy
had begun to import the Logan for their custom-
ers on their own, Renault responded in 2005 by
starting to sell the Dacia Logan in France, Bel-
gium, Luxembourg, the Netherlands, Germany,
Switzerland, Italy and Spain as well. Today the
Logan is marketed in a total of 59 countries. Ger-
many was the fifth largest sales market for the
Logan in 2007, with 17,500 vehicles sold, after
Romania (101,800 units), Russia (67,844), France
(32,600) and India (17,706).
In terms of timing, Renault’s ?internationaliza-
tion strategy for the Logan might be termed a
combined ?“waterfall-sprinkler” strategy. The
vehicle was introduced in a series of phases
in the various foreign markets, but each phase
included several markets.
2
Only the first two
phases went as planned; Renault had not
expected the demand that developed in Western
Europe, and it responded with a third phase of
internationalization efforts. The Logan provides
striking confirmation that internationalization
does not need to occur precisely as originally
planned; the process can be adjusted to accom-
modate unforeseen events.
3
Companies need to
be alert to signals from surrounding markets so
that they can quickly take advantage of opportu-
nities that arise.
When companies enter new markets, group-wide
considerations shape their brand strategies.
Hence the Logan is sold in 50 countries under
the Dacia brand and in seven under the Renault
brand. The name Dacia is used in countries
where Renault already has a reputation as a
design-oriented, high-volume brand, for example
in Central Europe, Turkey and North Africa.
Offering a second brand expands Renault’s prod-
uct range and appeals to new customer groups.
In countries where Renault does not yet have a
strong presence, the Renault is used as a way of
opening up the market – in Iran, as well as in
Russia, Argentina, Brazil and Mexico. The Logan
is now also available under the Nissan brand as
part of Nissan’s product range in Mexico and
South Africa. The company is therefore pursu-
ing a ?strategy of (largely) standardizing the
product while differentiating the brand, depend-
ing on the extent to which the Renault brand
is already established and how the company
intends to position itself in the market.
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.
Figure 2 provides an overview of selected
markets, the brands under which the Logan is
sold and its base price. It is evident that Louis
Schweitzer’s proposed base price of 5,000 euros
has not been achieved, although a few countries,
such as Romania and Morocco, come close if
taxes are not included. The Logan is still a low-
cost car, however, since it is less expensive than
traditional vehicles. It is sold for considerably
more than 10,000 euros only in Brazil and Ven-
ezuela, where it is positioned as one of Renault’s
mid-level vehicles rather than a more affordable
alternative.
In Western Europe, other manufacturers sell
certain models in the price range of 9,000 to
10,000 euros, which is what the Logan costs
with additional features (e.g. power steering, air
1.3 The market success of the Logan
2
For an overview of timing 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, side airbags). These include the
Citroën C1 (base price 9,190 euros), the Toyota
Aygo (base price 9,350 euros) and the Ford Ka
(base price 9,600 euros). But all of them are
compacts; the Logan is larger, in the same class
as the Golf. Renault’s primary target group
includes families wanting more room, which the
Logan provides at an unusually low price. Com-
mercial customers find the MCV, van and pickup
models appealing.
For many customers, for example in Eastern
Europe, the Logan is the first vehicle that they
have been able to afford. Market surveys have
shown that other Logan buyers, in Europe and
elsewhere, had previously been more likely to
purchase used rather than new vehicles. Still
others have chosen the Logan as an economical
second vehicle. For this reason there has been
no indication of ?cannibalization effects affect-
ing Renault models, according to Renault dealers
in Germany, where the Logan is sold at the base
price of 7,200 euros.
Figure 2: Marketing the Logan in selected countries
Source: The authors, based on research in the relevant countries.
As of the 1
st
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 ?rst 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
Country
List 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.
The success of the Logan has made Renault’s
Romanian subsidiary Dacia a mainstay of the
Renault Group. While Renault has experienced
declining sales and a loss of market share in
Western Europe, its sales have increased sub-
stantially in other markets. In fiscal year 2007,
Renault recorded an increase in Logan sales of
nearly 120,000 vehicles, or by more than 48 per-
cent. Total sales, including Dacia and all Renault
models, rose by only about 50,000 vehicles –
two percentage points – during the same period.
Clearly the Logan is driving Renault’s growth;
without it, total sales would have declined again
in 2007. Figure 3 shows trends in sales since the
Logan was introduced.
With over 350,000 vehicles sold in 2007, the
Logan now ranks third among Renault’s best-
selling models, after the Mégane and the Clio.
Indeed, demand so exceeded Renault’s expecta-
tions in 2008 that it was unable to increase pro-
duction sufficiently to keep up. The result was
waiting periods of several months to purchase
a Logan or a Sandero. A significant factor was
that Renault had not expected such a high level
of interest in these vehicles in Western Europe.
Furthermore, low-cost cars compete with used
cars, and it was difficult to predict how many
used car buyers would opt instead to purchase
a new Logan. Since then, however, Renault has
adjusted its predictions and capacities. It plans
to produce and sell some 500,000 Logans and
Sanderos in 2008, and substantial increases in
capacity will bring this figure up to 900,000 in
2009.
Figure 3: Sales ?gures for the Renault Group and the Logan
Source: The authors, based on ?nancial statements and corporate data.
1) Passenger vehicles and light commercial vehicles.
2) Projected figures provided by the company.
3) Includes the Sandero. Logan
3)
Renault Group
Legend:
Vehicles sold
1)
(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
145
248
367
500
900
2,533
2,434
2,484
2,733
3,000
2005 2007 2006 2009
2)
2008
2)
73
The Logan is not only driving Renault’s sales
growth; it is also increasing the company’s prof-
itability. Renault’s profit margin on every Logan
that is sold in Western Europe is roughly 15
percent. The only other automobile company to
achieve a similar profit margin is premium man-
ufacturer Porsche with its 911 Carrera model.
Internationally, Dacia’s average profit margin on
the Logan was about six percent in 2007. Con-
sequently, the Logan has become crucial in the
company’s efforts to achieve the goals laid out
by Renault’s CEO, Carlos Ghosn, in a February
2006, strategy paper entitled “Contrat 2009.” In
addition to setting a sales goal of three million
vehicles – which was originally even higher,
at 3.3 million – the plan also calls for nearly
doubling the profit margin in 2009, an increase
from 3.3 percent to 6 percent, the level Dacia
has already achieved. Clearly it is not Dacia’s
fault that Renault has been forced to revise its
sales goals and may well fall short of its target
profit margin. According to many experts, the
problem lies mainly in the outdated models that
were still being sold under the Renault brand as
recently as 2007.
Dacia’s success is very important
to the Romanian economy.
Dacia has come to play a critical role within
Renault Group, but it has also brought great
benefits, primarily economic, to the country
of Romania. Dacia provides 14,400 jobs at its
plants, but today there are also 4,000 jobs with
supplier companies in the Pites ¸ti industrial park,
6,500 jobs in the Dacia distribution network and
150,000 other jobs in Romania that are linked in
some way to Dacia. Both Renault and Dacia are
contributing to the country’s economic develop-
ment. Dacia alone accounted for two percent of
Romania’s gross national product in 2007. The
country’s international reputation has benefited
as well. As François Fourmont, General Direc-
tor of Dacia, points out, “[…] it is clear that
nowadays there is an association between Logan-
Dacia-Romania and that Logan depicts a good
image of Dacia and, at the same time, of Roma-
nia” (Radoslavescu 2005). Romanian Prime Min-
ister Ca ?lin Popescu Ta ?riceanu asserts that the
Logan is “the best ambassador Romania has ever
had” (Kuntz 2008). The Romanian people, too,
are proud of Dacia. The unexpectedly impressive
sales of the Logan in Western Europe have given
a particular boost to their self-esteem.
74
Rising earnings in the emerging markets, along
with greater price-consciousness and higher
vehicle maintenance costs in the industrialized
countries, are creating the conditions neces-
sary for low-cost cars to succeed. The Logan has
also demonstrated that a low-cost car can make
a profit. Accordingly, a number of established
companies as well as up-and-coming automobile
manufacturers from the emerging markets have
announced plans to design their own low-cost
vehicles. In January 2008, the Indian automobile
manufacturer Tata Motors set a new standard for
affordability when it introduced its Tata Nano in
New Delhi. This ?“ultra-low-cost car” (ULCC)
will be available in India in 2009 for the equiva-
lent of 1,700 euros. Since this corresponds to
100,000 rupees, termed lakh in Hindi, the Nano
has been dubbed the “one-lakh car.” Other
automobile manufacturers are seeing just how
much the price of a car might be reduced. “The
Renault Logan showed them a unique design is
possible. And the Tata Nano showed them how
far that could go,” says Nigel Griffiths, managing
director of the automotive section of the market
research firm Global Insight (Snyder 2008).
Worldwide demand for low-cost cars comes
mainly from the emerging markets, particularly
China, India and Russia. Earnings are rising,
and people are eager for greater mobility. Mobil-
ity for the masses has been increasing for some
time now in China and Russia, and the trend is
just beginning in India. India’s booming market
for motorcycles is still benefiting from a push for
greater mobility, since even the country’s middle
class is hard pressed to afford the cars that are
currently on the market. Companies producing
low-cost cars are now seeking to bridge this gap.
For instance, the Tata Nano is seeking to appeal
to India’s middle class, for which this model
is by no means as affordable as the term “low-
cost,” used in the industrialized countries, would
suggest.
Low-cost cars represent a growth
sector in the automotive industry.
Figure 4 shows forecasts for vehicle sales in the
low-price sector (selling for less than 10,000 US
dollars) in various countries in 2012 and com-
pares them with the figures for 2006. Annual
growth rates in the emerging markets between
2006 and 2012 are expected to range between
3.9 percent and 16.3 percent. For example,
forecasts indicate that the Chinese market for
low-cost cars will grow by 13.4 percent each year
up to 2012. Clearly, the low-cost car sector is a
growth market.
However, individual automobile manufacturers
are targeting very different segments of the
low-cost market, as Figure 5 shows. While the
Logan, priced at about 7,500 euros, is currently
the most affordable car available in Western
Europe, in India it is more expensive than sev-
eral competing models despite its lower base
price of 6,800 euros. Shortly after the introduc-
tion of the Tata Nano, Renault announced that it
will be working with Bajaj Auto, India’s largest
manufacturer of automobiles and motorcycles,
to develop an ultra-low-cost car for the Indian
market. In contrast to the Logan, which was
developed at Renault headquarters in France,
this vehicle is to be designed on site by a
French-Indian development team in India, which
will enable it to better focus on the needs of
local customers.
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. CAGR
2)
2012
2006
Note: All ?gures 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
Russia
1)
+ 16.3 % p.a.
104
42
Thailand
+ 13.4 % p.a.
2,640
1,243
China
+ 7.6 % p.a.
1,519
980
India
The low-cost car segment offers substantial
opportunities for growth in both the devel-
oped and emerging countries. Established
high-volume manufacturers that are introduc-
ing their own low-cost models need to take a
very different approach to development:
_ The design of a low-cost car needs to be
simple and robust to succeed, particularly
in the emerging markets.
_ Design-to-cost, carry-over and computer-
assisted engineering are effective methods
for achieving these goals.
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.
E 2,000 E3,000 E4,000 E5,000 E6,000 E7,000 E8,000
Legend:
Planned models Existing 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
Approx. E 5,000
Western Europe
About 2009
Chery
Logan (incl. Sandero)
Approx. E 7,500
Western Europe
2004 (2008)
Dacia
Kalina
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
Citroën
Palio
Approx. E 7,000
Eastern Europe,
South America
1996
Fiat
Indica
Approx. E 5,600
India
2008
Tata
HQ
Approx. E 3,800
China
1998
Geely
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
Making the low-cost Logan a reality required
simple construction, inexpensive materials
and the use of existing components. However,
Renault’s success in keeping costs low, set-
ting an affordable price and gaining customer
acceptance was not due only to these technical
aspects. Also essential in the Logan’s market
success were the appropriate ?configuration
and coordination of the entire ?value chain.
Most production stages were concentrated in
Romania, where labor costs are considerably
lower than in France. In addition, Renault took a
In 1999, as part of its strategy to market a low-
cost car, the Renault Group paid 50 million US
dollars to acquire a majority stake of 51 percent
in the Romanian automobile manufacturer SC
Dacia Automobile SA, previously a state-owned
company. Over the subsequent three years
Renault gradually increased its share to 99.3
percent, and today it owns nearly all of Dacia.
As the ailing state-run company was being
privatized, Renault was the only party to show
interest, and it was already familiar with Dacia
from years of working together:
From 1968 until
the fall of the Iron Curtain, Dacia was licensed
to manufacture the Renault 8 and the Renault 12
for the Eastern European markets. In addition to
Dacia, which was well-known in Eastern Europe,
Renault was interested in acquiring the two
vehicle and engine manufacturing plants located
in the town of Mioveni, near Pites ¸ti, which is
some 120 kilometers west of Romania’s capital
city of Bucharest.
After purchasing Dacia, Renault carried out an
extensive rehabilitation program aimed at mod-
ernizing the company’s nearly 40-year-old pro-
duction facilities. In terms of production quality
and efficiency, the plants lagged far behind
modern standards and were no longer capable
of manufacturing vehicles that could compete
in the market. Renault invested a total of nearly
500 million euros, or ten times what it had paid
to acquire the company, to update its facilities,
redefine the various departments and optimize
Nach der erfolgre-
ichen Sanierung konnte
Dacia sich international
etablieren.
new approach to configuration and coordination
in the areas of procurement, development and
logistics. This was instrumental in allowing the
company to keep the vehicle’s price low while
taking into account the needs of its customers.
The following sections describe the details of
Renault’s approach.
The proper configuration and
coordination of the value chain
have been essential factors in the
Logan’s success.
procedures. The company also sought to show
sensitivity in intercultural matters. These
measures quickly proved effective: Between
1999 and 2002, there was a 50 percent drop in
the number of breakdowns in the production
of the old Dacia models that were still on the
market. Today the two Dacia plants, which now
manufacture only Logan models (including the
Sandero), are among the most efficient facilities
in the entire Renault Group. Without Renault’s
successful rehabilitation efforts, the venerable
Dacia brand, which had produced the so-called
“people’s cars” of Romania and enjoyed great
prestige in such countries as East Germany,
would have disappeared without a trace. Its ?
acquisition by Renault meant the survival of
Romania’s only automobile manufacturer and
allowed it to establish itself internationally.
After successful rehabilitation
Dacia was able to establish itself
internationally.
Renault’s approach to modernization sought to
achieve only minimal automation of Logan pro-
duction; manual labor was to play a prominent
role. Even over the very long term, it is consid-
ered more economical to invest in manpower in
Romania than to put a great deal of money into
automation, owing to the country’s low labor
costs. Moreover, manual labor is capable of
producing high-quality goods, making vehicles
more reliable and helping to achieve Renault’s
78
goal of keeping maintenance costs low. Even
today, workers run stamping machines and
carry out spot welding by hand in producing
the Logan and its sister model, the Sandero.
Elsewhere in the automotive industry, this level
of manual labor is found only in the production
of absolute top-of-the-line models, such as the
Audi R8. Figure 6 describes the installation of
the spare wheel pan in the vehicle to illustrate
Renault’s approach to cutting costs.
In addition, Dacia exhibits a high level of verti-
cal ?integration, since all of the Logan’s pro-
duction stages are carried out at the two plants
in Mioveni. The vehicle production plant not
only carries out final assembly; it also contains a
pressing plant for stamping the individual parts
of the vehicle body, a body shop for welding the
parts together, and a paint shop for painting the
finished vehicle bodies. The nearby engine and
gearbox plant produces engines and gearbox
parts, oil pans, cylinder head covers and sub-
carriers. This allows Renault to achieve a high
level of ?local content in its Dacia plants, and
it benefits during each production stage from
Romania’s lower costs for labor and other pro-
duction factors.
The above comments show how important low
labor costs are in determining where a low-cost
car is to be produced. The Logan is now manu-
factured not only in Romania, but also in Colom-
bia, Brazil, Morocco, South Africa, Russia, Iran
and India – all countries with low labor costs
as well as target markets for this type of car.
By producing this vehicle in Romania, Renault
is able to reduce costs by 92 percent relative to
France, as shown in Figure 7.
The decision against a high level of automa-
tion resulted in the creation of additional jobs
in Mioveni. While Renault cut the number of
employees from 28,600, the level at the time of
the acquisition, to 11,000 (today 14,400), this
is still roughly twice as many people as are
employed at the French company’s other Euro-
pean production sites with a similar capacity.
In other words, twice as many jobs were pre-
served at the Dacia plants as would have been
the case at the usual level of automation within
the industry. Although Romanian law requires
a notice period of only two months, Renault
worked with the unions to draw up a multi-year
downsizing plan that included early retirement
provisions, retraining options and assistance in
starting up new businesses. Accordingly, Dacia
is regarded in Romania as a model for a socially
responsible approach to privatization. Overall, a
variety of stakeholders have benefited from the
Dacia plants’ relatively low level of automation:
Figure 6: Comparison of the costs of automated and manual vehicle
production, as exempli?ed 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 costs
1)
0.01 euros machine costs
1)
0.05 euros labor costs
79
Renault benefits from greater cost-effectiveness,
Dacia’s employees from additional jobs, custom-
ers from the high quality of Dacia’s vehicles,
and the Romanian state from a company that is
(again) prospering.
However, the selection of a production site must
not be determined solely by cost considerations;
all of the factors related to the site must be
taken into account.
5
In the automotive industry,
labor costs make up only 15 to 25 percent of all
production costs, so the advantage of low labor
costs can easily be offset by higher expenses in
other areas. These might result from lower pro-
ductivity, inferior quality, higher finished vehicle
transport costs or greater difficulty in procuring
components. Romania is an excellent choice as
a center for Logan production, since it offers
not only cost advantages, but a high level of
productivity and quality. “Romania is currently
undergoing a shift from simple wage labor to
technically sophisticated, high-quality produc-
tion,” Dirk Rütze, head of the German-Romanian
Chamber of Industry and Commerce in Bucha-
rest, points out (Mick 2004). Furthermore, the
“transport argument” is refuted by the fact that
on-site production makes it even easier to trans-
port vehicles to the emerging markets.
An efficient configuration of production activi-
ties requires not only a low-cost site, but also
that production stages be distributed within a
network in order to take advantage of further
cost savings - independent of labor costs. In its
Logan production network, which will encom-
pass eight sites worldwide by the end of 2008,
Renault has centralized a large portion of ?
value activities in Mioveni, as shown in Figure
8. The two Romanian plants are the Logan’s
main production sites and manufacture all of the
Figure 7: Comparison of labor costs in selected countries where the Logan
is manufactured
Source: The authors, based on ILO Laborsta (2008).
India France
3)
Brazil South Africa
2)
Colombia Russia Romania
1.2
2.5 2.5
4.0
4.6
6.2
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 costs
1)
(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
vehicle kits required by the company worldwide.
This makes it possible to produce large quanti-
ties, which leads to scale effects. These include
?size-related effects, such as increased returns
to scale and greater ?economies of scale, as
well as ?learning effects, which, given higher
volume, allow for greater speed and factor-saving
production, thus increasing efficiency. Both of
these effects are crucial to ensure the Logan’s
low purchase price.
The centrally manufactured kits are assembled
at the Romanian plant if they are intended for
distribution in the European markets. Otherwise
they are shipped as ?CKD (completely knocked
down) kits to plants located in a variety of dif-
ferent regions, where they are assembled and
delivered to the surrounding markets. Assem-
bling the kits on site has the advantage of avoid-
ing import restrictions on finished vehicles. An
import duty of 25 percent on completely assem-
bled vehicles, as is currently in force in Russia,
would eliminate the Logan’s price advantage. In
some cases the assembly sites also manufacture
engine and gearbox parts to complete the kits.
However, the Mioveni site is the only one that
boasts a pressing plant and a paint shop.
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)
_ Since 2005
_ Output:
72,700 (2007)
_ Capacity:
160,000 (2009)
_ Since 2006
_ Output:
15,520 (2007)
_ Capacity:
300,000 (2009)
_ Since 2007
_ Output:
18,100 (2007)
_ Capacity:
50,000 (2009)
Envigado (CO)
Rosslyn (SA)
_ Since 2005
_ Output:
24,643 (2007)
_ Capacity:
40,000 (2009)
_ From the end of 2008
_ Planned output:
unavailable
_ Planned capacity:
unavailable
Curitiba (BR)
_ Since 2007
_ Output:
47,391 (2007)
_ Capacity:
110,000 (2009)
Mioveni (RO)
_ Since 2004
_ Output:
222,854 (2007)
_ Capacity:
400,000 (2009)
Legend:
Production of vehicle
body parts
Production of engines
and gearboxes
Assembly
of CKD kits
81
The vehicle and engine plants in the Romanian
city of Mioveni serve as the hub of the produc-
tion network, while the associated assembly
plants carry out the final stage of production and
establish contact to the local markets. This con-
figuration of production activities is referred to
as a hub-and-spoke configuration,
6
and it allows
companies to take advantage of economies of
scale while also ensuring a local presence. It
is advantageous when economies of scale and
learning effects are important and different ver-
sions of the product are to be sold worldwide.
While the Logan is not currently manufactured
in different versions, Renault and Dacia are
already considering doing so in the interest of
targeting the vehicle even more closely to local
conditions and customer preferences. This is
expected to lead to still higher sales figures and,
in turn, to greater efficiency, thanks to additional
economies of scale and learning effects.
Renault is employing a variety of ?market
entry strategies as it establishes its international
Logan assembly plants. Rather than opening
new assembly facilities in the regional markets,
Renault has either integrated the Logan into pro-
duction at existing plants or begun to collaborate
with international partners, including competi-
tors. Such cooperation with competitors is typi-
cal of the transnational networks and diverse
international relation-
ships found in the
automotive industry,
in which competition
and cooperation go on simultaneously (?“coo-
petition”). The Avtoframos plant in Moscow, Rus-
sia, developed out of a ?joint venture between
Renault and the city of Moscow and is currently
manufacturing the Logan; beginning in late
2009 it will produce the Sandero as well. This
joint venture will eventually include not only
a vehicle assembly plant, but also sheet metal
processing and painting facilities. There are also
plans to have other vehicle production activities
handled by Russian subcontractors. This existing
assembly plant could become a complete produc-
tion facility for the Logan and Sandero models.
Verweis Kooperationskom-
petenz
In Casablanca, Morocco, Renault has contracted
to have the Logan manufactured by its partner
SOMACA (Société Marocaine de Construction
Automobile), in which Renault holds an interest
of 54 percent; Fiat and Peugeot have holdings
as well. SOMACA assembles the Logan for all
North African markets, and the same plant
also manufactures the Renault Kangoo, among
others, for this region. In Colombia, Renault
acquired 60 percent of the Colombian automo-
bile manufacturer Sofasa SA, which assembles
Logan kits. The vehicles produced in Colombia
are also exported to other Central and South
American countries. Renault also has its Twingo,
Clio and Mégane models assembled there.
Sofasa is involved in work for other manufactur-
ers as well; for example, it produces light-duty
commercial vehicles for Japan’s Toyota company,
which owns 28 percent of Sofasa.
In Iran, Renault is working together with IDRO
(Industrial Development & Renovation Organiza-
tion), the state authority in charge of the coun-
try’s industrial development. The two partners
operate the joint venture Renault Pars, which
markets the Tondar, as the Logan is called in
Iran. Renault Pars manufactures engines and
gearboxes, which are then assembled into
finished vehicles by the Iranian automobile
manufacturers Iran Khodro and SAIPA using
CKD kits from Romania. The Renault plant in
the Brazilian city of Curitiba also assembles
CKD kits for the Logan, along with other Renault
models, using engines and gearboxes produced
on site. In India, Renault is launching a joint
venture with the largest Indian automobile
manufacturer, Mahindra & Mahindra, which is to
produce CKD kits for the Logan at the Mahindra
plant in Nashik, some 180 kilometers to the
northeast of Mumbai. Under its strategic alliance
with Renault, Nissan will begin in late 2008 to
assemble CKD kits for the Logan pickup at its
plant in Rosslyn, South Africa, and distribute the
vehicles there under the Nissan brand.
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.
Cooperation with partner companies and the
use of existing Renault sites make it possible to
keep initial investments low, as compared with
establishing new plants. Manufacturing other
models at the same site produces synergies
in such areas as the procurement of operating
supplies and auxiliary materials. Cooperative
arrangements, such as joint production ven-
tures with competitors, can further reduce costs
through economies of scale. They also lower
capital requirements, since costs are shared by
the partners involved. The example of the Logan
demonstrates that a competitive strategy of ?
cost leadership also affects a company’s ?inter-
nationalization strategies, such as its strategy for
entering a market while also pursuing greater
centralization.
7
In itself, the selection of a low-wage site
does not guarantee success in manufactur-
ing a low-cost car.
_ An efficient production configuration
requires that numerous production stages
be centralized at one location so that the
company can benefit from economies of
scale and learning effects.
_ At the same time, additional decentral-
ized sites with specialized production
responsibilities, e.g. assembly plants, can
establish contact to the individual mar-
kets.
_ As decentralization takes place, it is
advisable to establish new networks or
take advantage of existing ones, since
cooperation with partners produces syn-
ergies and allows for sharing risks.
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
In the automotive industry, procurement costs
account for an average of 60 percent of total
vehicle manufacturing costs. Consequently,
Renault has been seeking to reduce the costs
of purchasing components for the Logan and
Sandero. Its success in doing so is due largely
to the fact that procurement at the Dacia plants
is highly localized. As Figure 9 shows, some
80 percent of procurement, in terms of value,
occurs in Romania. Since production is largely
centralized in Mioveni, although CKD assembly
takes place worldwide, Renault is able to take
advantage of Romania’s low labor, raw material
and technology costs globally. Short distances
also mean lower transport costs. Indeed, 50
percent of the materials for manufacturing the
Logan are obtained in the Pites ¸ti industrial park
that has sprung up in the immediate vicinity
of the Dacia plants, and this factor alone has
reduced costs by 100 euros per manufactured
vehicle as compared with traditional procure-
ment ?structures.
The numbers are similar for the Logan’s sister
model, the Sandero. Sixty percent of its parts
come from Romania. Another 30 percent are
purchased in the neighboring countries of
Poland and Hungary. By comparison, the local-
ization level of premium manufacturer BMW’s
plant in Spartanburg, South Carolina, was only
30 percent in 2007. Most of its parts still come
from Europe. Accordingly, BMW has been hard
Figure 9: Localization of procurement for Logan production
Logan suppliers
Volume of procurement
for the Logan (value)
6
48
14
10
110
As of December 31, 2007.
1) Including Turkey.
Number of suppliers
(Total: 188 suppliers)
P
i
t
e
s¸
t
i
R
e
s
t
o
f
R
o
m
a
n
i
a
R
e
s
t
o
f
C
e
n
t
r
a
l
/
E
a
s
t
e
r
n
E
u
r
o
p
e
1
)
W
e
s
t
e
r
n
E
u
r
o
p
e
R
e
s
t
o
f
w
o
r
l
d
0
20
40
60
80
100
120 Other countries
20 %
Pites? ti
50 %
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
hit by the increase in the value of the euro rela-
tive to the dollar, despite having a plant in the
United States.
The concentration of procurement in the
Romanian region is also reflected in supplier
numbers: Of the 188 suppliers that provide
components for Logan production in Mioveni, 54
(about 29 percent) produce those parts in Roma-
nia and another five in the surrounding Central
and Eastern European countries. Nine suppliers
for the Dacia plants operate from Turkey and 10
from Western Europe. The remaining 110 compa-
nies – whose share in the total value of procured
goods is much lower than their number would
indicate – are located elsewhere in the world.
The supplier companies that are active in Roma-
nia are not only Romanian companies such as
the up-and-coming Euro Auto Plastic Systems
(Euro APS); the six automotive suppliers that
manufacture Logan components in the Pites ¸ti
industrial park also include companies like the
American supplier Johnson Controls and its
French competitor Valeo.
Other suppliers will follow their lead. Another
American company, ArvinMeritor, is in the pro-
cess of moving its production of Logan door pan-
els to Pites ¸ti. Dacia suppliers are currently open-
ing more than 20 new plants in Romania. Half
of them are entirely new production facilities
(greenfield investments), while half are expan-
sions of existing plants. Dacia fully expects to
benefit directly from a further decline in produc-
tion and transport costs. This will also produce
more jobs in Romania.
If Renault and Dacia are to achieve the high
level of procurement localization they are aim-
ing for, their Romanian suppliers will need to
be efficient in their production, provide high-
quality goods and ensure reliable deliveries.
Under the Alliance Suppliers Improvement
Program (ASIP), a kind of academy for suppliers,
Renault sends some of its employees to supplier
companies to assist in optimizing procurement
and quality assurance and to transfer the nec-
essary key technologies. In addition, Renault
provides advice on general business issues such
as organization and corporate management.
Some 1,800 employees from supplier companies
were trained by this program between 2000
and 2004, for a total of roughly 20,000 hours of
training. These advisory services are not free;
every company that receives support under ASIP
and is subsequently accepted into the ranks of
Renault suppliers pays a pro-rata training fee to
Renault for each component that is delivered.
These training efforts are paying off: While the
Dacia plants in Mioveni recorded 5,750 faulty
parts per million in 2000 (0.58 percent), that
number had dropped to 35 (0.0035 percent) by
2007. In this category, the Dacia plants rank
third within the Renault Group.
Dacia is also benefiting from the fact that the
purchasing organization RNPO (Renault-Nissan
Purchasing Organization), which was estab-
lished as part of the strategic alliance between
Renault and Nissan, carries out a large share of
procurement for all of the brands included in
the alliance and makes important decisions in
related matters. It compares suppliers worldwide
and selects those that offer the best value for
the money. In 2007 it handled 83 percent of
the two companies’ procurement volume, which
corresponds to a total value of 51 billion euros.
Its bargaining power made it possible to achieve
substantial synergies, which are reflected in the
purchase price of the Logan and the Sandero
as well. If reasons of economy or quality argue
against procuring a part on site, it is purchased
somewhere else. Thus the group’s ?global
sourcing combines with local procurement to
achieve the best possible balance of procure-
ment for the Logan family of vehicles.
85
Manufacturing a low-cost car in an emerging
market requires a high level of localization in
the area of procurement.
_ A majority of parts need to be obtained near
the production site, first in order to benefit
from cost advantages, and second to avoid
transport costs.
_ A high level of localization can only be
achieved if local suppliers are able to meet
certain quality and reliability requirements.
This means that the manufacturer needs to
provide support for the development of sup-
pliers in the emerging markets.
Summary
a training program like the one Renault con-
ducted in Romania. There is no other option.
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. The major automotive compa-
nies are building a bridge for local suppliers,
so to speak. Their purchasing departments
have set certain internal targets for procure-
ment from the so-called low-cost countries,
ranging between 20 and 30 percent of total
volume. At present, however, none of these
manufacturers have been able to meet these
targets. But if a local supplier, for example in
Russia or India, is qualified and has produced
good results, a purchasing department will
consider using it as a supplier for the company
as a whole.
Of course, this only applies to certain parts.
No one is going to transport a painted bumper
from India to Europe, but shipping certain
forged parts might make sense. Manufacturers’
purchasing departments will make sure that
local suppliers become serious competitors in
all of the core markets relatively quickly. Fur-
thermore, these suppliers – for example Indian
small- and medium-sized businesses – are
already showing the necessary entrepreneurial
commitment to expand internationally.
The interview was conducted by Stefan Schmid
and Philipp Grosche.
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?
Of course, the established international auto-
motive suppliers will be able to claim a certain
share of the procurement volume for low-cost
vehicles; look, for example, at Bosch’s involve-
ment in the Tata Nano and Valeo’s participa-
tion in the Dacia Logan. But this share will
remain limited. For one thing, every country
has certain local content regulations that must
be followed, and for another, no low-cost manu-
facturer can ignore the cost advantages offered
by local resources. So manufacturers need to
procure a large percentage of their materials
locally.
This is certainly possible, but it may some-
times be difficult. Usually manufacturers will
first have to train local suppliers. In Russia,
for example, Volkswagen is currently facing
a major problem: It has not been able to find
enough local suppliers that are capable of
meeting its quality standards and that offer
the logistical capabilities necessary to support
series production. The only solution will be
Interview
86
Centralizing development activities is advanta-
geous for a new product like the Logan, since
short distances facilitate both organization and
coordination. When development is located at
headquarters, it is easier to take advantage of
the knowledge that is available throughout the
company. In the case of the Logan, this has
meant using existing construction plans and
parts as well as assigning employees to the
X90 project who had already been involved in
designing the company’s first design-to-cost car,
the Renault Twingo, in order to benefit from
their experience in designing the Logan.
“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, that the Logan was intended for
emerging markets with very different living
conditions and consumer preferences than those
found in Western Europe. Differences between
one country and another are a common reason
for decentralizing development activities. The
employees who designed the Logan were con-
scious of that fact, and sought from the very
beginning to take conditions in the emerging
economies into account. They visited target mar-
kets to gather relevant information. As Pierre-
Edouard Sorel, product manager for the Logan,
reports, “I wanted to do more than simply rely
on market studies to tell me about the expecta-
tions of future Logan customers. As the project
began, I went to potential markets to learn more
about local habits and customs” (Dacia 2004:
6). Through a mixture of centralized develop-
ment and local identification of customer needs,
Renault combined the advantages of centraliza-
tion, such as the ?network effects described
above, with the advantages offered by decentral-
ization, such as access to local information.
With the growing success of the Logan in a
wide variety of markets, Renault also came
to recognize that greater attention to local
customer preferences and vehicle usage could
lead to even higher sales. This is a conflict that
frequently arises in international management:
While international standardization can gener-
ate cost advantages, on the other hand regional
or local differentiation can help to increase
sales – which, in turn, leads to lower unit costs.
High sales numbers and low unit costs are cru-
cial in keeping the Logan’s purchase price low
and ensuring its economic success. While so
far this vehicle has been sold in the same form
worldwide, Renault recently announced that
it is developing model adaptations tailored to
selected sales regions, which will differ in their
interior design and features. However, these dif-
ferences will be relatively minor compared with
model adaptations carried out by other compa-
nies, so most of the advantages of standardiza-
tion will still apply.
8
The fact that more attention is being paid to
regional differences in customer preferences
and vehicle use is evidence of a company-wide
reassessment at Renault. Over the past few
years, the company has begun to rethink its
configuration of research and development and
to establish decentralized development centers
throughout the world. In addition to its R&D
headquarters at the Technocentre in Guyancourt,
it now has nine decentralized development
sites worldwide (in Portugal, Romania, Spain,
Argentina, Brazil, Chile, Mexico, Colombia, India
and South Korea) that carry out design and
construction work. One of them is the construc-
tion and design center Renault Technologies
Romania (RTR), with locations in Bucharest und
Pites ¸ti, which opened in 2007. These decentral-
ized facilities, staffed by local employees, are the
key to translating local customer preferences
into attractive vehicle models. According to an
official press release from the Renault Group,
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]ompetitive performance calls for closer con-
tact with local customers. Regional engineering
teams will have a better understanding of cus-
tomer’s needs and vehicle usage conditions on
local markets” (Renault 2007c).
Development activities are
located in target markets in order
to better understand local cus-
tomer preferences.
Renault Technologies Romania (RTR) will
eventually employ 3,000 workers (its current
workforce numbers roughly 1,700), making it
the Renault Group’s largest development center
outside of France. It is under the supervision
of the Technocentre in Guyancourt and is to
design and test new vehicles – and in particular
to develop a Logan model specifically intended
for Central and Eastern Europe, Russia, Turkey
and North Africa. This was why Renault chose
a site located near Dacia headquarters and the
Eastern European sales markets. In addition,
RTR was given four satellite sites in Russia, Slo-
venia, Turkey and Morocco. Over the long term
it will assume additional tasks, as well as taking
over from the Technocentre in Guyancourt sole
responsibility for all of the projects based on the
Logan.
Thus, the Renault Group has reassessed
not only the configuration of development activi-
ties, but also their coordination and manage-
ment. Approximately half of the development
work for the Logan pickup as well as the con-
struction of Sandero prototypes has already been
carried out by RTR.
Development headquarters in France will con-
tinue to be in charge of developing the various
Logan models destined for the Western European
market. Renault’s existing regional development
centers in Brazil and India would be a logical
choice for developing other regional models
meant for South America and Asia. These
regional centers are responsible not only for
developing (region-specific) vehicles and drive
train components, but also for providing techni-
cal support to local production sites, aiding in
the procurement of parts from local suppliers
and monitoring the market. In addition, these
centers assist local suppliers, starting with the
design of components for Renault. Shorter dis-
tances to production sites and suppliers allow
for better coordination, which can, in turn, lead
to higher quality.
For a company like Renault, which comes from a
country with a tradition of centralization and is
still 15.1 percent state-owned, success in decen-
tralizing certain aspects of development – and
thus also the company’s own expertise – is an
impressive achievement. It remains to be seen to
what extent decision-making responsibilities as
well will be decentralized – for example, permit-
ting RTR to take charge of all Logan projects.
This would bode well for the Logan’s long-term
success, since it would make it easier to adapt
the vehicle to local customer preferences. More-
over, abandoning the model of a single decision-
making center would result in a more open ?
corporate culture and greater attention to the
cultural influences found throughout the whole
company. This would truly put Renault on the
path of becoming a “global player,” as it already
describes itself on its website.
Developing a low-cost car requires attention
to vehicle usage and customer preferences
in the emerging markets, which may differ
dramatically from the developed countries.
_ The advantages of centralization are para-
mount in the initial design of a low-cost
car, since it is crucial to take advantage of
existing concepts and components.
_ As time goes by, it makes sense to estab-
lish decentralized development sites,
since this allows the company to learn
more about local markets and to tailor its
vehicles more closely to local customer
preferences.
_ In order to adapt a vehicle successfully
to the needs of local customers, the man-
agement of development activities must
be adapted as well. As such activities
are decentralized, the relevant decision-
making responsibilities also need to be
decentralized.
Summary
88
Benefiting from the advantages
of hub-and-spoke production
requires effective and efficient
logistics.
By transporting its vehicles by ship rather than
land, Renault is able to save 20 percent of the
relevant costs. About 80 percent of its vehicles
intended for the Western European markets
are brought to their intended markets by water,
even if land transport would be faster. Finished
vehicles destined for southern Europe and CKD
kits to be assembled in Morocco, Brazil and
Colombia are also transported by ship. The logis-
tics subsidiary, Gefco, of Renault’s French com-
petitor Peugeot transports them by train from
Mioveni to the Romanian port of Constanta on
the Black Sea, where they are loaded onto ships;
Renault is clearly willing to cooperate with its
competitors in order to cut costs. However, since
transporting vehicles by ship takes longer, it is
essential to plan ahead so that fluctuations in
production and demand do not lead to long wait-
ing periods for dealers and customers.
A hub-and-spoke configuration of the production
network requires an efficient logistical system,
aimed at supplying the assembly plants in the
regional markets with CKD kits produced at the
main plant in Mioveni. Realizing the cost bene-
fits of centralized production at the hub requires
effective and efficient distribution, which is why
Renault opened a state-of-the-art logistics center
in Mioveni in 2005. It is one of seven sites of the
company’s International Logistics Network (ILN),
which organizes and controls the flow of goods
within the Renault Group, from inbound to out-
bound logistics.
The ILN center in Mioveni serves as the central
hub and backbone of Logan production world-
wide. As shown in Figure 11, this center is
responsible for receiving all of the components
manufactured by the 188 suppliers, organiz-
ing the shipment of CKD kits to the various
assembly plants and taking charge of shipping
the vehicles produced in Mioveni to distributors
in the European markets. With 297 employees
and a volume of 872,243 cubic meters of compo-
nents shipped in 2007, which amounts to more
than 23,000 standard containers, the Mioveni
logistics center is not only the largest such
center in the Renault Group, but the largest of
its kind in the entire international automotive
industry.
The distribution of new vehicles is also strictly
governed by cost considerations, in order to
maintain the cost advantage of the Logan and
Sandero. In contrast to many of its competitors,
Renault usually transports its vehicles by ship,
which is the most economical alternative. Most
distribution for the German market is handled
by the German shipping company Willi Betz.
The vehicles are transported by truck from
Mioveni to the Danube port of Vidin, a distance
of 200 kilometers, where they are loaded onto
one of the Betz company’s ships. The 1,440
kilometer trip by river to Passau takes about five
days. From there Betz car carriers deliver the
vehicles to German Renault dealers with a Dacia
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 subsidiaries
throughout the world
Logistics center
Mioveni
A well-designed logistics network is essen-
tial to reap the benefits of a hub-and-spoke
production network.
_ It is crucial to have an efficient logistics
platform at the central production site,
which serves as the hub of international
production.
_ To gain the desired price advantage,
companies need to emphasize efficiency
when choosing a means of transporting
kits to decentralized assembly sites (if
applicable) or finished vehicles to their
destination markets.
_ It should be kept in mind during the plan-
ning phase that less expensive transport
alternatives require more time, so that
waiting periods for customers and dealers
can be kept to a minimum.
Summary
90
3. The competitive advantages offered by emerging markets
The example of the Logan shows that it takes
more than a production site with low labor costs
to produce a low-cost car. Upstream and down-
stream ?value functions need to be part of the
calculation as well, just as they are important
for a cost leadership strategy, as Porter points
out. The Renault Group focuses on the “low-cost
idea” throughout its value chain, which has
allowed it to keep the price of the Logan and
Sandero low. It is also clear that a cost orienta-
tion is a necessary, but not sufficient, condition
for the success of a low-cost car. While cost con-
siderations have played a significant role in the
geographical distribution of the relevant value
activities, they have not been the only factors in
the Logan’s success. The configuration-to-cost
model alone does not guarantee success. Other
important factors include training suppliers
in emerging markets, which promotes a high
level of localization in procurement, and taking
into account local conditions by decentralizing
development activities. Furthermore, it is cru-
cial not only to make changes in the ?value
configuration, but also to undertake necessary
adjustments in the coordination and manage-
ment of value activities, as is clear from the
need to decentralize decision making in the area
of development.
Low-cost cars represent a new kind of product
in the vehicle market, and they require a new
configuration of the value chain. As the target
markets for these products, emerging nations
play a central role. Figure 12 summarizes once
more the steps that Renault has already taken.
These measures apply not only to the automo-
tive industry, but also to many other industries
as well. The changes Renault has made in the
value chain provide a model for other companies
as they configure and coordinate their value
activities relating to other low-cost products.
It is essential that the entire value chain be
appropriately configured, and not only by choos-
ing a favorable production site, since the cost
advantage of a low-wage location can disappear
fairly quickly. If a company’s business model
is based solely on low labor costs during the
production stage, its competitive advantage can
easily erode as time goes by. Note that labor
costs in the emerging markets have risen dra-
matically over the past few years. In 2007, labor
costs in Romania increased by 30.2 percent,
compared with 3.3 percent in France and 1 per-
cent in Germany. Early in 2008, Renault endured
a three-week strike by Dacia workers, with the
unions demanding a 33 percent increase in
wages. The two sides ultimately agreed to an
average wage hike of about 27 percent.
Emerging economies can become
important sources of knowledge
and expertise.
Moreover, our analysis of Renault’s value con-
figuration shows that companies from the indus-
trialized countries can generate competitive
advantages by integrating emerging economies
into their value chains. This can be done, for
example, by carrying out development activities
in those countries. Knowledge and innovations
developed in emerging economies can be used
to competitive advantage worldwide – in a com-
pany’s domestic market as well. Accordingly,
the role played by the emerging markets is no
longer simply that of a cheap production site.
Instead, they should be viewed as a source of
knowledge and expertise that can help establish
a strong competitive position throughout the
world, as our conversation with Coimbatore K.
Prahalad (p. 98) indicates. Since low-cost cars
are primarily intended for the emerging mar-
kets, it only makes sense to carry out relevant
value activities in those locations as well. Fur-
thermore, by locating high-level value activities
in ?developing countries, companies from
the industrialized countries help to promote
economic development in other parts of the
world.
91
Figure 11: Overview of the con?guration of the value chain for low-cost
products
Development
_ Centralizing the development of low-cost
products to allow for the use of parts and
concepts that are already available within
the company.
_ As time goes by, decentralizing the develop-
ment of country- or region-specific models
that reflect customer preferences.
_ Decentralizing decision-making responsibili-
ties related to model adaptations, to ensure
that customer preferences are taken into
account.
Logistics
_ Establishing a suitable internal logistics net-
work to ensure that centrally manufactured
goods are distributed effectively and effi-
ciently within the production network.
_ Making consistent efforts to choose the least
expensive means of transporting goods to
dealers and customers to maintain the price
advantage of a low-cost product.
_ Taking longer transport times into account
during production planning so that waiting
periods for dealers and customers can be
kept to a minimum.
Production
_ Centralizing most production activities to
achieve maximum economies of scale.
_ Creating supplementary “production satel-
lites” to establish contact to target markets.
_ Cooperating with partners to achieve syner-
gies and share risks.
Procurement
_ Achieving a high level of localization at the
central production site to take advantage of
differences in the cost of production factors
and avoid transport costs.
_ Advising and training local suppliers to
achieve the highest possible level of localiza-
tion.
Renault’s configuration and
coordination for the Logan: A model
for low-cost products in general
_ Manufacturing a low-cost product requires
not only certain product and process innova-
tions, but also a reconfiguration of the value
chain and changes in the management of
value activities. Cost optimization is only
one factor among many.
_ Low-cost products have macroeconomic
implications: Emerging nations are no lon-
ger simply an “extended workbench” for
international value creation. Rather, they
can be a source of innovation.
Summary
92
In the interest of readability we have reduced
the number of references contained in this
version of the study. A complete list of refer-
ences is found in the bibliography. A German
version of the study can be obtained in printed
form as an academic working paper by
contacting the office of the authors
([email protected]); it may also be
downloaded from the website of the Chair of
International Management und Strategic
Management at ESCP-EAP European School of
Management Berlin (www.escp-eap.de/imsm).
93
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97
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).
Global
Businesses
Locally Responsive
Businesses
Multifocal
Businesses
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. Establishing Audi Hungaria as a subsidiary of Audi AG 105
1.1 Various reasons for direct investment in Györ 105
1.2 Innovative structures and processes for Audi Hungaria 108
2. Developing Audi Hungaria as a center of excellence within the Volkswagen Group 110
2.1 Ongoing development as a center of excellence for engine production 110
2.2 Simultaneous expansion as a center of excellence in convertible assembly 113
2.3 Upgrading the center of excellence for engine production by adding development 115
responsibilities
2.4 Ongoing acquisition of additional capabilities – expansion as a center of excellence 116
for vehicle production?
2.5 Audi Hungaria as a growth driver within the Volkswagen Group 118
3. Challenges in managing centers of excellence 120
References 123
In February 1993 the Bavaria-based company
Audi AG, which is part of the Volkswagen Group,
established a wholly owned ?subsidiary called
Audi Hungaria Motor Kft. in the Hungarian city
of Györ. After about 18 months of planning and
construction work, an engine assembly plant
began operations in Györ in October 1994. This
represented a change in Audi’s production strat-
egy; for the first time in the company’s history, it
was moving some of its production abroad. Until
then all of Audi’s production had been carried
out at two locations in Germany: in the city of
Ingolstadt in Upper Bavaria, home to company
headquarters, and in Neckarsulm in the Würt-
temberg region, just over 200 kilometers away.
Establishing a subsidiary in Györ was part of
a strategic reorientation of the entire company.
Audi began an extensive expansion and rework-
ing of its vehicle range in 1994, introducing the
reengineered A4 and A6 models and launching
the A8 luxury sedan. This was an effort to coun-
teract weak sales of existing vehicles caused by
the 1992 economic slump, while also structur-
ally generating new sales growth – especially in
the case of the A8.
This reorientation required a new production
strategy. The Audi A4, which replaced the suc-
cessful but aging Audi 80, was a model with an
innovative four-cylinder engine and five-valve
technology that the existing facilities in Ingol-
stadt und Neckarsulm were not equipped to pro-
duce. In addition, expected sales growth would
require new engine assembly lines to expand
capacity. In the interest of long-term competitive-
ness, Audi was looking for a site that would pro-
vide distinct cost and productivity advantages.
In an eight-month selection process, Audi
reviewed more than 180 possible sites all over
Europe as potential locations for a new engine
assembly plant, the majority of them in Central
and Eastern Europe. Among the finalists were
the German cities of Magdeburg, Chemnitz
and Ingolstadt and the Czech cities of Broumov
and Mladà Boleslav. The industrial city of Györ
(known as Raab in German) was finally selected
in 1992. Györ, with a population of 130,000, is
the sixth largest city in Hungary and located
between Vienna and Budapest, about 120 kilo-
meters from each.
Györ is also relatively close to Audi AG head-
quarters in Ingolstadt – only 610 kilometers
away. Company headquarters, the German
production sites and the existing suppliers
are therefore all within a reasonable distance.
Moreover, Györ has the advantage of being well
connected to the transportation infrastructure.
This is evident from Figure 1, which shows Audi
headquarters in Ingolstadt and the other Euro-
pean production sites, as well as Audi plants in
India and China. Györ is located on the railway
line between Vienna and Budapest and has a
direct highway connection to Germany, making
it easy to reach by rail or road. These reasons
alone, however, would not have tipped the bal-
ance in Györ’s favor.
Another major factor in selecting Györ was labor
costs, which were considerably lower than at
home. When the decision was made, labor costs
(wages and salaries, along with fringe benefits)
were only one-eighth as high in Hungary as in
Germany.
1
Hungarian labor law was also consid-
ered more employer-friendly, because the unions
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
had less influence. Both of these advantages
still hold true. Furthermore, the 40-hour week
was, and remains, the norm for workers in Györ,
and companies are allowed to operate up to four
shifts, seven days a week. Shifts can be called
or canceled at short notice without the need for
lengthy negotiations with the works council.
This allowed Audi not only to cut costs, but also
to make production much more flexible, lead-
ing to further savings. Other production factors
offered savings as well; energy, cleaning, trans-
port and security in particular are less expen-
sive than in Western Europe.
Moreover, an unfinished production hall measur-
ing 100,000 square meters was available in Györ
at a low price from the industrial conglomerate
Rába, a relic from the pre-1989 era. Rába’s com-
mercial vehicle division had been planning to
produce diesel engines for the Eastern European
markets in cooperation with its German competi-
tor MAN. After the opening of the former East-
ern bloc, however, this project was abandoned.
For Audi, this meant investing only one-third as
much as such a plant would have cost in Ger-
many. In addition, the plot of land on which the
building was located was relatively large, offer-
ing room for expansion. Audi took advantage of
this opportunity to build onto the existing parts
of the structure. Sixteen months after an agree-
ment was signed with the city of Györ, engine
assembly could finally begin.
Hungary granted Audi full exemption from
business and earnings taxes for a period of five
years, as is customary for foreign investments in
the country. The exemption could be extended
for an additional five years if Audi were to rein-
vest all of its profits from the Györ site during
the initial five-year period. From the outset, the
Györ plant was treated as a duty-free zone; in
other words, Audi is not required to pay duty
when importing supplier parts, nor when ?
exporting finished engines.
Along with these financial advantages, the high
level of education and training of the Hungarian
workforce argued in favor of investing in that
country. Györ in particular offered sufficient
numbers of well-trained potential employees,
including both skilled workers and university
graduates. Shortly before Audi’s decision, the
Figure 1: Audi AG production sites
Source: The authors, based on Audi (2008e).
Europe
India
China
Aurangabad (IND)
Changchun (CN)
Neckarsulm (D)
Ingolstadt (D)
Györ (HU)
Brussels (B)
Legend:
Production sites
Company
headquarters (also
production site)
107
Rába conglomerate had been forced to elimi-
nate over 20,000 jobs in Györ, many of them
in its commercial vehicle division. This meant
that a large number of people with a relevant
vocational background were looking for work
in the region. In addition, the local Institute of
Transportation and Telecommunications, which
has enjoyed university status since 2002, is con-
tinually training engineers and other specialists,
including economists. In Györ, Audi could count
on an ongoing supply of well-trained workers
and experienced job candidates who would be
able to start immediately when the new site
commenced operations.
Audi’s decision to open a plant in Györ was
therefore based largely on issues of efficiency.
Total costs of investment in Györ were between
30 and 40 percent lower than the cost of estab-
lishing a new plant in Germany, and at that time
ongoing production was roughly 60 percent
less expensive than at home. It was clear from
its consideration of these location factors that
Audi’s management was seeking to make the
company more competitive in its cost structure.
Procurement issues were also important; suit-
able personnel had to be available and the new
site needed to provide easy access to the exist-
ing supply and production networks. Strategic
considerations played a significant role as well;
the new assembly plant in Györ was clearly an
important part of Audi’s strategic reorientation
and essential for reaching its growth targets.
Companies that base their loca-
tion decisions primarily on low
costs, ignoring other factors, may
encounter problems.
An analysis of Audi’s decision regarding a plant
site shows that ?direct investment is not moti-
vated by a single factor, but by a variety of con-
siderations. Laying the groundwork for the suc-
cessful development of Audi Hungaria required
giving serious thought to a number of location
factors. Other companies today find themselves
struggling with low productivity because they
chose foreign locations mainly on the basis of
cost advantages, ignoring such potential prob-
lems as a lack of well-trained workers. “When
location decisions are strongly cost-driven, it
appears that other relevant factors are given too
little attention,” explains Steffen Kinkel, expert
on site planning at the Fraunhofer Institute in
Karlsruhe (Kinkel 2006: 12). VW, Audi’s sister
brand within the Volkswagen Group, is currently
experiencing difficulties because it cannot find
enough suitable workers to staff its new plant
in Kaluga, Russia. Thus VW is making only
slow progress toward achieving its original goal,
which was to use this plant to help open up the
promising Russian market.
_ In making decisions about foreign loca-
tions, companies need to be clear on
their goals in making a direct investment
in a foreign country. Success requires a
comprehensive and holistic evaluation of
all location factors.
_ It is particularly important to undertake
a dynamic assessment of the potential
investment. If the decision is based too
much on cost advantages, for example,
changes in relative costs over time may
offset the site’s advantages. In some
cases this may lead to an expensive relo-
cation.
Summary
108
The first innovation concerned organizational
structure. Audi immediately established a new
kind of leadership culture in Györ, aimed at pro-
moting entrepreneurship within the company.
Only two levels of management were instituted,
in the interest of creating unbureaucratic and
flexible ?structures. In contrast to the situ-
ation at the company’s German plants, where
the organizational system was still based on a
traditional division of labor with fixed responsi-
bilities, workers at the Hungarian plant immedi-
ately began working in flexible teams – much as
is the case at Toyota, the industry model.
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.
The teams consist of several skilled workers who
are in charge of operations, facility maintenance
and quality assurance. Team members handle
operational and organizational issues related to
specific production stages, an arrangement that
makes it possible to streamline decision making.
The teams also play a central role in optimizing
production. At a conventional automotive plant,
executives are responsible for solving problems
and improving processes, but in Györ these
tasks are performed by skilled workers. They
are expected to be constantly looking for ways to
optimize work processes and continually offer-
ing suggestions, not just when a concrete prob-
lem arises – another similarity to Toyota and its
continuous improvement approach (known as
“kaizen” in Japanese). “The associates who per-
form the value-added jobs are the most familiar
with the actual work and the actual problems
that affect the work,” notes Jeffrey Liker, Profes-
sor of Industrial and Operational Engineering
at the University of Michigan and an expert on
Toyota’s management method, in explaining the
advantages of assigning responsibility to skilled
workers (Liker 2006: 273).
Team leaders, who first serve as operational
members of the team, are in charge of making
sure that there is an adequate supply of parts,
carrying out quality inspections, substituting as
needed for absent team members and training
their colleagues. Although they are not officially
considered part of management, they assume
responsibilities that would be assigned to the
management of traditional organizations. The
role of team leaders and skilled workers is one
of the main reasons why Audi Hungaria has
been able to limit itself to two levels of manage-
ment. Jürgen Hoffmann, former Chairman of the
Board of Management of Audi Hungaria, points
out the advantage of a “lean” organization: No
employee can shirk his responsibilities, since
others would immediately notice. The workforce
at Audi Hungaria has accepted this arrangement
without objection.
Only a few Hungarian employees were introduced
to the operational methods in place at Audi’s
German plants in Ingolstadt and Neckarsulm; it
was felt that limiting exposure to those methods
would make it easier to establish a new system in
Györ. Jürgen Gebhardt, former head of production
at Audi AG, knew from his experience at Opel
that when new employees fall back on traditional
methods, it is much more difficult to put updated
structures and processes in place at a new site.
Another innovation involved logistics, with Audi
taking a new approach to integrating the Györ
plant into its operations. The Hungarian plant
is ?integrated into the value network of Audi
AG through a sophisticated external logistics
system that is managed and implemented by
Schenker, a subsidiary of Deutsche Bahn, Ger-
many’s national railway company. Freight trains
transport the some 3,000 individual parts that
are needed to assemble the engines (e.g. intake
and exhaust valves and spark plugs) from Ingol-
stadt to Györ and return the finished engines to
Ingolstadt. From there, the engines assembled in
Györ are distributed to their destinations.
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
It was important to structure the internal logis-
tics systems in Györ in a similarly innovative
way. At a plant of this size, internal logistics is
crucial for achieving a high level of efficiency.
First, the plant was designed to ensure that
distances between the delivery sites for engine
parts and the assembly lines, as well as between
the various assembly stations, were as short as
possible. Second, all internal plant logistics were
?outsourced. As production began in Györ,
Rudolph Logistik Kft., the Hungarian subsid-
iary of the German logistics specialist Rudolph
Logistik Gruppe, took over responsibility for
the movement of goods within the Audi plant,
including in the production halls and between
the various assembly stations. Rudolph employ-
ees handle everything associated with incoming
goods, goods inspection, inventory management,
assembly line supplies and the shipment of
assembled engines to other Audi plants. Since
Audi employees are not involved in moving
goods, they can concentrate exclusively on the
production process.
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.
It is largely due to the modern organizational
and management methods described above
that the Györ site today ranks at the top among
Audi AG locations in terms of productivity and
product quality. Thomas Faustmann, current
Chairman of the Board of Management of Audi
Hungaria, points out, “Our company’s success is
based on flexibility and an ongoing optimization
of our core processes” (Audi 2008f). Today, the
Hungarian subsidiary is a ?center of excel-
lence and an important strategic pillar of Audi
AG, as well as the entire Volkswagen Group.
_ When a company establishes a new
plant in a foreign country, it derives
advantages that are directly related to
the plant’s location, but it also has an
opportunity to introduce innovative orga-
nizational structures in the company as a
whole. This can be done from the ground
up, without interference from old and
time-worn ways of doing things.
_ Particularly when it is located in a differ-
ent environment, a new site can provide
feedback that can change the culture of
the overall organization.
Summary
110
Audi Hungaria fulfilled the expectations of its
parent company and quickly assumed an impor-
tant role within Audi AG. Except for the plant
in Sant’ Agata Bolognese, which is exclusively
devoted to producing engines for Audi’s Lambor-
ghini subsidiary, the Hungarian plant is Audi’s
only engine production plant. This has made it a
group-wide center of excellence, a term used for
a subsidiary that
_ has expertise in one or more ?value func-
tions or one or more products,
_ is responsible for several (country) markets in
the above-mentioned area(s) and
_ is well integrated into the corporate network
so that the entire company can benefit from
its expertise.
Figure 2 shows strategic options for centers of
excellence, depending on their expertise and
geographic area of responsibility.
3
Functional
centers of excellence have special capabilities
with respect to a value function such as procure-
ment, production or sales. They may also spe-
cialize in certain aspects of a value function, for
example the production of selected parts or the
assembly of the end product. The expertise of a
product-oriented center of excellence relates to
a specific product, and the center of excellence
carries out all of the ?value activities associ-
ated with that product, such as the procurement
of intermediate products, the manufacture of the
product and its marketing and distribution.
4
Originally, the Györ site was to be built and
expanded based on a three-stage investment
plan totaling 409 million euros. The first stage,
carried out in 1993 and 1994, included the basic
construction of the plant and its production facil-
ities. Upon completion of this stage, the plant
had an assembly capacity of up to 750 engines
per day, and its task was exclusively to assemble
four-cylinder engines for the Audi A4. All of the
necessary engine parts were brought in by train
from Germany.
During the second stage, completed in 1996,
Audi doubled the plant’s capacity to 1,500
engines per day. According to plan, the Györ site
also began manufacturing the cylinder housing
for the four-cylinder engines assembled there.
Departing from the original plans, however, the
Board of Management of Audi AG decided that
same year to have Audi’s entire range of engines
produced in Györ.
5
The introduction of the A4,
A6 and A8 models two years earlier had led to
sales growth, as the company had hoped, which
meant that engine and vehicle production capac-
ity had to be increased. Since the company was
pleased with the engines manufactured in Györ
and with the plant’s productivity, it seemed only
logical to move all engine production to Hun-
gary. This freed up capacity for vehicle produc-
tion at the German plants and made good use of
the Hungarian subsidiary’s expertise in building
engines. This paved the way for Audi Hungaria
to become a center of excellence in engine pro-
duction.
The third stage of the original investment plan
followed in 1997 and 1998 with the expansion
of production capacity to 2,200 engines per day.
Production of crankshafts and piston rods was
also moved to Györ. Audi Hungaria eventually
took over responsibility not only for all aspects
of Audi’s engine assembly, but also for produc-
ing those engine components that were not
obtained from outside suppliers. All of the value
activities related to engine production were
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
now concentrated in Györ, and Audi Hungaria
had become a functional center of excellence in
engine production. Since the Györ site is Audi’s
only engine production plant in the world, it can
be said to have a worldwide functional mandate.
The increase in Audi Hungaria’s responsibili-
ties and growth in Audi’s sales led to a steady
increase in the number of engines produced
each year, as shown in Figure 3. By 1999, five
years after the Hungarian plant had opened, its
annual engine production had already exceeded
the one-million mark. In the 14 years since the
plant commenced operations, a total of 14.8 mil-
lion engines have been produced in Györ. This
was made possible by further expansions that
gradually increased production capacity from
750 to 6,900 engines daily. Today Audi Hungaria
produces eight different engines: the R4 Otto
and TDI engines (four cylinders), the V6 Otto
and TDI engines (six cylinders), the V8 Otto
and TDI engines (eight cylinders), the V10 Otto
engine (ten cylinders) and the V12 TDI engine
(twelve cylinders).
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.
Audi Hungaria has demonstrated in a number of
ways that centers of excellence have a positive
effect on the company as a whole, and not just
on their local markets. The production system
implemented in Györ, which increased efficiency
(for example by outsourcing internal logistics)
and introduced innovative procedures (such as a
state-of-the-art organizational structure), became
the model for the production system that was
put in place at all Audi AG sites in 1999. The
transfer of knowledge went both ways, not only
from the German plants to Hungary, but also
in the other direction, and the entire company
benefited. The Audi plant in Györ serves as a
company-wide ?benchmark for measuring
the efficiency, productivity and quality of other
sites, and this has brought additional positive
feedback effects. Internal competition between
sites has also boosted productivity at the Ger-
man plants, as Jürgen Gebhardt, former head of
production at Audi AG, has pointed out.
In becoming a center of excellence, Audi Hun-
garia has not only contributed to the interna-
tional growth of its parent company, Audi AG;
it is now a leader in engine production for the
entire Volkswagen Group. Only 37 percent of
the engines produced in Györ in 2007 were
intended for vehicles sold under the Audi brand
name. The remaining 63 percent went to other
customers within the Volkswagen Group, as
shown in Figure 4. The VW brand now uses
nearly as many engines produced in Györ as
Audi AG does.
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 2006 2005 2007 2002
Engines produced
(in thousands)
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
104
196
585
987
1,002
1,061
1,220
1,280
1,335
1,481
1,694
1,894
1,913
113
In 1998 there was a further increase in the
value activities carried out at Audi Hungaria:
The Hungarian subsidiary took over all assembly
work for the Audi TT model, which was available
as a coupé and as a roadster (convertible). As
with the production of engines, vehicle assem-
bly was integrated into Audi’s existing value
network, in keeping with the network principle.
Vehicle bodies are still welded together and
painted in Ingolstadt, then transported by rail to
Györ for final assembly; the assembled vehicles
are then returned to Ingolstadt by rail. Network-
based production allows Audi to benefit from
the advantages offered by both sites: The use
of existing facilities in Ingolstadt eliminates the
need for further investments, while lower wages
in Györ lead to savings on labor-intensive assem-
bly work.
Audi Hungaria was quickly able to establish
itself as a serious alternative to Audi’s other
sites in the area of vehicle assembly. Since
officials at company headquarters in Ingolstadt
were pleased with the quality of assembly in
Györ, between 2001 and 2003 the plant was
also chosen to assemble the A3 model and its
sports car version, the S3. Since the end of
2007 the Györ plant has also assembled the A3
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)
1996
1)
2001 2007
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
1,073
555
29
167
665
693
Seat
195
10 %
VW
602
32 %
Other
2)
110
6 %
Audi
693
37 %
Source: The authors, based on Audi (1997: 10), Audi (2002a: 61), Audi (2008i: 75).
S
?
koda
277
15 %
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, along with the two versions of the
Audi TT. It is the only Audi facility that currently
assembles convertibles – the Audi TT roadster
and the Audi A3 convertible. The Audi A4 con-
vertible, the third “open” model sold under the
Audi name, is not manufactured by the company
itself, but is produced in the Westphalian city
of Rheine under a ?contract manufacturing
arrangement with production service company
Wilhelm Karmann GmbH.
Producing a convertible involves certain special
requirements during the manufacturing pro-
cess, for example because the process is less
automated. Moreover, far fewer of them are built
as compared with conventional vehicles. This
makes it difficult to integrate convertible manu-
facture into a traditional framework, and many
companies outsource production to external pro-
duction service companies. Audi decided to take
advantage of the Györ site, as Audi Hungaria has
the necessary flexibility and the expertise for
convertible assembly. Indeed, the Audi TT coupé,
the Audi TT roadster and the Audi A3 convert-
ible can be assembled on the same production
line. Audi’s Hungarian subsidiary can therefore
be called a functional center of excellence in the
area of convertible assembly, again with a world-
wide mandate.
However, the plant’s special competence in
assembly is limited to convertibles. It assembled
slightly fewer than 57,000 vehicles in 2007,
which accounts for only six percent of Audi’s
total vehicle production. Consequently, Audi
Hungaria cannot be considered a functional
center of excellence for assembly in general. Its
expertise is not great enough to distinguish it
from other sites that also carry out these activi-
ties successfully.
Nevertheless, Rupert Stadler, Chairman of the
Board of Management of Audi AG, expects
the Hungarian subsidiary to continue to be an
essential part of the company’s vehicle produc-
tion: “Audi Hungaria’s vehicle production has
been outstanding in the last few years, starting
with the Audi TT coupé and the TT roadster.
We are confident that our Hungarian plant, in
producing the new Audi A3 convertible, will
play an important role in achieving our strategic
goal of manufacturing 1.5 million vehicles in the
year 2015” (Audi 2007b). Over the long term,
it would be a good idea to produce the Audi A5
convertible, which is to take the place of the A4
convertible in 2009, in Györ as well. According
to press reports, Audi is considering taking over
the manufacture of the A5 convertible rather
than having it produced by Karmann in Rheine,
as the preceding model has been. From the per-
spective of Audi AG, it would make sense to use
the Györ site. This would not only take advan-
tage of resources within the company; it would
also help to utilize and expand the specialized
expertise of Audi’s Hungarian subsidiary.
115
At its own initiative, rather than at the sugges-
tion of headquarters in Ingolstadt, Audi Hun-
garia was given responsibility for development
activities related to series production. These
involve ongoing production and include produc-
tion support (when beginning production of
new engines), engine testing, adaptive develop-
ment, solving technical problems during the
production process, minimizing product costs
and redesigning engines during their life cycle.
Audi Hungaria has gained additional expertise
in these areas and is now able to solve produc-
tion problems independently, without help from
the German plants. This has also increased its
autonomy, which is essential for a successful
center of excellence.
Originally, this idea was met with skepticism at
company headquarters. While the capabilities
of the Hungarian engineers were not in doubt,
there was anxiety about an unchecked “knowl-
edge drain” and a loss of power. “We spent
two years trying to convince those in charge,”
observed Jürgen Hoffmann, former Chairman of
the Board of Management of Audi Hungaria, at
the opening of the development center (Sailer
2000). Norbert Pauli, head of engine develop-
ment at the Györ site, added, “There was such
skepticism in Ingolstadt that we gave our proj-
ect the code name of Csárdás [Authors’ note:
Hungarian national dance]” (Sailer 2000). But
ultimately the Hungarian subsidiary prevailed,
and it began to expand its development work in
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.
Audi AG funded this project in two stages,
investing 18 million euros in 2001 and 8 million
euros in 2004. A total investment volume of 26
million euros may seem insignificant, but it had
a marked effect on quality. The site was now
more than just an “extended workbench” for the
German sites; its value activities had expanded
to include more than production alone.
Today Audi AG has benefited greatly from its
Hungarian subsidiary’s enhanced competence
and autonomy, which have led to greater effi-
ciency and productivity in the network’s pro-
duction. Before, problems arising during the
engine production process that required input
from a development engineer – during testing,
for example – usually meant a time-intensive
process of shipping the engines back and forth
between Hungary and Germany and required
coordination between the respective employees.
This additional effort is no longer necessary.
Over the long term, it would be wise for Audi
Hungaria to be in charge of all aspects of engine
development. This would greatly simplify inter-
actions between development and production
and among the workers concerned. Audi Hun-
garia could then become a center of excellence
in the area of engine development as well.
The development center represented one of the
first projects in which Hungary was viewed not
simply as a production site, but also as a place
where development work could take place. This
was particularly gratifying for the Hungarian
government, and the Ministry of Education pro-
vided nearly 1 million euros in support. Audi is
not the only company to conduct research and
development in Hungary; the cell phone manu-
facturer Nokia, the network equipment manu-
facturer Ericsson and the technology company
Siemens have facilities there as well. Clearly,
Hungary is becoming a site for high-quality
value creation. The trade publication Corporate
Location concluded: “The indicators suggest that
Hungary is moving up the value chain. […] It is
timely that Hungary is attempting to transform
itself from just a manufacturing base into a des-
tination for investors searching for value-added
locations” (“No Longer the Poor Man of Europe”
2000).
2.3 Upgrading the center of excellence for engine production by adding
development responsibilities
116
The opening of tool production facilities at the
Györ site in 2005, at a cost of 40 million euros,
was the final step, so far, in the development
of the Hungarian subsidiary. This rounded out
Audi Hungaria’s production capabilities. Györ
won out over the other Audi AG sites in Europe
(Brussels, Ingolstadt and Neckarsulm) in an in-
company selection process. Tools and equipment
for vehicle series production are now being
produced in Hungary, including stamping equip-
ment, drawing, cutting and copying tools as well
as the so-called grippers that are used to join
vehicle body parts.
The center for tool manufacture also produces
vehicle body parts for Audi’s small-batch series,
a new feature at that site. Today the Györ plant
supplies vehicle body parts for Audi’s top-of-
the-line RS4, S6, RS6 and R8, which are sold in
considerably lower numbers than the company’s
regular series models. Production includes outer
skin panels, doors and hatchbacks, parts that
require a complex cutting and joining technique
and a great deal of manual labor to achieve the
superior quality offered by these premium vehi-
cles. The ?value chain at the Györ site includes
all of the steps shown in Figure 5.
2.4 Ongoing acquisition of additional capabilities – expansion as a center
of excellence for vehicle production?
Figure 5: Value chain at the Györ site
V
e
h
i
c
l
e
s
E
n
g
i
n
e
s
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
P
r
o
f
i
t
m
a
r
g
i
n
P
r
o
f
i
t
m
a
r
g
i
n
Procurement of engine and vehicle components
Carried out by Audi Hungaria Outsourcing to service companies Legend:
Development activities related to engine series production
Tool manufacture for vehicle production
Source: The authors, based on Porter (1986: 21).
117
A look at limited-lot series production is helpful
in determining whether Audi Hungaria might be
capable of taking on additional vehicle produc-
tion tasks. Two options are conceivable: First,
the Györ site could expand to include not only
assembly, but also production of its current
models. If Audi Hungaria’s limited-lot series
production proved to be as satisfactory as its
vehicle assembly, the Györ site might take over
the entire process of manufacturing the Audi
TT coupé and roadster models as well as the
Audi A3 convertible – including building vehicle
bodies. This would upgrade its role as a center
of excellence to include convertible production
as well as assembly. Another possibility would
be for the Hungarian subsidiary to produce a
specific higher-volume model, such as the Audi
A3, which was assembled there for a limited
period of time in the past. This would make Audi
Hungaria a functional center of excellence in the
production of that model.
Figure 6 shows the increase in Audi Hungaria’s
value activities and the current value chain at
the Györ site. Its responsibilities are likely to
continue to grow.
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 rod
Engine
assembly
Year
118
Audi AG and particularly the German sites have
benefited in a variety of ways from the Hungar-
ian subsidiary as a center of excellence, and not
least from the transfer of knowledge from Hun-
gary to Germany. This is reflected in company-
wide figures. Fears that Audi Hungaria and its
expansion would lead to a loss of jobs in Ger-
many have not been borne out. On the contrary:
There has been a steady increase in the number
of employees at the German plants since the
mid-1990s, as shown in Figure 7. The much
discussed “job drain” has not occurred. The
Györ site has helped Audi in pursuing its strong
growth strategy (see also the interview with
Rupert Stadler on p. 118). As a multiple center
of excellence, Audi Hungaria has provided Audi
AG with certain ?competitive advantages in
this context. “For [innovative] companies, glo-
balization is usually a win-win situation,” says
Matthias Wissmann, President of the German
Association of the Automotive Industry VDA
(“Für Globalisierung gerüstet” 2008; see also the
conversation with Matthias Wissmann following
this case study).
The Györ site has helped Audi to
pursue a strong growth strategy.
Many other stakeholders have also benefited
from the development of Audi Hungaria. In
terms of sales volume, Audi Hungaria is cur-
rently Hungary’s second largest company, 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
Countries
1)
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 53,347
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:
119
the oil and gas company MOL, as well as its
second largest exporter, accounting for about
nine percent of the country’s export volume. The
Györ region in particular has benefited greatly
from the Audi plant. Audi AG – along with other
automobile manufacturers – has triggered an
economic boom by locating some of its value
activities there. Today there are eleven other
automotive plants at the intersection of Hungary,
Austria, Slovakia and the Czech Republic, which
is why this region has been dubbed the “Detroit
of Eastern Europe.” And the advantages Hun-
gary offers go far beyond low labor costs. “The
Hungarians have shown that they can produce
high-quality automobiles,” says Stefan Menzel,
Deputy Head of Companies and Markets for
the newspaper Handelsblatt, underscoring the
country’s importance to the automotive industry
(Menzel 2008). Indeed, Daimler recently chose
Hungary as the site for its new compact vehicle
plant, over a number of cheaper alternatives.
and we are looking to recruit another 800. In
the future, too, we will hire more personnel
where it is necessary. Expertise is paramount.
And I, personally, feel very comfortable with
what Germany has to offer. But our employees
in Germany are aware that they are taking on
a certain responsibility when they come to
work for us.
I gather that you think you will be able to
maintain an 80-20 ratio of German to for-
eign sites by increasing productivity ...
Audi decided 15 years ago to move engine
production to Hungary. It was a difficult deci-
sion, and there were natural concerns that this
step would lead to a massive loss of jobs in
Germany. But what happened? We now employ
5,800 people in Hungary, and we have also
hired 10,000 new employees in Germany – a
clear win-win situation. Over the long term we
will need to hire new workers in areas where
we expect to see growth.”
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 ...
Given the complex products we are dealing
with, core competence is essential and clearly
far from a trivial matter. One example is the
design of the tailgate on our SUV models.
It requires competence in tool manufacture,
development and production, aspects that are
by no means standard in modern automotive
engineering. In Germany, we are able to find
the best workers for each core competence,
not least thanks to our excellent educational
system.
So you are more likely to increase the
number of employees in Germany in the
coming years than to cut jobs ...
We are currently expanding our workforce.
Last year we hired 600 university graduates,
Interview
120
As our research has shown, the role of a cen-
ter of excellence requires a certain amount of
autonomy; the subsidiary must be allowed to
take advantage of its specific capabilities. Audi
Hungaria has been able to assume leadership
responsibilities within Audi AG in its areas
of expertise. It makes all of the relevant deci-
sions on issues of maintaining and increasing
efficiency and quality in engine production. Its
leadership position has been enhanced by tak-
ing on related development activities in series
production.
Moreover, centers of excellence need to be well
integrated into the corporate network so that
the entire organization can benefit from their
expertise. Companies that are successful in
their use of centers of excellence are complex
network-based enterprises characterized by a
variety of vertical and horizontal flows of infor-
mation between the corporate units. The parent
company needs to make sure that its centers of
excellence have a certain degree of autonomy
but are also well integrated into the network.
The task of integrating centers of excellence
into the corporate network, while also ensur-
ing necessary autonomy, is accomplished by
using certain ?coordination tools. In a network
enterprise, person-oriented tools are particu-
larly important for integrating the company’s
various units. They are the subject of Figure
8, which was already dealt with briefly in our
introductory chapter. Such tools include personal
instructions, regular visits to the parent and sis-
ter companies by center of excellence staff (and
vice versa), the establishment of international
project teams, and the transfer of management
personnel. Since the management of centers
of excellence is strongly person-oriented, the
“human factor” is central to the management
of the company as a whole. One example of the
role of person-oriented ?coordination in inte-
grating Audi Hungaria into the larger organiza-
tion is that executives from the German sites are
sent to help manage Audi Hungaria. Local man-
agers receive a great deal of support from their
German colleagues. Frequent personal visits in
both directions and mixed-nationality project
teams are also important in integrating the site
into the corporate network.
Centers of excellence require both
autonomy and integration at the
same time.
While person-oriented coordination tools are
very important in a network enterprise, they are
not enough. Structural and technocratic instru-
ments are needed as well, and in most cases
they are used in combination with one another.
There also needs to be both vertical coordina-
tion, between the parent company and the sub-
sidiary, and horizontal coordination between the
various subsidiaries, for example between cen-
ters of excellence whose value activities build on
each other.
3. Challenges in managing centers of excellence
Parent companies should not regard their
foreign subsidiaries as mere “extended work-
benches” if they want to take advantage of
their full potential.
_ Instead, they can cultivate their foreign sub-
sidiaries by giving them additional respon-
sibilities in the value chain, for example for
R&D or high-value production activities.
_ Foreign subsidiaries can develop into cen-
ters of excellence that assume a leadership
role in the corporate network and make
good use of their unique strengths beyond
their own location.
_ Western companies should not limit their
subsidiaries to the industrialized countries,
but also consider the potential offered by
subsidiaries in up-and-coming economies,
for example in the emerging markets.
Summary
121
Because centers of excellence have their own
specific areas of expertise, responsibilities and
leadership roles, it is impossible to provide
general recommendations about appropriate
coordination tools. “The individual strategic role
of a subsidiary plays a crucial role in determin-
ing what type of coordination will maximize
the subsidiary’s contribution to the success of
the company as a whole,” explains Katharina
Kretschmer, management consultant for The
Boston Consulting Group. It is important to
remember that centers of excellence need to
be managed on a highly individual basis. If, for
example, Audi were to develop its Brussels plant
into a center of excellence, its management and
coordination would need to be adjusted accord-
ingly. Simply copying the methods used at the
Györ site would hardly be successful.
Scientific studies of coordination within inter-
national companies have provided some initial
insights: For instance, the various value activi-
ties need to be managed in an individualized
way. Person-oriented coordination tools have
been shown to be effective in the area of
research and development, and tend to be
preferable to structural or technocratic instru-
ments. In production, technocratic instruments
are effective, as are person-oriented methods,
but structural instruments are less successful.
These are only preliminary results, since much
research remains to be done on how best to
coordinate value functions. It appears, however,
that the activities carried out by a center of
excellence are important for determining how its
management should be organized.
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.
If a hierarchical company is to become a net-
work-style enterprise with centers of excellence,
this will require a change in its ?corporate
culture. This has implications for the company’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-oriented
coordination
_ Personal directives
_ Mutual adjustments
_ Personal visits
_ International project teams
_ Transfer of management
personnel
_ Standardization of roles
_ Culture-oriented coordination
122
management culture, since it requires balancing
the competing demands of autonomy and inte-
gration and recognizing subsidiaries as sources
of expertise and skills. Cultural elements of
host countries also need to be incorporated into
the company’s corporate culture. A strategic
decision to upgrade subsidiaries into centers of
excellence requires not only a structural reorga-
nization of the company, but also a careful effort
to reshape its culture.
Establishing centers of excellence has certain
implications for the management of the sub-
sidiaries concerned. Companies that fail to
take this into account will not be able to reap
the benefits such centers offer.
_ Centers of excellence need to have a certain
degree of autonomy in their areas of com-
petence so that they can put their expertise
into practice.
_ At the same time, they must be well inte-
grated into the corporate network so that
the entire company can benefit from their
expertise.
_ Because of differences in their activities,
expertise and roles, individual centers of
excellence need to be managed in different
ways. The executives involved are in charge
of choosing the appropriate coordination
instruments.
_ The integration of all of a company’s cen-
ters of excellence requires that cultural ele-
ments from host countries be incorporated
into the corporate culture of the company
as a whole.
Summary
In the interest of readability we have reduced
the number of references contained in this
version of the study. A complete list of refer-
ences is found in the bibliography. A German
version of the study can be obtained in printed
form as an academic working paper by
contacting the office of the authors
([email protected]); it may also be
downloaded from the website of the Chair of
International Management und Strategic
Management at ESCP-EAP European School of
Management Berlin (www.escp-eap.de/imsm).
123
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master/de3/unternehmen/Innovation/motoren/
tdi0/start.html (as of July 2, 2008).
Willershausen, Florian (2008): Schmerzhafte
Lektionen. In: WirtschaftsWoche, August 18,
2008, 60-63.
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 CO
2
- 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 CO
2
-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
CO
2
-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
CO
2
emissions are not the answer. We need CO
2
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 CO
2
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. Restructuring international value creation 135
2. Necessary changes in the management of international companies 141
References 144
Global networks and decentralized
configuration strategies
Strategic, structural and cultural implications
134
Our examination of case studies of automotive
companies has allowed us to identify trends in
the management of international value creation
and to outline measures for structuring the cor-
responding ?value chains to meet the needs of
the future. We have identified important levers
that will allow companies to achieve long-term
success in global competition. These include, in
particular, the strategic and ?structural dimen-
sions of value creation. At the same time, com-
panies need to make internal cultural changes,
especially regarding the management of ?
value activities.
All three case studies have shown that greater
decentralization of value activities is imperative
if companies are to remain competitive beyond
their national borders. Moreover, increasing
value creation in the various markets involves
not only individual ?value functions, but
virtually the entire value chain. While many
companies have long been seeking to decen-
tralize sales (and in some cases marketing as
well) – often in very different ways (Quelch/
Hoff 1986) – the current focus is increasingly
on decentralizing value activities in the fields of
procurement, production and development. As
we have demonstrated, however, the goal is not
to carry out every value activity in every market
and thus (again) to establish ?subsidiaries all
over the world as ?miniature replicas of the
parent company (White/Poynter 1984, 1989).
Instead, we need what might be termed “decen-
tralized centralization,” in which a variety of
activities are bundled together in different coun-
tries. Following the models of ?transnational
organization (Bartlett 1986, Bartlett/Ghoshal
1987a, 1987b, Bäurle/Schmid 1994) and ?het-
erarchy (Hedlund 1986, 1993) that are outlined
in the international management literature, it is
important to act globally as well as locally, and
centrally as well as decentrally, as Coimbatore K.
Prahalad pointed out in our interview.
There are a variety of reasons why such decen-
tralized centralization is important. For example,
decentralized plants need to have a high level
of localization in such areas as procurement,
which insulates the company from exchange rate
fluctuations, as shown particularly by the case
study of the Volkswagen Group; they also offer
the opportunity to benefit from differences in
the costs of production factors, as demonstrated
by the Renault and Audi case studies; and
they allow companies to take advantage of the
resources of local suppliers, as reflected in the
case study of Renault. However, a high level of
localization does not mean that all procurement
activities are highly decentralized. Rather, using
the advantages of ?global sourcing whenever
the benefits of centralization outweigh the disad-
vantages is important (Corsten 1993, Mair 1995).
Centralization does not necessarily need to take
place in the country where the company has its
headquarters, but rather where an international
comparison suggests that the benefits would be
greatest.
Carrying out production activities in local mar-
kets can be a wise decision, not least because
customers in certain countries and segments of
the market are increasingly interested in pur-
chasing a vehicle that has been manufactured
locally. This is an important consideration, one
that was evident in our case study of the Volk-
swagen Group and underscored by Carl-Peter
Forster, President of General Motors Europe, at
the Capital Automobile Summit held in Berlin
in September 2008, when he noted, “Productiv-
ity in production no longer offers a decisive ?
competitive advantage or disadvantage. Instead,
being a local manufacturer – producing on site
– is increasingly becoming a sales argument.”
135
1. Restructuring international value creation
adaptations for a local market, then development
activities will have to be located there as well,”
explains Harald Rudolph, Director of Strategy
at Daimler. He continues, “In China, there is
no way to avoid carrying out development work
within the country. This might involve different
chassis requirements or equipment features, for
example.”
Our analyses have also shown that simply
decentralizing value activities is not enough. It
is especially important to ?integrate individual
corporate units effectively in order to create
global network enterprises. This also requires
the decentralization of certain management
functions and decision-making responsibilities.
Decentralized decision-making ?structures
are clearly required in the local development of
region- or country-specific models, for example.
If adaptation is to be successful, a decentralized
development unit must be involved in relevant
decisions; otherwise the company reaps no
benefit from its expertise. This is clear from
the case studies on the Volkswagen Group and
Renault, and Ralf Kalmbach also emphasized
this point in our conversation.
No matter which specific value activities are car-
ried out by a foreign ?subsidiary, its resources
and expertise will not be fully utilized until it
becomes a specialized ?center of excellence
(Schmid 2003).
1
As is abundantly clear from the
Audi case study, this allows foreign subsidiaries
to generate competitive advantages for the entire
company that are helpful not only in the local
market but worldwide, and this can have very
Furthermore, laws in the growth markets of the
?emerging countries often favor local produc-
tion, as shown by the case studies of Volkswa-
gen and Renault. Since many of these countries
want value activities to be carried out within
their borders when they relate to products sold
there, they have introduced such measures as
?local content requirements and import duties
on fully assembled vehicles. These steps are
intended to ensure that the (rising) earnings of
the local population are not siphoned off abroad,
but instead help to further the country’s eco-
nomic development (Petersen 2004: 3, 149, 311).
Decentralizing development activities is also
becoming increasingly important. Owing to stiff
competition in the automotive industry, high-vol-
ume manufacturers in particular need to focus
more attention on adapting their vehicles to the
circumstances and preferences of their custom-
ers in their target markets – as is clear from the
case studies of Volkswagen and Renault. “The
concept of a standardized world car, one that
can be sold in precisely the same form in every
global market, does not work in the high-volume
segment,” observes Ralf Kalmbach, an automo-
tive expert with the Roland Berger consulting
firm. Thus decentralized development sites
have the responsibility of making use of local
resources and adapting specifically designed
models to the needs of local customers.
High-volume manufacturers, in particular, need
to adjust their vehicles to individual regions or
countries; they must compete today not only on
pricing, but based on product features, for exam-
ple by offering attractive vehicle equipment and
design. They cannot pursue a single-minded
?cost-leadership strategy (Porter 1999: 38-40,
97-164). However, premium manufacturers as
well can derive crucial competitive advantages
from adapting their vehicles to a given region or
country – even if their ?differentiation strate-
gies are based primarily on their brand image or
on certain product features such as innovative
technologies. This is why premium manufacturer
Daimler has significantly expanded its adaptive
development activities in recent years, and is
also considering decentralizing such activities.
“If it makes sense to develop certain model
136
Increasingly, high-volume automobile
manufacturers need to take a decentralized
approach to value creation within their
corporate networks. This does not mean
that every activity takes place at every site;
rather, it requires so-called “decentralized
centralization.” This is the only way for
automobile manufacturers to achieve con-
tinued success in the global market and to
benefit from new growth opportunities.
Glocalizing value creation
declining sales figures, emerging nations offer
opportunities for sales growth, and they also
represent possible sites for further value activi-
ties. Consequently, locating a wide range of such
activities and decision-making responsibilities
in the emerging markets is a central component
in the strategies of automobile manufacturers
to meet the needs of the future. These countries
will increasingly be the site of value creation
that can produce significant innovations. The
case studies on Renault and Audi are informa-
tive in this context, as is the conversation with
Coimbatore K. Prahalad.
The decentralization of value activities and deci-
sion-making responsibilities, as called for in this
publication, need not mean losing jobs in the
automobile manufacturers’ home countries. On
the contrary: The cases we have examined dem-
onstrate that companies can generate growth
for their overall organizations – and thus also
for their domestic sites – by relocating certain
value activities abroad. The case study outlining
the successful development of Audi’s Hungarian
subsidiary provides a particularly striking illus-
tration of this point. For their part, companies
that fail to respond to the need to decentralize
value activities and create global networks will
find themselves facing declining sales figures
and hence a loss of jobs, at their domestic loca-
tions as well.
positive ramifications for the domestic market.
Therefore, promoting the development of foreign
subsidiaries and assigning certain responsibili-
ties to those subsidiaries, in accordance with
their respective areas of expertise, is important.
In global networks, competitive advantages are
generated not only by corporate headquarters in
the domestic market, but also by foreign subsid-
iaries, and particularly by centers of excellence.
With the decentralized centralization of manage-
ment functions, such centers of excellence can
take on leadership roles throughout a company
in their areas of competence.
After the introduction of mass production in the
automotive industry at Ford and General Motors
back in the 1920s and the development of the
lean manufacturing concept at Toyota beginning
in the 1950s (Womack et al. 1991: 18), the next
profound change in the value structures of the
automobile industry is likely to involve achieving
a global balance between the centralization and
decentralization of value activities and decision-
making responsibilities. Borrowing the terminol-
ogy used by Womack et al. (1999), we might
call this the “third revolution” in the automotive
industry.
Our investigations have also shown that the
?emerging markets will play a major role in
creating sustainable ?value configurations in
the future. They were a focus of all three case
studies. While automobile manufacturers in the
established markets are faced with stagnating or
137
A decentralized configuration of value
activities needs to be accompanied by the
decentralization of management functions
and decision-making responsibilities. For-
eign corporate units take on certain man-
agement functions so that they can contrib-
ute their local resources and expertise for
the benefit of the company as a whole.
Decentralizing management functions
In the future, the role of the emerging
markets will no longer be limited to serving
as cheap production sites for the industri-
alized countries. They will also take over
more significant value activities, which will
offer companies competitive advantages
throughout the world. It is therefore cru-
cial to ensure that sites located in these
countries are an integral part of companies’
value chains.
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).
adaptive development activities offers clear
advantages, while it may be wise to continue to
choose a largely centralized configuration for
basic development, and even more so in the case
of research.
Our case studies also demonstrate that foreign
subsidiaries, with their specific value activities,
are integrated into the corporate network in
different ways and should be managed individu-
ally. This also means a need for different sets of
?coordination instruments. In the case of the
Volkswagen Group, for example, we recommend
decentralizing decision-making responsibilities
in the area of adaptive development, in the inter-
est of greater autonomy for the units involved.
The case study of Audi AG and its Hungarian
subsidiary explains in detail how an individual
subsidiary can assume a leadership role within
the overall company in its value competencies,
and how the nature and intensity of ?coordina-
tion activities need to be adjusted accordingly.
This, too, argues against the conclusions drawn
by Porter (1986: 27), who presumes that all cor-
porate units are to be coordinated in the same
way.
Overall, it cannot be assumed that a single
configuration-coordination profile applies to an
entire company. Instead, a company’s overall
profile encompasses all of the configuration-
coordination profiles related to the company’s
various value functions. We therefore argue in
favor of a differentiated approach to such func-
tions and the use of an expanded configuration-
coordination matrix, as shown in Figure 2. For
purposes of illustration, the value functions
of research, development and production are
entered into the matrix individually, taking into
account that individual value stages can exhibit
different configuration-coordination profiles in
their functions.
It should also be noted that the internationaliza-
tion of German automobile manufacturers and
automotive suppliers that has already occurred
has not brought with it a decline in employment
in the German automotive industry, as Figure 1
shows in its comparison of employment statistics
in 1997 and 2007 (jobs with manufacturers and
suppliers). Indeed, during this period, employ-
ment increased by nearly 11 percent (VDA 2008:
5), at a time when German manufacturers and
suppliers were establishing a number of interna-
tional production sites, thus ?internationaliz-
ing their value networks to a greater degree.
Other studies have also shown a positive rela-
tionship between the internationalization of
value activities and increased domestic employ-
ment (Klodt 2007: 138, Klodt/Christensen
2007). Experts predict a similar trend for the
future; worldwide demand for cars produced
by German manufacturers is expected to
increase by roughly 1.8 million units by the
year 2020. Some 700,000 of these additional
vehicles will likely be produced at German sites
(“Deutschland 2020. Zukunftsperspektiven für
die deutsche Wirtschaft” 2008: 9). However, this
kind of sales growth can only occur if compa-
nies implement the measures outlined above
for decentralizing value activities and decision-
making responsibilities.
The case studies contained in this publication
have also shown the need to look critically at
frequently cited ideas from the strategic and
international management literature. For exam-
ple, the aggregated configuration-coordination
profiles of entire companies presented by
Michael Porter (Porter 1986: 27) are not an accu-
rate reflection of reality. Our case studies show
that each value function involves a different ?
configuration strategy. For instance, while the ?
configuration of production activities is already
somewhat decentralized in the Volkswagen
Group, as well as at Renault and Audi, research
and development activities have been strongly
centralized in all of these companies, at least in
the past. And even within a single value func-
tion there may be good reasons for employing
different configuration strategies. Thus we see
– with reference to Toyota – that decentralizing
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 manufacturers
1)
Jobs in the German
automotive industry
2)
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 %
There can be no configuration-coordination
profile for a company as a whole, since the
individual value functions within a com-
pany differ substantially in their geographic
distribution and in the way their activities
are coordinated. Each value function has its
own profile and should be configured and
coordinated individually.
Function-specific configuration
and coordination
1997-2007
(production only)
140
Figure 2: Expanded con?guration-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.
Basic
research
Research Component
production
Applied
research
Development
Complete
production
1)
Production
Adaptive
development
Assembly
Market
observation
Basic
development
high
low
geographically
dispersed
geographically
concentrated
Coordination of
value activities
Con?guration of
value activities
their capabilities, subsidiaries can become func-
tional or product-oriented centers of excellence
(Schmid et al. 1999, Schmid 2003). This means
that decisions are no longer made exclusively at
headquarters, but instead we see the decentral-
ized centralization that was described above – in
the case of Audi, in the area of engine produc-
tion.
If foreign units are to gain the significance they
deserve, there must be a change in management
style. Instead of a “top-down” approach, in which
foreign subsidiaries are simply required to fol-
low orders from headquarters, a “bottom-up”
management style should be introduced that
allows foreign units to have a voice and partici-
pate in decision making. Figure 3 summarizes
the changes that are needed in the management
of international companies.
Companies clearly need to take action with
respect to their corporate culture. Neither purely
?ethnocentric nor purely polycentric ?cul-
tures are needed. Instead, companies should
move toward a ?geocentric culture to develop
a common cultural understanding shared by
the parent company and its subsidiaries, and
to account for changes in the strategies and
structures of value creation (Perlmutter 1969:
13, Kutschker/Schmid 2008: 287). Automobile
manufacturers, particularly within the high-
volume sector, must establish themselves locally
while also maintaining a global orientation. This
also applies to their basic assumptions, values,
norms, attitudes and convictions, as well as to
the relevant behaviors and artifacts (for more on
this understanding of culture, see Schmid 1996:
137 and Kutschker/Schmid 2008: 672). Carl-Pe-
ter Forster, President of General Motors Europe,
made the following comments at the Capital
Changes relating to value configuration affect
not only corporate strategies and structures, but
also ?corporate, and particularly management
culture. As value activities and decision-making
responsibilities become increasingly decentral-
ized, companies move from being strictly hierar-
chical structures to network-like organizations.
In that sort of network-based company, foreign
subsidiaries gain influence relative to the
domestic parent company. Accordingly, upper
management of the parent company should no
longer assume that all of the company’s primary
competitive advantages are generated at home,
as many have believed in the past (e.g. Hymer
1972, 1976). Instead, it must be recognized that
both the parent company and the subsidiaries
contribute to the company’s portfolio of competi-
tive advantages (Hedlund/Kogut 1993). Because
they are embedded in a number of different
contexts within the host country, subsidiaries
are able to tap into various sources of innovation
(Schmid/Schurig 2003).
2
This means that international companies need
to rethink the roles played by their subsidiaries.
In the past, foreign subsidiaries were often sim-
ply asked to implement in the respective local
market what had been developed and decided
by the parent company; today, in contrast, we
can assume that foreign subsidiaries are able to
offer significant strategic contributions and act
as centers of excellence with leadership roles
within the corporate network.
As the case study of Audi has shown, subsidiar-
ies in foreign countries are no longer respon-
sible only for their respective local markets, as
is common in the case of ?polycentric (Perl-
mutter 1969: 12f.) and multinational companies
(Bartlett/Ghoshal 1988: 64f.). Depending on
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).
see to it that their employees gain more knowl-
edge of other cultures and learn to interact
appropriately and work together effectively with
colleagues or business partners from different
cultural backgrounds (Müller/Gelbrich 1999: 32,
35f.).
3
Accordingly, there is a need for diversity
management among upper and middle manage-
ment and operational staff. This helps to achieve
a balance between globalization and localization
in the cultural sphere.
Automobile Summit held in Berlin in September
2008: “Automobile manufacturers cannot stay
local. They need to increase their global pres-
ence. The big challenge in this regard will be to
keep the entire company together, while at the
same time maintaining a sense of solidarity at
the local level.”
As value activities become more internation-
ally dispersed, and as the management of those
activities is assumed by a wider array of units,
it is increasingly important to handle cultural
differences properly, which involves acquiring
cultural competence with respect to a number
of dimensions. In particular, companies need to
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 Implementation
Important strategic contributions,
centers of excellence
Responsibilities
of subsidiaries
Domestic market
Transcending domestic market
(product or function)
Decisions Centralized at headquarters Decentralized centralization
Management style Top-down Top-down and bottom-up
Corporate culture
Ethnocentric (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”
also being integrative enough to bind together a
global network of corporate units.
Changes in value configurations represent
changes in the surface structures of a company,
which need to be reflected in its deep structures
(cf. Schmid 1996: 115-130, Kutschker/Schmid
2008: 690-692). It is clear that strategic, struc-
tural and cultural measures for reorganizing
international value creation and creating a com-
petitive network enterprise are all intertwined,
and it is only together that they can achieve
their full effect. These complex changes cannot
be made overnight. Companies are therefore
well advised to move quickly to adopt the
perspective outlined in this publication, and
especially to initiate the necessary cultural
changes.
At the same time, corporate culture has an
important function in integrating the various
corporate units into the company network; it
also serves as an instrument of coordination
(cf. Hedlund 1986: 24, Bartlett/Ghoshal 1988:
55f.). However, concluding that more atten-
tion should be paid to corporate culture should
not be misinterpreted as favoring a completely
homogeneous culture. Rather, it is important to
create a framework within which the individual
divisions, functions and subsidiaries can com-
fortably exist. The aim is to find an optimal way
to bring together the various subcultures, with-
out seeking to make them completely uniform.
Such cultural diversity is also important in the
light of the brand diversity found in a network
enterprise. Think, for example, of Audi, Bent-
ley, Lamborghini, Seat, S
?
koda and VW within
the Volkswagen Group; Dacia, Renault and
Renault Samsung within the Renault Group; and
Daihatsu, Hino, Lexus, Scion and Toyota within
the Toyota Group.
4
Changes in the configuration and management
of value activities must be accompanied by a
change in corporate culture. In order to respond
appropriately to the decentralization of value
activities and decision-making responsibilities,
companies need to achieve unity within diver-
sity. They must develop a culture that is flexible
enough to adjust to local circumstances, 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).
Changes in the configuration and coordina-
tion of value activities must be accompa-
nied by a change in corporate culture. In
order to respond appropriately to the decen-
tralization of value activities and decision-
making responsibilities, companies need to
achieve unity within diversity. They must
develop a culture that is flexible enough
to adjust to local circumstances, while also
being integrative enough to bind together a
global network of corporate units.
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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158 158
Bertelsmann Stiftung
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Responsible:
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in a Globalized World, and
personal assistant to Liz Mohn
Project manager:
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Phone +49 5241 81-81295
[email protected]
Translation and editing:
ZV | Mediengestaltung
& Sprachdienstleistungen, Gütersloh
Design and typesetting:
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Illustration credits:
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Publishing information
Stefan Schmid, Philipp Grosche
Strategy, Structure, and Culture
Managing the International Value Chain
in the Automotive Industry
Address | Contact:
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www.bertelsmann-stiftung.de
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