Page 96 - Operations Strategy

THE RElATivE imPORTAnCE Of PERfORmAnCE ObJECTivEs CHAngEs OvER TimE 71

than the old VW Beetle. Also the company started to rationalise its operations to ensure common-
ality between models and bring enhanced organisation to its global manufacturing operations,
and the company resumed profitable growth in 1975. During the remainder of the 1970s and
through the 1980s, Volkswagen continued to produce its successful Polo, Golf and Passat models.
Production facilities continued to expand around the world, but never again, Volkswagen vowed,
would they be left behind consumer tastes. Design and product performance moved to the front
of VW’s strategy and all models were updated at regular intervals. The next big challenge for the
company came not from the inadequacy of its models, but from its manufacturing facilities.
In the early 1990s, Volkswagen’s models were still highly regarded and commercially success-
ful, but costs were significantly above both its local European rivals and its Japanese competi-
tors. And, although by now it was by far the largest auto-maker in Europe, the prospects for
VW looked bleak. Management structures were bureaucratic, labour costs in Germany were
significantly higher than other European and US levels, and one estimate had Volkswagen need-
ing to operate at 95 per cent of capacity just to cover its costs. The break-even points of its rivals
were significantly lower, at around 70 per cent. A fundamental cost-cutting exercise was seen
by many commentators as the only thing that would save the company.
By the late 1990s, once again things were looking brighter in most of the company’s markets.
It had negotiated pay and flexibility deals with its employees, successfully cut the costs of buy-
ing parts from its supply base (at one point hiring the controversial José Ignacio López from
General Motors) and was continuing to introduce its new models. The most eye-catching of
these was the new Beetle – a design based on the old Beetle but with thoroughly modern parts
under its skin. Just as significantly, the company worked on the commonality of its designs.
Within the VW group, several models, although looking different on the surface, were based
on the same basic platform. Yet the company found that there were limits to how far one could
sell essentially the same car as different brands at different prices, and it eventually devised a
less obvious modular design strategy. Throughout the 2000s there was continued cost pressure
from (mainly Japanese and Korean) competitors and a severe recession at the end of the decade.
In response, VW’s production shifted increasingly to lower-cost locations such as East Europe
and China. At the same time it started to seriously adopt lean principles in all its operations.
Yet some markets defied the Group’s overall success. Although, by 2012, VW had become the
biggest auto-maker in China and Europe, the group had been losing money in the United States
for years. So much so that in 2014 VW’s works council chief labelled the car-maker’s US opera-
tions a ‘disaster’ and called for more models and swift decisions to revive the German group’s
declining fortunes in the world’s second-largest auto market.

Understanding VW’s operations strategy over time 11
Like any company, VW’s strategy has changed over time and, in turn, so has its opera-
tions strategy. The requirements of the market have changed as world markets have
grown, matured and become increasingly sophisticated over time, but also in response
to how VW’s competitors have behaved. Thus, VW markets that were small, local and
disrupted at the beginning of the period became increasingly large, international and
differentiated over time. Also, competitive pressure counted for little at the beginning
of the period, but by the 2000s automobile markets had become fiercely competitive.
Likewise, the nature of VW’s operations resources has changed, starting with a desper-
ate effort merely to satisfy even the most primitive of markets. Then, at various times
through the next 50 years, VW’s operations resources became more systematised, con-
siderably larger and far more complex, involving an interconnected network of inter-
nationally located operations.

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