{"id":5492,"date":"2015-12-09T19:10:54","date_gmt":"2015-12-10T00:10:54","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/volkswagens-emission-scandal-calls-its-operating-model-into-question\/"},"modified":"2015-12-09T19:30:38","modified_gmt":"2015-12-10T00:30:38","slug":"volkswagens-emission-scandal-calls-its-operating-model-into-question","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/volkswagens-emission-scandal-calls-its-operating-model-into-question\/","title":{"rendered":"Volkswagen\u2019s Emission Scandal Calls its Operating Model into Question"},"content":{"rendered":"

The Volkswagen Group (VW) is the world\u2019 second-largest automaker aiming to become the world’s largest car maker by 2018. The conglomerate has 593k employees, holds a 12.9 percent share of the world passenger car market and sold 10.1m vehicles in 2014. It was highly praised for its business and operating model until the recent emission scandal[1]<\/a>, highlighting the risks of an interwoven, global production network.<\/p>\n

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Business model<\/strong><\/p>\n

Innovation-driven VW frequently launches new models. It adapts to meet local requirements, and focuses on specific features of individual countries (esp. in growth markets). While emphasizing demand for quality, VW strives to reduce costs through efficient production processes and economies of scale. The Group\u2019s goal is to \u201coffer attractive, safe and environmentally sound vehicles which can compete in an increasingly tough market and set world standards\u201d[A]<\/sup>.<\/p>\n

VW\u2019s vehicle portfolio covers niches and reaches across segments, ranging from motorcycles to low-consumption small cars, luxury vehicles, pick-ups, buses and heavy trucks. It undertook aggressive expansion efforts in recent years: VW acquired Bentley, Bugatti, and Lamborghini in 1998, turned Skoda in a wholly owned subsidiary in 2000, acquired MAN in 2010, won the mutual turnover against Porsche in 2012, and fancied to acquire Suzuki and Alfa Romeo. Today, it is made up of twelve successful and very well-known brands, with distinct and individual images: Volkswagen Passenger Cars, Audi, Seat, Skoda, Bentley, Bugatti, Lamborghini, Porsche, Ducati, Volkswagen Commercial Vehicles, Scania, and MAN.<\/p>\n

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Operating model\u00a0\u00a0\u00a0\u00a0 <\/strong><\/p>\n

Through a certain degree of centralization VW secures control and leverages its size, while the global presence allows it to take account of local specifics: R&D (including international trend- and technology-scouting) is fairly centralized in Germany, with minor research bases in the US, Japan and China. Similarly, Group procurement purchases production materials, services and capex centrally to leverage bargaining power, but works in 39 locations across 23 countries.<\/p>\n

To ensure stable and efficient flows of high-quality and innovative procured components, VW pursues sustainable, long-term relationships with a variety of suppliers and demands a high degree of quality and commitment.<\/p>\n

The Group\u2019s multi-brand strategy generates internal competition, supports switchers experimenting with different brands, and appeals to a broad spectrum of people. Its strict hierarchical brand architecture with sub-brands (e.g. Lupo, Polo, Golf,\u2026) minimizes internal cannibalization of sales. The brands translate into corporate hierarchy and structure the business to represent consumer preferences inside the organization; the conglomerate consists of four product groups: passenger (VW), premium (Audi), luxury (Porsche), and commercial business holding company.<\/p>\n

The key component of process optimization and standardization is the modular platform strategy: design, engineering, production, and major components are shared over outwardly distinct models and types of cars. While other automakers share platforms across brands, VW\u2019s initiative is much more far-reaching: its entire production will rely on only three modular toolkits by 2020: The \u201cMLB\u201d[2]<\/a> supports bigger vehicles with longitudinally mounted engines, the \u201cMSB\u201d[3]<\/a> rear-engine sports cars, and the \u201cMQB\u201d[4]<\/a> engines mounted transversely to the direction of travel, which is common in microcars, sedans, crossovers and SUVs. The modular toolkits standardize the engine positioning and the distance between the front axle and pedal box; width, length and wheelbase can expand or contract according to model. Thus, different models can be integrated in the same production line. The modular platform strategy cuts costs, reduces production time, enhances flexibility to adapt to market trends and allows for shorter model development cycles. Consequently \u201cMQB could prove to be as revolutionary as Henry Ford\u2019s production line or Toyota’s just-in-time system\u201d[B]<\/sup>. However, a defect component potentially impacts millions of cars and leads to very high recall costs.<\/p>\n

\"Platform\"<\/a><\/p>\n

VW\u2019s ambitious goals strongly influenced its very meritocratic culture. Employees perceived high pressure to perform, promoting an authoritarian climate with limited open communication. Critics describe VW\u2019s feedback culture as backward and management style as \u201cmilitary\u201d and \u201cNorth Korea minus work camps\u201d[C]<\/sup>, identifying it as root cause for the emission scandal. Furthermore, VW lacked strict standards of compliance and governance esp. concerning its engineers, who can have enormous ramifications on the entire operational ability.<\/p>\n

While business and operating model align to a certain extent, VW remains exposed to ineffectiveness regarding company culture, compliance and governance.<\/p>\n

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[1]<\/a> As new vehicles have to meet ever stricter emissions standards for a range of pollutants, VW engineers illegally programmed and installed a software, known as \u201cdefeat device\u201d, in its diesel engines, which detects if a vehicle is in testing mode and activates emission controls to appear compliant with regulations. VW still seems uncertain about the details of the emissions scam, but up to 11 million VW, Audi and Porsche vehicles made from 2009 onwards may be affected and fines and penalties could hit $20 billion. Beyond the United States and Germany, several countries have launched investigations of their own against Volkswagen. The CEO resigned, but denied any knowledge of wrongdoing; several top executives and senior engineers have been suspended or fired. The long-term damage to VW\u2019s reputation is yet to be established.<\/p>\n

[2]<\/a> Modularer L\u00e4ngsbaukasten (Modular Longitudinal Platform)<\/p>\n

[3]<\/a> Modularer Standardbaukasten (Modular Standard Platform)<\/p>\n

[4]<\/a> Modularer Querbaukasten (Modular Transverse Platform). It debuted with the Audi A3 and Golf VII in 2012 and will supersede gradually the current PQ25, PQ35 and PQ46 platforms from 2005.<\/p>\n

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Sources:<\/p>\n