1. Situation Synopsis - background and case overview?
2. Key Issues - factors of greatest impact and key role players?
CASE STUDY 11.2: CAR WARS AT WOLFSBURG
Over the past 15 years, Volkswagen Group (VW) ac-quired several fiefdoms Audi, Lamborghini, Bentley, Bugatti, Skoda, SEAT that jealously guarded their brand and continuously rebelled against sharing knowledge. One member of VW's supervisory board (the German equivalent of a board of directors) commented that managing the company is "like trying to ride a chariot with four or five horses, each of which pulls in a different direction." Then Porsche AG entered the fray. The luxury sports car company, which relies on VW for some of its production work, began acquiring stock in VW and eventually achieved a controlling interest. Porsche CEO Wendelin Wiedeking was aware of VW's internal rivalries. "If you mix the Porsche guys with the Audi guys and the VW guys you will have trouble," says Wiedeking. "Each is proud to belong to his own company." Yet Wiedeking stirred up a different type of conflict as Porsche tightened its grip over VW's supervisory board. Through an unswerving drive for efficient production and astute marketing, Wiedeking and his executive team trans-formed Porsche into the world's most profitable and presti-gious car company. Wiedeking wanted to apply those practices at VW by closing down inefficient operations and money-losing car lines. "Wiedeking is a Porsche CEO from another corporate culture," says German auto analyst Christoph Stuermer. "He's out to maximize profits by cutting costs. And he snubbed everyone, telling off VW management, inter-fering with their way of doing business." Ferdinand Dudenhoeffer, director of Germany's Center of Auto-motive Research (CAR), agrees. "Porsche is very success-ful in being lean and profitable. It's not going to be harmonious." Particularly offended by Wiedeking's plans was VW chairman Ferdinand Piëch, who had a different vision of Europe's largest automaker. Piëch, whose grandfather developed the VW Beetle, placed more emphasis on spectacular engineering than exceptional profits. For example, he supported the money-losing Bugatti brand, which VW acquired several years ago when Piëch was CEO. More recently, Piëch championed the Phaeton, VW's luxury car that broke new ground in innovation ...
The discussion focuses on the very different views of two different auto maker executives and the conflict that arises during a partnership agreement, then attempted takeover. The discussion subtly points out the advantages and disadvantages of leadership and conflict management styles that are very different.
There are two with with a couple of questions. Thanks for your help.
Benetton Group S.P.A..: Raising Consciousness and Controversy with Global Advertising
Benetton Group S.p.A., the Italy-based global clothing retailer, exhibits something of a dual personality. Academics have hailed the company's information technology expertise: Benetton has also been cited as a textbook example of a flagship global firm that excels at building relationships. Moreover, the company continues to innovate in the area of upstream value chain activities: A recent article in Sloan Management Review explains how Benetton is rethinking its global supplier and distributor network. By contrast, the company has gained a great deal of publicity-much of it negative-for an advertising strategy that, over the course of nearly two decades, has emphasized social issues rather than the company's products.
Worldwide sales of Benetton's brightly-colored knitwear and contemporary clothing doubled between 1988 and 1993 to 2.75 trukkuib kure ($1.63 billion). In 1993 alone, sales were up about 10 percent, and net income increased by 13 percent. The strong showing in 1993 was due in part to the devaluation of the Italian lira, which enabled Benetton to cut prices for its clothing around the world. By contrast, 1994 results were discouraging. Sales were flat at $1.69 billion, operating profits fell 5 percent, to $245 million, and margins narrowed to 13.9 percent, down from 14.7 percent during 1991 to 1993. The sales slump was surprising in view of the fact that Benetton had opened stores in China, Eastern Europe, and India and extended the brand into new categories, such as footwear and cosmetics.
Some industry observers believed that Benetton's wounds were due in part to a backlash from Benetton's highly controversial global advertising campaigns, now several years old, keyed to the theme "The United Colors of Benetton." Various executions of the ads, in magazines and on posters and billboards, featured provocative, even shocking photos designed to focus public attention on social and political issues such as the environment, terrorism, racial issues, and sexually transmitted diseases. Te creative concept of the ads reflected the views of Oliviero Toscani, creative director and chief photographer for Benetton. "I have found out that advertising is the richest and most powerful medium existing today. Therefore, I feel responsible to do more than say,' our sweater is pretty," he told The New York Times. Noted Victorio Rava, worldwide advertising manager, "We believe out advertising needs to shock, otherwise people will not remember it."
One of the first ads to stir controversy depicted a white hand and a black hand joined by handcuffs; another showed an angelic elite child embracing a black child whose hair was unmistakably styled to resemble the horns of a devil. An ad with a picture of a black woman nursing a white baby appeared in 77 countries; while banned in the United States and the United Kingdom, and ad won awards in France and Italy. In fall 1991, several U.S. magazine publishers refused to carry some of the ads; one depicted a nun kissing a priest. A picture of a newborn baby covered with a bloody placenta was also rejected. According to Benetton's Rava, "We didn't envision a political idea when we started this "Colors" strategy five years ago, but now, with racist problems becoming more important in every country it has become political on its own."
With its next series of ads, Benetton used images associated with sexuality. As Peter Fressola, director of communication explained the message strategy, "We're saying there are two important issues to be addressed, and they are overpopulation and sexually transmitted diseases such as AIDS. I think it is time to take the gloves off and put on the rubbers and address these issues." In an interview with Advertising Age, Toscani explained, "Everybody uses emotion to sell a product. We want to show, in this case, human realities that we are aware of." The ads broke new ground for the images they presented; A man dying of AIDS surrounded by his family; a montage of multicolored condoms; a group of people with the initials HIV stamped on their arms; test tubes filled with blood labeled with the names of world leaders.
In France, the HIV ad caused a great deal of controversy. One man who was dying of AIDS ran an ad with a picture of his own face above a headline that read, "During the agony, the sales continue." In the United States, where the number of Benetton stores had been slowly dwindling, the ads were poorly received by many customers and Benetton retailers. The manger on Benetton store in Biloxi, Mississippi, received telephone calls from people who said they refused to shop at stores selling products from a "sick" company. In Florida, one franchisee closed a dozen Benetton locations, nothing, "It is not our function as retailers to raise the consciousness of people. I've had long, hard fights with Italy over the advertising," In an effort to help mollify its American licensees, Benetton began providing them with local ads featuring clothing instead of social issues. At the national level, however, Benetton continued the controversial ads. When asked about the possible negative impact of customer boycotts, Luciano Benetton, president of the company's U.S. division, said, "It's silly to change direction because someone in the market thinks it's not right. We are sincere, and we are consistent in pursing it this way."
Simon Anholt, an industry consultant and author of a book about international advertising, has asserted that the campaign's critics were missing the point. For one thing, notes Anholt, the goal of much youth-oriented advertising is to make a brand famous rather than to sell a product; Benetton's advertising has certainly accomplished this goal. A second point is that there is not meant to be a rational link between the message and the product per se; the target audience for the Benetton brand neither looks for nor desires such a link. Instead, Anholt believes, young people often wish to identify with a mindset or a philosophy; the marketer's task in such instances is to link the philosophy to the company's brand. Finally, Anholt suggests that the Benetton campaign may well have been designed to shock the parents of Benetton's target consumers' according to this view, young people are often attracted to the "hot" brands or "cool' styles that an older demographic may find offensive.
In the spring of 1994, Toscani pushed the envelope even further. A new $15 million ad campaign that ran in 25 countries featured a picture of the bloody uniform of a Croatian soldier who had died in the Yugoslavian civil war. Although Benetton executives had come to expect criticism, they were unprepared for the latest reaction. The company was accused of exploiting the war for the sake of profit. In France, many of the offending posters were pulled down or covered with graffiti reading "boycott Benetton" and "this is blood for money." The French minister for humanitarian affairs even made a public announcement discouraging people from buying Benetton sweater; he called for his fellow citizens to "pull (the sweaters) off people who are going to wear them." In some parts of Germany and Switzerland, the company's products were banned. Some media reports alleged it did not belong to the fallen soldier named in the ad. The Vatican newspaper charged Benetton with "advertising terrorism."
Luciano Benetton acknowledged that, "This is not what a corporate communications campaign should do. It should create interest." Still, he vowed the company would continue "to search for new facts and new emotions" to include in its ads. Indeed, when the Sarajevo daily newspaper Oslo bodhenie (Liberation) requested posters of the ad to put up around the city, Benetton supplied 10,000 copies.
Benetton occasionally put controversy aside and ran more mainstream ads. In 1995, the Chiat/Day agency created a television campaign that featured models posing and dancing against a white background while a voiceover presented the models' thoughts. In mid-1997, a new print campaign featured individual close-up portraits of young people from around the world juxtaposed with photos of Benetton apparel on the facing page. Benetton also teamed up with the United Nations for a campaign keyed to the International Year of Volunteers 2001. In 1998, aiming to boost sales and reach a broader market in the United States, Benetton reached an accord with retailer Sears, Roebuck and Co. A new, lower-priced clothing line, Benetton USA, was created especially for Sears.
By 1999, however, Toscani was championing a new cause: prisoners on death row in the United States. Once again, a number of critics took the company to task. Bob Garfield, the highly-regarded ad reviewer for Advertising Age magazine, awarded the campaign zero stars on a one-to four-star rating system. Garfield had dismissed some of Benetton's previous ads as "banal expressions of moral outrage over war, racism, and disease." Although Garfield acknowledged that the issue of capital punishment was worth exploring, he asserted that "no brand has the right to increase its sales on the backs, on the misery, on the fates of condemned men and women..."
In 2000, the state of Missouri filed a lawsuit against Benetton alleging that the company had misrepresented itself when requesting the interviews with death-row inmates. A week after the suit was filed; Sears cancelled its agreement with Benetton. (The lawsuit was settled after Benetton officials agreed to apologize to several Missouri families whose relatives were murder victims.) In May 2000, three months after the launch of the "We, On Death Row" campaign, Oliviero Toscani resigned from Benetton. In an interview with Ad Age Global in 2001, Toscani defended his body of work. "Most good ads are forgotten after six months, but who still remembers the Benetton ad with the priest kissing the nun? Ten years later and people remember! That's immortality!" he said. He also noted that Benetton's sales in 2000 were 20 times greater than they had been at the beginning of his career with the company.
Still, in 2000, U.S. sales accounted for just 11 percent of the Benetton's $1.8 billion in revenues, and the number of stores in the United States had dwindled to 150. In 2001, Benetton launched a new $10 million campaign in the United States that sidestepped social issues. The new ads, which some observers viewed as similar to ads for Gap, featured lively multiethnic models dancing in the company's knitwear. Benetton also announced plans to open new mega stores in key U.S. cities such as New York and Atlanta.
1. Do you believe Benetton is sincere in its efforts to promote social causes thought its advertising?
2. Compare and contrast the controversy over the "We, On Death Row" advertising campaign with the controversies generated by the earlier campaigns of the 1990's. Do you think Americans would respond differently than, say, Europeans? Why?
3. There is a saying in the marketing world that "there is no such thing as bad publicity." Does that apply in the Benetton case?
4. Assess Benetton's efforts to boost sales in the United States. What recommendations would you make to management?
Volkswagen AG: The Second Time's the Charm for Would-Be Global Automaker
Volkswagen AG enjoys the distinction of being the numerate carmaker in Europe and the fourth largest in the world. The compact Golf is the best-selling car in Europe, where VW commands a 17 percent market share. Initial European demand for a new midsize model, the Passat, was so strong that there was an eight=month waiting list. The company can boast that its giant Wolfsburg plant is home to the most automated production line in the world, capable of completing 80 percent of a car's assembly by machine. VW ranks as the second-largest company in the new Germany; only Daimler Chrysler is bigger. Outside Europe, Volkswagen has also achieved considerable success. In Mexico, for example, the company's whale of the passenger car market is 40 percent. Volkswagen is also the number one Western auto manufacturer in China, where it commands 55 percent of the market.
Despite its stature in the global auto industry, VW's financial performance has been erratic in recent years. In 1992, vehicle sales reached an all-time high of 3.5 million units. In 1993, VW was in the red due to a DM 1.84 billion loss at its Sociedad Espanola de Automobiles de Turisme (SEAT) unit in Spain. In 1994, net income rebounded to DM 150 million on sales of DM 80 billion. As these results suggest, VW faced enormous challenges as the twentieth century came to a close. The company has been forced to confront the fact that its costs are out of control. Much of the huge Wolfsburg assembly plant, parts of which date back to 1938, is woefully inefficient in comparison to lean-production facilities operated by competitors like Toyota and Nissan. VW's German plants must run at 90 percent of production capacity for the company to break even; European rivals can break even at production levels of 70 percent. Meanwhile, Japanese production capacity in Europe is approaching one million vehicles. The advent of the single market brought an end to trade barriers and quotas; as a result, competition in Europe is heating up.
VW has also been plagued by headaches as plans to source cars in lower-wage countries such as plans to source cars in lower-wage countries such as Portugal and Mexico workers to be quality conscious, manufacturing problems with new Jetta and Golf models made in Puebla, Mexico, caused a severe shortage of vehicles in North America during the 1993 model year. The situation only worsened Volkswagen's fortunes in the United States; here the company was clinging to a market share of barely 1 percent.
These and other problems can be traced in part to former chairman Carl Hahn's attempts to implement his vision of VW as Europe's first global automaker. In fact, management guru Peter Drucker credits Volkswagen for developing the first truly global strategy more than 30 years ago. By 1970, the Beetle was a mature product in Europe; sales were still moderately strong in the United States, and booming in Brazil. Drucker describes what happened next;
The chief executive officer of Volkswagen proposed switching the German plants entirely to the new model, the successor to the Beetle, which the German plants would also supply to the United States market. But the continuing demand for Beetles in the United States would be satisfied out of Brazil, which would then given Volkswagen do Brazil the needed capability to enlarge its plants and to maintain for another ten years the Beetle's leadership in the growing Brazilian market. To assure the American customers of the "German quality" that was one of the Beetle's main attractions, the critical parts such as engines and transmissions for all cars sold in North America would, however, still be made in Germany. The finished car for the North American market would be assembled in the United States.
Unfortunately, this visionary strategy failed. One problem was resistance on the part of German unions. A second problem was confusion among American dealers about a car that was equally "made in Germany," "made in Brazil," and "made in the USA," Two decades later, as described in an interview with Harvard Business Review, Hahn's strategic plan for the 1990's and beyond called for a decentralized structure of four autonomous divisions. In pursuit of this vision, Hahn invested tens of billions of dollars in Czechoslovakia's Skoda autoworks and SEAT in Spain. The Volkswagen, Audi, Skoda, and SEAT units each would have its own chief executive. As a whole, the company would be capable of turning out more than four million cars annually in low-cost plants located close to buyers. The company's R&D center, however, would continue to be in Germany. Highly automated plants in Germany would provide components such as transmissions, engines, and axles to assembly operations in other parts of the world.
In Spain, VW hoped to take advantage of labor rates 50 percent lower than in West Germany and roughly on par with those paid by Japanese companies with factories in Britain. Because labor makes up a larger model, and because annual demand in Spain amounts to 500,000 cars, Spain was an attractive location for small-car production. Besides serving the domestic market, VW hoped to use Spain as a production source that would allow it to cut prices and boost margins in Europe. Between 1986 and 1990, VW paid the Spanish government a total of $600 million in exchange for 100 percent ownership of SEAT. The company increased Spanish production from 350,000 to 500,000 vehicles; the popular Golf model represents about one-quarter of the output. VW invested $1.9 billion in a new plant in Martorell capable of producing 300,000 cars each year.
Similar reasoning was behind VW's 1991 purchase of a 31 percent stake in Skoda from the Czechoslovak government. Located northeast of Prague in the city of Mlada Boleslav, the Skoda works enjoyed distinction as the most efficient plant in the former Soviet Bloc. However, product quality was low, and the plant was a major source of pollution. With an eye to doubling production to 450,000 cars, VW pledged to invest $5 billion by the end of the decade. VW's presence has also persuaded TRW, Rockwell International, and other parts suppliers interested in serving Skoda and other automakers in Central and Eastern Europe, to establish operations in the Czech Republic. However, to maintain their low-cost position and ensure quality control, VW and Skoda executives are hoping to go a step beyond the Japanese-style "lean production" system that emphasizes just-in-time delivery from nearby suppliers. Several different suppliers, including the American company Johnson Controls and Pelzer, a carpet maker based in German, will manufacture components such as seats, instrument panels, and rear axles inside the plant itself. As Skoda CFO Volkhard Kohler explained in 1994, "We have to organize better than in the Western world and use supplier integration. Wages will increase, so we have to find other ways of being cost-effective. Supplier integration is part of the new thinking and what we do here can be a model for the West." Professor Daniel Jones of the Cardiff University Business School supports the effort. "It's physically integrated, but in terms of management and performance each runs his own show. It makes a lot of sense because you have the direct integration of people making the parts and the people putting them in the car," he said in an interview.
Hahn also earmarked $3 billion for a project in which he took a keen personal interest; investment in the former East Germany, where he was born. On October 3, 1990, German reunification added 16 million people to Volkswagen's home-country market virtually overnight. Under communism, the citizens of East Germany had a choice of basically one car: the notoriously low-quality Trabant. Hahn's strategy for a reunited Germany included building a new $1.9 billion factory that would employ 6,500 workers and produce a quarter of a million Golf and Polo models each year. The investment was justified in part by forecasts that East Germans would buy 750,000 cars each year; VW aimed to capture a third of the market, equal to its share in West Germany.
Unfortunately, Hahn's vision did not anticipate a global recession. First quarter 1993 sales in Germany were off by 25 percent; across Europe, sales declined by 17 percent. Needless to say, Hahn's multibillion-dollar investments weren't paying off. In January 1993, Hahn was succeeded as chairman by Ferdinand Piech, head of VW's Audi AG subsidiary and grandson of Ferdinand Porsche, designer of the legendary cars that bear his name, as well as the Volkswagen Beetle. Piech, who has been described as "steely eyed and intense," immediately declared a state of crisis in the company and began taking drastic actions; cost cutting topped the list. Piech planned to trim VW's worldwide employment of about 274,000, starting with 20,000 jobs in 1003. Despite sales increases in the Spanish market, SEAT was such a money loser that VW was forced to lay off several thousand workers. Spain's rigid labor laws make layoffs so costly that Piech was forced to ask the Spanish government for a subsidy of more than 30 billion pesetas ($230 million) to pay for the restructuring.
Meanwhile, the new chairman was facing a different kind of challenge. With great fanfare, VW announced in March 1993 that it had succeeded in luring a new production chief away from General Motors. Jose Ignacio Lopez de Arriortua was expected to play a major role in cost cutting at VW, but he arrived amid accusations of industrial espionage. Specifically, GM alleged that Lopez and several colleagues had left with secret information on product development and other sensitive issues. The controversy did not stop Lopez from doing what he had been hired to do. He broke long-term contracts with many of VW's suppliers and put new contracts up for bid; as a result, a higher percentage of components are now sourced outside Germany. At VW's new General Pachecho plant in Buenos Aires, Lopez subcontracted various aspects of production to a dozen outside companies. VW workers build a few crucial parts such as the chassis and power train; suppliers are responsible for various other tasks such as assembling instrument panels. Lopez anticipated a 50 percent reduction in costs. In the end, the espionage controversy cost Lopez his job, and CEO Piech settled the civil case by agreeing to pay GM $100 million and buy $1 billion in GM parts.
Even though his tenure at VW was brief and stormy, the positive aspects of the Lopez legacy are likely to endure. Maryann kellar, author of a book about VW, calls the Czech and Argentine experiment "something that has been talked about for years as the next great productivity and cost enhancement move by the industry." The strong leadership effort by VW's top executives is one reason why many observers remain bullish on the company, despite overall slow growth in the European auto market. Piech pledged to slash the number of auto platforms VW offers in its various nameplates from 16 to 4 by 1998. In 1996, Skoda rolled out the Octavia, the first new car developed by the Czech plant during the Volkswagen era and the first to use a VW chassis platform. Piech also won concessions from IG Metall, the German autoworkers union. The union agreed to 2.5 percent annual pay raises and a pledge of job security. In addition, the work day for many assembly line workers has been reduced to five hours and 46 minutes-in essence, a four-day week, the union also agreed that paid hourly breaks would be cut to 2.5 minutes from 5 minutes. CFO Bruno Adelt estimated that all the agreed-upon changes would boost productivity 4 to 5 percent.
Even as VW expands production in emerging markets and introduces production efficiencies, it is devising a strategy for a comeback in the United States. Mexican production of a new version of the legendary Beetle began in 1997 with a U.S. launch in 1998. As board member Jen Neumann said, "The Beetle is the core of the VW soul. If we put it back in people's minds, they'll think of our products more." Like its predecessor, the new Beetle has curved body panels and running boards. However, it is a front-wheel-drive model with more headroom and legroom. Marketing managers priced the new model at about 15,000, 10 percent higher than the company's entry-level Golf. This strategy de-emphasizes appeal to college-age, first-time buyers and targets a broad group of consumers who are looking for more than cheap transportation.
1. Evaluate Volkswagen's goal of becoming Europe's first global automaker. What is the rationale behind the strategy?
2. What is the biggest challenge currently facing Volkswagen management?
3. In 2002, VW launched a new super luxury model, the $85,000 Phaeton. Assess its prospects for success.