Transform a company that is almost bankrupt into a very successful one

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I have chosen as theme for this project "Leading strategic change", because I believe is amazing how a person can transform a company that is almost bankrupt into a very successful one, how a single person manages to orchestrate all the employees and operations of a company and accomplish a successful turnaround. More specifically, this theme is approached from the perspective of the case of Ferdinand PiÑ‘ch, who took over as CEO of the Volkswagen Group in 1993. After almost a decade of his leadership, the company had become "one of the world's best car companies", as it was declared in a Business Week article: "No doubt about it: Volkswagen CEO Ferdinand PiÑ‘ch engineered one of Europe's greatest turnarounds ever." [1] 

From previous years until 1993, when PiÑ‘ch took over as CEO, Volkswagen was in a deteriorating financial performance with profits down 85 percent and near bankruptcy. By 2001 VW was the market leader in Europe, China, and South America. Overall VW was the world's fourth biggest car company. [2] 

VW's turnaround was a real challenge, and as consequence only a good leader could save the company and transform it in one of most successful. With his huge passion for cars from early age, coming from his grandfather, the auto pioneer Ferdinand Porche, Piёch had the vision, competence, and persistence and he succeed. He is also known as an outstanding car developer.

When Piёch took over, there were many misalignments at all levels that made a change necessary. Some of the main misalignments are enumerated in Table 1. The company did not have the right strategy, its costs were very high, and the main factory in Germany was breakeven only at utilization rates above 100 percent. Moreover, the competitive environment was very tough, with Japanese factories being on average 35 percent more efficient than the European car makers (e.g. JIT, lean production, kanban).

Note: Table 1 and Table 2 and most of the information used in analyzing VW situation and Piech' leadership, are based on the data from the case study Globalizing Volkswagen, Creating Excellence on All Fronts by Z. Jan Kubes, George Rȁdler.

Environment

presence of competitors and especially Japanese competitors with better strategies

maturing markets in Europe, North America and Japan

huge R&D expenditure

car industry characterized by high rate of innovation

political conflict of interests

recession for the European car industry (90's)

high bargaining power of suppliers

customers looking for lifestyle/niche models

increasing power of buyers

Strategy

no clear strategy resulting in fixed costs rising faster than sales, high prices with low profits due to very high costs

turnaround strategies of previous CEOs failed (e.g. Carl Hahn, Rudolf Leiding, Kurt Lotz, Toni Schmucker)

the complexity of manufacturing process made impossible to reap economies of scale

there was little integration among brands, costly duplications between car brands and weak model line-up

Core competencies

Volkswagen had the image of producing high quality cars and with good sales network an impressive reputation and brand, but these were not enough to avoid the very bad situation of the company

Organization

too many employees and a strong policy against lay-offs due to political reasons (60% of the company sold to the public and the rest hold by the federal government and state)

chaotic accounting system

culture: managers were taking actions in a irresponsible way (nobody suffered when company was loosing money )

no collaboration between brands within VW Group, no communication

Table 1. Strategic misalignments at VW

Before coming to VW, Piёch was recognized as the one who successfully repositioned Audi as a technology leader. Being always full speed ahead, he managed to turnaround VW as well. The re-alignment was achieved at Volkswagen through Piёch' recovery plan. The strategic realignment is briefly presented in Table 2.

Environment

presence of competitors and especially Japanese competitors with better strategies

maturing markets in Europe, North America and Japan

huge R&D expenditure

car industry characterized by high rate of innovation

political conflict of interests

recession for the European car industry (90's)

high bargaining power of suppliers

customers looking for lifestyle/niche models

increasing power of buyers

Strategy

cost cutting, integration among brands (platform strategy), use of synergies, achieve economies of scale, increase in foreign labor, open cost effective plants in other countries

continual upgrading of product line

acquisitions and ventures

globalization

Core competencies

cost discipline

great cars

execution (Piёch leadership and his effect on VW)

Organization

innovation in labor relations (e.g. flexible production schedule in Germany, 5000x5000 program, global works council)

culture of managers responsible for their actions: cost consciousness

open communication, swapping ideas between brands, managers gathered to test cars in other countries, exchange of technologies between brands

Table 2. Strategic realignment at VW

How was strategic change implemented at VW?

Piёch' recovery plan involved avoiding cost duplication of investments, cutting down parts proliferation within the VW's Group, and rationalizing the production of different models of vehicles. His strategy was in line with future developments in the car industry.

First of all, PiÑ‘ch key of success as he admits is to find the right people. As consequence he cut the salaries of board members by 20 percent and he limited the VW's management board to just five members, from nine before he took the job. Except for the CFO all other members were new; some of them followed him from Audi. Creating a group with enough power to lead the change effort is one of the steps necessary in leading a change [3] .

He strongly encouraged open communication among board members. He introduced glass walls in board's members' offices. Every board member had to name a top executive who could replace him in case of absence. Therefore another step was to encourage the board to work together as a team. Encourage them to work as a team is another action needed in leading the change. [4] 

He believed in open competition between brands: "we let our brands do what they like as long as they bring in 6.5 percent sales [return on sales]". Therefore he set clear targets. He changed the rules of behavior. The managers had to meet in secret locations of the world to test cars, and to swap ideas about cars and to sell each other technologies they were developing. This was unusual for them, but PiÑ‘ch was encouraging this untraditional collaboration and the testing of products, believing that just looking at finance is not enough for success. Moreover, he instilled a culture of helping the smaller companies in the Group, by offering technologies and support. The high participation of management was another factor in achieving a great performance. Creating a vision and empowering others to act on the vision are other steps in leading change. [5] 

When Piёch took over VW he realized that nobody suffered when the company was losing money. He changed this attitude immediately, by making the managers more responsible for their actions. To make them focus on profitability, VW required new projects to be self financing. Any changes needed the board's approval, and Piёch himself monitored VW's purchasing list for pricing that seemed too high. Therefore in order to achieve and maintain the alignment, Piech was keeping discipline and he was vigilant in monitoring changes.

The departments were structured as a matrix in order to reap maximum synergies. The challenge was to benefit from economies of scale and keep the brands distinct in the same time. The manufacturing process was improved by use of similar platforms. Moreover, VW made use of diversification by offering financial services as well.

Piech was also taking risky actions. As an example, nobody was waiting luxury car from VW, but they became established players in the premium segment as well. Piёch was not afraid to take risks as he was very confident in his actions.

When Piёch realized that they have too many employees in time of recession, rather than laying them off he decided to introduce a four day week and reduce the annual work-time by 20 percent and receive 16 percent less salary. In this way he kept the employees until the recession lifted and showed to be a responsible employer.

In my opinion, Piёch is a change leader because with his self confidence and love for cars, he managed to bring VW from almost bankruptcy in a successful company. He was not afraid to change the members in the board, to take risky action, he challenged the managers to be more responsible and be involved in the process of change.

Piёch held personal responsibility for R&D, production, purchasing, quality and the VW brand. He was visiting the plants frequently and talking with employees. At the plant level he was known "to be though but extremely reliable." Piёch commitment to his job was huge, as he says you must be one the "field" to really see how things are going and to monitor them:

"I only spend few hours per week in my office. The life of the company does not happen here. It happens out there, in the development department, on the race track, in the design studio - there you get an impression of what is going on. It is management by asking questions, probing, clarifying, connecting, and always putting time pressure on people and never remaining non-committal." [6] 

His family owned one of the biggest businesses in Austria and a 34 percent stake in Porsche. Because of his background some argue that he is such confident and he is not afraid of confrontations, like others, for whom losing their job is a financial threat. He was described as being tough, authoritarian and that's why he had sometimes more difficulties with top managers. Journalists often described Piёch's management style as one of fear and brutality. But in the same time he is considered as being inspiring.

PiÑ‘ch is a transformational leader because he had a vision for VW and instilled commitment of employees resulting to the extraordinary performance of VW. He engaged in intellectual stimulation and inspirational motivation, by putting the managers to be more involved and responsible and make the change possible. He had as well charisma. He definitely did not back down from a fight and he followed his intuitions even though others did not believe it will succeed. He consolidated power and swept out top managers that did not follow his lead. [7] 

He had the engineering know-how and the right strategy to turnaround VW. He managed to stimulate the managers to achieve high performance standards. Regarding the 5 level leadership, I consider him as being at level 4, the effective leader, since he has professional will. From my own research I did not find reasons to suggest that he has personal humility. There are rumors that he has children that he doesn't even know and also problems with some family members.

I believe he is an authentic leader as well, because his words are consistent with his deeds. Piёch is often described as intense and unpredictable; he did not have a chauffeur, drove to work himself and often got first hand information from the dealers personally. Many people described him as being focused on the products: he lives, breathes and loves cars.

It is also possible, because of its commitment for its employees, that VW's Group success was not reflected on the stock markets. Piech said:

"I don't say shareholders don't count for Volkswagen, but they count on the same level as our customers and our employees," says Piech. "This is very European. If I would need a lot of capital, we would have to adapt. But as long as I can build up trust through the German system for our shareholders, what I try to do doesn't show up to our competitors." [8] 

In my opinion, Piech took the right actions to lead the change and his transformational effort can be seen in VW's success over his years of leadership. Moreover, Piëch was the winner of the award of Car Executive of the Century in 1999 [9] . After his retirement he still wanted to keep the connection with VW and his love for cars, as a consequence he currently serves as Chairman of the Supervisory Board at Volkswagen AG. Some of his media nicknames are "the emperor" or "patriarch", names which suggest that he is a powerful man and the fact that others are willing to follow him to accomplish his vision.

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