Case 3 VWoA-Group ITStalwarts

Volkswagen America

Managing IT Priorities Group 2 – IT Stalwarts Balaji Kannan Carlos Salvador Gary Kwong Kathleen Ojo Kurtis Franklin

INFO 609 – Fall 2011 California State University, San Bernardino

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Contents GENERAL ISSUES .................................................................................................................................................... 3 BACKGROUND ......................................................................................................................................................... 4 STAKEHOLDERS ..................................................................................................................................................... 6 THEORY AND CONCEPTS ..................................................................................................................................... 7 CORPORATE GOVERNANCE .................................................................................................................................................... 7 NEXT ROUND OF GROWTH .................................................................................................................................................... 8 HIGH LEVEL BUSINESS ARCHITECTURE .............................................................................................................................. 9

SYMPTOMS AND PROBLEMS .............................................................................................................................. 9 IT PROJECTS ARE HANDICAPPED BY BUDGET CONSTRAINTS............................................................................................ 9 DIFFICULTY PRIORITIZING IT OPTIONS ............................................................................................................................. 10 LEGACY CONSTRAINTS .......................................................................................................................................................... 10 IT IS VIEWED AS AN OBSTACLE, NOT AN ASSET ................................................................................................................ 10 FUNDING GLOBAL INITIATIVES - THE UNFUNDED SUPPLY FLOW PROJECT.................................................................. 10 COMPETITORS SIGNIFICANTLY EXPAND IT INITIATIVES ................................................................................................. 10 WEB ONLINE PURCHASING EXPANDS ................................................................................................................................. 11 ALTERNATIVES .................................................................................................................................................... 11 BUDGET CONSTRAINTS ........................................................................................................................................................ 11 PRIORITIZING IT OPTIONS .................................................................................................................................................. 12 LEGACY CONSTRAINTS ......................................................................................................................................................... 13 IT AS AN OBSTACLE AND NOT AS AN ASSET ...................................................................................................................... 14 UNFUNDED SUPPLY FLOW PROJECT ................................................................................................................................... 14 COMPETITORS ADVANTAGE IN IT OPERATIONS IN THE ENTIRE SUPPLY CHAIN ......................................................... 15 EBUSINESS CHALLENGES ...................................................................................................................................................... 16

EVALUATION ........................................................................................................................................................ 16 FIRST PHASE .......................................................................................................................................................................... 16 SECOND PHASE ...................................................................................................................................................................... 17 THIRD PHASE ......................................................................................................................................................................... 17

BEST SOLUTION AND IMPLEMENTATION PLAN ...................................................................................... 17 CURRENT STATUS UPDATE ............................................................................................................................. 18

REFERENCES ......................................................................................................................................................... 20

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General Issues Dr.Steiger, Director of Future Technologies at Volkswagen Audi Group delivered an address at the DZ Bank on the 14th November 2011, on the "Sustainability in Product and Production: The Volkswagen Strategy." The address covered the global trends and the challenges facing the automotive industry. Demographic change and urbanization, global shifts and expansion of the middle class, competition for resources, global warming and connectivity and mobility were highlighted as the trends and 'sustainability' pegged as the leading concept of the 21st century (“VWAG_Nachhaltigkeitsbericht_online_e.pdf,” n.d.). Volkswagen has been through tumultuous changes through peaks with ev ery new product released and into deep valleys with matured product and product obsolescence. The recoveries after each sharp fall synchronized with a new product release. The business model weakness combined with the economic challenges of the past decade poses a significant threat for Volkswagen. The "Strategy 2018" that was unveiled during the recent address proposes a twin leadership focus, economic and environmental , in achieving the objectives of this strategy(“VWAG_Nachhaltigkeitsbericht_online_e.pdf,” n.d.). The challenges are not just external. The company faced many issues internally and until recently, there wasn't consensus even among the senior executives, in their views on implementing strategies. Volkswagen had a myopic view of functions other than the core ones, product and production. Information Technology was considered a overhead and kept to a bare minimum. The 10 years, 1992 to 2002, the 'valley of despair' in Volkswagen performance coincided with the 'IT is a overhead' focus. Volkswagen had lost IT knowledge and skills within the organization with the unwise IT decisions. Dr. Uwe Matulovic, the new Chief Information Officer (CIO) of Volkswagen of America (VWoA), had two primary concerns: defining governance and establishing development process directives. However, he found himself in a challenging position. Matulovic faced inadequate funding, new business architecture, and increasing pressure from his peers. Given Volkswagen's history of viewing IT as a source of overhead expenditures, and the unpredictable United States market, these circumstances did not come as a surprise(Applegate, 2009, pp. 452–454). Matulovic’s biggest hurdle to overcome was the capped funding determined by Volkswagen Audi Group, the parent of Volkswagen of America. VWoA requested $210 million, but was only allotted $60 million for IT projects. Given the scope of VWoA’s initiatives, this amount was far short of what was needed(Applegate, 2009). Volkswagen Audi Group's new chairman, Dr. Bernd Pischetsrieder initiated a new strategy in 2001, of diversifying the product offerings with a portfolio that would match the global demand for vehicles and not just focus on the traditional products. Simultaneously, the brands were consolidated into two groups, classic and sporty. A number of models were proposed in each group to be developed between 2004 and 2008. This posed a number of challenges for the VWoA. Their imports would go up from 9 models in 2002 to more than 22 models by 2008. The entire American organization would be overwhelmed and it required a strategy to be developed at the subsidiary level. As part of this strategy, the "Next Round of Growth" (NRG) was developed and it became the key leadership focus.

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A new prioritization process, a part of the NRG had been implemented to determine which IT projects will receive funding. This process for managing IT priorities was part of a new business architecture designed to align organizational activity with corporate goals and strategy (the key concept of governance). As with any new initiative, this process experienced some significant growing pains, especially in its inability to capture “behind the curtain” programs such as the intercontinental Supply Flow project. The conflict between the requirements of the new program and the traditional project boundaries posed significant challenges for Matulovic. His decisions were bound by budgets allocated to VWoA but the impact of his decisions was global. The creation of gedasUSA and the transfer of IT staff from VWoA to gedasUSA increased the frustration within Volkswagen America because of the relationship mandated by gedasUSA's charter, which was to serve as an independent entity in the Volkswagen group. The eBusiness initiatives, Executive Leadership Team (ELT), Information Technology Steering Committee (ITSC), the Digital Business Council (DBC) and Business Process, Technology and Organization (BPTO) created between 1999 and 2002 posed significant challenges to IT prioritization. According to Matulovic, the issues were related to ambiguity in the governance and development processes and not the technology itself. "Volkswagen in the U.S.: An Evolving Growth Story," a report on the American subsidiary was presented in Chattanooga, on the 26th September 2011 by its CEO, Jonathan Browning and EVP and CFO, Michael Lohscheller. At the highest level, the significant problem for VWoA was a very low market share for Volkswagen brand in America, a mere 2.5 % compared with 14.5 % in Asia and 12.8 % in Europe. The challenges according to this report were market structure and product offerings, quality perception, brand acceptance, and network and customer experience(Volkswagen Group of America, n.d.-a).

Background Volkswagen Audi Group (VWAG) is the flagship German company founded in 1937 during the Second World War. Ferdinanand Porche designed the earlier Volkswagen or "people's car" in the 1930's. The Volkswagen Group is headquartered in Wolfsburg and is one of the world’s leading automobile manufacturers and the largest carmaker in Europe. In 2010, the Group increased the number of vehicles delivered to customers to 7.203 million (2009: 6.336 million), corresponding to a 11.4 percent share of the world passenger car market. In Western Europe just over one in five new cars (21.0 percent) comes from the Volkswagen Group. Group sales came in 2010 to 126,9 billion euros (2009: 105.2 billion). Profit after tax in the 2010 financial year amounted to 7.2 billion euros (2009: 0.9 billion). The Group is made up of nine brands from seven European countries: Volkswagen, Audi, SEAT, Skoda, Volkswagen Commercial Vehicles, Bentley, Bugatti, Lamborghini and Scania.

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Fig. 1. Volkswagen Brands Each brand has its own character and operates as an independent entity on the market. The product range extends from low-consumption small cars to luxury class vehicles. In the commercial vehicle sector, the product offering spans pick ups, buses and heavy trucks. From the first quarter of 2011 the Group operates 62 production plants in fifteen European countries and a further seven countries in the Americas, Asia and Africa. Around the world, nearly 400,000 employees produce about 30,000 vehicles or are involved in vehicle-related services each working day. The Volkswagen Group sells its vehicles in 153 countries(Volkswagen, n.d.). It is the goal of the Group to offer attractive, safe and environmentally sound vehicles which are competitive on an increasingly tough market and which set world standards in their respective classes. The company's signature car was the Beetle, its most popular car for many decades propelling the company to its peak in 1969. Beetle remains the best selling car of all time (Applegate). Volkswagen of America (VWoA) is a subsidiary of the VWAG and it started by importing the European car to America. VWoA has been shored up by introduction of new product in the market, the Rabbit in 1977, the Jetta in 1985 and the New Golf, New Beetle and New Passat in 1997. Since its inception, Volkswagen has been focused on the impact it had on the environment and the society. It has been actively involved in funding many environment and social initiatives, the foremost among them being the $1 billion LEED(R) -- Leadership in Energy and Environmental Design state-ofthe-art plan in Chattanooga, and a $5.28 million Partners in Education program(Volkswagen Group of America, n.d.-a). Volkswagen America is focused on smarter, greener and safer journey for its customers and dedicated to its responsibility to the community at large. Volkswagen has invested more than $4 billion in the United States of which $7 million has been invested so far in education(Volkswagen Group of America, n.d.-b). In 1992, VWoA, amidst sharply declining sales and market share, outsourced IT to Perot Systems. In the decade through this outsourcing contract, Volkswagen America lost IT knowledge and skills in the

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company. The IT staff strength declined to fewer than 10 immediately after outsourcing and slowly grew up to 28 by 1999. In 1999, gedasUSA was created in the United States, as a subsidiary of gedasAG, the consolidator of IT operations within the entire Volkswagen group. It was mandated to perform independently an dcharge the Volkswagen companies for IT related work. It was expected to assume responsibility for IT operations after the contrac t with Perot Systems expired in 2002. By 2002, ELT had become the single point of governance for all IT issues. The ELT was tasked with consolidation of all the eBusiness initiatives with gedasUSA as the lead IT partner for VWoA. To address the ambiguity caused by the ELT and its position in the organization, Matulovic created the BPTO to deal with the portfolio of "challenged" projects. A Project Management Office was created and empowered with all IT projects. The primary objective of the PMO was to ensure that projects were better planned and controlled. Prior to PMO, Volkswagen had many projects that were far in the execution phase with no meaningful contribution to the overall strategy or objectives of the organization. Once the capabiliity to manage the projects was built, Matulovic turned his attention to "Project Selection," to synchronize the goals, reduce cost and time spent on unviable projects and to enable better allocation of funds. The key events in the history of VWoA are captured in the timeline shown below:

Fig. 2. - Timeline of key events in VWoA's history

Stakeholders Volkwagen America's stakeholders is the whole world. It's mission to deliver"people's car" to the public is shored up by the shareholder's confidence in their Board of Directors, headed by Prof.Dr.Martin Winterkorn.

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The Management Board for Volkswagen brand is headed by Dr. Winterkorn and supported by Dr.Antlitz on Controlling and Accounting, Dr. Hackenberg on Development, Dr.Garcia-Sanz on Procurement, Dr.Heizmann on Group Commerical Vehicles, Christian Klingler on Sales and Marketing, Dr. Neubauer on Group Components, Dr. Neumann on Human Resources and Hubert Waltl on Production and Logistics as of November 2011(Volkswagen, 2011). The employees of the company are an integral part of Volkswagen America in the achievements made and therefore a key stakeholder in the success of the company.The customers are the basis for the company. Dealers are the intermediaries through whom the company reaches out to its customers. Volkswagen America is governed by the regulatory policies of various administrative bodies such as the EPA and state agencies, Securities and Exchange Commission, and the Federal Trade Commission. The United States Government along with the state governments where Volkswagen does its business regulate the labor, security, and privacy policies. In addition to these, Volkswagen is subjected to Corporate Governance regulations of the German Corporate Governance Code. Corporate governance section is mandatory with the annual report filed by Volkswagen AG. Volkswagen through the LEED(R) program recognizes the society and the environment as key stakeholders in its business. In addition, Volkswagen invests in education through partnerships with universities around the country and therefore, has academic community involved as a stakeholder in its business. Its Enterprise Research Lab founded in the Silicon Valley in California relies on this partnership with the academic world in part.

Theory and Concepts Corporate Governance Volkswagen America and its parent uses three levers of behavior, structures and processes to have a compliant organization that is sustainable, risk-and-value focused, and ethical. These three levers provide the corporate governance framework for Volkswagen.

Fig.3. Corporate Governance Framework

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Next Round of Growth Within the global corporate governance model, Volkswagen developed the Next Round of Growth strategic model in order to support its extended product portfolio. The subsidiaries, business units and product centers looked up to the NRG in order to evaluate their compliance to the enterprise objectives on five elements or goal areas: a. b. c. d. e.

Customer loyalty New vehicle value Stable business architecture Pre-owned vehicle business Optimize supply flow

Build Brand Customer Loyalty

B

Improve Vehicle Value

C

A

Stable Business Infrastructure

NRG

Pre-owned Vehicle business

E

Fig.4. - Next Round of Growth Model

D

Optimize the Supply flow

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Customer loyalty had the highest rank of 1 and the optimization of supply flow, an internal goal ranked 5 (Applegate, 2009, pp. 452–453).

High Level Business Architecture Implementation of the NRG program, the BPTO and corporate strategy groups in VWoA, in partnership with gedasUSA, created a high level business architecture (Applegate, 2009, p. 454). This helped the strategists understand the relationship among the different elements, utilize the information inventory effectively, and map the functions to the organization.

Fig.4. - Relationship among Strategy, Business Architecture, and Performance The output of this architecture would form the blueprint for formalizing corporate governance and in prioritizing the IT projects. It helped VWoA relate the ability of the organization to execute the strategy (Applegate, 2009, p. 455).

Symptoms and Problems The IT function spearheaded by Maltovic faced many problems. The important ones among them were

IT projects are handicapped by budget constraints IT at Volkswagen has never been looked upon as having the potential to create a strategic advantage. This viewpoint has caused the IT budget to remain at subsistence levels in order to provide more funding for “more important” functions such as Sales & Marketing. Due to these constraints, in the mid 1990’s Volkswagen’s IT infrastructure began to lose pace with technology and now Volkswagen now

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finds itself in a hole. The IT budget not only has to provide for current projects, but also needs to be able to help the company recover from a decade of neglecting IT. The current budget of 60 million dollars falls far short of the required 170 million dollars for projects deemed important to Volkswagen’s NRG (Next Round of Growth) program. At this rate, IT will become an obstacle to growth.

Difficulty prioritizing IT options Volkswagen instituted a new system of IT project prioritization in 2004 which required three phases of evaluation for each individual IT project. In these phases, each project was evaluated on its synergies to other IT projects, its link to enterprise goals and its individual merit. Many managers had problems in linking and categorizing their different projects with this new system due to its complexity. In addition, the focus on enterprise goal linkage prevented essential projects that did not fall into specific categories to be denied funding. The result was that some business units were not given funding for any projects.

Legacy constraints VWoA’s IT system still contained legacy IT infrastructure which imposed limits on what could be done now to use IT as a strategic advantage. During the 1990s decisions were made to withhold IT investment to support market incentives and now VWoA is faced with an old system that has limited capabilities.

IT is viewed as an obstacle, not an asset Traditionally, Volkswagen executives fought to reduce the overhead costs of IT to increase available capital for marketing and selling its’ products. Today, the feeling still remains that IT is expensive when compared to the benefits reaped. At the micro level, managers see inadequate funding for their IT projects and view this as a hindrance to their teams’ productivity.\

Funding global initiatives - The unfunded supply flow project The process currently in place does not address projects which accomplish global goals and do not relate directly to the NRG goals. These projects, though very critical to the overall success of the company, will not receive the proper funding and will be significantly impacted or even curtailed. An example of this shortcoming is the Supply Flow project, a very important company project to improve global integration, which was not funded as it should be.

Competitors significantly expand IT initiatives As the competition starts to uses IT as a strategic tool to grow and expand their business, VWoA will have no choice but to do the same. It will become a matter of necessity rather than a matter of choice. Once consumers are hooked on a brand, they tend to remain loyal to that brand and the cost of getting them to switch is high.

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Web online purchasing expands This is a matter of demographics. As the younger generation grows up, they are used to the web and online shopping and there will be more buying done online. They will move from researching online to actually buying online. If the process of buying automobiles online is improved, there will a significant up increase in online automobile buying. This will directly impact the EBusiness teams and cause them to play a very prominent role in VWoA’s future.

Alternatives Budget Constraints a) Remove the budget cap completely By uncapping the budget, the true potential of IT as a strategic advantage can be realized. Projects must still go through a selection process to determine if they are in line with company strategy. Projects must also undergo a Cost-Benefit Analysis before they are approved. Disadvantages It will be difficult to sell an unlimited IT budget in an environment that doesn’t trust or value IT. b) Increase IT budget by 10% per year, until IT catches up A more conservative alternative would be to incrementally raise the IT budget year-by-year to allow IT to“ put out the fires” created by the decade of neglect. Once the IT infrastructure is up to date, the budget can be scaled back to the required level. Disadvantages It will be a few years before IT infrastructure catches up It will be difficult to decrease a budget once it has been higher. People will be accustomed to the larger budget and feel squeezed by the constraints. c) Create a separate IT Department for each business unit If each business unit had its own IT department with its own budget & full autonomy, there will be less fighting for “a piece of the pie”, & each unit will learn to carefully select its projects. Disadvantages There may be a silo effect where each unit blindly works on its own projects, and doesn’t seek ways to share resources and develop enterprise systems. d) Engage consultants to prioritize projects and determine appropriate IT budget Currently, each business unit believes that its projects are a priority and linking their projects to company strategy. Consultants can provide an objective view of the business’ IT needs.

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Disadvantages Consultants are somewhat limited by the information provided to them. This information may be skewed to push a certain project.

Prioritizing IT Options a) Allow business units some process exemptions. Each business unit would be allowed a certain number of IT projects that would automatically pass through to the final project list. The number of projects would be limited to a predetermined number or each business unit would be allocated a specific budget. This would force the business units to prioritize their most important business goals without having to worry that essential projects will be rejected due to bad categorization or a lack of linkage to other projects. If an individual business system project is selected for funding, other business units can pitch their projects that contain synergies to that project. Disadvantages No guarantee that all business units will get funding for projects Adds further complexity to the final decision making process b) Do not require business project/enterprise goal linkage Allow business units to pitch IT projects that are not linked to any specific enterprise goals. This will allow important projects that are not easily classifiable to be considered for funding. This will also stop managers from manipulating projects in order to get the right classification that will get funded. Disadvantages No guarantee that all essential business units will get funding. Enterprise goals may not be addressed by any projects c) Revert back to ad-hoc method (mutually exclusive to all other alternatives) Each project will be discussed on its merits by a team of business and IT managers. Projects that are deemed adequately viable and necessary to the organization will be funded until there is no more budget .Individual business unit managers will prioritize which projects are most important and will present them accordingly. Disadvantages Enterprise goals may not be addressed by any projects Synergies between projects from different business units will be missed d) Simplify new prioritization method The new method of prioritization contains three phases before a list of projects to be considered for funding is ever created. During each of these phases, the projects must meet many different requirements and fall into the right category before it can proceed into the next phase. Any of these restrictions can cause a needed project to be rejected and allow less necessary projects to get through. Instead, the process should identify a small, concise list of goals to be achieved and only consider

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projects that help achieve those goals. It should also consider projects that are important to the business unit itself. Disadvantages The final project list to be reviewed will be much longer causing more difficult decisions for the final committee. Projects not clearly defined may be submitted under enterprise goals projects by managers looking for easy funding e) Continue to use new prioritization method as is The current review process with three phases is a useful prioritization tool. It looks for synergies between the projects of different business units and focuses on specific enterprise goals. Disadvantages All of the problems of the current system still remain.

Legacy Constraints a) Use a Service Oriented Architecture (SOA) approach SOA can help VWoA leverage their existing legacy systems while helping them achieve greater interoperability with other systems in their enterprise as well as those of customers, partners, and suppliers. SOA can help deliver real-time access and increase speed and accuracy of making business decisions. Reusing critical business data and applications of the legacy system through SOA can help deliver quicker and cheaper results across all projects. Disadvantages VWoA would have to train their employees on SOA methodologies. The transition to the new SOA could take months to accomplish. b) Create an entirely new in-house IT infrastructure The IT department will replace the old legacy infrastructure with a new one that is based on the latest technologies. The new infrastructure will address all current problems and help to implement all of the new strategy recommendations. The new IT infrastructure will be designed to design and deploy projects more rapidly. Disadvantages This will be time consuming for the IT department and will take all of its resources. VWoA’s IT departments are not information technologists by training or experience; they lacked the knowledge for such a huge operation. c) Purchase a new IT system from an outside vendor

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VWoA will replace the legacy infrastructure with a new IT system specifically designed for their needs and capabilities. The outside vendor will bring VWoA’s IT system up to modern standards for them to continue and improve their business. Disadvantages This would be very costly and time consuming. In order to meet VWoA’s requirements, the outside vendor would have to create an entirely new infrastructure from scratch. IT people will have to learn the new system and contact the vendor for any issues.

IT as an obstacle and not as an asset a) Present industry examples of IT success to ELT Present industry cases of how IT has improved the efficiency of business processes while reducing costs. This will demonstrate to the Executive Leadership Team the benefits to be had. As an initial step, suggest small scale projects that would be perceived as quick wins which would help gain support for more IT projects. Disadvantages ELT may still reject the IT movement even with the proven cases. Resource utilization in gathering and presenting convincing information. b) Internal IT Marketing Campaign Leverage existing IT focused employees to drive an internal campaign. Create a monthly digital newsletter with key IT events, focusing on highlights of successful projects. Weekly IT Productivity tips via email to all employees showing how they can use technology to improve their day-to-day performance. Provide more classes and seminars to better educate employees on efficiently using existing IT tools. Disadvantages Employees could reject the campaign and resources will be wasted. c) Replace CIO with one from another company Hire a new CIO from within the industry with a proven track record of promoting and utilizing technology ineffective ways. The long-term effect would be very positive for the company’s IT strategies. This alternative would also boost morale within the company in showing strong support for technology initiatives. Disadvantages Expensive to obtain and very few potential candidates. Could be disruptive short term while getting up to speed on the current state of Volkswagen.

Unfunded supply flow project a) Draw funds from other projects. A percentage of the entire budget that has been allocated to projects can be set aside for global projects

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not directly related to NRG goals. The percentage will vary from year to year and will be based on the number of global projects that require funding. Disadvantages Can draw significant amount of money from the prioritized projects and impact their success. b) Fund the project from alternative sources in VWAG VWAG should provide the funds with a separate budget since they are the ones who are requesting these projects. Disadvantages May cause friction between the parent company and the American subsidiary. c) Split the project funding between VWAG and VWoA. This alternative is a compromise between the first two alternatives and would keep both sides happy if it is done correctly. It would require time and effort to determine the ultimate benefit that each side is receiving and allocate the appropriate budget responsibility to them. Disadvantages It will be very difficult to get both sides to agree. Will be time consuming and costly and cause delays in getting these projects implemented d) Revisit the entire prioritization process. Perhaps because of this problem and other issues with the current process, it might be a good idea to go back to the drawing board and develop a new project selection process. It can utilize the strong points of the current process and eliminate its weaknesses. Disadvantages Will be time consuming and costly and unsure if the final version will be any better All the alternatives are mutually exclusive to each other. This is either due to the fact that they get funds from different sources or the process is being revamped in the last alternative.

Competitors advantage in IT operations in the entire supply chain This is an external factor and beyond the control of Volkswagen. The more Volkswagen delays, the more significant will be the loss for Volkswagen. a) Make IT a strategic component of the corporate governance framework. The corporate governance framework needs to look at IT as an integral part of its business. This approach will reduce the friction between the different business units and gedasUSA. The objective should be to leverage IT to increase the market share and improve quality rather than reducing IT costs. Disadvantages

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The company does not have IT skills in the senior level and this poses a significant risk with this approach. Increased cost and budget outlay for IT is needed.

eBusiness challenges This is an external factor and beyond the control of Volkswagen. The more Volkswagen delays, the more significant will be the loss for Volkswagen. a) Build in eBusiness as a part of the distribution network. Just like the dealer network, eBusiness should be a distribution channel for the products. Disadvantages Significant costs and delayed returns. b) Partner with companies setup to do eBusiness Volkswagen can approach eBusiness stalwarts like amazon.com in setting up their eBusiness or completely outsource. Alternately, Volkswagen can identify flagship dealers and empower them to setup eBusiness platform for the business. Disadvantages Automobiles being a unique product may not appeal to eBusiness vendors like amazon.com.

Evaluation Throughout Volkswagen of America’s history, they have never been able to maintain a constant level of growth in sales and profits. Instead, VWoA has experienced very high levels of sales and profits for short periods when one of their new models was a hit. If VWoA was unable to develop a big seller they would go through a long period of low sales. The 1990s were a period of low sales so VWoA went into a cost cutting mode in order to insure their survival. One of the results of this cost cutting was that the IT department was neglected. A successful product line during the first half of the 2000s has now allowed VWoA to exit their cost cutting mode. The years of neglect of the IT department has led to two contradictory results with very important implications for VWoA. A large budget increase is required to update the IT department while at the same time a feeling pervades among business managers that IT is not really a necessity or even worth the money. In order for VWoA to develop an IT system that will give them the tools to better achieve the company’s goals, we recommend a conservative, three phase strategy.

First Phase • •

Conduct an internal marketing campaign demonstrating the value of IT. Simplify the project prioritization process.

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Focus on choosing IT projects with low break even points and the highest ROI for the first few years to increase company confidence in IT.

Second Phase • • •

Ask the parent company to grant an increase in the IT budget cap. Make sure the prioritization process provides funding for VWAG mandated projects Loosen focus on short-term projects

Third Phase • • •

Request that VWAG remove the IT budget cap Leverage the current legacy system using a Service Oriented Architecture approach Remove global supply flow project from the prioritization process and ask VWAG to fund it from another source.

This strategy will help change the negative perception of IT throughout VWoA and elevate it to a positive and constructive asset. This positive perception mixed with an initial focus on short turnaround projects will demonstrate that IT can indeed be profitable. This will allow VWoA to ask for a gradual increase in the budget cap until they can hopefully get the cap removed. This in turn will allow VWoA to update their IT department and gain the tools to further achieve the company’s goals. In addition, we recommend simplifying the prioritization process in order to gain adoption by the business units. Finally, we feel strongly about using a SOA approach to leverage VWoA’s legacy systems and get the greatest return from the IT budget.

Best Solution and Implementation Plan Volkswagen had two main problems, the outsourcing of IT functions and the budget constraints of projects. Volkswagen should utilize the Business Process, Technology and Organization (BPTO) department to manage IT projects. Centralizing and internalizing the IT department would allow Volkswagen to lower costs in the long run while also increasing IT knowledge within its workforce. Having an internal IT department will allow Volkswagen to diagnose and solve problems much quicker and cheaper. It could then use Service Oriented Architecture (SOA) or Services on Demand (SOD) approaches to outsource specific IT services. The gedasUSA directive from the top is perhaps the limiting factor to this solution. The PMO (Program Management Office), subsection of the BPTO, in conjunction with the Digital Business Council (DBC) would review project proposals and categorize them according to the three different investment types: stay in business (SIB), return on investment (ROI), and option-creating investment (OCI). Categorizing the projects would allow Volkswagen to choose projects that would be most aligned with the company’s current goal. The budget constraints of IT projects that fall under the SIB or ROI categories should either be removed or decreased because they would allow Volkswagen to

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stay in competition with the other manufacturers as well as produce profits needed to fund future investments, respectively. While the IT focus on the organization and decisions are made within the budgets allocated to the Volkswagen America subsidiary, the impact of those decisions and the reach of the projects is beyond Volkswagen America's boundaries. This conflict in the budgetary scope needs resolution and this can be addressed by centralizing its IT and strategizing IT as a part of its corporate governance. The gedAS AG subsidiary could be made to function similar to the IBM Global Services.

Current Status Update In 2007, Volkswagen adopted a five-pillar strategy to increase its presense in the United States. The fivepillars of this strategy are: product, brand positioning, dealer network, organization and local production. Volkswagen continues to improve and continues to hold on to their market share. With improvement in their vehicles and competitive pricing consumers are now looking at Volkswagen a lot more before purchasing a new vehicle. Currently Volkswagen has won several awards one of the big awards was receiving the Green Award for their plant in China. This is a termendous image enhancer and brings more consumers to look at VW. Additionally, VW has also increased sales by 41% in October because of their new development in the Passat vehicle. Not only has their sales increased here in the United States but now are on track to become the world number one automaker of the world. Audi, which is VW luxury brand, is also attempting to grow in North America and therefore is considering sharing a facility with VW in the North America Plant, located in Chattanooga, TN. VW is currently producing 150,000 automobiles in this plant but has capacity to produce up to 250,000 and Audi might be able to take advantage of this situation. In 2009, Volkswagen launched its “Strategy 18” campaign, which states that the Volkswagen Group “aims to be the most successful and fascinating automaker in the world,” by 2018, and has set four goals that include increasing sales, capitalizing on technological innovation, increasing return on sales tax by 8%, and becoming the “top employer across all brands, companies and regions.(Volkswagen Group of America, n.d.-a)” Efficiency, safety, micro-mobility, traffic-flow solutions, clean and renewable, are the salient aspects of the sustainability initiative, that is "Strategy 18." Volkswagen had emerged from the shadows with its bold initiatives on the product, production, customer focused initiatives and is considered a leader in its position on fuel efficiency and carbon emissions (“VWAG_Nachhaltigkeitsbericht_online_e.pdf,” n.d.) . Volkswagen has emerged and taken over the market and will continue to do so as they continue to improve their production plants and their vehicles. However, Volkswagen of America is not efficiently using IT to assist in growing its’ business and streamlining its’ operations. There are constant disputes on

Group 2 - Volkswagen of America: Managing IT Priorities which projects should be prioritized and a lack of IT buy-in in general. While there are many factors in the automobile industry which are hindering revenue growth, IT should not be one of them.

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Group 2 - Volkswagen of America: Managing IT Priorities

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References Applegate, L. (2009). Corporate information strategy and management : text and cases (8th ed.). Boston: McGraw-Hill Irwin. Pare, Mike. "Sen. Bob Corker sees 'tremendous opportunit'y for VW additions in Chattanooga." (2011): n. page. Web. 1 Dec. 2011.. Volkswagen. (2011, November). Volkswagen Group Senior Management. Volkswagen Aktiengesellschaft. Retrieved December 1, 2011, from http://www.volkswagenag.com/content/vwcorp/content/en/the_group/senior_manag ement.html Volkswagen. (n.d.). Volkswagen Group The Group. Retrieved December 1, 2011, from http://www.volkswagenag.com/content/vwcorp/content/en/the_group.html Volkswagen Group of America. (n.d.-a). Volkswagen Group of America. Retrieved December 1, 2011, a from http://www.volkswagengroupamerica.com/ Volkswagen Group of America. (n.d.-b). Volkswagen Group of America - Chattanooga Plant. Chattanooga Plant. Retrieved December 1, 2011, b from http://www.volkswagengroupamerica.com/chattanooga/index.htm VWAG_Nachhaltigkeitsbericht_online_e.pdf. (n.d.). Retrieved from http://www.volkswagenag.com/content/vwcorp/content/en/sustainability_and_respon sibility.bin.html/marginalparsys/textandimage/downloadFile/VWAG_Nachhaltigkeitsber icht_online_e.pdf