Read What’s Driving Porsche? and History of Porsche AG – FundingUniverse.
From the perspective of an executive with the firm, prepare a
strategic plan to grow the business over the next three years.What’s Driving Porsche?See attachment History of Porsche AG – FundingUniversehttp://www.fundinguniverse.com/company-histories/porsche-ag-history/
Your strategic plan must be future-oriented and must:
Describe Porsche’s history and its 4Ps (Product, Price, Place, and Promotion).
Explain the current situation of the organization in the market (industry, market, and general environment analysis).
Assess the financial performance and condition of the organization.
Conduct a SWOT analysis (strengths, weaknesses,
opportunities, and threats) to determine areas that offer opportunities
for change.
Choose three or four areas from your SWOT analysis and
explain why the areas you have chosen are essential to your strategic
plan.
Describe your recommended organizational structure.
Explain your plan to measure the success of your strategic plan.
Your paper must be 10 to 12 pages in length (excluding the
title and reference pages) and be formatted according to 6th Edition APA style
guidelines. In addition to the
text, you must use at least five scholarly sources. Remember to
incorporate information that you have learned from this course as well
as your personal experience. Textbook Information: Abraham, S. (2012). Strategic management for organizations. San Diego, CA: Bridgepoint Education.
08_075_what_s_driving_porsche.henderson.pdf
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09-075
August 25, 2009
What’s Driving Porsche?
Rebecca Henderson, Cate Reavis
There are some customers who love the idea that an engineer working on their project in the
afternoon was the same guy working on a 911 motor in the morning.
—Managing Director, Porsche Engineering Group 1
We were working with Volkswagen on the next generation of the Cayenne (which shared its structure
with the VW Touareg and Audi Q7) and I wanted a clear connection to safeguard Porsche’s interests.
We could not do this alone.
—Porsche CEO Wendelin Wiedeking, on decision to acquire VW 2
In early March 2008, Porsche’s supervisory board, which included the chairman of the Volkswagen
Group, Ferdinand Piëch, agreed to raise its holding in Volkswagen from 31% to 50% giving it a
majority stake.
Porsche’s takeover of VW was seen by many as a wise move for the small, independent car company
that, unlike rival brands Jaquar, Ferrari, Lamborghini, and Lotus, had managed to avoid being
gobbled up by the auto industry’s behomoths the likes of General Motors, Chrylser and Ford. There
was, however, a key strategic question about Porsche’s acquisition of VW that was not receiving a lot
of press: Would the long-term stability of Porsche’s engineering and design prowess be at risk by
bringing VW “in-house”?
1
Scott Miller, “Road More Traveled,” The Wall Street Journal, August 21, 2002.
2
Ray Hutton, “Porsche Set to Take the Wheel at VW,” The Sunday Times, October 14, 2007.
This case was prepared from published sources by Cate Reavis under the supervision of Professor Rebecca M. Henderson.
Professor Henderson is the Eastman Kodak Leaders for Manufacturing Professor of Management. This case is based on
research conducted by Julien Heider, Jody Muehlegger and Konrad Haunit (MIT Sloan MBAs, Class of 2008).
Copyright © 2009, Rebecca M. Henderson. This work is licensed under the Creative Commons Attribution-Noncommercial-No
Derivative Works 3.0 Unported License. To view a copy of this license visit http://creativecommons.org/licenses/by-nc-nd/3.0/
or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA.
WHAT’S DRIVING PORSCHE?
Rebecca Henderson and Cate Reavis
Engineering and design were considered the hallmarks of Porsche’s competitive advantage, and rather
than keeping its R&D under tight wraps, Porsche shared its R&D team of 2,300 engineers with
outside companies, and had built a lucrative engineering services business based on this model.
Through its 100% wholly-owned customer engineering development company, the Porche
Engineering Group (PEG), Porsche made its wide-ranging expertise in the development and
production of vehicles available to clients from a variety of industries. PEG was considered Porsche’s
“secret weapon, enabling it to employ more engineers than if it worked alone, giving it an edge in
product development.” 3 Porsche’s small size and market niche made it easier for other auto
manufacturers to trust that Porsche would not use the technology knowledge attained through its
engineering services division to compete head-to-head.
Bringing the R&D functions of the two firms too close together could potentially weaken Porsche
engineers’ sense of belonging and demotivate them. While Porsche was a company that thrived on
healthy profit margins, VW’s business model was all about volume. Furthermore, if Porsche
engineering was too closely associated with the entire VW portfolio, the company could lose its
ability to sell external engineering to other OEMs concerned that Porsche would be sharing strategies
and innovations with VW. The question facing Porsche’s senior leadership was how to ensure that the
integration of VW did not negatively effect Porsche’s outside engineering business.
Porsche
Porsche was founded in 1931 by Ferdinand Porsche, along with his son and son-in-law, Anton Piëch,
father of VW Chairman Ferdinand Piëch. Known in its early days as the Porsche Engineering Office,
Porsche did not start off as an automaker, but rather a firm that sold design and engineering services
to other carmakers. In 1934, Adolf Hitler commissioned Porsche to make a “people’s car” or
“volkswagen.” The forerunner to the VW Beetle, the VW Type 60 hit the roads in the mid-1930s, and
in 1938 the first plant dedicated to the manufacturing of the VW was opened. It wasn’t until 1948,
three years after the end of World War II, that Porsche produced its first branded sports car. Within
two years, the Porsche 356 series rolled off the production lines. 4
By 2007, Porsche was the world’s most profitable automaker on a per unit basis, 5 a feat that was
especially impressive considering it produced just over 100,000 automobiles annually. The
company’s recorded average revenue per car of €62,568 ($91,974) dwarfed that of Mercedes’s
€40,445 ($59,454), BMW’s €34,766 ($51,106) and was nearly 2.5 times Audi’s €27,500 ($40,425). 6
In an industry where scale was usually considered a prerequisite for reducing production costs, the
company’s operating margins of nearly 20%, double those of Toyota, 7 made Porsche an exception to
the rule. In 2007, Porsche’s income topped $9.4 billion on revenue of $10 billion. (See Exhibit 1 for
3
Bret Orekson, “Engineering Is Porsche’s Secret Weapon,” Automotive News, January 15, 2001.
4
Adler, Dennis, Porsche: The Road from Zuffenhausen, 2003, p. 76.
5
Jeremy Cato, “Porsche Revs Up for Explosive Growth,” The Globe and Mail, February 22, 2007.
6
€1 = US$1.47 (December 31, 2007)
7
Gail Edmondson, “Pedal to the Metal,” BusinessWeek, September 3, 2007.
AUGUST 25, 2009
2
WHAT’S DRIVING PORSCHE?
Rebecca Henderson and Cate Reavis
select financials of Porsche and the top automakers.) Ironically, over 60% of Porsche’s pre-tax
earnings came from trading derivatives. All of the options trading Porsche was involved in pertained
to its stake in VW. Porsche used the options to hedge against the likelihood that VW’s shares would
rise after its interest was made public. 8
Porsche was renowned for the quality of its products. For three consecutive years (2006-2008),
Porsche was the top ranking brand in J.D. Power and Associates “Initial Quality Study” (IQS). The
study ranked brands by the fewest problems per 100 vehicles. Porsche spent about 12% of revenue on
R&D compared to an industry average of 4% to 6%. (See Figure 1.) Approximately 19% of Porsche
employees worked in its R&D facility compared to 6.6% at Volkswagen.
R&D Expenditure as % of Revenue for Select Auto Makers (2007)
300,000
14
250,000
12
8
150,000
6
100,000
%
10
200,000
Revenue
% on R&D
4
Porsche
Fiat Group
Automobiles
Nissan
Honda
0
Ford
(automotive)
0
VW
2
GM
(automotive)
50,000
Toyota
US$ Millions
Figure 1
Source: Annual Reports.
Turnaround
Porsche hit a speed bump in the early 1990s when production processes described as “fat and
wasteful” 9 and a weak U.S. economy sent orders plummeting. Between 1986 and 1993 Porsche’s
sales had fallen from more than 50,000 units to 14,000 units. 10 The company was teetering on the
verge of bankruptcy, and there were whispers about a possible takeover.
8
Richard Milne, “Share Options Put Porsche on a Faster Path to Profit,” Financial Times, November 12, 2007.
9
Tom Mudd, “Back in High Gear,” Industry Week, February 21, 2000.
10
Ibid.
AUGUST 25, 2009
3
WHAT’S DRIVING PORSCHE?
Rebecca Henderson and Cate Reavis
Newly named Porsche CEO Wendelin Wiedeking orchestrated a turnaround focused on building new
core competencies in lean manufacturing and synchronized engineering. In the past, Porsche’s
celebration of craftwork encouraged individuals to work on their own processes rather than
collaborating with the entire production line. But this soon became a significant handicap for the
company. Engineers were tempted to ignore the need for cross-department cooperation on Porsche’s
own car designs while making handsome profits for Porsche on outside sales of engineering
services. 11 As one industry observer put it, “Porsche didn’t have a full-fledged, adult-rated
simultaneous engineering process in place. It was still struggling to completely shed the rigid,
sequential system upon which it had relied for decades.” 12 Wiedeking introduced lean manufacturing
and the team concepts and processes followed by industry giants Toyota, Nissan and BMW.
Part of the turnaround included the decision to extend Porsche’s product line beyond the sports car
niche it had dominated for many decades. As Wiedeking explained, “Our strategy is to go beyond the
one-dimensional product range we have had so far.” 13 As Figure 2 shows, Porsche’s production and
sales doubled in just six years as did its revenue through organic growth.
Figure 2
Porsche Sales, Production and Revenue Results (1999-2008)
8,000.0
120,000
7,000.0
100,000
Units
80,000
5,000.0
4,000.0
60,000
3,000.0
Eur million
6,000.0
Production
Sales
Revenue
40,000
2,000.0
20,000
1,000.0
2008
2007
2006
2005
2004
2003
2002
2001
2000
0.0
1999
0
Source: Porsche Annual Report.
In 2003 Porsche introduced the Cayenne, an SUV which was entering into a crowded field of
competitors inhabited by Acura, Audi, BMW, Mercedes, Land Rover, Volkswagen, Volvo, Lexus,
and Infiniti. The year the Cayenne was introduced, Porsche’s vehicle production shot up from 50,000
11
Womack, James and Daniel Jones, Lean Thinking: Banish Waste and Create Wealth in your Corporation, 1996, p. 192.
12
Christopher Jensen and Don Sherman, “The Porsche Process,” Automotive Industries, November 1, 1997.
13
Brandon Mitchener, “Rebounding Porsche Seeks to Shift More Output Abroad,” The Wall Street Journal Europe, December 6, 1995.
AUGUST 25, 2009
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WHAT’S DRIVING PORSCHE?
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to 75,000 units a year. 14 The Cayenne, produced in collaboration with VW at VW’s factory in
Slovakia and which shared the same frame and doors as VW’s Touareg, was derided by many as a
“corruption of the brand.” 15 In fact the day after Porsche unveiled the first Cayenne prototype, the
company’s share price fell more than 4%. 16 Porsche CEO Wiedeking was aware of the risk the
company was taking in being so closely associated with a mass production carmaker that produced a
cheaper SUV. 17 It was a risk he believed would pay off down the road.
Porsche’s first foray outside of its sports car market was not an immediate hit. The early version of
the Cayenne was plagued with quality problems earning it the least reliable rating from Consumer
Reports magazine. In its efforts to correct problems with the Cayenne, the company went through a
cultural alignment of sorts. As one industry observer noted, “Sports car engineers didn’t quite
understand the demands of the many female buyers who ended up making the Cayenne their daily
runabout.” 18 One of those demands was having the capability to unlock the Cayenne from a much
further distance. Porsche key fobs were originally designed to unlock sports cars at a very close
distance. Porsche went to work to fix this defect and other more serious problems, and by 2006 the
Cayenne occupied the No. 1 spot in the IQS which measured buyer satisfaction in the first 90 days of
ownership. 19
In 2005, Porsche announced that it would be making another move outside its sports car niche. In
partnership with VW, Porsche would produce a luxury sedan called the Panamera (named after a
Mexican long-distance car race 20 ) which would compete against models produced by Mercedes,
Aston Martin, and Audi. The Panamera was being built in a low-cost part of East Germany and was
scheduled to launch in 2010. 21
Despite the significant changes to the company’s product line, Porsche’s outside engineering
business, PEG, remained focused on selling services based on Porsche’s strength in engineering.
Outside Engineering at Porsche
Providing outside engineering services for carmakers had always been an important part of Porsche’s
business model. While clients owned the research that Porsche conducted on their behalf, Porsche
reserved the right to use the research if the client chose not to, with the understanding that it would
14
Bret Okeson, “Engineering is Porsche’s Secret Weapon,” Automotive News, January 15, 2001.
15
Jeremy Cato, “Porsche Revs Up for Explosive Growth,” The Globe and Mail, February 22, 2007.
16
Scott Miller, “Road More Traveled,” The Wall Street Journal, August 21, 2002.
17
Jeffrey Fear and Carin-Isabel Knoop, “Dr. INg. H.c. F. Porsche AG (A): True to Brand?” HBS Case No. 9-706-018, Harvard Business School Publishing,
2006.
18
Jeremy Cato, “Porsche Revs Up for Explosive Growth,” The Globe and Mail, February 22, 2007.
19
Ibid.
20
Stephen Power, “The Family Porsche,” The Wall Street Journal, July 28, 2005.
21
Jeremy Cato, “Porsche Revs Up for Explosive Growth,” The Globe and Mail, February 22, 2007.
AUGUST 25, 2009
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WHAT’S DRIVING PORSCHE?
Rebecca Henderson and Cate Reavis
not be sold to anyone else. Porsche could test or develop ideas that the company would not have been
able to fund on its own. 22
For several decades VW had been Porsche’s main client. In 1949, Porsche and VW signed an
agreement under which Porsche was forbidden to design a car for any other company with an engine
between 1.0 and 1.3 liters through 1974. 23 The formality of this agreement, however, was in dispute
with others characterizing the contract as a “loose agreement” between Ferdinand Porsche and VW’s
chairman in which about 40% of Porsche’s development capacity belonged to VW over a certain
number of years. 24
By the 1980s Porsche was working with a variety of carmakers as well as motorcycle producer
Harley Davidson. In 1991, the company founded Porsche Engineering Services Inc. based outside of
Detroit, Michigan to serve the growing engineering demands of the North American market. As a
wholly-owned subsidiary of Porsche AG, PES was able to work with a wide array of carmakers. As
the CEO of PES explained, “We’re not a competitor to automakers, due to the limited number of
vehicles we produce. But we try to convince them that two OEMs working together, rather than one
OEM and supporters, makes a difference. We understand the fundamentals of automaking.” 25
In 2001, PES became the North American arm of the Porsche Engineering Group. With 400
employees, PEG was based out of Porsche’s R&D center in Weissach, a town of 7,000, 23 kilometers
from Porsche’s sales, marketing and production activities. PEG engineers had direct access to
Porsche’s entire engineering team of 2,300 which was also based at Weissach. To reassure clients that
their projects would remain confidential, Porsche required all visitors to sign a confidentiality
agreement, making them liable if any secrets learned at the Weissach complex were revealed. 26 In
addition, the company not only kept the names of its clients confidential, but it also disguised the
vehicles tested on its private racing track.
PEG worked with virtually every auto maker in the world, with the exception of those that produced
luxury sports cars, and was also involved in projects involving elevators, forklifts, earthmovers, and
artificial knees. 27 While revenues of PEG were not disclosed in Porsche’s annual report, one source
indicated it accounted for 3% of turnover. 28
Of significant help to PEG engineers was a pool of nearly 600 graduate student interns who worked
alongside Porsche’s staff engineers. A budget of $30 million was allocated to finance paid internships
for the students as well as university or institute-based research studies conducted exclusively for
22
Jeff Daniels, Porsche: The Engineering Story, (Somerset, UK: Haynes, 2007), p. 129-131.
23
Randy Leffingwell, Porsche 911: Perfection by Design,” (Osceola, WI: Motorbooks, 2007), p. 68.
24
Ibid.
25
Gary Kobe and Lindsay Brooke, “How’s Outside Engineering,” Automotive Industries, September 1, 1994.
26
Bret Okeson, “Engineering Is Porsche’s Secret Weapon,” Automotive News, January 15, 2001.
27
Ibid.
28
Scott Miller, “Road More Traveled,” The Wall Street Journal, August 21, 2002.
AUGUST 25, 2009
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WHAT’S DRIVING PORSCHE?
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Porsche. Porsche offered its top interns (typically about 10%) full time jobs, and those students who
did not get a job offer became part of an alumni network that would be called on to provide advice on
research and technology. A student intern cost 15% of what a full-time employee would cost. 29
Competitors and Market
The outsourcing of engineering services for carmakers was a growing industry. Some of the big
players for the automotive industry included Italy’s Stola and U.K.-based Hawtal Whiting and the
two U.S. automotive engineering companies MSX International Inc. and Modern Engineering Inc.,
each of which posted revenues between $100 and $500 million. Lotus Engineering was the only
carmaker with whom Porsche competed for outsourced engineering business.
These firms had seen their share of hard times. In the economic downturns of the early 1990s and
2000s, a lot of outsourced activities were brought in-house again. But by the mid-2000s, many of
these firms had their sights set on the U.S. auto industry where demand for outsourced engineering
was growing in spades due to production challenges and increased market segmentation. Between
1995 and 2005, the number of new car models produced by U.S. automakers grew 50% while the
annual sales per model dropped from 100,000 to 75,000 units. 30 As a CEO of a U.S.-based outside
engineering firm opined: “Outside engineering is a permanent change in the way business is done.
There’s no manufacturing business that needs to be vertically integrated anymore. It just costs too
much.” 31 The CEO of PES echoed this sentiment in 2005: “We’re following our customers’ changes.
The (automakers) have so many niche vehicles, it really compounds their resources. The downsizing
and reduction of engineering means there are gaps in some engineering programs. There are
opportunities for companies like us to provide that support.” 32 As one industry observer noted,
globalization was forcing many automakers to make the difficult decision of “entrust[ing] core
engineering services, and even the complete end-to-end design and development of a vehicle, to firms
with the experience, expertise and sheer innovative talent to help create better products, faster and at
lower cost. 33
Despite the up-tick in demand in the U.S. market, PEG sold PES to automotive supplier Magna
International in 2006 for an undisclosed sum. In commenting on the transaction, a Porsche executive
simply stated, “In the future, we will center all development activities for external customers in our
development centre in Weissach for efficiency reasons.” 34
29
Sigvald Harryson and Peter Lorange, “Bringing the College Inside,” Harvard Business Review, December 2005.
30
Terry Kosdrosky, “Switching Gears Pays Off,” Crain’s Detroit Business, October 10, 2005.
31
Stuart F. Brown, “New Products From Rented Brains,” Fortune, September 4, 2000.
32
Terry Kosdrosky, “Switching Gears Pays Off,” Crain’s Detroit Business, October 10, 2005.
33
Warren Harris, “Engineering Services Outsourcing,” PR Newswire, January 13, 2009.
34
“Magna Buys Porsche’s North American Engineering Services Unit,” Austria Today, August 10, 2006.
AUGUST 25, 2009
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WHAT’S DRIVING PORSCHE?
Rebecca Henderson and Cate Reavis
VW Takeover
Porsche made its first move towards VW in 2005 when it acquired a 20% stake igniting a rumor that
its eventual takeover of VW was not an “if” but a “when.” After all, it was no secret that VW was an
important partner and supplier …
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