Performance Measurement for the Purposes of R&D in the Car Manufacturing Industry

Contents

List of Figures

List of Tables

List of Abbreviations

1. Introduction
1.1 Initial Situation and Statement of the Problem
1.2 Objectives and Approach

2. Performance Measurement in Car Manufacturing Industry
2.1 Literature Review of Performance Measurement
2.2 Performance Measurement in Car Developing Projects

3. Criteria for Car Development Projects within the BSC
3.1 The Balanced Scorecard
3.2 Performance Criteria for R&D in the Car Manufacturing Industry pective
3.3 Applying the customized BSC to the Volkswagen Group strategy

4. Conclusion
4.1 Summary
4.2 Critical Appraisal and Outlook

Publication Bibliography

List of Figures

Figure 1: magic triangle of product development

Figure 2: Example of target costs derivation

Figure 3: Milestone-cost-trend-analysis

List of Tables

Table 1: Volkswagen Group strategy and performance criteria

List of Abbreviations

illustration not visible in this excerpt

1. Introduction

1.1 Initial Situation and Statement of the Problem

“The automotive year 2013 was especially for European car makers extremely challenging, in light of the uncertainties our forecast for 2014 is comparatively cautious."¹

This quotation from Martin Winterkorn, Chairman of the Board of Management of the Volkswagen AG, shows that the car manufacturing industry is currently facing a lot of challenges. Encouraged by an increasing globalization, the car manufacturing industry expanded to growing markets such as China, which is with about a demand of 19.3 million vehicles in 2013 the biggest market in the world.² Due to the different habits of customers’ worldwide and changing laws there is a high demand for innovations of alternative fuel vehicles, lightweight materials and connectivity.³ In order to provide alternative mobility concepts, efficient and comprehensive technology, the European car manufacturing industry invested over 32 billion Euros into Research and Development (R&D) in 2012. This investment is around 25% of the total R&D spending in the European Union.⁴ These investments demonstrate the importance of developing new products in the car manufacturing industry to obtain a competitive position in the global market. To ensure the profitability of developing projects it is important to keep balance between creativity during the innovation process and costs. Controlling helps the management to keep this balance and to measure the performance of new development projects. Therefore, performance measurement can be used. Since there is a large variety of criteria and tools to measure performances, it is necessary to select an appropriate tool and suitable criteria.

1.2 Objectives and Approach

Within this stated problem field, the objective of this seminar paper is to clarify how performance measurement is done in the field of Research & Development (R&D) of the car manufacturing industry.

To achieve this objective, Chapter 2 provides a literature review on Performance Measurement and in particular on development projects in the car manufacturing industry. This includes the characteristics of the car manufacturing industry and its challenging trends.

Taking this review as a base, in Chapter 3 the BSC is introduced as a performance measurement tool. Based on the characteristics of the car manufacturing industry appropriate criteria are determined to measure performances within the BSC. The criteria are compared to the strategy of the Volkswagen Group, as an example, of a successful car manufacturer. Therefore, the goals of the strategy were adjusted to the framework of the Balanced Scorecard.

Finally, the results of this seminar paper are reviewed within a critical appraisal in Chapter 4. Furthermore, an outlook for future trends in Performance Measurement in the car manufacturing industry is given.

2. Performance Measurement in Car Manufacturing Industry

In the first section of this chapter a brief literature review on Performance Measurement in the car manufacturing industry is provided. The second section of the chapter introduces the Performance Measurement in the car manufacturing industry focusing on the field of Research and Development (R&D). By giving an overview of possible modes of application, the broad variety of possible efficiency determinations is illustrated.

2.1 Literature Review of Performance Measurement

The evaluation and control of different circumstances and their effects on the company is one of most important functions of business management. To achieve this function appropriate performance measurement tools and criteria are needed. These tools and criteria were traditionally focused on monetary criteria. Monetary criteria can be derived from the accounting department (e.g. balance sheets or cost and activity accounting) and are valid and reliable. One of the disadvantages is that they are highly aggregated and relate to past performances.⁵ Günther/ Grüning pointed out that for the measurement of company performances it is recommended to include nonmonetary performance criteria.⁶ Using a variety of monetary and non- monetary criteria made it more complex to measure the development of a company. While every single criterion cannot be used to derive results, it is necessary to order and connect them. Therefore, performance measurement tools are needed to put all measures in a mathematical relation and arrange them logically. Today a multitude of performance measurement tools and criteria exists. Depending on whether the company as a whole or only specific business department is in scope, different tools and criteria have to be selected. Furthermore, the characteristics of the industry sector have to be taken into account. Since this seminar paper is focused on performance measurement in the car manufacturing industry and their car developing projects, the following section will characterize this industry sector.

2.2 Performance Measurement in Car Developing Projects

The car manufacturing industry today is facing two challenging trends: cost and innovation pressure. Cost pressure results of global competitive market and the rising demand of new regions (e.g. India) with comparatively low purchasing power. Increasing legal requirements for environment protection and customer preferences lead to more complex cars and new innovations in less time. To fulfill this demand the development time has been reduced from 60 month down to 40, while 60% of all development projects do not end in the estimated schedule. In addition, Schömann identifies that 75 - 85 % of the product lifecycle costs are defined during the product development process.⁷ Connecting these data makes it obvious that it is necessary to optimize the product development in car manufacturing industry. Referring to the challenges in the car manufacturing industry the used criteria have to be customized. Gentner pointed out, that the high cost, the strategic importance for the business success and the international competiveness force the car manufacturing companies to optimize costs, time, and performance of product development. He adjusted the magic triangle from Schmelzer to measure the efficiency of development projects in the car manufacturing industry. The magic triangle describes the coherence of the dimensions input, output and time (see Figure 1).⁸ According to these dimensions, an efficient development project can be run by reducing the input such as costs and resources. However this goal can also be reached by maximizing the quality and success of the project. All three dimensions depend on each other. Hence deadlines are not reached in time, the costs of the project increases while the output decreases. Even though it is possible that positive effects subsume negative effects and lead to a positive output. An example for this would be an increase of input and time in order to enhance the quality of the product. If the future customer is willing to pay more for this increased quality, the overall success can still be positive. All in all it is necessary to find an optimal combination of the dimensions input and time to increase the output and to run an efficient development project.⁹

illustration not visible in this excerpt

Figure 1: magic triangle of product development¹⁰

Summing up the car manufacturing can challenge the trends of innovation and cost pressure by optimizing their project development process in the field of R&D. To measure the performance of these projects the dimensions of criteria were presented. The criteria have to be customized to the characteristics of the car manufacturing industry. Besides, the criteria a suitable performance measurement tool has to be derived. One of the most established tools of performance measurement is the Balanced Scorecard which can be adapted to R&D easily.¹¹ Therefore, in the next chapter the BSC as a performance measurement tool and the customized criteria are presented.

3. Criteria for Car Development Projects within the BSC

With the findings from the literature review in Chapter 2 about the characteristics of performance measurement the car manufacturing industry, in this chapter the Balanced Scorecard as a performance measurement tool is introduced. In addition to this, customized criteria for the performance measurement of development projects in the car manufacturing industry will be identified. Therefore, the strategy of Volkswagen as a leading car manufacturer will be analyzed in order to determine criteria.

3.1 The Balanced Scorecard

The Balanced Scorecard (BSC) is the most common multi-dimensional performance measurement tool developed by Kaplan and Norton. It helps to convert strategic objectives into key figures. Reasons for its success are the key features:

Considering monetary and non-monetary criteria

- Considering criteria to measure the performance of different perspectives
- Considering criteria to measure the performance on a strategic and operational level
- Future-oriented measurements
- Focused on a limited number of measures

The Balanced Scorecard retains financial data as the ultimate outcome measure for company success, but also includes non-financial information in an attempt to redress the balance. Thus, it proposes three more perspectives such as customers, internal processes, and learning and growth.¹² These perspectives can be approached by questions such as:

- How do customers see us? (customer perspective)
- What must we excel at? (internal perspective)
- Can we continue to improve and create value? (learning and growth perspective)
- How do we look to shareholders? (financial perspective)

Since these questions are very general, the Balanced Scorecard can be adopted easily to different industry sector characteristics.¹³ Adjusting these standard perspectives to the individual strategy of a company helps to increase the quality of performance measurement.¹⁴ In the field of R&D in the car manufacturing industry, companies can articulate concrete goals as answers for these questions. Referring to the magic triangle, the answers should be given in the dimensions input, output and time.¹⁵ This ensures that the characterizing challenges such as cost pressure and pressure to innovate are taken into account.¹⁶ After setting goals for each perspective appropriate criteria have to be selected. The criteria are used to measure the performance of the defined goals. In the following section criteria for R&D in the car manufacturing industry will be determined.

3.2 Performance Criteria for R&D in the Car Manufacturing Industry

Financial performance measures indicate whether the company’s strategy leads to any value adding improvement at the bottom-line. Typical goals for the finance perspective of a company’s strategy are depending on growth, profitability and shareholder value. Focusing the R&D department and its car developing projects, the Return on Investment (RoI) and the development intensity can be used as criteria for the financial perspective. The high investments, as a characteristic of the product development in the car manufacturing industry, make these criteria very important for performance measurements in this industry. The RoI of the project is calculated by dividing the return (net profit) during the life cycle of a car through the capital that was invested. To calculate this criterion during the early stage of the car development, the Lifecycle profit has to be forecasted:¹⁷

illustration not visible in this excerpt

The criterion development intensity is the ratio between development cost and total sales. It indicates how many percent of the total sales are used for development projects during one year.¹⁸

illustration not visible in this excerpt

High development intensity is the basis for future innovations and competitiveness.¹⁹ Hence, reducing the development intensity could lead to less innovation and could have a decline of total sales in the future as a result. Since the car manufacturing industry is a highly competitive market where companies have to react fast on customers’ habits and politics, development intensity is an important criterion for the performance measurement.²⁰

The Customer’s perspective

Today many companies already focus on their customers. General goals like becoming the number one company from the customers’ perspective are included in every strategy. The BSC demands more precise goals for the products that are valued by the customers. Referring to the magic triangle, the customers concerns can be classified as output. In the scope of cars, the customer values quality and technology success such as functionality and novelty.

[...]

¹ Cf. MarketWatch (2014)

² Cf. VDA (2013)

³ Cf. KPMG (2012)

⁴ Cf. ACEA (2013)

⁵ Cf. Horvath (2002) and Gleich (2002)

⁶ Cf. Günther/Grüning, (2002)

⁷ Cf. Schömann (2012)

⁸ Cf. Gentner (1993)

⁹ Cf. Gentner (1993)

¹⁰ Cf. Schmelzer (1992)

¹¹ Cf. Siegwart et al (2009).

¹² Cf. Kaplan and Norton (1997)

¹³ Cf. Kaplan and Norton (1997)

¹⁴ Cf. Ahn (2005) p. 6

¹⁵ Cf. Section 2.2

¹⁶ Cf. Schoemann (2012)

¹⁷ Cf. Thoma (1989)

¹⁸ Cf. Geiger (2000)

¹⁹ Cf. OECD (2012)

²⁰ Cf. Chapter 2