Value-Based Management in German Auto Industry

The research addresses a significant gap in the existing literature concerning the application of value-based management (VBM) within the German automotive industry. While some empirical studies exist within the sector, most fail to provide substantial evidence on VBM utilization in strategic management. The primary research objective is to investigate the extent to which German automotive companies employ VBM in their strategic decision-making processes. A secondary objective is to analyze the types of performance indicators used, focusing on the role of Economic Value Added (EVA). The study acknowledges the complexity of the VBM field and emphasizes the importance of understanding its impact on companies’ performance. The German automotive industry serves as a crucial case study due to its significant economic contribution and its global influence.

The German automotive sector is highlighted as one of the mainstays of the German economy. The industry's economic impact is significant, generating a turnover of €317 billion in 2010, which accounted for one-fifth of the total turnover in German industry overall. In 2010, the sector also employed approximately 709,000 people, representing a substantial 14% of the total German industry employment. The study notes that the medium-sized supply industry, employing around one million people, further stabilizes the German labor market. The industry's success is closely linked to global economic trends and its significant role in exports, exceeding 12.7 million vehicles produced in 2010. Despite this success, the industry faces challenges such as globalization, increased competition, and the evolving demands of the global market, making the application of effective management strategies such as VBM crucial for sustained growth and competitiveness.

The research acknowledges the importance of considering various stakeholders beyond shareholders in the context of value creation. While maximizing shareholder value is a core goal, the study implicitly criticizes a solely shareholder-focused approach, indicating that the neglect of other stakeholders has been subject to critical assessment in the literature. The research delves into the complexities of aligning managerial objectives with those of shareholders. The principal-agent theory is mentioned as a framework for understanding potential conflicts of interest between management and ownership. The research implicitly suggests that effective value-based management systems can mitigate these agency problems by fostering goal congruence between agents (managers) and principals (shareholders). This alignment is deemed vital for creating sustainable increases in corporate value.

The document reviews existing approaches to value-based management, referencing significant contributions from Rappaport's shareholder-value concept, Stern Stewart & Co.'s Economic Value Added (EVA), and the Boston Consulting Group's performance indicators such as EVA and Cash Value Added (CVA). The study notes that these approaches emerged as responses to limitations of traditional management accounting systems, which often fail to adequately incorporate risk, inflation, and opportunity costs. The document emphasizes the importance of using value-based management as an integrated tool, aiming to measure and reward employee activities that directly contribute to shareholder value creation. It highlights the need for a balance between a value creation mindset and the implementation of management processes and systems to translate this mindset into action.

The study employed a qualitative research design, focusing on data collection through in-depth interviews with managers at German automotive Original Equipment Manufacturers (OEMs). A case study approach was adopted because the research questions center around common value-based management (VBM) themes, avoiding singular or extraordinary cases. The researchers opted for individual interviews with managers from various companies instead of focus group discussions due to pragmatic reasons related to the accessibility and scheduling of participants from different organizations. The chosen method allowed for precise data collection without imposing undue restrictions. The semi-structured interview approach balanced the need for detailed information with efficient resource utilization, enabling the researchers to gather rich, relevant data. This methodology is appropriate to the objectives of gathering insights into the practices and perceptions of VBM implementation within German automotive companies.

The research methodology involved collecting data on the attitudes of managers regarding value-based management topics. Information was gathered from interviews and potentially complemented by business reports and annual statements. The analysis focused on the extent to which companies in the German automotive sector utilize value-based management and the specific role of value-based management within these organizations. To understand the breadth of VBM adoption, the study considered both ‘pure’ value-oriented indicators (such as EVA, shareholder value, or free cash flow) and broader value-oriented indicators (like ROI, ROCE, ROE, and ROA). The analysis aimed to uncover the extent to which companies used value-oriented indicators, including both modern metrics and more traditional return indicators, and whether their usage was reflected in public reporting. The data was analyzed to test the hypothesis that automotive companies utilize value-based management in their strategic decision-making.

The research findings reveal a high prevalence of value-oriented indicators within the German automotive industry. A significant 85% of the companies surveyed utilize these indicators. This includes both modern metrics, such as Economic Value Added (EVA), and traditional return indicators like Return on Investment (ROI), Return on Capital Employed (ROCE), Return on Equity (ROE), and Return on Assets (ROA). The remaining 15% either do not use such indicators or fail to publicly disclose their use in their business reports. This discrepancy highlights a potential gap between internal value-based management practices and external communication of these strategies. The study notes that the high usage of value-oriented indicators, especially the broad category including traditional metrics, supports the overall hypothesis that German automotive companies do indeed utilize value-based management to some extent. However, the lack of transparency in reporting needs further investigation.

Economic Value Added (EVA) stands out as the most dominant key performance indicator (KPI) within the automotive industry. Despite its prevalence, the study highlights a noteworthy inconsistency in its calculation methods, limiting direct comparability across companies. The research observes a disconnect between the internal use of value-oriented approaches and their communication in formal business reports. The data suggests that companies implement value-oriented approaches internally but may not fully disclose this information in their public financial reporting. This finding suggests a potential lack of transparency in how German automotive companies present their value creation strategies and the actual usage of key value-based management indicators. Further investigation into the reasons behind this discrepancy is recommended.

The study reveals a notable difference in the usage of value-oriented indicators between Original Equipment Manufacturers (OEMs) and their suppliers. While OEMs show a stronger tendency to utilize ‘pure’ value-oriented indicators in the narrow sense (EVA, Shareholder Value, Free Cash Flow), the adoption of return indicators such as ROI, ROCE, ROE, and ROA is relatively consistent between OEMs and suppliers. This suggests a potential disparity in the strategic application of value-based management, with OEMs perhaps placing a greater emphasis on advanced value metrics compared to their suppliers. Further research could explore the reasons behind these differences, perhaps focusing on factors such as organizational structure, strategic objectives, and access to resources and expertise in calculating and interpreting sophisticated performance metrics like EVA.

While Economic Value Added (EVA) emerged as the leading key indicator in the German automotive industry, the study highlights a significant challenge: the non-uniformity of EVA calculation methods. This lack of standardization limits the comparability of EVA results across different companies. The inconsistency in calculations raises concerns about the reliability of using EVA for benchmarking or comparative analysis within the industry. The study also observes that many companies, while internally employing value-based management (VBM) principles, do not fully disclose their use of value-oriented indicators in their public reporting. This disconnect between internal practices and external communication needs further investigation. Understanding the reasons behind this disparity is crucial for developing a more accurate picture of VBM adoption and its impact on the German automotive sector.

The research suggests that despite the prevalence of some value-based management (VBM) practices, the German automotive industry faces considerable challenges, including increasing market saturation and intense global competition. Experts forecast a future consolidation of the industry, with a potential reduction in the number of Original Equipment Manufacturers (OEMs). The study implies that consistent and effective application of value-based management principles and the use of appropriate key performance indicators (KPIs) will be crucial for companies to navigate these challenges and maintain competitiveness. The non-uniform calculation of EVA is a key challenge that needs to be addressed to improve comparability and decision-making within the industry. The research underscores the ongoing need for continued refinement and integration of VBM strategies to support sustainable growth and long-term strategic objectives.