Transworld Auto Parts (A) PDF

9-110-027 REV: AUGUST 8, 2011 V. G. NARAYANAN LISA BREM Tra answorrld Auto P...

9-110-027 REV: AUGUST 8, 2011 V. G. NARAYANAN LISA BREM Tra answorrld Auto Partss (A)1 It was an unussually cool an nd foggy mo orning in the summer of 22009, but Ellen Bright, CE EO of Transsworld Auto Parts (TAP), was too preo occupied to nnotice the weeather. She w was focused o on the two balanced b scorecards beforee her. One, frrom the luxurry division, sshowed stronng financial reesults; whilee the other, from the econoomy division,, reported dissappointing ffinancial perfformance but good progrress in achievving the targeets for its no on-financial g goals. She wo ould soon bee meeting witth the headss of each diviision and wo ondered whatt feedback sh he should givve them abou ut their progrress in impleementing theiir strategies. With TAP’s future f on thee line, any m misstep she m made now cou uld be irrepaarable. TAAP, a $6.6 billion b subsid diary of a U.S. U diversifieed manufactu uring compaany, was a T Tier 1 manuufacturer of original o and after-market a parts p for autoomobile prod ducers in the United Statees and abroa ad. TAP had been directly y affected by the downturrn in the auto o industry (ssee TAP’s financial uding Chrysleer and Generral Motors, weere on the brink of reports in Exhibit 1). Major cusstomers, inclu insolv vency, and ev ven robust ca ar makers, su uch as Toyotaa and Honda, were selling g many feweer cars amidsst the global recession. r Thhe parent com mpany had hired h Ellen Brright, a veterran in the autto and aerosppace industriies, in Octobber 2008 to tu urn TAP arou und. The dissmal 2008 ressults and pro ojections for 2009 led Brig ght to concluude that she had to make radical cha anges in strattegy and theen implementt the new strrategy flawleessly. She had d no room forr error. If shee were successsful, however, TAP could d take advantaage of opporrtunities in the t troubled auto industrry. She recallled a recent report that outlined botth the challeenges and thee opportunitiees for auto parrts makers: g challenges of higher co Suppliers arre still facing d volume prressure, and, at osts, price and tim mes, erratic production p schedules s fro om their auto o-producing customers. T Thus, our U U.S. oriiginal equipm ment sales ou utlook for 2009 is negativ ve. We see ligght vehicle ssales volume of abbout 10.3 milllion in 2009 and a 11.5 milliion in 2010, d down from 113.2 million ffor 2008, with ha sim milarly scaled d reduction in productio on. Because the economy y has weakeened, howev ver, vissibility in 200 09 is more limmited than ussual. We exp pect the Detrooit Three to ccollectively lo ose sh hare to foreig gn brands in n 2009. Thuss, the greateer a supplier’s exposuree to U.S.-bassed companies, the greater will be b the impactt on its perforrmance, in ou ur view. Still, we believe thhat 1 This case borrows heeavily from an eaarlier case: Robeert Kaplan, “Dom mestic Auto Partts,” HBS No. 1055-078 (Boston: H Harvard Businesss School Publisshing, 2005) and its accompanyiing teaching notte: HBS No. 107--087 (Boston: Haarvard Business School Publish hing, 2007), as well w as Professor Kaplan’s accum mulated published d works on strattegy maps and tthe balanced sco orecard. The authors wish to thaank Professor Ka aplan for his guid dance, ideas, and d direction in dev veloping this case. ______________________ _______________________________ ___________________________________________________________________ Professoor V. G. Narayanan n and Research Asssociate Lisa Brem prepared p this case. The company menntioned in this casee is fictional. HBS ccases are developped solely as the ba asis for class discusssion. Cases are no ot intended to serv ve as endorsementss, sources of primaary data, or illustraations of effectivee or ineffective man nagement. Copyrigght © 2009, 2010, 20 011 President and Fellows F of Harvard d College. To order copies or request p permission to repro oduce materials, caall 1-800- 545-76855, write Harvard Bu usiness School Pubblishing, Boston, MA M 02163, or go to w www.hbsp.harvard d.edu/educators. T This publication maay not be digitized d, photocopied, or otherwise reprodu uced, posted, or tran nsmitted, without tthe permission of H Harvard Business SSchool. This document is authorized for use only in Prof. M P Ram Mohan & Prof. Viswanath Pingali's Senior Management Programme (SMP) Batch - 13 at Indian Institute of Management - Ahmedabad from Oct 2024 to Apr 2025.  110-027 Transworld Auto Parts (A) in the long term, rising automobile production in Asia and other emerging markets presents an opportunity for the larger multinational suppliers to increase sales and profits.... Despite near-term challenges, U.S. auto parts suppliers are increasing the proportion of business they do outside the U.S. Emerging markets are becoming more attractive to parts manufacturers due to lower labor costs for manufacturing and engineering, and/or growing demand in local and regional markets. China, for example, is important both as a source of low-cost parts to ship abroad, as well as for local market vehicle demand. Global expansion among the Tier 1 parts makers is important, as it supports automaker efforts to consolidate designs across international markets and to expand international businesses overall.2 The Executive Staff Meeting: Defining a Strategy In December 2008, following extensive consultations with her board of directors and the corporate executive team, Bright prepared for a high-level two-day offsite strategy meeting in which she would announce a dramatic restructuring. TAP manufactured two core product lines—electronics and interiors—in four customer-centered divisions: luxury, economy, midpriced, and truck. TAP served three geographic markets: North America, Europe, and Asia. The four customer divisions each had very different customers and customer value propositions. Bright looked over the marketing reports that Mary Stewart, her vice president of marketing and sales, had put on her desk that morning (see Exhibits 2 and 3). These reports reinforced her view that future success would depend on how well she positioned TAP to compete aggressively in its most profitable segments. Attending the meeting were Aaron Eckhard, the president of the luxury division; Kim Kwon, the president of the economy division; the chief financial officer; and the vice presidents of marketing, manufacturing, and research and development. After presenting a report that showed the product level financials (Exhibit 4), the global market production figures (see Exhibit 5), and the market segment reports, Bright summarized her position: If you look at our data and the reports coming out of the industry analysts at a macro level, you can see that the best course of action for us would be to go after the segments that give us the potential for the most profit. Those segments are the luxury car makers (mostly serviced from plants in Europe) and the economy car makers. Now, I realize that plants in both the U.S. and Asia serve a high proportion of economy car makers, but I feel strongly that TAP should focus its resources on Asia, since it is a growing market with great potential. As for our other customer segments, we are losing money in the truck and mid-price segments and these are dragging down our more profitable lines. After much discussion at the corporate level, a thorough review of the alternatives with TAP’s board of directors, and gaining preliminary agreement from union leaders, we’ve made the difficult decision to shut down the product lines and customer divisions that cater to these low-performing segments and focus only on luxury and economy car makers. Most of the plants affected will be in the U.S., leaving the majority of the facilities in Europe and Asia intact (see Exhibits 6a and 6b). We have not made this decision lightly, but we feel it is the only way we can save TAP. On the positive side, I believe we can grow our top line by selling more products to our customers in profitable segments and win over new customers in new markets, primarily in Asia. 2 Efraim Levy, “Autos & Auto Parts,” Standard & Poor’s Industry Surveys, June 25, 2009, pp. 3–4. 2 This document is authorized for use only in Prof. M P Ram Mohan & Prof. Viswanath Pingali's Senior Management Programme (SMP) Batch - 13 at Indian Institute of Management - Ahmedabad from Oct 2024 to Apr 2025.  Transworld Auto Parts (A) 110-027 Based on a competitive analysis conducted by an outside market research firm [see Exhibit 7] and an internal analysis of our core competencies, we’ve decided to differentiate ourselves in the economy division by producing high quality car parts with the lowest lifetime price. All of our major competitors in the economy segment focus their strategy on producing parts with the lowest initial cost. We will differentiate ourselves by instead producing high quality parts that will be known in the industry for durability and low maintenance cost. We must make sure that we clearly communicate our value position to auto makers who have built a reputation for durable, high quality cars in the economy segment. In the luxury division, our strategy will be to produce the most innovative, quality parts on the market. While our major competitors are pursuing a customer integration strategy, we believe that if we focus our efforts on producing the most innovative and technologically superior car parts in the industry, then luxury OEMs will come knocking at our door. You all know that our parent company has set a stretch target goal for us: By 2011, achieve an 8% return on capital employed (ROCE)—a dramatic increase over our current negative ROCE. The company’s CEO stated that if we do not reach these goals and maintain a positive cash flow, he will seek to either divest or close TAP. It appears that the unions will agree to the plant closures and offer substantial concessions on health care and pension benefits in order to save the company. We also have some resources available to us for capital improvements, R&D, and other investments; and we qualify for the U.S. government’s Auto Supplier Stability Program. We must do what we can within this constrained environment. I’d like to hear from each of you about how your division will help us achieve both our financial goals and our market strategy. Let’s start off with you, Joe. Joe Nathan, Bright’s newly hired CFO, shared his data with the group: Ellen and I have worked extensively to develop the economics that must be in place for TAP to achieve its financial goals. I designed a simple model to pinpoint the critical economic drivers needed to reach our goal of an 8% ROCE and positive cash flow by 2011. Due to the economic downturn and the extensive plant closures, we forecasted only $4.5 billion in sales in 2009. That means, to cut our negative ROCE from –15% to –7% in one year, we need to reduce our cost of goods sold (COGS) from 95% to 90% in 2009, then to 83% over the next two years. If economic forecasts are on track, and if we can target the right growth segments, we should see revenues increase to $5.5 billion by 2010, and $6.5 billion by 2011. We need to better utilize our capital assets, both current and new—currently we are operating at 65% on old assets—and we must get to 90% utilization on an upgraded and downsized asset base. Finally, we must minimize our total cost structure—today we are operating above the average cost in our competitor group and we are bleeding cash. We need to get to the lowest cost quartile to compete. These are the key drivers needed to get to the financial results expected by the parent company. We must balance them—one against the other—to achieve our overall goal of 8% ROCE by 2011. Eckhard, the luxury division president, chimed in: I am glad to see that the company is putting its focus and resources toward the luxury division. As you know, we have always been a leader in product innovation, something our customers continue to value. What you may not realize is that the innovative products we designed for our high-end customers five years ago have started to filter down to the rest of our customer divisions. Satellite radio and Bluetooth capability, for example, are now becoming options for the economy segments. 3 This document is authorized for use only in Prof. M P Ram Mohan & Prof. Viswanath Pingali's Senior Management Programme (SMP) Batch - 13 at Indian Institute of Management - Ahmedabad from Oct 2024 to Apr 2025.  110-027 Transworld Auto Parts (A) Bright asked Michael Milton, vice president of manufacturing, for his perspective. Milton said: We’re under huge pressure to reduce costs and prices to the customer, except for the very high end. Because of the uncertainty in the market, the OEM’s3 production schedules are all over the map, making it nearly impossible to anticipate their volumes, which in turn makes any capacity utilization target extremely difficult to make. In addition, our raw material costs are so unpredictable that it’s hard to keep COGS under control. To remain competitive in this environment—heck, to remain solvent in this environment— we need to do a lot of internal things better. We need to coordinate supplier management, manufacturing, and product delivery so we can effectively and efficiently get products to the customer. We need to be on time and on spec just to get the opportunity to sell new products. Key in my mind is managing the supplier pipeline, the raw materials—there’s a lot of money to be saved there, especially if we can consolidate our product line, increase capacity in the remaining plants, and redesign our products to reduce their materials costs without sacrificing product quality or functionality. We also need to balance our focus on cost cutting with the need to make investments in process improvements and new and upgraded equipment. Unscheduled downtime and the inability to make fast product switchovers on the manufacturing floor are killing us. Upgraded capital will both reduce our costs and help deliver consistently on time and on spec. We talk a lot about preventive maintenance, but we need to get real about it. This could save us big time in terms of costs and effectiveness. If we don’t do these operational things, we will have trouble convincing the luxury manufacturers to pay a premium price for our product. Plus we won’t be profitable in the economy segment if we can’t get our manufacturing costs under control. Kwon, president of the economy division, added his thoughts: It is not just that we should become better manufacturers—we have to be the best. Our customers, particularly in Asia, have no tolerance for substandard suppliers. We must not only be competent, but fully master just-in-time (JIT) and lean processes in order to gain and retain the economy car OEM customers in Asia. Our entire division must become lean—every single employee must be trained in these processes—and we can only do this with resources and total leadership buy-in from the corporate level. Rita Richardson, vice president of research and development, responded to the challenge to produce state-of-the-art, technologically sophisticated products: To go back to what Aaron said, I agree that if we are to compete in the luxury segment, we certainly need to get creative and bring to market new and improved products in partnership with our leading customers. Our customers have been demanding more from us on product development. In Europe, they want us to move faster—we have to come up with new designs and product innovations—because they are having trouble keeping up with new regulations on emissions and safety standards, and it’s very hard to anticipate what the customer will want. To reduce new product development time, we need to invest in new CAD/CAM software, and acquire and train skilled design engineers, scientists, and technicians from top- tier schools and competitors. We also need to invest in prototyping equipment. We want to be able to strip our competitors’ products, see what technology they have that we do not, reverse 3 Original equipment manufacturer. 4 This document is authorized for use only in Prof. M P Ram Mohan & Prof. Viswanath Pingali's Senior Management Programme (SMP) Batch - 13 at Indian Institute of Management - Ahmedabad from Oct 2024 to Apr 2025.  Transworld Auto Parts (A) 110-027 engineer those technologies, and acquire those capabilities. We should be a one-stop shop for all the technological needs of our premier customers. Stewart, VP of marketing, added: There are many things we should address from a marketing perspective. First, we must be much more aggressive in signing new customers in Asia. Everyone in the industry knows this is a growing segment, so the competition will be fierce. As Kim pointed out, we need to quickly get up to speed on lean processes to leverage our presence there and gain a reputation for delivering low-cost, high-quality parts in that region. Next, we should respond better to the evolving needs of our customer base. Our OEM customers are changing the way they do business; they are looking to partner much more closely with their suppliers. The parts suppliers that will flourish in this environment will be able to take total responsibility for key subassemblies. Gone are the days when the OEMs just wanted a specific part; now they want fully assembled systems that they can use for final assembly. Finally, we need to showcase the enhanced R&D capability that Rita is talking about by working more closely with our customers to anticipate their needs. We need to help our customer divisions get closer to their key customers to drive the message that TAP is an innovator with new and enhanced abilities to design the products they want. We should seek to partner closely with our thought-leading customers in product development from the inception of the idea to producing the final product. Perhaps a closer customer relationship can also solve the production lead time problems you’ve been experiencing in manufacturing, Mike. Milton replied: Yes, I agree that working more closely with our customers could help us anticipate changes in production schedules, and better employees with better training and better IT systems will help in that regard. However, with all due respect to Rita and Aaron, I think we’re getting ahead of ourselves here with all this commitment to R&D. We have to do the basic things right before we can move to innovation and new customers. We don’t have unlimited resources; we have to pinpoint where we should invest our time, people, and money so that they will have the most impact. I say we should focus on efficiencies and quality control at all our plants, then once we’ve established ourselves as the low-cost provider and are making some profits, move on to the R&D side. Richardson rebutted, “If you wait on R&D until you have all the factories working flawlessly, we’ll be so far behind that we’ll never catch up.” Bright interrupted the argument by saying: We have to be able to be competitive in all these dimensions, but each division will emphasize its own value proposition. As long as we can keep our operating cash flows healthy, the parent company is willing to invest in programs that can help us compete. I know this is difficult and these are probably the most grueling economic times that any of us has experienced. That’s why we need a clear strategy for our customer divisions, and an implementation plan and measurements that can keep us on track. We know our overarching strategy is to target the luxury and economy segments with low-cost/high-quality products and enhanced product innovation. We know our financial goals are to increase cash flow and ROCE; our customer goals are to increase market share in Europe and Asia. We know we have 5 This document is authorized for use only in Prof. M P Ram Mohan & Prof. Viswanath Pingali's Senior Management Programme (SMP) Batch - 13 at Indian Institute of Management - Ahmedabad from Oct 2024 to Apr 2025.  110-027 Transworld Auto Parts (A) to improve our internal processes and our employee competency levels to accomplish this. Now we need to decide how to craft implementation plans for each division that will help us reach our goals. I’m very intrigued by the idea of a strategy map and balanced scorecard. They have been used successfully in many top companies and I believe they can help us articulate and implement our strategy. The Balanced Scorecard Bright recalled her experiences in the summer of 2008 when she attended an executive education program that featured case studies and lectures on the balanced scorecard (BSC). Bright believed the BSC could help the TAP executive team describe the objectives that must be accomplished for the company to achieve its strategy. She had gone on to explain the concept behind the BSC to her team: The BSC is a tool designed to align the whole organization behind a single strategy. The BSC divides the possible performance measures into four categories, or “perspectives”: (1) financial, (2) customer, (3) process, and (4) learning and growth. The strategy map is a visual representation of our strategy and the cause-and-effect relationships that will enable us to reach our goals. The balanced scorecard takes the components of the strategy we identified in the map and creates specific targets and action plans to implement each strategic component. The scorecard is “balanced” because it uses both financial and nonfinancial metrics to track progress. Examples of financial goals are ROCE, cash flow, and revenue growth, whereas nonfinancial goals can include topics such as increased employee training and leveraging IT. The BSC also keeps us from focusing too much on the short term. Although improving revenues is vital for TAP’s short-term success, we can’t lose sight of our long-run goals that will position us for success years from now, like developing partnerships with our customers. To create a good BSC, we need to think hard about cause-and-effect relationships between the four perspectives. How exactly will utilizing IT, for example, help with product development? These linkages will provide the foundation for the programs we implement to reach our strategic goals. We must never forget that all of the nonfinancial goals have to be linked to our financial goals. The arrows that connect the objectives in the four perspectives represent these cause-and-effect relationships. Finally, I need to emphasize the difference between leading and lagging indicators. On the strategy map, many of the financial and customer goals are lagging indicators, that is, they improve only after the strategy has been implemented for some time. There are leading indicators, however, that we can affect immediately, such as number of machines receiving regular maintenance. Many of the nonfinancial measures will be leading. Meeting our leading targets should indicate that we are on track to achieve our financial (lagging) targets. Bright had turned to Kwon and Eckhard, saying: I want your top priority to be developing a balanced scorecard for your division. Our deadline is to have it completed within one month from today; the first of the New Year. You should first develop a strategy map to help you articulate the strategic objectives for each division. During the next several weeks, Ron Royerson, the vice president of strategic development, led a small project team to conduct interviews with the corporate VPs and division managers about their 6 This document is authorized for use only in Prof. M P Ram Mohan & Prof. Viswanath Pingali's Senior Management Programme (SMP) Batch - 13 at Indian Institute of Management - Ahmedabad from Oct 2024 to Apr 2025.  Transworld Auto Parts (A) 110-027 customers, competitors, quality initiatives, suppliers, and internal processes. He also gave them a presentation on how to draft strategic objectives for the strategy maps, and measures and initiatives for the balanced scorecards (see Exhibit 8 for an excerpt of this presentation). Royerson summarized: Strategic objectives, measures, and initiatives should be as action oriented, clear, and concrete as possible. Objectives should be dynamic; try to use action statements for each objective. For example, “provide superlative after-sales support” is better than “sales support.” Measures transform the strategic objective into tangible results and should give us the information we need to judge progress. Measures, if crafted correctly, will change behavior in the workforce. Finally, initiatives outline the action plans that will close the gap between our current performance (where we are now) and our desired performance (where we want to go). A well-crafted strategic initiative will have accountability, clearly defined start and stop dates, progress milestones, deliverables, a budget, and committed resource allocation. After several long days and weekend retreats, the team was able to complete strategy maps, balanced scorecards, targets, and action plans for the luxury and economy divisions (see Exhibits 9a and 9b for strategy maps, and Exhibits 10a and 10b for balanced scorecards, targets, and action plans). Once the BSCs had been approved, each division began to implement the action plans selected to help them reach their targeted performance. Eckhard described his experience crafting the scorecard: I was quite concerned that we should not bite off more than we could chew. I wanted to keep our goals within reach and not try to do everything at once. By focusing on just a few important measures that would help us reach our financial targets, I felt we had a better chance of success. Also, I am a great believer that you can effectively focus only on a few things at a time. It may be a cliché, but less is more. I believe that if your employees are happy today, your customers will be happy tomorrow, and your shareholders will be happy the day after. Kwon explained why his division had developed a more extensive scorecard: As we studied the strategy map, we realized there were many cause-and-effect linkages that would become crucial levers for changing behavior and thus enabling our organization to meet our goals. We decided to err on the side of more strategic objectives rather than less. When a pilot flies a plane, he doesn’t just worry about altitude; he has to be concerned with airspeed, fuel levels, trajectories, and weather conditions. Like the pilot, we believed that we had to simultaneously manage many factors if we wanted to reach our destination. Six Months Later—Summer 2009 Bright instituted quarterly review meetings to check the progress of each division’s new strategy. She used the balanced scorecard to review each division’s results compared to the BSC targets. Eckhard and Kwon both knew that the COO position was vacant and that one of them would likely end up with that job, and that a large part of their evaluation would be based on their performance as reflected in the BSC. Just before the second such meeting, Bright reviewed the BSC results (see Exhibits 10a and 10b). She was pleased to see that Eckhard had surpassed his cash flow and profit targets. Bright also noticed that the luxury division’s quality indicators dropped slightly, but it continued to rate highly on innovation. Overall, Eckhard and his division had done a wonderful job exceeding their financial 7 This document is authorized for use only in Prof. M P Ram Mohan & Prof. Viswanath Pingali's Senior Management Programme (SMP) Batch - 13 at Indian Institute of Management - Ahmedabad from Oct 2024 to Apr 2025.  110-027 Transworld Auto Parts (A) goals and were close to target on most of their customer initiatives. On the other hand, the economy division had not attained its financial targets. Bright was particularly puzzled at the economy division’s results because it had been so successful in the learning and process dimensions. As the fog continued to obscure the view from her windows, Bright pondered how she could determine which division had better performance. The luxury division, by meeting its financial targets, greatly added to the company’s overall financial health, and allowed TAP to report better results from the prior year. Turning to the economy division, she was satisfied with how they had positioned themselves to take advantage of anticipated growth in the economy segment, which would contribute to TAP’s long-term financial performance. She sat back and thought about her dilemma: “The more I look at these results, the more confused I become. I can’t decide which division has performed better.” 8 This document is authorized for use only in Prof. M P Ram Mohan & Prof. Viswanath Pingali's Senior Management Programme (SMP) Batch - 13 at Indian Institute of Management - Ahmedabad from Oct 2024 to Apr 2025.  Transworld Auto Parts (A) 110-027 Exhibit 1 Transworld Auto Parts Financial Statements Annual Income Statement (abbreviated) (in $USM except where noted) Dec 08 Dec 07 Dec 06 Dec 05 Dec 04 Revenue $ 6,681 $ 7,886 $ 7,993 $ 11,883 $ 13,060 Costs of Goods Sold 6,360 7,485 7,479 11,495 12,678 Gross Profit $ 321 $ 401 $ 514 $ 388 $ 382 Gross Profit Margin (%) 4.81% 5.09% 6.43% 3.26% 2.93% SG&A Expense 678 775 802 1,720 1,176 Operating Income $(357) $(375) $(288) $(1,332) $(793) Interest Expense 98 157 123 101 103 Income Tax Expense 0 0 0 0 0 Net Income $(455) $(531) $(411) $(1,433) $(897) Annual Balance Sheet (in $USM) Dec 08 Dec 07 Dec 06 Dec 05 Dec 04 Cash $1,626.0 $2,030.6 $1,539.9 $1,405.5 $1,326.4 Net Receivables 692.3 805.0 871.5 1,216.6 1,778.0 Inventories 247.8 346.5 364.0 375.9 622.3 Other Current Assets 174.3 468.3 520.1 143.5 184.1 Total Current Assets $2,740.4 $3,650.4 $3,295.5 $3,141.5 $3,910.8 Net Fixed Assets 1,513.4 1,955.1 $2,123.8 $2,081.1 $3,712.1 Other Noncurrent Assets 219.8 238.0 237.3 292.6 393.4 Total Assets $4,473.6 $5,843.5 $5,656.6 $5,515.2 $8,016.3 Accounts Payable $740.6 $1,236.2 $1,277.5 $1,262.1 $1,682.1 Short-Term Debt 1,887.9 66.5 70.0 339.5 355.6 Other Current Liabilities 361.2 466.9 450.1 469.7 652.4 Total Current Liabilities $2,989.7 $1,769.6 $1,797.6 $2,071.3 $2,690.1 Long-Term Debt 45.5 1,921.5 1,489.6 1,056.3 1,059.1 Other Noncurrent Liabilities 1,259.3 1,415.4 1,701.0 1,621.2 3,182.2 Total Liabilities $4,294.5 $5,106.5 $4,988.2 $4,748.8 $6,931.4 Total Equity 179.1 737.0 668.4 766.4 1,084.9 Total Liabilities and Equity $4,473.6 $5,843.5 $5,656.6 $5,515.2 $8,016.3 Source: Casewriters. 9 This document is authorized for use only in Prof. M P Ram Mohan & Prof. Viswanath Pingali's Senior Management Programme (SMP) Batch - 13 at Indian Institute of Management - Ahmedabad from Oct 2024 to Apr 2025.  110-027 Transworld Auto Parts (A) Exhibit 1 (continued) Transworld Auto Parts Financial Statements Annual Cash Flow Statement ($USM) Dec 08 Dec 07 Dec 06 Dec 05 Dec 04 Net Operating Cash Flow $ (81) $ 205 $ 197 $ 292 $ 293 Net Investing Cash Flow (146) (124) (236) (162) (547) Net Financing Cash Flow (178) 410 173 (51) 113 Net Change in Cash $ (405) $ 491 $ 134 $ 79 $ (141) Depreciation & Amortization 291 330 301 1,058 480 Capital Expenditures (206) (263) (261) (410) (579) Cash Dividends Paid 0 0 0 0 0 Source: Casewriters. Exhibit 2 TAP Customer Division Value Proposition, December 2008 End-User [or “Consumer”] Defined Mid-size Luxury Economy Attributes (in ranking of importance to end-user) First most important Comfort Innovation Low cost Second most important Low cost Performance Fuel economy Third most important Quality High quality Quality Customer (OEM) Defined Attributes (in ranking of importance to OEM) First most important Price New product innovation Price Second most important Customer service Product design Product quality Third most important On-time delivery Technical expertise JIT/lean Source: Casewriters. 10 This document is authorized for use only in Prof. M P Ram Mohan & Prof. Viswanath Pingali's Senior Management Programme (SMP) Batch - 13 at Indian Institute of Management - Ahmedabad from Oct 2024 to Apr 2025.  Transworld Auto Parts (A) 110-027 Exhibit 3 TAP Key Customer Segments by Percentage of Sales in Each Geographic Division, December 2008 North America Europe Asia Low-priced small cars 10% 5% 35% Low-priced midsized cars 16% 5% 30% Low-priced CUV/SUVsa 4% 5% 10% Luxury cars 5% 35% 5% Luxury SUVs 12% 5% 5% Luxury CUVs 8% 5% 5% Luxury sport 5% 30% 5% Moderately priced cars, SUVs, and 20% 3% 5% CUVs Trucks (noncommercial) 20% 7% 0% Total 100% 100% 100% Total Sales (%) 45% 30% 25% Source: Casewriters. a Crossover utility vehicles (CUVs) are built on car frames and have little or no off-road capability, SUVs (sports utility vehicles) are built on truck frames and typically have off-road capability. Exhibit 4 TAP Selected Financial Data, by Customer Division (in $USM), FYE 2008 Product Economy Small to Moderately Luxury (all Truck (all Total Category Midsized Priced segments) segments) Cars/SUVs/CUVs Cars/SUVs/CUVs Revenue $ 2,255 $ 745 $ 2,939 $ 742 $ 6,681 COGS 2,100 899 2,560 801 6,360 SGA 135 244 171 128 678 Operating Income $ 20 $ (398) $ 208 $ (187) $(357) Source: Casewriters. 11 This document is authorized for use only in Prof. M P Ram Mohan & Prof. Viswanath Pingali's Senior Management Programme (SMP) Batch - 13 at Indian Institute of Management - Ahmedabad from Oct 2024 to Apr 2025.  110-027 Transworld Auto Parts (A) Exhibit 5 Global Light Vehicle Production by Region (in thousands of vehicles) 2003 2004 2005 2006 2007 2008 North America 15,874 15,773 15,753 15,252 15,021 12,607 South America 1,922 2,517 2,816 3,034 3,492 3,688 European Union 17,472 17,765 17,793 18,058 18,992 17,710 Other Europe 1,909 2,355 2,259 2,528 2,840 3,107 Asia & Oceania 20,363 22,588 23,860 26,178 28,335 28,575 Africa 379 401 491 531 493 548 Total 57,918 61,399 62,973 65,580 69,173 66,234 Source: Compiled from data provided by the International Organization of Motor Vehicle Manufacturers and Efraim Levy, “Autos & Auto Parts,” Standard & Poor’s Industry Surveys, June 25, 2009. Exhibit 6a TAP Plant Status, Q4 2008 Plant Location Status Plant Location Status Electronics: Interiors: Pennsylvania, Remain Open Alabama, Montgomery Close by March 2009 Montgomery Ohio, Beatty Close by March 2009 Alabama, Dothan Close by Dec 2008 Michigan, Lansing Remain Open Poland Remain Open Michigan, Saginaw Close by Dec 2008 Japan Remain Open Mississippi, Jackson & Close by March 2009 Hattiesburg Mexico Remain Open Tennessee, Asheville Close by June 2009 Spain (3 plants) Remain Open Brazil (2 plants) Remain Open South Korea Planned opening fall 2009 Mexico (2 plants) Remain Open Argentina (2 plants) Remain Open France, Lyon Remain Open France, Montpellier Close by Dec 2008 Germany (2 plants) Remain Open UK Remain Open China (2 plants) Remain Open Japan (2 plants) Remain Open South Korea (3 plants) Remain Open Source: Casewriters. 12 This document is authorized for use only in Prof. M P Ram Mohan & Prof. Viswanath Pingali's Senior Management Programme (SMP) Batch - 13 at Indian Institute of Management - Ahmedabad from Oct 2024 to Apr 2025.  Transworld Auto Parts (A) 110-027 Exhibit 6b TAP Plant Status by Customer Segment and Product Line, Q4 2008 Electronics Interiors Argentina (1) Spain (1) Brazil (2) United Kingdom Luxury Poland Spain (2) Mexico (1) Japan (1) Germany (1) Japan (2) Germany (2) Lansing, MI China (1) Montgomery, PA Spain (3) Brazil (1) China (2) Argentina (2) South Korea Economy (planned Mexico (2) South Korea (1) Japan opening fall 2009) Lyon, France South Korea (2) Mexico South Korea (3) Ohio, Beatty Montgomery, AL Jackson, MS Truck/Mid Dothan, AL Saginaw, MI Hattiesburg, MS -Priced Montpelier, France Asheville, TN (all plants to be closed) Source: Casewriters. 13 This document is authorized for use only in Prof. M P Ram Mohan & Prof. Viswanath Pingali's Senior Management Programme (SMP) Batch - 13 at Indian Institute of Management - Ahmedabad from Oct 2024 to Apr 2025.  110-027 -14- Exhibit 7 Market Research Study—Competitive Analysis Economy Segment Competitor Analysis Low Lifetime Cost Low Initial Cost Customer 2 Customer 3 TAP Customer 4 Customer 1 Luxury Segment Competitor Analysis Ahmedabad from Oct 2024 to Apr 2025. Innovation Customer Relationships Customer 4 Customer 1 Customer 3 TAP Customer 2 Source: Casewriters. This document is authorized for use only in Prof. M P Ram Mohan & Prof. Viswanath Pingali's Senior Management Programme (SMP) Batch - 13 at Indian Institute of Management -  110-027 -15- Exhibit 8 Crafting a Strategy Map and Balanced Scorecard: Objectives, Measures, Targets, and Initiatives BSC Terminology Strategic Theme: Diagram of the cause and effect relationships between strategic objectives Strategic Theme: Objectives Measures Targets Initiatives Customer Service Excellence Statement of what How success in The level of Key action strategy must achieving the strategy performance or rate programs required Financial Max. Return achieve and what’s will be measured and of improvement to achieve on Assets critical to its success tracked needed objectives Profitable Growth Customer Industry Leading Ahmedabad from Oct 2024 to Apr 2025. Customer Loyalty Process Seamless Cross- Group Objectives Measures Targets Initiatives Delivery of Services Seamless Cross- Promised 97% Service Dispatch Group Delivery of Delivery % (first time) Automation Understand Drivers Effective Customer of Customer Value Service Processes Services Learning & Growth Ensure Market- Driven Skill Development Source: Adapted from private correspondence to the casewriters from Robert S. Kaplan. This document is authorized for use only in Prof. M P Ram Mohan & Prof. Viswanath Pingali's Senior Management Programme (SMP) Batch - 13 at Indian Institute of Management -  110-027 -16- Exhibit 9a TAP Luxury Division Strategy Map, FY 2009 Increase Increase Increase Increase Gross Revenues ROCE Cash Flow Financial Margin Initiate Manage Improve Customer Customer Innovation Customer R&D satisfaction Partnerships Reduce Raw Maintain Process Materials Quality Cost Leadership Ahmedabad from Oct 2024 to Apr 2025. Learning & Increase Employee Growth Engagement Source: Casewriters. This document is authorized for use only in Prof. M P Ram Mohan & Prof. Viswanath Pingali's Senior Management Programme (SMP) Batch - 13 at Indian Institute of Management -  110-027 -17- Exhibit 9b TAP Economy Division Strategy Map, FY 2009 Increase ROCE Increase Financial Increase Asset Cash Flow Increase Utilization Grow Revenues Gross Margin Grow Be the low- Be the high quality Customer Gain reputation Market maintenance- provider of auto for standing Share in cost supplier in parts in the economy behind quality the the economy segment economy segment segment Process Increase Eliminate useful life of Ahmedabad from Oct 2024 to Apr 2025. Better defects subassemblies forecast Develop closer Improve durability OEM customer Improve of parts demand relationships Supplier produced Performance Learning Train buyers Enhance Transform Align IT to Enhance on high electronic workforce into support workforce & quality interchanges JIT/lean TQM and capabilities in experts Make procurement with JIT TQM Growth JIT/lean a customers and priority for suppliers all workers Source: Casewriters. This document is authorized for use only in Prof. M P Ram Mohan & Prof. Viswanath Pingali's Senior Management Programme (SMP) Batch - 13 at Indian Institute of Management -  110-027 -18- Exhibit 10a TAP Luxury Division Balanced Scorecard, Action Plan, and Results Metrics for Six Months Ending June 30, 2009 (budget figures are for a three-year budget) Balanced Scorecard Action Plan Actual Performance Objectives Measures Target Initiative Budget Financial Perspective Increased ROCE  ROCE  –7%  4% Increase cash flow  Year-to-date (YTD) cash flow from operating  –$12M  $8M activities Increase revenue  YTD revenue  1.3B  1.2B Increase gross margin  Gross margin %  14%  15% Customer Perspective Improve customer satisfaction  Global market share  5% “Innovation” campaign $50M  5% Manage innovation  Customer survey: % of customers who consider  85% Customer attitudes survey $2.5M  83% TAP “excellent” at innovation, product design, & technical expertise  Number of new products introduced  50 New product launch $50M  50 Initiate customer R&D partnerships  Number of customers with whom TAP partners  20 Partnership initiative $10M  10 to research and develop new products Process Perspective Reduce raw materials cost  Cost of raw materials (% of revenue)  65% Supplier optimization program $5M  60% Maintain quality leadership  Reduce defect rates (per 1 million parts)  3 PPM TQM initiative $10M  5 PPM Learning and Growth Perspective Increase employee engagement  % of employees “very satisfied” with the  80% Employee engagement and $25M  62% resources they have to do their job (annual satisfaction ratings