Governing Strategic Flexibility in Automotive Electrification: Option Value Realisation and Option Governance at Toyota and Volkswagen

Résumé:

Research Question

This paper examines whether the strategic flexibility identified in prior studies of automotive electrification actually generated value after 2020, and whether firms were able to govern that flexibility appropriately as market and technological conditions changed. More specifically, it asks how far Toyota and Volkswagen benefited from the option structures they had built under uncertainty, and how they managed the timing of continuation, adjustment, and commitment in the transition towards electrified powertrains.

Earlier research highlighted the value of flexibility under uncertainty. Sanchez (1995) and McGrath (1997) developed the logic of strategic flexibility and real options in technology competition; Baldwin and Clark (2000) showed how modular architectures preserve future strategic choices; and Avadikyan and Llerena (2010) applied real options reasoning directly to hybrid vehicle investment. Building on this literature, prior studies analysed electrification through the lens of real options and product architecture (Mokudai, 2020a, 2020b), showing that powertrain trajectories and vehicle platforms can be interpreted as option structures when design elements are defined to preserve adaptive capacity. This platform-level perspective is important for comparing Toyota and Volkswagen, because the two firms differ not only in their powertrain portfolios but also in the architectural level at which flexibility was created and later tested.

The paper therefore conducts an ex-post evaluation of these earlier analyses. Its central question is not which powertrain technology ‘won’, but whether previously identified option structures created value and whether firms were able to maintain, renew, or replace them at the right time. This distinction between option formation and option governance is the core concern of the paper. The question carries renewed empirical significance in the mid-2020s, as the regulatory environment that originally shaped electrification strategies has itself become uncertain: the partial rollback of European CO₂ targets for 2030 and 2035, together with the reversal of EV support policies under the second Trump administration, has altered the conditions under which both firms must exercise or abandon the option structures they built. Regulatory uncertainty, which was always a premise of real options reasoning, has thus re-emerged as an active force reshaping the value and governance of those options.

Methodology

The paper adopts a comparative case study of Toyota and Volkswagen from 2020 to 2025. It uses prior studies on electrification and platform strategy as the analytical baseline and compares them with subsequent corporate developments. The analysis draws on annual reports, integrated reports, investor presentations, press releases, and observable platform developments.

The comparison focuses on two dimensions: option value realisation, namely whether previously formed flexibility contributed to technology reuse, broader product coverage, lower transition costs, or continued adaptability; and option governance, namely whether firms managed the timing of extension, modification, replacement, or recommitment appropriately as uncertainty evolved.

Findings

The analysis reveals two contrasting patterns of option governance.

Toyota illustrates a case in which strategic flexibility retained value because electrification did not converge rapidly on a single global pathway. A hybrid-based multi-path strategy remained meaningful under continued uncertainty, allowing the firm to preserve a broad set of technological positions. At the same time, this case raises a governance question: preserving flexibility may reduce the urgency of commitment and learning in dedicated BEV architectures.

Volkswagen illuminates a different but equally important dimension of strategic flexibility. Flexibility embedded in MQB and related architectures created value under one set of assumptions, but changing regulatory and competitive conditions reduced the effective duration of that flexibility. The move towards MEB and dedicated EV architectures should therefore not be read simply as a failure of the earlier strategy. Rather, it points to a different governance challenge: recognising when an option structure has reached its limits and when strategic recommitment becomes necessary. This challenge has been compounded by the recent weakening of European CO₂ targets, which has unsettled the regulatory foundation on which the MEB commitment was predicated, raising the question of whether the recommitment itself now requires recalibration.

Taken together, the two cases suggest that strategic flexibility in electrification should be evaluated not simply by whether firms preserved multiple pathways, but by whether they captured value from those pathways whilst managing the trade-off between continued flexibility, focused learning, and timely recommitment.

Practical and Theoretical Implications

Theoretically, the paper contributes to research on strategic flexibility and real options by shifting attention from option formation to the ex-post issue of option governance. It argues that the value of flexibility depends not only on having options, but also on recognising their duration, limits, and replacement points.

Practically, the paper offers implications for firms facing uncertainty in electrification. The central strategic issue is not simply whether to commit to one powertrain technology, but how to design and govern flexibility across competing technological paths. The comparison between Toyota and Volkswagen clarifies two distinct but equally instructive responses. These implications are particularly relevant as regulatory frameworks are revised, trade tensions reshape market access, and BEV adoption diverges across regions: the capacity to govern strategic flexibility — rather than merely possess it — emerges as a central determinant of competitive resilience. The paper thus speaks directly to debates on how productive models and platform strategies must evolve when regulatory certainty can no longer be assumed.

References

Avadikyan, A. and Llerena, P. (2010) ‘A real options reasoning approach to hybrid vehicle investment’, Technological Forecasting and Social Change, Vol. 77, No. 4, pp.649–661.

Baldwin, C.Y. and Clark, K.B. (2000) Design Rules, Volume 1: The Power of Modularity, MIT Press, Cambridge, MA.

McGrath, R.G. (1997) ‘A real options logic for initiating technology-positioning investments’, Academy of Management Review, Vol. 22, No. 4, pp.974–996.

Mokudai, T. (2020a) ‘Strategic flexibility in shifting to electrification: A real options reasoning perspective on Toyota and Nissan’, International Journal of Automotive Technology and Management, Vol. 20, No. 2, pp.137–155.

Mokudai, T. (2020b) ‘Sharyo purattofomu to senryakuteki junansei (Vehicle platforms and strategic flexibility)’, Jidosha Gijutsu, Vol. 74, No. 9, pp.16–21, in Japanese.

Sanchez, R. (1995) ‘Strategic flexibility in product competition’, Strategic Management Journal, Vol. 16, Suppl. 1, pp.135–159.