Instructions
Case Study: Siemens
Read the Siemens case study located in the section titled Case Studies in your textbook concerning the following situation:
Siemens is a leading global electrical engineering and electronics firm headquartered in Munich, Germany. Profiling a highly-diversified company, this case addresses the issue of optimizing the business portfolio through a coherent corporate strategy. An in-depth look at the programs designed and implemented at Siemens to spur management innovation provides a unique opportunity to study an organizations efforts to facilitate the transfer corporate-level core competencies across business divisions in order to strengthen competitive position and performance.
The case opens with an introduction and a profile of the company. Management innovation activity at Siemens is then thoroughly reviewed, including the context, evolution, purpose, content, implementation, capability development, and performance measurement of the companys top+ program.
This case study demonstrates how the principles of strategic management apply to Siemens structured and systematic approach to management innovation and business excellence. It also provides a framework for assessing the effectiveness of the companys corporate management tools and programs. Describe Siemens corporate-level strategy and characterize its level of diversification. Discuss the advantages and disadvantages of the companys matrix organizational structure. Does the organizational design effectively support the needs of Siemens corporate-level strategy? Describe how the company structured the top+ program. Who was responsible for oversight and coordination of the business excellence initiatives? How does the management innovation activity at Siemens facilitate achievement of the companys corporate objectives?
Using a balanced scorecard framework, outline the financial and strategic organizational controls used by Siemens to drive management behavior and firm performance. Are the corporate criteria balanced? Are they yielding desired outcomes for the company? Conduct a financial analysis using Siemens financial performance results from 1998 to 2007 to assess the effectiveness or success of the top+ program. What recommendations would you make to improve either the design or implementation of the companys management innovation efforts? Submission Details: Present your report as an 812-page Microsoft Word document formatted in APA style.
Support your responses with examples. Cite any sources in APA format.
Name your document MGT4070_W5_LastName_FirstInitial.doc
Submit your document to the Submissions Area by the due date assigned. Siemens CASE 15: Siemens: Management Innovation at the Corporate Level
Markus MenzGünter Müller-StewensInstitute of Management, University of St. Gallen
Introduction
At the Annual Shareholders Meeting in February 1998, Siemens announced disappointing overall results for fiscal 1997. While the firms sales growth met shareholder expectations, net income remained largely stable. During the following weeks and months, Siemens top management not only faced increased pressure from its shareholders, but also higher environmental uncertainty and stronger global competition than during the early and mid-1990s. The challenge for the top management team was to optimize the business portfolio in a way that promised to add substantial shareholder value over the next years. Hence, the need was to develop and implement a revised and more coherent corporate strategy.In response to the developments in 1997 and early 1998 and to facilitate the implementation of the corporate strategy, Siemens launched its first comprehensive corporate program in July 1998. A critical part of the so-called Ten-Point Program was the top+ program, which exclusively addressed issues of business excellence and management innovation. How did Siemens design and implement the top+ program and its management innovations? To what extent and how did Siemens benefit from these efforts? These and other related issues will be illustrated in the following.
Company Profile of Siemens
Founded in 1847, Siemens developed into one of the leading global electrical engineering and electronics firms over the past 160 years. At the end of fiscal 2007 (September 30, 2007), Siemens employed nearly 400,000 people at 1,698 locations all over the world. From 1998 to 2007, firm revenues and profits increased almost every year, resulting in revenues of 72.448 billion EUR and net income of 4.038 billion EUR. Headquartered in Munich, Germany, Siemens is publicly listed in Germany at the Frankfurt Stock Exchange and in the US at the New York Stock Exchange (NYSE). By the end of fiscal 2007, Siemens market capitalization had reached 88.147 billion EUR.1During the period from 1998 to 2007, the business portfolio was frequently adjusted (see Exhibits 1 and 2). Examples include the spin-off of the semiconductor business under the name Infineon Technologies by an initial public offering (IPO) in 1999. At the end of 2007, the firms portfolio consisted of the following operating groups: Automation & Drives (A&D), Industrial Solutions and Services (I&S), Siemens Building Technologies (SBT), Osram, Transportation Systems (TS), Power Generation (PG), Power Transmission and Distribution (PTD), Medical Solutions (Med), and Siemens IT Solutions and Services (SIS). In addition, Siemens Financial Services (SFS) and Siemens Real Estate Services (SRE) were part of the portfolio.
Exhibit 1: Siemens Corporate Structure 1998
Source: Siemens Annual Report 1998.
Exhibit 2: Siemens Corporate Structure 2007
Source: Siemens Annual Report 2007.Together with about 180 regional companies in five regions (Germany, Europe other than Germany, Americas, Asia-Pacific, and Africa, Near and Middle and Commonwealth of Independent States), the operating groups were part of a matrix organizational structure (see Exhibit 2). Although the operating groups had profit-and-loss responsibility and were largely autonomous regarding their operative business activities, some influence from the central top management and central organizational functions existed. First, the group presidents were frequently also members of the overall firms managing board. Second, although the central entity primarily exercised financial control over the operating groups, some strategic measures that affected the way the businesses operate also existed. For example, the centrally controlled operational excellence initiatives were mandatory for all operating groups.This case was prepared by Dr. Markus Menz and Professor Dr. Günter Müller-Stewens, Institute of Management, University of St. Gallen, Switzerland. Its objective is to illustrate a corporate-level management innovation program. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. Our information sources included interviews with Siemens management as well as publicly available corporate information (annual reports 1993-2008, presentations, press releases, websites of Siemens AG and its subsidiaries) and press articles. We would like to thank Siemens AG for the support. This case was written with the support of a Philip Law Scholarship by the European Case Clearing House (ECCH).
Copyright © 2010, University of St. Gallen, Switzerland. All rights reserved. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner. The influence on some of the strategic decisions of the firms businesses was indeed part of Siemens corporate strategy, aiming at superior value creation for the overall firm. During the period from 1998 to 2007, the firms corporate strategy developed towards a concept of simultaneous vertical and horizontal optimization. First, vertical optimization included active portfolio management and operational excellence in the areas of innovation, customer focus, and global competitiveness. Vertical optimization was designed to lead to synergy by leveraging corporate capabilities and tools to individual operating groups. Second, horizontal optimization concerned the exploitation of synergies across the operating groups facilitated by initiatives such as Siemens One. As illustrated in this case study, the firms corporate strategy was executed with the help of several corporate programs.The firms corporate center was supposed to contribute to the overall corporate development, including the corporate programs, and to support the operating groups. It consisted of so-called corporate departments, including corporate development, corporate finance, corporate legal and compliance, corporate personnel, and corporate technology. Further, the corporate center comprised five sub-centers: corporate communications and government affairs, corporate information office, corporate supply chain and procurement, global shared services, and management consulting personnel. During the period from 1998 to 2007, the corporate center of Siemens was itself subject to extensive restructuring activities. For example, in 2001 the firm planned to cut corporate center costs by 15 percent in each of the following two years.2 In addition to the corporate center functions, Siemens founded the in-house consultancy Siemens Management Consulting (SMC) in 1996. This internal top management consultancy not only contributed to the implementation of a variety of different corporate projects but also served as talent pool for future management positions at Siemens.
Management Innovation Activity at Siemens
According to Johannes Feldmayer, a former managing board member of Siemens, management innovation means changing the management system of the firm, which involves the principles and rules of structuring and managing the organization. Concerning a change in the €œhow€ rather than in the €œwhat€ of management, it has a systemic and sustainable character and is supposed to lead to significant improvements of the firms competitive position.3 While Siemens frequently had introduced single management innovations during the past decades, the electrical engineering giant started a more structured and systematic approach to management innovation and business excellence during the early 1990s. In 1993, then CEO von Pierer and his top management team initiated the top (time-optimized processes) program. Because of its importance for the overall firm, Siemens management decided to continue the program under the slightly revised name top+ from 1998 onwards. As we will illustrate in the following for the ten-year period from 1998 to 2007, what started as a productivity improvement initiative developed into a comprehensive management innovation program. Overall, its objective was to improve firm performance by a guided approach to business excellence. Broadly speaking, the main issues of the initiative were innovation, customer focus, and global competitiveness.
Context and Evolution of the top+ Program
Initiated by von Pierer in 1993, the top/top+ program was directly supervised by a member of the managing board (see Exhibit 3 for an overview on the programs names, responsible managing boards members, and corporate programs from 1993 until 2007). The Siemens operational excellence program top+ was characterized by a high degree of continuity concerning its supervision by the firms top management team. Until September 2000, Günter Wilhelm, Siemens head of the Automation and Drives (A&D) and Industrial Solutions and Services (I&S) Groups as well as of the overall Asian and Australian business activities, was responsible for launching and establishing the program. In the following years, Klaus Wucherer was in charge of the firms business excellence initiatives. Finally, Erich Reinhardt, then CEO of the Siemens Healthcare Sector, succeeded Wucherer, who resigned from the Siemens managing board by the end of 2007.
Exhibit 3: Context and Development of Siemens top+
Source: Siemens Annual Reports, www.siemens.com.Since the program was primarily aiming at a similarly high level of operational excellence across the business portfolio, the program was structured on the firm and group levels. In 2007, top+ was coordinated in the Siemens corporate center by a team of seven people (excluding the customer focus program Siemens One). The team head was responsible for the firm-wide top+ efforts and reported directly to the Siemens managing board member overseeing the program. The role of this team was coordinating the top+ initiatives of the different groups, further development of the overall program and single initiatives, and monitoring the progress of its implementation in the firms groups.4 For example, each of the three pillars of top+, innovation, customer focus, and global competitiveness, was coordinated by one person. In addition to this central unit, several other organizational units were involved in the implementation of top+. First, the central top+ team was supported by the Siemens in-house consultancy, SMC, which employed about 160 consultants at the end of 2007. Involved in top+ issues from the beginning of the program, typically teams of two to six SMC consultants were assigned to single implementation efforts. Second, in each of the firms divisions and regional companies, one manager was responsible for top+. Third, for Siemens One as part of the top+ customer focus program, a dedicated corporate-level unit within the central corporate development department was created.In the beginning, the top program was largely independent from other corporate-level programs. Over the course of its development, however, it became an integral part of the firms management system and more and more intertwined with other firm programs or initiatives. From July 1998 until the IPO of Siemens at the NYSE in March 2001, top+ was part of the Ten-Point Program aiming at sustainable performance improvements. Besides fostering the firms business excellence efforts, the Ten-Point Program included activities such as the restructuring of the semiconductor business, reorganizing the business segments, and optimizing the business portfolio.5Because of its prior success and the permanent need for methods of business excellence, Siemens top management decided to continue the top+ initiative following the IPO. Therefore, in December 2000, the firms top management team defined margin targets for each group that were to be reached by fiscal 2003. Called Operation 2003, the new program was supposed to direct firm-wide attention to five important actions for enhancing firm performance (increase profitability in information and communication groups; integration of recently acquired Dematic and VDO; improve profitability in US business; and asset management (reducing capital employed and improving cash flow)).6At the end of 2003, the top management team emphasized even further the importance of the top+ program for the success of Siemens. The program was integrated into a novel Siemens Management System (SMS), as then CEO von Pierer noted: €œBesides implementing Operation 2003, we also conducted a thorough review of our management system, which we wanted to make even more transparent and easier to understand. Thats why we expanded our top+ business excellence program at the start of fiscal 2004, integrating it into a reorganized Siemens Management System. In the future, we will concentrate on three Company-wide programs Innovation, Customer focus and Global competitiveness into which we are incorporating all our existing initiatives and projects. We are gearing our management development and employee learning measures to support and complement these programs.€ 7 In April 2005, top+ became part of the subsequently launched and more comprehensive Fit4More program (see Exhibit 4). Building upon the four pillars of performance and portfolio, people excellence, operational excellence, and corporate responsibility, the program was designed to further strengthen the firms competitive position and performance. Operational excellence should be achieved with the SMS including top+. The Fit4More program was planned as a mid-term program, with a pre-defined end date in 2007. Since the firm successfully completed the program by 2007, Siemens top management decided to continue the program under the slightly different name Fit42010 (see Exhibit 5). More precisely, managements intention was to continue to €œpush innovation by applying our proven top+ methods and the top+ toolbox while sharpening our customer focus and enhancing our global competitiveness€.8
Exhibit 4: Elements of Fit4More
Source: Presentation of Klaus Kleinfeld at EPG Conference, May 2005. Exhibit 5: Elements of Fit42010 Source: Siemens Annual Report 2008.
Purpose and Content of the top+ Program
The overall purpose of the top+ program was to increase EVA (economic value added) of the different operating groups and thus of the overall firm. The top+ program comprised several different initiatives, projects, instruments, and tools targeting at profitable firm growth. The operating groups were supposed to implement the tools in order to exploit synergies.9 More precisely, Siemens top management defined innovation, customer focus, and global competitiveness as targets and sub-programs of top+. These sub-programs constituted the focal issues of the overall management innovation program. They continuously guided the overall action and were characterized by rather broad firm-level targets. As indicated in Exhibit 6, under the umbrella of the three sub-programs, 11 initiatives were defined. First, the innovation program included technology platforms and trendsetting technologies:
Exhibit 6: Sub-Programs and Initiatives of Siemens top+ Source: Feldmayer 2006.
€œOur company-wide top+ Innovation Program is providing new momentum in our drive to fully leverage our synergy potentials. Initial results include cross-product technology platforms for remote services; a uniform controls architecture for applications ranging from power plants and railway systems to industrial controls and communications networks; and systematic best practice sharing of the kind that has long characterized our software initiative. By moving toward technological leadership in all our businesses, we are also strengthening our customer focus and global competitiveness.€10
Second, customer focus was comprised of the customer acquisition and the cross-selling initiative. Third, global competitiveness encompassed the software initiative, project management, a global production concept, shared services, and asset management. In addition to the initiatives relating exclusively to one of the sub-programs, the service and the quality initiative concerned all sub-programs. The 11 initiatives, which were characterized by precise planning and a relatively clear performance orientation, were mandatory for all Siemens groups. Further, they were managed and monitored by the firms corporate center and required regular reporting to the Siemens managing board.11
Each of the initiatives comprised one or more projects with a precise task. The groups respective management allocated resources (e.g., budget, human resources) to the projects. The projects were meant to lead to measurable results, and project progress was reported in a decentralized manner. Examples of concrete projects are a novel drive concept in the A&D division as part of the technology platform initiative, or the Bangkok international airport as part of the cross-selling initiative (i.e. Siemens One).12
While top+ itself can be considered a management innovation, it has been also a program for managing the appropriate use of partially new management instruments and tools and thus also enabled management innovation. From the beginning of the top/top+ program onward, management tools have been an integral part to achieve business excellence. Because management frequently emphasized the importance of tools for the success of top+, the program has been often referred to as €œtool kit€. A definition of top+ in the Siemens Annual Report 2001 illustrates this focus:
€œtop+ is our company-wide program to achieve sustained growth in profitability. To improve the performance of our businesses, we apply tried and tested methods e.g. cost reduction, sales stimulation, quality enhancement and asset management. The motto of top+ is: Clear goals, concrete measures, rigorous consequences. We continually monitor the effectiveness of our top+ activities.€ 13
In 2002, the program contained 11 different management tools: corporate plan/business plan dialogue; balanced scorecards; knowledge management; leadership and co-operation; innovation; cost effectiveness; sales stimulation; asset management.14 As the names of some of the tools indicate, they were partly identical with the above-mentioned initiatives. Other management instruments and techniques, however, were even more generic and similarly applicable for several initiatives. An example of the latter was the introduction of knowledge management with corresponding tools such as databases, etc. It was used in most of the initiatives, for example, in the project management and the service initiative. On the other hand, the asset management initiative consisted almost exclusively of a new and standardized approach to asset management and thus of a single management innovation. This initiative was concerned with €œthe process of managing corporate assets in order to enhance operational efficiency while minimizing costs and associated risks€.15 In sum, Siemens top management emphasized the importance of uniform firm-wide processes and methods that were designed to enhance business success.16
Interestingly, the focus of the overall program varied not only over time because of the changing organizational and environmental conditions, but also differed from group to group (and from region to region). First, over the course of the initiative, the priorities of the top+ program shifted from more efficiency-oriented initiatives such as asset management in the late 1990s toward the inclusion of growth-oriented initiatives in the program areas of innovation and customer focus that were facilitated by tools such as benchmarking and knowledge management. In addition, various other aspects were included in the program. For example, since software had become increasingly important for all Siemens businesses, a systematic qualification improvement program for the firms software engineers was launched as a new element of top+. This program enhanced the abilities of the software engineers and included group workshops and personal mentoring.17
Second, the focus of the top+ program also varied from group to group (and from region to region). Though the initiatives and management instruments of top+ were mandatory for all groups, their application was business specific.18 Groups and countries/regions focused on those initiatives and tools that they considered as most beneficial in the particular circumstances they faced.19 For example, in 2001 the Siemens VDO Automotive division launched the top+ WIP (Worldclass Improvement Program), which focused on a Zero Fault quality initiative, leveraging production and procurement synergies, and outsourcing.20 Further, as a wholly-owned Siemens subsidiary, Siemens Australias efforts centered on the tool business process reengineering (BPR) in the process initiative and on the implementation of SAP software as part of the software initiative.21
Besides considering aspects of the organizational and environmental context, decisions on which instruments or tools to include in the top+ program depended on extensive internal and external benchmarking. An important requirement was that the tools that became part of top+ be €œgeneric€ enough to be applicable across a diverse business portfolio but also be proven with concrete examples within Siemens. Therefore, the process of including certain tools started in most cases with a pilot project in one of the groups, often a consulting project of SMC. Contingent upon the successful adoption or development of a tool in the pilot project, they became part of the top+ program and were implemented throughout the firm. Hence, a positive track record of a tool in at least one Siemens group was required:
€œAll the tools we use have already demonstrated their effectiveness for our business. Firmly anchored in all of our activities around the world, this proven approach is driving successful top+ programs at every level of the Company.€ 22
Further, external benchmarking with direct competitors as well as with best-in-class competitors in certain areas was very important. Hereby, the operating businesses compared their value chains regarding different dimensions (processes, people, organization) and identified a cost-cap. The measures to close a potential gap compared to competitors included learnings derived from the benchmarking and the respective adaptation to Siemens. Top+ made benchmarking a mandatory step for all operating businesses. Because of the substantial differences between the operating businesses, the benchmarking cycle was based on the product lifecycle of the respective operating business.
In addition, two other mechanisms led to the inclusion of new management tools. First, sometimes new management tools were developed €œfrom scratch€ by SMC, facilitated by SMCs extensive consulting experience. Second, business groups and regions also developed their own business-or country-specific tools without the involvement of the corporate center. If the tools substantially improved the business group or regional company in a particular area, the corporate center analyzed whether they could also be implemented in other business groups and regional companies. An example is €œlow cost benchmarking€, which was developed by Siemens China and subsequently implemented in other firm businesses. Similarly, solutions for problems in single business groups led to changes for the overall firm, as von Pierer described in 2004:
€œIn response to the problems at our Transportation Systems Group, quality management has been reorganized throughout the entire Company. In every Group and every Region, we have established quality managers who are authorized to intervene and halt projects and processes if quality problems arise. In such cases, improvements that would entail high costs after project completion can be defined and implemented at an early stage.€ 23
Implementation of the top+ Program
From its launch in 1993 until 2007, Siemens top management considered top/top+ as a firm-wide program that was obligatory for all groups and regions of Siemens. Many groups and regions, however, initially only implemented parts of the overall program. While management tools were meant to guide the implementation of the top+ programs goals, groups and regions were ultimately responsible for assessing their specific situations and for choosing the appropriate measures. This led to varying implementation rates in different groups and regions.24
In the beginning, the implementation of top appeared difficult, mainly because of the autonomy and power of the different group presidents and their management teams. Although the implementation was mandatory for all groups, only some groups applied all instruments and tools provided. The main reason for the partial implementation of top was the still prevalent Siemens culture in the early and mid-1990s, which was characterized by a lack of firm-wide transparency and a lack of consequences for the management of low-performing groups. In the following years, however, von Pierer was able to change the culture by obliging every single group president to implement the program. This was also facilitated by introducing more transparent and standardized performance measures and clear consequences for managers who did not fulfill the agreed performance targets. Despite these changes, even during the subsequent years, the implementation varied across groups and regions. In 2002, then CFO Heinz-Joachim Neubürger noted:
€œThe instruments of top/top+ itself are good. Yet, we recognize again and again that they are not applied with the necessary consequence and persistence.€ 25
Indeed, the top/top+ program was criticized for being too broad instead of focusing on different or even conflicting targets such as innovation or productivity. This breadth hampered commitment to the program by the firms groups, particularly in the first years following the launch of top.26 To foster the implementation of the top+ program throughout the firm, two measures were taken. First, management required all groups to undertake extensive external benchmarking every two to three years. If a business failed to achieve its targets, the management team had to propose how it would close the performance gap. Since the standardized tools of the top+ program already existed, the businesses frequently opted to apply them in order to enhance performance. Hence, although most of the tools of the top+ program were not mandatory, business groups were indirectly required to apply them. Second, Siemens initiated the top+ award in 1999. It became the firms most important award and was given to the best performing teams, divisions, units and subsidiaries. Award criteria included an increase in EVA and the successful implementation of the top+ philosophy within a certain period of time.27 An SMC project manager described the implementation of the overall program as a €œmixture of push and pull efforts€.28
Numerous examples of the (successful) implementation of single aspects of top+ in groups or regions exist. Since 2000, Siemens used top+ as a framework for achieving performance improvements in their US business. The measures not only targeted the businesses independently, but also included initiatives for synergy realization across businesses. The latter included aspects such as €œone face to key customer groups€ and €œshared services for corporate functions€.29 As early as in 2002, the results of implementing elements of the top+ initiative appeared promising. Interestingly, at that time, Klaus Kleinfeld, one of the initiators of top+ and SMC and later Siemens President and CEO, served as CEO of the US business. Siemens CEO von Pierer noted:
€œLaunched two years ago, our top+ U.S. Business Initiative has begun to show results. Earnings at our American companies have increased significantly.€ 30
A further example is the strategic reorganization of the group Information and Communication Networks (ICN) in 2001. Following the changing strategic focus, tools of the top+ program were applied. The group defined concrete measures that were monitored monthly and, if necessary, adjusted. This included €œreducing the number of production sites by half, optimizing sales channels and accelerating development activities in promising innovation fields€.31 A variety of other businesses implemented elements of top+ in 2001 (e.g., A&D and Siemens Real Estate). For example, A&D in the Automation and Control (A&C) group applied tools such as asset management, quality, and cost reduction.32
An example of a particular implementation aspect of top+ and of the challenges firms such as Siemens face when dealing with a diverse business portfolio is the €œbusiness excellence leadership training€ in the Power Generation division. In 2000, the divisions management team decided to implement the top+ quality initiative, mainly aiming at improvements of the process quality. The power generation business is characterized by large customized orders for single customers. Compared to businesses with large-scale production facilities, relatively small series and individual customer demands lead to a typical project duration of 18 to 24 months. Process improvements by quality management tools such as Six Sigma are difficult to (statistically) measure since the different projects are only partly comparable. Nevertheless, process quality and customer satisfaction needed to be improved. Therefore, management decided to develop a distinct competence aiming at continuous improvement that builds upon elements of Six Sigma.33
As the in-house