This Document Contains Cases 13 to 15 Case 13: Polaris and Victory: Entering and Growing the Motorcycle Business INTRODUCTION To strengthen its diversified portfolio, Polaris Industries entered the motorcycle business in the 1990s. This case encapsulates the history and development of the Polaris Victory Motorcycle Division from its conception in 1993 up until 2014. It closely follows the new product research and development process, thoroughly examining the company’s pre-production planning stages. Decisions regarding product introduction and value chain activities (manufacturing, distribution, and marketing) are reviewed, along with detailed coverage of market conditions and industry competition. The objective of this case study is to re-examine the company’s strategy in light of actual performance and changing conditions in the marketplace. To do this requires an analysis of the conditions which initially influenced Polaris’ new product development decisions and a review of what the company did right and what it did wrong. Then, changes in the marketplace since the Victory motorcycle was introduced should be appraised in order to determine if the company’s strategy is suitable for current industry conditions. What factors influenced the company’s decision to enter the heavyweight segment of the motorcycle market in the mid-1990s? Were industry conditions favorable for a new entrant at the time? In what ways was Polaris successful with the introduction of the Victory product line? What did the company do wrong? 15 years after entering the industry, describe current market conditions facing Polaris. How have competitors responded to Polaris and Victory; and what prominent competitive threats presently exist? How do today’s conditions affect the company’s strategic decisions for Victory’s next decade in the marketplace? ANALYSIS What factors influenced the company’s decision to enter the heavyweight segment of the motorcycle market in the mid-1990s? Were industry conditions favorable for a new entrant at the time? In the search of expansion opportunities, Polaris looked at various industries in terms of competition, size, service level, and trends before the company’s attention was drawn to off-road motorcycles. At the time, the market was growing and showed promise, feedback from the loyal Polaris customer base was positive, and interest in this product line was fueled by the fact that Parks (who was on the research team) and Wendell (then, CEO) were both motorcycle owners. Further examination revealed several conditions which favored a decision to enter the motorcycle industry. Internally, the company’s infrastructure was well-suited to the needs of a motorcycle manufacturer. This included Polaris’ sales force, dealer network, service and warranty operations, and parts and accessories division. The company’s experience with recreational vehicles, engineering and design capabilities, technological knowledge, production capacity, marketing expertise, and distribution system were all internal strengths which could easily support expansion into the motorcycle business. And its interest in moving into a parallel engine business indicated that “the stars were all aligned”. In addition to the obvious synergies, statistics from the Motorcycle Industry Council revealed that unmet industry capacity would support a new entrant. The potential was enticing. The worldwide motorcycle market was larger than that for Polaris’ other product lines, and pricing models showed that motorcycles could retail for twice the price of all terrain vehicles (ATV) and personal watercraft (PWC) units in the company’s current line-up. Further analysis revealed the attractiveness of the $3 billion worldwide cruiser segment. Strong demand for cruisers triggered a doubling of sales in this segment from 1993 to 1997; and annual growth was predicted to remain at 11% over the next five years. Given the overall market size and high profit margin potential, the best entry point in the motorcycle industry appeared to be for a cruiser positioned competitively between the cycles produced by Harley-Davidson and Japanese makers. Feasibility of this expansion plan required capturing only a small share of the market for success. Competitively, Polaris believed that lengthy delivery delays at industry-giant, Harley-Davidson, made the competitor’s 54% market share vulnerable to a new product designed with superior functionality. The company also believed that it would be able to compete with a lower cost structure. (Refer to the competitor profile of Harley-Davidson below.) Harley-Davidson – Competitor Profile Disadvantages Advantages Entrenched world leader in heavyweight segment One of the most recognized and respected brand names Brand image of prestige, freedom, individuality Inimitable intangibles associated with the brand name Network of 1,000 dealers worldwide Able to charge premium price for high quality Market of older, more-experienced riders 1997 sales of $1.75 billion, 30% of the world market Largest company-sponsored enthusiast organization – 900,000 members --------------------------------------------------------------------------------------- Falling behind in innovation High costs Unable to meet market demand Excessive delivery delays With regard to Japanese motorcycle producers, Polaris discounted the likely threat from this competitor group primarily because of the importance of being “American-made” to much of the market. Only Yamaha’s position in each of the company’s other product lines commanded attention from Polaris decision makers. Essentially, Polaris was certain that offering another American branded product to meet excess domestic demand would be an advantage over foreign-produced motorcycles. In addition, Polaris believed it could design and deliver a superior cruiser that would eliminate the common practice of replacing many components (such as brakes, seats, wheels, vibration-adsorption devices, frame stiffeners, and intake systems) on their brand-new motorcycles immediately after purchase. Even with such strong market potential discovered by the Polaris research team, the company was taking a big risk in going up against industry powerhouses. Competition for this segment was daunting. Its iconic rival had few weaknesses and had risen from the ashes before. Even with clarity that it was making a good decision, Polaris did not underestimate Harley-Davidson’s status in the American market or the competitor’s ability to ward off hungry competitors. In what ways was Polaris successful with the introduction of the Victory product line? What did the company do wrong? With experienced researchers, and by drawing from all corners of the industry, Polaris executed a thorough, methodical, and analytical entry into its new business. Adding the motorcycle line to its portfolio enabled Polaris to balance seasonal production cycles for increased operational efficiencies and to expand into a related engine business, which added potential for an extended product line. In addition to production synergies, the move also provided cross-selling opportunities to a network of over 2,000 Polaris dealers. The company focused on power and handling as key performance areas and leveraged its strengths in engineering and manufacturing. Design decisions were based on customer preferences, cost factors, and sourcing considerations. Extensive benchmarking and testing of competitor products facilitated the development of the stiffest frame of any cruiser on the market and of an engine with up to 50% more horsepower than any direct competitor. Polaris orchestrated a high-profile product launch, with hyped media coverage. Feedback from early prototype demos was incorporated into the final product design. As a result of these exhaustive efforts, the Victory motorcycle emerged as a class-leader in quality, innovation, and style. It was rated the Best Cruiser of 1998 before it was even available to customers. With higher quality and a competitive price point, Polaris was able to directly take on Harley-Davidson in the marketplace with early success. Polaris invested $100 million in the development of the Victory motorcycle. As cruiser industry sales doubled from 1993 to 1997, the company fully expected to recoup its investment within three years. However, Polaris entered the market at the tail end of the expansion period. Consequently, it was 2006 before Polaris turned a profit on the new line. Sales peaked during 2006-2007 and then fell to 2003 levels. As of 2010, sales levels had yet to meet Polaris’ expectations. Using the estimates below, sales were still short of Polaris’ 4,000 unit breakeven point and were failing to meet the company’s targeted goal of capturing 5% (or $150 million) of the estimated global market. 2010 Sales (from Exh. 1) $60.1 million* Average Retail Price (from Exh. 3) $17,834 Estimated Units Sold 3,370 units (*This figure may include parts, clothing, and accessories, which would slightly distort, or overstate, the calculation.) Despite its product successes and an effective strategy to overcome entry barriers, hindsight reveals some hitches in Polaris’ market approach. No market remains static, and Polaris failed to consider the competitors’ responses to Victory’s arrival in the industry. Vigorous retaliation can be expected when existing firms have a major stake in the industry and substantial resources to support strategic or tactical moves. The company also failed to anticipate that other new entrants would be attracted to the same growing demand for the cruiser segment of the market that Polaris had identified. The company had done its homework, but it is possible that it was too comfortable with its choices to identify imminent competitor reactions or to prepare for unanticipated threats. Pursuing the on-road cruiser segment of the motorcycle market rather than the sports bike segment was inconsistent with Polaris’ portfolio of recreational vehicles designed for off-road adventures on alternative terrains. While the research team sought initial input from Polaris customers, it ended up building a bike for a different market. There was a portion of Polaris owners who were interested in the Victory motorcycle, but it appears that this narrow segment quickly tapped out. Over-reliance on the company’s existing distribution model (which was more suited to sports bikes) led to missed opportunities to attract on-road customers and to build name recognition beyond the Polaris community. Essentially, exclusive use of Polaris dealerships to sell Victory motorcycles reduced the effectiveness of the company’s marketing and distribution plan and prevented the company from realizing the product’s full potential from the outset. By selecting a higher-end of the cruiser market, Polaris was basically targeting the mature hard-core enthusiast with disposable income. This pitted the company in direct competition for Harley-Davidson’s base of older, more experienced riders. Long-term success required that the company break the competitor’s strong hold on the cruiser segment. Alternatively, the company might have found a niche where it did not go head-to-head with the powerful competitor. Or, it may have selected a younger market, with a longer growth outlook and greater potential to capture lifetime brand loyalties. Polaris may have misjudged the importance of American branding for the heavyweight cruiser market. It certainly miscalculated the ability of Japanese products to remain entrenched in the marketplace. And it underestimated Honda’s position as the world’s largest producer of motorcycles. 15 years after entering the industry, describe current market conditions facing Polaris. How have competitors responded to Polaris and Victory; and what prominent competitive threats presently exist? Since its inception, Victory has had a steady release of innovative and forward-styled cruisers. To enhance brand recognition in the heavyweight segment, expand into a larger spectrum of the motorcycle market, and fuel growth, the company has acquired, integrated, and re-launched the legendary Indian Motorcycles brand, grown international sales, acquired partial ownership of Brammo for access to electric power-train and battery-pack technologies, entered a joint venture with Eicher Motors to market bikes in India, surprised the market by announcing the bold, new Slingshot roadster, and announced its first electric motorcycle, the Victory Charger. Victory has experienced strong sales growth and financial performance in recent years; but the game is changing, and competition is coming on strong. To determine if the company can continue to compete against Harley-Davidson, Japanese giants, and energetic new motorcycle companies, an assessment of current market conditions and growth opportunities is warranted. Industry sales have rebounded since 2009, but competition is intense – more intense than when Polaris entered the market. Out of its major competitors, Harley-Davidson is Victory’s closest rival. A powerhouse in the high-margin cruiser category, Harley-Davidson is fighting against industry participants chipping away at its hold on the segment. By 2010, the company’s sales volume and dollars had fallen to 2001 levels. Its sales also peaked in 2006, and the company cut production by 1/3 from 2008 to 2009. Harley-Davidson has also discontinued and divested product lines and pressured labor unions for concessions – further efforts to confront market realities. Now that supply has caught up with demand, delivery delays are no longer a black mark against the company. But, its riders are aging, and younger riders are less attracted to the Harley-Davidson brand. The rival, however, is no stranger to tough times and intense competition. It is not a company to give up market share without a considered response, and the ability to reinvent the brand and revive growth is always a possibility. Despite its struggles, Harley-Davidson has announced two new models aimed at growth beyond the heavyweight motorcycle segment: a new electric motorcycle, the Live Wire, touted for its speed and quiet motor, and a new smaller bike, the Street 750, designed for the enormous Asian market. As noted previously, Polaris did not adequately anticipate competitive retaliation to its entry into the cruiser market. Japanese motorcycle manufacturers responded to Victory by quietly and deliberately making product improvements of their own and by increasing their presence in the heavyweight segment. In 2009, their bikes were as popular as ever, and the Japanese producers are showing no signs of retreat. Honda, in particular, retains its status as the largest manufacturer of motorcycles in the world and offers an extensive line, with a bike placed at every point in the product spectrum. Its scope and experience makes the competitor especially formidable. Throughout the industry, eager competitors have fostered the formation of many niches in the heavyweight and other motorcycle segments since Polaris entered the market. There are 77 sellers of new big twin cycles and numerous custom and touring producers. American brands have been revitalized. European bike companies, like Triumph and Norton, are creating interesting and exciting new motorcycle models. (The British Triumph was the fastest growing motorcycle brand in terms of 2010 sales.) Car companies, like Lotus and Catheram, are entering the motorcycle market. BMW also entered the low-slung cruiser market to take on Harley-Davidson; and it is second only to Harley-Davidson in market share for the heavyweight/cruiser segment. This high-quality maker, backed by strong engineering and extremely high performance features, commands a whopping 40% price premium for its bikes. Custom makers also present a credible threat. Although they charge higher retail prices, they are able to absorb higher production costs. And narrowing the delivery window, custom bike producer, Big Dog, takes only 60 days to turn out product and is price competitive with mass producers. Moreover, the market is peppered with entrepreneurial entrants, like Zero Motorcycles, who is gaining attention with its electric dirt bikes. Electric powered engines is a new category being targeted by large rivals with sufficient resources to shape and capture the emerging segment. In this budding category, Harley-Davidson, BMW, Tesla, and Daimler all have motorcycle models in development. (Note that three of these companies are automobile makers.) Finally, the ranking of shopper satisfaction with dealerships in Exhibit 6 is an indication of a service factor that is not aligned with the company’s premium product strategy. In fact, it is somewhat alarming that Victory is ranked just barely above the industry average. The company trails Harley-Davidson, BMW, Ducati, and Triumph. Even the Indian brand ranks slightly higher than Victory, but also follows Harley, BMW, and Ducati. STRATEGY How do today’s conditions affect the company’s strategic decisions for Victory’s next decade in the marketplace? Today, Victory has a complete line of premium cruiser and touring motorcycles. The division is well-managed, and its products are well-received. The brand delivers 95% satisfaction levels to its bike owners. Offering the market a better product in terms of weight, torque, storage, engine performance, and stability, the company means to stay in the heavyweight segment while pursuing innovation and parallel product categories. After 15 years, some strategic factors still hold true. Victory still needs to maintain high quality engineering throughout the entire production process, to keep up with innovation, and to nourish (or perhaps improve) the company’s ability to meet customer expectations. The company needs to continually improve its bikes, while keeping them at a price point at or below Harley-Davidson’s to remain a viable competitor. In addition, it needs to focus on maximizing the profit potential of this market. Since 2010, Victory sales have more than tripled, and margins have improved substantially. Since 2011, the Victory division has generated over 7% of Polaris profits. In competition for investment dollars against other Polaris divisions, the motorcycle division needs to heighten performance to secure internal funds for future innovation and growth initiatives. Polaris CEO, Scott Wine, is pushing for progress. Within the corporate structure and in pursuit of established objectives, there are several measures which Steve Menneto can adopt, as vice president of the motorcycle business, to grow sales, maximize profits and returns, increase value, and strengthen Victory’s competitive position in the market. The challenge now is to continue to innovate and grow in an increasingly crowded and difficult market segment. New “on-road” vehicle and electric motorcycle products play a crucial role in seizing new market opportunities. But in addition to new product development, expanded distribution and marketing are critical to meeting the company’s organizational goals. Initially, Victory motorcycles were a big hit with Polaris customers. But when initial sales to this base waned, it became apparent that demand for motorcycles amongst Polaris’ existing recreational, off-road product owners was an insufficient core market to achieve desired levels of expansion. The company has been passing up potential sales which could be achieved from placement where other on-road bikes are sold. Even after identifying the limitations of an exclusive Polaris cross-product distribution strategy, the division has failed to develop or broaden its distribution network. The Victory brand needs greater exposure, and the company needs a better presence in the on-road market – in other words, improved effectiveness of distribution and marketing. To pursue new outlets, management will need to establish solid plans for expanding product distribution and for selecting valuable distribution partners. Designing a distribution strategy for the new three-wheeled roadster will serve as a perfect opportunity to decide whether to reposition Victory into new sales channels or to take advantage of the hype and draw of the Slingshot to improve the effectiveness of the Polaris-owned distribution network. The same logic may hold true for the release of the Victory Charge, where new distribution outlets may offer new promise for cross-promotion. In addition, Exhibit 6 reveals a perception of mediocre performance at Victory dealerships. This indicates an area where there is room for improvement and the potential to impact performance and brand image. In the mature motorcycle market, having a recognizable brand is not enough to be competitive. Again, the excitement surrounding the leading-edge Slingshot is an ideal opportunity to enhance and promote the Victory/Polaris brand image. In addition, Polaris needs to continue to seek uncontested market space. This will be difficult given the crowded competitive landscape. Companies like Honda make everything from scooters to huge cruisers – including both on-road and off-road vehicles. Scott Wine wants the company to move into ‘adjacent’ businesses. Polaris might be able to make a smaller on-road bike, perhaps a racing bike, or starter bike (for younger riders at a lower price point). It may be able to make bikes that will sell in the lower weight classes. (If Victory could penetrate the lower weight segments it may be able to put its bikes in more dealerships.) Or the company may try a cooperative or diversification strategy to venture into off-road or sports bikes, which would complement its ATV and snowmobile businesses. Industry research is needed to determine the market potential for newer/younger riders and for each of these product options. Its major competitors are not giving away much ground to Victory. International markets are populated with a continuous stream of inventive competitors, and there are no foreign markets where Victory will not face Japanese rivals. While new technologies are gaining momentum in the industry, alternative energy motorcycles are being developed by no fewer than five major producers. Also, with Victory’s continued success, Polaris may decide to acquire another company. While the Victory Motorcycle line has achieved success, has a product that competes with the biggest motorcycle makers, and appears to be positioned for growth, the company’s future is anything but certain, given the level of competitive rivalry in the industry. The main factors for shaping Victory’s future success seem to hinge on greater distribution, the impact of diversification efforts in the new on-road division, and realizing the synergies and full potential of the Indian Motorcycle brand (including the use of the Indian Scout to find a small bike entry point for Victory). If the company can overcome its distribution challenges, if the new division creates a set of innovative new products that build synergies with the Victory motorcycle line, and if Victory can develop interest among younger riders and successfully expand into more motorcycle categories, then the potential to achieve a bright future may indeed be possible. Victory Retail Finl Data Sales Case 14: Safaricom: Innovative Telecom Solutions to Empower Kenyans INTRODUCTION The Safaricom case provides an excellent opportunity to apply strategic management concepts to a constantly growing and extremely competitive organization. Safaricom is the largest mobile service provider in Kenya. It offers not only means of mobile communication, but also is involved within the community. In addition, Safaricom sponsors athletic events such as Safaricom Sevens and a music festival, Niko na Safaricom Live. The purpose of this case study is to examine the factors that are crucial to Safaricom’s continued success and to propose strategic actions to sustain its competitive advantage. While Safaricom’s community involvement enhances its brand image, the mobile service sector of Safaricom is the largest and main focus. Safaricom was formed in 1997 and has grown to be the largest mobile service provider in Kenya by implementing different strategies, including acquisitions. The analysis should start with a scan of the general, industry, and competitive environments. How does the external environment in Kenya differ from anywhere else? The case also describes Safaricom’s competitive advantage, and the effectiveness of its strategies against industry rivals should be examined. Safaricom offers different services such as prepaid mobile, voice and data services, and its voice packages are bundled with other services such as rewards programs, music, and games. Finally, the pressing strategic concerns, the effectiveness of Safaricom’s leadership should also be considered to devise convincing recommendations. This case is ideal for demonstrating the importance of the external environment, competitive rivalry, and strategic leadership. The following points are to guide a review and discussion of these important concepts. • Describe the general environment that Safaricom faces. What are the segments in the general environment that relate to Safaricom’s situation? What are the opportunities and threats derived from the factors from the general environment? • Describe the competitor environment and identify the competitors. Has Safaricom done enough to outperform its competitors? • Evaluate Safaricom’s CEO, Robert Collymore’s strategic leadership. Has he been able to fulfill his responsibilities and continue to grow Safaricom as a company? • Describe Safaricom’s next move in terms of growth and expansion. Based on your analysis, what additional recommendations would you make to help Safaricom achieve its goals? ANALYSIS • Describe the general environment that Safaricom faces. What are the segments in the general environment that relate to Safaricom’s situation? What are the opportunities and threats derived from the factors from the general environment? Segments in the general environment that impact Safaricom are primarily demographic, economic, political/legal, technological, and global segments. Africa is now the last untapped market in the telecommunication industry. Safaricom is the largest mobile provider in Kenya, which is also the 3rd largest market in Africa. Kenya has several important and unique segments in the general environment. The primary segments in the general environment that Safaricom faces are: General Environment Demographic Segment Different indigenous languages (official languages are English and Swahili) Low household income 50% of population living below poverty line High unemployment rate (40%) Higher literacy rate than other African countries Economic Segment One of the fast growing economies in the region GDP growth in Africa has remained strong despite the slow growth in global economy Decreasing interest rate Political/legal Segment The Kenyan government encourages foreign direct investment Human rights issues Invasion of privacy, freedom of speech, and right to assemble issues Technological Segment Internet use continue to rise due to cheaper access via mobile phones and lack of fixed line infrastructure High potential growth in technology in Kenya Increasing number of households with a mobile phone Global Segment Global economic crisis starting in 2008 The opportunities and threats derived from the factors in the general environment: Opportunities Growing economy International expansion Increasing internet usage Domestic expansion Increasing number of mobile phone users Higher literacy rate Threats Low household income Global economic crisis High unemployment rate Corruptions Different indigenous languages (more costly to market products) • Describe the competitor environment and identify the competitors. Has Safaricom done enough to outperform its competitors? Safaricom has dominated the mobile service industry in Kenya, enjoying a 64.5% market share, 77.5% of voice traffic, and 72.6% of mobile data/internet subscribers. Safaricom has three direct competitors: Bharti airtel, Telkom Kenya, and YuMobile. There are other potential competitors that are currently operating in other African countries (not in Kenya) that Safaricom can potentially expand to (or these potential competitors can possibly expand into Kenya): Millicom, Etisalat Emirate Telecommunications Company, and MTN Group. The table below identifies Safaricom’s direct and potential competitors. Company Locations Market Share in Kenya (%) Direct Competitors Customer Base (in millions) Revenue (in billions US dollars) Safaricom Kenya 65 Yes 19.4 1.22 Bharti airtel Africa & Asia 15 Yes 262 14.7 Telkom Kenya (Orange) Kenya 11 Yes 2.8 Not publically trades (No financial info available) Essar Telekom Kenya (YuMobile) 25 countries, including Kenya 9 Yes 3 27 Millicom Latin America & Africa N/A No 47 4.814 Etisalat Emirate Middle East & Africa N/A No 139 8.96 MTN Group Africa & the Middle East N/A No 201 8.74 Safaricom focuses not only on the company’s growth but also promoting the growth of Kenya. It is very involved in the community through different initiatives and events. Safaricom strives to give back to the community, for example, through an organization called M-PESA Foundation. M-PESA provides programs that help improve health issues along with environmental and educational problems that Kenyans face. Safaricom’s goal is to improve the lives of its customers and offers the best service in the industry. Safaricom’s main strategic priorities are: 1. Deliver the ‘Best Network in Kenya’ 2. Grow mobile and fixed data 3. Deepen financial inclusion 4. Retain and reward the loyal customer base 5. Encourage further innovation. When looking at coverage as a whole in Kenya, Safaricom strives to increase 2G and 3G coverages along with many other goals such as increase their speeds and deliver a value-based pricing. Safaricom seeks to provide the best products and services for a price that Kenyans can afford, given that 23% of the population lives on less than $1 per day, and 58% of the population lives on less than $2 per day. Safaricom is also very serious about developing new services and increasing and maintaining the customer base. Other success factors include the recruiting, training, and retaining an experienced top management team, which have helped shape Safaricom into a successful company as it is today. Overall, Safaricom is in good financial standing. In order to achieve its goal of being the best network in Kenya, the number of cell phone and wireless internet base stations is critical. The more the base stations, the wider and more reliable coverage. The number of base stations has been grown from 2010 to 2013. Safaricom Base Stations Year 2010 2011 2012 2013 Total 2162 2501 2690 2905 3G 607 1140 1439 1604 Wimax 140 193 187 203 Growth from Last Year 2010 2011 2012 2013 Total N/A 15.68% 7.56% 7.99% 3G N/A 87.81% 26.23% 11.47% Wimax N/A 37.86% -3.11% 8.56% As shown in the table above, from 2010-2013, the number of Safaricom’s base stations has grown every year (with the exception of Wimax in 2012). However, the growth seems to slow down in 2012 and 2013. In order for Safaricom to continue to expand rapidly, it needs to maintain its growth rate of base stations in order to serve its customers. Safaricom has opened other lines of business that have been very successful in Kenya. Looking at the company as a whole it seems to be doing very well in the industry and for the consumers it is trying to reach. Safaricom strives to provide services and products that are affordable and that will keep its customer base growing. By periodically holding discounts, new promotions, and new bundle programs, Safaricom is able to keep the customers engaged and interested in its services and products. From this analysis, Safaricom still remains its competitive advantage and should be able to continue to outperform its competitors. However, Safaricom needs to continually providing superior services with new and improved products in order to maintain its competitive advantage. • Evaluate Safaricom’s CEO, Robert Collymore’s strategic leadership. Has he been able to fulfill his responsibilities and continue to grow Safaricom as a company? Strategic leadership is the ability to anticipate, envision, maintain flexibility, and empower others to create strategic change as necessary. Strategic leadership involves creating vision and mission, influencing successful strategic actions, and formulating and implantation of strategies. All of which yields strategic competitiveness and above-average returns. There are several key components of effective strategic leadership: 1. Determining strategic direction 2. Establishing balanced organizational controls 3. Effectively managing the firm’s resource portfolio 4. Sustaining an effective organizational culture 5. Emphasizing ethical practices Determining strategic direction Robert Collymore became Safaricom’s CEO in 2010. Since he took over the position, the company has continued to strive. Kenya is the third largest mobile market in Africa. Given the expected market growth in Kenya, Safaricom faces many competitors that can potentially take away its existing market share. Collymore has worked in the telecommunications industry for 25 years and was supported by CFO John Tombleson, who has strong background in financing growth. Under the leadership of Collymore, Safaricom identified its important strategic priorities that shape the company’s strategic direction: 1. Deliver the ‘Best Network in Kenya’ 2. Grow mobile and fixed data 3. Deepen financial inclusion 4. Retain and reward the loyal customer base 5. Encourage further innovation. Establishing balanced organizational controls Collymore is able to maintain balanced organizational controls, in terms of strategic and financial controls. Strategic controls focus on the content (rather than outcome), whereas financial controls focus on short-term financial outcomes. Collymore is able to maintain a long-term perspective by investing in services and products to provide the best network in Kenya. These initiatives, along with other community oriented charities and programs, may cost Safaricom more money in the beginning, but will have lasting benefits for the company. However, Collymore is also able to balance the strategic controls with financial controls. Safaricom has performed well financially. Total revenue increased from 107 billion Kshs in 2012 to 124.28 billion Kshs in 2013. There are 7 categories in two major segments for the revenue stream: service revenue and other revenues. Service revenue includes Voice, Messaging, Mobile Data, Fixed Service, and M-PESA. Other revenue includes Handset, Acquisition, and Other Revenue. Safaricom was also able to decrease operating costs from 24% of total revenue to 23% of total revenue. Total capital expenditures was 24.88 billion Kshs in 2013, of which 90% went to improvements in network quality, capacity, and coverage. This shows that Safaricom is willing to invest in the long-term success of the company. Net income increased from 12.63 billion Kshs to 17.54 billion Kshs. Earnings per share increased from 0.32 in 2012 to 0.44 Kshs in 2013. Effectively managing the firm’s resource portfolio Managing the firm’s resource portfolio includes exploiting and maintaining core competencies and developing human and social capital. As previously discussed, Safaricom has been able to maintain its competitive advantage and core competencies. Human capital is the knowledge and skills of a firm’s employees. The following lists Safaricom’s senior management team: Robert Collymore – CEO and Executive Director Robert (Bob) Collymore has 25 years of commercial work experience in the telecommunications industry. Collymore is also a trustee for M-PESA in both Kenya and Tanzania. John Tombleson – CFO, Board of Director John Tombleson has a background in financing growth. Tombleson first joined Vodafone in New Zealand in 2003. After two years of being founded, they captured 48% market share. Joseph Ogutu – Director Strategy & Innovation Joseph Ogutu develops Safaricom’s position in the industry by formulating strategic direction and driving innovation in their products and services. He also has 25 years of experience in telecommunications and severs as the chairman of Safaricom Foundation. Rita Okuthe – Director, Marketing Okuthe has a Master’s degree in Marketing and is known to drive revenues by having a great understanding of consumer behaviors. Sylvia Mulinge – General Manager Enterprise Business Unit With over a decade of marketing experience, half of which was in the telecommunications industry, Sylvia Mulinge has a high skill in consumer marketing and brand activation. Betty Mwangi – General Manager, Financial Services Betty Mwangi has over 13 years of experience in the telecommunications industry and manages the business unit that includes M-PESA. Mwangi was recognized by MCI in June 2010 as one of the top 10 women in mobile globally. As shown above, Safaricom has a strong senior management team. Safaricom also fills open positions with internal employees for 50% of the time and tries to hire equal numbers of men and women. Safaricom has achieved female representation of 30% of G4 management level positions and above. As a result, Safaricom is able to manage its human capital well. Safaricom manages its social capital by sponsoring various charity events such as M-PESA Foundation and Safaricom Foundation. It also sponsors Safaricom Sevens, the biggest rugby event in Kenya, and by sponsoring the music festival Niko na Safaricom Live. Sustaining an effective organizational culture Safaricom’s organizational culture is for the experienced management team to share its expertise with the entire organization. It has a program called Subject Matter Expert Program that sets up 50 employees in different disciplines to teach technology, finance, team building, and soft skills to other members in the organization. The goal is to promote a great customer experience at any point of contact. Safaricom also tries to promote from within the organization and encourages female representation. This ensures a supporting organizational culture for the existing employees that if they work hard, they can be promoted within. A survey was conducted that showed a 10% improvement for both employee satisfaction and manager engagement. This shows that Safaricom is able to sustain its effective organizational culture. Emphasizing ethical practices This component was not explicitly discussed in this case. But from the reading of this case, Safaricom’s management team seem to be aware of the importance of ethical practices given that they are well-aware of the importance of social capital. No violation of ethical practices was mentioned in the case. STRATEGY • Describe Safaricom’s next move in terms of growth and expansion. Based on your analysis, what additional recommendations would you make to help Safaricom achieve its goals? Based on this analysis, recommendations for Safaricom’s next strategic move(s) should address: - How should Safaricom maximize growth, increase profitability, and maintain or expand their market share? - Is the firm’s recent announcement to start providing television services a good move, or will this diversification outside of its core business hurt Safaricom in the long-run? - Should Safaricom differentiate its banking services from those of its competitors? - Safaricom originally differentiated its service by providing access to banking functions through its mobile platform; however, the company’s top competitors have started services that mimic Safaricom’s mobile banking services such as YuCash and Airtel Money. How can it stay ahead of the competition? - The internet is a wonderful tool for linking people together. Is investment in 4G LTE technologies a good option for Safaricom? With these factors in mind, a comprehensive strategy can be devised to improve the likelihood that the company will meet its organizational objectives. Growth, Profit, and Market Share Overall, Safaricom is the leading telecommunications provider in Kenya, and it offers the best quality of services in the country. Safaricom offers various types of products and services for their customers with a price that is as affordable as possible for most Kenyans. The company also has an effective organizational control system that balances strategic and financial controls. Further, Safaricom ensures that its employees have high satisfaction so it can attract and retain best employees in the industry. Bases on the analysis, Safaricom should further invest in its technology in order to maintain as an industry leader. In addition, Safaricom can provide more educational programs for its employees to develop more human capital. By further training its employees and sponsoring educational programs, Safaricom can become the number one company in Kenya that people want to work for. This will improve its human capital and also enhance its social capital and brand image. Diversification As a company grows, it is most likely to tap into other industries. A moderate level of diversification is usually good for the company financially because it can help a company when one of its core industries is not doing well. If Safaricom can maintain its customer service and product innovation in television services, this may be a good diversification strategy that can help the company in the long run. Differentiation of Banking Services Differentiation is always a great strategy because if it is done correctly, a company can enjoy a large market share with higher profit margin. Currently, Safaricom offers the following banking services: M-PESA: Safaricom’s money transfer service. It has over 17 million customers and is available in over 65,000 agent outlets, including supermarkets, gas stations, selected banks, and other authorized Safaricom retailers, and over 2,000 payment partners which include registered businesses that accept M-PESA payments. M-PESA is a fast and affordable way to send and receive money via mobile devices. M-Shwari: In 2013, Safaricom partnered with the commercial Bank of Africa. Customers can transfer funds from M-PESA to M-Shwari, allowing them to save money, earn interest, and even borrow a small amount of money through a “microloans” program. Customers can save as little as 1 Ksh ($0.012 USD) and borrow as little as Ksh 100 ($ 1.22 USD). There are no application forms, no ledger limits, no limits on the frequency of withdrawal, no minimum operating balances, and no charges for moving funds from M-PESA to M-Shwari and vice versa. Competition For Safaricom, it can differentiate its banking services by expanding the distribution network, reducing system downtime, and ensuring geographic redundancy. Given that Safaricom already has 65% of the market share in telecommunications sector, it will be easier for its customers to send money from Safaricom, instead of from other service providers. The key for Safaricom is to ensure that the banking functions through its mobile platform is reliable, efficient, user friendly, and easy to learn. If Safaricom’s platform is much easier to learn and use than its competitors, there is no reason Safaricom’s customers will switch to other banking service providers. Investing in New Technology When looking at Safaricom’s coverage as a whole in Kenya, it strives to increase 2G and 3G coverages, increase their speeds, and offer an affordable pricing. As technology advances, it will be unavoidable that customers will start to demand 4G LTE technologies. In order to maintain Safaricom’s competitive advantage and keep customers happy, it will have to improve its network by investing in 4G LTE technologies. Safaricom Competitors Base Stations Case 15: Siemens: Management Innovation at the Corporate Level INTRODUCTION 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 organization’s 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 company’s 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 company’s corporate management tools and programs. • Describe Siemens’ corporate-level strategy and characterize its level of diversification. Discuss the advantages and disadvantages of the company’s 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 Siemen’s facilitate achievement of the company’s 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 company’s management innovation efforts? STRATEGY • Describe Siemens’ corporate-level strategy and characterize its level of diversification. Discuss the advantages and disadvantages of the company’s matrix organizational structure. Does the organization’s design effectively support the needs of Siemens’ corporate-level strategy? A corporate-level strategy specifies the actions firms take to gain competitive advantages through their selection and management of different business groups that compete in different product markets. Siemens is a diversified company with an extensive portfolio of businesses that have only a few links between them. The electrical engineering giant’s particular mix and range of related and unrelated business units employs a highly-diversified related linked corporate-level strategy. An organization’s structure defines the firm’s formal reporting relationships, procedures, controls, lines of authority, and decision-making processes. It determines and specifies decisions to be made and work to be completed by members of the organization that stem from those decisions. To illustrate, consider Siemens’ corporate-level strategy, which aims for superior value creation across the entire firm. This strategy directly influences the strategic decisions made by each of the company’s independent business units. And these decisions shape the work that Siemens employees complete within the organization. Together with about 180 regional companies in five geographic regions (Germany, Other Europe, Americas, Asia-Pacific, and Africa), Siemens’ operating groups form a matrix organizational structure (depicted in Exhibit 2 of the case). Each of the operating groups has profit-and-loss responsibility and is largely autonomous regarding its own operational business activities. However, central top management and organizational functions influence the individual business units and divisions. Group presidents are included on the firm’s managing board. In addition, the central entity primarily exercises financial control over the operating groups and establishes strategic measures that guide business operations. (For instance, the centrally-controlled business excellence initiatives are mandatory for all operating groups.) Some of the work performed at Siemens’ headquarters is on performance appraisal, resource allocation, and long range planning to verify that the firm’s portfolio of businesses will lead to financial success. As a firm’s level of diversification increases, information processing, coordination, and control problems emerge that functional organizational structures cannot handle. Large firms like Siemens, with few or less constrained links among their divisions, use the strategic business unit (SBU) form of a multidivisional structure to support implementation of their related linked diversification strategies. The SBU form of the multidivisional structure consists of three levels: corporate headquarters, strategic business units (SBUs), and SBU divisions (refer to Figure 11.6 in the text and Exhibit 2 in the case). The SBU structure can be complex, given the organization’s size and degree of product and market diversity. The entities within Siemens’ corporate headquarter, SBU, and division levels are outlined and presented in the following boxes. The corporate structure also includes a managing board (corporate executive committee) and the services of five corporate centers (which are also detailed below). *The Siemens One unit is located in this department. The divisions within each SBU are related in terms of shared products or markets (or both), but the divisions of one SBU probably have little in common with the divisions of the other SBUs. Divisions within each SBU can share product or market competencies to develop economies of scope and possibly economies of scale. In this structure, each SBU is a profit center that is controlled and evaluated by the headquarters office. Sharing competencies among divisions within individual SBUs is an important characteristic of the SBU form of the multidivisional structure. Integrating mechanisms used by divisions in this structure can also be applied to the other divisions within the individual strategic business units. In this case study, the firm’s corporate-level strategy is executed with the aid of multiple corporate programs. During the period from 1998 to 2007, Siemens’ corporate strategy and programs targeted vertical and horizontal optimization. The company’s vertical optimization efforts involve active portfolio management and operational excellence in the areas of innovation, customer focus, and global competitiveness. They are designed to produce synergy by leveraging corporate capabilities and tools to individual operating groups. Its horizontal optimization efforts concern the exploitation of synergies across the operating groups, facilitated by initiatives such as Siemens One. One disadvantage associated with the related linked diversification strategy is that, even when efforts to implement it are properly supported by use firms’ structure, it can be challenging to effectively communicate the corporation’s operational value to shareholders and other investors. Furthermore, coordination between SBUs can be impeded because the SBU structure, similar to competitive forms of unrelated diversified firms, does not readily foster cooperation across SBUs. Thus, properly designed and employed integrating mechanisms are crucial for implementing the related linked strategy. • Describe how the company structured its 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 company’s corporate objectives? Siemens’ time-optimized process (top+) program consists of initiatives and tools designed to establish distinct managerial and business excellence competences throughout the corporation. To accumulate and promote proven and widely-applicable management innovations, the company instituted new structural and organizational principles to redefine its corporate management systems. The top+ program builds upon the corporate and SBU structural groups described in the section above to achieve a high level of operational performance and to exploit synergies across the firm’s diverse business portfolio. Its structure is based on corporate direction and oversight combined with decentralized autonomy and power at the SBU level. While use of the top+ program is mandatory throughout the corporation, its flexible application ensures that it is tailored to the specific business needs of individual groups. In addition, a high degree of management continuity contributes to the program’s integration with Siemens’ management systems and other organizational initiatives. In 2007, top+ was coordinated in the corporate center by a team of seven people (excluding the customer focus program, Siemens One). The team head is responsible for corporate-wide top+ efforts and reports directly to a member of the managing board who monitors progress of the program. The role of this team is to manage the top+ initiatives of the different SBUs (including eleven mandatory initiatives), to further develop the overall program and individual initiatives, and to monitor the progress of implementation at the SBU level. Each of the three pillars of top+ – innovation, customer focus, and global competitiveness – is overseen and coordinated by one person. In addition to this central management team, several other organizational units are involved in the implementation of top+. First, the central top+ team is supported by Siemens’ in-house consultancy (SMC) which employed approximately160 consultants at the end of 2007. SMC has been involved in top+ issues since the inception of the program, typically assigning teams of two to six consultants to individual implementation efforts. Second, in each of the firm’s divisions and regional companies, one manager is responsible for top+. Third, for Siemens One as part of the top+ customer focus program, a dedicated corporate-level unit exists within the central corporate development department. The purpose of the top+ program is to optimize Siemens’ business portfolio in a way that continually and substantially adds to shareholder value through a coherent and powerful corporate strategy. In other words, the overarching objective of top+ is to maximize the economic value added (EVA) of the integrated technology company. What started as productivity improvement (efficiency-oriented) initiatives has developed into a comprehensive management innovation (growth-oriented) program. Top+ has enabled Siemens’ intangible resources (organizational learning, knowledge management, and best practice transfer) to become the foundation of the company’s core competencies. At the corporate-level, these core competencies are complex sets of resources and capabilities that link different businesses through accumulated managerial and technological experience and expertise. Corporate value is created when the firm is able to transfer solutions developed within single independent business units to facilitate improvements across SBUs. Over time, the program management team makes adjustments so that top+ continues to fit evolving conditions in the organization’s internal and external environments. Siemens believes top+ provides a sustainable competitive advantage to enhance its competitive position, contributes to profitable firm growth, and ensures the company’s ongoing and long-term success. ANALYSIS • 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? The top+ program is managed at the corporate level, which requires regular reporting of measurable results to the managing board. With clear goals, concrete measures, and rigorous consequences, Siemens continually monitors the effectiveness of its top+ activities. Organizational controls are essential to ensure that desired outcomes are achieved by providing parameters for implementing strategies as well as the corrective actions to be taken when adjustments are necessary. The challenge is to properly balance the use of both strategic and financial controls to shape performance. The balanced scorecard is a tool that helps firm’s strike this balance. The underlying premise behind the balanced scorecard is that firms jeopardize future performance when financial controls are emphasized at the expense of strategic controls. This occurs because financial controls provide feedback about outcomes achieved from past actions but do not communicate the drivers of future performance. Thus, an overemphasis on financial controls may promote behavior that sacrifices the firm’s long-term, value-creating potential for short-term performance gains. In effect, managers can tend to make self-serving, risk-averse decisions when focus is on the short-term. In contrast, strategic control focuses on the content of strategic actions rather than their outcomes. They encourage lower-level managers to make decisions that incorporate moderate and acceptable levels of risk because leaders and managers throughout the firm share the responsibility for the outcomes of those decisions and the actions that result. Cross referencing the integrated perspectives of the balanced scorecard with Siemens’ performance measurements, the following tables highlight the criteria against which the company monitors the effectiveness of its activities. The first table features the company’s key financial controls. Perspective Criteria Financial EVA Net operating profit after taxes (NOPAT) less a charge for capital employed in the business (cost of capital). Growth Sales growth of 2 x global GDP ROCE “Appropriate” return on capital employed CCR Cash conversion rate (1 minus the revenue growth rate) Adjusted industrial net debt to EBITDA Defined ratio Margin ranges Individual targets for all operating groups Financial metrics of importance to Siemens are concerned with growth, profitability, cash flow, returns, and shareholder value. Alternatively, Siemens’ strategic controls are structured around the three pillars of innovation, customer focus, and global competitiveness. They are outlined in each of the three tables below. Perspective Criteria Customer Market transparency Market share goal setting in terms of individual customers and specific projects Customer relationship management Systematic collection and sharing of sales information at a central source; firm-wide introduction of the “Net promoter score” (a key indicator to measure the willingness, or likelihood, of customers to recommend Siemens’ products and services) Siemens’ customer-focused strategic criteria emphasize the depth and quality of the company’s relationships with its customers. The company thoughtfully aligns its development, production, and administration processes to customer needs. Perspective Criteria Internal Business Processes Lean production system Lean production system development; accelerated expansion through the reference configuration of a “Siemens Production System” (SPS) Productivity Enhancement of production processes and guidance of outsourcing decisions Concerned with global competitiveness and shareholder satisfaction, Siemens’ internal business process measurements focus on efficiencies throughout the value chain. Monitoring of internal business processes has inspired the reorganization of production capacity for world-wide operations. Perspective Criteria Learning and Growth Benchmarking Comparison of products, services, processes and financials in relation to the “best of practices” of other similar organizations Lead customer feedback Collection of feedback from key accounts concerning the state and improvement of innovation New generation business Identification and promotion of disruptive innovation topics of significant relevance to future business Siemens Top Innovators Development and expansion of top innovator network; intensive application of their experience throughout Siemens Innovator image Expansion of the corporate image as an innovation leader Its learning and growth criteria focus on the firm’s efforts to create an organizational climate that supports knowledge-sharing, innovation, and growth. Clearly the top+ program at Siemens heavily influences the control measurements of these less tangible aspects of the company’s performance. Research shows that decisions balancing short-term goals with long-term goals generally lead to higher performance. An appropriate balance of strategic controls and financial controls, rather than an overemphasis on either, allows firms to achieve higher levels of performance. Thus, using the balanced scorecard can help the firm understand how it satisfies shareholders (financial perspective), meets customer needs (customer perspective), shapes processes to make full use of its competitive advantages (internal perspective), and identifies ways to improve performance in order to grow (learning and growth perspective). Successful use of strategic control frequently requires appropriate autonomy for various subunits so that they can gain a competitive advantage in their respective markets. Strategic control promotes the sharing of both tangible and intangible resources among interdependent businesses within a firm’s portfolio. And autonomy allows flexibility to take advantage of specific marketplace opportunities. Although both financial and strategic controls are important, on a relative basis, financial controls are vital to the headquarters’ evaluation of each SBU; strategic controls are critical when the heads of SBUs evaluate their divisions’ performances. Strategic controls are also critical for the headquarters’ evaluation of the quality of the complete portfolio of businesses and for making a determination if those businesses are being successfully managed. • 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 company’s management innovation efforts? The overall purpose of the top+ program at Siemens is to increase the economic value added (EVA) of the company’s diversified operating groups (and thus, of the entire firm). Innovation, customer focus, and global competitiveness are the focal issues of Siemens’ management innovation program. The top+ program comprises several different initiatives, projects, instruments, and tools, all targeting profitable firm growth. The operating groups are expected to implement these tools in order to exploit synergies across business units. Overall, the leaders of Siemens consider the performance impact of top+ to be significant. From 1998 to 2007, the corporation increased sales by over 20%, earnings nearly 90%, and net income over 200% (due to highly controlled operating and GSA expenses). Market capitalization went up an impressive 214% (refer to Exhibit 8 in the case or the table below). 1998 to 2007 Ten-Year Period In EUR million Y1998 Y2007 % Chg. Sales 60,177 72,448 20.39% Total Operating Expenses 59,365 67,827 14.25% General, Selling, and Admin. 15,321 15,502 1.18% Cost of Goods Sold 40,024 48,563 21.33% EBITD 6,988 8,901 27.38% EBIT 3,163 5,998 89.63% Net Income 1,228 3,710 202.12% Total Assets 67,048 88,961 32.68% Total Current Assets 39,436 47,932 21.54% Total Liabilities 51,560 59,334 15.08% Total Current Liabilities 24,643 43,894 78.12% Total Debt 7,406 15,497 109.25% Total Common Equity 14,614 28,996 98.41% Year End Market Capitalization 28,069 87,992 213.48% Capital Expenditures 3,714 3,751 1.00% Free Cash Flow (2,116) 1,116 152.74% ROA 1.83% 4.17% 127.87% ROE 8.40% 12.79% 52.26% Employees 416,000 386,200 -7.16% During this period, the company’s total debt more than doubled, while assets grew by less than a third. But otherwise, performance was strong. Cash flows improved, and returns also increased. Firm revenues and profits increased almost every year, and market capitalization grew dramatically over the 10-year period (the value of the company rose from 28 billion EUR to nearly 88 billion EUR). However, it is unclear if this is the result of management innovation or portfolio management. Analysis of results as the program evolved may provide more insights to enable a better assessment of the program’s success. 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 firm’s management system and more intertwined with other firm programs and initiatives. From July 1998 until the IPO of Siemens in March 2001, top+ was part of the Ten-Point Program, which was chiefly aimed at sustainable performance improvements. Besides fostering the firm’s 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. The following table calculates the changes in key financial indicators when the top program was a component of the Ten-Point program. 1998 - 2000 Ten-Point Program In EUR million Y1998 Y1999 Y2000 % Chg. Sales 60,177 68,582 78,396 30.28% Total Operating Expenses 59,365 67,964 74,855 26.09% General, Selling, and Admin. 15,321 17,663 19,354 26.32% Cost of Goods Sold 40,024 46,071 51,075 27.61% EBITD 6,988 6,940 14,658 109.76% EBIT 3,163 3,648 10,377 228.07% Net Income 1,228 1,615 7,549 514.74% Total Assets 67,048 72,741 93,366 39.25% Total Current Assets 39,436 41,371 58,076 47.27% Total Liabilities 51,560 55,541 67,728 31.36% Total Current Liabilities 24,643 28,113 34,602 40.41% Total Debt 7,406 7,262 9,134 23.33% Total Common Equity 14,614 16,229 23,226 58.93% Year End Market Capitalization 28,069 46,126 85,789 205.64% Capital Expenditures 3,714 3,816 5,189 39.71% Free Cash Flow (2,116) 1,443 2,372 212.10% ROA 1.83% 2.22% 8.09% 342.08% ROE 8.40% 9.95% 32.50% 286.90% Employees 416,000 440,200 446,800 7.40% During this period, sales were strong, expenses remained steady, and earnings performed extremely well (EBIT grew 228%). Net income made a remarkable jump in the year 2000 – a 515% increase over 1998 levels. It is also notable that market capitalization, free cash flow, and returns more than doubled during these three years. And returns on assets grew 342%. Because of this success and the permanent need for methods of business excellence, Siemens decided to continue the top+ initiative following the IPO. Therefore, in December 2000, the firm’s 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; integrate recently acquired Dematic and VDO; improve profitability in US business; reduce capital employed; and improve cash flow. The next table calculates the changes in key financial indicators when top+ was incorporated into the Operation 2003 program. 2001 - 2003 Operation 2003 In EUR million Y2001 Y2002 Y2003 % Chg. Sales 87,000 84,016 74,233 -14.67% Total Operating Expenses 88,662 82,702 71,951 -18.85% General, Selling, and Admin. 23,422 21,274 18,601 -20.58% Cost of Goods Sold 60,011 57,873 50,177 -16.39% EBITD 8,737 7,773 7,089 -18.86% EBIT 3,631 4,218 3,916 7.85% Net Income 2,088 2,597 2,409 15.37% Total Assets 86,434 74,253 73,246 -15.26% Total Current Assets 51,013 44,062 43,489 -14.75% Total Liabilities 58,602 50,191 48,897 -16.56% Total Current Liabilities 44,524 34,712 32,028 -28.07% Total Debt 12,610 12,346 13,178 4.50% Total Common Equity 23,812 23,521 23,715 -0.41% Year End Market Capitalization 36,773 30,227 45,434 23.55% Capital Expenditures 7,048 3,894 2,852 -59.53% Free Cash Flow (1,444) 782.00 1,964 236.01% ROA 2.42% 3.50% 3.29% 35.95% ROE 8.77% 11.04% 10.16% 15.85% Employees 484,000 426,000 417,000 -13.84% The SBU data is not available in the case, but Operation 2003’s asset management focus on capital and cash flow achieved desired results for the corporation. Returns and market capitalization were also positive, and cost reductions ranged from 16.4% to 20.6% over the three-year period. However, sales fell from 2001 to 2003 by a total of 14.7%. With little to base this on, one speculation can be that the intense attention on operational performance detracted firm efforts from sales growth. At the end of 2003, Siemens’ top management team further emphasized the importance of the top+ program for the company’s success. At this time, the program was integrated into the novel Siemens Management System (SMS). The table at the top of the following page calculates the changes in key financial indicators when the top+ program was a component of SMS. 2004 - 2007 SMS In EUR million Y2004 Y2005 Y2006 Y2007 % Chg. Sales 75,167 75,445 87,325 72,448 -3.62% Total Operating Expenses 72,152 71,998 83,520 67,827 -5.99% General, Selling, and Admin. 18,630 18,839 20,494 15,502 -16.79% Cost of Goods Sold 50,701 50,213 60,099 48,563 -4.22% EBITD 7,504 7,642 7,903 8,901 18.62% EBIT 4,683 4,696 4,976 5,998 28.08% Net Income 3,405 3,058 3,087 3,710 8.96% Total Assets 74,707 79,884 85,990 88,961 19.08% Total Current Assets 45,946 46,803 51,611 47,932 4.32% Total Liabilities 47,323 52,111 55,982 59,334 25.38% Total Current Liabilities 33,372 39,833 38,957 43,894 31.53% Total Debt 11,219 12,435 15,574 15,497 38.13% Total Common Equity 26,855 27,117 29,306 28,996 7.97% Year End Market Capitalization 52,573 57,163 61,316 87,992 67.37% Capital Expenditures 2,764 3,544 3,970 3,751 35.71% Free Cash Flow 1,338 −1,535 −190 1,116 -16.59% ROA 4.56% 3.83% 3.59% 4.17% -8.55% ROE 12.68% 11.28% 10.53% 12.79% 0.87% Employees 430,000 460,800 475,000 386,200 -10.19% During this four-year period, earnings rose 28%, and net income went up slightly. Market capitalization increased an impressive 67%, but much of that growth occurred during the final year of the program. Total assets grew 19%, but total liabilities went up over 25%. Capital expenditures were again on the rise to 1998 levels; total debt rose 38%; and both cash flow and returns suffered. Based on these mixed results, the firm’s positive view of the power of its management innovation program might be disputed. Evidence to support the conclusion that top+ (while certainly positioning Siemens to achieve uncommon success as a highly diversified firm) does not have a clear causal link with overall firm performance. Take sales as a case in point. Sales growth was good during the Ten-Point Program, fell through the Operation 2003 program, and really only did well in the year 2006 during the SMS program. The variability in workforce numbers is also concerning. Interestingly, the number of employees at Siemens grew during the Ten-Point Program, a period that achieved strong profitability, returns, and market valuation. However, the number of employees fell during Operation 2003, and so did the company’s growth levels. Again, during the SMS years, the size of the workforce rose then fell dramatically in the year 2007. Such variability in workforce numbers can severely hamper the development and exploitation of superior organizational capabilities. Appropriately designed organizational structures provide the stability a firm needs to successfully implement its strategies and maintain competitive advantages while simultaneously providing the flexibility to develop advantages it will need in the future. Structural stability provides the capacity the firm requires to consistently and predictably manage its daily work routines, while structural flexibility makes it possible for the firm to identify opportunities and then allocate resources to pursue them as a way of being prepared to succeed in the future. Losing productive employees can result in a loss of knowledge within a firm. Properly devised incentives and rewards should be linked to a combination of corporate, SBU, and divisional performance measures to prevent the loss of such valuable intangible human resources. Siemens Finl Solution Manual Case for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781305502147, 9780357033838
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