Germany’s initial weak value against the US Dollar in the post-war situation gave Siemens huge advantages in expanding their business internationally.
(source : IMF, yardeni.com)
Germany had a low level of inflation (which is conducive to capital-intensive expansion), and high contribution of the manufacturing sector to GDP, which greatly aided the country’s Post-War recovery process.
(source : OECD Historical Statistics, 1970-200)
In conclusion, both internally as a company, and externally as a part of national culture, Siemens had advantages in supporting its emergence as a strong company in Post-War German.
Its organisational culture served well its industrial relationship between employees and employers, and its support of innovation gave Siemens a comparative advantage on its emergence in Post-War German. These factors helped form a learning curve – heavily contributing to supporting Siemens as a business entity.
National culture gave Siemens opportunities to utilize its advantage to the optimum point. This form of synergy served Siemens well from the early 1950s to the end of 1970s. Then the world entered a new era of competition, changing Siemens as an organisation.
Question 2:
Trace the events responsible for its relative decline in the mid 1980’s. Critically evaluate the attempts made by Karlheinz Kaske to deal with these problems.
This glorious success had established a firm foundation for Siemens. However, the company started to loss money. One of the reasons was that micro-circuits had to be purchased from Toshiba because of the unsuccessful production in this area. The decision to diversify into other fields was also the reason for lack of success. A large proportion of the profits the company made in the mid 1980’s came from financial investments rather than selling their products. Furthermore, the recession of the economy as a whole led to a falling demand in the market - ‘the fall in the value of US Dollar led to competition both at home and overseas’.
From a leadership aspect, both Plettner and Kaske adopted costly acquisitions and expansion policies. The development of its own microchips led to a heavy cost to the company. The spending on R&D also resulted in a significant drop in both earnings and dividends. Furthermore, much of the expenditure on R&D was not efficiently allocated to relevant markets.
The conservative board and management style made it difficult for the company to face adversity. Poor power delegation and a strong corporate culture background disadvantaged the company in the intense competitive market it faced. The company operated a matrix structure from 1966 to 1987. One of the disadvantages of the matrix structure is that the lack of a clearly defined hierarchy of authority can lead to conflict between functions and product teams.1 This conflict was found in Siemens between Heads of the Groups and Departments. The consequence was that the company was inefficient in making decisions and the lack of flexibility resulted in slow and delayed reaction time.
All these problems made Siemens decline in 1980s. The restructuring of the company under Kaske was an evolution. He wished to simplify the decision process and wanted to design a new structure which was close to the market and the customer. He immediately moved away from heavy engineering, focusing instead on microelectronics, automotive electronics, communications and automation. His strong interest in R&D and microelectronics showed in the company’s expansion into automotive systems. The change may enable Siemens to concentrate on its customers and rebuild its strengths. The prospects of success were recognised by most observers.
It was clear that the existing hierarchy helped the company in the past but the same structure did not work in the present. Kaske established a small managerial committee to solve these problems. However, the company’s culture made this task very difficult because many managers feared their jobs or power would be damaged due to the change of structure. The change of the company’s culture was therefore urgent. At this point, Kaske failed to do so. He recognised that restructuring was essential for the company to regain market position, but he did not realise the fundamental problem was the culture. The deep-rooted culture made managers regard the restructuring as a threat so they were less willing to support the programme.
The restructuring of the company by Kaske indicates a more radical departure from the past. The change may be seen as an attempt to address the old form within the organisation. Kaske had put in place a significant programme of change and development, but fundamental change of its nature in the company cannot happen overnight.
Question 3:
To what extent are the policies of Heinrich von Pierer different from those of Karlheinz Kaske? Critically assess whether you think these new policies will lead to improved performance by Siemens.
To Siemens, the 1980s was a mixed period. In the middle of the decade the fortunes of the company deteriorated. The instability of the international business environment partially led to this deterioration, but internal problems of Siemens and a gloomy German economy significantly contributed. Hence, the leaders of the company, first Kaske and then Von Pierer embarked on radical reorganisations and rationalisation programmes designed to retain Siemens’ position as an influential international business.
The difference in their age, background, and personality resulted in two different policies, which are listed and compared as follows:
Kaske: to retain Siemens’ leading position in the international market place on the basis of his rapid and costly expansionist policy
Von Pierer: to improve the profitability of the company
Kaske: moved attentions from heavy engineering to the fields of microelectronics, automotive electronics, communications and automation.
Von Pierer: initiated Time Optimised Process (TOP) program to consolidate Kaske’s expansionist policies without providing a clear company-wide future strategy
- Effects on the structure change
Kaske: restructured the company to be more flexible and market- orientated
Von Pierer: basically retained the previous structure, but gave its business units more responsibility
- Effects on the culture change
Kaske: tried to change its rooted conservative culture but failed
Von Pierer: attempted to change the culture of the company to “make every worker feel responsible for the success of the company.”…
Critical evaluation of Heinrich von Pierer’s new policies
Von Pierer aimed to improve the profitability of the company. Therefore, his first task was to consolidate Kaske’s costly expansionist policies by initiating a new programme called Time Optimised Process (TOP). The primary purpose of the programme was to reduce the company’s costs as soon as possible. Unfortunately, as indicated in the case, the lack of consideration to several problems within the organisation, meant the programme did not work as expected,
a) Rooted organisational culture:
Schein (1980) states three levels of organisational culture – artefacts, beliefs and values. Organisations develop deep-seated values and beliefs of how people should behave and cooperate. Siemens, a company with a history of over 100 years, enjoys a culture of force and momentum. It is difficult to change and reflects fundamental assumptions about the nature of the people, the company and the environment. Thus, the key innovative measure taken should have been to make beliefs explicit. This can be fulfilled by inquiring managers and others about the problems, opportunities and challenges the company is facing. This process helps to identify the underlying assumptions which guide behaviour (Egan, 1994)
b) Uncertainty avoidance:
Hofstede (1991) defines uncertainty avoidance as “the extent to which the members of a culture feel threatened by uncertain or unknown situations.” In other words, if things are not clear, people will improvise or use their initiative. But TOP program hasn’t suggested any “clear indication of the strategic areas on which Siemens should concentrate or any visible Siemens strategy for the future.” As Tim (2002) states “Leadership is the process of motivating other people to act in particular ways in order to achieve specific goals.” So it is obvious that the uncertainty was primarily caused by the weak leadership. Pierer’s should have taken pains to guide the employees to strive for the agreed objectives.
c) Chaos among employees:
Rapid job cutting, one of the consequences of the TOP programme, resulted in chaos among employees, which laid a negative effect on the innovation and the development of the company. As a leader, Von Pierer should have made efforts to motivate the employees to be more efficient by satisfying their needs, such as security, stability and improved working conditions.
However, there are still some positive signs within the policies, such as the usage of the term “empowerment”. As mentioned in the case, Von Pierer gave his business units more responsibilities and opportunities to make their own decisions, and he tried to relate the success of the company to every worker. As Clutterbuck (1994) concludes, such approaches intend to help people to take more control of their job, and enhance the contributions they make as individuals and members of a team.
Question 4:
Suggest further changes that could be made to increase the chances of a successful revival of the fortunes of Siemens:
The size of Siemens is such that it will inevitably experience diseconomies of scale, such as managerial inefficiencies (known as X-inefficiencies). This is not uncommon for multinational enterprises, but in the case of Siemens these problems are personified by the diverse nature of its business activities and external environment. Mintzbergs (1992) notion of a divisionalised structure with each division within the organisation adopting its own independent structure would best suit Siemens. Although there is some evidence that such a structure already exists, greater autonomy needs to be given to these divisions. This can be achieved through greater decentralisation of power from the board of directors to the heads of division. Decisions need to be made by the people with the expertise and knowledge rather than the older members of the board who may not be fully aware of the specific challenges facing individual departments. Thus power needs to be redistributed to the people who can use it best.
In order for Siemens to revive its fortunes a change in management style is required. The organisation needs to be run more in the interests of the shareholders. The shareholder value perspective emphasises profitability and sees organisations primarily as the instruments of their owners (Rappaport, 1998; Schleifer & Vishney 1997). Shareholder value, synonymous with profit maximisation is not about shareholder value itself. In practice it amounts to the goal of creating shareholder value. One of the key tools in assessing whether an investment will create shareholder value is using the net present value (NPV) approach to valuing cash flows. Thus Siemens needs to identify its least profitable divisions and take immediate action. If an investment is not creating value it should be sold. This strategy of downsizing and redistributing may prove unpopular with workers, as it inevitably will lead to job losses. However, giving employees stock options could help to maintain motivation by giving workers a sense of ownership (limits the principal-agent dilemma).
For instance Siemens Medical and Information divisions both offer less than a tenth of a percent profit on turnover figures. These areas have valuable capital tied up which could offer much higher potential earnings elsewhere. Thus the notion of opportunity cost should become of greater significance to the Siemens Board. Thus Siemens should sell these divisions and concentrate on value adding activities.
The main problem Siemens is facing is over diversification. It needs to re-identify its core competencies and get back to basics. “Core competencies are the collective learning in the organisation, especially how to coordinate diverse production skills and integrate multiple streams of technologies. Core competencies should be difficult to imitate and should make a significant contribution to the perceived customer benefits of the end product. A good example of a core competence is Sony’s ability to miniaturise.” (Prahalad & Hamel 1990) Essentially Siemens needs to rediscover what it does best and then concentrate more of its resources towards those sectors. This again links into the notion of specialisation, downsizing and creating shareholder value. Siemens has in fact itself identified this necessity:
“Siemens focuses on its core expertise and builds up additional capacities in places where we can establish the necessary proximity to customers, find qualified employees and operate at competitive costs.” ()
This view is further supported by the work of Porter (1990) who identifies “firm strategy, structure, and rivalry” as one of the components of his “diamond determinants of national competitive advantage”.
Another widely adopted corporate technique is that of benchmarking, which measures and compares the performance of an existing process, product or service against that of the recognized best in class, both inside and outside the industry (Haslam, Neale & Johal 2002). The use of benchmarking may in fact help Siemens in identifying its core competencies.
Siemans thus needs to adopt a style of management more geared towards the creation of shareholder value.
References:
Books Used:
1Gareth R. Jones (2001), Organization Theory, 3rd edition.
Jones, Gareth (2003) Organizational Theory, Design, and Change, Pearson Book
Haberberg and Rieple (2001) The Strategic Management of Organisations, Pearson Book
Colin Haslam, Alan Neale and Sukhdev (2000) Economics in a Business Context 3rd edition;
M E Porter (1990) ‘Determinants of national competitive advantage’, in The Competitive advantage of nations
Huczynski & Buchanan (2001) Organisational Behaviour, an Introductory Text, 4th ed. London: Prentice Hall
Mullins (2004) Management and Organisational Behaviour 7th ed.
Richard Tilly (2001), German Economic History and Cliometrics: A selective survey of recent tendencies, European Review of Economic History. Cambridge University Press
De Long, Comment on Peter Temin (1995), The ‘Koreaboom’ in West Germany: Fact or Fiction? University of California at Berkeley and NBER.
Schein, E.H. (1980), Organisational Psychology (3rd edn), Prentice Hall, Englewood Cliffs, NJ
Egan, G. (1994), Working The Shadow Side: A Guide to Positive Behind the Scenes Management, Jossey-Bass, San Francisco
Hofstede, G. (1991), Cultures and Organisations: Software of the Mind, McGraw-Hill, London
Tim, H (2002), Management: Concepts and Practices(3rd edn), Financial Time, Prentice Hall
Clutterbuck, D (1994), The power of Empowerment, Kogan Page, London
Articles:
C K Prahalad and G Hamel (1990) The core Competence of the Corporation
International Directory of Company Histories ((1995 Vol. 2) Edited by Paula Kepos
Internet Sites:
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Economic History: Foreign Exchange Rates (Source: IMF)., Dr. Ed Yardeni’s Economic Network., . [accessed 26.12.04]
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International Directory of Company Histories (Vol 2) Edited by Paula Kepos (1995)
Transistor as the main building block of electronic era was discovered in 1947
