Prof. Dr. Harald Hungenberg
Dr. Andreas König
Lehrstuhl für Unternehmensführung
Fachbereich Wirtschaftswissenschaften
Lange Gasse 20
90403 Nürnberg
Tel: 0911 / 5302 288
Fax: 0911 / 5302 474
Harald.Hungenberg@wiso.uni-erlangen.de
Siemens Corporate, 20071
After a long conference day with business analysts from around the globe, Peter Löscher,
CEO of Siemens AG, is sitting in his office in Munich, Wittelsbacher Platz. For a while, he
contemplates the beautiful Picasso blue-period painting right next to the door. Then, he flips
again through the conference folders on his desk. Löscher, who became CEO just half a
year ago, is happy and concerned at the same time. ‘The conference went well,’ he thinks.
‘It was only my second larger analyst meeting and I was able to show the analysts that our
company is on track.’ Yet, at the same time, Löscher knows that there is more work to do.
‘The analysts are still not satisfied. They mentioned a couple of issues referring to our portfolio,’ he continues to recall; ‘we need to go over our corporate strategy again and see what
we can do.’
Siemens – 160 years of high-end technology
Siemens was founded by Werner von Siemens and Johann Georg Halske in Berlin on October 12, 1847 as “Telegraphen-Bauanstalt von Siemens & Halske.“ As one company official points out: ”It all began with a cigar box and some copper wire to construct a device
that pointed to letters instead of Morse code. This device helped in transmitting messages
reliably over long distances and laid the foundation of the Telegraphen-Bauanstalt von
Siemens & Halske.”2
Within just a few decades, Siemens developed from this small but innovative backyard
start-up to one of the largest high-tech companies worldwide. From the very first days,
Siemens differentiated itself through high-end technology. In addition, from the beginning,
the company operated on an international basis. During the mid 1920’s, Siemens belonged
to the world’s big five electrical engineering companies. After World War Two, the three
larger branches that had remained from Siemens were able to regain their global position
and, in 1966, Siemens & Halske AG, Siemens-Schuckertwerke AG, and Siemens-ReinigerWerke AG merged to become the Siemens AG.
During the late 1960’s, Siemens AG was structured into six units, some of which were
managed independently. In 1967, Bosch-Siemens Hausgeräte GmbH, a manufacturer of
white goods such as washing machines, was founded. In 1969, Siemens and AEG merged
1 The decision situation in this case study is fictitious. The case is intended to be used as the basis
for class discussion rather than to illustrate effective or ineffective handling of a management situation.
2 Gould, L. S. (2008). Field Guide: Siemens. Automotive Design & Production, Vol. 120: 48-51.
their power generation divisions, which, eleven years later, were taken over entirely by
Siemens. During the late 1960’s and the 1970’s, Siemens was the largest employer in
Germany with over 200,000 employees in 1960 and roughly 300,000 in 1972. Between
1951 and 1970, revenues increased from DM 1 billion to 11 billion.
Throughout the late 1980s, Siemens restructured its organization into 15 market-focused,
flexibly operating divisions. The management’s goal at that time was to give more selfresponsibility to the several decentralized units, which seemed to be necessary in an increasingly global economy.
During the 1990s, through various large changes in the businesses portfolio, Siemens
changed from being focused on customers mainly in the public sector in highly regulated
markets to a competitive shareholder-oriented global business operating in all kinds of markets. For instance, in 1990, Siemens Nixdorf Informationssysteme AG was founded,
Europe’s largest computer manufacturer. In 1999, this business was merged into Fujitsu
Siemens Computers AG. As another example, in 1998, Siemens took over the fossil power
generation business of Westinghouse in the U.S. and, three years later, Siemens was for
first time listed at the New York stock exchange.
Siemens today – positioned as a global player
One core element of Siemens’ strategy in the years of CEO Klaus Kleinfeld (2005-2007)
was a consistent portfolio development. For instance, in 2006, large parts of the telecommunication business were joint with Nokia to become Nokia Siemens Networks. Simultaneously, Siemens invested in several substantial acquisitions in the fields of energy, industry,
and health. In 2006 alone, Siemens acquired businesses worth more than EUR 6 billion.
During the fiscal year (FY) of 2007, Siemens got confronted with a substantial corruption
scandal. The scandal resulted in one of the biggest bribery investigations in German corporate history. Siemens was being investigated on allegations that it bribed customers to win
contracts. The U.S. Securities and Exchange Commission were also probing the matter. As
a result, the company could face fines running into billions or may face exclusion from its
bidding for public contracts.
As a consequence of the corruption scandal, several board members of Siemens had to
leave the company. Most importantly, in 2007, Klaus Kleinfeld resigned as CEO to be succeeded by Peter Löscher. Peter Löscher, who before was a top manager at Merck & Co., is
the first externally hired Siemens CEO ever.
Peter Löscher leads a company which, now, at the end of 2007, has more than 400,000
employees and operates in 190 countries. Siemens offers products mainly to business customers in the areas of IT, communications, automation and control, power, transformation,
medical, and lighting. Products include a broad range of systems, solutions and services –
from light emitting diodes to power stations. More than 90 percent of Siemens’ business involves investment goods and infrastructure systems. In 2006, Siemens generated EUR
66.5 billion of revenues and a net income of EUR 3.3 billion.
From the beginning of his tenure as CEO, Peter Löscher emphasized that he wants to continue the strategic path commenced by his predecessor. Löscher said: “Siemens’ innovations have transformed the world. Building on our innovativeness, a long-term oriented portfolio and financing strategy, and the clear goal to become a world leader in corporate governance, Siemens will continue to grow profitably in the future.”
Major steps in this direction were the introduction of a compliance program in October 2007
and the redesign of the corporate structure into three main sectors: industry, energy, and
2
healthcare.3 Furthermore, Löscher fostered the implementation of the strategic plan “Fit4
2010”, which had already been initiated by Klaus Kleinfeld.4 “Fit4 2010” aims at sustainably
enhancing competitiveness and shareholder value. In particular, “Fit4 2010” is targeted at
(1) optimizing capital efficiency with a ROCE5 of 14-16%; (2) attaining a cash-conversion
rate of ‘1-growth rate’6; (3) sustaining twice the global GDP growth rate (3.4% in 2007); and
(4) achieving new operative margin ranges7. According to Siemens, “the program is based
on the values for which Siemens stands: responsibility, excellence, innovation. In addition,
[by implementing the program], the company strives to attain the highest possible standards of business ethics to be ranked among the best in terms of transparency and compliance.” “Fit4 2010“ builds around four cornerstones:
•
People excellence, including aspects such as developing talent globally and attain a
high performance culture
•
Operational excellence, including a focus of innovation, customer satisfaction, and
global competitiveness
•
Corporate responsibility, encompassing the goals of becoming the best-in-class in
corporate governance, compliance, climate protection, and corporate citizenship
•
Portfolio development,8 comprising activities such as the sale of Siemens VDO Automotive AG to Continental AG and the acquisition of Dade Behring, a North American diagnosis company, by Siemens Medical Solutions. When developing its portfolio, Siemens strives to focus on organic growth and the exploitation of past acquisitions. It is also crucial to note that Siemens’ goal is to become number one or two in
all of the markets in which the company is active.
Operating in a challenging business environment
Siemens operates in a challenging business environment. Several developments stand out:
Mega trends. Siemens aims at responding to and leveraging four overall trends: climate
change, globalization, urbanization, and demographic change. These four trends have severe consequences for all of Siemens’ businesses, such as an increasing scarcity of natural
resources, a growing need for environmental care, an increasing mobility, growing demand
for safety and security, a growing demand for health care and elder care, and a regional
shift of economic gravity.
Increasing demand for electricity. One of the most important consequences of the four
mega trends is an increasing demand for electricity. Power transmission and distribution
are two of Siemens’ key businesses. The company is the second largest player in fossil
power generation worldwide and the fifth largest player in wind power generation. Global
electricity consumption is expected to double by 2030, growing at an average rate of ap-
3 Exhibit 1: New corporate structure.
4 Exhibit 2: Corporate strategy “Fit4 2010”.
5 ROCE: This metric is calculated by dividing income before interest expense by capital employed.
6 The cash-conversion rate determines how much of the profit is converted into cash that can be
used to finance Siemens’ businesses, in other words, the ratio of free cash flow from continuing
operations to income from continuing operations.
7 Goal for Industry: 9-13% (current margin: 10.1%), Energy: 11-15% (currently 6.4%), Healthcare:
14-17% (currently 11%).
8 Exhibit 3: Stock price development and strategic actions of Siemens 2004 – 2007.
3
proximately 2.7% per year to reach 21,699,000 million kilowatt hours in 2015 and
30,116,000 million kilowatt hours in 2030. China and the U.S. lead the growth in annual net
electricity consumption with increases of 4,300,000 and 1,963,000 million kilowatt hours,
respectively, over the projection period. Siemens has a significant presence in power generation as well as power transmission and distribution. Growing demand for electricity
worldwide would provide revenue generating opportunities to the company.
Intense competition. Siemens faces intense competition all across its market segments.
Specifically, the company is challenged by downward price pressure and is exposed to severe market downturns. Some markets in which it operates are undergoing consolidation,
which may result in stronger competitors and a change in relative market position.9 In recent years, the company is also facing competition from companies from developing countries such as India and China.
Regulations. The Waste Electrical and Electronic Equipment (WEEE) Directive of the European Union (EU) makes producers of electrical and electronic goods financially responsible
for specified collection, recycling, treatment, and disposal of past and future covered products. Although some countries are yet to implement this directive, companies operating in
the market became responsible for implementing WEEE in 2005. The Waste Electrical and
Electronic Equipment Regulations 2006, which implement most aspects of the WEEE Directive, came into force in 2007 in the UK. Several product lines of Siemens are subject to
the WEEE regulation. Siemens could incur sizeable costs and liabilities under the new legislation.
In good shape, yet a few scuffs
Siemens has to tackle the challenges in its environment by using its strengths and being
aware of its weaknesses.
Geographical and business diversity.10 Siemens operates in about 190 countries spread
over the Americas, Europe, Africa, Middle East, CIS, and Asia Pacific. During FY2007, the
company generated 83% of its revenue in markets outside Germany. Diversified businesses both in terms of business segments and geographic presence provide a competitive
advantage to the company as diversification insulates Siemens from cyclical downturns in
any particular business segment and country.
Strong R&D capabilities. Siemens has built up strong research and development (R&D) capabilities in recent years. In FY2007, Siemens increased its R&D investment to EUR 3.4 billion, compared to EUR 3.1 billion in 2006. The company operates 150 R&D locations in
over 30 countries. It also owns 50,700 active patents. The average number of employees
engaged in R&D in 2007 was approximately 31,000, up from 26,000 in 2006. The company’s division Automation and Drives (A&D) focuses its R&D activities on manufacturing
automation; the Osram division focuses its R&D activities on fostering sustainable products,
9 The principal competitors of its automation and drives business include ABB, Schneider Electric,
Rockwell and Emerson. In automation and drives business, the company also competes with specialized companies such as Eaton, Honeywell and Fanuc. The industrial solutions and services
segment of Siemens competes with ABB, General Electric, Honeywell, Invensys and Alstom. Siemens Building Technologies is challenged by Tyco, UTC, Honeywell, Danfoss, Johnson Controls
and Schneider Electric. The power generation segment of Siemens competes against several
global players. In fossil power generation, the company's main competitors include General Electric, Alstom Power, Mitsubishi Heavy Industries, as well as Hitachi and Toshiba. In industrial applications, Siemens faces competition from General Electric, Solar, MAN Turbo and Dresser Rand. In
instrumentation and controls, the company competes with Vestas and General Electric.
10 Exhibit 4: Worldwide business of Siemens 2007.
4
increased brightness, and lower production costs of LEDs. Power Generation’s (PG) R&D
activities emphasize on rotating machinery such as gas and steam turbines, generators,
compressors, wind turbines, instrumentation, and control systems for renewable, nuclear,
and fossil power generation. Medical Solutions invests in R&D to improve technology and
clinical applications of medical imaging systems, such as magnetic resonance imaging,
computer tomography, x-ray angiography, ultrasound, and information technology.
Siemens’ focus on R&D allows the company to develop new products and to improve existing products; thus, ultimately, R&D enables Siemens to maintain and expand its strong
market positions.
Steady financial performance.11 Over the years, Siemens has delivered consistent financial
results. The revenues of the company increased at a Compounded Annual Growth Rate
(CAGR) of 14% from EUR 55.781 billion in FY2005 to EUR 72.448 billion in FY2007. The
company’s net profits followed a similar trend. The net profit increased at a CAGR of 25%,
from EUR 2.576 billion in FY2005 to EUR 4.038 billion in FY2007. The company’s net profit
increased by 20.7% in FY2007 compared to FY2006. Additionally, the business divisions
and geographic divisions also showed a significant financial growth. Steady financial performance enables the company to manage its operations well and also increases the financial flexibility of Siemens.
Downgrade in ratings. Despite its performance, in 2007, Siemens’ credit ratings were
downgraded by various global rating agencies. A key factor affecting Siemens’ credit rating
is its capital structure, the ability to generate cash flow, geographic and product diversification, as well as competitive market position. For instance, in November 2007, Moody’s Investors Service downgraded Siemens’ long-term corporate credit rating from Aa3 to A1.
The rating action followed the company’s announcements regarding a share-buyback program and capital structure ratio of 0.8 – 1.0 to be achieved by 2010. Additionally, there has
been no improvement in long-term corporate credit rating by Standard & Poor’s (S&P).
Standard & Poor’s rates Siemens’ long-term corporate credit AA– and kept a ‘negative’ outlook. Hence, Siemens’ ability to obtain funding from external sources may be restricted by
further downgrades in the company’s credit ratings.
Dependence on third party providers. Siemens depends upon third party service providers
for the majority of its operational activities. It uses third party services for manufacturing,
assembling, and testing its products. These third parties have supply and production tie-ups
with multiple companies. During a period of excess demand, third party service providers
may not have sufficient capacity to meet all of Siemens’ needs. This could adversely affect
the company’s operations. Heavy dependence on third party reduces the company’s control
over manufacturing yields, quality, product delivery schedules, and costs. Dependence on a
third party can also lead to shortages and delays of input goods, which could substantially
harm the company’s business.
11 Exhibit 5: Five years summary of key financial indicators.
5
Exhibit 1: New corporate structure
Source: http://w1.siemens.com/press/pool/de/events/pressegespraech/press-briefing-silde.pdf
Exhibit 2: Corporate strategy “Fit4 2010”
* One goal of the Fit42010-program was the IPO of Siemens VDO. However, after evaluating all options and the interests of
all parties, the Supervisory Board and the Management Board have decided to sell Siemens VDO to Continental.
Source: http://w1.siemens.com/annual/07/pool/download/pdf/e07_00_gb2007.pdf
6
Exhibit 3: Stock price development and strategic actions of Siemens 2004 – 2007
+ Important Acquisitions
• - Important Sales
• ~ Joint Venture
EUR
108.75
~
June 2006 JV with Nokia
-
-
Mobile Device
(BenQ) June 2005
Dematic June 2006
+
VDO December 2007
(EUR 11.4 bn)
UGS Corp. January
2007 (EUR 2.7 bn)
+
+
Flender Holding VA Tech. July 2005
GmbH March 2005
(EUR 1.0 bn)
(EUR 1.2 bn)
+
+
+
DPC April 2006
(EUR 1.54 bn)
Bayer Diagnostics June
2006 (EUR 4.2 bn)
Dade Behring July
2007 (EUR 5.2 bn)
Exhibit 4: Worldwide business of Siemens 2007
Source: http://www.e-berger.de/CorporateStrategy_Koerte_2007-10-24.pdf
7
Exhibit 5: Five years summary of key financial indicators
Please note: Free cash flow in exhibit 5 comprises the outcomes of operative and non-operative groups
Source: http://w1.siemens.com/annual/08/pool/downloads/pdf/en/pdf_e08_05_fiveyearsummary.pdf
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Exhibit 6: Overview weighted average cost of capital (WACC) and free cashflow development of Siemens divisions
WACC
Free Cashflow
Free Cashflow
Free Cashflow
2007
2007
2008*
2009*
Automation and Drives (A&D)
7.50%
1,857
2,154
2,499
Industrial Solutions and Services (I&S)
8.00%
397
458
529
Siemens Building Technologies (SBT)
8.00%
340
417
510
Osram
7.50%
392
407
422
Transportation Systems (TS)
8.00%
335
485
703
Power Generation (PG)
8.00%
2,019
2,480
3,045
Power Transmission and Distribution (PTD)
8.00%
515
703
959
Medical Solutions (Med)
8.00%
1,380
1,617
1,894
Siemens IT Solutions and Services (SIS)
8.50%
18
23
29
7,253
8,744
10,590
Operations Groups
(in millions of euros)
Total Operations Groups
* expected based on extrapolated EBITDA growth 2006-2007
9
Exhibit 7: Siemens divisions in figures
Operations Groups
(in millions of euros)
Capital
employed
Revenues
Relative market
share***
EBIT**
2007
2006
2007
2006
2007
2006
Automation and Drives (A&D)
7,026
3,837
15,389
13,041
2,091
1,571
Industrial Solutions and Services (I&S)
1,198
1,279
8,894
8,819
406
270
47%
Siemens Building Technologies (SBT)
1,807
1,764
5,062
4,796
356
224
45%
Osram
1,994
1,976
4,690
4,563
481
448
67%
Transportation Systems (TS)
296*
649
4,452
4,493
198
78
32%
Power Generation (PG)
1,371
1,945
12,194
10,086
1,150
731
60%
Power Transmission and Distribution
(PTD)
1,865
1,701
7,689
6,509
620
303
49%
Medical Solutions (Med)
8,234
4,975
9,851
8,227
1,229
957
63%
253
18
5,360
5,693
243
-733
42%
24,044
18,144
73,581
66,227
6,774
3,849
Siemens IT Solutions and Services
(SIS)
Total Operations Groups12
*
2007
adjusted by means of average capital employed 2007/2006
** adjusted
*** estimated relative market share based on FY2005
12 Without reconciliation to financial statements, other operations, and strategic equity investments.
Therefore, the amounts for revenues differ slightly from those listed in exhibit 5.
10
Exhibit 8: BCG’s traffic light portfolio
Strategic
assessment
Market
growth
(20062007)
Green
Green
Yellow
Yellow
Red
Red
Relative market share (2007)
Red
Yellow
Spread
(2007)
Green
Green
Yellow
Red
∆ EVA (2005-2007)
Financial
performance
Source: http://www.wiwi.uni-regensburg.de/dowling/files/sm/WS05-06/SM16-1-06.pdf
11