Marchs Analysis of Organizational Decision for Siemens - Essay Example

March’s Analysis of Organizational Decision for Siemens Siemens was incorporated in 1847 in Germany and it was considered to be one of the largest electronics and electrical engineering companies of the world. It produces a wide variety of products, systems and services that cover automation and control, information and communications, medical solutions, transportation, power and lighting. Every product and service segment is a part of a number of groups of companies. Under information and communication, their major products are communication networking, mobiles and business services like consultancy. Automation and Control is covered by four groups which deals in automation drives, industrial consultancy services, logistics and building technologies. Power segment deals with power generation, transmission and distribution. Transportation segment covers transportation automotives and systems. Medical segment provides products, solution and services for healthcare department. Lighting segment produces high tech electronics, financing and real estate offers corporate financing and risk management. It is very vital to understand the business nature, its products and procedures for better analysis of the company’s existing strategy and its outcomes. First we will analyze the company’s position using the Cyert and March’s decision making theory. The theory presented by Cyert and March distinguished between three major elements that an organization should focus on while making a decision (Pennings, 1983). These were: Organizational Goals. Problems that a company faces induce goals. When a company is faced by issues, the management of the company set some goals so that it can come over the issues and achieves the benchmarks it has set for it self in light of its past experience and performance. After the crisis in 2000 in The United States of America that followed Europe in 2001, the company’s main goal has been to try to stable its position. The various sectors of the organization were affected by the crisis. The level of budgets that should be invested was radically cut down. The main focus of the company had been to restore its sales and market share since after the crisis. As shown in the case study, the net income of the company fell down to 2,088 million Euros from 8,860 million Euros. Economic Value Added to the company went into negative from 7,095 to (743) million Euros. Company’s stock performance fell, so did its stock price. The market capitalization of the company was deeply affected as well. So the company’s major goal had been to restore its market share, increasing the efficiency of its business so that the same level of income should be restored by taking proper measures to minimize the threat of any potential economic crisis. Because the only reason of such fall in value of the company (Stock performance as compared to Dow Jones Stock: 2000-- +57.88, 2001-- -28.30) is due to the lack of preparation against any uncertainty in economic failures on part of the company. Thus the main focus of the company’s management has to analyze how such a disaster can be averted in future, what are the chances of achieving the same level of market share that the company was enjoying before the crisis, and to see how its competitors are dealing with it. What more could be done so that the at least the same if not better level of competitiveness could be maintained. Organizational Expectations. According to the author, after the information that has been acquired by judging the company’s situation, it should be analyzed that what kind of expectations a management team can establish from its company. The most important part of this element is the attention that is paid to the acquisition of that information. The focus is on how that information can be acquired and to what use can it be put. It’s very important to properly focus the search on the relevant matters. After analyzing the Research and Development expenses of the company from the year 2000 to 2002, it can be seen that the company dedicated vast resources into researching new ways as to how to overcome the gap that the company is suffering between its past and recent performances. It gathered information relating to how the existing processes were working and what kind of changes could have been made to make the processes more adaptive towards the changes in the global market. The main areas of information gathering could have been market survey and analysis. The changes in the market should have been noticed and analyzed to devise a better strategy; this step would have led the company to focus on the right track. For example, according to the information obtained the company was widely invested in a combination of long term and short term projects, long term projects are designed in a way that short term economical changes are expected not to effect the validity of the investment. Where as, in short term projects, customers have greater sensitivity towards prevailing economic conditions. Such short term projects covered the segment of information and communication, and as per the segment information of the company it can be seen that this segment suffered 31% decrease in new orders and 25% decrease in sales, which was a much higher margin of loss as compared to all the other segments of the company. This information infers that the segment of information and communication suffered the most because of the global crisis of 2000-2001. Furthermore in light of the information acquired, the demand of power generating equipment fell, especially in the US, as it started focusing on gas turbine power plants combined cycle power plants. Many companies went through acquisitions and mergers after the crisis, most of which were the company’s competitors. Such information can lead to the realization of the fact that the competitive edge of the market can be getting stronger. Organizational Choice: In this part of the decision making process it is seen that in the light of the information obtained by the company, what alternative the company chooses to achieve its set goals. In light of the economic crisis Siemens intensified cost cutting approach through out its business groups. The major part of company’s choice of decision making is to mitigate any potential threats that the company might receive as to the company the loss in the market share and the overall performance of the company is the lack of preparation for any sort of economic disaster in the past. So the company divested in a lot of unprofitable ventures, as well as it led to consolidation of manufacturing facilities so that the cost benefit cold be derived by using the same facility for the manufacture of similar products. It also led to a reduced headcount. If we look at Siemens reaction to the market we will see that the power generation group of the company optimized its gas turbines manufacturing process so that it could adjust its capacity while increasing the effectiveness of its turbines, so that it could respond better to the increasing price pressure that will arise as a result of the overcapacity of the gas turbines. This theory particularly focuses on four concepts: resolution of conflict between different strategic approaches and the brains behind those strategies, developing a strategy that could avoid or mitigate uncertainty in the future, encouragement for searching potential problems that a company might face and eventually establishment of a better learning process on part of the organization. By obtaining the right information a company will be able to focus its resources on more crucial aspects, as in the light of this case study and the approach the company took to deal with the economic crisis it can be seen that the company realized that as it was suffering from lower profitability, it was vital for the company to go through some cost cutting procedures. In order to avoid huge shocks in future, that could arise from some unforeseen situations, like the economic shock of 2000-2001, the company uses sensitivity analysis to have an idea as to how it will react if one or more vital financial aspects undergo the worst possible scenarios. Such procedures lead to a better preparation for mitigating future risks. All these procedures lead to a better learning on the part of the organization. Especially after going through such economic disasters in 2000-2001, the organization should be prepared for any future improbabilities. The theory implies that there are two management levels that are involved in the decision making process. One is the upper management that makes the decisions, the other one is the lower management that applies different processes to make that strategy work. Taking Siemens as an example, it can be observed that for financial risk management, the operations are devised by the Managing Board that is led by the Chief Financial Officer; the duties are then delegated to central functions and the business groups. Specialist departments help in implementing and carrying out the effective tools for risk management. Day to day risk management activities are carried out at the operational level and internal audit department regularly evaluate the performance and controls related to risk management. In the end the theory suggests that to analyze the effectiveness of a prospective strategy, two aspects should be evaluated; Financial criteria: See if there are enough funds to implement the strategy. Improvement criteria: Evaluate if implementing the new strategy will bring about any kind of improvement in the company. If these two criteria are met satisfactorily then the prospective strategy can be effective in achieving organization’s goals. Q2. Apply Bates model to Siemens case The decision making theory devised by Bates was abbreviated as ACTIONS, its main focus was that all the aspects of this theory should be answered and that will lead to a better strategy making (Evans, Haughey, Murphy 2008). The areas that will be focus by analyzing the case study of Siemens are: Access: This aspect of the theory addresses the question that whether the resources needed to implement the strategy are easily accessible or not. In light of the current approach of the company, it is trying to develop a strategy that will mitigate the risk of future uncertainties as well as focusing on its current operations. Keeping in mind the technological segments of the company, the company must have enough resources to readily incorporate the changes in the technology, because providing the market with obsolete technology, or not been able to launch the product in a timely manner will lead to huge losses to the company. Cost: This aspect of the decision making theory focuses on the cost effectiveness of the strategy. It ensures that all the cost related attributes should be covered while planning the new approach. The first part of Siemens new approach towards dealing with the new market changes was to adjust its cost in proportion to its new level of income. We saw earlier that the company went through a lot of cost cutting procedures. It reduced its head count and divested in the non core and unprofitable investments. Furthermore it incorporated for the new expenses like research and development. If we look at the financial highlights of the company we will be able to see that even though the level of income has decreased over the period of 2000-2001, the company is still able to generate net income rather than net losses. It means that it is adjusting its costs in accordance with its potential levels of income. It is not only incorporating the new more vital costs like research it is also cutting down the avoidable costs so that the company does not have to face liquidity problems. Teaching Function: Teaching function covers the approaches that a company is taking to make its situation and strategy more understandable to its management. As observed earlier, the company undergoes regular sensitivity analysis. According to the company’s case study, it is believed by the company that sensitivity analysis provides reasonable risk estimates those using straightforward assumptions that are easily understood by the shareholders, management, customers, suppliers and various other stakeholders. Sensitivity analysis helps them understand the impact of any future changes in the market. It is believed by the company that because of sensitivity analysis, the decision makers in the non-financial business areas of the company were able to avoid huge future losses. Interactivity: This area focuses on the part where it analyses if the existing technologies of the company are interacting with each other and with the market in efficient manner. In other words by answering to this area of this approach of decision making, the company ensures if the technologies incorporated in the company are adaptive towards each other and the changes in the market. One example is the adaption of Siemens’ Power Generation Group towards changed market demand for gas turbines. The company instantly started focusing on optimizing its business operations so that the market interest is not lost. It increased the efficiency of its gas turbines so that competitive edge could be maintained. It can also be proven from the financial results of the company segment for the year 2002; its sales grew by 10%, meaning that its ability to adapt quickly towards changing technology led to better financial results. Organizational Issues: Siemens was considered to be one of the largest electronics and electrical engineering companies of the world. Such a reputation is not achieved if the company is not adaptive towards new technological developments in the market. The company is trying to provide the market with new high-tech products. Secondly the financial services of the company are managing its operations towards better risk management. They have better operations that deal with the economic changes in the market in more effective manner. Their internal risk management policies are governed by a Managing Board, which keeps regular checks on the control system through internal audit department. To hedge itself from foreign risks, the company has mitigated its foreign losses through investments in derivatives like futures, forwards and swaps. Almost 75% of the foreign investments of the company are covered by these hedge funds. The remaining is closely scrutinized by the Corporate Finance Department. Thus all in all the company is trying to be most adaptive towards any kinds of changes that it can go through. Novelty: This area of this decision making process deals with the fact that every time the organization brings something into the market, it should have the edge of innovation in it. In today’s cutting edge technology era, it is very crucial and vital for the company to introduce new technology. Only that can help it attain the competitive edge that it is striving for. Speed: This area of decision making analyses how fast a company is adaptive towards the changes the global market puts it through. If the current strategy of the company is able to deal with it and how fast. This can also be shown through the example of the power generating segment of the company. Their actions showed that the company has the ability to focus on its operations according to the market demands and in a speedy manner too. So as far as this analysis go, so far the company’s strategy has been able to answer all the questions that this theory raises. Thus the strategy can be considered effective in long run. Q3. Define strategy using external resources. Identify and analyze the current strategy of Siemens. Strategy can be defined in many ways. According to business dictionary, strategy can be defined as a method or plan that is designed and implemented with the help of resources to achieve desired goals. Strategy can also be defined as both the means and the ends, it will include the goals of the company, and it will define all the steps that are to be taken to achieve those goals (Burton, Hunter, Obel, Sondergaard, Dojbak, 1998) From the overall picture, the current strategy of Siemens, according to the case study, proves to be more towards the risk aversion edge. The whole strategy of the company is designed to avoid any losses or uncertainties that the company might go through. This will be proved and analyzed by looking at the operations of the company. In every area of the business, steps have been taken to minimize risks. So every area will be dealt with separately. Basic functions of Siemens are highly related to technology. So the risks that are associated with it are of material nature to the company. The biggest threat to technology is the dynamic changes in the environment and the inability of the company to keep up with the change. Siemens highly committed its company to the highest extent with the research and development procedures. Every area of the business has its own share of research and development budget. After the economic crisis of 2000, the research and development expenditure increased from 5.85 billion Euros to 6.73 billion Euros. This proves that avoiding technology crisis is a major part of Siemens current strategy. After the economic crisis of 2000, many of Siemens competitors merged their operations, leading to the existence of a stronger competitive market. So Siemens strategy involves divesting in non profit investments and investing in other areas of the business through acquisitions or joint ventures. The threat that the company can face here is that the partners are also the competitors, so they might pose some threats. Higher administrative and transaction costs along with potential write offs are also a part of the threats that Siemens will have to face. Siemens major part of operations are based on long term contracts, such contracts can suffer major deviation from expected results like in case of the recent economic crisis. Besides that the company has to suffer costs related to technology, or service costs like installation and maintenance in addition to other performance criteria that are expected out of the company. Operational failures can also lead to penalties and liabilities. Thus to minimize its cost base it’s the part of company’s strategy to rely on third parties for the supply of parts and services. Such services reduced Siemens costs relating to manufacturing and quality assurance. But still working with third parties give the company a lesser hold and control over costs and outcomes and it can lead to poor quality products or delays in the delivery in times of high demand, to mitigate that risk Siemens work closely with their third party vendors. Its part of Siemens strategy to explore foreign markets, as it already holds almost 400 manufacturing sites in 190 countries. Such strategic moves lead to uncertainties regarding the political or legal changes in a foreign market. It is company's strategy to take adequate measures to deal with them. These threats involve nationalization of company’s private assets, civil disturbances and economic or exchange controls. In the wake of his operations Siemens might have some environmental responsibilities in case of contamination around its manufacturing sites. As a part of its strategy Siemens maintain liability insurances at a considerable level. In the same way, incase of any prospective legal claims the company might face, its part of the company’s strategy to maintain a liability account in its financial statements. It’s a highly competitive market, so the more advantage the company has the better. As a part of its strategy the company focuses on hiring highly qualified personnel, the company’s success depends upon it. Siemens foreign operations expose the company to various financial risks like foreign exchange risks, interest risks and equity price risk. To equip itself against such threats, as apart of the company’s strategy the company has taken some really serious steps. It maintains a Managing Board that oversees the risk management area of the company. It is led by the Chief Financial Officer of the company. To estimate potential threats the company regularly carries out sensitivity analysis. To deal with potential equity price risks the company pools and analyses the interest and currency risks together. Their records are maintained on a real time basis. As a part of maintaining good relations with its customers, a vital part of company’s strategy, Siemens often finances its customers. This has implied risk of defaulting but Siemens financing operations are very selective in nature and the company does not invest if the financial risks are not justifiable. Thus it can be seen that after the economic crisis, the basic focus of the company’s strategy has been on making its operations cost effective, while streamlining with the technological developments in the market, and through proper risk aversion techniques minimizing any future economical threats on the company. Bibliography PENNINGS, J. M. (1983). Decision making: an organizational behavior approach. New York, M. Wiener Pub. EVANS, T. D., HAUGHEY, M., & MURPHY, D. (2008).International handbook of distance education. Bingley, UK, Emerald. http://site.ebrary.com/id/10409253. BUSINESS DICTIONARY: Available at: , [Accessed at: 26- Dec-2011] BURTON, R. M., OBEL, B., HUNTER, S., SØNDERGAARD, M., DØJBAK, D., & BURTON, R. M. (1998). Strategic organizational diagnosis and design: developing theory for application. Boston, Mass, Kluwer Academic Publishers. Read More