The Competitive Environment/Position of Siemens AG - Essay Example

Introduction Multinational enterprises (MNEs) cannot rely on one particular strategy when they are faced with various problems (Hrebiniak, 2006). Olson, Slater and Hult (2005) argued that not only MNEs but small level enterprises need to adjust their strategies in accordance with dynamics of competitive environment. In such context, the study has selected Siemens AG as a case organisation in order to understand its current competitive environment. In the first part, the paper will critically evaluate current competitive position of Siemens AG in context to both business and corporate level challenges. In the second part, the study will select relevant strategic options that will enable Siemens AG to address identified challenges over the next 1-3 years. Siemens AG: Business Background Siemens AG is renowned German multinational electronics and engineering conglomerate. The German electronics and engineering giant is headquartered at Munich, Germany. Werner von Siemens established the company in 1847 (Siemens, 2014). In the last 166 years, Germany-based Siemens AG has not only established global presence in over 150 countries but also successfully diversified product portfolio. As of 2014, Siemens AG operates four different business units which are energy equipments, healthcare devices, industry related goods and infrastructure & cities (Siemens, 2014). Siemens AG offers solutions to multiple industrial segments like transportation and lighting, medical equipments, power devices, automation, control mechanism, information technology and communications. As of 2013, total employee base of Siemens AG is over 4,50,000 (Körte, 2007). Part A: Competitive Environment/Position Competitive Environment/Position: Business Level Allio (2005) and Chimhanzi and Morgan (2005) pointed out that competitive position of companies are being directed by both business level challenges and corporate level challenges. Interesting fact is that Siemens AG faces challenges in both business level and corporate level operations. De Wit and Meyer (2010) stated that companies need to assess existing competitive position before designing strategies which can help them to explore existing market opportunities. Analyzing competitive position helps companies to identify challenges and these challenges can be used as the framework to develop strategies (De Wit and Meyer, 2010). Siemens AG is electronics and engineering conglomerate which earns revenue from operating in multiple industry segments, therefore, Siemens AG faces competition from many competitors belonging to different industry segments. The study will take a more generalized approach to conduct Porter Five Forces analysis for Siemens AG (Porter, 1985) Porter Five Force Bargaining Power of Buyer: Low In industrial electrical equipment industry, buyers are generally commercial users, engineering companies and governments of different countries. Products are highly technical in nature and specialized knowledge is required in order to evaluate purchased items. Generally, buyers need to sign contract with companies in order to purchase equipments. Bargaining power of buyer has been reduced by three factors which are, 1- absence of electrical equipment sellers who can meet specialized need of buyers, 2- high switching cost and 3- need of buyers to maintain relationship with sellers throughout the project life cycle for implementation of technical equipments (Körte, 2007). Bargaining Power of Suppliers: Low Large electrical equipment companies buy electronic parts and raw materials from variety of suppliers situated in different geographic locations. Due to presence of multi channel sourcing model and abundance of sourcing partners, companies do not rely on any particular supplier. On the other hand, many MNE electronic and engineering companies have their own production facilities to produce technical components that can be used in manufacturing complex electrical systems. Therefore, these MNE electronic and engineering companies have little dependency on suppliers (Körte, 2007). Threat of New Entrants: Low The electrical equipment industry has been dominated by global players like Siemens AG and General Electric (GE) for more than 20 years (Agut, Moreno and Casserras, 2013). A new entrant needs to invest huge amount of capital for establishing production plants, workshops, distribution channel and research & development (R&D) centres. Moreover, new entrants need to have sufficient resource capability, credentials and connections with government and big companies in order to sell their products. Presence of such entry barriers decreases attractiveness of the industry among new entrants (Agut, Moreno and Casserras, 2013). Threat of Substitutes: Moderate Within last 10 years, many small level companies and entrepreneurs have established the market for green technologies that can be classified as potential substitute for electrical equipments being offered by existing companies (Agut, Moreno and Casserras, 2013). For example, small level solar equipment sellers are selling equipment to big companies and government at cheaper rates in comparison to traditional electronic equipment sellers. Substitutes for electrical equipments also include equipments that are being made of renewable energy sources and low cost Chinese technology. Degree of Rivalry: High The industry is diversified in nature and no particular company has market dominance in all the business verticals. Therefore, existing players tend to compete with each other to increase penetration in different business verticals. On the other hand, Chinese and Indian companies are expanding their business in developed countries and competing with MNE electronic and engineering companies in their home country (Körte, 2007). It is evident from Porter’s five force analysis that competitive positioning of Siemens AG is directed by industry rivalry (Homburg, Krohmer and Workman, 2004). Competitor profiling is needed in order to understand nature of threat Siemens AG is facing from cross segment industry rivals (Higgins, 2005). Competitors Siemens AG compete with different kinds of industry competitors in different business sector. However, General Electrics Co. (US) is probably the most prominent competitor to Siemens AG (Agut, Moreno and Casserras, 2013). Product portfolio, distribution channel, resource capability and target segment of GE has close symmetry with Siemens AG. GE is an American multinational conglomerate, which operates through multiple divisions like GE Energy, GE Technology Infrastructure, GE Capital and GE Business Solutions (Agut, Moreno and Casserras, 2013). GE has greater market penetration than Siemens AG in the field of industrial automation, medical equipment manufacturing, nuclear or solar and electrical equipment manufacturing and manufacturing of transmission. In USA, Siemens AG is struggling to compete with GE in terms of product innovation, value chain cost reduction and supply chain partner integration. In case of rail manufacturing, Siemens AG faces competition from Bombardier Inc. and Alstom SA. These two companies offer similar kind of equipment support to manufacture Train à Grande Vitesse (TGV) as Siemens AG. In case of energy sector, Siemens AG faces competition from ABB Ldt. Siemens AG and ABB Ldt compete with each other in terms of electricity transmission technology and power transmission. However, market penetration of Siemens AG is larger than ABB Ldt. On the other hand, ABB Ldt has generated more sales revenue than Siemens AG when it comes to selling high voltage direct current (HVDC) power lines (Agut, Moreno and Casserras, 2013). Philips Electronics N.V is main competitor for Siemens AG in healthcare equipment sector. Interesting fact is that Siemens AG sells its healthcare products to hospitals while Philips Electronics N.V targets retail customers. Due to divergence in target market, possibility of direct competition between these two players is less. Apart from aforementioned competitors, Siemens AG is also facing competition from small level players who are using green technologies such as renewable energies and low carbon emission infrastructure to develop electronic equipments that are being preferred by customers (Finisterra do Paco, Barata Raposo and Filho, 2009). Hood (2012) and Gerzema and D’Antonio (2011) argued that customer trend is shifting rapidly with rise in economic uncertainties and emergence of young customers. In case of electrical equipment industry, demand for low cost and environmentally sustainable technology is increasing among customers. As a result, low cost competitors from China and India are posing threat to large players’ like Siemens AG and GE. Figure 1: Competitive Threat for Siemens AG (Source: Körte, 2007) It is evident from the above diagram that Siemens AG is facing stiff competition from counterfeiters, small level electrical equipment vendor and international electrical device manufacturer from India and China. For example, Indian competitors like Larsen & Toubro, BHEL and Anchor are creating stiff market challenge for Siemens AG in their home country. On the other hand, Chinese competitors like Huawei and Delta are challenging the dominance of Siemens AG. Challenges According to Körte (2007), challenges faced by Siemens AG at business level is being directed by three factors such as, 1- achieving sustainable product innovation and continuous improvement of process integration, 2- optimizing value chain activities in order to achieve global competitiveness and 3- increase customer satisfaction level by delivering unique level of value proposition to customers. These are the four challenges being identified by the study and these challenges can be elaborated in the following manner. Product innovation- it has been already discussed that facing competitive threat from GE, ABB Ldt, Alstom SA, Indian and Chinese low cost players and green electrical equipment manufacturers in terms of product innovation and patent filing. Figure 2: Stagnant Product Innovation in Siemens AG (Source: Körte, 2007) In USA market, Siemens AG slipped to 9th position in terms of granted new product patent in last three years. In last five years, growth of new product innovation in research & development centres of Siemens AG has been decreased by 5% (Agut, Moreno and Casserras, 2013). Therefore, the company has the challenge to revive research and development activities in order to achieve product innovation. Value chain optimization- increasing cost of value chain activities has decreased profitability and margin earning opportunity for Siemens AG. The German multinational electronics and engineering conglomerate is facing challenges in deploying lean production system and achieving supply chain collaboration to decrease overall cost of value chain and increase global competitiveness (Körte, 2007). Customer satisfaction- according to Agut, Moreno and Casserras (2013), Siemens AG is facing challenge to retain their industrial customers due to lack of product innovation, lack of financial stability and lack of negotiation capability. The company has not been able to establish proper customer relationship management (CRM) framework in order to ensure delivery of value proposition to customers. In such context, the company is facing challenge to increase customer satisfaction level and retain existing customers (Agut, Moreno and Casserras, 2013). Competitive Environment/Position: Corporate Level While working on corporate level strategy, Porter (2013) identified four corporate level verticals such as practice-portfolio management, transferring skills, sharing activities and restructuring. However, Porter (2013) found that transferring skills and sharing activities depend heavily on business level activities. Therefore, these two factors cannot be considered as pure form of corporate level issues. In case of Siemens AG, practice-portfolio management and organizational restructuring issue will be discussed in order to understand competitive position of the company in terms of corporate level. Practice-portfolio management Porter (2013) identified portfolio management as most important corporate level decision for companies. In case of Siemens AG, achieving diversification through acquisition is the major portfolio challenge. In the last 15 years, the company has expanded its business portfolio through acquisition of small level firms and unrelated businesses. For example, in order to increase presence in rail automation business, Siemens signed acquisition agreement worth of €2.2 billion with Invensys Rail (Siemens, 2012). The German engineering giant has launched "Siemens 2014" program in order to execute series of acquisition activities in order to expand its business portfolio. According to Agut, Moreno and Casserras (2013), major challenge for Siemens AG is to deliver value to shareholder while expanding business portfolio through merger and acquisition activities. For example, till 2014, excessive investment of capital on acquisition of Invensys Rail might create problem for Siemens AG to earn desired return on investment (Siemens, 2012). Therefore, portfolio management will be significant corporate level challenge for German multinational electronics and engineering conglomerate. Organizational restructuring Mendelow’s (1981) stakeholder matrix has been used to decide key stakeholders for Siemens AG. Low power and low interest stakeholders- community, NGOs, general people and industrial customers. Low power and high interest stakeholders- suppliers of raw material and employees in the company have limited power to alter strategic decisions of the company. High power and low interest stakeholders- board members, research institutions and governments have the power to influence strategic direction of the company. High power and high interest stakeholders- shareholders, financial partners and stock market analysts have significant interest in business operation of Siemens AG. Agut, Moreno and Casserras (2013) pointed out that centralized organizational structure of the German engineering giant has created problem in decision making by organizational leaders. On the other hand, lack of transparency in information sharing is associated with problems in organizational structure of the company. Recently, CEO Peter Loescher left the job for not meeting target of stabilising financial position of the company (Bradt, 2013). Agut, Moreno and Casserras (2013) found that 10 members management board of Siemens AG is plagued by dilemma in decision making, draconian decision making process and lack of risk taking capabilities. The company faces challenge in ensuring communication flow between employees and cross functional knowledge sharing. Agut, Moreno and Casserras (2013) suggested that Siemens AG needs to restructure its board structure and functional divisions in order to organizational culture of knowledge sharing and product innovation. Part B: Strategic Options Consideration of research works of Schaap (2006) and Schmidt and Brauer (2006) reveals the fact that companies need to restructure existing strategy in order to decrease amount of resource integration in strategy deployment activity. Therefore, before developing strategic recommendation for Siemens AG that may help the company to meet challenges over the next 1-3 years, the study will discuss existing strategy of the company. Siemens AG: Vision and Mission It has been mentioned that Siemens AG operates in four business sectors such as energy, equipment, healthcare devices, industry related goods and infrastructure & cities. Value system of the company is being directed by three matrices such as being responsible, being excellent and being innovative. On the basis of such value drivers, vision for its individual business unit is being created by Siemens AG such as, achieving energy efficiency, increasing industrial productivity, making technology personalized and affordable and developing intelligent infrastructure solutions (Agut, Moreno and Casserras, 2013). Siemens AG has the mission to develop forward-looking technology and infrastructure that can address requirements of customers in environmentally sustainable manner (Agut, Moreno and Casserras, 2013). Existing Strategy The German engineering giant has established more than 700 subsidiaries across different countries and in the year 2013, the company has earned revenue of more than €75 billion (Siemens, 2014). Agut, Moreno and Casserras (2013) stated that major stakeholder for Siemens AG are shareholders, customers, business partners, supplier network, community and universities. In the last 20 years, the company has developed global network of innovation in order to use academic institutes, universities and research laboratories for driving new product development concept integration, idea generation and achieving breakthrough innovation. Global business operation of Siemens AG can be depicted in the following manner. Figure 3: Global Presence of Siemens AG (Source: Körte, 2007) It is evident from the above diagram that 50% of sales revenue for Siemens AG is being earned by the company from its operations in EU (European Union) nations while only 15% of revenue is being contributed by business operation in Asia pacific region (Körte, 2007). 25% of business revenue is being earned by German multinational electronics and engineering conglomerate from its business operation in North America and South America. However, the company has established most numbers of facilities like factories, research and development labs, engineering hubs and innovation centre in Americas region. Agut, Moreno and Casserras (2013) identified three different strategic directions for Siemens AG such as achieving market growth through product innovation, delivering value to customers and achieving market leadership position through team collaboration. Achieving market growth- Siemens AG is focusing on entering emerging markets like BRICS (Brazil, Russia, India, China and South Africa) which have growth potential and low entry barrier for global players. New product innovation and diversification of environmental portfolio is being done by Siemens AG in order to penetrate in emerging market. Delivering customer value- the German engineering company has expanded service portfolio and professionalization of service delivery is being done by them in order to deliver value to customers. Power of Siemens- ‘One Siemens’ program is being launched by the company in order to integrate employee efforts and use a single brand name for all its business verticals in order to align activities of different business units. The above mentioned three strategies can be adjusted in context to both business level and corporate level challenges faced by the company. Business Level: Strategic Options De Wit and Meyer (2010) pointed out that companies need to use their resource capabilities in order to design strategies. Siemens AG can also use their existing resource capabilities in order to address business level challenges over next 1 to 3 years. Product innovation- the German engineering giant needs to open research & development bases emerging markets in order to increase scope of product innovation. Within next 1 year to 3 years, Siemens AG will need to open at least 10 R&D centres across developing countries while establishing partnership with engineering colleges and universities in order fillip growth of product innovation. Acquisition of low cost and green technology using competitors will also increase innovation capability of Siemens AG (Agut, Moreno and Casserras, 2013). Value chain optimization- within next 3 years, the company needs to replace existing production system by lean production system. On the other hand, the German engineering giant needs to implement activity based procurement management technique in order to decrease cost of procurement. Discourse historical approach can also be used by Siemens AG in order to increase partner collaboration in supply chain. Profitability of the entire value chain can be increased through eradication of redundant supply chain activities (Körte, 2007). Customer satisfaction- Agut, Moreno and Casserras (2013) suggested that Siemens AG needs to implement customer loyalty program and use cloud based CRM software in order to process customer data in real time manner. Using cloud based CRM software would help the German company to track customer feedback in responsive manner. In emerging markets, the company needs to conduct market research in order to understand requirements and cultural tradition of customers in precise manner. Based on market research findings, customer value proposition strategy can be designed by the company (De Wit and Meyer, 2010). Corporate Level: Strategic Options Porter (2013) stated that companies face difficulties in implementing strategic changes in corporate level due to two reasons, 1- involvement of high degree of probabilistic risks for diversifying business portfolio and 2- requirement of organizational level stakeholder integration. In such context, Siemens AG needs to take longitudinal approach while addressing challenges regarding organizational restructuring and practice-portfolio management. Organizational restructuring- in order to bring flexibility and speed in corporate level decision making, the German engineering company needs to adopt lattice management model and decentralized functional structure. In lattice management structure, heads of different functional divisions within the company will be looped and these functional heads will work collaboratively in order to handle corporate level problems. Size of the board should be reduced in order to decrease dilemma in strategic decision making. On the other hand, cross functional job responsibility transfer will be done in periodic manner in order to create scope of knowledge sharing and knowledge integration to drive innovation (Schaap, 2006). Practice-portfolio management- within next 1 to 3 years, the company will need to decrease non-performing business portfolios by terminating contracts or divesting. Within next 3 years, the company should divest unprofitable business activities such as providing technical solution to nuclear sector or rail board automation (Agut, Moreno and Casserras, 2013). Even, Siemens AG needs to take help of financial partners in order to decrease invest amount in acquisition process. Acquiring low cost competitors will also help Siemens AG to decrease risk in business portfolio management. Conclusion It is evident from that above discussion that Siemens AG is facing challenge in terms of both corporate and business levels. The study has reviewed the challenges separately for business and corporate levels for the German engineering and equipment companies. On the basis of challenges evaluation, suitable strategies are being recommended. Recommended strategies can be evaluated on the basis of Rumelt’s strategy evaluation criteria (Porter, 2013). Consistency: recommended strategies are being adjusted in context to present goals and policies of the company. Consonance: The recommended strategies are being developed in order to help Siemens AG to address external challenges. Feasibility: existing resource capabilities of the company is being taken into account while making strategic recommendation. Advantage: recommended strategies would help Siemens AG to create competitive advantage through product innovation and cost optimization. Therefore, recommended strategies are being evaluated as valid and feasible for the German electrical company to help them to achieve business success in future years. Reference List Agut, P. A., Moreno, C .V. and Casserras, G., 2013. Qualitative and quantitative analysis of Siemens AG. . [pdf] Universitat de Barcelona. Available at [Accessed 28 March 2014]. Allio, M. K., 2005. 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