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CASE: SM-181A
DATE: 10/07/2010

SIEMENS: BUILDING A STRUCTURE TO DRIVE


PERFORMANCE AND RESPONSIBILITY (A)
I want to create an environment where managers can look people in the eye and feel confident that
1
they will do what is asked of them.
Peter Lscher, Chief Executive Officer, Siemens

INTRODUCTION

Peter Lscher became CEO of Siemens in July, 2007. It was one of the most turbulent times in
the companys history. Siemens was reeling from a compliance scandal involving hundreds of
millions of Euros in suspected bribes, and had to pay billions of Euros in fines and fees to clear
its name. Further, the companys operating groups were underperforming their peers in terms of
profitability, and had been for some time. (See Exhibit 1 for a comparison of Siemens business
to their benchmarks.) Adding to the challenges, Lscher was the first outsider to run Siemens
since the companys founding in 1847.

In the fiscal year prior to Lschers arrival, Siemens had reported 475,000 employees, 66,487
million of revenue and 3,345 million of net income. 2 It had a strong geographic presence, with
business activities in over 190 countries, and operated in a wide range of industries. (See
Exhibit 2 for more information on Siemens offerings.) When recalling his acceptance of the

1
All quotations are from the authors interviews conducted in 2010 unless otherwise noted.
2
Siemens, Siemens Multi-Year Overview, 2010,
http://www.siemens.com/investor/en/financials/multi_year_overview.htm, (July 15, 2010).
Sara Gaviser Leslie prepared this case with Professor Jesper Srensen as the basis for class
discussion rather than to illustrate either effective or ineffective handling of an administrative
situation.

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CEO position, Lscher explained that he was keenly aware of both the companys strengths and
weaknesses:

Siemens has been a proud company. It has had a great engineering culture, a
great innovation culture, and a strategy which was absolutely the right one. I had
competed against Siemens, so I knew this company as a fantastic and great
competitor. However, because of the scandal, the company was in a state of
major shock and they needed an outsider to run the company.

After his arrival, Lscher moved quickly to assess the organization. He spent his first 100 days
at Siemens visiting some of the companys largest markets (the U.S., China, and India), key
customers, and businesses. His goal was to get a firm grasp on the state of the organization and
the kind of changes that needed to be made. He suspected this would include changes to the
corporate structure. He wondered, however, if Siemens global competitors, such as General
Electric, would take advantage of distraction caused by the crisis. It was also unclear what
Siemens managers, many of whom had spent their entire career at the company, were thinking:
Will he come with his team? Who will they be? Will he trust us? Will he change all the
strategies that we had? Nevertheless, Lscher felt ready for the challenge that awaited him.

COMPANY BACKGROUND

On October 12, 1847 Werner von Siemens and his partner, Johann Georg Halske, established
Telegraphen-Bauanstalt von Siemens & Halske in Berlin. Siemens laid the foundation for the
company with his invention, in 1846, of the pointer telegraph. This new generation of
telegraphing technology automatically synchronized movements of the transmitter and receiver,
making it faster and more reliable than any other device of its kind. Siemens & Halske built
Europes first electric telegraph line from Berlin to Frankfurt which, on March 28, 1849, was
used to announce the election of Frederick William IV of Prussia as German emperor.

Initially, telegraph systems for the German state provided Siemens & Halskes main income.
However, by the early 1850s, Siemens & Halske began exploring international markets because
Germany could not support enough projects of a sufficient magnitude. The company opened its
first representative office in London in 1850 and, in 1855, constructed a large-scale telegraph
system in Russia and established a Russian subsidiary run by Werners brother, Carl. 3 After
completion, the system was permanently serviced by Siemens employees, who were granted
status as Russian civil servants to enable them to continue in this job. Further, Werners brother,
Wilhelm Siemens, along with two other brothers, Friedrich and Carl, established an English
subsidiary in 1858. The telegraph business contributed a major percentage of the companys
revenue for decades as Siemens participated in numerous large-scale projects, including the first
direct transatlantic telegraph cable. 4

Management disagreements led to Halskes departure and revealed the Siemens brothers
divergent views on company management: Werner, in Berlin, favored a business run strongly

3
Wilfried Feldenkirchen, Siemens (Munich: Piper, 2000).
4
Wilfried Feldenkirchen, Werner von Siemens Fit42010? SiemensWorld, October 2007.

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from Germany while Wilhelm, in Britain, supported greater autonomy for the subsidiaries.
Eventually, the brothers agreed to pursue a close-knit family business with worldwide operations
under Werners direction.

In 1866, Werner von Siemens made another breakthrough invention. Building on the work of
Michael Faraday, he established the dynamo electric principle and then designed the first
dynamo generator. This enabled the generation of electric power cheaply and easily wherever it
was needed. Subsequently, it led to new business opportunities in power generation, streetlights,
and other large-scale projects. In later years, Siemens continued to drive innovation in electrical
engineering, introducing the first electric locomotive (1879), the first electric streetcar (1881),
and the first electric streetlights (1882). (See Exhibit 3 for an illustration of the major milestones
in Siemens history.)

Siemens grew rapidly, surpassing 1,000 employees in 1870. When Werner von Siemens died in
1892, his company had over 6,500 employees, with more than 3,000 outside Germany. After
becoming a joint-stock corporation in 1897, Siemens began to make acquisitions and form
partnerships to increase its portfolio of electrical engineering products. As a result, Siemens
became a collection of three inter-related companies focused on high-voltage current products,
electrical medical equipment, and telegraph and radio technologies. By the start of World War I,
Siemens had close to 82,000 employees.

In 1969, the three corporate entities were consolidated under a single corporate umbrella,
Siemens AG. This included six operating groups and five central departments. A reorganization
in 1989 transitioned the company from a functional reporting structure to a divisional structure
and assigned responsibility for worldwide business operations to 15 new operating groups, two
special divisions and two major independent subsidiaries and regional units. The new structure
placed a greater emphasis on local responsiveness in the regions and enabled Siemens to
benchmark against its peers.

SIEMENS IN THE TWENTY-FIRST CENTURY

Lscher took over the reins of Siemens from Klaus Kleinfeld, who had been appointed CEO in
2005. Kleinfeld succeeded Heinrich von Pierer, who had led the company since 1992. Like all
10 of his predecessors, Kleinfeld had strong ties to the company: he had spent a substantial part
of his career working at Siemens.

Kleinfeld had inherited a company that produced an impressive array of consumer and industrial
goods including the following: power generation equipment (hydro, electric, and wind), food and
beverage filling and packaging equipment, supply chain management solutions, magnetic
resonance imaging machines, electronic patient records, water treatment plants, cellular phones,
subway cars, home appliances, automotive fuel injectors, air pollution reduction technologies, IT
security, hearing aids, high-speed sorting and picking machines, motors, process control systems
for dairy farms, and lighting systems. Moreover, Siemens operated on a global scale, with a
presence in almost every nation. In the breadth of its product and geographic scope, Siemens
often was compared to (and competed against) U.S.-based General Electric, United
Technologies, and Honeywell International; Japanese Mitsubishi; and Swiss Asea Brown Boveri
(ABB).

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Kleinfelds primary focus upon assuming office was to drive the companys main operating units
to achieve the ambitious profit margin goals that von Pierer had established in 2000. Company
performance had improved under von Pierer, and Siemens remained one of the dominant
German corporations. However, over the previous 10 years Siemens shares had a total return of
273 percent versus GEs 423 percent. 5 Kleinfeld wanted to ensure that the company engaged in
profitable businesses that could enable Siemens to grow at twice the global GDP rate. 6

The Corporate Management Structure

German law required a two-tier board system for all public corporations, consisting of a
Supervisory Board (Aufsichtsrat) and a Managing Board (Vorstand). The Supervisory Board
consisted entirely of non-executive directors (half of whom were elected by employees) who had
a monitoring role. They were much less directly involved in management than a board of
directors of an American corporation. By law, managerial functions could not exercised by the
Supervisory Board. The Supervisory Board oversaw and appointed the members of the
Managing Board, and approved major business decisions. 7 In early 2007, the Managing Board of
Siemens included 10 top Siemens executives and represented the company to the public.
Promotion to the Managing Board was historically viewed as the pinnacle of a Siemens career.
The Managing Board had responsibility for preparing the annual financial statements and
convening the shareholders meetings. (See Exhibit 4 for an illustration of the company
structure in early 2007.)

The Managing Board also elected the members of the Corporate Executive Committee (CEC),
which was charged with the strategic management of the corporation. Between meetings of the
Managing Board, the CEC acted on its behalf. The CEC defined the companys business
priorities and monitored their implementation. The CEO, CFO, and head of human resources
were ex officio members of the CEC while the other members were elected by the Managing
Board and approved by the Supervisory Board. The CEC made corporate strategy decisions on
topics such as portfolio management, mergers and acquisitions, large research and development
and customer projects, and governance. The CEC also determined go-to-market strategies,
methods for establishing organizations, bidding practices, staffing levels, and research and
development spending.

Below the Managing Board and the CEC, Siemens was structured in operating groups, regional
units, shared services, corporate departments and corporate centers. The operating groups were
divided into six business areas: automation and control, power, medical, lighting, transportation,
and information and communications. The operating groups consisted of multiple divisions and
subdivisions. The divisions of the operating groups had worldwide presence and were
responsible for the ongoing business operations (e.g. determining where they conducted
business, setting R&D spending, and choosing contract manufacturers).

5
Jack Ewing, Siemens New Boss: Can He Deliver? BusinessWeek, January 24, 2005.
6
Siemens, SiemensWorld, May 2007.
7
The two-tier board system was a general requirement of German law and was still in existence in 2010.

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Instead of direct responsibility for operations, the CEC had mainly a coaching function; it made
operational decisions only when the expected impact of a decision was so extensive that the
decision could not be made by the operating groups themselves, such as decisions that impacted
Siemens as a whole. Generally, operating groups were granted substantial autonomy. Each CEC
member coached one to two operating groups and some oversaw a specific geographic region.
The committee members had no direct responsibility for the day-to-day business of the operating
groups; ultimate responsibility for these units rested with the operating groups management.

A Solutions-Focused Technology Firm

Siemens had over 12 operating groups consisting of over 70 divisions 8. While each division had
a specific focus such as motion control systems, wind power or molecular imaging, and its own
products, Siemens was intent on delivering integrated solutions to customers. Large projects, by
their nature, also required the coordination of many of Siemens businesses, as Heinrich
Hiesinger, the CEO of Siemens Industry Sector explained:

If you think about Siemens building a steel plant, we clearly make the core steel
process but there is no plant without electricity. In any building, we need medium
voltage equipment so the interaction between the power distribution division and
the building technologies division is required for most of our customers.

Likewise, if Siemens industrial solutions and services were involved in a large construction
project such as a sports stadium or an airport, the client would need solutions from different
operating groups such as building technologies, power transmission and distribution or
transportation systems.

Some collaboration between divisions occurred due to the rotation of Siemens employees
through the companys many operating groups. Siegfried Russwurm, executive vice president of
human resources under Lscher, had a career that was typical of a Siemens manager.
Immediately upon receiving his PhD in production engineering, Russwurm joined Siemens
medical engineering group. (Many Siemens managers had advanced technical degrees.) He
subsequently became the head of the electromedical systems division before leading the motion
control systems division in the automation and drives group. He later returned to the medical
solutions group in an executive management role. Russwurm felt that he was able to add value
to the company due, in part, to his varied experience. For example, when a team in the power
generation group was looking for a way to transmit data from a windmills rotor to the static
component, Russwurm suggested, These machines have turning magnets. You should look at
the CT machines in the medical solutions group. They might be able to provide a solution.

Siemens corporate technology (CT) supported operating groups and divisions in innovation. CT
conducted research, with a long-term horizon (10 to 20 years), on new technologies that could be
useful to the groups. CT took a leading role in the technological alignment of the entire
company and also participated in the strategic planning process, while assisting in research and
development investment discussions. Piezo, an electroceramic that the company experimented

8
Note that the divisions referenced were the divisions of the organization before January 1, 2008.

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with over many years, illustrated the breadth of applications that Siemens could realize from a
single technology. (See Exhibit 5 for more information on piezo and its applications.)

Local Responsiveness

The Siemens global structure was reproduced, at the operating group and division levels, in the
geographic regions where Siemens operated. The countries where Siemens was most active had
an executive manager known as Mr./Ms. Siemens. This individual acted as the country
manager for all of Siemens businesses in a specific geography and, at the same time, was the
CEO of the respective regional company. In addition to market development in local markets, a
primary responsibility of a Mr./Ms. Siemens was to serve local customers through product
integration, and be responsive to local market needs. Mr./Ms. Siemens had substantial discretion
in formulating product specifications for local clients. For example, the regional company of
Siemens in Argentina might bid on a subway project and develop a bid that was closely tailored
to the needs of the Buenos Aires subway system, with many of the project management and
technology risk decisions made locally.

The emphasis on local responsiveness could create tension between headquarters and the
regions. In order to best serve customers and maximize revenue, Mr./Ms. Siemens in a region
might tailor solutions for their specific region. For instance, simply to drive volume growth,
Siemens bought Siemens an insurance company in France.

Team-Based Management

Committees played an important role at Siemens: they assumed responsibility for decisions at
each level of the organization, from the CEC to the business segments. While at higher levels
these committees had multiple members, at the division and subdivision levels, decision making
rested with a two-person team consisting of a technical head and a commercial head. The
technical head or CEO focused on technical sales and business matters; the commercial head or
CFO had responsibility for accounting and control. The two executives operated in parallel lines
of authority but both reported to the same member of the CEC.

The commercial and technical heads made decisions through mutual agreement; from the
beginning of the company, the technical head and commercial head shared responsibility. Both
were responsible for the units performance, and both had to sign off on all decisions.
Accordingly, this management practice was known as the four eyes principle.

Kleinfelds Initiatives

Soon after arriving, Kleinfeld set into place a two-year restructuring program dubbed Fit4More.
Kleinfelds message to the company was, We commit to something and we deliver. That is the
culture we want to form. He stood by his word. In 2005, the managers of the logistics and
assembly systems division, a unit with $1.9 billion in sales, dragged their heels in telling him that
the division would only deliver a 2 percent margin. In response, Kleinfeld transferred the most
portable parts of the division to other parts of Siemens and sold off the rest of the business.
Around Siemens, BusinessWeek reported, there was a collective gasp. He also divested the
companys communication business by transferring the unprofitable mobile-phone unit to

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Taiwan's BenQ Corporation at a cost of 810 million Euros 9 , and put most of Siemens telecom
equipment business into a joint venture with Nokia. 10

Kleinfeld felt that tremendous global shifts in population and wealth would create substantial
growth opportunities for Siemens. He drove the company to focus on these megatrends
global developments that would have long-term effects on society, shape future markets, and
generate above-average growth. The first two megatrends he defined were changing
demographics and growth of cities worldwide; Kleinfeld believed Siemens had the ability to
capitalize on the increasing need for reliable and affordable health care and worldwide demand
for power. 11 By building the companys infrastructure and capabilities in the direction of these
megatrends, Siemens would be positioned to sell CT and MRI scanners, switching systems and
trains for subways, power plants, and myriad other offerings to developing economies around the
world.

Kleinfeld also advanced Siemens One, a program he co-created before becoming CEO, to
simplify large-scale projects for customers by creating a unified front and experience. Siemens
One was particularly focused on large, global customers. The Siemens One organization
identified opportunities that involved solutions from multiple Siemens companies and their
partners, and then developed, managed and directed a coordinated and integrated approach for
the customer. The goal was to both maximize profits for Siemens and give customers greater
control, seamless coordination, accountability and cost savings. Kleinfeld believed Siemens
competitive advantage was being able to optimize the strengths of each of its business segments;
for example, it could supply both light rail equipment and a power grid in one contract. 12

THE END OF THE KLEINFELD ERA

Despite his success in enabling the company to hit aggressive internal earnings targets, Kleinfeld
had his critics. Many resented Kleinfelds embrace of globalization, and felt he practiced a
heartless U.S. management style. The changes he made disrupted Siemens and even earned
Kleinfeld the moniker most hated corporate boss from the Financial Times Deutschland.13
Unlike his predecessor von Pierer, who played tennis with Germanys chancellor and served on
the board of several German companies, Kleinfeld ran the New York Marathon and served on
the boards of Citigroup and Alcoa. 14

The end of the Kleinfeld era, however, was prompted by a dramatic police raid on Siemens
offices. In November 2006, police raided 30 Siemens offices to confiscate documents and detain
several executives who illegally bribed foreign officials to win contracts. The crimes surprised

9
Benedikt Kammel, Siemens Kleinfeld Faces Investor Anger as Earnings Decline, Bloomberg, January 24, 2006,
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aTOLjltMveRw&refer=market_insight, (September
10, 2010).
10
Jack Ewing, Siemens Culture Clash, BusinessWeek, January 29, 2007.
11
Siemens Annual Report 2005 (October 2005).
12
Thorsten Futh, Siemens Goes Mega, Time, May 3, 2007.
13
Alex Bakst, Siemens Strikes Back, Spiegel Online, October 2, 2006,
http://www.spiegel.de/international/0,1518,440409,00.html (July 13, 2010).
14
Jack Ewing, Siemens Culture Clash, BusinessWeek, January 29, 2007.

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many, especially in the age of computer information and tracking. According to the U.S. Security
and Exchange Commission, "Employees obtained large amounts of cash from Siemens cash
desks. Employees sometimes carried that cash in suitcases across international borders to pay
bribes. Payment authorizations were recorded on Post-it notes that were later removed to avoid
leaving any permanent record." 15

Prior to 1999, German firms had been permitted, under German law, to deduct foreign
beneficial expenditures (ntzliche Aufwendungen) from their German taxes, provided those
expenditures were necessary to win business. Under pressure from the United States and other
members of the Organizations for Economic Cooperation and Development (OECD), however,
the European Union adopted strict anti-bribery rules and implemented them in the laws of its
member states. In 2002, the German parliament passed an additional law making it illegal to
bribe employees of private companies, as well as public officials.

Kleinfeld responded to the arrests by saying that he was shocked and that We are interested in
getting to the facts, but getting to all the facts. We are talking about things that are important,
that we cant take lightheartedly. Dont get me wrong: this is not meant as an excuse. If
you, in your mind, get it wrong and think, I just have to beat the competition, you are
fundamentally doing something wrong. 16

The Siemens bribery scandal turned out to be one of the largest in European history, costing
Siemens more than $1.6 billion in fines and fees in Europe and the U.S. alone. 17 It prompted the
reorganization of the companys Managing Board. Additionally, despite the fact that the bribes
had occurred before his term as CEO, Kleinfeld did not make himself available for an extension
of his contract on April 25, 2007. In an emailed statement, he explained, In times like these, the
company needs clarity about its leadership. I have therefore decided not to make myself
available for an extension of my contract. '' 18 The scandal, raids by the public prosecution
department, exits of many key executives including von Pierer, and daily negative press, together
diminished employee satisfaction and created a tremendous distraction for all employees.

A NEW LEADER AND ORGANIZATIONAL STRUCTURE

Peter Lscher arrived at Siemens in July 2007. While Lscher had not been groomed by Siemens
for the role of CEO, he was an experienced global leader. Having Italian and Austrian ancestors
and married to a Spanish woman, Lscher had studied and worked around the globe, most
recently at Merck and General Electric (GE). After GE acquired his employer, the British firm
Amersham PLC, Lscher became president and CEO of GE Healthcare Bioscience and member
of the Corporate Executive Council (CEC) of GE. Lscher felt his background and cultural

15
SEC Charges Siemens AG for Engaging in Worldwide Bribery, U.S. Securities and Exchange Commission,
December 15, 2008, http://www.sec.gov/news/press/2008/2008-294.htm, (September 2, 2010).
16
The New York Times, February 28, 2007, as quoted in Siemens: Anatomy of Bribery, Stanford GSB case P-68,
by David P. Baron.
17
Ari Shapiro, Siemens Hit with $1.6B Fine, NPR Morning Edition, December 16, 2008,
http://www.npr.org/templates/story/story.php?storyId=98317332, (July 15, 2010).
18
Simon Thiel, Siemens's Kleinfeld, Dogged by Bribery Affair, Quits, April 25, 2007,
http://www.bloomberg.com/apps/news?pid=newsarchive&refer=home&sid=aLlIsDA9ALVo, (September 1, 2010).

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upbringing were his greatest assets: When you run one of the most global organizations you
must understand the different elements in different parts of the world and how to link them
together the best possible way. (See Exhibit 6 for a background on Lschers professional
experience.)

One of Lschers first steps was to hire Peter Solmssen to assume the role of general counsel and
spearhead future compliance programs. Solmssen and Lscher had worked closely together at
GESolmssen had been general counsel at GEs Healthcare business after several years as a
mergers and acquisitions lawyer in a major law firm. At Siemens, Lscher and Solmssen
emphasized transparency, which included full collaboration with external authorities
(prosecutors, SEC, etc.) and lawyers, and launched an amnesty program. To support these goals,
Lscher established a new organization with a dedicated member of the managing board for legal
and compliance and put in place strong general counsels in each sector, division, and region.

Recalling his first meeting with the management board, Lscher remembered feeling disbelief:

I will never forget my first management meeting at Siemens. We went into the
boardroom and there were huge stacks of paper on the table in front of each
person. Everything was prepared for a decision but not for any discussion of
options or debate. When I opened the meeting, I said, Before we go into the
agenda today, lets do a quick update as to how the business is going. Each of you
should take five minutes to provide a brief discussion on your business. The
executives looked at me and said, The operating units are responsible for this.
We should invite them the next time.

Until January 2008, some Managing Board members were responsible for a specific region while
others were not. Each of them, however, had a high number of direct reports. Not surprisingly,
Managing Board Members experienced information overloadthey often did not even know
each of these individuals who reported to them. Russwurm commented that if he had asked his
predecessor, who served as head of the Europe, Middle East and Africa regions, whether he
would be able to recognize the head of Siemens Estonia, he likely would have answered, No.

Lscher conducted an appraisal of all executive management personnel and replaced all but two
Managing Board members and many operating group and division heads. He dismantled the
CEC and established the Managing Board as the sole governing body. The Managing Board was
reorganized to include the CEO, CFO, general counsel, chief of human resources, CTO, CEOs of
three newly created Sectors. Lscher also abolished the four eyes principle and replaced it with
the CEO principle. When Lscher was later asked, in a meeting with top leadership, What
about the four eyes principle? his response was, The four eyes principle is dead!

Corporate Reorganization

Lscher consolidated the business from 10 operating groups to 3 sectors: industry, energy, and
healthcare. (See Exhibit 7 for the new organization structure and associated responsibilities.)
The industry sector, the largest of the three, consisted of the industry automation, drive
technologies, industry solutions, building technologies, OSRAM, and mobility divisions. In

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FY2008, the first year that the new organization structure was active, the industry sector
generated 38 billion. The energy sector focused on energy providers and industrial companies
in the oil and gas industry. Its product offerings included solutions for generation, transmission,
and distribution of electrical energy. The sector had revenue of approximately 23 billion in
FY2008. The healthcare sector offered customers a portfolio of medical solutions from imaging
to laboratory diagnostics to clinic IT. In FY2008, the sector had revenue of 11 billion. 19 Below
the 3 sectors were 15 divisions, which each included separate business units. (See Exhibit 8 for
an illustration of Siemens chain of command.) Each business unit had its own strategy within
its area of responsibility, developed in consultation with the sector leadership, which also made
capital allocation decisions across business units within the sector.

Siemens IT Solutions and Services (SIS) and Siemens Financial Services (SFS) became cross-
sector businesses that dealt with external and internal customers and were fully fledged
businesses with P&L responsibility. Cross-sector services (e.g. accounting) only served internal
customers. Corporate units, such as corporate finance and control, corporate human resources or
corporate legal and compliance had company-wide guideline competencies, supervisory duties,
and exercise coordination tasks.

Introductions of Clusters

In addition to consolidating different product lines into sectors, Lscher also consolidated the
regional structure. He organized the 190 countries where Siemens operated into 17 regional
clusters. (See Exhibit 10 for a map of the clusters.) Each cluster was responsible for shared
services and maintaining a cost effective infrastructure, and provided increased focus on
customers and the local sales organizations. Some clusters, such as the U.S., Canada and
Germany, included only one country while others, such as northwest Europe, included several
countries. The goal was to enable the regions to focus fully on customers by minimizing the
administrative and coordination activities within individual countries.

Most countries had the global structure (sectors, divisions, and business units) reproduced within
them. The introduction of clusters brought more oversight to the regions and attempted to better
manage resources across the company. Clusters and sectors made decisions together as to how
they wanted to serve the countries within their areas of responsibility. For instance, Siemens
established competence centers within the clusters to support countries with smaller markets,
enabling the company to streamline its operations. The competence centers also were a positive
introduction for customers, especially those in smaller countries, who would not have ordinarily
been able to access Siemens resources.

The Two-Dimensional Structure and Establishing Right of Way

Siemens had a two-dimensional structure comprising the global business (sectors, divisions and
business units, 1st dimension) and the regional units (clusters and countries, 2nd dimension). The
sectors, divisions and business units were each responsible for all aspects of their business,
including the operating results worldwide. For example, the CEO of the healthcare sector was
held accountable for the global performance of Siemens healthcare businesses.

19
Siemens 2008 Annual Report (October 2008).

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In order to strike a balance between the global business and the regions, Lscher re-introduced
the concept of the right of way of the global business. (The concept of a right of way for the
global business had been in place since 1989. However, the sectors and regions had conflicting
targets.) Right of way substituted the old matrix structure where two dimensions would negotiate
if they had a disagreement. As Solmssen explained:

The global entrepreneur makes the product decisions about where were going to
sell and where we are going toand not going toinvest. This is critical. But,
we also dont want to give up our very strong local identities. We set up this
dialectic on purpose knowing theres going to be a lot of discussion, which is
healthy.

Establishing right of way meant that headquarters would encourage regional management not to
accept the project specifications they were given but, instead, shape the specifications so that
Siemens could sell the product and make a profit. If Mr./Ms. Siemens had a strong relationship
with a customer and knew about the specifications in advance, s/he could bid competitively and
make money from any changes that the customer made rather than absorbing their cost.
Solmssen emphasized that one of the sales initiatives he was pushing was profiting from change
order fees: If you are working on a big project, change orders happen. Dont feel guilty about
itmake money from it! This is a huge cultural change for the company.

Simplifying Financial Reporting

Lscher abolished all profit and loss accounts except for four categories Siemens as a whole,
the sectors, divisions and business unitsas a means to get the headquarters and regions to work
together to optimize the global businesses P&L. Previously each operating group and each
region had maintained separate P&Ls. This change simplified reporting and reinforced the global
entrepreneurs right of way but, as Hiesinger explained, it was a shock to the Mr. and Ms.
Siemens around the world. While regional managers would still be measured on profit as a key
performance indicator, they were not to optimize it versus the global P&L. Instead, the regions
needed to focus foremost on contributing to the global P&L.

Maintaining Entrepreneurial Regions

Despite pushing the notion of right of way and the elimination of country-level P&Ls, Lscher
did not want to determine the outcome of all discussions between the global business and the
regions. For instance, customer demands for healthcare technology in Africa were not the same
as those in Northwest Europe. Lscher wanted to empower the regional leadership to respond to
these needs in the way they felt most appropriate: I dont want to write down exactly who has to
do what. I would like this organization to be the frame and develop it according to the needs of
the particular market estimates and businesses, as appropriate.

The major task of the regions was to drive market share and share of wallet. Their focus was to
be on local customization; Mr./Ms. Siemens were to tune the global strategies so that they fit best
to the local specifics. Accordingly, the company still needed to maintain a spirit of
entrepreneurship in the regions. Lscher explained that the cluster organizations would take over

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much of the administrative responsibilities, enabling Mr./Ms. Siemens to become more


entrepreneurial and able to focus on customers. Roland Busch, the chief strategy officer, added,
At the end of the day, the battle ground sits somewhere in the countries and the regions. That is
where we meet our competitors. That is where we meet our customers and that is where we have
to win.

Megatrends and Siemens Vision

In an effort to reorganize and reenergize the company, Lscher added climate change and
globalization to the megatrends of urbanization and demographic change. These global
challenges had been aggravated and boosted by deep and continuous change of economic
conditions by the world economic and financial crisis. Against the background of these global
challenges Lscher formulated the vision Siemens - the pioneer redefining the standards of the
company. Siemens understood itself as the pioneer in energy efficiency, industrial productivity,
affordable and personalized healthcare and intelligent infrastructure solutions. With this vision
Lscher strengthened the pioneering spirit that had been the basis for Siemens success
throughout the history of the company. One example of the implementation of this vision was the
positioning of Siemens as a pioneer and leading provider of green technologies. In fiscal 2009,
Siemens sold ecofriendly products and solutions worth 23 billion.

Lscher also re-launched Siemens One, a program Kleinfeld had initiated. Siemens established
market development boards (MDBs), virtual organizations that addressed cross-sector projects
and combined several business units in multiple sectors with one lead division/business unit
hosting and driving the MDB, to support the Siemens One effort. The MDBs included
hospitality, airports, hospitals, automotive, chemicals, pharmaceuticals, food and beverage,
metals and mining, oil and gas, public sector, and pulp and paper to support this effort. For
instance, a recently-created MDB focused on cities comprised any businesses or business units
that sold solutions, services or products to municipalities. This could include building
infrastructure such as lighting and building management, light rail transportation, traffic
management systems, power supply, water purification, or similar offerings.

Lscher refocused and enhanced account management through dedicated professional account
managers and introduced the executive relations program for the Managing Board and regional
clusters. This program involved Managing Board members sponsoring key accounts. He
repositioned MDB Hospitals and added three new MDBs: cities, data centers and power utilities.
(See Exhibit 10 for the Siemens One Framework and MDB leadership.) Pedro Miranda, the head
of Siemens One, and Lscher stressed the importance of the Siemens One approach to
customers. As Miranda explained, We put the customer at the center. It isnt so much
development of markets as it is customer development.

Siemens, by setting up the Siemens One infrastructure, was able to support the mission of selling
solutions. This was the companys key differentiator, explained Solmssen:

Customer meetings should start by Siemens asking, What are your challenges?
When I recently spent an hour and a half with the head of one of the biggest
hospital chains in the United States, we didnt talk about magnetic resonance
imaging or CAT-scans or ultrasound once. We talked about his problems. He

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Siemens: Building a Structure to Drive Performance and Responsibility (A) SM-181A p. 13

knows there are one or two companies he can talk to who can help him solve his
problems, which are largely the industrialization of medicine. We address these
problems through a broad range of technologies and experience.

CONCLUSION

Based on Lschers initiatives, the company began to emphasize its strengths, as Solmssen
explained:

We had to focus on what our actual competencies are as opposed to all of the
other things we can do. As an engineering company with our breadth and size,
our real competitive value is [that] we can say to big companies and more
importantly to governments, Youve got these problems. We believe theres a
technology solution and were the people to address it.

Nonetheless, substantial challenges remained for Lscher and his new management team. One
was the tension between the global businesses and the regions. Lscher noted:

When I arrived, this company looked like a confederation of 190 nation states
because the power base was very much in the regions. There was a global
organization, but there was not a clear message to the organization of what the
global leaders role was with respect to the regional companies.

In addition, Siemens faced challenges surrounding management and leadership skills. As


Hiesinger recalled, Things were very slow and inconsistent because the group strategies did not
drive discussion and management. Similarly, Russwurm noted, You couldnt always count on
the presence of great leaders in every part of the organization.

Finally, the fact that Lscher was new to Siemens raised additional challenges. As Hiesinger
pointed out, Siemens is a large and complex company, and, for a foreigner, it takes a while to
understand the corporation. The collaboration that occurs in Siemens is clearly much easier to
instigate if you have made your way through the company and you know many people.

It was not clear that Lschers structural changes were sufficient to turn around a ship as large as
Siemens. The companys employees were also not certain that he could lead the company
forward.

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Exhibit 1
Siemens vs. Competitors

Source: Siemens

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Siemens: Building a Structure to Drive Performance and Responsibility (A) SM-181A p. 15

Exhibit 2
Siemens Lines of Business

Source: Siemens

This document is authorized for use only by Zoe Glasberg in CASES - MBA 625 Summer 2016 Section CA taught by Jeffrey H. Sacksner, Concordia University - Canada from May 2016 to
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Siemens: Building a Structure to Drive Performance and Responsibility (A) SM-181A p. 16

Exhibit 3
Major Milestones in Siemens History

Source: Siemens

Exhibit 4
Siemens Organization Structure in May 2007

Source: Siemens

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Siemens: Building a Structure to Drive Performance and Responsibility (A) SM-181A p. 17

Exhibit 5
Piezo Technology and Applications

The corporate technology group began experimenting with piezo in the 1950s as an extremely stable and selective
filter for telecommunications: the piezo filters allowed a large number of calls to be transmitted per channel and
enabled Siemens to compete with Bell Labs. Subsequently, Siemens had utilized piezo technology in applications
ranging from piezoceramic films for telephones and microphones, transducers for ultrasound diagnostics in
healthcare, tubes for inkjet printers, and surface acoustic wave (SAW) filters to replace electromagnetic filters in
Grundig television sets. SAWs made significant revenue for Siemens after becoming components of mobile phones.
As Max Guntersdorfer, formerly manager of Microsystems at Siemens corporate technology, explained, Mobile
phones would be unthinkable without SAWs. 20

Source: Siemens
In the first decade of the 2000s, Siemens was using piezo in the development of actuators 21. This application grew
out of the work of piezo injectors for automotive technology. Piezo injectors could be controlled more precisely
than solenoid valves (the previous technology) and they could inject fuel in several exactly proportioned amounts
during an engine cycle. This led to fuel savings of 20-30 percent and sharply reduced emissions. Siemens
developed the first piezo injector in 1980 and, since that time, had registered over 100 patents for the technology. 22

20
Siemens Corporate Technology, Piezo Technology, Fall 2005,
http://www.siemens.com/innovation/en/publikationen/publications_pof/pof_fall_2005/corporate_technology/piezo_t
echnology.htm, (June 15, 2010).
21
Actuators convert energy into motion. They can also be used to apply a force. An actuator typically is a mechanical
device that takes energy, usually created by air, electricity, or liquid, and converts that into some kind of motion. That
motion can be anything from blocking to clamping to ejecting. Actuators are typically used in manufacturing or industrial
applications and may be used in things like motors, pumps, switches, and valves.
22
Siemens Corporate Technology, op. cit.

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Siemens: Building a Structure to Drive Performance and Responsibility (A) SM-181A p. 18

Exhibit 6
Peter Lscher Background

Peter Lscher, MBA


President and Chief Executive Officer of Siemens AG
born on September 17, 1957 in Villach, Austria

Education
Secondary School (baccalaureate)
Studied economics at Vienna University of Economics and Business
and at the Chinese University of Hong Kong
Vienna University of Economics and Business, MBA
Harvard Business School, AMP
Michigan State University, Honorary Doctorate of Engineering
Professional History
1985
Kienbaum und Partner
- Senior Management Consultant
1988
Hoechst Group (merged with Rhone Poulenc Rohrer)
- Various management positions in Spain, the U.S., Germany, the UK
and Japan
2000
Aventis Pharma Ltd., Japan
- Chairman, President and CEO
2002
Amersham plc, UK (acquired by General Electric)
- President of Amersham Health and Member of the Board of Directors (UK)
- Chief Operating Officer and Member of the Board of Directors (UK)
2004
General Electric Company (GE)
- President and CEO of GE Healthcare Bio-Sciences. GE Healthcare, UK
- Member of the Corporate Executive Council (CEC) of GE
2006
Merck & Co., Inc.
- President of Global Human Health
July 2007
Siemens AG
- President and Chief Executive Officer

Positions
Member of the Supervisory Board of Mnchener Rckversicherungs-
Gesellschaft AG, Munich
Chairman of APA, the Asia-Pacific Committee of German Business
Vice Chairman of the European Round Table of Industrialists (ERT)
Co-Chairman of the EU-Russia Industrialists Round Table (IRT)
Chairman of the Board of Trustees of the Siemens Stiftung
Member of the Board of Trustees of the Ernst von Siemens Kunststiftung
Member of the Board of Trustees of the Carl Friedrich von Siemens
Stiftung
Member of the Board of Trustees of the Glyndebourne Arts Trust

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Siemens: Building a Structure to Drive Performance and Responsibility (A) SM-181A p. 19

Exhibit 7
Siemens New Management Structure 2007

Source: Siemens

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September 2016.
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Siemens: Building a Structure to Drive Performance and Responsibility (A) SM-181A p. 20

Exhibit 8
Siemens Chain of Command

Source: Siemens

Exhibit 9
Regional Organization

From ~70 Regional Companies to 17 Regional Clusters

Sout h West Nort h West Russia / Cent ral


Europe Europe Asia

USA Canada Germany Cent ral East ern Japan


Europe

Nort h East Asia

Meso-America Brazil Middle East ASEAN

Af rica Sout h Asia Pacific


Aust ral-Andina

October 2010 Copyright Siemens AG 2010. All rights reserved

Source: Siemens

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September 2016.
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Siemens: Building a Structure to Drive Performance and Responsibility (A) SM-181A p. 21

Exhibit 10
Siemens Market Development Boards

Source: Siemens

This document is authorized for use only by Zoe Glasberg in CASES - MBA 625 Summer 2016 Section CA taught by Jeffrey H. Sacksner, Concordia University - Canada from May 2016 to
September 2016.