Siemens Shapes Up

For Wolfgang Knupfer and his 11 subordinates, it was a nerve-racking ordeal. Seated at a conference table, the 52-year-old Siemens manager listened for two hours while staffers critiqued his performance. Shaking off their fear of offending the boss, they bluntly urged him to make decisions faster and improve his rapport. Says Knupfer, who runs X-ray tube production and development: "I realized they thought I was a bit authoritarian."

It was hardly a typical encounter between a German executive and his employees. But Knupfer survived. Now, after a session with the company psychologist, he's learning how to manage differently. He gives more positive feedback and he acts more decisively. The 11 staffers were recently critiqued by their employees, and soon, such bottom-up reviews will be expanded throughout the entire $60.4 billion company. It's all part of an extraordinary upheaval in Siemens' stolid, hierarchical, and very German corporate culture.

Step inside the new Siemens. After nearly a decade of hit-or-miss efforts to restructure, speed product development, and otherwise reinvent itself, Siemens has finally shed its plodding perfectionism. Gone are the endless meetings, the aimless research, the stacks of approval forms, the fear of taking risks. A new generation of managers is fostering cooperation across the sprawling company. They are setting up teams to develop products and attack new markets. They are trying all kinds of techniques--from hiking expeditions to weekend workshops--to spur ideas and new work methods.

The top brass call it a cultural revolution. There's a new emphasis on revving up innovation and pleasing the customer. "It's a completely different way of thinking," says Siemens Chief Executive Heinrich von Pierer, 54. The result: a different approach to producing everything from hearing aids to power plants. Now, von Pierer says, there's a lot more cooperation in the lab, on the factory floor, in the marketing department, and in corporate headquarters. "This is exactly what we need," he says. "People are no longer afraid to speak out with an idea."

PRICE BIND. Von Pierer is clearly the guiding force behind the Siemens transformation. Since taking the helm in 1992, he has shuttered factories, slashed payroll, axed noncore businesses, and forced Euro-centric managers into high-growth Asian markets. And for the first time ever, he has opened up the company for a real financial airing. In 1994, he began disclosing profits for Siemens' eight divisions, making managers of all 18 units and 266 business areas answerable for the bottom line.

His most critical challenge has been to break with decades of entrenched practices. By trying to change the Siemens mind-set, he has gone beyond the plain cost-cutting of most of corporate Germany and of Siemens' European rivals. This gives his company its best chance yet to compete against its big global competitors, such as General Electric, ABB, and Hitachi.

Von Pierer's task is all the more demanding now, with the added pressure on all of Germany's manufacturers. Global competition is driving down prices for such items as medical and telecommunications equipment. The 10% rise in the mark against the dollar this year is slamming German exports. In addition, hefty pay raises won by IG Metall workers in March hiked Germany's wage costs, already the world's highest. The combined effect will erode the savings Siemens has squeezed out. "It won't wipe us out," says Siemens economist Martin Gross. "But it hurts."

Von Pierer has a two-pronged strategy to keep up the momentum: ever more cost-cutting, coupled with reaping the rewards of the cultural revolution.

Since 1992, von Pierer has reduced Siemens' workforce by 7.5%, to 382,000, and he will cut 12,000 more jobs by the end of Siemens' fiscal year on Sept. 30. He plans to cut Siemens' operating expenses by $3.6 billion this year alone. Every operation is under scrutiny. All noncore businesses will go on the block, von Pierer says, including profitable ones. "Siemens has turned the corner," says Peter Roe, electronics analyst for Banque Paribas in London. "But they can't stop now."

Primed for the fight, von Pierer already has moved production out of pricey Western Europe. Siemens now assembles lower margin electrical components in the Czech Republic, chips in Malaysia, and computers in China. To guard against the soaring mark, it purchases 25% of its components in dollars, and its local content in the U.S. is 80%. When it comes to currency fluctuations, "Siemens is one of the companies that is best-protected in Germany," observes Sunke Papenhausen, a Deutsche Bank Research analyst in Frankfurt.

More important than slashing, however, is von Pierer's drive to keep the company's fortysomething managers on top of innovation. He is constantly championing such successes as the Siemens automation group. It developed a new machine-tool control system in just two years--a third the usual time--for one-third the cost of previous systems.

Back in 1992, Siemens automation manager Klaus Wucherer hand-picked a dozen engineers to develop the system. To spur them on, he rented a house down the road from headquarters, set them loose in jeans and shirtsleeves, and hired a marathon runner, Kurt Krause, as captain. Last fall, just as the machine-tool market began to recover, Wucherer's team unveiled a state-of-the-art system. Sales boomed.

Wucherer used that success to spread change throughout his group. Meeting at the house, software engineers and production experts learned to speed up decisions that once took reams of paper and weeks of meetings. Today, their colleagues are doing the same.

Learning such lessons didn't come easy to von Pierer, either. When he started his shake-up of Siemens three years ago, he quickly won the support of senior managers. But he soon hit a brick wall when he failed to prepare the rest of Siemens' employees. The attempt to recast thousands of bureaucrats into entrepreneurs sparked confusion, anxiety, and resistance in the middle and lower ranks.

NO BMW. Many employees felt betrayed. One such was a 46-year-old manager who was gunning for a promotion that would have included a BMW as a bonus. In October, 1992, restructuring eliminated his department. Now, morale shattered, he does a job that he used to supervise. "I worked so hard for this company, and I thought the company would never forget it," he says. "I'm not as committed anymore."

Such bad blood and poor communication undermined von Pierer's early efforts. So he turned to board member Walter Kunerth, who had won kudos for a turnaround at Siemens' automotive unit. Kunerth incorporated the company's hodgepodge of projects into a program called TOP--time-optimized processes. Last year, Kunerth launched a high-profile educational campaign aimed at employees at all levels. Says Kunerth: "Now, I realize you have to start with the cultural change first."

Taking a chapter from U.S. management texts, TOP encourages creativity, speed, and a keen focus on the market. Under TOP, employees form teams to solve a problem or accomplish a special task, such as designing a product. Team members set clear goals and sign a statement agreeing to them. Their bonuses--and jobs--depend upon it.

In one TOP program, for example, a special team shaped Siemens' attack on the market for semiconductors used in prepaid telephone cards in Europe and Asia. Siemens was lagging. In a break with the old style, the chip division put a youngster--32-year-old Peter Bauer--in charge. He and a dozen team members brainstormed in meeting rooms away from phones, scrawling ideas on swaths of brown paper tacked to the walls.

They were searching for ways to get to the market fast. "We were energized. It was all up to us," Bauer recalls. Working long days and unpaid weekends, they pulled it off. Now, Siemens is edging ahead of Motorola Inc. and SGS Thomson Microelectronics in the world market for these chips--a market that is growing 30% annually.

For older managers who slowly worked their way up, flexible project teams are just too touchy-feely. As von Pierer puts it, it's like the joke about the Siemens office worker who, finding a tack on his chair, carefully lowers himself onto it, muttering that management must have had a good reason. Used to taking orders, such managers can't cope. "We've had some personal tragedies," concedes Gerhard Angermuller, head of quality control at a turbine plant. "People have to adapt or leave."

DUELING BIDS. Siemens has also taken radical measures to force managers to adapt to the market's stern demands. The company called in its blue-ribbon customers. Engineers and managers alike were humbled as Opel, Ford, and Sony gave them an earful at three-day gripe sessions at Siemens' Bavarian hideaway. Alan Burton, Ford's European telecom manager, shocked one group by disclosing he had received competing bids from three Siemens divisions for the same tender. Siemens assigned him a full-time account executive.

Semiconductor managers were even more stunned. They resisted the TOP program at first, arguing that their division had slashed payroll 30%, closed factories, and was poised to announce a return to profit after years of heavy losses. But when Sony Corp. came to a TOP workshop and blasted Siemens for rotten service and erratic delivery, "there were plenty of shocked faces," recalls David Vicker, deputy manufacturing chief of Sony's TV plant in Wales.

"It was brutal," admits one Siemens chip manager. He and others got the message: Customers count. Excellent technology is not enough. Until TOP, says Gerhard Ott, head of software development for telephone switches, service wasn't emphasized: "We expected customers to buy what we have."

Siemens' vast network of research labs has not escaped the new regimen. Siemens spends $5.4 billion a year--9% of revenues--on research and development. Two-thirds of sales come from products and systems less than five years old, compared with 50% a decade ago. Nevertheless, von Pierer wants to accelerate the idea flow. Starting last October, project leaders were given more freedom to choose what they want to research, but they can't get a budget until a product division gives the nod.

That's a huge relief for specialists frustrated with the long R&D chain of command. Scientist Brigitte Stroetmann, who works in Siemens' central research lab, now deals directly with the medical division on her research project on the nervous system. It has possible applications for ear implants. "I love this new freedom," she says.

Von Pierer's whole campaign is aimed at getting Siemens into new high-growth markets around the world. After spending years developing Eastern European markets, he is moving to become a bigger player outside Europe, especially in Asia. Siemens has historic ties with Asia--it sold China its first power generator in 1872--but it has not kept up with the Americans and Japanese. Now, von Pierer plans to invest $3.4 billion by the year 2000 in Asia and to double sales, to $14.3 billion.

Power generation is one growth area. Siemens formed a "Taiwan Team" to break into a market long dominated by GE and won the bidding for its first two projects: two $715 million power stations in southern Taiwan. The team kept cost down by pulling together turbines from the U.S. and Germany and plenty of components from Taiwan itself. Back home at the Mulheim plant, north of Dusseldorf, line workers cut the cost of a generator in half by speeding up production and delivery.

The competition has noticed. "We are fighting ferociously ever there," says Robert W. Schubert Jr., director of marketing for ABB Asea Brown Boveri (Holding) Ltd.'s power business, which is vying with Siemens in Asia. Some competitors suggest that Siemens is lowballing its bids, but Siemens managers deny it.

Perhaps the single biggest sore point remaining is computer division SNI, the last unit to be still posting losses. Gerhard Schulmeyer, the former chief of ABB's U.S. operation and a longtime Motorola executive before that, has been cleaning house since taking over the $8.4 billion unit last spring. Eight of the top 16 managers have been there less than one year.

BRAINSTORMING. As an outsider, Schulmeyer attacked SNI's sluggishness head-on. For a week last fall, he sat with 300 managers in a hotel to dream up ideas on how to change the company. The division's 50 profit centers are submitting detailed strategic plans to management. "You can't imagine the stress on this organization," Schulmeyer says. Nonetheless, sales are up 8%, and Schulmeyer expects SNI, which bled an estimated $1.4 billion over the past four years, to actually post an operating profit this year.

Even with SNI still lagging, the cultural revolution at Siemens is starting to pay off. While net profits slipped 17%, to $1.18 billion, in the year ended last September, earnings jumped 8% in the three months to December, and analysts see a 20% increase for the year. Siemens' share price is outperforming the market for the first time in two years. It has risen 10.3% since mid-December, even as the Frankfurt market stayed flat.

With margins much lower than its global rivals GE and ABB, Siemens still has a ways to go. Its pretax return on sales was just 2.5% in 1994, compared with 4.9% for ABB and 14.4% for General Electric. However, "Siemens is now on the right track," says management consultant Roland Berger.

Even so, von Pierer knows that he can't let up. "We have to keep asking ourselves: `Are we flexible enough? Are we changing enough?"' he says. Recently, he had self-addressed postcards inserted into the company magazine that urged his employees to keep sending him their ideas. He expects a torrent of responses. Only with that kind of attitude can von Pierer keep Siemens in fighting form.


CULTURE Replaced hierarchical structure and engineering focus with new emphasis on innovation and service. Set up special teams to develop new products and markets faster. Appointed new generation of managers in their 40s.

STRUCTURE Eliminated two layers of middle management. Gave managers in local markets free rein to cut costs and bid for projects. Required research labs to work directly with product divisions.

DOWNSIZING Slashed workforce by 7.5%, mostly through early retirement. Sold $2 billion in noncore businesses. Plans further layoffs and asset sales.

GLOBAL REACH Setting up facilities in Eastern Europe and Asia to lower costs and reach new customers. Bought telecommunications units in U.S. and Italy. Plans to move more production out of Germany.


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