The Winds of Change at Siemens Master in Science in Business Administration Rita Moura Salvador | 152111020 Supervisor | Professor Ilídio Barreto Dissertation submitted in partial fulfillment of requirements for the degree of Master of Science in Business Administration, at the Universidade Católica Portuguesa, September 16th, 2013. Acknowledgements First, I would like to thank my dissertation supervisor, Professor Ilídio Barreto, for his support and availability to share his knowledge and to help me write this dissertation, especially given the restrictions I had. Second, I would also like to express my gratitude to all my colleagues at Siemens which, not only answered my incessant questions, but also allowed me to tell the beautiful story of this great company. I would specially like to thank my team for the opportunity, the time, the constant motivation and for listening to me. Also, I would like to thank my professors, teaching assistants and academic staff at Católica-Lisbon School of Business and Economics for helping me to grow academically, professionally and personally. Moreover, I would like to thank my family, especially my parents, brother and grandparents for the concern and the motivation given throughout these months. Also, I would like to thank to my colleagues that attended the seminar alongside me, particularly to Samir, who always had the right words for me. Last but not the least, I would like to thank to Diogo for listening, reading, correcting, advising, giving me motivation…thank you very much. II Abstract Strategic change is a topic of great importance given the turbulence of the markets in which firms operate. Related to this topic, it has recently been developed the concept of dynamic capabilities, which refers to the ability of companies to sustain their competitive advantage in changing environments. Often as a mean to cope with the challenges presented by the environments, companies hire outside CEOs in order to acquire new perspectives, capabilities and mindsets to improve company’s performance. This dissertation comprises a teaching case about Siemens. The longstanding corporation has a history of success but where there were also some threats to the sustainability of the company in the market. In this case, the main focus is on the period since 2007. In that period, Siemens hired the first outside CEO in its history and the crisis took place, putting to the test the endurance of the CEO and, ultimately, of the company. III Table of Contents Introduction ..................................................................................................................... 5 Literature Review ............................................................................................................ 8 The Emergence of Dynamic Capabilities ...................................................................... 9 Resource Reconfiguration and Dynamic Capabilities ................................................... 9 The new definition of Dynamic Capabilities: a multidimensional construct ................. 10 Strategic Change ......................................................................................................... 10 Strategic Change and CEO Origin .............................................................................. 11 Teaching Case .............................................................................................................. 13 160 years of History .................................................................................................... 14 Faces of progress, faces of change ............................................................................ 17 Restructuring – Take 1: A New Triad – Energy, Industry and Healthcare .................. 20 Restructuring – Take 2: The Birth of a New Sector ..................................................... 21 IC Strategies for a Sustainable Growth ....................................................................... 23 Exhibits ........................................................................................................................ 25 Endnotes ..................................................................................................................... 30 Teaching Note ............................................................................................................... 34 Synopsis ...................................................................................................................... 35 Teaching Purpose ....................................................................................................... 36 Intended Contribution .................................................................................................. 36 Instructor Preparation .................................................................................................. 37 Suggested Assignment Questions .............................................................................. 38 Teaching Plan ............................................................................................................. 45 Discussion .................................................................................................................... 46 Conclusion .................................................................................................................... 50 Bibliography .................................................................................................................. 52 IV Introduction 5 Strategic management is a field of great importance in management studies as the environment is becoming more competitive and more volatile. Variables as technology, politics, demographics and even competition are sources of instability in the market that often cause shocks that completely shift the condition under which the company operates, demanding strategic change. Be that as it may, the topic of Dynamic Capabilities has gained increasing importance in the field of strategic management. This view emerged due to a limitation in the Resource-based Theory (Barney, 1986, 1991): the environment is dynamic in its nature instead of static as Barney assumed in his theory. Teece (1997) attempted to overcome this hurdle through the development of an article, triggering the work of several scholars (Barreto, 2010). The Resource-based Theory explains how to achieve a sustained competitive advantage, assuming that resources and capabilities are heterogeneously distributed across firms and that such conditions are stable over time (Barney, 1991). On the other hand, in his work, Teece et al. (1997:516) defined Dynamic Capabilities as “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments”. Barreto (2010) also acknowledged the dynamic nature of the markets. In his definition of Dynamic Capabilities, Barreto (2010) considered it as a multidimensional construct: “A dynamic capability is the firm’s potential to systematically solve problems, formed by its propensity to sense opportunities and treats, to make timely and market-oriented decisions and to change its resource base”. Under this umbrella topic that is Strategic Change, there is a very interesting topic that often relates to Dynamic Capabilities which is CEO origin, tenure and discretion. When a company changes its CEO, the new CEO characteristics play an important role and ultimately affect the company performance (Zhang and Rajagopalan, 2009). Furthermore, the impact of the decisions of an inside CEO versus an outside CEO on firm’s performance differs depending on the level and positive versus negative effect of strategic change (Zhang and Rajagopalan, 2009). 6 This dissertation will focus on the Siemens case. From the World War II to the current crisis, many were the shocks that the 165-year old engineering giant faced. I will analyze major structural changes occurred in last decades, but a special emphasis will be given to recent restructurings occurred in the company. Over the years, many leaders headed the company to success. For over 100 years the company was run by Siemens family members and by 1968 the company began to be leaded by inside, (or promoted) CEOs. However, in 2007 the situation changed greatly: for the first time Siemens had an outside CEO. The dissertation is divided into Literature Review, Teaching Case, Teaching Note, Discussion and Conclusion. In the first, the theory will be presented to frame the Teaching Case. After the Teaching Case, the Teaching Note will provide a comprehensive guide to class discussion of theoretical topics and case study. Finally, the last two sections will feature the Discussion and Conclusion parts to complete the dissertation. 7 Literature Review 8 The Emergence of Dynamic Capabilities The Strategic Management field has been greatly developed in the last few years. In fact, nowadays markets operate in situations much more challenging as the occurrence of sudden shocks in economies, competition, technology and regulation is more frequent (Barreto, 2010). Therefore, this instability results in a difficulty in sustaining a long-term competitive advantage, which, in turn, has been proved to be decreasing its longevity (Wiggins & Ruefli, 2005). Indeed, the realization that firms operate in changing markets enabled to overcome the limitations of the Porter’s Five Forces Model and the Resource-based Theory (Barney, 1986, 1991). The former, assesses the industry attractiveness and, thus, the likelihood of