Siemens AG: Global Development Strategy

By:(Group 1)

Ankur Jha (60010)Garima Gupta (60014)Himani Singhal (60016)Kunal Pahooja (60022)

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Protagonists

Horst Eberl, Division Head ( Career Switching Networks)

Karl-Friedrich Hunke, Sub Divisional Head

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KEY FACTS

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Telecommunication Systems: The Invisible Hand

• See Exhibit 1 for background on early history of telecommunications.

• Large telecommunications systems operated smoothly by multinational giants such as Siemens, Lucent, Ericsson, and Alcatel.

• For decades, providers of these large systems around the globe enjoyed a cozy relationship with their traditional customers, up to 30 – year lifespan of a telephony system.

• In the mid – 1990s, the internet now allowed for the revolutionary possibility of cheap transmission of voice and data over the same broadband lines using the same protocols and even low service transaction cost.

• Siemens and others feared that internet – based voice transmission could dominate their industry if it could solve quality and reliability

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Siemens: Building an Industrial Giant

• Founded in 1847 to manufacture and install telegraphic systems• Installed first deep-sea telegraphic cables connecting England with America as well as India• Over the years, capitalized on several emerging technologies ranging from the telephone to electric power generation to the X ray tube• In 1909 company built an automatic telephone exchange to serve Munich’s 2500 telephone users• Throughout the twentieth century, Siemens continued its international growth, with its presence extending even as far as Mars, through development of space probe technologies for NASA• By 2000 Siemens was among one of the top five electrical and electronics companies in the world • It had 464,000 employees across 190 countries, with 57,000 dedicated to R&D and held some 120,000 patent rights and spent over ten billion Euros on R&D• Its largest, Information and Communications networks (ICN), employed 53,000 people, operated in 160 countries and headquartered at Munich, Germany• See Exhibit 4 for financials and Corporate structure of Siemens6/29

Strengths of Siemens

• International Orientation since its inception

• Dominant player in Telecommunication, medical technology, data processing system, manufacturing of heavy electrical equipment, nuclear plant & rail road equipment

• Expert in managing large & complex projects & prided itself on quality and durability

• Siemens has historically guarded its credit rating

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Traditional Strategies of Siemens

• Marketing- Close Relationship with largest customer

- No aggressive marketing

• Credit Policy“Siemens have traditionally guarded its credit rating”

• TechnologyStick with its traditional electromechanical technology

• SystemHighly Centralized, all product related decision were taken at Munich

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Change in Policies:

• In 1990s, worldwide wave of deregulation affected various industries including telecommunications, which was changing rapidly

• 1998 marked a crisis point when net income slumped two – thirds from a 1996 peak of $1.36 billion

• Then, Siemens CEO Von Pierer implemented a policy change due to various reasons:

- “ Siemens Problems are Germany’s Problem”- Deregulations world wide- Rapidly evolving Telecommunication Industry- Iffy Marketing- High Labour Costs and Taxes

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New Policies:• Adaptation of US-Style of management

• 10 point plan : Divesting Poor performing units in order to strengthen remaining

businesses Setting tougher profit targets for managers 60% managers’ pay to performance Trimming the high cost German workforce & management by as

much as a third Reducing overtime pay Adopting US accounting principles Aggressively incorporating marketing into its Product Development

processes Move from electromechanical system to digital system to built next

generation mobile networks

By early 2000, Von Pierer’s strategic shifts appeared fruitful: net income in the mobile phone business doubled a weak Euro helped by making its products cheaper overseas In U.S., Siemens became the largest foreign employer the ICN division’s 10% market share was well below the company’s

25% share of the world ‘s telecommunications systems so company made a series of strategic acquisitions , such as Unisphere Networks

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ICN• ICN represented a natural outgrowth of Siemens work

• ICN could provide telecommunication switching system based around “EWSD”

• EWSD: Best selling and most reliable switch in world

• Evolved from “EWSA” as strategic change from analog to digital platform.

• ICN+EWSD was result of strategic decision to turn digital, it took 30000 staff year

• The decision paid off 2000 as the technology routed 1 in 5 phone across world

• Aimed at achieving 99.999% reliability with downtime of under five minute per switch per year

• 270 million Euros per year on R&D

• ¾ of ICN revenue was through hardware and remaining from software

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ICN Customer Orientation

• EWSD hardware & software development followed a regular release cycle with

1000 staff year per cycle

• By 2000 ICN was already developing release 15.0

• Emphasis was on good service and maintained close links with its customers

• Yearly EWSD updates for Wealthier customer in developed nation

• Reliability, durability & prompt service were most attractive offerings for developing nations

• “FEKAT” a proprietary fault management tool

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Global Product Development and Project Management

• Almost half of R&D efforts at 17 RDCs scattered across the globe due to two reasons1.Problem of local labour shortage at Munich was solved2.Customization of product as per country need through RDCs

• Out of a total of 60-70 customization project almost 20 were self financed, mostly through customer wish list

• Customised project development also give chance to test various new technologies

• Great Variance existed between different RDCs

• Germans use to control RDCs in initial years but slowly local managers were given control

• “A false sense of security can be created from specifying everything”

• Munich coordinated cooperation between RDCs through formal channel annual conferences with RDCS representative

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Centre of Competence

• Munich coordinated through Matrix structure

• CoC were divided on technical lines

• Each CoC controlled budget & milestones for projects

• CoC structure allowed groups to work on new product development along with trouble shooting old product

• 90 project mangers were responsible for bringing subprojects output in line with milestone

• More than 40 among these were with multiple project responsibilities and 20 were involve with customization project

• Every Monday CoC heads meet with senior project management

• Bi weekly “Development Board” for Higher level problems solving

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Challenges in Coordinating Effort

• Interdependency of Subprojects

• Delays in assembling crucial employees from different countries

• It costs as much as 15% of project budgets

• Cultural and linguistic differences slowed down the projects

• No clarity as who is leading the project

• At CoC meets decision were often use to delayed for weeks

• Some RDCs reported directly to independent Siemens company located in their home country rather than to Business division

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Comparison of two Overseas RDCsBoca Raton (OLD)

- Est. 1978

- Largest RDC

- Contrast to culture of Munich head quarter

- Often drifted technology apart from Munich

- Act First then inform

- “NIH” syndrome

- Working style Issues with Munich

- Agree to Disagree

Bangalore (NEW)- Est. 1994

- City developed as India’s silicon valley

- Labour cost was 20% lower than Munich

- Attrition rate was comparative high

- Communication difference

- Fourth largest RDC

- Comfortable with top Down management approach

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Early Experience at Bangalore

• First significant project for AG “ADMOSS”

• It allowed modern call centres to increase their productivity through capability

• 500 features chosen from customer wish list

• Munich engineers had not worked for programming larger computer

• Bangalore was chosen because of its strength in personal computer programming

• It started with Munich controlling most of the Bangalore operations

• 2 million lines of ADMOSS computer code were melded together to create a integrated system many problem surfaced.

• Matter become more worsen as Indians can’t fly Munich to resolve problem due to visa restriction by German govt.18/29

Issues with ADMOSS

• Frustration among employees because of non clarity of work

• Employees felt demotivated because of miscommunication

• Testing of newly integrated system was a major obstacle

• ADMOSS finally released in 1996,a year late turned out be embracement for company

• Indo-German team eventually corrected 90% of ongoing fault

• ADMOSS ended up highly popular with customers

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East is east, West is west

- High Turnover Rate

- Salary Discussion were common

- Too Polite

- Not well motivated

- Just Fault analysis & no Documentation

- Cultural barrier

- Workers need sense of belonging

- Lifelong engagement

- Directness & Bluntness in communication

- Sense of Duty

- Well Document every fault in order to understand the health of system

-Take customization as a sense of duty

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The Net Manager Project• Power of personal computer got highly improved by Mid 90s

• At ICN, this realisation gave birth to “EWSD Net Manager”

• It is user-friendly & graphics based software product for completing range of facilities

• Net Manager development required deep understanding of EWSD technology & its 6000 functions

• Net Manager required knowledge of programming in desktop computer languages of with Munich developers lacked experience

• ICN has refined its own language “CHILL” but it was required to made compatible with Windows

• Due to budget cut at Munich, ICN senior managers decided that RDC should develop the Net Manager

• Boca Raton & Bangalore were front runners, due to advantage of greater experience & cost advantage respectively

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Net Manager & Bangalore

• The project eventually went to Bangalore due to knowledge of programming & availability of pool of staff, familiarity with programming & budgetary restriction with western RDC• Net manager has grown in scope so project become very challenging in managing interdependencies b/w many other Siemens telecommunication product• The technology was evolving rapidly hence 60% of Bangalore staff were part of project• By 1999 the Version 2 was sent to Munich testing, which eventually crashed by an hour• Severe faults were found in system & some of them were “I” level fault and their solutions were also trivial• Bangalore RDC boosted its staffing on Net Manager to resolve the issue.

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Reasons and After effects

• Root Cause of failure- Ignorance of Bangalore RDC staff- Underestimated the volume- Run Time of Project

• Few Reliability issue cropped up

• Old test bud sent to Bangalore were not capable enough to detect design problem

• August 2000 deadline for fault fixing of Version 2 delayed the planned Version 3 scheduled in July 2000

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Problem Statement

• ICN’s largest customer was demanding the product (Net Manager) but also issued a warning that reliability problems will not be acceptable.

• How to come up with a reliable and durable system, once Siemens hallmark?

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Evaluation of Alternatives• Move out of Bangalore to any European Country

Benefits- Proximity to Munich- Communication & Coordination issue will be resolve- Cultural barriers will be resolved- Low travelling cost

Cons- 50% of resources for NetManager, development & project management were based in Bangalore- Transferring system will delay the project by several weeks

• If remain in Bangalore Benefits

- Staff is having expertise with programming required for Net Manager- Cost Advantage

Cons- Communication & coordination issue- High attrition rate - Pollution & Traffic- High travelling cost

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Alternatives Contd…

• Relocating core Net Manager activity to Munich and leaving development activity to Bangalore

Benefits- Will ensure strict project management

- Quality control along with keeping Indian developers on board

Cons- Same coordination & communication issues as before will exist

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Recommendations

• Stick with Bangalore RDC

- The already have done two project so they have experience & learning from past experiences

- Expertise in developing desktop based programming

- The coordination & communication can be resolved with more interaction with Munich & directly with end user.

- Better testing mechanism if availed at RDC will reduce the fault

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Peripheral Issue

If Bangalore want to grow into a world stature city, it would need to discipline pollution and growing traffic

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