Solution to Siemens Ceberus Case

Siemens CerberusEco in China: Introducing low frills products in a high-quality company

Based on Case ESMT–311–0123–1

Case Questions

Carsten Liesener has proposed a new market entry strategy for Siemens Fire Safety & Security Products in China.

1. Make a decision on the proposal. Do you think it is a viable strategy? Be sure to consider both the strengths and the weaknesses of the strategy.
2. Regardless of whether you think the proposal is a good idea, or a bad one, develop an alternative strategy and a rationale for it (a good exercise no matter what your verdict on Carsten’s proposal).

Relevant Models and Concepts

From the University of Oxford’s Saïd Business School Strategy and Innovation Diploma Programme.

Enter Middle Market

Gadiesh, O., Leung, P., & Vestring, T., 2007.

Liesener has proposed a classic “attack from above or buy way in” strategy. This applies when a company’s competitive position is still strong, but the state of the premium segment is starting to erode. An adjunct in the same vein is to buy a competitor, such as DST.

Simultaneous Engineering

Williamson, P., & Yin, E., 2014

In this model, Siemens would consider “modularizing” its products, concentrating efforts on proprietary value and focusing on components with clear, standard interfaces. Then, innovate in parallel; where able, outsource non-critical components to local vendors. The benefit of this approach is that incremental innovation would be enhanced; Siemens would focus its effort on the aspects of the product that add the most unique value. It’s not clear from the case that this would be the approach Liesener is advocating.

Launch-Test-Improve

Williamson, P., & Yin, E., 2014

A fire and safety product must be designed and built to meet essential performance characteristics — after all, people’s lives depend upon it. That said, Siemens can launch-test-improve variants on its services or sales or VAP (value added provider) engagement models. In other words, focusing a tight innovation cycle on the business around the product rather than the product itself.

Reverse Innovation (RI)

Immelt, J. General Electric.

Liesener appears to embrace RI. But even as the R&D will be local, Product Management will be in Switzerland, which contradicts the Local Growth Team approach of RI. This organizational design could undermine the development efforts for low cost markets from inception by introducing bureaucracy and cultural distance.

AAA

Ghemawat, P., 2007.

Siemens appears to be using Adaptation, optimizing for the Chinese market first. However, it is mixing in some Aggregation by having PM overseen by Switzerland. Further, the 2 of the 3 teams are composed of staff in-country and out-of-country. This could be a harbinger of potential difficulties.

Liesener is also using cost Arbitrage to help enter the market by designing and manufacturing locally.

Double Helix

Fine, Charles (1998)

Fire and safety systems appear to be largely vertically integrated. This may have contributed to the desirability of having Switzerland oversee PM. The joint teams are composed of managers from China and outside China, arguably leading to “high-dimensional complexity”, a characteristic of late vertically integrated organizations. Some of the internal critiques about IP, cannibalization and ramping up to sell products (rather than solutions) could be attributed to organizational rigidities.

At this stage, there may be more pressure to dis-integrate through modularization and horizontal organization. This could be a promising opportunity for Siemens if it can take the lead in modularization and set the standards for a Fire Safety & Security Product platform.

Innovation from the Base of Pyramid

Hart, S. & Christensen, C. 2002.

While China is a large, sophisticated market with a range of market segments, success with M3 requires “low cost innovation, flexibility”. By making good enough products for this segment, Siemens can attack other BRIC markets, block competitors and defend its positions in M2 and M1.

CAGE

Ghemawat, P., 2001

Siemens faces several “distances”: Cultural (language, ethnicities, social norms); Administrative (political systems, government institutions); Geographic (no common border); and, Economic (consumer income, cost, quality).

Answers

Question 1: Viable Strategy?

Thesis: No, this is not a viable strategy for addressing China or other Emerging Markets.

While Liesener manages to incorporate a number of best practices that could help it succeed in China’s M3 segment and subsequently in the BRICs, he lacks a few critical elements that would better ensure success. Though the R&D team has yet to be established, there is no indication that it will be much more than an extension of similar teams in Europe, rather than a deep embrace of Reverse Innovation. It also appears Siemens does not have a fully integrated strategy that has considered both market and non-market factors.

Strengths

1. Siemens is “innovating from the base of the Pyramid” with low cost innovation in an emerging market. It is testing its product, R&D and marketing and sales in a competitive segment of the market. Success here would suggest success in other BRIC markets.
2. Liesener is entering the middle market by “attacking from above”, from a perch of relative strength in the M1 segment.
3. Liesener has established joint teams, in the case of two of them, consisting of in-market and out-of-market managers; this can help reduce at least one of the CAGE distances: cultural.

Weaknesses

1. Siemens faces many other weaknesses of distance: administrative, geographic, economic and despite his joint teams, even cultural. Already the strains are showing by the skepticism expressed at headquarters. It faces language differences; the political structures are different; the physical distances are great; the economic differences are large, with China having much lower per capita income than Europe. Finally, the cultural differences while perhaps bridged for the M1 market are sure to spring up anew when Siemens pursues the M3 market in T2, T3 cities. The risk is that any setbacks will encourage the naysayers at Siemens, dooming the project.
2. Though Liesener seems to be adopting Reverse Innovation (à la GE), the fact that Product Management will be overseen from Switzerland (a locale as different from China as can be imagined!) does not augur well. The differences will be magnified as Siemens enters the more provincial markets in T2 and T3 cities. According to GE, all work should be entrusted to the Local Growth Team, including P&L responsibility. The in-country/out-of-country dual-headed teams could also be cumbersome long term; they are likely to exacerbate the CAGE “distances”.
3. Corporate governance differences are not addressed. Germany, the home of Siemens, is a coordinated market economy. China by contrast is a command economy and not nominally capitalist; certainly in 2009, it had institutional voids. How to compensate for these is not adequately explained. For example, if some local competitors suffer from CeberusECO’s entry into M3, what could they do to create non-market obstacles? Similarly, what are the non-market challenges in developing relationships with VAPs? Would they be constrained to cooperate with a foreign company because of local government ownership or involvement that might favor local firms?
4. Non-market strategies are not considered. There are political, regulatory and other non-market dimensions that should be included in the overall strategy. For example, it might be possible to lobby the Chinese regulators to incorporate international standards (e.g., ISO or UL) as part of their economic development and to improve the lives of ordinary people. This could provide a competitive shield for Siemens and Ceberus as they would have a head start on implementing these standards.

Question 2: Alternative Strategy

Liesener can improve its strategy for broadening its market share in China, across the 3 segments, M1, M2, M3, by:

• Utilizing Reverse Innovation and delegating product development entirely to the local market team.
• Embracing Simultaneous Engineering (SE) and greater modularization of Fire Safety and Security Products (FSSP) to lead a new generation of innovation as the industry becomes more horizontal.
• Analyzing the risks of non-market forces and how they could impact Siemens’ options and capabilities.
• Considering the goals, opportunities, decision-making of non-market actors.
• Developing non-market strategies to complement its market ones and to preempt actions by non-market actors or competitors who might use non-market strategies.

Reverse Innovation tenets state that a Local Growth Team (LGT) should have P&L and product decision-making responsibility in the market. Its resources must also be based in the market, managed in that market and have product ownership. So, Siemens should follow these tenets, rather than have hybrid teams with members from various regions (i.e., the three two person teams); it should also eschew Swiss-based product management overseeing the Chinese team. Finally, the LGT must report high into the organization, perhaps even above Liesener. Once the LGT has successfully brought one or more products to market, it should then move to other emerging markets and even to address price-sensitive, “good enough” market segments in rich markets. The reason for using RI is to ensure that LGTs work without compromise to address the needs of their local markets — any adulteration of this principle could cause suboptimal compromises and lengthen Time-to-Market. Only a team unfettered by overseers at headquarters can work to win in its marketplace.

FSSP have had mostly proprietary designs and in a vertically integrated industry. The business model in advanced economies consists of selling solutions, which include the product as well as long term maintenance contracts that generate significant recurring revenue. However, the one-size-fits-all-markets of designing and building globalized products has reached its limits for more than the rarified M1 segment in countries like China. Designing products for M3-type segments requires lower development and production costs; this can be achieved with Simultaneous Engineering (SE), enabled by greater modularization. SE allows development teams to work in parallel, coordinating closely through clear interfaces. An enabler of simultaneous engineering is modularization. With modularization, a more horizontal industry tends to gain ascendency.

The Double Helix model implies that as the industry becomes more horizontal, suppliers will emerge to specialize in modules, perhaps eventually developing supplier market power. Siemens needs to recognize this trend, which it could accelerate by adopting SE in China. And, Siemens can be a leader of this trend by developing FSSP for emerging markets, then leverage the modularized, horizontal product in the advanced markets. In this fashion, it can disrupt its traditional competitor, Honeywell globally. Thus, the reasons for adopting SE are to reduce the product development time, in turn reducing costs, and to advance a more modular platform, which will allow Siemens a global strategic advantage as an early mover.

Non-market strategies must be considered in Siemens’ overall plans. Given the complexity and comparative sophistication of the Chinese market, it must avoid the “liability of the foreigner”. As noted above, Siemens must consider its competitors, both the global ones and local, like GST. What will their reactions be as Siemens enters the M3 segment? Will the local competitors seek to block CeberusECO through their own non-market strategies? Could they influence VAPs to not work with Siemens, perhaps via the local governments? Could the local competitors seek cross-ownership stakes in key VAPS to prevent Siemens from recruiting them? All these questions and more must be carefully considered by Liesener and his team — ideally, they would use a 4I’s analysis.

On the other hand, Liesener would be wise to implement his own non-market moves. For example, can they influence regulators or government bodies to adopt international standards for the M3 segment? If so, this could give CeberusECO an advantage, as it could more readily leverage Siemens’ experience with such standards. Could they block Honeywell from the M3 segment perhaps by influencing local government? Or can Siemens tie up enough local VAPs through cross-ownership that Honeywell will find few remaining partners? Can they parry the non-market strategies of local competitors like GST — for example by taking small ownership stakes in key VAPs? These non-market strategies should be carefully analyzed for possible adoption.

More broadly, can CeberusECO take the message to community groups that could agitate for the adoption of international standards or other practices that would favor Ceberus? Could Liesener develop favorable PR, perhaps around green technologies, local manufacturing and so on? These moves could forestall Honeywell in M3 and potentially limit the maneuvering room of local competitors, too.

Finally, Siemens could partner with or acquire one or more local players. This could be a variant on the “Attack from above” approach for entering middle markets. Is GST a viable acquisition target?

The reasons for non-market strategies as noted above are to enhance its market ones, anticipate the moves of competitors and create obstacles for them. In fact, some of the non-market strategies can take a weakness (e.g., products that only comply with international standards) and turn it into a strength (i.e., position competitors that don’t support such standards as less trustworthy). The strategies that tie up partners with exclusive or preferential relationships in T2 and T3 cities can have a blocking effect on some competitors.

Thus, Siemens can improve its chances of success in China’s M3 segment by embracing Reverse Innovation fully, adopting simultaneous engineering and modularization, and by implementing non-market strategies that either throw competitors off balance or give it an advantage. Together, these address the weaknesses identified in the answer to question 1. They turn a primarily advanced economy market-oriented product strategy in to a multi-dimensional one that leverages local governments.

Appendix: Notes on Case

Introduction

Future growth for Fire Safety & Security Products were understood to be in BRIC countries. The issue was how to address.

Liesener “proposed turning the solutions business of the … fire safety and security products on its head and developing a new product family under a new brand name in China and to sell these products with the help of value-adding partners.” There was skepticism; concerns were cannibalization and intellectual property protection. And, the strategy of selling products instead of solutions could be profitable in China.

Time was of the essence. Could Siemens succeed at “selling complex solutions in the high-end markets (M1) and plain, functional products in the less demanding but typically fast-growing markets (M3)?”

Siemens fire detection

“A typical fire detection system consisted of various components like the control panel, the primary power supply unit, secondary power supply units, initiating devices, notification appliances, and the interface to the customer and the supplier or fire departments.”

“In 2007 the product portfolio of Siemens fire detection consisted of three main solution categories: Sinteso for life-cycle business, Synova for product business, and Management Stations.”

China market

Macro-economic factors in 2007–8 were overall positive, with increased emphasis on environment and spreading benefits of growth to broader sections of society.

Fire detection products were in 3 segments, M1, M2, M3.

M1: premium, with many MNCs selling imported products, complying with international standards and produced in MNC’s home country.

• Other international companies were often customers.
• “The overall … was about 1.1 million units … about €28 million.”
• Siemens and Honeywell were dominant.
• Post-sales maintenance contracts were part of “solutions” business.
• General contractors (GC) were heavily involved in deciding, often specifying brands.
• Influencers were designers, vendors, VAP (value added provider).
• Siemens sells to this segment through distributors, VAPs, installers and GCs.

M2: medium, locally produced by MNCs.

• Comply with international standards and often identical to M1 products.
• “The price point … was about 30 to 40 percent lower and the market volume was 3.2 million units, … about €48 million.”
• Post-sales maintenance contracts were part of “solutions” business.
• “The products had fewer features but nevertheless had fast communication protocol, adjustable sensitivity, anti-disturbance mechanisms, and were also humidity-proof.”
• Expected to move upwards to include most M1 features in 2–3 years.
• End-users would typically set budgets and preferred brands; installers had higher influence.

M3: low end, dominated by local suppliers with local products.

• Complied with Chinese national standards.
• Didn’t include a post-sales services or maintenance business.
• “M3 segment … largest segment, with about 17 million units … about €103 million.”
• Simple, reliable products using stub line, no polarity; these made installing a bit more complex.
• GST was market leader in this segment.
• Price-sensitive buying, with installers typically recommending. Brand not a factor.
• Leading companies sell directly to installers, with sales offices all around country. Each office has about 10 contract, commission-based sales reps.
• “About 60 to 70 percent of the market volume for … M2 and M3 … was in tier 2 and tier 3 cities.”
• Siemens had presence in only 25%, but local competitors were in about 70% of those cities.

Proposal

Needed an urgent response not just for China but for other emerging markets.

Organized his team into 3 two-person teams:

• Product manager HQ + Product Manager China
• Head R&D HQ + China
• Head Sales + Head Marketing China

New product family called Ceberus with CeberusPRO for M2 and CeberusECO for M3.

Objectives were:

• Establish local footprint in Chinese M3 segment.
• Build local expertise.
• Build low-cost capabilities for other M3 markets globally.
• Block M3 competitors from moving up.
• Create brand and differentiated product portfolio.

Start with tier 2, 3 cities; focus on upper residential and commercial.

• Sell through VAPs, but initially just with existing channels and known partners.
• “The key would be … a clear and easy to understand differentiation between the existing M2 products (CerberusPro) and the new CerberusECO products for the M3 market.” Main distinctions were features, price, sales channels.
• CeberusECO products were positioned at 50–60% lower, with stub line, no polarity and simple labyrinth.
• Partners incented with volume and growth-based discounts/rebates. Additional discounts for maintaining stocking levels (relative to orders).
• Service supplied through a hotline and delivered via certified partners. No Siemens people.
• All VAPs trained by Siemens; would get marketing and technical support.
• Development done in China by new R&D team (not yet built), with support from headquarters.
• Produce in China.
• Product Management overseen from Switzerland.
• Launch “third quarter of 2009 and … to sell 26,000 products at a system price point of about 55 Rmb (about €6) in the first year and then 250,000 units … in 2010. According to the plan, this would calculate to a small loss in year one and [break even] in 2010.”
• “Main concerns were sufficient R&D capabilities to develop reliable products in time and within cost. Other concerns were related to IP issues and the high turnover of staff in China. [Also,] the sales approach with VAPs, as building up and training new VAPs would be both timely and costly.”

Exhibits

Exhibit 2:

• Starting in FY10, the M1 market shrinks one time dramatically, presumably cannibalized by M2 and M3. It never recovers, even as the market grows by 30% in FY11. (All comparatives based on revenues.)
• In unit volume terms, the market expands from 26K in 2009 to 631K in FY12, a staggering 24 fold increase!
• By FY12, M3 is projected to be 40% of the market — up from 0% in 2008! (By revenues; by units likely far more.

Exhibit 3:

• M2 and M1 products appear to be adding features rapidly. But M3 is adding incrementally.
• Volumes of M3 products are tremendous: M3 in this year is 17 million units, compared to about 1 million in M1. Unit volume of M2 is far larger, but not enough to make a volume business. It appears vulnerable to cannibalization from M3.
• [Note, no date/year for data in this exhibit.]