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September 25, 2014Presentation at Ethos
Trojan Horses of Decline
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IT'S THE ECONOMY, STUPID!
2005 2006 2007 2008 2009 2010 2011 2012 2013
8%7%6%5%4%3%2%1%0%
Common belief on the cause of corporate decline
Strong correlation between economic volatility and bankruptcy
Clear relation between GNP and bankruptcy [1990-2011]
Brazilian growth phase
Slowdown of growth
Significant economic swings in the past
-4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%0
1000
2000
3000
4000
5000
6000
7000
8000 R2 = 0.75
GNP growth
Legal entitiesfailing
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Source: Datastream
Value destruction at Nokia and Saab
With the downfall of Nokia, EUR 205 bn was destroyed
With the downfall of Saab, EUR 1.3 bn was destroyed
Liquidity crisis
Strategic crisis
Earnings crisis
Market cap in EUR bn
'01 '08 '10 '11'09'02 '03 '04 '05 '06 '07
EUR205 bn
250
200
150
100
50
0
Liquidity crisis
Strategic crisis
Earnings crisis
Market cap in EUR bn
'01 '08 '10 '11'09'02 '03 '04 '05 '06 '07
EUR1.3 bn
3.0
3.0
3.0
3.0
3.0
3.0
CASE STUDY FOR TODAY
LOSS IN VALUEDownfall causes an irretrievable loss in value
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SPEED OF LOSSCeteco's downfall happened in just 6 months
+244%
523,730611,221
328,170228,742177,884161,097
Development of operating income
[EUR k]
Structural sales decline
-41,594
18,57413,16712,9729,8006,270
Development of net income [EUR k]
Net income becomes negative
173535
596846
19971996199519941993 1998
Development of solvability [%]
Solvency drops below minimum solvency level of 20%
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LOSS OF TIME~16 months are lost because crises are identified too late
Time between identification and start of restructuring [cum. frequency in %]
Source: Roland Berger
11%
5+ years
21%
Start of restructuring
33%
1 year2 years
57%
3 years
90%
4 years
100%
Number of years between identification ...... andrestructuring Causes
> Failed identification systems
> Early warning signs of crisis are ignored (still hoping for improvement)
> When there is a threat of bankruptcy, stakeholders resist (e.g. by restricting room for action)
Ø 16 months
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Source: Bol.com
RESEARCHCurrent literature focuses on success stories …
… and is more popular than scientific inquiry
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COMPANY DECLINELiterature pays far less attention to the root causes of decline
Altman, 1968Provides formula for predicting bankruptcies (Z-score), but does not go into the root causes of company decline
Argenti, 1976Argenti's Corporate Collapse is still one of the more frequently cited books on decline
Miller, 1977Argues that failures originate from within a company and are caused by "intrinsically interrelated factors"
Hambrick and D'Aveni, 1988Study of 57 large bankruptcies and 57 survivors; indicates that decline can be seen as a downward spiral
Flagg et al., 1991 Predicts which "failing firms" will ultimately go bankrupt, but neglects the root causes of the decline
Pandit, 2000In 1976, Argenti concluded that the literature on company downfall at that time was "rather disappointing"In 2000, Pandit's literature survey comes to a similar conclusion about the bulk of literature available and advocates more triangulated and comprehensive research into decline
Slywotsky and Dryzik, 2005Lays out a method for identifying and responding to strategic threats to help companies survive
Source: Pandit, 2000; Literature survey
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CAUSES?Most research and practitioners confuse symptoms with causes
Causes of decline according to major research
Source: Central Bureau for Statistics (CBS); Graydon; OO&R U
nder
inve
stm
ent
Mismanagement
Economic causeLiquidation of holding
Problems within management
Shell companies, dubious practices
Unprofessional entrepreneurship
Economic conditions
Financing difficulties
Archaic managementFraud
Competition
Health/personal problemsPoor
management
Mar
ket-r
elat
ed
Ove
r-fin
anci
ng
Excessive investments
Cost level too high Strangulation
contracts
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SUMMARY
… an irretrievable loss in value… that downfall occurs fast… that management takes actiontoo late
Economics reveal …
… is mainly aimed at creating managerial success… is more popular than scientific… does not tackle the root causes of decline
The current literature …
??
??????WHAT causes top-notch firms to go from
GOOD to GREAT to GONE?
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MANEUVERINGCauses of decline should be identified in the strategic arena
Phases of a crisis and when companies respond [% of companies examined, 2005]
Source: Roland Berger
LIQUIDITY crisis
SCO
PE F
OR
ACTI
ON
CAUSEEFFECT
Time
Urgency
STRATEGIC crisis
EARNINGS crisis
Insolvency
NEED
FOR ACTIO
N
Urgent restructuring cases ( 71%)
17%
29%
54%
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+ 2 years
+ 136%
+ 54%
RESTRUCTURINGOnly a financial, operational and strategic approach truly works
Operational restructuring vs. comprehensive restructuring
Unexploited potential: realigning core businessCompany value
> Restructuring often focuses only on cost reduction and improving the efficiency of operations while disregarding the root causes of the crisis
> This approach has significant improvement potential (average: 54%)
> However, a comprehensive approach (strategic, operational and financial restructuring) usually offers twice as much improvement potential (average: 136%)
Source: K. Lafrenz, Unternehmenswertsteigerung durch Restrukturierung (RB Study)
Realigning core business Restructuring operations
-50%
0%
50%
100%
150%
Unexploited potential
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FOUNDATIONSDecline's roots are laid in the 1st stage of strategy development
Roots of decline
Source: Roland Berger
> Current reality: "Challenging commonly accepted facts challenges personal integrity"> Ambition: "No one ever got fired for introducing an aggressive growth strategy"> Business model: "Compliance is a board issue, consistency management's"
Typical examples:
Understandingthe drivers of current reality
Defining ambitions
Definingthe business model
Preparing implemen-tation
Executing the strategy
Improvedperformance
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SUSTAINABILITYA business model defines how to be sustainably in business
Source: Teece 2010; Roland Berger
Customer
Company
"A business model is the architecture of value creation within a company which defines the delivery of value to customers (value delivery), the persuasion of customers to pay for that value (value compensation), and the conversion of such revenue into profit (value capture)"
David Teece, 2010
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Entangled Out-of-focus A business model that no longer focuses on creating value for the customer
Unadapted Overstretched A business model that stretches beyond a company's capabilities
1 2
3 4
A business model that runs fundamentally different activities in the same way
A business model that is not adjusted to changed market dynamics
OUR RESEARCHOur case studies revealed four types of Trojan Horses
Source: Roland Berger
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CASE: SAABSaab is a premium brand car manufacturer
Source: Roland Berger
Saab business model
Car producers capture value if they realize a high production utilization rate. Saab realizes this by properly aligning the car sales margin with its value delivery to cover the relatively high cost base per car (due to a high production complexity, high R&D spend and high marketing spend)
Saab produces innovative cars of high quality for a relatively small target group, adhering to its core values of safety, environmental consciousness, and turbocharging
Due to the level of value delivery, customers are willing to pay a premium for the purchase of the car and spare parts. Proactive customer interaction secures a loyal target group
Value capturing
Value delivery
Value compensation
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OBSERVATIONAfter Saab joined GM, the level of innovation fell
1) In cooperation with SubaruSource: Press research; Roland Berger
Saab 9-5 (1998) Saab 9-2X (2005)1)
Built with GM technology
Side impact protection
(1972)
Saab Trionic (1991)
Turbocharging (1977)
Saab active head restraint
(1997)
Dual brake (1963)
Saab 92 (1950) Saab 99 T (1974)
Saab 96 (1960) Saab 9000 (1984)
Saab 9-4X (2011)Saab 9-3 (2002)
Car introductions
Major innovations
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OBSERVATIONGM turned the Saab into a middleclass brand
Source: Press research; Roland Berger
Consequences of GM management
"Saab will base future vehicles on GM's Epsilon front wheel drive platform; this way Saabs could be built along-side other GM vehicles at plants other than Trollhatten."
Reuters, 1999
"Saab will become a GM brand, rather than a stand-alone car maker with its own design, engineering, purchasing and manufacturing departments."
The Independer, 2004
"Saab will share more components with other GM products and be made in flexible factories that make other GM products."
Automotive, 2005
"Saab's head of design will take over styling for Porsche in November."
The Globe, 2004
LOW RANGE
PREMIUM
LUXURY
Rea
lized
mar
gin
per c
ar
Product complexity
CONCEPTUAL
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OBSERVATIONThe losses at Saab can be seen in the falling production numbers
1) Target set by GM after 2003; 2) Estimate from The Economist in 2010
Source: OICA; Press research
0
50
100
150
20102008200620042002200019981996199419921990
Liquidity crisis
Earnings crisis
Strategic crisis
GM breakeven target1)
Saab production[# '000 cars]
"In all that time, Saab has been profitable for only two years."
The Globe, 2004
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OBSERVATIONGM and SAAB run fundamentally different business models
Source: Roland Berger
Business model inconsistencies
Saab GM
> Innovative, high quality cars for a relatively small customer group
> Low-cost cars for the mass market
> High premium> Loyal customer group
> Low premium> Transactional customer
relationship
> High margin, low volume > Low margin, high volumeValue capturing
Value compensation
Value delivery
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TIMELINESaab lost its competitive edge
Source: Saab annual reports; Press research; Roland Berger
1989 1990-2000 2000-2008 2009-2011
Increase in strategic risk
Strategic crisis
Earnings crisis
Liquidity crisis1 2 3 4
> New owner GM does not recognize Saab's quality brand, distinct design and loyal customer base
> Reduced quality (manufacturing & engineering)
> Mismatch between Saab's offering and client demand
> Continuing changes in senior management
> Reduced quality of new models
> Badly damaged image, especially with its specific, loyal customer base
> Added value of Saab questioned by GM
> Orders decrease> Share price drops> GM focuses on cost
reduction by further centralizing R&D, design and production
> Acquired by Spyker to return to old values
> Attempt to return to old Saab brand and quality failed due to lack of time and funds
> Inability to pay suppliers and employees
> Saab files for protection from bankruptcy twice in three years
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WHITE KNIGHT?Spyker underestimated the effort to move Saab back
Returning Saab's brand and quality
Source: Press research; Roland Berger
Spyker understood that Saab needed to return to its original business model …
… but underestimated the amount of fundsthat would be needed [EUR bn]
Required funding
~1.5-2
Collected funds
~1
Funding required for:> Starting up production> Working capital for suppliers and dealers> Development of new models
Funding gap ~EUR 0.5-1 bn
LOW RANGE
PREMIUM
LUXURY
Rea
lized
mar
gin
per c
ar
Product complexity
CONCEPTUAL
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CONCLUSIONIn the course of two decades, Saab had two Trojan Horses
Unadapted
Out-of-focus
Entangled
Overstretched
Trojan Horse(s) at Saab Reasoning
✓
✓
> GM tried to run fundamentally different activities in the same way
> Efficiency-focused GM made Saab go from a premium to a middleclass brand; value delivery and value compensation went out of alignment
Source: Roland Berger
> Spyker understood how to restore Saab's brand position, but underestimated the amount of time and funding that would be needed, overstretching the company
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STRESS TESTTrojan Horses can be identified in four steps
Define the business modelTest the robustness of
the business model
Step 2Define how value is created for customers and other stakeholders
Step 4 Check the balance between
risk and reward
Step 1Unbundle the company's activities
Step 3 Measure the business model
against external changes
Business model
Source: Roland Berger
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