Conferência Ethos 360°: René Seyger

1230914 Ethos_Roland Berger_MG_v8.pptx

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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]


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%


+ 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


> 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



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CASE: SAABSaab is a premium brand car manufacturer


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

http://www.google.nl/url?sa=i&rct=j&q=saab+9-2+X&source=images&cd=&cad=rja&docid=18mmyAy2rl3S6M&tbnid=4h0AmQBnGRn6-M:&ved=0CAUQjRw&url=http://www.auto123.com/en/car-reviews/used/2005-2006-saab-9-2x-pre-owned?artid=96614&ei=JcyDUfLRIozasgaRyoDYBg&psig=AFQjCNHGaVeXZfr2OAZMxVueS0sOeF9XKg&ust=1367678314325798

http://www.google.nl/url?sa=i&rct=j&q=saab+99+turbo&source=images&cd=&cad=rja&docid=MiWjK54rvA6yKM&tbnid=vRIV4CJXKIOjJM:&ved=0CAUQjRw&url=http://gomotors.net/SAAB/SAAB-99-TURBO/photos.html&ei=48qDUdqCKo3MswbG3IGIAw&bvm=bv.45960087,d.bGE&psig=AFQjCNFAXAy_oIvBa4p5W_Iy4zHCmpMaIQ&ust=1367678020532450

http://www.google.nl/url?sa=i&rct=j&q=saab+9-4+X&source=images&cd=&cad=rja&docid=BCPoAlB9X6ni9M&tbnid=C6oyC0aiODVGNM:&ved=0CAUQjRw&url=http://www.automobilesreview.com/pictures/saab-london-show-highlights/saab-9-4x-biopower-02.html&ei=Bc2DUbXJMJDktQbTyIHgAQ&psig=AFQjCNGQ_OxLRyskc8vSEBmfYAVQE_tIvQ&ust=1367678450092036


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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


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


> 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



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Conferência Ethos 360°: René Seyger

Government & Nonprofit

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