Niels LundeChefredaktør, dagbladet Børsen

Danfoss: Core & Clear

Copenhagen Business School, 4. November, 2015

1. Why a book about Danfoss?2. Three sources of inspiration3. The Core & Clear Strategy4. Danfoss’ answers to key strategic questions5. Key Learnings

Agenda

”Miraklet i Lego” (”The Miracle at Lego”) – was a book about how to create value by understanding the identity and the core business of a company

Danfoss: Not only how to understand a core business, but also how to establish a businessmodel – in a traditional manufacturing company facing fierce competition,

Niels B. Christiansen: I wanted to understand how a CEO works with strategy.

1. Why a book about Danfoss?

Chris Zook and James Allen in ”Profit from the Core”:

- identifies and explains three key factors that differentiate growth strategies that succeed from those that fail:

Reaching full potential in the core businessExpanding into logical adjacent businesses surrounding that corePreemptively redefining the core business in response to marketturbulence,

It all starts with the question: What is your reason to exist?

2. Three sources of inspiration

Roger Martin and A. G. Lafley’s five strategic questions in ”Playing to Win”

1. What are your winning aspiration, what do you want to achieve? 2. Where will you play, in which bussinesses, segments and geographies do you want to compete? 3. How will you win, what is your Value Proposition and what are your competitive advantages? 4. What capabilities must be in place, what core-competences do you need to make your business unique compared to your competitors? 5. What management systems are required?

2. Three sources of inspiration

Richard Rumelt in ”Good Strategy, Bad Strategy”: The kernel of a strategy contains three elements:

1. A diagnosis that defines or explains the nature of the challenge.2. A guiding policy for dealing with the challenge.3. A set of coherent actions that are designed to carry out the guiding policy.

2. Three sources of inspiration

Source: Danfoss 2009

3. The Core & Clear strategy Outset Journey Destination 2015

Stre

ngth

s and

Cha

lleng

es Core & Clear

Free & Agile

Customer & Innovation

Passion & Performance

Our Aspiration

Danfoss is recognised as a

global trendsetter.

We passionately push boundaries on

results and reputation

Culture

Our Promise & Our Behaviour

Source: Danfoss 2009

Danfoss Business Portfolio

EBIT Margin(average 2005-08)

Sales growth(CAGR 2005-08)

Danfossaverage

Danfossaverage

High Pressure

Pumps

FloorHeating

DistrictHeating

WaterValves

BurnerControls

ComfortControls

ElectricalHeating

GearMotors

DrivesDivision

AutomaticControls

Household Compressors

CommercialCompressors

HeatPumps

Appliance Controls

100121

141 146 151 155

2006-09 2010 2011 2012 2013 2014

Sales index

100120

150 153 154 158

2006-09 2010 2011 2012 2013 2014

FE index

100136 108 116 130 147

2006-09 2010 2011 2012 2013 2014

EBIT Margin index

100

151

73120 139

189

2006-09 2010 2011 2012 2013 2014

Cash Margin index

100 110 102 97 99 93

2006-09 2010 2011 2012 2013 2014

Sales index

10087 91

81 8059

2006-09 2010 2011 2012 2013 2014

FE index

100

336270

320

410466

2006-09 2010 2011 2012 2013 2014

EBIT Margin index

100

178 169

252223

288

2006-09 2010 2011 2012 2013 2014

Cash Margin index

Core for Growth: Core for Cash:

Source: Danfoss 2015

Danfoss Group including figures from Sauer-Danfoss Inc. in 2000-2008

Free Cash Flow excl. M&A since 1991

0

2

4

6

8

10

12

14

16

18

1991-2008

Bn DKK

2009

2010

2011

2012

2013

2014

0

2

4

6

8

10

12

14

16

18

2009-14

Bn DKK

1.6 Bn

16.7 Bn

1.6 Bn

16.7 Bn

Source: Professor Sean Meehan, IMD at Danfoss 2009

Critical Mistake – Misunderstanding Customer Needs

Companies address needs by putting forth a value proposition, that is, a set of benefits they offer to customers to satisfy their needs.

LESSON: Don’t be dismissive of the basics, customers care a lot about your performance on these and the other layers; often these are the winners!

USP

Segment Reqs

Category Basics

Source: Danfoss Business System

DBS is built around 3 cornerstones

… Chris Zook & James Allen, Roger Martin & A. G. Lafley and Richard Rumelt.

4. Danfoss’ answers to…

The strategic question: What is your reason to exist?

Answer: Danfoss exists to push the boundaries for energy efficiency.

This is what makes Danfoss unique and upon that insight the company builds it’s competitive advantage and identifies it’s core-competences:

1. Technological insight and innovation understanding

2. Global customer proximity and application knowledge

3. Use of scale (Danfoss One Company, Danfoss Business System).

4. Danfoss’ answers …

Richard Rumelt: A strategic process can be divided into three phases:

The Core & Clear-diagnosis: From the hit of the financial crisis – to the identification of the dead Mooses - until the identification of the four focus areas (Sept. 2008 – June 2009)

The Core & Clear-guiding policy: From the management’s work on a common understanding of the four focus areas to the presentation of the strategy for Top 200 in Orlando, US (June 2009 – January 2010)

The Core & Clear-set of coherent actions: The execution of the four focus areas and the roll-out of Danfoss Business System (January 2010 – present),

Reflection: The diagnosis = Nine months. The guiding policy = Seven months. The set of coherent actions = +Five years.

4. Danfoss’ answers…

Danfoss’ answers to the five questions of Roger Martin og A.G. Lafley: 1. What are your winning aspiration, what do you want to achieve?

Answer: The Aspiration, which the Executive Committee made at the meeting in Falsled in the summer of 2009, which subsequently was broken down into an operational Promise and supported by the values, called Behaviours,

Important change of Behaviours: ”Passionate about technology” was changed to ”We will be innovative in our ambition to exceed expectations” i 2009 – change of mindset from technology-focus to customer-focus.  

4. Danfoss’ answers…

Danfoss’ answers to the five questions of Roger Martin og A.G. Lafley: 2. Where will you play, in which bussinesses, segments and geographies do you want to compete?

Answer: The understanding and the choice of the portfolio, where the businesses were divided into Non-Core which was divested and into Strategic Adjacencies, Core for Growth, Core for Cash – a life cycle.  

4. Danfoss’ answers

Danfoss’ answers to the five questions of Roger Martin og A.G. Lafley:

3. How will you win, what is your Value Proposition and what are your competitive advantages?

Answer: The formulation of the individual divisions’ Value Propositions and the disciplined work with the four areas of action Core & Clear, Free & Agile, Customer & Innovation and Passion & Performance.

4. Danfoss’ answers

Danfoss’ answers to the five questions of Roger Martin og A.G. Lafley: 4. What capabilities must be in place, what core-competences do you need to make your business unique compared to your competitors?

Answer: The identification and development of the three core competencies, 1. Technological insight & innovative understanding, 2. Global customer proximity & application knowledge and 3. Use of scale, 5. What management systems are required?

Answer: The annual Perspective Process with follow-up at so-called Business Review Meetings + Danfoss Business System.

4. Danfoss’ answers…

1. Always be alert

Economic growth can make you complacent. In the years before 2008, Danfoss accepted mediocre results and low cash flow, acquired non-core businesses and developed complexity – and made itself vulnerable vs. the recession,

When you are hit by a crisis, it is too late to strenghten your competitiveness.

5. Key Learnings

2. Align the management team First: Make the management team face the problems – the company’s Dead Mooses

Second: Take the time to in-depth discussions of both the problems and the solutions. Be sure that every member of the management team have the same interpretation of what is going to happen. In details

Third: Be sure that the members of the management team gives the same answers to any question about the strategy and it’s implementation. A clear communication is vital.

5. Key Learnings

3. Understand your core business

You can create value by understanding your core business – and by managing it from that insight: Strategic Adjacencies, Core for Growth, Core for Cash

When understanding your core business, you can identify your core-competences.

5. Key Learnings

4. Strong execution

Strategies often looks like one another – it is the ability to take tough decisions and execute them which determines who will win and who will loose

Communicate the strategy in an understandable way and break it down into smaller tagets so that everybody in the company knows the strategy and understands it,

Be patient. Do not rush to the next phase of the strategy if you are not absolutely sure, that you have accomplished what you wanted.

5. Key Learnings

5. Danish companies can win

Danfoss has created more value than its peers, e. g. Siemens, ABB, Emerson 2009-2014.

The Danfoss-case shows both the weakness and the strength of family owmership.

5. Key Learnings

Thank you