Conferência Ethos 360°: René Seyger

1230914 Ethos_Roland Berger_MG_v8.pptx
September 25, 2014
Presentation at Ethos
Trojan Horses
of Decline

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
0
1000
2000
3000
4000
5000
6000
7000
8000
-5.0% 0.0% 5.0% 10.0%
R2 = 0.75
GNP growth
Legal entities
failing

3230914 Ethos_Roland Berger_MG_v8.pptxSource: 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
EUR
205 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
EUR
1.3 bn
3.0
3.0
3.0
3.0
3.0
3.0
CASE STUDY FOR TODAY
LOSS IN VALUE
Downfall causes an irretrievable loss in value

SPEED OF LOSS
Ceteco's downfall happened in just 6 months
+244%
523,730611,221
328,170
228,742177,884161,097
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
17
3535
5968
46
19971996199519941993 1998
Development of
solvability [%]
Solvency drops
below minimum
solvency level of 20%

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 ...
... and
restructuring 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

6230914 Ethos_Roland Berger_MG_v8.pptxSource: Bol.com
RESEARCH
Current literature focuses on success stories …
… and is more popular than scientific inquiry

COMPANY DECLINE
Literature pays far less attention to the root causes of decline
Altman, 1968
Provides formula for predicting bankruptcies (Z-score), but does not go into the root causes of company decline
Argenti, 1976
Argenti's Corporate Collapse is still one of the more frequently cited books on decline
Miller, 1977
Argues that failures originate from within a company and are caused by "intrinsically interrelated factors"
Hambrick and D'Aveni, 1988
Study 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, 2000
In 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, 2005
Lays out a method for identifying and responding to strategic threats to help companies survive
Source: Pandit, 2000; Literature survey

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
Underinvestment
Mismanagement
Economic cause
Liquidation of holding
Problems within
management
Shell companies, dubious practices
Unprofessional entrepreneurship
Economic
conditions
Financing
difficulties
Archaic
managementFraud
Competition
Health/personal
problemsPoor
management
Market-related
Over-financing
Excessive
investments
Cost level too high
Strangulation
contracts

SUMMARY
… an irretrievable loss in value
… that downfall occurs fast
… that management takes action
too 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?

MANEUVERING
Causes of decline should be identified in the strategic arena
Phases of a crisis and when companies respond [% of companies examined, 2005]
LIQUIDITY crisis
SCOPEFORACTION
CAUSE
EFFECT
Time
Urgency
STRATEGIC crisis
EARNINGS crisis
Insolvency
NEEDFORACTION
Urgent restructuring
cases ( 71%)
17%
29%
54%

+ 2 years
+ 136%
+ 54%
RESTRUCTURING
Only a financial, operational and strategic approach truly works
Operational restructuring vs. comprehensive restructuring
Unexploited potential: realigning core business
Company 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

FOUNDATIONS
Decline'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:
Understanding
the drivers of
current reality
Defining
ambitions
Defining
the business
model
Preparing
implemen-
tation
Executing
the strategy
Improved
performance

SUSTAINABILITY
A 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

Entangled Out-of-focus
A business model that
no longer focuses on
creating value for the
customer
Unadapted Overstretched
stretches beyond a
company's capabilities
1 2
3 4
runs fundamentally
different activities in the
same way
A business model that is
not adjusted to changed
market dynamics
OUR RESEARCH
Our case studies revealed four types of Trojan Horses

CASE: SAAB
Saab 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

OBSERVATION
After Saab joined GM, the level of innovation fell
1) In cooperation with Subaru
Source: 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

OBSERVATION
GM turned the Saab into a middleclass brand
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
Realizedmarginpercar
Product complexity

OBSERVATION
The 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

OBSERVATION
GM 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 volume
Value
capturing
Value
compensation
Value
delivery

TIMELINE
Saab 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

WHITE KNIGHT?
Spyker underestimated the effort to move Saab back
Returning Saab's brand and quality
Spyker understood that Saab needed to
return to its original business model …
… but underestimated the amount of funds
that 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
Realizedmarginpercar
Product complexity

CONCLUSION
In 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

STRESS TEST
Trojan Horses can be identified in four steps
Define the business model
Test the robustness of
the business model
Step 2
Define how value is created for customers
and other stakeholders
Step 4
Check the balance between
risk and reward
Step 1
Unbundle the company's activities
Step 3
Measure the business model
against external changes
Business model

Conferência Ethos 360°: René Seyger

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Conferência Ethos 360°: René Seyger