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Global Strategy 3rd Edition by Mike Peng
Edition 3ISBN: 978-1133964612Global Strategy 3rd Edition by Mike Peng
Edition 3ISBN: 978-1133964612 Exercise 4
A Subsidiary Initiative at Bayer Material Science North America
Bayer Group is a $50 billion chemical and health care giant based in Germany. Its three main product divisions are Bayer MaterialScience (BMS), Bayer CropScience, and Bayer HealthCare. In this matrix organization, each of these product divisions has country/regional subsidiaries in major markets. Between 2004 and 2011, the CEO for Bayer MaterialScience North America (BMS NA) was Greg Babe. Contributing 25% of BMS' global revenues, BMS NA delivered highly respected performance. It had strong sales growth in 2005 ($3.5 billion, increasing from $2.7 billion in 2004), and suffered a modest flattening in 2006 ($3.3 billion). However, in early 2007, BMS made a radical decision: to dismantle BMS NA-in other words, to shut down the North America regional headquarters in Pittsburgh. Allegedly undermining cost competitiveness, the regional structure was viewed as too bloated.
Shocked, Babe asked for time to propose another solution. In his own words: "The stakes couldn't have been higher: not only the future of my position but the credibility of the entire regional operation was in question." Cost cutting was nothing unusual in this cyclical industry, and the norm was usually to shave off a certain percentage of overhead (such as 10%). A month into the analysis, Babe and his team had an "aha" moment. The cost structure, they realized, should be dictated by how they grew the business, not by an arbitrary target. With that insight, they looked at the overall picture from a strategic growth lens rather than a tactical cost reduction lens. They set two specific goals: (1) to grow at 1% to 2% above GDP and (2) to save 25% on selling, general, and administrative (SG A) costs. To deliver that, Babe needed to completely reshape his unit but also needed additional investment of $70 million.
In late 2007, when Babe presented to BMS's global leadership team, everyone expected him to come up with a cost-cutting exercise. Instead, he presented a subsidiary growth initiative. BMS's global leadership team challenged key concepts of the proposal, many of which deviated from Bayer's global norms. For example, transportation was historically deemed by Bayer as a core competence. Babe proposed to outsource it, which would allow customers to give a 12 (rather than 72) hours' notice for shipping. Overall, Babe promised to turn BMS NA into a lean growth engine. In the end, the bold proposal paid off. Babe left the meeting with $70 million in hand. In his own words:
I was excited, but also scared to death, because delivering on it was by no means going to be easy. It would require laying off hundreds of employees and retraining more than 1,000 others, outsourcing many operations, rolling out new IT systems, and modifying our product offerings, all within 18 months-not much time for a project of that scale.
To make the matters worse, the chemical industry soon entered a severe downturn worldwide, and BMS suffered eight consecutive quarters of declining sales starting in 2008. In such a bleak environment, BMS NA's efforts became more strategically important. By early 2009, BMS NA delivered on everything Babe had promised: it reduced SG A costs by 25% ($100 million) and head count by 30%. It actually overdelivered: only $60 million of the $70 million allotted for growth was spent. By 2010, BMS NA's sales turned around and enjoyed double-digit quarterly growth (2010 sales went up to $2.7 billion from the bottom of $2.1 billion in 2009). What was more valuable was that some of the reorganized processes (such as outsourcing transportation), so foreign at the time to BMS, now became implemented by BMS around the world. Overall, by endorsing the regional subsidiary's initiative, BMS's global leadership team took some significant risk. But in the end, the payoff was handsome.
Sources: Based on (1) Bayer AG, 2012, www.bayerus.com; (2) G. Babe, 2011, The CEO of Bayer Corp. on creating a lean growth engine, Harvard Business Review , July: 41-45.
What are the advantages and disadvantages of a matrix structure as seen in this case?
Bayer Group is a $50 billion chemical and health care giant based in Germany. Its three main product divisions are Bayer MaterialScience (BMS), Bayer CropScience, and Bayer HealthCare. In this matrix organization, each of these product divisions has country/regional subsidiaries in major markets. Between 2004 and 2011, the CEO for Bayer MaterialScience North America (BMS NA) was Greg Babe. Contributing 25% of BMS' global revenues, BMS NA delivered highly respected performance. It had strong sales growth in 2005 ($3.5 billion, increasing from $2.7 billion in 2004), and suffered a modest flattening in 2006 ($3.3 billion). However, in early 2007, BMS made a radical decision: to dismantle BMS NA-in other words, to shut down the North America regional headquarters in Pittsburgh. Allegedly undermining cost competitiveness, the regional structure was viewed as too bloated.
Shocked, Babe asked for time to propose another solution. In his own words: "The stakes couldn't have been higher: not only the future of my position but the credibility of the entire regional operation was in question." Cost cutting was nothing unusual in this cyclical industry, and the norm was usually to shave off a certain percentage of overhead (such as 10%). A month into the analysis, Babe and his team had an "aha" moment. The cost structure, they realized, should be dictated by how they grew the business, not by an arbitrary target. With that insight, they looked at the overall picture from a strategic growth lens rather than a tactical cost reduction lens. They set two specific goals: (1) to grow at 1% to 2% above GDP and (2) to save 25% on selling, general, and administrative (SG A) costs. To deliver that, Babe needed to completely reshape his unit but also needed additional investment of $70 million.
In late 2007, when Babe presented to BMS's global leadership team, everyone expected him to come up with a cost-cutting exercise. Instead, he presented a subsidiary growth initiative. BMS's global leadership team challenged key concepts of the proposal, many of which deviated from Bayer's global norms. For example, transportation was historically deemed by Bayer as a core competence. Babe proposed to outsource it, which would allow customers to give a 12 (rather than 72) hours' notice for shipping. Overall, Babe promised to turn BMS NA into a lean growth engine. In the end, the bold proposal paid off. Babe left the meeting with $70 million in hand. In his own words:
I was excited, but also scared to death, because delivering on it was by no means going to be easy. It would require laying off hundreds of employees and retraining more than 1,000 others, outsourcing many operations, rolling out new IT systems, and modifying our product offerings, all within 18 months-not much time for a project of that scale.
To make the matters worse, the chemical industry soon entered a severe downturn worldwide, and BMS suffered eight consecutive quarters of declining sales starting in 2008. In such a bleak environment, BMS NA's efforts became more strategically important. By early 2009, BMS NA delivered on everything Babe had promised: it reduced SG A costs by 25% ($100 million) and head count by 30%. It actually overdelivered: only $60 million of the $70 million allotted for growth was spent. By 2010, BMS NA's sales turned around and enjoyed double-digit quarterly growth (2010 sales went up to $2.7 billion from the bottom of $2.1 billion in 2009). What was more valuable was that some of the reorganized processes (such as outsourcing transportation), so foreign at the time to BMS, now became implemented by BMS around the world. Overall, by endorsing the regional subsidiary's initiative, BMS's global leadership team took some significant risk. But in the end, the payoff was handsome.
Sources: Based on (1) Bayer AG, 2012, www.bayerus.com; (2) G. Babe, 2011, The CEO of Bayer Corp. on creating a lean growth engine, Harvard Business Review , July: 41-45.
What are the advantages and disadvantages of a matrix structure as seen in this case?
Explanation
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Matrix structure:
The matrix structure ...
Global Strategy 3rd Edition by Mike Peng
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