Voith Siemens Hydro:
Reviving an Old Industry Facing New Low-Price Competitors
Strategic Situation
With 24,000 employees and sales of about Ђ 3.3 billion during the fiscal year 2002/2003, Voith is one of the largest family-owned companies in Europe. As of 2003, its subsidiary, Voith Siemens Hydro was one of the four historically dominant players in the hydro-power plant industry. Like its three main competitors, Alstom, VA Tech, and GE, it has gone from producing components of the hydro-plant, to producing everything it takes to generate the power, leaving only the initial planning and
the civil construction of the dam to others. But in the last decade, the dominant players in the hydro-plant industry have been pushed into a strategic corner of low margins, a tiny technological advantage, and no clear competitive advantage.
Sources of power generation are one problem. In terms of return on investment, hydro-power cannot compete with gas- or coal-generated power. But, because water management is critical in most places in the world the market remains.
The strategic problems of their customers are also strategic problems for plant producers. Unlike the regulated electrical markets of old, utilities today face competition and are receiving shorter, lower-margin contracts for supplying energy. Customers have changed from technophiles, interested in the highest efficiency, longest lifespan plants to pricesensitive customers, who worry about a very fast return on their investment.
By combining lower prices with faster cycle times, Voith
Siemens Hydro can have a value advantage over both its old and its newer rivals.
Last, a whole new set of rivals has arisen based in Russia, China, and India. While none has double-digit market share yet, they are growing market share at high doubledigit rates, and most can match the efficiency of the big four's turbines and generators. While these new competitors are reputed to produce less reliable plants as a whole, they are offering power plants at lower prices, approximately 30% lower than the big four.
CEO's Strategic Declaration
Dr. Hubert Lienhard, Voith Siemens Hydro's CEO,
declared that he would achieve an industry leading
and sustainable profit margin by cutting costs, refocusing his company around projects, rather than engineering, thereby changing its culture.
VISION's Engagement Strategy
VISION developed a two-prong strategy for this engagement. Its primary point of attack was to change the management and cultural processes to produce at least a 10% cut in costs of delivery for hydro plants of all sizes. (Large hydro is Voith Siemens Hydro's staple.) VISION mapped and diagnosed the management practices from Marketing's identification and qualification of potential customers through to the final commissioning of the completed power plant. This mapping and diagnosis identified the waste from both poor management coordination and from a culture poorly aligned with the company's new strategy. VISION designed new processes, refined them, and rolled them out through increasingly larger pilots. The roll-out will be completed by a VISION trained Voith Siemens Hydro team that works along side the VISION
team.
VISION used its value-conflict based listening to analyze customers in high-growth hydro markets to understand how the competitive advantage in cost could be used to grow market share and profitability without triggering a price war.
VISION's Intervention
Using its Commitment-based Design techniques of mapping and diagnosing management coordination waste and its cultural misalignment, VISION uncovered a number of wasteful and misaligned processes from sales through engineering and then on to commissioning. For instance, instead of simply identifying and qualifying new customers, sales representatives under the new strategy needed to help potential customers see, very early, how to achieve the best economic and environmental value from their hydro-plants. Engineering had to have its roles and focus redesigned to cut out rework. Likewise, purchasing had to secure early price commitments. Plant building project teams had to coordinate better with civil contractors to bring the plant live much sooner than was standard.
The joint Voith Siemens Hydo-VISION team designed new processes in marketing, sales, engineering, and project management and rolled out these new processes on a project-by project basis, with Voith Siemens Hydro people gradually taking over more of the lead in each successive rollout. Throughout the design and rollout process, the VISION team trained Voith Siemens Hydro managers in the techniques of managing by commitments rather than only by supervising tasks.
Meanwhile, the VISION team interviewed customers and found them conflicted: they wanted to grow, but felt hamstrung by the unstable energy environment and the cost of power plants. If plant owners could enjoy a faster pay back through faster construction times, earlier revenue, lower interest rates, AND lower costs, the conflict could be resolved. Achieving a sustainably faster construction time would give Voith Siemens Hydro a competitive advantage beyond price competition.
Results
Strategic
The VISION management process and culture change work will reduce cycle time by cutting the overall construction time saving, approximately, 7% of the total cost of the project, for medium-sized hydro. Larger savings could be accrued in large hydro. By combining lower prices with faster cycle times, Voith Siemens Hydro can have a value advantage over both its old and its newer rivals.
Operational
VISION changed the sales processes to achieve a higher sales hit rate by ensuring that sales representatives consulte with potential clients early and develop comprehensive sales strategies.
VISION restructured the engineering and project management processes including the development of design freezes to eliminate the costly scrambling done by engineers to meet ever-changing design specifications. Careful handovers from sales and proposal teams to the production project managers eliminate expensive waste from rework and missed deadlines. These changes would amount to a 10% reduction in cost.
Financial
Voith Siemens Hydro is now leads the industry in its margins, an industry that includes GE.
Client satisfaction
We sought to transform the Voith Siemens Joint Venture from a successful, leading equipment supplier to a first-rate plant provider and to do so quickly.
To achieve this transformation, we saw that we would have to build on the strong Voith culture to adopt it to the emerging needs of a plant and solution provider.
The VISION team focused on our people-to-people management processes in sales and marketing,
engineering, and the multi-year cycle of hydro-plant building.
The efficiency and customer-centric orientation VISION has brought cuts across our entire product line and will leave us with a new competitive advantage.
I rate VISION as a top consultancy in culture change and strategy implementation.
Dr. Hubert Lienhard, CEO, Voith Siemens Hydro