Harvard Case - Siemens Electric Motor Works (A) (Abridged)
"Siemens Electric Motor Works (A) (Abridged)" Harvard business case study is written by Robert S. Kaplan. It deals with the challenges in the field of Accounting. The case study is 7 page(s) long and it was first published on : Jul 5, 1990
At Fern Fort University, we recommend that Siemens Electric Motor Works (SEMW) implement a comprehensive strategy to improve profitability and address the challenges posed by the changing global market. This strategy should focus on optimizing manufacturing processes, leveraging activity-based costing (ABC) for accurate cost analysis, and adopting a more robust pricing strategy to ensure competitive advantage.
2. Background
This case study focuses on Siemens Electric Motor Works (SEMW), a leading manufacturer of electric motors based in Germany. The company faces a challenging environment marked by intense competition, fluctuating raw material costs, and increasing customer demands for customization and shorter lead times. SEMW's traditional cost accounting system, based on volume-based allocation, fails to accurately capture the true costs associated with diverse product lines and customer requirements. This leads to inaccurate pricing decisions, impacting profitability and market competitiveness.The main protagonists of the case study are:
- Dr. Klaus Schmidt: The CEO of SEMW, who is concerned about the company's declining profitability and the need to improve its cost accounting system.
- Mr. Hans M'ller: The head of manufacturing, who is responsible for optimizing production processes and reducing costs.
- Ms. Anna Bauer: The head of finance, who is tasked with developing a more accurate cost accounting system and improving financial reporting.
3. Analysis of the Case Study
This case study can be analyzed through the lens of cost accounting, strategic management, and operations management.
Cost Accounting:
- Traditional Cost Accounting System: SEMW's current system relies on volume-based allocation, which fails to accurately capture the costs associated with different product lines and customer requirements. This leads to inaccurate pricing decisions and a lack of visibility into true cost drivers.
- Activity-Based Costing (ABC): ABC is a more accurate cost accounting method that assigns costs to activities and then to products based on their consumption of those activities. ABC can help SEMW identify cost drivers, improve cost allocation, and make more informed pricing decisions.
Strategic Management:
- Competitive Advantage: SEMW needs to develop a sustainable competitive advantage in a challenging market. This can be achieved through innovation, superior customer service, and cost leadership.
- Growth Strategy: SEMW should develop a clear growth strategy that considers market trends, customer needs, and its own capabilities. This strategy should include targeted investments in research and development, new product lines, and emerging markets.
Operations Management:
- Manufacturing Processes: SEMW should optimize its manufacturing processes to reduce costs, improve efficiency, and shorten lead times. This can be achieved through lean manufacturing techniques, automation, and process improvement initiatives.
- Supply Chain Management: SEMW should improve its supply chain management to ensure reliable sourcing of raw materials, reduce inventory costs, and minimize disruptions.
4. Recommendations
To address the challenges facing SEMW, we recommend the following actions:
- Implement Activity-Based Costing (ABC): SEMW should implement ABC to accurately capture the costs associated with different products and customer requirements. This will provide a more accurate understanding of cost drivers and enable more informed pricing decisions.
- Optimize Manufacturing Processes: SEMW should implement lean manufacturing techniques, automation, and process improvement initiatives to reduce costs, improve efficiency, and shorten lead times.
- Develop a Robust Pricing Strategy: SEMW should develop a pricing strategy that considers its cost structure, competitive landscape, and customer value. This could involve value-based pricing, cost-plus pricing, or a combination of both.
- Invest in Innovation and New Product Development: SEMW should invest in research and development to develop new products and technologies that meet evolving customer needs and provide a competitive advantage.
- Expand into Emerging Markets: SEMW should consider expanding into emerging markets to tap into new growth opportunities. This will require careful market research, strategic partnerships, and cultural sensitivity.
- Enhance Employee Training and Development: SEMW should invest in training and development programs to enhance employee skills and knowledge, particularly in areas related to cost accounting, lean manufacturing, and customer service.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations align with SEMW's core competencies in manufacturing and its mission to provide high-quality products and services to its customers.
- External Customers and Internal Clients: The recommendations address the needs of both external customers (by providing competitive pricing and innovative products) and internal clients (by providing accurate cost information and improving operational efficiency).
- Competitors: The recommendations help SEMW stay competitive by improving its cost structure, developing innovative products, and expanding into new markets.
- Attractiveness - Quantitative Measures: Implementing ABC will provide more accurate cost data, enabling better pricing decisions and improved profitability. Optimizing manufacturing processes will reduce costs and improve efficiency, leading to higher margins. Investing in innovation and new product development will create new revenue streams and enhance market share.
6. Conclusion
By implementing these recommendations, SEMW can improve its profitability, enhance its competitive advantage, and achieve sustainable growth in a challenging global market. The key to success lies in adopting a strategic approach that combines cost optimization, operational excellence, and a focus on customer value.
7. Discussion
Other alternatives not selected include:
- Merging with a competitor: This could provide economies of scale and access to new markets, but it also carries significant risks, such as cultural clashes and integration challenges.
- Outsourcing manufacturing: This could reduce costs in the short term, but it could also lead to a loss of control over quality and production processes.
Key risks and assumptions associated with the recommendations include:
- Implementation challenges: Implementing ABC and other changes requires significant effort and commitment from all stakeholders.
- Market volatility: Fluctuations in raw material costs and customer demand can impact profitability and growth.
- Competition: Competitors may adopt similar strategies, making it difficult to maintain a competitive advantage.
8. Next Steps
To implement these recommendations, SEMW should:
- Form a cross-functional team: This team should be responsible for developing and implementing the strategy.
- Develop a detailed implementation plan: This plan should include timelines, milestones, and resource requirements.
- Communicate the strategy to all stakeholders: This will ensure that everyone understands the rationale for the changes and is committed to their success.
By taking these steps, SEMW can position itself for long-term success in a competitive global market.
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Case Description
Explores how a cost system can help support a firm's decision to change strategies. In the process, the students are introduced to a simple activity-based cost system. Siemens Electric Motor Works found itself facing an increasingly competitive environment and so made a decision to move from mass production of specialty motors to the production of small lots of custom motors. In doing so, they found their old cost system led them to poor decision making. By switching to a simple activity-based system, more accurate product costs were computed, facilitating better divisional performance.
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