978-1259913747 Siemens Energy How To Engineer A Green Future Case

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Structure of the Case

As the case begins, Wolfgang Dehen, CEO of Siemens Energy, is returning—energized—from a

meeting with executives of the partner companies of the Energy Industry Partnership Programme.

Leaders of some of the largest energy firms in the world meet with governmental officials each year in

Davos, Switzerland, to discuss the major issues facing the energy industry. Tomorrow, Dehen will meet

with his own strategy team to figure out how best to position Siemens in light of the growing empha-

sis on alternative energy sources. A host of new technologies are vying to replace carbon-based fuels,

and Siemens has to decide where to place its bets. Should the company cast a wide net or invest more

deeply in a limited number of options? Which energy forms should it pick? Is it possible to predict the

leading technology of the future, or can Siemens choose an alternative energy source and help make it

the winner? Finally, how should the company go about investing? Going it alone, developing alliances,

and acquiring smaller firms with promising innovations all provide unique benefits and risks.

After introducing the strategic dilemma, the case provides background information on the com-

pany. Siemens Energy (NYSE, ticker symbol SI) can trace its roots back to 1847 when Siemens & Halske

Company began producing telegraph equipment in Germany. During its 150-year history, Siemens

has grown to become Germany’s second-largest employer with 427,000 employees worldwide. The

case describes how the company has diversified its activities over time to include electrical engineer-

ing, electrical power generation, alternative energy sources, and complementary technologies such

as steam and gas turbines, superconducters, and others. Siemens now has the capability to offer a

complete package of power plant financing, construction, operation, and maintenance. Next, the case

explains the company’s corporate structure, following a major reorganization in 2008. There are three

main groups (Industry, Energy, and Health Care), each of which is segmented into multiple divisions

(see Exhibit 2). In 2009, the Energy sector accounted for roughly 33 percent of company revenues, but

42 percent of profits.

The bulk of the case is devoted to a discussion of the global energy market and Siemens’s position in

various alternative energy sectors. Currently, carbon-based fuels such as oil, coal, and natural gas make

up roughly 84 percent of the world’s energy sources. While historically oil has been relatively cheap, its

costs have risen dramatically in recent years (see Exhibit 1), resulting in increased demand for alterna-

tive sources of energy. Meanwhile, fuel demands are projected to grow exponentially as countries like

India and China continue to industrialize. Increased consumption brings with it concerns about the

adequacy of worldwide supplies, as well as increased pollution and the accelerated release of carbon

dioxide into the earth’s atmosphere (which is thought to be related to global warming).

Siemens Energy: How to Engineer a Green Future?

TEACHING NOTE

MHE-FTR-011

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REv: JANuARY 6, 2012

Teaching Note — Siemens Energy: How to Engineer a Green Future?

Alternative energy is based on the principle of using renewable natural resources to create energy

instead of carbon-based fuels. Energy generated from sources such as the wind, sun, or water is car–

following potential alternative energy sources and/or distribution systems: wind energy, solar energy,

nuclear energy, hydropower, geothermal power, and smart grids. A subsection under each energy type

delineates Siemens’s position in that sector.

Before closing, the case provides comparison data on Siemens’s major competitors, with an empha-

sis on u.S.-based General Electric. The two companies compete in all of the same major energy fields,

including complementary technologies and components. While GE has the “home court” advantage

in the united States, Siemens tends to dominate in Europe. Both are facing increasing challenges from

third-party competitors from countries such as China. The case concludes with a reiteration of the chal-

lenges Siemens faces as it aims to place significant bets on the energy(s) of the future.

Suggested Answers

AnAlysis: Focus on internAl And externAl environment

1. The case identifies a number of renewable energy sources. Which ones do you think will be

viable future businesses? Why?

The alternative energy sources identified in the case include wind, solar, nuclear, hydropower, and

geothermal. Each type of renewable energy has strengths and weaknesses regarding its viability as a

future business, as summarized in Exhibit TN-1.

2. Apply the structure-conduct-performance (SCP) model to determine the (U.S.) industry

structure for each of the renewable energy sources identified in your response to Question 1.

According to the SCP model, industry structure determines firm conduct. In turn, industry struc-

ture and firm conduct work together to determine firm performance. This question asks students to

examine the degree of fragmentation versus consolidation of each of the alternative energy markets

Wind—Wind power is deemed to have immense upward potential for at least the next two decades,

making it the fastest growing alternative energy sector. Siemens claimed to be the fifth-largest global

installer of wind-turbine power in 2009, and aims to become number 3 by 2012. Market entry is limited

due to technological complexity and the scale of operations required to make, transport, and install

wind turbines. Because turbine parts must be transported by land (cargo ships and aircraft do not have

Teaching Note — Siemens Energy: How to Engineer a Green Future?

Solar—Solar is the second most established renewable energy technology. The industry is segmented

into several categories, including production and manufacturing, installation and service industries,

and design and installation of turnkey high-tech plants.

Installation and service is the midmarket activity between production and end use. Businesses in

this industry take solar panels and install them for customers, as well as provide ongoing support and

service. Depending on their capabilities, many have diversified into the development of complemen-

tary products such as switchboards and distributors. For example, the u.S. firm SolarCity offers solar

Hydropower—Hydropower is another industry that requires significant experience and large up-

front investments, limiting it to just a few large competitors (an oligopoly).

Nuclear—In addition to the need for significant up-front investments and large-scale operations,

nuclear energy is a highly regulated industry because of concerns over radiation exposure, waste dis-

posal, and the potential for terrorism. These entry barriers characterize it as an oligopolistic industry,

dominated by a few large players. For example, some of the leading firms in the u.S. nuclear market

are Westinghouse, GE Energy, Hitachi America, Bechtel Corporation, and Southern Company. Siemens

Teaching Note —Siemens Energy: How to Engineer a Green Future?

of McGraw-Hill Education.

also recently announced $40 million in funding to support design and planning work for the Next

Generation Nuclear Plant as well as basic university research in nuclear energy. Thus, there are signifi-

cant opportunities in this industry, should Siemens choose to pursue them.

FormulAtion: Focus on Business,

corporAte or GloBAl strAteGy

3. What are some potential entry barriers for developing new energy-related products, services

and technologies?

The following list provides examples of how these criteria can be applied to the case.

Access to natural energy resources—One problem for many forms of natural energy is that their

sources are limited. Wind farms must be installed in areas with sustained wind, many of which are

located offshore. Solar panels require locations with high levels of solar radiation, and hydropower

facilities must be located near significant bodies of water. Geothermal energy requires low-lying areas

(to reduce drilling depth) and stable tectonic properties.

Environmental concerns/regulations—Several alternative energies pose significant environmental

risks, either through installation and/or the risk of accidents. Given the damaging effects of small

doses of radiation to humans and the environment, not to mention the risk of serious accidents or ter-

rorist attacks, nuclear energy is extremely problematic in this regard. Hydroelectric power likewise

entails significant environmental concerns, due to the large scale disruption of waterways and sur-

Teaching Note — Siemens Energy: How to Engineer a Green Future?

of McGraw-Hill Education.

are so large that it takes specialized capabilities to produce, transport, and install them. In contrast,

solar panels can be made in a variety of sizes and customized for home, vehicle, or commercial use.

Lack of technological development—Wind, solar, nuclear, and traditional sources of hydroelec-

tric power have generated enough research and development to make them technologically feasible,

though not all have been widely implemented. In contrast, alternative forms of hydropower (such as

river and tide turbines) and geothermal energy still require significant technological investment to be

4. In which renewable energy sources should Siemens Energy invest, and why?

Most alternative energy opportunities are still in their infancy relative to the fossil-based energy

sources we rely on today. Given their newness, there is a high degree of uncertainty associated with

any recommendation. Some choices appear safer based on current levels of knowledge, while others

wind and solar energy look most promising, based on their widespread availability, technological

feasibility, and the potential for future market growth. The basic technologies are well developed in

both sectors, but there is ample room for incremental efficiency and process improvements, an area where

Siemens excels. Wind turbines have efficiency rates of roughly 40–45 percent, whereas solar panels (a

Meanwhile, Siemens is also a logical candidate to build any new dams. A riskier but potentially more

profitable venture is for Siemens to leverage its deep expertise in traditional hydropower generation to

develop alternative forms of water power such as river and tide turbines and wave power. This is an area

where the technology has not yet been developed, and which is ripe for innovation and potential first-

mover advantages.

Teaching Note —Siemens Energy: How to Engineer a Green Future?

Siemens may also be in a position to take the lead in generating global product and system design

standards for smart grids and related products. Smart grids seem to be a natural fit for the company,

position in wind turbines, turnkey solar plants, hydropower, and smart grids on a global basis. All of

these sectors have significant barriers to entry and are likely to remain oligopolistic in nature, provid-

ing significant profit potential for the foreseeable future.

implementAtion: Focus on recommendAtions

And How to execute tHem

5. How aggressive should Siemens be in pursuing these new technologies? Is it better to be a first

mover and set the standard, or let other firms take the initial risk and then capitalize on their

discoveries?

In answering this question, students should be aware of Siemens’s vision, as stated in the company’s

2011 Annual Report (page 21):

To be a pioneer – this is our vision, our identity and the defining characteristic of our corporate culture.

This vision is based on our values – responsible, excellent and innovative – which provide the foundation

for our success. Together with these values, our strategy and the One Siemens framework, it also defines

our business goals and specifies a clear direction for our development.

If Siemens’s past is an accurate predictor of its future, this does not mean it has to invent or develop

everything on its own. Rather, it implies a multifaceted approach, where the company invests strongly

Teaching Note — Siemens Energy: How to Engineer a Green Future?

6. How should Siemens go about developing alternative energy technologies? Go it alone? Create

strategic alliances? Acquire smaller companies? Support your answer.

Depending on the nature of the market, Siemens has been willing to go it alone, forge strategic alli-

independent r&d

• Siemensemploysroughly27,800researchershousedat160R&Dcentersworldwide.

spin-offs and licensing.

• ExamplesofSiemens’sproprietarytechnologiesinclude:

• Agearlesssix-megawattwindturbineforuseonthehighseas

externAl pArtnersHips

Siemens actively builds a knowledge network with universities, suppliers, and customers to foster

the development of new ideas. As part of its open innovation approach, the company sponsors two

dedicated research (technology-to-business) centers in Berkeley and Shanghai that bring in external

researchers to work at Siemens’s laboratories.

• Siemensengagesinmorethan1,000cooperativeresearchprojectsperyear.

• ExamplesofSiemens’spartnershipsinclude:

• ApartnershipwithBMWtodevelopatechnologyforsafechargingofvehiclebatteries

Teaching Note —Siemens Energy: How to Engineer a Green Future?

Acquisitions

• Siemensalsoseekstostrengthenitscorebusinessesthroughacquisitions.Recentexamplesinclude:

• Acquiringa24percentstakeintheItaliansolar-thermalspecialistArchimedeSolarEnergy

Recent Updates

Siemens reconsiders nuclear strategy. In the wake of Japan’s 2011 tsunami and nuclear crisis, Siemens

was reportedly rethinking its plans to form a partnership with the Russian State Atomic Energy Corp.

The alliance was a central part of Siemens’s nuclear energy strategy, after pulling out of a previous ven-

ture with Areva SA of France. Following the Chernobyl disaster in 1986, Siemens had placed most of its

nuclear activities into the Areva venture, in which it retained a minority holding. In 2009, it sought to

sell its remaining 34 percent stake in order to pursue the Russian opportunity, resulting in a two-year

long court battle. The case was due to be settled in a Paris arbitration court in 2011.

Germany has always had strong antinuclear sentiments, which flared after the accident at the

Fukushima Daiichi plant. Massive street protests erupted, prompting Chancellor Merkel to temporar-

ily shut down seven nuclear reactors. Siemens played a significant role in constructing most of the

existing 17 nuclear plants in Germany, where nearly one third of its total workforce lives.

Fuhrmans, v. (2011), “Siemens rethinks nuclear ambitions,” the wall street Journal, April 15. http://

online.wsj.com/article/SB10001424052748704547804576260953845777640.html

Smart-grid alliance with Boeing. In August 2011, Siemens and Boeing announced a new strate-

gic alliance to produce and sell smart-grid and other energy-conservation technologies to the u.S.

http://online.wsj.com/article/SB10001424053111904480904576496431858175632.html.

Restructuring. In 2011, Siemens restructured to create a fourth (“Infrastructure & Cities”) segment

out of portions of the existing industry and energy divisions. Subsequently, Siemens also announced

plans to divide its renewable energy group (part of the overall Energy division) into two independent

units (one for wind power and one for solar and hydropower).

Teaching Note — Siemens Energy: How to Engineer a Green Future?

“Siemens to divide renewable energy division,” marketwire, August 8, 2011. http://www.mar-

ketwire.com/press-release/siemens-to-divide-renewable-energy-division-an-industrial-info-news-

alert-1546807.htm.

Additional Resources

1. The Siemens Company website is located at http://www.siemens.com/entry/cc/en/.

2. The Natural Resources Defense Council web page at http://www.nrdc.org/.

http://www.nrdc.org/energy/renewables/energymap.asp. An interactive map showing the best

3. The World Future Energy Summit web page: http://www.worldfutureenergysummit.com/. The

“World Future Energy Summit is the world’s foremost annual meeting committed to advancing

4. https://www.mckinseyquarterly.com/video/The_future_of_capitalism_Building_a_sustainable_

energy_future_2478 . the future of capitalism: Building a sustainable energy future (December 2009).

“In this video, three CEOs—Tom Albanese of mining giant Rio Tinto, Aubrey McClendon of

5. PBS offers a series of clips on wind energy. Go to the following link and search on key

words from the titles listed next: http://www.pbs.org/newshour/video/module_byid.

html?s=news01n28e8q9a3.

Teaching Note —Siemens Energy: How to Engineer a Green Future?

of McGraw-Hill Education.

wind energy in Baja california (1:18). June 16, 2010.

off-shore wind farm approved in massachusetts (4:26). April 28, 2010.

officials debate wind farm regulation – #812 (6:58). September 18, 2009.

david nahai: los Angeles water and power (5:53). June 9, 2009.

April sall: california desert coalition (6:52). June 9, 2009.

6. the new york times has video clips on two forms of hydropower:

http://video.nytimes.com/video/2006/12/29/science/1194817091738/tidal-turbines.

Teaching Note — Siemens Energy: How to Engineer a Green Future?

ExHIbIT TN-1 Strengths and Weaknesses of Each Type of Renewable Energy

(continued)

Energy Type Strengths Weaknesses Current Market Status

One turbine can supply power to an

entire village.

Low risk of catastrophic impact to

Turbines may interfere with

wildlife migration and agricultural

productivity.

Size makes manufacture,

transportation, and installation

logistically challenging.

40–45%).

Few major competitors but market is

attractive to new entrants.

Solar Unlimited energy source.

Must be extracted in high radiation

areas.

production facilities.

Second most established energy

technology.

Nuclear Unlimited energy source.

High initial cost.

Provides ~14% of electricity

worldwide.

Teaching Note —Siemens Energy: How to Engineer a Green Future?

Energy Type Strengths Weaknesses Current Market Status

Hydropower Reliable source of energy.

High initial cost.

A U.S. DOE study identified

impact but are not as well developed

technologically.

Geothermal Reliable source of energy.

May be installed wherever energy is

Significant up-front costs,

engineering, and safety issues.

A niche alternative due to limited

potential energy generation.