Question: Siemens' Simple Structure-Not

There is perhaps no tougher task for an executive than to restructure a European organization. Ask former Siemens CEO Klaus Kleinfeld. Siemens-with €76 billion in revenue in financial year 2009/2010, some 405,000 employees, and branches in 190 countries-is one of the largest electronics companies in the world. Although the company has long been respected for its engineering prowess, it's also derided for its sluggishness and mechanistic structure. So when Kleinfeld took over as CEO, he sought to restructure the company, making the structure less bureaucratic so decisions are made more quickly. He spun off underperforming businesses and simplified the company's structure. One of the challenges of transforming European organizations is the customary participation of employees in executive decisions.

Half the seats on the Seimens board of directors are allocated to labor representatives. Not surprisingly, labor did not react positively to Kleinfeld's restructuring efforts, and picket lines became a constant presence outside his corporate offices. In his efforts to speed the restructuring, labor groups alleged, Kleinfeld secretly bankrolled a business-friendly workers' group to try to undermine Germany's main industrial union. Due to this and other allegations, Kleinfeld was forced out in June 2007 and replaced by Peter Löscher. Löscher has found the same tensions between inertia and the need for restructuring. Only a month after becoming CEO, he faced the decision whether to spin off the firm's underperforming €10 billion auto parts unit, VDO. He had to weigh the forces for stability, which want to protect worker interests, against U.S.-style pressures for financial performance. One of VDO's possible buyers was a U.S. company, TRW, the controlling interest of which is held by Blackstone, a U.S. private equity firm. German labor representatives scorn such firms as "locusts." When Löscher decided to sell VDO to German tire giant Continental Corporation, Continental promptly began to downsize and restructure the unit's operations. Löscher has continued to restructure Siemens.

In mid- 2008, he announced elimination of nearly 17,000 jobs worldwide. He also announced plans to consolidate more business units and reorganize the company's operations geographically. "The speed at which business is changing worldwide has increased considerably, and we're orienting Siemens accordingly," Löscher said. Under Löscher, Siemens has experienced its ups and downs. In 2008, its stock price fell 26 percent on the European stock exchange and 31 percent on the New York Stock Exchange. In 2009, however, Siemens' earnings were up 32 percent, despite an ongoing global recession, and most indicators suggested 2011 would be an equally profitable year. Though Löscher's restructuring efforts have generated far less controversy than Kleinfeld's, that doesn't mean they went over well with all constituents. Of the 2008 job cuts, Werner Neugebauer, regional director for a union representing many Siemens employees, said, "The planned job cuts are incomprehensible nor acceptable for these reasons, and in this extent, completely exaggerated."

1. What do Kleinfeld's efforts at Siemens tell you about the difficulties of restructuring organizations?

2. Why do you think Löscher's restructuring decisions have generated less controversy than did Kleinfeld's?

3. Assume a colleague read this case and concluded, "This case proves restructuring efforts do not necessarily improve a company's financial performance." How would you respond?

4. Do you think a CEO who decides to restructure or downsize a company takes the well-being of employees into account? Should he or she do so? Why or why not?