Industry Forces: CEO Kleinfeld's Responsibilities

Please see discussion questions at the end.

If things had turned out a little differently, Siemens (SI ) Chief Executive Klaus Kleinfeld might already be on his way to executive stardom, like his role model Jack Welch. Just two years after Kleinfeld took over the Munich electronics and engineering behemoth, Siemens is on track to hit its aggressive internal earnings targets for the first time since 2000. In fact, it is expanding both sales and profits faster than Welch's former fiefdom, General Electric Co. (GE ) What's more; the company has a larger presence than GE in rapid-growth markets such as India.

But instead of literary agents breaking down his door in pursuit of a tome of management wisdom, Kleinfeld has angry employees demonstrating outside his window. He has gotten little applause for boosting 2006 sales by 16% and profits by 35%, and he faces questions about a bribery scandal that has sapped his authority even though he is not personally implicated.

Transforming Siemens was never going to be easy. With branches in 190 countries and $114 billion in sales last year, the company has long been respected for its engineering prowess but derided for its sluggishness. And Germany Inc., with its long-standing tradition of labor harmony and powerful workers' councils, is highly resistant to the kind of change Kleinfeld has tried to implement. That's one reason Siemens lags seriously in overall profits, with a margin of 3.5% compared with 12.6% for GE. Kleinfeld concedes that some people doubt Siemens can change its ways, but he counters: "It took less time than we originally planned to get that growth momentum started."

Against the odds, in just two years Kleinfeld has managed a mighty restructuring. He has quoted the management precepts of Welch and has drawn on the GE playbook to realign Siemens as the world's leading provider of such infrastructure as airports, power plants, and medical equipment. He has pushed Siemens' 475,000 employees to make decisions faster and focus as much on customers as on technology. He spun off underperforming telecommunications-gear businesses and simplified the company's structure. And when one group of managers failed to deliver, he broke up an entire division.

RESPECT AND RESENTMENT

Although restructuring has dominated his tenure, Kleinfeld isn't just a cost-cutter. If you want to make his eyes light up, say "megatrends." The 49-year-old believes Siemens is perfectly positioned to profit from huge global shifts in population and wealth, and he spent $8.6 billion last year on acquisitions in areas such as medical diagnostics and wind power. As people in the developing world get richer, he says, Siemens will supply CT and MRI scanners to diagnose their ills. It will build switching systems and engines for their trains and subways. And it will sell them water-purification equipment, power plants, and machines to run mines and factories. Barely a day goes by without Siemens announcing orders to modernize a steel mill in Russia, build a cement plant in Yemen, or set up a desalination operation in Pakistan. Says Kleinfeld: "This company is solving the biggest issues this planet has."

Investors have warmed to Kleinfeld's vision. Siemens shares have risen 26% in the two years since he took over, vs. 6% for GE. But his tactics have made him a target for German resentment of globalization and the perceived heartlessness of U.S.-style management methods. When, in an attempt at openness, Kleinfeld invited workers to respond to his blog, they did?in spades. "I used to feel good in the Siemens family," one employee wrote. "But there's not much of that feeling left."

More alarming, Siemens is the target of an expanding investigation by Munich prosecutors. In the probe of alleged bribes to foreign officials to win telecommunications contracts, authorities briefly jailed a former member of Siemens' executive board and many lower-ranking managers. Siemens admits that as much as $546 million may have been misused. Kleinfeld, who was stationed in the U.S. during much of the time the alleged misconduct took place, has not been identified as a target of the investigation and has taken measures to prevent future scandals. He has hired a former senior German prosecutor to serve as compliance officer and retained an outside law firm to conduct an independent inquiry. Munich prosecutors say Siemens is cooperating in the bribery probe. That hasn't stopped some shareholder activists from criticizing Kleinfeld's handling of the crisis, and he is sure to come under fire when the company holds its annual meeting in Munich on Jan. 25. Shareholder groups have already filed motions to withhold approval of the Siemens management board, normally a formality in Germany.

The pressure is apt to grow. Siemens says it expects the U.S. Securities & Exchange Commission to investigate, potentially exposing the company to hundreds of millions of dollars in fines. But unless new and far more damaging revelations arise, Kleinfeld is unlikely to be forced out. Still, the crisis has become a distraction. "Yes, it is taking part of my time," says Kleinfeld, who has off-loaded some responsibilities to other members of the management board as a result.

If Kleinfeld is worried, though, he isn't showing it. A few weeks after Munich prosecutors seized documents from 30 Siemens locations?including his office?Kleinfeld seems relaxed and self-assured. Never mind that in a waiting room a few feet from his door, headlines on a stack of newspapers arrayed neatly on a table blare the latest news on the scandal. He yawns occasionally, the only sign of fatigue.

Provided Kleinfeld weathers all the turbulence, he still has the potential to emerge as one of Europe's most dynamic chief executives. With an eye to his German critics, Kleinfeld these days deflects comparisons to Welch. But it's hard not to see some of the former GE chief's energy and competitive spirit?not to mention impatience?in Kleinfeld. He rises before dawn to jog and often barrages subordinates with phone calls and e-mails late into the night. "If you turn off your phone, he calls your wife," says one manager who counts himself a Kleinfeld admirer. Siemens executives know that an e-mail ending with the word bitte ("please") means get it done now?or else. "I wonder when that guy sleeps," says Hermann Requardt, Siemens' chief of research and development.

HAPPY IN THE HEARTLAND

Kleinfeld downplays the influence of his three years in the U.S., a stint ordinary Germans view as a blot on his résumé. There's no question, though, that he counts those years among his best. "I liked it over there," says Kleinfeld, who served as CEO of Siemens' U.S. operations in 2002 and 2003. "Wherever I went, I made friends." And to this day, Kleinfeld's style is decidedly less German-centric than that of his predecessor, Heinrich von Pierer. Von Pierer played tennis with the Chancellor. Kleinfeld runs the New York Marathon. Von Pierer served on a half-dozen boards of German companies. Kleinfeld does so for Citigroup (D ), Alcoa (AA ), and the New York Metropolitan Opera. Von Pierer speaks English well but prefers German. Kleinfeld is totally fluent in English.

His affection for the U.S. comes naturally, perhaps because Kleinfeld personifies the American ideal of the self-made man. He was 10 when his father died, and by the age of 12 he was working in a supermarket and taking on other part-time jobs to help make ends meet. Later, while working full-time at Siemens, he completed his doctoral work on corporate communications strategy, which was published as a book.

Today, Kleinfeld is as comfortable hobnobbing with global leaders as he is chatting with entry-level employees. September found him speaking about climate change at the Clinton Global Initiative in New York, and then meeting workers in a nearby suburb.

He also knows how to enjoy himself. In December, Kleinfeld danced the night away at a Christmas party for U.S. employees at New York's B.B. King Blues Club. He even plays a decent blues harmonica, though never in public.

One of Kleinfeld's problems is that few inside Siemens can match his energy. The Old Guard tends to grumble that Kleinfeld is too impatient and demanding. Soon after taking office in January, 2005, he vowed that Siemens would finally achieve ambitious profit-margin goals established in 2000 for each unit. The targets range from 6% for auto parts to 13% for the top-performing medical-equipment division. Kleinfeld staked his job on the company hitting those numbers by April, 2007?which now looks likely, analysts say. His message: Everyone, including the boss, is accountable. "We commit to something, and we deliver," Kleinfeld says. "That is the culture we want to form."

Communicating that culture change across such a sprawling enterprise is a massive challenge. The company's 11 main business units operate almost as separate entities, with their own boards and distinct corporate cultures, making it hard for directives from the top to filter down to the troops. One executive says Kleinfeld's biggest impact so far has been increased pressure to speak English throughout the company?hardly an earth-shattering reform. And while Siemens excels at technological breakthroughs, such as mobile phones with built-in music players, they have often failed because of poor marketing and a lack of focus on the consumers who use the products. So how do you persuade Siemens' vaunted engineers to pay more attention to customers? Kleinfeld declared that he would personally visit Siemens' 100 biggest clients in his first 100 days in office. He wound up meeting more than 300 of them.

Kleinfeld isn't shy about administering harsh medicine when he feels it's needed. That's something new at the 159-year-old company. At the end of 2005, it became clear that the Logistics & Assembly Systems Div., which made products such as sorting equipment used by the U.S. Postal Service, would deliver only a 2% profit margin. Most unpardonable in Kleinfeld's eyes was that the unit's managers waited too long to alert him to the problem. So Kleinfeld transferred the most profitable parts of the division, such as baggage-handling systems for airports, to other parts of Siemens. The rest was sold. Within weeks, an entire Siemens division with $1.9 billion in annual sales was vaporized. Around Siemens, there was a collective gasp.

TOSSING OUT TELECOM

He has been equally tough on some sacred pieces of the Siemens empire. Founder Werner von Siemens made his name laying intercontinental telegraph lines in the mid-1800s, but that didn't stop Kleinfeld from getting rid of communications businesses. He paid Taiwan's BenQ Corp. to take the money- losing mobile-phone division off his hands at a total cost to Siemens of $1.4 billion. And he put most of Siemens' telecommunications-equipment business into a joint venture run by Finland's Nokia Corp. (NOK ) But the Nokia deal has been delayed until questions about the bribery scandal are cleared up. In September, BenQ declared the German handset unit insolvent. Although Kleinfeld insists he thought it had a future under BenQ, workers have charged that he should have foreseen the disaster. In the face of pressure from labor leaders and German politicians, Siemens ultimately coughed up $46 million to aid workers who lost their jobs.

Some Siemens watchers say Kleinfeld has become more cautious following the bribery investigation and the uproar over his restructuring moves. Those controversies clearly rob him of political capital, and plenty of people both inside and outside Siemens would surely love to see Kleinfeld fail. Says a consultant who has worked closely with Siemens: "Some people are betting that he doesn't survive and that they can go on in the normal way."

Kleinfeld, though, has no plans to give up, and he is pressing to reshape the "normal" ways in which the giant company operates even as the investigations continue. Says Kleinfeld: "We are fitter than ever."

Discussion Questions:
1. What are the industry forces that dominate Siemens' industries?
2. What are the different types of responsibility that Kleinfeld shoulders in his job as CEO? Do you consider them to be strategic responsibilities?
3. Do you think that the level of strategic turbulence and restructuring that Kleinfeld faces is common in business? Do you believe that Kleinfeld helps to create this turmoil?
4. How do you see the US and German business environments as different?
5. To what degree do you believe Kleinfeld must simply react to his environments as opposed to "creating" them?