Company Rise and Slide into Decline
ThyssenKrupp formed when two German steel and iron companies merged in the late ’90s. Each dated back to the early 19th century and each had formed a pillar of first Prussia then Germany’s industrial economy. Success as a steel manufacturing concern led to attempts at diversification,
globalization, and acquisition. The resulting conglomerate stitched together a patchwork of different business and held them together with an opaque, ad hoc central management. Unsurprisingly, poor oversight led to waste and misconduct. While remaining the largest steelmaker in Germany, s wasted billions in poorly judged attempts to enter steel mills in emerging markets. Corporate scandals rocked the company, and fines followed revelations that the company acted to artificially inflate the price of elevators and railway tracks. In short, the company was a TOM loser. It’s operational model did not fit its business model, which itself seemed to made up on the fly. Key failings include:
- no standardized method of accounting or control across or wishing business units.
- the company’s main unit, steel, had a business model based on low-cost, quality steel production but a business model that had furnaces running constantly and independent of demand.
- the company’s corporate business model relied on outdoing competitors in a variety of industries, but the operational model only compared the performance of units to other units within the company, if at all.
In 2012, repeated sub-par performance prompted a change of leadership. The new CEO, Heinrich Hiesinger, embraced a program of radical change for ThyssenKrupp’s business model and corresponding changes in its operational model. Each now reinforces the other and supports the company’s strategy as a going concern in an economy that no longer supports the margins historically enjoyed by steel-makers.
Hiesinger repositioned the company, shedding much of its historical steel business. Instead of basing business on steel and engineering, he instead sought to generate value as an industrial goods and services provider. He divested, overtime, numerous low-margin business units and prioritized investment into high-technology services and complex component fabrication.
ThyssenKrupp transitioned to targeting partnerships with automobile, heavy equipment, and high technology manufacturers, using its expertise to become an invaluable part of their supply chain. Of note is that the company pursues complete fabrication in industries (e.g. elevator construction and aspects of nautical engineering) where it has a measurable advantage relative to competitors while simultaneously pursuing its role as a supplier in industries where it lacks the competence to compete in finished goods.
Transitioning from an unfocused steel concern into an integrated technology solutions conglomerate required radical restructuring. The various business segments were reorganized into two divisions: Materials and Technologies. With this came an emphasis on procedural transparency and accountability. Business units were also now evaluated relative to the competition in their industries, not just against other internal units. Thus, the previously praised elevator unit, which had higher margins than ThyssenKrupp’s steel business, was revealed to be significantly less profitable than other elevator makers.
Identifying inefficiencies allowed ThyssenKrupp to leverage its considerable assets and far-ranging expertise to drive down costs or exit if no cost savings were within reach.
The new streamlined operational model also supported the business model by controlling the diversified portfolio of business in a unified effort to provide the kind of integrated material and technology solutions required of long-term success.
ThyssenKrupp’s business model adaptation targeted higher margin, more stable business than steel. Its aligned operational model has helped it achieve its goals, though the company is still a work in progress. This year the company turned its first annual profit since its transformation began, and its business units are capable of competing within their industries. Even in industries or countries where ThyssenKrupp cannot directly compete, its two-pronged approach has resulted in numerous partnerships with the market leaders. By becoming a supplier for the market leader, ThyssenKrupp has captured value it–any many others–would otherwise have been forced to leave on the table for others.