Siemens AG is transforming itself into an e-business

SIEMENS AG IS TRANSFORMING ITSELF INTO AN E-BUSINESS

THE PROBLEM

Siemens AG (siemens.com) is a German–based 150–year–old diversified and global manufacturer. With 484,000 employees, Siemens does business in 190 countries and has 600 manufacturing and D & D (research and development) facilities in over 50 countries. Its product lines and services are extremely varied, including communication and information, automation and controls, power, transportation, medical equipment, and lighting. Besides its own 13 operating divisions, Siemens AG has interests in other companies like Bosch (household appliances), Framatome (in France’s nuclear power industry), and Fujitsu computers. [1]

Facing hundreds of competitors, most of which are in foreign countries, the company has difficulties expanding its business in a fast­–changing business environment and was unable to enjoy the profit margin of some of its competitors. A major problem area was the coordination of the internal units of the company. Another one was the collaboration with so many supplies and customers. In particular, its supply chain ­—the flow of materials from supplies through manufacturing, distribution, and sales—is very complex. Finally, it was necessary to find ways to contain costs and to increase customer service.

 

THE SOLUTION

By the late 1990s the company decided to transform itself into a 100 percent ”e–business”—a company that performs various business functions electronically. It would do so by introducing Web–based system and electronic commerce applications in all of its operation. The reason for such an ambitious goal was the need to solve the problems caused by multiple supply chain operations. Embarking on a four–year plan, the company started the transformation in 1999.

Siemens had decided on a dual approach: It would use its own in–house information system capabilities where it made sense to do so, but it would also go out–of–house to purchase some system from major vendors. Siemens strategic goals were to:

· Improve its readiness for extended electronic commerce by standardizing hundreds of business processes across multiple divisions. (For example, the company went from over 300 different process applications to 29.)

· Redesign the information technology infrastructure to enable integration of” best–of–breed” software (software components that best fit the company’s need’s, each from a different vendor), integrated into an interprisewide platform.

Besides being able to handle electronic transactions, Siemens also wanted to create an easily accessible central corporate knowledge base —a companywide storehouse of proven methodologies (known as” best practices”; see Chapter 9).[2]

Using SAP R/3 system (see Chapter 7), along with software from i2 Technology and IBM, the company built functional system that link the enterprise, ensure support functions, and connect with the company’s supply chain partners. Functions such as taking customer orders, online procuring of materials and components that go into the manufacturing process, collaborating with business partners in developing products, and transporting finished products were integrated across the company, using the Internet as much as possible. Also, the system was designed to provide better customer service to Siemens’s business customers.

THE RESULTS

In its 2000 fiscal year, the company saw its online sales and its electronic procurement transactions reach 10 percent of its total sales and purchases, respectively. In 2002, online sales increased by 25 percent, and e-procurement grew 60 percent over its 2000 level.

As of January 2004, most employees are networked throughout the company.

They have direct access corporate information is in use. This portal offers various workplace aids, including search engines, forms, travel booking, and electronic expense account reporting.

The transformation to an e-business cost Siemens around 1 billion euros. President and CEO Heinrich von Pierer says, “This will make us faster and help us further cut costs.…All of this is aimed at meeting today’s e-economy goals directly, with the promise of operational economies in return.”

Sources: Compiled from Schultz (2002), aberdeen.com (accessed September 2002), an siemens.com (accessed May 2002).

LESSONS LEARNED FROM THIS CASE

This case illustrates that fierce global competition drivers even large corporations to find ways to reduce costs, increase productivity, and improve customer service, which increase competitive advantage. These efforts are best achieved by using Web-based systems, which are the major enablers in the transformation to an e-business or e-company in the digital economy.

In this chapter we present characteristics and concepts of the digital and how it is changing business processes. We also describe the extremely competitive business environment in which companies operate today, the business pressures to which they are subject, and what companies are doing to counter these pressures, especially in strategic management. Furthermore, you will learn what makes information technology a necessity in supporting organizations, and why any manager in twenty-first century should know about it.

Many new terms and concepts are introduced in Chapter 1 and discussed in more detail in later chapters. You will benefit most from Chapter 1 by reading it as an overview—aim to get the “big picture” in this chapter and plan to fill in the details later.

This brief “Lessons Learned” section ties the key points of the opening case to the topics that will be covered in the chapter.

Doing Business in the Digital Economy

Conducting business in the digital economy means using Web-based systems on the Internet and other electronic networks to do some form of electronic commerce. First we will consider the concepts of electronic commerce and networked computing and then look at the impact they have made an how companies do business.

OPPORTUNITIES FOR ENTREPRENEURS.

The new digital economy is providing unparalleled opportunities for thousands of entrepreneurs, some of them in their teens, to apply EC business models to many business areas. As we will see throughout the book, many of these initiatives were started by one or two individuals. Others were started by large corporations. These startup companies

Diamonds forever — online

T

he gems market is a global one with thousands of traders buying and selling about $40 billion worth of gems each year. This age-old business is very inefficient in terms of pricing: several layers of intermediaries can jack up the price of a gem 1,000 percent between wholesale and final retail prices.

Chanthaburi, Thailand, is one of the world’s leading centers for processing gems, and that is where Don Kogen landed, at the age of 15, to search for his fortune. And indeed, he found it there. After failing to become a gem cutter, Kogen moved into gem sorting, and soon he learned to speak

 

 

Thai. After three years of observing how gem traders haggle over stones, he decided to try the business himself. Having only a small amount of “seed” money, Kogen started by purchasing low-grade gems from sellers who arrived early in the morning and selling them for a small profit to dealers from India and Pakistan who usually arrived late in the day. Using advertising, he reached the U.S. gem market and soon 800 potential overseas customers. Using faxes, he shortened the order time, which resulted in decreasing the entire time from order to delivery. These various business methods enabled him to grow his mail-order business to $250,000 per year by 1997.

In 1998, Kogen decided to use the Internet. Within a month, he established a Web site, thaigem.com, and sold his first gem online. By 2001, the revenue reached $4.3 million, growing to $9.8 million in 2002. Online sales account for 85 percent of the company’s revenue. The buyers are mostly jewelry dealers or retailers such as Wal-Mart or QVC. Kogen buys raw of refined gems from all over the world, some online, trying to cater to the demands of his customers.

Thaigem’s competitive edge is low prices. The proximity to gem-processing factories and the low labor cost enable Kogen to offer prices significantly lower than his online competitors (such as Tiffany’s at tiffany.com). Kogen makes only 20 to 25 percent profit, much less than other dealers make. To make the business even competitive, Kogen cater even to small buyers. Payments are made safely, securely, and conveniently using either PayPal or Escrow.com. Delivery to any place is made via Federal Express, at $15 per shipment.

Dissatisfied customers can return merchandise within 30 days, no questions asked. No jewel is guaranteed, but Kogen’s name is trusted by over 68,000 potential customers worldwide. Kogen enjoys a solid reputation on the Web. For example, he uses eBay to auction gems as an additional selling channel. Customers’ comments on eBay are 99 percent positive versus 1 percent negative.

Thaigem.com is further expanding its customers-service program. The company has implemented a 24-hour “Live Support” chat service, Monday through Friday, further augmenting this service with the addition of a 1-800(toll-free) number for U.S. customers. This “Live Support” chat software allows Thaigem.com to track the movement of customers and know exactly what products or content pages customers are viewing.

For Further Exploration: Go to blackstarading.com and compare it to thaigem.com; which site do you think is better? What kinds of business and revenue models were used? Were they effective? How is competitive advantage gained in this case?

Introduction

By definition the Internet is a worldwide, publicly accessible series of interconnected compute networks that transmit data by packet switching using the standard Internet Protocol. But, how did it come to be this technology that is so popular and so widely used around the world? Was it always so large and extensive, filled with information about just about anything you could possibly think of accessible from almost anywhere, anytime? The answer is no and its important to understand where it all came from to understand how to utilize it to its fullest potential now.

Creation

The Internet origin comes from a military project. The Semi Automatic Ground Environment (SAGE) program consisted of networked country- wide radar systems together for the first time. This was created around 1958 as part of an attempt to regain the lead in technology from the Soviet Union who had recently launched Sputnik. J. C. R. Licklider was selected to head the committee which controlled the SAGE project. He envisioned universal networking as a unifying human revolution.

SAGE Computer Room

Licklider recruited Lawrence Roberts to head a project which implemented a network. Roberts had worked with the U.S. Air Force on a packet switching system as opposed to a circuit switching system. On October 29, 1969, Licklider and Roberts interconnected the first two nodes between UCLA and SPI International at Menlo Park, California. This was the beginning of the Advanced Research Projects Agency Network (ARPANET) which was one of the key networks which our Internet today was based off of. Soon after the first international packet- switched network service was created between U. S. and U. K.

Vinton Cerf and Robert Kahn developed the first description of the TCP protocols (covered more deeply in the introduction to Networking lesson) in 1973. The term “Internet” was first used in 1974 to describe a single global TCP/IP network detailed in the first full specification of TCP written by Cerf and his colleagues. The first TCP/IP- wide area network was created on January 1, 1983 when hosts on the ARPANET were switched over from the older protocols to TCP/IP.

In 1984, the United States National Science Foundation (NSP) commissioned the construction of a 1.5 megabit/ second network which became known as NSFNET. In 1989 the US Federal Networking Council approved the interconnection of the NSFNET to the commercial MCI Mail System. Soon after, other commercial e-mail services were soon connected such as OmTyme, Telemail, and Compuserve. Three Internet Service Providers (ISPs) were also created: UUNET, PSINET, and CERFNET. More and more separate networks were created that eventually interconnected with this large, growing network. The ability of TCP/IP to work over virtually any pre-existing communication networks allowed for a great ease of growth, although the rapid growth of the Internet was due to primarily to the availability of commercial routers from companies such as Cisco Systems, proteon and Juniper, the availability of commercial Ethernet equipment for local-area networking and the widespread implementation of TCP/IP on the UNIX operating system.

Growth

Although the basic applications and guidelines that make the Internet possible had existed for almost a decade, the network did not gain public face until the 1990s. On August 6, 1991, CERN, which straddles the border between France and Switzerland, publicized the new World Wide Web project. The web was invented by English scientist Tim Berners-Lee in 1989.

Internet logo

An early popular web browser was ViolaWWW. It was eventually replaced in popularity by the Mosaic web browser. By 1996 usage of the word “Internet” had become commonplace, and consequently, so had its use as a reference to the World Wide Web. Over the course of the decade, the Internet successfully accommodated the majority of previously existing public networks (although some networks have remained separate).

Today`s Internet

Aside from the complex physical connections that make up its infrastructure, the Internet is facilitated by bi- or multi –lateral commercial contracts and technical specifications or protocols that describe how to exchange data over the network. Indeed, the Internet has severely matured since its birth many years ago. Today almost 1.5 billion people use the Internet. That`s almost a quarter of the entire world (a lot of people).

ICANN Headquarters

 

The Internet Corporation for Assigned Names and Numbers (ICANN) is the authority that coordinates the assignment of unique identifiers on the Internet, including domain names, Internet Protocol (IP) addresses, and protocol port and parameter numbers. A globally unified namespace is essential for the Internet to function. Because the Internet is a distributed network comprising many voluntarily interconnected networks, the Internet, as such, has no governing body.

One of the most common uses people have for the Internet is the World Wide Web. Whenever you say you are “on the Internet” you are using the World Wide Web. When you are suffering the Internet through different pages you are moving through the World Wide Web. However, that is not only use for the Internet. E-mail is another very popular use for the Internet. Internet e-mail may travel and be stored unencrypted on many other networks and machines out of both the sender`s and the recipient`s control. Remote access is another very common use for the Internet. The Internet allows computer users to connect to other computers and information stores easily, wherever they may be across the world. File sharing is also popular. It allows people to send files through e-mail, FTP, peer-to-peer networks, etc.

 

[1] Various icons are used throughout the book to identify a particular perspective or functional area related to the nearby example. This icon, for example, indicates an international perspective. Refer to the preface for a listing of all of the icons.

 

[2] Each chapter opens with an example that illustrates the applications of IT in real–world organization and the relevance of the chapter topics. The format—problem, solution, results—helps model a way to think about business problems.

 

SIEMENS AG IS TRANSFORMING ITSELF INTO AN E-BUSINESS

THE PROBLEM

Siemens AG (siemens.com) is a German–based 150–year–old diversified and global manufacturer. With 484,000 employees, Siemens does business in 190 countries and has 600 manufacturing and D & D (research and development) facilities in over 50 countries. Its product lines and services are extremely varied, including communication and information, automation and controls, power, transportation, medical equipment, and lighting. Besides its own 13 operating divisions, Siemens AG has interests in other companies like Bosch (household appliances), Framatome (in France’s nuclear power industry), and Fujitsu computers. [1]

Facing hundreds of competitors, most of which are in foreign countries, the company has difficulties expanding its business in a fast­–changing business environment and was unable to enjoy the profit margin of some of its competitors. A major problem area was the coordination of the internal units of the company. Another one was the collaboration with so many supplies and customers. In particular, its supply chain ­—the flow of materials from supplies through manufacturing, distribution, and sales—is very complex. Finally, it was necessary to find ways to contain costs and to increase customer service.

 

THE SOLUTION

By the late 1990s the company decided to transform itself into a 100 percent ”e–business”—a company that performs various business functions electronically. It would do so by introducing Web–based system and electronic commerce applications in all of its operation. The reason for such an ambitious goal was the need to solve the problems caused by multiple supply chain operations. Embarking on a four–year plan, the company started the transformation in 1999.

Siemens had decided on a dual approach: It would use its own in–house information system capabilities where it made sense to do so, but it would also go out–of–house to purchase some system from major vendors. Siemens strategic goals were to:

· Improve its readiness for extended electronic commerce by standardizing hundreds of business processes across multiple divisions. (For example, the company went from over 300 different process applications to 29.)

· Redesign the information technology infrastructure to enable integration of” best–of–breed” software (software components that best fit the company’s need’s, each from a different vendor), integrated into an interprisewide platform.

Besides being able to handle electronic transactions, Siemens also wanted to create an easily accessible central corporate knowledge base —a companywide storehouse of proven methodologies (known as” best practices”; see Chapter 9).[2]

Using SAP R/3 system (see Chapter 7), along with software from i2 Technology and IBM, the company built functional system that link the enterprise, ensure support functions, and connect with the company’s supply chain partners. Functions such as taking customer orders, online procuring of materials and components that go into the manufacturing process, collaborating with business partners in developing products, and transporting finished products were integrated across the company, using the Internet as much as possible. Also, the system was designed to provide better customer service to Siemens’s business customers.

THE RESULTS

In its 2000 fiscal year, the company saw its online sales and its electronic procurement transactions reach 10 percent of its total sales and purchases, respectively. In 2002, online sales increased by 25 percent, and e-procurement grew 60 percent over its 2000 level.

As of January 2004, most employees are networked throughout the company.

They have direct access corporate information is in use. This portal offers various workplace aids, including search engines, forms, travel booking, and electronic expense account reporting.

The transformation to an e-business cost Siemens around 1 billion euros. President and CEO Heinrich von Pierer says, “This will make us faster and help us further cut costs.…All of this is aimed at meeting today’s e-economy goals directly, with the promise of operational economies in return.”

Sources: Compiled from Schultz (2002), aberdeen.com (accessed September 2002), an siemens.com (accessed May 2002).