A Critical Evaluation of Strategic Change and Entrepreneurship

3.1 How Continental AG set the agenda for ‘strategic change’ at the beginning of the 1990s

One word that best describes how the German automotive supplies company set the agenda for strategic change would be ‘transformational’ as opposed to ‘incremental change’ (Johnson and Scholes, 1999). This is because the changes that took place after the arrival of Continental’s new chairman, Dr. Hubertus von Grünberg in 1991 involved changing completely the organisation’s existing culture, strategic focus, structure, routines and taken for granted assumptions (Ibid). Incremental changes, which would involve fine tuning and adapting of Continental’s existing functional and bureaucratic structure would certainly be insufficient in surviving the crisis it faced both externally (futile growth strategies in mature markets, which led to fierce price wars; global recession in the tyre industry; threat of takeover by Pirelli) and internally (suppression of innovative capability; absence of entrepreneurial initiative; lack of knowledge of the sources of the company’s losses and lack of accountability for losses made – Bruch and Vogel, 2004, cited in De Wit and Meyer, 2004, pp. 739 – 740).
Johnson and Scholes (1999) identified two sub-types of transformational change: planned transformational and forced transformational (a matrix of all the types of strategic change is shown in appendix A). Planned transformational change describes a situation where management anticipates a need for transformational change whereas forced transformational change occurs when a company find itself in an uncompetitive position or its stakeholders are dissatisfied with the current strategy (Ibid). The early part of the case study suggested that Continental AG’s external and internal crisis was quite severe, leading to the company to make a record loss of €65.5million in 199. Thus, there may have been some element of imposed transformational change. However, when Dr. von Grünberg became the company’s new chairman he had a clear vision of how the company should change its strategic focus in the coming years, which implies that there may have been some planning involved. Continental’s new chairman set the agenda for strategic change in a forceful and high profile manner by arranging a press conference in order to communicate his vision to all of the company’s stakeholders, particularly managers and employees. He initiated strategic change by emphasising the need for the company to change its focus on growth through profit and innovation rather than growth previously fuelled by acquisitions aimed at higher sales (Bruch and Vogel, 2004, cited in De Wit and Meyer, 2004, p. 741). By focusing on changing Continental AG’s overall business philosophy and communicating the broad strategic goals of profitability and innovation to all mangers and employees, Dr. von Grünberg was able initiate changes in all areas of the company rather than just specific aspects.

3.2 How Continental AG implanted profitability towards a new growth strategy and whether the company has been able to sustain its ‘new’ growth strategy since the 1990s to date

Continental AG carried out its new growth strategy through bringing about three major changes. First, decentralising the company which involved the dissolution of the functional structure and setting the formation of product driven divisions or strategic business units (SBUs) within Continental AG. The purpose of this exercise was to make it easier for the company to determine which units were generating profits and which units were making losses. As a result, Continental AG moved from a functional orientated organisation to a profit orientated organisation whereby managers of each division were given responsibility for the whole production and marketing process of the unit’s products and became accountable for the product’s market results. An example of the discovery of hidden loss making units was the break up of the passenger tyre division into two units: the highly profitable replacement business unit and the loss making original equipment unit. This meant that the results of the latter area were no longer incorporated in the results for passenger tyre division and clear for all to see. Dr. Stephan Kessel became head of the newly independent original equipment business and improved the unit’s fortunes. The original equipment business became profitable by 1997 (Bruch and Vogel, 2004, cited in De Wit and Meyer, 2004, pp. 741 – 742).
Second, measures to increase the profitability of Continental AG’s service functions i.e. I.T. and human resources, which involved mainly the drive to decrease costs. These included the outsourcing of the company’s operations through transferring 370 employees to a company jointly operated by IBM and Continental, and a management buy out of large parts of the human resources development department into an independent company, Contur GmbH. The measures to increase earnings were also extended to areas such as procurement and production. In purchasing, Continental, like other tyre manufacturers, was previously dependent on a monopolistic supplier for steal cord, a vital component in tyre making. Despite the high prices commanded by the supplier, purchasing staff were unwilling to look for alternatives due to fears over compromised quality. Continental solved this problem by setting up a group to search for alternative lower priced suppliers. As a result, they found an alternative source of steel cord in Russia at a cheaper price, and concerns regarding quality were allayed by putting future suppliers together with Continental’s purchasers, quality staff and product developers to improve the products (Exhibit 2, Bruch and Vogel, 2004, cited in De Wit and Meyer, 2004, p. 743). By 1997, Continental AG sourced more than 50% of its rubber, steel and carbon black from cheaper foreign suppliers, including those from Eastern Europe. In production, plants were located to lower wage countries such as Portugal and the Czech Republic in order to decrease costs.
However, this has provoked opposition from workers in Austria who chained themselves to factory gates in protest (Economist, 1997).
Third, central co-ordination of decentral activities. Organisations generally run the risk of inefficiency due to the decentralised units drifting apart, and therefore Continental kept functions such as controlling, finance and technology and purchasing as central units. In spite of considerable decentralisation occurring at Continental, Dr. Hubertus von Grünberg still had direct influence over investment activity. For example, he would occasionally reject investment requests if the project proposal did not appear to realise the predicted return even if it had received the approval by managers of divisions and central units (Bruch and Vogel, 2004, cited in De Wit and Meyer, 2004, pp. 743 – 744).
In my view, Continental AG’s has been able to sustain its new growth strategy since the 1990s to date because it brought the company many benefits including: stabilised profitability, lower costs and greater organisational flexibility, which in turn has allowed the company to adopt a more entrepreneurial and innovative orientation – both sources of long-term competitive advantage.

3.3 Critical evaluation of how Continental AG fostered ‘strategic innovation’ in the 1990s by (1) development and marketing cutting edge technology, (2) giving managers a great deal of latitude

Much of the case study demonstrated that Continental AG has encouraged ‘strategic innovation’ successfully throughout the organisation. Much of this success has been largely due to Dr. Hubertus von Grünberg’s determination for the company to achieve ‘Technological Leadership’ (Bruch and Vogel, 2004, cited in De Wit and Meyer, 2004, p. 744). Roberts (2004, p. 11) defined companies, which seek to be technology leaders as ‘those…that sought to lead aggressively in technological change relative to their key competitors – that strategically took a position of seeking technology leadership rather than merely being on a par with competition…’. Von Grünberg’s ambition for technological leadership was matched through the inauguration of a central research and development facility located in Hanover, close to the Continental AG headquarters. The R&D resources that existed in Traiskirchen (Semperit tyre brand) and Aachen (Uniroyal) were transferred to the new facility in Hanover, which led to some resistance. However, the problem with centralising R&D activities is the decrease in responsiveness towards client needs of each tyre brand. Dr. von Grünberg foresaw this and therefore introduced quarterly RDE (research-development-engineering) meetings in which R&D staff were brought together with managers of tyre divisions to evaluate various innovations and their marketability and thus ensuring that any new developments met market demand (Bruch and Vogel, 2004, cited in De Wit and Meyer, 2004, p. 744).
A major part of Continental AG’s pursuit of technological leadership was the development and marketing of cutting edge technology and raising the company’s status from a manufacturer of tyre products to a supplier of complete systems to the automotive industry. This was because Dr. von Grünberg anticipated the threat of becoming a secondary supplier to the automotive industry if the company stuck with the development and manufacture of tyres alone. This was due to their limited innovation potential. The company’s goal to become a system supplier was fulfilled in the next seven years through offering complete systems consisting of tyres and technical components to car manufacturers, the establishment of the automotive systems division (which involved chassis development) and the acquisition of Teves in 1998, which developed brakes and chassis (Bruch and Vogel, 2004, cited in De Wit and Meyer, 2004, pp. 745 – 746). In my opinion, these changes resulted in Continental gaining additional competencies and resources, which in turn enable the company to effectively develop and market cutting edge technologies and thus foster strategic innovation. Roberts (2004) found that companies, which are technology leaders, are far more successful in terms of the proliferation of new products. Additional research demonstrated that Continental AG is no exception. Since repositioning itself as an automotive system supplier, the company has carried out a wide range of innovations including: the frictionless starter (Davis, 1997a); brake-by-wire systems in partnership with Italian brake specialist Brembo SpA (Davis, 1997b); ContiSafetyRing device (Design News, 1999) and the ’30 metre car’ – a prototype care that could stop at high speed in 30 metres (Ward’s Auto World, 2001).
Encouraging strategic innovation was also done through giving managers greater latitude so that they can release their entrepreneurial energy. Entrepreneurs have competencies or characteristics, which set them apart from other individuals. These competencies include: a high tolerance for risk; the ability to innovate; always actively seeking change; people skills and customer orientated (Benton, 1996; Hatch, 2000; Hyatt, 2004). In my view, Continental had certainly succeeded in developing an innovative and entrepreneurial culture. This success has been mainly due Dr. Hubertus von Grünberg’s awareness of the competencies present within entrepreneurial individuals, which enabled him to a craft an environment in which these competencies can be exploited. He did this by firstly, removing the bureaucratic and functional structure and replacing it with independent market orientated divisions headed by managers with full responsibility to find solutions to achieve profitability (Bruch and Vogel, 2004, cited in De Wit and Meyer, 2004, pp. 746 – 750).
Second, von Grünberg initiated a far reaching process of cultural change throughout the organisation, which included ‘Delegation of Authority and Responsibility’ (DAR) whereby all managers and employees had the opportunity to unleash their entrepreneurial potential. The cultural change also involved more entrepreneurial orientated working practices such as cross-functional project teams (Bruch and Vogel, 2004, cited in De Wit and Meyer, 2004, pp. 746 – 750). Such activities allow employees/managers to interact with colleagues in other functions, which in turn increase knowledge and skills sharing, and this has been shown to lead to more effective product development (Afuah, 1997).
Third, Dr. von Grünberg encouraged both senior and divisional managers to question the status quo and consistently find innovative solutions that ‘creatively destroys’ the status quo. The chairman of Continental also encouraged managers and employees to take risks (Bruch and Vogel, 2004, cited in De Wit and Meyer, 2004, pp. 746 – 750).
Fourth, Continental AG’s chairman developed a personnel structure, which gives young executives who display entrepreneurial qualities major career opportunities and dismiss those managers and employees who fail to conform to the changes that had taken place within the company. Dr. von Grünberg’s policies also involved setting tailored departments, which placed young managers in difficult situations so that they are tested to the limits of their ability, and giving high performing junior executives business puzzles to work on alongside their regular tasks (Bruch and Vogel, 2004, cited in De Wit and Meyer, 2004, pp. 746 – 750).
The measures discussed above give talented employees and managers the opportunity to behave entrepreneurially. This in turn increases their job satisfaction and thus the likelihood that they will stay with the company. Retaining such a precious management resource – ambitious, risk taking and entrepreneurial individuals – is important as they will provide Continental with future strategic innovations for the long-term (Willax, 1999).

3.4 Critique of statement made by Dr. Stephan Kessel, chairman Continental AG’s Executive board and a critical reflection on the future strategic direction of Continental AG, post 2007

In 2001, Dr. Stephan Kessel argued that Continental AG had to concentrate on three areas in order to deal with its future challenges: stretch the core area of competence – chassis systems; integration of tyres and chassis components and maintaining entrepreneurial energy. On the first area, Dr. Kessel stated that the company needed to establish chassis systems as its core competence because he believed the value of electronic content would increase from 15% to 17% of a standard sized vehicle in 2001 to 35% to 40% in 2006. Dr. Kessel was correct in making this stipulation, electronic content did increase in vehicles to 22%, which is not as much as he had forecast but nevertheless, a significant proportion. This is forecast to rise further to 40% by 2010, which represents an opportunity for Continental AG as it already has a strong presence in the automotive electronics business (Datamonitor, 2007).
The second area, integration of tyres and chassis components, would certainly help the company meet future challenges of an even more competitive marketplace. Integration between the various tyre divisions and Automotive Systems division brought Continental many benefits including: greater cross-functional identification and cooperation between the divisions in order to develop new products and innovative processes; a company wide balanced scorecard for each business unit, which led to better handling of corporate divisions through fewer performance targets. This in turn allowed Continental to be trendsetter rather than trend follower in technological innovation.
Dr. Kessel was also right in mentioning the third area, maintaining entrepreneurial energy, which is an essential quality within any company. Firms now operate within a rapidly changing and volatile commercial environment and innovation and entrepreneurship are more essential than ever in obtaining a sustainable competitive advantage.
In recent years, it seems that Continental AG is heading in the right strategic direction. The company has been building its hybrid product portfolio, strengthened its presence in the automotive electronics business through acquiring Motorola’s electronics division for $1 billion and expanded further in to India and China. This is due to opportunities of increasing in demand of hybrid electric vehicles (HEVs) of 4.5 million units by 2013, increasing electronic content in vehicles and an increase in demand for light vehicles in China to 7.7 million units by 2010 (Datamonitor, 2007a). Nonetheless, 68.8% of Continental’s revenue comes from the European market, which makes the company more vulnerable to economic fluctuations in this region than two of its ‘big three’ rivals, Michelin and Bridgestone as they have more balanced revenue profiles (Datamonitor, 2007b and c). Continental AG would therefore have to develop strategies to counteract this imbalance.