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Read Vestas Wind Systems A/S – Exploiting Global R&D Synergies (Case) in your course pack.Use the articles, “Distance still matters” and “The Cosmopolitan Corporation” to discuss the difficulties that you think Madsen will face in trying to deliver tangible outcomes that will benefit Vestas as a whole.You are restricted to a 2 page (1½ -spaced) response. Use 12 point Times Roman font size with one inch margins all around.Submit your assignment to the Turnitin dropbox located in the Assignments area. References are Key to the paper
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VESTAS WIND SYSTEMS A/S — EXPLOITING GLOBAL R&D
SYNERGIES
Professor Torben Pedersen and Research Assistant Marcus Møller Larsen wrote this case solely to provide material for class
discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may
have disguised certain names and other identifying information to protect confidentiality.
Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of
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Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected].uwo.ca.
Copyright © 2009, Ivey Management Services
Version: (A) 2009-11-26
Much had happened since the chief executive officer (CEO) of Vestas Wind Systems A/S, Ditlev Engel,
broadcast the company’s new corporate strategy — The Will to Win 2005-2008 — from headquarters in
Randers, Denmark, to all Vestas employees worldwide in 2005. Vestas was the market-leading producer of
high-tech wind turbines. A merger the year before with a Danish turbine producer had experienced
financial difficulties, and management was replaced with fresh leadership in order to bring the Danish
company to new heights. With the new management came a radical reorganization and the announcement
of several new strategic initiatives. As Engel stated, “These initiatives are aimed at increasing effectiveness
in all areas of Vestas’s business. We will professionalize our dialogue with the customers, we will improve
the quality of our products and we will be much more effective in all that we do.” The charismatic CEO
also argued that “by the implementation of The Will to Win, we create a new global Vestas. This work will,
no doubt, be exciting and very hard. At the same time, it will require the will to change in all of us and I
am confident that we at Vestas can meet this challenge.”1
Among the initiatives was the establishment of the Vestas Technology R&D business unit, headed by Finn
Strøm Madsen. Inexperienced in the field of wind energy, Madsen was determined to achieve global
leadership in all core technology areas and, consequently, strengthen a core competence for the company.
By 2008, Madsen had succeeded in setting up a global R&D network with R&D centres in Denmark, the
United Kingdom, Singapore and India, and in early 2009, a centre was opened in the United States. Vestas
Technology R&D accounted for €228 million in expenditures (3.7 per cent of the consolidated revenue) in
2008, which was 79.5 per cent higher than in 2007. That same year, Vestas announced a new corporate
strategy known as the No. 1 in Modern Energy strategy. With this strategy, the company — as market
leader — committed itself to promoting the wind industry as a whole and to putting wind energy on par
with oil and gas. In addition, the strategy highlighted Vestas as a high-tech company and put a greater
emphasis on its technological innovations.
1
Vestas’s website, press section, accessed October 28, 2009.
This document is authorized for use only by Karun Kapoor ([email protected]). Copying or posting is an infringement of copyright. Please contact
[email protected] or 800-988-0886 for additional copies.
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Despite impressive growth in recent years — the amount of energy delivered by Vestas had increased by
75 per cent since 2005 and its revenue had grown by 68 per cent — Madsen faced a dilemma. The number
of employees in Technology R&D was at a record high, the R&D network already encompassed five
development facilities around the world, and further expansion was planned. On top of that, the network
had extensive links to external research centres and universities. The task of coordinating and,
consequently, capitalizing on the R&D network was growing more complex and complicated as the
network expanded. Identifying novel, profitable competences and innovations around the world, managing
the interfaces between different research units and resources, and exploiting synergies were challenges
Madsen faced. Even though Vestas had shown positive growth, competition from different types of
companies was growing considerably due to the attractiveness of the wind energy industry.
Madsen knew he had the full support of Engel, who had stated: “Investments in research and development
demand some financial resources, but we truly believe that the right framework also gives many rich
opportunities.”2 However, Madsen also knew that he would eventually have to present some tangible
results arising from the extensive R&D efforts that were launched under his leadership. He therefore had
mixed feelings as he prepared himself for the weekly Vestas Government meeting, where Vestas’s
management shared and discussed business information and progress.
INTRODUCING VESTAS WIND SYSTEMS A/S
Vestas Wind Systems A/S was a global, market-leading producer of high technology wind power
solutions. Its headquarters were located on the east coast of Jutland — the Danish mainland. By the end of
2008, the company had delivered 5,580 megawatts of electricity through its wind turbines, which were
installed around the world. It held 23 per cent of the wind energy market and employed approximately
21,000 workers all around the world. In 2008, the company had €6,035 million in revenues and gross
profits of €1,179 million (see Exhibits 1 and 2).
The company was founded in 1945 as Vestjysk Staal Teknik A/S (abbreviated to Vestas) by Peder Hansen,
the son of a successful blacksmith in western Jutland. During its first 30 years, the company’s activities
focused on a broad line of household appliances and agricultural products. However, in 1979, during the
turmoil of the second oil crisis, Vestas manufactured and delivered its first wind turbines to customers who
were increasingly demanding sustainable energy. Vestas has since grown to become a globally successful
wind energy company, with its core businesses centred on the development, manufacturing, sale,
marketing and maintenance of wind power systems that use wind to produce electricity. The name of the
company was changed to Vestas Wind Systems A/S in 1986, a change that marked the company’s
exclusive focus on wind power solutions.
In 2005, Ditlev Engel, then the newly appointed CEO and president of Vestas, announced the launch of a
new corporate strategy — The Will to Win 2005-2008 — which would eventually transform the company
from a mere Danish producer of wind power turbines into a global energy and technology corporation.
Engel described his view of the strategy, stating: “The initiatives presented today aim to ensure that Vestas
will still be the world’s leading manufacturer of wind power systems in three years time — both in terms
of technology and the market…. We must be prepared for the fact that the future customers for our wind
power systems are international energy companies. They have high demands for us and for our products.
Many people still regard wind power, and thereby Vestas, as a ‘romantic flirt’ with alternative energy
sources. It is not. Vestas and wind power are real, very competitive alternatives to oil and gas.”3 Even
2
3
Børsen, January 22, 2008.
Vestas’s website, press section, accessed October 28, 2009.
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[email protected] or 800-988-0886 for additional copies.
Page 3
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though Vestas was already the world’s largest player in the wind energy market, the new strategy
explicated the company’s global aspirations and professionalized the organization in accordance with a
global mindset. The alteration in management and strategy came one year after the company merged with
another Danish wind turbine maker, NEG Micon. The merger made Vestas the global leader in the wind
energy market, but the marriage also entailed some financial troubles, which eventually prompted the
changes.
In conjunction with the new strategy, the company presented a new vision of “Wind, oil and gas” and
revised its mission to “Failure is not an option.” The former was formulated to underpin wind as a source
of power at least as important as fossil fuels. The latter emphasized the company’s commitment to
continually optimize working processes, safety procedures and products. In addition, Vestas was proud to
possess an extensive portfolio of wind turbines based on more than 25 years of experience, insight and
knowledge of wind, ranging from the V52 turbine with a capacity of 850 kilowatts to the V90 with a
capacity of three megawatts (see Exhibits 3 and 4). On average, Vestas installed a new wind turbine every
three hours. Since 1979, the company had delivered approximately 38,000 turbines.
No. 1 in Modern Energy
Following significant success with the Will to Win strategy, Vestas commenced on a new corporate
strategy, namely the No. 1 in Modern Energy strategy, in 2008. While the focus of the Will to Win strategy
was internal improvements, the new strategy emphasized external positioning and Vestas’s commitment as
market leader to promoting the industry as a whole and to putting wind energy on par with oil and gas.
Vestas aimed to create the world’s strongest energy brand. To achieve that goal, the company focused on
consolidating its market leadership position in the high-growth wind energy industry, which was becoming
increasingly competitive. “Vestas will be one of the world’s top five energy brands,” marketing director
Tina Ebler argued with regard to the new strategy, “and wind will not be characterized as alternative
energy anymore. Politicians and decision makers should understand that wind works.”4 Also integral to the
new strategy were the financial goals set for 2009, which reflected the company’s ambition to be profitable
while remaining No. 1 in Modern Energy. The goals included an EBIT margin of 11 to 13 per cent, net
working capital of a maximum of 10 per cent of annual revenue, and revenue of €7,200 million.
Vestas’s structure consisted of the Executive Management and 14 separate business units focused on sales,
production or development. While the former consisted of Ditlev Engel and Henrik Nørremark, executive
vice-president and chief financial officer (CFO), each of the latter was represented by a separate unit
president. Corporate Functions was also a unit in the company structure, and dealt with aspects such as
contracts, forecasts, planning, IT, finance and operations (see Exhibit 5). The company introduced a core
concept coined “Vestas Government,” under which Executive Management and the presidents of the 14
business units — the “Ministries” — met on a weekly basis to share and discuss key business information
and to monitor the implementation of the company’s strategy. Accordingly, a Vestas Constitution was
formulated with the purpose of converting visionary thoughts into concrete action. “Constitution is a very
basic term. It is something people understand,” Engel explained. “In the same way [as with a national
constitution], it makes it clear that all of our business methods and systems, all of the laws that surround us
on a daily basis, derive from some very fundamental attitudes.”5
4
5
Børsen, April 16, 2008.
Berlingske Nyhedsmagasin, March 30, 2007.
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Markets and Competitors
Vestas’s most important markets were in Europe, constituting 60 per cent of revenue in 2008, followed by
the Americas and Asia/Pacific, accounting for 26 per cent and 14 per cent, respectively. However, despite
the significance of the European markets, the company was well aware of industry analysts’ forecasts that
although Europe remained the absolute leading market for wind energy — representing 61 per cent, or
57,000 megawatts, of accumulated installed capacity in 2007 — the North American and Asian markets
(particularly the United States, China and India) were growing rapidly. Analysts expected these markets to
replace Europe in market importance in just a few years. It was therefore no surprise when Vestas
announced the establishment of R&D centres close to these markets (Singapore, Chennai and Houston).
Much of the industry’s growth potential was facilitated by the exceedingly supportive political and social
climate. Not only had the anti-nuclear power campaign sparked a general interest in the industry, but
favorable political resolutions and targets had also contributed to the remarkably optimistic forecasts.
Among the latter was the E.U. resolution that 20 per cent of all energy consumption must come from
renewable sources by 2020. Also, China set its renewable energy target at 15 per cent, while the newly
elected U.S. president publicly announced his intentions of creating a green economy.
A result of these developments was that Vestas found itself facing growing competition. Vestas was the
largest producer of wind energy at the end of 2007 in terms of market share, but the large conglomerates of
Siemens and GE Wind were using their strong financial bases to invest heavily in wind energy to capture
future market shares and were therefore considered to be serious challengers. In addition, a number of
listed companies (Suzlon, Gamesa, Nordex and Repower) and family-owned businesses (Enercon Gmbh)
represented strong rivalries for Vestas (see Exhibit 6). Lastly, there was an increasing number of low-cost
Chinese providers entering the wind energy scene, which were seen as posing a considerable threat to
Vestas’s market-leading position. In fact, Per Krogsgaard, the director of BTM Consult, a Danish
consultancy company specialized in renewable energy, stated that “the Chinese market is booming at the
moment, and you should not be surprised if Chinese producers like Goldwind become the world’s largest
in a short period due to the large sales on the Chinese market.”6 Peter Kruse, Vestas’s director for
Communication and Investor Relations, was, however, not overly concerned: “We are in a far more mature
market today, and the large customers in the energy sector always consider how long the different
producers have been in the market — they want to be fully reassured that the producer is safe before they
place large orders.”7
A GLOBAL R&D NETWORK
“For us, research and development is a global activity,” explained Finn Strøm Madsen, president of Vestas
Technology R&D. “It is through technology that we need to differentiate ourselves. Our goal is to have a
borderless, global setup with hubs in Europe, Asia and North America. Via this network, we are aiming for
an ongoing flow of ideas and technology for developing the best products and services.”8
Vestas Technology R&D was established in 2005 in conjunction with the reorganization of the company
under the vision “Global leadership in all core technology areas,” and had roughly 1,300 employees of 18
different nationalities scattered around the world in 2008. The formation of the business unit was a
manifestation of the company’s focus on technology, as well as a means of accessing technological
6
Børsen, March 31, 2008.
Ibid.
8
Vestas Magazine Win(d), February 2008.
7
This document is authorized for use only by Karun Kapoor ([email protected]). Copying or posting is an infringement of copyright. Please contact
[email protected] or 800-988-0886 for additional copies.
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hotspots around the world and fostering a global search for talent. With the new establishment came the
unification, professionalization and globalization of Vestas’s R&D, which had previously been implicitly
and tacitly carried out to a large extent. This change was evident in such aspects as R&D responsibility,
which was now centralized in Technology R&D, and the introduction of technical risk management as a
central concept. Prior to the Will to Win strategy, Vestas’s research and development was characterized by
decentralized R&D responsibility, the mixed use of new products and unproven technologies, and limited
risk management (see Exhibit 7). In addition, until the network was centrally organized, each R&D activity
was undertaken by individual engineering branches, such as Mechanical, Blades, Electrical and Plant IT.
As time passed, it became apparent that this silo structure was exceedingly time consuming, as the process
of creating compatible components required intense dialogue with the other branches. Such a process was,
consequently, highly resource-demanding.
In 2008, Vestas used €228 million on research and development, compared to €127 million in 2007.
Technology R&D consisted of three sub-units: Global Research (“Develop breakthrough innovation”),
Engineering and Products (“Deliver products to production”), and Operations (“Enhance service business”)
(see Exhibit 8). The objectives of the business unit were accordingly three-fold: to secure effective product
development in Engineering and Products, to strengthen Global Research project execution and innovation,
and to leverage synergies in the supply chain. Four cornerstones of supporting the R&D activities were
identified: the creation of a global network (considered the most significant), research programs with
internal and external partners and top universities around the world, a strategic focus on intellectual
property rights, and new ventures and acquisitions. “Global Research must contribute to driving down the
cost of energy by maturing new technologies to create breakthroughs that can be deployed into products,”
Jan Kristiansen, senior vice-president of Global Research, commented. “We must be a network-based
organization, both because of our own globalization but also because a global presence is essential to
gaining access to key competences.”9 Vestas’s Technology R&D consisted of many pieces of knowledge
and could not, therefore, rely solely on one location. Instead, it had to tap into knowledge from a global
network of R&D centres.
Development Facilities
Inaugurated in 2008, Vestas Technology R&D’s head office in Aarhus, Denmark, was the industry’s
largest, most modern R&D centre. As stated in Vestas’s annual report, “the centre unites a number of test
and development facilities in a unique innovation environment, which produces optimum conditions for
integrated product development and cross-disciplinary collaboration with customers and suppliers.
Following an extension of the facilities, the centre will house more than 900 people in 2010.” With a large,
symbolic wing crossing through the triangular infrastructure, the flagship centre carried out research and
development across the entire value chain, and possessed excellence status in most of the functional
competences for research. “That a Danish company has, in relatively few years, taken a global role as the
world’s undefeated market leader is, in itself, an achievement,” Ditlev Engel said in relation to the new
development facility in Aarhus. “…but we cannot allow ourselves to rest on our laurels — the competition
is extremely tough. Therefore, it is essential for us to remember that our leading position is not all about
the number of wind turbines we sell and install. It is equally about the technological …
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