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Professor David J. Collis and Research Assistant Tonia Junker (Europe Research Center) prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2017, 2018 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

D A V I D J . C O L L I S

T O N I A J U N K E R

Digitalization at Siemens

On a rainy December afternoon in 2015, Joe Kaeser, CEO of Siemens, came out of a meeting with his business heads after a spirited discussion about the future of Siemens’ Digitalization Initiative. The meeting had been called by Chief Strategy Officer (CSO) Horst J. Kayser, who, with Kaeser, had put digitalization at the core of a new corporate strategy based around Electrification, Automation, and Digitalization (EAD).

As Kayser noted, “Electrification was a common denominator for all of Siemens’ businesses, from power to rail to factory automation. Automation was another defining factor, with the automation of power plants and energy grids bringing the possibility of intelligent management and control to the system. The future was in the software above the automation layer, meaning digitalization.” Indeed, while Kayser expected 2%–3% growth in the mature electrification technology, and 4%–6% growth in automation, where the installed base of Siemens systems created customer loyalty,a digitalization was expected to grow at 7%–9% per annum over the cycle and could be applied to every Siemens’ business “along the electric value chain.” (See Exhibit 1 for growth chart.)

With this in mind, the Siemens managing board had created the Siemens Digitalization Program to make Siemens a leader in the paradigm shifts that resulted from combining the physical and virtual worlds. Although a corporate initiative, keeping the balance between corporate directives and independent business unit innovation would be critical to its successful implementation. The board discussed whether Siemens should launch a central analytics platform to be used across all divisions to create value from machine-generated data—e.g., for predictive maintenance schemes. One of Siemens’ main competitors, GE, was already using this approach with its corporate platform Predix, but Siemens executives reasoned that Siemens’ strategy was based on the specific offerings of the business units, and feared they could lose their influence with such a centralized approach. Indeed, Kaeser and Kayser had opted for a push-and-pull approach for the analytics platform, in which corporate encouraged and enabled business units to build on their own ideas, rather than issuing top-down mandates. This had led to the analytics platform being built as a base to support applications for specific use cases, rather than being designed centrally to support all possible business needs.

a One-third of factories in the world used the modern version of the SIMATIC automation platform, first introduced by Siemens in 1958.

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Siemens’ History Founded in 1847, Siemens built the first long-distance telegraph line in Europe in 1848. The

company introduced innovations like the dynamo in 1866, the electrical railway in 1879, and other developments in electrical engineering, communications, and power technology. (See Exhibit 2 for key milestones.) Over the years, the company became an industrial conglomerate active in a wide range of businesses, including semiconductors, telecommunications, power plants, lightbulbs, dishwashers, and healthcare equipment.

By the end of the 20th century, Siemens’ financial performance deteriorated as the conglomerate structure allowed profitable business units to subsidize their poorer-performing peers. Accountability within Siemens was weak and management gave out only vague targets like “become better every year,” without communicating explicit metrics for divisional performance.

Under increasing pressure from shareholders in the early 2000s, CEO Heinrich von Pierer began a corporate program that concentrated on cost reduction, innovation, and growth, to ensure that Siemens could compete on price while still differentiating itself from low-cost players in developing countries. (See Exhibit 3 for Siemens’ corporate programs.) This initiative was complemented by the 10-Point Program, aimed at sustainably improving profitability, and Operation 2003, which gave specific margin targets to groups and focused on generating cash in a period of slow macroeconomic growth. Pierer also exited the semiconductor business, which had reported a loss of DM 1.2 billion in 1998 (about €600 million) due to falling market prices and high capital investment.

With financial markets pushing more strongly for shareholder value creation in 2005, Pierer became chairman of Siemens’ supervisory board, while Klaus Kleinfeld took over as CEO. Kleinfeld started a corporate program to drive operating performance in which every division was given an explicit and openly communicated target margin range. He also started active portfolio management, no longer supporting those divisions unable to reach their targets. While, for example, investing in wind turbines and healthcare to satisfy the demand for sustainable energy sources and the needs of an aging population, Kleinfeld divested the loss-making mobile phone business. At the same time, Siemens’ heritage telecommunications business had run into a strategic quagmire after missing the technology shift from central office switching, where it was one of the global market leaders, to decentralized voice- over-IP network structures. To Kleinfeld it became clear that the telecommunications unit could not become competitive in the foreseeable future, and, in a traumatic decision, he spun off the business into a joint venture with Nokia in 2007.

After several years of investigations for bribery, Siemens agreed to pay $1.6 billion in fines in 2007 in Germany and the U.S. The scandal brought unprecedented upheaval, and Kleinfeld, despite not being personally involved, stepped down to allow for a fresh start.1

Peter Löscher took over in 2007, the first CEO hired from outside the company—from Merck & Co., a U.S. pharmaceutical firm. Realizing that a crisis of leadership had created the scandal, Löscher replaced about 80% of the top-level executives, while at the same time simplifying the structure of the management board. He reorganized the firm into four sectors—Energy, Industry, Healthcare, and Infrastructure—and established a program to unleash the potential of Siemens as an integrated technology company, significantly increasing R&D spending even during the economic crisis. 2

Under Löscher, Siemens sold its Home and Office Communication Devices business, and spun off its Osram lightbulb division. Siemens also sold its 50% stake in the joint venture Fujitsu Siemens Computers to Fujitsu in 2009, and its assembly systems business in 2010. Löscher had a particular interest in healthcare, and pushed for a turnaround of the then loss-making IT business of Siemens

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Healthcare, which had run into trouble with an unprofitable sales strategy for its IT services. Finally, following the strategy of being competitive in its core businesses, Siemens sold off its share in the joint venture with Nokia in 2013, effectively exiting the telecommunications business.

Having transformed the organization and strengthened global competitiveness, Löscher introduced the One Siemens Framework to unify the company. However, he was ousted by the board in July 2013 after a series of profit warnings and failure to deliver against promised targets. Joe Kaeser, former CFO, took over as CEO. He wanted to develop a comprehensive strategy that would capture a more relevant description of Siemens after its transition from industrial conglomerate. For this he brought back Kayser, a former Siemens executive who had left the company in 2008, as Chief Strategy Officer.

Vision 2020

The new strategy, Vision 2020, aimed to anchor digitalization within the company’s DNA in pursuit of a mission to “make real what matters, by setting the benchmark in the way we electrify, automate and digitalise the world around us.” 3 It would expand Siemens’ product portfolio in the global oil and gas industry and in distributed power generation, while exiting the last of its B2C businesses— household appliances and hearing aids.b The organization was to be split into nine divisions, each with a clear customer focus, to remove a layer of management. Culturally, the change was intended to move from being a “family” that offered lifetime employment, to becoming a “sports team” with a common identity in which individuals would be changed out if not performing.

Vision 2020 had seven specific goals: cost reduction of €1 billion by 2016; creation of sustainable value by tapping growth fields and getting the ten lowest-performing businesses in shape; the execution of a financial system with a target ROCE of 15%–20%; globalizing management by having more than 30% of division and business unit managers based outside Germany by 2020; a 20% improvement in Siemens’ Net Promoter Score; a 75% approval rating in Leadership and Diversity in a global engagement survey to make Siemens an employer of choice; and an increase of employee shareholders by 50% to 200,000 to foster an ownership culture.

Kaeser explained, “In 2014 . . . we were able to reverse the downward trend of our profitability in recent quarters and reduce the gap to our competitors. At the same time, we laid the foundation for the long-term development of Siemens with Vision 2020. In 2016, we want to achieve a noticeable increase in growth. In 2017, we want the gap to the competition to be closed.” 4

In fiscal year 2016, Siemens had grown to some 351,000 employees in 190 countries (see Exhibit 4 for Siemens’ global presence), with worldwide revenues of €79.6 billion (see Exhibits 5 and 6 for financials and stock price), and was organized into nine divisions that covered 50 business units in over 100 fields. The portfolio was rounded out by Siemens Financial Services and a corporate services unit that supported all business units, and four “go-to-market” regions. (See Exhibits 7 and 8 for portfolio overview and organizational structure.)

Internet of Things The expression “Internet of Things” (IoT) was coined by the British technology pioneer Kevin

Ashton in 1999. In the past, the Internet had been almost completely dependent on people for its supply of information. But now, things could be enabled to generate data themselves and to communicate

b Criteria to determine resource allocation among Siemens businesses included market growth; size of profit pool; competitive advantage and firm capabilities; synergy with other businesses; and potential to disrupt the industry.

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with each other. According to research firm Gartner, approximately 26 billion objects would be linked together in the IoT by 2020, 33 billion if laptops, PCs, and smartphones were added.5 While the amount of data worldwide in 2015 was estimated to equal one zettabyte—written as a one followed by 21 zeros—it was expected to increase 40-fold by 2020.6

This data provided better insight into users, devices, and systems, and, with the application of advanced analytics and machine learning or “artificial intelligence,” software could control those devices in myriad ways. When combined with cloud and mobile technologies for consumers, the IoT would lead to the smart home where room temperature, sound, and alarm systems would all adjust to the presence or absence of individuals or could be monitored and adjusted remotely from smartphones. In healthcare, clothing equipped with sensors would be able to detect when older people fell down, and small containers holding medications would “know” whether their owners had taken prescribed pills or not, sending an e-mail or text message reminder when necessary. 7

But perhaps the biggest opportunity lay in the Industrial Internet of Things (IIoT), where the automation and control of machines could be combined with real-time information and analysis to create intelligent, yet autonomous, systems. (See Exhibit 9 for smart data applications.) Examples of new business opportunities included online support and remote monitoring of a system in order to detect problems and prevent outages through predictive maintenance. 8 Subway carriages, for example, could be pulled out of service for repair if sensors detected a spike in voltage when doors opened, since this was an early warning indicator of a later service failure. In manufacturing, not only could uptime be improved and energy usage reduced by designing, for example, a self-learning gas turbine that used neural networks to optimize itself by changing parameters, such as blade angle and speed, but networked machines could also “learn” over time how to improve performance as a system. A wind farm, for example, could maximize electricity generation by continually changing the direction and orientation of each turbine as it learned the optimal configuration for differing wind conditions. In the medical field, the analysis of millions of X-rays shared from around the world could improve cancer detection rates and refine treatment protocols.

To deliver the IIoT required sensors and actuators on each machine that collected data on its current state and altered its settings, as a thermostat did in the home or a programmable logic controller did on a machine tool. While such automation had existed for a long time, the ability to collect information from many machines, connect it to and then store it in the cloud, and analyze masses of data (“big data”) to develop software that could improve the system performance of equipment within specific vertical markets was novel. The computing layer and relevant analytic techniques, such as neural networks, were in principle applicable to any data source and so could be standardized across industrial uses or vertical markets.

One obstacle impeding the growth of the IoT was the lack of technical standards to ensure that all devices from all manufacturers could communicate with one another. A key technology for connecting everyday objects to networks was radio-frequency identification (RFID), but it was not the only standard, competing with WLAN, Near Field Communication, and Bluetooth. Another problem was security: poor encryption of sensitive private information, combined with weak passwords, and defective user interfaces could turn Internet-connected devices into major security risks. 9

Digitalization at Siemens Digitalization came to Siemens’ attention during the first Internet bubble. Looking back, board

member Roland Busch remembered, “We all went through this 2001 e-commerce hype, and when it fell back everybody was happy that we were still in our traditional businesses of welding and bending.

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. . . At the time I was Head of Strategy, and I somehow got the feeling that there was still something big on the horizon.”

Anton Huber, responsible at that time for the Automation & Drives business, saw how much software was already involved in industrial automation, and worried that automation was becoming a digital business. In meetings with customers, Huber found demand for tools that would simulate technically complex plants or processes before construction and explained the impact on his business: “Automation software needs to be tested before being installed. Manufacturers need to prepare and train for the next product without stopping the current production line. We thought, why not simulate it like flying an airplane?”

So Huber took the initiative and appealed directly to the board. In 2006 Huber proposed investing in CAD/CAM (computer-aided design and computer-aided manufacturing) with PLM (product lifecycle management) technology by acquiring the U.S.-based company UGS Corp. for $3.5 billion— the biggest acquisition in Siemens’ history. CEO Kleinfeld and then-CFO Kaeser supported the idea, but other board members were skeptical whether a down-to-earth German automation company could run a Texas-based software player, particularly when it had failed to make such a transition in the telecommunications business. Fearing that with the growing importance of software to the automation business, Siemens might lose the part of the business that created value for customers—ending up just selling commoditized controller boxes—Huber convinced the board, and the deal was closed in 2007.

The UGS acquisition led the company a step toward digital factories in which virtual factories could be constructed, allowing manufacturers to test out their operations before building even a single physical machine or product, as flight simulators allowed pilots to virtually fly a plane. Siemens became the first supplier to offer a software and hardware portfolio encompassing the complete lifecycle of products and production facilities. Siemens also learned from UGS how to sell software as a license directly to end users, separately from automation sales, which typically went through a value- added reseller. The acquisition enabled UGS to get contracts from companies like Daimler, with credibility as part of Siemens.

2nd IT Revolution Initiative

Roland Busch, CSO in 2008, understood that what was happening to manufacturing would also happen elsewhere as IT changed the value chain and business models of many industries. Convinced that the increasing importance of IT would eliminate weaklings in the value chain, he knew that Siemens needed to be at the forefront of this evolution and wondered how to create a “movement” inside a large corporation.

Head of Strategy Development Gerhard Fohringer recalled, “I’ll always remember the time when our management guys watched CNN in their hotel on a business trip and they saw the Smarter Planet advertising: they saw a train, a power plant, a manufacturing plant, and they expected to see ‘Siemens,’ but instead it said ‘Smarter Planet by IBM.’ That was a trigger!”

In 2009, Busch met with 25 units from the industry, infrastructure, and energy divisions, which he thought would be most affected by the digital evolution. According to Busch, the result was eye- opening:

We asked them three questions: What’s your business relationship with IBM? What is your biggest opportunity? What is your biggest threat? The first one stood up, from the mobility and traffic management unit: “We are cooperating with IBM, we have a project

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going on for traffic management in London. The opportunity is that we are complementary; the threat is after cooperating we are now in a full-fledged competition in Singapore where they are offering against us.” The second one stood up: “I’m from building technology. We are making this Green Building Initiative with IBM, and we are cooperating well, but here comes the threat: they are now creating a community where they put themselves in the circle: they are trying to learn our processes, our businesses, and our customers, and then they try to commoditize our products.”

All invited business units told the same story of “coopetition”—how IBM tried to cooperate and learn the way that Siemens understood its customers and processes, before incorporating that into their business model and competing against Siemens. Busch reported the experience to the board and convinced members that they would be missing the boat if they did not act. With the full support of the board, Siemens shut the doors to IBM in terms of cooperation for a while.

Further discussions in the strategy group about how Siemens could fend off other software-oriented competitors, which might be able to generate solutions that would attack Siemens’ automation space and competence, led to the launch of the 2nd IT Revolution Initiative at Siemens in 2010. While some divisions, like automation, had already started to make investments for a digital future, the key for all to realize, according to Busch, was “that the whole business model is changing.”

Busch felt it was important to start this initiative with the 15 or so businesses that would be most impacted by digitalization, before extending it more broadly across the portfolio. He hoped to have a positive effect on conservative business units by showcasing examples, like the successful integration of the UGS software company into the traditional Siemens automation business. Fohringer remembered, “We educated and challenged the business units, so that it became clearer why we moved into a certain space and how we could defend it and match it with our core business.”

A steering committee was put in place to guide the initiative, consisting of the four business sector heads, the heads of technology and HR, and Busch as CSO under the governance of a board-level committee. Busch asked the business units involved in the meeting where the threat of IBM had been discovered, and to draw up landscapes of their IT systems, showing the architecture of hardware and software in the different layers. The goal of this exercise was to identify each unit’s line of defense and the strategic control points that would define areas for investments or partnering. The business units then presented these landscapes to the committee, and together they defined the “no-fly-zones”— zones where it was essential for Siemens to protect its knowledge and competence and where cooperating with companies that could become potential rivals would be too risky. In other zones, cooperation was seen as beneficial because Siemens realized that it could not do everything alone, but needed to develop an ecosystem of partners.

From Horizontal to Vertical IT

The overall strategy was to move away from horizontal IT, which included general-purpose programs and applications, such as desktop services and data management. Competition there was computer and software companies, like IBM, Microsoft, and Google. Instead, the focus was to be on vertical IT, which included software running the core processes of Siemens’ customers in, for example, manufacturing systems, or transmission and distribution grids. In each vertical, domain-specific expertise, such as fluid dynamics for analyzing liquid flows in pipelines, would be critical to developing successful software applications. Only companies like Siemens, with a heritage and accumulated expertise in that domain, would be successful.

Regarding the UGS acquisition, Fohringer explained:

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We were in the automation game, and we saw that we made big profit there, but we knew that this would change and that some of the value would go into the software layers. We had two opportunities: ERP (enterprise resource planning) and the supply chain market, or the PLM market with its design tools specific to our customers’ processes. The horizontal ERP market had big players like Oracle or SAP, so it was not easy for Siemens to step in, but we saw in PLM a fragmented situation with a lot of players and smaller software companies where our expertise would win out.

After realizing that the strength of Siemens’ business lay within the vertical, domain-specific expertise, the question came up of what should become of the current Siemens IT business (Siemens Information Systems, or SIS), which focused on horizontal IT. This was a €4.5 billion business employing 38,000 people, but which had lost €463 million in 2009. Trying to build it to compete with big players like Oracle, IBM, or Accenture was risky and would require capital, so an option to sell SIS was considered.

While there was some resistance from people who did not understand why Siemens would sell its IT business while in the middle of the 2nd IT Revolution, in 2011 the French IT company Atos was chosen to take over SIS for $1.1 billion. Busch explained, “We thought it was a good way to embrace the 2nd IT Revolution, having a partner, and at the same time creating a strong European player, which I think is good for the whole IT landscape.” SIS thus became part of Atos, with Siemens as a strategic shareholder owning 15% and committing €5.5 billion to a seven-year contract for future IT services.

Siemens and Atos set up a joint investment fund, with €50 million from each company, later adding another €25 million each, to finance innovation projects that required cooperation between Siemens and Atos. Thus Atos was guaranteed a customer base in the Siemens divisions, and Siemens’ business units could have their innovation projects financed independent of their own R&D budgets.

To access the fund, business units had to develop a business case and receive approval from the decision committee of Siemens and Atos representatives. One example for collaboration was developing an integrated toll system for roads in France. For this, Siemens built software related to the road and the vehicles, while Atos contributed the financial transaction software.

The commitment Siemens had given Atos made it a reliable and trusted partner with which it could work on projects that Siemens would not have given to Oracle or IBM for fear of them becoming direct competitors. The partnership with Atos became, in the words of Fohringer, “an unexpectedly positive, proactive, responsive, and trusted partnership, which I would not have expected when we started.” The share price of Atos rose from €25 in 2011 to nearly €70 in late 2015.

Digitalization of Services

Management early on recognized the impact that digitalization would have on the service component of all Siemens’ businesses. (See Exhibit 10 for digital services at Siemens.) With access to data from individual machines, maintenance could move from being scheduled (even if unnecessary) to predictive. The resulting improvement in machine uptime allowed manufacturers to sell equipment, like GE jet engines or Siemens trains, by hours of use rather than as a capital purchase.

Busch explained that service had often been treated as an underdog within Siemens, but with digitalization it became strategically more important. “When I looked at other companies, and benchmarked how much service they did in terms of percentage of revenue, profitability, and growth, Siemens was really lagging behind.” When he brought this to the attention of the board, it increased support for the service community.

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The first priority was to efficiently and securely enable data access to the installed base of Siemens equipment at customers’ sites. Because this was a common requirement across all divisions, a common connectivity tool—the common Remote Service Platform (cRSP)—was developed and quickly adopted by the businesses.

Some executives at Siemens were skeptical about the reach and the universality of the IoT technology. Anton Huber, now CEO of Siemens’ Digital Factory division, argued, “To believe that you can use for a hospital the same thing as for some milk-processing company or automotive manufacturer is a bit farfetched.” As examples, the type of data, the refreshment cycle time, and the APIs could all differ between an electricity grid, a train signaling system, and a digital scanner.

The Digitalization Initiative When Kaeser took over as CEO in 2013, he announced that he would take half a year with strategist

Kayser and the board to review the Siemens strategy in light of five megatrends he observed: urbanization, demographics, globalization, climate change, and digitalization. Kaeser explained:

In the future, digitalization will shape our economy and our society much more than in the past. It has already brought about material changes. Just think of the music industry, photography, retail trade, the energy market or the print media. Major brands vanish. And companies that were completely unknown yesterday are suddenly global market leaders. Those who don’t act in time run into acute difficulties. But those who anticipate and shape these changes and develop the right business models have every chance of emerging as true winners. 10

For Kaeser, the 2nd IT Revolution program had not been enough. He now wanted to widen its impact from the business units involved in that program to all of Siemens. Kayser wholeheartedly supported this approach, especially since he had wondered about Siemens’ role in the digitalization arena from his perspective as an outsider before joining as CSO. He recalled:

I was always wondering why Siemens wasn’t leading the charge. I heard IT companies talk about the Internet of Things, and they have no idea of manufacturing and automation structures, and an automation system is de facto an Internet of Things because it connects thousands of sensors and actuators. Some international competitors like GE were jumping on the bandwagon, talking about the industrial Internet, and Siemens was nowhere to be seen!

The new initiative was introduced in spring 2014, about the time Siemens implemented the new organizational structure, streamlining divisions so that they served distinct customer groups, like utilities, network operators, power distribution, rail operators, and construction companies. Learning from earlier experiences with corporate programs—like Fit4More, which had relied on workshops and change management processes—this initiative stressed targets and accountability.

The committee in charge of the Siemens Digitalization Program consisted of Chief Technology Officer Siegfried Russwurm as the official leader of the initiative, and all nine new divisional CEOs. The committee met regularly to evaluate the progress that divisions were making in driving their own digitalization initiatives. This meant that the pressure was now on all divisions, not just on those thought to be most impacted by digitalization.

Russwurm thought that this was very important, since some of the divisions had been a bit reluctant to get on board. “I told them, ’Folks, if you believe that your business is not affected by digitalization,

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there are only two options. Option 1 is that you just got it wrong. And option 2 is that you are right, but your business should not be within Siemens.’ It shook up some of our business leaders!” It also gave Russwurm the opportunity to explain to the divisions that were most advanced in digitalization that they needed to help their peers step up, which he admitted was sometimes tricky. “They ask why they should do something to help others if it compromises their own P&L. How do you convince them rather than force them to work for the greater good of the whole corporation? I haven’t found the magic silver bullet yet.”

Thomas Zimmermann, CEO of the Digital Grid business unit in the Energy Management Division, found the new method quite stimulating. He explained:

We know that digitalization is our future, and we are absolutely committed to shape our industry. The corporate initiative drives this one step further by constantly pushing you out of your comfort zone. As soon as you think that you are doing quite well, around the corner someone is doing even better. The better is the enemy of the good, and you are pushed all the time to go forward. We always have access to the best experts, and this exchange and impulse is very helpful. So I really want to stress this overall cultural transformation.

To make EAD tangible, Kaeser clearly categorized businesses into electrification, automation, and digitalization components. The electrification layer was composed of business units dealing with electromechanical systems; automatization was the layer with controllers, human-machine-interface panels, and the software around it; and digital was the vertical software and digital services. Kaeser had this quantified, so that he would be able to measure results of the Digitalization Initiative, and at the end of 2014 Siemens held a Capital Market Day for analysts. Russwurm presented the digitalization framework with the quantified EAD levers, announcing that under “D” Siemens currently generated €2.4 billion of vertical software and €500 million of digital service revenues from more than 300,000 remotely monitored devices, while enhanced “A” plus related services were a €33 billion business and enhanced “E” accounted for €37 billion of revenue. (See Exhibit 11 for 2016 EAD split.) Corporate Strategy projected more than 9% growth in software revenue with margins above 20%, and 15% growth in the sales of digital services with margins above 30%.

The yearly strategy review was also used to keep business units accountable for their digital plans. The Strategic Planning unit had an eight-page template to cover the main drivers of every business unit strategy in the annual review, and digitalization occupied one of these pages. Kayser explained, “This template forces us at Corporate Strategy to focus on our key priorities, and it really contributes to the core strategic direction of the divisions, and we feel that it is a powerful tool. The strategy review process is a process that is taken seriously!”

As Busch noted:

If you ask each business unit in a strategy review to talk about their digitalization strategy, you trigger a more and more bottom-up thinking and process. There is this quote in Germany that says, ‘Where the eyes of the Lord rest, cattle prosper,’ so when you are caring for the cattle, they grow. It means that if the managing board of Siemens puts digitalization on the agenda, of course it will grow.

For the purpose of raising awareness in the company on how IT developments would affect the different businesses, Siemens introduced CEO summits in 2011: every six months the CEOs of 15–20 business units would meet with a different set of experts in locations such as Silicon Valley to exchange

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ideas about their digital agenda. Novel approaches would be discussed and a business chosen to experiment with the idea, which could then become a best-practice example for others to learn from.

Arthur Kaindl, General Manager of Digital Health Services at Siemens, was convinced of the value of this approach: “I really find it useful. Sometimes you are so in the middle of your own agenda that getting outside input helps you to correct your path, or to support what you are doing.” The trips among digitally minded business unit leaders also helped create a community within Siemens that was based on digital culture. The sharing of ideas and fears also helped the board to get honest feedback about the evolution of the company.

Fohringer and his strategy team tried to facilitate these kinds of exchanges and sharing, by being in constant contact with the business units and meeting regularly with around 80 different people from the various divisions. They had an oversight role for the initiative, setting guidelines, assisting in the governance processes, and ensuring transparency. Progress toward targets for each business unit was reviewed every three to six months with accountability and consequences for underperformance.

Data Platforms for Customers and Partners

The long-term vision at Siemens was to create customer value by combining its knowledge of the economic challenges and user needs of different industries, such as railroads, with the data science of pattern recognition and machine learning.

Siemens’ connected devices were already generating 16 terabytes of operating data per month, therefore making the service business a good starting point for data analytics. While all business units could use cRSP, many divisions had built their own data and analytics platforms, with their own names, adapted to their customers’ particular needs. Siemens Healthcare, for example, used data analytics to predict the failures of X-ray tubes one to two weeks prior to their actual failure, so that preventive maintenance could be scheduled. In the Mobility division, preventive maintenance instead of scheduled maintenance according to mileage or use time led to savings of over 20%. Johannes Emmelheinz, CEO of Siemens Mobility Customer Services, noted, “We had train parts which we scheduled to change every seven years. And now the train has been in operation for 15 years and we have not changed them once because the analysis of the data shows that it is still functioning safely. This saves a lot of material and hours!”

The Industrial Data Analytics initiative In early 2014, Siemens started Industrial Data Analytics (IDA) as a cross-divisional initiative to build a platform for industry. A separate organiza- tional unit was created for platform management, and by mid-2015 IDA was developing the first use cases from energy, mobility, and healthcare.

Fohringer explained, “Focus is more important than synergies. In the end we are safe against Google and IBM because we can do things they can’t do in our verticals. But there are still some areas where it makes sense to work across business units.” The idea was to keep business units responsible for their P&L, but to exploit similarities in use cases across business units. The focus had to remain on the business units’ vertical know-how about their customers, which, according to Busch, was the competitive advantage that differentiated Siemens from competitors. As Russwurm put it, “We had to understand where scale is the winning argument versus where customer intimacy is the winning argument.”

IDA, like cRSP, was funded out of the Siemens-Atos fund—the biggest such project financed this way—and it used Atos to build the IT architecture and framework. The functionalities developed by platform experts in Siemens Corporate Technology and at Atos were regularly checked and signed off

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by business unit CEOs, who only then approved further funding. The common layer was limited to the technical base that was needed to have a functioning system, and it was left to the business units to build software add-ons based on their knowledge of their verticals.

Siemens’ Corporate Technology department, which historically was composed of academics and technicians who helped business units on specific research topics, now had to become a corporate organization that could establish and develop a platform. (See Exhibits 12 and 13 for Corporate Technology’s role). The business units quickly saw the benefits of this approach. Emmelheinz explained, “I gained a lot of speed through this, because I could use standardized tools and platforms, and I didn’t have to spend my time and my people on these technical basics, focusing instead on creating benefits for our customers. I believe that I understand my customers’ pain points better than someone in corporate.”

The IDA platform was designed to be interoperable with multiple vendors so that Siemens could partner with others, such as IBM, Accenture, and SAP, to support a broader ecosystem. The vision was to further enhance IDA to enable real-time and distributed analytics. Furthermore, artificial intelligence functionalities were to be integrated through a mix of Siemens’ own and third-party technology.

Emmelheinz expressed his enthusiasm: “IDA is basically a set of software tools and hardware infrastructure which can be scaled and used by everyone. And on top is our customer know-how. At least in my industry we are definitely ahead of the pack, and with the infrastructure, which is scalable, we have a cost position, which at the moment I believe is unbeatable.”

Going beyond maintenance-related services, Siemens Healthcare launched the Teamplay platform in 2014, which established a network among its own installed base of 500,000 scanners and also those of competitors in a cloud-based solution. Clinical users of Teamplay could tap into the data to compare themselves to other imaging centers or apply analytics to patient protocols. While agnostic as to the make of scanner, centers that owned Siemens scanners had access to a freemium subscription service.

Kaindl explained, “The triggering point must always be the customer challenge that you want to resolve, and what is the best, most efficient, quickest way to resolve it. That should be the guiding question, ideally using as many corporate synergies as possible. But when corporate is just driving everything centrally, you risk disconnecting business units from the customers.”

MindSphere The Digital Factory department within the Industry division launched an industrial cloud-based data platform in November 2015. Complementary to IDA, this MindSphere platform-as-a-service (PaaS) tool allowed Siemens customers to collect, manage, analyze, and visualize data for their own purposes—as an open, cloud-based operating system for the IoT. Siemens also provided the functionality in an on-premise solution for customers preferring their data not to “leave the premises.” Many customers treated their domain knowledge as their own intellectual property, and MindSphere allowed them or other third parties to develop their own unique applications. First use cases in MindSphere were centered around the monitoring, prediction, efficiency, and reduction of power consumption in manufacturing sites.

Like cRSP and IDA, MindSphere benefited from having Siemens divisions deeply involved in its development, to ensure its suitability across industrial verticals and acceptance by the divisions and their respective customers. Additionally, the company decided to use this industrial cloud-based data platform as the base for any data-based offerings of any other division to ensure operational synergies and speed, and to allow Siemens to become a scale leader in the industrial PaaS market, including in applications and services running on MindSphere.

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Digitalization Capabilities in 2015

Siemens had changed employee recruitment and training as it sought to incorporate digitalization. With 17,500 software engineers and 220 data scientists already employed, HR Director Janina Kugel drove employer branding campaigns and introduced different workspaces, replacing the long halls and closed doors with transparent and communication-oriented open spaces. According to Michael May, Head of Research for Analytics and Monitoring, the hardest people to find were data scientists who knew both analytics and the Siemens domains, and who were able to explain what they were doing in business terms. Siemens built collaborations with several universities to attract talent to its globally distributed offices, and the HR department sought to increase public awareness in the U.S. about Siemens’ digitalization strategy, in order to reach software talent at institutions like University of California, Berkeley, and Stanford University. (See Exhibit 14 for locations of data scientists.)

Indeed, by 2015 the IoT was moving all Siemens businesses away from electrification to digitalization of products and services. Siemens had spent over €3 billion since the UGS acquisition in 2007 to support this shift out of an annual R&D budget of €4.1 billion. This meant an evolution from mechanical-electrical–driven products to IT-based systems that could be monitored and optimized. In Mobility, for example, it was now possible to give availability guarantees for trains since the early detection and correction of anomalies in vehicle performance could prevent disruptions. On the Barcelona-to-Madrid rail link, for example, Siemens provided the railroad operator a performance contract with a guarantee and passenger reimbursement for anything above a 15-minute delay by providing 99.9% on time performance. This led 60% of rail passengers to choose rail over air for their subsequent travel plans.

Digitalization of Siemens’ core businesses was not, however, uniform. As Busch explained, “Each branch has its own speed and conservatism. Public transport and grid utility, for example, are extremely conservative. When you build a utility grid, you build it for the next 40 years. You can imagine how difficult it is to digitalize the grid in terms of automating it, putting new IT technology into it, managing it—and this conservatism is within our customers as it is within our people.”

In contrast was the Digital Factory, Siemens’ own business that operated two state-of-the-art factories in Germany and Shanghai at the forefront of digitalization. Their capability to create a “digital twin” of a product, process, or plant allowed for the investigation of the consequences of potential actions or scenarios in a virtual universe that could be used to optimize actions in the physical world. Russwurm described the development: “The digital twin allows for simulating things long before they are built, which speeds up time significantly for our customers. We don’t build prototypes anymore but simulate everything, and the first product is really supposed to be a sellable product.” This method was used, for example, for the Boeing 787 Dreamliner, where a full simulation of the plane existed before the first fuselage sections were physically made, but it was also employed in other industries with frequent design changes, like automotive.

Kayser explained the differences in maturity between the Siemens divisions:

If you look at some of the evaluations that analysts do for Siemens, Siemens currently has a valuation of roughly one times sales, and for an industrial company that is normal. But in our divisional parts evaluation, the numbers go from 0.6/0.7 times sales for the more mechanical businesses like railways, to 2.3/2.5 times sales for our digital factory division. Some divisions have 60% E, a little layer of A, and no digital business yet, whereas the digital factory division has 10% E, 50% A, and 40% D, and it’s quite obvious that they get a much higher multiple because it is more profitable and higher growth.

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A Different Approach to Digitalization: GE GE, one of Siemens’ main competitors, had a more centralized and top-down approach to

digitalization. In November 2011, GE CEO Jeff Immelt created one central software unit within GE as a separate division. Bill Ruh, who had experience in large systems-based networking, was hired from Cisco to manage this new department—GE Software (later called GE Digital).11 GE claimed to be within the “industrial internet” and saw itself as the “Digital Industrial Company.”12

By 2016, the company was spending $1 billion a year to boost its digital capabilities, and had 1,000 software engineers and data scientists working in its software unit in San Ramon, California, close to Silicon Valley.13 Ruh did not believe in a decentralized approach in software: “Co-location is everything. Distributed software development in my mind doesn’t work.” 14

The idea was to build one common platform that all GE business units, as well as their customers, could use. The platform, called Predix, was launched in August 2015 to much fanfare, and rolled out to customers in early 2016.15 Although Predix was conceived with similar goals to Siemens’ Mind- Sphere, notably the possibility for business units and their customers to manage and analyze industrial data,16 the approach was quite different.

According to Kayser, GE’s approach saw Ruh himself as the digital boss of everybody within the matrix structure, pushing down the platform he built with his team onto the different business units, who had only been marginally involved in its creation. “At Siemens we do feel that we are going at it in a way more orchestrating, decentralized approach; we didn’t try to do it centrally,” Kayser commented.

In September 2015, GE announced that it expected the Predix platform to make $5 billion in revenues in 2015 while tripling this number by 2020. It also announced the development of Predix.io, its PaaS offering, where companies could build their own custom applications on top of Predix.17 Analysts, however, worried about the competition GE would face in setting itself up as a software business, as it would be taking on Microsoft, Amazon, IBM, Oracle, and SAP. “GE is drag-racing with the best technology companies in the world,” said Frank Gillett of Forrester Research. “Kudos to them for trying, but I think they will find it harder than they think.” 18

Ruh argued that software rivals started from a position of weakness because they did not have the same understanding of industrial machines. 19 Within Siemens, however, the opinion prevailed that the limited involvement of business units in the development of Predix would be a hindrance to the platform’s success. Emmelheinz argued, “What I sense is that they come from the money side, not from the pain points of the customers. I believe that I can influence the system much better if I have a clear customer case.”

Russwurm recalled that some people had left GE out of frustration and joined Siemens:

I vividly remember a guy who was running a significant business for GE before joining us. He had a pretty good problem description of why he had left GE, which was that these guys believed they could understand the needs of his customers better than he and his organization. His concern was that he would run into the same problem at Siemens. I said, “It’s pretty simple: you know the customers, and whoever in Corporate Technology believes that he or she knows the customers better than you, I would tell them to apply for work on the business side.”

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However, GE was strong in marketing, launching ad campaigns on their digital offerings, including Predix. But even this received mixed reviews. GE had been running ads showing a young software engineer explaining his new job at the company to family and friends. In one, his friends are unimpressed by what he does for power plants and hospitals, but enthuse over another engineer who is working on “the game where you put fruit hats on animals.” The gulf between the cultures of Palo Alto, California, and GE’s headquarters was wide. “They should not underestimate the challenge of reinventing themselves as a digital company,” said Jim Heppelmann, Chief Executive of PTC, a software company that worked with GE. “Silicon Valley is a very special place in terms of its culture, its star system, its remuneration. That’s something GE can’t bring.” 20

Driving Digitalization Forward When asked how Siemens had evolved in its digitalization journey on a scale from 1 to 10, Kayser

noted:

In 2008 we were probably at 2 to 3, because there was the big acquisition of UGS, but there was also confusion about what software and IT integration meant for our business. By 2013 there had been progress, the IT Revolution had started, SIS had been divested, it had been understood that we needed to focus on our verticals, there was a certain openness to digitalization, but still some confusion about the Internet of Things and what it meant for us, so we were at 4 to 5. I think that in terms of strategic clarity and direction we have made huge progress. We are relatively competitive today with what we are doing, and so I would say that we are at 6 to 7.

In order to reach a 10 on the scale, Kayser wanted more digitalization of internal processes, and to attract younger employees who were used to working in quite different, digital styles.

For Busch, the speed with which Siemens could drive its digitalization forward was essential, as exponential developments were observed in data generation and analytics. “If that’s true what we are seeing, whatever we do now, we have to double the speed. I think we did the right things, we covered everything from platforms to business models to HR, to our visibility of being an IT company to the outside world, but the point would be: we have to be faster!”

For Zimmermann, it was all about getting more thought leadership into the market, to get out the word that Siemens was not only market leader in electrification and automation, but also a powerhouse in digitalization and software. “Especially in the software and IT area, marketing is half the business! Creating customer value is the other half that has to follow.”

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Exhibit 1 EAD Growth Chart, 2015

Source: Company documents.

Exhibit 2 Key Milestones in Siemens’ History

Source: Company documents.

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717-428 Digitalization at Siemens

Exhibit 3 Corporate Programs at Siemens, Overview

Source: Company documents.

Exhibit 4 Global Presence of Siemens

Source: Company documents.

For the exclusive use of R. Gunim, 2020.

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717-428 Digitalization at Siemens

Exhibit 6 Relative Stock Price Development of Siemens and Key Competitors since 1998

Source: Company documents.

Exhibit 7 Siemens Business Divisions, 2016

x Power and Gas: products and solutions for environmentally-compatible and resource- saving power generation, using fossil or renewable fuels for energy production and the transport of oil and gas. Examples: gas and steam turbines, generators and compressors, integrated power plant and automation solutions.

x Healthcare: leader in medical imaging, laboratory diagnostics, and clinical IT. Run separately from other businesses within the corporation. Over 500,000 imaging scanners installed worldwide. Universal imaging software for 3D reading and advanced visualization that could be used in its own devices and those of other producers.

x Energy Management: facilities and systems for the low-voltage and distribution power grid, smart grid and energy automation solutions, power supply for industrial plants, and high-voltage transmission systems.

x Digital Factory: comprehensive portfolio of hardware and software products enabling the integration of data from development, production and suppliers, allowing for the complete digital representation of the entire physical value chain. Product Lifecycle Management (PLM) software allowing for the development and optimization of new products on an entirely virtual basis.

x Siemens Wind Power: wind turbines offering solutions to meet both business and environmental needs, with over 27,000 megawatts of wind power installed. A platform strategy for wind power plants helped bring down the costs of wind power, as did innovations in blade design and generator technology. Leader in on- and offshore wind power.

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Digitalization at Siemens 717-428

x Power Generation Services: extensive service network around the world for expert support, maintenance, repairs, replacements, modernizations and upgrades of components, such as gas, steam and wind turbines as well as generators in large-scale and industrial power plants, and compressors for the oil and gas industry. Remote monitoring and diagnostics.

x Building Technologies: leading provider of automation technologies and services for commercial, industrial and public buildings and infrastructures across their entire lifecycle. Applications included building operation, automation, comfort, fire safety and security, as well as products, solutions and services to optimize the energy costs, reliability, comfort and performance of buildings while meeting ecological and sustainability requirements.

x Mobility: vehicles for rail traffic, signal and control technology for rail-based passenger and freight traffic, electrification solutions for rail and road traffic, maintenance and service of vehicles and infrastructure, and road traffic control and information systems.

x Process Industries and Drives: automation, drive technology, industrial software, and services based on best-in-class technology.

Source: Company documents.

Exhibit 8 Siemens Organization Structure

Source: Company documents.

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717-428 Digitalization at Siemens

Exhibit 9 Smart Data—From Descriptive to Prescriptive Analytics

Source: Company documents.

Exhibit 10 Examples of Digital Services at Siemens

Source: Company documents.

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Digitalization at Siemens 717-428

Exhibit 11 EAD Split, 2016

Source: Company documents.

Exhibit 12 Collaboration between Corporate Technology and Business Units

Source: Company documents.

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717-428 Digitalization at Siemens

Exhibit 13 Customizability for Each Business Unit

Source: Company documents.

Exhibit 14 Geographical Location of Siemens Data Scientists

Source: Company documents.

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Digitalization at Siemens 717-428

Endnotes

1 “Kleinfeld Throws in the Towel: Siemens CEO Undermined by Board,” Spiegel Online International, April 26, 2007, http://www.spiegel.de/international/business/kleinfeld-throws-in-the-towel-siemens-ceo-undermined-by-board-a- 479588.html, accessed December 2015.

2 Peter Löscher, “The CEO of Siemens on Using a Scandal to Drive Change,” Harvard Business Review, November 2012, https://hbr.org/2012/11/the-ceo-of-siemens-on-using-a-scandal-to-drive-change, accessed December 2015.

3 Siemens Mission Statement, https://www.siemens.com/annual/14/en/company-report/our-path/, accessed November 2016.

4 “Annual Shareholders’ Meeting of Siemens AG – Speech by Joe Kaeser,” January 27, 2015, provided by the company.

5 Gitta Rohling, “Facts and Forecasts: Billions of Things, Trillions of Dollars,” Siemens company website, October 1, 2014, http://www.siemens.com/innovation/en/home/pictures-of-the-future/digitalization-and-software/internet-of-things- facts-and-forecasts.html, accessed December 2015.

6 Siemens company website, “Digitalization – Special feature on the future of manufacturing.”

7 Rohling, “Facts and Forecasts: Billions of Things, Trillions of Dollars.”

8 Siemens company website, “Digitalization – Special feature on the future of manufacturing.”

9 Rohling, “Facts and Forecasts: Billions of Things, Trillions of Dollars.”

10 “Annual Shareholders’ Meeting of Siemens AG – Speech by Joe Kaeser,” January 27, 2015, provided by the company.

11 Karim R. Lakhani, Marco Iansiti, and Kerry Herman, “GE and the Industrial Internet,” HBS No. 614-032 (Boston: Harvard Business School Publishing, 2015).

12 GE Company website, “Discover GE Digital,” https://www.ge.com/digital/stories/discover-ge-digital-digital- industrial-company, accessed October 2016.

13 Ed Crooks, “General Electric: Post-industrial revolution,” Financial Times, January 12, 2016, http://www.ft.com/cms/s/0/81bec2c0-b847-11e5-b151-8e15c9a029fb.html#axzz44ZFn1XP1, accessed March 2016.

14 Lakhani, Iansiti, and Herman, “GE and the Industrial Internet.”

15 Barb Darrow, “GE preps industrial-strength cloud of its own,” Fortune, http://fortune.com/2015/08/05/ge-preps- industrial-cloud/, accessed March 2016.

16 Crooks, “General Electric: Post-industrial revolution.”

17 Ron Miller, “GE Predicts Predix Platform Will Generate $6B in Revenue This Year,” TechCrunch, September 29, 2015, http://techcrunch.com/2015/09/29/ge-predicts-predix-platform-will-generate-6b-in-revenue-this-year/, accessed April 2016.

18 Crooks, “General Electric: Post-industrial revolution.”

19 Crooks, “General Electric: Post-industrial revolution.”

20 Crooks, “General Electric: Post-industrial revolution.”

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