The Global Rubber & Tire Industry

Strategic Leadership is defined as the ability to shape the organisation’s decisions and deliver high value over time, not only personally but also by inspiring and managing others in the organisation. (Lynch, 2009).

The focus of strategic leadership is sustainable competitive advantage, or the enduring success of the organization. (Hughes & Beatty, 2005)

Key components of Strategic Leadership:

How to lead so that others will follow.

How to shape culture.

How to structure and influence decision making. (Lynch, 2009)

In view of the above definitions and key characterisitcs, strategic leadership in the Global Rubber & Tire Industry in general and Continental AG in particular is seen as the ability of a corporate leader to build long term value for the stakeholders of an organisation.

In the context of Continental AG, Dr. Hubert von Grunberg displays Strategic Leadership by first acknowledging the fact that all was not well at Continental. Aginst the backdrop of rising sales, profits were falling, to the point of a loos in 1991. The drive to increase sales and maintain a position in the Global Market using aggressive pricing was detrimental to the immediate and long term well being of Continental.

This was swiftly followed by a Clear 10 point recovery plan announced in December 1991, the direction was clearly set for the turn around through encouragement of Entreprenuership and strategic alliances, and a goal of ensuring profitabilty in 1992.

The next step in the turn around was the identification of the individual business units and making each unit responsible for profitability. In this process, no preson or process was considered immune to review, and the subsequent restructuring of the Organisation from a Task oriented sturcture in 1991 through to a Market oriented structure in 2001 further depicts strategic leadership.

Entrepreneurship is a way of thinking, reasoning and acting that focuses on the identification and exploitation of opportunities from a broad general perspective typically driven by the leadership of individuals or small groups. (Lynch, 2009)

Corporate Entrepreneurship is often called Intrapreneurship and is defined as Entrepreneurs can be found starting organizations, running organizations and working in organizations as employees. In the latter case they are typically called intrapreneurs, i.e. internal entrepreneurs. (Thompson & Martin, 2005)

The key consideration is the identification and utilisation of opportunities for profit. Given the case study, Entrepreneurship is embedded at the core of the recovery plan of Continental AG.

The case study goes on to state that the Tire as a product had largely expended innovative capacity. Inspite of this the dedicated focus on technological leadership is an important Entrepreneurial component.

The first instance is the key belief of Dr. von Grunberg that Complete sytems will be the dominant supplier to the Automobile Industry in the short and medium term. The establishment of Automotive systems as division to develop these integrated sytems pre-empted the possible relegation of Continental as a secondary supplier had it remained a pure Tire manufacturer.

The identification of Rubber lifting belts as an alternative product also shows high entreprenuerial capacity, as Continental was already a Global leader in the Tire industry whose primary input is Rubber. This opportunity and subsequent alliance with Otis, a global leader in the elevator industry resulted in substantila supply contracts.

Given the illustrations above, it is evident that all Entrepreneurs are Strategic Leaders, but the same cannot be said for the reversal, ie. All Startegic Leaders are not necessarily Entrepreneurs.

1.2 Critical evaluation of Continental’s Agenda for Strategic Change at the beginning of the 1990s.

Strategic change concerns changes which take place over time to the strategies and objectives of the organization. Change can be gradual or evolutionary or more dramatic, even revolutionary. (Thompson & Martin, 2005)

Lynch argues that it is important to distinguish Strategic Change form Organisational Change – (Lynch, 2009). Organisational change inevitably happens in the course of the daily operations of an organisation whereas Strategic Change is a planned and excuted set of events and actions which move an organisation in the direction of achieving its clearly defined objectives. This involves substantive changes beyond normal routines and the induction of new patterns of action, belief and attitudes. (Schein, 1990)

Tichy identifies four main causes of Strategic change, namely Environment; Business Relationships; Technology; People. (Tichy, 1983). The situation facing Continental AG in 1991 was a compound combination of all the four causes. The leading cause was the Environment as Tire market was saturated; Car Manufacturers were pushing down prices; Technology was plateaued and as a result a New Leader was appointed. The cause of the crisis can be narrowed to complacency, and irresponsiveness to Market demands.

Hannagan explains that Strategic change can be incremental where the organisations’ underlying values and beliefs are not radically altered or transformational where a major paradigm shift occurs in the cultural assumptions. Whether it is incremental or transformational, strategic change is concerned with changes which are necessary to maintain the link between the organisation and its environment so that it remains competitive and able to meet the needs of its customers. (Hannagan, 2002). Given the scale of the down turn at Continental AG, a hybrid combination of small incremental changes and quantum leap transformational strategic changes were adopted to mark a path to recovery.

The agenda for Strategic change undertaken by Continental AG can be broken down in to the sections outlined below.

Change in Leadership – Appointment of Dr. von Grunberg. The implementation of a turnaround strategy necessitated a change at the helm of the organisation. This resulted in the appointment of a new chairman of the Executive Board.

The first step towards achieving profitability was identifying loss making units down to the smallest possible element. In this case the segregation of a number of divisions into smaller units. This is witnessed in the separation of the replacement tire business which was profitable from that of the loss making original equipment business.

A further step in the turnaround strategy was the conversion of Common service functions into profit centres. Human Resource and Information Technology, which were shared services across the organisation, were eventually separated into separate commercial entities. This was a clear departure from the thinking where support functions are cost centres.

Despite the conceived stagnation and exhaustion in the innovative potential of the Tire as a product, the heavy emphasis on Technological excellence, Innovation and Integration formed an additional key factor in the change strategy. The harmonisation of Research and Development in a central location and the allocation of a percentage of all revenues to R&D is a manifestation of this.

Entrepreneurship – The conviction that Continental AG has the capacity and capability to identify opportunities in the market and take advantage of these to enhance profitability was evident in the strategic move towards moving beyond the traditional core product of Tires and into a complete systems supplier to the Automobile industry.

2.1 How Continental AG fostered Strategic Innovation to achieve growth in productivity from 1991 to 1999 in view of Porter’s Value Chain

A systematic way of examining all the activities a firm performs and how they interact is necessary for analyzing the sources of competitive advantage. In this chapter, I introduce the value chain as the basic tool for doing so. (Porter, 1985)

Every firm is a collection of activities that are performed to design, produce, market, deliver, and support its product.

Value Chain as defined by Porter (1985) comprises of 5 Primary activities, namely Inbound Logistics, Operations, Outbound Logistics, Marketing & Sales and Service. In addition a Porter’s Value chain has 4 Support Activities i.e. Firm Infrastructure, HRM, Technology Development and Procurement.

(Porter, 1985)

Continental AG achieved growth in productivity by fostering strategic innovation in a number of its value chain activities. These are briefly enumerated below.

The reorganisation of Continental AG’s Infrastructure by means of Decentralisation of its Bureaucracy and restructuring the organisation from a task oriented structure into a market oriented one.

The creation of Business Unit Value chains for Passenger Tires and Commercial Tires, consequently merging Manufacturing and Marketing of each and giving each unit Individual profit responsibility.

The conversion of Support activities of Information Technology and Human Resource into individual Business Unit Value Chains and subsequently independent business entities.

Revisiting and improving procurement of important inputs, steel cord being a key example. The resulting savings in costs greatly enhanced profitability. This required expansion of the procurement process to ensure quality, and thus displays the advantage of creating a linkage between the value chain of Continental and its supplier.

Remarketing and positioning of competing acquired brands into complementary positions based on quality and application. This is seen by placing Continental as a premium brand and Barum as budget, similarly marketing Uniroyal as the rain tire and Semperit as the winter tire.

Development of Technology, and when necessary acquiring another Company (Teves) to focus on Automotive Systems competency as opposed to manufacture of Tires only. This enabled Continental AG to create competitive advantage through differentiation.

The development of a Modular Manufacturing Plant where the base model of tires is mass manufactured, but allowing for some customisation and diversity is evidence of Innovative operations.

2.2 Comparison of “Corporate Governance” and “Corporate Social Responsibility” practices of Continental AG with those of Goodyear Tire and Rubber Company

Corporate Governance is defined as the responsibility of a firm’s board of directors. The directors have a fiduciary duty to the shareholders, who are the corporation’s owners. (Sompayrac, 2006)

Corporate social responsibility (CSR) can be defined as the “economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time”. (Carroll & Buchholtz, 2003)

In line with the above definitions, Corporate Governance focuses on the efficient and prudent execution of Organisation’s responsibility to its shareholders as its legal owners, whereas Corporate Social Responsibility concentrates on the Organisation’s responsibility to all its stakeholders, of whom the owners are a section. The stakeholders will include shareholders, employees, customers, suppliers, government, society at large and the Environment.

As elaborated in the Corporate Governance Section of Continental’s annual report for 2009 (Continental Corporation, 2010), the Supervisory Board and Executive Board are equally responsible for the governance of the company. The Supervisory Board comprises of twenty members, half of whom represent shareholders’ and half elected as Employee representatives. The Supervisory Board advises and supervises the Executive Board, oversees the strategic implementation of policies, approves decisions of material importance and appoints the Executive Board through and with the consent of the Annual General Meeting of Shareholders. The Chairman of the Executive Board serves as the Chief Executive Officer of the Company

The Goodyear Tire and Rubber Company Corporate governance guidelines provide for a Board of Directors comprising of nine to twelve members elected at the Annual General Meeting of Shareholders of the Company. The Chairman of the Board at Goodyear may, but need not be, the Chief Executive Officer of the Company. (The Goodyear Tire and Rubber Company)

Prominent similarities in the Governance models of Continental and Goodyear are the functions of Audit, Compensation and Remuneration, Appointment and Governance are vested in the Supervisory and Executive Board at Continental and in the Board of Directors at Goodyear. Both Companies have prudent guidelines regulating the conduct of the members who serve on these boards.

The key differences observed between Corporate Governance at Continental and Goodyear are twofold. First, the bicameral structure at Continental, where the Supervisory Board acts in an Advisory Capacity to the Executive Board. A single governance structure exists at Continental. Whereas a two level governance structure provides additional guidance, supervision and prudence, it also adds an additional layer of bureaucracy and associated bottlenecks and costs to the organisation.

The second difference observed between the Governance structures is the presence of elected representation of the Employees in the Supervisory Board, in a number equal to those of the Shareholders representatives. This presence ensures the involvement of Employees representation in material decisions of the Company, and consequently offers better protection of the Human Resource employed at Continental AG.

The Corporate Social Responsibility activities of Continental AG are summarised in the Company’s Annual Report for the Financial Year 2009 (Continental Corporation, 2010)accessed on the company’s website. The principal focus of the Corporate Responsibility Report is activities revolving around non-shareholding stakeholders. The Key areas of focus are Employees, Environment and Acting Responsibly.

Complementing the Annual Report, whose primary target is shareholders, is the BASICS of Continental AG. These driving principles have evolved very little from their formulation as described in the case study to date as available on Continental’s corporate website. The BASICS cover the relationships of Continental with Customers, Suppliers, Employees, Partners and Shareholders. This vision defining document has a more holistic approach towards CSR by encompassing the expectations of all stakeholders.

Goodyear Tire and Rubber Company, in contrast to Continental, does not report its Corporate Social Responsibility activities in its Annual Report to Shareholders, but publishes a separate Report for CSR (The Goodyear Tire & Rubber Company, 2009), as available on the company’s website. This Report outlines four stakeholders namely, Consumers, Associates, Environment and Communities.

Both companies give a high level of importance to Employee training and development through various initiatives, and the creation of a safe working environment with almost zero injuries. Equal emphasis is directed to customer focus in the Continental BASICS (Continental Corporation, 2010)and the Goodyear CSR report (The Goodyear Tire & Rubber Company, 2009).

With regards to Environmental protection, both Continental and Goodyear have comprehensive policies for sustainable and responsible behaviour. Continental reports on its Carbon Management activities in its annual report giving detailed information of its efforts to contain its Environmental impact. Goodyear reports its Environmental Impact in the CSR Report and highlights its Energy and Water Efficiency in its Manufacturing processes. In addition Goodyear emphasises the Environmental friendliness of its products by focusing on fuel efficient tires and its prototype tire manufactured from renewable biomass.

It is also observed that Goodyear has a more focused Community Engagement Policy in the areas that it operates. This includes visible support of charities through its aerial blimp, support for education, disaster relief and road safety campaigns. Whereas at Continental this facet is not very prominent and is limited to its Formula Student and Ambassador training and education programs.

Effectiveness of “Functional”, “Organisational” and “Corporate” structures in unleashing Manager’s Entrepreneurial Energy.

The Functional structure in place at Continental AG in 1991 is explained in the case study and displayed in the illustration below.

Functional Structure of Continental AG in 1991

Distelzweig, 2006 argues that the functional structure as was in place in 1991 has distinct advantages and disadvantages. The advantages noted in this structure are efficiency and skill development, and the disadvantages being the creation of a narrow departmental focus at the cost larger organisational goals, and the challenge of coordinating geographically dispersed locations under the same function.

This structure took a considerable toll on management time and resources in overseeing day to day operational activities as elaborated by Bartlett and Ghoshal (1995).

Given the scenario at Continental, this structure was largely focused on tasks and control, with individual units having minimum autonomy. Such a situation of top-down control resulted in discouraging the development and cultivation of Entrepreneurship in Continental.

Organisational structure of tire operations in 1992

The metamorphosis of Continental AG from functional departmentalisation as described above to an Organisational model (also referred to as Divisional or Multidivisional model) was initiated by Dr von Grunberg as he took the lead role as chairman of the Executive Board. The earliest transformation noted in the case study is the realignment of the Production and Marketing sections of Tyres, into Passenger and Commercial Tires. This reassignment along the lines of Product Division allowed mangers to take responsibility for their respective Product and consequently Market segment.

This structure evidences visible improvements over the functional structure as elaborated by Distelzweig (2006) in offering the divisional managers autonomy for their unit but may create some duplication of efforts if key functional tasks defined above.

Bartlett & Ghoshal, 1995 discuss that this structure freed up time and resources of senior managers to engage in strategic activities, but argue that this structure was unable to generate and nurture new business opportunities internally. As each division in the organisation became individually responsible for its revenue stream and profitability, new ventures were seen as unjustifiable capital and human resource costs, thus discouraged. Thus, necessitating growth through expansion and acquisition.

This structure is seen to encourage a limited level of Entrepreneurship among unit managers, but given the cost justification argued above still limits the extent to which this energy can be unleashed.

Corporate structure of Continental AG in2001

At the turn of the century as Dr von Grunberg was handing over the reins of Continental AG the structure at the Company had evolved to the corporate model described in the case study and pictured below. This model was meant to maximise the utilisation of Entrepreneurial talent and energy in the company and drive it through continued profitability, which had been achieved through an impressive turn around in the last decade.

Bartlett and Ghoshal (1995) recommend that for a company to sustain its growth in the current times, an emergent management approach is required. This approach is comprised of a three coordinated core processes, namely Entrepreneurial, Integration and Renewal Processes. The Corporate structure at Continental AG is in alignment with this model.

The Entrepreneurial Process is visible in the revised structure by giving each business unit sufficient autonomy and creative space to identify and exploit opportunities. The creation of a Strategic Technology unit is a key factor in the integration Process and enables diverse business units to collaborate towards making Continental a trendsetter in the automotive Industry. The Renewal Process comprising of rationalisation and revitalisation aspects, where mind sets and ingrained cultures are challenged are evidences in the departure for a “hypercaution” towards a willingness to take risks in business.

In conclusion, Schuler (1986) states that successful Corporate Entrepreneurship involves two importan factors, organisational structure and human resources. Human resources foster and facilitate innovation and entrepreneurship and to sustain this requires flexible organisational structures and policies. This has been continuously improved and optimally enabled in the evolution of the structure through functional, organisational and finally the corporate structure at Continental AG.

3.2 Evaluating the effectiveness of Dr. Stephan Kessel’s leadership skills.

Thompson and Martin (2005) explain that the qualities and skills of an effective leader are broadly classified in three categories, Drive, Judgement and Influence. Drive combines motivation, ambition and ability. Judgement includes decision making, opportunity spotting, problem framing and analytical skills. Influence encompasses the effect on people’s behaviours, networks and contacts. In addition to the above categories, De Vries (1996) discusses that leaders require architectural and charismatic skills to enable them be effective in their organisations.

Dr. Kessel was appointed to head the then loss making Original Equipment unit of passenger tires in 1995, and responsible for the return to profitability of this unit. He was later to run the Commercial tire unit form 1997 and was appointed to the Executive Board. He was appointed Chairman of the Executive Board in June 1999 and relinquished his position in September 2001. (Continental Corporation, 2001)

The meteoric career, but short stint at the helm of the organisation as viewed through the lens of the above considerations may be evaluated as a mixed bag of success and disappointments.

Assessing the Drive of Dr. Kessel, it is found that his ambition and ability are reasonably successful with his leading the Original Equipment passenger tire division to profitability and his subsequent success at the Commercial tire division, coupled with his tenure on the Executive Board. Murphy (2001) also opines that his acquisition plans may be termed as too ambitious, thus being a damper on his leadership.

In evaluating his Judgment skills, Dr. Kessel’s decision making and opportunity skills are an accomplishment in the earlier tenure of his leadership. His commitment to continue on the path of Innovation set by his predecessor Dr. von Grunberg and cultivating Entrepreneurship in the management of Continental AG are visible landmarks. However, his subsequent decision (not covered in the case study) to sell off the Conti Tech division, which was unsuccessful and contributed his departure from Continental may be viewed as a let-down. (Murphy, 2001)

Dr. Kessel’s departure as announced on the Continental Website on 11th September 2009 was explained as:

“Meeting today, the Supervisory Board of Continental AG, Hanover, appointed Manfred Wennemer (53) Chairman of the Executive Board. Wennemer replaces Dr. Stephan Kessel (47), who immediately relinquishes his seat on the Executive Board over differences concerning the strategic orientation of the corporation. Kessel is departing from the company on very amicable terms.” (Continental Corporation, 2001)

The specific mention of differences in strategic orientation, while partly reflecting on the Judgement criteria, can be viewed as failure to Influence the Supervisory and Boards to align themselves with his strategic direction. This was an irreconcilable difference and leaves the Influence portion of Dr. Kessel’s leadership largely wanting.

A Tire Industry publication (Tyre Industry Publications Ltd, 2001)also elaborates the growing differences of opinion between Dr. Kessel and his predecessor, Dr. von Grunberg, who at that point in time was Chairman of the Supervisory Board (which is mandated to appoint and replace Executive Board Members). This may also be measured as a shortfall in the Influencing ability of Dr. Kessel.

In conclusion, using De Vries (1196) criterion it may be summarised that Dr. Kessel was considerably successful in his Architectural role in designing and running profitable units and the Organisation as a whole, his Charismatic role and ability fell short of what was required at Continental AG in 2001.