Denmark’s Vestas Wind Systems is a world leader within the global wind turbine industry. But after 2008 Vestas has experienced a near death experience and is struggling for survival. It is argued that had Vestas paid attention to what the management guru Peter Drucker labeled the five deadly business sins Vestas might have avoided getting into dire straits.
According to Drucker the five deadline business sins are applied to Vestas in this article and as follows.
1. The first and easily the most common sin is the worship of high profit margins and of “premium pricing. (Peter Drucker)
The financial targets for Vestas’No.1 in Modern Energy strategy were defined October 2009, as Triple 15. The aim was to achieve an EBIT margin of 15 per cent by 2015 with corresponding revenue of € 15 billion and annual growth of 15% was required. In 2011 Vestas announced it was abandoning its Triple 15 plan. Even around 2008 when Vestas’ shares soared, at least 15 Chinese companies were commercially producing cheaper wind turbines. Tellingly Vestas’ position was then that:
“We will not go into price competition and we are not going to compete with the cheapest,” Finn Strom Madsen, president of Vestas Technology R&D, later told at a meeting.
2. Closely related to this first sin is the second one: mispricing a new product by charging, “what the market will bear”. (Peter Drucker)
With the Triple 15 strategy Vestas’ calculation was that at 90 USD per barrel of oil, wind energy would be a competitive alternative energy source to oil and gas, but as underlined by the Magazine Cleantechnica April 2012 it is stated that:
…as the prices of fossil fuel energy sources continue to rise, wind energy prices continue to fall and dropped about 4%.
3. The third deadly sin is cost-driven pricing. The only thing that works is price-driven costing. (Peter Drucker)
In regard to this deadly business sin the following quote by Vestas on prices and cost in 2009 and 2012 almost tell their own story.
“We have a strong belief we’ll see a reduction in construction costs,” said Kasper Ibsen Beck, a Vestas spokesman. “We have changed the business organization, streamlined production, reduced costs on core technologies that are too expensive and are reducing fixed costs.” (Vestas 2012)
The prospect of being taken over by Mitsubishi Heavy Industries is considered by many industry experts to be the best business prospect for Vestas, as it would add know-how and capital to the company. Unsurprisingly, as Vestas shares have fallen more than 90 percent since peaking at 692 kroner ($119) in 2008.
4. The fourth of the deadly business sins is slaughtering tomorrow’s opportunity on the altar of yesterday. (Peter Drucker)
Does Vestas sacrifice tomorrow’s business opportunities in its current restructuring process?
“Based on more recent patent application filings Totaro and Assoc. a consultancy firm, recognized several future technology trends as well as new concluding that technologies and their patents will likely be directed towards six core areas with grid integration and monitoring and control among the six.
Vestas seems to have decided to have focus on product innovation, operational efficiency and profitability. But wouldn’t Vestas be better off if it made a more radical innovation focus around its competences within grid integration and become a world leader with Smart Grid Energy control systems?
5. The last of the deadly sins is feeding problems and starving opportunities. (Peter Drucker)
From Vestas’ announcement of its reorganization of top management around early 2012 it becomes clear that the new organization is staffed to solve the issues of lowering the cost base and increase short-term sales of existing products. From Vestas’ restructuring we can only guess, but one can reasonably suspect that it falls within the ballpark of Drucker’s fifth deadly sin of feeding problems of the aforementioned problems and starving future opportunities.
Peter Drucker’s writings on five deadly business sins are more than 20 years old, yet it is striking how relevant they still seem applied to a present days’ business case like Vestas Wind Systems.
Link to full article at Innovation Management:
Jørn Bang Andersen, Senior Advisor Innovation, Nordic Innovation & Advisory Board Member to Kellogg Innovation Network