Wendt India: Strategy Marries Organizational Structure
It is often said that an organization achieving its goals is contingent on whether its internal structure is geared towards its strategy. The processes, technology, people and culture in an organization are sine qua non towards predicting the success of the company. The right people with the appropriate responsibilities predicate the achievements of any organization. Since the opening up of the Indian economy, a number of multinational companies have established their footprint in India. Reorganizing their structure to exploit the advantages of geography and establishing an organization level strategy will aid the achievement of organizational objectives. This article focuses on Wendt India, the Indian arm of the German technology solution provider to reiterate the importance of marrying organizational structure with strategy.
Wendt India1 is a joint venture, and a publicly held, listed Company started in 1983 by Wendt Germany. In 1991, Wendt India went into a strategic collaboration with the US $2 billion Murugappa Group. Wendt India is a manufacturer of different types of high tech cutting and grinding tools with the latest technology. When it comes to grinding applications, Wendt is recognized as the foremost technology solution provider in the industry. It operates from the state of the art production facility in Hosur, its sole manufacturing unit in India. However, the company has marketing offices in Bangalore, Baroda, Chandigarh, Chennai, Coimbatore, Delhi, Faridabad, Hosur, Hyderabad, Kolkata, Mumbai, Pune and Nasik.
This article analyses the internal structure of the company and aims to understand the the parameters involved in structuring an organization in order to harmonize strategy with structure. Specifically, we use Wendt as an example of how firms are structured to achieve their goals and implement their strategies.
Organizational Structure: An Overview
Wendt India’s framework is a hybrid structure with the departments organised along functional lines at the top management level. But the manufacturing department is further classified on the basis of product lines. There are a total of 14 product lines, each involving a separate process. Each product has a product manager and a production manager whose functions are detailed later.
Similarly, the marketing department is organised based on the geographical segments. The entire landscape is carved into seven different zones, each headed by a regional head and assisted by territory heads and the sales-force. Such an elaborate arrangement allows Wendt to cater to specific industries located in these regions.
The administrative functions in the organisation have been clubbed under the direct control of the CFO. This structure provides relatively shorter lines of communication. This improves the interaction among the different administrative departments and in turn increases the coordination amongst these departments.
How is it that Wendt manages to produce customized products with only a 7-day lead time? Although the products supplied to clients are differentiated, 90% of the production processes are similar across product lines. This helps Wendt in two ways. Firstly, these economies of scope help Wendt in starting the manufacturing process even before the actual order is received from the client. Once the order is received, Wendt runs the final customized processes to get the product as per customer specifications. Secondly, the commonalities in the production processes also help in minimizing the risk that entails transaction-specific investment.
Wendt’s clients usually specify the geometric dimensions of the tool required. Using these output specifications, the Production Manager decides on the material and the design required for the product. He then chooses one out of the seven standard processes used for production and subsequently allocates resources in the manufacturing unit. The USP of this process is the ability of the industry to leverage the knowledge systems of Wendt and thereby help the production engineers create value for the company.
The actual blue-collared workforce of the company is machine-skilled. This is significant because Wendt does not enjoy economies of scale. To meet the customer specifications for each product, the workers will have to perform slightly differentiated tasks, and be able to operate their machines accordingly. Although overall volumes are substantial, they do not encourage division of labour due to the customization of products which calls for product-specific reconfiguration of the process.
Wendt minimizes its market-based transactions (outsourcing) due to time constraint, with the only exception of routine lathe jobs that can be completed overnight. An interesting feature is that Wendt does not employ contract outsourcing which is common in manufacturing units. Instead it directly accesses the market, which gives it the advantage of time and control with the tradeoff being marginally higher costs.
Wendt India has more than 150 competitors, but none who supply the entire range of products that Wendt manufactures. Competition is based more on precision than on price, because the product is custom-made. Here, Wendt has an advantage over its competitors as it has always been a leader in the quality of manufactures produced.
Involving the principles of game theory, we see that the only hold Wendt has over its customers is through the quality of goods it produces. If there is any decrease in the quality of the products supplied, there will be a considerable decrease in the volume of business, as customers will switch over to competitors who provide better prices for the compromised quality.
It is also a fact that the clients perceive a need to maintain their reputation capital as well. Clients are outsourcing the production of a very critical component in their assembly line to Wendt, and if they renege on their agreement towards the end of the production cycle when Wendt has invested in the specific transaction, Wendt will be less inclined to accept orders from that particular client from then on, who thus loses out on the quality of products offered by Wendt.
It is thus interesting to observe a multiple-period game in which both parties stand to lose valuable reputation capital if they do not fulfil their sides of an unwritten agreement. Relationships in such an industry, therefore, are trust-based. Indeed, one of the responsibilities of the CEO is to manage relationships with clients.
Uncertainty: How is it dealt with?
The uncertainty in the environment is kept in check largely by the territorial Heads of Sales and the Product Manager. They effectively do the role of boundary spanning by passing on the required information.
The territorial heads are the vanguard of the organization and are the representatives of the firm to potential customers. Their main responsibility is to maintain extremely good relationships with their clients so that the customer base is maintained. They also assess the demand for the various products in the market.
The Product Managers are the rearguard of the organisation. They look for new product opportunities and obtain information on product variations expected by customers. They hold regular meetings with existing customers to discuss how better processes can be implemented. They organize seminars to apprise clients on the latest technology that is available. They also perform the role of a liaison officer by ensuring coordination between the marketing and manufacturing department. This helps the company ensure that the requirements of the customer are accurately communicated to the production manager.
Wendt has a very unique culture. They believe that their employees are their raison d’être. Wendt recognized early on that success in business depended not only on their world class technology, and their leadership position in different products, but also on their employee performance. Thus, they implemented the 5S Japanese management technique. They also have a very unique concept of ‘Total Employee Involvement’ (TEI). Employees are combined into small groups who coordinate amongst themselves. There is a ‘Good Morning Meeting’ everyday when these groups meet, share thoughts and plan the day’s schedule. This makes overtime mostly irrelevant. Very often the CEO also addresses the gathering. Regular awards are presented for good work performances. There is a great sense of camaraderie and joie de vivre among the employees.
TEI also removes the problem of communication by ensuring that the entire workforce can interact without the hierarchical limits usually associated with a typical Indian manufacturing company. This is also evident from the fact that the dress code is common across the organization, the use of common canteens and the minimal use of personal secretaries.
Regular training programmes are held in Wendt’s own training centre. Here the employees share their experiences, frustrations and knowledge with both colleagues and superiors. There are several events like family days, which help integrate the personal lives of the employees with their work life. This family culture has also rubbed off on the environment with the company having an exemplary environmental policy.
A unique example of the systems in place is the whistle blowing policy. Few companies have such policies in India. At Wendt, any employee can register a complaint. It will be looked into within an hour and action taken immediately on proof of misconduct. For example, a production manager was sacked within half an hour of a complaint being proved. The level of trust is so large that its employees are not frisked even though small diamond cutting tools are in use. Also, union action which is a bane in many a manufacturing company, is virtually redundant. Although a formal union is required as per the law, all wage and other issues are dealt with well in advance. The rewards system implemented in the organisation enhances self esteem. There are also strong belief systems in place - with an emphasis on both the mission and vision of the company.
The indicator which seems to confirm that these systems are working well is the attrition rate which is around 2-3% on an average. This is also because career progression for employees becomes clearer.
Wendt has established many production plants around the world, including Germany, Belgium, US and UK. However, Wendt India is the only plant where the entire range of Wendt’s products is manufactured. This is because Wendt India is a cost-leader for Wendt GmbH, by virtue of the lower labour costs in India. The manufacturing plants in other locations produce only a specific set of specialized products to serve the local markets. Wendt follows a global strategy, with technology principally being developed in Germany, and manufacturing principally carried out in India, the centres of lowest cost for each of these resources.
In the Indian market, Wendt is a differentiator. This is because they manufacture highly customised niche products. Wendt is able to command a high price, with considerable profit margins, as competition is based on the level of precision to which the goods can be manufactured. Margins are about 30% when PBT is considered, and 25% with PAT.
Until recently, the characteristics of Wendt India's strategy were primarily that of a “defender”. It created a stable niche for itself in the high end abrasives and cutting tools market by delivering uncompromising quality, excellent customer service and regular contact with their customers for possible improvements in design. Although there was some focus on product development, it was closely related to their existing product lines. All this resulted in incremental growth by penetrating the market and expanding on the peripheries.
However, this also made them vulnerable to sudden shifts in the market. For example, from the manufacturing of grinding tools, Wendt has now shifted its focus to the manufacture of turning tools due to recent changes in technology.
Recently, there has been a small shift in strategy towards expanding their product range to include technology solutions. This has been coupled with some changes in organizational structure. The introduction of the product manager has been necessitated to accommodate a strategy of growth into new domains.
Organizational structure has a tremendous impact on the way an organization can achieve its goals. By describing the various aspects of Wendt’s structure, we have tried to lead the readers towards appreciating how the different aspects of an organization can be defined to achieve organizational objectives. The interplay between the strategy, culture and processes as well as the structure of Wendt lends insight into the reasons for the success of desired goals. And this success has been achieved by carefully defining the roles of technology and people in the organization.
Sourav Mukherji , Associate Professor of Organization and Strategy at the Indian Institute of Management Bangalore. An engineer from IIT Kharagpur, he obtained his doctorate from the Indian Institute of Management, Bangalore. He can be reached at email@example.com
Arjun R Kannan (PGP 2007-09 at IIM Bangalore) holds a B. Tech. in Chemical Engineering from Indian Institute of Technology (IIT) Madras. He can be reached at firstname.lastname@example.org
Deepak J (PGP 2007-09 at IIM Bangalore) holds a B. Tech. in Electrical Engineering from Indian Institute of Technology (IIT) Madras. He can be reached at email@example.com
Duggirala Madhumita (PGP 2007-09 at IIM Bangalore) holds a B. Tech. in Engineering Physics from Indian Institute of Technology (IIT) Madras. She can be reached at firstname.lastname@example.org
Deepshikha Priyadarshini (PGP 2007-09 at IIM Bangalore) holds a B. Tech. and M. Tech. in Mechanical Engineering from Indian Institute of Technology (IIT) Kanpur. She can be reached at email@example.com
Yurek Raaj V (PGP 2007-09 at IIM Bangalore) holds a B. Com. from Vivekananda College, Madras and has passed the CA P.E. II. He can be reached at firstname.lastname@example.org
Organizational behavior & human resources, Strategy, Manufacturing, Wendt, Control systems, Organizational structure, Culture, Total Employee Involvement, India