A Subsidiary Initiative at Bayer MaterialScience North America

A.OVERVIEW

Bayer Group is a $50 billion chemical and health care giant based in Germany. Its three main product divisions are Bayer MaterialScience (BMS), Beyer CropScience, and Bayer HealthCare. In this matrix organization, each of these product divisions has country/regional subsidiaries in major markets. The CEO for Bayer MaterialScience North America between 2004 and 2011 was Greg Babe. The company did fairly well under his leadership in both 2005 and 2006. But in 2007, BMS made a radical decision: to dismantle BMS NAin other words, to shut down the North America regional headquarters in Pittsburgh. The reason cited was for cost competitiveness and also the regional structure was seen as too bloated.

Babe asked for time to arrive at another solution. They came up the usual idea of cost cutting. The norm was usually to shave off a certain percentage of the overhead. Babe and his team realized that cost structure should be dictated by how they grew the business and not by an arbitrary target. With that insight, they looked at the overall picture from a strategic growth lens rather than a tactical cost reduction lens. They set two specific goals: (1) to grow at 1% to 2% above GDP and (2) to save 25% on selling, general, and administrative (SG&A) costs. To deliver that, Babe needed to completely reshape his unit but also needed additional investment of $70 million.

In late 2007, when Babe presented to BMS's global leadership team, everyone expected him to come up with a cost-cutting exercise. Instead, he presented a subsidiary growth initiative. BMS's global leadership team challenged key concepts of the proposal, many of which deviated from Bayer's global norms. Babe rebutted every argument and promised to turn BMS NA into a growth machine. His proposal paid off and BMS invested $70 million in BMS NA.

When BMS suffered eight consecutive quarters of declining sales starting in 2008; it was BMA NA which delivered or rather over deliveredonly $60 million of the $70 million allotted for growth was spent. By 2010, BMS NA's sales turned around and enjoyed double-digit quarterly growth (2010 sales went up to $2.7 billion from the bottom of $2.1 billion in 2009). What was more valuable was that some of the reorganized processes (such as outsourcing transportation), so foreign at the time to BMS, now became implemented by BMS around the world.

BMS took considerable risk in backing its regional subsidiary's initiative but in the end it reaped enormous profits.

B. CASE DISCUSSION QUESTIONS for Assessments and Applicaitons

Please copy the questions before providing your in-depth discussions:

1. While Bayer has a matrix structure, it has maintained some flavor of a geographic area structure. What are the advantages and disadvantages of a geographic area structure as seen in this case?
2. What are the advantages and disadvantages of a matrix structure as seen in this case?
3. What would you do, if you were the CEO?