Vestas Case Analysis

Wind. It means the world to us.
Wind. It means the world to us.
Vestas’ World of Wind Case Analysis Vestas’ World of Wind Case Analysis

John Dietrich, EMBA Cohort -59, University of Denver, Daniels College of Business
John Dietrich, EMBA Cohort -59, University of Denver, Daniels College of Business

I. Contents
I. Core Problem/ Issue ………………………………………………………………………………2
II. SWOT Analysis ……………………………………………………………………………………….2 A. Strengths ………………………………………………………………………………..2 B. Weaknesses ……………………………………………………………………………3 C. Opportunities …………………………………………………………………………3 D. Threats …………………………………………………………………………………..4
III. Alternatives …………………………………………………………………………………………4
IV. Recommended Strategy …………………………………………………………………......4 A. Phase 1: Now …………………………………………………………………………4 B. Phase 2: 1-3 years ………………………………………………………………….4 C. Phase 3: 3+ years ……………………………………………………………………5
V. Appendix A: McKinsey 7-S Framework ………………………………………………..6
VI. Appendix B: Financial Ratios ……………………………………………………………….9
VII. Appendix C: Macro Forces ………………………………………………………………..13
VIII. Appendix D: Porter’s Five Forces …………………………………………………….15
Bibliography ……………………………………………………………………………………………17

I. Core Problem/Issue

“In the Last 15 years Vestas had reported yearly double digit organic growth, mainly driven by the rapid development of the wind energy market. But this extended sellers’ market had Vestas to become a rather introverted company, less attentive to customer needs, and with limited marketing activities.” (Steenburgh & Corsi, 2011, p 1). The economic downturn of 2008 caused a significant loss in sales and left Vestas in a volatile position in the wind energy market.

The core problem for Vestas is that they have become complacent in marketing themselves to an ever evolving and growing wind energy market. In order for them to grow in both established and emerging markets, they must be able to convince the world that they are the leader in wind energy production.

II. SWOT Analysis A. Strengths
Vestas has had several years of success in the wind turbine manufacturing market and established themselves as pioneers in the wind turbine industry. They are defined as the world leader in turbine manufacturing and are known in the industry for producing some of the best functioning, high quality turbines. They are leaders in wind turbine technology and continue to introduce new turbines to the market setting them at the forefront amongst their competitors. Other strengths include: * Decentralized manufacturing allowing for savings in transportation and less dependence on one market for success and faster adaptation to that market’s needs. * Strong management keeping company in line with their core values. * Experience in the wind turbine market. * Strong Brand in the global market. * Continued investment in R & D. * Wide range of products to offer customers. (2MW-7MW)
(Vestas, 2013)

B. Weaknesses
Though Vestas has proved to have several strengths in the wind turbine manufacturing market, they are not without some weaknesses. Being that they solely operate in the wind turbine market, they are very susceptible to large variations in sales depending on the current market state and this can have a significant impact on their bottom line and overall value to their shareholders. The wind industry is also highly dependent on incentives to boost the production of alternative energy and they can also see large reductions in sales if these incentives are not renewed. “The economic downturn that followed the US economic crisis and the increased competition in the wind turbine industry had brought a sudden drop in orders from 6,019 MW in 2008 to 3,072 MW in 2009.” (Steenburgh & Corsi, 2011, p 1). Other areas needing improvement are: * Marketing and clearly defining who they are marketing to. * Internal communication between divisions to ensure overall company vision. * Supplier relationships not as established(produced most components in house to ensure quality) * Poor performance management. Unable to quickly react to economic fluctuations in the market.

C. Opportunities
The biggest opportunity for Vestas is that with improving technology, wind turbines are becoming more financially viable. Staying at the forefront of the market is a key to their future success. Also, the success of their turbine that can be used in deep water (i.e. a floating turbine). With the power production capabilities of off-shore turbines, this could create a huge gain in the market for Vestas. Other opportunities include: * Entering in to agreements that include potential revenues from the power their turbines generate. * Collaborating with other industries in order to transfer knowledge. In 2009 Vestas announced they would collaborate with Boeing in R & D. (Vestas, 2009). * Building portfolio to include turbines for the individual consumer market.

D. Threats
Some of the threats that Vestas is exposed to are limitations with regards to vital parts needed for wind turbine manufacturing, disruptive technologies in other renewable energy markets making them a more viable alternative than wind, and imitation of their technology. Other threats include: * Other companies leading innovation within the wind turbine industry. * Market saturation of wind turbines. * Limited Patent Laws in emerging markets.

III. Alternatives
Diversify

While Vestas remains as the leader in wind turbine manufacturing, their volatility with the current economic conditions shows that they need to have a diversified portfolio in order to weather turbulent times. Partnering with energy companies, in which they would receive a portion of the proceeds from the sale of the energy the turbine produced. Even in economic downturns, energy is still consumed and with current regulations requiring the use of alternative energy, this could generate stable income for Vestas even when sales of their turbines decline.

Innovate in other markets.

While I previously discussed them diversifying within the wind turbine market, Vestas could also use its innovative engineers to create value in markets outside of the wind genre. Partnering with Boeing is one such example, but they were only using the partnership to try and create additional value within the wind market. They could use their knowledge of blades and reduction of friction and quality to produce items in other market segments that would outperform the current suppliers in that market.

IV. Recommended Strategy A. Phase 1: Now
Vestas needs to learn from the mistake they made in not preparing for economic uncertainties and address the other weaknesses identified. They need to clearly define their marketing strategy and target audience. Their marketing strategies also need to be tailored for individual markets. In the US, they can target the general population selling their turbines as the best and what Americans need. Also showing that they manufacture in US and create jobs will help them to increase their US market share, currently dominated by GE. Whereas the above approach will work in the US, the target audience in China would be the government. They need to have marketing campaigns that will show that their turbines are best for the government and the people as a whole.

Restructuring should also be something that is closely looked at. A company that operates in a volatile market needs to minimize excess. Evaluating essential positions and personnel will allow them to quickly react to the current market and eliminate any excess staff that is not required. This would also address their performance management due to changing markets as they would be able to more easily adapt to current situations.

B. Phase 2: 1-3 years
The next step for Vestas would be to prevent any supply issues related to the manufacturing of their wind turbines. Wind an ever growing wind turbine market, resources become more limited. Vestas should work towards creating exclusive partnerships with their suppliers. Another step would be to purchase the supplier outright. This would prevent any production limitations and could actually create supply limitations for their competitors.

Another vital step in phase 2 is lobbying. With the development of the deep water turbine, Vestas has the opportunity to steal a huge portion of the US market for wind turbines from GE. Lobbying to ensure the importance of the future of wind energy will keep incentives and tax credits in place to allow for increased profits. Lobbying in China for additional patent protection and increased production within the Chinese market can also help them gain more market shares in this rapidly growing market. C. Phase 3: 3 + years
For the long term, Vestas needs to diversify their portfolio. They need to partner with energy companies in order to receive a portion of the proceeds from the energy their turbine produces. They also need to use their extensive knowledge and innovative capabilities to break in to other markets. While this is risky, their diversification could prove to provide financial stability in times of economic instability. There is also a saturation limit for the wind energy market and Vestas needs to develop a path for the company to ensure their existence once this saturation level is reached.
Appendix A: McKinsey 7-S Framework A. Strategy
Vestas Strategy is clearly shown by how they view wind power. “In the years ahead, when wind will come to represent a growing portion of the combined energy supply, Vestas must consolidate its position as the leading brand in renewable energy in a market characterized by ever-growing competition. All prerequisites are in place because wind power is: financially competitive, predictable, independent, fast and clean” (Vestas, 2013). Their key strategy can be summarized as making the highest quality products that outperform their competitors to sell in the market.

B. Structure
Based on Vestas time in the wind market, their business life cycle can be defined as mature. Each time the company develops a new turbine or enters in to a new market, like off-shore turbines or rural areas of China, its life-cycle goes through a re-birth.

Vestas structure seems to be one of a divisional structure. This allows each division to work on their key area of expertise without having to focus energy on areas outside their individual business unit. This allows them to excel in areas of quality and technology, because their engineers are solely focused on these tasks.

C. Systems
Realizing that they lacked the systems necessary, Vestas developed a system that allowed customers to provide feedback and rate their overall experience allowing them to adapt based on what customers wanted at any given time. It also allowed them to build on positive experiences with specific customers and eliminate processes that produced a negative experience.

Another key system to Vestas was the types of contracts that Vestas entered in to with its customers. “Vestas generally signed four types of contracts: supply, supply and installation, services and turnkey solutions” (Steenburgh & Corsi, 2011, p 4). This allowed them to provide service based on the customer need and also allowed for protection of a customer’s investment to ensure a secure return. Their turnkey option also made them very attractive to developers. Developers usually financed their projects with loans and in order to secure the loan, a stipulation was often that a turnkey agreement be in place.

The other major system in place at Vestas was their sales ranking process. “The marketing team continuously screened the market to identify potential new sales opportunities and ranked them according to the probability that the project would go through and that Vestas would be selected as the supplier” (Steenburgh & Corsi, 2011, p 6). This allowed them to invest the resources appropriately to the projects that were most likely to materialize and produce positive gains for the company.

D. Shared Values
Vestas shared values can be shown in their mission statement of “A world where we are relentlessly committed to wind taking its place along oil and gas: focusing our 30 years of pioneering expertise, our IP, our R & D centers (the largest in the world) and our people on one pure goal generating and sustaining the greatest return on wind for our customers.”(Vestas, 2013). Their clearly defined goal is one in which at least 20% of the global electricity supply is provided by wind and bringing wind “on par with oil and gas”(Vestas, 2013).

Vestas’ Values * Leadership: commitment from top management is mandatory. * Collaboration: Commonly agreed upon practices and standards. * Ethics: Code of conduct in which all employees must adhere to uphold the company’s reputation. * Quality: Produce the highest quality product that surpasses the competition. * Sustainability: All decisions and processes based on achieving company vision. * Human Rights: Safety First and Environmental Impact and social responsibility.
(Vestas Code of Conduct, 2013) E. Style
Vestas style can be seen in how they take care of their employees. They believe that producing the highest quality turbines that produce the greatest return on investment will be what sets them apart from their competitors. Their top down approach in which management is expected to ensure adherence to their quality metrics sets in order to keep their company’s reputation as the top performer in the industry. F. Skills
Vestas skill set is mainly one of obtaining and keeping the top innovators in the engineering market. Those with the best skill sets are appointed, not elected. This can be seen with their hiring Albaek to establish a global marketing department instead of electing someone from within where they were noted to have a significant issue in identifying their market.

G. Staff
Vestas senior leadership ensured they were employing the most highly qualified staff in order to remain pioneers in the wind industry. They sought out top innovators and those that could set Vestas apart from their competition in engineering, marketing and sales and service.

VI. Appendix B: Financial Ratios
A. Liquidity * Current Ratio – Vestas has adequate liquidity to cover liabilities, though it is trending downward. * Quick Ratio – Vestas has declined in liquidity to cover liabilities. * Average Collection Period (days) – Vestas has overall reduced their average collection period. Reduced collection period in 2010 could be correlated to the economic downturn. * Inventory Turnover – Inventory turnover has reduced correlated to reduced sales. Liquidity | 2011 | % Change | 2010 | % Change | 2009 | % Change | 2008 | % Change | 2007 | Current Ratio | 1.03 | -17.6% | 1.25 | -21.9% | 1.6 | 46.8% | 1.09 | -6.8% | 1.17 | Quick Ratio | 0.39 | 0.0% | 0.39 | -56.7% | 0.9 | 55.2% | 0.58 | -19.4% | 0.72 | Avg. Collection Period | 74.33 | 51.8% | 48.95 | -49.6% | 97.16 | 1.7% | 95.50 | 16.5% | 81.98 | Inventory Turnover | 1.94 | -25.7% | 2.61 | -17.7% | 3.17 | -11.2% | 3.57 | -12.1% | 4.06 |

B. Asset Management * Total Asset Utilization – Vestas had a history of sufficiently using assets to generate sales, but the economic downturn has made them ineffective. Vestas needs to restructure and eliminate excess assets. * Fixed Utilization Asset – Vestas is using its fixed assets to generate almost twice the amount in sales. Asset Management | 2011 | % Change | 2010 | % Change | 2009 | % Change | 2008 | % Change | 2007 | Total Asset Utilization | 0.74 | -24.3% | 0.98 | -5.0% | 1.03 | -9.3% | 1.14 | 0.5% | 1.13 | Fixed Asset Utilization | 1.40 | -17.5% | 1.70 | 3.3% | 1.64 | -3.4% | 1.70 | 4.5% | 1.63 |

C. Capital Structure * Debt-to-Assets – Vestas has a higher long term debt, but this can be expected with the type of industry they are in. It is acceptable and they still have flexibility to operate. * Debt-to-Equity – Vestas has a low ratio of debt to equity showing the company is well capitalized. * Times Interest Earned- Vestas needs to reevaluate their current structure and evaluate future earnings to ensure that they can utilize their debt to lower operating costs and allow for net income. Capital Structure | 2011 | % Change | 2010 | % Change | 2009 | % Change | 2008 | % Change | 2007 | Debt-to-Assets | 0.66 | 9.0% | 0.61 | 27.9% | 0.48 | -24.5% | 0.63 | -2.4% | 0.65 | Debt-to-Equity | 0.36 | 9.1% | 0.33 | 230.0% | 0.1 | 66.7% | 0.06 | -40.0% | 0.10 | Times Interest Earned | 0.00 | 5.0% | 15.50 | -86.1% | 111.80 | 28.1% | 87.27 | 50.8% | 57.88 |

D. Profitability * Contribution Margin – Vestas declining contribution margin due to increase in cost of goods sold is concerning. They need to evaluate their suppliers and either enter in to long-term agreements to lower costs or produce the goods in house at an overall lower cost. * Profit Margin on Sales – Vestas is not currently making any profit on sales. The current economic state has contributed to this, but Vestas needs to look at what is spending to try to generate a sale and make reductions where possible. * Break-Even ($)- There has been an upward trend on the amount required to break even. Vestas needs to find a way to lower fixed costs. * Return on Total Assets – The economic downturn has caused Vestas to have a negative return on total assets. They need to evaluate their current assets and re-assign or eliminate in order to increase the ratio. * Return on Equity – A negative return on equity shows that Vestas needs to make changes in order to generate more equity for shareholders. * Primary EPS – Again this ratio shows that Vestas needs to evaluate their current position and potentially purchase back some shares to reduce the total number of outstanding shares. * Price/Earnings – Vestas is not producing earnings that are expected by its shareholders. Shareholders however may be reluctant to sell shares at the current time hoping that Vestas will recover from its current position. Profitability | 2011 | % Change | 2010 | % Change | 2009 | % Change | 2008 | % Change | 2007 | Contribution Margin | 0.12 | -26.8% | 0.17 | -21.8% | 0.22 | 11.2% | 0.20 | 15.1% | 0.17 | Profit Margin on Sales | -0.03 | -226.2% | 0.02 | -74.2% | 0.09 | 3.0% | 0.08 | 41.4% | 0.06 | Break Even Point in Dollars | $ 52,661.29 | 11.3% | $ 47,303.10 | 21.8% | $ 38,850.32 | -6.6% | $ 41,582.61 | 15.0% | $ 36,171.25 | Basic Earning Power | 0.04 | -67.0% | 0.13 | 5.7% | 0.13 | 22.0% | 0.10 | 87.5% | 0.06 | Return on Total Assets | -2.25 | -197.4% | 2.31 | -76.6% | 9.86 | -7.1% | 10.61 | 44.9% | 7.32 | Return on Equity | -6.23 | -222.2% | 5.10 | -76.6% | 21.77 | -25.9% | 29.36 | 40.1% | 20.95 | Primary EPS | $ (0.82) | -206.5% | $ 0.77 | -73.8% | $ 2.94 | 6.1% | $ 2.77 | 75.3% | $ 1.58 | Price/earnings ratio | $ (15.54) | -188.0% | $ 17.66 | 213.2% | $ 5.64 | 47.4% | $ 3.83 | -26.4% | $ 5.20 |

E. Graphs

Appendix C: Macro Forces A. Political/Legal/Regulatory
The wind industry is extremely susceptible to political, legal and regulatory actions, though most recent actions have been to support the wind industry and the use of alternative energy. The American Recovery and Reinvestment Act (ARRA) invested billions of dollars in renewable energy and allowed profits to soar. Other policies also helped stimulate the wind industry. In the US, there was a production tax credit on a national level and many states adopted a Renewable Energy Standard. In China, things like Certified Emission Reductions allowed foreign investors to invest in renewable energy in China in order to trade or sell the credits to countries with higher pollution levels and recover their initial investment or make profit.
Lobbying also had a significant impact on the wind energy market. As every energy sector was fighting for their piece of the pie with regards to the ARRA, lobbying for wind energy was crucial to influence political figures away from the oil and gas industry.

B. Economic
The wind industry is not recession proof. During the economic downturn in 2009, the wind industry saw large reductions in purchases. Economic stimulus packages greatly helped Vestas’ sales in the United States, but when the stimulus is used up and tax credits are not renewed, then the purchase of wind energy will be based on renewable energy laws that have been put in place. The price of oil also greatly affects the purchase of wind energy. A growing middle class in China also means the purchase of more vehicles and the use of more oil. As oil prices rise the use of alternative energy becomes more cost effective and the wind energy becomes a more viable option.

C. Social/Demographic
There is no tangible measurement for the use of wind energy, as people do not specifically consume wind energy, but just energy in general. Social trends towards alternative energy are very positive. In the US this means that these attitudes can be imposed on the government and force policies that promote or require the use of alternate energies such as wind. Consumers desire to reduce their carbon footprint and as they become more educated on the impacts of global climate change, they positively promote the use of more sustainable energy that has less impact on the environment. This has increased the demand for wind energy despite its higher cost when compared to oil and has prompted the government to provide policy to offset these costs, i.e. renewable energy tax credits. D. Technological
As technological advances are made, there is positive a movement towards the use of renewable energy. Better use of materials used in making wind turbines reduces the costs associated with the initial setup of wind farms and better performance of the wind turbines also allows for greater return on investment. Advances in the energy grid structure have also made the use of wind energy more feasible. Smaller wind turbines can be used where the larger ones are not feasible and the ability for individuals to be able to connect individual turbines to the energy grid and be financially supported reduces up-front capital costs and makes it more attractive to the consumer (DOE, 2008).

E. Ecological
The use of sustainable and renewable energy has a direct impact on the ecological impact. With growing concern for the environment, the use of wind energy has become more relevant to consumers. The fact that wind capacity in the US is very large allows for growth of the industry with minimal ecological impacts. Also, the areas where the wind capacity is largest are generally rural areas where the setup of wind farms is very feasible. Also, advances in technology allow for greater exploitation of wind capacity that is not currently accessible. For instance the development of deepwater turbines will allow for the harvesting of wind energy off the coastal US, which currently is not cost effective to implement(DOE, 2008).

Appendix D: Porter’s Five Forces

A. Rivalry
Vestas still has the largest market share, but currently compete with some other big players such as Siemens and GE. GE still dominates the US market, but has not significantly broken in to the world market yet. To more effectively compete with GE, Vestas has set up manufacturing facilities in the US, including Colorado. That said, other competitors have followed suit, also investing in the US market and increasing the rivalry to try to take some of the US market share from GE. The other problem that Vestas face when trying to compete with GE in the US is that it is their home turf. “They know how to deal with utilities and have established relationships with them. For Vestas this is a learning process.”
(Steenburgh & Corsi, 2011, p 3). One advantage for Vestas, is there lack of diversity in to other market segments allowing them to gain business. GE and Siemens had financing divisions and this gave Vestas the advantage when other financing options were being sought.

B. Barriers to Entry
The wind energy industry has high barriers to entry. There are extensive start-up costs related to both production facilities and Research and Development. Lack of skill in markets has also raised a large barrier to entry. Whereas the US has what is considered a large technically skilled workforce, developing countries like China still face shortages on the skilled labor required to build and install advanced wind energy sources. Another barrier is demand. Large demand attracts new entrants and low demand scares them away. The US wind energy sector is also dominated by large manufacturers and prevents entry of smaller companies because it is much harder to gain a market share. This is different in emerging markets and the barriers to entry are much lower resulting in increased number of entrants in these markets.

C. Substitutes
The wind energy market is riddled with substitutes. Other sources of energy include the traditional oil and gas as well as other renewable energy resources. The high initial cost of setting up a wind generation system, makes the substitutes much more attractive. When comparing costs of different sources of energy, wind is generally ranked in the top three for direct costs. However, indirect costs such as environmental and health impact can greatly reduce the cost per KW hour(DOE, 2005). Wind energy costs to be competitive require the indirect costs to be quantified for other energy sources through tariffs or purchase of CO2 emission credits. Also, a large impact on reducing the capitol costs of wind energy is through the provided tax credits that are currently in place for the use of alternative energy.

D. Supplier Power
The material requirements needed to build wind turbines are generally very high quality. For this reason strong relationships must be developed between the buyers and suppliers of these materials. Also, the increased demand of wind energy gives the suppliers power due to a shortage of components. However, suppliers can lose power if they raise prices too high due to the fact that the profit margins when building wind farms is very volatile and alternatives such as producing the components in house if the price is too high. Generally this is solved with long-term agreements are put in place, balancing the power between the buyer and supplier. Another factor that has reduced supplier power is the entry of several new manufacturers of components. This increased number of suppliers has reduced the potential for bottlenecks in the manufacturing process and have pushed for

E. Buyer Power
The number of buyers of wind energy when compared to the number of suppliers greatly increases competition amongst the different wind energy companies. Vestas has increased their abilities in this respect by offering a wide range of turbines and selling the fact that they produce the highest quality turbines and therefore have been able to keep their prices high despite the competition lowering their prices. Despite this fact, the buyers still have significant power. “Of Vestas’ 212 customers in 2010, less than 15% of the customers generated 80% of revenues.”(Steenburgh & Corsi, 2011, p 5). This gave their customers a great deal of power and customer satisfaction becomes key in order to maintain desired price levels.

Bibliography
Corsi, E. & Steenburgh, T. (2011). Vestas’ World of Wind. Harvard Business School. Boston: Harvard Business School Publishing Corporation.
Department of Energy. Cost of different forms of Energy. www.doe.gov.

Vestas, Wind. It means the world to us.(TM). http://www.vestas.com/en/about-vestas/corporate-vestas/vision,-mission-and-strategy/vision.aspx?action=3
Vestas 2013 Code of Conduct (2013). www.vestas.com
Vestas 2012 Annual Report (2012). www.vestas.com
Vestas 2009 Annual Report (2009). www.vestas.com
Vestas 2008 Annual Report (2008). www.vestas.com
Vestas Financial Statement 2007(2013). Mergent Online
Vestas Financial Statement 2008(2013). Mergent Online
Vestas Financial Statement 2009(2013). Mergent Online
Vestas Financial Statement 2010(2013). Mergent Online
Vestas Financial Statement 2011(2013). Mergent Online

Bibliography: Corsi, E. & Steenburgh, T. (2011). Vestas’ World of Wind. Harvard Business School. Boston: Harvard Business School Publishing Corporation. Vestas, Wind. It means the world to us.(TM). http://www.vestas.com/en/about-vestas/corporate-vestas/vision,-mission-and-strategy/vision.aspx?action=3 Vestas 2013 Code of Conduct (2013) Vestas 2012 Annual Report (2012). www.vestas.com Vestas 2009 Annual Report (2009) Vestas 2008 Annual Report (2008). www.vestas.com Vestas Financial Statement 2007(2013) Vestas Financial Statement 2008(2013). Mergent Online Vestas Financial Statement 2009(2013) Vestas Financial Statement 2010(2013). Mergent Online Vestas Financial Statement 2011(2013)