SKF Bearings (A)

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IMD063
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SKF BEARINGS SERIES:
MARKET ORIENTATION THROUGH SERVICES (A):
RESTRUCTURING THE BEFORE AND AFTER MARKET
This case was prepared by In the spring of 1987 Mauritz Sahlin, CEO of SKF, the world's
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Professor Sandra Vandermerwe largest bearing company, took a bold step. The time had come
and Dr. Marika Taishoff as a to do whatever was necessary to improve profitability and
basis for class discussion, rather return on assets. He knew that his plan would require a
than to illustrate either effective complex reorganization of SKF with far-reaching
or ineffective handling of a consequences, but he had no other options.
management situation.
Production had already been rationalized and was fully
This case has won a 1997 automated, leaving little room for real savings. The company
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European Case of the Year could not pull back on R&D expenditures as they were
prize, awarded by ECCH (the essential to having technological prowess and quality
European Case Clearing House), standards. Cutting back on staff would upset the unions and
Cranfield, U.K. provoke costly work stoppages.
He was convinced that the only viable long-term solution was

to change the strategic orientation of SKF from the production
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line to the market. Amidst great uncertainty and speculation, he

called together the senior bearing managers from around the
world to Saltsjobaden, Sweden, to announce his intention to
split the company into three new areas.
It is essential, he said, that we optimize by structuring around our

market relationships instead of our manufacturing capacity. If we want
to remain the industry leader in bearings, we must be prepared to give
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customers what they want rather than merely sell them what we make
He knew that the traditional sluggish culture of the company

had to be altered. Questions would have to be answered which
were not yet part of the existing SKF vocabulary. He expected
criticism, resistance and conflict among the divisions. Even
confusion for awhile. He was prepared to take the risks.
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Copyright © 1990 by IMD - International Institute for Management

Development, Lausanne, Switzerland. Not to be used or reproduced without
written permission directly from IMD.
This document is authorized for educator review use only by Dibyendu Nandy, ICFAI University until Nov 2022. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
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The Beginnings and Background
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As in many industrial success stories, the formation of SKF happened by chance.
At the turn of the century Sven Wingquist, a young Swedish maintenance
engineer, was fed up with the poor quality of bearings, with frequent stoppages
and replacements that were not only expensive but took weeks for suppliers to
deliver. The frustrated Wingquist got his employer's blessing to begin work on a
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new bearing in 1905 and soon perfected a product that was more effective and
longer lasting than competitors' models. By 1907 Svenska Kullager Fabriken
(SKF), the new company set up to produce and market the technological
innovation, was in business.
The ball bearing, a device which allows rotation around a shaft or axle with
minimal friction, is an essential part of any motion dependent product, be it car,
machine, truck, or train. As a result, high quality bearings soon became an
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indispensable item for all major industrial sectors, ranging from electrical and
heavy industries to transportation. Over the next six decades, SKF grew in
tandem with industrial growth and became the world leader in bearing technology
and applications.
Up through the mid-'60s, SKF was highly centralized; all aspects of the business
such as logistics, global sales, application engineering and public relations were
handled by the parent company in Göteborg. Five European plants produced a
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wide range of products geared to their own large local customer base. These
regional units concentrated exclusively on the manufacturing process, particularly
on maintaining cost effectiveness. Countries did not export to each other or
operate internationally except rarely--when the initiative came from Göteborg.
The company's underlying drive was mass production and having high quality
standards. In the words of one executive, "Big was beautiful." The plants were
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given significant capital budget allocations. Large economies of scale meant that
huge quantities of bearings could be sold at competitive prices on the world
market. Operations were integrated as much as possible both horizontally and
vertically. A tools division was acquired in order to expand into the manufacture
of engineering products and machine tools. Manufacturing machinery was
designed in-house so that material flow systems and production techniques could
be perfected and capacity increased.
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R&D contributed greatly to SKF's strength. Since most bearings had an average
life of five years, there was a continuous need to develop new products. About
200 people in the Netherlands were involved in product development and in
improving the engineering and performance standards for the product lines. Input
was received from the various plants where R&D had a close relationship. As a
general rule, SKF preferred to overdesign its products to ensure that the needs and
specifications of the plant managers were met.
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The '70s and '80s: Japanese and European Competition
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In the early '70s the Japanese, already strong in Asia, entered the European
bearings market. As a result, SKF management was forced to cut costs further
"by whatever means" as well as begin exporting outside their traditional markets.
To reach this goal while developing scale economies, production facilities were
rationalized along the lines of the Japanese model, i.e., each factory became
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responsible for making and exporting a specific bearing type for world
consumption.
The rise in oil prices in the early '80s, causing a drop in real wealth and in demand
for capital goods and consumer durables, put additional pressure on margins.
"Production Concept 80", aimed at stimulating effective production, at cutting
staff and underscoring the manufacturing process in company investment policy,
was SKF's response to economic conditions as well as to competitive threats.
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This concept, along with the continued emphasis on top quality standards, allowed
SKF to remain the number one bearings producer. By the late '80s the company
had 20% of the world bearings market share, nearly twice that of its closest
competitor, Nippon Seiko of Japan. Another Japanese bearings producer, NTN,
had 10%, followed by Germany's F.A.G. and Timken of the US with 8.5% each,
and the Japanese firm Koyo with 6% of the world market.
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Bearings producers were not the only competitors on the world scene. Automobile
manufacturers, including Ford, Honda and Mercedes, through their spare parts
divisions, were both competitors to and customers of SKF. This was also the case
for some specific manufacturers of automobile parts, such as the UK's Quinton
Hazel, which would typically purchase SKF bearings and sell them under its own
brand name to distributors, thereby cutting into a segment of SKF's traditional
customer base.
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SKF's position had always been strongest in Europe and Latin America, with 35%
and 30% of these markets respectively. In the US, SKF was in third position, with
12%. On average, Europe accounted for almost 60% of SKF's business, North
America for 20%, Sweden 5% and the rest of the world 15%. Despite this
comparatively strong market share, worldwide economic and industrial conditions
continued to squeeze margins during the first half of the decade. This situation
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came to a head in 1985 when SKF's volume in the US, susceptible to economic
changes and often indicative of what could happen in other regions, plunged 15%.
The company was obliged to embark on a substantial restructuring program in the
US.
1986: A Financial Ebb

By 1986, SKF had 48 factories in 13 countries operating at near or full capacity to
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produce two million bearings a day. SKF vigorously promoted its products
through 35,000 local dealer and distributor (d/d) outlets worldwide, as well as a
direct sales force of 600 throughout 130 countries. Dealers and distributors carried
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large stocks of limited range high turnover bearings for SKF, along with
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competitive bearings and complementary materials and tools.
When Sahlin took the helm as CEO in 1985, SKF was operating at the crest of
what amounted to a roller bearing boom. Nevertheless, economic conditions and
competitive pressure made it a buyers' market. Bottomline results began to turn
flat at SKF that year, when sales slackened and margins narrowed. (The financial
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profile for the years 1982 through 1986 are shown in Exhibit 1.)
Segmenting the Bearings Market

With increasing competition, SKF found it more and more difficult to differentiate
its product from the others. It had always applied one strategy and organization
for all bearing customers. High quality products were sold in large quantities at
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competitive prices. Sahlin questioned this approach and, late in 1986,
commissioned research to examine the bearings market in detail. He wanted to
establish whether the market could be segmented along any natural split amongst
the product lines according to specific customer needs.
Consumers were grouped into three categories:

1) Automotive OEM (cars, trucks, electrical), with 32% of SKF bearings
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sales in Skr.
2) Machinery OEM (heavy industry, railway, general machinery), with

27% of SKF bearings sales in Skr.
3) Aftermarket (vehicles and industrial), with 41% of SKF bearings

sales in Skr.
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Whereas bearings were regarded as vital components in the OEM market, in the
aftermarket they were seen merely as spare parts. Large OEM sales were handled
directly by the company's global sales arm. Contracts were substantial and steady.
"Large orders were signed and executed in a routine way."
The aftermarket sales were made to distributors and dealers, who in turn served
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end users. Relationships were entirely different for these markets, as were the
services demanded. Delivery requirements, lead times and quantities, along with
type and range of bearings needed, also varied considerably.
There were more than twice as many OEM than aftermarket customers, although
fewer in the vehicle business than in machinery. Automotive OEM customers
were large and tended to operate centrally on a European, if not global scale. By
contrast, machinery OEM users were smaller; their particular strengths tended to
be in specific industries and geographic locations. Large OEM customers made up
roughly 40% of the total SKF bearings sales in kronor. Lead times were stable and
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predictable, making forecasting straightforward. Profit margins were low in the

OEM sector. The larger OEM customers, who often set their own prices on
substantial, long-term contracts, were particularly cost conscious since "every
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cent saved was money in the bank." SKF was thus under constant competitive
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pressure to keep price increases at or below the inflation rate.
OEM customers were considered the glamorous end of the business, always given
priority by the SKF factories. High volume production and sales standards set for
the large OEM customers were applied throughout the rest of the organization.
OEMs were not only allocated most of the new product funding, but also attracted
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SKF's best talent. Some of the reasons for this situation were:
x OEMs would typically deal with big name customers like
Volkswagen or Ford, and would be involved in negotiations at a
senior managerial level.
x Technical developments for OEMs were more challenging than for
the aftermarket because they tended to be more complex and state-of-
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the-art.
x Orders for the OEM were larger, steady and more consistent, with
lead times that made well-defined production schedules possible.
By contrast, the aftermarket tended to concentrate on single sale deals for motor
dealers and factories. Although price was important, these clients, for whom
speed, availability and assistance were essential, were prepared to pay more than
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the OEM customers. In fact, the higher prices in the aftermarket enabled SKF to
do OEM business that otherwise may not have been justified. It had long been
suspected that, despite being largely limited to single sales, the aftermarket was
the most profitable part of the business. However, since operating results for all
the markets were consolidated, this impression was never really confirmed.
The aftermarket was subdivided into two separate categories:
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1) The Industrial Aftermarket (factory owners and plant managers),

with 66% of SKF aftermarket sales in Skr.
2) The Vehicle Aftermarket (fleet owners and repair shops), with 34%
of SKF aftermarket sales in Skr.
In their industrial aftermarket business, which contributed two-thirds to the
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overall aftermarket sales, SKF had concentrated mainly on steel and paper mills.
Mines and railways were also a part of this business. These customers had the
same basic needs wherever they were geographically situated. The distributor
network accounted for 80% of the sales.
For industrial users, the cost of the bearing was "peanuts compared to the cost of
standstill." They sought to minimize downtime and maximize the recovery speed.
Customers spent 75% of downtime locating the proper equipment and people, and
only 25% on actually repairing the machine.
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The lifetime of a bearing played a fundamental role in the success of the

customer's production activities. Longevity was affected by: 1) the quality of the
product, 2) how it was installed, 3) protecting the bearing from the environment,
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and 4) the quality of maintenance management at the factory. The last three
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factors depended on the users. Most bearings failed because of incorrect
installation, inadequate or improper lubrication or environmental contamination.
The vehicle aftermarket accounted for one-third of total aftermarket sales. Despite
the fact that the automobile and truck sectors contributed 24% of SKF's OEM
sales, the aftermarket had been relatively ignored. This neglect stemmed from the
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basic principle, "if we made it, we sold it." And since SKF made only a limited
range of bearings compared to the great variety of autos, the aftermarket had
never been considered a priority.
Dealers for automotive OEMs and independent distributors channeled spare parts
through to the car and truck market. Because of the better service they were
receiving, garage and fleet owners were increasingly shifting their business to the
independents. Bearings comprised only 3-4% of distributor and retailer sales,
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compared to between 30% and 70% in the industrial aftermarket. The distance
from the bearing manufacturer to the final user was much longer in the vehicle
aftermarket, with the channel consisting of wholesalers, large retailers, and
garages. Since cross referencing of bearing components was not consistent in the
industry, it was difficult to ascertain which manufacturer's part was being
replaced.
Vehicle dealers and repair shops wanted a bearing quickly because car owners
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expected vehicles back within a couple of hours. They also needed the right
bearing for that particular vehicle. Replacing a bearing presented three problems
for the bearing installer: 1) where to find the correct bearing, 2) how to mount and
install it, and 3) how to obtain the various accessories to get the job done.
SKF had always regarded distributors as customers rather than as part of the
channel to the end user. Bearings were sold to them instead of through them.
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Relationships with end users were left in the distributors' hands. Sales people
loaded up the distributors' shelves and devised all sorts of deals to gain volume,
even if items had to be taken back unsold. The distributor network gave Bearing
Services the necessary local presence and coverage, and it was often more cost
effective than using a direct salesforce to get the bearings to the customer. There
was, however, no guaranteed preference for the SKF brand.
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Splitting the Organization

Research showed that the market for bearings was far from homogeneous. This
information confirmed Sahlin's instincts that different target segments had to have
their own market strategies and organizations.
No one knew what to expect when Sahlin convened an urgent meeting in
Saltsjobaden. As one manager described it, "Phone calls had been made back and
forth to try to find out what was going on and who had been invited. Most of us
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only found out the next day when it made The Financial Times." At the meeting,
Sahlin announced that, as of September 1, the bearings group would be officially
reorganized into three new areas.
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1) Bearing Industries would include all the manufacturing plants
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producing "standard" bearings for OEM, both machinery and
automotive. The selling would be done by its own salesforce in
countries where SKF had factories, such as Germany, France, the UK,
the US, Sweden, Brazil, Argentina, Mexico and Italy. In other
countries such as Switzerland, Belgium and Holland, Bearing
Services would do the selling.
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2) Bearing Services, carved out of the global sales organization, would
handle the entire vehicle and industrial aftermarket as well as some of
the smaller OEM clients with whom the aftermarket distributors did
business.
3) Specialty Bearings would handle products outside the standard line
which needed highly specialized skills. This division would have its
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own factories and would utilize Bearing Industries' and Bearing
Services' salesforce in most countries. Customers included the
aerospace industry, medical equipment suppliers, large machine tool
producers, and satellite manufacturers which required custom-
designed products for highly specialized applications.
Each business area would have its own CEO and separate worldwide profit
responsibility. Efforts would be made to keep these autonomous, thus minimizing
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the need for coordination. Sahlin believed the new structure would allow each
business unit to be more flexible, to target and get close to its own customers,
thereby commanding better margins. (For the old and new group organization
structures, see Exhibit 2.)
The research confirmed Sahlin's earlier instincts that the aftermarket was indeed
the profitable end of the business. He had long believed that this market had not
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been given enough attention but nothing had been done because it was not clear
what to do and the financial significance of the aftermarket had never been
established. Sahlin was convinced that the key to future profits and customer
loyalty was in offering the aftermarket SKF knowhow and expertise. Bearing
Services, he decided, would be a major focus for the company in the future.
The sales management teams which had been dealing with the aftermarket had
previously reported to the manufacturing companies. Now, in the newly formed
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Bearing Services, they were elevated to the same status as that of their former
bosses. Sales and marketing directors in various countries became managing
directors (MDs).
Transforming the Change Process

Previously, all changes at SKF had been very structured. Typically, before any
decision could be made, numerous studies were undertaken and proposals
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scrutinized in order to minimize risk. A kind of "bible" was then written stating
exactly how the change would take place--what had to be done, by when and by
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whom. As little as possible was left to chance. Sales budgets, production budgets
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and action plans were put in place before the new process began.
It was clear to Sahlin that SKF not only had to become a market focussed
company, but the process of change itself had to be transformed. Although the
ultimate goal of improving profits was straightforward, exactly how it would
evolve was not 100% clear. The company would have to learn by doing, by
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feeling out the market and being as flexible as possible.
One thing was obvious: the entire culture of the company needed a jolt. The
manufacturing functions had always had the clout, but they would have to give up
some of that power. The financial approach to the market would have to change as
well. Marketing could no longer be considered an expense or cost center, but
would have to be handled like any other capital investment.
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Sahlin knew it would be impossible to move the whole company at once. He
expected Bearing Services to be a springboard to a new SKF market culture. Once
they began making positive inroads into the market, he was convinced that the
rest of the organization would follow. The goal was not to push for sudden and
monumental changes but, rather, to let things take shape as they moved along.
Small positive steps had to be taken to influence people and convince them about
the new SKF way. He drafted a rough outline of how the organization would look
and some guidelines for implementation. He wanted the company's technical
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expertise be used to serve customers more fully, thus giving SKF a significant
competitive edge. A new CEO would be appointed to each of the three areas and
left to formulate his own plan.
Göran Malm, a sales and marketing specialist with a financial background, had
been the European marketing and sales manager for SKF. He had been Singapore
area manager for less than a year when Sahlin called and asked him to head
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Bearing Services. Malm, who had been pushing for change at SKF for some time,
had initiated and set up maintenance support centers in Sweden to provide
services for the aftermarket there. He was, Sahlin believed, the ideal candidate for
the job. At first Malm was reluctant: he'd only just begun to develop a network in
Singapore. Sahlin remained adamant: "I decide on the priorities, Goran," came his
voice late one night. "I need you back here. You understand the aftermarket and
what the customers want. Let me have your decision soon, Goran."
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Malm had smiled as he put down the phone. He knew the job would be tough, but
he also knew he couldn't resist the offer to lead Bearing Services.
Some Reactions to the Restructuring

* Most aftermarket sales people liked the idea of the split; they would finally be
elevated from the second class status to which they felt they had been relegated.
As one marketing director expressed it. "Suddenly we felt that we were as
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important as the guys in manufacturing. It was incredible. We knew then that

Sahlin was serious about becoming customer oriented. There had been lots of
jokes about the d/d club or, as some called it, the dinner/dance club. That's the
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way those of us in the aftermarket were seen--wining and dining customers
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without doing any real work. We were happy that at last someone was listening to
us and we could concentrate on customers' needs."
* Some of the more traditional administration, engineering and financial
executives lacked enthusiasm. They couldn't quite see the point. "It will simply
add extra costs we don't want or need in our business" was the typical remark.
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* Another reservation was whether or not to take the restructuring seriously. "This
is just another reorganization. We've had so many, how long will this one last?"
was the refrain.
* Some thought that too many questions had been left unanswered and that the
ultimate objectives were still too vague. It wasn't that they necessarily disagreed
with the overall plan: they wanted more data and details so they could "proceed
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in an orderly SKF fashion."
* Others felt that such a novel approach would simply not be feasible in an
institution as bureaucratic as SKF. The stringent reporting requirements to head
office and rigid structural barriers were just some of the many obstacles which
would have to be overcome. These executives were not convinced that the new
structure could fit the managerial techniques and tools that they knew worked.
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* The MDs who had previously controlled both sales and aftermarket did not all
react positively when they heard Sahlin's reorganization plan. Some resented the
sudden change in status of the people who had previously been working for them
and who would be taking away a chunk of their business and their profits. "Some
executives tried to get around it by saying 'yes', but then delayed implementation."
When challenged about these concerns, Sahlin stated repeatedly that he
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understood the difficulties ahead, but was prepared to take whatever risks were
necessary.
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INTERNATIONAL
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SKF Bearings (A)
Exhibit 1
Financial Profile for 1982-1986
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In Skr (bn)
Consolidated 1982 1983 1984 1985 1986
Net Sales 14.4 16.2 17.8 20.0 20.1
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Operating Expenses 13.0 14.9 15.9 17.9 18.0
Income after Financial

Income and Expense .657 .604 1.3 1.4 1.5
Total Assets 18.8 18.6 21.8 22.0 22.8

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Shareholder Equity 5.4 5.2 6.8 6.7 7.3
Return on Total Assets 8.0 7.4 9.8 9.5 9.3
Price per Share 29.2 42.0 43.0 75.0 84.0

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Bearings:
as % of Total Sales 80 82 80 76 77
as % of Total Profits 90 95 80 78 75
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Source: Annual reports

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INTERNATIONAL
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SKF Bearings (A)
Exhibit 2
Old and New Organizational Structure
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t

He was convinced that the only viable long-term solution was

line to the market. Amidst great uncertainty and speculation, he

It is essential, he said, that we optimize by structuring around our

He knew that the traditional sluggish culture of the company

Copyright © 1990 by IMD - International Institute for Management

1986: A Financial Ebb

Segmenting the Bearings Market

Consumers were grouped into three categories:

2) Machinery OEM (heavy industry, railway, general machinery), with

3) Aftermarket (vehicles and industrial), with 41% of SKF bearings

predictable, making forecasting straightforward. Profit margins were low in the

1) The Industrial Aftermarket (factory owners and plant managers),

The lifetime of a bearing played a fundamental role in the success of the

Splitting the Organization

Transforming the Change Process

Some Reactions to the Restructuring

important as the guys in manufacturing. It was incredible. We knew then that

Consolidated 1982 1983 1984 1985 1986

Net Sales 14.4 16.2 17.8 20.0 20.1

Income after Financial

Total Assets 18.8 18.6 21.8 22.0 22.8

Return on Total Assets 8.0 7.4 9.8 9.5 9.3

Price per Share 29.2 42.0 43.0 75.0 84.0

Source: Annual reports

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