A Subsidiary Initiative at Bayer MaterialScience North America

Bayer Group  is a $50 billion chemical and health care giant based in Germany. Its three main
product divisions are Bayer MaterialScience (BMS), Bayer CropScience, and Bayer HealthCare.
In this matrix organization, each of these product divisions has country/regional subsidiaries in
major markets. Between 2004 and 2011, the CEO for Bayer MaterialScience North America (BMS
NA) was Greg Babe. Contributing 25% of BMS’ global revenues, BMS NA delivered highly
respected performance. It had strong sales growth in 2005 ($3.5 billion, increasing from $2.7
billion in 2004), and suffered a modest flattening in 2006 ($3.3 billion). However, in early 2007,
BMS made a radical decision: to dismantle BMS NA—in other words, to shut down the North
America regional headquarters in Pittsburgh. Allegedly undermining cost competitiveness, the
regional structure was viewed as too bloated.
Shocked, Babe asked for time to propose another solution. In his own words: “The stakes couldn’t
have been higher: not only was the future of my position but the credibility of the entire regional
operation in question.” Cost cutting was nothing unusual in this cyclical industry, and the norm
was usually to shave off a certain percentage of overhead (such as 10%). A month into the
analysis, Babe and his team had an “aha” moment. The cost structure, they realized, should be
dictated by how they grew the business, 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 re-shape 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. For example, transportation was historically deemed by Bayer as a core
competence. Babe proposed to outsource it, which would allow customers to give a 12 (rather
than 72) hours’ notice for shipping. Overall, Babe promised to turn BMS NA into a lean growth
engine. In the end, the bold proposal paid off. Babe left the meeting with $70 million in hand. In
his own words:
I was excited, but also scared to death, because delivering on it was by no means going to be
easy. It would require laying off hundreds of employees and retraining more than 1,000 others,
outsourcing many operations, rolling out new IT systems, and modifying our product
offerings, all within 18 months—not much time for a project of that scale.
To make the matters worse, the chemical industry soon entered a severe downturn worldwide,
and BMS suffered eight consecutive quarters of declining sales starting in 2008. In such a bleak
environment, BMS NA’s efforts became more strategically important. By early 2009, BMS NA
delivered on everything Babe had promised: it reduced SG&A costs by 25% ($100 million) and
head count by 30%. It actually over-delivered: only $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. Overall, by
endorsing the regional subsidiary’s initiative, BMS’s global leadership team took some significant
risk. But in the end, the payoff was handsome.
Sources:

(1) Bayer AG, 2012, www.bayerus.com;

(2) G. Babe, 2011, The CEO of Bayer Corp. on creating a lean growth engine, Harvard Business
Review, July: 41–45.