THAILAND

Heinz Landau

Leading a German Subsidiary in ­Thailand: An Experience Report Introduction In this article, the author will share some of his experiences that he made while he was at the helm of Merck Ltd., Thailand from 1992 until 2008. He started in 1992 as the Director Chemical Division, became Managing Director in 1993 and was Chairman of the company from 2001 ­onwards. Merck Ltd., Thailand is a subsidiary of Merck KGaA, Darmstadt, which is a DAX 30 enterprise that is active in the fields of pharmaceuticals and chemicals. In 2010, Merck KGaA reported worldwide sales of 8.9 billion Euros. It has about 40,000 employees in 64 countries. Merck has a very long history in Thailand. Its roots can be traced back to the year 1899. A travel report found in the company archives in Darmstadt stated the revenue generated from the sales of chemical products to Thailand in that specific year. Furthermore, it mentioned that B. Grimm Co. was appointed as an agent for Thailand. Until today, B. Grimm Co. is Merck’s partner in Thailand as a group of companies active in the fields of energy, cooling, healthcare, lifestyle, real estate and transport. Although being one of Thailand’s oldest companies, it has always

Author

Heinz Landau was employed by Merck Ltd., Thailand, a subsidiary of Merck KGaA, Darmstadt, from 1992 until 2008. He started in 1992 as the Director Chemical Division. In 1993, he was promoted to the position of Managing Director. In 2001, he be­ came the Chairman of the company. ­E-Mail: [email protected].

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been in German ownership. Nevertheless, legally, it is a Thai entity. As an agent, B. Grimm had conducted the business for Merck in Thailand for many decades in a very successful way. Nonetheless, in 1991, Merck’s headquarter decided to go for an even stronger presence in Thailand and established together with the B. Grimm Group a joint venture in Bangkok, namely Merck Ltd., Thailand. Merck Ltd., Thailand is a company that is active in selling, marketing and distributing chemical and pharmaceutical products to its customers in Thailand. While its chemical products are all imported, the huge ­majority of its pharmaceutical products are contract-manufactured in Thailand. As a result of the stronger commitment and support of Merck KGaA in Germany, the joint venture took off big time. Sales experienced a quantum leap and kept rising year by year. During his long career abroad, the author has observed several cases (not only in the Merck world) where the decision of the head office of a company to found a subsidiary in a country after having run the business for years with the help of a local agent or partner, brought a tremendous sales jump. A strong commitment by the headquarter often results in market and brand leadership of the subsidiary. Merck Ltd., Thailand’s revenue rose from Baht 75 million (about 3 million USDollars) in 1991 to Baht 1.8 billion (about 55 million US-Dollars) in 2008. Despite the Asian crisis from 1997 until about 2002, Merck Ltd., Thailand achieved profitable double digit sales growth in 14 out of 17 years (see figure 1). At the same time, the number of employees rose from about 50 to 200. The infrastructure of the company grew along with the business development. Having initially only a small rented warehouse near the port, the company constructed a state of the art Chemicals Distribution Center which has been labeled as a show piece by the Thai Government authorities. It is also one of the safest and most effective warehouses for Merck worldwide.

Furthermore, the office infrastructure was tremendously improved. Merck Ltd., Thailand’s office is today one of the most modern and most functional offices within the Merck group. In terms of information services, the company moved from no software at all on the author’s arrival in 1992 to a local software solution and then to today’s applied software called “Scala”. It is a software suitable for medium-sized companies which has been serving Merck Ltd., Thailand very well for many years.

Business Philosophy of ­ Merck Ltd., Thailand The basis for the remarkable development of the company over the years was a wellcrafted strategy as well as the mission, ­vision and values that were adapted from

■■ A well-crafted strategy as well as mission, vision and values are crucial for the success of a company. At the same time, modern companies are not only committed to shareholders, but also to other stakeholders like employees, customers and the society. ■■ A holistic and creditable CSR-approach, fully integrated in a company’s business strategy, can be a key factor for the business success of a company. ■■ Controlling tools of the head office of an international company often need to be complemented with local controlling tools in the subsidiary. Moreover, tools for a ”self-controlling”-approach can help in overcoming cross-cultural barriers. ■■ The author has had very good experiences with the application of different controlling tools (e.g. balanced scorecard) and gives an experience report with regard to the integration and adaption of local requirements to the mentioned tools. In doing so, a sustainability balanced scorecard was established and proved to be suited for the specific demands in Thailand.

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time to time in line with the company’s and the markets’ needs. Being a strong believer in customer orientation, Merck Ltd., Thailand’s first vision statement focused on its customers. The same applies for its second vision statement. However, Merck Ltd., Thailand’s third vision statement saw the inclusion of the employees as an important component. Key performance indicators for the measurement of the progress in implementing the company’s vision were the score that was achieved in customer and employee satisfaction surveys. The customer satisfaction surveys were conducted every six months. For that purpose, a one page questionnaire was developed that contained about 12 questions. During the first few years, the customer satisfaction questionnaire was sent to all customers. However, later on, the surveys were only conducted among VIP- and A-customers. In order to assure a meaningful percentage of customer responses, gifts were raffled off among the customers that sent back completed questionnaires. Another important tool was the employee satisfaction survey that was carried out every six months. For that purpose, a set of about 50 – 60 questions had been ­developed. The participation rate of the employees in the surveys has always been

very high (mostly above 90 %). The results were openly shared with the employees and were discussed with them. Every time, three focus areas for improvement were identified and, most important, were acted upon. This assured a continuously high participation rate of all employees. Later on, the vision statement was revisited once more and was newly crafted. In the meantime, the leadership team and employees of Merck Ltd., Thailand were strongly committed to the so-called 4 stakeholders-approach (see figure 2). The company is not only committed towards its shareholders, but also towards its employees, its customers and the Thai society. The author believes that the current ­vision statement is fitting very well in today’s world (see figure 3). A modern vision statement should contain employees, customers and the society. The reader might wonder why the share­ holders have never been mentioned in any of Merck Ltd., Thailand’s vision statements over the years. It should be stated that the company has been profitable from day one of its operations. And since making profits (over a period of time) is the basis for the existence of any company, the author thinks that it is not necessary to mention the shareholders explicitly in the vision statement.

Fig. 2 | Merck Ltd., Thailand’s

4­stakeholders-approach

• Care for employees • Care for customers • Care for shareholders • Care for society

As a further step towards implementing the vision statement of Merck Ltd., Thailand, the care-concept was developed. The core value “care” was at the heart of the organization and the operations. The carephilosophy was holistically implemented across the company and showed high commitment by the employees (see figure 4). As the result of the described process above, CSR (= Corporate Social Responsibility) had become part of Merck Ltd., Thailand’s DNA and was at the same time a firm and important part of its business strategy. Due to its holistic and credible CSR-approach, the company became a role model for successful integrated CSR-implementation. As a consequence, Merck Ltd., Thailand

Fig. 1 | Sales development 1991 – 2008 of Merck Ltd., Thailand (index chart; 1991 = 100) sales 2,500 – 2.229 1.971

2,000 – 1.679 1.488

1,500 – 1.314 1.012 1.068

1,000 – 788

500 –

340 100

156

431

542

620

1.165

907

638

217

0– 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 years

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was honored by the Thai Ministry of Social Affairs and Development as one of the four leading companies in Thailand in the field of CSR. In the Merck Group, it was considered as the leading company in CSR worldwide. And finally, Merck Ltd., Thailand won in January 2009 the CSR Leadership Excellence Award in Singapore against tough competition from international and local companies from Singapore, Malaysia, the Philippines, Indonesia, India and the U.S.A. The key benefits (and therefore, also the business case apart from the first listed benefit) of Merck Ltd., Thailand’s CSR-engagement were as follows: ■■M  aking a contribution to the Thai society ■■Positioning Merck Ltd., Thailand as a “caring” company ■■Creating a better image of the company in the eyes of the employees, the customers, the shareholders and the society in terms of “contributing to the society” (“living the 4 stakeholders-approach”) ■■Differentiation from the competitors ■■Increasing employee and customer engagement and loyalty From a controlling perspective, the challenge was how to measure the impact of the company’s CSR-activities on its stakeholders. Therefore, the following parameters (among others) were selected: ■■Results of the employee caring survey (contained questions related to the CSR topic) ■■Results of the customer satisfaction survey (contained questions related to the CSR – topic)

■■Results of a brand image study conducted by Gallup Consulting ■■Donation summary

Major Controlling Tools at Merck Ltd., Thailand The above described CSR-parameters are examples for controlling tools and parameters that had been developed locally. Due to the fast growing business of Merck Ltd., Thailand and the corresponding organizational and business infrastructure chan­ ges, a growing need for more specific local controlling tools that could serve the local operations became imminent. For many years, Merck Ltd., Thailand had been dependent on the excellent controlling tools of the head office that were part of the Merck Group’s international reporting system. There were two issues to deal with though: first of all, these tools served more the head office than the local subsidiary and secondly, those controlling tools targeted almost exclusively the finan­ cial aspects of the business. However, these aspects were served very well due to the excellence of the processes and the tools. The local Finance Department was able to produce a comprehensive monthly sales report as well as the monthly profit and loss statement for the local company and its different business units by the end of the last working day of the month. This was possible due to the fact that the sales for the month were closed

Fig. 3 | Vision – Merck Ltd., Thailand

before the last working day of the month and the following dedicated outstanding performance of the employees of the local Finance Department who worked overtime in the evening and night to have the report ready the next day. This was their way of showing that they are a valuable contributor to the success of Merck Ltd., Thailand. They were very proud of this achievement, since they probably were the fastest team in the Merck Group in closing the accounts. Keeping in mind that Merck Ltd., Thailand is pursuing a 4 stakeholders-approach, different aspects needed to be added to the financial perspective. Therefore, the leadership team of the local company decided to develop a balanced scorecard for the company. The first ever balanced scorecard was developed with the help of two management interns from Pforzheim University of Applied Sciences with Prof. Dr. Juergen Janovsky as their academic advisor. One of the first decisions was not to compile a balanced scorecard for the whole company, but rather two scorecards for the pharmaceutical business and the chemical business, due to the different nature of the business. The Pharmaceutical Division had outsourced the sales and the distribution function while the Chemical Division did sales, marketing and distribution all by itself. Therefore, the main difference between the two balanced scorecards came from the internal processes and the customer perspective, while the learning &

Fig. 4 | Employees of Merck Ltd., Thailand forming the word

DOI: 10.1365/s12176-012-0317-6

“care” during an Annual Take-Off-Meeting of the company

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1995

T ogether, we are dedicated to improve continuously in response to our customers’ needs.

1999

To be the company that comes first to customers’ mind in terms of innovative and outstanding customer service and support in the chemical and pharmaceutical industry in Thailand.

2002

To be the company that comes first to our customers’ mind in terms of innovative and outstanding customer ­care rendered by talented, satisfied employees.

2004

We will be the first in customers’ minds to provide outstanding customer care through innovations created by talented, satisfied employees, while positively contributing to Thai society.

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growth perspective and the financial perspective were identical in both businesses. As an example, please find below the balanced scorecard (cause and effect chain) of the Pharmaceutical Division (see figure 5). For the four different perspectives, 13 objectives and 19 KPIs (= Key Performance Indicator) had been developed. Ownership for the measurement of each criteria had been established. The balanced scorecard was presented by the local Finance Director and the local Financial Analyst to the local expanded management team every quarter. In the same meeting, an action plan was discussed and agreed upon. Please find below the KPIs that were measured: a) Learning & Growth-Perspective: – Employee satisfaction survey score – Staff turnover – Absenteeism rate – Competency assessment – Number of breakthrough innovations b) Internal Processes-Perspective: – %-share of strategic products – Number of strategic products newly listed in hospital/drugstore drug lists – Number of days from registration until market launch – Service grade – Days of stock inventory – % of manufacturing orders within specified time c) Customer-Perspective: – Customer satisfaction survey score – Customer loyalty index score – Customer retention rate

d) Financial Perspective: – Sales growth – Operating Result (OR)/Earnings ­Before Interest and Taxes (EBIT) – Return On Sales (ROS) – Return On Capital Employed ­(ROCE) – Free Cash Flow (FCF) Another flagship controlling tool that had been used since 1999 every two to three years at Merck Ltd., Thailand is a management quality excellence check. In the company’s permanent strive for excellence, over the years various management quality assessments had been applied at the ­local company: ■■t he European Foundation for Quality Management (EFQM) Excellence Model ■■the U.S. Malcolm Baldridge Performan­ ce Evaluation Framework and ■■the Thailand Quality Award Excellence Method As an example, the last EFQM excellence check is described hereafter. The EFQM Excellence Model consisted of nine criteria that were split into two categories: enablers and results (see figure 6). The enablers are referred to the capabilities of the company enabling it to achieve results. Therefore the logical flow of the model was from left to right and was only supported by a learning or feedback flow from the results back to the enablers. The first enabler criterion “Leadership” built a base for all following criteria as it provided an important catalyst for setting free and

directing any other capabilities within the firm. Subsequently, the “Policy and Strategy” criterion, the “People” criterion – often associated with Human Resources – and the criterion dealing with “Partnerships and Resources” of the firm formed the second logical step of the model. A common explanation for this structure was that these three enabler criteria deal with “setting the scene” and providing the inputs for any company’s transformation processes. These “Processes” then followed as the last enabler criterion which linked the enablers to the results. The criterion was usually very broad and required extensive assessment or sound focus to be handled effectively. The enabler criteria in general should follow a driving-force-logic for the results, e.g. good enablers should contribute to good results taking aside the common case of wasted potential (which of course could be identified in the assessment process as well). The first result block then consisted of “Customer Results”, “People Results” and “Society Results”. The “Customer Results” criterion was the criterion with the highest scoring weight in the whole model (20%), which outlined the customer orientation of the model in general and was found to apply for basically all companies. The “People Results” criterion measured the effectiveness of the activities within the “People” criterion and therefore mainly reflected the success of HR-activities. The “Society Results” criterion catered to the growing demand for recognition by

Fig. 5 | Balanced Scorecard of Pharmaceutical Division

Financial

Customer

Sales Growth

OR/EBIT

ROS

High customer satisfaction

Internal Processes

Listing strategic ­products

Learning & Growth

High people satisfaction & motivation

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ROCE

FCF

High customer loyalty

Time to market

Efficient & effective inventory ­management

High people excellence

Increase commercial effectiveness

Innovation

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the society and often made an important difference. The result criteria were completed by the “Key Performance Results” criterion, which measured the company’s success with the common, mainly financial and intuitive non-financial measures. Consequently the EFQM-check of the company was and still is a long term management process (see figure 7). Often, these checks were conducted with the help of management interns (students from reputable universities) and the Inhouse Consulting Department of Merck KGaA. The last check is described hereafter. After the author had decided together with his leadership team to carry out an EFQM-check, two suitable students (Arne Koch and Matthias Wilrich) were iden­ tified with the help of Prof. Dr. Lutz Kaufmann of the WHU – Otto Beisheim School of Management, Vallendar. The two students conducted the assessment within a three months management internship in Thailand. However, before coming to Bangkok, they had to spend one day at the Inhouse Consulting Department of Merck KGaA where the project and the EFQM-check methodology were explained to them. ­After their arrival in Thailand, an EFQMcheck team was established by the author who served as project owner for the check. The team consisted of 18 senior and middle managers (two persons for each of the nine criteria). The two management interns served as project leaders. This might

be considered as unusual, however, the ­author has had excellent experiences with high caliber students when he entrusted them with the responsibility for challenging tasks and projects. After a kick-off workshop for the whole EFQM-check team, during the following three months all data relevant to the nine criteria were collected by the team across the company. Finally, the time for the two days self-assessment workshop had arriv­ ed. For that purpose, Hans-Juergen Mueller and Dr. Markku Klingelhoefer, both from Inhouse Consulting from Merck KGaA, flew in to Thailand to give us guidance for the scoring process in the self-­ assessment workshop. On the third day, an optimization workshop was carried out. During this workshop, the previously identified areas for improvement regarding the nine criteria were clustered and prioritized. Based on an effort / benefit-matrix, six projects and the corresponding project owners were identified, along with project milestones and timelines. In the coming months, the implementation process of the projects was reviewed regularly. Concluding, it can be said that the author considers the EFQM-check a very valuable tool with regard to the strive for excellence for any organization. The benefits of the application of these assessment and development tools are substantial. The last flagship controlling tool of Merck Ltd., Thailand that should be introduced here is the Sustainability Balanced

Scorecard (see figure 8). It was developed during a four-months project in Bangkok by Martin Sextl, a management intern from the TUM, University of Technology, Munich under the guidance of his academic advisor, Dr. Erik Hansen. Since CSR was fully integrated in the business strategy of Merck Ltd., Thailand, the author felt the need for a controlling tool to measure the company’s CSR-activities. The previous balanced scorecards for the Pharmaceutical Division and for the Chemical Division did not contain any indicators regarding the impact of CSR on Merck Ltd., Thailand’s business and the Thai society. Therefore, the objective of the project was to develop a Sustainability Balanced Scorecard that considers the full range of the company’s care-philosophy including all of the CSR-activities. The project was divided into three major phases. In the first phase, the company’s CSR-activities were analyzed in detail to find out the long term impact. The activities included the programs under the partnership with CARE Thailand/Raks Thai Foundation with whom Merck. Ltd., Thailand had established a cooperation since 2002, the Employee and Customer Volunteering Programs of the local company and the Environment, Health and Safety (EHS)-Management. Besides a thorough data analysis, extensive discussions with the local CSR-Manager and managers of the Raks Thai Foundation were held in order to measure the impact of these activities.

Fig. 6 | The EFQM Excellence Model (see European Foundation of Quality Management 2010) Enablers

Results

People 9%

Leadership 10 %

Policy & Strategy 8%

People Results 9%

Processes 14 %

Partnership & Resources 9%

Customer Results 20 %

Key Performance Results 15 %

Society Results 6% Innovation and Learning

22

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Fig. 7 | The EFQM-check is a long term

management process

Decision by Management Planning of the Procedure Kick-off Workshop Data Collection Self-Assessment Workshop Optimization Workshop Project Design Implementation of the Planned Measures Regular Review of the Implementation

During the second phase, indicators were developed that were able to display these impacts in an optimal way in the scorecard. Here, the input of the Raks Thai Foundation was crucial to measure the impact of the three development projects that Merck Ltd., Thailand had launched with them. The Raks Thai experts set up logical frameworks and developed indicators to evaluate the impact achieved in each of the three program regions. Furthermore, the Gallup Customer Engagement Study, the customer satisfaction survey and the employee caring survey were used to derive indicators that display the effect of the CSR-activites on these two stakeholder groups. Concerning the environment, health and safety, in interviews with the responsible senior staff key performance indicators were developed to illustrate the long term impact of the local company’s EHS-management. At the end, all of the new indicators were bundled under four strategic goals which

were formulated to represent Merck Ltd., Thailand’s CSR-approach in the scorecard. These goals were “high customer involvement in CSR”, “high people engagement in CSR”, “efficient and effective EHS-management” and “social contribution”. Finally, after having developed several indicators covering all aspects of Merck Ltd., Thailand’s Corporate Social Perfor­ mance (CSP), the new indicators had to be integrated into the existing balanced scorecards. Numerous possibilities of integrating social indicators into a traditional balanced scorecard that are suggested in literature were scrutinized. However, it was concluded that placing the new indicators in an additional fifth perspective of the balanced scorecard was the most suitable option for Merck Ltd., Thailand. Please find below the Sustainability Balanced Scorecard for the Chemical Division of the local company. The following key performance indicators were developed for “Social”, the fifth

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Fig. 8 | Sustainability Balanced Scorecard of Chemical Division

Financial

Sales Growth

Customer

High customer satisfaction

Internal Processes

Efficient & effective complaint handling

Learning & Growth

High people satisfaction & motivation

Social

High customer involvement

dimension of the Sustainability Balanced Scorecard of the Chemical Division: ■■Customer participation rate in CSR-activities ■■Customer involvement willingness score ■■Customer donations ■■Number of accidents in the Chemicals Distribution Center ■■Tons of recycled containers of glass and plastic ■■Employee participation rate in CSR-activities ■■Average volunteering hours per employee ■■Raks Thai Foundation’s projects progress ■■Number of CSR-initiatives

Cross-Cultural Aspects From A Controlling Perspective After having introduced three major controlling tools of Merck Ltd., Thailand, I would like to reflect briefly on the crosscultural aspects. Establishing a controlling function in a company in Thailand is a tough job. The problem is not the lack of competent people, but the fact that controlling is considered as interfering in the work of another department or another colleague. And that goes totally against the mentality of Thai people who are very loyal to their own boss (rather than the com24

OR/EBIT

ROS

ROCE

FCF

High customer loyalty

Efficient & effective inventory management

Efficient & effective order & quotation handling

Efficient & effective IS support

High people excellence

Efficient & Effective EHS Management

Innovation

High employee engagement

pany) and who are very harmony-oriented. Conflicts are avoided whenever possible. Therefore, at Merck Ltd., Thailand, we chose the following approaches that proved to be very successful: a) Management and the Finance Department helped to develop key performance indicators for every department and for every main process. In this way the department managers or the process owners were able to go for a “selfcontrolling”-approach where the KPIs gave them a thorough overview where they stood regarding the effectiveness and efficiency of their department or that process. b) A few flagship controlling tools were developed and implemented (as described above) where the focus was always on a team approach in terms of a joint evaluation and a joint action plan. So the strong team bonding contributed immensely to the successful application of such corporate controlling tools.

Contribution to Society

finement from time to time here and there. However, the big challenge will be to still develop and implement one or the other controlling tool that can also measure the “soft side” of the company’s business approach. In addition, one has to be aware that not all soft factors can and should be measured. It rather requests closeness and being in touch by the leaders with employees, customers and other stakeholders. Literature 1. European Foundation of Quality Management 2010: The EFQM Excellence Model, http://www.­ efqm.org/en/tabid/132/default.aspx, (accessed: 22.11.2010).

Outlook The strongly established controlling tools will make a significant contribution to the success of Merck Ltd., Thailand as well in the future. Existing tools will see some reZfCM | Controlling & Management

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