What is the basic strategy needed to move the company in a new direction based on environmental analysis and company values? Which KPIs effectively measure success of th

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LONG-TERM ORIENTATION IN THE BENEDICTINE MONASTERY OF ADMONT Dietmar Sternad wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Copyright © 2016, Richard Ivey School of Business Foundation Version: 2016-03-21

On a cold winter’s day in February 2015, the twin towers of the abbey church were hardly visible in the heavy snowstorm. Helmuth Neuner, long-time business director of the Benedictine monastery of Admont in Austria, was trudging through the snow over the monastery’s main courtyard. His attention was on one of the Admont Monastery’s businesses, the wooden panel production company STIA Holzindustrie GmbH (STIA), which was facing a rapidly changing market environment. Chinese producers of cheap wooden and laminate floors were putting pressure on the price levels. With its comparatively high labour costs, STIA had a considerable cost disadvantage. For the last two years, the company had reported losses (see Exhibits 1 and 2). “I do not demand the same high returns from all our businesses,” thought Neuner. “But this is about the long-term viability of the company. We do not need to take any dividends out of the business. Nevertheless, we need to earn at least enough to be able to invest into the future.” Neuner saw it as one of his major challenges to keep STIA afloat in a stormy market over the next decade. He knew that the company had certain advantages: in particular, a loyal labour force — people who had a deep attachment to the product and their employer. But was it enough to survive in the long term? THE FIRST 871 YEARS In 1074, based on an endowment of Saint Hemma of Gurk, the Benedictine monastery of Admont was founded in a remote location amidst the Ennstal Alps in the northern part of the Austrian province of Styria. Following the famous motto of their order’s founder, Saint Benedict of Nursia, “ora et labora et lege” (“pray and work and read”), the Benedictines soon developed Admont Monastery not only into a widely known centre of spirituality and literacy but also into an important economic base for the region (see Exhibit 3). The original endowment had included vast forest lands. These forests and the monastery’s vineyard estate, established in 1139 in the village of Jarenina (Slovenia), remained the main sources of income for centuries. Timber had long been in high demand, and the monastery’s wine was highly renowned and consumed from the Austrian royal court to England.

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Page 2 9B16M045 Based on its strong economic basis, the monastery flourished in the 17th and 18th centuries, founded a high school, was widely acknowledged for its school of broidery art, and created the world’s largest monastery library room: a Baroque masterpiece that blended architecture, frescoes, sculptures, and books into one unique, holistic piece of art. The monastery experienced much harder times in the 1930s. Following a collapse of timber prices during the Great Depression, Admont Monastery was unable to pay wages and bills. It had to sell precious works from its famous art collection to survive. Just a few years later, in 1939, the monastery was expropriated by the Nazi regime. The monks had to wait until the end of World War II to return, but parts of the property — most notably the monastery’s vineyards — remained lost. DIVERSIFICATION INTO INDUSTRY After the events in the early 1930s, the convention of monks realized that it was too dangerous to rely on agriculture and forestry as the sole economic pillars. They decided to diversify the monastery’s business operations. Hydroelectric power stations and utilities, ski lifts, a museum, a care home, a market garden, restaurants, real estate development, and service businesses were added to Admont Monastery’s portfolio. In the 1970s, the monastery also started to diversify into industry. Out of a felt responsibility for the development of the region and for providing jobs, but also as part of an overall vertical integration strategy, it invested in timber-processing plants. STIA was founded in 1972 with 13 employees for the industrial production of formwork panels. Soon the company specialized in higher-quality natural wooden panels (used by furniture makers and for facades) and triple-layered floorboards under the “Admonter Naturboden” brand name. The company established itself well in both the domestic and international markets, especially in the years after 1990 when it developed its widely renowned wide plank floors. In 1973, the Admont Monastery, together with a joint venture partner, established DANA: Austria’s first industrial producer of wooden doors. Due to the partner’s bankruptcy, the monastery took over full ownership of DANA in 1979. In the 1980s and early 1990s, under new management headed by Neuner, the company doubled the number of employees, tripled its revenues, and achieved a market share of over 60 per cent in its home market of Austria. Based on his successful performance at DANA, the convention of monks decided to appoint Neuner as the monastery’s business director in 1994. (The monks decided democratically on all fundamental business matters, including the appointment of the top management or the approval of the yearly budget, based on the principle of majority rule.) In his new role, Neuner was responsible for all of Admont Monastery’s business activities. From this new perspective, he soon realized that DANA no longer fit into the monastery’s portfolio:

I knew that the Admont Monastery would not be able to manage such a company well in the long term. The industrial business is far too volatile. Moreover, DANA was becoming too big for Austria, but at the same time, we did not want to take the investment risk involved in further internationalizing the business.

Thus, in 2005, the monastery decided to sell DANA — which, by that time, had developed into a more than €50 million1 business — to a U.S.-based globally active windows and doors corporation. 1 € = EUR = euro; all currency amounts are in € unless otherwise specified; €1 = US$1.13 as of February 9, 2015.

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Page 3 9B16M045 FROM DOORS TO HOUSES The Admont Monastery invested all the proceeds from the sale of DANA into real estate. “It was a change of paradigm,” said Neuner, as the monastery deliberately decided against a further investment in its traditional forestry business, in which Admont Monastery was among the top five in Austria. Neuner explained the decision:

In forestry, the yield is well below 1 per cent. In real estate, I had a yield of 5–6 per cent from the beginning: returns that I cannot guarantee in industry. A 0.5 per cent difference in yield will double your assets in a century. Thus, if I invest in real estate, I have the same substance as in a forest, but a much higher chance to accumulate property. I cannot be sure of a sustainable 4–5 per cent rate of return over decades in industry. Also, with real estate, I do not have a full guarantee. In the early 1900s, for example, an Austrian law set maximum house rent limits. If legislature interferes, the returns can also diminish in real estate. The substance, however, remains intact.

Neuner was aware that entering new business segments did not come without risks:

Many others who thought that they needed to diversify failed. Their new pillars were breaking away because they did not have the necessary skills to manage them. If you do not understand anything about real estate, you will not be happy with it. You need to build the skills to successfully manage a new business segment.

The Admont Monastery created its own real estate development department. Several employees successfully graduated from a real estate academy. In the beginning, Admont Monastery entered into a partnership with a local insurance firm that had a reputation for being a long-standing expert in real estate. The first projects were developed together, with the monastery taking the junior partner role with a share of 30 to 35 per cent. After the successful completion of three joint projects, the monastery started its own projects. Sensing that closeness to customers was a key success factor in the business, it also set up a property management department. In the meantime, the monastery also offered its real estate development and property management services to third parties, mainly other church-related organizations, as Neuner explained:

At first, our sister and brother organizations were quite skeptical, as they saw that we did something in which they had not been able to proceed. We could change that perception over the years, however. Now we help them to develop their own real estate. We never pull them over the barrel. We are transparent, open, honest, and very correct. That’s our highest credo. Thus, others can participate as well. Now that we have built a reputation, more and more potential partners are asking us to cooperate with them.

Within two decades of Neuner’s tenure as a business director, Admont Monastery had invested in real estate with a value that was equivalent to the 60,000 acres of forest land that had formed the basis of the monastery’s prosperity for over eight centuries. RE-ENTRY INTO THE WINE BUSINESS In 1991, the Slovenian government passed a denationalization law that enabled the privatization of businesses that had been in state ownership in the Communist era. The Admont Monastery saw this as an opportunity to regain its former vineyard estate around Jarenina, although the vineyards were abandoned

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Page 4 9B16M045 and the buildings desolate. After some years of juridical quarrels over the rightful ownership, Admont Monastery reacquired the estate. Twelve million euros were invested in re-cultivating 170 acres of vineyards, restoring the buildings (including a representative castle), and setting up a new production site. Forty-three people were employed in the winemaking business in 2015. After more than 15 years of investment, the vineyard estate was still not profitable, despite producing a rather large quantity — 300,000 litres — of wine per year. Neuner explained the rationale behind this unusual investment that had remained unprofitable for a long period:

It is not our intention to make profits right away. That is our most important advantage compared to other investors who need to earn their money back in a very short time. If you contribute to the development of a region — even if it is only a small region — for a long time, you have a responsibility. In the time between 1139 and 1938, the monastery engaged in regional development, built schools and roads, and made sure that the people could live and survive. The wine brought added value to the region — value that could also be sold well to the benefit of the Admont Monastery. We want to assume this responsibility again. In the long run, we, of course, also want to earn something again, but at the moment, we focus on building the substance, improving the substance, and creating value in the substance. If we would sell it again today, we would not get anything for it. But how will it look in 200 years? I am convinced that food staples — and I consider wine a food staple — are something that we will always need. In the long term, when we are able to improve our name and make the wine more known again, we will also get returns. We just need to establish our new brand — Dveri Pax. It takes time, but we will take our time.

The vineyard estate was named Dveri Pax instead of bearing the name of the monastery in order to enable the people in the region to identify with their own local brand. In addition to developing the estate’s brand, Neuner also saw the need to better position Slovenia as a wine-growing country in global markets:

It just takes time — or money. But in this respect, we are conservative. We do not want to take too much money into our hands to push it in the short term. It will happen automatically. You just need to take your time — and that’s what we do.

The Dveri Pax estate engaged in some marketing activities including wine presentations, a bar-showroom in the nearby city of Maribor, and invitations to journalists. However, a stronger focus was set on ensuring the quality of the product than on marketing, as Neuner explained:

We will build trust and credibility only with consistency and quality. Only high quality lasts. It will become apparent. People will taste the wine and will buy it if it is good. We will provide high quality every year, or we won’t offer the wine to the market at all. Thus, we will reach at least a balanced business result within the next five to ten years.

INVESTMENT AND LEADERSHIP PRINCIPLES Just like a typical corporation, the Admont Monastery also held capital assets that it invested on the stock market. When doing so, Neuner followed some basic rules:

We try to invest as ethically as possible, although we use a wider definition about what we consider an ethical investment. I also do not see us as a shareholder who wants to profit from

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rising share prices. I want to acquire a part of a business — a business that I understand, in which I trust, and where I can assume that the management will work prudently to generate a reasonable dividend yield. It is a nice side effect if the share price is also developing well.

In all investment activities, however, the monastery remained relatively risk-averse. For example, it engaged in neither derivatives nor currency exchange transactions. “We do not enter any sphere of risks,” said the monastery’s abbot, Bruno Hubl. “We cannot afford that for moral reasons.”2 Even the Internet business was avoided: “We prefer real estate and forestry,” said Neuner.3 Although Neuner agreed that “a monastery is not programmed to deal with risks,” he was also convinced about the need for courage:

The courage to make decisions is the first element of success. You need to have courage. Just leaning back and not doing anything cannot work out well, even with a lot of substance. You cannot win out of fear — not even if you are long-term-oriented. You need to keep the fire burning — as they say — and not the ashes.

Keeping the fire burning over the long run was also a key principle in people management at the Admont Monastery. Those who entered a management position in one of the monastery’s businesses usually remained there for decades. Neuner therefore placed great emphasis on selecting the right people, as he explained:

Personality and moral attitude are what really counts here. In conversations with employees, attitudes, dignity, and humility are important — things that Saint Benedict also put into the foreground. To my mind, humility is one of the most important elements of leadership — it’s about letting the other person live, giving him or her the chance to develop, and taking delight in how the other one is able to do something.

HIGHER PURPOSES For the Admont Monastery, business played an important role — but as a means, not as an end. “It has a serving function,” says Neuner. “The other tasks of the monastery have priority. Business is the bread.”4 The monastery’s other duties included pastoral care for 26 parishes; the only high school in the region with over 550 students; a care home; a community centre; and a combined natural history, fine art, and modern art museum with around 80,000 visitors per year. Neuner explained the importance of the monastery’s work:

I do not serve shareholder value with my work here but purposes for which the monastery and I take responsibility. As a farmer’s child, I had to run for miles to go to school, which makes the monastery’s high school all the more important for me. It is the only option for getting a secondary school leaving certificate5 around here. Or take our care home: We have just invested €3 million for 35 care places. We will never see this money again, but that does not matter. I am

2 Klaus Höfler, “Abt Bruno Hubl: ‘Nur Schneller Gewinn – Das Kann Es Nicht Sein,’” DiePresse.com, August 13, 2009, accessed February 13, 2015, http://diepresse.com/home/politik/innenpolitik/502019/Abt-Hubl_Nur-schneller-Gewinn-das- kann-es-nicht-sein. 3 Anke Henrich, “Admont-Wirtschaftsdirektor Neuner: ‘Es Geht Auch Anders,’” Wirtschafts Woche, accessed April 2, 2015, www.wiwo.de/unternehmen/interview-admont-wirtschaftsdirektor-neuner-es-geht-auch-anders-seite-2/5525220.html. 4 Andreas Kump, “Am Boden Bleiben,” Adoro – Your Admonter Magazine 2 (2012): 15. 5 Comparable to a high school diploma in the United States.

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convinced — as are the Benedictine monks — that you can lead a company both in a humane and a sustainably successful way.6

Abbot Bruno added another important purpose of the monastery’s businesses: “Not least, it is also about creating jobs. Earned profits are also serving the common good.”7 He recognized the importance of profitability for keeping a business alive: “Of course, we need enough to reinvest and renew. But the thinking always needs to be sustainability-oriented. Only short-term profits — that is not the right way.”8 Admont Monastery’s monks, along with Business Director Neuner, always tried to keep the well-being of the region in mind when making decisions about the monastery’s businesses, which provided close to 600 jobs in and around a small and relatively remote village of only 2,500 inhabitants. “It has been our aspiration to develop the region around the monastery for almost a thousand years,” said Neuner. “Only if the region is functioning, can we preserve education, jobs, or regional energy supply. The financial crisis will throw the spotlight on the development of regions again.”9 STIA HOLZINDUSTRIE GMBH After the sale of DANA, STIA (which stands for “Stift Admont,” the German name of the monastery) remained the monastery’s single largest business unit in terms of revenues (€50 million in 2014) and employees (over 330). The main markets for its wooden panels and floorboard products were Austria (33 per cent of total revenues in 2013) and neighbouring countries Germany (24 per cent), Italy (17 per cent), and Switzerland (9 per cent), but STIA also exported to overseas markets such as China and Japan.10 The village of Admont was STIA’s only production location. The company sourced its raw wood exclusively from forestry operations that were certified according to high international sustainability standards. Following a general approach of using geographically close sources of raw materials (71 per cent of the raw wood was sourced domestically, 15 per cent was from Scandinavia, 6 per cent was from Russia, 3 per cent was from Germany, and 5 per cent was from other countries),11 STIA did not use any tropical wood, as managing director Ewald Fuchs explained:

We never asked for a price quote for low-grade timber. Even if it is certainly an everyday disadvantage for our sales representatives. But using dubious materials or producing somewhere else than in Admont: that’s just not us.12

For coatings, STIA preferred materials that were close to nature (e.g., plant oils). The company used modern, energy-efficient manufacturing technologies that kept emissions to a minimum, and it processed all waste wood to produce electrical energy and heat. Thus, STIA supplied both the monastery and the municipality of Admont with electricity and heat, while almost achieving carbon neutrality. In 2005, following Japanese examples, STIA introduced a continuous improvement process. It was launched with three keywords: cleanliness, order, and safety. First, all machines went through a basic cleaning. Working places were optimized regarding both functionality and appearance. Major

6 Henrich, op. cit. 7 Kump, “Am Boden Bleiben,” op. cit., 17. 8 Höfler, op. cit. 9 Henrich, op. cit. 10 Andreas Kump, “Die Longseller,” Adoro – Your Admonter Magazine 1 (2012): 12. 11 Kump, “Am Boden Bleiben,” op. cit. 12 Kump, “Am Boden Bleiben,” op. cit., 11.

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Page 7 9B16M045 maintenance-based and productivity-related figures were regularly tracked with the aim to shorten cycle times, improve quality, and decrease costs. Employees could use “idea cards” to suggest improvements and received financial bonuses if these improvements led to positive outcomes for the company. Although the company had thrived for more than four decades, it faced considerable challenges. It experienced a strong decline in demand in one of its main foreign markets, Italy, following the 2008–09 financial and economic crisis. The market situation was generally characterized by a volatile demand that varied from quarter to quarter. Orders were increasingly placed at short notice, which made production planning and resource management more difficult. At the same time, competition from Asia in parquet floors was strongly increasing, with the effect that the whole market was shifting toward lower-margin products. As a result, even STIA as a high-quality producer was not able to enforce higher price levels to match the increase in labour, raw materials, consumables (e.g., glue or packaging materials), and energy costs. Fortunately, the whole plant had been modernized just before the 2008–09 global financial crisis; thus, it currently did not require high investments. Roundwood prices had remained at very high levels in Austria (especially for fir and larch, the main varieties used by STIA) for years (see Exhibit 4). Imports from more distant supply markets like Russia, Romania, and Ukraine (where roundwood was available at 20–40 per cent below the Central European price levels) were not economical due to the high share of transport costs. As a result of the political crisis in Ukraine, the key production country of oak slats, STIA also faced price increases and supply shortages of this important raw material. In many European markets, the wood-flooring demand was declining (see Exhibit 5). At the same time, Austrian and German producers were losing export market share to Eastern European, Scandinavian, and Chinese competitors (see Exhibit 6). STIA’s management also found it difficult to assess future demand, as the macroeconomic outlook for the main markets within the eurozone (and specifically the key market Italy) remained uncertain. European construction activities in the residential sector decreased by 4 per cent in 2013 and stagnated in 2014.13 Industry experts were a bit more optimistic about the growth of the housing construction market for 2015–2017.14 In recent years, in an effort to increase sales volumes, STIA had put a stronger emphasis on sales and marketing activities. It employed new sales representatives in its core markets. In 2013, the “Admonter” brand identity was revamped with an even stronger emphasis on the natural and sustainable origin of the products and on the timelessness and beauty of their design. “Nature’s favourite designer” became the new promotional slogan of the brand, which was positioned in the premium segment. In addition to addressing the main customer groups of wholesalers, architects, and planners, STIA also started to become more strongly engaged in raising brand awareness among consumers — for example, through radio and magazine advertising. FACING THE CHALLENGE Neuner reached his office after his short walk through the snow-covered courtyard. The office door directly faced Abbot Bruno’s. Both doors often remained open, and the two men frequently exchanged

13 “2015: Towards a New Cycle for the European Construction Industry? The Risk of German Slackening in Growth,” Euroconstruct, December 4, 2015, accessed April 3, 2015, www.euroconstruct.org/pressinfo/pressinfo.php. 14 Ibid.

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Page 8 9B16M045 ideas. Neuner therefore also knew what Abbot Bruno thought when one of the monastery’s businesses faced a crisis situation: “We generally try to exhaust all possibilities to hold the jobs.”15 Neuner knew that he had to address the ongoing problems in the monastery’s industrial business. STIA’s management had already tried to tackle the challenges in several ways. Cost optimization projects had been initiated, also with external help. A tight stock management system helped to considerably decrease inventory levels of both raw materials and finished goods compared to previous years. The company also worked with temporary employment agencies to achieve faster reaction times to changes in order levels. However, these measures had not yet brought STIA back to profitability. Neuner weighed his options. He would never want to lower quality levels. “Passion for the product has top priority,” he thought. “We want to create something in which we take pleasure ourselves, combining functionality and good design — and that’s only possible with quality.” STIA prided itself on providing “stability in value” for its customers. Neuner saw this as a key competitive advantage. And he was convinced that the trend toward sustainable and authentic products would work in STIA’s favour — at least in the long run. Neuner was of the opinion that the company had to invest more in product development: “We need a product with a unique selling proposition again — something that is hard to imitate.” STIA had already started to diversify and offer not just wooden floors but also wooden panel solutions for walls. At the moment, a development team worked on special acoustic panels that could be used in concert halls as well as in homes. The product was still too expensive to be widely marketable. Neuner was convinced, however, that it would find a market in the future. Neuner’s thoughts turned to the reasons why he had first accepted the job at Admont Monastery as a young man. He had been fascinated by the monastery’s social commitment and its regional development function. During all the years of his tenure as Admont Monastery’s business director (the modern and secular equivalent of the cellarer: the monk responsible for the monastery’s provisions), he had always held The Rule of Saint Benedict, the founder’s famous precepts for his order’s monastic communities, in high esteem (see Exhibit 7). He wondered what Saint Benedict would advise him to do in the current situation.

15 Höfler, op. cit.

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EXHIBIT 1: STIA HOLZINDUSTRIE GMBH BALANCE SHEET (STRUCTURED AS REQUIRED BY AUSTRIAN ACCOUNTING STANDARDS, IN MILLIONS OF EUROS)

31/12/2013 31/12/2012

Long-term intangible assets 2.4 2.6 Long-term tangible assets 10.2 12.0 Financial assets 0.4 0.3 Fixed assets 13.0 14.9 Inventory 19.4 21.1 Accounts receivable 2.7a 3.1 Cash/bank 0.8 0.1 Current assets 22.9 24.3 Prepaid expenses 0.9 0.8 TOTAL ASSETS 36.8 40.0 Share capital 2.1 2.1 Accumulated profits 4.5 6.5 Own funds 6.6 8.6 Subsidies 0 0.5 Provisions/accruals 2.8 2.5 Bank debt 4.2b 10.8 Accounts payable 0.7c 0.5 Liabilities toward affiliated companies 21.8d 16.4 Other liabilities 0.7 0.8 Total liabilities 27.4 28.5 TOTAL EQUITY AND LIABILITIES 36.8 40.0 a 100% of accounts receivable are short term (< 1 year) b 100% of bank debts are short-term loans (< 1 year) c 100% of accounts payable are short term (< 1 year) d 11.9% of liabilities toward affiliated companies are short term (< 1 yea

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