178 Vle Case-studies (1)

7/26/2019 178 Vle Case-studies (1)

1/49

VLE case studies referred to in MN1178 Business andmanagement in a global context

Chapter 7 Case 1: Strategy at Proctor & Gamble

Founded in 1837, Cincinnati-based Proctor & Gamble has long been one of the worlds mostinternational companies. Today it is a global colossus in the consumer products business, withannual sales in excess of $50 billion, about 54 per cent of which are generated outside theUnited States. P&G sells more than 300 brands including Ivory soap, Tide, Pampers, Iams

pet food, Crisco and Folgers to consumers in 160 countries.

Historically, the strategy at P&G was well established. The company developed new productsin Cincinnati and then relied on semi-autonomous foreign subsidiaries to manufacture, marketand distribute those products in different nations. In many cases, foreign subsidiaries had theirown production facilities and tailored the packing, brand name, and marketing message tolocal tastes and preferences. For years this strategy delivered a steady stream of new productsand reliable growth in sales and profits. By the 1990s, however, profit growth of P&G wasslowing.

The essence of the problem was simple: P&Gs costs were too high because of extensiveduplication of manufacturing, marketing and administrative facilities in different nationalsubsidiaries. The duplication of assets made sense in the world of the 1960s, when nationalmarket were segmented from each other by barriers to cross-border trade. Products producedin Great Britain, for example, could not be sold economically in Germany due to high tariff

duties levied on imports into Germany. By the 1980s, however, barriers to cross-border tradewere falling rapidly worldwide and fragmented national markets were emerging into largerregional or global markets. Also, the retailers through which P&G distributed its productswere growing larger and more global, such as Wal-Mart in the United States, Tesco in theUnited Kingdom and Carre-four in France. These emerging global retailers were demanding

price discounts from P&G.

In the 1990s, P&G embarked on a major reorganisation in an attempt to control its coststructure and recognise the new realism of emerging global markets. The company shut downsome 30 manufacturing plants around the globe, made 13,000 employees redundant andconcentrated production in fewer plants that could better realise economies of scale and serve

regional markets.It wasnt enough. Profit growth remained sluggish, so in 1999 P&G launched its secondreorganisation of the decade. Named Organisation 2005, the goal was to transform P&G intoa truly global company. P&G tore up its old organisation, which was based on countries andregions, and replaced it with one based on seven self-contained global business units, rangingfrom baby care to food products. Each business unit was given complete responsibility forgenerating profits from its products and for manufacturing, marketing and productdevelopment. Each business unit was told to rationalise production, concentrating it in fewlarge facilities; to try to build global brands wherever possible, thereby eliminating marketingdifference between countries; and to accelerate the development and launch of new products.P&G announced that, as a result of this initiative, it would close another 10 factories and lay

off 15,000 employees, mostly in Europe where there was still extensive duplication of assets.The annual cost savings were estimated to be about $US 800 million. P&G planned to use the


2/49

savings to cut prices and increase marketing spending in an effort to gain market share andthus further lower costs through the attainment of scale economies.

This time the strategy seemed to be working. Between 2003 and 2007 P&G reported stronggrowth in both sales and profits. Significantly, P&Gs global competitors, such as Unilever,Kimberly-Clark and Colgate-Palmolive, were struggling between 2003 and 2008.

(Source: L.P. Willcocks, using multiple published sources, including annual reports.)


3/49

Chapter 7 Case 2: Cemex and its global expansion

From relatively modest beginnings as a Mexican family-owned conglomerate, since 1996

CEMEX has been the third largest cement company in the world (measured by cementproduction capacity). Having completed the acquisitions of Southdown in the United Statesand RMC in the UK, the group was a well-established three-legged player in America,Europe and Asia. However, global competition was tough and, by 2008, CEMEX was still not

positioned in the two emerging giant markets of China and India.

CEMEXs strategy to become one of the leading players in the world of cement took placeover many years in three major steps: (1) consolidating its presence the Mexican market, (2)internationalisation, and (3) global management. We will look at each of these in turn.

Mexico

In 1985, when Lorenzo Zambrano was appointed head of CEMEX, the company was fairly

similar to any other developing country conglomerate. Founded in Mexico in 1906, CEMEXhad grown from a regional cement producer to a diversified group of companies with interestsin tourism, petroleum and mining projects, and was listed on the Mexican stock exchange.The signing of the GATT agreement in 1985 turned Mexico, the worlds thirteenth-largestcement consumer, into an open marketplace and, at the same time, an interesting expansionopportunity for cement multinational companies (MNCs). The demographics, the attractivemarket characteristics and the expected infrastructure development all gave Mexico a hugegrowth potential. With increased competition from more efficient international players, aconsolidation movement was inevitable. Zambrano implemented a deliberate strategy to makecement its core business. CEMEX divested the company of nearly all its non-core and non-cement related businesses, reinvesting the proceedings into cement assets. It acquired the two

major cement manufacturers in Mexico, thus becoming the main national player and the tenthlargest cement company in the world.

CEMEX was creative in its efforts to expand its Mexican market. It developed exceptionalcustomer care service support. In 1998 it changed the image of cement by launching a

programme whereby people who had little money or savings could invest in home building.This linked with more traditional community savings schemes. In 2001 it targeted Mexicanmigrants to the USA. It enabled migrants to send back money to family members forconstruction projects, and it also helped Mexican migrants to spend money on Mexican-basedhomes. While its competitors were selling bags of cement, CEMEX was selling the dream ofa home, with a business model supported by innovative financing and construction expertise.

Its Mexican cement sales tripled, while still allowing CEMEX to charge 15 per cent morethan its competitors.

CEMEX also improved its efficiency by using information technology (IT). In 1987 CEMEXhired a cyber-visionary, Gelacio Iiguez, who created a network information system byinstalling satellite dishes for voice and data transmisson in all its plants. He also developed anintegrated dispatching system, centralising dispersed operation by a satellite. In the pastdelivery trucks had often failed to reach customers on time, resulting in cancellations orreorders and consequent losses. To avoid this, CEMEX equipped its ready-mix deliverytrucks with global positioning systems, enabling customers to track them. A centralmonitoring system also helped in redirecting a truck where an order had been cancelled. Thisdrastically reduced delivery times and enabled 70 trucks to make deliveries that had

previously required 100 trucks. The technology enabled big savings in fuel, payroll andmaintenance, while increasing customers goodwill. In 1995 CEMEX launched one of the


4/49

first corporate websites. It featured catalogues of products for clients as well as financial andcompany information for analysts. Zambrano also launched a logistics system that enabledcustomers to track shipments online. In 2000 CEMEX formed a subsidiary to manage its e-

business efforts. One of these was Contrumex, a construction industry online marketplaceaimed at small and medium-sized businesses in Latin America. Another was Latinexus, an

online exchange for indirect goods and services created in partnership with other leadingcompanies in Mexico and Brazil. CEMEX renamed its subsidiary Neoris and relaunched itas an independent company offering website services, e-consulting and web architecture tocompanies other than CEMEX.

The basis of CEMEXs e-business strategy was fivefold:

1. The boundaries between companies and industries was becoming increasingly blurred.2. The relationships between companies and their markets was changing.3. Time has sped up. Information is everywhere, readily available and virtually free.

CEMEX needed to seize the opportunity to differentiate itself by speed of decision-making and new business strategies

4. The internet is changing the nature of work. Computers and networks can replace humanhands and minds in many routine activities. This frees up people to take on the moreinformation-intensive activities that create value for the firm and customers.

5. There has been a shift in value creation from owning assets to leveraging assets throughnetworks.

Internationalisation

Cement is a very cyclical industry and its presence in several countries with counter-cyclicaleconomies would ensure a more predictable stream of cash flows. The companys

performance was intimately pegged to the evolution of the Mexican economy. This meanthigh cash-flow volatility and high costs of capital. In the mid-1980s, internationalopportunities were substantial, but CEMEX would have to make focused decisions, first

because of the reduced amount of available resources and, second, because only a focusedplayer would be able to compete with the larger MNCs operating in various internationalmarkets. The man with this vision was Lorenzo Zambrano. Ricardo Castro, CEMEXs seniorvice-president of Strategic Business Development for Asia and Africa, describes hischairmans vision:

He saw opportunities in both the Mexican cement market and markets beyond its national borders. So hisstrategy was to transform the Mexican conglomerate into a focused cement player with global coverage.Initially, the company divested its non-core assets, becoming first a regionalMexican cement producer.Subsequently, the company expanded nationally, and finally became global.

1

One of the early steps to internationalisation was to export cement from Mexico to the UnitedStates and Latin America. However, given its structural economic characteristics andparticularly the high transport costs, international trading had limited potential. In 1992,CEMEXs first direct investment was in Europe with the acquisition of Valenciana andSanson in Spain. At the time, Spain was one of Europes most attractive markets and throughthis acquisition CEMEX instantly became the market leader in Spain and the worlds fifthlargest cement producer, with 36 million tons of capacity. It was also the companys firstmajor encounter with its global competitors, the French company, Lafarge, and the Swisscompany, Holcim (at the time Holderbank). The success in Spain spurred further internationalexpansion, this time in South and North America. In 1994 CEMEX acquired Vencemos,Venezuelas largest cement company; Cemento Bayano in Panama; and a plant in Texas.

1Quoted in Lassserre, P.Cemex: Cementing a global strategy. Case 3072331. (France: Insead, 2007).


5/49

Further acquisitions in the Dominican Republic in 1995 and Colombia in 1996 werecompleted.

By this time the expansion strategy was already paying off. When Mexico entered its 1994crisis, leading to its currencys the Pesos massive devaluation, CEMEX was able to offsetsevere losses with profits from its international operations. In the mid-1990s CEMEX began

its expansion into Asia, a region that clearly matched its strategy for high growth potentialmarkets. Government infrastructure spending was on the rise, and per capita cementconsumption was still very low but growing fast. Asia represented more than 20 per cent ofthe worlds capacity of 1.4bn tons.

By 1994 CEMEX set up trading operations in Southeast Asia and in 1999 establishedCEMEX Asia Holdings (CAH), with a mission to develop new partnerships and cement-related businesses in that region. In 1997, it made its first acquisition, a 30 per cent stake inRizal Cement in the Philippines. However, immediately after acquiring Rizal Cement, theAsian crisis set in and caught CEMEX, and everyone else, by surprise. The industry saw ahuge reduction in demand throughout the region in the Philippines by 17 per cent, Indonesia

by 30 per cent, Malaysia by 37 per cent and Thailand by 35 per cent. But the crisis, whichmade many regret the high acquisition prices paid prior to 1997, also presented the cementMNC with an opportunity. Heavily indebted local producers now wanted to sell and priceswere going down. By late 1998, CEMEX had guaranteed a 70 per cent stake in Rizal Cement,and also bought Apo Cement, the lowest cost producer in the Philippines.

In Indonesia, CEMEX was named preferred bidder for Sement Gresik, a state-ownedcompany that had consolidated three out of the five state-owned cement producers andcontrolled about 40 per cent of domestic production. The government wanted to privatise thecompany and by May 1998 CEMEX was planning on taking a majority stake. But after strikesand protests, the government backed off and CEMEX only took a 25 per cent share of thecompany. Since it was unable to take control of the company CEMEX divested itself of itsstake in August 2006. With Asia on hold, CEMEX expanded its operations in America andEurope. In November 2000 CEMEX acquired Southdown, No. 2 in the United States, with 12

plants serving 27 states. Southdown operates at full capacity and serves only the Americanmarket, providing a stable stream of cash flows. In 2005 it acquired the RMC group, based inthe UK, which increased its capacity by around 20 per cent, strengthened its position acrossthe cement value chain, reinforced its presence in Europe and made CEMEX the worldslargest producer of ready-mix.

Going global

From 1996 to 2008, CEMEX had consolidated its position as the third largest cementproducer in the world, behind Lafarge/Blue Circle and Holcim. By 2005 it had achieved anestimated production capacity of 94 million tons per year. It was the number one producer ofready-mix, with 76 million tons; one of the largest aggregate producers, with 175 milliontons; and one of the top cement traders in the world, selling more than 17 million tons in 2005.

What truly makes CEMEX a global company and not simply a multinational? According tothe companys executives, there are several factors that make CEMEX a truly global company.First, the international expansion strategy was a planned and organised move, rolled out inseveral phases. As a consequence, today CEMEXs international network is not a sum ofdifferent operations in different locations, but can be seen as a network of systems. Initially,CEMEX represented a Mexican cement production system. Later it became a system ofcement production and trading in the Caribbean region, with ramifications in Europe, Latin

America and North America. It later advanced into the Mediterranean region, and went as faras Asia in 1995 (although the first acquisition in Asia only occurred in 1997).


6/49

Secondly, CEMEX full integrates its international operations into the CEMEX network. Thisis mainly achieved via a common technological platform, organisational structure andcorporate culture. In addition, its trading activity is important in achieving a trueinterconnection between CEMEX and independent production systems. This activity allowsCEMEX to maintain a strong relationship between cement producers and customers

worldwide.Finally, the company has developed a knowledge community through a series of practicesknown as the CEMEX Way. This can be summarised as follows:

The CEMEX way:

identifies and disseminates best practice and standardises business processes across the globe

has common management principles and systems for the entire organisation encourages all managers to speak the same language when discussing business

issues implements knowledge and experiences gathered over many years of doing business in

various countries.The CEMEX way specifies everything about the running of the company, down to the makeof computers employees must use. It also insists on mutual learning across subsidiaries. It alsouses a post-merger integration (PMI) process that is put in place after each acquisition, toensure that the acquisition is quickly and well assimilated. CEMEX specified three conditionsfor an acquisition to go ahead. The acquisition should provide a return on investment much

bigger than the cost of capital. Second, it should enable CEMEX to maintain its financialstrength and credit quality. Third, CEMEXs management expertise should be able to increasethe acquired companys value. In the integration process, CEMEX decides on whichoperations should be decentralised and those that need centralised decision-making andstandardisation. It uses the CEMEX brand, and sources people and assets internationally. It

standardises management practices, but if local practices are particularly effective, itstandardises those for CEMEX as well.

A key issue for CEMEX has been its management of people. There is a clear career path toensure the best of new employees find their way quickly up the company. There is anintensive induction programme educating people into the CEMEX way. Multiple training andeducation programmes are made available to staff, including over 260 e-learning courses onoperations, business and managerial skills.

CEMEX is also notable globally for its extensive leverage on technology. For example, whileit was still mainly a domestic company based in Mexico, ready-mix concrete trucks wereequipped with computers on board. This allowed for central tracking by global-positioning

satellite systems and precise planning of cement delivery schedules. Technology has allowedCEMEX to become one of the lowest cost producers anywhere in the world. Its technological

backbone also allowed CEMEX to specialise in markets that lack highly developed roadsystems or solid telephone networks and where competing becomes a matter of showingcustomers that you can save them from uncertainty. What CEMEX did was adapt globaltechnology to the developing worlds almost limitless range of local problems.

CEMEX is also strong on global branding and its concern for customer satisfaction. While theCEMEX brand is strongly used, it also has product sub-brands, designed to suit the needs ofthe customer in whichever part of the world they are in. Historically, by managing all thecritical activities IT, staff, innovative marketing methods, acquisition strategy and effective

customer support CEMEX had delivered superior value to all its stakeholders.


7/49

Information technology and acquisitions

CEMEXs approach to IT is interesting, not least for illustrating Chapter 13 of this subjectguide. Its decision to enter global markets in the 1990s coincided with the IT revolution, butalso a consolidation spree in the global cement industry. CEMEXs main competitors hadstarted acquisitions earlier and had used a decentralized approach. They ran into problems

unifying diverse cultures and systems. CEMEX was able to assimilate acquisitions in monthsdue to its IT expertise, process standardisation philosophy and capabilities. Eight e-groupswere made responsible for process effectiveness. Each e-group has business, IT and HRexperts. These groups worked closely with the staff from the acquired company to decidewhat could be standardized and what practices and systems could remain localised. About 20

per cent of the acquired companys practices are retained, with the rest typically recorded in adatabase, in case they subsequently proved useful.

The future 2008 and beyond1

CEMEX is absent from the two leading emerging countries, China and India, which togetherrepresent more than 50 per cent of world markets. Could it ignore those giant source of

demand and if not, the challenge was how to develop a presence? The Chinese market inparticular is very fragmented, with about 1,000 local producers.

The financial crisis that hit the world in 2008 had dire effects on CEMEX. By 2009 CEMEXhad accumulated a debt burden of $US 19.4 billion. At this point, Mexico accounted for onlyone-third of its revenues, but contributed substantially to this debt burden. CEMEXs strategyof acquisitions to expand was a fundamental part of its success but this backfired with theacquisition of Rinker in 2007 and the subsequent global financial crunch.

Having acquired companies during the boom times, CEMEX became more optimistic afterevery acquisition. Optimism, proven track record on acquisitions and debt-clearing ability inthe past guided the acquisition of Rinker, an Australian company. As the US market slowed

down from 2008, where Rinker had most of its operations, CEMEXs hopes for theacquisition were shattered. Moreover, Rinker was probably overpriced when CEMEX boughtit in 2007 for $US 15.3 billion. Certainly by 2008 some estimated its value to be a low as halfthat figure.

By 200809 the major markets of the USA, the UK, Spain and Mexico had all experiencedmajor slowdowns as they moved towards recession. Another blow CEMEX had to absorb wasnationalisation of its company in Venezuela. It asked for $1.3 billion in compensation, butwas offered only $650 million. When CEMEX rejected the offer, the state seized its assets.

From 2009 to 2013, Cemex constantly had to scout for debt restructuring or sell assets inorder to pay impending debts. The signs are that it has managed this troublesome period with

great difficulties, but that it may well come out of this challenging period with a good futureahead of it.

(Source: L.P. Willcocks, using multiple published sources.)

1This section is based on annual reports from 20082013 and Vivek, M. et al. Cemexs cost of globalised growth

The cash crunch?IBSCDC case 3101061. (Cranfield: Case Clearing House, 2010).


8/49

Chapter 8 Case 1: The changing steel industry

For a long time, the steel industry was seen as a static and unprofitable one. Producers werenationally based, often state-owned and frequently unprofitable the early 2000s saw 50independent steel producers becoming bankrupt in the United States alone. But recent yearshave seen a turnaround. During 2006, Mittal Steel paid $36bn (24.5bn) to buy Europeansteel giant, Arcelor, creating the worlds largest steel company. The following year, Indianconglomerate Tata bought the Anglo-Dutch steel company, Corus, for $13bn. These high

prices indicated considerable confidence in the prospects of a better industry structure.

New entrants

In the last two decades, two powerful groups have entered world steel markets. First, after aperiod of privatisation and reorganisation, in 2009 Russia had become the worlds secondlargest steel exporting country (behind Japan), led by giants such as Severstal and Evraz.China, too, had become a major force. Between the early 1990s and 2009, Chinese producersincreased their capacity six times. Although the Chinese share of world capacity reached over40 per cent in 2009, most of this was directed at the domestic market. Nevertheless, Chinawas the worlds fourth largest steel exporter in 2009.

Substitutes

Steel is a nineteenth-century technology, increasingly substituted by other materials such asaluminium in cars, plastics and aluminium in packaging, and ceramics and composites inmany high-tech applications. Steels own technological advances sometimes work to reduceneed: thus steel cans have become about one-third thinner over the last few decades.

Buyer power

The major buyers of steel are the global car manufacturers. They are sophisticated users andare often leaders in the technological development of their materials. In North America atleast, the decline of the once dominant Big Three General Motors, Ford and Chrysler hasmeant many new domestic buyers, with companies such as Toyota, Nissan, Honda and BMWestablishing local production plants. Another important user of steel is the metal packagingindustry. Leading can producers such a Crown Holdings, which makes one-third of all foodcans products in North America and Europe, buy in large volumes, coordinating purchasesaround the world.

Supplier power

The key raw material for steel producers is iron ore. The main producers Vale, Rio Tinto

and BHP Billiton control about 70 per cent of the market for internationally traded ore. Ironore prices had multiplied four times between 2005 and 2008, and, despite the recession, by2010 were still twice the 2005 level.

Competitive rivalry

The industry has traditionally been very fragmented: in 2000, the worlds top five producersaccounted for only 14 per cent of production. Companies such as Nucor in the USA, Thyssen-Krupp in Germany as well as Mittal and Tate responded by buying up weaker international

players. By 2009, the top five producers accounted for 20 per cent of world production. Thenew steel giant, Arcelor-Mittal, alone accounted for about 10 per cent of world production,and for one-fifth of the European Union market. Nonetheless, despite a cyclical peak in 2008

and a slump in 2009, the world steel price was basically the same in 2010 as it was in 2005.(Source: L.P. Willcocks, using multiple published sources on steel industry growth.)


9/49

Chapter 8 Case 2: Portman-Ritz-Carlton, Shanghai

How does a five-star hotel differ from its lower-tier competitors? How does the best five-starhotel stand out from its five-star peers? The answer is people, according to Mark DeCocinis,general manager of the five-star Portman-Ritz-Carlton Hotel in Shanghai, China, which has

been named the Best Employer in Asia by Hewitt Associates three times.

Our priority is taking care of our people, said DeCocinis in an interview. Were in the service business,and service comes only from people. Its about keeping our promise to our employees and making that aneveryday priority. Our promise is to take care of them, trust them, develop them, and provide a happy placefor them to work. The key is everyday execution.1

One of the secrets behind the Portman-Ritz-Carltons success is that the general managerinterviews every prospective employee. Of course this is a time-consuming process for a busygeneral manager. Yet, by doing that, the general manager is able to get a feel for theintangible nature of the potential employees attitudes. In terms of the questions that the

general manager asks, DeCocinis shared that he usually asks them about themselves and triesto make a connection. But the most important question he asks is: Why do you want to joinour hotel? and Whatever they say, the most important notion needs to be I enjoy workingwith people, notjust using the phrase I like people I really want to find out whatmotivates them

2

The Portman-Ritz-Carltons employee satisfaction rate is 98 per cent, and its guestsatisfaction is between 92 per cent and 95 per cent. To translate excellent HR management to

better firm performance, the hotels performance goals are aligned with the Ritz-Carltons

corporate goal from the company to the hotel, and from the hotel to each division. Thismeans that everyone is part of the whole. Every employee comes up with a plan to reach thegoal for the next year, measured by guest satisfaction, financial performance and employeesatisfaction. Bonuses at the end of the year are based on improvements made.

If the person smiles naturally, thats very important to the Ritz-Carlton, itturns out, because this is something that they feel the candidate cant force. In a culture where

people tend to have more reserved expressions, service personnel who smile naturally arevaluable and rare resources appreciated by hotel guests.

In China, many multinationals face a constant shortage of talent and high employee turnover.Yet, the Portman-Ritz-Carlton has not only been able to attract, but also to retain, high-qualitystaff to deliver excellent customer service and ensure profitable growth. What are the secrets

behind its ability to retain these individuals? To illustrate this ability, a senior executivepointed to one incident. During the 2003 SARS crisis, business started to deteriorate. By April,the Ritz Carlton occupancy rate, which should have been at 95 per cent, had dropped to 35 per

cent. The first step was for the executive team to take a 30 per cent pay cut. But then it gotworse. By May, the occupancy rate was 17 per cent to 18 per cent. The hotel reduced theworking week to four days, and staff were asked to take their outstanding paid leave days.And then, when these reserves were used up, everyone really pulled together. Employees whowere single gave their shifts to colleagues who had families to support. Some employees wereworried that their contracts would not be renewed given the low occupancy rates, so the hotelchain renewed them without a second thought. Employee satisfaction rate that year was 99.9

per cent. This was a negative situation that turned out to have extremely positiveconsequences.

1Quoted in Peng, M. Global strategic management. (London: Cengage, 2009) [ISBN 9780324590982] Chapter 3.

2Ibid.


10/49

Such a willingness to go the extra mile to ensure employee satisfaction is reciprocated by aloyal, dedicated and hard-working workforce. Within the Ritz-Carlton family of 59 hotelsworldwide, the Portman-Ritz-Carlton has been rated the highest in employee satisfaction forfive consecutive years. It has also won the prestigious Platinum Five-Star Award by the China

National Tourism Administration. It is one of only three hotels in China, and the only

Shanghai hotel, to receive this inaugural award, which is the highest hospitality award inChina.

(Source: L.P. Willcocks, using multiple published sources.)


11/49

Chapter 10 Case 1: Levis Strauss goes local

The early 2000s saw a tough few years for Levi Strauss, the iconic manufacturer of blue jeans.The company whose 501 jeans became the global symbol of the Baby Boom generation andwere sold in more than 100 countries, saw its sales drop from a peak of $71 billion in 1996 to

just $4 billion in 2004. Fashion trends had moved on, its critics charged, and Levi Strauss,hamstrung by high costs and a stagnant product line, was looking more faded than a well-worn pair of 501s!

Perhaps so, but 20052006 brought signs that a turnaround was in progress. Sales increasedfor the first time in eight years, and after a string of losses, the company started to register

profits again.

There were three parts to this turnaround. First, the company made cost reductions at home.Levis closed its last remaining US factories and moved production offshore where jeanscould be produced more cheaply. Second, the company broadened its product line,introducing the Levis Signature brand that could be sold through lower-priced outlets inmarkets that were more competitive, including the core US market where Wal-Mart haddriven down prices. Third, the company decided in the late 1990s to give more responsibilityto national managers, allowing them to better tailor the product, offering and marketing mixto local conditions. Prior to this, Levis had basically sold the same product worldwide, oftenusing the same advertising message. The old strategy was designed to enable Levis to realisethe economies of scale in production and advertising, but it wasnt working.

Under the new strategy, variations between national markets have become more pronounced.Jeans have been tailored to different body types. In Asia, shorter leg lengths are common,whereas in South Africa, womens jeans must have a larger backside, so Levis had

customised the product offering to account for these physical differences. Then there are thesocio-cultural differences (see Chapter 3 of this subject guide). In Japan, tight-fitting black

jeans are popular; in Islamic countries, women are discouraged from wearing tight-fittingjeans, so Levis offerings in countries like Turkey are roomier. Climate also has an effect onproduct design. In northern Europe, standard weight jeans are sold, whereas in hottercountries lighter denim is used, along with brighter colours that are not washed out by thetropical sun.

Levis advertisements, which used to be global, have also been tailored to regional differences.In Europe, the ads now talk about the cool fit. In Asia, they talk about the rebirth of anoriginal. In the United States, the advertisements show real people who are themselvesoriginals: ranchers, surfers, great musicians, for example. There are also differences indistribution channels and pricing strategy. In the fiercely competitive US market, prices are aslow as $25 and Levis are sold through mass-market discount retailers, such as Wal-Mart. InIndia, strong sales growth is being driven by Levis low-priced Signature brand. In Spain,

jeans are seen as higher fashion items and are being sold for $50 in higher-quality outlets. Inthe UK, prices for 501s are much higher than in the United States, reflecting a more benigncompetitive environment.

This variation in marketing mix seems to be reaping dividends. Although demand in theUnited States and Europe remains sluggish, growth in many other countries is strong. Turkey,South Korea and South Africa all recorded growth rates in excess of 20 per cent per annumfollowing the introduction of this strategy in 2005. Looking forward, Levis has been

expecting for some time that 60 per cent of its growth would come from emerging markets.(Source: L.P. Willcocks, using multiple published sources.)


12/49

Chapter 11 Case 1: Unilever

Unilever is one of the worlds oldest multinational corporations, with extensive productofferings in the food, detergent and personal care businesses. It generates annual revenues inexcess of $50 billion and a wide range of branded products in virtually every country.Detergents, which account for about 25 per cent of corporate revenues, include well-knownnames such as Omo, which is sold in more than 50 countries. Personal care products, whichaccount for about 15 per cent of sales, include Calvin Klein cosmetics, Pepsodent toothpaste

brands, Faberge hair care products and Vaseline skin lotions. Food products account for theremaining 60 per cent of sales and include strong offerings in margarine (where Unileversmarket share in most countries exceeds 70 per cent), tea, ice cream, frozen foods and bakery

products.

Historically, Unilever was organised on a decentralised basis. Subsidiary companies in eachmajor national market were responsible for the production, marketing, sales and distribution

of products in that market. In Western Europe, for example, the company had 17 subsidiariesin the early 1990s, each focused on a different national market. Each was a profit centre andeach was held accountable for its own performance. This decentralisation was viewed as asource of strength. The structure allowed local managers to match product offerings andmarketing strategy to local tastes and preferences and to alter sales and distribution strategiesto fit the prevailing retail systems. To drive the localisation, Unilever recruited local managersto run local organisations; the US subsidiary (Lever Brothers) was run by Americans, theIndian subsidiary by Indians, and so on.

By the mid-1970s, this decentralised structure was increasingly out of step with a rapidlychanging competitive environment. Unilevers global competitors, which include the Swiss

firm Nestl and Proctor & Gamble from the United States, had been more successful thanUnilever on several fronts building global brands, reducing cost structure by consolidatingmanufacturing operations at a few choice locations, and executing simultaneous productlaunches in several national markets. Unilevers decentralised structure worked against effortsto build global or regional brands. It also meant lots of duplication, particularly inmanufacturing, a lack of scale economies and a high-cost structure. Unilever also found that itwas falling behind rivals in the race to bring new products to consumers. In Europe, forexample, while Nestl and Proctor & Gamble moved toward pan-European product launches,it could take Unilever four to five years to persuade 17 European operations to adopt a new

product.

In an effort to address this situation, Lever Europe was established to consolidate the

companys detergent operations. The 17 European companies report directly to Lever Europe.Using its newfound organisational clout, Lever Europe consolidated the production ofdetergents in Europe in a few key locations to reduce costs and speed up the introduction ofnew products. Implicit in this new approach was a bargain: the 17 companies wouldrelinquish autonomy in their traditional markets in exchange for opportunities to help developand execute a unified pan-European strategy. The number of European plants manufacturingsoap was cut from 10 to two and some new products were manufactured at only one site.Product sizing and packaging were harmonised to cut purchasing costs and to accommodateunified pan-European advertising. By taking these steps, Unilever estimated that it saved asmuch as $400 million a year in its European detergent operations.

By 2000, however, Unilever found that it was still lagging behind its competitors, so thecompany embarked upon another reorganisation. This time the goal was to cut the number of


13/49

brands that Unilever sold from 1,600 to just 400 and to market these on a regional or globalscale. To support this new focus, the company planned to reduce the number ofmanufacturing plants from 380 to 280 by 2004. The company also established a neworganisation based on just two global product divisions a food divisions and a home

personal care division. Within each division are a number of regional business groups that

focus on developing, manufacturing and marketing either food or personal care productswithin a given region. For example, Unilever Bestfoods Europe, with its headquarters inRotterdam, focuses on selling food brands across Western and Eastern Europe, while UnileverHome and Personal Care Europe do the same for home and personal care products. A similarstructure can be found in North America, Latin America and Asia. Thus, Bestfoods NorthAmerica, with its headquarters in New Jersey, has a similar charter to Bestfoods Europe, but,in keeping with differences in local history, many of the food brands marketed by Unilever in

North America are different to those marketed in Europe.

(Source: L.P. Willcocks, using annual reports, and Hill, C.International business. (New York: McGraw Hill,(2010) [ISBN 9780071220835].)

Further questions to consider:

1. What was Unilever trying to do when it introduced a new structure based on businessgroups in the mid-1990s? Why do you think that this structure failed to cureUnilevers ills?

2. In the 2000s, Unilever switched to a structure based on global product divisions. Whatdo you think is the underlying logic for this shift? Does the structure make sense,given the nature of competition in the detergents and food business?

3. Using a search engine, look up the latest developments in Unilevers structure. (Itsannual report might help you here; also have a look at its entry on Wikipedia.)


14/49

Chapter 11 Case 2: Dow chemicals matrix structure

A handful of major players compete head-to-head around the world in the chemical industry.

These companies are Dow Chemical and DuPont of the United States, ICI in the UK and theGerman trio of BASF, Hoechst AG and Bayer. The barriers to the free flow of chemicalproducts between nations largely disappeared in the 1970s. The ability to sell freelyworldwide, along with the commodity nature of most bulk chemicals, has ushered in a

prolonged period of intense price competition. In such an environment, the company that winsthe competitive racer is the one with the lowest costs. Dow Chemical was long among thecost leaders.

For years, Dows managers insisted that part of the reason for this was its matrixorganisational structure. Dows organisational matrix had three interacting elements:functions (e.g. R&D, manufacturing, marketing), businesses (e.g. ethylene, plastics,

pharmaceuticals) and geography (e.g. Spain, Germany, Brazil). Managers job titles

incorporated all three elements for example, plastics marketing manager for Spain andmost managers reported to at least two bosses. The plastics marketing manager in Spain mightreport to both the head of the worldwide plastics business and the head of Spanish operations.The intent was to make Dow operations responsive to both local market needs and corporateobjectives. Thus, the plastics business might be changed with minimising Dows global

plastics production costs, while the Spanish operation might be changed with determininghow best to sell plastics in the Spanish market.

When Dow introduced this structure, the results were less than promising: multiple reportingchannels led to confusion and conflict. The large number of bosses made for an unwieldy

bureaucracy. The overlapping responsibilities resulted in turf battles and a lack of

accountability. Area managers disagreed with managers who oversaw business sectors aboutwhich plants should be built and where. In short, the structure didnt work. Instead ofabandoning the structure, however, Dow decided to see if it could be made more flexible.

Dows decision to keep its matrix structure was prompted by its move into thepharmaceuticals industry. The company realised that the pharmaceutical business is verydifferent from the bulk chemicals business. In bulk chemicals, the big returns come fromachieving economies of scale in production. This dictates establishing large plants in keylocations from which regional or global markets can be served. But in pharmaceuticals,regulatory and marketing requirements for drugs vary so much from country to country thatlocal needs are far more important than reducing manufacturing costs through scaleeconomies. A high degree of local responsiveness is essential. Dow realised its

pharmaceutical business would never thrive if it were managed using the same priorities as itsmainstream chemical operations.

Accordingly, instead of abandoning its matrix, Dow decided to make it more flexible in orderto better accommodate the different businesses, each with its own priorities, within a singlemanagement system. A small team of senior executives at headquarters helped set the

priorities, within a single management system. After priorities were identified for eachbusiness sector, one of the three elements of the matrix function, business or geographicarea was given primary authority in decision making. Which element took the lead variedaccording to the type of decision and the market or location in which the company wascompeting. Such flexibility required that all employees understand what was occurring in the

rest of the matrix. Although this may seem confusing, for years Dow claimed this flexible


15/49

system worked well and credited much of its success to the quality of the decisions itfacilitated.

By the mid-1990s, however, Dow had refocused its business on the chemicals industry andhad divested itself of its pharmaceutical activities where the companys performance had beenunsatisfactory. Reflecting the change in corporate strategy, in 1995 Dow decided to abandon

its matrix structure in favour of a more streamlined structure based on global businessdivisions. The change was also driven by realisation that the matrix structure was just toocomplex and costly to manage in the intense competitive environment of the 1990s,

particularly given the companys renewed focus on its commodity chemicals wherecompetitive advantage often went to the low-cost producer. As Dows then CEO put it in a1999 interview: We were an organisation that was matrixed and depended on teamwork, butthere was no one in charge. When things went well, we didnt know whom to reward, andthen things when poorly, we didnt know whom to blame. So we created a global divisionalstructure and cut out layers of management. There used to be 11 layers of management

between me and the lowest level employees; now there are five. In short, Dow ultimatelyfound that a matrix structure was unsuited to a company that was competing in very cost-competitive global industries, and it had to abandon its matrix to drive down operating costs.



16/49

Chapter 12 Case 1: Philips NV in China

The Dutch consumer electronics, lighting, semiconductor and medical equipmentconglomerate, Philips NV, has been operating factories in China since 1985 when the countryfirst opened its markets to foreign investors. Then China was seen as the land of unlimiteddemand, and Philips, like many other Western companies, dreamed of Chinese consumerssnapping up its products by the millions. But the company soon found out that one of the bigreasons the company liked China the low wage rates also meant that few Chinese workerscould afford to buy the products they were producing. Chinese wage rates are currently one-third of those in Mexico and Hungary, and five per cent of those in the United States or Japan.So Philips hit on a new strategy: keep the factories in China but export most of the goods tothe United States and elsewhere.

By the mid-2000s, Philips had invested over $2.5 billion in China, operated 25 wholly ownedsubsidiaries and joint ventures in China which together employed approximately 30,000

people. At this point Philips was exporting nearly two-thirds of the $7 billion in products thatthe factories produced every year. Philips accelerated its Chinese investment in anticipation ofChinas entry into the World Trade Organization (WTO). The company planned to move evenmore production to China in the future. In 2003, Philips announced it would phase out

production of electronic razors in the Netherlands, lay off 2,000 Dutch employees and moveproduction to China by 2005. A week earlier, Philips had stated that it would expand capacityat its semiconductor factories in China, while phasing out production in higher-cost locationselsewhere.

At this time, more than 25 per cent of everything Philips made worldwide came from China,and executives said the figure was rising rapidly. Several products, such as CD and DVD

players, are now made only in China. Philips also started to give its Chinese factories agreater role in product development. In the TV business, for example, basic development usedto occur in Holland but was moved to Singapore in the early 1990s. Now Philips hastransferred TV development work to a new R&D centre in Suzhou near Shanghai. Similarly,

basic product development work on LCD screens for cell phones was shifted to Shanghai inthe mid-2000s.

The attractions of China to Philips included continuing low wage rates, an educatedworkforce, a robust Chinese economy, a stable exchange rate that is pegged to the US dollar,a rapidly expanding industrial base, which included many other Western and Chinesecompanies that Philips uses as suppliers, and easier access to world markets after Chinasentry to the WTO. Philips stated that ultimately its goal was to turn China into a global supply

base from which the companys products would be exported around the world.

Some observers worried that Philips and companies pursuing a similar strategy might beoverdoing it. Too much dependence on China could be dangerous if political, economic orother problems disrupted production and the companies ability to supply global markets.Some observers believed that it might be better if the manufacturing facilities of companieswere more geographically diverse as a hedge against problems in China. These critics fearswere given some substance in early 2003 when an outbreak of the pneumonia-like SARS(severe acute respiratory syndrome) virus in China resulted in the temporary shutdown ofseveral plants operated by foreign companies and disrupted their global supply chains.Although Philips was not directly affected, it did restrict travel by its managers and engineers

to its Chinese plants.(Source: L.P. Willcocks, using multiple published sources.)


17/49

Chapter 12 Case 2: Hewlett Packard in Singapore

In the late 1960s, Hewlett Packard was looking around Asia for a low-cost location to produceelectronic components that were to be manufactured using labour-intensive processes. The

company looked at several Asian locations and eventually settled on Singapore, opening itsfirst factory there in 1970. Although Singapore did not have the lowest labour costs in theregion, costs were low relative to North America. In addition, the Singapore location hadseveral important benefits that could not be found at many other locations in Asia. Theeducation level of the local workforce was high. English was widely spoken. The governmentof Singapore seemed stable and committed to economic development, and the city-state hadone of the better infrastructures in the region, including good communications andtransportation networks and a rapidly developing industrial and commercial base. HewlettPackard also extracted favourable terms from the Singapore government with regard to taxes,tariffs and subsidies.

At its start, the plant manufactured only basic components. The combination of low labour

costs and a favourable tax regime helped to make this plant profitable earlier than expected. In1973 Hewlett Packard transferred the manufacture of one of its basic handheld calculatorsfrom the United States to Singapore. The objective was to reduce manufacturing costs, whichthe Singapore factory was quickly able to do. Increasingly confident in the capability of theSingapore factory to handle entire products, as opposed to just components, HewlettPackards management transferred other products to Singapore over the next few yearsincluding keyboards, solid-state displays and integrated circuits. However, all these productswere still designed, developed and initially produced in the United States.

The plants status shifted in the early 1980s when Hewlett Packard embarked on a worldwidecampaign to boost product quality and reduce costs. It transferred the production of its HP41C

handheld calculator to Singapore. The managers at the Singapore plant were given the goal ofsubstantially reducing manufacturing costs. They argued that cost reduction could be achievedonly if they were allowed to redesign the product so it could be manufactured at a loweroverall cost. Hewlett Packards central management agreed, and 20 engineers from theSingapore facility were transferred to the United States for one year to learn how to designapplication-specific, integrated circuits. They then brought this expertise back to Singaporeand set about redesigning the HP41C.

The results were a huge success. By redesigning the product, the Singapore engineers reducedmanufacturing costs for the HP41C by 50 per cent. Using this newly acquired capability for

product design, the Singapore facility then set about redesigning other products it produced.Hewlett Packards corporate managers were so impressed with the progress made at thefactory that they transferred production of the entire calculator line to Singapore in 1983.They followed this transfer with the partial transfer of ink-jet production to Singapore in 1984and keyboard production in 1986. In all cases, the facility redesigned the products and oftenreduced unit manufacturing costs by more than 30 per cent. The initial development anddesign of al these products, however, still occurred in the United States.

In the 1980s and early 1990s, the Singapore plant assumed added responsibilities, particularlyin the ink-jet printer business. In 1990, the factory was given the job of redesigning an HPink-jet printer for the Japanese market. Although the initial produce redesign was a marketfailure, the managers at Singapore pushed to be allowed to try again, and in 1991 they weregiven the job of redesigning HPs DeskJet 505 printer for the Japanese market. This time the

redesigned product was a success, garnering significant sales in Japan. Emboldened by thissuccess, the plant has continued to take on additional design responsibilities. Today, it is


18/49

viewed as a lead plant within Hewlett Packards global network, with primary responsibilitynot just for manufacturing but also for the development and design of a family of small ink-jet

printers targeted at the US market.


Further questions to consider:

1. Is HP still based in Singapore? Look at its location strategy in 2013. Use a search engineto discover the role of Singapore in its overall strategy.

2. In recent years HP has run into a lot of strategic and financial problems. Do you think theSingapore location has mitigated these problems or made them worse?


19/49

Chapter 12 Case 3: Lenovo and in-house production

In a modest factory on the outskirts of Chinas capital, electronics maker, theLenovo Group,

displays its unusual approach toward capturing the top spot in the global computer market.The factory, which in 2013 assembles desktop computers and servers, resembles thousands ofothers across China. Robotic arms are in constant motion, moving parts and pieces around.Rows of workers, clad in blue, pop parts into place as computers make their way down theline. The factory can churn out about 25,000 machines in a day.

The difference: the facility, its equipment and its employees are all part of Lenovo. It is one ofeight company-owned factories around the world, with three more to be built in China andBrazil. That is a departure from the common industry practice, in which companies fromApple to Hewlett Packard increasingly outsource the assembly, and even design, of laptopsand other gadgets to contract manufacturers. Lenovo sees retaining all these functions as a keyadvantage. Selling PCs is like selling fresh fruit, says Lenovo chief executive Yang

Yuanqing. The speed of innovation is very fast, so you must know how to keep up w ith thepace, control inventory, to match supply with demand and handle very fast turnover.1

This came into play late 2011 when flooding in Thailand caused a shortage of some types ofhard drives for the computer industry. The company first had to battle with other companiesto procure more hard drives. But because Lenovo assembles many of its own computers, itwas able to quickly shift the mix of products in its pipeline to focus on products for which thehard drives were available, and prioritise products that had higher profit margins, according toLenovos supply chain senior vice president.

The rapid rise of Lenovo

According to the supply chain vice president, Lenovo gained a tremendous amount of marketshare during that industry crisis because of the speed of its supply chain. Lenovo saw itsmarket share climb above 14 per cent in the fourth quarter as it shipped 13 million computers,up from 13.7 per cent in the previous quarter, according to research firm International DataCorporation (IDC). Hewlett Packard, the top computer vendor by unit sales for the past fiveyears, saw its market share that quarter drop to 16 per cent from 18 per cent in the previousquarter. Hewlett Packard has never commented publicly on this.

The in-house approach combined with aggressively moving into fast-growing emergingmarkets has helped Lenovo turn a declining business around. Its profit for the fiscal yearended March 31 grew by 73 per cent to $473 million, outpacing most of its rivals. As recentlyas 2009, Lenovo was still posting losses. Lenovo didnt sell outside China until 2005, when it

shocked the high-tech world by buying a major business unit of International BusinessMachines (IBM). Lenovo hired a US high-tech executive to run the company, but salessagged during the recession. So, in 2009, Lenovo co-founder Liu Chuanzhi and Yang tookcontrol again and got the company back on track, largely by boosting sales in developingcountries like China, India, Russia and other markets where PC sales have surged.

Whereas Chinese manufacturers make huge numbers of computers and other devices sold byother companies, Lenovo is different because it sells under its own name. That makes it thefirst Chinese global consumer brand. By mid-2012, Lenovo faced a bigger challenge than itsrecent turnaround. Demand for traditional PCs was slumping as hand-held gadgets likeApples iPad gained popularity. Yang was hoping that his approach to the PC business would

1Chao, L. As rivals outsource Lenovo keeps production in-house, Wall Street Journal, 9 July 2012;

http://online.wsj.com/article/SB10001424052702303302504577325522699291362.html(accessed 22 May 2013).
http://c/public/quotes/main.html?type=djn&symbol=0992.HKhttp://online.wsj.com/article/SB10001424052702303302504577325522699291362.htmlhttp://online.wsj.com/article/SB10001424052702303302504577325522699291362.htmlhttp://online.wsj.com/article/SB10001424052702303302504577325522699291362.htmlhttp://c/public/quotes/main.html?type=djn&symbol=0992.HK


20/49

aid a new push into new types of smartphones, tablets and internet-connected televisions.Early in 2012 Lenovo unveiled its first internet-connected television, the K91 Smart TV, thenmade it available for sale in China. Lenovo said it needed to line up deals with content

providers before it could sell the TV in the USA and elsewhere, and did not know howquickly that would happen. Later in 2012, Lenovo planned to start selling its first smartphones

powered by a chip designed byIntel Corp. It also was getting ready to start selling theIdeaPad Yoga, an ultrathin laptop with a keyboard that can swing behind the monitor totransform the gadget into an iPad-like tablet.

David Wolf, chief executive of Wolf Group Asia, a Beijing-based marketing strategy firm,said the challenge for Lenovo was to develop products that are not just good products, but that

people cant wait to have. But, according to him, Lenovo recognise that theres a pathway andthey need to be on it. Sales of Lenovos newest products are small but growing. According tothe IDC, the company was the fourth-largest vendor of tablets in the first quarter of 2012 witha 2.8 per cent share of unit shipments, up from number eight in the fourth quarter of last year.

Apple, meanwhile, garnered a 63 per cent share of tablet shipments with its iPad. Apple chief

executiveTim Cook has not been impressed with Lenovos tinkering with tablets. In anearnings call in April, when analysts asked if he would consider making a device to provideoptional keyboards to iPads, he commented that you can converge a toaster and a refrigerator,

but those things are probably not going to be pleasing to the user you wind upcompromising both and not pleasing either user.

Yang spent a lot of time at the Consumer Electronics Show in Las Vegas in January lookingat products from competitors. He said later that compared to Samsung, LG and thosecompanies in terms of design, Lenovo still have room to improve. For him, those companies

products are both fashionable and stylish. That represents a real challenge for Lenovo.

Yang started out at the predecessor company of Lenovo in 1988, delivering computers by

bicycle in the early days. In the USA, there is an infrastructure to fulfil a companys everyneed. In China, by contrast, Lenovo had no infrastructure, so had to do it themselves. Its firstadvertisement was taped to the window of its office which Lenovo displayed by turning thelights on at night.

Yang moved up the ranks after catching the eye of the companys co-founder, Liu. He becamechief executive in 2001 at the age of 36. That year, he led a team of 10 executives on a worldtour of companies likeCisco Systems,Intel and Hewlett Packard, which at the time weremore than three times Lenovos size by revenue. After Lenovo bought IBMs PC unit in 2005,Yang moved to the USA; he stepped back from the CEO position and became chairman of thecompany, bringing US executives in to take his place. The integration of the two companieswas rocky, but Lenovos profits were climbing sharply by mid-2008.

However, the global economic downturn exposed huge vulnerabilities within the company.The IBM ThinkPad business was heavily reliant on commercial sales at a time whencompanies were reducing spending on technology, and Lenovos consumer business wasstrong only in China. The company struggled to get its products on the shelves of majorretailers in the USA, and its global market share dropped to less than 7 per cent worldwide byunit shipments, lagging behind Hewlett Packard,Dell and TaiwansAcer.

Lenovo co-founder Liu decided to return as chairman in 2009 while Yang shifted from thechairmans seat back to being CEO. Liu has since stepped down, and in 2012 Yang was bothchairman and CEO. He had a four-year plan. He refocused the company on China as well asother emerging markets. He expanded its vast network of resellers around China so that even

in rural areas customers would be close to a Lenovo store with customer service, and he madean aggressive push into India and Russia, where IBMs ThinkPads were well known but
http://c/public/quotes/main.html?type=djn&symbol=intchttp://topics.wsj.com/person/c/timothy-cook/5997http://c/public/quotes/main.html?type=djn&symbol=CSCOhttp://c/public/quotes/main.html?type=djn&symbol=DELLhttp://c/public/quotes/main.html?type=djn&symbol=2353.TWhttp://c/public/quotes/main.html?type=djn&symbol=2353.TWhttp://c/public/quotes/main.html?type=djn&symbol=DELLhttp://c/public/quotes/main.html?type=djn&symbol=CSCOhttp://topics.wsj.com/person/c/timothy-cook/5997http://c/public/quotes/main.html?type=djn&symbol=intc


21/49

Lenovos brand wasnt. Others in the industry have been sceptical of this approach. SteveFelice, Dells president, was asked in an earnings call in May 2012 why the company didntgo after the market for competitively priced PCs, particularly in Asia. He replied that Dell hadbacked off of that market. He added that Dell would watch the situation carefully, but hedidnt think that type of competition was sustainable at an industry-wide level.

As part of the plan, Yang sat down in 2009 with Lenovos supply chain senior vice president,pouring over charts and analyses of the costs and benefits of in-house manufacturing. Theydecided to increase the company's in-house manufacturing to 50 per cent (from less than 30

per cent). Although three years before, the whole industry believed that the future was aboutoutsourcing, Lenovo came to the conclusion that the company could move faster if it wasmore vertically integrated.

Lenovo chief technology officer said in 2012 that the companys strategy was playing a keyrole in the development of new products. Looking at the industry trends, most innovations forPCs, smartphones, tablets and smart TVs were related to innovation of key components suchas display, battery and storage. Differentiation of key parts, for him, was very important. So

Lenovo started investing more, and working very closely with key parts suppliers for productslike bigger and thinner touch screens. He said consumers could expect to see some of theseefforts embodied in new products from Lenovo by the end of 2012.

Lenovo already has had some misses in its recent efforts to branch out into new products. Oneof its earliest efforts to show the world its innovative abilities was its U1 Hybrid, acombination notebook and tablet with a detachable keyboard unveiled in 2010, which provedtoo costly to make and which missed its release date. Eagerness drove Lenovo to show off theU1 Hybrid before it was ready. Still, the device, which was a novel idea at the time, did attracta lot of attention for the company, including from David Roman, formerly an executive at HPand Apple, who signed up that year to become Lenovos chief marketing officer. He says he

joined the company because he was impressed by Lenovos innovative efforts and Yangsdetermination, and saw its lack of brand identity as an opportunity.

Roman said he wanted to find ways to make Lenovo into a brand considered to be cool andinnovative rather than cheap by consumers around the world. But, as it turned out, his taskstarted from inside the company. There were very emotional discussions in the beginningabout actually having Lenovo on the front of the ThinkPad. The logic was the Lenovo namecould actually be damaging to ThinkPad, but Roman could not see the logic of puttingLenovos best product on the market without its logo.

Since then, Roman has launched an overhaul of the companys image, purchasing advertisingslots during hit prime-time TV shows such as Glee and National Football League broadcasts.One advertisement shows a Lenovo laptop activating a parachute after being tossed out of a

plane to show how quickly it boots. In Lenovos US offices, slogans from the campaign Lenovo for those who do are plastered everywhere.

Senior executives at Lenovo consider building a brand to be a crucial part of Lenovos nextphase of growth now that the PC business is on an upswing. The message from the seniorexecutives is: to have higher market share, you need to have a brand.

(Source: L.P. Wilcocks, using multiple published sources, including Chao, L. As rivals outsource Lenovo keeps productionin-house, Wall Street Journal, 9 July2012;http://online.wsj.com/article/SB10001424052702303302504577325522699291362.html(accessed 22 May 2013).
http://online.wsj.com/article/SB10001424052702303302504577325522699291362.htmlhttp://online.wsj.com/article/SB10001424052702303302504577325522699291362.htmlhttp://online.wsj.com/article/SB10001424052702303302504577325522699291362.htmlhttp://online.wsj.com/article/SB10001424052702303302504577325522699291362.html


22/49

Chapter 12 Case 4: PanGenesis and offshore outsourcing

We have an innovative workforce solution for offshore outsourcing, asserted CarlosApstegui, head of PanGenesiss Costa Rican operations. We have a unique apprentice

programme to tap young Costa Rican students and a special approach to importing highlyqualified labour into Costa Rica. We have created a formula that allows us to lower chargerates, perform faster development and all this in this attractive small nation. He finished hissentence by waving at the many tropical plants around him in the garden of the hotel hosting alarge technology conference.

His guest was Paul Matzurski, a deputy CIO at a large US corporation who was visiting CostaRica for the first time in search of new destinations for offshore outsourcing. Matzurskisipped his drink and said, I didnt know the extent of the tight labour market here and eventhe rest of Latin America. He continued: You know, labour scarcity, the search for talent,and a tight labour market are all issues we deal with a lot in the USA. We hear about the tight

labour markets in India and elsewhere. I was surprised to learn this is the case here in CostaRica. Even [Costa Rican] President Arias spoke of spending more on education during hiskeynote address to this conference yesterday.

PanGenesiss CEO, Richard W. Knudson, spoke up: Let me tell you the details ofPanGenesiss workforce and pricing plans, he said to Matzurski. Do you have a sheet of

paper? I will explain. Fifteen minutes later, Matzurski had a much clearer appreciation ofPanGenesiss ambitious plans.

Matzurski leaned back and pondered the PanGenesis value proposition for offshoreoutsourcing.This is certainly creative, intriguing, and ambitious,he thought, but will it work?Will the programme provide the apparent substantial improvement in productivity and quality

at a lower cost with quicker delivery? Will the plan generate enough skilled employees? Howmany more years will it take to get the kinks out of this new workforce method?

In 1997, Costa Ricas president, Jos Mara Figueres, flew to California to visit Intelsheadquarters in Santa Clara, California. This was an unusual visit: the president of a tinyCentral American country was coming to press his case that Intel, one of the worlds mostimportant tech companies, should choose Costa Rica as the next location of its semiconductor

plant.

The Intel gamble clearly paid off. Costa Rica is now a high-tech star. Intel alone employs5,500 in country. The other major multinational corporation player in the country is HewlettPackard, which employs a similar number. Dozens of other foreign tech companies, including

those in the life sciences, have set up operations in Costa Rica, and hundreds of indigenousCosta Rican firms have sprouted up selling their products and services to clients in the region,as well as to North America and to Europe. Until its rise as a tech centre, Costa Rica was bestknown for its coffee, bananas, rain forest and, most interesting, abolishing its standing armyin 1948.

Costa Rica has only 4 million people and so the boom in high tech has led to an usual high-tech labour crunch with escalating salaries. Of the labour force, there are about 7,500 software

professionals (or as many as 25,000 if broader assumptions are used) and another 20,000employees in a related boom sector: call centres. Costa Rica has nurtured good schools anduniversities, both public and private, yielding one of the highest literacy rates in the world. In

addition to the major public universities, one of its leading a private universities, Universidad


23/49

Latina, has established a number of computer-related programs that help train softwareprofessionals.

And its timing has been right. By 2007 the global tech boom was in its second decade, with anaccelerating global demand for software professionals in both wealthy and emerging nationsand an ensuing labour crunch and a related problem of turnover as people jumped from job to

job in the hot market seeking higher salaries. At the same time, baby boomers in Europe andthe United States were racing toward retirement, with US Labor Department estimates that by2020, there will be a 28 million person shortage in the labour force. And so, after looking atthe overheated markets in India and China, and the upcoming crunch in the USA, many haveturned to labour markets in Latin America to fill the void. PanGenesis is one of the companiesthat was in the right place.

PanGenesis is an IT services firm targeting and servicing multinational clients. Thus, itsforeign clients outsource IT support offshore (nearshore) to PanGenesis. PanGenesis wasfounded in 2002 and is headed by three experienced leaders. American CEO and founderRichard W. Knudson is an old hand in offshoring, having lived in India for seven years

consulting to the Indian IT industry. Among his many accomplishments, Knudson wasinvolved in early capability maturity model (CMM) evaluations in India and China. Thefirms president is Jim Kamenelis, the former CIO of Xerox Palo Alto Research Centre, oneof the most venerated R&D centres in modern US history. Carlos Apstegui heads operationsin Costa Rica. He is a native of Costa Rica and has 20 years of successful IT businessoperations in Costa Rica.

PanGenesis is building several programmes for tapping inexpensive but well-trained ITlabour.

Apprentice programme

CEO Knudson and President Kamenelis began working with the newly elected Able Pachecogovernment in 2002 to create apprentice programmes. Working with influential people inCosta Rica and making his case directly to the president and the science and technologyminister, Pardo-Evens, many of the elements of the programme were in place in 2007.

At its core, the programme targets young, poor students just out of secondary school. Thereare many excellent students who are not funnelled through career tracks for various reasons.Typically they are busy working to contribute to the family income. Only about 20 per cent of2,500 applicants who apply at the state-funded public university computer science (CS)

program are accepted, with the remaining 80 per cent ripe for an apprentice programme. Ofthose who are accepted into the CS programs, 60 per cent are unable to finish. A related

source of apprentices are the 450 students who finish the strong high school IT track,comprising 2,500 hours of work. In spite of their computer prowess, many seek structure intheir computer career plans.

All of these students can be turned into productive software engineering professionals throughthe apprentice programme. The students undergo a rigorous six-month training programmethat includes English immersion; intensive programming concepts; configuration managementusing well-known software; quality assurance audits; nightly code reviews; training indocumentation; and teamwork, scheduling and statistical analysis. Once the training issuccessfully completed, the graduates become engineering apprentices and are assigned tosupport a seasoned software engineer for four hours a day. This pair acts as a development

team. The qualification for an apprentice is modelled in Figure 1 below.


24/49

Figure 1.

The apprentice relieves the software engineer from having to perform important but non-engineering housekeeping tasks that take up a substantial amount of time. This frees theengineer to focus on high-impact software engineering tasks.

While fully educated and experienced software engineers are charged out at up to $30 anhour, an apprentice is charged to the client at a much lower rate. PanGenesiss income for theapprentice is used to fund the apprentices living expenses, pay the university for theapprentices four-year university education to receive a software engineering degree, andsponsor grants for underprivileged students and support university classrooms andlaboratories.

To remain an apprentice the student must pursue a university degree as a software engineer,maintain high grades, properly and diligently perform his or her apprenticeship assignments,and commit themselves to working for PanGenesis after graduating from the university. Theapprentice works four hours each day and attends the university the remainder of the time.This programme is modelled in Figure 2 below.

Figure 2.

As shown in Table 1 that follows, the apprentice model allows PanGenesis to significantlyunderbid competitors while substantially reducing project and development costs and deliverytimes. In addition to schedule and cost benefits, the services and products receive a substantialimprovement in quality due to 100 per cent code reviews and frequent quality auditsconducted by the well-trained apprentices. This value-added to quality and project cost is notfactored into the savings already achieved by the apprenticeship model.


25/49

Costs and charges for apprentice-supported teams

Typical engineering tasks Hours

Core engineering work 4.0

Productive housekeeping tasks: configuration management, codereview, quality audits, scheduling, statistical analysis, etc.

2.5

Social time: Phone calls, long lunch, breaks, non-businessconversation

1.5

In the traditional model, assume a typical project with the following parameters:

Traditional model Metrics

Total project hours 10,000

Rate charged in offshore outsourcing $30 per hourSkills needed: Engineers experienced in J2EE, Web applications 5 or more years

experience

Number of engineers assigned 5

Effort per week 200 hours per week

Duration 50 weeks

Total charge to customer $300,000

In the PanGenesis apprentice model, the apprentice takes over some of the software

engineers productive housekeeping tasks:

Apprentice model Metrics

Number of total productive hours (1,000 hours added for apprenticemanagement)

11,000

Apprentice daily work hours 4

Engineering rate $30 per hour

Apprentice rate $9

Total weekly charge to customer of a team of engineers andapprentices

$1,380

Charge rate by PanGenesis (engineers with five or more years ofexperience)

$23 per hour

Effort per week (engineers and apprentices) 300 hours

Duration (total hours/weekly burn rate) 37 weeks

Total cost to PanGenesis of team of engineer and apprentice (hours

average rate)

$253,000

Table 1: Software engineer productivity: the workday breakdown.


26/49

Underemployed university graduates

According to the governments estimate, Costa Rica has 47,000 underemployed orunemployed university graduates. The Arias governments minister of science and technology,E. Flores, would like to retrain them for IT. Therefore, PanGenesis has included a fast-track

programme for these professionals using the apprenticeship programme model. Theseprofessionals have experience in business that would add value to their role as a softwareengineer.

The PanGenesis programme is an accelerated two-year programme during which studentswork while attending the core software engineering courses to qualify for a degree in softwareengineering. The accelerated pace is based on having met prior university general educationand elective requirements from the employees previous degree. Income from the client forthe degreed professional/apprentice is used in the same way as the income from secondaryschool graduates who cannot afford the university.

Labour importation

The last element of the PanGenesis model is to build a large, scalable, highly qualifiedengineering workforce. To accomplish this, it is augmenting Costa Rican labour with guestworkers from other nations. PanGenesis has established an international IT sourcingcapability, hiring skilled software engineers from Eastern Europe, the Philippines and LatinAmerica. This initial workforce will serve clients and will be the first mentors to theapprenticeship workforce being developed.

Of particular interest to the firm is the Philippines, which has a relatively large and mobile ITprofessional labour pool. Its engineers are well trained, speak excellent English and are alsofamiliar with Spanish. Filipino employees will enjoy income tax exemption because they are

working outside the Philippines. They will be working for an affiliate company of PanGenesis.PanGenesis pays their social security tax due on salary received in Costa Rica, and providesthem with room and board expenses.

(Source: Oshri, I., J. Kotlarksy and L. Willcocks The handbook of global outsourcing and offshoring.

(Basingstoke: Palgrave Macmillan, 2011) second edition [ISBN9780230293526] pp.7076. Reprinted with kindpermission from Palgrave McMillan and the author, Erran Carmel.)


27/49

Chapter 13 Case 1: WR Grace and information systems

WR Grace is a chemical manufacturer with its headquarters in Columbia, Maryland. Foundedin 1854, the company develops and sells specialty chemicals and construction products and

has been a worldwide leader in those fields. Grace has over 6,300 employees and earned $2.8billion in revenues in 2009. The company has two operating segments: Grace Davison, whichfocuses on specialty chemicals and formulation technologies, and Grace ConstructionProducts, which focuses on specialty construction materials, systems and services. Betweenthese two divisions, there are over 200 separate subsidiaries and several different legal entitiesthat comprise the full company.

Grace has operations in 45 countries around the world. Though Grace is a strong andsuccessful company, global companies with separate divisions often struggle to unify theirinformation systems. Grace is not a single, cohesive business unit its an amalgam of manyoperating divisions, subsidiaries and business units, all of which use different financial data,

reports and reconciliation methods. Though this fractured structure is common to mostglobal companies, it created problems for the companys general ledger. The general ledger ofa business is its main accounting record. General ledgers use double-entry bookkeeping,which means that all of the transactions made by a company are entered into two differentaccounts: debits and credits. General ledgers include accounts for current assets, fixed assets,liabilities, revenues and expense items, gains, and losses. Its no surprise that a globalcompany that earns several billion dollars in revenues would have a complicated ledgersystem, but Graces general ledger set-up was more than just complicated. It was adisorganised tangle of multiple ledgers, redundant data, and inefficiency processes. Thecompany had three separate ledger systems from SAP: one for its legal reporting requirementsteam and two more for each of its two major operating segments, Grace Davison and Grace

Construction Products. But each of the three implementations for these systems occurredseveral years apart, so the differences between the ledgers were substantial. All three ledgershad different configurations and different levels of granularity within the reportingfunctionality, and all three of the ledgers were driven by separate data sources.

The classic general ledger is used for reporting revenues and expenditures for allsubsidiaries, accounts and business areas. The Grace Davison ledger stored information oncompany codes (subsidiary ID numbers), accounts, profit centres, plants and trading partners.The Grace Construction Products management ledger stored information on company codes,accounts, business areas, profit centres, trading partners and destination countries. GraceDavison used profit-centre accounting for its management reporting, and Grace Construction

Products used special-purpose ledgers to gather the same financial information. If this soundslike a confusing arrangement, thats because it was. Consolidating this data across the twodivisions and across its many sub-divisions proved difficult, and compiling company financialreports was a painstaking and time-consuming task. Reconciling the financial data from eachof the three reporting sources resulted in lengthy financial close cycles and consumedexcessive amounts of employee time and resources. Michael Brown, director of finance

productivity at Grace, said that from a financial point of view, we were basically threedifferent companies.

Grace management decided that the company needed to eliminate the financial reportingsilos and create a system that served all parts of Graces business. The company hoped tocreate a global financial standard for its financial reporting system, using the slogan one

Grace to rally the company to work towards that standard. SAP General Ledger was the mostimportant factor in Graces ability to accomplish its goal. Attractive to Grace because of its


28/49

many unique and useful features, SAP General Ledger has the ability to automatically andsimultaneously post all sub-ledger items in the appropriate general accounts, simultaneouslyupdate general ledger and cost accounting areas, and evaluate and report on currentaccounting data in real time. Grace also liked SAPs centralised approach to general ledger,including up-to-date references for the rendering of accounts across all of its divisions.

Consolidating multiple ledgers is a difficult task. SAP General Ledger helped Grace tosimplify the process. SAP Consulting and an SAP General Ledger migration team assisted thecompany along the way. SAP implementations feature an SAP team leader and projectmanager as well as a migration cockpit. The migration cockpit is a feature of SAPimplementations that offers a graphical representation and overview of the general ledgermigration process. The cockpit displays steps of the migration in sequence and manages logs,attachments, and other materials important to the general ledger. The migration cockpit helpsto ensure that sufficient planning goes into the general ledger consolidation process, and thatthe necessary business process changes accompany the technical changes of implementing aunified general ledger. SAP and Grace split the project into two main components: GeneralLedger Data Migration and Business Process Testing. General Ledger Data Migrationinvolved acquiring all of the relevant data from Graces three separate ledgers, combining itand eliminating redundancies, and supplying it to the SAP General Ledger. A small teamexecuted this half of the project. Grace decided to standardise its reporting processes around

profit-centre accounting and built its general ledger design with that standard in mind.

Business process testing was completed by a global SAP team performing multiple full-cycletests. In other words, SAP testers accessed the system remotely and tested all of the functionsof SAP General Ledger to ensure that the system would work as planned. The SAP GeneralLedger project manager oversaw both components of the project. During the testing process,SAP testers used a technique called unit testing, common to many system upgrades of thistype. The testers set up a dummy system with a prototype version of the general ledger and

used it to test different types of accounting documents. Grace wanted to modify theconfiguration of the general ledger to conform to the companys unique needs andcircumstances, and made sure that the people who knew what was needed were building thesystem and designing its specifications. Because of these adjustments, unit testing was criticalto ensure that configuration changes had not affected the overall integrity of the system. SAPtesters also performed basic scenario tests, complex scenario tests and tests on specialaccounting document types in an effort to ensure that the general ledger was equipped tohandle all of the tasks Grace expected it to perform. They also tested in-bound financeinterfaces, such as the HR interface, bank statements and upload programmes, as well asspecial document types used by those interfaces. SAP and Grace both knew that a significanteffort would be required to properly test the general ledger, and SAPs experience with

similar upgrades in the past was helpful in ensuring that SAP performed the proper number oftests. After the data migration was completed, Grace had to decommission its old ledgers,which were still pivotal sources for many of the custom reports that the company wasgenerating on a regular basis. For example,

178 Vle Case-studies (1)

Documents