lafarge case

8/10/2019 Lafarge Case

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LAFARGE

International Strategy & Management

Case 3 - 2014/11/18

Marina Cossou

Kevin Sedbon

Xiaoyou Wu

Sabrina Wee

Aljoscha Ziller


2/17

AGENDAAGENDA


Case Overview

Globalization for Lafarge

Lafarges strategy

Lafarges structure

Lafarge way

Role of organizational culture and heritage

Management of the change process

Role of best practices

Factors of growth in emerging markets

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6

5

4

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8

9

7

Analysis of the merger from an analysts point of view


3/17

Starting as a local French player, Lafarge istoday the world leader in constructionmaterials and is present in 75 countries

GlobalFootprint

Increasing Sales and probability over thelast 5 years (1997 6,413 Mio; 2002 14,61Mio)

RapidGrowth

Heavy investments in newly industrializedcountries such as Turkey, Morocco, EasternEurope, Brazil and many more)

Lafarge acquires local cement producers toenter the respective markets

GlobalAcquisition

Strategy

Demand is determined by Business cycles lower prices will not increase Sales(inelastic demand)

High fix cost (more than 50% of totalproduction cost) high break even point

Competition occurs on local level due tohigh transportation cost

Market is dominated by the six sisters ofcement

Cementindustry has

particular

specialties

30/11/2014 Lafarge Case 3

Lafarge has been growing at a alarming rate. It has successfully achieved its vision of becoming the number

one firm in the construction industry. However, there is still a long way to go and several questions remain:

How do you manage a global company like this that used to be a small French player? How do you integrate

acquisitions? Is the growth sustainable? How can the international change process be sustained?

CASE OVERVIEW

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4/17

GLOBALCEMENT INDUSTRY PEST ANALYSIS


Political

In some countriesthe government hasan influence in

determining the price Governmentspending affects theamount of housesbuilt and hereby alsothe demand forcement

Economic

The demand for newbuildings isincreasing

continuouslyThe amount ofinfrastructureprojects acrossindustries isincreasing

Competition workson another level sincecompetition is facedon a local level

Social

A house is one of themost important needof a human being

It is also animportant statussymbol

Due to the higherautomation laborcost is reduced andpeople were laid of

Technological

The industry ishighly dependent ontechnology

Energy consumptionis one of the majorcosts in producing

Overall, the cement industry is affected by several drivers. Lafarge has to manage several stakeholders

effectively. The industry is attractive but has a high impact on the daily life of people. Lafarge should focus

on its stakeholder engagement and manage its transformation to a global leader very carefully.

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5/17

For Lafarge, globalization means to be present in every strategic market by acquiring one or more of the local

cement producers.


1. Profits are sensitive to the level of utilization of the production capacity. Lafarge should manage to run its plants at

a high capacity rate with high efficiency. Since competition is local, price cuts can be spotted easily. Lafarge

should focus on price rebates regarding Sales volume to gain market share

2. Competition occurs on a multi point and multi market level. Lafarge should focus on establishing key locations by

acquisitions since this is the easiest access at the lowest cost. Fewer players mean that the prices tend to rise.

3. In terms of method of growing the markets have become global (competitors follow similar strategies), however

local consumer tastes are diverse. Lafarge needs to integrate the acquired companies fast and make sure to have aglobal workforce that shares the culture of the firm but I also aware of the local customs

GLOBALIZATION FOR LAFARGE

2

Cement is produced locally

Production requires huge captive investment

High fixed costs with little cost of labor due to automation and high cost but high cost ofenergy consumption

Due to high transportation cost the sphere of business is within the radius of 150300 km

Competition is faced on a local level and is based on head to head market confrontation

1. Localproduction and

competition

High concentration in the cement industry with a few multi-plant firms

Competition occurs on a multi-point and multi-market level.

2. Small number ofcement firms

control the market

Mature markets are saturated. To achieve sustainable growth newly industrialized countriesare being targeted

Recession in mature markets increases the pressure of entering other markets

Differences in working cultures, languages and mindsets need to be managed

3. Investment innewly

industrializedcountries

FACTORS AFFECTING GLOBALIZATION


6/17

Expanding current operations means creating new facilities which is capital intensiveAcquiring an existing player avoids greenfield costly procedures

Refurbishing and modernizing existing plants is less costly than creating one fromscratch

A capitalintensivebusiness

It is difficult to geographically extend operations of one facility

Transportation costs prevent cement to be sold further than 150-250 km from thecement plant; it is difficult and costly to stock and have inventories

As price of cement is proportional to transportation costs, extending operations of acertain facility would lead to a decrease of competitive advantages

An industryimperative

Small nationals and local family players tend to be acquired by biggest ones. To stay inthe game, one has to follow the trend

The only way to compete is by quantity and not price as price policy is uniform acrosscompetitors and product is undifferentiatedAcquisitions make good business sense

Mature markets and global economy trends makes it vital to grow in foreign countries

A trendimperative

Objective of the firm : to improve performance of existing operations (divestiture ofspecialty materials, question about divesting from roofing operations)

Acquisition can be a good lever to expand operations, add new products within existingLafarge divisions, benefit from knowledge from competitors (e.g. Redland acquisition)

Consumers tastes vary throughout the world: acquiring local foreign firm gives access tomarket expertise

A move in tunewith Lafarge

actual strategy


There are three ways to grow: expansion, takeovers, or greenfield opportunities. Taking into account the

issue of competing with price and the industry specificities as well as the trend in the market and Lafarge

strategy, the best solution for the company is to grow by acquisition.

GROWING BY ACQUISITION

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7/1730/11/2014 Lafarge Case 7

Industry specificities and stakes make it necessary to grow (fear of being acquired, limitations of one

production sites to cater the needs of a whole region). By offering the possibility to gain from synergies, to

better products and competencies and settle in new areas, value is created via growth process.

IMPERATIVE OF GROWTH & VALUE CREATION

A trend in the industry, smallplayers were acquired

by other players who started to grow by acquisitionsNot growing implies being unable to compete with

bigger players and eventually being acquired

Markets have become global yet in the building

material business markets are inherently localTo stay in the head of the game, one has no choice

but to grow

A cement facility can only cater for the needs of an

area within 100-250 km of the production site andtransportation costs are excessive

If another competitors facility is within our own

facility range, the only way to be profitable is to growelsewhere

Low inventories is another parameters explaining the

necessity to grow. As it is impossible to stock cement,one needs to use all ways to sell its production.

Growing is a good option to succeed

Growth can be a good opportunity to create synergiesAcquiring existing firms enables to acquire

knowledge and expertise, expand the range of

products, pool out resources and management

competenciesBy growing through acquisition you can leverage on

knowledge to better the quality of your product, thus

creating value

Growing can help a firm offer price rebates to buyers

and expand market share

Growing can help a firm enhance its core competency

and thus participate to creating value

Growing might comes with settling in new market,thus creating value for local buyers who might not have

access to the resources or products offered by a

company prior to its instalment in the country

HOW IS VALUE CREATED VIA GROWTH?

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LAFARGES ORGANIZATIONAL STRUCTURE

Direction Generale

Cement Division Aggregate &Concrete Division Roofing division Gypsum division

Operational staff

8 regions

Divisional staff

A multi-dimensional matrix structure focused on regions and product divisions

Organization after restructuring (1999)

In 1999, Lafarge decided to implement some changes in its organizational structure in order to follow on its

global strategy. Its structural management among its business divisions and regions provided more

decentralization to support its organic growth and acquisitions.

No business

division

separation

before 1999

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9/17

Lafarges objective to fully integrate its worldwide operations can be betterachieved as its easier to focus on one region of the world and a type of product=> gaining more expertise

As Lafarge business drastically expanded over the last years through a strategyof acquisitions, its important to separate the divisions to differentiate theproducts.

Separation of the4 divisions byregions and

products

Employees empowerment is key to improve local responsiveness and, therefore,increasing the probability to acquire new businesses in emerging and maturemarkets => consumer taste vary throughout the world.

Each unit is responsible for its own assets and returns, allowing each businessunit manager to focus and improve its own performance.

Creation ofbusiness unit

managerresponsible for

EVA

Necessity to acquire a professionalculture to fit the growth strategy as Lafarge was

originally a family business based on personal and informal relations.Reducing uncertainty and providing clarifications about the groups strategy andobjectives for everyone => as a group grows, clear guidelines have to be defined to haveall employees on thesame page.

Developing a

commonlanguage TheLafarge way


Overall, Lafarges new organizational structure has been successful to support its growth strategy by

acquisitions as it provided more delegation and empowerment to its managers in order to have a better

understanding of the local markets, which facilitated global integration.

IS LAFARGE NEW STRUCTURE EFFECTIVE TO

SUPPORT ITS GROWTH STRATEGY?

4

A global strategy of growth must be supported by an adequate organizational structure


10/1730/11/2014 Lafarge Case 10

Although a new organizational structure has been implemented and seems to be successful, the Group still

has to make some efforts to realize the full benefits: having less power concentration at the top, adding

more indicators and supporting its employees with this change of culture.

HOW CAN LAFARGE REALIZE THE FULL BENEFITS

OF ITS ORGANIZATIONAL STRUCTURE

4

LESS TOP-DOWNAPPROACH

Although the organizationis flatter with divisionalstuff and lots of effortshave been made, most of

the decisions are stilltaken by the DirectionGnrale.

Business unit managersshould be moreempowered to takedecision as the taste isdifferent across countries.

ADDING MOREINDICATORS TO

MEASUREPERFORMANCE AND

EFFICIENCY

This indicator forcesbusiness unit managers toonly focus on theirperformance to get

bonuses, whereas Lafargeoperates LT investments.

Its an absolute measureand cannot be comparedbetween between businessunits.

EVA should not be thesole indicator => balancescorecard are good

indicators and measuremore than performance

A TEAM DEDICATED TOTHE INTERNAL CHANGE

This organizationalchange has been quiteviolent for employees as itchanged the groups

mindset from a family to aglobal business.

A team should bededicated to helpemployees to face thischange of culture and torespond to their problemsor misunderstanding onthe ongoing process.


11/1730/11/2014 Lafarge Case 11

Aspects of both the Principle of Action and The Lafarge Way affect directly and indirectly the goals set by

Lafarge. In achieving these goals, Lafarge ultimately keeps to its strategy, hence both the POA and the

Lafarge Way is in line with Lafargesoverall business strategy.

LAFARGES OVERALL STRATEGY, POA AND WAY

Strategy: Keep growing and growing profitably3

3 Goals from Strategy: (1) double sales within 10 years; (2) grow more rapidly than competitors;

(3) integrate acquired units as quickly as possible

Principles of Action

- Responsibilities drawn up:

1) By striving to anticipate and meet customersneeds, Lafarge tries to develop differentiation in itsproducts (when possible) via approximation to clients

and identifying their special needs. Hence, Lafargeattempts to add value to customer that can lead tohigher prices and establish customer loyalty in thelong run, ultimately impacting goals (1) and (2)directly.

2) In making the employees the heart of the company,Lafarge establishes excellent HR management policiesand practices. Culturally established HR practices area source of competitive advantage that are hard to beobtained and once acquired, difficult to duplicate(Som) Thus giving Lafarge an edge over theircompetitors and aiding in goals (2) and (3) directly

3) The emphasis Lafarge places on gaining from thecompanys diversity helps achieve goal (3) directly.

The Lafarge Way a management model

(1) An organised and coherent Group, with sharedvalues and clear strategies, well definedprocedures, systems and rules - It helps strengthenLafarges corporate culture, hence fostering andemployees loyalty and impacting goal (3) directly.

(2) Confident in a decentralized and participativemanagement process - By decentralizingresponsibilities and encouraging personal initiative, itfosters a sense of involvement in employees anddirectly impacts goal (3). Additionally, decentralizingallows localization and thus adjustments to localcustomers needs. This helps establish customerloyalty and adds value to the customer, henceimpacting goal (1) directly.

(3) With managers who lead by example, takeinitiatives and who want to contribute to theoverall success of the group -Good support anddirection from management encourages fasterintegration of employees, hence impacting goal (3)


12/1730/11/2014 Lafarge Case 12

Lafarges archetype of administrative heritage is the multi-centered MNE. Given the nature of the cement

industry, the archetype makes sense for Lafarge, allowing Lafarge to encourage the exchange of best

practices while giving its operating units a high degree of autonomy.

MANAGING A GLOBAL CORPORATION -

THE ROLE OF ORGANIZATION CULTURE ANDADMINISTRATIVE HERITAGE

Organizational Culturehow things ought to be

National cultural roots partly determine aglobal corporations culture : Corporationneeds to understand the cultures of thedifferent nations where it operates and learnwhen and how to adapt to those cultures

Effective integration of geographicallydispersed operations requires aninternational mindset.: Use of expatriation orinternational assignments to ensure properknowledge exchange of culture

Assimilating organizational culture: A pushto assimilate organizational culture may betolerated but the acquirer organization shouldbe sensitive about pushing organizationalpractices that have national cultural roots

The 3 Cs of Culture:In assimilatingorganizational culture, corporation should keepin mind to be clear, consistent, andcomprehensive

Administrative Heritage how things ought to be done

Definition:The key routines developed by thefirm since its inception. Administrative Heritagecan also be influenced by national culture.

Four archetypes of administrative heritagethat is associated with a specific routine of

international firm specific advantage (FSA)transfer: Centralized exporter, internationalprojector, International Coordinator, multi-centered MNE. By identifying its natural ordesired archetype, the global corporation can bemore aware of the possible pitfalls whentransferring FSA.

For a successful transfer of knowledge for aglobal corporation: The global corporationrequires a historical emphasis on knowledge

creation, minimal differences of values andpractices of founders and senior managers, andproper processes, systems and supportinfrastructure to facilitate creation ofknowledge.


13/1730/11/2014 Lafarge Case 13

Although LafargeHolcim had painted a rosy picture of their merger and had backed it with figures and a

brief roll-out strategy for their merger, there is still the question of how well the organizational fit would be

between the two companies, an important factor that has caused many mergers to fail. Additionally,

another sources of concern would be that the realization of cost synergies might not necessarily materialize

without the right implementation.

AN ANALYSTS STANDPOINT: LAFARGEHOLCIM

Worlds biggest Cement Company provides economy of scale and scope Operational Synergy Imperative: (Estimated synergy:1bn) Costsavings in areas such as logistics, distribution, IT, energy consumption,procurement, maintenance and general administration

Synergy Imperative: Synergy of Lafarges technical know-how andHolcimsmarketing. Geographical complementary in portfolios lead tobalanced and diversified geographical portfolios(60% emerging markets,40% developed markets, with


14/1730/11/2014 Lafarge Case 14

To support its global strategy of growth, Lafarge carried out a new structure in organization, mainly

consisting of decentralization, integration, avoidance of uncertainty and synergies among divisions.

INTERNAL CHANGE PROCESS

Integrate worldwide operations

Long range planning

Evolution of a shared culture:familyties

Committees and cross-functional teams

Proper information technologyand control systems

Constant internal and externalcommunication within the group

Differentiate andmanage localbusiness units

Organizationaldecentralization:changing of ahierarchicalstructure to a flatterone

Delegation ofauthority

Decentralizednetwork of applicantlaboratories

Reduce and avoiduncertainty

Gathering andforecasting ofmarket information

Monitoring ofinternal activities

Participatingindustry activitiesand interact withkey players

Synergize

Centrallaboratory:pool togetherscientificknowledge anddevelopssynergiesbetweenmaterials

Organizational restructure: clarification, simplification and formalization of Group policyin finance, human resources, R&D, corporate communication, environment, information systems,

purchasing and marketing.


15/1730/11/2014 Lafarge Case 15

Lafarge is considered a storehouse of best practices in the industry and its best practices strongly support

its internationalization process, by providing a standardized benchmark and optimized measure for

management and quality control of its different units worldwide.

LAFARGESBESTPRACTICES

Best practices

Optimize

management and

productionprocess,

minimize

uncertainty

Plays as a

benchmark for

decentralizedmanagement

divisions

Assess and

maintain quality

of the Groupsworldwide cement

units

Standardize and

simplify internalfunctions, reduce

management cost

Internationalization Process


16/1730/11/2014 Lafarge Case 16

Lafarge pursues growth in emerging markets through expansion, takeovers and setting up Greenfield

projects. Yet since emerging markets are not mature and equilibrated, there is diversity inside the markets.

Hence when entering the markets, Lafarge needs to take the specialty of markets into account and seek the

best path of growth.

FACTORS RESULTING IN DIVERSE PATHS OF

GROWTH IN EMERGING MARKETS

Geographical condition:natural resources for raw material,

transportation convenience, etc.

Equilibration level of market:number of competitors, market

potentials, maturity level of industry

chain, etc.

Local policies:taxation, acquisition policies,

construction regulation, etc.

Market size:regional economy size, potential

demands, construction potential, etc.


17/1730/11/2014 Lafarge Case 17

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