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LAFARGE
International Strategy & Management
Case 3 - 2014/11/18
Marina Cossou
Kevin Sedbon
Xiaoyou Wu
Sabrina Wee
Aljoscha Ziller
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AGENDAAGENDA
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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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Analysis of the merger from an analysts point of view
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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
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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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GLOBALCEMENT INDUSTRY PEST ANALYSIS
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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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For Lafarge, globalization means to be present in every strategic market by acquiring one or more of the local
cement producers.
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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
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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
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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
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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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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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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
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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?
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A global strategy of growth must be supported by an adequate organizational structure
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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
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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.
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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)
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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.
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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
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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.
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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
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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.
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