Managing globalisation CBS 25 February 2013 Jrgen Huno Rasmussen - - PowerPoint PPT Presentation

Managing globalisation

CBS 25 February 2013 Jørgen Huno Rasmussen

Jørgen Huno Rasmussen

• Education

M.Sc. (Civil Eng.), DTU, 1976; HD (Organisation), CBS, 1977; Ph.D. (Construction Management), Stanford University, California, 1978 + DTU, 1979

• Career

1.12.2003- Group CEO, FLSmidth & Co. A/S 2000-03 Group Director, Veidekke ASA, N 1987-03 President & CEO, Hoffmann A/S 1986-87 International Director, Hoffmann A/S, UK 1983-86

• Dept. Manager, H. Hoffmann & Sønner A/S

1981-83

• Dept. Manager, Chr. Islef & Co. A/S

1979-81 Project Manager, A. Jespersen & Søn A/S

• Non-executive posts

Chairman of the Board of Lundbeckfonden and LFI A/S, Vice Chairman of the Board of Tryghedsgruppen, member

• f the

Board of Tryg Forsikring A/S, Vestas Wind Systems A/S, Bladt Industries A/S, Industriens Arbejdsgivere i København and DI’s Board of Representatives.

• Publications

70’s: articles on organisation; 90’s: articles on the Construction Industry and ATV white paper on future engineering education; 2001: ATV white paper on deterioration of Danish Infrastructure.

Conclusion

• Globalisation is here to stay
• Try to hide from it and sooner or later be helplessly

destroyed by it

• Or embrace it unconditionally and make it work wonders in

your interest

Agenda

• The inevitable globalisation
• Management response
• Global split of work:

– Centralisation of R&D in Western technology centres – ”Off-shoring” of standard engineering to India – ”3C-sourcing” of manufactured components in China – Global decentralisation of Sales & Customer Services

• Culture and other complexities

Why do some companies win and some loose under the same circumstances?

∑ CGJ/Sk, H&S, M&T, MT Højgaard < 0

• Professor Henry Mintzberg, McGill

University, Montreal, 1973: First ever empirical study of managers!

• An MBA can help but is not the

solution for all managers

• You need talent + lots of

practical experience

• Arguing for managers to:

– Strive for balance – Employee involvement – Long-term perspectives

”No science in managerial work”

Research now popular and easily accessible

• Jim Collins, Stanford Bus.

School, 2001

• No theoretical basis
• But combining empirical facts:

– ”Great companies” do consistently better than all peers ≥ 15 years – Killing myths: they are not more innovative! – They ”face the brutal facts” and – Focus on the core business, where they can excel: – ”If it’s not core, we don’t do it. Period!”

Facilitates shared concepts and language

• Why do some companies

excel and former market leaders disappear?

– Bethlehem Steel, the world’s largest steel co. building 1 Liberty ship a week, went bankrupt on the day of my first visit to FLSmidth’s US head

• ffice in Bethlehem, PA
• ”Good to Great” became

mandatory reading for Global Management in FLSmidth and inspired us to fanatic focusing!

Globalisation is here to stay

• Professor Jagdish Bhagwati,

Columbia University, N.Y., 2004:

– Globalisation influences all aspects

• f life

– Not an ”evil process” you can make go away – Potentially an extraordinary powerful force for social goods – Promoting open societies through free exchange of ideas and goods

Jagdish Bhagwati speaker at FLSmidth’s global 125th anniversary seminars, May 2007

Reminding us that no one can hide from globalisation!

The Chinese Government concentrates the country’s cement competence under the umbrella company Sinoma, which internationally offers turnkey cement factories 30-40% below world market price!

Political globalisation from China - Spring 2004

29% 24% 19% 12% 16%

The Chinese offensive:

The international cement kiln market excl. China

33% 32% 17% 11% 7% 60% 0% 22% 9% 9% FLSmidth Sinoma (CHINA) Polysius KHD Others 34% 18% 21% 13% 14% 2004 2007 2003 2005

Dania, Mariager, DK

Product development doubled

145 143 169 210 268 315 281 339 50 100 150 200 250 300 350 400 20042005200620072008200920102011

M DKK R&D investments in FLSmidth

Special R&D focus on:

• 1. Reduced power

consumption

• 2. Reduced emissions
• 3. Increased capacity
• 4. Reliability

Global split of work is a solution – but not for everything

”Off-shoring” of engineering to India

• Transfer to our Indian subsidiary of order-related standard engineering
• From 600 in 2004 to 4,000 employees or 28%
• f workforce in India
• Attrition 8% < DK
• More than 90% of standard

engineering executed in India for any global cement project

• Next phases:

– Minerals eng. 40% 90% – Administrative functions (Financial Shared Service centres)

FLSmidth House, Chennai Designed by C. F. Møller, Aarhus

”3C-sourcing” of ”hardware”

• 80% of sales prices are ”hardware” = manufactured components and

equipment (+10% ”software” = engineering + 10% profit)

• 80% of manufactured goods are outsourced
• External sourcing single most important cost factor
• In 2004 95% of all external sourcing was from the most expensive regions

in the world – near head offices in Copenhagen and Pennsylvania!

• New sourcing from Cost Competitive Countries (= China):

– Invest in extra QA/QC to ensure same quality – Global benchmark: Landed cost from China sourcing + transport + duty – Dual suppliers of everything – 800 potential suppliers evaluated – Typical net saving 20-50% – 3C-sourcing from 5% 40% of all external group spend in 2011

}

The Chinese threat not a coincidence

• Prof. Peter Williamson, INSEAD

and Singapore, June 2007:

• Provided the theoretical

explanation of what we had just experienced - and why it will continue!

The new facts

• Chinese advantages

– All types of low-cost talents – State assets and IP at low cost – Management autonomy from shareholders:

• Fast decisions
• Long term goals

– Strong personal incentives to innovate and take risks +

• New gateways into world markets through globalisation

– Outsourcing opens the gates ~ FLSmidth “CITIC” mills – Modularisation of products and services:

• enter core industry without figuring out everything at once

– Codified knowledge through IT – Liberalised M&A

The brutal consequences:

Chinese ”Cost Innovation”

• High technology at low cost

– Latest technology to mass market at discount prices – Using high technology to make things cheaper, not more complex

• Variety and customisation at low cost

– Process flexibility and recombination of existing technology in new ways (CEO Zhang Min of Haier, world leader of consumer electronics: ”recombinative innovation”)

• Specialty products at low cost (former niches)

– Lower R&D and design costs lower breakeven – Further reduced by sharing costs across multiple specialties – Turning niches to mass markets through lower prices – Hopping from one niche to the next

The loose bricks in our defences

• Segments where cost innovation (not just low costs) is especially

competitive

• and / or we are reluctant to release full counterattack

– Low-end segments – Geographically peripheral markets – Troublesome customers

• The first loose brick gives a foothold and a platform for self-

reinforcing cost innovation – Dragons chase volume aggressively – High technology, variety and customisation at low cost

Fortunately Dragons also have weak spots

• Experience in running complex systemic business
• Lack of strong brands
• Limitations of cost innovation for early stages of product life cycle

– novel functionality more important than value for money

• Markets that are immature in China:

Several key minerals : Unlike cement, China is a consumer not a producer of minerals

BCC version 2.0 = Be Competitive in China

• Early 2008 task force:

Reduce our prices in China by 50% through re-design of products to enable 100% local content

– Chinese business set-up – Chinese vendor components – Chinese manufacturing – Chinese materials – Chinese sourcing – Chinese standards – Chinese language – Strong Customer Service set-up

• But price reductions only increase sales moderately – political

barriers?

• Early 2012: Acquired majority in local company

√

China sourcing is also in-house manufacturing of critical components to protect IP rights

Doubling capacity in Qingdao 2004

• Planning again 2005

Ready 48 weeks later Next expansions 38,000 m2 inaugurated January 2012

Service is another way to beat Chinese competition

• A global Chinese supplier of infrastructure will typically

– Sell on a hit and run basis – Design and manufacture in China – Erect and assemble locally with imported Chinese labour – Pull out after hand over

• But for the typical customer

– Operational costs are far higher than depreciation and interests

• f capital investment

– Lead times for wear and spare parts critical – Support and continuous production key for profitability – Energy costs are increasing – Authorities' demands to environmental emissions increasing – Constant upgrade and optimisation necessary

• Globalised response

– Establish and maintain global footprint for sales and services – Stay close to the customer for the long term – Continuously develop new concepts and services – Align standards and qualities globally

}

Global reach in FLSmidth with presence in 50 countries

So FLSmidth focused on Customer Services

• All types of services before, during and after the

supply of new plants

• 8 “SuperCenters” with regional warehouse of

critical spares , repair and training facilities

• FLSmidth Institute is the industry’s leading

provider of seminars and training in cement and minerals plant operation, production and maintenance topics

• Complete “Operation & Maintenance”

contracts of entire plants for 4-7 years

• Latest updated strategy 2012:

– Vision to be our customers’ preferred full- service provider – Products are no longer “the end” but rather “the means” to obtain service for customers

and it worked: ”Customer Services” now 5 x 2003

1 2 3 4 5 6 7 8 9 10 2001 2002 2003 2004 2005 2006 2007 2008 2009 F2010P2011P2012

DKK bn

CS Cement CS Cement O&M CS Cement Product Companies CS Minerals CS Minerals O&M CS Minerals Product Companies

Customer Services (CS) order intake

2012 Q3 39% of all group activities

Religious globalisation from the Middle East - Spring 2006

The Muhammed Crisis

The press wrote off FLSmidth’s markets

Serious background

Geographical distribution of new cement plants in 2005

2/3 in Muslim countries

Middle East 50% Pakistan 20% Rest Asia 9% Africa 8% Latin America 7%

North America 4%

EU 2%

Danish firm wins $72m Egypt deal

COPENHAGEN: Danish engineering company FLSmidth yesterday received an Egyptian order worth $72 million despite a widespread boycott of Danish products throughout the Arab world over Prophet Muhammed cartoons. Spanish-Egyptian joint venture Arabian Cement Company placed the order for engineering services and equipment for the construction of a cement plant near the city of Suez. "The reason we have received this order, despite all the chaos surrounding the newspaper drawings, is

• ur very good contacts created in the Middle East over many years," FLSmidth chief executive Joergen

Huno Rasmussen said. From Havarti cheese to Lego toys, products made in Denmark have been yanked off store shelves throughout the Middle East and in other Muslim countries where governments and consumers have demanded an apology for the printing of 12 cartoons in a Danish newspaper. One of Europe's largest dairy companies, the Danish-Swedish Arla Foods, is thought to be the worst hit, losing an estimated $1.6m each day.

Source: Gulf-Daily-News.com

New Strategy Formulation: Top-Down, Bottom-Up

Corporate Business unit ... Department Individual 1.Explain the choice that has been made and the rationale for it. 2.Explicitly identify the next downstream choice. 3.Assist in making the downstream choice as needed. 4.Commit to revisiting and modifying the choice based on downstream feedback. Top- Down Bottom- Up

Strategy and Execution The Choice Cascade- Model (Martin, 2010)

Competitors’

• fferings

Customers’ needs FLSmidth’s capabilities

How to become the market leader?

…by:

• Creating partnerships with key

customers

• Eventually One Source for our

customers’ needs

• First bundling and combining
• fferings (full service)
• Supplied by integrating our

products and capabilities

• Avoiding head-to-head competition

Context (technology, industry, demographics, regulations, etc.)

After Collis & Rukstad (2008)

Sweet spot

How can we grow?

Products Markets

Ansoff’s Growth Vector (1987)

Current New Current New …by:

• Focusing on our customers long-term

interest and customer intimacy

• Being full service provider
• Develop new markets in focus

industries

• Develop sustainable solutions
• Product Leadership
• Operational Excellence
• Within processing equipment &

material handling

Product Development

• new products in several

industries

• turnkey in cement
• full service provid.

...and by that we started the strategy implementation...

• Engaged the organisation in strategy

formulation and implementation – We received positive feedback externally and internally – Ongoing process with many initiatives – Engaging the organisation in strategic thinking

• Changed reporting structure

– Poses new opportunities and challenges as we become more transparent – We compiled new structure in record time – “Hit the ground running” – “Fine tuning” ongoing

• Change in Group Executive Management

– From 4 to 6 directors, 4 being new – Many new exiting initiatives and good momentum in the implementation 5

Group Executive Management

Group Engineering (Chennai) **** Group Research and Product Review * Group Supply Chain & Quality *** CS Min. Processing CS Cement CS Materials Handling Excel O&M Airtech Automation MAAG Americas Pfister Ventomatic EMEA & APAC GTC Cement India China Hydromet GTC Concentrators GTC Hydro & Conc. Global Execution MP Sales & Execution Territories Hydro & Conc. Global Process Pyromet GTC & Global Exec. MP Global Engineering

CEO

CFO

Cembrit

Material Handling

Customer Service

Cement

Material Handling

Mineral Processing

• 1. No separate unit – represents Tax & Structure, Trade Finance & Treasury, Group Control & Consolidation 2. Includes Accounting 3. Includes Risk Management

Abon Krebs Ludowici

Inspiration to final implementation:

Translation from new Vision to daily guidance

• Follow-up by Jim Collins in 2011
• In cooperation with Prof. Morten

Hansen, UC Berkeley and INSEAD, who joined our global Management meeting 12.9.12 and assisted us with:

• Defining our own SMaC recipe

– Specific – Methodical and – Consistent

– Recipe for operating practices

37

SMaC recipe for FLSmidth

• Always prioritize long-term Group interest above individual units
• First response to customer inquiries always within 24 hours
• No deviations from 10 Commandments (contract conditions)
• Never split sales and execution (execution = project management

and procurement), i.e. must always be within same Operating Business Unit

• FLSmidth shall stay asset light, i.e. max. 25 % in-house production
• No in-house civil construction
• In-house suppliers always preferred
• 75 % 3C sourcing
• No purchase of category items outside the category management

system

• 90 % of all standard engineering to be made in India
• Only actions that we would be prepared to see on the front page

Cultural challenges changing over time

Vestergade, Cph., 1906? Chennai, India, 2006

• But Scandinavian values and

leadership styles have proven to be very sustainable in global integration...

Thank you for your attention

Back up slides

Increasing output from R&D

• and focus on minerals growth industries

14 21 27 24 15 13 3 3 4 15 18 37 24 34 10 20 30 40 50 60 2006 2007 2008 2009 2010 2011 2012

minerals cement

Historic FLSmidth priority patent application filing 17 37

The Chinese threat cont.

• Warnings in the data: “Machinery show significant exposure to

disruption from the new Chinese competition in the global market” – Protection from brand and historical references only temporary

• Counter measures

– Increase own capability to penetrate China’s growing market and match their advantages from operating there – Introduce new technology in mature products, where a dominant technology is about to shift competition to variety and cost – Ramp up investments in intangible assets as brand building and proprietary technologies higher barriers

”No longer sufficient to approach China just as a huge prospective market or a source of low cost manufacturing capacity

• High-end niches are blown apart when customers get the

same technology, features, choices or customisation elsewhere at better value for money”

The Chinese threat cont.

What is our main challenge?

• We choose to ”Be Competitive in China” - Why?
• Just as: ”we choose to go to the moon in this decade and do the
• ther things (climb the highest mountain, fly the Atlantic),

not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win!” JFK, Rice Stadium, 1962

Consequences of globalisation are repetitive

Spring 2008: Repetition of the Muhammed crisis

• Due to reprint in several papers because of attack on the artist Kurt Westergaard
• Jordan now leading the boycott against Denmark
• Then FLSmidth signed it’s first contract in Jordan for many years:

”FLSmidth to supply new cement plant in Jordan

Company Announcement to the Danish Financial Supervisory Authority No. 34-2008, 23 July 2008 FLSmidth has signed a contract worth EUR 119m (DKK 888m) with Modern Cement and Mining Company to supply equipment and civil design for a cement plant with a capacity of 3,500 tonnes clinker per day. The plant will be located northeast of the town of Qatraneh, 80 km south of Amman, the capital of Jordan. Modern Cement and Mining Company is

• wned by the Jordanian company Manaseer Group.”

Strategy overview end 2012 DONE:

• Aligned execution in Cement projects,

Product Companies and Min. Proc. products

• Grown Cust. Serv. offerings across

industries and geographical markets

• Established ownership to profitable

Divisions

• Achieved market acceptance as ”One

Source”

TO DO:

• Transfer best PM practices to MH
• Ensure Customer Intimacy through global

service culture

• Maximise Group results across

divisional silos – Customer needs above internal aspects – First right of refusal to all potential internal suppliers above divisional sub-optimisation

• From max EBIT to max ROCE
• Get on board shared Helios IT platform

– Globally aligned procedures – Only implementation in 1 legal unit/country

Vi skabte nyt begreb på børsen

• Everyone has tried to focus on doing the right things
• 1. Clear governance structure
• 2. Clear strategy and action plan
• 3. Execution
• 4. Execution
• We have been lucky

– Markets have developed favourably – We have built a strong track record of results – Our business model has proven to be sustainable

• And even better, the long term outlook is bright

– High emerging markets exposure – Untapped market opportunities in Minerals and customer services

...and it worked

Source: Citigroup

Expansion in Minerals is sustainable

Mining investments 1978-2007

Evolution from OEM into full-service provider in key industries…

Discrete equip. supplier OEM Island supplier Full- flow sheet For full plants Full- flow sheet Design and supply Plant inte- gration Design, supply & construct. EPC of plants Full service provider (or DBO) EPC + O&M

Horisontal (partial vertical) integration of the value system

Sub

• ptimisation
• f single

machineries Holistic complete flow sheet approach –

• verall plant
• ptimisation

To prepare ourselves for the uncertain, fast- changing unforgiving environment

Fanatic DISCIPLINE Productive PARANOIA Level 5 AMBITION Empirical CREATIVITY

• We need to develop a SMaC recipe

– Specific – Methodical and – Consistent

• And exercise (10X) leadership

behaviour through: – Empirical creativity for developing it – Fanatic discipline for sticking to it – Productive paranoia for sensing necessary changes

New 5 year plan 2012-2016

New factory, Qingdao January 2012