Integration of Two Latin American Mining Services Companies

Abstract

This Case describes the creation of a new organization designed to implement an aggressive growth strategy in Latin America and ultimately, on a global scale. It presents unique challenges in four interconnected fronts: to achieve the goals of shareholders from two countries with a history of geopolitical tension; the simultaneous implementation of a competitive strategy in two time horizons; the design of a requisite organization for the medium and the long-term; and the balanced integration of the leadership teams of both companies. Critical elements for the successful implementation of the requisite organization were the alignment of processes, roles, accountabilities and interactions with the business model and strategy, and the involvement of key stakeholders throughout the project.

Background

The economic growth experienced by Latin America in the last decade stands in stark contrast to the recurring crises that historically plagued the entire region. As an emerging economy, Latin America presents a context of opportunity, mainly tied to the production of raw materials and the exploitation of natural resources.  At the same time, a growing middle class which in 2010 counted   382 million potential consumers, represents a significant and attractive market, not only for multinational companies from developed countries, but for a new class of international enterprise – the “Multilatinas”, regional companies that expand beyond the borders of their country of origin, to aggressively compete in the global economy.

The mining industry is one of the economic sectors with the greatest growth, fueled by increasing demand and record prices. In the next decade, Chile, Peru, Mexico and Brazil are expected to attract multibillion Dollar investments for the exploration and exploitation of minerals.

It is within this context that two companies belonging to two important economic groups based in Latin America, decided to explore ways to create a strategic alliance to pursue a competitive strategy  based on customer added-value and differentiation.

Company I, based in Peru, is leader in manufacturing of critical supplies for the mining industry. It holds 60% market share in underground mining and 17% in open pit mining. It exports products to the United States, Canada, Chile, Ecuador and Bolivia.

Company II, mainly a service company based in Chile that also manufactures mining supplies, is recognized as one of the most important mining services concerns in Latin America.

Initially, the Companies forged a commercial agreement to market complementary products throughout Latin America. However, the ultimate goal was to have operational and legal integration necessary to offer comprehensive services, capture synergies, and project a market presence that could allow them to become the leading provider of mining services on a global scale. Their plan is to first achieve regional pre-eminence in 5 years in the mining markets of Chile, Peru, Argentina, Panama, Colombia, Brazil and Mexico, and then expand to other regions in 7-10 years.

The major shareholders designated a top executive of each company –one of them the future CEO- to head a team to explore the feasibility of the intended alliance, to define the business model and strategy, and to design the regional organization to successfully execute the business plan. The vision and determination of the future CEO was a critical success factor.

AMG Consulting Group was retained to assist in the integration of strategic, organizational and cultural variables, considered critical success factors to overcome market challenges, competitive challenges, and natural trust issues between heretofore business competitors.

The consulting engagement was structured in two phases:

1. Strategy definition and organizational design, including re-statement of the business model, definition of the value proposition and strategy that will ensure competitive differentiation, design of the requisite organization to grow the business in the transition, and the definition of roles and accountabilities to ensure effective execution (1).
2. Organizational implementation and Cultural integration, involving the development of leadership practices, assistance in the transition to assume new roles and accountabilities, and the integration of national and business cultures within the organization.

The following description refers to the implementation of Phase I.

Engagement

1. Vision and Strategy: a radical shift in the business model

The objective was to formulate a shared vision with specific goals for the long-term, to define a business model that clearly established a strategy for competitive differentiation, and to establish criteria to facilitate the design of the requisite organization.

The greatest difficulty in this phase was that the two co-leaders of the project had a personal stake in its outcome, and that they were operating under instructions to protect and enhance the interests of the shareholders each one represented. There was also uncertainty regarding the nature, extent and strategy for the intended alliance.

AMG followed two guidelines in the design of this phase of the engagement: 1) due to the short time available to prepare for the integration of both companies, the process had to be well structured in order to produce relevant, well-founded and efficient discussions; 2) to create an environment that would promote frank exchanges thus building the necessary trust to ensure a successful integration. The engagement  entailed:

• Strategic review of the business context (economic trends, markets, demand, competition, etc.) in which the intended alliance would operate.
• In-depth discussion to clarify and agree on a shared vision, including specific goals and time horizons.
• Definition of the value proposition to ensure competitive differentiation, and the organizational capabilities required for execution.
• Determination of the level of complexity for the business strategy and its implications in terms of organizational design and required human capability.
• Definition of organizational design guidelines consistent with the principles of the Requisite Organization and functional to the realities of Companies I and II.

Key management personnel from both companies participated throughout the process. Frequent group discussions eased the airing of differences, facilitated the creation of consensus, improved trust, and helped to eliminate unfounded fears.

A significant outcome of this process was a major change in the core business, where the value proposition shifted from a product focus to a solutions focus, including services inserted in the value chain of the mining industry clients, and widening the spectrum of potential products and services that could be offered. This shift also implied changes in the business model, the underlying processes, as well as in the organizational and individual capabilities that were critical for a successful implementation.

The main vectors that characterize this shift are summarized in the concepts below:

MISSION

“To contribute to the safe and efficient use of resources by our customers in their productive processes and in the growth of their business”.

Value Proposition:

1. Customized solutions  for the exploitation of mining resources, up to the reduction and refining plants.
2. Design, supply, and implementation of process management systems to improve productivity and profitability of capital employed in the productive processes.
3. Joint management of risks and benefits resulting from relevant processes and accruing to stakeholders.

VISION

To become a World-Class  company  in the supply of innovative and efficient solutions for the . . . (omitted due to confidentiality)

• To be the leader in Latin America (5 years), and one the three top companies in the World (7-10 years), in the supply of products and services to the Mining Industry.
• To be perceived by our clients as strategic partners contributing to the sustainable and profitable growth of their business.
• To be a global, innovative, customer-centered company, with strong local presence and cultural affinity with our customers.
• To be one organization with one culture: trustworthy, safe, simple and efficient, and with the best people

1. A. Major Increase in the level of complexity

The scope of the vision defined for the business and the shift in the business model and value proposition, imply a major increase in the level of complexity that must be managed to achieve stated goals. Specifically, to strata V in the short term, and to strata VI in the long term.

This increased complexity is mainly due to:

1. Globalization of demand/ Concentration of purchasing power of customers

Trend towards consolidation in the mining industry. The reduction in the number of supply contracts, more global in scope, increase the negotiating power of customers.

While Companies I and II separately had a marketing approach and supply processes directed to customers’ contacts in strata III and IV, the new value proposition and the globalization of demand require interaction with customers’ management at level V or higher.

1. 2. Scope of proposed growth objectives

The business is expected to grow from a dominant position in the local markets of Chile and Peru, and limited presence in other Latin American countries, to a position of regional leadership in the span of 5 years, and global leadership in 10 years.

This strategy contemplates organic growth in established markets, and alliances, mergers and the opening of new markets, all of which involve decisions with a longer time span.

1. 3. Major shift in the Value Proposition

-     Develop and install processes and practices to support the new business model.

-     Convert the transactional relationship with the customers into a more permanent bond where the company becomes an integral part of the value chain of its customers.

-     Promote an organizational culture focused on developing critical skills to ensure competitive differentiation.

-     Attract, recruit and retain human capital required to successfully compete on a global scale.

1. 4. Need to install competitive advantages

The delivery of innovative solutions requires profound knowledge of the customer processes, practices and values, and to work effectively with and within its organization.

In the case of the mining industry, the sustainability of the business depends to great extent on the careful management of stakeholders’ relations: government, national and international regulations, local communities, public opinion, etc.

1. 5. Blending of diverse organizational cultures

The vision and strategies defined for the integrated concern require the development of a new organizational culture with common values, processes and practices, effectively blending the organizations of Companies I and II, and integrating future acquisitions.

Cultural integration processes are particularly demanding of the managerial ranks , who must lead and model behaviors to align the entire organization, and to capture the synergies contemplated in the Project.

1. B. Organizational Design Guidelines

The in-depth analysis of the above factors increased management’s understanding of the main concepts behind Elliott Jaques’ Requisite Organization, such as the essence of complexity inherent to a task and the level of complexity implicit in a business strategy, the relationship between time span and complexity, and the number of distinct managerial levels appropriate to execute the strategy at various stages of the project.

To complement the general principles, specific criteria was develop to address the timing, reality and business nature of the Company

The general principles were:

• The business strategy defines the maximum level of complexity to be managed by the organization.
• From this definition emanate the authority and accountability of the CEO and the requisite number of managerial levels for the organization.
• The ideal distance between the levels of complexity assigned to manager and subordinate is one stratum.
• The organizational complexity should be managed, not reduced or eliminated. The Requisite Organization calls for a structure that seeks simplicity and effectiveness through:
  • Definition of key processes to execute the business strategy.
  • Clear assignment of accountabilities for every role, including cross-functional interactions.
  • Allocation of human capability consistent with the level of complexity inherent to each role.
• The successful implementation of the Requisite Organization demands LEADERSHIP that sets the strategic direction for the business, manages the required organizational capabilities, maximizes individual contributions, and models essential values and culture for the entire organization.

The specific criteria include the creation of a corporate office to articulate the interests of the two shareholders, to define and lead the international growth, and to facilitate the capture of synergies. Such corporate office was to add tangible value, acting with speed, flexibility, and world-class quality.

The creation of a role at the corporate level was dictated by:

• The relevance of the processes involved to sustain the business model and the value proposition.
• The need to project a corporate brand on a global scale.
• The importance of capturing operating synergies.
• To ensure the standardization and application of policies and practices that are key to the sustainability of the business.
• To seek growth opportunities in a coordinated manner.

At the country level (local operating units):

-     Local management was to be accountable for the administration and results of the areas assigned to each country.

-     Certain functions were to remain at the local level: sales and customer service, accounting and administration, regulatory compliance, safety-quality-environmental issues, community relations.

1. A. Present Situation

Both, Company I and Company II, operated in their parent countries through a Level IV organization. Both companies managed, in addition, certain local operations and the export business to countries with no local presence.

A diagnostic review was carried out in order to increase understanding of the business processes, as well as to identify possible organizational dysfunctions that needed attention in the design of the integrated organizational structure.

Organizational dysfunctions – Company I

• Excessive divisions in the management of production areas
• Unclear definition of accountabilities for quality, safety and environmental issues between operating and support functions; and for planning issues between Administration and Systems/Processes.
• Levels of complexity of several functions in the commercial area were not properly identified.
• The delivery of mining services (an operating activity) was under the supervision of the commercial area.

Organizational dysfunctions – Company II

• Unclear definition and assignment of accountability for technical development between the commercial and the engineering functions.
• Unclear definition of interactions between the management of line and support functions (Human Resources, Safety and Environment).
• Two maintenance areas with limited coordination.

These dysfunctions were addressed in the design of the requisite organization for the integrated companies.

1. B. Organizational Design of the Corporate Office

The design of the new organization contemplated a transitional stage to conduct the regional expansion in the medium term, and a long-term design to support the strategy of global expansion. In both cases, the roles assigned to the corporate office seek to strengthen the position of the company in their countries of origin, capture synergies (operations, supply chain, exports, R&D), conduct a consolidated strategy of investment and growth, homogenize policies, standards and practices, develop a corporate strategy of market positioning and branding, and coordinate the supply and servicing of export markets.

The main accountabilities of the corporate roles include:

-     Set the vision and overall strategic direction, and monitor its execution

-     Define and model corporate identity (branding)

-     Realize potential synergies

-     Conduct overall investment and new business development strategy

-     Develop corporate relations and business agreements with global customers

-     Manage access to, and allocation of capital

-     Build and strengthen key organizational capabilities that support the value proposition

-     Design and monitor common policies with regard to safety, quality and environmental concerns.

Corporate Office (Requisite Organization)

The recommended design presents a stratum gap between the CEO and the functions of R&D, Human Capital, Safety and Environment, because the projected growth resulting from the company’s long-term strategy, does not warrant a full-blown Level VI Organization.