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

of 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 office 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

of 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 KHDOthers

34%

18% 21%

13%

14%

2004

2007

2003

2005

Dania, Mariager, DK

Product development doubled

145 143 169

210

268

315 281

339

0

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%

of 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

of 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

0

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2

3

4

5

6

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8

9

10

2001 2002 2003 2004 2005 2006 2007 2008 2009 F2010P2011P2012

DK

K b

n

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 East50%

Pakistan20%

Rest Asia9%

Africa8%

Latin America7%

North America

4%

EU2%

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 our 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’ offerings

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 offerings (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

Mar

kets

Ansoff’s Growth Vector (1987)

Current New

Curr

ent

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

* Reports to CEO ** Reports to CFO

*** Reports to EVP, Cement **** Reports to EVP, Customer Service

Group functions Group HR * Group IT ** Helios & Business Processes Alignment * Group Finance1 ** Group Marketing & Business Development * Shared Services2 ** Communications * & Investor Relations ** Legal3 ** Group EPC Support ****

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 Jørgen Huno Rasmussen

CFO Ben Guren

Cembrit

Material Handling Carsten R. Lund

Customer Service Bjarne Moltke Hansen

Cement Per Mejnert Kristensen

Material Handling

GTC Material Handling

Sales & Execution BUs & Territories

Mineral Processing Peter Flanagan

1. No separate unit – represents Tax & Structure, Trade Finance & Treasury, Group Control & Consolidation 2. Includes Accounting 3. Includes Risk Management Note: GTC = Global Technology Center; O&M = Operation & Maintenance; CS = Customer Services; BUs = Business Units; Conc.= Concentrators; Exec. = Execution MP – Mineral Processing; MH – Material Handling

Abon Krebs

Ludowici

4 December 2012

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

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3

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15 18 37

24 34

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20

30

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60

2006 2007 2008 2009 2010 2011 2012

minerals

cement

Historic FLSmidth priority patent application filing

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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 other 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 owned 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 optimisation

of single machineries

Holistic complete flow sheet approach – overall plant optimisation

OEM = Original Equipment Manufacturer EPC = Engineering, Procurement & Construction O&M = Operation & Maintenance DBO = Design, Build & Operate

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