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The process of identifying strategic organizational


transformations in an AEC company in Colombia: a case study
of change implementation, outcome, obstacles and enablers

by

Carlos MUNAR

DGA 1005 LECTURES DIRIGEES

MONTREAL, MAY 27, 2019

INTERVENTION PROJECT
PRESENTED TO ÉCOLE DE TECHNOLOGIE SUPÉRIEURE
IN PARTIAL FULFILLEMENT OF THE REQUIREMENTS FOR THE
DEGREE OF DOCTOR PHD

ÉCOLE DE TECHNOLOGIE SUPÉRIEURE


UNIVERSITÉ DU QUÉBEC

Creative Commons Munar, 2019


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PROCESSUS D'IDENTIFICATION DE TRANSFORMATIONS STRATÉGIQUES
ORGANISATIONNELLES DANS UNE SOCIÉTÉ AEC EN COLOMBIE: ÉTUDE DE
CAS SUR LA MISE EN ŒUVRE DU CHANGEMENT, LES RÉSULTATS, LES
OBSTACLES ET LES FACILITATEURS

Carlos MUNAR

RÉSUMÉ

Coninsa Ramon H. S.A. et Urbanizadora de Santafé de Bogota (groupe CRH) est un groupe
privé d’entreprises familiales qui figure parmi les 10 plus grands du pays. La plus grande
entreprise du groupe, CRH, a été la première à mettre en œuvre ISO 9000 en 1998 et l’une des
premières à adopter Lean Construction au milieu des années 2000. Toutefois, leurs projets ont
une faible productivité et le groupe est confronté à des problèmes de performance financière,
au point que le groupe CRH est passé de la position 2 en 2009 à la position 7 en 2017 dans le
classement national des entreprises de construction urbaine.

L'objectif de ce rapport est d’appliquer les connaissances acquises dans le cours DGA 1005
Lectures dirigées au but de préparer le travail sur le terrain d'une étude de cas examinant la
mise en œuvre de la restructuration organisationnelle proposée par Deloitte en décembre 2018.
Le projet d'amélioration de Deloitte comprend (1) développer et renforcer les capacités
stratégiques de CRH et (2) renforcer les processus de prise de décision au sein de l'entreprise.

L’hypothèse de travail du chercheur est que les défis actuels de CRH sont dus aux menaces
pesant sur les niches commerciales de l’entreprise portées par la Crise financière 2007-2008,
auxquelles les actionnaires de CRH n’ont pas réagi efficacement.

Mots clés: Stratégie, structures, organisation, structure organisationnelle, entreprises


familiales.
v

THE PROCESS OF IDENTIFYING STRATEGIC ORGANIZATIONAL


TRANSFORMATIONS IN AN AEC COMPANY IN COLOMBIA: A CASE STUDY
OF CHANGE IMPLEMENTATION, OUTCOME, OBSTACLES AND ENABLERS

Carlos MUNAR

ABSTRACT

Coninsa Ramon H. S.A. and Urbanizadora de Santafé de Bogotá (CRH Group) is a private
group of family businesses that is among the 10 largest in the country. CRH, the group's largest
company, was the first to implement ISO 9000 in 1998 and was one of the first to adopt Lean
Construction in the mid-2000s. However, their projects have low productivity and the group
faces problems of low financial performance, to the point that CRH Group fell from position
2 in 2009 to position 7 in 2017 in the national ranking of urban construction companies.

The objective of this report is to present the application of the prescribed readings of the course
DGA 1005 Lectures dirigées in the preparation of the field work of a case study examining the
implementation of the organizational restructuring proposed by Deloitte on December 2018.
The Deloitte improvement project intends (1) to develop and boost CRH strategic capabilities
and (2) to straighten the decision-making processes in the company.

The researcher’s working hypothesis is that CRH current challenges have their origins in the
threats to the company’s business niches conveyed by the Financial Crisis 2007-2008, face to
which CRH shareholders did not react effectively.

Key words: Strategy, Structures, Organization, Organizational Structure, Family businesses.


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TABLE OF CONTENTS

Page

INTRODUCTION …………………………………………………………………………………13

CHAPTER 1 COMPANY BACKGROUD AND SYNOPSIS OF CURRENT STATUS ........ 15


1.1 Basic company information ..................................................................................................... 15
1.2 Family Owned and Family Controlled Company .................................................................... 15
1.3 The foundation, growth and socioeconomic context ............................................................... 16
1.3.1 The initial opportunity: The Savings and Housing Corporations ....................................... 17
1.3.2 Colombian industrialization process ................................................................................... 17
1.3.3 The globalization: International joint-ventures ................................................................... 18
1.3.4 A strategy: the merger ......................................................................................................... 18
1.4 The Financial crisis of 2007–2008........................................................................................... 19
1.5 Structural reorganisation project .............................................................................................. 21

CHAPTER 2 METHODOLOGY ............................................................................................... 23

CHAPTER 3 COMPETITIVE FORCES ACTING IN THE COMPANY’S SETBACK ......... 27


3.1 The Financial crisis of 2007–2008: a paradigm shift............................................................... 27
3.2 Substitute services.................................................................................................................... 28
3.2.1 The real estate securitization market................................................................................... 28
3.2.2 The commercial centers for leasing .................................................................................... 28
3.2.3 The securitization of tourism projects................................................................................. 29
3.3 New entrants: The Spanish urban construction companies ..................................................... 29
3.4 Bargaining power of buyers ..................................................................................................... 30
3.5 Bargaining power of suppliers ................................................................................................. 31
3.6 Capitalization and investment of economic groups owned construction companies .............. 31
3.6.1 Constructora Colpatria S.A. ................................................................................................ 31
3.6.2 Constructora Bolivar S.A. ................................................................................................... 31
3.7 Economic groups entering the real estate sector ...................................................................... 32
3.7.1 Grupo Aval’s and Construcciones Planificadas S.A........................................................... 32
3.7.2 The Santo Domingo Family Group and Terranum Corporativo S.A.................................. 34
3.8 Capitalization and expansion of established construction companies ..................................... 36
3.8.1 Constructora ConConcreto S.A. ......................................................................................... 36
3.8.2 Alliance with GCA in a verticalization process .................................................................. 38
3.8.3 Grupo Marval S.A. .............................................................................................................. 40
3.8.4 Amarilo SAS ....................................................................................................................... 41

CHAPTER 4 CONINSA RAMON H. S.A. PERFORMANCE DIAGNOSIS .......................... 47


4.1 Diversification.......................................................................................................................... 47
4.2 CRH Diversification policy contradictions.............................................................................. 48
4.3 2016 strategic action plan ........................................................................................................ 49
4.3.1 At the Business strategic level ............................................................................................ 51
4.3.2 At the Corporate strategic level .......................................................................................... 51
4.3.3 The influence of the organizational culture ........................................................................ 51

CHAPTER 5 THE MCKINSEY BENCHMARKING STUDY OF PRODUCTIVITY OF THE


COLOMBIAN CONSTRUCTION SECTOR ..................................................... 53
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5.1 McKinsey Benchmarking study of productivity and risks management of the Colombian
construction sector ................................................................................................................... 53
5.2 The company challenges ......................................................................................................... 53

CHAPTER 6 THE DELOITTE PROJECT................................................................................ 57


6.1 The Deloitte improvement project........................................................................................... 57
6.2 Model of Governance .............................................................................................................. 58
6.2.1 Critical decision-making of the company ........................................................................... 59
6.2.1.1 Critical themes for the company .......................................................................................... 60
6.2.1.2 Instances – Committees........................................................................................................ 60
6.2.1.3 Participants ……………………………………………………………………….60
6.2.2 Empowerment of capabilities ............................................................................................. 61
6.2.2.1 Key Capabilities ……………………………………………………………………….61
6.2.2.2 Key Interactions ……………………………………………………………………….61
6.3 Roles required .......................................................................................................................... 61
6.4 Model of Operation ................................................................................................................. 61
6.4.1 Align the Performance Management .................................................................................. 62
6.4.2 Align Business Process Management ................................................................................. 63
6.5 Model of the delivery of the service ........................................................................................ 63
6.5.1 Strategy focus ..................................................................................................................... 63
6.5.2 Commercial focus ............................................................................................................... 64
6.5.3 Strategic Business Units focus ........................................................................................... 65
6.6 Opportunities of improvement ................................................................................................ 65
6.7 Innovation ................................................................................................................................ 66
6.8 Keys of success........................................................................................................................ 66

CHAPTER 7 THE STRUCTURAL REORGANIZATION ...................................................... 67


7.1 New positions in the organizational chart ............................................................................... 67
7.1.1 Commercial Chief Officer .................................................................................................. 67
7.1.2 National Manager of the Divisions of Real Estate Development (RED) ........................... 68
7.1.3 Commercial and Customer Experience National Manager ................................................ 68
7.2 New structural organization chart ........................................................................................... 68
7.3 Strategic Business Plan and Value Chain and main processes................................................ 68

CHAPTER 8 FIELD WORK RESEARCH TOOLS ................................................................. 73


8.1 Grounded Theory..................................................................................................................... 73
8.2 Complex Adaptive Systems .................................................................................................... 74
8.3 The Operational Excellence and the Shingo Model ................................................................ 74

CONCLUSION …………………………………………………………………………………..75

ANNEX I Real Estate Investment Trust (REIT) Business Model ..................................81

ANNEX II The Ambition Matrix of Deloitte ...................................................................85

ANNEX III Deloitte Capabilities Development Model.....................................................87


LIST OF BIBLIOGRAPHICAL REFERENCES ................................................................................ 89
LIST OF TABLES
Page

Table 1 Evolution of Revenue of Colombian Building Construction Leaders (2010 - 2017) 44


Table 3 One-year Rate Return of PSP Investment according to asset's class .........................44
10

LIST OF FIGURES
Page

Figure 1 Creation of industrial plants in Colombia ............................................................... 17


Figure 2 Macroeconomic Colombian Variables showing Financial crisis of 2007–2008
effects and rapid recovery ......................................................................... 19
Figure 3 CRH Revenues and Operational Profit 2000-2017 (Urbansa S.A. is not included) 20
Figure 4 Porter's Model of Corporate Strategy and Business Strategy .................................. 24
Figure 5 Competitive Forces against CRH in the real estate sector ....................................... 27
Figure 6 Spain Construction Cycle and Gross Domestic Product ......................................... 29
Figure 7 Bancolombia vs Grupo AVAL stocks prices in change percentage since 2014 ...... 32
Figure 8 Terranum Corporative S.A. Sales vs Profit 2011-2016 ........................................... 35
Figure 9 Conconcreto shareholders’ participations ............................................................... 37
Figure 10 Conconcreto Business Segments ........................................................................... 37
Figure 11 Contribution of Amarilo SAS and associates to Major Office campaign 2015 .... 45
Figure 12 Evolution of the Operational Revenue of Colombian Building Construction
Companies Period 2010-2017 ................................................................... 46
Figure 13 Performance of CRH in each of the 6 International Dimensions .......................... 54
Figure 14 Adoption of best practices in the 6 International Dimensions ............................... 55
Figure 15 Management of the project .................................................................................... 57
Figure 16 Deloitte Model of Organizational Analysis criteria and dimensions .................... 58
Figure 17 Model of Governance (relation Critical Decisions and Capacities) ...................... 59
Figure 18 Deloitte Model of Performance Management ........................................................ 62
11. Figure 19 Deloitte Model of Delivery of the Service ............................... 64
Figure 20 Coninsa Ramon H. S.A. Structural Organization proposed by Deloitte (December
2018) ......................................................................................................... 69
Figure 21 BPMS Value Chain and Process Map Strategic Real Estate and Public Private
Contract Divisions (Dec-2019) ................................................................. 70
Figure 22 20 BPMS Value Chain and Process Map Strategic Real Estate Division (July-
2016) ......................................................................................................... 71
Figure 23 The Ambition Matrix of Deloitte ........................................................................... 85
Figure 24 Deloitte Capabilities Development Model ............................................................. 87
11

LIST OF ABREVIATIONS

BPMS Business Process Management System


BS Bachelor of Science Degree
BSU Business Strategic Unit
CA Competitive Advantage
CAMACOL Colombian Chamber of Construction
CAPEX Capital Expenditures
CAS Complex Adaptive Systems Model
CEO Chief Executive Officer
COO Chief Operations Officer
CRH Coninsa Ramon H. S.A.
CSU Corporate Support Unit
EB Executive Board of Directors
ERP Enterprise Resources Planning
GC General Contractor
GCA Economic Group of Companies of Antioquia
IMF International Monetary Fund
OC Organizational Culture
OPEX Operational Expenditures
OS Organizational Structure
PPC Public Private Contract (Strategic Business Unit)
RED Real Estate Development (Strategic Business Unit)
RER Real Estate for Rental (Strategic Business Unit)
ROE Return on Equity
SBP Strategic Business Planning
SBU Strategic Business Unit
SENA Colombian National Service of Training – Ministry for Promotion of Science,
Research, Technological Development, Innovation and entrepreneurship.
SIC Superintendent of Industry and Commerce
SNA Social Network Analysis
SWOT Strengths, Weaknesses Opportunities, Threats Analysis
URBANSA Urbanizadora de Santafe de Bogota S.A. (another construction company of the
shareholders)
WB World Bank
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INTRODUCTION

This report presents the application of the prescribed readings of the course DGA1005 Lectures
dirigées in the preparation of the field work of a case study examining the implementation of
the organizational restructuring of a Colombian AEC company (Coninsa S.A.).

Chapter One presents basic information on Coninsa Ramon H. SA (CRH) and the family
ownership structure. It also explores the economic background of its foundation and growth
period up to the globalization, and subsequent structural reorganisation. Readers familiarized
with the theme can go directly to Chapter Two.

Chapter Two, “Methodology”, presents the theoretical models used to study the corporate and
business strategies of CRH competitors and the aspects examined in the CRH strategies’ flaws.

Chapter Three analyzes the “Porter’s competitive forces” acting in the urban construction
market of Colombia, incumbents and new players, as well that the strategies observed
(acquisitions, strategic alliances, relational strategies and globalizations strategies). It includes
data of companies’ structure ownership, geographical factors, and Colombian political
relations influencing their performance.

Chapter Four approaches a CRH first Corporate and Business strategies diagnosis, explains the
influence of the Organizational Culture (OC) and advances some conclusions.

Chapter Five presents the results of the Benchmarking Study conducted by McKinsey Global
Institute in 2017.

Chapter Six outlines Phase I of the of Deloitte proposal (December 2018) and the project to
develop and boost strategic capabilities and decision-making processes in the company.

Chapter Seven presents the new instances of governance, structural reorganisation, new
positions and proposed Strategic Map designed by Deloitte.

Chapter Eight discusses some thoughts regarding the tools and main questions of the research.

The concluding chapter presents the hypothesis that CRH’s current challenges originated in
the Financial Crisis 2007-2008, face to which the shareholders did not react effectively. It also
assesses the benefits of the Deloitte project with the help of Complex Adaptive Systems.
15

CHAPTER 1

COMPANY BACKGROUD AND SYNOPSIS OF CURRENT STATUS

1.1 Basic company information

Coninsa Ramon H. S.A. (CRH) is a medium-large sized architectural/engineering, real estate


and general contractor (AEC) firm based in Medellin, founded in 1972. CRH is an unlisted,
family owned stock company with about 1800 1 non-unionized employees and serves the
Colombian internal market, providing AEC services to government, private and multinational
clients. In 2017 the company had a revenue equivalent to C$188.1 M and assets equivalents to
C$464.6 M2, placing CRH the 15th in the country urban construction sector. Founder families’
second-generation members operate the company and have key roles in CRH organizational
structure. The company is not part of any holding.

1.2 Family Owned and Family Controlled Company

CRH shareholders also founded Urbanizadora Santafé de Bogotá S.A. (URBANSA) 3 in 1991,
(a competing building construction company based in Bogota D.C., which ranked 18 on the
sector in 2017), Constructora Buen Vivir S.A. in 2002 (based in Medellin) and Promotora
Region Caribe SAS. in 2012 (based in Santa Marta). URBANSA is managed by an industrial
partner; it interchanges limited technical knowledge and none of the family members
participates in its operation.

Through this lens, the shareholders act, informally, as an economic group of “family-
owned/controlled companies”. Thus, the combined revenue of the companies (C$312 M in
2017) places the CRH group 6th in the urban construction sector of Colombia.

1
In the period 2016−2018 the company laid−off around the 10% of its staff
2
Colombian Pesos (COP) are converted to Canadian Dollars (CAD) using the World Bank Price level ratio of
PPP conversion factor (GDP) to market exchange rate. http://data.worldbank.org/indicator/PA.-
NUS.PPPC.RF?locations=CO
3
The companies are administered separately and do not share any information.
16

1.3 The foundation, growth and socioeconomic context

CRH was founded by two investors (Londoño and Hoyos) and two industrial partners (Garcia
and Jaramillo). Ramon H., the Londoño’s family patriarch invested in Medellin rural land (in
what is now known as the “Golden Square Mile”) and also owned the biggest chemical factory
of the province 4 —construction was, for him, one more business. In turn, Oscar Hoyos’ 5
ancestors were seasoned engineers and administrators who made a fortune in gold mining and
railway construction. He had served as Councilman of Medellin for several terms and some of
his relatives managed the Empresas Publicas de Medellin (EPM the Medellin City Public
Utility Co), since its creation in 1920.

The Hoyos family bought shares from its partners and now owns a controlling stake in CRH
(66.1%) and URBANSA (41.8%). The company and the partners make donations to local
politicians from the extreme right-wing party in Medellin and right-center wing in Bogota.
None of the partners donate to presidential political campaigns.6

In the first phase (1972−1999) the rapid growth of CRH was associated to the expansion of the
“Economic Group of Companies of Antioquia” (GCA)7. GCA formed the first Colombian
“Keiretsu”8 in the 60s to prevent “hostile takeovers”. Thus, the “informal” GCA conglomerate
is composed of over than 120 companies whose stocks are public traded, while being
"controlled" by one bank and three holdings: Bancolombia (banking), Grupo Argos (cement,
power & infrastructure), Inversura (insurance), and Nutresa (packaged food). CRH owners,
despite keeping a low profile, are among most influential of GCA shareholders. CRH and GCA
close relations can be inferred. In fact, when Juan Londoño, former CRH’s CEO left the
company in 2006, he was designated CEO of GCA’s energy holding.

4
Londoño acquired Inextra S.A. in an auction after it was confiscated from German owners during WWII.
5
Eng. Oscar Hoyos Posada deceased on December 2018
6
Legal persons are not authorized to make contributions in the presidential campaign.
7
“Grupo Empresarial Antioqueño” also known in the media as “Sindicato Antioqueño”
8
This form of organization of property is similar to the Japanese model known as Keiretsu, that emerged in the
postwar period and applies in cases of Mitsui, Mitsubishi, Sumitomo, Fuyo, and Sanwa. In this system, each of
the companies participates in the capital of one and the other (forming a network in which each possesses others),
without having the absolute control of any in particular.. Cutts, Robert (1992)8. [Free translation]
17

1.3.1 The initial opportunity: The Savings and Housing Corporations

Coninsa Ltd. and Ramón H. Londoño Ltd. were founded in 1972 and 1975, respectively. 1972
was also the year when Colombian government opened the mortgage credit system to the
private sector with the creation of the Savings and Housing Corporations (SHC). The SHC
incentivized saving in Colombia to funnel it into the construction industry. The increasing
housing demand resulted from the phenomenon of population concentration in the cities.
Likewise, the industrial job creation of the 60s and 70s and the consequent economic growth
boosted the development of the middle social class, which required more and better-quality
housing. In turn, the construction boom fueled economic growth.

1.3.2 Colombian industrialization process

On the one hand, Colombian industrialization had a short duration. The takeoff began in the
1930s, the industry gained dynamism throughout the 1960s (employment) and 1970s
(production). Finally, after a peak in 1985, the global dynamics decreased due to (1) the relative
low productivity of the sector; (2) the impact of the loss of Direct Foreign Investment on
Colombian industry, which favorized Asian countries; and (3) the neoliberal policies imposed
by the World Bank (WB) and the International Monetary Fund (IMF).

Figure 1 Creation of industrial plants in Colombia


Taken from Fuente: DANE, Encuesta Anual Manufacturera Metodología: 1974-2001
18

1.3.3 The globalization: International joint-ventures

On the other hand, the first symptoms of a major crisis were present in 1997, when it was
necessary to liquidate major leasing and commercial financing companies. In 1998 the banking
crisis deepened and took ahead several commercial banks and Savings and Housing
Corporations. In October of that year, the biggest SHC corporation was nationalized and
around 100,000 households lost their homes. The experience acquired by the company in the
industrial sector would be crucial to ensure its survival upon the 1998 SHC’s crisis and the
global offshoring of industry jobs.

1.3.4 A strategy: the merger

Coninsa Ltd. Incorporated in Coninsa S.A. in 1990. Both companies went national in 1992,
opening the Bogota DC Regional Office. By 1997 the Bogota market had a 20% share of the
companies’ turnover. Coninsa Ltd. had acquired experience in the industrial sector and went
on to bid in international public tenders. not only had CRH built the “iconic” headquarters of
EPM (1994−1997), but also most of the infrastructure of its new value-added business: mobile
communications. Finally, Coninsa S.A. together with Camargo Correa Inc. (a Brazilian
company with 58,000 workers) built the biggest wastewater treatment plant in Medellin (1996-
1999). This association opened the door to dam construction projects. During this period, the
newly formed company got the ISO-9000 certificate (1998), being the first in the country. That
was a real Competitive Advantage (CA) that allowed the company to comply with the tender
requirements of the megaprojects fund by the WB and the IMF. At the same time, Ramon H.
Londoño Ltd. accumulated the surplus necessary to invest as equity in bigger real estate
projects, as well. Informally, both companies acted like one entity up to 1999 when the
government approved the merger. In the midst of Colombia deepest economic recession since
the World Word II, Coninsa Ramon H. S.A. RH emerged as the country’s third largest
construction company, with a presence in Medellin and Bogota.

After the financial crisis of 1998, the real estate market took three years to recover but CRH’s
infrastructure division performed well. Indeed, the national government would undertake
ambitious projects to export surpluses of electric power and reactivate the economy. Once
again, CRH was in the right place.
19

1.4 The Financial crisis of 2007–2008


By 2002 the urban construction division had recovered and CRH infrastructure division (dam
contracts) had built three medium energy projects: Hydro Montañitas, Niquía & Tasajera and
Guadalupe (between 2004-2007).

Nevertheless, the entire economy was hit by the Financial crisis of 2007–2008. Not
immediately, as was the case in the USA, but in 2009.

After one bad year, the company was awarded the EPM contract Hydro Porce III (C$540 M)
with a 20% share of a consortium including the Brazilian multinational Camargo Correa in (in
2009−2011). Next that it won the Engineering, Procurement and Construction (EPC) Hydro
Tunjita (C$75 M) and Hydro Sogamoso ISAGEN CAD$ 26 M (2010-2011).

Finally, in 2012 it was awarded the 2.4GW hydroelectric plant Hidroituango. the biggest in the
country, accounting for 17% of its power generation —a C$2,5 B contract, in which CRH has
a 10% stake. The other members of Consortium CCC are Camargo Correa (55%) and
Conconcreto S.A. (35%).

Figure 2 Macroeconomic Colombian Variables showing Financial crisis of 2007–2008 effects


and rapid recovery
20

Up to 2008, Conconcreto S.A (currently with 58-years of experience) was the national leader
and AIA S.A. (69-years of experience) and CRH (47-years of experience), were either the
challenger or follower. Due to the crisis Conconcreto S.A. and A.I.A. S.A. lost their leadership
and filed for bankruptcy protection.

In 2010, the urban construction sector improved and began a real estate boom that would last
up to 2014. CHR and URBANSA still performed well and together ranked 2nd in the
Colombian urban construction market. In 2011 CRH’s infrastructure division (roads and
mining) had serious loses and CRH Group ranked 4th. Between 2013 and 2014 CRH
temporally recovered and CRH Group ranked 2nd again.

In 2015 CRH sales decreased 9.4%, and CRH Group declined from position 2 to position 4.
Between 2014 and 2016 CRH lost 35.5% of its urban construction market share, decreasing
from 4.2% to 2.7%. In 2016 CRH recovered and URBANSA overperformed, keeping CRH
Group in position 4, but far away from the leader Amarilo SAS which almost doubled its sales.

Figure 3 CRH Revenues and Operational Profit 2000-2017 (Urbansa S.A. is not included)
21

In 2017 CRH and URBANSA revenues plummeted 27.9% and 43.6% respectively. CRH lost
the leadership in the Medellin real estate market to Constructora Capital a 20-year company
and the group declined to position 6 in the national ranking of urban builders with sales around
one third of the leaders, Amarilo SAS and Grupo Marval.

Eventually, in mid-2018 the Hidroituango Plant project caused a major ecological disaster,
when the deviation tunnel collapsed (affecting tens of thousands of inhabitants in three towns,
who had to evacuate their homes), forcing the Consortium CCC to flood the machine room for
eight months.

The disaster, with a cost about C$865 M, forced its owner EPM to liquidate international
investments while it settles the claims with the international insurers. Despite the fact that 10
months later an international investigation blamed the designer, Integral S.A., the incident
attracted bad press to CRH, resurfacing conflicts of interests during the bid process. Allegedly,
Hoyos Sr., who was member of the board of directors of Integral S.A. during the time that
company executed Hidroituango designs, could have had access to confidential information.

The reconstruction of the engine room will delay the delivery of the project three years on the
horizon of 2021.

1.5 Structural reorganisation project


CRH is implementing a structural reorganisation process designed by Deloitte Touche
Tohmatsu Limited (Deloitte) in 2018. The project, ending in 2020, aims to increase governance
and gain commercial capabilities.

The restructuring intends to recover market share and improve company performance after a
Benchmarking study conducted by Mckinsey & Company in 2017, showed that CRH ranked
11th among the 14 companies assessed. In fact, CRH Return on Equity (ROE)9 fell from 13.4%
in 2016 to 6.52% in 2017, well below the industry average of 15%.

9
Return on Equity, or ROE, is the most common profitability ratio. ROE, expressed in percentage, evaluates the
performance of a business. The most frequently used method is to divide net profit by total net worth (assets).
23

CHAPTER 2

METHODOLOGY

A case study design must have at least the following central components (Yin, 1994) 1: (1) A
study’s questions – “how”, “why”; (2) Study’s (theoretical) propositions – pointing attention,
limiting scope, suggesting possible links between phenomena; (3) Study’s units of analysis;
(4) Logic linking the data to the propositions – matching pieces of information to rival patterns
that can be derived from the propositions; and (5) Criteria for interpreting the findings. This
report proposes initial answers to components (1) and (2).

A significant change in level of analysis, with respect to that made in the master's degree
research, is moving from the general description of the performance of CRH, to aspiring to
achieve a generic profile of “the successful company” at the individual level. It is obvious that
within the large spectrum of Colombian construction companies with different strategic
approaches and development processes, some are successful, and others are not. That is why it
is necessary to individually analyze the data collected, contrasting the incumbents who
achieved better results with those prone to failure. In this way, better possibilities of
understanding may arise.

This suggests that in order to understand the problems of strategic management, the inductive
method (Glaser and Strauss, 1999)2 is not entirely inappropriate. What is required is, rather, to
develop a model that, at least in its design, seeks to facilitate the accomplishment of a consistent
research task.

For instance, to serve the purpose of the course Lectures Dirigées, the researcher adopted the
so-called Corporate level and Business level model (Porter, 1987). The Corporate level
conveys the most abstract aspects of the strategic problem, which can be classified as two basic
problems. The first is to define and select the objectives of the organization, as well as the rules
of conduct that will govern the search and selection of decision and action alternatives (these
rules represent the so-called non-economic objectives of the organization). The second is to
define and choose, for the organization, a selection of product-market combinations that serve
three generic economic objectives, which may be mutually exclusive, namely: short-term
24

profitability, long-term profitability, and objective flexibility (Ansoff, 1972). The Business
level is framed by positioning the companies studied within each of the selected Colombian
construction-market combinations (real estate, urban construction, infrastructure and PPP). At
this level, the strategic problem is aimed at guaranteeing the fulfillment of the corporate
objectives by developing competitive advantages in each current business, so that on the whole
the development of the entire organization can be supported. This assumes that all the claims
originating from the corporate strategic reflection only have development at the business level,
because at a strategic level it does not really compete (Porter, 1987), so a symbiotic relationship
between the two levels of strategy is assumed.

Figure 4 Porter's Model of Corporate Strategy and Business Strategy


From https://saylordotorg.github.io/text_international-business/s14-01-business-and-
corporate-strateg.html

For these effects, the researcher used the competitive strategy (Porter, 1982) 3 —the most
outstanding theoretical instrument offered by the industrial economics school— to map the
strategic groups and competitive forces of the Colombian construction industry (Porter, 2008)4.

An additional contribution was introduced from the research of the School of Hautes Études
Commerciales - HEC (Anastassopoulos & Dussauge, 1985), which explains those strategic
approaches that transcend the competitive logic of Porter, recognizing that there are
relationships motivated by aspects other than costs and prices, according to the breadth of the
non-economic objectives of the organization.
25

The analysis will recognize the mode of development of the companies’ different generic
strategies, in addition to those that arise from the strategic mind of the strategist (Minztberg,
Brian et al., 1999): (1) acquisition strategies (Howson, 2003), (2) strategic alliance and (3)
relational strategy (Detrie, 1997) and (4) a fourth, more contemporary, called globalization
strategy, that arises of distinguishing any of the above aforementioned from that imposed by
the globalized capital structure of the firms after the transactions, where coordination is
necessary, not only of the different units, but also of the administrative and operational
processes of international organizations. (Porter, 1982).

CRH strategies flaws will be approached from the Rumelt (2012) perspective. Rumelt claims
that most deep strategic changes are brought about by a change in diagnosis –a change in how
the company perceives its situation. After doing so, the strategy implementation requires a
“guiding policy” for dealing with the challenge, defining methods of handling the situation and
coordinating possible actions. It also needs a set of “coherent actions” that are required to carry
out the guiding policy: This means that the actions adopted should be consistent and
coordinated in matter of policies, resources allocated, and maneuvers undertaken.

This first approach to the problematic will suggest some (A) Interests and (B) Ideas that will
be used to define later a (C) Theory. Together, these are the top key elements that make up the
social research process (Babbie, 2011) 5 . Likewise, the researcher proposes to develop a
decision-making model based on a Ground Theory research on the biggest project failure of
the company.

The working hypothesis is that the organizational culture of the company prevented it from
responding to the threats arising from the 2007-2008 Financial Crisis.

Finally, CRH’s internal strategy flaws and bad performance cannot be fully understood unless
CRH is compared with its competitors. Consequently, the first objective of the dissertation
might be to build a model of strategic analysis that would be useful when applied to different
types of Colombian construction organizations — of different sizes, different level of
development and unequal objectives.
27

CHAPTER 3

COMPETITIVE FORCES ACTING IN THE COMPANY’S SETBACK

The strategy of a leader is [to see that] a “window of opportunity had


opened and be the first one to take advantage of it. Not necessarily the
first mover, but the first to get it right”. (Rumelt, 2011)

3.1 The Financial crisis of 2007–2008: a paradigm shift


In the aftermath of the Financial crisis of 2007-2008 CRH faced threats from almost every
corner. The industry experienced a business paradigm change in 2010, when North American
investors and Colombian economic groups entered the real estate market introducing new
business models, Spanish building construction companies arrived to the urban sector and its
traditional client, the GCA, created its own real estate company and a Real Estate Investment
Trust in a process of verticalization.

Figure 5 Competitive Forces against CRH in the real estate sector


From the “Five Competitive Forces that Shape Strategy, by Porter, HBS, 2009
28

3.2 Substitute services


Up to 2010 Colombia had protectionist policies preventing foreign companies from entering
commercial real estate activities outside the scope of their business. However, the conjuncture
2007/2008 generated a flow of capital from North America. This Foreign Direct Investment
(FDI) developed the internal securitization market. The Central Bank accounts indicate that in
2014 there were about C$2100 B and more than 2,900 investors betting on real estate vehicles
offered by stock brokers, trust funds and private equity funds. Its 2016 value was C$5170 B.

3.2.1 The real estate securitization market

Real Estate Investment Trust (REIT) —known in Canada as Collective Investment Fund
(CIF)— is a vehicle that returns equity investors up to 15%. Through the REITs, the
securitization market, before reserved for infrastructure projects and institutional investors,
became the ideal vehicle of investment for the country's middle and upper−middle classes.
Now, anyone with as little as C$5,000 dollars could invest in urban projects of tourism, rental
offices, clinics, malls or warehouses. Securitization of real estate properties was not a novelty.
The difference was the size of the projects and the exchange risk involved. The modus operandi
of the REITs is explained in Annex I.

The developers who embraced securitization could supply institutional customers with real
estate projects of offices, logistics and industrial, according to their specific needs,
accompanying them through each step from structuring and promotion to the turnkey delivery.
In turn, the customers did not have to immobilize resources in Capital Expenditures (CAPEX)
relied to the construction and could focus them on the acquisition of machinery and equipment.

3.2.2 The commercial centers for leasing

Another new business model was developing commercial centers for leasing. Under this
model, the developer is paid a monthly lease plus a percentage of the merchants’ sales. This
new business model aligns landlord-tenant interests. On one hand, AEC firms access
international equity funds to expand their operations without immobilising their assets. On the
other hand, the merchants are no longer forced to freeze financial resources in the purchase of
real estate, and can invest them in commercial operations where they obtain better profitability.
29

3.2.3 The securitization of tourism projects

Another business model was the securitization of tourism projects (hotels, spas, etc.). In 2003
the government passed a bill exempting all services provided in new hotels (built up to 2017)
of income tax, for a period of 30 years.

3.3 New entrants: The Spanish urban construction companies


The second paradigm was the arrival of Spanish building construction companies, which ran
out of business as soon the Financial crisis of 2007–2008 hit Spain. The construction crisis in
their country has become an opportunity for the sector to consolidate businesses in Latin
America.

Figure 6 Spain Construction Cycle and Gross Domestic Product


Source: Informe SEOPAN, 2014, p. 35.

Until 2010 the Spanish companies (such as ACS, Acciona, FCC, Ferrovial, OHL y Sacyr)
tendered infrastructure megaprojects only. Now, the urban construction and real estate markets
were attracting medium and large sized Spanish companies, having not only technical
experience but also the financial leverage to undertake ambitious real estate projects.

That was the case of Alonso Balaguer Co., that currently participates in the BD Bacatá project
(a 67-story tower with a total surface area of 111,480 m2) with a C$160 M investment. It will
30

be the first crowdfunded skyscraper, meaning that it was funded by private individuals through
the purchase of shares and fiduciary rights allowed under Colombian law.

Ortiz real estate and other companies such as Sando or ACR, also work in Colombia. Some
companies worked together: for instance, Moyua and Obenasa who allied to create the firm
Activa in order to venture into Panama, Peru, Brazil, Colombia and Mexico. The sector adds
investments of more than USD 500 M. Spanish building construction companies also compete
in the public sector.

3.4 Bargaining power of buyers


Grupo Exito (also known as Almacenes Exito S.A.) is the largest South American retail
company, tracing its origins to Medellín and the GCA. In 1972 it transitioned into a
hypermarket, adding locations in Bogotá. Up to 2008 CRH had built eight of the ten major
facilities. The expansion of CRH from Medellin to Bogota was due to this venture.

Early 2010 was marked by an acquisition spree, when Grupo Exito sold 25% of its shares to
French group Casino. By 2016 the Groupe Casino owned 67%. In 2016, Grupo Exito and the
Real Estate Fund Colombia (FIC), signed an1 agreement under which the latter would invest
C$770 M in Viva Malls Real Estate Trust. Viva Malls is the financial vehicle to develop and
operate the largest commercial spaces in Colombia created by Grupo Exito in 2011. Viva Malls
started operations with a portfolio of 14 assets (12 in operation and two more in development),
which will represent a total of about 434,000 m2 of commercial area for lease by 2018.

FIC is one of the largest private equity funds in the country with a focus on real estate
investments. Its main investor is Bancolombia and it is managed by Fiduciaria Bancolombia
(Trustee), both owned by the GCA. Grupo Exito will be the provider of management,
development, marketing and real estate administration services to Viva Malls.

Exito still hires CRH, but fees are decreased. The fee in Delegated Management public
contracts is 10%. In private contracts it varies between 6%-8% for civil works (according to
the complexity of the job) and 3% for equipment supply. By 2016 Grupo Exito lessened the
fee to 3.5%. The GCA not only deteriorated as a construction services customer, it also became
the CHR real estate rental division’s main competitor.
31

3.5 Bargaining power of suppliers


CEMEX S.A.B. de C.V. is a Mexican multinational that manufactures and distributes cement,
ready-mix concrete and aggregates in more than 50 countries. It is the second largest building
materials company worldwide. In 1998 Cemex launched “Patrimonio”, benefiting more than
low-income 260,000 families with loans worth US $ 140 M for the construction of more than
1.3 M square meters. Cemex capitalized on its experience and went onto participate in a
government bid to build 100,000 social housing units. It was awarded the construction of 5404
homes worth C$110 M between 2014-2015. Cemex Colombia will develop 17 affordable
housing projects totalling 10,017 units worth C$210 M during 2016 and 2017.

3.6 Capitalization and investment of economic groups owned construction companies

3.6.1 Constructora Colpatria S.A.

Colpatria (legally, Scotiabank Colpatria S.A.) is a private economic group, with business in
banking, insurance, construction, road concession and mining sectors. The group operates as a
bank (Banco Colpatria founded in 1955 and Colombia's fifth-largest bank). In 2011 Scotiabank
bought a 51% stake in Banco Colpatria for C$665 M in cash and, with 10 M common shares,
acquired effective control of the businesses. Subsequently, its subsidiary Constructora
Colpatria S.A. (founded in 1979) launched housing projects in Mexico and Ecuador. The
company, with C$1.9 B of assets and C$713 M revenue in 2017, moved to position 3 from
position 4 in 2014 in the urban construction market.

3.6.2 Constructora Bolivar S.A.

The Grupo Bolivar S.A. (founded in 1939) is a public holding, whose services include
investments in valuable tangible and intangible assets, structuring and administration of
portfolios and start-ups funding. Grupo Bolivar successfully listed an Initial Public Offerings
(IPO) of SHC Banco Davivienda S.A. (the third largest of the country) on the local stock
exchange in 2012, with a capitalization of C$321 M. Afterwards, its subsidiaries, Constructora
Bolivar Bogota S.A. (founded in 1983) and Constructora Bolivar Cali S.A. (founded in 2004),
launched a Land Bank in intermediate cities to develop social and middle-class housing. The
company, with C$2.2 B of assets and C$453 M revenue in 2017, ranks 4th in the market.
32

3.7 Economic groups entering the real estate sector

3.7.1 Grupo Aval’s and Construcciones Planificadas S.A.

Grupo Aval is the biggest Colombian public holding comprising four banks, a Pension Fund,
telecommunications, real estate, concessions, PPPs and in Colombia and Central America.
Grupo Aval is controlled by Sarmiento Angulo (a self-made billionaire with an estimated net
worth of C$16.5 B), who owns 80% of its shares. Sarmiento made a fortune in real estate
development and founded its own SHC (AV Villas) in 1972, whose yields proved it to be
superior business to construction. However, in 2010 the holding re-entered the sector with the
brand Construcciones Planificadas S.A.

Grupo AVAL listed an IPO on the NYSE for USD $1265 M on September 2014, just before
its devaluation. The investment has subsequently disappointed investors. The group, valued at
USD $15 B at the time of the IPO, now has a market capitalization of around USD $7 B. The
price decline of the shares in USD has been 53%. Over the same period of time, the Colombian
peso has declined in value by 39% (from 1,998 COP to 3,2491 COP, versus the USD).

Figure 7 Bancolombia vs Grupo AVAL stocks prices in change percentage since 2014
Taken from https://seekingalpha.com/article/4232815-scandal-grupo-avals-current-

Construcciones Planificadas S.A.’s lines of business consist of high-end offices for lease or
sale, 5-star hotels and shopping centers. It is developing the “Sarmiento Angulo Business
33

Citadel”, the biggest non−residential real estate project ever built in Bogota DC. It is located
in the Golden Mile Square close to the airport. It comprises over 1.5 M square meters in 16
office towers (still under construction), one convention center and one hotel. The shopping
center (with an area of 317,000 m2) was delivered in 2017. The hotel, a luxury 14-storey high-
tech building, is the first Grand Hyatt hotel in Colombia, with 373 rooms, built at a cost of
C$172 M. It was started in 2014 and inaugurated in 2018. Construcciones Planificadas S.A.
provides services of management, design (architectural, technical and interior design),
construction, commissioning, commercialization, administration and maintenance of the
facilities. Likewise, the company holds the ownership of most of the offices, the whole
shopping center and the hotel.

Since 2017 Grupo Aval share prices have dropped an additional 20% while Grupo
Bancolombia stock10 (the GCA’s bank) has gained in local currency. Grupo Aval’s stock bad
performance can be traced to fears of escalating legal troubles involving Corficolombiana S.A.,
the Grupo Aval’s PPP subsidiary, and the Brazilian firm Norberto Odebrecht Constructora, the
leading company of Odebrecht S.A. (founded in 1944), a diversified US$25.7 B (by 2017)
holding with businesses in the fields of engineering, construction, chemicals and
petrochemicals and with a presence in South America, Central America, North America, the
Caribbean, Africa, Europe and the Middle East. The corruption scandal caused the cancellation
of two PPP contracts: (1) a C$2,6 B deal to build and operate 1,100 km of toll roads connecting
Bogota with the North Shore and (2) a C$1,1 B contract to recover the Magdalena River’s
navigability along a 908 km section in the lower basin up to the mouth of the Caribbean Sea
(Barranquilla). It also resulted in fines over C$72 M.

Odebrecht S.A. paid about USD $ 788 M in bribes in exchange for public contracts in Latin
America between 2001 and 2016. The firm was sentenced in U.S.A. to pay USD $2.6 B in
fines, signing off on a plea deal with U.S., Brazilian and Swiss authorities. The investigation
led to the arrest of the CEO Marcelo Odebrecht in Brazil in 2015, who was given a 19-year jail
sentence; the resignation of two presidents in Peru; the arrest of the vice-president of Ecuador

10
Bancolombia bank is as big as Aval Group’s four banks combined. All accounts for the 45% of the country’s
financial market, each very close to the 25% concentration, maximum allowed by the Colombian antitrust law.
34

and one ex-vice minister and two ex-congressmen in Colombia. There are on-going
investigations into dozens of former presidents, vice-presidents, ministers and top government
officers of Panama, Argentina, Brazil, Colombia, Ecuador, Guatemala, Mexico, Peru and
Dominican Republic.

In Colombia Odebrecht S.A. / Corficolombiana S.A. bribed politicians and government


officers with nearly USD $30 M. In 2017 the Colombian Chamber of Infrastructure expulsed
Norberto Odebrecht Constructora and it was banned from Colombian public bids in 2018.

Finally, Corficolombiana S.A.’s CEO was arrested in 2018 and given an 11-year jail sentence,
while top officers of Grupo Aval (including Sarmiento Angulo’s son) are being investigated
for anticompetitive practices and undisclosed conflict of interests.

3.7.2 The Santo Domingo Family Group and Terranum Corporativo S.A.

Terranum Corporativo S.A. is a full-service real estate company comprising five business lines:
real estate development, asset management, property management, brokerage services and
architectural design. The group, which started as Estrategias Corporativas S.A. with a capital
of C$700,000 dollars in 2007, at the end of 2017 was managing assets valued in C$3.2 B. The
company was rapidly acquired, and the founders retained 1%.

Terranum Corporativo S.A. belongs to Santo Domingo Family (45%), one of the largest
conglomerates in the region, known to dominate Colombian beer market; Cadillac Fairview
Corporation Limited (30%, owned by the Ontario Teachers' Pension Plan) and Equity
International (24%) a U.S. A. private equity firm founded by Sam Zell in 1999 to invest in real
estate in markets outside of the United States, with a particular focus on emerging markets.

1. Terranum Development focuses on the development, ownership and management of


high-end quality corporate property in Colombia and the Andean region. The division
was the first in Colombia to provide best-in-class property specifically designed to meet
the needs of international corporations in 2011 with a Free Industrial Economic Zone
built close to the airport. It is currently developing corporate properties in the region
with estimated investments of over C$750 M.
35

2. Terranum Hotels owns Decameron Hotels & Resorts’ All-inclusive offer, the biggest
hotel chain in Latin America. Terranum Investment is the largest Colombian REIT,
with over US$320 M in assets under management.
3. Terranum Management is the largest property and facility management company in
Colombia, managing over 3.5 M square meters for top corporate clients.

Terranum S.A. also ventures in the Brazilian real estate market with Bracor, and in the Mexican
market with Corporate Properties of the Americas.11

Terranum S.A. meteoric success has been obscured by lack of “Due Diligence”12 and non-
disclosure of conflict of interest which caused his CEO (and founder) being fired of the
company in 2015 and loses of about C$45 M between 2015 and 2016.

Figure 8 Terranum Corporative S.A. Sales vs Profit 2011-2016

After extended lobbying of the Portuguese and Colombian governments in 2013 Terranum
S.A. and the Portuguese Prebuild signed to develop a concrete precast materials factory, that
would create 1500 jobs. Terranum invested some C$26 M in the purchase of the land and about
C$133 in the construction. Prebuild, invested C$133 in equipment and C$26 M in capital for
the operation. The total investment, therefore, was close to C$320 M. The deal had the

11
Corporate Properties of the Americas is a Mexican full- service real estate company. It manages over 6 million
square meters of warehouse, distribution, and light manufacturing space located in four main commercial hubs
12
Due Diligence consists of a comprehensive audit of operational, financial and reputational issues.
36

additional logic that Prebuild was the designer and the general contractor, because it had
knowledge of what their needs were. This produced the unusual situation where a client was
simultaneously a builder and tenant. The turning point was the collapse of the holding owner
of Banco Espíritu Santo, the second biggest bank in Portugal and Banco Espíritu Santo Angola
in mid-2014. The banks financed Prebuild operations, who in turn owned indirectly 10% shares
of the holding. Terranum, which was unaware of this relation, hired the firm Control Risk to
make a new evaluation in 2015. Prebuild’s illiquidity (mid-2014) turned to insolvency in mid-
2015, when Prebuild cessed operations for good.

3.8 Capitalization and expansion of established construction companies

3.8.1 Constructora ConConcreto S.A.

ConConcreto S.A. (founded in 1961) is a second-generation, family-controlled, public


company with assets of C$3.1 B and revenues of C$1.6 B in 201713. It is the leader engineering
company of the country and provides planning, design, construction, operation and
maintenance services for building and engineering projects (such as tunnels, bridges, airports,
dams, hydroelectric plants, roads, PPPs and mass transport systems), in several of which has
partnered with CRH.

The company was founded by four partners, but the Aristizabal Family managed to buy their
stakes. The firm was the first in going public in the Colombian local financial market with an
IPO in 2010. Then, in 2012, the company sold an additional 20% shares to fund its expansion
plan in Panama. Due to the 2014 strong devaluation of Colombian currency (39%)
ConConcreto shares had low marketability. Next year, in 2015, the French construction
company Vinci SA, a world leader in construction and concessions, acquired 20% of the
company providing fresh funds to enter the roads concession sector.

13
Conconcreto S.A. had net sales for C$1.08 B and assets of C$3.1 B in 2018. The others of incumbents (with
the exception of Amarilo SAS) have not yet submitted their financial information to the Superintendency of
Societies.
37

Figure 9 Conconcreto shareholders’ participations

Despite the fact the Aristizabal keeps a 55% controlling share, most of the company endeavours
involve strategic partnerships to distribute risk, which in turn reduces the actual participation
and decision-making power of the family.

ConConcreto S.A. has four operative divisions: building construction, real estate (housing),
infrastructure and Panama (through its subsidiary Conconcreto Internacional). However, from
the strategic perspective, Conconcreto is structured in four business segments:

Figure 10 Conconcreto Business Segments

Conconcreto S.A. is the technological leaders in the building construction sector. It pioneered
with introduction of the ERP SAP in the 90s and the early adoption of BIM in mid-2010s and
maintains a constant effort for digitalization of its projects.
38

Also remarkable is a Conconcreto S.A. initiative promoting contest of Open Innovation. Back
in 2014, Conconcreto asked for proposals to improve its operations in three areas:
1. How to get the information of work completed from a construction project in a quick
manner and in real time?

1. How can standardized systems help us increase the productivity in the construction of
our building projects?

2. How to take advantage of the visitor traffic in [our] shopping malls to increase sales in
our stores?

The winner of the first contest was Real Group Interactive SAS, a young company of Cali.
Together they launched a Drone service allowing the generation of digital terrain models with
high resolution and orthophotos that achieve a broader vision, on a large scale and in less time,
of the current situation at highly complex worksites. Conconcreto also runs since 2017 a 3D
laboratory with the only fluid concrete 3D printer of the country. The company submits projects
to the calls for proposals of technological projects of the Colombian Ministry for the Promotion
of Science, Research, Technological Development and Innovation, in yearly basis.

3.8.2 Alliance with GCA in a verticalization process

SITUM signed with Conconcreto S.A. to create PACTIA SAS in 2015. SITUM is a real estate
company subsidiary of Argos (the cement holding of the GCA) created in 2013. The new
company PACTIA will run the Pactia Private Equity Real Estate Fund, which will develop and
operate lease projects in the sectors of commerce, logistics and storage, offices, hotels, self-
storage and leased housing. PACTIA’s portfolio, with 722,581 square meters under
management, comprises more than 72 assets worth C$1.6 B, and presence in 14 provinces of
Colombia, Panama City and the United States. Pactia's strategy revolves around five axes:

1. Profitability: Accomplish profitable growth of the business


2. Differentiation: Enhance cost efficiency
3. Operating Efficiency
4. Technology and innovation: Innovation at the service of the business
5. Sustainability:
39

PACTIA’s operating efficiency strategy is based on (1) strengthening vertical integration, (2)
retaining key business knowledge and (3) developing and retaining human talent.

This joint-venture marked the beginning of a verticalization process in the GCA and other
Colombian economic groups, which henceforth will demand less services of family
construction companies.

Current Conconcreto S.A. market capitalization barely achieves C$1211 M. On the whole, the
stocks of construction Colombian companies have not fared well. Since 2014 they have
14
devalued more than 33%, in parallel with the Colombian currency. Nonetheless,
Conconcreto S.A.’s low share valuation results from two additional threats:

1. The crisis of the hydro Hidroituango, where the owner EPM faces project delivery delays
of almost three years, increasing CAPEX and OPEX by about C$865 M. (Conconcreto is
part of the CCC Consortium with 35%; Camargo Correa with 55%, and CRH with 10%).

2. Allegations of corruption emerged in August 2018. After two years of preliminary


investigation, the Superintendent of Industry and Commerce (SIC) charged Conconcreto
S.A. with collusion and other anticompetitive practices. The collusion occurred in the
contract selection process led by the National Infrastructure Agency (ANI) for the
construction of the PPP Third Lane Bogotá - Girardot with an official budget estimated at
C$1.7 B. It was found that Conconcreto S.A. had colluded or cartelized with the companies
Benton and China Gezhouba in 2015.

The SIC indictment states:

There is abundant evidence that would demonstrate that in the course of the
administrative inspection visit carried out by the Superintendence of Industry
and Commerce in September 2016 at the facilities of CONCONCRETO, its
President JUAN LUIS ARISTIZÁBAL VÉLEZ issued the order to destroy and
hide all the information of the Third Lane Bogota - Girardot [bid offer]….

14
Colombian construction companies’ shares have low liquidity. This forced the GCA to withdraw its PPP
company Odinsa S.A. from Medellin and Bogota Stock Exchange despite the fact it is the leading member on
highway and airport PPPs in Colombia, Ecuador, Aruba and the Dominican Republic
40

So far, Conconcreto has managed to prevent the Attorney General from prosecuting the
company (and Aristizabal) using the evidence collected by the SIC. If found guilty, the
company, which finances were already delicate, is alike to being fined with C$78 M, the
equivalent to 2017 profit.

Intriguingly, Conconcreto had previously sold 50% stake of the contract to Vinci Highways a
subsidiary of Vinci Construction (August 2016). The project would be carried out by a joint-
venture consisting of Vinci Construction Grands Projets / Vinci Construction Terrassement
(50%) and Conconcreto (50%).

3.8.3 Grupo Marval S.A.

Grupo Marval S.A. (founded in 1976) consists of four companies: Urbanizadora Marín
Valencia S.A., Marval S.A., Construcciones Marval S.A. y Grupo Andino Marín Valencia
S.A., with combined assets of C$1,282 M and revenues of C$642 M in 2017. The company,
which focuses on cost leadership, is the biggest in the social housing market since 2010 and
2nd in the urban construction sector in 2017. The company, founded by Marin Valencia family
in the province of Santander, focuses in social and low-middle housing and urban roads. The
company is known for its aggressive style to defend its market niche in Santander province
and for making “generous” donations to the right-wing presidential campaigns, beginning with
Pastrana Borrero (in the 70s) and his son Pastrana Arango (in the 90s). Just after campaigning
for Pastrana Arango, Grupo Marval won public tenders to build four large prisons in the
country. The partners have a direct line with the Uribe Velez administrations (2002-2010), the
Vice-presidency (2014-2018) and the current Duque Administration (2018-2022).

Grupo Marval, which has built over 120,000 homes, was the first Colombian company to
participate in international bids in Panama, where it won a USD $160 M turnkey project, to
build prison facilities for 5500 inmates in 2010. After that, the company entered Uruguay (with
a prison facility worth USD $60 M), Peru and Honduras. The company’s portfolio comprises
social, low-middle and middle housing, hotels, shopping centers and prisons.

In 2013 the company expanded to intermediate cities, with a C$550 M investment in two hotels
(Holiday Inn franchises), three commercial malls in alliance with Grupo Exito and residential
projects. In 2015 Marval signed a deal with the Char Family (a business group with investments
41

in commerce and financial services, and strong links to local politics), which enabled the
company to successfully enter the North Shore real estate.

Grupo Marval was also hit by the devaluation of 2014. Nevertheless, it managed to
commercialize its inventory through an Internet marketing company formed by three of the
biggest construction companies of the country: Constructora Colpatria S.A., Marval S.A. and
Amarilo SAS.: “Casa Propia S.A. —My own house https://casapropiacolombia.com/en/—
targets expatriated Colombian in U.S.A., to lure them into buying real estate in Colombia
taking advantage of the increased purchase power of the USD currency.

In 2016, Grupo Marval signed an agreement with the National Savings Fund (a government
second-tier bank that concentrates all civil servants’ compulsory savings) to commercialize
about 100 projects, accounting for 17,614 homes in Bogota, Barranquilla, Cartagena (North
Shore), Bucaramanga, Ricaurte and Cali worth, C$1.7 B.

A study by the Habitat Inspection, Surveillance and Control Office of Bogota D.C. showed
that Grupo Marval accounted for 219 complaints of the total of 2,197 complaints filed between
2016 and 2018 for low quality and environmental damages. The claims against Marval were
six times more than the closest, and far more than Amarilo SA (the challenger in the sector)
with 8 complaints and Constructora Bolívar with 7 complaints.

3.8.4 Amarilo SAS

Amarilo SAS, with C$2.1 B in assets and C$1.04 B of revenues in 201715, is the leader in urban
sector and the second in malls and housing development in Colombia. It started as Inmobiliaria
Mazuera Ltd. (1992) “borrowing the brand” from Fernando Mazuera Ltd. (founded in 1969).
The firm started as a general contractor; after four years Inmobiliaria Mazuera Ltd expanded
to Cali City. In 2004 the SIC forced it to change to a new brand, the current Amarilo S.A.

In January 2005 Amarilo S.A. and CRH founded Amarilo Coninsa & Ramón H. S.A., which
would be liquidated in April of the same year, supposedly because there were no the projects
to develop.

15
Amarilo SAS had net sales of C$926.9 M and assets of C$1.1 B in 2018..
42

In 2009, Amarilo SAS signed a strategic alliance with the Public Sector Pension Investment
Board (PSP Investments), a Canadian crown corporation and one of Canada’s largest pension
investment managers, with $153 B of net assets under management (as at December 2018)16
Throughout 2010-2016 PSP Investments would invest C$293 M in middle and upper-middle
condos, offices and shopping centers.

In 2010 Amarilo sold a 10% stake to Faraday Venture Partners, S.L. a Spanish equity fund
specialized in Latin America (managed by the multinational Amicorp), and the company went
onto develop “Ciudad Verde” (Green City). In 2011 Amarilo SAS acquired Soluciones
Inmobiliarias MS S.A., a real estate company, to reinforce its sale force in Ciudad Verde.

Ciudad Verde is a model of urban management in Soacha (a municipality located on the


outskirts of Bogotá), which included the negotiation and incorporation of a 328 hectare master
plan (a city in itself) and the construction of 49,500 homes of social housing for more than 200
thousand inhabitants. This model is a private developer proposal to the enormous challenge of
planned residential urbanism, and the quantitative and qualitative deficit of housing in
Colombia —estimated at 4 million homes. Ciudad Verde adopted de business model of “Land
Readjustment” that had two precedents in Bogota DC, both managed by public boards. The
basic concept is stated in a resolution of the United Nations Centre for Human Settlements:

"Under land readjustment programmes, undeveloped areas, usually an urban fringe,


can be designated for improvement, including the rearrangement of plots, the grading
of land, the construction of roads and the provision of infrastructure. Instead of paying
a betterment levy, landholders must surrender part of their land to the local authority
as payment for the improvements. The local authority can then resell this portion of
land to recoup the improvement costs." (HABITAT, 1990)

Amarilo SAS executed the civil works at a cost of C$150 M. The housing solutions were
developed, built and commercialized by Amarilo SAS and other nine companies Marval S.A.,

16
PSP Investment Board manages funds transferred by: (a) Public Service Superannuation Investment Fund and
the Public Service Pension Fund; (b) the Canadian Forces Superannuation Investment Fund and the Canadian
Forces Pension Fund; (c) the Royal Canadian Mounted Police Superannuation Investment Fund and the Royal
Canadian Mounted Police Pension Fund; and (d) the Reserve Force Pension Fund
43

Constructora Bolívar S.A., Ospinas S.A., Emezeta S.A., Mendebal S.A., Colsubsidio (a
parafiscal organism), Prodesa S.A. and the group Coninsa Ramón H S.A. & Urbansa.

Indeed, the PSP Investments 2010’s and 2011s reports stated:

During fiscal year 2010, the Real Estate Group continued its investment initiatives in
emerging markets …For instance, PSP Investments was among the first foreign
institutional investors to take advantage of real estate opportunities in Brazil and
Colombia, where rapidly expanding middle-class populations have been driving
demand for new housing, retail and, more recently, office space.

In 2012 Amarilo SAS split their operations into two different companies: Amarilo Inversiones
SAS (investments) and Cimento Inmuebles Comerciales SAS (real estate). In 2013 Cimento
signed an alliance with the Guatemalan group Spectrum, who has 25 years of experience in
Guatemala, Nicaragua and Honduras, and is part of Grupo Pantaleón (founded in 1849), the
largest sugar business of Central America. As a result, Cimento delivered Fontanar Shopping
Center in Chia (an intermediate city in north Bogota) in 2015, with 57,000 m2 of Gross
Leasable Area (GLA) and C$266 M investment. It is also developing the Arkadia Shopping
Center in Medellin with a 149,279 m2 GLA, which will be delivered in late 2019. In 2019,
(after years of political lobbying), the company launched a controversial urban renovation
project with a 175,000 m2 GLA on only 2,9 hectares of land in a commercial area of Bogota.
This caused a political scandal and exposed a conflict of interest related to Amarilo's donations
to the campaign of the current mayor, Peñaloza, in the 2015 elections

In 2014 PSP had commitments for COP $61,3 B, which raised to COP $209,8 B in 2015.
Eventually, in 2016 Amarilo SAS sold a 30% stake to PSP Investments 17 . The founders’
remaining 60% share and the 10% Faraday Venture Partners equity were acquired by Narrow
Bridge Corp18, a private equity fund incorporated at the British Virgin Islands. The acquisition

17
PSPIB DevCol Inc., a Non-distributing corporation registered in Montreal in 2007 who acts as Access to
Information and Privacy Coordinator in behalf of PSP Investments.
18
Narrow Bridge Corp actual investors are unknown due to British Virgins Islands secretive company ownership
information policy. The equity fund only accepts professional grade investors (Qualified Investors under U.S.
definitions), able to make a minimum US$ 5 million investment commitment during a three year period. The fund
with offices in U.S. specializes in Latin America real estate.
44

was advised by the multinational law firm Baker McKenzie, known for its multiculturalism
and large experience advising U.S.A. companies investing in Latin America.

The business plan of Amarilo SAS intended to replicate the Ciudad Verde project in
Barranquilla (22,000 homes) and Soledad (15,000 homes), with SITUM the real estate
company of Grupo Argos (GCA), accompanied by Constructora Colpatria S.A. and Prodesa
S.A. (a Bogota company) between 2016 and 2018. Amarilo would develop 3,200 upper middle
condos in 8 residential complexes in Bogotá, among other projects, together with Constructora
Bolívar S.A. and Acierto Inmobiliario (a Medellin company). Likewise, it will build retail
malls in Medellín, Barranquilla, Cali, Bucaramanga and Bogotá.

On the one hand, the growing involvement of PSP Investments, increased Amarilo SAS
operational revenue from C$47.6 M in 2010 to over C$1,0 B in 2017.

On the other hand, PSP Investments real estate investment yields in emergent countries
(13.6%) were above the fund median (10.8%)

Table 1 Evolution of Revenue of Colombian Building Construction Leaders (2010 - 2017)


2010 2011 2012 2013 2014 2015 2016 2017 2018
AMARILO 47,6 55,6 98,5 98,7 128,5 763,1 943,5 1 039,9 926,9
MARVAL 440,8 513,0 503,8 500,3 675,6 851,2 769,3 935,5
COLPATRIA 219,5 256,1 290,2 194,7 202,8 509,6 393,6 730,8
BOLIVAR 161,6 186,1 162,3 210,8 241,5 258,5 547,2 453,4
ARQ/CONCRETO 83,8 94,8 81,1 100,3 155,1 294,3 305,9 435,7
MORA 63,5 54,3 91,4 103,0 106,3 211,7 292,9 280,5
CRH & URBANSA 240,7 161,0 149,7 258,7 273,0 324,4 480,6 312,0

(Elaborated by the researcher with data of the Superintendency of Commercial Societies)

Table 2 One-year Rate Return of PSP Investment according to asset's class


One-year Rate
ASSET CLASS
of Return
Public Market 8.3%
Real Estate …….13.6%
Private Equity …….12.9%
Infrastructure …….19.3%
Natural Resources …….11.2%
Private Debt 8.2%
Complementary Portfolio 33.0%
45

In 2010 Amarilo S.A. and a pool of companies, among them Marval S.A. and Constructora
Bolivar S.A., created “Donde Adquirir Vivienda SAS” (Where to buy house) as a common
marketing vehicle. After two-year investigation the Superintendent of Industry and Commerce
(SIC) sanctioned the companies for violating antitrust norms.

Amarilo SAS and Donde Adquirir Vivienda SAS, together, were the biggest contributors to
the current Bogota D.C. mayor’s political campaign back in 2015. CRH made a substantial
contribution through Urbansa.

Figure 11 Contribution of Amarilo SAS and associates to Major Office campaign 2015

According to the SIC Amarilo has a 6.6% share of the residential market and 1.93% of
shopping centers. PSP Investment has a market share of 7.08% of shopping centres..
46

Figure 12 Evolution of the Operational Revenue of Colombian Building Construction Companies Period 2010-2017
(Elaborated by the researcher * MARVAL groups the 4 companies of the group. **BOLIVAR groups 2 companies)
47

CHAPTER 4

CONINSA RAMON H. S.A. PERFORMANCE DIAGNOSIS

4.1 Diversification
In 2016 CRH founders declared that it most successful strategy was diversification:

“The firm resilience is the result of a strategy of “diversification” driven by four


engines: (1) architectural, (2) real estate (development and lease), (3)
institutional/industrial construction and (4) infrastructure.” (Hoyos, 2016)

Supposedly, CRH obtains an advantage by entering multiple related businesses —moving


away from specialization. We will see that this “diversification” has been implemented in the
Colombian construction industry with mixed results19 and it does not necessarily convey a
competitive advantage (CA): understood as a key element that enables firms to anticipate
future scenarios, while allowing them to leverage strengths and minimizing weaknesses.

Thus, diversification cannot be limited to acting on several subsectors of the construction


industry but also entering sectors where firms’ expertise adds CA; for example, the
transportation Public Private Partnerships (PPPs). PPPs require heavy injections of capital, to
which family businesses do not have access —either because they lack financial engineering
skills or simply due to the shareholders’ aversion to risk. For example, diversification made
sense in the tourism sector where CRH would have provided construction and real estate rental
and administrative expertise.

The fact is that most successful family businesses either listed shares on the stock exchange or
admitted foreign partners with the consequent loss of control, or a combination of both
strategies. They obtained considerable financial leverage, enabling the creation of new market
niches allowing for specialization.

19
A.I.A. S.A. (founded in 1949), a similarly “diversified” company, filed bankruptcy in 2015.
48

4.2 CRH Diversification policy contradictions

CRH participated in one hotel project, of urban renovation in Downtown Bogota, which was
not good, and moved away, despite the fact that through this incentive 45,500 rooms were built
in the country attracting FDI for C$17 B, in the past two decades. Similarly, CRH entered the
concession business late, and very cautiously, to the extent that the company liquidated a 5%
partnership of the International Airport of San Andrés in 2017. The only significative PPP
investment was the Tunel de Aburra Oriente S.A. PPP, with a 18.7% stake of a CA$1.1 B 30-
year contract to Build, Operate, and Transfer an 8.3 km tunnel for the Antioquia Provincial
Transit Authority, begun in 2008.

After years of indecisiveness, in 2011 the company entered the road market and won two major
contracts to build 290 km highways, in a joint venture with the Mexican firm Tradeco
Infraestructura. In 2013 Tradeco was held in default in a USD $290 M contract in Houston.
This led to defaulting on USD $667 M Mexican public contracts in 2015, for which it was
disqualified in mid−2016 to participate in public bids for 30 months, leaving the company in a
critical situation. The affair jeopardized Tradeco’s growth plan to go public to the Mexican
Stock Exchange. Therefore, CRH was to complete the Colombian road contract on its own.

Throughout 2011-2014 CRH expanded to the North Shore of the country with simultaneous
building projects and infrastructure contracts. CRH signed with the multinational mine
company Carbones del Cerrejon Limited, a contract for the resettlement of two towns (Patilla
and Chancleta) in the middle of an open sky coal mine in the desert of La Guajira, in the north
of the country. In Colombia history there was only one precedent for the relocation of an entire
town, on the occasion of the construction of a dam in 1960, but this was in a zone near Bogota20.
In this single contract CRH had cost overruns over CA $25 M.

Eventually, in 2012 CRH created Promotora Region Caribe SAS to serve the Caribbean cities
of Barranquilla, Cartagena and Santa Marta. By 2014 it had launched projects on the three
cities without first validating its value proposal. Poignantly, the Caribbean market did not

20
“The logistics challenged CHR mobilization capabilities who had to assign staffers from Barranquilla,
Medellin, and Bogota. Booking air tickets every month, finding accommodations, transporting materials,
equipment, dealing with the hot weather —all things the company was not familiar with.” CRH manager Munar.
49

appreciate the value of the company’s high-quality and stuck to low-priced competitors’
products.

For example, local codes did not require high−rise residential building to comply with
fire networks standards (NFPA 13 Standard for the Installation of Sprinkler Systems)
as Bogota or Medellin codes, but CRH offered them. CRH’s skilled subcontractors
lacked knowledge of the zone and did not perform well. Conversely, local
subcontractors managed the resources well, but were weak in the technical standards
of CRH production. (Vanegas, 2017)

To summarize, a series of misconceptions in the feasibility and failures in the execution, placed
the North Shore projects in the worse of the scenarios. By 2016, the losses were estimated at
C$31 M. 21 It has to be reckoned that CRH did not partner with local players in these ventures.
Ignorance of local conditions prevented the firm from evaluating its degree of exposure.
Instead of working under a measured risk, the company acted in a context of uncertainty. It is
highlighted that in the towns’ resettlement contract there was a concentration of decision-
making at the top of the hierarchy (family member).

4.3 2016 strategic action plan


In mid-2016 the Executive Board instructed the CEO, the Chief Operations Officer (COO) and
the COO and the Chief Infrastructure Officer CIO to combine the Kaplan Method with the
commercial strategy “Playing to Win” (Martin, 2013)6. 22 They had to answer these questions:

(1) What is the winning situation of the company for this type of business? (2) Where
will the company play? (3) In what geography? (4) What type of clients? (5) Where
not to play?

The team identified where CRH did and did not do well.

The decisions were all associated with business not to go. CRH gave up on contracts in rural
areas where the company has no operational capacity. This includes the road construction
subsector. Regarding the infrastructure macro projects, CRH will bring the administrative and

21
The company sued the coal company and recently, after five years, (February 2019) an arbitral award
condemned Carbones del Cerrejon Limited to compensate CHR with CA $11.5 M.
22
Martin is a former student of Peter Drucker. Drucker asserted that the most important decisions are about what
[objectives] must be abandoned and frequently it is the most disregarded decision (Drucker, 2002).
50

contractual experience, and leave the operational and the engineering dominance to partners
who have the technical expertise. Regarding the public and private infrastructure businesses
the company would be more selective bidding on offers with an optimal ratio of profit and risk.
(Vanegas, 2017).

Nevertheless, these recommendations came late. By 2016 the roads and mine projects had
drained the hydroelectric plants’ profits. Additionally, the North Shore real estate endeavours
would compromise the liquidity of the sister company Urbansa, whose returns where funnelled
to complete those projects through 2016-2018.

The 2016 strategic action plan has not driven the expected results because it did not set up the
three basic elements of a good strategy (Rummel, 2012). First, the recommendations lacked “a
diagnosis”. The strong CRH OC feature of “saving face” prevented the COO and CIO to
explicitly stating the causes of the setback. For example, the Cerrejon Mine failure discussions
were conducted in closed chambers, with the shareholders only. Consequently, neither the
COO nor the General Construction Manager had a say to influence how the Board of Director
perceived the situation. Second, the advices concerned what objectives must be abandoned
(Drucker, 2002), but lacked a formal “guiding policy” for dealing with the real estate and urban
construction businesses’ objectives, in which, it is true, the company has expertise, but there
was room to improve and perform better. Even more, the Action Plan did not state how the
company would manage the equity shortage during the 30-month maturity cycle of the
upcoming building projects. Third, the 2016 Action Plan was incoherent in terms of
empowerment policies. The middle managers, who were already overwhelmed with the
predicament of focusing on the daily problems of the production and deploying technical
improvement projects, were not included in the formulation of the new strategy.

2016 Action Plan confused goals with strategy. For example, one of the four mega objectives
set in 2016 was:

We will achieve in 2022, a cumulative profit of CA$546 M with a minimum ROE of 15%.

As Rumelt says, this goal skipped over the fact that no one had a clue as to how to get there.
Every aspect of it 2016’s “blue sky objectives” lacked no explicit diagnosis, and there was no
hope of ever achieving the desired state of affairs, leaving the organization no better off.
51

7% loss of assets is not enough to explain the 2017 setback. Its roots must be traced back to
the Financial crisis of 2007–2008. In effect, CRH’s upper management was unable to read the
2009 paradigm shift and the threats the financial crisis conveyed to its niche of business.

Henceforth, a reputation of being a good builder and taking care of local politics and
commercial relations would not be enough to guarantee the leadership for the company. Truly,
in a globalized economy, the investments of international equity funds and partnerships with
Colombian economic groups became indispensable to keep the market share.

4.3.1 At the Business strategic level

A hindsight analysis reveals flaws in CRH business strategies in following aspects:

1. Strategic alliance: lack of “Due Diligence” of its international partner Tradeco.

2. Short term-oriented tactics: defending current products through reducing costs


strategies putting pressure on the human resources.

3. Favoring growth by the mere fact of growing, instead of innovating with products that
improved profitability.

4.3.2 At the Corporate strategic level

1. Lack of governability (Family protocol of accountability).

2. Shortage of Risk management policies: expanding in the North Shore without a prior
validation of its value proposal and proper assessment of its actual capabilities.

3. Lack of long-range vision of the rapid business models’ change.

4. Resistance to technological change (new business models like REITs)

4.3.3 The influence of the organizational culture

As we will see in the following chapter the McKinsey Benchmarking confirmed the findings
of the Strategic Survey launched in 2017, where the Strategic dimension of the business got a
3.67/5.0 score.
52

Staffers acknowledged that CRH’s best strategy is to defend current products by lowering
prices or improving services (both putting pressure on the human resources). Technology does
not have high relevance for upper management and the CRH OC mindset is based on tradition
and experience.

Planning is perceived as a non-fundamental and medium-term tool. Similarly, the analysis of


competition had no great significance.

The score of the Technology dimension, close to indifference, indicates a low


importance given to research and development −and to its influence in the
organization. This might also indicate low innovation levels, slow evolution,
and/or no differentiation in its range of products. The organization denotes a
market-oriented proactivity, with at least awareness of the need for innovation,
but with a predominant Aversion to change.(Munar,2008)

“Diversification” does not reduce risks per se in a firm whose division are highly
compartmentalized and do not share information, as is the case of CRH. On the contrary, the
Real Estate Divisions (Bogota, Medellin and Caribbean) and the Infrastructure Directors, eager
to prioritize their own initiatives, overestimated the returns and misjudge the risks. All relied
on the production unit negotiation capabilities to correct mistakes during the carry out of the
projects. In the Cerrejon Mine case the inadequate information flow, depending on the position
in the hierarchy and not on the importance of the process in the value chain, had an immediate
consequence: nor the CEO nor the Board of Directors had enough control of the business.

CRH OC tends to defend the status quo; therefore, the company is not open to disruptive
innovations, especially if they relate to adopting new business models. CRH organization up
to very recently— was prone to rear-view mirror thinking: the company tried to break through
the Financial Crisis 2007-2008 (in Colombia in 2009) with the same strategies it overcome the
Colombian SHC mortgages crisis of 1998, i.e. moving from the real estate to the infrastructure
sector. Once the crisis was overcome, CRH continued doing more of the same.

The shareholders have not understood that their businesses are no longer a matter of building
and maintaining a reputation as an excellent builder, but rather of doing it quickly and
acceptably well to respond to the financial returns needs of third-party investors. Instead, they
struggle with the predicament of being highly reliable and fast, and at the same time low-cost
and high quality.
53

CHAPTER 5

THE MCKINSEY BENCHMARKING STUDY OF PRODUCTIVITY OF THE


COLOMBIAN CONSTRUCTION SECTOR

5.1 McKinsey Benchmarking study of productivity and risks management of the


Colombian construction sector
This benchmarking, the first of its kind ever performed in the country, was promoted by the
Construction Chamber of Colombia and conducted by the consultant McKinsey Global
Institute (subsidiary of McKinsey & Company) at a cost of C$1.4 M. The report, delivered in
December 2017, revealed that CRH had just 47% adoption rate of best practices in the
comparable areas to international companies −−which implies a 20% gap.

A previous research (Munar, 2018) identified CRH’s organizational weaknesses for the
adoption of innovation. The McKinsey report highlighted the firm’s delay in adopting best
practices on almost all of the set of 6 international dimensions.

1. Supply Chain Management


2. Collaboration and Procurement
3. Architectural and Engineering
4. Onsite Construction
5. Technology
6. Training

McKinsey Benchmarking was a call to actions for shareholders who had an overvalued
perspective of CRH’s capabilities. In fact, it ranked 11th among the 14 companies of the study:

5.2 The company challenges


With regard to the profitability of the business, McKinsey found that the average Return on
Equity (ROE) of the 14 companies benchmarked was 15.0% and the best quartile 20.5%, while
the Coninsa Ramon H. S.A. was 13.4% in 2016 and 6.52% in 2017. Even more worrisome, as
McKinsey only included projects closed by 2016 the above data did not reckon the poor results
of North Shore projects in 2017.
54

Figure 13 Performance of CRH in each of the 6 International Dimensions


Taken from McKinsey Benchmarking of the urban construction industry in Colombia

In summary:

1. The company performs well in Supply Chain Management, Sales, Industrial Safety and
Risk Management,

2. It accomplishes acceptably in Onsite Construction Operations and Training and

3. It underachieves in Collaboration / Procurement, Architectural / Engineering and


Technology.

The low architectural performance is remarkably. The firm has not won any public design
competition since 2010 and the last third party private contract dates from 2015.The McKinsey
report created a sense of urgency in the company.

The McKinsey report confirmed previous recommendations to transform the short-term value
proposition based on reducing costs, into a long-term value proposition, based on innovation.
Insisting on defending current products implies the company’s product portfolio is doomed to
show no differentiation from competitors.
55

Figure 14 Adoption of best practices in the 6 International Dimensions


Taken from McKinsey Benchmarking of the urban construction industry in Colombia

Finally, McKinsey advises that there is room for increasing CRH performance by 10%, to
reach the national average, and by 20%, to be equal to the international industry average.
57

CHAPTER 6

THE DELOITTE PROJECT

6.1 The Deloitte improvement project


The company had never hired a consultant to advise on strategy. Until then the “strategies”
were designed by the board of directors, the CEO, family members or the operational and A&F
managers. CRH signed Deloitte Touche Tohmatsu Ltd (Deloitte) for an undisclosed amount
after the McKinsey Benchmarking and soon after the 2017 trial financial balance was ready.

The consultancy needs to answer following questions:

1. What is the level of development of organizational capacities?

2. Does the organization have “fat”, or where does it need leverage the potential of its
resources?

3. What are the opportunities and industry practices that we can implement?

4. What tangible benefits does change bring?

Deloitte conducted the improvement project in two phases. The first, with four steps, observed
how people worked prior to design the future operational model. The results of Phase I were
presented to the Presidency Committee on mid-December 2018. The socialisation of the
project among middle managers concluded in Mars-2019 and the socialisation among the
operational staffers is still on-going. The expected results are expected in a time frame of two
years.

PHASE I PHASE II

Understanting of
Planning of the Design of future Definition of a
current Implementation
project operative model route map
operative model

Figure 15 Management of the project


58

Figure 16 Deloitte Model of Organizational Analysis criteria and dimensions

Deloitte’s proposal consists of

Aligning the Model of business and [human] talent to enable the


strategy of Coninsa Ramon H. S.A., considering:

Component Analysis

Analysis of the instances of the governance, the decision-


1 Model of Governance
making and the structural organization.

Analysis of the opportunities of improvement of the processes:


2 Model of Operation
using leading practices, standardization and automation.

Model of the delivery The way in which the processes are executed to evaluate the
3
of the service cost and efficiency.

6.2 Model of Governance

Deloitte identified two different areas of work to strengthen its strategy:

1. Critical company decisions


2. Developing the capabilities (capacities) of the company

The Deloitte’s Capabilities Model (Annex III) results from the conjunction of:

1. Mission
2. Insight
3. Process
4. Technology
5. Talent
6. Integration.
59

Figure 17 Model of Governance (relation Critical Decisions and Capacities)

Deloitte proposed a capacities scheme of organization by networks, in order to assure the


necessary interactions and to improve its development and operation in the organization

Deloitte considered the main issues of the organization and proposed government instances
that ensure their proper functioning and development, guaranteeing the participation of the
chosen attendees to reach agreements and make relevant decisions.

6.2.1 Critical decision-making of the company

Deloitte proposes to adjust the governance and structural organization. The committees are re-
defined to respond to critical decision-making. There are two goals:

1. Simplify and strengthen existing government bodies


2. Improve interaction among areas, particularly to improve work by capacities

The roles of the participants are also re-defined. The primary group becomes a committee of
the Presidency. It includes three committees according with their work agenda: (1) Strategy,
(2) Technology, and (3) Human Talent. Another separate body is the (4) Business Structuring
Committee. The (5) Commercial Committee is strengthened by integrating the marketing and
60

sales issues. The governance is associated with these committees and the control of the
development of the projects and their results. The accountability relies on defining instances
of government that simplify decision-making and strengthen empowerment, within a known
framework.

6.2.1.1 Critical themes for the company

1. Strategic planning
2. Monitoring the businesses performance
3. Talent management
4. Technology
5. Structuring of new businesses
6. Commercial
7. Operational
All the instances will have a defined leader of the body, required decisions, policies, processes
(inputs and outputs), participants and frequency of the meetings.

6.2.1.2 Instances – Committees

The instance needs to ensure:

1. Effectivity of the decision-making


2. Optimization on time and number of meetings
3. Clarity of the agenda and critical decisions of the meeting

6.2.1.3 Participants

The participants must have clarity of:

1. The objectives
2. Their responsibility
3. Decisions required
4. Defined timing
61

6.2.2 Empowerment of capabilities

6.2.2.1 Key Capabilities

1. Reading the market and the client


2. Structuring new businesses
3. Building very well
4. Experience of the client as a value differentiator
5. Innovation

6.2.2.2 Key Interactions

Review the required roles and key interactions to ensure the transversal development of
capabilities:

1. Involve and hold people accountable in all the areas they intervene
2. Align all stakeholders with the objectives of the capability

6.3 Roles required


1. Leadership to ensure its development
2. Responsible for the decision-making and management
3. Specialists in the topic to be developed
4. Operational staffers for execution and documentation
5. Support for its habilitation

6.4 Model of Operation


Deloitte diagnosed that CRH works “with” processes but not “by” processes.

It covered two aspects:

1. Align performance management


2. Business Process Management
62

Deloitte recommendation covered the following actions:

1. Standardization of processes at the national level


2. Alignment with the strategic map
3. Enhance productivity
4. Assign responsible at national level

6.4.1 Align the Performance Management

The following changes look to align performance management:

1. Control the strategic cycle from start to finish


2. Definition of the strategy
3. Tracking the result
4. Intervention of the result and strengthening of the cycle of projections

Figure 18 Deloitte Model of Performance Management


63

6.4.2 Align Business Process Management

Deloitte asserted that the organization has been managing processes but has not been managed
by processes. Deloitte recommended to strengthen the Commercial, Structuring and Support
Cycles to better articulate better the strategy:

1. Definition of the processes of the company processes to manage the business objectives
transversally.
2. Define indicators and goals for the main cycles of the business and manage them
according to specific desired results of the cycle.
3. Define indicators and goals for the main business cycles
4. Take advantage of opportunities for standardization, automation, use of good practices
and consolidation.
5. Ensure the planning cycle from beginning to end, integrating the definition of the
strategy with the initiatives and actions, the measurement and the intervention to ensure
the result.
6. Articulate project management and continuous improvement with the management of
business performance.
7. Integrate risk management.

6.5 Model of the delivery of the service


Deloitte identified the critical issues to be aligned in four work fronts: (1) Strategy, (2)
Commercial, Strategic Units and (4) Support. Together they strengthen the business structuring
capacity and the commercial management process:

6.5.1 Strategy focus

1. Enable the strategic cycle from start to finish ... execute the strategy!
2. Standardize processes and sales force alignment nationally.
3. Integrate the Enterprise Resource Planning (EPR) information and take advantage of it
through advanced analytical tools.
4. Analyze the offer and the competitive position of CRH
5. Develop the prioritization model of initiatives and investments
64

6. Standardize the design and structuring of businesses.


7. Integrate the different systems and ensure their standardized use throughout all the
business units.
8. Strengthen the behaviors that reinforce the client's experience and the development of
the organizational capacities
9. Strengthen the government of financial, culture, legal and IT decisions

10.
11. Figure 19 Deloitte Model of Delivery of the Service
12. From Deloitte report (December 2018)

6.5.2 Commercial focus

1. The commercial processes are unified to lead the capacity of “Adequate reading of the
market and the client" and the "Customer experience as a value differentiator"
2. Also, “Leadership of project management” and the “Structuring capability of real estate
businesses” will be unified.
3. Specialize the commercial role whose responsibility is the effective commercialization
of the portfolio of solutions of the Strategic Business Unit (SBU) Real Estate
Developments (RED) strengthening cross-selling opportunities.
65

4. Responsible for aligning marketing issues, customer experience and market reading,
with the sales strategies of the business teams.
5. For decision making, it proposes the creation of a Commercial Committee —led by the
Presidency— which will follow-up the SBU’s results and the whole as well.
6. The measurement of the result and the incentives must be aligned with the indicators
associated with the business result (Income Growth, EBIT, project profitability.

6.5.3 Strategic Business Units focus

The strategic business units are responsible for:

1. The identification and structuring of new projects / portfolio management based on


market reading and understanding of customer needs.
2. The definition of the strategy and the target market
3. The management of the operation in alignment with the strategic and commercial
definitions ensuring the efficiency and control of the operation

6.6 Opportunities of improvement


Deloitte found the following opportunities of improvement:

Tableau 1 S Opportunities of improvement according with Deloitte's criteria and dimensions


1. Strategy • Manage the strategic cycle to enable the execution of the strategy and
alignment with the fulfillment of financial goals to develop the long-
term goals of the company.
• Incorporate formal projection and follow-up schemes
• Incorporate goals and milestones in the face of capacity development.
2. Structure and • Define the roles and responsibilities in the processes for the definition
Organization and execution of the company strategy aligned with the defined
business model.
3. Processes • Update and document the processes of definition of the CRH strategy,
monitoring and its execution, and the intervention and alignment to
ensure the achievement of the goals and strategic objectives as well as
for the development of the capacities
4. Technology • Use of analytical tools for the projection and analysis of business
scenarios
5. Information • Align the indicators with respect to the measurement to strengthen the
analysis and intervention against the execution of the strategy.
66

6.7 Innovation
The objective of the innovation is to promote and strengthen the appropriation of innovation
methodologies in the company, ensuring the development of the initiatives and their alignment
with the corporate strategy. In this way, its strengthening will have an impact on:

1. Business units and the way in which they operate


2. Relation with the customer
3. Reading of the market and the client
4. Forms, processes and construction tools
5. Optimization of support processes

6.8 Keys of success


1. Participation and commitment of all the members of the Primary Committee in their
different roles,
2. Communication and openness of all to understand the changes in the presidency control
section, the government and operation schemes
3. Openness to understand the changes that are suggested in the model, what is expected
of it, and give it life with the implementation.
4. Active participation in new or redefined government instances, and in the assurance of
process cycles.
5. Measure the result, and take realignment actions if the goal is not achieved (culture
change)
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CHAPTER 7

THE STRUCTURAL REORGANIZATION

7.1 New positions in the organizational chart


Deloitte proposes the creation of a Business Division in the company. These are the new
instances of governance (positions) in the structural organization of the company:

1. Commercial Chief Officer

2. Commercial and Customer Experience National Manager

3. Real Estate Development National Manager

7.1.1 Commercial Chief Officer

So far, the business division managers have been led by the CEO, whose specialty is civil
engineering and finance. He oversees 19 officials nationwide.

The Commercial Chief Officer (CCO), whose profile would be purely commercial with
specialization in marketing, will supervise the new positions of National Managers of the
Divisions of Real Estate Development (RED) and Commercial and Customer Experience.
Through them the CCO will supervise the following Strategic Business Units:

1. Real Estate for Rental (RER),

2. Real Estate Development ((RED)

3. Public Private Contracts (PPC).

So far, these divisions have seven managers in the three branches, who interacte in
uncoordinated way with the Corporate Support Units (Architecture, Marketing, Sales and
After-Sales).

Additionally, the Architectural Workshop, which reports to the Operations Division (on
technical matters) will also report to the CCO.
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7.1.2 National Manager of the Divisions of Real Estate Development (RED)

1. Identify and structure new projects and manage their portfolio based on the market
reading and understanding of the client's needs.

2. Standardize national processes and take advantage of best practices

3. Manage the operation of the projects in alignment with the strategic and long-term
definitions, ensuring their efficiency and control

7.1.3 Commercial and Customer Experience National Manager

1. Align market reading and customer experience, ensuring comprehensive product


definition and marketing and sales strategies.

2. Specialize the commercial role whose responsibility is the effective sale of the
portfolio.

3. Consolidate all marketing issues of the BSUs, Real State for Rent (RER), and Public
Private Contracts (PPC), architecture and corporate.

4. Guarantee, jointly, the appropriate synergy between Real Estate Development (RED)
and Real Estate for Rental (RSR).

5. Standardize national processes and take advantage of best practices

7.2 New structural organization chart


The following graphics shows the existing structural organization chart against the desired one.
CRH has not hired the Key staffers proposed, and has not appointed anyone for the position
of National Operation Officer, which remains vacant since July 2017.

7.3 Strategic Business Plan and Value Chain and main processes
The proposed structural organization will reflect on a new Strategic Business Map. This 2018
version is much more elaborated than the 2016’s version that showed the Value Chain and the
2011’s version which had a functional approach.
69

Figure 20 Coninsa Ramon H. S.A. Structural Organization proposed by Deloitte (December 2018)
70

Figure 21 BPMS Value Chain and Process Map Strategic Real Estate and Public Private Contract Divisions (Dec-2019)
71

Figure 22 20 BPMS Value Chain and Process Map Strategic Real Estate Division (July-2016)
73

CHAPTER 8

FIELD WORK RESEARCH TOOLS

8.1 Grounded Theory


The Constructon Unit of CRH has a great interest in making an accurate forecast model for the
projects the company tenders or undertakes. The Construction Managers must report each
month their estimation for the completion time of the projects they supervise. So far, no tool
exists to correlate the accuracy of the forecasts. It should be possible to develop a model for
each director, which in turn would serve to build a large matrix model for the accuracy of CRH
forecasts. This way the company would have a holistic model of its capacity performance. This
would be a great help, during the bidding and posterior feedback, to evaluate the scope of the
commitments against its true production capacity. The researcher considers that the data stored
in the CRH ERP since 2014 (which have not been exploited, so far), and those data generated
in the future, are ideal for applying the principles of Grounded Theory to a practical
investigation linking the making-decision process with performance.

Housing projects’ life cycle have a duration between 30-34 months. Companies can increase
or decrease the speed of production, but cannot stop, because they risk losses of market share,
expertise of employees and reputation —due to the sad aspect of the abandoned works.
Following the Benchmarking developed by McKinsey, the company adopted benchmarks to
measure production of both social housing (condos per day delivery and others) and non-social
housing; nevertheless, the statistics are cold because there is no information as to why the speed
went up or down at a certain moment; that is, the outcomes of the projects are not linked to the
context of the performance of the product in the market or the evolution of the macroeconomic
aspects of the sector. For example, if sales speed goes down, production must also go down so
that the company does not have to manage inventories. Another example, even if the demand
for social housing is good, at the end of the year companies delay the closing of sales so that
the price, which is tied to the legal minimum wage, will be reckoned with that of the following
year. Conversely, the construction of social housing is a market regulated by the government
and the delivery of projects is celebrated as an achievement by the local and national
74

governments. That is, there is a great political pressure to execute them in the shortest possible
time. Failure in a public contract implies closing the doors of the sector for five years. What is
the middle point? A good macroeconomic example is the close relationship between the
Government bonds rate and the housing demand. If the former increases on 1% the latter
decreases by 6%. At the market scale such relations can be inferred from variables such as the
minimal wage, the price of the cement and the steel, etc.

8.2 Complex Adaptive Systems


The researcher will use a Complex Adaptive Systems Model (CAS) to map the current CRH
upper management communication patterns and power relationships and the changes
introduced after the implementation of the new instances of governance of the Deloitte project.

We have seen that the decision-making process in Coninsa Ramón H. SA does not always obey
the objective needs of the market. For example, the “unreasonable” donations to Catholic
NGOs in a moment where the company needed to gain financial leverage. A paramount
example is the financial failure of the Cerrejón Mine in 2011. In that contract, it would have
been enough to stop the works (or threaten to stop the works) and reimburse the insurer for the
payment of the penalties. Failure to enforce a contract between private companies in a remote
corner of the country would not have affected Coninsa S.A.’s reputation. Moreover, if they had
stopped the works, they would have gained bargaining power. However, the shareholders
preferred to comply and maintain an image of “good contractors”, forgetting that, in the end,
this was just another business.

On the other hand, the assets of CRH have very low turnover. The partners of the company
have interests in other GCA companies whose margins exceed 12%. Can one wonder why they
continue in business despite recent losses? The answer must be sought in the social role the
owners feel they embody, which demands they not only perform in the entrepreneurial
endeavours, but also create and keep jobs.

8.3 The Operational Excellence and the Shingo Model


After the departure of the ex-Vice President of Operations, Mr. Yhony Vanegas, the
Operational Excellency project was renamed "Construir Bien" (Build well) and the Shingo
Model was abandoned.
75

CONCLUSION

The competitive forces acting in the Colombian urban construction sector

The Colombian urban construction industry sector presents few barriers to new entrants,
especially after the Financial Crisis 2007-2008. The new players, Colombian economic groups
(Grupo Aval, Santo Domingo, GCA and Grupo Bolivar), North American equity funds (Equity
International, Cadillac Fairview and PSP Investment), a Canadian bank (Scotiabank) and a
French contractor (Vinci Construction) exerted acquisition strategies that changed the sector’s
business model, from medium-scale, family owned businesses to large-scale companies, who
can mobilize significant resources, and build megaprojects, i.e. “cities within cities”.

Grupo Aval, the biggest of the country, listed stock on the NYSE and is in the midst of a
corruption scandal with the Brazilian Odebrecht, while its subsidiary Terranum SA had a
setback due to improper due diligence and conflict of interests. Grupo Bolivar financed with a
local IPO and buyouts (cash-outs), selling its bank’s offices through securitization, and signing
a 20-year lease. Conconcreto S.A. set a local IPO first and then recapitalized (cash-in) with the
French Vinci Construction. Several companies (Marval S.A., Conconcreto, Amarilo and
Constructora Colpatria) went on to export services to Honduras, Panama, Peru, Uruguay,
Ecuador, Brazil and Mexico. The success of Marval S.A., the leader in social housing despite
accumulating hundreds of quality claims, is attributable to its political lobby. The economic
groups deployed strategic alliances of verticalization: (1) Cement companies such as Cemex,
entered social housing; Argos holding (GCA) allied with Conconcreto S.A; and (2) the retailer
Exito and an equity fund of Bancolombia (GCA) created Viva Malls. This strategy aimed the
objective of turning the relevant target companies’ portfolio around, with sophisticated
financial engineering (REITs). Amarilo SAS’s success consisted in thinking big, and actually
developing its strategy with adequate financial leverage to which family-owned companies
would not have access. Also, the company wielded relational strategies with more than a
dozen construction firms while making substantial donations to political campaigns, unlocking
the target’s growth potential.

Amarilo SAS —urban sector leader— and Conconcreto S.A. —leading engineering
contractor— were established family-owned firms with experience managing FDI. After the
76

acquisitions, the original owners retained a majority stake and the CEO positions, surely due,
to their political and business connexons. Turnarounds sought by the globalization strategy
were providing capital for growth and instilling best management and governance practices:
(1) Attracting new clients, (2) Business sophistication, (3) Improvement in the accounting and
financial practices, (4) Credibility and prestige and (5) Professional Board of Directors. Both
companies had been sanctioned for anticompetitive practices and antitrust non-compliance.

Finally, it was observed that the entrepreneurs’ motivations are not always objective. Indeed,
bank tycoon Sarmiento Angulo (now 86-years-old) re-entered real estate —Sarmiento Angulo
Business Citadel— with the tacit that desire his name endure in the Bogota D.C. toponymy.

Coninsa Ramon H. S.A. strategy flaws

The literature review attributes family business organizational structure failures to two main
factors: (1) Favouritism: expressed in the promotion of family members to decision-making
positions, based on the family ties instead of meritocracy, and (2) Lack of governance:
observed in the disparity, often contradictory and more numerous set of objectives of the
companies.

In the case of the Cerrejón Mine none of the internal audit “fuses” (cost control and scheduling)
“jumped” in time because they were overcome by the enormous informal power of the project
manager, a family member whose accountability was, to say the least, poorly defined. In fact,
after such huge setback, he continued in the company and would merely be “relegated” to an
administrative post in the worksite of Hidroituango dam.

While CRH donated over 10% of its profit to Catholic charities in 2015 and 2016 (to the
detriment of the business priorities), Urbansa contributed to the center-right candidate political
campaign and did not make any other donation —Urbansa increased revenues in between 2015
and 2016 by 71%. The fact that Urbansa CEO is also an industrial partner aligns the company’s
objectives with the commercials’ objectives of the sector giving the company a professional
management style. This distinguishes Urbansa from the paternalist and authoritarian style of
CRH attached to traditional values and predominance of experience over innovation. In
general, Urbansa S.A. is more prone to enter in Strategic Alliances than CR, partially due to
77

its target is Bogota DC (which accounts for 45% of the national market) and the business
connections of its CEO, who is a also member of the board of directors of a SHC bank.

In the aftermath of 2007-2008 Financial Crisis, larger companies, like Conconcreto SA, and
smaller, like Amarilo SAS, sought diligent financing in the stock market or injection of Foreign
Direct Investment (FDI). Those companies which went public did it successfully —all without
exception are in the PPP sector. CRH, which has a significant stake in a profitable PPP (Aburra
Tunnel), could well have gone public, in 2009, as soon as the concession started. Not only did
this not happen; it was never considered. CRH assumed that they would circumvent the crisis
the same way they did with the 1998 financial crisis in mortgages. CRH upper management
did not anticipated that the business would never be the same again.

Finally, is must be emphasized that Urbansa SA has been CRH’s “lifeboat” during the past five
years. However, there was a limit. After transferring funds over C$30 M, Urbansa SA itself
has ended up short of cash: its revenue falling by 70% in 2017.

Traditional Medellin real estate and construction firms (CRH and A.I.A. SA) saw how their
best client, the Group of Companies of Antioquia, turned into their biggest competitor.

Concluding thoughts: Governance, Decision-making and Complex Adaptive Systems

From a Complex Adaptive Systems (CAS) perspective, the Deloitte project had the intentional
23
goal of engaging with Complexity [Adami, C. (2002) Mitchell, 2009)]. CRH's current
problems are complex. The 2007-2008 Financial Crisis paradigm shift put Colombia on the
map of emerging countries; thus, international equity funds now target its real estate industry.
Before the paradigm change, the problems, although challenging, were simple enough to be
solved through the wisdom and relationships of the founders.

Established companies, uneasy with uncertainty, often postpone the decision to commit to new
business models until they know all the options available. This is how decisions are usually

23
"Complexity is so general a term that it seems to mean something different to everyone." General agreement,
however, exists that complex systems involve "many simple parts [that] are irreducibly entwined." These parts,
or agents, interact in ways that give rise to "evolutionary processes and often surprising 'emergent' behaviors
[Adami, C. (2002) Mitchell, 2009)],
78

made, with endless lists of pros and cons which staffers rigorously analyze to reach a
conclusion. The issue with this traditional decision-making process is that is not possible (or it
is impractical) to gather all the information. Consequently, any strategic change project needs
first to trigger a cultural change that enables good, self-motivated, “Just do It” leaders to go
through the challenge of the implementation of new decision-making processes with a sound
strategic vision and a strong tolerance for ambiguity.

The five CAS attributes — (1) networks, (2) emergence, (3) self-organization and social
coordination, (4) feedback sensitivity, and (5) agility— are a means for leaders of observing,
understanding, and interacting with change and ambiguity.

If CRH embraces the past five years' failures, they may recognize the actions that lead to
emergence occurring and figure out its own conceptual framework of self-organization and
adaptation at the agent interactions level. A greater awareness of the interactions with the
environment will increase the sensitivity to feedback and eventually, fuel powerful networks
inside and outside leading to innovation.

The most valuable contribution of Deloitte project is the identifying the vertical division of
core cycles of the company: Strategic, Commercial, Business and Support (productivity). For
now, Deloitte focuses on developing the firm’s capabilities24 and minimizing the existing “silo
effect”, with the creation of new interdisciplinary decision bodies: The Strategy, Technology,
Human Talent, Business Structuring and Commercial Committees. This is a first step towards
unlocking innovation.

The role of emergence is to have ideas and concepts arise organically, driven by those who are
closest to the pressures of change. Most breakthrough innovations don't happen out of the
blue. Instead, they develop from existing ideas that collide with other ideas over the course of
time. In this stage, transformational leadership must allocate resources to specific operative
innovations (responses to a problem) to scale them in the organization.

24
Deloitte’s Capabilities Model results from the conjunction of: (1) Mission, (2) Insight, (3) Process, (4)
Technology, (5) Talent and (6) Integration.
79

Facing the need for greater innovation, CRH should also consider moving away from four-year
strategic plans, to encourage greater emergence and agility, and to push their teams beyond a
typical checklist. The concept started at Intel and Google, with the purpose of challenging
teams to focus less on the question "What are we capable of doing this year?" and more on
the question "Where do we want to go?" (Siemens & Dawson, 2018)

Why Coninsa Ramon H. S.A. and Amarilo SAS created a company beginning 2005 only to
liquidate it after three months? The researcher thinks it was about differences of values and not
of disagreements of commercial objectives. Thus, concerning the means to achieve such
objectives. Amarilo SAS was a rising star, with less to lose than CRH, and a different
perception of the admissible risk. Is Amarilo’s CEO a shrewd leader whose expertise led him
to anticipate the effect of the crisis? Reason-based decisions are not enough to explain success.
It is often convoyed by other elements such as trial and error, test, get results, interpret and
adjust the course. Most likely, from a CAS perspective, when the crisis came, Amarilo SAS
organization was in tune with the market, saw a business opportunity and took advantage of it.

Decision making is, like human situations, a complex discipline that does not admit absolute
answers. Managing an 1800-employee company and being faithful to CRH shareholders’
Catholic principles, is not easy. It implies giving up profitable business, in some cases, to make
the most convenient decision for the company and the owners’ families. The Deloitte project
cannot guarantee a CRH transition to the third generation; in fact, firms this size can survive
years in a slow agony before filing bankruptcy. Rather, the project consists of (1) creating the
conditions for these strategies to emerge and (2) strengthening the decision-making processes
so that CRH does not postpone the fundamental decisions needed to unlock those strategies.

Among those fundamental decisions should be: A) Promoting a generational change in the
Board of Directors, increasing the number of independent members, and B) Hiring a CCO
outside of the owner families, who brings expertise from competing companies.

CRH has not prepared the path for the CEO succession, despite Hoyos Jr.'s imminent
mandatory retirement in late 2020. CRH shareholders might consider nominating candidates
by meritocracy, even though this means bringing in someone outside of the owner families.
81

ANNEX I

Real Estate Investment Trust (REIT) Business Model

1. A Developer and the final user (the Customer) elaborate the feasibility project and
Due Diligence

2. The Developer executes (or hires third-party AEC companies to execute) the
architectural and basic engineering designs.

3. The Private Equity Fund evaluates the feasibility of the project.

4. The Developer buys the land and consigns it to a trust company.

5. The Trustee will henceforth be the spokesperson for the trust.

6. The Developer (or the AE company) executes the engineering designs and obtains the
construction licenses and permits on behalf of the Trust.

7. The Investment Fund provides the Trust with equity.

8. The Trustee collects the capital from individuals who buy shares of the Trust.

9. The Trustee hires a General Contractor, which could be the Developer or a third-party
construction company.

10. Once the equilibrium point is reached, the fiduciary (Trustee) delivers the resources
to the General Contractor against delivery of the work executed.

11. In the end, when the physical work is finished, the facilities will constitute an
autonomous patrimony, administered by the Trustee.

12. The Developer provides management, development, marketing and administration


services, like lease of properties, brokerage, maintenance, etc.
13. The Trustee is in charge of distributing to the investors (including the investment fund)
the profits derived from the exploitation of the properties of the Trust.
83
85

ANNEX II

The Ambition Matrix of Deloitte

Figure 23 The Ambition Matrix of Deloitte


87

ANNEX III

Deloitte Capabilities Development Model

Figure 24 Deloitte Capabilities Development Model


89

LIST OF BIBLIOGRAPHICAL REFERENCES


91

1
Robert K. Yin: 1994, Case Study Research. Design and Methods (Second edition. Thousand
Oaks: Sage) By
2
The Discovery of Grounded Theory Strategies for Qualitative Research Barney G. Glaser
and Anselm L, Strauss
3
Porter, M. (1982). Choix strategiques et concurrence. Paris: Economica.

4 Porter, M. (1987). From competitive advantage to corporate strategy. Harvard Business


Review, 65(3), 4359.
5
Earl Babbie (2011) The Basics of Social Research, Fifth Edition
6
Lafley, A.G. & Martin, L. (2013). “Playing to win : how strategy really works”. Harvard
Business Review Press