LAFARGE

International Strategy & Management

Case 3 - 2014/11/18

Marina Cossou
Kevin Sedbon
Xiaoyou Wu
Sabrina Wee
Aljoscha Ziller

AGENDA

Case Overview

Globalization for Lafarge

Lafarges strategy

Lafarges structure

Lafarge way

Role of organizational culture and heritage

Management of the change process

Role of best practices

Factors of growth in emerging markets

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Analysis of the merger from an analysts point of view

Lafarge Case

CASE OVERVIEW

Global
Footprint

Starting as a local French player, Lafarge is

today the world leader in construction
materials and is present in 75 countries

Rapid
Growth

Increasing Sales and probability over the

last 5 years (1997 6,413 Mio; 2002 14,61
Mio)

Global
Acquisition
Strategy

Heavy investments in newly industrialized

countries such as Turkey, Morocco, Eastern
Europe, Brazil and many more)
Lafarge acquires local cement producers to
enter the respective markets

Cement
industry has
particular
specialties

Demand is determined by Business cycles

lower prices will not increase Sales
(inelastic demand)
High fix cost (more than 50% of total
production cost) high break even point
Competition occurs on local level due to
high transportation cost
Market is dominated by the six sisters of
cement

Lafarge has been growing at a alarming rate. It has successfully achieved its vision of becoming the number
one firm in the construction industry. However, there is still a long way to go and several questions remain:
How do you manage a global company like this that used to be a small French player? How do you integrate
acquisitions? Is the growth sustainable? How can the international change process be sustained?
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Lafarge Case

GLOBAL CEMENT INDUSTRY PEST ANALYSIS

Political

Economic

In some countries
the government has
an influence in
determining the price
Government
spending affects the
amount of houses
built and hereby also
the demand for
cement

The demand for new

buildings is
increasing
continuously
The amount of
infrastructure
projects across
industries is
increasing
Competition works
on another level since
competition is faced
on a local level

Social
A house is one of the
most important need
of a human being
It is also an
important status
symbol
Due to the higher
automation labor
cost is reduced and
people were laid of

Technological
The industry is
highly dependent on
technology
Energy consumption
is one of the major
costs in producing

Overall, the cement industry is affected by several drivers. Lafarge has to manage several stakeholders
effectively. The industry is attractive but has a high impact on the daily life of people. Lafarge should focus
on its stakeholder engagement and manage its transformation to a global leader very carefully.

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Lafarge Case

GLOBALIZATION FOR LAFARGE

For Lafarge, globalization means to be present in every strategic market by acquiring one or more of the local
cement producers.

FACTORS AFFECTING GLOBALIZATION

1. Local
production and
competition

2. Small number of
cement firms
control the market
3. Investment in
newly
industrialized
countries

Cement is produced locally

Production requires huge captive investment
High fixed costs with little cost of labor due to automation and high cost but high cost of
energy consumption
Due to high transportation cost the sphere of business is within the radius of 150 300 km
Competition is faced on a local level and is based on head to head market confrontation
High concentration in the cement industry with a few multi-plant firms
Competition occurs on a multi-point and multi-market level.
Mature markets are saturated. To achieve sustainable growth newly industrialized countries
are being targeted
Recession in mature markets increases the pressure of entering other markets
Differences in working cultures, languages and mindsets need to be managed

1. Profits are sensitive to the level of utilization of the production capacity. Lafarge should manage to run its plants at
a high capacity rate with high efficiency. Since competition is local, price cuts can be spotted easily. Lafarge
should focus on price rebates regarding Sales volume to gain market share
2. Competition occurs on a multi point and multi market level. Lafarge should focus on establishing key locations by
acquisitions since this is the easiest access at the lowest cost. Fewer players mean that the prices tend to rise.
3. In terms of method of growing the markets have become global (competitors follow similar strategies), however
local consumer tastes are diverse. Lafarge needs to integrate the acquired companies fast and make sure to have a
global workforce that shares the culture of the firm but I also aware of the local customs
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Lafarge Case

GROWING BY ACQUISITION

A capital
intensive
business

Expanding current operations means creating new facilities which is capital intensive
Acquiring an existing player avoids greenfield costly procedures
Refurbishing and modernizing existing plants is less costly than creating one from
scratch

An industry
imperative

It is difficult to geographically extend operations of one facility

Transportation costs prevent cement to be sold further than 150-250 km from the
cement plant; it is difficult and costly to stock and have inventories
As price of cement is proportional to transportation costs, extending operations of a
certain facility would lead to a decrease of competitive advantages

A trend
imperative

Small nationals and local family players tend to be acquired by biggest ones. To stay in
the game, one has to follow the trend
The only way to compete is by quantity and not price as price policy is uniform across
competitors and product is undifferentiated Acquisitions make good business sense
Mature markets and global economy trends makes it vital to grow in foreign countries

A move in tune
with Lafarge
actual strategy

Objective of the firm : to improve performance of existing operations (divestiture of

specialty materials, question about divesting from roofing operations)
Acquisition can be a good lever to expand operations, add new products within existing
Lafarge divisions, benefit from knowledge from competitors (e.g. Redland acquisition)
Consumers tastes vary throughout the world: acquiring local foreign firm gives access to
market expertise

There are three ways to grow: expansion, takeovers, or greenfield opportunities. Taking into account the
issue of competing with price and the industry specificities as well as the trend in the market and Lafarge
strategy, the best solution for the company is to grow by acquisition.

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Lafarge Case

IMPERATIVE OF GROWTH & VALUE CREATION

A trend in the industry, small players were acquired

by other players who started to grow by acquisitions
Not growing implies being unable to compete with
bigger players and eventually being acquired
Markets have become global yet in the building
material business markets are inherently local
To stay in the head of the game, one has no choice
but to grow

A cement facility can only cater for the needs of an

area within 100-250 km of the production site and
transportation costs are excessive
If another competitors facility is within our own
facility range, the only way to be profitable is to grow
elsewhere
Low inventories is another parameters explaining the
necessity to grow. As it is impossible to stock cement,
one needs to use all ways to sell its production.
Growing is a good option to succeed

HOW IS VALUE CREATED VIA GROWTH

?
Growth can be a good opportunity
to create synergies
Acquiring existing firms enables to acquire
knowledge and expertise, expand the range of
products, pool out resources and management
competencies
By growing through acquisition you can leverage on
knowledge to better the quality of your product, thus
creating value
Growing can help a firm offer price rebates to buyers
and expand market share
Growing can help a firm enhance its core competency
and thus participate to creating value
Growing might comes with settling in new market,
thus creating value for local buyers who might not have
access to the resources or products offered by a
company prior to its instalment in the country

Industry specificities and stakes make it necessary to grow (fear of being acquired, limitations of one
production sites to cater the needs of a whole region). By offering the possibility to gain from synergies, to
better products and competencies and settle in new areas, value is created via growth process.

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Lafarge Case

LAFARGES ORGANIZATIONAL STRUCTURE

Organization after restructuring (1999)

Direction Generale

Cement Division

Aggregate &
Concrete Division

Operational staff

Divisional staff

8 regions

Roofing division

Gypsum division

No business
division
separation
before 1999

A multi-dimensional matrix structure focused on regions and product divisions

In 1999, Lafarge decided to implement some changes in its organizational structure in order to follow on its
global strategy. Its structural management among its business divisions and regions provided more
decentralization to support its organic growth and acquisitions.

IS LAFARGE NEW STRUCTURE EFFECTIVE TO

SUPPORT ITS GROWTH STRATEGY?

A global strategy of growth must be supported by an adequate organizational structure

Separation of the
4 divisions by
regions and
products

Lafarges objective to fully integrate its worldwide operations can be better

achieved as its easier to focus on one region of the world and a type of product
=> gaining more expertise
As Lafarge business drastically expanded over the last years through a strategy
of acquisitions, its important to separate the divisions to differentiate the
products.

Creation of
business unit
manager
responsible for
EVA

Employees empowerment is key to improve local responsiveness and, therefore,

increasing the probability to acquire new businesses in emerging and mature
markets => consumer taste vary throughout the world.
Each unit is responsible for its own assets and returns, allowing each business
unit manager to focus and improve its own performance.

Developing a
common
language The
Lafarge way

Necessity to acquire a professional culture to fit the growth strategy as Lafarge was
originally a family business based on personal and informal relations.
Reducing uncertainty and providing clarifications about the groups strategy and
objectives for everyone => as a group grows, clear guidelines have to be defined to have
all employees on the same page.

Overall, Lafarges new organizational structure has been successful to support its growth strategy by
acquisitions as it provided more delegation and empowerment to its managers in order to have a better
understanding of the local markets, which facilitated global integration.

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Lafarge Case

HOW CAN LAFARGE REALIZE THE FULL BENEFITS

OF ITS ORGANIZATIONAL STRUCTURE

LESS TOP-DOWN
APPROACH
Although the organization
is flatter with divisional
stuff and lots of efforts
have been made, most of
the decisions are still
taken by the Direction
Gnrale.
Business unit managers
should be more
empowered to take
decision as the taste is
different across countries.

ADDING MORE
INDICATORS TO
MEASURE
PERFORMANCE AND
EFFICIENCY
This indicator forces
business unit managers to
only focus on their
performance to get
bonuses, whereas Lafarge
operates LT investments.
Its an absolute measure
and cannot be compared
between between business
units.
EVA should not be the
sole indicator => balance
scorecard are good
indicators and measure
more than performance

A TEAM DEDICATED TO
THE INTERNAL CHANGE
This organizational
change has been quite
violent for employees as it
changed the groups
mindset from a family to a
global business.
A team should be
dedicated to help
employees to face this
change of culture and to
respond to their problems
or misunderstanding on
the ongoing process.

Although a new organizational structure has been implemented and seems to be successful, the Group still
has to make some efforts to realize the full benefits: having less power concentration at the top, adding
more indicators and supporting its employees with this change of culture.

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Lafarge Case

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LAFARGES OVERALL STRATEGY, POA AND WAY

Strategy: Keep growing and growing profitably3

3 Goals from Strategy: (1) double sales within 10 years; (2) grow more rapidly than competitors;
(3) integrate acquired units as quickly as possible
Principles of Action
- Responsibilities drawn up:
1) By striving to anticipate and meet customers
needs, Lafarge tries to develop differentiation in its
products (when possible) via approximation to clients
and identifying their special needs. Hence, Lafarge
attempts to add value to customer that can lead to
higher prices and establish customer loyalty in the
long run, ultimately impacting goals (1) and (2)
directly.
2) In making the employees the heart of the company,
Lafarge establishes excellent HR management policies
and practices. Culturally established HR practices are
a source of competitive advantage that are hard to be
obtained and once acquired, difficult to duplicate
(Som) Thus giving Lafarge an edge over their
competitors and aiding in goals (2) and (3) directly
3) The emphasis Lafarge places on gaining from the
companys diversity helps achieve goal (3) directly.

The Lafarge Way a management model

(1) An organised and coherent Group, with shared
values and clear strategies, well defined
procedures, systems and rules - It helps strengthen
Lafarges corporate culture, hence fostering and
employees loyalty and impacting goal (3) directly.
(2) Confident in a decentralized and participative
management process - By decentralizing
responsibilities and encouraging personal initiative, it
fosters a sense of involvement in employees and
directly impacts goal (3). Additionally, decentralizing
allows localization and thus adjustments to local
customers needs. This helps establish customer
loyalty and adds value to the customer, hence
impacting goal (1) directly.
(3) With managers who lead by example, take
initiatives and who want to contribute to the
overall success of the group -Good support and
direction from management encourages faster
integration of employees, hence impacting goal (3)

Aspects of both the Principle of Action and The Lafarge Way affect directly and indirectly the goals set by
Lafarge. In achieving these goals, Lafarge ultimately keeps to its strategy, hence both the POA and the
Lafarge Way is in line with Lafarges overall business strategy.

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Lafarge Case

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MANAGING A GLOBAL CORPORATION THE ROLE OF ORGANIZATION CULTURE AND

ADMINISTRATIVE HERITAGE
Organizational Culture
how things ought to be
National cultural roots partly determine a
global corporations culture : Corporation
needs to understand the cultures of the
different nations where it operates and learn
when and how to adapt to those cultures
Effective integration of geographically
dispersed operations requires an
international mindset.: Use of expatriation or
international assignments to ensure proper
knowledge exchange of culture
Assimilating organizational culture: A push
to assimilate organizational culture may be
tolerated but the acquirer organization should
be sensitive about pushing organizational
practices that have national cultural roots
The 3 Cs of Culture: In assimilating
organizational culture, corporation should keep
in mind to be clear, consistent, and
comprehensive

Administrative Heritage
how things ought to be done
Definition: The key routines developed by the
firm since its inception. Administrative Heritage
can also be influenced by national culture.
Four archetypes of administrative heritage
that is associated with a specific routine of
international firm specific advantage (FSA)
transfer: Centralized exporter, international
projector, International Coordinator, multicentered MNE. By identifying its natural or
desired archetype, the global corporation can be
more aware of the possible pitfalls when
transferring FSA.
For a successful transfer of knowledge for a
global corporation: The global corporation
requires a historical emphasis on knowledge
creation, minimal differences of values and
practices of founders and senior managers, and
proper processes, systems and support
infrastructure to facilitate creation of
knowledge.

Lafarges archetype of administrative heritage is the multi-centered MNE. Given the nature of the cement
industry, the archetype makes sense for Lafarge, allowing Lafarge to encourage the exchange of best
practices while giving its operating units a high degree of autonomy.

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Lafarge Case

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AN ANALYSTS STANDPOINT: LAFARGEHOLCIM

Benefits

Worlds biggest Cement Company provides economy of scale and scope

Operational Synergy Imperative: (Estimated synergy: 1bn) Cost
savings in areas such as logistics, distribution, IT, energy consumption,
procurement, maintenance and general administration
Synergy Imperative: Synergy of Lafarges technical know-how and
Holcims marketing. Geographical complementary in portfolios lead to
balanced and diversified geographical portfolios(60% emerging markets,
40% developed markets, with <10% in any market)
Financial Strength Imperative: (Estimated combined revenues :
31.6bn; EBITDA: 6.4bn, Estimated Financing Synerg: 0.4b ) Lower
borrowing costs strengthens Lafarge currently weak financial position.
Cash from assets sold off can strength financial structure

Challenges

Industry Outlook: US and Europe markets are still down.

Possible loss of income from divestments: Need to sell off assets
(divestments) to meet certain government regulations
Organizational Culture: For Lafarge employees, the shift from being a
French national champion to an European MNC might affect employees
performance, which will eventually affect the companys performance. For
the both firms, there will be a need to find a way to share both firms
culture.

Although LafargeHolcim had painted a rosy picture of their merger and had backed it with figures and a
brief roll-out strategy for their merger, there is still the question of how well the organizational fit would be
between the two companies, an important factor that has caused many mergers to fail. Additionally,
another sources of concern would be that the realization of cost synergies might not necessarily materialize
without the right implementation.
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Lafarge Case

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INTERNAL CHANGE PROCESS

Organizational restructure:

clarification, simplification and formalization of Group policy

in finance, human resources, R&D, corporate communication, environment, information systems,
purchasing and marketing.

Integrate worldwide operations

Long range planning
Evolution of a shared culture:
family ties
Committees and crossfunctional teams
Proper information technology
and control systems
Constant internal and external
communication within the group

Differentiate and
manage local
business units

Reduce and avoid

uncertainty

Organizational
decentralization:
changing of a
hierarchical
structure to a flatter
one

Gathering and
forecasting of
market information

Delegation of
authority

Participating
industry activities
and interact with
key players

Decentralized
network of applicant
laboratories

Monitoring of
internal activities

Synergize
Central
laboratory:
pool together
scientific
knowledge and
develops
synergies
between
materials

To support its global strategy of growth, Lafarge carried out a new structure in organization, mainly
consisting of decentralization, integration, avoidance of uncertainty and synergies among divisions.

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Lafarge Case

14

LAFARGES BEST PRACTICES

Best practices

Optimize
management and
production
process,
minimize
uncertainty

Plays as a
benchmark for
decentralized
management
divisions

Assess and
maintain quality
of the Groups
worldwide cement
units

Standardize and
simplify internal
functions, reduce
management cost

Internationalization Process
Lafarge is considered a storehouse of best practices in the industry and its best practices strongly support
its internationalization process, by providing a standardized benchmark and optimized measure for
management and quality control of its different units worldwide.

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Lafarge Case

15

FACTORS RESULTING IN DIVERSE PATHS OF

GROWTH IN EMERGING MARKETS

Equilibration level of market:

number of competitors, market
potentials, maturity level of industry
chain, etc.

Geographical condition:
natural resources for raw material,
transportation convenience, etc.

Market size:
regional economy size, potential
demands, construction potential, etc.

Local policies:
taxation, acquisition policies,
construction regulation, etc.

Lafarge pursues growth in emerging markets through expansion, takeovers and setting up Greenfield
projects. Yet since emerging markets are not mature and equilibrated, there is diversity inside the markets.
Hence when entering the markets, Lafarge needs to take the specialty of markets into account and seek the
best path of growth.

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