178 Vle Case-studies (1)

VLE case studies referred to in MN1178 Business and
management in a global context
Chapter 7 Case 1: Strategy at Proctor & Gamble
Founded in 1837, Cincinnati-based Proctor & Gamble has long been one of the world’s most
international companies. Today it is a global colossus in the consumer products business, with
annual sales in excess of $50 billion, about 54 per cent of which are generated outside the
United States. P&G sells more than 300 brands – including Ivory soap, Tide, Pampers, Iams
pet food, Crisco and Folgers – to consumers in 160 countries.
Historically, the strategy at P&G was well established. The company developed new products
in Cincinnati and then relied on semi-autonomous foreign subsidiaries to manufacture, market
and distribute those products in different nations. In many cases, foreign subsidiaries had their
own production facilities and tailored the packing, brand name, and marketing message to
local tastes and preferences. For years this strategy delivered a steady stream of new products
and reliable growth in sales and profits. By the 1990s, however, profit growth of P&G was
slowing.
The essence of the problem was simple: P&G’s costs were too high because of extensive
duplication of manufacturing, marketing and administrative facilities in different national
subsidiaries. The duplication of assets made sense in the world of the 1960s, when national
market were segmented from each other by barriers to cross-border trade. Products produced
in Great Britain, for example, could not be sold economically in Germany due to high tariff
duties levied on imports into Germany. By the 1980s, however, barriers to cross-border trade
were falling rapidly worldwide and fragmented national markets were emerging into larger
regional or global markets. Also, the retailers through which P&G distributed its products
were growing larger and more global, such as Wal-Mart in the United States, Tesco in the
United Kingdom and Carre-four in France. These emerging global retailers were demanding
price discounts from P&G.
In the 1990s, P&G embarked on a major reorganisation in an attempt to control its cost
structure and recognise the new realism of emerging global markets. The company shut down
some 30 manufacturing plants around the globe, made 13,000 employees redundant and
concentrated production in fewer plants that could better realise economies of scale and serve
regional markets.
It wasn’t enough. Profit growth remained sluggish, so in 1999 P&G launched its second
reorganisation of the decade. Named ‘Organisation 2005’, the goal was to transform P&G into
a truly global company. P&G tore up its old organisation, which was based on countries and
regions, and replaced it with one based on seven self-contained global business units, ranging
from baby care to food products. Each business unit was given complete responsibility for
generating profits from its products and for manufacturing, marketing and product
development. Each business unit was told to rationalise production, concentrating it in few
large facilities; to try to build global brands wherever possible, thereby eliminating marketing
difference between countries; and to accelerate the development and launch of new products.
P&G announced that, as a result of this initiative, it would close another 10 factories and lay
off 15,000 employees, mostly in Europe where there was still extensive duplication of assets.
The annual cost savings were estimated to be about $US 800 million. P&G planned to use the
1

savings to cut prices and increase marketing spending in an effort to gain market share and
thus further lower costs through the attainment of scale economies.
This time the strategy seemed to be working. Between 2003 and 2007 P&G reported strong
growth in both sales and profits. Significantly, P&G’s global competitors, such as Unilever,
Kimberly-Clark and Colgate-Palmolive, were struggling between 2003 and 2008.
(Source: L.P. Willcocks, using multiple published sources, including annual reports.)

2

Chapter 7 Case 2: Cemex and its global expansion
From relatively modest beginnings as a Mexican family-owned conglomerate, since 1996
CEMEX has been the third largest cement company in the world (measured by cement
production capacity). Having completed the acquisitions of Southdown in the United States
and RMC in the UK, the group was a well-established ‘three-legged’ player in America,
Europe and Asia. However, global competition was tough and, by 2008, CEMEX was still not
positioned in the two emerging giant markets of China and India.
CEMEX’s strategy to become one of the leading players in the world of cement took place
over many years in three major steps: (1) consolidating its presence the Mexican market, (2)
internationalisation, and (3) global management. We will look at each of these in turn.
Mexico
In 1985, when Lorenzo Zambrano was appointed head of CEMEX, the company was fairly
similar to any other developing country conglomerate. Founded in Mexico in 1906, CEMEX
had grown from a regional cement producer to a diversified group of companies with interests
in tourism, petroleum and mining projects, and was listed on the Mexican stock exchange.
The signing of the GATT agreement in 1985 turned Mexico, the world’s thirteenth-largest
cement consumer, into an open marketplace and, at the same time, an interesting expansion
opportunity for cement multinational companies (MNCs). The demographics, the attractive
market characteristics and the expected infrastructure development all gave Mexico a huge
growth potential. With increased competition from more efficient international players, a
consolidation movement was inevitable. Zambrano implemented a deliberate strategy to make
cement its core business. CEMEX divested the company of nearly all its non-core and noncement related businesses, reinvesting the proceedings into cement assets. It acquired the two
major cement manufacturers in Mexico, thus becoming the main national player and the tenth
largest cement company in the world.
CEMEX was creative in its efforts to expand its Mexican market. It developed exceptional
customer care service support. In 1998 it changed the image of cement by launching a
programme whereby people who had little money or savings could invest in home building.
This linked with more traditional community savings schemes. In 2001 it targeted Mexican
migrants to the USA. It enabled migrants to send back money to family members for
construction projects, and it also helped Mexican migrants to spend money on Mexican-based
homes. While its competitors were selling bags of cement, CEMEX was selling the dream of
a home, with a business model supported by innovative financing and construction expertise.
Its Mexican cement sales tripled, while still allowing CEMEX to charge 15 per cent more
than its competitors.
CEMEX also improved its efficiency by using information technology (IT). In 1987 CEMEX
hired a cyber-visionary, Gelacio Iiguez, who created a network information system by
installing satellite dishes for voice and data transmisson in all its plants. He also developed an
integrated dispatching system, centralising dispersed operation by a satellite. In the past
delivery trucks had often failed to reach customers on time, resulting in cancellations or
reorders and consequent losses. To avoid this, CEMEX equipped its ready-mix delivery
trucks with global positioning systems, enabling customers to track them. A central
monitoring system also helped in redirecting a truck where an order had been cancelled. This
drastically reduced delivery times and enabled 70 trucks to make deliveries that had
previously required 100 trucks. The technology enabled big savings in fuel, payroll and
maintenance, while increasing customers’ goodwill. In 1995 CEMEX launched one of the
3

first corporate websites. It featured catalogues of products for clients as well as financial and
company information for analysts. Zambrano also launched a logistics system that enabled
customers to track shipments online. In 2000 CEMEX formed a subsidiary to manage its ebusiness efforts. One of these was Contrumex, a construction industry online marketplace
aimed at small and medium-sized businesses in Latin America. Another was Latinexus, an
online exchange for indirect goods and services created in partnership with other leading
companies in Mexico and Brazil. CEMEX renamed its subsidiary ‘Neoris’ and relaunched it
as an independent company offering website services, e-consulting and web architecture to
companies other than CEMEX.
The basis of CEMEX’s e-business strategy was fivefold:
1. The boundaries between companies and industries was becoming increasingly blurred.
2. The relationships between companies and their markets was changing.
3. Time has sped up. Information is everywhere, readily available and virtually free.
CEMEX needed to seize the opportunity to differentiate itself by speed of decisionmaking and new business strategies
4. The internet is changing the nature of work. Computers and networks can replace human
hands and minds in many routine activities. This frees up people to take on the more
information-intensive activities that create value for the firm and customers.
5. There has been a shift in value creation from owning assets to leveraging assets through
networks.
Internationalisation
Cement is a very cyclical industry and its presence in several countries with counter-cyclical
economies would ensure a more predictable stream of cash flows. The company’s
performance was intimately pegged to the evolution of the Mexican economy. This meant
high cash-flow volatility and high costs of capital. In the mid-1980s, international
opportunities were substantial, but CEMEX would have to make focused decisions, first
because of the reduced amount of available resources and, second, because only a focused
player would be able to compete with the larger MNCs operating in various international
markets. The man with this vision was Lorenzo Zambrano. Ricardo Castro, CEMEX’s senior
vice-president of Strategic Business Development for Asia and Africa, describes his
chairman’s vision:
He saw opportunities in both the Mexican cement market and markets beyond its national borders. So his
strategy was to transform the Mexican conglomerate into a focused cement player with global coverage.
Initially, the company divested its non-core assets, becoming first a regional Mexican cement producer.
Subsequently, the company expanded nationally, and finally became global. 1

One of the early steps to internationalisation was to export cement from Mexico to the United
States and Latin America. However, given its structural economic characteristics and
particularly the high transport costs, international trading had limited potential. In 1992,
CEMEX’s first direct investment was in Europe with the acquisition of Valenciana and
Sanson in Spain. At the time, Spain was one of Europe’s most attractive markets and through
this acquisition CEMEX instantly became the market leader in Spain and the world’s fifth
largest cement producer, with 36 million tons of capacity. It was also the company’s first
major encounter with its global competitors, the French company, Lafarge, and the Swiss
company, Holcim (at the time Holderbank). The success in Spain spurred further international
expansion, this time in South and North America. In 1994 CEMEX acquired Vencemos,
Venezuela’s largest cement company; Cemento Bayano in Panama; and a plant in Texas.
1

Quoted in Lassserre, P. Cemex: Cementing a global strategy. Case 3072331. (France: Insead, 2007).

4

Further acquisitions in the Dominican Republic in 1995 and Colombia in 1996 were
completed.
By this time the expansion strategy was already paying off. When Mexico entered its 1994
crisis, leading to its currency’s – the Peso’s – massive devaluation, CEMEX was able to offset
severe losses with profits from its international operations. In the mid-1990’s CEMEX began
its expansion into Asia, a region that clearly matched its strategy for high growth potential
markets. Government infrastructure spending was on the rise, and per capita cement
consumption was still very low but growing fast. Asia represented more than 20 per cent of
the world’s capacity of 1.4bn tons.
By 1994 CEMEX set up trading operations in Southeast Asia and in 1999 established
CEMEX Asia Holdings (CAH), with a mission to develop new partnerships and cementrelated businesses in that region. In 1997, it made its first acquisition, a 30 per cent stake in
Rizal Cement in the Philippines. However, immediately after acquiring Rizal Cement, the
Asian crisis set in and caught CEMEX, and everyone else, by surprise. The industry saw a
huge reduction in demand throughout the region – in the Philippines by 17 per cent, Indonesia
by 30 per cent, Malaysia by 37 per cent and Thailand by 35 per cent. But the crisis, which
made many regret the high acquisition prices paid prior to 1997, also presented the cement
MNC with an opportunity. Heavily indebted local producers now wanted to sell and prices
were going down. By late 1998, CEMEX had guaranteed a 70 per cent stake in Rizal Cement,
and also bought Apo Cement, the lowest cost producer in the Philippines.
In Indonesia, CEMEX was named preferred bidder for Sement Gresik, a state-owned
company that had consolidated three out of the five state-owned cement producers and
controlled about 40 per cent of domestic production. The government wanted to privatise the
company and by May 1998 CEMEX was planning on taking a majority stake. But after strikes
and protests, the government backed off and CEMEX only took a 25 per cent share of the
company. Since it was unable to take control of the company CEMEX divested itself of its
stake in August 2006. With Asia on hold, CEMEX expanded its operations in America and
Europe. In November 2000 CEMEX acquired Southdown, No. 2 in the United States, with 12
plants serving 27 states. Southdown operates at full capacity and serves only the American
market, providing a stable stream of cash flows. In 2005 it acquired the RMC group, based in
the UK, which increased its capacity by around 20 per cent, strengthened its position across
the cement value chain, reinforced its presence in Europe and made CEMEX the world’s
largest producer of ready-mix.
Going global
From 1996 to 2008, CEMEX had consolidated its position as the third largest cement
producer in the world, behind Lafarge/Blue Circle and Holcim. By 2005 it had achieved an
estimated production capacity of 94 million tons per year. It was the number one producer of
ready-mix, with 76 million tons; one of the largest aggregate producers, with 175 million
tons; and one of the top cement traders in the world, selling more than 17 million tons in 2005.
What truly makes CEMEX a global company and not simply a multinational? According to
the company’s executives, there are several factors that make CEMEX a truly global company.
First, the international expansion strategy was a planned and organised move, rolled out in
several phases. As a consequence, today CEMEX’s international network is not a sum of
different operations in different locations, but can be seen as a network of systems. Initially,
CEMEX represented a Mexican cement production system. Later it became a system of
cement production and trading in the Caribbean region, with ramifications in Europe, Latin
America and North America. It later advanced into the Mediterranean region, and went as far
as Asia in 1995 (although the first acquisition in Asia only occurred in 1997).

5

Secondly, CEMEX full integrates its international operations into the CEMEX network. This
is mainly achieved via a common technological platform, organisational structure and
corporate culture. In addition, its trading activity is important in achieving a true
interconnection between CEMEX and independent production systems. This activity allows
CEMEX to maintain a strong relationship between cement producers and customers
worldwide.
Finally, the company has developed a knowledge community through a series of practices
known as ‘the CEMEX Way’. This can be summarised as follows:
The CEMEX way:
identifies and disseminates best practice and standardises business processes across the globe
•
•
•

has common management principles and systems for the entire organisation
encourages all managers to ‘speak the same language’ when discussing business
issues
implements knowledge and experiences gathered over many years of doing business in
various countries.

The CEMEX way specifies everything about the running of the company, down to the make
of computers employees must use. It also insists on mutual learning across subsidiaries. It also
uses a post-merger integration (PMI) process that is put in place after each acquisition, to
ensure that the acquisition is quickly and well assimilated. CEMEX specified three conditions
for an acquisition to go ahead. The acquisition should provide a return on investment much
bigger than the cost of capital. Second, it should enable CEMEX to maintain its financial
strength and credit quality. Third, CEMEX’s management expertise should be able to increase
the acquired company’s value. In the integration process, CEMEX decides on which
operations should be decentralised and those that need centralised decision-making and
standardisation. It uses the CEMEX brand, and sources people and assets internationally. It
standardises management practices, but if local practices are particularly effective, it
standardises those for CEMEX as well.
A key issue for CEMEX has been its management of people. There is a clear career path to
ensure the best of new employees find their way quickly up the company. There is an
intensive induction programme educating people into the CEMEX way. Multiple training and
education programmes are made available to staff, including over 260 e-learning courses on
operations, business and managerial skills.
CEMEX is also notable globally for its extensive leverage on technology. For example, while
it was still mainly a domestic company based in Mexico, ready-mix concrete trucks were
equipped with computers on board. This allowed for central tracking by global-positioning
satellite systems and precise planning of cement delivery schedules. Technology has allowed
CEMEX to become one of the lowest cost producers anywhere in the world. Its technological
backbone also allowed CEMEX to specialise in markets that lack highly developed road
systems or solid telephone networks and where competing becomes a matter of showing
customers that you can save them from uncertainty. What CEMEX did was adapt global
technology to the developing world’s almost limitless range of local problems.
CEMEX is also strong on global branding and its concern for customer satisfaction. While the
CEMEX brand is strongly used, it also has product sub-brands, designed to suit the needs of
the customer in whichever part of the world they are in. Historically, by managing all the
critical activities – IT, staff, innovative marketing methods, acquisition strategy and effective
customer support – CEMEX had delivered superior value to all its stakeholders.

6

Information technology and acquisitions
CEMEX’s approach to IT is interesting, not least for illustrating Chapter 13 of this subject
guide. Its decision to enter global markets in the 1990s coincided with the IT revolution, but
also a consolidation spree in the global cement industry. CEMEX’s main competitors had
started acquisitions earlier and had used a decentralized approach. They ran into problems
unifying diverse cultures and systems. CEMEX was able to assimilate acquisitions in months
due to its IT expertise, process standardisation philosophy and capabilities. Eight ‘e-groups’
were made responsible for process effectiveness. Each e-group has business, IT and HR
experts. These groups worked closely with the staff from the acquired company to decide
what could be standardized and what practices and systems could remain localised. About 20
per cent of the acquired company’s practices are retained, with the rest typically recorded in a
database, in case they subsequently proved useful.
The future – 2008 and beyond 1
CEMEX is absent from the two leading emerging countries, China and India, which together
represent more than 50 per cent of world markets. Could it ignore those giant source of
demand and if not, the challenge was how to develop a presence? The Chinese market in
particular is very fragmented, with about 1,000 local producers.
The financial crisis that hit the world in 2008 had dire effects on CEMEX. By 2009 CEMEX
had accumulated a debt burden of $US 19.4 billion. At this point, Mexico accounted for only
one-third of its revenues, but contributed substantially to this debt burden. CEMEX’s strategy
of acquisitions to expand was a fundamental part of its success but this backfired with the
acquisition of Rinker in 2007 and the subsequent global financial crunch.
Having acquired companies during the boom times, CEMEX became more optimistic after
every acquisition. Optimism, proven track record on acquisitions and debt-clearing ability in
the past guided the acquisition of Rinker, an Australian company. As the US market slowed
down from 2008, where Rinker had most of its operations, CEMEX’s hopes for the
acquisition were shattered. Moreover, Rinker was probably overpriced when CEMEX bought
it in 2007 for $US 15.3 billion. Certainly by 2008 some estimated its value to be a low as half
that figure.
By 2008–09 the major markets of the USA, the UK, Spain and Mexico had all experienced
major slowdowns as they moved towards recession. Another blow CEMEX had to absorb was
nationalisation of its company in Venezuela. It asked for $1.3 billion in compensation, but
was offered only $650 million. When CEMEX rejected the offer, the state seized its assets.
From 2009 to 2013, Cemex constantly had to scout for debt restructuring or sell assets in
order to pay impending debts. The signs are that it has managed this troublesome period with
great difficulties, but that it may well come out of this challenging period with a good future
ahead of it.
(Source: L.P. Willcocks, using multiple published sources.)

1

This section is based on annual reports from 2008–2013 and Vivek, M. et al. Cemex’s cost of globalised growth
– The cash crunch? IBSCDC case 3101061. (Cranfield: Case Clearing House, 2010).

7

Chapter 8 Case 1: The changing steel industry
For a long time, the steel industry was seen as a static and unprofitable one. Producers were
nationally based, often state-owned and frequently unprofitable – the early 2000s saw 50
independent steel producers becoming bankrupt in the United States alone. But recent years
have seen a turnaround. During 2006, Mittal Steel paid $36bn (€24.5bn) to buy European
steel giant, Arcelor, creating the world’s largest steel company. The following year, Indian
conglomerate Tata bought the Anglo-Dutch steel company, Corus, for $13bn. These high
prices indicated considerable confidence in the prospects of a better industry structure.
New entrants
In the last two decades, two powerful groups have entered world steel markets. First, after a
period of privatisation and reorganisation, in 2009 Russia had become the world’s second
largest steel exporting country (behind Japan), led by giants such as Severstal and Evraz.
China, too, had become a major force. Between the early 1990s and 2009, Chinese producers
increased their capacity six times. Although the Chinese share of world capacity reached over
40 per cent in 2009, most of this was directed at the domestic market. Nevertheless, China
was the world’s fourth largest steel exporter in 2009.
Substitutes
Steel is a nineteenth-century technology, increasingly substituted by other materials such as
aluminium in cars, plastics and aluminium in packaging, and ceramics and composites in
many high-tech applications. Steel’s own technological advances sometimes work to reduce
need: thus steel cans have become about one-third thinner over the last few decades.
Buyer power
The major buyers of steel are the global car manufacturers. They are sophisticated users and
are often leaders in the technological development of their materials. In North America at
least, the decline of the once dominant ‘Big Three’ – General Motors, Ford and Chrysler – has
meant many new domestic buyers, with companies such as Toyota, Nissan, Honda and BMW
establishing local production plants. Another important user of steel is the metal packaging
industry. Leading can producers such a Crown Holdings, which makes one-third of all food
cans products in North America and Europe, buy in large volumes, coordinating purchases
around the world.
Supplier power
The key raw material for steel producers is iron ore. The main producers – Vale, Rio Tinto
and BHP Billiton – control about 70 per cent of the market for internationally traded ore. Iron
ore prices had multiplied four times between 2005 and 2008, and, despite the recession, by
2010 were still twice the 2005 level.
Competitive rivalry
The industry has traditionally been very fragmented: in 2000, the world’s top five producers
accounted for only 14 per cent of production. Companies such as Nucor in the USA, ThyssenKrupp in Germany as well as Mittal and Tate responded by buying up weaker international
players. By 2009, the top five producers accounted for 20 per cent of world production. The
new steel giant, Arcelor-Mittal, alone accounted for about 10 per cent of world production,
and for one-fifth of the European Union market. Nonetheless, despite a cyclical peak in 2008
and a slump in 2009, the world steel price was basically the same in 2010 as it was in 2005.
(Source: L.P. Willcocks, using multiple published sources on steel industry growth.)

8

Chapter 8 Case 2: Portman-Ritz-Carlton, Shanghai
How does a five-star hotel differ from its lower-tier competitors? How does the best five-star
hotel stand out from its five-star peers? The answer is ‘people’, according to Mark DeCocinis,
general manager of the five-star Portman-Ritz-Carlton Hotel in Shanghai, China, which has
been named the ‘Best Employer in Asia’ by Hewitt Associates three times.
‘Our priority is taking care of our people,’ said DeCocinis in an interview. ‘We’re in the service business,
and service comes only from people. It’s about keeping our promise to our employees and making that an
everyday priority. Our promise is to take care of them, trust them, develop them, and provide a happy place
for them to work. The key is everyday execution.’ 1

One of the ‘secrets’ behind the Portman-Ritz-Carlton’s success is that the general manager
interviews every prospective employee. Of course this is a time-consuming process for a busy
general manager. Yet, by doing that, the general manager is able to get a ‘feel’ for the
intangible nature of the potential employee’s attitudes. In terms of the questions that the
general manager asks, DeCocinis shared that he usually asks them about themselves and tries
to make a connection. But the most important question he asks is: ‘Why do you want to join
our hotel?’ and ‘Whatever they say, the most important notion needs to be ‘I enjoy working
with people’, not just using the phrase ‘I like people’… I really want to find out what
motivates them’ 2 If the person smiles naturally, that’s very important to the Ritz-Carlton, it
turns out, because this is something that they feel the candidate can’t force. In a culture where
people tend to have more reserved expressions, service personnel who smile naturally are
valuable and rare resources appreciated by hotel guests.
The Portman-Ritz-Carlton’s employee satisfaction rate is 98 per cent, and its guest
satisfaction is between 92 per cent and 95 per cent. To translate excellent HR management to
better firm performance, the hotel’s performance goals are aligned with the Ritz-Carlton’s
corporate goal – from the company to the hotel, and from the hotel to each division. This
means that everyone is part of the whole. Every employee comes up with a plan to reach the
goal for the next year, measured by guest satisfaction, financial performance and employee
satisfaction. Bonuses at the end of the year are based on improvements made.
In China, many multinationals face a constant shortage of talent and high employee turnover.
Yet, the Portman-Ritz-Carlton has not only been able to attract, but also to retain, high-quality
staff to deliver excellent customer service and ensure profitable growth. What are the ‘secrets’
behind its ability to retain these individuals? To illustrate this ability, a senior executive
pointed to one incident. During the 2003 SARS crisis, business started to deteriorate. By April,
the Ritz Carlton occupancy rate, which should have been at 95 per cent, had dropped to 35 per
cent. The first step was for the executive team to take a 30 per cent pay cut. But then it got
worse. By May, the occupancy rate was 17 per cent to 18 per cent. The hotel reduced the
working week to four days, and staff were asked to take their outstanding paid leave days.
And then, when these reserves were used up, everyone really pulled together. Employees who
were single gave their shifts to colleagues who had families to support. Some employees were
worried that their contracts would not be renewed given the low occupancy rates, so the hotel
chain renewed them without a second thought. Employee satisfaction rate that year was 99.9
per cent. This was a negative situation that turned out to have extremely positive
consequences.

1
2

Quoted in Peng, M. Global strategic management. (London: Cengage, 2009) [ISBN 9780324590982] Chapter 3.
Ibid.

9

Such a willingness to go the extra mile to ensure employee satisfaction is reciprocated by a
loyal, dedicated and hard-working workforce. Within the Ritz-Carlton family of 59 hotels
worldwide, the Portman-Ritz-Carlton has been rated the highest in employee satisfaction for
five consecutive years. It has also won the prestigious Platinum Five-Star Award by the China
National Tourism Administration. It is one of only three hotels in China, and the only
Shanghai hotel, to receive this inaugural award, which is the highest hospitality award in
China.
(Source: L.P. Willcocks, using multiple published sources.)

10

Chapter 10 Case 1: Levis Strauss goes local
The early 2000s saw a tough few years for Levi Strauss, the iconic manufacturer of blue jeans.
The company whose 501 jeans became the global symbol of the Baby Boom generation and
were sold in more than 100 countries, saw its sales drop from a peak of $71 billion in 1996 to
just $4 billion in 2004. Fashion trends had moved on, its critics charged, and Levi Strauss,
hamstrung by high costs and a stagnant product line, was looking more faded than a wellworn pair of 501s!
Perhaps so, but 2005–2006 brought signs that a turnaround was in progress. Sales increased
for the first time in eight years, and after a string of losses, the company started to register
profits again.
There were three parts to this turnaround. First, the company made cost reductions at home.
Levi’s closed its last remaining US factories and moved production offshore where jeans
could be produced more cheaply. Second, the company broadened its product line,
introducing the Levi’s Signature brand that could be sold through lower-priced outlets in
markets that were more competitive, including the core US market where Wal-Mart had
driven down prices. Third, the company decided in the late 1990s to give more responsibility
to national managers, allowing them to better tailor the product, offering and marketing mix
to local conditions. Prior to this, Levi’s had basically sold the same product worldwide, often
using the same advertising message. The old strategy was designed to enable Levi’s to realise
the economies of scale in production and advertising, but it wasn’t working.
Under the new strategy, variations between national markets have become more pronounced.
Jeans have been tailored to different body types. In Asia, shorter leg lengths are common,
whereas in South Africa, women’s jeans must have a larger backside, so Levi’s had
customised the product offering to account for these physical differences. Then there are the
socio-cultural differences (see Chapter 3 of this subject guide). In Japan, tight-fitting black
jeans are popular; in Islamic countries, women are discouraged from wearing tight-fitting
jeans, so Levi’s offerings in countries like Turkey are roomier. Climate also has an effect on
product design. In northern Europe, standard weight jeans are sold, whereas in hotter
countries lighter denim is used, along with brighter colours that are not washed out by the
tropical sun.
Levi’s advertisements, which used to be global, have also been tailored to regional differences.
In Europe, the ads now talk about the cool fit. In Asia, they talk about the rebirth of an
original. In the United States, the advertisements show real people who are themselves
originals: ranchers, surfers, great musicians, for example. There are also differences in
distribution channels and pricing strategy. In the fiercely competitive US market, prices are as
low as $25 and Levi’s are sold through mass-market discount retailers, such as Wal-Mart. In
India, strong sales growth is being driven by Levi’s low-priced Signature brand. In Spain,
jeans are seen as higher fashion items and are being sold for $50 in higher-quality outlets. In
the UK, prices for 501s are much higher than in the United States, reflecting a more benign
competitive environment.
This variation in marketing mix seems to be reaping dividends. Although demand in the
United States and Europe remains sluggish, growth in many other countries is strong. Turkey,
South Korea and South Africa all recorded growth rates in excess of 20 per cent per annum
following the introduction of this strategy in 2005. Looking forward, Levi’s has been
expecting for some time that 60 per cent of its growth would come from emerging markets.
(Source: L.P. Willcocks, using multiple published sources.)

11

Chapter 11 Case 1: Unilever
Unilever is one of the world’s oldest multinational corporations, with extensive product
offerings in the food, detergent and personal care businesses. It generates annual revenues in
excess of $50 billion and a wide range of branded products in virtually every country.
Detergents, which account for about 25 per cent of corporate revenues, include well-known
names such as Omo, which is sold in more than 50 countries. Personal care products, which
account for about 15 per cent of sales, include Calvin Klein cosmetics, Pepsodent toothpaste
brands, Faberge hair care products and Vaseline skin lotions. Food products account for the
remaining 60 per cent of sales and include strong offerings in margarine (where Unilever’s
market share in most countries exceeds 70 per cent), tea, ice cream, frozen foods and bakery
products.
Historically, Unilever was organised on a decentralised basis. Subsidiary companies in each
major national market were responsible for the production, marketing, sales and distribution
of products in that market. In Western Europe, for example, the company had 17 subsidiaries
in the early 1990s, each focused on a different national market. Each was a profit centre and
each was held accountable for its own performance. This decentralisation was viewed as a
source of strength. The structure allowed local managers to match product offerings and
marketing strategy to local tastes and preferences and to alter sales and distribution strategies
to fit the prevailing retail systems. To drive the localisation, Unilever recruited local managers
to run local organisations; the US subsidiary (Lever Brothers) was run by Americans, the
Indian subsidiary by Indians, and so on.
By the mid-1970s, this decentralised structure was increasingly out of step with a rapidly
changing competitive environment. Unilever’s global competitors, which include the Swiss
firm Nestlé and Proctor & Gamble from the United States, had been more successful than
Unilever on several fronts – building global brands, reducing cost structure by consolidating
manufacturing operations at a few choice locations, and executing simultaneous product
launches in several national markets. Unilever’s decentralised structure worked against efforts
to build global or regional brands. It also meant lots of duplication, particularly in
manufacturing, a lack of scale economies and a high-cost structure. Unilever also found that it
was falling behind rivals in the race to bring new products to consumers. In Europe, for
example, while Nestlé and Proctor & Gamble moved toward pan-European product launches,
it could take Unilever four to five years to ‘persuade’ 17 European operations to adopt a new
product.
In an effort to address this situation, Lever Europe was established to consolidate the
company’s detergent operations. The 17 European companies report directly to Lever Europe.
Using its newfound organisational clout, Lever Europe consolidated the production of
detergents in Europe in a few key locations to reduce costs and speed up the introduction of
new products. Implicit in this new approach was a bargain: the 17 companies would
relinquish autonomy in their traditional markets in exchange for opportunities to help develop
and execute a unified pan-European strategy. The number of European plants manufacturing
soap was cut from 10 to two and some new products were manufactured at only one site.
Product sizing and packaging were harmonised to cut purchasing costs and to accommodate
unified pan-European advertising. By taking these steps, Unilever estimated that it saved as
much as $400 million a year in its European detergent operations.
By 2000, however, Unilever found that it was still lagging behind its competitors, so the
company embarked upon another reorganisation. This time the goal was to cut the number of

12

brands that Unilever sold from 1,600 to just 400 and to market these on a regional or global
scale. To support this new focus, the company planned to reduce the number of
manufacturing plants from 380 to 280 by 2004. The company also established a new
organisation based on just two global product divisions – a food divisions and a home
personal care division. Within each division are a number of regional business groups that
focus on developing, manufacturing and marketing either food or personal care products
within a given region. For example, Unilever Bestfoods Europe, with its headquarters in
Rotterdam, focuses on selling food brands across Western and Eastern Europe, while Unilever
Home and Personal Care Europe do the same for home and personal care products. A similar
structure can be found in North America, Latin America and Asia. Thus, Bestfoods North
America, with its headquarters in New Jersey, has a similar charter to Bestfoods Europe, but,
in keeping with differences in local history, many of the food brands marketed by Unilever in
North America are different to those marketed in Europe.
(Source: L.P. Willcocks, using annual reports, and Hill, C. International business. (New York: McGraw Hill,
(2010) [ISBN 9780071220835].)

Further questions to consider:
1. What was Unilever trying to do when it introduced a new structure based on business
groups in the mid-1990s? Why do you think that this structure failed to cure
Unilever’s ills?
2. In the 2000s, Unilever switched to a structure based on global product divisions. What
do you think is the underlying logic for this shift? Does the structure make sense,
given the nature of competition in the detergents and food business?
3. Using a search engine, look up the latest developments in Unilever’s structure. (Its
annual report might help you here; also have a look at its entry on Wikipedia.)

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Chapter 11 Case 2: Dow chemical’s matrix structure
A handful of major players compete head-to-head around the world in the chemical industry.
These companies are Dow Chemical and DuPont of the United States, ICI in the UK and the
German trio of BASF, Hoechst AG and Bayer. The barriers to the free flow of chemical
products between nations largely disappeared in the 1970s. The ability to sell freely
worldwide, along with the commodity nature of most bulk chemicals, has ushered in a
prolonged period of intense price competition. In such an environment, the company that wins
the competitive racer is the one with the lowest costs. Dow Chemical was long among the
cost leaders.
For years, Dow’s managers insisted that part of the reason for this was its matrix
organisational structure. Dow’s organisational matrix had three interacting elements:
functions (e.g. R&D, manufacturing, marketing), businesses (e.g. ethylene, plastics,
pharmaceuticals) and geography (e.g. Spain, Germany, Brazil). Managers’ job titles
incorporated all three elements – for example, plastics marketing manager for Spain – and
most managers reported to at least two bosses. The plastics marketing manager in Spain might
report to both the head of the worldwide plastics business and the head of Spanish operations.
The intent was to make Dow operations responsive to both local market needs and corporate
objectives. Thus, the plastics business might be changed with minimising Dow’s global
plastics production costs, while the Spanish operation might be changed with determining
how best to sell plastics in the Spanish market.
When Dow introduced this structure, the results were less than promising: multiple reporting
channels led to confusion and conflict. The large number of bosses made for an unwieldy
bureaucracy. The overlapping responsibilities resulted in turf battles and a lack of
accountability. Area managers disagreed with managers who oversaw business sectors about
which plants should be built and where. In short, the structure didn’t work. Instead of
abandoning the structure, however, Dow decided to see if it could be made more flexible.
Dow’s decision to keep its matrix structure was prompted by its move into the
pharmaceuticals industry. The company realised that the pharmaceutical business is very
different from the bulk chemicals business. In bulk chemicals, the big returns come from
achieving economies of scale in production. This dictates establishing large plants in key
locations from which regional or global markets can be served. But in pharmaceuticals,
regulatory and marketing requirements for drugs vary so much from country to country that
local needs are far more important than reducing manufacturing costs through scale
economies. A high degree of local responsiveness is essential. Dow realised its
pharmaceutical business would never thrive if it were managed using the same priorities as its
mainstream chemical operations.
Accordingly, instead of abandoning its matrix, Dow decided to make it more flexible in order
to better accommodate the different businesses, each with its own priorities, within a single
management system. A small team of senior executives at headquarters helped set the
priorities, within a single management system. After priorities were identified for each
business sector, one of the three elements of the matrix – function, business or geographic
area – was given primary authority in decision making. Which element took the lead varied
according to the type of decision and the market or location in which the company was
competing. Such flexibility required that all employees understand what was occurring in the
rest of the matrix. Although this may seem confusing, for years Dow claimed this flexible

14

system worked well and credited much of its success to the quality of the decisions it
facilitated.
By the mid-1990s, however, Dow had refocused its business on the chemicals industry and
had divested itself of its pharmaceutical activities where the company’s performance had been
unsatisfactory. Reflecting the change in corporate strategy, in 1995 Dow decided to abandon
its matrix structure in favour of a more streamlined structure based on global business
divisions. The change was also driven by realisation that the matrix structure was just too
complex and costly to manage in the intense competitive environment of the 1990s,
particularly given the company’s renewed focus on its commodity chemicals where
competitive advantage often went to the low-cost producer. As Dow’s then CEO put it in a
1999 interview: ‘We were an organisation that was matrixed and depended on teamwork, but
there was no one in charge. When things went well, we didn’t know whom to reward, and
then things when poorly, we didn’t know whom to blame. So we created a global divisional
structure and cut out layers of management. There used to be 11 layers of management
between me and the lowest level employees; now there are five.’ In short, Dow ultimately
found that a matrix structure was unsuited to a company that was competing in very costcompetitive global industries, and it had to abandon its matrix to drive down operating costs.
(Source: L.P. Willcocks, using multiple published sources, including annual reports.)

15

Chapter 12 Case 1: Philips NV in China
The Dutch consumer electronics, lighting, semiconductor and medical equipment
conglomerate, Philips NV, has been operating factories in China since 1985 when the country
first opened its markets to foreign investors. Then China was seen as the land of unlimited
demand, and Philips, like many other Western companies, dreamed of Chinese consumers
snapping up its products by the millions. But the company soon found out that one of the big
reasons the company liked China – the low wage rates – also meant that few Chinese workers
could afford to buy the products they were producing. Chinese wage rates are currently onethird of those in Mexico and Hungary, and five per cent of those in the United States or Japan.
So Philips hit on a new strategy: keep the factories in China but export most of the goods to
the United States and elsewhere.
By the mid-2000s, Philips had invested over $2.5 billion in China, operated 25 wholly owned
subsidiaries and joint ventures in China which together employed approximately 30,000
people. At this point Philips was exporting nearly two-thirds of the $7 billion in products that
the factories produced every year. Philips accelerated its Chinese investment in anticipation of
China’s entry into the World Trade Organization (WTO). The company planned to move even
more production to China in the future. In 2003, Philips announced it would phase out
production of electronic razors in the Netherlands, lay off 2,000 Dutch employees and move
production to China by 2005. A week earlier, Philips had stated that it would expand capacity
at its semiconductor factories in China, while phasing out production in higher-cost locations
elsewhere.
At this time, more than 25 per cent of everything Philips made worldwide came from China,
and executives said the figure was rising rapidly. Several products, such as CD and DVD
players, are now made only in China. Philips also started to give its Chinese factories a
greater role in product development. In the TV business, for example, basic development used
to occur in Holland but was moved to Singapore in the early 1990s. Now Philips has
transferred TV development work to a new R&D centre in Suzhou near Shanghai. Similarly,
basic product development work on LCD screens for cell phones was shifted to Shanghai in
the mid-2000s.
The attractions of China to Philips included continuing low wage rates, an educated
workforce, a robust Chinese economy, a stable exchange rate that is pegged to the US dollar,
a rapidly expanding industrial base, which included many other Western and Chinese
companies that Philips uses as suppliers, and easier access to world markets after China’s
entry to the WTO. Philips stated that ultimately its goal was to turn China into a global supply
base from which the company’s products would be exported around the world.
Some observers worried that Philips and companies pursuing a similar strategy might be
overdoing it. Too much dependence on China could be dangerous if political, economic or
other problems disrupted production and the companies’ ability to supply global markets.
Some observers believed that it might be better if the manufacturing facilities of companies
were more geographically diverse as a hedge against problems in China. These critics’ fears
were given some substance in early 2003 when an outbreak of the pneumonia-like SARS
(severe acute respiratory syndrome) virus in China resulted in the temporary shutdown of
several plants operated by foreign companies and disrupted their global supply chains.
Although Philips was not directly affected, it did restrict travel by its managers and engineers
to its Chinese plants.
(Source: L.P. Willcocks, using multiple published sources.)

16

Chapter 12 Case 2: Hewlett Packard in Singapore
In the late 1960s, Hewlett Packard was looking around Asia for a low-cost location to produce
electronic components that were to be manufactured using labour-intensive processes. The
company looked at several Asian locations and eventually settled on Singapore, opening its
first factory there in 1970. Although Singapore did not have the lowest labour costs in the
region, costs were low relative to North America. In addition, the Singapore location had
several important benefits that could not be found at many other locations in Asia. The
education level of the local workforce was high. English was widely spoken. The government
of Singapore seemed stable and committed to economic development, and the city-state had
one of the better infrastructures in the region, including good communications and
transportation networks and a rapidly developing industrial and commercial base. Hewlett
Packard also extracted favourable terms from the Singapore government with regard to taxes,
tariffs and subsidies.
At its start, the plant manufactured only basic components. The combination of low labour
costs and a favourable tax regime helped to make this plant profitable earlier than expected. In
1973 Hewlett Packard transferred the manufacture of one of its basic handheld calculators
from the United States to Singapore. The objective was to reduce manufacturing costs, which
the Singapore factory was quickly able to do. Increasingly confident in the capability of the
Singapore factory to handle entire products, as opposed to just components, Hewlett
Packard’s management transferred other products to Singapore over the next few years
including keyboards, solid-state displays and integrated circuits. However, all these products
were still designed, developed and initially produced in the United States.
The plant’s status shifted in the early 1980s when Hewlett Packard embarked on a worldwide
campaign to boost product quality and reduce costs. It transferred the production of its HP41C
handheld calculator to Singapore. The managers at the Singapore plant were given the goal of
substantially reducing manufacturing costs. They argued that cost reduction could be achieved
only if they were allowed to redesign the product so it could be manufactured at a lower
overall cost. Hewlett Packard’s central management agreed, and 20 engineers from the
Singapore facility were transferred to the United States for one year to learn how to design
application-specific, integrated circuits. They then brought this expertise back to Singapore
and set about redesigning the HP41C.
The results were a huge success. By redesigning the product, the Singapore engineers reduced
manufacturing costs for the HP41C by 50 per cent. Using this newly acquired capability for
product design, the Singapore facility then set about redesigning other products it produced.
Hewlett Packard’s corporate managers were so impressed with the progress made at the
factory that they transferred production of the entire calculator line to Singapore in 1983.
They followed this transfer with the partial transfer of ink-jet production to Singapore in 1984
and keyboard production in 1986. In all cases, the facility redesigned the products and often
reduced unit manufacturing costs by more than 30 per cent. The initial development and
design of al these products, however, still occurred in the United States.
In the 1980s and early 1990s, the Singapore plant assumed added responsibilities, particularly
in the ink-jet printer business. In 1990, the factory was given the job of redesigning an HP
ink-jet printer for the Japanese market. Although the initial produce redesign was a market
failure, the managers at Singapore pushed to be allowed to try again, and in 1991 they were
given the job of redesigning HP’s DeskJet 505 printer for the Japanese market. This time the
redesigned product was a success, garnering significant sales in Japan. Emboldened by this
success, the plant has continued to take on additional design responsibilities. Today, it is

17

viewed as a ‘lead plant’ within Hewlett Packard’s global network, with primary responsibility
not just for manufacturing but also for the development and design of a family of small ink-jet
printers targeted at the US market.
(Source: L.P. Willcocks, using multiple published sources, including annual reports.)

Further questions to consider:
1. Is HP still based in Singapore? Look at its location strategy in 2013. Use a search engine
to discover the role of Singapore in its overall strategy.
2. In recent years HP has run into a lot of strategic and financial problems. Do you think the
Singapore location has mitigated these problems or made them worse?

18

Chapter 12 Case 3: Lenovo and in-house production
In a modest factory on the outskirts of China’s capital, electronics maker, the Lenovo Group,
displays its unusual approach toward capturing the top spot in the global computer market.
The factory, which in 2013 assembles desktop computers and servers, resembles thousands of
others across China. Robotic arms are in constant motion, moving parts and pieces around.
Rows of workers, clad in blue, pop parts into place as computers make their way down the
line. The factory can churn out about 25,000 machines in a day.
The difference: the facility, its equipment and its employees are all part of Lenovo. It is one of
eight company-owned factories around the world, with three more to be built in China and
Brazil. That is a departure from the common industry practice, in which companies from
Apple to Hewlett Packard increasingly outsource the assembly, and even design, of laptops
and other gadgets to contract manufacturers. Lenovo sees retaining all these functions as a key
advantage. ‘Selling PCs is like selling fresh fruit,’ says Lenovo chief executive Yang
Yuanqing. ‘The speed of innovation is very fast, so you must know how to keep up with the
pace, control inventory, to match supply with demand and handle very fast turnover.’ 1
This came into play late 2011 when flooding in Thailand caused a shortage of some types of
hard drives for the computer industry. The company first had to battle with other companies
to procure more hard drives. But because Lenovo assembles many of its own computers, it
was able to quickly shift the mix of products in its pipeline to focus on products for which the
hard drives were available, and prioritise products that had higher profit margins, according to
Lenovo’s supply chain senior vice president.
The rapid rise of Lenovo
According to the supply chain vice president, Lenovo gained a tremendous amount of market
share during that industry crisis because of the speed of its supply chain. Lenovo saw its
market share climb above 14 per cent in the fourth quarter as it shipped 13 million computers,
up from 13.7 per cent in the previous quarter, according to research firm International Data
Corporation (IDC). Hewlett Packard, the top computer vendor by unit sales for the past five
years, saw its market share that quarter drop to 16 per cent from 18 per cent in the previous
quarter. Hewlett Packard has never commented publicly on this.
The in-house approach – combined with aggressively moving into fast-growing emerging
markets – has helped Lenovo turn a declining business around. Its profit for the fiscal year
ended March 31 grew by 73 per cent to $473 million, outpacing most of its rivals. As recently
as 2009, Lenovo was still posting losses. Lenovo didn’t sell outside China until 2005, when it
shocked the high-tech world by buying a major business unit of International Business
Machines (IBM). Lenovo hired a US high-tech executive to run the company, but sales
sagged during the recession. So, in 2009, Lenovo co-founder Liu Chuanzhi and Yang took
control again and got the company back on track, largely by boosting sales in developing
countries like China, India, Russia and other markets where PC sales have surged.
Whereas Chinese manufacturers make huge numbers of computers and other devices sold by
other companies, Lenovo is different because it sells under its own name. That makes it the
first Chinese global consumer brand. By mid-2012, Lenovo faced a bigger challenge than its
recent turnaround. Demand for traditional PCs was slumping as hand-held gadgets like
Apple’s iPad gained popularity. Yang was hoping that his approach to the PC business would
1

Chao, L. ‘As rivals outsource Lenovo keeps production in-house, Wall Street Journal, 9 July 2012;
http://online.wsj.com/article/SB10001424052702303302504577325522699291362.html (accessed 22 May 2013).

19

aid a new push into new types of smartphones, tablets and internet-connected televisions.
Early in 2012 Lenovo unveiled its first internet-connected television, the K91 Smart TV, then
made it available for sale in China. Lenovo said it needed to line up deals with content
providers before it could sell the TV in the USA and elsewhere, and did not know how
quickly that would happen. Later in 2012, Lenovo planned to start selling its first smartphones
powered by a chip designed by Intel Corp. It also was getting ready to start selling the
IdeaPad Yoga, an ultrathin laptop with a keyboard that can swing behind the monitor to
transform the gadget into an iPad-like tablet.
David Wolf, chief executive of Wolf Group Asia, a Beijing-based marketing strategy firm,
said the challenge for Lenovo was to develop products that are not just good products, but that
people can’t wait to have. But, according to him, Lenovo recognise that there’s a pathway and
they need to be on it. Sales of Lenovo’s newest products are small but growing. According to
the IDC, the company was the fourth-largest vendor of tablets in the first quarter of 2012 with
a 2.8 per cent share of unit shipments, up from number eight in the fourth quarter of last year.
Apple, meanwhile, garnered a 63 per cent share of tablet shipments with its iPad. Apple chief
executive Tim Cook has not been impressed with Lenovo’s tinkering with tablets. In an
earnings call in April, when analysts asked if he would consider making a device to provide
optional keyboards to iPads, he commented that you can converge a toaster and a refrigerator,
but those things are probably not going to be pleasing to the user… you wind up
compromising both and not pleasing either user.
Yang spent a lot of time at the Consumer Electronics Show in Las Vegas in January looking
at products from competitors. He said later that compared to Samsung, LG and those
companies in terms of design, Lenovo still have room to improve. For him, those companies’
products are both fashionable and stylish. That represents a real challenge for Lenovo.
Yang started out at the predecessor company of Lenovo in 1988, delivering computers by
bicycle in the early days. In the USA, there is an infrastructure to fulfil a company’s every
need. In China, by contrast, Lenovo had no infrastructure, so had to do it themselves. Its first
advertisement was taped to the window of its office which Lenovo displayed by turning the
lights on at night.
Yang moved up the ranks after catching the eye of the company’s co-founder, Liu. He became
chief executive in 2001 at the age of 36. That year, he led a team of 10 executives on a world
tour of companies like Cisco Systems, Intel and Hewlett Packard, which at the time were
more than three times Lenovo’s size by revenue. After Lenovo bought IBM’s PC unit in 2005,
Yang moved to the USA; he stepped back from the CEO position and became chairman of the
company, bringing US executives in to take his place. The integration of the two companies
was rocky, but Lenovo’s profits were climbing sharply by mid-2008.
However, the global economic downturn exposed huge vulnerabilities within the company.
The IBM ThinkPad business was heavily reliant on commercial sales at a time when
companies were reducing spending on technology, and Lenovo’s consumer business was
strong only in China. The company struggled to get its products on the shelves of major
retailers in the USA, and its global market share dropped to less than 7 per cent worldwide by
unit shipments, lagging behind Hewlett Packard, Dell and Taiwan’s Acer.
Lenovo co-founder Liu decided to return as chairman in 2009 while Yang shifted from the
chairman’s seat back to being CEO. Liu has since stepped down, and in 2012 Yang was both
chairman and CEO. He had a four-year plan. He refocused the company on China as well as
other emerging markets. He expanded its vast network of resellers around China so that even
in rural areas customers would be close to a Lenovo store with customer service, and he made
an aggressive push into India and Russia, where IBM’s ThinkPads were well known but
20

Lenovo’s brand wasn’t. Others in the industry have been sceptical of this approach. Steve
Felice, Dell’s president, was asked in an earnings call in May 2012 why the company didn’t
go after the market for competitively priced PCs, particularly in Asia. He replied that Dell had
‘backed off’ of that market. He added that Dell would watch the situation carefully, but he
didn’t think that type of competition was sustainable at an industry-wide level.
As part of the plan, Yang sat down in 2009 with Lenovo’s supply chain senior vice president,
pouring over charts and analyses of the costs and benefits of in-house manufacturing. They
decided to increase the company's in-house manufacturing to 50 per cent (from less than 30
per cent). Although three years before, the whole industry believed that the future was about
outsourcing, Lenovo came to the conclusion that the company could move faster if it was
more vertically integrated.
Lenovo chief technology officer said in 2012 that the company’s strategy was playing a key
role in the development of new products. Looking at the industry trends, most innovations for
PCs, smartphones, tablets and smart TVs were related to innovation of key components such
as display, battery and storage. Differentiation of key parts, for him, was very important. So
Lenovo started investing more, and working very closely with key parts suppliers for products
like bigger and thinner touch screens. He said consumers could expect to see some of these
efforts embodied in new products from Lenovo by the end of 2012.
Lenovo already has had some misses in its recent efforts to branch out into new products. One
of its earliest efforts to show the world its innovative abilities was its U1 Hybrid, a
combination notebook and tablet with a detachable keyboard unveiled in 2010, which proved
too costly to make and which missed its release date. Eagerness drove Lenovo to show off the
U1 Hybrid before it was ready. Still, the device, which was a novel idea at the time, did attract
a lot of attention for the company, including from David Roman, formerly an executive at HP
and Apple, who signed up that year to become Lenovo’s chief marketing officer. He says he
joined the company because he was impressed by Lenovo’s innovative efforts and Yang’s
determination, and saw its lack of brand identity as an opportunity.
Roman said he wanted to find ways to make Lenovo into a brand considered to be cool and
innovative rather than cheap by consumers around the world. But, as it turned out, his task
started from inside the company. There were ‘very emotional discussions’ in the beginning
about actually having ‘Lenovo’ on the front of the ThinkPad. The logic was the Lenovo name
could actually be damaging to ThinkPad, but Roman could not see the logic of putting
Lenovo’s best product on the market without its logo.
Since then, Roman has launched an overhaul of the company’s image, purchasing advertising
slots during hit prime-time TV shows such as ‘Glee’ and National Football League broadcasts.
One advertisement shows a Lenovo laptop activating a parachute after being tossed out of a
plane to show how quickly it boots. In Lenovo’s US offices, slogans from the campaign –
Lenovo ‘for those who do’ – are plastered everywhere.
Senior executives at Lenovo consider building a brand to be a crucial part of Lenovo’s next
phase of growth now that the PC business is on an upswing. The message from the senior
executives is: to have higher market share, you need to have a brand.
(Source: L.P. Wilcocks, using multiple published sources, including Chao, L. ‘As rivals outsource Lenovo keeps production
in-house, Wall Street Journal, 9 July
2012; http://online.wsj.com/article/SB10001424052702303302504577325522699291362.html (accessed 22 May 2013).

21

Chapter 12 Case 4: PanGenesis and offshore outsourcing
‘We have an innovative workforce solution for offshore outsourcing,’ asserted Carlos
Apéstegui, head of PanGenesis’s Costa Rican operations. ‘We have a unique apprentice
programme to tap young Costa Rican students and a special approach to importing highly
qualified labour into Costa Rica. We have created a formula that allows us to lower charge
rates, perform faster development – and all this in this attractive small nation.’ He finished his
sentence by waving at the many tropical plants around him in the garden of the hotel hosting a
large technology conference.
His guest was Paul Matzurski, a deputy CIO at a large US corporation who was visiting Costa
Rica for the first time in search of new destinations for offshore outsourcing. Matzurski
sipped his drink and said, ‘I didn’t know the extent of the tight labour market here and even
the rest of Latin America.’ He continued: ‘You know, labour scarcity, the search for talent,
and a tight labour market are all issues we deal with a lot in the USA. We hear about the tight
labour markets in India and elsewhere. I was surprised to learn this is the case here in Costa
Rica. Even [Costa Rican] President Arias spoke of spending more on education during his
keynote address to this conference yesterday.’
PanGenesis’s CEO, Richard W. Knudson, spoke up: ‘Let me tell you the details of
PanGenesis’s workforce and pricing plans,’ he said to Matzurski. ‘Do you have a sheet of
paper? I will explain.’ Fifteen minutes later, Matzurski had a much clearer appreciation of
PanGenesis’s ambitious plans.
Matzurski leaned back and pondered the PanGenesis value proposition for offshore
outsourcing. This is certainly creative, intriguing, and ambitious, he thought, but will it work?
Will the programme provide the apparent substantial improvement in productivity and quality
at a lower cost with quicker delivery? Will the plan generate enough skilled employees? How
many more years will it take to get the kinks out of this new workforce method?
In 1997, Costa Rica’s president, José María Figueres, flew to California to visit Intel’s
headquarters in Santa Clara, California. This was an unusual visit: the president of a tiny
Central American country was coming to press his case that Intel, one of the world’s most
important tech companies, should choose Costa Rica as the next location of its semiconductor
plant.
The Intel gamble clearly paid off. Costa Rica is now a high-tech star. Intel alone employs
5,500 in country. The other major multinational corporation player in the country is Hewlett
Packard, which employs a similar number. Dozens of other foreign tech companies, including
those in the life sciences, have set up operations in Costa Rica, and hundreds of indigenous
Costa Rican firms have sprouted up selling their products and services to clients in the region,
as well as to North America and to Europe. Until its rise as a tech centre, Costa Rica was best
known for its coffee, bananas, rain forest and, most interesting, abolishing its standing army
in 1948.
Costa Rica has only 4 million people and so the boom in high tech has led to an usual hightech labour crunch with escalating salaries. Of the labour force, there are about 7,500 software
professionals (or as many as 25,000 if broader assumptions are used) and another 20,000
employees in a related boom sector: call centres. Costa Rica has nurtured good schools and
universities, both public and private, yielding one of the highest literacy rates in the world. In
addition to the major public universities, one of its leading a private universities, Universidad

22

Latina, has established a number of computer-related programs that help train software
professionals.
And its timing has been right. By 2007 the global tech boom was in its second decade, with an
accelerating global demand for software professionals in both wealthy and emerging nations
and an ensuing labour crunch and a related problem of turnover as people jumped from job to
job in the hot market seeking higher salaries. At the same time, baby boomers in Europe and
the United States were racing toward retirement, with US Labor Department estimates that by
2020, there will be a 28 million person shortage in the labour force. And so, after looking at
the overheated markets in India and China, and the upcoming crunch in the USA, many have
turned to labour markets in Latin America to fill the void. PanGenesis is one of the companies
that was in the right place.
PanGenesis is an IT services firm targeting and servicing multinational clients. Thus, its
foreign clients outsource IT support offshore (nearshore) to PanGenesis. PanGenesis was
founded in 2002 and is headed by three experienced leaders. American CEO and founder
Richard W. Knudson is an old hand in offshoring, having lived in India for seven years
consulting to the Indian IT industry. Among his many accomplishments, Knudson was
involved in early capability maturity model (CMM) evaluations in India and China. The
firm’s president is Jim Kamenelis, the former CIO of Xerox Palo Alto Research Centre, one
of the most venerated R&D centres in modern US history. Carlos Apéstegui heads operations
in Costa Rica. He is a native of Costa Rica and has 20 years of successful IT business
operations in Costa Rica.
PanGenesis is building several programmes for tapping inexpensive but well-trained IT
labour.
Apprentice programme
CEO Knudson and President Kamenelis began working with the newly elected Able Pacheco
government in 2002 to create apprentice programmes. Working with influential people in
Costa Rica and making his case directly to the president and the science and technology
minister, Pardo-Evens, many of the elements of the programme were in place in 2007.
At its core, the programme targets young, poor students just out of secondary school. There
are many excellent students who are not funnelled through career tracks for various reasons.
Typically they are busy working to contribute to the family income. Only about 20 per cent of
2,500 applicants who apply at the state-funded public university computer science (CS)
program are accepted, with the remaining 80 per cent ripe for an apprentice programme. Of
those who are accepted into the CS programs, 60 per cent are unable to finish. A related
source of apprentices are the 450 students who finish the strong high school IT track,
comprising 2,500 hours of work. In spite of their computer prowess, many seek structure in
their computer career plans.
All of these students can be turned into productive software engineering professionals through
the apprentice programme. The students undergo a rigorous six-month training programme
that includes English immersion; intensive programming concepts; configuration management
using well-known software; quality assurance audits; nightly code reviews; training in
documentation; and teamwork, scheduling and statistical analysis. Once the training is
successfully completed, the graduates become engineering apprentices and are assigned to
support a seasoned software engineer for four hours a day. This pair acts as a development
team. The qualification for an apprentice is modelled in Figure 1 below.

23

Figure 1.
The apprentice relieves the software engineer from having to perform important but nonengineering housekeeping tasks that take up a substantial amount of time. This frees the
engineer to focus on high-impact software engineering tasks.
While fully educated and experienced software engineers are ‘charged out’ at up to $30 an
hour, an apprentice is charged to the client at a much lower rate. PanGenesis’s income for the
apprentice is used to fund the apprentice’s living expenses, pay the university for the
apprentice’s four-year university education to receive a software engineering degree, and
sponsor grants for underprivileged students and support university classrooms and
laboratories.
To remain an apprentice the student must pursue a university degree as a software engineer,
maintain high grades, properly and diligently perform his or her apprenticeship assignments,
and commit themselves to working for PanGenesis after graduating from the university. The
apprentice works four hours each day and attends the university the remainder of the time.
This programme is modelled in Figure 2 below.

Figure 2.
As shown in Table 1 that follows, the apprentice model allows PanGenesis to significantly
underbid competitors while substantially reducing project and development costs and delivery
times. In addition to schedule and cost benefits, the services and products receive a substantial
improvement in quality due to 100 per cent code reviews and frequent quality audits
conducted by the well-trained apprentices. This value-added to quality and project cost is not
factored into the savings already achieved by the apprenticeship model.

24

Costs and charges for apprentice-supported teams

Typical engineering tasks
Core engineering work
Productive housekeeping tasks: configuration management, code
review, quality audits, scheduling, statistical analysis, etc.

Hours
4.0
2.5

Social time: Phone calls, long lunch, breaks, non-business
conversation

1.5

In the traditional model, assume a typical project with the following parameters:
Traditional model
Total project hours
Rate charged in offshore outsourcing
Skills needed: Engineers experienced in J2EE, Web applications

Metrics
10,000
$30 per hour
5 or more years
experience

Number of engineers assigned

5

Effort per week
Duration
Total charge to customer

200 hours per week
50 weeks
$300,000

In the PanGenesis apprentice model, the apprentice takes over some of the software
engineer’s productive housekeeping tasks:
Apprentice model
Number of total productive hours (1,000 hours added for apprentice
management)

Metrics
11,000

Apprentice daily work hours

4

Engineering rate
Apprentice rate
Total weekly charge to customer of a team of engineers and
apprentices
Charge rate by PanGenesis (engineers with five or more years of
experience)

$30 per hour
$9

Effort per week (engineers and apprentices)

300 hours

Duration (total hours/weekly burn rate)
Total cost to PanGenesis of team of engineer and apprentice (hours
× average rate)

37 weeks
$253,000

$1,380
$23 per hour

Table 1: Software engineer productivity: the workday breakdown.

25

Underemployed university graduates
According to the government’s estimate, Costa Rica has 47,000 underemployed or
unemployed university graduates. The Arias government’s minister of science and technology,
E. Flores, would like to retrain them for IT. Therefore, PanGenesis has included a fast-track
programme for these professionals using the apprenticeship programme model. These
professionals have experience in business that would add value to their role as a software
engineer.
The PanGenesis programme is an accelerated two-year programme during which students
work while attending the core software engineering courses to qualify for a degree in software
engineering. The accelerated pace is based on having met prior university general education
and elective requirements from the employee’s previous degree. Income from the client for
the degreed professional/apprentice is used in the same way as the income from secondary
school graduates who cannot afford the university.
Labour importation
The last element of the PanGenesis model is to build a large, scalable, highly qualified
engineering workforce. To accomplish this, it is augmenting Costa Rican labour with guest
workers from other nations. PanGenesis has established an international IT sourcing
capability, hiring skilled software engineers from Eastern Europe, the Philippines and Latin
America. This initial workforce will serve clients and will be the first mentors to the
apprenticeship workforce being developed.
Of particular interest to the firm is the Philippines, which has a relatively large and mobile IT
professional labour pool. Its engineers are well trained, speak excellent English and are also
familiar with Spanish. Filipino employees will enjoy income tax exemption because they are
working outside the Philippines. They will be working for an affiliate company of PanGenesis.
PanGenesis pays their social security tax due on salary received in Costa Rica, and provides
them with room and board expenses.
(Source: © Oshri, I., J. Kotlarksy and L. Willcocks The handbook of global outsourcing and offshoring.
(Basingstoke: Palgrave Macmillan, 2011) second edition [ISBN 9780230293526] pp.70‒76. Reprinted with kind
permission from Palgrave McMillan and the author, Erran Carmel.)

26

Chapter 13 Case 1: WR Grace and information systems
WR Grace is a chemical manufacturer with its headquarters in Columbia, Maryland. Founded
in 1854, the company develops and sells specialty chemicals and construction products and
has been a worldwide leader in those fields. Grace has over 6,300 employees and earned $2.8
billion in revenues in 2009. The company has two operating segments: Grace Davison, which
focuses on specialty chemicals and formulation technologies, and Grace Construction
Products, which focuses on specialty construction materials, systems and services. Between
these two divisions, there are over 200 separate subsidiaries and several different legal entities
that comprise the full company.
Grace has operations in 45 countries around the world. Though Grace is a strong and
successful company, global companies with separate divisions often struggle to unify their
information systems. Grace is not a single, cohesive business unit – it’s an amalgam of many
operating divisions, subsidiaries and business units, all of which use different financial data,
reports and reconciliation methods. Though this ‘fractured’ structure is common to most
global companies, it created problems for the company’s general ledger. The general ledger of
a business is its main accounting record. General ledgers use double-entry bookkeeping,
which means that all of the transactions made by a company are entered into two different
accounts: debits and credits. General ledgers include accounts for current assets, fixed assets,
liabilities, revenues and expense items, gains, and losses. It’s no surprise that a global
company that earns several billion dollars in revenues would have a complicated ledger
system, but Grace’s general ledger set-up was more than just complicated. It was a
disorganised tangle of multiple ledgers, redundant data, and inefficiency processes. The
company had three separate ledger systems from SAP: one for its legal reporting requirements
team and two more for each of its two major operating segments, Grace Davison and Grace
Construction Products. But each of the three implementations for these systems occurred
several years apart, so the differences between the ledgers were substantial. All three ledgers
had different configurations and different levels of granularity within the reporting
functionality, and all three of the ledgers were driven by separate data sources.
The ‘classic’ general ledger is used for reporting revenues and expenditures for all
subsidiaries, accounts and business areas. The Grace Davison ledger stored information on
company codes (subsidiary ID numbers), accounts, profit centres, plants and trading partners.
The Grace Construction Products management ledger stored information on company codes,
accounts, business areas, profit centres, trading partners and destination countries. Grace
Davison used profit-centre accounting for its management reporting, and Grace Construction
Products used special-purpose ledgers to gather the same financial information. If this sounds
like a confusing arrangement, that’s because it was. Consolidating this data across the two
divisions and across its many sub-divisions proved difficult, and compiling company financial
reports was a painstaking and time-consuming task. Reconciling the financial data from each
of the three reporting sources resulted in lengthy financial close cycles and consumed
excessive amounts of employee time and resources. Michael Brown, director of finance
productivity at Grace, said that ‘from a financial point of view, we were basically three
different companies’.
Grace management decided that the company needed to eliminate the financial reporting
‘silos’ and create a system that served all parts of Grace’s business. The company hoped to
create a global financial standard for its financial reporting system, using the slogan ‘one
Grace’ to rally the company to work towards that standard. SAP General Ledger was the most
important factor in Grace’s ability to accomplish its goal. Attractive to Grace because of its
27

many unique and useful features, SAP General Ledger has the ability to automatically and
simultaneously post all sub-ledger items in the appropriate general accounts, simultaneously
update general ledger and cost accounting areas, and evaluate and report on current
accounting data in real time. Grace also liked SAP’s centralised approach to general ledger,
including up-to-date references for the rendering of accounts across all of its divisions.
Consolidating multiple ledgers is a difficult task. SAP General Ledger helped Grace to
simplify the process. SAP Consulting and an SAP General Ledger migration team assisted the
company along the way. SAP implementations feature an SAP team leader and project
manager as well as a migration cockpit. The migration cockpit is a feature of SAP
implementations that offers a graphical representation and overview of the general ledger
migration process. The cockpit displays steps of the migration in sequence and manages logs,
attachments, and other materials important to the general ledger. The migration cockpit helps
to ensure that sufficient planning goes into the general ledger consolidation process, and that
the necessary business process changes accompany the technical changes of implementing a
unified general ledger. SAP and Grace split the project into two main components: General
Ledger Data Migration and Business Process Testing. General Ledger Data Migration
involved acquiring all of the relevant data from Grace’s three separate ledgers, combining it
and eliminating redundancies, and supplying it to the SAP General Ledger. A small team
executed this half of the project. Grace decided to standardise its reporting processes around
profit-centre accounting and built its general ledger design with that standard in mind.
Business process testing was completed by a global SAP team performing multiple full-cycle
tests. In other words, SAP testers accessed the system remotely and tested all of the functions
of SAP General Ledger to ensure that the system would work as planned. The SAP General
Ledger project manager oversaw both components of the project. During the testing process,
SAP testers used a technique called ‘unit testing’, common to many system upgrades of this
type. The testers set up a ‘dummy’ system with a prototype version of the general ledger and
used it to test different types of accounting documents. Grace wanted to modify the
configuration of the general ledger to conform to the company’s unique needs and
circumstances, and made sure that the people who knew what was needed were building the
system and designing its specifications. Because of these adjustments, unit testing was critical
to ensure that configuration changes had not affected the overall integrity of the system. SAP
testers also performed basic scenario tests, complex scenario tests and tests on special
accounting document types in an effort to ensure that the general ledger was equipped to
handle all of the tasks Grace expected it to perform. They also tested in-bound finance
interfaces, such as the HR interface, bank statements and upload programmes, as well as
special document types used by those interfaces. SAP and Grace both knew that a significant
effort would be required to properly test the general ledger, and SAP’s experience with
similar upgrades in the past was helpful in ensuring that SAP performed the proper number of
tests. After the data migration was completed, Grace had to decommission its old ledgers,
which were still pivotal sources for many of the custom reports that the company was
generating on a regular basis. For example, reports are automatically generated from the
special-purpose ledger, or reports that group all the transactions that took place within a
particular country in the past year, and so on. To decommission its old ledgers, Grace had to
eliminate as many of those custom reports as it could, and move the essential ones over to the
new general ledger. Grace recruited employees from all areas of their financial division to
identify the most critical reports.
With the general ledger migration completed, all of WR Grace shares a common accounting
infrastructure. Now management can quickly develop an overall picture of the company’s
financial status, and most of the ledger can be accessed or updated in real time. The financial

28

reconciliation processes at the end of each reporting period were totally eliminated, allowing
Grace to devote less energy to managing its ledgers and more on actually running its business.
The eventual savings in all areas of the business should pay for the installation in a short time.
Grace’s accountants and financial planners will be much more efficient. Managers will spend
less time getting the information they need. The total IT costs for maintaining a single ledger
will be far less than the costs for maintaining three, and fewer errors will make their way into
the general ledger system. Best of all for Grace, the implementation was completed on time
and under budget.
Grace hopes to use the General Ledger platform to continue making other improvements with
SAP. Grace plans to upgrade its consolidation systems, financial planning and analytics
functions to SAP systems. Grace already had a strong relationship with SAP. In 1997, Grace
installed SAP software for the first time, and prior to the general ledger migration, Grace was
already using SAP Business Information Warehouse and NetWeaver Portal globally. This
pre-existing relationship made the process of implementing SAP General Ledger much easier.
It’s also the reason why Grace is so optimistic that by switching to SAP solutions it will
achieve similar gains in other areas of its business.
(Source: L.P. Willcocks, using multiple published sources.)

29

Chapter 13 Case 2: 3M develops a global IT architecture
3M is a diversified technology company with a global presence. Its products are available in
200 countries, it has operations in 62 countries and it produces over 55,000 products. In 2009,
the company generated $23.1 billion in revenue, down from $25.6 billion (8 per cent) in 2008
as the global recession slowed business activity. The company employs 76,000 people. 3M,
with headquarters in Minnesota in the USA, is the poster-child for global US firms: 63 per
cent of its revenue comes from offshore sales (14.6 billion) and 58 per cent of its employees
are international.
Historically 3M’s core competencies have been sticky films and scratchy papers (sandpaper)
and, since its founding in 1902, the company has continuously demonstrated through new
products just how much the world depends on these competencies. 3M is organized into six
largely independent divisions: industrial and transportation (tapes, abrasives and adhesives);
healthcare (surgical tapes to dental inserts); consumer and office (furnace filters to Post-it
notes and Scotchbrite pads); safety, security and protection services (respirators to Thinsulite
insulation and RFD equipment); display and graphics (LCD monitors to highway reflective
tape); and electro and communications (insulating materials to disk drive lubricants). 3M is
among the leading manufacturers of products for many of the markets it serves.
With such a large global presence and with many of its foreign operations the result of
purchases, the company was until recently a collection of legacy applications spread across
the globe. 3M inherited the hardware and software of acquired companies, from the shop floor
to supply chain, sales, office and reporting systems. Even where 3M expanded organically by
moving into new countries, each of the six divisions, and thousands of their smaller
operations, developed their own information and reporting systems with very little corporate,
global oversight. As one manager noted, if 3M continued to operate its business with an
accumulation of disaggregated solutions, the company would not be able to efficiently operate
in the current recession, or support future growth.
In 2008, 3M began a series of restructurings of its operations, including a review of its global
systems. In 2010, 3M adopted SAP’s Business Suite Applications to replace all of its legacy
software around the world. The intent was to transform its business processes on a global
scale, and force independent divisions to adopt common software tools and, more importantly,
common business processes. The price tag was also global: licensing fees paid to SAP are
reported to be somewhere in the region of $35 million to $75 million. Business Suite 7 is
SAP’s brand of enterprise systems. It consists of five integrated modules that can be run on a
wide variety of hardware platforms, and which work well with software from other vendors.
The core business process and software modules are customer relationship management
(CRM), enterprise resource planning (ERP), product lifecycle management, supply chain
management (SCM) and supplier relationship management. Each module has pre-defined
business processes and the software needed to support these processes. Firms adapt their own
business processes to these ‘industry best practice modules,’ or make changes in the SAP
software to fit their business models. Business Suite is built on a service-oriented architecture
(SOA), which means it can work well with data from legacy database systems and offers
lower implementation costs.
In implementing SAP’s Business Suite, 3M is not following in the footsteps of some ill-fated
global system initiatives by other Fortune 500 companies. Rather than do a ‘rip, burn, replace’
of all its old software, 3M is rolling out the SAP enterprise software in phased and modular
stages. Following a piecemeal approach, it is rolling out a demand forecasting and supply

30

planning module in Europe first, and then once the concept is validated, additional rollouts
will follow around the world. In Asia-Pacific, 3M is implementing its ERP system over the
next few years. In the past, executive managers in the USA did not have timely, accurate or
consistent information on how all the firm’s business units, regions and products were
performing. To a large extent, 3M was not manageable or governable prior to the current
effort to rationalise its systems. One solution will be SAP’s business intelligence (BI)
software which will enable 3M’s management to access accurate and timely data on business
performance across its divisions to support informed decision-making. The SAP software
agreement enables 3M to integrate the best practices it has gained with its existing BI
deployments from the SAP BusinessObject portfolio in the USA and in other regions into the
global rollout template. One advantage of having integrated global systems is the ability to
transfer what you learn in one region to another region. In a further sign that 3M management
has a keen understanding of corporate structure and strategy, the firm plans to maintain a
large measure of independence among the six divisions because their histories and products
are so different. It will not force the divisions to adopt a single instance of the SAP products
but instead will allow substantial variation among divisions – what one wag called ‘virtual
instances’ of the software that reflect the needs of customers served by the various divisions.
3M’s efforts to create a global IT infrastructure identify some of the issues that truly global
organisations need to consider if they want to operate across the globe. Like many large,
multinational firms, 3M grew rapidly by purchasing other businesses in foreign countries, as
well as through expanding domestic operations to foreign countries. In the process, 3M
inherited hundreds of legacy software systems and developed new systems, few of which
could share information with one another, or report consistent information to corporate
headquarters. 3M’s legacy information systems simply could not support timely management
decision-making on a global scale.
To solve its global management and business challenges, 3M adopted an integrated suite of
software applications from SAP, one of the world’s largest software firms. 3M had to devise a
flexible, modular implementation strategy that integrated both the existing legacy systems and
preserved some measure of autonomy for the six divisions that are the basis of the company.
3M is now able to respond to changes in business conditions around the globe and around the
clock.
(Source: © L.P. Willcocks, using multiple published sources.)

31

Chapter 12 Case 3: ABB and a ‘multinational’ approach
When ABB was created in 1988 through a merger between Swedish ASEA AB and Swiss
BBC Brown Boveri, the new CEO, Percy Barnevik, believed that local presence was key and
soon became famous for his ‘multi-domestic’ approach. Under the company slogan ‘Think
Global, Act Local’, Barnevik created a federation of thousands of companies that were
distinct businesses and separate legal entities. In Barnevik’s own words, ABB wanted to be
‘global and local, big and small, radically decentralised with centralised reporting and control’.
For many years, ABB’s local operations were organised within the framework of a twodimensional matrix aimed at maximising performance in every country while coordinating
across business product areas globally. Every local manager reported to one or several
product area managers responsible for developing worldwide product and technology
strategies, as well as a regional manager in charge of executing these strategies based on the
unique needs of local markets. However, the driving thrust of ABB was local profits; if a local
manager could show good financial performance, he or she enjoyed great operational
independence from regional or global influence.
ABB relied on the principle that a decentralised organisation works effectively when there is
financial accountability to higher-level managers. To this end, the company designed a global
financial reporting system called ABACUS, which collected uniform financial performance
data at a high level for the company’s 4,500 profit centres.
ABB’s ‘multi-local’ model was held up as a best practice example of successful
decentralisation during the 1990s. The local nature of the ABB business, the ABACUS
financial performance measures, the effort to foster culturally sensitive managers and the
small but effective top management team were considered the key strengths of ABB’s
multinational approach.
(Source: Kettinger, W., D. Marchand and J. Davis ‘Designing enterprise IT architectures to optimise flexibility
and standardisation in global business’, MISQ Executive 9(2) June 2010, pp.95–113..Reprinted with kind
permission from MISQE.)

32

Chapter 13 Case 4: Escalation in global outsourcing projects: the
XperTrans-C&C BPO Case 1
Introduction
It is March 2011. Francesca Harding, an independent consultant with many years of
experience in IT and business process outsourcing, has been hired to analyse the recent
history of outsourcing of the human resource (HR) function at Clean&Cure (C&C), a global
multinational company. John Delaney C&C’s CIO, appointed in February 2011, invited
Harding into his office, then shook his head ruefully. ‘You know, Francesca, the more they
tell me, the more I just do not understand why they went on with it. I mean, I like the original
idea, the principle, but there were so many things they could and perhaps should have done....
well, that’s my thinking anyway. And of course things have moved on from last year when the
contract was taken over by another supplier. I can’t say we are happy. We have just brought
HR in Germany back in-house. What I want from you is a sober, objective report on what
happened and what we can learn from it, but more importantly what we should do now.
Something I can discuss with HR Director, and the CEO as a matter of urgency. Are you up
for it?’ Francesca Harding nodded. ‘I am going to need to talk to quite a few people, John,
and I am going to need a lot of documents. Then give me two weeks, and I will come back
with something that hopefully makes sense. These things are like detective stories, except
there rarely is one person or one factor, or one explanation, but I guess the really important
thing is that the organisation gets to learn from it, and gets to put its sourcing, project
management and IT function on the right footing.’ ‘Yeah, that’s right,’ said Delaney. ‘Well
good luck with it.’ And with that Francesca Harding went off to do her analysis of the
XperTrans- C&C case that had caused the participant organisations so much grief over the
previous four years. Here is what she found.
Beginnings
XperTrans is a US-based outsourcing provider, which entered into human resources
outsourcing (HRO) services in the early 2000s. However, working assiduously in the early
2000s, XperTrans established a HRO client base of renowned multinational companies within
a matter of a few years. The HRO business line was not XperTrans’s core business – in fact in
2007 it only accounted for 10 per cent of the company’s revenues. The firm’s main areas of
focus have always been, and into 2007 remained, Customer Management and Information
Technology operations.
In 2007 XperTrans was successful in winning the biggest global HRO deal of the time, with
the client company Clean&Cure (C&C), beating big competing suppliers such as Accenture
and IBM. The XperTrans-Clean&Cure contract was signed in May 2007, though the bidding
process stretched back into 2006. A ten-year contract was signed worth more than $1 billion.
XperTrans agreed to support 120,000 C&C employees working for 250 different C&C
subsidiaries all around the world. Within the Europe, Middle East and Africa region
XperTrans’s aim was to cover 44 C&C countries in 13 languages from their Hungarian
service centre with a planned total headcount of 150‒200 employees.
1

This case is based on real client and supplier companies but the two organizations have been renamed to
preserve the anonymity requested. Participants from the two companies have also had their names changed in
the text. All detail is otherwise accurate except where confidentiality or competitiveness issues arise, in which
case the data has been suppressed or generalised. The case has been designed for class discussion only rather
than to indicate good or bad practice in the particular circumstances prevailing. The authors are Dorottya
Kovasznai and Leslie Willcocks of the LSE.

33

The aim of the contract was to provide a HRO solution that covered the full employee
lifecycle from recruitment to termination, supporting all HR domains (recruitment, HR
administration, payroll, compensation, benefits, training,etc.). The designed business
processes were based on XperTrans’ self-developed HR Information Technology Services.
The HR IT Services included the management and administration of a centralised and
consolidated global HR system that was deployed to manage and administer employee data
and reporting.

34

Massive recruitment campaign
and XperTrans Service Centre site
ramp-up in preparation for
planned July 1, 2009 Wave B go
live. Wave B training and Wave C
implementation continue, but a
growing number of countries are
delayed to later implementation
Waves

Recruitment of EMEA
regional implementation
team begins

XperTrans-C&C deal signed in May 2007:
- Biggest ever HRO contract at the time
- Project value (for 10 years) exceeded $1 billion
- XperTrans agreed to support 120.000 C&C
employees globally

Febr 2010:
-XperTrans CEO &
president replaced
March 2010:
-XperTrans sells HR Management line of
business to competitor ANG

Wave A go live with 2 countries
(South Africa-1 March, Germany-1
April):
-Serious operational issues after
go live (e.g. payroll)

Sales pursuit and
contract crafting
process begins

2006

Aug 2009 - Febr 2010:
-Wave A stabilisation

June 2010:
-ANG takeover comes into effect
July 2010:
-C&C takes payroll back
in-house globally

Early 2009:
-Series of Wave A
country delays

2007

2008

2009

Global design workshops finish
and EMEA design workshops
begin: 88 EMEA local workshops
to be held by early 2008

2010

2011

Oct 2009:
-Majority of Wave B
resources released
Aug 2009:
-Project put on hold for an unspecified period
and XperTrans asked to stabilise Wave A
operations
-Announcement of Wave B resources' layoff

Implementation team starts
developing Service Centre
operational workflows and
processes
EMEA Service Centre management and
Wave A employees recruited and
trained. Planned total EMEA Service
Centre headcount 150-200 to support 44
C&C countries in 13 languages

June 2009:
-Temporary freeze of global Wave B
preparation activities announced
-No new go live date specified

Figure 1: XperTrans-C&C Timeline (Europe Middle East and Africa focus).
35

In addition, HR IT also covered the management of enterprise application interfaces,
security, business continuity and disaster recovery services, as well as the administration
and management of integrated Employee and Manager Self Service applications.
Automation and integration of HR processes were crucial for C&C, as by 2007 the
company’s HR activities were performed using 665 different software applications across
its subsidiaries. In contrast, XperTrans set out on a large-scale rationalisation, aiming to
deliver HRO services to C&C based on 30 software packages and tools. As originally
planned, most C&C subsidiaries used SAP to manage their HR operations, so the supplier
XperTrans decided to stick to this and host SAP as part of its service. This meant that all
payroll functions and the full employee lifecycle management (compensation, benefits,
HR administration, etc.) would be handled through a standard SAP HR module, though
these were to be harmonised across the various C&C subsidiaries. In addition, XperTrans
planned to develop custom applications to (1) handle Contact/Case tracking between
C&C and the XperTrans service centre, (2) integrate payroll across subsidiaries, and (3)
to conduct employee satisfaction surveys. The remaining 27 software/tools to be applied
by XperTrans were to be purchased from other third party vendors and covered many
different purposes. Three examples were: Recruiting/Applicant Tracking (Taleo),
Performance Management / Succession Planning (SuccessFactors), and Knowledge
Management (Authoria).
The original intention of XperTrans was to implement their HR outsourcing model
developed in the USA with minimal changes, despite the implementation going into
C&C’s European, Middle East and Africa (EMEA) region.
The project plan and its implementation
The project was broken down into numerous Waves and Phases and a country-by-country
go-live plan in order to realise a step-by-step implementation approach and to avoid the
pitfalls of a ‘big-bang’ strategy. The initially planned project timelines are shown in
Figure 1 and Figure 2.

36

Figure 2: XperTrans-C&C project waves and countries.

37

Figure 3:XperTrans-C&C project go-live milestones (EMEA-specific).

38

The project had an extremely ambitious timeline: global design workshops were to be
finished in late 2007, regional design and implementation were supposed to be completed
within the following two years, and all countries were expected to go live by mid-2010
(see Figures 2 and 3). However, the EMEA implementation team encountered a series of
difficulties when they commenced the development of regional HR business processes
because the adjustment of the US-developed service model to the local circumstances
emerged as a far from straightforward process. In particular, the US model could not
easily accommodate the immense complexity of the country-specific labour legislation
requirements and the diverse HR practices present in the EMEA region.
After the go-live with the first wave of countries (‘Wave A’: South Africa and Germany)
in early 2009 (see Figure 2), XperTrans experienced a series of serious operational issues
which made it clear that the implemented HRO solution was far from ideal. The main
problem was XperTrans’s inability to meet the payroll accuracy service level agreement,
which obviously raised concerns on C&C’s side. To make things worse, the
implementation team was struggling to meet the development deadlines set for the
upcoming project waves and consequentially numerous country-go lives had to be
postponed.
Still, in spite of the growing problems surrounding the project, it came as a surprise for
XperTrans that in June 2009 C&C requested to delay the Wave B go-live scheduled for
the following month (see Figure 2). Finally, in August 2009 the client requested
XperTrans to put the entire project ‘on hold’ for an unspecified period of time and asked
them to concentrate on the stabilisation of the live Wave A countries. Although in the
EMEA region Wave A only involved a relatively small employee population in South
Africa and Germany, on a global level XperTrans were already servicing more than 50
per cent of C&C’s total headcount. This was due to the fact that in North America the
USA and Canada ‒ with a significant employee population ‒ had already gone live. At
this stage, Clean&Cure were worried that the outsourcing project might jeopardise their
entire HR operations, but in their view, it was already too late for them to back out of the
contract.
From August 2009 to February 2010 XperTrans worked diligently on stabilising the
project, but the majority of their resources hired to support the Wave B countries were
laid off. In early 2010 XperTrans announced that their CEO and president were to be
replaced, and in March 2010 they agreed to sell their HR management line of business to
ANG (a competitor in the HRO arena) with an effective date of 1 June 2010. ANG took
over all client accounts from XperTrans and XperTrans’s own in-house HR operations.
ANG also brought its own clients to the Budapest-based service centre XperTrans and
C&C had established. The future of the project became insecure. In practice, Clean&Cure
decided to take payroll back in-house globally in July 2010, but there was no decision on
the future of the remaining outsourced HR operations.
Throughout the winter of 2010‒11 ANG worked initially on the idea of expanding the
number of clients serviced from Hungary, but after reviewing the XperTrans contracts
they had taken over, they changed plans. In March 2011 C&C decided to backsource
their entire German account with immediate effect. The outsourcing arrangement there

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was not working well, and C&C found themselves facing a series of further decisions to
sort out their HR sourcing strategy and future.
Outsourcing management
Francesca Harding contemplated this history with little pleasure. She could see that the
timelines were ambitious and that there was a lot more complexity than both companies
originally saw in what they were undertaking. She also drew on her long experience and
did an analysis of other issues against the better practice she had seen in many other
outsourcing arrangements. In particular she focused on strategy, contracting, relational
governance and project management.
On strategy, C&C had turned to outsourcing to harmonise their disparate HR systems into
a more cost effective global HR system. The aim was to outsource all their HR activities
except that which was considered ‘strategic’. For XperTrans, HRO had always been a
small part of its operation, and this major deal offered a great opportunity to strengthen
this line of business by creating a prestige client and site. At the time the deal was signed
there were hardly any global HRO contracts of this size and scope, so there were no
robust benchmarks available. XperTrans were selected because they seemed to provide
the best combination of cost, scope, timeline and transformation. Harding knew some of
the senior managers involved on the XperTrans side and managed to get to talk to several
of them on the telephone. One gave her some insight into the selection process:
‘The people we had on-board during the sales pursuit were incredibly convincing. They
were saying our capabilities were fantastic – if we get this deal we are able to build the
plane while flying it.’ (XperTrans regional operations implementation manager).
As far as Harding could work out, contract crafting had been a long and meticulous
process, but it involved mainly sales people from XperTrans’s side and no experts with
global service centre operation experience. In an attempt to please the client, XperTrans
had also committed to provide a level of service that they were not providing to any other
client. They also set an ambitious timeline. XperTrans had also promised to implement
their US HR outsourcing solution with minimal changes to the EMEA region, without
verifying the viability of this model. It was a fee-for service contract (employee/month)
which turned out to be not at all profitable for XperTrans. A senior manager from
XperTrans gave Harding some further insight that sounded useful:
‘American companies signing global deals have a very narrow minded vision, they don’t
quite still understand that you can’t do it the same way in 44 countries as you do it in one.
It would be important to have people from operations involved when crafting the contract
to avoid setting unrealistic service levels.’ (XperTrans senior operations manager).
Harding contemplated governance, relationships and project management. The
relationship between the two companies seemed to have been generally positive and
cooperative. C&C agreed to make payments towards the initial investment that
XperTrans had to make upfront. The joint governance procedures were specified in detail
by the contract including escalation, dispute resolution and change request procedures.
The appointed contract managers on both sides were responsible for overseeing the
development of the project on an ongoing basis. C&C was a very hands-on client and
they were following the project closely at every stage. On the face of it there was not
much wrong in these areas, as far as Harding could see.

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She decided to dig deeper still, but in another way. Harding re-looked at the case details
and the interviews she had carried out, firstly at the macro level, then at middle and micro
levels. She asked herself – how could this outsourcing arrangement secure continuous
commitment from both organizations over several years, despite the obvious question
marks that kept coming up in that period amongst everyone she talked to who had been
involved in the project?
Escalation at the macro-level
The picture that emerged made it clear that the roots of XperTrans’s commitment to the
C&C project went back to the history of the HRO business line within the supplier
organisation. According to a senior XperTrans manager:
‘In the early 2000s XperTrans wanted to go into HRO, because it was fashionable and it
seemed to be a big market. They thought it was similar to the other call centre businesses
the company had already been in, but this was a mistake they made. In the US HRO is
still relatively simple, but here in EMEA it is so massively complicated.’
In 2007 XperTrans’s HRO business line was still not profitable and winning a huge
global contract with C&C was perceived as a great opportunity to turn things around.
C&C fitted XperTrans’s desired client profile and there was a determination to learn from
past mistakes and to do outsourcing with this client well. Furthermore, the project meant
great opportunities for XperTrans locally as well, because the scope for Europe was
massive. As a consequence, it soon became received wisdom that the C&C project was
vital for both XperTrans as a company and for the Hungarian service centre. However, as
the events unfolded, it turned out that the project was vital for XperTrans’s HRO business
line only.
XperTrans’s original aim was to implement their US HR outsourcing solution based on
an integrated technology platform with minimal local customisations in all C&C
countries worldwide. Although it soon turned out that for some HR domains (e.g. payroll,
benefits) the US solution could not be easily applied to Europe, the EMEA resources had
no choice but try and make the solution stipulated in the contract work by every means
possible. To make things worse, XperTrans had committed to provide a level of service
that they were not providing to any other client at the time. They also decided to start the
EMEA implementations with a particularly complicated country, namely, in this case,
Germany.
Harding could see that there had been a strong disconnect between what was promised,
the level of in-house knowledge XperTrans had, the timeline that was given and the
actual requirements of the individual countries. The people who had a high level view
and who made the high level judgements simply did not have the detailed information
about what exactly would be required. This resulted in a serious resource planning issue
and a series of middle-level and micro-level problems. A senior operations manager from
XperTrans gave Harding the following summary:
‘They did not take into consideration the language differences and the fact that each of
the 44 EMEA countries has its own unique legal regulatory system. I believe that the staff
headcount calculations were fundamentally flawed as well. The complexity of the whole
project was not mapped adequately and thus the IT support base of the whole operation

41

could not be calibrated adequately. XperTrans’s HRO model works in the US, but not in
Europe due to the local complexities and due to cultural differences.’
Escalation at the middle-level
The XperTrans EMEA team assigned to the C&C project started to experience
difficulties during the local design workshops. Though they were following the process
development instructions provided by the US team diligently, it was not clear to them
how the documents created at the workshops could be turned to usable work processes at
the end of the day. According to one XperTrans manager:
‘The atmosphere at the local design workshops was generally very cooperative, but I
think initially people did not really understand what their input was supposed to be… At
that point I thought. ‘How on earth will this all come together?’’
In addition, as more and more countries were postponed to later project waves, it became
a problem in itself that the development team was still working from the information
collected on the local design workshops a long time previously. As one XperTrans
manager told Harding:
‘Some of the information we used as an input to our work processes were based on threeyear-old C&C decisions which had not been revised as time went by. This of course led
to missed targets and serious escalations and disputes. It was simply unrealistic to expect
that XperTrans was going to provide a service of six sigma accuracy under these
circumstances.’
The sheer size of the venture and the high number of different teams working on the
project often created situations when the stakeholders’ interests clashed. There were no
people from operations involved in the contract crafting process, and as a result,
XperTrans committed to providing unrealistically high service levels in an attempt to
please the client. As the regional operations implementation manager from XperTrans put
it:
‘Operations should have been involved in the design and in setting the service level
agreements (SLAs), not just sales. What sales people tend to forget is that they should
regard operations as the end user, because it is operations who actually need to run the
service centre when it is fully implemented.’
All interviewees commented on the communication problems between the different
working groups. Apparently, the XperTrans team had worked in silos: the solutions
experts designed the processes, the IT specialists tried to translate them into IT
functionality, and finally it was the operations team who had to work along the lines of
those processes. To complicate things further, the IT specialists were all highly paid
contractors who did not understand operations. Being outsiders, IT people did not have
any incentive to spend time on trying to understand operations’ needs and this of course
impacted the developed solution in a negative way.
Finally, XperTrans’s practice of evaluating progress and making decisions had been
heavily based on routines. The high-level contact managers never stopped to reassess the
overall viability of the venture as a whole – they solely monitored project milestones and
deadlines. According to a XperTrans training manager:

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‘We got to a stage where instead of creating processes adequately, people were rushing
to finalise processes towards particular deadlines. We have been replacing many of the
processes created before go-live, because they were created by people who were told to
create processes, but who did not have a stake in creating those processes accurately.
Some of the processes were very, very high level and vague, others were patchy and
incomplete.’
Escalation at the micro-level
The macro-level decision to try and implement XperTrans’s US HR outsourcing model in
all C&C countries worldwide seemed to have had plenty of micro-level consequences. As
a result of the complexity of the project, the ambitious timeline, the extremely strict SLAs,
the flawed resource planning and the inadequate level of in-house expertise, the Wave A
countries experienced serious difficulties after go-live. According to one project
coodinator:
‘There were a series of seemingly insignificant practical issues which caused huge
problems after we went live. There were numerous translation and data conversion
problems, which caused serious SAP errors in the live system. The translation of
fulfilment items to local languages had not been performed adequately and there were
certain hard copy retention requirements the service centre had no information about. In
some cases, processes were developed without taking into consideration the realities of
the countries in question (e.g. you cannot build a process which relies on the postal
services in South Africa.)’
According to one senior C&C manager, XperTrans started to lose credibility with C&C
when they decided to hire external consultants to help them manage the implementation
in the EMEA region:
‘A company employing consultancy in anything is doing so because it does not have
enough knowledge in-house. And that is fine. But if you are supposed to be a HRO
provider, it’s a bad sign if you have to hire consultants to tell you about employment law
in certain countries.’
Organisational characteristics seemed to have further compounded the situation by
preventing decision-makers from getting a clear picture of the real state of the project. On
the client’s side, C&C had not requested early feedback from their own team internally –
they waited for almost a year before they looked into the evaluation of the project. On
XperTrans’s side, the delay in the client’s feedback had helped to maintain the
impression that the project was more or less on track. Interestingly enough, there had
been no employee transfers between C&C and XperTrans, which contributed to the low
level of transparency between the two organisations. As XperTrans had not had prior
experience in HRO projects of this scale, they did not have adequate planning,
monitoring and self-assessment procedures in place:
‘At the beginning a lot of time was spent on having fun at workshops (and a lot of money
was spent on travelling and staying in luxury hotels). But by the time got to 2009, travel
restrictions had to be imposed because we were exceeding budgets; deadlines needed to
be extended and panic started. I just think that there have not been realistic estimates
made of the time and resources needed.’ (XperTrans training manager).

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Harding recalled that the contract had failed to take into consideration the circumstances
of the regions outside the USA, and global leadership had not paid attention when
European managers were raising concerns about the viability of the model in EMEA.
Furthermore, XperTrans were not only working in silos, but in many cases the roles and
responsibilities within the teams had not been clarified either. Harding could see that this
made it hard to oversee the real status of the project and to assess the progress made.
According to one senior manager:
‘The gaps were frustrating: the initial processes did not specify responsibility areas,
decision-making points and exact escalation routes. At go-live no-one had the authority
to initiate a comprehensive clean-up to evaluate what went well and what was missing.
From April 2009 onwards we had been experiencing serious operational issues, but there
was no-one there to put the project back on track. We had to wait until October 2009 for
the stabilisation team to arrive.’ (XperTrans project coordinator).
In addition to the broken communication lines and the lack of clarity over roles, timing
was another issue. Many functionalities were not finalised until a couple of weeks before
go-live, so operations people had not been able to be properly trained:
‘We had to wait until go live to see what actually happens in the systems and how. The IT
specialists of course had known it, but they would not share, not even with the
implementations team. We were talking about fictional theoretical systems up until the
very last day before go-live.’ (Implementation team coordinator)
From the point of view of technology, SAP HR was supposed to be configured in a
standard way globally, but eventually the EMEA context had made country-specific
customisations unavoidable. Due to cost and time constraints, there were a lot of SAP
items not finished in time, while others were configured incorrectly. There was also an
extraordinary lack of resources available for testing the systems. In addition, the testing
did not go well, which made the client very concerned. At the end of the day, inadequate
IT planning had cost XperTrans a lot of money, because it negatively impacted on the
service centre’s readiness for go-live and it resulted in missing service levels on a regular
basis. Finally, Harding noted that, although the driver of HR outsourcing was supposed to
have been automation, XperTrans operation managers estimated that only around 50 per
cent of the C&C project’s service centre processes were automated as of July 2010.
Conclusion
In rereading her notes the same questions kept coming back to Francesca Harding. She
had seen it all too frequently in her career and not just in outsourcing. It seemed to be all
too common in all sorts of organisational ventures. Was she seeing it again here? The
phenomenon of escalation. Why do organisations embark upon questionable outsourcing
ventures and why do they persist with them well beyond an economically defensible
point? How and why does such escalation of commitment occur? And how do you deescalate and turn such projects around? She also was intrigued to see the extent to which
the XperTrans-C&C case followed the better practices she regularly recommended to
clients and which also appeared in recent reviews of outsourcing practices. Harding
turned her mind to writing a report. She had two days of work ahead. She drafted out the
questions she needed to answer:

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1. How do the client and supplier outsourcing practices exhibited in the XperTransC&C case compare against what is recommended as ‘best’ or effective practices
by outsourcing advisers and researchers?
2. Why did the escalation of commitment to this IT-enabled HR business project
occur? What de-escalation should have been carried out, and when?
3. How can de-escalation of the project be managed, going forward, and how should
C&C set up its project practices to ensure they do not repeat such an experience?
4. What implications does this experience have for C&C for redesigning its back
office IT function to help business functions like HR get their IT delivered using
both internal expertise and external services?
5. What should C&C do now? Clearly a sourcing strategy had to be developed, and
within it there are immediate challenges to be dealt with and decisions to be made.
While the new supplier had taken over the contract in July 2010, there seemed
little interest on all sides to continue with the project, at least on existing terms.
Should C&C terminate the contract, renegotiate with ANG, bring all HR back inhouse as done with payroll or terminate the contract then relet it through a new
competitive bid process? Each of these options had their own challenges. Harding
knew her hard-won experience was going to be vital if she was going to make
headway on making a recommendation for the way forward.
(Source: © Kovasznai, D. and L.P. Willcocks ‘Escalation in global outsourcing projects – the Expertrans
C&C BPO case’, Journal of Information Technology Teaching Cases 2, 10-16 (March 2012), pp. 1‒7.
Reprinted with kind permission of the authors and Palgrave MacMillan.)

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Chapter 14 Case 1: Royal Dutch-Shell and expatriate policies
Royal Dutch-Shell is a global petroleum company with joint headquarters in both London
and The Hague in the Netherlands. The company employs more than 100,000 people; at
any one time approximately 5,500 of whom are living and working as expatriates. The
expatriates at Shell are a diverse group, made up of over 70 nationalities and located in
more than 100 countries. Shell, as a global corporation, has long recognised that the
international mobility of its workforce is essential to its success. By the 1990s, however,
Shell was finding it harder to recruit key personnel for foreign postings. To discover why,
the company interviewed more than 200 employees and their spouses to determine their
biggest concerns. The data were then used to construct a survey that was sent to 17,000
current and former expatriate employees, expatriates’ spouses and employees who had
declined international assignments.
The survey registered a phenomenal 70 per cent response rate, clearly indicating that
many employees thought this was an important issue. According to the survey, five issues
had the greatest impact on the willingness of an employee to accept an international
assignment. In order of importance, these were:
1. separation from children during their secondary education (the children of British and
Dutch expatriates were often sent to boarding schools in their home countries while
their parents worked abroad)
2. harm done to a spouse’s career and employment
3. failure to recognise and involve a spouse in the relocation decision
4. failure to provide adequate information and assistance regarding relocation
5. health issues.
The underlying message was that the family is the basic unit of expatriation, not the
individual, and Shell needed to do more to recognise this.
To deal with these issues, Shell implemented a number of programmes designed to
address some of these problems. To help with the education of children, Shell built
elementary schools for Shell employees where there was a heavy concentration of
expatriates. As for secondary school education, it worked with local schools, often
providing grants, to help them upgrade their educational offerings. It also offered an
education supplement to help expatriates send their children to private schools in the host
country.
Helping spouses with their careers is a more vexing problem. According to this survey
data, half of the spouses accompanying Shell staff on assignment were employed until the
transfer. When expatriated, only 12 per cent were able to secure employment, while a
further 33 per cent wished to be employed. Shell set up a spouse employment centre to
address the problem. The centre provides career counselling and assistance in locating
employment opportunities both during and immediately after an international assignment.
The company also agreed to reimburse up to 80 per cent of the costs of vocational
training, further education or reaccreditation, up to a maximum of $4,400 per assignment.

46

Shell also set up a global information and advice network known as ‘The Outpost’ to
provide support for families contemplating a foreign posting. The Outpost has its
headquarters in The Hague and now runs 40 information centres in more than 30
countries. The centre recommends schools and medical facilities and provides housing
advice and up-to-date information on employment, study, self-employment and volunteer
work.
(Source: L.P. Willcocks, using multiple published sources and annual reports.)

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Chapter 14 Case 2: Lenovo and human resources
In late 2004 IBM announced that it was getting out of the personal computer business and
would sell its entire PC operations to Lenovo, the fast-growing Chinese manufacturer of
personal computers, for $1.75 billion. The acquisition turned Lenovo into the world’s
third-largest PC firm. It also raised many questions about how a Chinese enterprise with
little global exposure would manage the assets of a US firm that had 2,400 employees in
the USA, 4,000 in foreign manufacturing facilities, and 3,600 sales and distribution
centres in over 50 countries around the world.
Lenovo moved quickly to reassure employees that it was committed to building a truly
global enterprise with a global workforce. Less than 24 hours after the two companies
announced the acquisition, the human resources department at IBM’s PC division
released a 59-point question-and-answer memo to all employees informing them that they
would become employees of Lenovo, that their compensation and benefits would remain
identical or fully comparable to their IBM package, and that they would not be asked to
relocate. The memo also made it clear that employees could accept employment at
Lenovo or leave, with no separation pay. IBM would not consider them for a transfer
within IBM or recruit or hire the new Lenovo employees for two years.
What really surprised many observers, however, was the composition of the top
management team at the new Lenovo and the location of its global headquarters. Top
executives at Lenovo were clever enough to realise that the acquisition would have little
value if IBM’s managers, engineers and salespeople left the company, so they moved
Lenovo’s global headquarters to New York! Moreover, the former head of IBM’s PC
division, Stephen Ward, was appointed CEO of Lenovo, while Yang Yuanqing, the
former CEO of Lenovo, became chairman, and Lenovo’s Mary Ma became CFO. The 30member top management team was split down the middle – half Chinese, half American
– and boasted more women than men. English was declared the company’s new business
language. The goal, according to Yang, was to transform Lenovo into a truly global
corporation with a global workforce that would be capable of going head-to-head with
Dell in the battle for dominance in the global PC business. The choice of Ward for CEO,
for example, was based on the assumption that none of the Chinese executives had the
experience and capabilities required to manage a truly global enterprise. A candidate’s
nationality was not an issue for Lenovo when deciding who should hold management
positions. Rather, the decision focused on whether the person had the skills and
capabilities required for working in a global enterprise. Lenovo was committed to hiring
the very best people wherever they might come from.
Commenting on the acquisition, Bill Matson, a former IBM executive who became senior
vice president of human resources at Lenovo, noted that the company would use the same
set of principles to guide workforce management in all locations. He noted that you have
to establish the broad principles of how you want to manage your business, but then you

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have to be very astute about making sure that those principles are applied in every local
market so that you remain responsive to the needs of people in different environments. 1
(Source: L.P. Willcocks, using multiple published sources, including Hill, C. International Business. (New York,
McGraw Hill, 2010) [ISBN 9780071220835] Chapter 18.)

1

Quoted in Hill, C. International business. (New York: McGraw Hill, 2010) [ISBN 9780071220835]
Chapter 18.

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