Monday, August 15, 2005

Forget multinational: what does it mean to be multifunctional?

True risk diversification will one day involve going across disciplines, not simply going across borders.

FT.com : Lessons on forging a world-beater.
Peter Marsh
2378 words
9 August 2005
Financial Times (FT.Com)
English

(c) 2005 The Financial Times Limited. All rights reserved

The most common view of a multinational is that it sells products, services or consultancy advice and tries to make its customer base as broad as possible, but without moving away from its area of expertise. That is how a giant business such as Procter & Gamble, which makes a huge range of consumer products but does not venture into consultancy or services, has built up an empire that sells to 180 countries.

KPMG and Deloitte, two of the world's biggest accountancy firms, have moved into management consultancy. Both, however, would be reluctant to use their financial knowledge to venture into manufacturing.

It is far from common for an international enterprise to set out to be an expert in a specific type of business and then use its knowledge to move into a number of new areas, spanning manufacturing, service and consultancy. The approach adds up to that of a "multi-function" business - one with a knowledge base that is fairly narrow but can be leveraged globally across a range of business functions.

One company that is trying to follow this strategy is Duferco, a "multi-function" business in the steel industry. Duferco's approach sheds light on a novel strategy that could appeal to companies in other spheres. For instance, it would be possible - at least in theory - for consultancy companies that are experts in forensic science to offer kits of chemicals to practitioners in the field, such as police forces. In biotechnology, a number of companies supply medical diagnostics kits and sell their ideas to bigger groups.

Based in the quiet lakeside town of Lugano in Switzerland, Duferco is already the world's biggest steel trading company. It has moved in the past few years into steel production through ownership of eight plants in countries including the US, Italy, Russia, Belgium and South Africa.

Bruno Bolfo, Duferco's chairman and owner, says the company has set its sights on going further than this and offering advisory services in steel production and trading to companies around the world with which it has relationships.

"I like the idea of the project manager approach in which we can bring our expertise in steel to help solve problems for companies across a variety of areas, from the technical aspects of manufacturing to involving disciplines such as investment banking," says Mr Bolfo, an Italian businessman who started Duferco in 1979 and has a reputation for being one of the shrewdest brains in the global steel industry.

Duferco's ideas may be relatively unusual, but they are not unique. Another model is Cargill, the giant US agribusiness company. With annual sales of $63bn (GBP35bn) and more than 100,000 employees in 59 -countries, privately-owned Cargill is a distributor, processor, consultant and banker in its chosen field of food and agriculture.

Another company following a "multi-function" approach - in the field of materials and energy - is Glencore. The Swiss-based company combines commodity trading with production operations around the world, with the latter employing 50,000 people. Glencore also owns stakes in several publicly quoted mining and metals companies such as the UK's Xstrata and Century Aluminium of the US.

Many big oil companies, such as Royal Dutch Shell and BP, use variants of the "multi-function" approach favoured by Duferco, by involvement in "upstream" and "downstream" parts of oil processing as well as in trading. The obvious problem with this approach is that it requires a huge knowledge base if it is to work properly.

All this takes a long time to acquire - and Duferco has not tried to do things in a hurry. It has taken its time devising a business structure to cater for the variety of different ways of making money - even though all are connected to steel.

From its origins as a pure trading company without production assets, Duferco started pursuing its broader "multi-functional" ideas from the late 1990s.

After guessing correctly that the steel industry would rebound from a moribund period partly because of huge demand from China and sector consolidation that made individual steelmakers more powerful, Mr Bolfo started recruiting production experts, financial specialists and project engineers who could consider proposals for new steel plants in different parts of the world.

Compared with Cargill and BP, Duferco is a lot smaller, with sales in 2004 of $5.4bn. The revenues came largely through shipping 14m tonnes of steel to customers, split roughly 60/40 between traded steel and material made in its own plants.

The company has 10,000 employees and 40 offices around the world, mostly concerned with trading, with the head office in Lugano employing 200.

It has tried to create a multicultural approach to management. The eight-member executive board includes Mr Bolfo and two other Italians, three Belgians and two executives from the US. Other senior executives come from Serbia, Britain, Ukraine, Argentina, Brazil and Canada.

Duferco has two important relationships with steelmakers that illustrate some of its ideas. One of them is Industrial Union of Donbass (ISD), one of Ukraine's -biggest steelmakers. It owns half of the trading side of Duferco's business, and -channels a large part of its steel output through the company, thus giving itself a broad sales network for its products.

In an extension of this relationship, ISD and Duferco teamed up last year to take over Dunaferr, Hungary's biggest steel producer. The two companies are also exploring a collaboration in which Duferco would acquire a stake in two ISD steel plants in the Ukraine. In exchange, ISD would buy into one of the Swiss -company's mills in Italy. In each venture, the two companies would use their different strengths to help each other, for instance in finding supplies of raw materials or customers.

Duferco last year also formed a partnership with Corus, the Anglo-Dutch steelmaker. Under this agreement, Corus will sell about three-quarters of the output of a large steelworks it runs in Teesside over the next decade to Duferco and a consortium of three other steelmakers (from Mexico, Italy and South Korea) that the Swiss company has identified. The agreement with Corus also gives Duferco a role in managing the Teesside sites, using its expertise gained from running other steel plants.

Through both of these ventures, Duferco aims to use its know-how in both manufacturing and services to help the partners, while learning something from them in return.

An example of how this works is that ISD is a leader in producing unfinished "slab" steel that is sent to steel users around the world for final processing. Slab distribution is a market that the Teesside works is entering into, therefore it seems likely that Duferco will transfer to its Anglo-Dutch partner ideas from its Ukranian supplier.

Mr Bolfo is casting around for other projects where Duferco's expertise could be relevant. The Swiss company is talking to investors and steel specialists in the Middle East about acting as the lead manager in projects that could take slab steel - perhaps from Duferco's own steel sites or those with which it has relationships - and bring it to plants in the region for final rolling operations to turn the steel into products such as sheet for packaging or industrial processing.

Part of Duferco's job, if such projects take off, would be to take a role in arranging finance for the $100m-$200m that such plants would cost, while also -advising on management or even running operations itself. It would also inject some capital. Mr Bolfo explains his approach as "somewhat similar to that of an investment bank".

"Rather than using only our own money to acquire 100 per cent of assets, we intend to use our name, finance capabilities, project skills, plant management and deal structuring capabilities to organise ventures where we contribute our experience and cash. In these projects, we would be combining a number of -functions, involving investment banking, venture capital, consultancy and orthodox business management."

Mr Bolfo says he has a number of projects under discussion, some of which could reach fruition in the next year or so.

"A key part of what we do is bringing business disciplines together in a novel way that you don't often see in our industry."

The art of selling one product to two markets

From a base in Markdorf, a quiet town in southern Germany, an unusual technology company has established itself as the dominant player in an important niche of the US decorating industry, writes Peter Marsh. The strategy of the privately owned Wagner shows how a fairly small company can take a set of engineering ideas, turn them into products and sell them to a broad group of customers, spanning both consumers and industrial users.

Over the past 20 years, Wagner has built itself into the biggest supplier of spray guns for painting in the US - a country in which many European companies have found it very difficult to do well, particularly in consumer products. While such guns are viewed in Europe as a tool for professional painters, in the US they are widely used by people in their own homes to paint interiors and outside surfaces such as fences. Wagner is thought to account for roughly 85 per cent of the $150m-a-year market (in factory prices) in the US for these products.

It has done this by capitalising on knowledge built up over several decades in Europe in the field of professional applications for paint guns. Thorsten Koch, chief executive of Wagner, calls his company a "category champion": it has taken ideas for one group of customers in industry and used them to meet the needs of consumers as well.

While the approach seems sensible enough, it is seen surprisingly infrequently across manufacturing companies. In many cases, companies consider the approach they need for selling similar products to consumers and industry users are quite different and are reluctant to espouse both.

That is why the commonest strategy in the drugs industry is for companies to concentrate on either prescription-only products or over-the-counter medications bought by ordinary people, but not on both types of medicine.

In industrial equipment, companies such as Atlas Copco of Sweden have built up enviable reputations for making cutting machinery but would not think of trying to sell the same hardware to a mass market of householders.

Even in the area of hand-held power tools - equipment similar conceptually to the paint gun - the idea of selling similar products to both consumers and professional users is not universally held. Bosch of Germany and Black&Decker of the US are companies that do sell to both. But Makita of Japan - which with these two companies is one of the three largest makers of power tools globally - has resisted the "category champion" approach. It insists on selling only to professional users, arguing that if it tried to make products suited to DIY aficionados, its reputation in the eyes of industry customers would be harmed: they would think Makita had gone "downmarket" by espousing "lower-tech" ideas.

Of Wagner's 349m ($431.5m) sales last year, 52 per cent came from the US. Nearly two-thirds of Wagner's US revenues derive from consumer paint guns - a product that Wagner invented in the early 1980s - with the remainder coming from different brands of painting systems sold to industry.

Crucial to this strength in the US is Wagner's obsession with the technology of paint guns - which it sells in about 3,000 varieties and at retail prices of between $50 and, for large industrial systems, $2m.

The company has a 170-strong development team, comprising one-tenth of its worldwide employees, split between its main administration and production centres in Germany, the US, Switzerland and Italy and a small plant in the Czech Republic.

"We build pumps that work to a high performance - operating at up to 500 times atmospheric pressure - and we put a lot of effort into developing components such as special nozzles and tubing that not only make the products work effectively but hard to copy," says Mr Koch.

Wagner's efforts in developing new technical ideas, backed by heavy use of -patents, are one reason why the company has relatively few rivals in both the consumer and industrial sections of its market. It has therefore avoided some of the strong competitive pressures facing companies in the related business of hand-held power tools, such as electric drills.

Another key ingredient to Wagner's progress - at least in the US - is heavy use of advertising. It spends $20m-$25m a year in this area in the US, mostly on television advertising to consumers.

"The outlay is two to three times as much as you'd expect from a company of this size," says Dean Buresh, chief executive of Marketing Drive, a US advertising agency that organises Wagner's US campaigns. He says that this level of advertising can pay off only if it is associated with a good product.

One potential problem for Wagner is that its category champion strategy could go awry if its base of professional customers are put off buying the products through the association with consumer items - just the association that Makita, for instance, is keen to avoid. Wagner recognises this as an issue and tries to address it by using a series of different brands to sell to the different groups of industrial users and consumers. As long as this juggling act carries on, the company believes its success can continue.

FIVE KEY FACTORS FOR MULTI-FUNCTIONALISM

* Develop a range of skills by employing key people with specific knowledge in areas such as project management or investment.

* Employ top people of different nationalities and encourage them to exchange ideas freely.

* Pay attention to the production side - a role in which it is often difficult to gain expertise except through operational experience - by owning manufacturing assets around the world.

* Pay close attention to opportunities in emerging economies such as eastern Europe and China.

* Staying private may be wise - multi-functional businesses are hard to sell to most investors, who are used to the defined operations of conventional companies.

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