For 2008, Aget is contemplating adding two new dry-process kilns for an investment of 10.7 million . That investment is expected to increase current capacity by 18%.

1. Assuming the most current operational cost levels, what sales must it generate to recoup the above investment?
2. If we assume 2004 prices of 45.91 /mt, what does the new break-even level do to the utilization rate, given its new capacity level? What can you say about its effect upon Agets pricing?
3. It is expected that the dry-process technology will help achieve an increase of 22% in production cost efficiencies, compared to current level. How might such an increase affect price competitiveness?
4. Assuming that Agets sales by 2008 will have grown at the forecasted global market rate increase of 22.6% over those of 2004, what will be its production and utilization rate?

1. If Aget does capture 20% market share in the markets of Lebanon, Kuwait and UAE, as estimated, at what sales units and revenues, will it break-even? What is the B/E market share?
2. In case Aget reduced price by 10%:

1. What effect would such price reduction have on gross margin?
2. By how much must sales increase to avoid a loss in gross profit?
3. What can you say about the potential implications of such price reductions, upon the industry and the market?

1. Based on your analysis, is Agets contemplated expansion into Lebanon, Kuwait, and UAE advisable or inadvisable? Argue your position.

Lafarge - Aget Heracles Company Background Aget cement (written "aget" but pronounced "ayet"), a major Greek company, was formed in 1911. In 1992 sold its 50.5% shares to the Italian Calcestruzzi, SpA., currently in the Italcementi group. In 1996, Aget acquired Halkis Cement Group, reducing the number of domestic players in the Greek market. In 2000, 54.48% of its shares were sold to the English Group Blue Circle Industries, plc. In 2001, Blue Circle Industries, plc was acquired by the French Group Lafarge, a global building materials producer. Aget, a national company, has major regional operations throughout the prosperous market of Middle East and periphery with terminals and bulk cement storage and concrete/aggregate facilities in Egypt, Saudi Arabia, Nigeria, and Algeria. It presently contemplates expanding into Lebanon, Kuwait and UAE. Aget is regionally famous for having a top quality product and in the Greek market enjoys a large market share, about 50% in the cement/concrete (beton) business. It has a large share of the public works and other institutional markets. Its major competitors are Titan cement and Halyps cement, currently a subsidiary of the Italcementi group, whose combined share almost equals the other 50% the market. Aget's presence in the Middle East is threatened by the conglomerate Italcementi's aggressive entry into the above market. The Italcementi group is a vertically integrated company, owning limestone gypsum and rock quarries, processing plants and distribution facilities in more than ten countries while Aget must rely on suppliers for gypsum and rock. Aget has a collective production capacity of 11.2 million tons, but achieves about 8.5 million tons in annual sales, indicating a utilization rate of about 76%. Its cement is distributed and delivered by sea-vessels and trucks. The Product Cement may be used, in combination with other ingredients, to produce concrete for a variety of construction needs. The product may be delivered for mixing at the building site or already mixed and delivered for immediate use upon arrival at the site. Cement is a solid gray powder manufactured using pyroprocessing in kilns from limestone, silica sand, clay, slate and other additives using a chemical process and a * 2004 Sales: 390,215 45.91 = 8.49 mmt. (see P&L statement, exhibit I) Professor Constantine G. Polychroniou developed this case for class discussion. The case is developed for class discussion and does not serve as a source of primary information or to indicate effectiveness or ineffectiveness of managerial action. The author brings into the case information that he had gained when he was in an advisory capacity with Aget Heracles in the early 80's. Other data have been pulled in from public sources. Certain company information or data have been subtly disguised so as to enhance, or conversely not affect, the pedagogical effect of the case 1 great amount of heat. The resulting compound, known as clinker, is ground into powder and blended with gypsum which controls the setting of concrete. The powder is so fine that one kilogram of cement contains more than 300 billion grain- particles. Cement quality, strongly guided by technical specs, is viewed as extremely important by cement or concrete users. The product seems to be viewed as a commodity product given its broad use and the lack of distinctive branding. Portland cement, invented in 1824, is not a brand name but the generic term, just as sterling is a type of silver, and represents several types of cement made predominantly of calcium silicates and manufactured from limestone, shale, clay and iron ore. Its important ingredient is cement clinker which granulated product produced under temperatures in excess of 1500 C. Portland cement accounts for more than 95% of all cement produced. The number and amount of compounds in a cement, when converted into concrete, determine the cement's engineering performance vis a vis its durability and resistance to decay. So, Portland cement may be specified in types I, II, III, IV, and V. Each of these types has a different chemical composition. For instance, the type IV Portland Cement, a "low heat" cement, is deemed appropriate for use in extensive concrete structures such as the Hoover Dam. The type V is a "sulfate-resistant" cement and it is deemed appropriate for use in areas that have sulfate-rich soils or waters, whereas, the type II is both a "moderate heat" and "moderate in sulfate- resistance" cement. Portland cement is a cost-effective material used practically in all forms of construction, either in precast or ready-mix concrete. The concrete is a mixture composed of 11% percent cement, 41% gravel, 26% sand, 16% water, and 6% air. The quantity of water helps determine the strength of the concrete. That is, more water makes the concrete weak, while adding more cement increases its strength. Blended cements represent a wide range of products with which to prepare concrete with specific applications. These cements are ideal for specific environments, to counteract chemical reactivity, for particular projects such as roads, bridges, etc. Specialty cements, such hydraulic cements are excellent binders for soil stabilization and act as retardant to fluid accumulation. Masonry/Mortar cement used for concrete bricks, stucco products and tile-joint applications. White cement used in special architectural designs that require a colored surface finish. Cements may also be identified using numbers. For instance, #325 is a lower-grade cement, whereas, #525 is a high-grade cement. The Industry The global cement industry is driving toward oligopoly through mergers and acquisitions resulting in capacity concentration and potential cartelization through the dominance of a few transnational players. However, the industry remains largely fragmented, where no one player has a double-digit market share, and lacks the capacity to exercise price discipline, being plagued by excess capacity rising operating costs and depressed margins. It has been growing at a rate of about 4% annually over the past 20 years showing an aggregate production, in 2003, of about 2 1.82 billion metric tons of cement with an annual turnover of about $100 billion. It is a highly fragmented industry with a few players controlling a disproportionally high market share (Exhibit B). Industry capacity utilization is around 71% signifying likely downward pressure on prices. Increasing capacity utilization, given an increase the demand for cement, would mean greater pricing leverage and profitability for the producer. It is a capital intensive industry making change-introduction less desirable and less likely. The capital investment per worker in the cement industry is among the highest in all industries. The global industry operates plant and processing facilities in some 150 countries worldwide. It is projected that the industry will enjoy continuing growth on expectations of high cement consumption. It is noteworthy that worldwide the import duty on cement and clinker has been reduced by an average of 30%. As mentioned earlier, the industry worldwide has been witnessing a wave of consolidation driven by acquisitions, strategic alliances and partnerships as dominant, more efficient players focus on adding synergistic value to their organizations. This trend has been the result of the need to increase cost efficiencies by investing in new precalciner kilns that would increase production capacity and cut costs, exploiting economies of scale, enhance market presence and beef up market share in an increasingly competitive and mature industry. The players' market dominance and strength of competitive positioning is manifest by means of point of manufacture and point of distribution. This is the case because proximity of plant to market is an enhancer to cost efficiencies and distribution proximity is a catalyst achieving market power which is exceedingly important as market networking becomes increasingly critical. Also, manufacturing costs are rising requiring a greater focus on cost control and increasing efficiency levels. In response to that, the cement industry has enhanced efficiency by directing new capital investment in plants that replace the wet-process with the dry-process of cement manufacture. The latter technology is less energy intensive and thus more cost efficient. As global competition heats up international cement producers find that positioning may render a competitive advantage, given that market presence plays a decisive role in influencing capacity utilization deemed particularly significant in a commodity market. Furthermore, global operations have also brought about added pressure for focusing on industrial ecology and carbon dioxide emission management, an orientation that is deemed to be a strategic policy for establishing trust and community relationships, a concern that is juxtaposed to industry standards and specifications that address issues of product performance vis a vis safety and structural integrity. Nevertheless, it should be pointed out that the cement business is largely a local business, in that, for most projects product availability and delivery are both decisively pivotal. The industry is in a long maturity and, given its nature of capital intensity, players in it frown upon change. However, the industry must balance endogenous concerns and exogenous challenges. Endogenous concerns would include: commoditization, capital and resource intensity, market pressures, product maturity, etc. Exogenous challenges would include: customer needs, innovation in technologies, global 2 Annual turnover is the value of all supplies made or to be made in the current year. Synergistic value would also include "strategic enterprise value" which is value measurable in non- financial terms, i.e., image. 3 consolidation, regional integration, environmental sensitivities, energy prices, regulatory interference, etc. Market - Competition In 2003 the global construction materials market grew by 4.2% reaching a value of $249.9 billion. The forecast for 2008 is that the global market will reach a revenue level of $306.4 billion, representing an increase of 22.6% within the 5-year period. Cement is the leading source of revenue for the market generating 49.9% of the market's total revenue or $124.7 billion valued at manufacturers' selling price. Cement buyers that are able to consolidate into becoming major customers exert decisive pressure upon suppliers. Under these circumstances, and feeling the need to increase market share, suppliers succumb to pressure to lower prices adversely affecting industry profitability. Cement or concrete buyers that enjoy guaranteed low prices, by virtue of competition and the product's commodity character, look to identify added value transaction assets such as "trusting a supplier". This reality constitutes a potential base for developing effective anti-commoditization strategies. Also, as customer needs evolve the pressure for product development increases. For instance, certain customers such as governments, hospitals or other institutions are showing interest in specialty cements and cement mixtures that have been produced with environmentally appropriate products or products whose use would not deplete natural resources. Also, emerging needs for special designs that call for extra durability of structures require the development of such specialty cements or cement products. For instance, the Middle East market seems exceedingly value concrete structures and concrete-based construction. This may incentivize cement producers to make long-term investments in new cement-compositions even though they have resigned to the fact that cement is strictly a commodity whose price is uniform in a given market. Market demand for cement is normally elastic (elasticity is around 1.5) given its low value commodity character. However, demand for cement is local, and, price inelasticities may be observed especially among grades of cement. Furthermore, as the market demand for cement worldwide keeps growing, and, as the standard of living keeps increasing the opportunity continued cement sales and specialty cements is likely to grow, as well. Innovation in technology is likely to beef up the gamut of construction materials and intensify competition among them. Portland cement, despite its high popularity, may lose its differential edge if substitutes that render a greater net value can be produced. Volatility in energy prices will likely enhance uncertainty and be counterproductive to achieving desired cost efficiencies. Such reality may give impetus to global or regional players to seek out alternative energy sources or proceed with investments in production technologies or processes that effectively answer the call of higher energy prices. Nevertheless, diesel prices are critical to improving operating costs It is reported that the cement industry contributes about 3% of the total greenhouse gas emissions. (Pressures of the Kyoto protocol may intensify investment in cement production technology) DATAMONITOR; Global Construction Materials; Industry Profile; Reference Code: 0199-2030 Publication date: May 2004. 4 and transport costs considering that about 60-70% of the cement is transported by road. Competition is likely to intensify as consolidation increases and product differentiation remains remote. The transnational model of global reach and local responsiveness is the field in which the drama of competitive action will unfold. Competitive sustainability pivots on the player's ability to control costs, increase operational efficiencies, reduce uncertainty by effectively managing risk, establish a better distribution system, and last and most importantly to differentiate. The markets for cement are identified as building and non-building construction. The building construction market has two distinct segments: the residential and non-residential, with the latter being the largest. The non-building construction is heavy construction and addresses areas such as: highways, power plants, pipelines and heavy industrial structures (chemical facilities, petroleum refineries, nuclear structures, etc.). The non-building market is the fastest growing market given the developmental needs of global infrastructure. Market segments that Aget wants to focus on are: Non-residential, and the Non- building market. Regionally, Aget has a market share of 11.6% of 73.4 million metric tons (mmt) or 8.5 mmt. (2004 sales). Total regional market sales for 2004, allocated on a per segment basis, are shown in Exhibit C. of the 8.5 mmt of Aget's total annual sales the non-residential segment accounts for 58% or 4.93 mmt, the non-building segment accounts for 36% or 3.06 mmt, and the remaining 6% or 0.51 mmt is residential. Anticipated regional growth in cement consumption, per segment of interest, is indicated in Exhibit D. If current share levels are maintained Aget's projected sales for the next 5 years are depicted in Exhibit E. The collective market potential of the markets of Lebanon, Kuwait and UAE is estimated to be 9.7 mmt. Preliminary estimates of required investment and expected sales have been $6.3 million and 1.94 mmt., or about 20% market share, respectively. Pricing Demand is locationally differentiated, i.e., it varies from location-to-location depending largely on population density, but highly undifferentiated in terms of quality, i.e., cement standards are usually common across borders because cement is experience or performance good. The demand for cement depends macroeconomic factors such as population growth, GDP growth, interest rates, economic policies formulated that, for instance, affect infrastructure development, etc. Cement is a homogeneous product with a low price elasticity due to lack of substitute materials. Specialty cements, used for their strength in specific applications such as http://www.census.gov/epcdaics/NDEF234.HTM 5 pavement restoration, special architecture and other projects, as a differentiated line are priced higher and demand for them seems to be even more inelastic. However, a material known as "fly ash", chemically reinforced, may replace even 100% of that cement Fly ash is derived from burning coal and is a valuable additive that makes concrete stronger, more durable and easier to work with. In 2002, as the price of specialty cement increased 12% there was an increase in its demand of about 4%. However, in 2004 the specialty cement's price increased further by 9% effecting a 17% increase in sales of fly ash. High production and transportation costs and a sizeable incipient investment constitute formidable entry barriers to local firms. Under such conditions cost efficient firms are able to engage in selling on the basis of marginal costs. Economies of scale beefed up by operational flexibility are at the forefront of effective competition making price the competitive variable in the cement industry, further indicating the criticality of cost efficiencies. Despite an increase in the price of materials, there is downward pressure on non-specialty cement market prices due to the gap between production capacity and utilization, on the one hand, and competition on the other. Although operational costs in the cement industry are subject to the industry's dependence on production factors, with prices largely administered, cement pricing is guided by market commoditization. So, if volume growth continues, as expected, cement prices will depend on whether and/or to what extent capacity increases or remains unchanged. That is, a decrease in the gap between demand and supply is deemed to enhance the suppliers' pricing power. Therefore, increases in the prices of raw materials or production factors do not automatically get passed onto the customer. Passing, such price increases onto the customer depends on excess capacity or rate of utilization. On the other hand, when competitors cut prices, players that do not follow suit run the risk of market share loss while collectively they suffer a net loss in profitability. Despite such realities Aget is contemplating to further cut its price by 12% in order to increase capacity utilization, resulting in an increase in market share and a reduction in unit costs. Moreover, Aget is pondering that its regional competitors will not match its price cuts as they operate at capacities close to 95%. Specifically, in an internal survey Aget's executives believed that the probability of anyone competitor cutting prices was no more than 25%. They all agreed that if a price cut was to occur it would not be more than 70% of Aget's contemplated price cut. Aget expected to achieve a 20% increase in market share, if the price cut was not matched and an 8% market share if the price cut was matched to the level of 70%. Aget's largest competitors had a lower cost structure than Aget because they offered fewer support services and they employed a transactional approach. As a result they were better positioned to compete on price. However, Aget was poised to increase its profitability if it could bundle its offering and maintain its niche on customer relationships. ? A product of coal burning. The use of "fly ash" improves concrete performance, making it stronger, more durable, and more resistant to chemical attack. Fly ash use also creates significant benefits for the environment. http://www.civil.columbia.edu/meyer/publications/2002_04_ShahPaper.pdf Concrete and Sustainable Development (C. Meyer) 6 In terms of production operations, energy and power inputs account for about 75% of the cost of production. Freight cost is the single largest cost element for any cement company (see Exhibit F). Competitive pricing, that may lead to greater market concentration, is discouraged due to the industry's high and rising energy and transportation costs. Tariffs, that range from 10% to 40%, continue to be an impediment to effective or "value-oriented" pricing for both the customer and the supplier. These tariffs are gradually being eliminated as WTO regulations take hold. Such pending reality is expected to enhance both demand and the cement industry's profitability. In 2004, however, prices increased by 2.8% over those of 2003, from $58.5 to $60 pmt. This may have been the result, among others, of a brisk increase of 10.1% in construction spending over that of 200310 Company operations The company operates multiple quarries from which it extracts the raw materials of limestone, clay and marl. The method for material extraction used blasting and breaking up stone deposits with heavy machinery. The raw (rock) material is then transported to special installations in which the rock is further broken down to small size roadbed-surfacing stones (metalling). In turn, this crushed material is transported into a storage area, using conveyor belts, railways or even trucks, in which it is blended and homogenized. At this stage, the combining of the raw mix with silica sand, iron oxides, alumina deposits, shell and other organic materials is decided upon and machine-executed on the basis the type of cement the production schedule calls for. That mixture enters a processing mill in which it is grinded to a fine powder. This raw meal is then transferred to a silo in which it is further homogenized. Following the homogenization process the raw meal enters the kiln in which it is burned at 1,450 C. The extreme heat helps the raw meal to chemically convert into a new product, known as clinker. The clinker is then cooled down and taken to special ball mills where it is ground to a powdery dust and with gypsum and other polymers it comes out as cement. The amount of gypsum, and other additives used is dictated by the type of cement to be produced, or the need for which it is produced. At this point the cement is stored in silos from which it is distributed for use, either in bulk or packaged in bags by special rotary packers and automatically palletized. At this juncture, the production process is complete and it is traditionally monitored by production controllers. Aget wants to computerize the entire production process, thus minimizing errors and increasing efficiencies. The ratio of raw material requirements to cement production is 1.6:1, that is, for 1 ton of clinker produced 1.6 tons of raw material is required. This means that it is imperative for the cement producer to have access to ample quarry material. Access to quarries is deemed essential not only in terms of raw material availability but also for controlling costs, such as, royalty payments, etc. Aget's platform product line is Portland cement. The company also produces Hydraulic cement which is capable of hardening under water and which is unique for constructing water tanks, sewer pipes, tunnels, dams, etc.; specialty cement, such as white cement for architectural applications, is a low-alkali cement used in special construction requiring slow strength gain; aggregates & concrete, such as sand, gravel, cracked rock, and, pre-cast or ready-mix concrete; roofing, which is tiles in concrete; and, gypsum, which is plasterboard for walls & ceilings. In Euros (C) this would be equivalent to 45.91, at an exchange rate of 1 USD = 0.765286 EUR (March 2005). 10 U.S. Department of Commerce's report for August 2004. 7 From the above product lines Portland cement is by far the most dominant in terms of sales and operational impact. Aget products are used in residential, industrial, commercial and infrastructure applications. Operations mainly focus on selling cement or formulating, preparing and delivering ready-mixed concrete at customer's designated job sites. Aget's operational objective is to offer services that reduce its customers' overall construction costs and increase net value. Revenues, from operations, may be allocated as follows: ready-mix concrete 68%; other operations 6%. cement trading 26%; About 95% of revenues are from direct sales and the remaining 5% are generated using agents and dealers who sell a broad array of building products sourced from several suppliers. Such intermediary relationship is of a transactional character with no exclusivity on purchasing or selling. Trade margins range from 8% to 12%. Fifty five percent (55%) of the cement traded is sold in bulk form and the other 45% is packaged in 50-kgr. bags. Aget's manufacturing operations improvement plan calls for adding two new dry- process kilns totaling an investment of 10.7 million . The aforesaid improvement is estimated to help increase current capacity by 18% over current levels, and, raise energy efficiency and productivity. Such kiln technology is said to have synergistic effects in that it allows the utilization of organic waste for fuel. The over 2000 C heat is considered by technicians an ideal process for consuming waste such as chlorinated organic compounds considered persistent organic pollutants, such as, used tires, solvents, paint-wastes, used oil, petroleum residues to name a few. This model of environmentally-friendly production is considered advisable also from the standpoint of adherence to environmental regulations despite their relatively high costs The cement kiln's great appetite for energy is typically satisfied using coal. Because energy costs can account for up to 40 percent of the total cost of cement manufacturing, the use of efficient energy is considered critical. Conversion to coal was started in the 1970's. Currently, more than 90% of production is achieved using relatively low-priced high-sulfur coals as primary fuel. In addition, recently Aget has introduced internal changes such as operator training, improving work procedures and maintenance scheduling, training on material handling, optimizing production schedules, etc. Above changes are expected to incrementally improve operating efficiencies resulting in a further decrease of operating costs. International expansion Collectively, the market of the Middle East is a high growth market as demand exceeds available supply. For instance, Syria's has beefed up its production to 96% of capacity (4.8mmt of 5mmt) and is planning to increase capacity by 3mmt or 60% in the next 4 years. At the same time, OMRAN - a state-owned company - is increasing its imports from the peripheral countries. 11 It is estimated that about 25% of the capital costs of building new plants and major modernizations go to meeting environmental regulations. 2 Operating efficiencies address overall productivity. They include: labor improvement, effective use of financial resources, enhanced production capabilities, effective materials management, and generally the functioning of the internal organization. 13 http://www.ameinfo.comews/Detailed/43865.html 8 The demand for cement in Saudi Arabia has been growing in response to sustained population growth and continued development of infrastructure. It is projected that the annual growth in demand consumption will be around 5%. Recently, the domestic production has been sold in advance to domestic users, reducing exports, and, catapulting producers into increasing capacity. In the Gulf States demand exceeds supply due to feverish construction and development of major projects such as airports, island development, railways, waterfront building, etc. Such demand has accelerated cement production and overall capacity is expected to increase by 60% (from 36mmt to 60 mmt) over the next 3 years. Growth in demand expected to be an average of 12% a year. In such an environment, Aget expects a push for industry consolidation as a drive for market share will increase the pressure for cost reduction. In Jordan, cement monopolies, that have resulted in distribution overpricing and supply discontinuities, have been countered by government measures to increase cement availability in the Jordanian market, indicating the need for imports. In addition, Iraq's pending reconstruction is estimated to add to an already healthy Middle East cement market. Aget's bid for a stronger presence into the Middle East market is a test to its management international know-how as the region presents special challenges across several functional areas. First, and foremost, Aget's cultural orientation is deemed essential in adjusting its efforts to the demands of Middle East business culture. Aget realizes that although business solutions across cultures may be similar those solutions are arrived at in unique ways because of business customs and practices. In foreign markets, a new entrant may experience the need to lubricate and at times even to suborn. This is all in the name of facilitating doing business in the foreign market, from getting a license to passing a ministerial decree. Second, Aget faces the challenge of developing and motivating a local sales force in the Middle East market. It has decided that incipiently it should establish a sales office in each of the three countries, Lebanon, Kuwait and UAE and staff each of those offices with a sales manager and two salespeople. Third, in addition to the pricing inflexibilities inherent in the cement market, due mainly to the commodity character of the product, Aget must contend with the prospect of price escalation and the possible creation of parallel markets14. Appropriate action is being planned to ward off such a possibility. (The incidence of a parallel market was manifest as recently as 2003 in Syria where the demand for cement kept rising while OMRAN, the state-owned company, limited supplies by restricting imports. Such disequilibrium created a black market for cement). Fourth, the cement industry's economies of scale in production and marketing, the cement's uniform global image and Aget's ability to transfer expertise and know-how are all vital to the success of its global strategy. Aget recognized that in order to be competitive in a global business market it must meet the challenge of creating 14A "parallel market" or "gray market is defined as "trade diversion". A good commonly diverted from the intended channel of trade/market, without the knowledge of the manufacturer, into another because considerable price difference exist between those two markets. Such difference exceeds transportation and logistical costs. 9 collaborative relationships that are guided by unique local marketing idiosyncrasies, essentially upgrading it to a transnational enterprise. Customers - Distribution Aget's target customers include: Contractors, Builders, Ready-mix producers, concrete product manufacturers, & Masons. Aget's channels of distribution and product/sales allocation encompass the following: Cement (bagged or bulk), normally sold directly to small customers for sacking it or indirectly through retailers such as lumberyards, accounts for about 26% of total sales. Of that, 55% is bulk-cement and 45% is bagged. An average of 80% of the above is direct sales, the remaining 20% is transacted through brokers or dealers. Ready mix concrete, sold directly to customers that require a ready-application product and which is customarily dispensed using leased special cement trucks, also accounts for about 68% of aggregate sales. Pre-cast concrete products, sold directly to a range of customers and which account for about 6% of all activity. The top 15% of customers account for 75% of total sales. These customers are, by and large, concentrated in the "ready mix concrete" segment and are involved with major project construction such as road and massive structures. Cement products are stored in silos to which bulk cement trucks have access via dispatch points. This network of cement storage and distribution terminals helps create a unique advantage as these silos or terminals are located in proximity to high growth areas and close to potential customer activity. In addition, they offer customers the opportunity to select from a wide range of cement blends to suit their particular needs. About 90% of the production output is distributed, from the plant to selling points, using sea-vessels or trucks. The rest, 10%, is picked up by the buyers using their own transport. As indicated in Exhibit F, freight accounts for 19.7% of COGS. Recently, Aget has been contemplating acquiring and operating its own transport. Specifically, it plans to purchase maritime vessels & land trucks that it is estimated would transport up to 75% of the remaining (2004) production of 90%. The investment required is 14.5m . This undertaking is expected to render an estimated 24% in transport net savings after recouping the incipient investment. Aget has established regional sales offices through which it coordinates sales and delivery. The company has organized customer-teams made up of civil engineers, chemical engineers, and production specialists. These teams' primary goal is to help the customer achieve optimum use of the product, be it cement or concrete mix. By "optimum" we mean to use the right product for the right project or structure. This may best be accomplished using a proactive approach to customer's contemplated needs. That is, in the design phase of the project the customer works in tandem with Aget's customer-team to identify product requirements and decide on an optimum product spec. This is an overall win-win exchange as both parties to the exchange are better able to implement and communicate joint value-added efforts leading to synergistic benefits. The customer decides on the right product and is assured availability and prompt delivery, avoiding construction delays, etc. The supplier is alerted to the type of product needed, ensuring timely production and 10 product-project compatibility. Both, customer and Aget, get a chance to test the advisability of developing a relationship. Transportation is a very critical element for the cement industry, given its cost impact of almost 20% (Exhibit F). The modes of transportation used are generally road, rail or sea. Transport proliferation enhances the commoditization of cement, as a larger number of competitors have greater access to a given market/location. The high costs of transportation, in the cement industry, helps transform an otherwise transnational enterprise into a locally responsive and physically present operation. Cement/concrete customers, in particular the larger ones, operate a decision-making unit (DMU) also known as buying center (BU) which plays a pivotal role in the interworkings of the cement/concrete construction market. The buying center of the larger customer could be stratified into two groups, on the basis of orientation. The group whose orientation was deemed to be strategic was made up of executives whose interests converged at achieving targeted business results, such as, project profitability and long-term market posturing. The other group had a more tactical orientation and its direct goal was the successful functioning of the buying project. The latter group was largely made up of hands-on staff and their influence was expertise-related. Aget had realized that its approach to its customer's buying center should be bipolar, entertaining the concerns and interests of both groups by defining each group's particular real or perceived tradeoffs between product value and product cost. The second group usually had a civil engineer as a team leader whose role was to integrate intragroup actions and to be the liaison between the two groups. This team leader was the incipient most important link to seeing the eventual success of a transaction. Aget executives thought that an effective approach to developing a project with a customer would pivot on how strong of a relationship Aget sales people could develop with, and how they can empower, the team leader in the buying center's further proceedings. As demand for cement/concrete-based construction increases and the competitive environment changes customers adapt to the new dynamics by changing their expectations. When customers lack prior experience in, or with, a given project they tend to take whatever steps necessary to see their first experience successful. To that effect, they are quality and service-oriented and are willing to pay the asking price. As those customers acquire experience with the product and process-relevant services they migrate to a different market position which prescribes a set of different expectations. For instance, when customers start to first use fly ash in the concrete mix they need the advice of a specialist in determining the ratio of fly ash to cement that would prospectively produce the desired durability. But as the customers acquire that expertise their needs change compelling them to migrate to a different product/customer relationship. This is further enhanced by a gradual change in the purchasing strategy of the buying center in which procurement seems to gradually dominate the engineering and other quality-oriented influences. That new relationship seems to beef up the customer's negotiating leverage, with the cement supplier, for added services and lower prices resulting in eroding the supplier's profitability. This may be, at least to some degree, countervailed by focusing on a bundled offering. Product policy may be used as a strategic tool to broaden the influence of Aget on the customer simply because the product affects the entire organization. Consequently, Aget should use its product offering in a way that positively affects 11 the customer's product/output, its engineering challenges, financial considerations, etc. Aget salespeople have, up to this point, concentrated on selling cement or concrete mix, the actual product. This type of selling is strictly transactional and does not seem to be cultivating a relationship, which in the longer term may produce loyalty This approach called for dealing with the procurement/purchasing agent of the buying center, who is mostly interested in getting the lowest possible price, and not with other influentials such as engineers and project managers whose interest goes beyond that of a low price. If Aget wanted to change its customer policy it would have to revise its salespeople's current approach, i.e., who they called on, how, etc. Changes in the scope and approach of Aget's sales force would require that they be an integral part of a change in the structure of its sales organization. This would mean devising a sales architecture whose pivotal focus would be long-term customer profitability resulting from the greatest possible opportunity for Aget. Marketing strategy - Issues Forward thinking cement producers are planning on how to increase their customer- base, how to get closer to their market activity, how to enhance cost efficiencies, and last and most importantly, how to differentiate their position vis a vis that of their competitors. Advances in chemical engineering and production process technologies are expected to have an impact on product development and profitability. The ability to differentiate the product offering, be it either bundled or unbundled, is a strategic advantage to gaining growth, sustaining market dominance, and to safeguarding and in fact increasing profitability. Aget, having a viable market position and a strong financial structure, is poised to achieve future growth through market penetration and market development. In accomplishing the above the company has decided to implement a three-prong strategy goal: To expand into new markets To consolidate, defend or enhance existing market shares and, To offer a core product that the customer perceives to have superior value to that of the competitors . Aget could capitalize on its distinctive competencies and its expertise that has developed in the Middle East market. Understanding the business culture and practices, unique to the Middle East market, constitutes an edge that Aget can and should exploit in entering into, and developing, the markets of Lebanon, Kuwait and UAE. Aget's good image has already penetrated into the regional Middle East market and it is considered pivotal to establishing the links and networks necessary to enjoy an early and sustainable growth in market share. Aget executives have been perplexed as they seek out additional ways to differentiate in such a commodity. They thought that an effective way to seek out sustainable "differentiators" might be to use segmentation to better understand customers. They observed that customer decision making was affected by previous experience, or lack thereof, with the seller and was guided by the type of purchasing strategies selected. In addition, they recognized that customers differed in terms of their buying objectives and expectations. That is, there were customers who required a full service transaction and customers who were in search of a low cost supplier. Moreover, product pricing and services rendered defined behavioral 12 attitudes that were deemed to strongly influence decision making as their fluctuating values affected relevant demand. Also, the customer's likelihood or capability to switch supplier directly depended on the extent of the relationship with that supplier, given the product's relative price uniformity and commodity character. Therefore, it became obvious Aget executives that a well-defined marketing strategy to address the issue of customer relationship would be advisable and that it should be formulated on the basis of: the key roles in the buying center, who performs those roles, the organizational structure, both formal and informal as well as conceiving of guidelines by which to effectively manage those relationships. Furthermore, such marketing strategy's core value would pivot around the cement/concrete offering, customer management, and, pricing issues. Revamping Aget's marketing strategy should be done against a desired tradeoff between profitability and market share. These are the elements that such a revised marketing strategy should be fine tuning. Cement is sold using specifications that establish the properties needed in the cement, depending on the project for which it is destined. This means that differentiating on cement properties is not viable unless the cement producer has some distinctive proprietary advantage vis vis product development. Aget would have to look elsewhere for achieving differential market position. Developing relationships using incremental value-added services would seem to offer a sustainable competitive advantage. Thus, Aget considers customer development a critical issue and one which requires a strategic focus. Specifically, it must identify its customer needs/problems/opportunities current and future, pragmatic and perceived, prioritize them and determining how its customer assesses value, and, develop programs/product offerings that would be appropriate. To that effect, it contemplates developing customer-support teams which will aid the customer starting with the project design and materials specification through to the maintenance phase. The use of such prior and posterior support is thought to help differentiate Aget from other competitors by delivering differentiable value and create or enhance working relationships with customers. The value delivered will be further increased by transforming a sales-oriented sales force into a management information and advisory team at the disposal of the customer. These evolving networks are deemed to not only help in the growth of market share but also to solidify market position, increase customer satisfaction, fend off competition and enhance incremental profitability. Aget executives have reasoned that the product offering must go beyond customer's expectations as such expectations, when met, can only deliver threshold level- satisfaction. On the other hand, when such expectations are not met their absence produces intense dissatisfaction and increases the likelihood of supplier-switching. By performing beyond customer expectations, Aget will eliminate the risk of not meeting such expectations and its potential consequences and, simultaneously, achieve viable customer satisfaction levels. Such product augmentation will be conducive to developing customer relationships but also, through conditioning, it would help upgrade current customer expectations resulting in intensifying future competition among cement producers. Aget executives felt they had quite a few challenges to deal with in managing Aget's future market success. Among others, such relevant challenges included: how to differentiate such an entrenched commodity like cement; how to manage customer relationships; how to price for achieving alternative objectives; how to expand regionally and achieve sustainable growth; and, how to meet future challenges resulting from an increasingly competitive environment amidst a more globally integrated economy. 13 Exhibit A Portland cement specification - purchase order Technical specification of Portland Portland cement bs12/196 grade # 42.5r "British standard". Chemical analysis SiO2: 19.62%, A1203: 5.18%, Fe203: 3.89%, CaO: 61.62%, MgO: 2.44%, Na20: 0.46%, K20: 0.27%, CI: 0.07%, SO3: 2.71%, 1.0. I: 2.15%. Undetermined: 0.37%. Total: 100% C3A 7.15% max3.5. Physical & mechanical: Standard consistency: 25.5% Packaging: in 50kgs pp bags Quantity: min 12.500 metric tons (+/- 5%) Price: contact us Size of shipment: min 12.500/mt Loading rate per day: 2000 tons a day Discharge rate per day: min 2000 tons a day Inspection: SGS certificate is required as a supporting documentation for product quality Delivery time: within 30-45 day after confirmed L/C Origin: Supplier's plant origin Payment term: DL/C at sight, irrevocable, non transferable, confirmed and payable at sight by a prime first class bank Shipment: first shipment will commence (30-45 days) after receipt and acceptance of designated buyer's payment instrument 1/C Documents: full set of international accepted standard Exhibit B Global market structure* Company Global Market Share CRH Holcim Lafarge Taiheiyo Other 4.10% 4.00% 3.50% 1.20% 87.20% * DATAMONITOR; Global Construction Materials; Industry Profile; Reference Code: 0199-2030 Publication date: May 2004 Exhibit C Total Regional Market Sales Allocation per Segment* - 2004 2004 Regional Sales by Market Segment Building segment Non-Building segment A. Residential: 11.89 mmt. Heavy construction B. Non-residential: 39.26 mmt. (industrial & non-industrial): 22.09 mmt. Total sales: A+B+C = 73.4 mmt. Exhibit D Anticipated 5-year Segmental Regional Growth in Cement Consumption Years Segment 2005 2006 2007 2008 2009 (Growth rate) Non-residential 3.9% 40.79 3.8% 42.34 4.1% 44.07 4.3% 45.97 4.0% 47.81 (Growth rate) Non-building 4.0% 22.97 4.1% 23.91 3.8% 24.82 4.7% 25.99 6.1% 27.57 Exhibit E Aget's 5-Year Projected Sales Growth* Years Segment 2005 2006 2007 2008 2009 (Growth rate) Non-residential 3.9% X 4.93 = 5.12 3.8% X 5.12 = 5.31 4.1% X 5.31 = 5.53 4.3% X 5.53 = 5.77 4.0% X 5.77 = 6 (Growth rate) Non-building 4.0% 3.06 = 3.18 4.1% 3.18 = 3.31 3.8% 3.31 = 3.43 4.7% 3.43 = 3.6 6.1% 3.6 = 3.82 * Assuming maintenance of current share levels. Exhibit F Average Cost Structure (as % of cost of sales) * Power & Fuel 32.8% Material cost 12.4% Freight (outward) 19.7% Admin. & Overhead 19.8% Employee cost 8.0% Selling expenses 4.2% Repair & Mainten. 3.1% * Averages cover the period of 1995 through 2004. Exhibit G Average Returns on Capital Employed* 1994 1995 1996 1997 1998 1999 15.8% 22.9% 28.8% 13.9% 4.8% 4.0% Pure Cement Companies Diversified Cement Cos. 16.4% 17.5% 14.3% 10.7% 7.7% 6.7% Source: INDIAN Cement industry http://www.icraindia.com/biz-arch/u2000ceaexecutive.pdf 2003 2.829 228,858 15,256 244,114 63,538 Exhibit H Balance Sheet AGET GROUP OF COMPANIES BALANCE SHEET AS OF 30.9.2004 (In 000 EURO ) ASSETS 2004 B. FORMATION EXPENSES 1.778 C. FIXED ASSETS I. II. Intangible, Tangible assets 651,349 642,284 Less: Acc. Depreciation 440,016 211,333 413,426 III. Investments & other long-term Assets 15,260 TOTAL FIXED ASSETS 226,593 D. CURRENT ASSETS I. Inventories 58,393 II. Receivables 1. Trade debtors 158,746 183,516 2. Sundry debtors 44.458 203,204 38.584 III. Cash at bank and in hand 40.786 TOTAL CURRENT ASSETS 302,383 E. ACCRUALS & PREPAYMENTS 1,343 TOTAL ASSETS (B+C+D+E) 532,097 MEMO ACCOUNTS 124,050 LIABILITIES A. SHAREHOLDERS' EQUITY I. Issued Share Capital 109,467 II. Share premium 1,279 III. Revaluation reserves 9,028 IV. Reserves 153,771 Consolidation difference (1,523) V. Retained earnings Retained earnings brought forward (22,079) (39,765) Profit for the period 86,185 83,023 Less: Other taxes (586) 63.520 _(8.739) TOTAL SHAREHOLDERS' EQUITY 335,542 B. PROVISION FOR RISK & CHARGES 80,490 C. LIABILITIES 1. Long-term 1,249 II. Short-term 71,490 64,432 III. Bank overdrafts 30 160 101.650 82.039 TOTAL LIABILITIES 102.899 D. ACCRUALS & DEFERRED INCOME 13.166 TOTAL LIABILITIES (A+B+C+D) 532,097 MEMO ACCOUNTS 174,050 222,100 17.932 303,570 1.626 552,139 74,769 109,467 1,279 9,362 137.309 (1,523) 34,519 290,413 75,013 28,545 146,471 175,016 11.697 552.139 74,769 Exhibit I Income Statement AGET GROUP OF COMPANIES PROFIT AND LOSS STATEMENT AS OF 30.9.2004 (In 000 EUROC) Operating Results 2004 2003 Turnover (Sales) Less: Cost of sales 390.215 281.405 108.810 5 393.559 285.805 107.754 1 108.815 107.755 19.808 183 4.842 19.497 178 5.559 Add: Other operating income Gross operating results Less: Administration expenses Research & development expenses Selling & distribution expenses Oper. Income before investing & financial activities Less: Interest expense and financial charges Total operating income Plus : Extraordinary & non-operating income Less : Extraordinary & non-operating expenses Less : Total depreciation Less : Charged to the operating cost Net income before tax 24.833 83,982 543 83.439 25.234 82,521 2.898 79.623 1.677 2.598 2.357 3.163 (680) 82,759 (565) 79,058 20.577 20.577 18.507 18.507 82.759 29,058