In turbulent markets, companies can enhance their agility and minimize risk by orchestrating a network of resource providers. The story of Promon, a Brazilian engineering company, illustrates the advantages of orchestrating a network.
Promon initially grew on the back of government funded infrastructure projects that were the mainstay business of Brazil’s engineering firms during the 1970’s and early 1980’s. This all changed when a fiscal crisis in 1986 prevented the Brazilian government from commissioning new projects and forced it to renege on existing contracts. Most Brazilian engineering firms collapsed in the face of this sudden-death threat and disappeared.
Promon survived and thrived while its competitors floundered, in large part, because the company successfully transformed itself into an innovative systems integrator for the telecommunications, power and industrial segments. As an illustration, one joint-venture formed by Promon has 82 employees who supervise a project with 1,907 workers representing 573 separate subcontractor companies. Promon rolled out this system throughout the 1990’s. System integration projects increased from less than 20% in the late 1980’s to over 90% by the end of the 1990’s.
The company developed sophisticated skills for forging and managing partnerships, which allowed it to increase net revenues (including both revenues for services and the value of goods and services procured under its responsibility) from $10 million in 1987 – the year after the Brazilian government’s fiscal crisis – to $852 million in 2008, while decreasing total staff from 4,000 to approximately 1,360 professionals over the
After the September 11 terrorist attacks, the aviation industry witnessed a severe decline in air travel, which translated into cancelled contracts for airplanes and sharp reductions in purchases planned for the future. Aircraft producers like Embraer had already committed significant resources to building planes – aircraft that they could no longer sell. Between August 31st and December 31st, 2001, Embraer’s inventories grew from $600 million to $1.1 billion, absorbing $500 million in cash in four months.
CEO Mauricio Botelho later remarked: “If we did not have cash at hand and weren’t flexible, we would probably be dead right now”. But by building a cash cushion during the relative lull in the airline industry in the late 1990s, Embraer was able to survive 9/11. Embraer also shifted production to military aircraft to capitalize on rising demand from the defense sector after the terrorist attacks. Embraer’s operational improvements also conferred the flexibility to respond to the September 11 slowdown. Botelho described the situation:
We were increasing our production from 14 to 20 aircraft per month from January to December 2001. On August of that year, we had delivered 18 aircraft. Then, September 11th came and we immediately, by the end of September, announced our actions to face the new scenario. We visited all our customers, studied the impact on their operations, and then studied the impact on us. And we reacted very promptly, adjusting our man power, our course and everything to a new delivery scheme of 10 aircraft per month. We adjusted from 18 to 10 aircraft per month overnight. Flexibility is mandatory, and the downturn forced us to lay off 1,800 employees (14% of total) and reschedule our production line.
One might be tempted to attribute Embraer’s resilience to luck. After all, Embraer was at the right place to capitalize on the boom in demand for regional jets. However, a comparison with competitor Fairchild Dornier
As a state-owned enterprise, Embraer had long suffered under stifling bureaucratic processes. One long-time employee recalled, “Embraer was subject to many procedures, norms and government audits, which contributed to bureaucratizing the company, setting barriers to its efficient operations.”
Founder and long-time CEO Ozires Silva initially wanted to establish Embraer as a private firm, and resorted to government funding only after failing to persuade private investors to finance such a risky enterprise. Under Silva’s leadership, Embraer was not as bad as many other state-owned enterprises in Brazil: bloated infrastructure, over-politicized appointments and lack of long-term financing. But it still suffered from the bureaucracy that often plagues state-owned enterprises.
However, government influence prevented Embraer from promoting employees based on merit, responding quickly to changing market conditions, or developing sophisticated financial engineering strategies. Nevertheless, his successor dramatically increased the organization’s agility through a number of steps.
- Delayer and organize around customers. To reduce the distance from the top to the bottom of the organization, Botelho reduced the number of managerial levels from seven to five. By 1996, Botelho
The period between 1997 and 2000 proved relatively calm for Embraer, at least by the standards of the global airline industry and the early 1990s in Brazil. As the sales of the ERJ-145 took off, Embraer executives took advantage of the break in the action to position the company to seize future opportunities and avoid or respond to sudden-death threats that might emerge in the future.
- Continuously improve operating efficiency Although Embraer had a long history of new product innovation, the company’s engineering prowess had not translated into efficient production processes. Embraer had introduced quality improvement programs in early 1985, but these were executed in a fragmented and half-hearted manner. In 1996, Embraer top executives initiated a business process redesign project to implement Total Quality Management techniques in all of the company’s processes. Embraer also worked with external partners including McDonnell Douglas, Boeing, and the International Organization for Standardization to provide external certification of quality, as well as guidance on how to improve Embraer’s internal processes to achieve higher quality targets. Embraer also invested heavily in information technology – not only for the design and engineering, but for all financial reporting systems as well. These actions together enabled Embraer to cut its production cycle by half, while increasing revenues per employee five-fold.
In September 1995, Mauricio Botelho joined Embraer as the CEO. Botelho was a 53-year-old mechanical engineer, a seasoned executive who served on the board of the lead investor in the syndicate that acquired Embraer. When Botelho arrived, along with his long-time colleague Antonio Manso, they did not like what they saw. The assembly line was empty, the mainstay Bandeirante and Brasilia models were outdated, and development had been cancelled on the CBA 123. Botelho later recalled:
When I arrived, we had $330 million in annual losses, a backlog of less than $200 million and 6,100 unmotivated employees. And yet Embraer had a history of products that were to some extent pioneers in the market. First on my agenda was to understand how Embraer got into this position.
Botelho quickly concluded that Embraer had focused too heavily on improving technology, lost sight of its customers and, as a result, lacked a product to serve the customers’ emerging needs. Studies conducted prior
The late 1980s and early 1990s were as difficult for Embraer as the preceding years had been good. The fall of the Berlin wall in 1989 resulted in steep reductions in military spending around the world. A global recession depressed demand for air travel, leading airlines to delay or cancel their orders for new planes. Even as demand contracted, supply grew because European countries supported their local champions’ entry into the regional jet market, spawning new rivals including Aerospatiale (France), Saab (Sweden), Daimler Aerospace (Germany), Fokker (Holland), and Casa (Spain).
Embraer initially responded to these altered environmental conditions by doing more of what had worked in the past. Historically, executives had seen Embraer as an “engineering company” and believed that superior engineering would sustain the company’s success. These strategic frames led Embraer managers to focus on refining and extending their existing turboprop planes, investing more than $280 million on a state-of- the-art turboprop, known as the CBA 123, even as momentum was building for short-range jets instead.
The CBA 123 was to become the most advanced turboprop ever built. But it had two problems. The advanced
In order to succeed in an unpredictable market, companies must respond quickly and effectively to sudden-death threats and rapidly identify and exploit golden opportunities. During periods of relative calm, managers must excel at active waiting by monitoring the emerging situation, identifying and managing potential risks, building slack resources and maintaining internal and external flexibility. Successfully doing any of these is hard enough, but excelling at all of them is daunting. Few companies have done it all as successfully as the jet manufacturer Embraer.
Today, Embraer is the fourth largest aircraft manufacturer in the world, with over twelve thousand employees and $5.5 billion revenues in 2009. By the end of the 1990’s, the company had emerged as one of Brazil’s largest exporters. Over the 1990’s, Embraer won a 40% share of the global market for regional jets, while the market leader Bombardier lost nearly half of its market share over the same period, and number three Fairchild Dornier filed for bankruptcy.
To understand Embraer’s success in the 1990’s, it helps to start at the beginning and understand the company’s origins. The story begins in 1941, when the Brazilian government created an Aeronautics Ministry to
To understand how companies thrive in turbulent markets, Martin Escobari and I studied ten Brazilian companies that thrived despite Brazil’s turbulence during the 1990s. Brahma (brewing and beverages which through a series of acquisitions created Anheuser Busch InBev), Embraer (aircraft production), Votorantim (diversified conglomerate specializing in basic industries), Banco Itaú (banking), Natura (cosmetics), América Latina Logística (logistics), Promon (engineering), Sabó (auto parts), Pão de Açúcar (food retailing), and Aracruz (pulp and paper).
We paired each of the ten with a comparable firm that was less successful in managing turbulence. These paired companies provide a valuable contrast to our more successful firms. The similarities among the more successful companies, as well as the differences between them and their less successful peers, form the foundation for the findings in this book.
There are a few things to note about the companies we studied. First, they represent a broad cross-section of the economy. Most studies of management in turbulent environments have focused on U.S. information technology companies, primarily in the period between 1980 and 2000. By sampling across a variety of industries we hope to glean general insights about managing in unpredictability that would not emerge from a
My last post provided a brief overview of Brazil’s economy and long history of economic turbulence. Even by Brazilian standards, the 1990’s were extremely turbulent. The best way to illustrate the impact of shocks on companies’ ability to build long-term competitiveness is to imagine yourself as the CEO of a Brazilian company in the 1990’s. These are the challenges you would have faced.
The decade began with President Collor freezing all financial assets for eighteen months. This asset freeze caused a liquidity crisis, and companies in certain industries such as retail and consumer goods witnessed sales plunge 30-50% within a few months. Collor simultaneously eliminated an extensive list of preferential incentives and protective tariffs for Brazilian companies, thereby exposing them to direct competition with some of the most competitive and efficient global competitors. In contrast to Mexico’s gradual integration into the North American Free Trade Agreement (NAFTA) over ten years, these changes took place over the span of months in Brazil.
Four years later, Brazil’s government launched a new currency as part of its Real Plan, and inflation dropped from a monthly rate of 47% in June to 3% in August of 1994. You might think that is good news, but inflation
Before introducing the Brazilian champions that succeeded despite volatility, it is worthwhile pausing to discuss the Brazilian economy and economic history as context for the companies that succeeded in the 1990s out of that country.
Brazil has been described as a slumbering economic giant waiting to awake. It is the fifth largest and most populous country in the world, the ninth largest economy (in terms of purchasing power), and the largest market in South America, accounting for up to 60% of South America’s total Gross Domestic Product (GDP) during the 1990’s. Brazil is highly integrated in the global economy. The country is among the world’s top three exporters of tobacco, sugar, orange juice concentrate, soy, beef, chicken, iron, and tin. China is the only country that received more foreign direct investment among the developing countries between 1998 and 2001.
Much of Brazil’s trade was done with the United States, and Brazil was a larger trade partner to the U.S. than Italy, Spain, or India throughout the 1990’s. Despite its impressive accomplishments, many commentators argue that Brazil has failed to fully realize its potential. “Brazil is the country of the future,” as the old joke goes, “and always will be”. Annual growth in GDP averaged a modest 2.5% between 1980 and 2000 versus 10.2% for China, 7.8% for South Korea and 5.7% for India.
Brazil’s progress in recent decades has tended to come in jubilant bursts, including president Juscelino