Case Study : Amanco - An Excerpt from Market Movers : Lessons from a Frontier of Innovation

Case Study: Amanco An excerpt from Market Movers: Lessons from a Frontier of Innovation Full Market Movers report, and its companion piece, Developing Value, are available at www.ifc.org/enviro  and www.sustainability.com/marketmovers 1 Market Movers Case: amanco Pipe dreams Amanco has grown to be tiation through innovation is the access to reasonably priced finance Latin America’s leading only way to escape from that type to buy the agricultural irrigation manufacturer of plastic pipes of low-margin ‘commodity hell’. kits that Amanco was proposing and fittings with a strategy But the benefits of many forms of to sell, so the company found part- that has built-in sustainability. innovation in the industry often ners who could help with training prove short-lived; new products and financing – including the Inter- The Sao Paulo-based company was sometimes have a competitive American Development Bank and bought for $500 million in February advantage for just a matter of the NGO Opción. There were sound 2007 by Mexichem, a Mexican months. business reasons for choosing Gua- chemicals manufacturer that is temala – it had some 300,000 small quoted on the Mexican stock market. So the company has differentiated farmers who could be potential Mexichem was one of at least nine itself by developing a brand that customers. Despite their limited organisations interested in purchasing is associated with sustainability in resources these farmers have Amanco at the time of its sale, all the countries in which it oper- proved to be a good credit risk. attracted, according to CEO Roberto ates. This is partly reinforced by its Salas, due to Amanco’s leading new products, which systematically The gradual build-up of the com- position in Latin America, its proven take account of environmental and pany’s reputation for innovation track record of profit growth and its social impact. For example, the com- and sustainability through the sustainability commitment. pany has taken the precautionary development of this sort of new approach in identifying a substitute, product and service has been calcium zinc, which can be used to backed by a concerted attempt to replace lead-containing compounds lead discussions across the region “Twenty-first century in its PVC piping at an extra cost on the sustainable use of water companies need to integrate of only 3.5%. Then it developed a resources and on transparency. new plastic technology for sewage Amanco was a leading supporter themselves much more closely piping that is more water-tight than of the Fourth World Water Forum, with what is happening in any comparable material, and also held in Mexico City in March 2006, cheaper to install. and it has signed agreements with society in general. Those that other firms in the sector to increase don’t will be relegated to The company has a wide range of transparency and hence to reduce clients and it develops products the opportunities for corruption. Jurassic Park.” and services specifically for differ- ent groups. It has, for instance, The company’s financial performance Julio Moura, president and CEO of GrupoNueva been developing a scheme based has been uneven across the conti- on the base of the pyramid (BoP) nent. Although it is the leader in concept, identifying products and its Spanish-speaking markets, it has services designed to improve social a much less dominant position in Sustainability – or the triple bottom conditions for low-income custom- Brazil, even though Brazil accounts line (TBL) approach, as it is called ers while creating value for the for over a quarter of the company’s internally – first became part of the business. The company invited its total sales and is its biggest single company’s competitive strategy employees to come up with busi- market. Nevertheless, Amanco’s under previous owner, GrupoNueva, ness plans for the scheme and it efforts to strengthen reputation “as Amanco searched for the best received 250 proposals, some of and brand have been working – way to attain price premiums” which are now up and running. and the company has gone from notes Andreas Eggenberg, a former being relatively unknown in Brazil senior executive. Amanco is in a The initial BoP project was a to being widely recognised and market that is highly commoditised. $100,000 investment in Guatemala. highly trusted in only a few years. A pipe is a pipe is a pipe. Differen- Small farmers there do not have  Market Movers 17 2 Sustainability performance of efforts to lead the debate on customers who lack access to the water resources and transparency, banking system – enabling them What you measure is what you get for instance, cannot be quantified. to purchase building materials. But Jorge Ramirez, the company’s Amanco has also set up a pro- Amanco has been a pioneer in financial director, is convinced that gramme to train plumbers from measuring the impact of its TBL the extensive media coverage that low-income groups, certifying strategy, building on the ideas of these initiatives receive has a posi- those who successfully complete Robert Kaplan, a Harvard profes- tive effect on consumers’ awareness the programme as ‘Doctores de sor of accounting who in the 1990s and attitude towards the company. Construção’, a brand which adds developed a method of extending There is less doubt about the ben- value for the plumbers. For Amanco, a company’s measure of its perfor- efits of the company’s efforts to this is also part of developing the mance beyond the financial. On reduce waste and to lower accident company as an alternative to the the understanding that what you rates. These are all measured and market incumbents in Brazil, who measure is what you get, he set out managed, and have a positive impact were already working with the a concept he called the ‘Balanced on costs. well-established plumbers. “The Scorecard’.10 This added other only way to success is with surprise yardsticks of company performance, The BoP segment, although still small, – doing something differently,” such as customer satisfaction and already generates over $4 million in says Salas. levels of innovation, to the classic revenues and the company believes profit and loss account. The idea the BoP idea has high growth poten- To some extent Amanco’s distinc- aroused widespread interest. tial, projecting that income from it tive culture is self-sustaining. The will double year-on-year. Since the company attracts the sort of em- Amanco has extended the idea of initial project in Guatemala, the ployees that want to make it work, the Balanced Scorecard to embrace company has developed new ideas and who gain satisfaction from the both social and environmental including a pilot financial services idea. Amanco has frequently been dimensions. It has begun to produce program for the residential building named as a Top 100 employer in what it calls a ‘Sustainability Score- and installation segment in Brazil, Brazil, and in 2007 Amanco Ecuador card’ (see Figure 6 on page 41), and launched in 2005. The program was cited as the fifth best employer its efforts stimulated Kaplan himself provides credit cards to low-income in all Latin America.12 to co-author a Harvard Business School case study entitled ‘Amanco: Developing the Sustainability Scorecard’.11 It is a constant chal- lenge for companies to measure the impact of the sustainability element of their strategies, and Amanco has gone as far down this road as any. Amanco first introduced its Sus- tainability Scorecard in 2003 and it has been continuously refined ever since. Initially it focused on the social impact on employees and the communities around its factories. But it has since been expanded to include business with low-income customers, fighting corruption in the sector, and indicators on acci- Courtesy of Amanco dent prevention and eco-efficiency. It is difficult to measure the impact of every aspect of Amanco’s sustain- ability strategy. The specific benefit 10 RS Kaplan and DP Norton, ‘The balanced scorecard: measures that drive performance’, Harvard Business Review, Jan–Feb 2002. 11 Ricardo Reisen de Pinho and Robert Steven Kaplan, ‘Amanco: Developing the Sustainability Scorecard’, Harvard Business School Case 9-107-038, January 2007. 12 Citations by the Great Place to Work Institute, www.greatplacetowork.com/ (27 August 2007). 3 Market Movers Conclusion 21st century business a number of plants, although conflict and globalisation. the company provided extensive Amanco’s new owners seem The company’s fortunes are closely retraining and outplacement determined to continue with the allied to those of the region. The services to help laid-off employees sustainability strategy that made growth of Latin America’s GDP find new work. To succeed in the company so attractive when per capita over the past 25 years the 21st century, Julio Moura, it came on the market. Mexichem has been poor – lower than for all president and CEO of former has confirmed that it intends to emerging-economy regions except owner GrupoNueva, has said continue with this approach and sub-Saharan Africa. Moreover, state that companies need a different has created a special board of spending on infrastructure has approach to that of the last century. directors for Amanco, to reflect fallen sharply in all countries except In essence, they need to integrate the company’s wide geographical Colombia as fiscal controls have themselves much more closely with spread and support its sustainability been tightened. Most spending on what is happening in society in goals. But there will be different water and sanitation in the region general. Those that don’t, he says, challenges in nurturing such a remains publicly financed. “will be relegated to Jurassic Park.” strategy for a quoted company, The big opportunities over the next with the short-term horizons that The company has already been ten years, he believes, will come are imposed on it by its investors, through some hard times. During from “the things that society is most as opposed to those that were the economic crisis between 1999 concerned about”. Among which faced by Amanco when it was and 2003, Amanco had to close he includes climate change, poverty, privately owned. Box 4: Innovation Like any business, Amanco ‘water solutions’ to different opportunities – innovating seeks to increase profits. consumer segments. Social and products and services to meet However, the company is environmental problems such needs at a competitive price. constrained by the fact that as water leakage or farmers’ Innovation in production pipes are a commoditised lack of access to financing are processes to reduce resource product, with traditionally the source of ideas, and then and energy consumption has low margins. Amanco has Amanco applies creativity, also helped the company keep solved this challenge by research and development prices down and contributed developing a value proposition to try to solve them. Amanco to increased profits. based on providing tailored thus turns these problems into Courtesy of Amanco  Market Movers 4 Courtesy of Amanco 5 Market Movers Company profile Amanco is a Latin American producer of integrated water solutions for the construction, infrastructure and irrigation industries. It is also involved in the trading of construction products. It produces an annual Sustainability Scorecard, which measures the results of environmental and social management as well as standard financial results. Founded Operations Market share key data Amanco Holding Inc. was Plants operating in 14 Latin 2005: from 17% (Peru) to formed in 1994 through American countries 66% (Ecuador); 28% across the merger of several pipe the region systems companies owned Markets by Swiss entrepreneur Stefan More than 55,000 points of Awards and recognition Schmidheiny. sale in 29 countries, including – 2006 and 2007: Amanco primarily Brazil, Mexico, (Ecuador) listed in Best Ownership structure Colombia, Argentina and Companies to Work for in Latin Wholly owned subsidiary of Central America America by Great Place to Work Institute (ranked 5th) Mexichem since March 2007 – previously part of GrupoNueva Main competitors – 2005: Distinction Companies used as benchmarks for Corporate Social Responsibility from Mexican Sector include Wavin (Dutch), Uralita Center for Philanthropy Pipe systems, construction (Spanish), Iponor (Finnish) and (CEMEFI) products and geosynthetic Tigre (Brazilian) – 2002, 2003, 2004 and 2005: systems listed in Best Companies to Employees Work for in Brazil by Great Headquarters 7,100 Place to Work Institute Sao Paulo Revenue (USD mn) EBITDA (USD MN) 798 800 90 85 84 700 688 80 75 592 592 67 600 70 512 61 500 60 FY02 FY03 FY04 FY05 FY06 FY02 FY03 FY04 FY05 FY06 Compound annual growth rate (CAGR) CAGR from 2002 to 2006: 8.6%. from 2002 to 2006: 7.8%13 13 Here, and elsewhere in the case studies, CAGR has been calculated by the authors, based on revenue, income or EBITDA figures provided by the companies.  Market Movers 6 The Amanco business case – the three most important factors Here we highlight the three most important ways in which sustainability performance at Amanco is influencing business drivers and supporting business strategy. 1. Brand value increased through 3. Cost savings from supporting sustainability governance environmental efficiency – Sustainability is an integral part of – Good environment, health and Amanco’s brand differentiation. safety management saves money and contributes to increased – In Brazil, Amanco has gone from margins. being relatively unknown to having 50% brand awareness in – There were $850,000 in savings less than 18 months. in 2006 through eco-efficient management of plants (reducing – Leadership on transparency within resource and energy consumption). sector helps make Amanco the preferred brand to win ‘clean’ contracts in an industry prone to corruption. Amanco business case matrix 2. Market creation by helping customer’s own economic development Environmental Social Governance Performance Performance Performance – Amanco created new markets at the base of the pyramid. Sales & Market Access – Substantial potential as new segment accounts for 80% of customer base but currently only Operational 20% of sales. Efficiency – Pilot projects providing new agricultural products and services Access to Capital are now generating $4.1 million in revenues. Risk Mgmt & – Amanco estimates income from Licence to low-income segments will double Operate year-on-year, compared with just 5–15% growth in other segments. Talent & Human Capital Brand Value & Reputation © 2007 International Finance Corporation and SustainAbility ISBN 978-1-903168-21-9 Market Movers: Lessons from a Frontier of Innovation First Edition 2007 All rights reserved The material in this publication is copyrighted. IFC and SustainAbility encourage the dissemination of the content for educational purposes. Content from this publication may be used freely without prior permission, provided that clear attribution is given to IFC and SustainAbility and that content is not used for commercial purposes. International Finance Corporation SustainAbility Ltd. Cover photos courtesy of Amanco, 2121 Pennsylvania Avenue, NW 20-22 Bedford Row Deqingyuan, Jubilant Organosys Washington, DC 20433 London WC1R 4EB and MAS USA T +44 (0) 20 7269 6900 Writer: Timothy Hindle T +1 202 473 3800 F +44 (0) 20 7269 6901 Designer: Gimga Group F +1 202 974 4384 london@sustainability.com Printer: Balmar, Inc. www.ifc.org/enviro SustainAbility Inc. This publication is printed with 1638 R Street, NW vegetable, soy-based inks on Finch Suite 301 Fine paper. This paper is FSC certified Washington, DC 20009 by SmartWood. USA T +1 202 315 4150 The Forest Stewardship Council F +1 202 315 4178 (www.fsc.org) is an international network to promote responsible washington@sustainability.com management of the world’s forests. www.sustainability.com/marketmovers