amanco: developing the sustainability scorecard · amanco executive. (exhibit 2 shows amanco’s...

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________________________________________________________________________________________________________________ Professor Robert S. Kaplan and Senior Researcher Ricardo Reisen de Pinho of the Latin America Research Center prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management Copyright © 2007, 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

R O B E R T S . K A P L A N

R I C A R D O R E I S E N D E P I N H O

Amanco: Developing the Sustainability Scorecard

A modern company must have a much broader and more sophisticated relationship with society, and must respond to issues that didn’t exist previously… Our strategy is the best for the sustainable creation of value.

— Stephan Schmidheiny, Grupo Nueva and Amanco’s founder1

On January 9, 2006, CEO Roberto Salas arrived at the new Amanco headquarters in São Paulo

after a long and strenuous tour through the company’s key units in Latin America. Salas had conducted intense and productive discussions about how to strengthen and standardize Amanco’s Sustainability Scorecard system (SSC), for use in executing Amanco’s new strategy.

Amanco was Latin America’s biggest producer and marketer of plastic pipes and fittings for transporting fluid. It had dominant positions in Colombia and Ecuador, and was a major competitor in Brazil and Mexico. Amanco had become a top brand while establishing a reputation as a leading company in corporate social responsibility. Julio Moura, Amanco’s chairman, explained, “Customers want products that improve the society in which they exist and that protect the environment.”2

Salas reflected on the company’s recent financial performance (summarized in Exhibit 1):

Amanco has lived by its triple bottom line values and become one of the Latin American’s most admired socially responsible companies. It has received several awards for being a “best” place to work. Concurrently, our revenues went from $520 million in 2001 to $688 million in 2005, with EBITDA jumping from $52 million to $84 million. For 2006, we expect revenues of $770 million and an EBITDA of $102 million.

Living on a Thirsty Planet3

Water was critical for long-term economic development, human health, social welfare and environmental sustainability. Although three-quarters of the planet’s surface was covered by water and it was by far the most abundant natural resource, 97.4% of it was salt water. Most of the 2.6% non-saline water was either inaccessible in glaciers, polar ice caps, and deep underground, or it fell at the wrong time in the wrong place during floods and monsoons.4 The only water readily available for

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human use lay in lakes, rivers, and aquifers. Of this, 66% was used for agriculture, 20% for industry, and 10% for domestic households, including drinking water and sanitation. The remaining 4% evaporated from reservoirs.5

Global consumption of water had outpaced the rate of human population growth by a factor of two in the previous 20 years. Dense urban and massive industrial growth, pollution, land degradation, leakage, and over-extraction had reduced many regions’ ability to meet their citizens’ growing water demands. For example, leaky pipes in Mexico City lost an estimated 40% of the city’s water.6 Approximately 1.1 billion people lacked access to safe drinking water and 2.6 billion people did not have adequate sanitation. Contaminated water caused about 4,500 preventable children’s deaths every day.7 UN Secretary Kofi Annan stated that “fierce national competition over water resources has prompted fears that water issues contain the seeds of violent conflict.8

A myriad of consultants, equipment suppliers, and service providers fought over the multibillion-dollar global market for water. Some of the world’s biggest investors had chosen water as the commodity that could appreciate the most in the next several decades. “There is only one direction for water prices at the moment, and that’s up,” stated the manager of a $2.9 billion water fund based in Geneva.9 Similarly, General Electric’s CEO Jeffrey Immelt anticipated doubling GE’s revenue from water purification and treatment to $5 billion by 2010.10 The Inter-American Development Bank invested $3.1 billion in water and sanitation projects in Latin American between 2003 and 2005.11

Commitment to Social and Environmental Performance

Stephan Schmidheiny, a Swiss lawyer and experienced world traveler, had become CEO of the Schmidheiny Group in 1976 at age 29. The Group was a business conglomerate with decentralized operations in multiple world locations. It owned, among other companies, Eternit AG, an asbestos cement company with operations in more than 20 countries. Eternit’s plants had been threatened by expensive lawsuits and strict environmental standards, including a potential ban on asbestos by the European Union. Schmidheiny initially took pre-emptive measures by installing new equipment in the factories, implementing personnel training programs, and launching research to develop asbestos-free products. Eventually, however, he took more drastic action:

I myself had been dangerously exposed to asbestos fibers during my training period in Brazil. . . . I made a radical decision, even though I did not have the faintest idea of how this change was to be implemented. I publicly announced that the group would cease to manufacture products containing asbestos. I made the decision to get out of asbestos based on the human and environmental problems associated with the mineral. It was a painful period, but it was invaluable preparation for my later being thrown into a position of leadership on business and society issues.12

In 1984, the Group was split between two of the founder’s sons and heirs. Schmidheiny became the owner of the Eternit Group. He launched a diversification strategy by acquiring distressed companies in need of basic restructuring. He expanded the family’s investments in Latin America, where it had operated since the 1930s.

Schmidheiny attracted global attention by publicly addressing business decisions in social and environmental terms. In 1990, he was appointed chief advisor for Business and Industry to the Secretary General of the United Nations Conference on Environment and Development (UNCED), better known as the Rio de Janeiro Earth Summit of 1992. He helped to organize a forum that later became the World Business Council for Sustainable Development, WBCSD. This organization



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assembled the world’s 160 most important enterprises to develop a business vision for sustainable development. Schmidheiny explained the origin of a key term:

While writing the [Changing Course] book, we held a competition to find the most appropriate term to define a company’s potential contribution to sustainable development. We received hundreds of proposals, from which I selected eco-efficiency. The eco prefix elegantly combines two fundamental concepts: economy and ecology. Simply put, eco-efficiency means adding greater value to goods and services while using fewer resources and generating less waste and pollution. 13

Social and Environmental Activities in Latin America

In the mid-1980s, Schmidheiny established FUNDES, a philanthropic organization to support the development of small and medium-sized businesses in Latin America. In 1994, he donated approximately $300 million to form the AVINA Foundation. This non-profit organization worked with civil society and business leaders on sustainable development initiatives in areas such as citizen participation, community organization development, and eco-efficiency. The organization also sponsored programs in communications and education, including a partnership with Harvard University and nine leading Ibero-American universities.14

In 1998, Moura, Schmidheiny’s top lieutenant in the region, consolidated the remaining family-owned Americas businesses into Grupo Nueva, a private holding company with leadership positions in forestry, wood, fiber, cement products, pipes, and accessories. Moura required all Grupo Nueva companies to be committed to sustainable development. He recalled, “Business has a tremendous role to play. To tackle the challenges is an opportunity for business, and if business integrates these opportunities into its business strategies and creates win-win situations, it can work.”15

In 2003, all Grupo Nueva stock and other interests were donated to the VIVA Trust, a gift worth about $1.0 billion. VIVA earmarked the dividends from its holdings to promote sustainable development throughout Latin America, especially through the work being done by the AVINA Foundation. Concurrently, Schmidheiny stepped down from all operational responsibilities.

In 2005, Grupo Nueva companies had sales of about $1.4 billion and EBITDA of $240 million. It employed 17,600 people in 17 Latin American countries. Amanco was one of its company holdings.

Amanco

Amanco was a major producer of plastic pipe for water transport. As the demand for drinking water increased throughout Latin America, particularly in large urban areas, the systems for transporting water became a lucrative business. Latin America, however, was far from a homogeneous market. Brazil, accounting for roughly one-third of the Latin American market, was distinct by language and culture. Language and cultural differences within even the Spanish-speaking countries led to local strategies, marketing, and management systems. “Initially, Amanco worked as a federation, with some of its country units operating as stand-alone units,” stated an Amanco executive. (Exhibit 2 shows Amanco’s geographic presence.)

In 1999, Moura invited Roberto Salas, the Amanco country manager in Ecuador, to come to Costa Rica and become Amanco’s COO, responsible for developing Amanco as a multinational competitor across Latin America. Salas, who soon thereafter became Amanco’s CEO, transformed the company from a collection of separate geographical units into a more integrated organization. (See Exhibit 3




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for Amanco’s recent history.) He introduced, in October 2005, a new organizational structure (see Exhibit 4) focused on specific geographical and market segments. Salas explained:

We decided to create a matrix encompassing two geographical areas, Amanco Hispánico and Amanco Brazil, along with three business units: Agricultural Solutions, Financial & Small Business Services, and Building Products Innovation. This model enabled us to consolidate a market-driven culture supported by a deep knowledge of our current and potential clients as well as building capacity to foresee future market trends.

Product Lines and Brands

Initially, Amanco was a simple industrial manufacturer of pipes and accessories. (See Exhibit 5 for a sample of products.) Amanco’s current mission was to provide complete solutions to its customers, not just individual products. Amanco worked with its customers to manage the complete water cycle, from extraction, conduction, and distribution, to after-use stages of recollection, sewage, wastewater treatment, and disposal. The company had also made important inroads in providing piping for electricity, telecommunications, and natural gas. It deployed initiatives to train third-party sellers and installers, and provided credit to small and medium-sized clients. In 2005, pipes and profiles represented 55% of Amanco’s total sales, connections represented 19%, and accessories, 8%, while other business lines accounted for the remaining 18%.

The plastic pipe industry had experienced important technological progress in recent years. New polymer materials enabled Amanco to offer competitively priced products with greater hardness, size, lightness, flexibility, and tolerance to both low and high temperatures. But the competitive advantage of new products often lasted just a few months. Amanco had to innovate continually and improve the efficiency of business processes such as marketing and finance. Amanco also had to contend with escalating oil prices, which could cause customers to look for substitute products.

Amanco had expanded through regional acquisitions and operated with different trademarks in different countries. In Colombia and Venezuela, Amanco’s products appeared under the name Pavco, while in Ecuador they were known as Plastigama. Marise Barroso, Amanco’s corporate marketing director, commented on the role for a common brand: “While we want to preserve the strong brands acquired across the region, we need to establish a common brand platform that will help us integrate processes, develop new products, and report results in a single manner.”

Sales and Competition

Latin American markets were fragmented, with few global players. Many small local competitors avoided paying taxes and offered bribes to secure important deals.

Fifty-eight percent of Amanco’s sales came from the construction sector, encompassing large building companies and independent plumbers and builders; 26% from infrastructure, including water and wastewater companies and municipalities; and 14% from agribusiness. It reached these customers through diverse distribution channels including public auctions, large distributors, small and medium-sized building materials depots, and building material chain stores. The sales within each channel depended on cost-to-serve and customer satisfaction, which varied by country.

By 2005, Amanco had become Latin America�s largest company for producing and marketing plastic pipes and fittings for fluid transport, mainly water, and for providing integrated solutions for building, infrastructure, irrigation, and environmental engineering projects. (Exhibit 6 shows selected




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market indicators.) Amanco operated 21 production plants in the 12 major countries in Latin America, sold its products in 29 countries, and employed more than 5,600 people.

Amanco’s First “Triple Bottom Line” Scorecard

Amanco, like other Grupo Nueva companies, had a corporate vision “to be recognized as a leading industrial group in Latin America, operating in a framework of ethics, eco-efficiency, and social responsibility, that generated economic value and improved its neighbor’s and its region’s quality of life.” In 2000, Grupo Nueva introduced scorecards into Amanco’s management system.16 Salas described this early phase of performance measurement:

We initially worked at the corporate level with triennial scenarios in which we designed financial, social, and environmental targets for each year. This was the core for our system and showed Amanco’s commitment to triple bottom line performance:

1. Create economic sustainability in the long run. 2. Generate value through a system of corporate social responsibility. 3. Generate value through environmental management.

The first scorecard was in the shape of a pentagram (see Exhibit 7). The five blocks represented Finance, Customers, Process and Technology, Human Resources, and Social and Environmental Management. Collectively, these blocks were expected to support and guide the company to achieve its three bottom-line objectives. Amanco’s executive team translated the objectives in each block into action plans, detailing who would be responsible for a specific achievement, the milestones to be accomplished during a certain period of time, and finally, a description of the necessary resources to be allocated to achieve that objective. Top management revised these action plans quarterly and thoroughly discussed them with middle and front-line management levels. Local managers adapted the corporate pentagram to their country or region, taking into account local peculiarities and characteristics.

Salas commented on the origin of the system’s name:

One of the most important success factors for any system implementation is communicating it throughout all management levels and business units. It should be something that can provoke instant awareness and boost morale. Not surprisingly, communication starts with selecting the name for the initiative, one that can be easily understood and quickly assimilated by the whole company.

Most of the literature about scorecards was in English and a straight translation to Spanish or Portuguese would sound more like Control Panels, a rather operational tool. It would not communicate the strength and importance of our emphasis on creating an out-of-the-box strategy to support the development of an inspiring, innovative, and unique company. We also wanted to avoid implying that the ultimate objective of the company was to generate some kind of social balance. The new managerial tool should align strategy and management with the creation of value in a long-term sustainable way, encompassing the triple bottom line concept. With this perspective, Amanco and Grupo Nueva chose the term “Sustainability Scorecard.”

Salas felt, however, that the initial sustainability scorecard just classified different programs and actions into five blocks. It did not clearly present the triple bottom line concept as an element for




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competitive advantage development and value creation. He wanted a clearer, more logical representation.

Designing the Triple Bottom Line Strategy Map

In 2002, Salas and his corporate team introduced a strategy map adapted from the Kaplan-Norton Balanced Scorecard template (see Exhibit 8).17 The top row of the map expressed Amanco’s commitment to triple bottom line performance. Beneath it, the team rearranged the five blocks in the previous pentagram into causal links that better connected all stakeholders’ needs and objectives. Salas noted:

Customers were the growth engine of our company and therefore should be its core. Any other dimension would be either a consequence or a feeding element. The customer dimension should encompass three objectives: brand management, innovative and high-margin products, and customer satisfaction.

The first objective established the four Amanco brand attributes: integrity, innovation, solutions, and reliability. The second, innovation and high-margin products, emphasized our offer of differentiated solutions to customers. Finally, customer satisfaction expressed developing a long-term profitable relationship with channels and customers.

We retained social and environmental as a separate dimension to signal their importance in Amanco’s way of doing business and how they integrated with all actions of the company.

These design decisions raised questions within the company, according to Wladimiro Woyno, a Colombian and director of human resources:

We had decided that the company would be customer focused, stressing relationships rather than transactions, and also be a leader in corporate social and environmental responsibility. Some executives viewed this as a difficult business strategy, believing it was not feasible “to give everything to everyone,” as some interpreted the promise. We are still an organization in a consolidation process, with several initiatives being conducted simultaneously, competing for the same resources, and sometimes without a clear order and focus.

The new sustainability strategy map and scorecard helped the company communicate its strategy in a more objective and clear way. Amanco created a strategy management committee which met quarterly to manage and learn from its sustainability scorecard. The committee conducted a yearly strategic planning process to review and update the strategy. The company also periodically revised the sustainability scorecards of its regional operational units.

Using the Sustainability Scorecard to Drive Value Creation

In 2003, Pierre Roulet, a seasoned Brazilian-Swiss executive, joined the company as CFO. He found the SSC far from ideal.

Amanco was still operating in a decentralized manner, and with great asymmetries among its business units. Some countries were able to show solid revenue streams, low debt ratios, and valuable tax credits. Others were under-performing. Few were looking for potential




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synergy or leverage. Moreover, while the corporate Amanco was privately held, some subsidiaries had minority shareholders.

Amanco’s SSC did not have a predefined owner. In some countries HR was responsible, while in others, finance, marketing, or some other group ran the scorecard. This lack of accountability and standardization led to countries such as Brazil viewing the SSC as an operational tool like a cockpit with dozens of indicators. Costa Rica’s SSC was basically a cut-and-paste from the corporate strategy map. It did not translate the overall strategy into objectives and measures that reflected local opportunities and competition. It was easy to communicate the local scorecard to the head office, but it did not drive the subsidiary to maximize local value.

Most business units had a budget culture instead of a value-creation one. Amanco’s officers drove looking at the rear mirror rather than with an eye on the road ahead. Since they were rewarded for meeting the budget, managers knew that negotiation skills were more lucrative than attempting to deliver breakthrough results. Finally, some of the objectives were attached to metrics that did not capture the essence of what they should measure, sending the wrong message to management.

Salas agreed with Roulet:

Our strategy maps were complex and difficult to understand. Some showed what we would like to do but not what we could do. We also did not have reliable systems to capture, consolidate, and produce information. We were still developing a corporate culture that would align our objectives and effective action plans to people who would be accountable for delivering results. We also needed to properly link Amanco’s SSC with compensation. This would create a direct connection between overall corporate value creation and individual performances and contributions.

Translating Ideas into Action

Amanco’s management developed several initiatives to promote adoption of the SSC. With consultant support, Salas organized monthly meetings to evaluate local strategy maps and preach their advantages. Country managers engaged actively in the process, since they would ultimately be responsible for adapting the corporate maps to their respective countries. This process reflected Amanco’s belief that country managers and each business unit had to be accountable for executing the strategy. (See Exhibit 9 for Amanco’s Ecuador strategy map.) Salas commented on the key questions he addressed to managers:

In every meeting with country or business-unit managers, we tackle six main basic issues for each proposed initiative or action. The first two focus on how the initiative creates a competitive advantage and how it translates it into a superior value proposition. To answer these two questions, managers must think strategically and have a deep knowledge of the markets they compete in.

We follow those questions with questions about operational issues, such as how they are improving process, technology, and costs, while leveraging eco-efficiency and social corporate responsibility into a competitive advantage. Finally, we discuss how to ensure that our employees have the required skills and competences to deploy our strategy, and communicate these to our stakeholders. If the managers’ response to any question is inadequate, we force them to rethink the issue.




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Combining strategic analysis with the SSC, top management also envisioned specific programs tapping portfolio management, asset allocation, information technology, and customer relationships. Roulet elaborated on some of them:

We felt the need to connect the SSC to value-creating performance measures and incentives. We wanted a single overriding goal to summarize the interaction among all the variables and to balance conflicting objectives. Economic Value Added (EVA), by measuring profits after subtracting the expected return to shareholders, seemed to us the right summary metric.

The introduction of EVA forced country managers to better manage their own resources and act as owners. Our Colombian subsidiary, for instance, with no debt on its balance sheet, kept excess cash invested at low local interest rates while other subsidiaries borrowed at expensive rates. EVA introduced an opportunity cost for capital. The hoarding of cash stopped immediately. As a corporate target, we set an objective to generate an increase in EVA of $4.6 million for each year commencing in 2005.

One plant manager explained how the EVA metric forced managers to think about the financial returns from their physical assets: “The performance of our extrusion machines is normally measured by tons produced per hour. But we sell meters of pipes, not tons. We began to measure machine productivity by contribution/minute produced per dollar invested, a better way to measure the machine’s contribution to EVA performance.”

Linking the Sustainability Scorecard to Compensation

To reinforce the new SSC measurement system, Grupo Nueva wanted a new compensation system linking managers’ rewards to results.

Woyno highlighted the new system:

People, not information, add value to the organization. Managers must be motivated to act upon their new information. When managers are not rewarded to make the right decision, they rarely will.

The incentive system needs to change from rewarding and retaining individuals who perform local tasks well to encouraging them to address both local efficiency and global performance. The system had one component to reward above-average individual performance, but its main focus was to measure employee contribution to enterprise value creation. We used EVA as the key financial measure, but also included social and environmental metrics. These metrics have an important influence on the total cash reward received, and in some cases they are mandatory and binary. Employees who do not reach the target receive no reward from that dimension. For example, managers could have several social objectives, one of them being a zero fatal-accident rate under their supervision. If they achieve all social objectives but not the fatal injury one, then they won’t be entitled to receive the bonus component based on social performance.

By 2005, however, only 70 employees had been included in the new compensation system, and little consistency existed across the organization because of different country laws and labor structures. In Brazil and Mexico, for instance, all employees had to be rewarded with a percentage of company profits; other countries had more flexible regulations. The exception was Ecuador, where employees at all levels had variable compensation linked directly to their local SSCs. “For 2006, Brazil’s compensations system has been reviewed and SSC will become the basis for variable




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compensation at all departments.” Woyno added: “We plan to implement the same process throughout the group, after aligning local scorecards to the new corporate SSC.”

Measuring Social and Environmental Performance

Amanco’s definition and understanding of social and environmental impact had evolved over the years. (Exhibit 10 shows an early indicator list.) Initially, the scope of Amanco’s social impact objective encompassed employees and the communities surrounding the company’s manufacturing plants. Over time, the company broadened the definition to include customers and suppliers. In 2005, Amanco widened its definition further to encompass issues such as eliminating corruption in public bidding, conducting business with low-income customers, leading public debate on water issues, and capturing value in its brand.

Amanco’s management team established guidelines to standardize social and environmental measurement across its various stakeholders. Woyno described Amanco’s main initiatives:

We carried out workshops in all country offices to help our employees understand our mission statement and the company’s values. Concurrently, we implemented vertical communication mechanisms with employees, such as “O que voce pensa?” (What do you think?), to encourage employees to identify behaviors that were at odds with these values. Management had to report on how it addressed the issues raised. We also conducted yearly internal surveys to gauge employee satisfaction and collect general socioeconomic characteristics of the workforce, including family environment, education, and health.

Amanco hired an outside contractor to conduct objective, regular surveys of customer satisfaction across all Latin American countries so that regional trends could be highlighted.

The success of these efforts was validated when independent external surveys found Amanco to be an excellent employer. The company was continually named a Top 100 employer in Brazil since 2000, and was cited as the best employer in Ecuador in 2005.

Amanco’s Social and Environmental Metrics

A key metric for health and safety performance was time lost due to injuries. Across the company, the indicator showed about a 50% reduction in the prevalence and severity of accidents from 2001 to 2005. But results varied from country to country, so Amanco continued to focus on improving its social dimension metrics.

Amanco recognized that a significant share of its workforce in country offices had little or no formal schooling. Furthermore, Amanco’s workforce was only 16% female, though women were capable of performing any job in the company. Employee turnover had decreased from 24% in 2001 to 13% in 2005, assuring a healthy mix of age groups, while still providing availability of good employment opportunities for young workers.

Amanco was concerned with the impact of its business activities on noise, pollution, and transportation in the communities neighboring its production facilities. It developed a framework to institutionalize the dialogue with leaders and citizens from these communities.

An Amanco regional executive explained how treating employees and neighborhoods as stakeholders affected Amanco’s business conduct:




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When we had to close plants in countries such as Venezuela, Nicaragua, and Mexico, we let employees know about it well in advance. Although this decision could affect the continuity of our operations during the course of the process, we felt this was the right thing to do in terms of transparency and respect to [those] who had contributed to Amanco’s value creation. Furthermore, we initiated programs to support employees who would lose their jobs, by enhancing their existing skills, developing new competences such as entrepreneurship, and providing some with outplacement processes. By the end of the process, most employees had a new job and we could close the factories without major issues.

Amanco measured its environmental performance by reductions in per-unit inputs and wastes from its products and processes. Amanco also emphasized effective product-creation processes that would offer environmentally friendly, reliable, innovative, and long-lasting products. The product development process used a cradle-to-grave approach that included raw materials, production processes and equipment, use of finished goods, packaging, and final disposal of all new products. Salas expounded on the importance of this approach:

Our industry has faced challenges ranging from the use of chlorine derivatives as a raw material in many products and processes, to controlling and security issues of sensitive chemical materials that can be used in illegal activities. For example, solvent and fixative components are commonly used by us in quite a few industrial activities. Due to their potential hazardous nature we implemented severe process control, even outsourcing some of the functions to companies better able to handle them. In addition, we closed an important business line due to its use of a plasticizer element that could cause long-run health problems. Amanco’s policy for these issues is black or white. There is no grey zone.

Roulet commented on some of the financial and environmental trade-offs:

PVC is a widely-used plastic in our industry, and our main raw material. It is low cost, easy to assemble, and used heavily in construction. But because of its lead content, concerns have been raised about the impact of PVC on human health and the environment. Replacing lead with calcium zinc, a non aggressive chemical element, incurs a 3.5% cost increase for pipes and 8% for connections.

We created a pact among our main competitors to make the transition from lead to zinc during a certain period of time without any of us exploiting the replacement as a brand flag. Unfortunately, not all our competitors met the deadlines as we did. It doesn’t matter. We see ourselves as leaders, not followers. Eventually, our environmental leadership will be acknowledged.

Salas concurred:

We constantly attempt to create economic value by building competitive advantages in core areas such as product development and operational effectiveness. However, economic aims can never conflict with our principles and beliefs. The way to balance these apparently distinctive dimensions is to set the correct and profitable mix of products and services. It should be clear to all that what we do is far from philanthropy or playing “the nice guy” role. Our goal is to minimize risks and maximize opportunities.

Our decisions can sometimes lead to cost increases or diminished market share in the short term, but we strongly believe our eco-efficiency adds value to our products, potentially attracting more customers through the environmental and social responsibility embedded in our company branding and promise. For us, sustainability means creating long-run value through consistency and trust.




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Innovation and Branding

The company decided to expand its SSC definition to strengthen the linkage between the social and environmental dimension and Amanco’s value proposition. The concept was to build value creation routes in which these issues could be added to regular business processes, helping the company to develop competitive advantages and target new customer segments. Salas explained: “In developed countries, companies can charge premium prices for products and services that clearly address social and environmental questions. However, this is much more complex in poor countries, We decided to focus on innovation and branding as key factors for differentiation.”

Amanco had committed to conduct at least 10% of its turnover with low-income customers, which in fact made up almost 50% of Amanco’s final clients. “However, it is crucial to note that products targeted at this segment need to satisfy the same financial criteria as other product lines,” an Amanco executive emphasized. Another important requirement was for these sales to raise the quality of life for clients, something difficult to measure. Salas explained:

We don’t want just to sell pipes and products. We want to offer solutions that give our customers access to water and sanitation. We now measure water savings or increases in families’ income due to use of our products. The next step requires measuring more complex linkages such as how enhanced usage of water resources leads to illness reduction and social inclusion ratios.

In 2005, Amanco had several pilot projects under way to pioneer new products and services. In Guatemala, Amanco developed a funding structure with the Interamerican Development Bank (IDB), to offer a new agricultural kit to low-income families and cooperatives that would increase farmer productivity. The program had a 2006 goal to reach 2,500 families, with sales of $3.5 million in Latin America. In Brazil, Amanco was testing the feasibility of a new distribution system targeted at small-scale retailers located in low-income neighborhoods. It wanted to make these retailers better entrepreneurs capable of providing more services, such as credit and loyalty programs, to their customers. For example, in 2005 it introduced Credconstrução, a credit card for do-it-yourself and refurbishing customers who had no access to the banking system. In an initial 10-month trial phase, the company delivered approximately 7,000 credit cards. It expected to deliver up to 26,000 plastic cards by the end of the first year. Salas commented:

We started to analyze this low-income small-business segment not simply as small retailers or individuals, but as one composed of small entrepreneurs with dreams and aspirations. Our mission became not just to sell them products they could re-sell, but to teach them how to make their activities more successful and sustainable in a way in that includes them in civil society and also increases our sales. This creates a strong sense of loyalty.

Another initiative was to perform training programs for local plumbers at retail stores. These workers usually had poor training and education. “Training programs affiliate them to a network that provides professional certification and prestige in the local community and provides retailers with a competitive advantage. We see it as a win-win situation for the company, retailers, and installers,” stated an Amanco’s sales officer.

Amanco also decided to create a strong reputation, through an integrated communications plan based on several initiatives. Amanco had started to contact and be contacted by suppliers and major clients to discuss social and environmental impact. “So far, there was no institutionalized process for dialogue with them, but we can be used as a catalyst and an example in this process, potentially creating a model for other industries,” pointed out an Amanco employee.




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Roulet and Barroso commented on Amanco’s decision to stay away from any business practice that could raise ethical questions:

About one-third of our revenue is contracted via public auctions, an area particularly prone to corruption. The bribes ultimately raised the cost of providing water services to governmental entities and lowered overall public investment in water. We addressed the matter by negotiating a no-corruption agreement with main competitors in Brazil, Argentina, Colombia, and Mexico.

The company also connected its brand with the water theme by raising public consciousness about ethical issues related to social and environmental problems. Amanco launched “Aqua Vitae,” a magazine devoted to water issues for distribution to key stakeholders. In 2006, Amanco intended to organize 15 events all over Latin America, such as the first Brazilian Forum on Water Issues. All these strategy changes had been reflected in Amanco’s proposed 2006 SSC (see Exhibit 11).

Challenges Ahead

The major challenge ahead lay in Brazil, which Amanco first entered in the 1990s when it acquired two Brazilian manufacturers. In 2003 the company started producing irrigation equipment, hoping to penetrate the agribusiness sector, which was predicted to grow above GDP rates. Amanco’s largest competitor in Brazil, Tigre, had about a 40% market share of an approximately $1.0 billion market.

In 2005, Amanco moved its headquarters to Brazil and replaced most of its Brazilian management. Salas assumed the additional responsibility of becoming the country’s CEO. Several executives questioned why Amanco, with a dominant position in Latin America’s Spanish-speaking countries, was fighting for share in the huge and complex Brazilian market.

Salas commented:

Brazil is key for any player who wants to be a winner in Latin America. It has an enormous potential for growth. But its macroeconomic conditions, market characteristics, and business practices make it a complex country in which to operate. Due to local management style, competitive position, and language differences, our Brazilian companies operate almost completely independently from Amanco’s systems, programs, and processes. We hope to introduce our strategy based on Brand, Innovation, and Services to propel us into a leadership position.

Salas reflected on recent events and tried to foresee Amanco’s next steps:

In the last year and a half Amanco was under great pressure to create a new operational platform, and we may have lost some consistency. We were more focused on our turnaround in Brazil and less on the group’s culture. Before this period, I spent around 25% of my time championing innovation, awareness, and culture. I need to revitalize this message; creating the right culture is a continuous process and we cannot afford to lose it from our sight.

Our fast and steady growth may require a new capital structure in which we raise debt or equity from new shareholders. Our culture needs to be strong and transparent enough to surpass any short-term quarterly pressure for results and ensure long-term sustainability and leadership.

Salas believed strongly that Amanco was a unique company with a growing vision for humanity. Could he use Amanco’s Sustainability Scorecard to leverage Amanco’s diversity and align all operating units around a shared strategy? Could he transfer the Amanco culture to Brazil, or would the SSC curtail innovation and creativity in this critical new market?




13

Exhibit 1 Amanco’s Financial Performance 2000–2005 (in $ millions)

2005 2004 2003 2002 Net Sales 688 592 514 496 EBITDA 84 76 67 61 Operational Working Capital 143 144 123 102 EVA 12

Total Liabilities/Total Assets (%) 18.6 17.7 15.6 11.9 Net Worth/Total Assets (%) 50.5 54.6 57.7 60.5

Source: Grupo Nueva and Amanco Annual Reports 2004 and 2005.



107-

038

-1

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ibit

2A

man

co’s

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grap

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ence

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th A

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ce:

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anco

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107-

038

-1

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ibit

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co’s

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ent H

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ry

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1998

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ce:

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anco

.




16

Exhibit 4 Amanco’s 2005 Organizational Structure

Grupo Nueva’s BoardChairman

Julio Moura

Executive President Roberto Salas

Auditing and Risks Committee

Grupo Nueva

Finance Pierre Roulet

Agricultural Solutions

Committee Amanco

Mexico

General Manager Amanco Hispánico

Mauricio Nieto

General Manager Amanco Brazil Roberto Salas

Centroamérica

Región Andina

Colombia

Financial Services

Building Products

HRWladimiro Woyno

Marketing Marise Barroso

LegalDavid Lorie

New Products & Infrastructure

Manufacturing

Social Responsibility

Shared Services

Geo-synthetic Products

IT

Serves Amanco Hispánica and Brazil


Julio Moura



Grupo Nueva



Committee Amanco

Mexico


Mauricio Nieto


Centroamérica

Región Andina

Colombia

Financial Services

Building Products

HRWladimiro Woyno


LegalDavid Lorie


Manufacturing


Shared Services


IT


Financial & Small Business

Services

Building Innovation Products

Strategy Committee

Amanco


Julio Moura



Grupo Nueva



Committee Amanco

Mexico


Mauricio Nieto


Centroamérica

Región Andina

Colombia

Financial Services

Building Products

HRWladimiro Woyno


LegalDavid Lorie


Manufacturing


Shared Services


IT



Julio Moura



Grupo Nueva



Committee Amanco

Mexico


Mauricio Nieto


Centroamérica

Región Andina

Colombia

Financial Services

Building Products

HRWladimiro Woyno


LegalDavid Lorie


Manufacturing


Shared Services


IT


Financial & Small Business

Services

Building Innovation Products

Strategy Committee

Amanco

Source: Amanco.




17

Exhibit 5 Sample of Amanco’s Products

Source: Amanco.




18

Exhibit 6 Amanco’s Selected Operational Indicators (2004)

Country

% of Amanco’s

Total Sales Estimated

Market Share Main Consumer Segments Brazil 27% Player A 40%

Amanco 20% Residential, Infra-structure and Agriculture

Central America 23% Amanco 42%

Player B 36% Residential, Infra-structure and Agriculture

Colombia 18% Amanco 52%

Player C 22% Player B 11%

Residential, Infra-structure and Agriculture

Mexico 11% Amanco 20%

Player D 20% Player B 16%


Ecuador 8% Amanco 63%

Player E 11% Player F 8%


Venezuela 5% Amanco 33%

Player G 25% Player H 19%

Residential and Infra-structure

Peru 4% Amanco 20%

Player I 15% Player J 13% Player B 12%

Residential, Infra-structure, Agriculture and Mining

Argentina 4% Amanco 29%

Player A 25% Player K 18%


Source: Amanco.



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107-

038

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1-

Exh

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107-

038

-2

2-

Exh

ibit

10

Am

anco

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107-

038

-2

3-

Exh

ibit

11

Am

anco

Sus

tain

abili

ty S

core

card

: Pr

opos

ed 2

006

Sour

ce:

Am

anco

.




24

Endnotes

1 Adapted from “Three years after the creation of the Viva Trust—A conversation with Stephan Schmidheiny,” available at www.gruponueva.com/databases/comunicacion/sitenueva.nsf/pages/ entrevistastephaneng.html, accessed September 9, 2006.

2 Adapted from Robert S. Kaplan and David P. Norton, The Balanced Scorecard: Translating Strategy into Action (Harvard Business School Press, 1996).

3 Adapted from “Water—a shared responsibility,” The United Nations World Water Development Report 2, 2006. Published in 2006 jointly by the United Nations Educational, Scientific and Cultural Organization (UNESCO) and Berghahn Books.

4 Adapted from Thames Water, “Planet Water—Liquid thinking, practical solutions,” available at http://www.rwethameswater.com/en_gb/Downloads/PDFs/PlanetWater2.pdf, accessed March 25, 2006.

5 Igor A. Shiklomanov, “World water resources at the beginning of the 21st century,” available at http://webworld.unesco.org/water/ihp/db/shiklomanov/index.shtml, accessed April 3, 2006.

6 Adapted from “World Water Crisis,” BBC News, available at http://news.bbc.co.uk/hi/english/static/in_depth/world/2000/world_water_crisis/default.stm, accessed March 25, 2006.

7 “Water for Life—Making it happen,” World Health Organization, WHO, and United Nations Children’s Fund, UNICEF Joint Monitoring Programme for Water Supply and Sanitation, 2005.

8 Adapted from “UN warns of looming water crisis,” BBC News, March 22, 2002, available at http://news.bbc.co.uk/2/hi/1887451.stm, accessed March 25, 2006.

9 Unless noted otherwise, the sign $ stands for U.S. dollars.

10 “Water Outperforms Oil, Luring Pickens, GE’s Immelt, Guy Hands,” Bloomberg.com, available at http://www.bloomberg.com/apps/news?pid=10000082&sid=a823kgVOs5Zo&refer=Canada, accessed August 11, 2006.

11 “Inter-American Development Bank Water and Sanitation Sector Loans Promoting Privatization,” available at http://www.noidb.org/index.php?lang=english&page=materials, accessed August 10, 2006.

12 Extracted and adapted from http://www.stephanschmidheiny.net/officialwebsite/, accessed March 22, 2006.

13 Ibid.

14 For more information, access http://www.sekn.org/en/index.html.

15 “Can business do business in ways that reduce poverty and save the environment?” World Business Council for Sustainable Development, February 21, 2006, available at www.wbcsd.org, accessed October 30, 2006.

16 For more information, access http://www.globalreporting.org/Home.

17 R. S. Kaplan and D. P. Norton, “Having Trouble With Your Strategy? Then Map It,” Harvard Business Review, September–October 2000.



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