GLOBAL MARKETING

SECOND ASSIGNMENT: INDIVIDUAL WRITTEN REPORT

Submitted by: Axel Marian Capalbo

Student ID: 26044444

Course: MSc International Business

Management

Lecturer: Nigel Jones

Date of submission: 07.05.2017

Body word count: 5’157

Table of contents

List of figures .............................................................................................................. 3

List of abbreviations ................................................................................................... 4

Introduction ................................................................................................................. 5

1. Grupo México’s profile ........................................................................................ 7

1.1 Structure, product and service portfolio and market focus....................... 7

1.2 Pillars of success ....................................................................................... 13

1.3 Rationale for further investigation............................................................. 16

2. Critical evaluation: Position on the global mining market .............................. 17

2.1 Environmental trends resulting from the PESTLE analysis .................... 17

2.1.1 Political and legal environment .......................................................... 17

2.1.2 Socio-cultural and environmental aspects ........................................ 18

2.1.3 Economic and technological tendencies ........................................... 18

2.2 Relation between Grupo México and its competitors .............................. 20

2.3 The findings from the SWOT analysis ....................................................... 22

3. Conclusions and recommendations ................................................................ 24

3.1 Decision for the division to expand........................................................... 24

3.2 Market selection.......................................................................................... 27

3.3 Adaptation of the organisation’s value chain ........................................... 33

3.4 The suggestion at a glance ........................................................................ 34

List of references ...................................................................................................... 36

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List of figures

Figure 1: Grupo México's corporate structure (Grupo México S.A.B. de C.V., 2015a) ... 8

Figure 2: Overview on Grupo México's mining division (Grupo México S.A.B. de C.V.,

2015a) .......................................................................................................................... 9

Figure 3: Overview on Grupo México's transportation division (Grupo México S.A.B. de

C.V., 2015a) ............................................................................................................... 11

Figure 4: Overview on Grupo México's infrastructure division (Grupo México S.A.B. de

C.V., 2015a) ............................................................................................................... 12

Figure 5: Price development of copper from 45 years ago until the present day (as of 6th

May) (Macrotrends.net, n.d.) ....................................................................................... 19

Figure 6: Comparative classification of the global champions in relation to Grupo México

(own elaboration based on Doole & Lowe (2012)) ...................................................... 22

Figure 7: Key figures of the operational performance of Grupo México's Rail Holding from

the fiscal years 2014 and 2015 (Grupo México S.A.B. de C.V., 2015b) ...................... 26

Figure 8: The growing EBITDA margin of Grupo México's transportation division from the

fiscal years 2011-2015 (Grupo México S.A.B. de C.V., 2015b) ................................... 26

Figure 9: Mexico’s cultural dimensions in comparison with Argentina and Peru (Hofstede

Centre, n.d.)................................................................................................................ 28

Figure 10: Mexico’s cultural dimensions in comparison with Colombia and Chile

(Hofstede Centre, n.d.) ............................................................................................... 29

Figure 11: Mexico’s cultural dimensions in comparison with Brazil and Venezuela

(Hofstede Centre, n.d.) ............................................................................................... 29

Figure 12: Existing and proposed border-crossing rail lines in South America (Small,

2014) .......................................................................................................................... 31

Figure 13: The specified business portfolio matrix (based on Harrell & Kiefer (1993)). 32

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List of abbreviations

GM Grupo México

ROE Return on equity

S.A. Sociedad Anónima (Spanish for “Anonymous Company”)

S.A.B. de C.V. Sociedad Anónima Bursátil de Capital Variable

(Spanish for “Public Stock Corporation with Variable Capital”)

S.A. de C.V. Sociedad Anónima de Capital Variable

(Spanish for “Anonymous Company with Variable Capital”)

Plc Public limited company

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Introduction

In the domain of present-day entrepreneurial activities, the zeitgeist is dominated by the

dynamic nature of globalisation reflected in several aspects of global marketing. Under

the assumption of free border and culture-crossing transfers of goods and services, the

majority of international entities is continuously pressured to solve a variety of issues.

For instance, while it is forced to stabilise its supply chain through B2B partnerships, stay

informed about the market situation, evaluate the necessity of an adaptation and

guarantee its own profit growth, the enterprise is not allowed to neglect the creation and

delivery of the value needed by the customer, along with finding the best method to

satisfy the stakeholders.

However, one of the greatest uncertainties an established company is permanently

confronted with is the question whether it is ignoring the drastic pace of change. The

consequence is visible through the loss of its competitiveness, provoked by the entry of

new competitors or substitutes outrunning the firm in terms of market share, the

customers’ brand loyalty, product quality, the degree of innovation etc.

According to the global market review by Azevedo, Chin, Khanna, León, Maggard,

Meyer, Michael, Tansan, Ullrich and Verma from the Walters/Boston Consulting Group

(2016), this risk increased especially due to the appearance of global challengers from

rapidly developing economies, mainly hailing from Asia and Latin America.

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Among all these newcomers, Grupo México (GM), a representative of the metals and

mining branch, pertains to the group of the most auspicious firms and serves as the

central object of investigation for this report.

In this context, the analysis is structured in the following manner.

The first chapter presents a topical overview of GM’s business units, their respective

product portfolio and market focus. In addition, the description is accompanied by an

explanation of reasons for the firm’s success on domestic, regional and international

level to date, what includes a characterisation of the concerned competitive advantages.

Lastly, a rationale is introduced in order to clarify the choice of the most significant

company divisions for further scrutiny, which is supposed to lead to the definite draft of

the marketing strategy.

The second chapter continues the exploration of GM’s current state with a critical

evaluation of the environmental trends informing the international market sector of the

extractive industries, particularly in the metals and mining branch. By drawing on the

concepts of PESTLE and SWOT analyses (Lee & Carter, 2012) among others, this part

unifies both the macroeconomic and the microeconomic business spheres to mirror the

strengths, weaknesses, threats and opportunities, which the corporation is facing as a

global challenger.

Taking all these factors into consideration, the third and final section contains a set of

recommendations implying an exclusive strategic approach designed to underpin GM’s

pursuit of becoming an established global player. Therefore, the developed outline is

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supposed to enable the organisation to defend and expand its competitive advantages

against other existing competitors in the metals and mining market with the help of

specific branding and marketing mix decisions. Incidentally, this chapter’s last paragraph

summarises the aforementioned suggestions via SMART rules.

1. Grupo México’s profile

1.1 Structure, product and service portfolio and market focus

Founded in 1978 and headquartered in Mexico City (MarketLine Advantage, 2016a), the

Grupo México S.A.B. de C.V. is a holding company with a broad operational scope

permeating numerous industries. Although its main activities focus on the exploration,

extraction and the processing of metallic natural resources, predominantly copper, silver

and zinc, figure 1 below also conveys a strong commitment to freight forwarding services

via railway transport and infrastructural projects.

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Figure 1: GM's corporate structure (Grupo México S.A.B. de C.V., 2015a)

As far as the corporate structure is concerned, it is characterised by a threefold division,

making GM itself a parenting brand. While fully owning the subsidiaries Americas Mining

Corporation and ASARCO, apart from serving the function of the major shareholder of

the Southern Copper Corporation within its mining business unit, GM exerts a similar

degree of co-determination in the remaining branches. This fact is mirrored by the

similarly high percentage rates related to the possession of its subsidiaries, amounting

to a proportion of either approximately 75% in the cases of the FM Rail Holding and the

subordinate Grupo Ferroviario Mexicano, or 100% allowing the full control over other

affiliates.

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A closer look at every division reveals the respective product and service portfolio, along

with the specific market focuses.

As indicated in figure 2, the primary line of activity covers the exploration, depletion and

processing of copper, zinc, molybdenum and precious metals (Grupo México S.A.B. de

C.V., 2015a).

Figure 2: Overview on GM's mining division (Grupo México S.A.B. de C.V., 2015a)

Its wide scope is supported by an intercontinental presence consolidated under the major

subsidiary, the mentioned Americas Mining Corporation. In this sense, there are several

local branches to distinguish according to their size and the insinuated resource intensity:

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  The Southern Copper Corporation penetrating the local market as well as the

Peruvian one with a total of ten open pit and underground mines, seven

exploration projects and 16 refineries and other metallurgical complexes

operated by a personnel of ca. 14’000 people (Grupo México S.A.B. de C.V.,

2015a; MarketLine Advantage, 2016a),

 The ASARCO Inc., active in the United States and comprising three open pit

mines and 6 facilities for smelting and refining the won copper, which are run by

approximately 2’500 employees (Grupo México S.A.B. de C.V., 2015a;

MarketLine Advantage, 2016a),

 An exploration project commenced in Spain in 2015 (Grupo México S.A.B. de

C.V., 2015a; MarketLine Advantage, 2016a).

At the same time, the figure 3 suggests that GM’s freight railroad and passenger services

are basically concentrated on Mexico and represented by the FM Rail Holding company.

In other words, the subdivisions Infraestructura y Transportes Ferroviarios with Ferrosur

S.A. de C.V. and Grupo Ferroviario Mexicano with Ferromex S.A. de C.V. are

incorporated directly (Grupo México S.A.B. de C.V., 2015a; MarketLine Advantage,

2016a).

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Figure 3: Overview on GM's transportation division (Grupo México S.A.B. de C.V., 2015a)

Thus, this conglomeration results in an enhanced track network amounting to about

10’000 kilometres, which is not only passing through Mexico, but also offering junctions

at five border points with the USA as well as at ports at both the Pacific and Atlantic coast

(Grupo México S.A.B. de C.V., 2015a; MarketLine Advantage, 2016a).

In view of this high level of connectivity, the corresponding services are not limited to the

mere loading, forwarding and unloading cargo. They do also include a supporting

coordination at the target terminals for clients from automotive, chemical, construction,

energy, heavy and metal industries (Grupo México S.A.B. de C.V., 2015a; MarketLine

Advantage, 2016a).

In the third and final case, the infrastructure division is led solely by the subsidiary México

Proyectos y Desarrollos S.A. de C.V. However, its scope contrasts with the other

penetrated sectors in size and the degree of internationalisation as depicted in figure 4.

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Figure 4: Overview on GM's infrastructure division (Grupo México S.A.B. de C.V., 2015a)

Evidence for that is provided in two respects. On the one hand, all the subordinate

entities focus exclusively on the home market, except for Grupo México Servicios de

Ingeniería operating in Peru as well. On the other, the low accumulated workforce of less

than 3’000 employees might point out a comparatively less capital-intensive contribution

to the operative business spanning consultancy and management services for projects

in construction, engineering, infrastructure, power generation and oil production (Grupo

México S.A.B. de C.V., 2015a; MarketLine Advantage, 2016a).

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 1.2 Pillars of success

Undoubtedly, GM’s success as one of the world’s largest producers of copper and the

leading railroad company in Mexico (Grupo México S.A.B. de C.V., 2015a) must rest on

a broader variety of reasons. The company size, the diversified portfolio, an enormous

volume of capital embedded in all the processes and the firm’s situation in a resource-

rich country are only a couple of factors.

In fact, a more profound analysis under the utilisation of the typology of assets by Doole

and Lowe (2012) leads to the following additional sources of the holding company’s

competitive advantage. In accord with this concept, the respective tangible as well as

intangible indicators are highlighted and explained under the adaptation of a

shareholder’s, a business customer’s and a stakeholder’s perspective.

In terms of intangible assets, it is possible to distinguish between the reputational,

strategic and organisational/culture-bound categories (Doole & Lowe, 2012) exerting an

impact on GM’s success.

The determinants of the corporation’s reputation are based on diverse initiatives

reflecting its ambition to strengthen the brand recognition under positive and trustworthy

associations.

One representative example is the augmented focus including projects related to the

generation of energy from renewable sources like the wind and the sun in favour of a

long-term low-carbon policy (Larrea Mota Velasco, 2015). It is to assume that this

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approach towards an incrementally modernised corporate culture might not only satisfy

the Mexican government as well as investors and shareholders, but also the local society

thanks to the consideration of social responsibility.

Another means consists of a bond of US$132 million invested in auxiliary training and

health and safety programmes in both the Mining and the Infrastructure Division in 2015

(Larrea Mota Velasco, 2015). Although the financial aspect adds a tangible component

to this endeavour, the positive effect on GM’s image results from the initiation of such

preventive measures, which in turn level the working conditions between the main

company and the regional collaborators and ensure a fair deal with these external

stakeholders.

The third and final example of this kind is of organisational nature, namely the Risk

Committee. Introduced as an internal agent, the responsibilities include more than the

monitoring of the exact implementation of the risk management policy across the

subsidiaries. Its remit also encompasses the submission of periodical reports on the

operational effectiveness and issues at the working place to the Board of Directors, apart

from the reception and redirection of subsequent adjustments set by the upper

management (Larrea Mota Velasco, 2015). Conversely, such a thorough safeguarding

implies to what extent GM is willing to guarantee the quality of a seamless workflow in

compliance with its etiquette characterised by ensuring a trustful relationship with

investors and shareholders in particular.

From a strategic point of view, GM benefits not only from a dominant position in the

national extractive branch and a natural monopoly in the Mexican railway sector.

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Furthermore, the firm takes advantage of bilateral agreements granting exclusive

privileges for decades, lowering the prospects of local rivalry and facilitating transregional

growth. In its recent history, the Aznalcollar mine in Spain, awarded in 2015 for purposes

of exploration, and the acquisition of the Florida East Coast Railway company in March

2017 (MarketLine Advantage, 2016a) confirm GM’s progress in this regard.

Among these intangible assets, the Code of Ethics (Larrea Mota Velasco, 2015) defines

the entire corporate culture and underlines the organisation’s striving for compliance with

the values of Corporate Social Responsibility, along with the human rights and the

principles of the International Labour Organisation. As a matter of fact, the progressive

attributes of this artefact inform GM in various forms.

On the one hand, it transcends the internal boundaries, specifically in cases of

cooperation with third collaborators. Their signature on a mutual certificate obligates

them to agree to the terms (Grupo México S.A.B. de C.V., 2015a). Moreover, their

capability of abiding by these norms is tested on a regular basis through training units

covering topics like an appropriate prevention of conflicts, tolerance at the working place,

the preservation of human rights, and respect for the environment and the communities

settled near the subsidiary.

Simultaneously, GM itself proves its self-commitment and its circumspection via its

foundation and independently launched projects such as the “Network of Business

Foundations and Associations” aiming at partnerships with external business and charity

equivalents (Grupo México S.A.B. de C.V., 2015a).

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On the other hand, within GM’s boundaries, the vision is represented in the following

manner. The employees are perceived as corporate citizens, whose freedom of

association as well as individual characteristics of their identity are respected. With this

in mind, the company reserves the right to monitor the processes in order to detect

violations reported to the supervisors and finally to the Ethics and Discipline Committee

(Grupo México S.A.B. de C.V., 2015a).

As far as the tangible assets are concerned, it is necessary to discern between

technological and financial ones (Doole & Lowe, 2012). In the recent past, GM

demonstrated its technological know-how especially by supplying the national oil industry

with state-of-the-art equipment for drilling platforms in Veracruz and by optimising the

diesel consumption of the own fleet of trains by 15 million litres (Larrea Mota Velasco,

2015). In financial terms, the holding’s ability to fund and invest a total sum of US$1.22

billion in 2015 in the Mining Division alone (Larrea Mota Velasco, 2015) makes evident

that many smaller or inexperienced rivals would be at a competitive disadvantage in

terms of scalability.

1.3 Rationale for further investigation

Eventually, it can be said that these influencing factors contribute to GM’s position as

one of the most dominant and powerful competitors in the Mexican transportation and

mining sector.

However, this outline does not reflect the enterprise’s current situation on the global

market. For the sake of a strict investigation in this matter, the critical evaluation in the

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next chapter pays attention to GM’s Mining Division as its flagship line of activities and

its circumstances under which it needs to operate. The outcome of this analysis will

determine the ultimate strategic approach to build competitive advantage.

2. Critical evaluation: Position on the global mining market

2.1 Environmental trends resulting from the PESTLE analysis

2.1.1 Political and legal environment

In opposite to the more structured oil industry, the degree of state involvement in metal

mining consortia is significantly lower (Dicken, 2011). One indicator implying this is the

absence of a major association of the likes of OPEC influencing the development of the

global price for base metals, what in turn lets draw the conclusion that the existing field

of activities is relatively liberal and co-created by privatised organisations.

However, the governments of nation-states with the most abundant deposits of metals

like copper, e.g. Chile, Mexico and China, are aware of their locationally specific

advantage and protect it via a complex legal framework (Dicken, 2011). In the light of

this demonstration of territorial sovereignty, any MNC willing to realise an FDI in the

respective market must fulfil several legal and environmental regulations and obtain

approvals before commencing any operations or installing basic facilities.

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 2.1.2 Socio-cultural and environmental aspects

In the context of GM’s active participation in the mining industry, the socio-cultural and

environmental aspects are strongly interrelated. Regardless of Mexico, Peru or the USA

being the mainly penetrated markets, the holding company is forced to respect the rights

of the indigenous communities living close to previously untouched zones of land where

development plans are supposed to be drafted and implemented (Central Intelligence

Agency, n.d.-a, n.d.-b, n.d.-c; Grupo México S.A.B. de C.V., 2015a).

This imperative condition exceeds the basic guidelines revolving around an agreement

on employee health and safety at the working place (Dicken, 2011), and draws attention

to other social and environmental consequences once a deposit of copper would become

completely depleted. A company’s retreat, disused mines and recurring high rates of

local unemployment, accompanied by a grave lack of prospects, are only a couple of

instances reflecting such disadvantages (Barham & Coomes, 2011).

2.1.3 Economic and technological tendencies

Economically, GM keeps growing in an environment characterised by a long-standing

consolidation. Nowadays, the market can be segmented into a small number of major

companies having emerged thanks to numerous mergers and acquisitions, what in turn

enabled them to hold the majority of the total market share (UNCTAD, 2011). As

explained in the previous chapter, GM itself obviously resorts to the same method.

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In spite of that, any influential player on the global commodity market has always been

subject to immensely fluctuating prices and volatile demand (Dicken, 2011), as illustrated

in figure 5 for copper.

Figure 5: Price development of copper from 45 years ago until the present day (as of 6th May)

(Macrotrends.net, n.d.)

The visible interplay of rising and dropping price levels, let alone the respective decrease

or increase of demand, has an effect on the shareholders’ and investors’ behaviour to

avoid or spur investments in GM’s policy.

Technologically, although still unaffected by a radical shift towards renewable energies,

enterprises such as GM are confronted with a cluster of dilemmas requiring a prudent

management of capital. These challenges range from years of exploration in increasingly

difficultly accessible areas, continue with unclear prospects of the ROI, demand forecast

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and legal restraints, and end with the search for an adequate balance between

technologies used for the enhancement of the scale of production and those applied for

the maintenance of the current infrastructure (Dicken, 2011).

2.2 Relation between Grupo México and its competitors

Given the already known product and service portfolio of GM, it is opportune to examine

the current structure of the actual global champions, namely the BHP Billiton Group,

Glencore plc, Rio Tinto plc and Vale S.A. (MarketLine Advantage, 2017), in a

comparative fashion.

Considering the resource similarity, the largest intersection between GM and its rivals

appears in the product lines including copper (BHP Billiton Group, Glencore plc, Rio Tinto

plc, Vale S.A.), zinc (BHP Billiton Group, Glencore plc), precious metals (BHP Billiton

Group, Rio Tinto plc, Vale S.A.) and services in logistics infrastructure (Glencore plc,

Vale S.A.) (BHP Billiton, n.d.-b; Glencore, n.d.-b; MarketLine Advantage, 2017; Rio Tinto,

n.d.-a; Vale, n.d.-b).

Apart from this overlap, their profiles are remarkable for a differently prioritised

diversification. While every single one of them focuses on additional major commodities

and energy products such as aluminium, coal, iron ore, crude oil and gas, the output of

Glencore and Vale even supplies the agricultural segment with fertilisers (Glencore, n.d.-

b; MarketLine Advantage, 2017).

According to the frequency of overlaps, the measured level of resource similarity can be

categorised as follows. BHP Billiton, Glencore and Vale demonstrate the highest

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similarity by sharing three common products and/or services with GM, whereas Rio Tinto

shows a slightly more moderate similarity with two mutual goods.

In terms of the market commonality, all of the mentioned champions exceed the object

of investigation with a global presence across Europe, Africa, Asia and Oceania,

Australia and the Americas. Especially in terms of the latter region, BHP Billiton

concentrates its production of iron pellets in Brazil and the possession of mines in Chile,

Peru, Colombia and the United States (BHP Billiton, n.d.-a; MarketLine Advantage,

2017). At the same time, Rio Tinto maintains its operations in the copper and coal

segment in Chile and the U.S. either, while Glencore and Vale benefit extensively from

the Peruvian and the Brazilian market (Glencore, n.d.-a; MarketLine Advantage, 2017;

Rio Tinto, n.d.-b, n.d.-c; Vale, n.d.-a).

Therefore, the degree of market commonality varies depending on the number of

matching markets entered by GM and its competitors. In total, BHP Billiton is leading in

this category, followed by Rio Tinto, Vale and Glencore with respectively lower

intensities.

A roundup of both dimensions in figure 6 reveals that BHP Billiton can be classified as

GM’s most direct rival, although Rio Tinto, Vale and Glencore cannot be ignored as

potential competitors.

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Figure 6: Comparative classification of the global champions in relation to GM (own elaboration

based on Doole & Lowe (2012))

2.3 The findings from the SWOT analysis

Taking the micro-economic environment from chapter 1 and the macro-economic

perspective from the previous subchapters into account, GM’s aspiration after a position

of a global player is subject to a current state of strengths, weaknesses, opportunities

and threats.

In regard of the strengths, it is noteworthy that the company’s asset portfolio can still be

deemed competitive despite the wider scope of the champions from identical business

fields. One plausible explanation for this organisational advantage might be the locational

proximity to the big players through mining activities in Peru and the USA (Grupo México

S.A.B. de C.V., 2015a; MarketLine Advantage, 2016a). Beside this evident

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internationalisation, GM heavily exploits its high production levels and local expertise in

Mexico, a market untouched by any of the analysed competitors.

Moreover, the holding group’s stable financial condition, achieved through a significant

reduction of liabilities, long-term debt and other leases in 2014 (MarketLine Advantage,

2016a), translates well into a strong liquidity animating the investors to fund projects

grasping new market opportunities (MarketLine Advantage, 2016a).

However, the pace with which future initiatives would be implemented might be

hampered because of the severely declining operational margin, income and ROE in

2015 (MarketLine Advantage, 2016a). This weakness, which is mainly attributable to the

decreased global prices of precious and base metals (Grupo México S.A.B. de C.V.,

2015b) as well as to the latest depreciation of the Mexican peso, could evoke the

opposite effect on the shareholders’ part in form of an aloof attitude towards investments,

resulting in a complete retreat in the worst case.

Nevertheless, the following opportunities arise for GM as a whole. Firstly, it could

continue its growth in the mining division by progressing with the inspection of the

Aznalcollar mine in Spain for the reserves of copper, zinc and lead (Grupo México S.A.B.

de C.V., 2015a; MarketLine Advantage, 2016a). Secondly, there is potential to

strengthen the operational versatility and rise the returns in the transportation sector with

an expansion of the fleet of rail vehicles and the corresponding infrastructure worth ca.

US$ 378 million (Grupo México S.A.B. de C.V., 2015a; MarketLine Advantage, 2016a).

Otherwise, GM could focus on obtaining bid awards for governmental projects in the

home construction market, what in turn would promise further development for the third

company segment (MarketLine Advantage, 2016a).

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Lastly, these chances to remodel the brand DNA in part might help to master the threats

by which the mining division is predominantly affected. In fact, the loss of the competitive

advantage may not only be provoked by own technological deficits at the stages of

planning and realising feasible and effective production chains (Dicken, 2011). The

profitability might also diminish drastically because of time-consuming and complicated

bureaucratic formalities, where GM would need to prove its compliance with

governmental, social and environmental regulations in order to have issued an approval

to commence the exploration of a terrain (Dicken, 2011; MarketLine Advantage, 2016a).

3. Conclusions and recommendations

With the help of the background provided through the analysis above, it is possible to

convert the facts into advisable implications related to both the future market/geography

development and the branding and marketing mix. Thus, the following proposal

comprises three steps dealing with the conformation of a lasting competitive advantage.

3.1 Decision for the division to expand

The line of argument from the SWOT analysis, which referred mostly to GM’s mining

division, supports the diversification as an appropriate approach to stabilise an enterprise

primarily focused on the extraction of commodities. An emancipation of another well-

internationalised business unit, particularly the transportation division, could lead to a

variety of positive long-term effects.

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On the one hand, a slight dissociation from the major line of production activities would

enable to circumvent the direct competition with the global champions and the ruthless

quest for very location-specific, undiscovered sources of raw materials, and possibly win

these as business customers for the own freight forwarding services.

On the other hand, a shift towards the rail holding could weaken the direct

macroeconomic influence of global price fluctuations on the annual turnover and profit

margin. The financial indicators in figures 7 and 8 convey a specific coherence. To be

exact, the steadily growing double-digit EBITDA and net profit margins of GM’s railway

branch might compensate the stagnating operational performance of the mining division,

caused by the global extraction industry’s loss of about 25.1% of its market value and a

diminishment of its market volume by ca. 2.9% in 2015 (MarketLine Advantage, 2017).

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Figure 7: Key figures of the operational performance of GM's Rail Holding from the fiscal years

2014 and 2015 (Grupo México S.A.B. de C.V., 2015b)

Figure 8: The growing EBITDA margin of GM's transportation division from the fiscal years 2011-

2015 (Grupo México S.A.B. de C.V., 2015b)

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The last aspect worth a justification is the versatile operational capability of a train fleet

compared to a reliability on the winning of a few base and precious metals within natural

restrictions. At this point, the profitability could turn out to be constant thanks to the risk

spread across a great variety of prospective business customers and the corresponding

cargo segments. In 2015, the transportation of steel, agricultural products and

automobiles as well as the intermodal transport amounted to about 51% of the total

transported volume of the record-breaking 54.22 billion net tons per kilometre (see figure

7) thanks to the growth of all these industries in Mexico (Grupo México S.A.B. de C.V.,

2015b).

These deliberations encourage to call into question to what extent the growth of GM’s

railway unit might be attained through an internationalisation strategy accompanying the

latest capital investment of approximately US$378 million into the extension of its total

capacity (Grupo México S.A.B. de C.V., 2015b).

3.2 Market selection

As an LSE with thousands of employers, it is advisable to GM’s rail holding to follow a

pro-active market selection and check the potential locations for their suitability.

Following the process of a rough market screening (Lee & Carter, 2012), the first phase

ought to clarify which markets might be most accessible in the near future.

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A closer examination from a cultural and negotiation-oriented point of view reveals that

the emerging economies among the “neighbouring” countries in the Latin American

region largely coincide in their mind-sets. As the figures 9, 10 and 11 imply, the

similarities encompass high levels of uncertainty avoidance, a below-average degree of

individualism for the benefit of a stronger collectivism, a weakly developed long-term

orientation and an above-average power distance, except for Argentina.

Figure 9: Mexico’s cultural dimensions in comparison with Argentina and Peru (Hofstede Centre,

n.d.)

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Figure 10: Mexico’s cultural dimensions in comparison with Colombia and Chile (Hofstede Centre,

n.d.)

Figure 11: Mexico’s cultural dimensions in comparison with Brazil and Venezuela (Hofstede

Centre, n.d.)

Other indicators demonstrating the high measurability and accessibility of these markets

(Hollensen, 2014) are not only the geographic proximity, but also the role of Spanish as

a widespread lingua franca, along with Brazilian Portuguese as a related Romance

29
language, and the common understanding of an implicit, highly contextualised

communication (Usunier & Lee, 2013) alleviating the likelihood of a cultural clash.

Incidentally, it is worth stressing the intense political and economic co-operation between

Mexico and the South American continent, for example by holding a full membership in

the Pacific Alliance trade bloc and the status as an observer in the intergovernmental

unions Mercosur and the Union of South American Nations, respectively.

Continuing the screening process according to the attributes of profitability and market

size (Lee & Carter, 2012), the attractiveness of the regional railroad market might

facilitate GM’s position as a pioneer to build a competitive advantage.

While the superordinate branch of transportation services reached a higher market value

of ca. US$154 billion in 2016 (MarketLine Advantage, 2016b), the railroad sector keeps

suffering from still prevalent deficiencies, making it an absolute niche with a poor market

share of ca. 1.7% (MarketLine Advantage, 2016b), in spite of its continuous growth in

value (MarketLine Advantage, 2013). One reason for that is the fact that state-owned

players are operating in their countries under monopolistic conditions, what hampers a

fast entry (MarketLine Advantage, 2013). Another deficit is visualised in figure 12, which

clearly shows the vast underdevelopment of a border-crossing railway network, and

hence the lack of reliable traffic junctions and terminals with ports along the Pacific and

Atlantic coast.

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Figure 12: Existing and proposed border-crossing rail lines in South America (Small, 2014)

However, there arises an opportunity to transfer the expertise of GM’s rail holding to

display the advantage of rail freight forwarding in contrast to the predominant roadway,

namely the capability of transporting larger volumes of cargo on a straighter line to satisfy

the cross-sector demand within a shorter period of time (MarketLine Advantage, 2016b).

The lacking continental rivalry in the railroad segment underpins this potential.

Before proceeding to the strategic details, the insights from the market screening need

to be concluded. In correspondence with the business portfolio matrix in figure 13, the

primary opportunity recommended to GM to widen its scope of rail freight forwarding

31
activities includes South American countries with an access to the maritime coasts due

to the high cultural compatibility and their positive development thanks to their emerging

economies. Secondarily, the enterprise might intensify its growth in the already touched

US-American market, as exemplified via the acquisition of the Florida East Coast

Railway company in March 2017 (MarketLine Advantage, 2016a). The residual and

riskiest alternatives, that comprise more exotic markets, could be categorised under the

tertiary opportunity.

Figure 13: The specified business portfolio matrix (based on Harrell & Kiefer (1993))

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 3.3 Adaptation of the organisation’s value chain

By implementing a shift towards the own transportation division in order to develop a

second flagship eclipsing GM’s aforementioned direct and potential competitors, it is

paramount to redefine the framework for the penetration of new markets.

Strategically, the application of a multi-domestic approach is most probable due to the

following factors affecting the range of GM’s transportation services and the extent of

branding: the diverging, country-specific legal and economic standards and the general

conditions of entry. Therefore, referring to the generic international product strategies,

the services could be expanded through a localised promotion (Lee & Carter, 2012).

Under these circumstances, there are two adequate options granting access to the

chosen markets with a relatively high level of involvement. On the one hand, GM could

promote and place its freight forwarding services via joint ventures with the rather

privatised national railway companies (Doole & Lowe, 2012). On the other, there is the

possibility to form strategic alliances with the predominantly nationalised insiders from

the railway sector to create synergies and exchange the respective expertise (Doole &

Lowe, 2012).

Although both scenarios entail large-scale projects, the latter eventuality would typically

entail government orders, where biddings serve as the main promotion channel. If GM

participated and received an award, this outcome would secure privileges to develop and

place the transportation services and lead to a unique competitive position.

33
Organisationally, the service portfolio could be restructured for the initial stage and be

based upon a function as an agent offering auxiliary services for the expansion of the

railroad network. Instead of splitting up and exporting the own fleet of trains to the South,

GM could reduce its capital intensity by arranging leasing or purchasing agreements of

essential vehicles from local providers (MarketLine Advantage, 2013) to widen the total

capacities. This aspect might enhance the predictability of bottlenecks and thus positively

affect the pricing procedure and the cost structure.

In the end, a smooth connection between all these elements within such prospective B2B

or business-to-government relations can trigger a special effect to GM’s advantage,

namely the acquisition of the direct and potential rivals from the mining branch for the

own services by forwarding their freight to the present and future coastal terminals.

3.4 The suggestion at a glance

Lastly, the suggestion can also be summarised in accord with the SMART principles as

follows.

The devised strategic concept demonstrates its specificity by recommending a venture

emphasising the diversification apart from the creation of a geographical axis of activities

covering both American continents. The major goal is to make the core business less

dependent on the volatile demand of the global commodity market.

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This way to become a global champion is measurable both quantitatively and

qualitatively according to the number of successfully concluded negotiations and the

respective progress in the fields of rail construction, the enhancement of vehicle

capacities and the operational performance throughout the first fiscal years.

Besides, the achievability is underlined by the high probability to enter the selected

markets through strategic alliances or joint ventures, depending on the proportion of

nationalised or privatised railway service providers per state. At this moment, a probable

engagement on GM’s part would guarantee lasting advantages of a pioneer in a rather

restricted market.

The plan implies its realism thanks to the company’s investment risks spread across all

cooperating partners and business customers. Furthermore, the interest to improve the

cross-border rail traffic determines a part of the political agenda represented by the

continental trading blocs.

In terms of the time period for the implementation, the entire engagement is definitely

long-term oriented. It can be assumed that it would roughly take about two decades to

realise such large-scale projects across South America at the same time. The endeavour

to interconnect the respective national railroad systems would certainly require a

prolongation of a similar length.

35
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