GEM Corporation
Track: Management Education and Teaching Cases
Key words: Corporate strategy, growth, internationalization, Latin America
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GEM Corporation
Abstract
This case describes ACOSA, a forestry and industrial company engaged in the wood business, and EDIMCA, a store chain
engaged in marketing customized wood and wood accessories. Both Ecuadorian companies with operations in Colombia
and Peru had a common group of shareholders and in 2010, after a shareholding restructuring, the Arteta family acquired
most of the shares of both to create GEM Corporation. The case study has been structured to present enough information
for the reader to decide in which markets GEM should target and with what strategy. The goal of the case is to learn about
proper manners to formulate and execute growth and internationalization strategies.
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In January 2011 Carlos Valdivieso, CEO of Corporación GEM, was in his office analyzing the data recently collected by the
company for the strategic definition process it was about to undertake.
Since his appointment as CEO of ACOSA in early 2008, he had felt concerned that the internal change process involving
the board would lead it to neglect key issues for the firm’s operation and survival.
Aglomerados Cotopaxi S.A. (ACOSA) was a forestry and industrial company engaged in the wood business. It was
vertically integrated and involved in the production of particleboard, medium density fiberboard (MDF), and lumber. On the
other hand, Empresa Durini Industria de Madera Compañía Anónima (EDIMCA) was a store chain engaged in marketing
customized wood and accessories solutions in the furniture, construction, and decoration industries. Both companies had a
common group of shareholders.
In 2008, ACOSA began a shareholding restructuring which ended two years later. Once it was over, the Arteta family
acquired most of the shares of both EDIMCA and ACOSA to create GEM Corporation.
Under the new structure Mr. Valdivieso was appointed CEO of GEM. He decided to start a strategy definition process to
determine GEM’s growth path. Options included continued growth in current markets or looking for new markets.
Economic, Political and Social Situation1
Concerns about the global economic outlook began to dissipate in early 2011. By late 2010 total production had grown
5.3% and a W-shaped (double dip) recession became increasingly unlikely after the financial crisis that hit economies in
2008 and 2009.
Economic growth in 2010 compared to 2009 reported 8.5% for the Asian Tigers 2, 6.2% for Latin America and the
Caribbean, 4.4% for Japan, 3.0% for the U.S.A and 1.9% for the Eurozone.
The behavior of international trade flows was a key factor of economic recovery, particularly in the case of Latin America.
Export value for emerging countries in 2010 increased by 12.8%, while in terms of volume foreign sales grew 15.0%. In the
specific case of Latin America and the Caribbean, export volume grew 23.4%, during 2010.
1
2
IMF, World Economic Outlook Report, April 2011.
Hong Kong, Singapore, Korea, and Taiwan.
3
However, new concerns were visible in the economic outlook. The volatility of commodity prices, pressures on government
budgets, high unemployment levels and the risks of economic overheating in emerging countries were some of the
challenges to be faced.
In the sociopolitical realm, Latin America’s outlook was stable. However, some governments’ populist measures were a
source of concern and uncertainty for the business sector.
Industry
In the last decade greater emphasis on environmental conservation and natural resource protection had been seen all over
the world. According to FAO, in 2010 the total forest area around the world amounted to about 4 billion hectares, i.e., 31%
of the entire Earth. While between 1990 and 2000 the forest area in the world decreased at a rate of 8.3 million hectares per
year between 2000 and 2010 the net change in forest area took place at 5.2 million hectares per year.
Additionally, since 2000, 76 countries had issued or updated official publications on forest policy and, since 2005, 69
countries had enacted or amended forest laws.
By 2010, in Latin America and the Caribbean there were approximately 890 million hectares of forest. Protected areas had
increased at a rate of 3 million hectares per year, or 4.5% on average since 2000, for a total of 18% of the forest area in
areas officially protected in 2010. Much of the increase in forest protection occurred in South America.
This environmental protection trend resulted in the development of technologies allowing to replace lumber with derived
products involving lower environmental impact. This was one of the main reasons why the board industry had experienced
significant growth over the last decade.
A wide variety of panels had been created although the most common were particleboards, as well as plywood and, more
recently fiberboard, essentially medium density fiberboard (MDF.)
MDF board production in Latin America had increased at an average annual rate of 12.3% since 2000, with total production
of 6.1 million m3 in 2010. Furthermore, the change in particleboard production in that decade took place at an average rate
of 4.6% per year, totaling 4.8 million m3 in 2010. Most of the production occurred in South America, mainly in Brazil,
Chile, Argentina and Ecuador (See Exhibit 1).
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Consumption in the region was growing even more strongly. MDF consumption had more than tripled over the last decade,
reaching 6.3 million m3 with an average annual growth rate of 14.0%. On the other hand, particleboard consumption grew
at a rate of 3.9% to 4.2 million m3. Major consumers in the region included Brazil and Mexico, followed by Argentina,
Venezuela, Colombia and Costa Rica (Exhibit 2).
The trade balance showed growth potential for the industry in Latin America. Except for Chile, Argentina, Uruguay and
Bolivia, the other countries in the region showed a negative balance (Exhibit 3).
The production chain of wood panels consisted of five links. Feedstock systems were the link including forest plantation
activities. Primary processing dealt with preparing raw material coming from forests. Secondary processing involved all
activities related to intermediate goods production, such as boards. Finally, there were marketing channels networks and
consumers (Exhibit 4.)
Additionally there was a pre-stage related to producing inputs to grow wood, involving seeds and seedling suppliers
(nurseries and bio-factories), agricultural inputs (pesticides, fertilizers), forestry machinery and tooling.
In forestry and industrial activities, grouped in the first three links in the chain, it was essential to synchronize forest assets
and plant capacity as well as operational excellence. This was because forest plantations took at least 20 years to be usable,
while significant variation of plant capacity took at least five years. Thus, business success depended on attaining
compatibility between times and long term financial management.
As a result of the difficulty of balancing production times from forest and business operations most companies were
vertically integrated backwards and had their own forests. Some had even ventured into the production of chemicals and
resins involved in board manufacturing.
Over the last few years a trend toward forward vertical integration had also been noticed in the industry. Thus, it was
common for manufacturers to have their own retail premises. As a result, there was little relationship between board
producers and suppliers, and the industry was dominated by the former.
Entering the forest and industrial business involved significant investment, in addition to essential know-how. On the other
hand, even though entering the retail business did not require such a significant investment or specialized knowledge, access
to products was limited given that producers barely met their own retail store needs.
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Because of the finite nature of the raw material used, another key factor was a strong environmental responsibility
management and forest culture. To successfully perform this management it was essential to promote a strong relationship
with governments.
Finally, product quality and knowledge of subsequent customers (distributors, retailers and end customers) were significant
factors in the forest and industrial businesses.
There was a strong competition in the board industry, particularly in South America. Due to the variety offered in board
marketing, and the usually similar characteristics of the product, know the end customers it was essential to advise them and
offer them additional services, such as board cutting or laminating. As a result, business firms needed staff properly
selected, trained, evaluated and rewarded. Competition was not so fierce in the rest of Latin America.
In view of increasing difficulties to obtain timber, resulting in high prices, boards accounted for a very important input in
the construction sector. In furniture manufacturing there were other materials that could replace wood, such as plastics and
metals. However, wooden furniture remained the consumers’ favorite, because of appearance, elegance and quality.
Competition
The two major competitors in the Latin American wood panel industry were MASISA and ARAUCO. They had focused on
serving the largest markets. Instead of confining themselves to the region they had recently expanded their operations to the
United States and were contemplating the possibility of entering China. There were also other participants focused mainly
in their own home countries.
MASISA3 was founded in Chile in 1960 and by 2010 it had forestry operations in four Latin American countries. In
addition, it was engaged in industrial and commercial operations throughout most of the continent. Its forest estate consisted
of 225,000 hectares, distributed in Venezuela (84,800 ha), Chile (82,800 ha), Argentina (45,200 ha) and Brazil (12,200 ha),
as well as 65,000 hectares devoted to conservation areas and protection of natural forests. MASISA’s industrial unit
consisted of seven industrial complexes in Chile, two in Brazil and one each in Mexico, Venezuela and Argentina. It had an
installed capacity of 3.0 million m3 per year to manufacture MDF and particleboard; 1.3 million m 3 for board coating;
487,000 m3 of sawn timber production; 156,000 m3 of pre-painted MDF moldings and 42,000 m3 of solid wood doors.
3
MASISA: Financial social, and environmental management report. 2010 Annual Memory. Available at
http://www.masisa.com/chi/inversionistas/informacion-financiera/memorias-y-estados-financieros.html,
accessed
November 2012.
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It had its own distribution and marketing system: Placacentro MASISA. This was a network of specialty shops, served
through franchising, with a total of 316 stores located in Mexico (61) Argentina (58), Chile (51), Brazil (39), Venezuela
(38), Colombia (27), Ecuador (17) Peru (20), Paraguay (3) and Uruguay (2). In 2010 approximately 30% of sales were made
through Placacentro MASISA (see Exhibit 5.) MASISA’s total sales volume of in 2010 was 6.0 million m 3, worth $ 1,017.3
million (Exhibit 6). The value of the corporation forest unit sales reached $ 170.7 million, while industrial and commercial
operations sales totaled $ 846.6 million. Cost of sales in 2010 was $ 806.3 million. Forest operations accounted for 20.3% of
total costs, while the industrial and commercial unit accounted for 80.7%. MASISA’s net reported profit in 2010 was $
209.1 million (Exhibit 7).
Moreover, CELULOSA ARAUCO Y CONSTITUCIÓN4 was a corporation formed from the merger of Industrias de
Celulosa ARAUCO S.A. and Celulosa Constitución S.A. made by Empresa Copec in 1979. ARAUCO product offering
ranged from pulp wood logs5, poles, and lumber, to particleboard, plywood and MDF. Additionally, the company produced
electricity through biomass residues to supply energy for a part of its operations. Furthermore, it sold its energy surplus.
Most ARAUCO operations were carried out in Latin America, although its presence was strongest in Chile and Argentina.
It had presence in 71 countries around the world through representatives and sales offices. Its total forest estate in 2010
consisted of 990,300 hectares, spread over Chile (721,500 ha), Argentina (127,300 ha), Brazil (73,600 ha) and Uruguay
(67,900 ha).
ARAUCO had six plants devoted to manufacturing cellulose, five of them in Chile and one in Argentina. Its total installed
capacity was 3.2 million ADt. 6 It had eight facilities located in Chile (3), Brazil, (3) and Argentina (2). Overall it had a total
production capacity of 3.2 million m3 of boards and 326,000 m3 of MDF moldings. It had nine sawmills, 8 in Chile and one
in Argentina, processing 2.8 million m3 of timber and 9 electric power plants with capacity to produce 644 MW.
ARAUCO did not own retail stores. It distributed its products to retailers through 19 wholesale centers (see Exhibit 8.)
ARAUCO's total sales in 2010 amounted to $ 3.788 million. Revenue from cellulose sales, used in paper production,
accounted for 47.3% of total sales, while sales of boards and lumber accounted for 29.3% and 16.4% of revenues. Wood not
sawn and energy surplus accounted for 4.1% and 2.9% of consolidated sales, respectively. In 2010, ARAUCO’s total cost of
sales was $ 2.298 million and reported earnings at period end were $ 701 million (Exhibit 9).
4
Information taken from Celulosa ARAUCO y Constitución S.A.: 2010 Annual Memory. Available at
http://www.arauco.cl, accessed November 2012.
5
Wood logs prior to sawing.
6
Air Dry metric ton: marketing unit. It corresponds to one metric ton of cellulose that can have at most 10% of moisture.
Source: Panorama de la Celulosa. ARAUCO. http://www.corma.cl/_file/file_405_82590_arauco-franco_bozzalla.pdf
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In the Ecuadorian market the main competitor was NOVOPAN del Ecuador S.A. 7 founded in 1979 by César Álvarez Barba,
Juan Vilarrasa Alsina, and Andrés Chiriboga León. In 2010 NOVOPAN was a member of Grupo PELIKANO, along with
Plywood Ecuatoriana S.A. and Contrachapados de Esmeraldas S.A. (CODESA), companies engaged exclusively in
producing plywood boards. NOVOPAN had the largest particleboard manufacturing plant, in addition to its own
distribution channel in Ecuador, the Novocentro store chain. In 2010 the latter had 32 stores awarded through franchising. In
addition to PELIKANO boards they offered other accessories for woodworking, cutting, edging and modulation. In 2010
NOVOPAN reported sales of $ 86.8 million, of which 59.2% were exports to Peru, Colombia, Chile, Puerto Rico, Panama,
Bolivia, USA, Costa Rica and South Africa. The remaining 40.8% went to the Ecuadorian market.
In 2010, NOVOPAN assets totaled $ 82.5 million and the company’s equity worth $ 61.7 million. In addition,
NOVOPAN’s total profit for the period was $ 17 million. The company established in 2007 a particleboard plant located in
the province of Pichincha, with a production capacity of 200,000 m3 per year. With this new plant its production
quadrupled. NOVOPAN forest estate amounted to 3.6 billion hectares, planted with eucalyptus and radiata pine as well as
200 hectares of forest devoted to conservation.
TABLEMAC,8 a company exclusively devoted to production and wholesale marketing of boards, was the main competitor
in Colombia. It was founded in 1988 and since 1992 it began to produce and market its goods. It had two particleboard
production plants with a total installed capacity of 110,000 m3 per year. It also had a factory devoted to turn boards into
ready-to-assemble furniture and to produce parts for doors and furniture. Additionally, in 2010 the firm conducted
feasibility studies to establish the first production line of MDF boards in Colombia. It approved an investment of nearly
US$ 45 million to install and commission the plant, which was launched in September 2011 with an installed capacity of
132,000 m3 9. TABLEMAC worked with patula pine and eucalyptus woods. In 2010 its forest estate was 5,042 hectares and
it had access to 366 hectares through agreements with other private entities.
TABLEMAC net sales in 2010 amounted to $ 48.4 million; 95.4% took place in the Colombian market, while 4.6% were
exports made to Ecuador, Panama, Peru and Central America. In terms of volume, total sales were nearly 83,000 m 3.
TABLEMAC’s cost of sales in 2010 was $ 31.8 million, while reported net income was $ 3.7 million (Exhibit 10).
7
http://ecuadorforestal.org/actualidad-forestal/novopan-del-ecuador-s-a-los-tableros-mdp-son-su-carta-de-presentacion/
PELIKANO, Available at http://www.ekosnegocios.com/marcas/marcasEcuador.aspx?idMarca=42, accessed November
2012
Ranking Gestión 2012. Gestión Magazine, issue 216, June 2012
8
TABLEMAC: 2011 Annual Report. Available at http://www.tablemac.com, accessed November 2012.
9
http://www.revista-mm.com/ediciones/rev68/empresa_tablemac.pdf
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PIZANO SA was founded in 1935 and was one of the largest companies producing wood products in Colombia. It was
engaged in manufacturing plywood, smooth and laminate particleboard, veneer, and doors. It had three plants located in
Barranquilla, Tocancipá, and Bogota10, with a total annual capacity to produce about 200,000 m3 of particleboard. In
addition, Pizano had about 30,000 hectares of forest, which ensured its supply of raw material. 11 PIZANO sales in 2010
were around $ 84.3 million. Exports accounted for 5.9% and the main destinations were the Caribbean, Venezuela and the
United States. The company reported total assets of $ 188.8 million, while liabilities and equity were $ 75.9 million and $
112.9 million respectively. Profits for 2010 totaled $ 66.9 million12.
Peruvian Boards SA (TAPESA, for its acronym in Spanish) 13 was another direct competitor. It was founded in 1979 by the
major cooperative sugar mills in Peru, and was the only company in the country engaged in manufacturing particleboard. It
marketed particleboard under the brand Maderba in Peru, Colombia, Bolivia, Argentina and Chile. Unlike other
manufacturers of particleboard in South America, TAPESA not only used in the production process wood, but also used
sugar cane bagasse, a byproduct of the sugar mills. It had a plant in the department of La Libertad, with capacity to produce
up to 20,000 m3 per year. TAPESA sales in 2010 were approximately $ 12.1 million. Of these, about 25.6% were exports
mainly to Mexico, USA and Venezuela. 14
MASISA and ARAUCO have a significant presence in the Brazilian market. Another major player was FIBRAPLAC,
located in Rio Grande do Sul and owned by Grupo Isdra. It was founded in 2000 and had installed capacity to produce
800,000 m3 per year. By 2010 its production was approximately 500 000 m3 of particleboard and MDF, worth $ 305.6
million. This company had a strong emphasis on innovation and had cutting-edge technology in its various product lines,
which allowed it to offer its customers 18 different patterns of MDF and particleboard.
REXCEL a company founded in the early 1960s and engaged in manufacturing and marketing particleboard was an
outstanding player in Mexico. It was owned by Grupo Kuo, a Mexican consortium active in the timber, automotive, food,
10
http://www.elcolombiano.com/BancoConocimiento/P/persiste_disputa_legal_por__dumping_en_aglomerados/persiste_disp
uta_legal_por dumping_en_aglomerados.asp
11
http://www.ecobusiness.in/noticias/archives/83719
12
CORFICOLOMBIANA: Dictamen del revisor fiscal sobre los estados financieros consolidados. 31 de diciembre de 2010
y
30
de
junio
de
2011.
Available
at
http://www.corficolombiana.com.co/WebCorficolombiana/paginas/documento.aspx?idd=499&idr=2287,
accessed
November 2012.
13
http://es.scribd.com/doc/113208217/las-4-pes, http://www.fitchratings.cl/Upload/a-masisa.pdf
14
Boletín
Sector
Maderas
y
sus
Manufacturas:
diciembre
2010.
ADEX.
Available
at
http://www.adexdatatrade.com/boletines/boletines%202010/for2010-12.pdf, accessed November 2012.
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and chemicals industries. By late 2010 REXCEL15 had 6,000 hectares of commercial forest plantations, plants to produce
chemicals resins required in the manufacture of boards with a capacity of 24,000 tons per year and three plants producing
particleboards with an installed capacity of 460,000 m3. REXCEL did not owned retail stores.
Very little competition was seen in Central America. Large companies had not shown interest in this market and there were
no specialized shops. There were still no plants manufacturing MDF and particleboard production took place mainly in
Costa Rica with DURPANEL and in Guatemala with MADERAS EL ALTO y TABLEROS DE AGLOMERADO.
DURPANEL S.A. was founded in Costa Rica in 1975 and since then devoted itself to manufacture particleboard for
different applications in the furniture and the construction industry. By late 2010 it had a nearly 15,000 m 2 facility and an
annual installed capacity of 60,000 m3 for production at two processing lines. However, it lacked forest plantations.
MADERAS EL ALTO S.A had its own forests and a history of over 20 years in the production of particleboard. Besides
selling in Guatemala it exported to other Central American countries, though financial position was instable due to internal
management problems.
TABLEROS DE AGLOMERADO was a rather new company. It was founded in Guatemala in 2004 and had a special
emphasis on environmental protection. It had its own forests managed under strict environmental standards and a part of its
policy was to ensure that its factory would only use products committed to socially responsible management. It planned to
establish an MDF line in 2011.
GEM Corporation
The Durini and Arteta families had a prominent role in the Ecuadorian wood and wooden products industry since the first
half of the 20th century. In the 1930s, Juan Manuel Durini Palacios founded Compañía Durini, which evolved from a
sawmill to a retail store. Empresa Durini Industria de Madera Compañía Anónima (EDIMCA) was formally founded as a
chain of stores in 1964 by Juan Manuel Durini Palacios and Federico Arteta Rivera.
Enchapes Decorativos S.A. (ENDESA) and Aglomerados Cotopaxi S.A. (ACOSA) were founded in 1976 and 1978,
respectively, and both companies engaged in the production of wooden boards. ENDESA focused on manufacturing
15
http://www.rexcel.com.mx/navigation/ao?action=getQuienesSomos,
http://www.quiminet.com/sh9/sh_vcdadvchgsAaasd.htm
and
http://www.americaeconomia.com/negociosindustrias/fusiones-adquisiciones/chilena-masisa-adquiere-empresa-rexcel-en-mexico-por-us54
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plywood and ACOSA on particleboard. Finally, Bosques Tropicales S.A. (BOTROSA) was founded in 1980to produce
plywood.
In the early 90s major changes were made in ACOSA’s production line. In order to meet the market demand for solid pine
wood products, an industrial sawmill was set in 1995 and in 1996 the production line of particleboard with decorative
designs was expanded. In 1997 the largest and most important MDF board plant in the Andean region was established.
Although some years before ACOSA products were exported to Colombia, in 2000, it was decided to establish a wholesale
distributor that received the products imported from Ecuador. In 2001, in conjunction with the two main customers,
activities in Colombia were expanded by importing and distributing not only ACOSA products, but also other accessories
for woodworking. Since profit margins from this form of operation were not optimal, the firm chose vertical integration,
establishing retail stores in 2003 (Madecentros) to expand company influence all over Colombia.
Something similar took place in Peru since 2000, culminating with the purchase, along with two Peruvian partners, of
Interforest stores in 2005.
A shareholding restructuring process began in 2007 and culminated in 2010 with the consolidation of a majority stake from
the Arteta family in both EDIMCA and ACOSA through the GEM holding company created in 2008 to manage the family
interests in both companies. It included two other minority partners. The Arteta family also had shares from BOTROSA and
ENDESA although these were minority shares, as control of these was in the hands of the Durini family and other partners.
After the restructuring process GEM was articulated as a vertically integrated group engaged in production and retailing of
particleboard and MDF (Exhibit 11). GEM operations covered from production of seed for forest plantations to selling the
boards to final consumers. The firm reported assets of $ 114.4 million and total equity of $ 58.8 million (Exhibit 12).
GEM’s primary objective was to be the leader in retail marketing of wood products, substitutes and related goods, with a
model based on vertically integrated business units from forest and industry activities to serve as a benchmark for
environmental sustainability in the long term. It aimed at reaching consolidated sales of US$ 700 million by 2020
Forestry and industrial operations were carried out in Ecuador, through ACOSA, a forest company which was a leader in
forest plantations and wooden board production and marketing committed to sustainable development and seeking to
become a regional leader as well as the best option for customers and a symbol of business excellence. The main objective
of this business unit was to increase profitability through the promotion of best practices, business alignment, the
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solidification of its own structure and the use of technology, always taking into account integrity, a focus on customer needs
and social and environmental responsibility.
ACOSA had 12,000 hectares of forest located in the Central Sierra of Ecuador. Of these, approximately 67% was cultivated
pine (patula and radiate), 30% were protected areas and 3% was planted with eucalyptus (Exhibit 13). The company
managed three product lines: MDF and particle boards, which could be plain or have different coatings, and wooden pallets.
Additionally, contract sales of pine seedlings were made and the firm was just starting the sale of substrate, although the
latter activities did not account for a significant portion of company income (Exhibit 14).
The industrial plant employed 448 people and produced a monthly average of 6,277 m 3 of MDF, 3,204 m3 of particleboard
and 1,800 m3 of wood used in manufacturing pallets. EDIMCA stores in Ecuador sold 55% of the boards and 45% of them
were exported to Madecentros stores in Colombia and Interforest stores in Peru. All pallets were sold to Dole Food
Company, Inc., both directly and through Unión de Bananeros Ecuatorianos S.A. (UBESA), a subsidiary of Dole in
Ecuador. ACOSA sales in 2010 amounted to $ 45.1 million and had a 9% growth since 2007. Without neglecting the needs
of its customers ACOSA aimed at a very efficient use of resources. In addition, it conducted extensive work to optimize
order management in order to handle high volumes and thus lower costs.
EDIMCA was the commercial arm of GEM in Ecuador. This retail chain consisted of 19 stores employing 400 workers. It
provided solutions to the construction, decoration, and wood industry sectors as well as to the general public to meet their
needs and contribute to national development. It aimed at being the leading network marketing solutions for the
construction finishes, and a benchmark of business excellence.
EDIMCA had chosen as its primary objectives to attain profitable customers in the long run, to increase the company share
of wallet of customers and increase the percentage of operating profitability, to turn each store in the customer hub of
operations. Each facility had approximately 150 m2 divided into a showroom and a workshop with a laminating machine
and two cutters. This layout allowed to offer customers (mostly small artisans of wood) products of recognized quality as
well as hinging, cutting, plating, gluing and routing services. The company spared no effort in order to offer customers the
best quality. These additional services were one of the store hallmarks, as well as one of the reasons why customers
preferred them.
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EDIMCA sales in 2010 were $ 58.2 million, with an average annual growth of 6.7% over the last three years. ACOSA
particleboards and MDF boards accounted for 50% of sales, 30% came from plywood produced by ENDESA-BOTROSA,
and the remaining 20% were products related to wood work and boards, such as fittings and accessories.
Stores in Peru and Colombia had the same format EDIMCA used in Ecuador. The Interforest chain in Peru, whose shares
were equally divided among GEM and two other Peruvian partners, had 9 shops, a total of 300 employees and sales of $
25.9 million in 2010, which had grown by 11% since 2007. In Colombia GEM controlled 35% of the retail chain
Madecentros, while other two partners controlled 35% and 30%. There were 45 shops totaling 500 employees; sales had
more than doubled over the last three years from $ 25.4 million in 2007 to $ 53.1 million in 2010. Also in 2010 5,000
hectares of forest had been acquired.
GEM’s net profit in 2010 was about $ 7.8 million; 54% was derived from its industrial and forest operations and profits
from the retail business came 18% from Ecuador, 16% from Peru and 12% from Colombia (Exhibit 15). Furthermore, GEM
sales amounted to $ 182.3 million.
The population of Ecuador, Peru and Colombia totaled 89.9 million people in 2010, and average per capita GDP was $
8,900. Together these three countries had a forest area of 160.1 million hectares and per capita consumption of MDF and
particleboard had grown in the last decade, 171% and 84.0%, respectively, reaching an average of 4.9 m 3 and 2.9 m3 per
thousand inhabitants on average. GEM’s share in these markets amounted to 45% in Ecuador, 10% in Peru and 7% in
Colombia. In these markets ACOSA-EDIMCA competed with large particleboard producers in the region such as
ARAUCO, MASISA and NOVOPAN, and with smaller local producers such as PIZANO and TABLEMAC in Colombia as
well as TAPESA in Peru (Exhibit 16.)
Brazil accounted for the largest economy in the region. It had 193 million inhabitants and a GDP per capita of $ 11,300 in
2010. The country’s forest coverage was 477.7 million hectares. Particleboard consumption had increased from 4.8 m 3 per
thousand inhabitants in 2000 to 18.5 m3 per thousand inhabitants, and MDF consumption had gone from 10.3 m3 per
thousand inhabitants to 13.5 m3 per thousand inhabitants in the same period. In Brazil a strong competition was seen
between the largest particleboard companies in the region, which had focused on serving large markets.
The population of Argentina, Chile and Uruguay in 2010 totaled 60.6 million and they had an average per capita GDP of $
15,400. These countries were the home base of the largest producers of timber products and had a forest area of 50.8 million
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hectares. These countries had seen an average reduction in particleboard consumption of 8.49 m 3 per thousand people in the
last decade and 5.77 m3 per thousand inhabitants for MDF.
By 2010 Mexico had a total population of 112 million people and its southern states 16 accounted for 13.4%. The average
GDP per capita in southern Mexico was US$ 32,900, while the average for the whole country was US$ 15,000. MDF and
particleboard consumption per thousand inhabitants in 2000 was 1.4 m 3 and 0.1 m3, respectively, going in 2010 to 9.3 and
2.1 m3 per one thousand inhabitants.
In Central America the great board producing companies had not yet any important activity. This region totaled a population
of 38.5 million inhabitants and an average GDP per capita of $ 6,700. The largest forested area was in Nicaragua (5.2
million hectares), followed by Honduras, (4.6 million hectares), Guatemala (3.9 million hectares), Costa Rica, (2.4 million
hectares) and finally El Salvador, with only 298,000 hectares. A key factor was that environmental law in Costa Rica was
more stringent than in other countries. In 2010, MDF and particleboard consumption per thousand inhabitants was 9.2 m3
and 7.3 m3, respectively. Change over the last decade was 0.7 and 3.1 m3 per thousand inhabitants, respectively.
GEM Corporation Decisions
After adding ACOSA and EDIMCA activities, Mr. Valdivieso and his team saw the need to define a new strategy in order
to achieve the goal of US$ 700 million in sales by 2020.
After careful analysis supported by international consultants, they concluded that GEM’s options included continued growth
in current markets or looking for new markets such as Mexico, Central America, Brazil, or the Southern Cone.
Additionally, they had to determine the best way to grow, whether by starting new alliances, engaging in acquisitions or
establishing means of distribution.
16
Campeche, Chiapas, Oaxaca, Quintana Roo, Tabasco, and Yucatán
14
Exhibit 1
Latin America: MDF Production
Cubic meters (000s)
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
249.0
235.0
235.0
578.0
893.0
631.0
655.0
620.0
797.0
606.0
606.0
5.0
7.0
6.0
6.0
11.0
21.0
21.0
21.0
21.0
21.0
21.0
Brazil
1,001.0
1,204.5
1,413.4
1,667.6
1,713.6
1,966.0
2,294.0
2,467.0
2,646.0
2,856.0
3,477.0
Chile
510.0
552.0
434.5
618.1
639.3
691.8
957.0
919.0
1,015.0
832.0
956.0
Colombia
14.0
12.0
17.0
19.0
21.0
22.0
23.0
27.0
32.0
32.0
32.0
Cuba
85.0
85.0
85.0
85.0
85.0
85.0
85.0
85.0
85.0
85.0
85.0
Ecuador
31.0
31.0
44.5
43.1
32.8
32.8
42.0
48.0
60.0
55.0
58.0
Mexico
0.0
0.0
101.0
83.0
83.0
113.0
154.0
214.0
136.0
136.0
136.0
Panama
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
4.0
Uruguay
1.3
1.3
1.3
1.3
1.3
1.3
1.3
1.3
1.3
10.0
43.0
12.0
12.0
178.0
212.0
163.0
168.0
650.0
656.0
656.0
656.0
656.0
1,912.3
2,143.8
2,519.7
3,317.1
3,647.0
3,735.9
4,886.3
5,062.3
5,453.3
5,293.0
6,074.0
Argentina
Bolivia
Venezuela
Latin America
Latin America: Particleboard Production
Cubic meters (000s)
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
485.0
403.0
403.0
455.0
536.0
602.0
585.0
555.0
564.0
512.0
512.0
0.1
0.0
0.0
0.1
2.0
1.0
1.0
1.0
1.0
1.0
1.0
Brazil
1,762.0
1,833.0
1,940.6
2,108.4
2,369.6
2,263.0
2,500.0
2,784.0
2,768.0
2,623.0
3,193.0
Chile
366.0
360.0
448.0
447.0
488.0
501.0
522.0
515.0
551.0
382.0
515.0
Colombia
160.0
147.0
131.0
149.0
162.0
168.0
176.0
208.0
228.0
232.0
232.0
Costa Rica
22.0
22.0
22.0
22.0
22.0
22.0
22.0
22.0
22.0
22.0
22.0
Cuba
62.0
62.0
62.0
62.0
62.0
62.0
62.0
62.0
62.0
62.0
62.0
Ecuador
94.0
94.0
94.0
94.0
94.0
94.0
94.0
94.0
94.0
94.0
94.0
Guatemala
4.5
4.5
4.5
4.5
4.5
4.5
7.0
7.0
7.0
7.0
7.0
Mexico
0.0
0.0
131.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Panama
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
Paraguay
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
Venezuela
60.0
62.0
58.0
18.0
22.0
16.0
38.4
11.8
11.8
11.8
11.8
3,020.6
2,992.5
3,299.1
3,465.0
3,867.1
3,838.5
4,112.4
4,363.8
4,412.8
4,050.8
4,753.8
Argentina
Bolivia
Latin America
Source: FAO
15
Exhibit 2
Latin America: MDF Consumption
Cubic meters (000s)
Argentina
Bolivia
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
188.0
176.0
1.0
22.2
468.7
214.0
233.8
312.0
524.8
343.0
329.8
7.2
15.0
2.0
0.0
4.1
13.5
13.5
10.6
13.3
18.6
15.8
Brazil
815.0 1,014.5 1,066.4 1,266.6 1,217.7 1,756.6 2,319.9 2,259.0 2,713.0 2,817.7 3,571.5
Chile
267.0
309.0
155.7
259.2
20.0
308.1
445.0
132.1
148.6
118.3
251.5
Colombia
33.4
24.5
34.9
67.1
141.4
142.4
115.6
121.1
190.7
142.4
134.8
Costa Rica
13.9
13.9
13.9
13.9
36.3
36.3
36.3
32.5
25.6
5.3
14.3
Cuba
92.3
95.3
95.3
95.3
105.0
94.5
89.6
98.7
94.6
90.2
90.1
Ecuador
36.4
42.3
12.7
19.6
50.1
50.1
0.0
0.0
37.9
0.0
64.6
El Salvador
1.6
7.6
7.6
3.2
8.5
8.5
4.6
1.5
1.7
1.7
1.2
Guatemala
5.8
3.4
1.0
13.9
26.2
26.0
21.7
10.6
13.0
13.9
20.5
Haiti
0.0
0.0
0.0
0.0
0.5
0.5
0.5
0.5
0.5
0.5
1.8
Honduras
7.1
4.5
8.5
15.5
19.3
19.3
14.1
11.8
19.4
14.0
8.7
158.1
157.0
258.0
624.0
697.0
753.1
915.8
838.4
797.6
1.9
1.9
3.1
1.3
2.3
2.3
2.8
1.2
2.1
1.9
1.0
Panama
10.5
12.5
16.6
15.2
16.1
16.1
16.0
15.0
16.4
14.0
14.0
Paraguay
0.2
0.2
0.2
0.2
1.5
1.5
1.5
1.5
3.4
3.5
5.7
13.0
14.0
18.0
25.5
24.0
27.0
40.0
18.0
62.0
40.8
57.8
Dominican Rep.
6.1
6.1
6.1
6.1
10.9
10.9
15.7
11.0
16.0
8.3
9.4
Uruguay
6.0
9.7
13.3
10.8
9.4
16.4
19.3
35.3
38.3
37.0
21.0
38.1
41.0
159.3
147.3
88.1
46.4
604.3
597.3
666.3
664.5
661.0
Mexico
Nicaragua
Peru
Venezuela
Latin America
797.6 1,049.1
1,701.6 1,948.4 1,873.6 2,605.9 2,947.2 3,543.4 4,906.2 4,504.5 5,385.2 5,123.6 6,323.6
Source: FAO
16
Exhibit 2 (Cont.)
Latin America: Particleboard Consumption
Cubic meters (000s)
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
353.0
331.0
298.0
350.0
324.4
418.0
421.2
521.0
518.0
442.0
442.0
5.7
5.0
5.0
5.1
7.0
2.4
2.4
2.4
8.2
8.5
8.5
Brazil
1,761.0
1,871.0
1,965.6
2,169.9
2,423.1
2,296.0
2,372.0
2,567.0
2,749.0
2,604.2
2,604.2
Chile
334.9
295.9
399.0
380.0
426.0
417.0
497.1
463.0
530.0
383.2
383.2
Colombia
102.2
123.5
121.4
134.1
152.2
158.2
218.0
253.8
258.7
259.4
259.4
2.8
2.8
2.8
2.8
0.0
0.0
0.0
0.0
6.0
15.5
15.5
Cuba
61.7
61.7
61.7
61.7
63.7
63.7
65.1
67.3
70.4
62.2
62.2
Ecuador
77.7
64.7
43.6
0.1
59.6
59.6
65.9
61.4
43.0
49.1
49.1
El Salvador
8.1
9.0
9.0
19.3
25.4
25.4
17.1
14.3
10.1
10.1
10.1
Guatemala
17.6
16.5
28.9
23.7
32.4
21.4
29.7
16.3
17.1
8.9
8.9
Haiti
0.0
0.3
0.6
0.6
0.1
0.1
0.1
0.1
0.1
0.1
0.1
Honduras
0.6
1.0
1.0
1.0
3.7
3.7
7.0
7.0
9.4
1.0
1.0
Argentina
Bolivia
Costa Rica
Mexico
10.0
95.0
226.0
369.7
285.4
254.2
176.0
133.0
175.0
175.0
175.0
Nicaragua
3.9
3.9
2.9
5.2
8.8
8.8
4.1
3.4
2.8
1.0
1.0
Panama
3.9
3.4
4.1
6.0
7.0
7.0
6.0
9.0
14.3
13.0
13.0
Paraguay
0.1
0.3
0.3
0.3
3.7
3.7
3.7
3.7
6.0
4.9
4.9
27.0
31.0
41.0
57.0
56.2
70.8
80.9
103.9
134.0
128.6
128.6
Dominican Rep.
4.0
4.0
4.0
4.0
4.9
4.9
2.8
4.3
8.6
4.1
4.1
Uruguay
4.2
3.9
3.0
7.0
7.0
9.0
14.0
13.0
14.0
12.0
12.0
71.5
71.4
42.1
0.0
0.0
0.0
42.9
0.0
0.0
11.2
11.2
2,849.9
2,995.2
3,260.0
3,570.2
3,868.5
3,806.7
4,023.5
4,242.4
4,573.9
4,193.8
4,193.8
Peru
Venezuela
Latin America
Source: FAO
17
000s m3
-50
Perú
México
Colombia
El Salvador
Panamá
Bolivia
Rep. Dom.
Paraguay
Guatemala
Chile
Honduras
Nicaragua
Cuba
Haití
Venezuela
Costa Rica
Brasil
México
Colombia
Brasil
Perú
Guatemala
Costa Rica
Panamá
Rep. Dom.
Honduras
Ecuador
Paraguay
Cuba
Venezuela
Haití
El Salvador
Nicaragua
Bolivia
Uruguay
Argentina
-400
Ecuador
Chile
-200
Argentina
000s m3
Exhibit 3
Latin America: MDF - Balance of Trade
800
600
400
200
0
-600
-800
-1000
Latin America: Particleboard Balance of Trade
100
50
0
-100
-150
Source: FAO
18
Exhibit 4
Boards Value Chain
Wood Industry
Lumber
Primary transformation
Boards and planks
Pulp and paper
Furniture
Balsa wood processors
Secondary transformation
Construction Industry
Other industrial segments
(doors and windows)
Craft segment
19
Exhibit 5
MASISA: Presence in Latin America
Source: MASISA S.A. 2010 Annual Memory
20
Exhibit 6
MASISA: Sales Composition
Sales Composition by product
Sales Composition by destination
Source: MASISA S.A. 2010 Annual Memory
21
Exhibit 7
MASISA: Financial Statements
MASISA, S.A. - Summary financial statements (US$ 000s)
Revenue
Gross margin
Gross margin (%)
Other revenue by function
Distribution cost and management expenditure
SGA / Sales (%)
Other expenses by function
Net financial expenses
Exchange differences and result per re-adjustment units
Expense (income) form income tax
Gain (loss) attributable to comptroller owners
Bottom line margin (%)
Depreciation & amortization
Consumption of own raw materials
EBITDA
EBITDA margin (%)
Source: MASISA S.A. 2010 Annual Memory
Dec. 31st.
2009
914.268
203.021
22,2%
79.555
-155.647
17,0%
-59.901
-49.156
50.674
-14.964
38.757
4,2%
64.839
49.495
161.708
17,7%
Dec. 31st.
2010
1.017.343
211.060
50,7%
62.737
-137.455
13,5%
-30.262
-53.527
3.569
20.170
72.424
7,1%
41.899
93.597
209.101
20,6%
Variation
11,3%
4,0
-21,1%
-11,7%
-49,5%
8,9%
-93,0%
-234,8%
86,9%
29,3%
Exhibit 8
ARAUCO: Presence in Latin America
Business offices
Operational centers
Representatives
Source: ARAUCO 2010 Annual Memory
22
Exhibit 9
ARAUCO Income Statement
Income Statement
Profit (loss)
Operating revenue
Cost of sales
Gross revenue
Other revenue by function
Distribution cost
Management expenses
Other expenses by function
Other profits (loss)
Financial revenue
Financial costs
Share of income (loss) of associates and businesses
Sets accounted for using the equity method
Exchange differences
Profit (loss) before taxes
Expense for Income Taxes
Profit (loss) from continuing operations
Profit (loss) from discontinued operations
Profit (loss)
2010
MUS$
2009
MUS$
3,788,354
(2,098,191)
1,490,163
378,188
(379,579)
(323,916)
(50,642)
292
22,154
(213,912)
3,113,045
(2,152,535)
960,510
181,383
(388,535)
(249,340)
(59,681)
64,102
19,313
(193,872)
(7,693)
(16,288)
898,767
(198,018)
700,749
0
700,749
6,621
17,632
358,133
(53,537)
304,596
0
304,596
694,750
5,999
700,749
300,898
3,698
304,596
Profit attributable to
Profit (loss) attributable to
Profit (loss) attributable to non-controlling shares
Profit (loss)
Source: ARAUCO 2010 Annual Memory
23
Exhibit 10
TABLEMAC Income Statement
2010
88,129,394
4,233,494
92,362,888
(60,677,052)
31,685,836
Operating income
Local sales
Export sales
Net sales
Cost of sales
Gross profit
Operating expenses
Management
Sales
(5,264,126)
(15,951,469)
(21,215,595)
Operating profit
10,470,241
Non-operating income (expense)
Financial revenue
Financial expense
Other revenues
Other expenses
Equity method
1,384,090
(2,067,665)
590,460
(924,913)
(1,018,028)
Profit before income tax allowance
Provision for current income tax
9,452,213
(2,338,032)
Net profit
7,114,181
Source: TABLEMAC 2011 Annual Memory
Exhibit 11
GEM: Corporate Government Structure
Source: GEM
24
Exhibit 12
GEM: Financial Statements
2010 Financial Balance - US$ MM
Assets
Liabilities
Equity
Financial debt
Financial expend.
Forest
& Ind.
48.0
18.3
29.6
9.7
0.6
Retail
ECU
29.2
16.4
12.8
3.9
0.3
Retail
COL
21.5
14.5
7.0
7.1
0.5
Retail
PER
15.7
6.3
9.4
2.1
0.2
Total
114.4
55.6
58.8
22.8
1.6
Operational Results - US$ MM
2007
2008
2009
2010
45.6
30.5
15.1
41.7
26.9
14.8
45.1
28.5
16.6
59.3
48.0
11.3
56.3
45.0
11.3
58.2
50.3
7.9
2007
2008
2009
2010
Sales
Cost of sales
Gross Margin
Retail (INTERFOREST)
23.3
18.6
4.7
Retail (MADECENTROS)
29.0
23.2
5.8
24.9
19.9
5.0
25.9
20.7
5.2
Sales
Cost of sales
Gross Margin
25.4
20.3
5.1
30.8
24.6
6.2
38.3
30.6
7.7
53.1
42.5
10.6
Sales
Cost of sales
Gross Margin
Sales
Cost of sales
Gross Margin
Forest & Industrial (ACOSA)
41.4
27.7
13.7
Retail (EDIMCA)
47.9
38.3
9.6
Source: GEM
Exhibit 12. Cont.
Operational Results – US$ MM
Source: GEM
25
Exhibit 13
ACOSA Forest Assets
Source: GEM
26
Exhibit 14
ACOSA Products
Particleboard
(Duraplac)
Veneer
Solid Wood
MDF
(Fibraplac)
Pallets
Forest
Veneer
Sustratum
Crudo
Crude
Pine
seedlings
Foil
Foil
Melamine
Melamine
Rh
Light
Rh
Melamine
Paintable
Ranurado
Rh
Rh
Melamine
Source: GEM
Exhibit 15
GEM: Profit Composition
Retail PER 16% Retail COL 12% Retail ECU 18% Forest + Ind 54% 27
Source: GEM
Exhibit 16
Market Share - Ecuador, Peru, and Colombia
Source: GEM
28
GEM Corporation
Teaching Note
Statement of Relevance
In January 2011 Carlos Valdivieso, CEO of GEM Corporation, was in his office analyzing the data recently collected by the
company for the strategic definition process it was about to undertake.
Since his appointment as CEO of ACOSA in early 2008, he had felt concerned that the internal change process involving
the board would lead it to neglect key issues for the firm’s operation and survival.
Aglomerados Cotopaxi S.A. (ACOSA) was a forestry and industrial company engaged in the wood business. It was
vertically integrated and involved in the production of particleboard, medium density fiberboard (MDF), and lumber. On the
other hand, Empresa Durini Industria de Madera Compañía Anónima (EDIMCA) was a store chain engaged in marketing
customized wood and accessories solutions in the furniture, construction, and decoration industries. Both companies had a
common group of shareholders.
In 2008, ACOSA began a shareholding restructuring which ended two years later. Once it was over, the Arteta family
acquired most of the shares of both EDIMCA and ACOSA to create GEM corporation.
Under the new structure Mr. Valdivieso was appointed CEO of GEM. He decided to start a strategy definition process to
determine GEM’s growth path. Options included continued growth in current markets or looking for new markets.
Target Market Statement
The case is in-depth and complex and is suited for use with advanced MBA and EMBA students, as well as practitioners.
Depending on the instructor’s needs, different aspects of the case can be highlighted and it can be used in a course/module
focusing on business strategy.
29
Teaching Objectives
1.
To illustrate the main issues about growth management during the internationalization process
2.
To learn about the process of internationalization of a company from an emerging economy
3.
To learn about building brands from emerging markets
Teaching Strategy Statement
The instructor should quickly articulate the key decisions that Valdivieso needs to make: basically, which markets should be
emphasized by ACOSA and EDIMCA with what strategies. The discussion should be guided in order to determine what
has been the positioning of the company and what should be in the future. To do it, it is essential to determine the main
characteristics of both companies and the way that they already operate in Ecuador, Peru y Colombia.
It is crucial to analyze industry trends at the global, regional and country level. Focus in areas such as industry growth, size
and industry structural changes. The instructor should lead a detailed analysis of competitors and the characteristics of the
different growth possibilities for GEM.
Activity Statement
•
What are the key decisions facing CEO Carlos Valdivieso and his crew?
•
Where does GEM compete? How does GEM compete?
•
What are the strengths and weaknesses of GEM?
•
Should GEM develop new markets? If yes, why? What markets?
Research Statement
The case is based on primary research with the company, including interviews key GEM executives such as Carlos
Valdivieso, CEO of GEM, Federico Arteta Durini, member of the Board of Directors and who has strategic responsibility
for geographic expansion projects; Byron Solano, strategy process coordinator; among others. Interviews were conducted
in order to verify and update information, in topics such as the markets where GEM is operating, its sales and its financial
records. It is also based on secondary research on relevant industry trends and characteristics.
The case includes the company history, a description of the competitive landscape and market information.
30
Conclusions
This case is going to be useful to illustrate growth strategies during the internationalization process. Also the case could be
used to generate ideas and conclusions about proper manners to develop strategy during the geographical expansion process
of a company.
31

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