Case - YARA
INTERNATIONAL1
It had been a demanding week for Mr. Egil Hogna, Senior Vice President Downstream
at Yara International ASA. He had been travelling across Latin America visiting four
countries in six days and was now heading back home to the Oslo headquarters of the
world’s largest fertilizer company. This was his third trip to Latin America over the last
four months since he took over the job as SVP Downstream and he realised that they
now had come to a cross-roads on their market presence in Colombia.
Mexico,
Guatemala and also Ecuador were an easy ride compared to Colombia. There they had
already established a local presence through their own sales office, and the visit there
was more of a courtesy kind.
The story was however quite different in Colombia. Senõr Cesare Gonzales, their local
and - most would say - very loyal and devoted distributor since the last 23 years was
utterly opposed to any of the solutions suggested by Yara to the dilemma that they were
confronted with. He could still hear the resounding mantra given by Mr. Gonzales:
“You are the producers – we are the marketers”. He was so frustratingly stubborn and
single minded - “You are the producers – we are the marketers” – and Mr. Hogna
slowly developed a sense of antipathy for the guy they all worshipped only a couple of
years back. Sitting back in the business lounge at the Baranquilla International Airport,
Ernesto Cortissoz, recollecting the discussions over dinner the night before, he realised
that he was about to change his mind about their presence in Colombia, but that he
would have a hard time convincing some of his colleagues back in Norway of the
necessity to shift to another operation mode in this important market. He knew that at
the Monday meeting next week he needed to persuade a lot of people who were staunch
supporters of Mr. Gonzales and of the idea of continuing with him as their sole
distributor in Colombia. Mr. Hogna was quite adamant that something had to be
changed, but he was still worried about the consequences and he was unsure of how to
11
This case is written by Prof. Carl Arthur Solberg, BI Norwegian School of Management, Oslo in cooperation with
Mr. Egil Hogna, Vice president Downstream, at Yara International, Oslo. It has been developed for class discussion
in international marketing and management courses. Although the case describes a real life situation, certain facts
have been changed in order to conceal critical information. This does not however essentially alter the issues raised
in the case. For background information about Yara, please visit their home page www.yara.com
Case til Internasjonal markedsføring 9. utgave av Carl Arthur Solberg, Universitetsforlaget, 2015
Side 1
tackle the marketing task in the wake of an indispensable and - he hoped - imminent
break out.
It was not easy. A lot was at stake. In fact, Colombia had over the last two decades
evolved into one of the most important markets for NPK fertiliser from their Porsgrunn
plant in Norway, taking about 10% of its total production of some 2 million tons of
NPK and Mr. Gonzales had been the key architect behind the success. Only China and
Scandinavia were larger markets for the Porsgrunn plant. “You know Egil” the local
plant manager, Mr. Ola Earthgood, had insisted before he left, “we risk a 10% loss of
our NPK output and that represents a turnover of some USD 80 million. We’re gonna
have a hard time to find other markets to offset such a loss, and in the long run we could
jeopardise the viability of the plant itself. It will take a nerve to challenge Mr Gonzales
bearing this in mind....”. And he was of course right in that the profitability of the plant
hinges on its utilisation rate and, as to make matters worse, that the 2008-2009 financial
crisis had made a big bite into both sales and profits. Yara downstream activities were
particularly hard hit by the crisis. For instance in Latin America sales in 2009 fell one
third from the year before – a combined effect of lower prices and lower volumes.
Only a few years earlier they were reluctantly accepting things as they were. Mr.
Gonzales had through his firm Ferticol SA developed Yara to be one of the major
players in the Colombian market achieving a market share of some 35-40%. His
dealer network of some 80 dealers was well located in central agricultural regions
of the country and represented the “upper crust” of the industry. Their first
contact originated back in 1986 at a trade fair in Madrid, were Mr. Gonzales
expressed interest in a presentation held by a Yara (then Norsk Hydro 2 )
agrochemical engineer. He was particularly impressed by the reported crop yields
provided by the Yara NPK prills. Actually, their product was in many ways
different from those of their main competitors at the time as they were producing
compounds – as opposed the more generally used blends. One of the key
differences between the two lies basically in the fact that in the Yara product the
three main nutrients of the fertiliser – Nitrogen (N), Phosphorus (P) and Potassium
(K) – were all present in each prill with equal parts in the whole batch, whereas
most of the competitors supplied a blend where the components randomly were
present with varying degree of concentration. Hence the yield was superior with
the Yara product and a lower dosage could be used than with that of the
competitors. Mr. Gonzales had indeed experienced the variance of fertiliser yields
2
Yara International AS was spun off from Norsk Hydro in 2004. For the sake of simplicity we will in the following
use Yara as the name of the company throughout the rest of the narrative, even though Norsk Hydro was the name of
the company before 2004.
Case til Internasjonal markedsføring 9. utgave av Carl Arthur Solberg, Universitetsforlaget, 2015
Side 2
from his time in the horticultural industry in Colombia. This experience would be
a perfect background for him to represent Yara in his country. A year later they
were in business, at first only on an individual purchase contract basis, but it
evolved with time into a close distributorship relation, where he de facto was their
sole distributor in Colombia.
Their relationship was built on trust gained through a professional handling of
business matters and an evolving friendship between Mr. Gonzales and key
personnel at Yara. Yara was delivering good products at a slightly higher price
than the general market price level for blends, but Mr. Gonzales was able to
communicate the higher product quality to the market and therefore rapidly gained
the commitment of the best dealers in Colombia. If there was a problem in the
delivery Yara would instantly give him accurate information; if he expressed the
need for extended credit terms it was granted – at times it could go well beyond
the “normal” 90 days. Certainly, the then controller at the Porsgrunn plant, Ms.
Peggy Credilane, was at first not happy with this, but the upside was a loyal
distributor and also a more rational logistics solution (larger and fewer shipments),
and if Yara needed to push product, Mr. Gonzales would have available
warehouse space as long as the credit terms were generous enough.
However, the profitability of the Colombian operations was not among the best in
the Yara system – rather it was ranking as a “middle of the ground” performer in
their portfolio. If truth be told, top management of Yara was already back in
1998-99 starting to ask questions about the Return On Capital Employed levels of
the Colombian venture. True, Mr. Gonzales had managed to get a good grasp of
the market, reaching almost 40% market share; true, the Colombian market
constituted a significant addition to the capacity utilisation of the Porsgrunn plant,
thereby securing essential scale economies and its competitiveness. Nevertheless,
some key people at headquarters in Oslo started to ask “impertinent” questions
about the potential for improved returns. First the then President Mr. Thorleif
Enger expressed concerns about the Colombian venture not yielding better results
even after fifteen years of operation: “Yes - we do have a comfortable market
position in Colombia, but things have not really moved the last couple of years
and our volumes and returns are not showing any sign of improvement”. And as
the present CEO, Jørgen Ole Haslestad, was professing: “We need to get closer to
the customer in order to understand what is happening in the market and how the
customers think”. To that effect they established in 2001 a liaison office in
Bogotá in order to get a better grasp of the market. Two people, one from
headquarters in Oslo and one local were hired to both overlook the market
operations and to spot new market opportunities in Colombia and beyond. This
was not well viewed by Mr. Gonzales as he persistently was telling his mantra
(“You are the producer – I am the marketer”), however he acquiesced and
acknowledged that as long as he was in command of the operative marketing and
sales programme he was not to be challenged by headquarters.
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Side 3
Concurrently with the decision to set up a liaison office, Yara eventually
formalised the relationships with Ferticol SA, as the uncertainty concerning the
future was increasingly worrying Yara management. Mr. Gonzales saw this as a
clear advantage in that he secured his position in a potential termination conflict.
In fact with no distributorship contract until that date, he believed that he still was
to be regarded an agent by Colombian Code of Commerce. This was only partly
true, since he de facto was their distributor, buying and taking title to the product
rather than – as in the agency contract – acting on behalf of the principal,
receiving a commission or a fee. So for severance payment accruing to the agent,
this was indeed a point of uncertainty, since agent he was not. They settled for a
severance payment of 1 million USD in case of termination, whatever the cause of
the contract cessation by Yara. At the same time they also formalised the
“producer-marketer” role distribution, so as to assure Mr. Gonzales of his position
in the value chain.
A year later – in late 2002 - the expat head of the Bogotá office, Mr. Ole Clerck,
reported back to headquarters that some of Ferticol’s local dealers expressed
concern about being financially squeezed and that some of them had been forced
into bankruptcy by Mr. Gonzales. This was possibly not a big surprise as the
whole world was in financial disarray in the wake of the bursting of the dot.com
bubble that year. But it raised some eyebrows at headquarters when they learnt
that the credit line offered by Mr. Gonzales was only 30 days, whereas Ferticol
was often given more than 180 by Yara! It was only after they bought Kemira
OY’s fertiliser business in 2007 that their suspicion was given real substance 3. In
fact Kemira Growhow as they now where labelled, had sales offices both in
Colombia and Ecuador, and they reported much higher returns than Yara in this
latter’s relationship with Ferticol, and that came at much lower volumes and only
after 6-7 years of operation. It appeared that Ferticol not only squeezed the
dealers on credit terms, but also on price. So on 100 USD in the market the
dealers would typically only have a margin of some 15%, and Ferticol reaping the
bulk of the margin of some 30%, leaving 55% to Yara. This equation was quite
different in the Kemira case: roughly 20% at the dealer level, 20% at the local
sales office level and 60% at producer level.
Discussing the matter with Mr. Clerck during his last visit to Colombia, Mr.
Hogna asked how this could be: “I mean, how can Cesare sit back with those
profit margins at the expense of his dealers, whereas most of the competition is
operating with much lower margins?” Mr. Clerck offered the following
explanation: “You know Egil, Cesare has been very successful in building an
image of being the industry leader in Colombia. He has used our logo for what it
is worth: Yara and the Viking ship are basically seen as a household, local brand.
3
Kemira OY of Finland spun off their fertiliser business to Yara in 2007. This acquisition considerably boosted
Yara’s market position and brought them a supplementary marketing and sales network around the world, in among
other places, in Colombia and Ecuador.
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Side 4
And in support of this Ferticol has over the years invested in a very competent
sales force, with great product knowledge and with frequent and close relations
with their dealer network. And remember”, he added, “Ferticol also has a wide
product range, offering other products than just ours, so many of their dealers
have developed a certain dependence on Ferticol. Also – and let’s not forget that
– Cesare has grown into an important figure locally in Baranquilla, not that I make
any allusion to any wrongdoing, but of course, when you are centrally placed in
the industry network, you find most of the time ways to improve your situation....”.
That was indeed true: Mr. Hogna recalled the occasional receptions and cocktail
parties held by Mr. Gonzales at his residence outside Baranquilla, where he had
the chance to meet local figureheads and also some local horticultural leaders.
These were useful inputs in his formation of the total picture of the marketing
situation. And indeed, at these occasions he also got the opportunity to experience
Mr. Gonzales’ devotion to Yara: in the middle of the pear shaped swimming pool
a mosaic blue and white Yara Viking ship gleamed from the bottom. There was
no doubt where his loyalties were....
Eventually, after years of hesitation and internal deliberations, in early 2009 Mr.
Jørgen Ole Haslestad suggested a solution to the dilemma: a joint venture initially
to be owned 49% by Yara and 51% by Ferticol, but with Yara to take a majority
ownership after four years. They also offered an unbalanced distribution of the
dividend from the JV the four first years: Ferticol 65%/Yara 35%. This proposal
was advanced after several attempts had been made to more closely monitor
Ferticol’s marketing activities. But to no avail: Mr. Gonzales – now 76 years old
– was the big boss, his producer-marketer mantra was constantly repeated and he
was uninterested in whatever change was suggested in the operating conditions of
their relationship. Two of his sons were involved in the discussions, but they
were only regarded as apprentices and were – despite their age: 42 and 39 years not given any decision making role in the firm.
Back in Norway, Monday morning, 09:00 o’clock meeting with top management of his
department. Mr. Hogna still a bit jet lagged felt well prepared for the discussion.
Present: the regional sales manager Latin America, Ms. Elfrida Rodrigues, Mr.
Earthgood, and Chief Legal Officer Mr. Trygve Faksvaag.
Mr. Hogna opened the meeting with a warm “Good morning everyone. I hope that you
have had time to consider the facts of the situation in Colombia. It is not a straight
forward decision to take, and we need to make sure that all the aspects of the situation
are properly evaluated before we decide what to do. As far as I am concerned we have
two major alternatives: 1) stay with our present distributor, Ferticol, or 2) move all our
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Side 5
importing activities to the Kemira Growhow sales office, thereby riding on our market
experience acquired through their network and their operations in the market. In this
latter case, we will most likely change the name of our subsidiary to Yara Colombia
Ltda. We may of course also set up a totally new Yara sales office and let the Kemira
brand sail on its own – each brand then will operate with their own distribution network
and their own marketing strategy, independently and side by side. This third solution
will however meet resistance in the board of directors, as the sentiment there is to
rationalise rather than setting up double sets of sales units abroad. If we continue with
Ferticol, we need to try and persuade them to take a more customer friendly stance
toward their dealers. We all know that these lately have been under financial pressure,
both concerning credits and price – and I think that with some patience and some
pressure from our side we may in the longer term succeed in that endeavour.
Remember that Mr. Gonzales is now soon 80, and his sons seem to be more willing to
discuss viable solutions with us than the ‘old man’, but we don’t really know how long
time it will take before they will be able to take the helm. And we don’t know how
competent they are.”
Ola Earthgood was the staunchest advocate of the status quo in the group and he
reminded his colleagues of the vulnerability of the Porsgrunn plant should the volumes
drop. “He has been serving us pretty well after all. I agree that his pricing policies are
dubious, and that our margins could be better in that market, but on the other hand
losing ten percent of our total volume is much more serious. Even though we may take
advantage of the Kemira Growhow dealer network, that network is much weaker
compared to our existing distribution. Not only is it much smaller with their 35 dealers,
but also it mostly consists of second tier dealers compared to Ferticol’s structure.”
Elfrida Rodrigues filled in: “and not only that”, she said, “but rumours have it that the
Russians are actively searching for new outlets in South America, and if we cease our
relationship with Senõr Gonzales I am convinced that the two will be in business in the
course of less than one week”!
The Russian fertiliser company, Acron - second only to Yara in terms of compound
NPK output, was one of Yara’s main competitors in world markets. It was generally
known that they were about to review their own presence in Colombia, as they up till
this date only had occasional deliveries through direct sales to some of the larger dealers
around Bogotá based on the dealers’ attempt to pressure Ferticol on price. Their product
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Side 6
quality was, however, not as good as Yara’s, but they were indeed a serious player in
the market. Mr. Hogna thought by himself “Well – so much for Cesare’s loyalty....
Now that we plan to set up our own sales unit – the quality seems to be more than good
enough, even for him .... He will have a hard time biting his own words”. As a matter
of fact Cesare had always been dismissing Acron as low quality supplier, and had gone
to length to communicate this viewpoint to his dealers. Mr. Hogna said: “I agree that
we are vulnerable since we do not have the direct link to the dealers or to the end users.
But that is one of the main problems that we want to address: customer contact. And
furthermore, our brand name is well known in the market, and if I am not mistaken, a
great deal of these guys would rather welcome us as their main supplier instead of
Ferticol. Cesare’s tough policy towards many of the dealers has given him a reputation
in the market that probably will help us retain a large part of them. And – given a
properly conducted marketing campaign, I think we will be able to increase our market
share in the course of a couple of years”.
“This may be true, but we don’t really know” Ms. Rodrigues countered. “One problem
that we are sure to encounter is the fact that we are culturally extremely far from
Colombia. Of course daily etiquette is relatively easy to learn – even though there are
lots of pitfalls even here, but the mechanisms that follow in the wake of hierarchical
rules and social network ties, are something far less permeable. And these things are
extremely important in B2B relations. As far as I am concerned this will prevent us
from an easy ride into the market. And I can say this, Egil, since I am half Spanish,
speak the language and feel that there are many things going on there that I cannot
fathom! Using a local figure to head the subsidiary is of course a way around, but then
again, we will still struggle with the problem of understanding and interpreting the
information – that he might give us! It took us a long time to understand the way in
which Cesare was operating – I say no more”!
This was not the first time Mr. Hogna heard the cultural argument, and of course he was
aware of the problems: “It is certainly true that we are way away from Colombia – also
in cultural terms. And we have heard rumours of .. ehem... should we call it irregular
business practices. That has however not prevented the Kemira people to successfully
penetrate the market, and their top guy in Colombia was a Finnish expat. I don’t think
that we are any worse than the Finns” he said. To what Mr. Earthgood retorted
“Success is relative : the Kemira Growhow brand sells possibly a fifth of our volume”.
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Side 7
“Yes Ola, we all know that”, Mr. Hogna resignedly replied, “but Kemira entered the
market only ten years ago, in a situation where we were already the market leaders and
had captured the best dealers. And to be true, I think that precisely this year is a good
time to do the switch, since Colombia just recently has entered into a new deal with the
EU, which I am sure that will have an effect on their agribusiness exports and thus boost
the fertiliser market”.
Mr. Faksvaag had been listening to the discussion, and many of the arguments were
known to him. However, he warned against a problem that was so far not given so
much attention. “We don’t know for sure”, he said, “but I have heard rumours of Mr.
Gonzales registering a trade mark that is profiling a Viking ship. Granted it has a
somewhat different shape than our logo, but possibly still similar enough to potentially
confuse some of our end users when they see the two products together. We need to
look more seriously into that, and consider what possible legal actions to take. I don’t
say that this should preclude any switch to fully owned operations, but it might affect
the way in which we’ll approach our marketing in the wake of a break-up.”
The meeting was drawing towards the end and Mr. Hogna concluded: “Well – we all
know that we have different views on the situation. I will now, together with Elfrida
and Trygve, set up a PM to top management, where we discuss these matters more in
detail, and outline the consequences of the two alternatives, particularly with a view to
the local marketing effort. Thank you for your contributions.”
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Side 8