fesanco (pdf) - Babson College

Date January 25, 2010 Case Number 467-C-10
Introduction
FESANCO
It was September 2002 and Miguel Fernandez was looking out at the Pacific Ocean,
completely engrossed in his ideas for a new business. Earlier that day he had attended
the official inauguration of a mobile crane by its new owners in the Port of Mejillones
(see Exhibit 1), a ceremony attended by local authorities and many visitors. A few
weeks earlier, his team of workers had dismantled the huge crane, originally located in
Valparaiso, the main port of Chile, and moved and reassembled it in Mejillones, 1,400
kilometers to the north.
The project was the first of its kind in Chile and despite skepticism from many people, it
had been carried out successfully, with no assistance from the European crane maker.
For Miguel, this success confirmed that he had been right to found his startup a few
years earlier to take advantage of opportunities created by changes in the Chilean laws
governing ports.
Miguel’s business, Comercial Fesanco S.A., was founded in 1998 as a technical
representative and reseller dedicated to the maintenance and sales of port cranes. The
company sells spare parts and after-market maintenance services for heavy-duty
equipment.
Miguel was wondering that afternoon if the success of his latest project could be used to
demonstrate Fesanco’s technical capabilities and strengths. The company might expand
the scope of their services to the mining industry or offer their engineering services to
neighboring countries where the ports were also modernizing. On the other hand, maybe
it would be more prudent to think about consolidation in Chile because Fesanco was
still too new a company to consider increasing its geographic or industrial scope.
The ringing of his cell phone broke into Miguel’s thoughts.
Flashback
As a student at a public school in Valparaiso, Miguel already cared about the plight of
the poor, a concern reinforced by his middle-class family. He spent his summers
volunteering at a camp on a local beach that offered recreational and educational
activities for disadvantaged children.
Miguel’s dedication grew stronger when he met Monica, his future wife, at the camp.
They became friends and discovered they had many interests in common. They joked
about having a family of six children some day.
This case was prepared by Orlando De la Vega and Rodrigo Vergara of Pontificia Universidad Católica
de Valparaíso under the direction of Babson College Professor Bradley George as a basis for class
discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
Funding was provided by Banco de Chile.
Copyright by Babson College 2010. To request the Teaching Note, please contact the authors at
orlando.delavega@ucv.cl or rodrigo.vergara@ucv.cl.

Miguel’s high school years, from 1969 to 1973, were a period of great social and
political upheaval in many Latin American countries, including Chile. Miguel became
deeply introspective and for a time lost his religious faith. He wondered why there was
so much hatred and intolerance in the world. He decided that in such a chaotic
environment, the only way to achieve success was through hard work and integrity.
Toward the end of 1973, a military government took over in Chile and ruled until 1998.
Miguel began studying for a degree in mechanical engineering at the Pontificia
Universidad Catolica de Valparaiso in 1974. He was the first member of his family to
have the chance to pursue a professional career.
At this time, Miguel (like other students in Chile) was focused only on his studies. But
by his fourth year at the university, he felt that some of the classes given by his
professors did not address his interests, and he decided to take the initiative, with the
consent of the school’s administration. Miguel and some of his classmates created the
Professional Extension Group (PEG). Their goal was to develop a roundtable forum in
which undergraduates could create workshops and discuss new topics and issues related
to mechanical engineering.
The dean warned Miguel that group activities at universities, especially political ones,
were forbidden, and that starting PEG would be risky. Miguel responded that he was
well aware of the restrictions. He knew it was a risk both for himself and the university,
but he believed the school should trust him. He said, “Our purpose is professional, but it
is also cultural. People are made up of body, mind, and spirit, and all these dimensions
deserve attention. This initiative is a good way to add value across those dimensions.”
Despite the negative predictions of his classmates, Miguel received permission to start
PEG at the university. Miguel and the other founders were extremely enthusiastic. They
invited entrepreneurs and executives to their conferences and seminars. They also
organized professional workshops where undergraduates analyzed new projects and
watched films about mechanical engineering and specialized foreign documentaries.
PEG became well known at the university, and soon professors also joined PEG and
became active in discussion forums.
The following year, the dean asked Miguel to become the president of his class, but he
said no because he had been appointed to the position rather than elected by his
classmates in a democratic election. In the end, however, he accepted the responsibility
because his fellow students wanted him as their leader and pressed him to take the job.
As president, he created teams of students that enthusiastically developed programs, and
he invited students to participate in social and spiritual reflection activities.
Early jobs
Miguel graduated in 1980 and began his first professional experience at Flexshoes, a
small company that made shoes. Miguel was in charge of machinery maintenance, and
in his free time he talked to workers and learned about their problems and goals for the
future. After thinking about how to better manage employees, Miguel said to his boss
one day, “I’m convinced that the only way to achieve success in business is to develop a
motivated team of workers who are totally focused on quality.”
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This was the same year that, at the age of 23, he decided to marry his girlfriend Monica
and start a family. According to Miguel, that was “the most important startup company”
he ever created.
After two years at Flexshoes, Miguel felt that its organizational climate and culture were
substandard, and since the people in charge did not want to change, he found another
job. He began working at Comercial Maipo as an engineer in training in January 1981,
just as the company was developing a new business unit for the import and sales of
vehicle batteries. Comercial Maipo acted as a representative for global producers like
Japan Storage Battery Company and PT Century Batteries Indonesia. Miguel learned
everything he could about this business. He was involved with importing products and
with creating a distribution network around the country. In 1983 he was promoted to
manager of logistics. Although Miguel enjoyed this job, by 1985 it was becoming
monotonous, and once again he started thinking about a different professional setting.
The port industry
In 1986 Miguel was hired by Agunsa, a shipping agency with offices along the entire
Chilean coast. He began as the engineer in charge of maintenance for heavy-duty
machinery in the Port of Valparaiso.
During his frequent visits to various ports, Miguel met people involved in fieldwork.
The person who most attracted his attention was Rene Segura, the maintenance engineer
of Ultraport. Rene always knew the latest developments in technology and was
considered the most skilled specialist in the maintenance of high-tech machines.
Unfortunately Rene worked for a competitor.
Miguel enjoyed this new job, and after few years he was promoted to chief maintenance
officer in charge of high-performance machinery, equipment, and the boats operating in
every Chilean port. The CEO of Agunsa often complimented Miguel on his ability to
build relationships and on his sales skills. He even used to joke that Miguel should get a
job in sales. This particular comment intrigued Miguel, and in 1994 he decided to study
for a graduate degree in business administration, with a focus on marketing and finance,
at the Pontificia Universidad Catolica de Valparaiso so he could strengthen his
management skills.
Miguel’s schedule was on overload during those years. He worked all day, took classes
at night, and spent the weekend studying and completing assignments. The only time he
saw his children was when he drove them to school in the morning. At their school he
met Ricardo San Martin, an attorney specializing in maritime law who had litigation
experience in insurance claims for vessels and cargoes. They soon established a
friendship. Both worked in the maritime and port industry, they had children at the same
school, and every morning they ate breakfast together at a restaurant near the school.
The Chilean economy had been growing during the previous ten years by about six
percent annually, and the future looked promising because of the commercial free trade
agreements that Chile was signing with United States, Canada, several countries in
Southeast Asia, and the European Union. Judging by what Miguel saw in various ports,
he thought the Chilean port model was inefficient and outdated. The cargo movement
had grown (see Exhibit 2), and the system was unable to face the challenges and
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dynamism that the global economy demanded. He predicted to Ricardo that, sooner or
later, the port system would have to modernize, and there were no private local
companies to help the port administrators find services and resources to maintain their
heavy-duty equipment. Ricardo had heard that the Chilean authorities were willing to
privatize the main Chilean ports under long-term concession agreements, and that the
government would invite domestic and foreign private companies to take over port
management. This work would be done via a new law affecting ports. Miguel’s
reaction to this news was, “This is an opportunity that someone should definitely
prepare for!”
As chief maintenance officer at Agunsa, Miguel was familiar with the entire
marketplace of heavy-duty equipment, and he had worked with several global providers.
Gottwald Port Technology, a German company, was the main provider of equipment
and spare parts for Agunsa because of the high quality of its products and services.
Miguel knew Heinz Hinrichs, the sales director at Gottwald, and Andreas Moeller, the
sales director for the Americas, who were interested in increasing their sales
representatives around the globe.
Gottwald Port Technology, based in Düsseldorf, Germany, was the world’s leading
supplier of mobile harbor cranes (HMK series). The company produced a
comprehensive range of HMK cranes with lifting capacities of up to 120 tons and a
radius of up to 56 meters, in addition to rail-mounted portal harbor cranes (HSK series).
Gottwald also offered services for terminal operators, from conceptual design and
operational layout, to basic engineering of equipment and systems, to automated guided
vehicles (AGV) and automated container stackers (ACS). The company had a
workforce of around 700 employees in Düsseldorf at the time, and the profit for fiscal
year 1999 was around $200 million.
In the course of his work, Miguel often supervised projects to upgrade and modernize
the equipment and logistical processes at Agunsa. He worked with Rolando Ramos,
who was in charge of the planning and control of logistics and operations. Rolando had
a degree in business administration, and he was known at Agunsa as a methodical and
organized professional who was good at strategic planning and management. Because of
their complementary skills, he and Miguel were a successful team.
The Asian Crisis
While Miguel was working at Agunsa, the Asian Crisis started in Thailand in 1997 and
quickly spread to Indonesia, Korea, Japan, Hong Kong, Malaysia, Singapore, the
Philippines, and Indonesia (see Exhibit 3).
The effects of the Asian Crisis were felt in Latin America starting in October 1997,
when Asia’s currency devaluations started pressuring other markets, which in turn
transformed a regional drama into a broader crisis of emerging economies. Latin
America was affected through two main channels: finance and trade. As a result, Latin
American trade balances with Asia deteriorated. The price of essential goods like
copper and petroleum—the primary Latin American exports—declined significantly in
1997 due, in no small measure, to the reduction of the Asian demand. Chile was
especially exposed because 38.12 percent of its exports were to Asia (see Exhibit 4).
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Changing conditions
In November 1997, Agunsa started a reengineering process and Miguel had to leave the
company. During his last days at the company, he sent faxes to machinery suppliers to
explain his situation and introduce his replacement. Within a few minutes he received
responses from those suppliers, in particular from Heinz Hinrichs, who wished him well
in his future projects and asked if he would be interested in working on new projects in
Chile as a reseller for Gottwald.
One month later, on December 19, 1997, Port Law number 19.542 was published in the
official Chilean newspaper. The purpose of this law was to modernize the eleven largest
Chilean ports (see Exhibit 5) by means of accelerated development of the state-owned
ports by improving efficiency and reducing costs. This process would need private
investment in order to enhance the competitive position of Chilean foreign trade.
In conjunction with this new law, the public company EMPORCHI, which then, as now,
managed all Chilean ports, published a master plan to implement the new law according
to clear specifications about the conditions that private companies and consortiums had
to present in their bids. The proposals had to be focused on the modernization of
facilities and equipment, and Miguel knew there was no local company with the
capability to sell port machinery and provide maintenance services to private operators
in the new terminals.
The foundation
Miguel’s first step after leaving Agunsa was to propose a new kind of business to a few
large companies. His idea, derived from the new law of ports, was to provide services to
the new private port operators related to the maintenance of their heavy-duty machinery.
The proposal was intended to be a joint venture. Miguel would provide the talent,
knowledge, and skills to manage the project, while the established company would
provide its resources, organization, and market positioning.
Unfortunately companies were not interested in Miguel’s proposal, probably because of
the negative effects of the Asian Crisis. This situation made him rethink his project.
Maybe his idea was not as good as he believed. Nevertheless, Miguel was so convinced
the project could succeed and so sure the opportunity should be pursued that he kept
looking for a partner. When he still failed to find one, he decided to create his own.
Miguel needed a lawyer to set up the company, and he decided to talk to his friend
Ricardo San Martin. With typical enthusiasm, Miguel said, “This is a great opportunity
and I can’t walk away from it. You know I have the experience and expertise to
succeed.” Aware of the current economic crisis, Ricardo advised that this was not the
right time to start a business, and he tried to convince Miguel to proceed in stages,
beginning with a small consultant’s office.
Miguel responded with a proposal. “The services we offer to large companies have to be
developed by a relatively large provider. I don’t want to be just a reseller of cranes and
spare parts. I want to set up a publicly traded company. Bad economic times can be
good for startups, and I will create this company alone, unless you want to share the risk
with me.”
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Miguel’s invitation was accepted, and on March 19, 1998, Comercial Fesanco S.A. was
founded. Miguel chose this particular day in which Catholics honor St. Joseph the
Worker, who was designated as the protector of the personnel. As his initial equity,
Miguel invested US $10,000 he had received as a severance payment from Agunsa.
Ricardo agreed to invest $4,000 and Miguel’s wife Monica added $1,000 from her
savings. Fesanco’s first office was in Miguel and Monica’s house. During this stressful
period, Monica was the mainstay for her family and also for her husband’s
entrepreneurial adventure.
Lemonade
In the ensuing months, the Asian Crisis continued to hammer the worldwide economy.
The demand for consulting services and spare parts declined precipitously. Ricardo was
ready to end the Fesanco project, but Miguel was convinced that the economic crisis
would force them and the entire industry to improve their administrative and operational
efficiency.
One year after it was founded, Fesanco was suffering from a serious cash flow deficit.
Miguel was unwilling to use his family’s house as collateral for loans. By that time, he
and Monica had the six children they had dreamed of when they were young. Instead
Miguel made a phone call to Heinz Hinrichs, the sales director of Gottwald, to ask if the
company would hire him as its official representative in Chile. He proposed to be their
exclusive agent for $2,000 monthly for a period of two years.
The timing was not ideal; the effects of the crisis were serious, especially for companies
involved in foreign trade. Miguel thought that the worst-case scenario would be an
immediate no. Instead Heinz said he would analyze the proposal with Andreas Moeller.
Within a few days, Heinz and Andreas sent a fax with a positive response. It was a nice
surprise when Miguel saw that the entire $24,000 had been immediately deposited in his
bank account as a sign of their confidence in him.
New beginnings
In August of that year (1999), the ports of Valparaiso, San Antonio and San Vicente
were privatized, in a concession model for a period of twenty years. Two months later,
the Port of Mejillones was also privatized in the same way.
The continuing Asian Crisis meant that the following year was still bad for sales (see
Exhibit 6), and Miguel watched each dollar as if it were his last. Fesanco was close to
bankruptcy when, in November of 2000, they received an urgent phone call from TPS,
the company that had the concession for the Port of Valparaiso. The voice on the other
end of the line said, “Miguel, we need to buy and assemble a port crane right away. Can
you help us solve this problem because we’re in trouble. The only person who can do it
is you, so please do your best. If you can solve our problem, the purchase order is
yours.”
Miguel called his contacts in Europe and America and by the end of the day, with the
help of Andreas Moeller, he was able to tell TPS that a crane was available and the
problem was solved.
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Fesanco’s responsiveness was recognized and valued in the marketplace. Three months
later a different customer asked Miguel to find two new cranes for the port of San
Vicente (operated by SVTI). However, there was one stipulation: Fesanco had to work
on the assembly and preventive maintenance of the equipment.
With no time to spare and grateful for the vote of confidence, Miguel accepted the
challenge even though Fesanco did not have the necessary technical team to accomplish
the project. He remembered Rene Segura, the maintenance engineer he had worked with
at Ultraport, and offered him the position of operational manager. Rene accepted and
convinced two other technicians who had worked with him to join Fesanco as well.
Together they started hiring a small team of technicians and experienced workers.
Gottwald also gave them technical support and assistance, and Miguel was able to lease
an office near the port areas so he could work away from his house.
Focus on quality
During a routine inspection at the SVTI project, Miguel observed some deficiencies in
the assembly operation. He used this as an opportunity to emphasize the importance of
doing a job well and the advantage of high-quality service. He called together his
employees and spoke to them.
You guys don’t know how lucky you are. You should appreciate how important
you are and how necessary your job is for yourselves and our company. These
days many people don’t have a job, and the unemployment rate is growing. This
job is a gift from God, so we have to be thankful and do it right.
Please do your jobs well from the beginning and pay attention to each and every
detail of the project. Together we can bring value to our customers, and this will
be the basis of our success and the reason our customers come to us. This work
is our way of contributing to society.
Please believe that the concern of this company is the value of each person
rather than profit. Our mission is to hire the best people so they can work in a
pleasant atmosphere and ensure the well-being of their families. We offer
training and professional development, and we encourage spiritual growth. In
short, we want to ensure the growth of the whole person.
These words, spoken at just the right moment, made a positive impact on the Fesanco
workers, and the technical project was finished the right way in spite of its low
profitability.
Beginning of the takeoff
At the beginning of 2002, Ultraport and Complejo Portuario de Mejillones (CPM), the
new private port operator of Mejillones, hired Fesanco to dismantle a crane at the
Valparaiso port. This crane also had to be taken to Mejillones for its reassembly. The
one stipulation was that Rene Segura had to be the manager in charge of the entire
operation.
The business began growing and Miguel thought it was time to hire someone to
improve planning and control in the company and develop a pricing system to enhance
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profitability. Who better to do this job than Rolando Ramos, who accepted a part-time
position in the company?
With Rolando and Rene onboard, the Mejillones project got off to a good start, with
solid technical and financial planning.
New opportunities were on the horizon. Rolando kept in touch with colleagues at
Agunsa who were working in Ecuador and Peru. They told him that the main ports in
those countries were going to be tendered soon (see Exhibits 7 and 8). Rolando and
Miguel visited people in those countries to see if there were any opportunities for
Fesanco and to look for local partners. Since CPM was a subsidiary of the Codelco
Mining Company, the largest copper mine in the world and the main user and customer
of the Port of Mejillones, Miguel also kept thinking about the possibility of making a
foray into that industry (see Exhibits 9 and 10).
The Mejillones project ended in September 2002, a total success in terms of Ultramar’s
requirements for timing, budget, and quality, and the crane was officially handed over to
the customer. Top executives from Ultraport, CPM, and Codelco, as well as local
authorities and the head of Gottwald for Latin America, attended the inauguration
ceremony in the Port of Mejillones. After the ceremony, Miguel looked out at the sea of
Mejillones, slashed by the silhouette of the newly assembled crane, and thought about
the possibilities for Fesanco. He asked himself, “How can we take advantage of
opportunities without enough money to invest? Leaving the country to market our
services is difficult, and the mining industry is very competitive in Chile. On the other
hand, the economic crisis could end at any time, and this may be a good time to expand.
But I’m not sure my European partner feels the same way.”
His thoughts were interrupted by a phone call. He heard a familiar voice with a German
accent. “News travels fast,” he thought, as he said hello to Andreas Moeller. Andreas
congratulated him on the finished project and then posed the following question: “Do
you remember that several years ago I suggested the possibility of creating subsidiaries
in Chile, Peru, Brazil, and Ecuador? Well, my friend, don’t you think it’s time to untie
your boat and let sail it out to sea, with your destination being to create Gottwald Peru
and Gottwald Ecuador?”
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Case preparation questions
1. What is the problem (the dilemma) for Miguel in this case?
2. Which of the creation-oriented behavior principles of entrepreneurship (bird-inhand,
crazy quilt, affordable loss, and lemonade) is the most relevant in this case? Why?
3. What would you do next in the position of Miguel Fernandez?
Use the following framework to analyze the pluses and minuses of the challenges and
opportunities.
MARKET
PERSONAL
FEASIBILITY VALUE
Is it doable?
Technical feasibility
Market feasibility
Can I do it?
What does it take?
Who else do I need?
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Is it worth doing?
Financial feasibility
Affordable loss
Do I want to do it?
What excites me about it and why?
Source: Dew, Read, Sarasvathy, Wiltbank, Ohlssn, “Effectuation in Action, Work in Progress”, March 2009.

Exhibit 1: The Gottwald HMK 280E mobile crane installed in Port of Mejillones
10

Exhibit 2: Chilean foreign trade
11

Exhibit 3: Growth of real GDP during the Asian Crisis
12

Exhibit 4: Latin American exports to Asia in 1997
13

Exhibit 5: Largest Chilean ports
14

Exhibit 6: Income and Net Profit at the beginning of Fesanco
15

Exhibit 7: Latin-America port laws and reforms
16

Exhibit 8: Port Efficiency Index 2002 versus GDP per Capita
17

Exhibit 9: Most relevant copper producers in 2002
18

Exhibit 10: Mine project investments for 2003-2004
19