Cinemex: Cycles of Strategic Decisions and Strategy Alignment
It is March 2010. Having sold his stake in the company and detached from the CEO role, Mr. Miguel ngel Dvila is reflecting on the earlier years of his venture and the many events that occurred before. Among the key aspects that can be said of Cinemex, he well remembers a great deal of pressure from investors and partners, competitors, strategic decisions, operations, financial management, and a significant personal involvement and stress. However, he felt a surge of pride and enormous satisfaction as he realized that together with a great team of people, they had taken their company from a mere idea to having become a major entertainment company that revolutionized the movie theater industry in Mexico. Cinemex is a company dedicated to the development and operation of multiple complexes of movie theaters that emerged in 1993 as a result of the Project started by 2 Mexican and one American students at Harvard Business School, Miguel ngel Dvila, Adolfo Fastlicht and Mathew Heyman.
The idea behind the venture was to correct the deficiencies of the movie theater industry in Mexico. Enforced price controls by the Mexican government were removed. Also, due to the overly complicated worker union situation for the existing companies, the number of screens have been decreasing in Mexico from 3 500 during 1980s to less than 1 000 in the 1990s. Before the company startup, there were 12 times more people per screen than in the US and there was a very poor choice of rundown theaters at that time. Motivated by positive changes in Mexico, the founders of Cinemex focused on creating an excellent set of new, innovative services together with top-line facilities in order to create a new experience for the Mexican movie viewers.
The present case is intended to analyze and get a deeper understanding on how strategic decisions were made at Cinemex and how the strategy alignment was reached during the life-spam of the company at the present time.
The Conception Stage
It was 1991, Dvila, Heyman and Fastlich were first-year students at Harvard Business School. Dvila and Fastlicht got to know each other during gatherings of Mexican students, where they used to play the poker game. Dvila, Fastlicht and Heyman met during class breaks. Apparently the three of them have not many things in common, including their personal interest, looks, and backgrounds.
Do Not Copy or Post without authorization from EGADE Business School Mexico. Copying or posting is an infringement of copyright. REV: April 2010. Professor Ral Carral and Professor Alfredo A. Capote prepared this case. This case was developed from published sources and interviews with one of the company founders. This case is developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright 2010 EGADE Business School MEXICO. To order copies or request permission to reproduce materials, contact EGADE Mexico. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of EGADE Business School Mexico. Cinemex: Cycles of Strategic Decisions and Strategy Alignment
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As things turned out, the personal and professional interests of the three classmates started to convey. After some of their initial interactions, they got to know that Heyman prepared strategic plans and on managing real state for Garth Drabinsky, the head of Canadian Cineplex Odeon which ran an important chain of theaters with operations also in the United States of America. Heyman had a desire of setting up movie theaters outside the over-competed US market. Fastlicht, whose family is well recognized in the real estate business, got to understand the opportunity for movie theaters in Mexico from the real estate standpoint. Dvila, on the other hand, had a history of being one of the smartest students. He was the top student in his generation during his Bachelor of Science in Accounting at ITAM University. Later on, he worked for several Mexican government institutions and particularly as a business analyst at McKinsey in Mexico, one of the top global strategy consulting firms in the world. He was also awarded a scholarship at Harvard Business School from the Fullbright Program. Therefore, even though Dvila did not have previous knowledge in the industry or as an entrepreneur, he had a privileged intellect and a very strong analytical mindset to understand and develop the movie theater opportunity.
It was then during the Fall of 1992 when they took a second-year field study as part of their MBA curricula, where they created a business plan of the movie theater company in Mexico. The minds and hearts of the three classmates were deeply in the project. They began working on it, which required travel to Mexico, without sponsorship of any kind than their own scarce personal money. They decided to enter the annual HBS business plan competition. The project started to consume a significant amount of their time and efforts. By April 1992, they actually won the HBS competition. This created a significant momentum. Without any support from Harvard Business School, they entered the International Business Plan Competition at the University of Texas and presented the business plan again to a panel of judges. Among the judges, there were Venture Capital firms representatives. The panel publicly aired their concerns that the plan would require 6 million US Dollars, which they thought was a significant amount of money. Through back channels, the Harvard team learned that the judges thought that the team came across too arrogant.
Some of the key points in the business plan included strategic decisions such as:
The overall multiplex concept, with state of the art, high quality facilities of 4 or more screens per theater, which was non-existent in Mexico, and a higher price of over $3 US Dollars per ticket; this was almost 4 times more expensive than the $0.80 enforced price by the government which was now removed with the regulatory changes The scope of the business with 16 theaters, 158 screens, 32 800 seats, 2 330 people attending 35 showings per screen per week, which created the sufficient critical mass and economies of scale Locations of the cinema Multiplexes inside a growing number of shopping malls with excellent locations, surrounding facilities and parking (in Mexico City and other cities in the country), which was drafted by Fastlicht, who knew the real estate situation from his family business Excellent customer service, with careful attention to employee recruitment, selection and training The approach to film distributors, which included fewer prints for longer periods of time by moving films from large- to smaller-seating screens while attendance decreased over time; this approach was very appealing to distributors, as drafted by Heyman, who knew the industry The inclusion of well designed information systems and automation of payment systems with credit cards, including the forward purchasing of tickets with credit cards over the phone In summary and financially speaking this represented annual revenues of 71.6 million, annual theater cash flow level of 23.1 million, and annual net income of 10.2 million by mid-1999
The costs of preparing the business plan and attending the two contests represented for the partners cash problems, debts to the school and credit cards. By that time, and helped by Heymans connection with Garth Drabinsky, they started discussions with Cineplex Ordeon for funding. Initially, the partners asked for $250,000 US Dollars. Cineplex Ordeon agreed to the funding but only in exchange of 75% ownership in the venture, Cinemex: Cycles of Strategic Decisions and Strategy Alignment
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which the partners declined. Finally, Cineplex Ordeon agreed to fund the study with $30,000 US Dollars, which relieved the partners from more difficult money leakages.
The funding for the business plan was just a very minor deal in comparison to the further stages where they needed funding for stating up company operations. Also, by that time, the founders did not know the many problems, disappointments, lost sleep, delays in achieving the goals that they defined on paper, and intensity of conflicts among people who were so different in backgrounds, affinity and style down the road.
Seed Financing and Start-Up
The partners had to their advantage a good timing to start the business not only because of the regulations changes in Mexico, but also by attracting a valuable partner. Alan Friedberg recently retired from his position of chairman of one of the largest US theater chains, Loews Theaters. He is also the former President of the National Association of Theater Owners. He was introduced to the team by Matt Heyman at the time they were preparing the business plan. Friedberg agreed to serve as the proposed company chairman in return for a fourth of the founders ownership share. The partners thought that Friedberg would be most helpful in getting film distributors to provide films to the company. But Friedberg proved to be most helpful in gaining credibility during the funding process.
Starting from April 1993, the partners were making all possible efforts they could figure out to get the required funding to start their new venture. It seemed that things were right in place by having 3 smart, young, hard working Harvard MBA graduates together with the seasoned executive, and a well-drafted and awarded business plan. It was also a right timing regarding other business aspects. There was a significant and attractive business opportunity to capture. The Mexican market was practically virgin in a 100 year-old industry. There were no entry barriers or patent restrictions. There were a declining number of decadent competitors with run-down facilities. There were important regulatory changes in Mexico that would transform the industry significantly. They knew that there was a winning formula in the business, just as it has worked graciously in the US and in many other markets.
The first investor prospects that the partners met were the billionaire members of the J ohnson & J ohnson family who happened to finance Friedberg in his earlier US cinema company. The conditions could not be better. Friedberg and the J ohnson family knew each other, trusted each other, have done business together earlier. They have been successful before. Then they met. The meeting apparently went very well. The partners were all confident that they had a deal. But as things turned out they though that the team had little experience and they refused the offer.
The partners continued looking for possible investors during the next weeks but only to find refusals. They met with Bankers Trust, who argued that Mexico is too risky as an investment. They went to a fund run by Harvard University called Harvard Management which also declined the offer saying that they had a policy of not funding Harvard students. They went to the Chairman and CEO of a potential competitor, AMC, which replied a no go and that they are far ahead of them. They met with the CEO of another potential competitor, Cinemark, which also did not see the value partnering with them. They met Odyssey Investment Partners, a leading middle-market private equity investment firm. After 4 positive meetings they refused the offer with no apparent argument.
Time went by. They did not find a firm commitment to invest. The situation started to get even more complicated. By late May the MBA studies were about to end. The partners were looking for alternative job offers. Dvila was holding open job offers from investment form Goldman Sachs and the management consulting firm McKinsey. Fastlicht was holding a job offer from Pepsico while Heyman from Blockbuster video. They tried to set deadlines to get a firm investment commitment or to rather land on a respected job in an established company. That deadline kept extending into August 1993. Dvila and Fastlicht left for Mexico while Heyman went to New York to stay with his girlfriend. They finally had to let go the job offers risking the chances of not succeeding at raising money and loosing the chances to get a good job at once.
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But the team was really determined to get the required funding for the venture. Specially Fastlicht and Dvila were contacting bankers in Mexico. It was a frustrating process for them. In the Mexican culture people do not directly say no to other peoples faces. It required guesswork and involved more uncertainty. Among some of those bankers, specially Fastlicht contacted a friend of him from J .P. Morgan in Mexico. J .P. Morgan took some time to be in touch again, but their response was that they were doing due diligence and that they wanted to talk further with the partners. Fastlicht and Dvila contacted Heyman in New York and asked him to contact J .P. Morgan in their local offices in New York.
During all this time of uncertainty and failed efforts, a small victory was when Fastlichts grandfather helped to organize several investors with $2.5 million US Dollars of soft money. This money included $500,000 US Dollars from Friedberg. Finally one bank was willing to loan $2 million US Dollars if the partnership would put $1 million in escrow. This scheme would represent a slower start with just one theatre, and they had to refuse that offer along the way.
Not hearing anything further from J .P. Morgan, they decided to make one significant last try. They rented a room at the luxurious Hotel El Presidente for $2,000 US Dollars and spent money into popcorn and a simultaneous translator for English speakers. They organized a presentation for 40 people including private investors, bankers and film distributors who agreed to come showing support to the project. The partners wives served as hostesses for the meeting. The meeting started very well with the presentation of the project with a terms sheet proposing that the partners keep a 60% share of the business. Thereafter the meeting deteriorated into questioning and disputes among the attendees. The meeting lasted for 3 hours. But the people from J .P. Morgan stayed after the meeting and indicated their interest. J .P. Morgan specially liked the idea of an emerging middle-class market where there are no exact alternatives of entertainment, competition is weak, the market was virgin, and being in Mexico, where surely there will be economic growth.
It was by October when finally J .P. Morgan offered to invest $4 million US Dollars with a limit of 40% of the total equity, with a second installment of $4 million US Dollars on the same conditions. The proposal required the partners to make a $100,000 US Dollar investment outright, with some $33,000 US Dollars for each partner. They offered them the opportunity to earn, as a group, increments of 2% in equity for each of 5 annual targets that they set. They also offered two additional 5% increments that depended on the value of the company at the time it might be sold. This offended Friedberg. He abandoned the project, giving the other partners his share. J .P. Morgan also thought that the project needed hungry, young talented men and not a well seasoned executive who has achieved a significant success already. Friedberg was replaced by Mark Fastlicht, Adolfos father. Mark Fastlicht was also an investor with relationships with important people. His appointment was fully supported by the other investors.
J .P. Morgan convinced the partners that they needed to ask for much more money than what they initially considered. They were worried that other competitors with much stronger financial arm would take over the market fast. The support of J .P. Morgan was very positive and it created a domino effect with more investors to join. In J anuary 1994 they closed the deal for $67 million Mexican Pesos, which was equivalent to $21.5 million US Dollars at that time. It was the largest venture capital startup in Mexico in history at that time. They did the whole deal without a lawyer. This is something that drove Heyman crazy, even though they did not have the money to pay one. But this did not stop here. After 15 days they had up to $11 million US Dollars. In less than 2 months they grew to $15 million US Dollars. Since the partners were still inexperienced in these deals, J .P. Morgan acted as an equalizer in the negotiations, so that they took care of the partners so that they did not give away much and maintain their motivation. The final share of ownership of the founding partners was altogether 16% in case that they achieve their internal rate of return goals.
First Developments of the Venture
It was difficult to sort out the required funding for the new venture. Accomplishing that stage required tough decisions, such as Friedberg to leave the venture, getting more funding than initially thought, founders giving Cinemex: Cycles of Strategic Decisions and Strategy Alignment
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out their share of the company, and aligning investor partners into the same vision and strategy. However, now with the money at hand, the management team had to implement and deliver the expected results. No doubt that within the partners minds there were fears on the very real chances that all that money gets lost. They soon realized that getting the required funds was just the beginning.
A significant first decision was the organization of the company. The most common practice in the organizational charts of companies is to put in place a CEO with functional and staff areas reporting to him. In the case of Cinemex, the founders decided to structure the company with 3 CEOs with clearly defined responsibilities closer to the partners competencies and interests. Dvila was assigned the responsibility of operations and finance, which included human resources, customer service and information technology. Fastlicht was responsible for site selection, lease negotiation and construction. Heyman was primarily responsible for film buying, concessions and advertising. This decision had the advantages of a clear focus on these 3 important areas with a CEO role and responsibility. But since there was no clear single top manager within the company, it was also another source for conflicts. Investors also expressed their concern about this particular issue. It is not so easy and clear cut from the managerial perspective.
As the company was legally constituted, the first developments started to unfold. They started hunting a deal to open a movie complex on the relatively new, premium area of Santa Fe, inside a top shopping mall. Cinemex had the disadvantage that the economy was booming and there were many exhibitors wanting to set their shops, amenities, restaurants, and facilities at the shopping mall. Also the theater business industry in Mexico did not enjoy a good reputation and the developers did not understand the multiplex cinema concept. However, the team gave a very professional presentation together with their competitors on the same table. They managed to convince the developers. The developers were attracted to their overall approach, economic package, and the fact that J .P. Morgan was with them. There was also a good chemistry with the developers since Fastlichts family was in real estate for generations. Almost at the same time, a second prominent location became available. It was in the Altavista region of Mexico City. Cinemex agreed to the deal with a significant up-front cost of 1.1 million US Dollars and a costly lease.
By December 1994, 5 months after the funding of Cinemex, the Mexican economy went into a deep crisis, perhaps among the worst in Mexican history. A severe impact for the company was on the devaluation of the Mexican currency. The $67 million Mexican Pesos, which a month back represented 21.5 million US Dollars were instantly converted to $13 million US Dollars. Even if there were ample funds to open the committed 2 complexes, the devaluation of the Mexican currency represented a great constraint in terms of growth capacity. The crisis also brought some more problems. Later they realized that Cinemex had realized a currency exchange gain on $4 million US Dollars they were holding. They had to pay to the Mexican government a 34% income tax on that. All of these problems made Cinemex management to take another important strategic decision: to open theaters only in the metropolitan Mexico City area.
As pressures started to surmount during the crisis, the first hiccups among partners started to appear. Specifically it came up the compensation packages issue. Initially these were stated in Mexican Pesos roughly equivalent to $70,000 US Dollars. As the local currency devalued, this amount was converted to half in US Dollar value. Heyman was especially sensitive to this issue. He thought that he should have more than the rest of the managing partners because he was supporting financially his father in the US and he thought he sacrificed the most by going to Mexico to live. Fortunately, the partners were able to negotiate a salary relief with the investors and restored all of their salaries in US Dollar equivalents.
Many other conflicts between the managing partners soon followed. Heyman was particularly negative against some of the informal business practices from his partners, and especially with Fastlicht. The Santa Fe deal was made only on a handshake basis. Then, the contractor gets into trouble after the devaluation. The construction of the shopping center slowed down significantly. In order to get the construction work back to speed they had to give the contractor a loan of $5 million Mexican Pesos. They put all that money in and even until J uly 1995 Cinemex had only a handshake on the lease. Fastlicht argued that it is a common business practice in Mexico and it was necessary to stay in business in the prime Santa Fe shopping mall. Heyman was hesitant to believe Fastlicht and he lost trust in him.
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Thereafter, more conflicts arose. Heyman was arguing over the many details of the business, including the colors of the logo, the uniforms, even the popcorn bags. Dvila acted as a mediator of conflicts. But the partners were bickering intensively to the extent that Heyman wanted to quit. Fastlicht and Dvila became frustrated with this behavior and if they would have enough money to cash him out, they would have.
But fortunately, not all was bad with the new venture. Even if the crisis brought significant pressures and problems there were some positive aspects from the devaluation. The overall construction industry went into a economic downturn. This meant that cash proved to be very valuable during the tough times. The leverage in dealing with real estate developers, contractors and local authorities improved significantly. Also, the devaluation scared off foreign competitors. As a result, Fastlicht started a more intensive look at interesting locations for new theater openings, and the tough times helped to consolidate the company more slowly with fewer but firm steps. These positive aspects, together with the resolution of the investors to agree with a compensation relief for the managing partners, brought some peace of mind and calmed down the conflicts. Also the development with the theater facility at Altavista has advanced significantly by mid-summer 1995.
The First Openings and Major Problems
A very important decision taken by the founders in the business plan was to replace the 70-year old corrupt workers union STIC with the Progressive Union formed under the more liberal administration of President Salinas. This decision implied confronting the existing union and creating a new set of contracts, facilities, and affiliating the workers with a new workers union. This decision written on paper proved to be very difficult to implement in real life. It tested the partners as managers and business men, but most of all, as men of courage. This confrontation implied for the founding partners to even risk their physical integrity and life.
The STIC union wielded its power aggressively. For more than 70 years the union controlled almost every aspect of Mexican film industry from production through distribution and exhibition. There were many problems with the existent workers union that made the whole industry decadent and uncompetitive. There were vicious relationships between workers and different factions of the workers union. There was a preponderant corruption that benefited their leaders and members. The exhibitors had two payrolls. One payroll was for the nonunion workers, who got no benefits, or pension, or perks, but did all of the work. There was also the payroll for the union workers, who got all the benefits and perks, but did not work at all. The common practice for union workers was also to inherit their jobs from their parents or even to sell their jobs to the best money offer. The ticket prices were imposed by the government to an equivalent to roughly 0.80 US Dollars. By contract, the person behind the counter in the candy store selling popcorn could not dispense soda, and vice versa. If the candy shop is to sell both popcorn and soda there must be two lines. The existent conditions mainly imposed by the STIC and government at that time made the whole industry difficult to keep alive. The film exhibition industry was in steep decline. From 3,500 screens that existed in the 1980s there were only less than 1,000 screens in the 1990s. Some of the existing theater owners even sold their facilities as pieces of land with the bankrupt company so that they could avoid the salary and contract revision with the workers.
As a new law passed in December 1992, it reversed the control of the government and the unions on the industry. The new legislation mandated sweeping changes. The government decided to sell off their theaters that it had to own over the years. It would back off from film production, exhibition and distribution. Price controls on tickets were lifted. But still the STIC union was desperately trying to hold their ground. Cinemark, a US chain, opened operations in Mexico in 1992 without the enrollment of their workers in the STIC. Cinemark opened a theater in Aguascalientes, a town in the neighborhood of Mexico City but without the mass market of the Capital City. This was good to avoid attention from STIC. Cinemark opened some more theaters but it was still a small chain but growing. STIC feared to lose control over the theaters as new chains enter the market and the existing chains leave them. Other operators trying to break STICs monopoly had suffered rowdy picketing for months and even years, with repeated rocks thrown through the theaters. The opening of the first Cinemex complex represented a major threat for their survival as a union.
Dvila knew how desperately STIC became and they were after him personally with his first opening in Altavista. Three days before the scheduled opening, Dvila was interviewed by Reforma, a popular newspaper Cinemex: Cycles of Strategic Decisions and Strategy Alignment
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in Mexico City. During the interview, he was told at that precise moment 150 people under STICs leadership had broken into and occupied the facilities. The staff and management were involved at that time in a training session and had locked themselves in an upstairs office. Then, acting on the same moment he told the reporters that if they want a real story they had to go with him to Altavista. Dvila went to the theater with the reporters and saw the union leader ready to make a speech to the public and the media. He then started his speech and accused Cinemex of taking the jobs of the union members to give them to others. Dvila stepped forward and called him a thief and traitor to his people. The leader reacted by impulse and physically attacked Dvila in front of the cameras and the reporters. This was a widely reported event.
The actions of STIC worked against them. Cinemex sued and won a law suit against STIC for trespassing. But it was not that simple to get rid of them. As Dvila announced a false opening of the theater, a number of protesters camped outside. But fortunately just one day before the real opening, the authorities were able to arrest the union leader and hold him for several days in jail due to the building occupation and his attack. Now with the leader gone for some time, the founders thought that it was possible to open the theater with very few protesters outside. There were policemen guarding and protecting the theater. Dvila gave the order to lit the box office, pull the curtain, open the refreshment stand, and they all invited people to come in for the big opening.
By Wednesday afternoon, August 2 nd , 1995 the Altavista multicinema complex opened to the public. After 2 or 3 days from the real inauguration, there was an enormous crowd showing and there was a significant amount of free passes given. The first days were disastrous. The water system failed and the managing partners were running around with buckets of water to flush the toilets. The huge lines at the entrance were impossible to manage. The air conditioning failed. People came out of the theaters dripping wet of sweat. There were many people shouting. Dvila and Heyman were mad with Fastlicht and demanded him to repair things for once. But contrary as they could think as a bad experience, it turned out that people really enjoyed the projection quality and sound, the concessions were outstanding, and the choice of several movies at the same place was fantastic for the customers. The major concern they had was the price of the tickets, which was roughly equivalent to 3.35 US Dollars. It was 4 times more expensive than the current normal cinemas.
The battle with STIC was hard. The partners received dead threats. Dvila, in particular, was the unionist worst enemy and main target. Dvilas weight dropped from sixty-five to fifty-eight kilos. But fortunately for Cinemex and the industry in general, the authorities supported the weakening of the 70-year old regime that plunged the industry into disaster. But now with this issue resolved, they were poised for a larger success and more openings.
After significant delays due to the crisis, finally the Santa Fe complex opened to the public by October 1995. It was only 2 months after the Altavista opening. Now with the Altavista complex having more controlled operations there was an important learning that the managers had to avoid the many operational problems and mistakes for Santa Fe. Altavista was targeted for high A, B, B+segments. But Santa Fe had even more demanding, higher class segments. Santa Fe was located in a very exclusive, premium area of Mexico City. The operations had to run much better and the facilities should be high class. Santa Fe ended up being a great success for Cinemex.
Strategic Decisions on Theater Openings and Target Segments
The Altavista and Santa Fe theaters demonstrated in a strong way that the founding partners were right on the concept. It proved to be successful for people among high class neighborhoods. It was a choice that the market did not have before and they were enlightened with it. However, nobody would know if the same concept could succeed in poorer neighborhoods. In the business plan analysis they discovered that the market potential was significantly undeveloped in comparison to the US. In the metropolitan area of Mexico City there were 12 times more people per screen than in the US. The question remained if there was really a mainstream market that includes also lower classes that would demand such services. It remained to be seen if the cause for the lack of development was the fact that theaters at that time were outmoded, run-down, and under malpractices influenced by the prominent STIC union. However, it was not an easy decision. The price of the ticket of around Cinemex: Cycles of Strategic Decisions and Strategy Alignment
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$3.35 US Dollars was about equal to Mexicos daily minimum wage. Therefore, it was logic to price the tickets at a lower rate but still higher than normal. The key question was: if the same concept was to be offered for lower class segments, even if they have to pay much more, would they go for it?
This is how another significant strategic decision taken in the business plan came into action: to open theaters with the same concepts for lower market segments. The company leased space for a 10-screen complex in Los Reyes, a poor neighborhood near the womens jail in Mexico City. This was a critical step for the company. If the concept did not work, Cinemex would be limited to being a niche player for upscale neighborhoods. Therefore, the company would not have much of a market, and therefore not have much of a business. This would make all of the efforts in vain if it did not work.
Ironically, Heyman was the most optimistic about the lower market segment strategies among the founding partners, for once. As a foreigner he did not understand the Mexican market as intimately as Dvila and Fastlicht did. But he knew that the best performing theaters in the US market are precisely in poor neighborhoods. In the US poor people have significant movie attendance. They even go to the movies to have dinner while watching the movies instead of going to fancy restaurants, as rich people do. Also, another advantage for the cinemas in poor neighborhoods was the real estate costs are much less. However, it implied more effort to run the theaters. There needed to have much better security, cleaning, and overall maintenance. But the profitability was significant and that compensated in a strong manner.
Very close to the new site there were two old twin two screen theaters. Actually those theaters were extremely successful. They were having about 3,000 people per screen per week. Heyman became even more enthusiastic with the idea of opening the theater there. So they did. Construction began 1995, and in May 1996 the theater opened.
Once the theater opened with great expectations, they had only very little attendance. Despite the fact that ticket prices were about half of the other Cinemex theaters only few people dared to enter. Dvila observed that local people stood outside the fancy lobby steering from the glass doors and windows. They did not seem to understand that the fancy place was meant for them. They were not used to them and thought that it was intended only for rich people. Dvila instructed his employees to go outside, interact with the crowd, and encourage them to come in and look around. Gradually, some of them did. Some of those people had never walked on wall-to-wall carpeting or being in such nice places. It was part of educating the market to feel comfortable with the choice of Cinemex. Soon, the complex was a success. Crowds of people started to attend the showings, proving that the business model applied to a large mass market.
In 1996, in its first round of capital, Hoyts, a US-based movie chain, invested 22 million US Dollars in exchange of 30% of the company. This meant that already after a year of operations the company was already valued at 60 million US Dollars, which was a great achievement already then. Having this cash enabled Cinemex to finance their expansion in Mexico City.
During the first years of operations they were facing critical decisions on theater openings, as the company was still young and growing to achieve the required economies of scale. One major decision was whether to open or not a theater complex in the upscale mall located in south Mexico City - Perisur. The tough decision regarding Perisur was that the prices of renting the space were significantly high and the overall margins were very low in comparison to other theater operations. The funding required to open Perisur was almost similar to opening 2 or 3 theaters in other parts of Mexico City. Also they were facing the risk of cannibalizing their Altavista complex, which was located somehow near Perisur. At the end, they decided to not open Perisur and rather keep their resources for other theater operations.
At the same time that Cinemex concept started having a major success, other competitors were quick to react as J P Morgan has foreseen. Organizacin Ramirez, which owned the largest Mexican chain of movie theaters, started a new brand and concept of cinemas called Cinpolis. They took the same concept as Cinemex with great facilities, carpeted floors, top notch quality of sound and projection, quality seats and excellent candy stores. While Cinemex was growing only in Mexico City area with limited resources and funding, Cinpolis grew much more aggressively. They went nationwide and with many more theaters than Cinemex. Having Cinemex: Cycles of Strategic Decisions and Strategy Alignment
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being on the business for a long time and with a strong financial arm, they were able to commit to much larger investments and leverage their own properties and operations. Whereas Cinemex turned down the opportunity to open a complex in Perisur, Cinpolis came on board instead. This opening was a huge success for Cinpolis. They positioned the brand very well in the upscale southern neighborhood of Mexico City and the attendance was very significant and much more profitable than anyone could anticipate.
As Dvila now reflects on this specific decision: this was the result of us being arrogant with a great start of the company and being blind to the opportunity that we had on hand. Cinpolis took that opportunity for themselves
But as the operations needed more scale and to involve a much more massive effort, the operations needed more detail and attention.
Strategic Decisions over New Theater Businesses and Operations
Not long after the company opened the Altavista facility, Fastlicht, with his personal connections with the media mogul Emilio Azcrraga major shareholder of Televisa and the largest media company in Mexico and Latin America, proposed to his partners the idea of selling on-screen ads. He had no prior experience in ad sales but he strongly advocated for it. The idea was not new. Their major competitors, Organization Ramirez, had a long tradition of having commercial messages preceding films in Mexican theaters. This was also a practice in the US and in many theaters around the globe.
Fastlicht first retained Televisa to serve as Cinemex sales agent. As the worlds largest producer of Spanish- language TV programming, this arrangement seemed logic since they already knew the business and had multiple outlets. However after 3 years, Cinemex took back this effort. They worked directly with advertisers to develop ads for exhibition in theaters. Often, this resulted also in ads that could be repurposed for both theaters and television but making sure that they were high quality and distinctive. Actually, some of the best ads shown in theaters made a great experience and a significant impact to the audience. This business grew significantly. According to their own estimates, the theater screen market in Mexico represented $40 million US Dollars a year at the turn of the century. Cinemex took the lions share of that business during that time.
Cinemex also ventured into other related businesses that the founding managers thought could be close to their current business and could leverage their own resources to increase sales significantly. One strategic decision was with live entertainment business. They tried to have live theater plays in some of their top facilities. Also they wanted to offer a variety of live shows complementing their movies offer. But it turned out to be a major failure. This particular move resulted in around $4 million US Dollars of losses for the company. After a series of failed attempts they decided to terminate the new venture and rather focus on their mainstream movie theater operations and grow that business much more.
Cinemex, as a 3-headed monster with 3 CEOs had an interesting dynamic. Few companies prosper with 3 equally powerful leaders at the top, which was a concern for J P Morgan since the beginning. However, it proved to work out well in improving the position of Cinemex and strengthening their core business, but not without a great deal of challenges.
Heyman, who was in charge of getting the best distribution of films for Cinemex, did a fantastic job. He executed the booking and exhibiting of films to the heart of the strategic planning and real estate functions. This meant that the content of movies shown had a great acceptance by the crowds. He also mastered very well what films to show in large and small screens. Cinemex relationship and leverage with the film distributors was also excellent. This made them having the best content possible with related materials and promotions.
Dvila, who enjoyed very much his Service Management course at Harvard more than any other course, was the operations guy at Cinemex. He was in charge of recruiting, hiring, training, accounting, company policies, and overall operations. Dvila also differentiated Cinemex from his operational stand-point. They started hiring college students for entry-level positions, dressed them up, and paid them about three times more than Cinemex: Cycles of Strategic Decisions and Strategy Alignment
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organizations like McDonalds were paying to new hires. They created the first Mexican implementations of great new cinema services using IT and technology-based processes like Lnea Cinemex which relied on a phone and credit card system that customers could use for advance systems. Also they implemented credit card systems and efficient ticket sales at theaters. Their operations were well standardized to a great quality of service and the employees felt a great proud by working at Cinemex.
Fastlicht, who ran the real estate and on-screen ads operations of the company, did also a very good job, mainly with his relationships and strategic planning activities to setup new facilities and advertising businesses for Cinemex. It served Cinemex very well.
The 3 founders of Cinemex soon realized that they were running their own areas almost single-handledly, without input from his colleagues. As the business started to grow much more significantly, each founder got himself more involved to his specific problems. This pulled them apart. This is when they decided to take some steps to formalize their communications. They began meeting for breakfast at a local restaurant every Tuesday morning. They compared notes, discussed about specific important issues, and made plans.
An interesting rule prevailed in their decision making process. Most of the time, they were thriving for unanimity. But when they all did not agree on the decision to make, they settled for a two-to-one vote. This assumed that the odd man out would go along with the others. However, whenever a decision fell into one partners own sphere of influence, that partner got a quality vote. This meant that it could even outweigh the others 2 votes. When decisions were on booking films, Heyman got the quality vote. When decisions were related to ads and real estate, Fastlicht had the quality vote. When decisions were on quality of service, Dvila had the ultimate word. But unfortunately, this did not always happen. Every now and then, decisions touched upon a variety of issues and spheres of influence. This is when decision making had its complications within Cinemex. Mostly, it was even more complicated considering that the founding managers were so different from each other. This is how strategic decisions were very much as a result of the discussion of 3 CEOs. It was not always easy to push for large decisions that touched upon major issues that involved the company at large. But the main benefit of the partners arrangement was that important decisions were actually the result of consensus and discussions of the 3 very different partners. Decisions were not just part of the inner mental processes, likes and dislikes of a particular individual at the helm of the company.
Investors Strategic Exit and Entry Decisions
It was already over 5 years since the founders started with their project. They have been growing significantly to have a company with around 2,000 employees, annual sales of nearly $150 million US Dollars, and over 20% of market share nationwide in Mexico. They were already a very significant player in the market. They knew quite well the market, its core business, carried very little debt and had money in the bank. They had money at least to finance organic growth and cover for whatever eventual operational instability. Cinemex was very well consolidated from being a medium-sized to a big company in Mexico in a very short period of time. But they had some challenges. They were still lagging behind Cinpolis / Organizacin Ramirez with a stronger financial arm to grow nation-wide and expand their business significantly. They also foresaw that the industry was also going into a downturn. The Mexican economy was then growing but it has always being a country with financial instability as the founders experienced during the early years. So, more times of economic crisis could well be expected. The founders were restless on what to do with the company.
The good business and financial situation with Cinemex at that time made the company look very good for a being potential acquisition target. It was then that the founders and shareholders thought it was time to sell the company to somebody that will inject new money and stamina to the business. Also the founders thought that their experience with Cinemex needed to come to an end for them. It was then that they engaged into an auction to sell the company. They had big efforts into making a due diligence on the company, preparing all of the required documents and actively engaging from all perspectives into the auction.
Unfortunately for the owners and shareholders of Cinemex at that time, this auction process came into an end without achieving any result. The potential buyers, who were other players in the same industry mostly from the Cinemex: Cycles of Strategic Decisions and Strategy Alignment
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US were having great financial difficulties during that period of time. The focus of those companies was more on how to stay alive rather than expand their own business. Ironically, so it seems, Cinemex had a much stronger financial structure and growth than most of the potential buyers, even if they were smaller in their operations. Cinemex had lesser amount of theaters and sales in overall than the average cinema chain in the US, but nobody was interested in buying the company at that time.
Fortunately, the auction remained more or less unnoticed to the employees. Morale did not suffer much during this process. But the inability to sell the company kept percolating into the founders minds and made them re- think what to do with their lives. Heyman, more than his partners, was bitterly disappointed. He thought that he would remain for quite a long time as international executive in Mexico. It looked to him as he would be trapped into that role for the rest of his life. Also he felt like he did not belong to the Mexican culture. He did not like the fact that Mexico was very much about whose father and mother you come from. He felt very much like an alien in Mexico while at the same time he was very much related to the US culture in Los Angeles or New York, where he wanted to live.
In the meanwhile, both Dvila and Fastlicht remained committed to a carreer and life in Mexico City. They were both wandering about the possibility of a leveraged buyout. For Dvila, who had always had dreamed of going into politics, it was a possibility to accumulate wealth for running for a public post. Dvila, actually had this dream since he was a small kid and his father worked in the government in positions as high as undersecretary. But as a result of the failed auction the three partners felt uneasy about the business situation of Cinemex together with their personal careers. None of the founders felt indispensable. They knew that at some point the three-headed-monster structure eventually would have to be dismantled. They also thought that it was necessary to offer opportunities for career advancement for young talent at Cinemex for the company to prosper and grow much more.
During 2000 and 2001 the company had to hold on with organic growth. Without the best possible motivation of having failed the auction to sell the company and the founding partners being stuck in managing the 3-headed monster, they were still growing in their geographic territories with theaters near Mexico City in the neighboring towns of Toluca and in the outskirts of Mexico City. The business remained healthy, and even with better than expected cashflows that helped mainly to support growth. Cinemex was having about 50% market share in the markets where they were competing. They were still in contact with Onex, the Canadian-based cinema chain, for the possibility to sell the company to them. But they did not return their calls and they seemed to be distant to Cinemex.
In 2002, the conditions to sell were even better than before. The company was doing well. It generated a considerable cashflow and they were making great profits. But the most pressing issue was that the founding partners needed to give the expected return on capital to their shareholders to be able to get their additional ownership percentages. It was then that the partners received a letter of intent from Cinemark together with Organizacin Ramirez. Cinemark still remained a small player in comparison to the rest. They had a strong ambition to expand. Their managers were planning to have an IPO to finance the expansion. The deal called for the obliteration of Cinemex, and the division of its assets between Cinemark and Organizacin Ramirez. Organizacin Ramirez had a strong financial arm to finance the possible partial acquisition of Cinemex. This would mean that the Cinemex brand together with much of the Cinemex team would disappear. The partners were not in a hurry to return the signed letter. Dvila, in particular was not happy with this offer and seeing his company to be broken apart. His heart felt closer to the company that he saw it growing from a mere idea into the current state. He wanted to see the company, the name, and the people who they had put together as a team to continue. That was a strong motivation for him.
Unexpectedly, Onex, the large Canadian movie theater chain who was also the failed auction and many other times being in contact, called back. They invited Cinemex to New York for further talks about the possibility to merge. This invitation made Fastlicht, in particular, uncomfortable. He was wandering if this was for real or if it was simply a move to break the Cinemark deal? Fastlicht suggested Dvila that if they are really serious, they can come to Mexico. So they did. Few representatives with a team of negotiators came to Mexico. Soon they found out that the prolonged silences few months ago were the result of a proposed merger between Onex and Cinemark that did not go through. Onex then felt free to go after Cinemex after that failed attempt. Cinemex: Cycles of Strategic Decisions and Strategy Alignment
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Once the conversations started to take shape between Onex and Cinemex, Fastlicht called Cinemark to tell them that another suitor is entering negotiations to buy them. Fastlicht offered Cinemark the chance to up their offer. Cinemark declined. Cinemark also reminded Fastlicht that the deadline on their offer was approaching. With the anxiety that this decision implied, the partners let the Cinemark deal to expire while focusing on the Onex deal without any firm guaranty that it would go through.
Fortunately for the partners the deal with Onex progressed well. By J une 2002, 48 days after the negotiations formally started, the deal was done. Ironically, in the meanwhile, Cinemark IPO failed. Cinemex sale price was $300 million, with Onex taking 58% ownership and Los Angeles-based Oaktree Capital Management taking the reminding 42% ownership. This deal also released Heyman and Fastlicht from their current executive positions while appointing Dvila as the sole CEO of the company. Fastlicht remained as a consultant. Heyman at long last, would go home. He went to live on the beach in Key Biscayne for a year and then he moved his family to Los Angeles. However, every now and then, he misses the satisfaction of running the three-headed monster together with the other founders. He misses the business and the satisfaction of betting heavily on Spiderman over Titanic and being proven right. Mexico was the only territory in the world where Spiderman beat the most successful movie of all times (before Avatar from the same Director J ames Cameron).
J .P. Morgan the original investor that took the big chances with Cinemex has expressed its satisfaction with the deal. They even wrote few lines about Cinemex in their global annual report 2002 on page 11:
Grupo Cinemex is the leading multiplex movie theater operator in Mexico City, with a market share of more than 50%. An investment by JPMorgan Partners (JPMP) in Grupo Cinemex illustrated the firms commitment to portfolio companies through the complete business and investment cycle. JPMP backed the companys strong management team and proven business model. In May 2002, JPMP, along with other shareholders, sold its investment in Cinemex to an investor group, reporting returns of more than three times its invested capital.
The investors got 25% on compound annual interest in US Dollar value for the eight years that they remained with Cinemex. This was a very good return. But 24 months later, by J une 19 of 2004, Onex and Oaktree Capital Management sold 100% of their Cinemex shares together with some more businesses to 3 investment funds - The Carlyle Group, Bain Capital and Spectrum in exchange of $1,500 million US Dollars.
Dvila kept his role as CEO of Cinemex during 3 more years. In J une 2008, he retired from the CEO role. The shareholders appointed Alma Rosa Garca Puig, a trusted employee that surged among the ranks of the team that the founders created. Garca Puig was first hired in 1995 by Matthew Heyman to analyze the profitability of firms. Her role evolved into supervising programming of films and strategic analysis with Heyman. But her great analytical and leadership capabilities made her to progress inside of the firm and became a very valued member by the founders of Cinemex.
At the end of 2008, a major Mexican group headed by Germn Larrea, the third wealthiest person in Mexico with over $7,500 million US Dollars of personal wealth according to Forbes, acquired the company once more. Larrea, the major shareholder of the movie chain MMCinemas, decided that they would buy Cinemex for $3,500 million Mexican Pesos (about $270 million US Dollars with an exchange rate of $13 Mexican Pesos per US Dollar). MMCinemas had at that time over 100 complexes, twice more than the 44 complexes that Cinemex owned at that time. But interestingly, Alma Rosa Garca Puig, who came from the acquired company Cinemex, was appointed to continue in the merged company as the CEO instead of Alfredo Casar, the CEO at that time of MMCinemas. This move meant also the continuity of the brand Cinemex with its great position in the consumers mind. This also represented the continuity of the management team at that time. They promised at that time to expand their base of close to 150 complexes and 5,400 employees with 200 more complexes. In 2009, Alma Rosa Garca Puig was ranked number 12 among the most powerful Mexican women even at her 38 years of age.
During the second quarter of 2009 there was a AH1N1 influenza outbreak in various parts of the world, being Mexico one of the most affected countries. Unfortunately for the movie theater business, the authorities Cinemex: Cycles of Strategic Decisions and Strategy Alignment
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enforced the closing of theaters to avoid a mass contagion. Fortunately, this disease was controlled and live came back to normal in Mexico. But it affected the business significantly. Also by that time, with certain degree of surprise in the media, it was then in J une 2009 that they announced the departure of Alma Rosa Garca Puig. But Cinemex continues to be firmly positioned in the market as a strong brand, a growing company, and having now the required financial muscle behind Larrea to challenge Organizacin Ramirez.
Cinemex: Cycles of Strategic Decisions and Strategy Alignment
2005 2006 Change% Number of Employees 2183 2527 15.8 Efficiency (Sales / Emp $) 0.7 0.7 Source: Cinemex
Cinemex: Cycles of Strategic Decisions and Strategy Alignment
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Exhibit 5 Cinemex in Brief, Year 2005
39 complexes, 438 screens & 87,000 seats Leader in Mexico City area with 50% market share At a national level, market share of 20% with presence in Morelos, Toluca, Guadalajara and Estado de Mxico 27 million tickets sold in 2003 Direct employment to 2,200 people and indirect employment to 6,000 Cinemex was building 2 complexes in 2005, and is planning to open 5 more in 2006
Source: Cinemex
Exhibit 6 Cinemex Organizational Chart, 2005
Source: Cinemex
Note: The functions that were subdivided in 3 CEOs were later consolidated after Dvila took over as sole CEO of Cinemex
Cinemex: Cycles of Strategic Decisions and Strategy Alignment
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Exhibit 7 Backgrounds of Cinemex Founders
Matthew D. Heyman, age 35, was primarily responsible for film buying, concessions, and advertising. Heyman received a Master in Business Administration from Harvard Business School and earned a Bachelor of Science degree from New York Universitys Stern School of Business. Prior to business school, Heyman served as Vice President, Business Affairs and Executive Assistant to the CEO at Cineplex Odeon.
Miguel Angel Dvila, age 31, was primarily responsible for operations and finance. Dvila received a Master in Business Administration from Harvard Business School and earned a Bachelor of Science degree from Instituto Tecnolgico Autnomo de Mxico (ITAM). Dvila is also a Certified Public Accountant in Mexico. Prior to business school, Dvila served as Business Analyst for McKinsey & Co. in Mexico City.
Adolfo B. Fastlicht, age 30, was primarily responsible for site selection and marketing. Fastlicht received a Master in Business Administration from Harvard Business School and earned a Bachelor of Science degree from Boston Universitys School of Hotel and Food Administration. Prior to business school, Fastlicht served as Executive Assistant to the CEO at Grupo K, a Mexico City-based real estate developer owned by his family.
Exhibit 8 The evolution and strategic business decisions of Cinemex during 1991-2009
Conception of business case Seed financing 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 First Theater openings Targeting customer segments Major business decisions Strategic Exit decisions, business consolidation