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Alberto Duran, founder and CEO of Mundivox Communications of Brazil, has seen the world of telecommunications from various perspectives. He worked in the telecom sector for J.P. Morgan in New York, and Bain & Company and Monitor Company in Boston and London. He specialized in the development of strategies for major industry players worldwide, including privatizations and M&A in North America, Europe, and Asia. In 1999, Duran founded Mundivox Communications in Brazil. In an interview with Knowledge@Wharton, he talks about the troubled environment in the wake of the slowdown and the key issues in managing a company that is growing at an astonishing 100% a year.
An edited transcript of the conversation appears below:
Knowledge@Wharton: What has been the impact of the global financial crisis on Brazil?
Alberto Duran: That depends [on if you’re asking about the] short term or long term. In the short term, it has been incredible what has happened with the [real-dollar] exchange rate. Some say it is good — that it is a natural path, because the real was overvalued. The real was at 1.60, 1.55 during the summer [though it went up to 2.4 by December]. These are incredible numbers that we have not seen for so many years. Remember that right before Lula [President Luiz Inacio Lula da Silva] was elected for the first term, the real was four to the dollar. It has been an incredible shift, historically.
In the long run, I believe that Brazil is very solid. Why? Brazil has a rich population, and a growing middle class to manufacture, to produce. They are incredibly aggressive and ambitious. And you have poorer people who, despite the social issues, want to come back into a market, want to go into a market. And finally, a lot of people, and I see that in my employees, are looking for the steps they have to take in order to make money, in order to be able to work.
I travel around the world. I go four or five times to Asia every year. I am in the U.S. every month. I am in Europe three or four times a year as well. I see huge changes in what is outside the so-called “developed market.” These markets consist of incredibly rich countries. But they have not been able, throughout history, to tap into opportunities for their population. So I am extremely positive about Brazil. Obviously, you have to go through the shifts of a developing country, which is still very bound to market forces like everyone else. But you have the fundamentals, something that I do not really see in Europe, for example.
Knowledge@Wharton: Do you see any impact on the telecommunications sector?
Duran: The telecommunications sector is interesting. In my case, we build networks and we have products for companies — voice and data. We have not seen any changes whatsoever. We have not seen any change in the past month in sales. We have not seen any change in productivity. However, we obviously have to see the impact on the banks. We have not seen any impact on credit — for example, short-term credit from banks in Brazil. I do not know if it is going to happen. A lot of people are actually guessing that it may happen, but let us see.
Knowledge@Wharton: It is, of course, true and a very positive sign that the market has been going up in the U.S. as well as in Brazil and in Asia. Do you see this as volatility, or do you think that things are back on the upswing again?
Duran: The question for me would be: Why is the market driving all this? The managers of a company and the board of directors are in charge of the long-run situation, [but] the health of a corporation is measured mostly by the stock market. That was supposed to be for the long-run growth of the company and to align [it] with the shareholders and their interests. In reality, what I have seen is companies taking short-term decisions to create short-term mini-bubbles or to please the expectations of bankers who often do not understand exactly what they are doing. I have seen it in my industry. I see the major telecom companies acting like banks. I do not see them acting like telecom companies. I benefit greatly from that. I do not know about society, but personally I could not be more pleased because I actually compete with banks instead of competing with telecom companies.
Knowledge@Wharton: Speaking of the telecom industry, I had a question about one more aspect of the economy. As you know, the real was fairly strong against the dollar, but as a result of this financial crisis there has been depreciation in value. Some companies import equipment from overseas, and I understand you import some equipment from China. In what kind of position does this put importers in Brazil?
Duran: It is a good question, but it is not as relevant as one would think. I manage the company in such a way that I try to maintain my costs. My industry is very local, because most of my cost is actually digging the streets, it is construction. And construction is cement. Construction is PVC. Construction is cable. Construction is fiber optics. Construction is people, local people. Today, after nine years, I have more than 1,000 people in the company. Equipment is significant, and the high end of my equipment comes from overseas — the U.S., obviously, China and India. But in reality, it is only 7% of my cost. So if the real devalues 25%, I can absorb that with no sweat.
Knowledge@Wharton: Perhaps you could help put what you just said into context for our listeners by explaining what exactly Mundivox is and how your business model has evolved.
Duran: Mundivox is a telecom company that began in 2000. I came up with the idea in 1999, and in March 2000 we started operations, building networks and providing data and telephone services for corporations. Now, we are expanding. Late last year, we started to expand to the residential market as a separate unit of the company. But Mundivox is 90% based on corporations. This year, we will be growing 100% in revenues. Our strategy is to recreate modern infrastructure to connect clients. When I started the company, everybody was talking about unbundling. So you do not need another infrastructure company, everybody will share infrastructure. But the fact of the matter is that unbundling did not work. I said it at the time; not too many people believed me. Being a small company I had to do what people did 70 years ago when the telephone industry started, which is building infrastructure on a city-by-city basis. So I focused on geographic growth. And I believe in a BCG framework, which is relative market share drives profitability. I use that consistently. I go to one neighborhood. I go to one city block. I build infrastructure there. I maximize sales. I move to another city block. One by one, I optimize logistics, my capex [capital expenditure] and my people, performing better in terms of services. And so we are going to complete a decade.
The industry is very small compared to the huge banks I compete with but we can have the benefit of looking at the client in the eye. And hopefully responding better than the other companies do and increasing revenue. And, interestingly, I have not spent one cent in marketing.
Knowledge@Wharton: That is interesting because Brazil has such a large and growing telecommunications market. There are huge telephone companies, Telefónica and others, who are quite active here. Could you help explain your competitive strategy? How do you compete in this environment and how is that you are able to grow at a time when other companies seem to be struggling?
Duran: First, Brazil is divided into three major areas. Let us forget about Brazil and let us think about three different countries: the south, which is dominated by a company called Brasil Telecom; the northeast and the Rio area where there is Telemar; and Telefónica in the state of São Paulo. Those companies bought the rights and they are natural monopolies. It used to be the Telebras system. On top of that you had long distance deregulation. One company — Embratel — was allowed everywhere, but it did not have local networks. What I saw was that the monopolies would continue to be monopolies. They are going to act like better monopolies, but they will continue to be monopolies. [But] you have a long distance network Telmex, which is owned by Carlos Slim, which is coming. He is going to have to build networks and he will not be able to do it everywhere. So let us find niches.
In the beginning, everybody told me go to São Paulo, which is the biggest city in Brazil. And I thought why São Paulo if I can go to a second city, which is half the size, and has huge opportunities. The fact of the matter is that it takes a long time to build infrastructure. And it is not a question of money. You can have all the money in the world [which I did not have]. But the government will never allow you to break and destroy the whole city at once because you have money. You have to do it by tranches, which means you may have an opportunity to start small.
The financial crisis of 2001-2002 and the telecom and internet meltdown, hit me. I went virtually bankrupt three times and I sold my house to be able to fund the company. I could not believe that the large companies were not going to look at me for such a long time. It is probably a big question they still have. But the fact of the matter is that we continued growing. We focus on a niche which is small-and-medium sized companies, which is very difficult for a big corporation to focus on. The main reason for that is the small-and-medium sized company thinks like a big company, makes demands like a big company, but does not have the revenue to be attractive to a major corporation.
In 1995, when I was working for Bain & Company and AT&T in New Jersey was one of my clients, they acquired a company called Unitel in Canada, which became AT&T Canada. I was business director for a year in Toronto. Every time that I tried to create a strategy and I used every tool to attack small-and-medium sized businesses, the answer from my boss was always: You are fighting too much with little crowds. Come with me, play golf, I will introduce you to six people and you will have a much better bonus at the end of the year. He gave me an understanding of how these companies think.
The year before I had spent time working with the Mexican government on how to deregulate the market and privatization. I was a kid out of Wharton, but I actually saw how the forces influenced the government of Mexico. That is how I came up with the idea of building a micro [but full-sized] telecom company that builds infrastructure, goes to buildings, puts fiber and builds the infrastructure in the building. I would have my own technicians, because otherwise I lose contact with the client. If I do not understand the infrastructure and problems happen, as they always do, I will not have the knowledge of where or how to fix them. I will not depend on third parties. That works for big companies.
Knowledge@Wharton: You went from being a consultant to becoming an entrepreneur.
Knowledge@Wharton: What did you have to learn to make that transition and how did you learn it?
Duran: I remember a partner at Bain & Company taught me a very big lesson. He came and said: “Look, the difference between being a consultant and being a manager in a big company is that we have the benefit of not dealing with normal people. We usually deal with very interesting, highly-educated, self-motivated people making good money and thinking big. You are now going to be dealing and struggling with the difficulties that a normal person and a normal worker face every day.”
It is very hard and very important because, at the end of the day, as an entrepreneur you end up providing a lot of jobs. You have to think of the reactions of your employees. We were very lucky in getting the benefits of higher education and dealing with very interesting people around the world. But we very often forget the real people, the majority of the people in the streets. And that is a disease that all of us who come from great schools face and must try to cure, because that is where the real growth and the real creation come from. I am not talking about creating money. I am talking about creating things that this world still needs.
After nine years we are close to 1,000 people now. I do not see my company stopping until we drive 100,000, perhaps 200,000. Maybe I will do it. Maybe I will be in charge; maybe not. But what is interesting is having the model that is going to continue growing. Hopefully we will find a way to continue motivating people to work hard, to make more money, and to bring more money and knowledge to the next generation.
Knowledge@Wharton: What are your top two or three priorities for the next couple of years?
Duran: The first priority, believe it or not, it is creating new management in the company. I find the biggest problem is to create middle management. They are extremely smart; they are extremely capable in their field technically. But their view of the world and their view of what is right and what is wrong may be sometimes different. Diversity to me is not in race, it is in the way you think. And that is where the biggest focus and the biggest challenge lie, because without those managers we cannot grow to have 10,000 people. I need more managers to move into different areas, to lead more people and to influence those people like I would.
I had an interesting meeting with Craig Barrett from Intel seven years ago. Everything was going down (in price) and Intel was looking at companies. I was not a “sexy” company for Intel at that time because I was infrastructure based. I was not going to help Intel. But everybody was asking questions about money and capital and Intel capital. I was struggling to survive at that time but I did not ask that question. [I did not look to them for money.] I came in and asked: How did you make this a company with so many thousands of employees. That to me represents how you have grown. That is what I am concerned with; growth — economic growth, healthy growth — is everything. That is how companies become rich. And that is how countries become richer.
And Barrett said I had asked a very interesting question. The answer is culture — it depends on the culture. That is when I started going back to my books and my management theories. I said, “Okay, that is what it meant.” I started paying more attention to the soft issues and to psychology, than the tools that I had learned to use at the beginning of my career.
Knowledge@Wharton: What are some of the things you are doing to shape the kind of culture you want at Mundivox?
Duran: It is very difficult to structure a program when you are growing at 100%. At 100% the fact of the matter is that we change every year, we change everything, every system, every procedure. Everything that we had a year ago is basically nonexistent today. So we have to be constantly changing. And to constantly change, the biggest problem that I find is that people think in their boxes. They forget to share with others those boxes and perspectives — right or wrong — for the company to grow as a whole.
So to me it is constantly being together, being in the field. Twice a week I am with my people and I go to visit every construction site. I take my supervisors to lunch, not my directors. I go with employees to a site for an hour or two to understand their lives and to talk to them as much as possible. The one thing that we are doing is trying to create some retreats and some parties where you share on a day-to-day basis.
If there is a mistake or if I have a different opinion, I go and tell them. And I tell them it is not just your right to criticize me; you have to criticize me. But please bring me two pieces of data. Only with the two pieces of data to justify your statement can you convince me that you think mathematically and I can try to understand what you are trying to say. It is very easy to criticize; everybody can be a critic. But positive criticism is what it is all about.
Knowledge@Wharton: What are some of the risks that keep you up at night?
Duran: The biggest one is having an accident or security problems. We had an incident some months ago in Leblon. At 3:00 a.m. we were installing the fiber optics. [The workers] were probably making too much noise. Suddenly, someone came down with two machine guns and said, “You stop now; otherwise, I will kill you.” That is something that really concerns me. Companies have to learn how to deal with it and people have to learn, so we are putting more and more security into the company. We are growing, so we have to structure all that within the company.
The other [risk] is losing the best talent. But that has become easier because I always pay my people better than the competition. It is very simple. They work harder, but I pay much better. And it is not easy to work in my company because growing at 100%, you are not going to have an easy day. I do not care where you come from. I do not care if you are a man or a woman. All I care about is your creating value. And the way we define creating value is doing what we decide together to do. We have clients to connect and we have to be much better than the rest. So it is incredibly aggressive and we make lots of mistakes. But I believe that the winner is he who corrects the mistakes faster.
Knowledge@Wharton: In your career, whether as a consultant or as an entrepreneur, what is the biggest mistake you have made? What did you learn from it?
Duran: Underestimating people is very easy. You sometimes become too arrogant. Companies are people; the leaders are very smart. I never underestimate my competition, I never underestimate my employees, I never underestimate anybody. I am very clear about it. I believe that we live in a world based on people, not based on markets. I am a finance major. But finance to me is a consequence which sometimes becomes a leading edge. But it should not be the purpose, unless you are a bank. It should be a measure.
Knowledge@Wharton: When entrepreneurs think about the future, at some point there is an exit strategy, sometimes through an IPO and in other cases by being acquired. Do you give any thought to such issues today, and if so what is your thinking?
Duran: I did at the very beginning. When I started Mundivox, I had a reputation and I raised easy money from investors [who I still have]. I sold 27% of the company. I kept the rest. Everybody asked me why I did not sell more. And I said no. I need to be in control. I cannot let bankers or investors decide. If I am not the right guy, I have to go away and someone else should take command. But there has to be a leader. It is a family corporation owned by shareholders. It is nothing else but a family corporation. When the capital structure of a company dictates results, it is very damaging. Strategy starts being driven by [the need for better short-term] financial results.
Many entrepreneurs do not have a choice. They have to sell the majority and become an employee with an upside. But then you change the rules. You become an employee. You do not remain an entrepreneur. To be an entrepreneur is to have the biggest burden of the risk. And it is very distracting to think about exit strategies. You have to think about creation of value for the enterprise. It is not only the money that should lead you to become an entrepreneur, because that is not what it is all about. To be an entrepreneur is to be in creation. You are an architect, you are creating, you are leading people. In the long run it is hopefully going to bring you profit and wealth. I do not know what I would do with that afterwards, which is a bigger problem.
Knowledge@Wharton: How do you define success?
Duran: You have to look at yourself. Success is different for everybody. It is like truth, that depends on the glass that you are looking at. Dante said that a long time ago [in The Divine Comedy]. My definition of success at this moment is growth. It is seeing people being influenced and having the life I always wanted to have. It is a combination, having time to spend with my family as well and trying to influence other people to have 25 years of growth. I do not want to have five years of stellar growth. Success is seeing something being realized and seeing something continue to be realized. More and more success is having something being realized by my directors, my employees, and not by me. That is a big shift that I had to do two years ago. If it continues based on me looking at every client, I am not building a company, I am being a consultant.
And so it is my definition of success. Economics is nice. It is part of life, but it is not my driving force. I believe I am creating a lot of wealth, but it is just a measure to fulfill the rest.