Cemex Case Study Problem

Cemex, one of the world’s largest cement producers, created a blue ocean of high profitability and growth in the cement industry that historically competed solely on price and functionality. It did so by shifting the orientation of its industry from functional to emotional.

In Mexico, cement sold in retail bags to the average do-it-yourselfer represents more than 85 percent of the total cement market. As it stood, however, the market was unattractive. There were far more noncustomers than customers. Even though most poor families owned their own land and cement was sold as a relatively inexpensive functional input material, the Mexican people lived in chronic overcrowding. Few families built additions, and those that did took on average four to seven years to build a single additional room. Why? Most of families’ extra money was spent on village festivals, quinceañeras (girls’ fifteen-year birthday parties), baptisms, and weddings.

As a result, most of Mexico’s poor had insufficient and inconsistent savings to purchase building materials, even though having a cement house was the stuff of dreams in Mexico.

Cemex’s answer to this dilemma came with its launch of the Patrimonio Hoy program, which shifted the orientation of cement from a functional product to the gift of dreams. When people bought cement they were on the path to building rooms of love, where laughter and happiness could be shared —what better gift could there be? At the foundation of Patrimonio Hoy was the traditional Mexican system of tandas, a community savings scheme. In a tanda, a group of individuals contributed a small sum each week for ten weeks. In the first week, lots are drawn to see who “wins” the pot in each of the ten weeks. All participants win the 1,000 pesos one time only, but when they do, they receive enough to make a large purchase.

In traditional tandas the “winning” family would spend the windfall on an important festival or religious event such as a baptism or marriage. In the Patrimonio Hoy, the winner is directed toward building room additions with cement. Think of it as a wedding registry, except that instead of giving silverware, for example, Cemex positioned cement as a loving gift.

At its debut, the Patrimonio Hoy building materials club that Cemex set up consisted of a group of roughly seventy people contributing on average 120 pesos each week for seventy weeks. The winner however, did not receive the total sum in pesos but rather received the equivalent building materials to complete an entire new room. Cemex complemented the winnings with the delivery of the cement to the winner’s home, construction classes on how to effectively build rooms, and a technical adviser who maintained a relationship with the participants during their project. The result: Patrimonio Hoy participants build their homes or additions three times faster at a lower cost than the norm in Mexico.

Whereas Cemex’s competitors sold bags of cement, Cemex was selling a dream, with a business model involving innovative financing and construction know-how. Cemex went a step further, throwing small festivities for the town when a room was finished thereby reinforcing the happiness it brought to people and the tanda tradition.

Since the company launched this new emotional orientation of Cemex coupled with its funding and technical services, demand for cement has soared. For more than 15 years, Cemex has been contributing to solving the housing shortage in underserved areas through its Patriomonio Hoy program. It has won multiple awards, including the UN Programme’s 2006 World Business Award in support of the UN Millennium Development Goals and the 2009 UN Habitat Award for Best Practices in Affordable Housing Solutions.

Overall, Cemex created a blue ocean of emotional cement that achieved differentiation at a low cost. It did so by challenging the functional–emotional orientation of its industry, as path five of blue ocean strategy’s six paths framework suggests.

OF ALL the countries and all the industries you could choose, Mexico and cement might seem to be the most unlikely combination to produce an agile, efficient, e-business pioneer. Yet Cemex is just such a company. It is rapidly spreading across the globe, and it is more profitable than either of its two big international rivals—France's Lafarge and Switzerland's Holcim (known until recently as Holderbank).

The Mexican company owes its success partly to the fact that, unlike its European rivals, it concentrates on developing countries. Profits there are greater because in such markets most cement is sold in bags for small-scale building, rather than in big ready-mixed quantities.

But the company also owes its success to what is known as “the Cemex Way”. This corporate philosophy involves wholeheartedly embracing new technology and imposing tightly controlled standards worldwide, for both its technology and in-house management techniques.

Reprints

Cemex's ability to apply this philosophy rests on a fortuitous mix of modest beginnings, good timing and the technology fetish of the company's chief executive, Lorenzo Zambrano, now reckoned to be Mexico's second-richest man. “I could say that I had a vision,” says the jolly, 56-year-old Mr Zambrano, “but it doesn't really work that way.”

A grandson of the man who founded Cemex in 1906, Mr Zambrano spent 18 years rising through the ranks before he became the boss in 1985. On his way up, he discovered the value of information. He wanted to make the plants that he supervised more efficient, but he chafed at the lack of ready data on how well they were performing. So he set up a small team of programmers to come up with ways to generate automated plant reports.

Not long after taking the helm he created something that Cemex had never had before—an information-technology (IT) department. The company began automating plant operations, and then its sales and accounting as well. At the end of the 1980s, it set up a satellite network so that it could transmit all the internal data to its headquarters in Monterrey, Mexico's dusty northern business capital.

Naturally, automation reduced staff costs: a handful of people can now run a big cement plant. Even such things as quality control can be handled automatically by machines that extract samples from the production line, slice them thin, analyse them by laser and spit out the results on a screen.

More valuable than the reduced headcount, though, was the data which the automation produced. Mr Zambrano could check sales figures or kiln temperatures on the network, and then use his latest toy, e-mail, to ask managers why their units were not keeping up to scratch. The company's first pilot e-mail system was launched in 1991. In 1992, it switched to Lotus Notes, which it still uses today.

There was resistance to the changes, especially to the e-mail; but open information and easy communication together brought about a shift in the corporate culture. Knowing that they were being watched, employees began to strive for improvements. At the same time, Mr Zambrano sought to make his managers receptive to new ideas from below. “IT frees up everyone's imagination,” he says.

This upset Mexico's hierarchical, do-not-question-the-boss traditions. But it was a good moment for such an upset. Mr Zambrano took the helm just as Mexico's protectionist economy began to open up, leaving many family firms, stuck in their old ways, struggling to compete. He took the opportunity to grow by buying other, less agile Mexican firms.

At one stage he fired the company's top management—although it was hard, he remembers, to attract new talent. He won people over by promising them the chance to move around a lot within the firm, although at the same time he reduced the choices available to them by getting rid of the group's sidelines in hotels, petrochemicals and mining.

Gradually, computerisation spread throughout the group. Cemex has never had a big mainframe, relying instead on distributed, interconnected systems that share information across the company. These allow top managers to see what is going on, but they also give lower-level employees some access—enough to allow “a healthy degree of competition” between different units, says Hector Medina, Mr Zambrano's number two.

With the arrival of the Internet, the transparency spread outside the company, provoking some complaints from within that it was making too much information public. Cemex is, indeed, “one of the most investor-friendly companies in Latin America,” says Gordon Lee, a New York-based analyst with Goldman Sachs, an investment bank.

Cemex is now pushing the information culture even further, putting computers with Internet access into its employees' homes. Cynics might see that as a sinister attempt to keep them chained to their work. Cemex sees it as a philanthropic gift to the employees' families and an investment in the future by spreading IT further.

Mix and match

Connectedness has also transformed many of the company's internal processes—most notably the delivery of ready-mixed concrete. Getting mixer trucks from the plants to the building sites at the right time, with cement needing to be poured within 90 minutes of mixing, is always logistical hell. But by putting a computer and a global-positioning-system receiver in every truck, and then combining their positions with the output at the plants and the orders from customers, Cemex has been able to produce a system that not only calculates which truck should go where, but also enables dispatchers to redirect the trucks en route.

That has reduced the “window of time” for delivery from three hours to under 20 minutes, even with the chaotic traffic and the last-minute cancellation of orders that are typical of Mexico city. It has enabled each truck to meet many more orders per day.

The real power of its IT, however, only became clear when Cemex grew big enough to expand abroad. Some 55% of its holdings are now outside Mexico. Its first purchase was two Spanish cement makers in 1992, and it has since moved into Asia, South and Central America and Egypt.

Last year it took a big bite north of the border by buying Southdown, America's second-biggest cement manufacturer, for $2.8 billion, and in May of this year it bought a Thai company, Saraburi Cement. At $73m, that was a much smaller purchase, albeit one that was more in keeping with the group's emerging-market strategy.

In each case, “post-merger integration teams”—ie, executives armed with laptops—were dispatched to analyse the new acquisition, to cut costs, and to harmonise its technical systems and management methods with Cemex's. The Cemex Way specifies everything, down to the make of computers that employees must use. It can seem authoritarian at times, but it does at least ensure that communication across the company is seamless.

And it yields some welcome savings. According to Mr Zambrano, improving logistics at Southdown, already a fairly well-run firm, will save $15m a year, in a company that makes pre-tax profits of $280m. Moreover, with practice, the pace of integration has speeded up. Turning Valenciana and Sanson, the Spanish companies, into true subsidiaries took 18 months; Southdown, much bigger, was substantially “Cemexed” within four.

The fact that Cemex developed its “way” before it started expanding abroad has also given it an edge over Holcim and Lafarge, both of which had foreign subsidiaries long before the communications revolution began. It has been much harder for them to overcome institutional inertia and to unify their widespread information systems.

Cemex's growing presence in developing countries gives it two other advantages, besides fatter margins. First, hundreds of thousands of bags labelled “Cemex” are a good way to make the company's brand better-known. And second, it has had to deal with lots of small distributors rather than a few large ones, which has given it a powerful incentive to computerise its logistics and, eventually, to shift most of its transactions online.

This is the direction in which things are now moving. Last year, the company spun off its internal IT arm, Cemtec, and joined it with four other Spanish and Latin American firms to create Neoris, an IT consultancy. Neoris is now part of CxNetworks, a Miami-based subsidiary that Cemex wants to use in order to turn itself into an e-business in every way possible. Also part of CxNetworks are Construmix, a construction-industry online marketplace, and Latinexus, an e-procurement site.

How much this fits into Cemex's overall development, and how much it was just an opportunistic attempt to benefit from the tech-stock boom, is uncertain. Some analysts think that Cemex was simply hoping to boost its stockmarket valuation, which it has long considered too low, given that it is more profitable than its more highly valued competitors. Not surprisingly, Cemex denies this. But in any case, since the dotcom market collapsed the question has become moot—and Cemex's market valuation has continued to go up regardless (see chart).

Although Cemex is undoubtedly at the cutting edge of IT, it still has some way to go in what it calls “e-enabling”, something which Neoris will be in charge of. The goal is for all the company's operations to become web-based, with all its employees having access to their own files, the company's data and outside information through a single, personalised portal. Operations will be centralised through the Internet, even though the management teams themselves may be spread across the globe.

Corporate finance is already run in this way, and procurement, sales, distribution, and supplier and customer relations are also intended to become as Internet-based as possible. By the end of this year, Cemex plans to be halfway there. Ultimately, Mr Zambrano hopes that putting the company online will save it some $120m.

On the sidelines

All that should keep Cemex a jump ahead of its competitors, at least for the time being. Its aim is not necessarily to get bigger than them, only to stay more profitable. And although they are adopting new technology too, Cemex's rivals will have trouble catching up.

But what can Cemex make from its e-business sidelines? Juan Pablo San Agustin, the brash young boss of CxNetworks, sees the greatest promise in helping other companies to “e-enable” themselves, the job which Neoris does. Mr Lee at Goldman Sachs agrees: “The part where there's existing cashflow that should see growth is Neoris.” Latinexus, he says, may have a future too, since business procurement in Latin America is generally inefficient and sometimes murky, with lots of middlemen.

As for Construmix, the construction-industry portal, Mr San Agustin thinks that its future lies not simply in buying and selling online, but in providing other services for customers who already buy Cemex cement. For instance, it could create an online meeting-place for everybody involved in a particular construction project. The blueprints could be put on the Internet and be updated online. The contractors and suppliers would then be able to consult an up-to-date version at all times. Construmix might also become a place to sell insurance, financing and other ancillary services.

Whether all this takes off remains to be seen. Having hoped to take CxNetworks public before the market crashed, Cemex now has to finance the venture's development alone. Since its Spanish purchases, the company has had a reputation for getting heavily into debt. That has been one reason for its low market price in the past.

Another factor has no doubt been a traditional wariness about investing in an emerging-market company—although Cemex executives lose no time in claiming that its debt rating is better than that of the Mexican government. For now, though, CxNetworks needs relatively little new investment.

Despite the economic slowdown in North America, where Cemex makes three-quarters of its profits, analysts remain bullish; in the first quarter of this year, the group's net sales were up by 19% on the previous year, and by 34% in North America.

At home, meanwhile, the group's future also looks pretty secure. In one of his more populist moments, Mexico's new president, Vicente Fox, promised that every peasant shack in the country would have its mud floor cemented by the time he leaves office.

This article appeared in the Business section of the print edition

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