Business Strategy reading and Answer 3 short-answer question

AAAStrategy.TheCEMEXCase..pdf

Home >Business & Finance homework help >Marketing homework help >Business Strategy reading and Answer 3 short-answer question

! 1!

AAA Strategy.

The initial rational behind the global expansion of CEMEX, was one of aggregation (scale economies), adding volume, and decreasing costs by leveraging capabilities across borders. Pursuing a horizontal acquisition strategy made aggregation even more viable. Eventually, CEMEX implemented different kinds of arbitrage(absolute economies), such as institutional/administrative arbitrage, by “acquiring” through the Spanish acquisitions – getting investment-grade – and then reducing at least 6 percent points in cost of capital (see exhibit 1); and knowledge arbitrage, by transferring best-practices across regions (see exhibit 2).

But at the end of the 90s, a “pending” strategy got relevance: adaptation (local responsiveness). CEMEX was concerned by the lack of differentiation of cement. Vertical integration was an option, but CEMEX executives had no desire to run hardware stores or provide financing for construction. However, there was a clear intention of providing a customer with an integrated experience. Some companies attempt to discover customer “deeper needs” with focus groups, but this is the equivalent of scientists going to the zoo to study animal behavior. To empathize with customers’ unmet needs, managers must observe them in the wild, not the zoo. To better understand the needs of Mexico’s less affluent customers, CEMEX assembled a cross- functional team of high-potential managers who spent 10 hours each day for a year in an extremely poor neighborhood in Guadalajara. This intense observation provided many surprising insights. They noticed, for example, that poorer consumers generally bought less expensive powdered cement in bags, rather than pricier ready-mixed concrete delivered by trucks. In these neighborhoods, cement is a consumer product. Their observation led CEMEX to market powdered cement like powdered soap, through consumer advertising and sponsoring local football clubs. More importantly, the team gleaned insight into the subtle emotional benefits of home extension that supplemented the functional benefits of more room. Home improvements not only added space, they learned, but also conferred an important psychological satisfaction by creating ‘patrimonio’ — something of enduring value that customers could pass on to their children and grandchildren. The insight that buildings represented more than utility inspired CEMEX to create a program called ‘Patrimonio Hoy’ (legacy today) that appeals to consumers’ aspirations to create an enduring legacy that their children and grandchildren could enjoy. To help customers realize their legacy, the CEMEX team had to understand obstacles that prevented consumers from building a legacy. !“Patrimonio Hoy” is present in 5 countries: Mexico, Colombia, Nicaragua, Costa Rica and Dominican Republic, having served more than 300 000 families of the low-income segment.

And around the “Patrimonio Hoy” project, CEMEX developed an orchestration strategy, by assembling a network of hardware stores, banks and community leaders to help poor customers build extensions to their homes. By relying on partners rather than building the full infrastructure itself, CEMEX earned a healthy return on invested capital despite a relatively low price point. Identifying an unmet customer need is one thing, but meeting that need is quite another, particularly when providing an integrated solution would require resources and competencies that CEMEX doesn’t control. CEMEX executives had no desire to run hardware stores or provide financing for construction. To provide their customers with an integrated experience, CEMEX needed to work with partners, including mom and pop retailers and banks. The team was also charged with observing local hardware stores first-hand to understand what would induce them to work with CEMEX. “Construrama” is now the largest network of materials construction outlets in the world (aprox 3000). It started on august 2001 in Mexico, a developing market.

! 2!

Developing Markets.

Today, more than 10 years later, CEMEX has leveraged the learning from its home market (emulating Construrama) and defined a commercial)standardized)approach)towards)the)cement) business)in)developing)markets,)following)a)solid)philosophy)with)the)final)goal)of)making)its) customers)grow)so)CEMEX)can)grow)alongside)them.)!

• )This)approach)consists)on)the)following:!

• )Significantly)larger)and)well)trained)sales)force)compared)to)its)peers)to)provide)a) differentiated)customer)service.!

• )Robust)commercial)administration)back)office)that)supports)24E7)its)sales)force.)Some) benefits,)among)others:!

• )Speeds)up)day)to)day)commercial)transactions.!

• )Makes)input)of)new)customers)more)agile.!

• )Intelligent)Supply)Chain)Management.!

• )Most)of)its)volume)is)delivered)to)our)customers,)regardless)of)order)size.!

• )Constantly)assess)and)optimize)distribution)(warehouses))network)in)order)to) be)most)of)the)time)closer)to)customers)and)end)users)than)its)competitors.!

• )Always)aim)for)less)concentration)in)its)customer)base,)and)work)proactively)to) supply)materials)and)provide)services)to)all)different)types)and)sizes)of)customers.!

• )Work)together)with)customers)developing)joint)working)plans)so)they)can)leverage) worldEclass)management)best)practices)that)help)them)to)enhance)their)profits,) regardless)of)the)economic)cycles.!

• )Have)an)aggressive)marketing)strategy)with)the)end)users)to)increase)the)top)of)mind) of)CEMEX)brand)and)hence)market)penetration.!

• )Have)a)consistently)superior)product)and)service)quality)that)has)helped)to)be)the) brand)of)choice)in)most)of)its)markets.!

But, is there a higher WTP (willingness to pay) as a consequence of this standardized approach? Exhibit 3 shows the price dynamics of some selected countries. As we can see, the price variation has been favorable to CEMEX.

)

! 3!

Exhibit)3)

To illustrate these principles with an example in particular, let us see some data from CEMEX Egyptian operations: Relevant Market Assessment (basic variables):

• Bagged vs. bulk ratio: 91% Bags, 9% Bulk

• Market Shares:

! 4!

! • Herfindahl Index, HHI = 0.16. Well below USA threshold of 0.25. Market is quite fragmented

Results of implementing a tailor made price-volume strategy (described later) and following the standardized approach (described before) in Egypt during 2011:

• Price and volume variations vs. peers (2011 vs 2010):

• Brief description of efforts made locally:

o CEMEX enjoys the strongest brand equity in the informal sector, which is the largest construction segment, and a proven track record of knowing how to work profitably with households and the small contractors.

o Unlike CEMEX competitors who rely on just a few traders, CEMEX does business with more than 1,200 retail partners.

o CEMEX retailer's shops are scattered across rural upper Egypt as well as some northern markets including Cairo, all of them at the reach of households and small contractors. CEMEX offers the best service in the industry.

o CEMEX customers complete orders on the Internet, mobile phones, or by dialing into a toll-free centralized customer service office. They can choose whether to pick up their orders from CEMEX warehouses or have their orders delivered at their doorsteps.

o CEMEX offers multi-products such as gypsum, steel, white cement, and wood for franchise shops. 50% of CEMEX cement sales are special products, with an average price premium of $5 to $10 per ton compared to traditional products.

o Unlike most of the new competitors cement plants, CEMEX plant has three kilns and seven grinders which give CEMEX the flexibility to produce products that match specific market needs. One example is CEMEX hot-weather cement, specially designed for the challenges of large infrastructure projects in Egypt's south, and CEMEX is working to introduce other new products such as: oil well cement, Ready-mix concrete paving, and soil cement paving. This last service tailored to pave full rural areas of operation.

Market'Share ITA 28% LAF 20% CX 13% Titan 9% Vicat 8% Cimpor 7% Other 15%

Volume Prices CX .3% .7% LAF .13% .11%

! 5!

Changing Product Mix.

After the wave of acquisitions in emerging markets (with the exception of Spain and the USA in that same period), CEMEX faced the challenge of supplying markets with very different product mix (bag vs bulk cement ratio). There is a clear difference in prices, as we see in Exhibit 4, but contrary to what we could think, there is not necessary a correlation between cement prices and level of concentration (see Exhibit 5).

Exhibit)4)

! 6!

Exhibit)5)

! 7!

And there is also a difference in the set of skills needed to manage the variety (see the Exhibit 6)

Exhibit)6)

In the recent years, CEMEX has identified the different factors that affect the different strategies to implement country to country, depending of the mix of businesses. Accordingly, it defined a price-volume strategy tailor-made to each of its markets and businesses. Among the most important factors are:

1) Competitive landscape: number of competitors and their level of vertical integration: Cement, Aggregates and RMX.

2) Degree of concentration of the market’s customer base 3) Degree of presence of substitute products such as wood, fly ash and non-clinker

cementitious materials (blast furnace slag) 4) Specifically in the case of cement:

a. Local market demand dynamics that drive the bulk vs. bagged ratio for the entire market. In general, emerging economies such as Mexico and Egypt tend to have a high bagged to bulk cement demand ratio because of the significant size of the self-construction and informal sectors.

! 8!

b. Local supply dynamics that drive the supply-demand equilibrium: new capacities added over time. Including sometimes the presence of disruptive competitors. Also the specific product mix strategy selected by each competitor.

c. For coastal areas the presence of imports from other parts of the country or different countries.

5) Specifically in the case of the local businesses such as Aggregates and Ready Mix new variables play an important role:

a. For Aggregates the reserves levels and depletion strategies followed by the different competitors, and the reclamation requirements to comply with local authorities, mostly at the municipal level.

b. For Ready-Mix Concrete the type of demand that exists in the market. There are prescription based or commodity type markets (USA) and more sophisticated or performance based markets (France) in which CEMEX has been able to design specialty mixes and sell high margin concrete products.

6) Increasingly high environmental and government regulations

)

HyperELocal.)

Mostly affected by the recent economic crisis, the investments are getting more selective. A main trend in the industry is beginning to take place (mostly as a consequence of scarcity of funds [and high debt leverage] and also for the excess of supply): the surge of a variety of different new business models, where orchestrating/articulating/mobilizing other’s resources will – is – shaping a new game. In the developed markets, mostly as a consequence of stagnation of demand, new sources of revenue are being searched. And)in)the)same)way)that)the CEMEX “construrama” concept, where almost 3000 distribution outlets (not-owned by CEMEX) offer “solutions for housing” (rather than selling only cement) the concept will be emulated in trying to make “partners” (no-competitors) to play ball. The term “hyper-local” is being used to send the signal of customize each game. (This orchestration does not mean a proliferation of JVs).)

A bunch of plants are closed, but the market in every region – although scarce – is still there. The scale is not profitable for the individual players, but offering a more integrated game, making every node play, could lead to a combined gain.

CEMEX has developed a variety of concepts to understand and deal with this hyper-local approach: local network management, local)Relevant)Market)(“Plaza”),)aggregates)plaza,)and)readyE mix)clusters.))In)the)same)“local”,)different)competitors)coEexist,)as)we)see)the)example)of)France)(the) Normandy)region),)at)the)Rouen)hyperElocal)market,)in)the)Exhibit)7.))If)every)competitor)follows)its) traditionalEegocentric)way,)business)will)destroy.))An)alocentric)approach)makes)more)sense.)In)some) cases,)the)different)players)in)every)local)market)swap-their)assets)accross)other)local)markets,)where) the)same)competitors)meet)again.)

)

! 9!

)

Exhibit)7)

)

• What)is)a)Local)Relevant)Market)(“Plaza”)?)(see)Exhibit)8)!

• A)trading)zone)where)local)demand)is)satisfied)in)the)most)part)from)quarries)located)at) economicallyEaccessible)distances!

• Economical)transportation)means,)such)as)barge)and)rail,)will)promote)the)expansion)of) plaza)boundaries)by)sourcing)from)outlying)quarries)!

• Boundaries)are)thus)not)fixed)and)will)tend)to)expand)over)time,)as)local)scarcity)(and) hence)price))increases!

! 10!

Exhibit)8)

• Necessary)to)analyze)ReadyEMix)and)Aggregates)from)a)larger)perspective! - to)understand)supplyEdemand)flows)! - to)optimize)quarry)production)mix)based)on)client)demand)(mainly)ReadyEMix))needs! - to)optimize)sourcing)from)quarries)to)plants! - to)understand)competitive)dynamics))! - and)thus)be)efficient)and)successful)in)synergy)retrieval! - Other)Local)businesses)(asphalt)and)block))should)also)be)analyzed)in)view)of)the)

sourcing)availability)and)local)networks)dynamics! !

In)Exhibit)9,)we)can)see)in)more)detail)the)necessary)understanding)of)the)dynamics)of)plants,)clients,) competitors,)and)transportation)channels.)

)

! 11!

Exhibit)9)

There is clearly an evolution in CEMEX management mindset. Starting with aggregation and arbitrage, and then, focusing on adaptation. And in the dimension of adaptation, first in developing markets, and then in developed ones.

! 12!

)

Exhibit)1)

Administra*ve/Ins*tu*onal2Arbitrage:2 CEMEX s2Capital2Costs2

1992 1993 1994 1995 1996 1997 1998 1999 2000! 2001 2002 2003

Year!

Pe rc en

t !

! 13!

Exhibit)2)

Knowledge)Arbitrage:)CEMEX)

Source: CEMEX Annual Report 2002