SESSION 2 “The Globalization of Cemex”.
MATERIALS Case: HBS 9‐701‐017 The Globalization of CEMEX Additional material: Exhibits 4‐8
1. What benefits have CEMEX and the other global competitors in cement derived from globalization? 1. 2. 3. 4. 5.
Economies of Scale Manufacture closer to point of use to reduce the logistic cost Avoid Import tax by producing the local country Reduce the risk of political and economic crisis Reduce risk of dependency on single market
2. How specifically has CEMEX managed to outperform its leading global competitors in the cement industry? (See exhibits 4‐8) . 1. EBIT – 29%, Competitors are between 10-15% 2. Maintain healthy cash flow – Ratio – 20% 3. Stock Profitability -
3. What accounts for the sequence in which CEMEX entered foreign markets? How do the markets it has entered recently compare with the markets that it entered early on? 1. Trade sanctions in US, major exports market for CEMEX 2. Went for portfolio diversification but this didn’t work well. Based on boston consulting advise they went for regional expansion. Earlier Markets US LATAM Europe Recent Markets SE ASIA Egypt
4. What recommendations would you make to CEMEX regarding its
globalization strategy going forward? In particular, what kinds of countries should it focus its future expansion on?
The cement industry and its players made first steps in the direction to Global integration only in the 1970s. It could be seen as somewhat paradoxical, because if we apply the matrix of Global Integration and Local Responsiveness pressures to the cement industry, we can clearly identify that the industry scores high on most of the factors that should have pushed it to globalization much earlier. These factors include large investment intensity, technology intensity in production, pressures for cost reduction, universal needs, presence of multinational competitors, and access to localized resources. But that matrix does not take into account the inherent characteristic of the industry’s principal product, namely low-value-to-weight ratio of cement. Therefore, the move from the fragmented localized markets to formation of the MNCs spanning the globe was caused not by the intrinsic universal need for cement itself or by the opportunities for labor cost arbitrage, as was common for many other industries. Since cement itself was, and mostly remains, not an export-driven business, because it was expensive to transport, there had to be other drivers for globalization of the industry. Indeed, the emergence of MNCs in the cement industry was caused by significant progress in the development of the supportive functions underlying the industry as a whole, such as telecommunications, information technology, capital markets, knowledge management. Unlike the cement, these functions were much more suitable for “export” and their “ value-to- weight” was very high. Analysis of the factors of Local Responsiveness shows us that the cement industry generally does not have high pressures for localizing their product. These pressures are medium at the most. Even though there can be some noticeable differences in consumer demands from developed and emerging markets, e.g. bulk vs. bagged cement, these differences are not affecting significantly, if at all, the product’s characteristics and the manufacturing process. Besides, since cement is consumed locally, there is no additional cost of changing production processes within one plant in order to produce different specifications. Every plant may have their production processes optimized for local preferences, if necessary. However, as was demonstrated by the CEMEX experience, the production processes in general are highly standardized and could be efficiently transferred among multiple plants within the company. The Ghemawat’s approach to modern day globalization focuses on managing the tensions between the three types of global strategy instead of just adopting one, two or sometimes all three of those strategies and trying to excel in each of them. Of the three strategies, Adaptation, Aggregation, and Arbitration, CEMEX has clearly achieved its success by focusing on Aggregation and effectively managing Adaptation.
However, the aggregation in CEMEX had a significant twist, when the economies of scale were achieved not by simple centralization of production and development, but rather by efficient management of its global knowledge base. The cornerstone of the CEMEX Way corporate philosophy was transfer and standardization of best practices throughout the company. The remarkable distinction of the company ’s approach was that this knowledge transfer was not a one-way traffic when the best practices from the home base were exported and bluntly enforced on the new acquisitions. The company’s executives were able to identify early on and maintain the attitude of continuous learning and expanding their knowledge base through acquisitions. The PMI process was aimed not just at introducing the tested processes and practices in the newly acquired plants, but also at cataloging, analyzing and benchmarking the practices of these new acquisitions. This approach resulted in 70% of CEMEX’s practices being adapted from its acquisitions. One of the most notable examples of t his learning attitude was the application of the PMI process to Mexican operations in 1996 after a spree of foreign acquisitions in Europe and Latin America.
Cemex distributor Puerto Aventuras, Mexico
The success of the company coming from the developing market and becoming one of the three global giants in the industry is a powerful testimony to the appropriateness of their corporate philosophy, known as CEMEX way. The continuous learning, allowing the information to flow freely in both directions between the corporate headquarters and new acquisitions is a primary reason for the company’s success. CEMEX should stay the course and continue refining their strategy through reiterative process of learning. This will allow the company to stay relevant and keep its competitive edge in the ever-changing global economy.
