Globalization “The CEMEX Way”
CEMEX, based in Mexico, became the largest supplier of building materials especially after it won a majority stake at Rinker’s group in 2005. This led to a high return in the year 2007 though things were not the same in 2008. CEMEX’s success was considered a major achievement since it was based in an emerging country considering cement’s low value to weight ratio.
The achievements could be attributed to how it looked at acquisitions, and the post-merger integration (PMI) process that ensued. The CEMEX Way was basically standardizing business processes, technology, and organizational structure across all countries while simultaneously granting countries certain operational flexibility, enabling them to react more nimbly to local operating environments. It also encouraged innovation which was an ongoing process as it recognized the value of ‘continuous improvement.
Globalization began in the early 1990’s and the company integrated its acquisitions successfully. The general development and expansion of CEMEX could be categorized in four ways: Laying the Groundwork for Internationalization, Stepping Out, Growing Up, and Stepping Up.
Laying the Groundwork for Internationalization
CEMEX evolved from a small, privately-owned, cement-focused Mexican company to a publicly-traded global leader within more than 50 countries and it increased the number of employers from 6,500 to 65,000, while revenue increased from $275 million to $21.7 billion in 2007. Before 1992, the company tried to solidify its position at home. It developed a set of core competencies that would shape its later trajectory including strong operational capabilities based on engineering and IT, and a culture of transparency.
The current CEO, Lorenzo Zambrano assumed his post in 1985 at the time when Mexico had begun to open up its economy, culminating with its entry into NAFTA. Mexico began the process of entering GATT (WTO’s precursor) due to the 1982 crush which undercut state-led nationally-focused model that had been predominant in Mexico over the years. Zambrano then realized that the Mexican cement industry would soon turn into a global game, and hence he prepared the firm for a global fight. This was done through exporting so as to explore opportunities in foreign markets, investing in satellite communication system, CEMEXNET, and implementing an Executive Information System which enabled “virtual inspection” by CEO, Zambrano.
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In 1989, CEMEX acquired Mexican cement producer Tolteca, making CEMEX the second largest Mexican cement producer. Again, it acquired a majority stake in two Spanish cement companies, Valenciana and Sanson, for $1.8 billion, giving it a majority market share (28%) in one of Europe’s largest cement markets. This was a strategic response to Holcim’s growing market share in Mexico. Due to its operation in Spain, CEMEX tapped lower cost enabling it to fund its growth elsewhere at affordable rates. CEMEX set ambitious goals for cost recovery in order to pay off the debt taken on to fund the acquisition.
Spanish acquisition resulted to an improvement in operating results due to the transfer of best practice. The company discovered, for example, that the two Spanish companies were unusually efficient due to the use of petroleum coke as a main fuel source which encouraged CEMEX to use petroleum coke as a part of the company’s energy-efficiency program.
Accelerating Internationalization and Consolidating the CEMEX Way
After CEMEX’s move to Spain, acquisitions in Venezuela, Colombia, the Caribbean, the Philippines, and Indonesia followed soon. This helped exploit the core capabilities. Attempts to impose the same management processes and systems used in Mexico on the newly acquired Colombian firm resulted in an exodus of local talent. It used the CEMEX Way, also known as internal bench marking, to conduct business throughout all of its locations. More a corporate philosophy than a tangible process, the CEMEX Way was driven by five guidelines:
- Efficiently manage the global knowledge base.
- Identify and disseminate best practices
- Standardize business processes
- Implement key information and Internet-based technologies
- Foster innovation
The CEMEX Way process involved the dispatch of a number of multinational standardization teams made up of experts in specific functional areas in addition to a group leader, and IT and HR support. Each team was overseen by a CEMEX executive at the VP level.
The CEMEX Way was arguably what made CEMEX’s PMI process so unique. While typically 20% of an acquired company’s practices were retained, instead of eliminating the 80% in one swift motion CEMEX Way teams cataloged and stored those practices in a centralized database. Furthermore, in just 8 years, CEMEX was able to bring down the duration of the PMI process from 25 months for the Spanish acquisitions to less than five months for Texas-based Southdown. CEMEX relied on the middle-level managers to both diffuse the company’s standard practices and to identify existing capabilities in the acquired firms that might contribute to the improvement of CEMEX’s current capability platform.
As the result of the tragic death in 1996 of CEMEX’s CFO Gustavo Caballero, the CEMEX Way was consolidated. Hector Medina, who at the time was the general manager of Mexican operations, took over the CFO role, and Francisco Garza, who had been general manager of Venezuela, was named to head Mexican operations. Garza decided to apply the PMI process to Mexico as if it had just been acquired. Savings of $85 million were identified. More importantly, it clearly established the principle of learning and continuous improvement through the punctuated PMI process and the continuous CEMEX Way. CEMEX also developed a branded cement strategy in Mexico that addressed the specific needs of customers for bag cement.
Finally, with a growing number of plants and markets on the Caribbean rim, CEMEX began to actively exploit the capacity for cement trading to smooth/pool demand, economizing on capacity and raising average utilization rates in an industry notorious for large swings in output in line with macroeconomic fluctuations.
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Toward the end of the 1990s, CEMEX began to consider diversification into other activities. It made a series of changes in the way it explored potential acquisitions, including asking the Boston Consulting Group, its long-time strategic advisor, to assign a new set of partners. It redefined large markets, such as the United States, into regions. This set the foundation for the acquisition of Texas-based Southdown, making CEMEX North America’s largest cement producer. Another change was to shift the way performance was measured, from an emphasis on margins, which had made cement appear much more attractive than concrete or aggregates, to return on investment, which in many cases reversed the apparent attractiveness of different businesses. Other targets were also identified, most importantly RMC, a UK-based, ready-mix concrete global leader whose acquisition was finalized on March 1, 2005. This acquisition was CEMEX’s first acquisition of a diversified multinational and gave it a much wider geographic presence in developed and developing countries alike. Financially, RMC was suffering. Culturally, RMC was the polar opposite of CEMEX since it was a highly decentralized company while CEMEX brought the CEMEX Way and a single operating culture that connected more readily at the plant and operation level than RMC.
Despite all of RMC’s challenges, CEMEX was able to work its PMI “magic” in a very short period of time. CEMEX had clearly joined the big leagues, yet the imprint of its early years remained very strong. In 2007, CEMEX took another major step, acquiring control of the Rinker Corporation. Rinker did not suffer the same lack of learning processes and cultural integration as RMC.
Problems faced and the solutions
The major problem that had been faced was the competition both at home and in Europe. The great threat was from Holcim. CEMEX was able to deal with it by acquiring a majority stake in two Spanish companies, Valenciana and Sanson. This gave CEMEX a majority market share (28%) in one of Europe’s largest cement markets.
Another challenge was the trade sanctions in the U.S, which was by then its largest market outside Mexico. Due to an economic downturn, the U.S International Trade Commission slapped CEMEX a 58% duty on exports but later reduced to 31%. A possible solution to this would have been to discover other international markets other than relying on one.
At some point, CEMEX started a program of sending their managers to countries where the newly acquired companies operated. This presented a major challenge since these positions were not covered with new hires hence lowering performance. A significant solution for this would have been to promote the managers’ assistants to fill the vacancies and employ some new persons to serve at lower level.
Upon the acquisition of the U.K.-based RMC, CEMEX's share price dropped hours after the announcement, and Moody’s indicated that it was putting CEMEX on credit watch for a possible downgrade, voicing concern that the size of the RMC acquisition would distract management from its goal of cutting the company’s debt. CEMEX tried to solve the challenge by acquiring control of Rinker which did not suffer the same way RMC did and instead generated profits for CEMEX.
In mid-1980’s CEMEX lost its strategic focus. Zambrano solved this selling, at opportune times, almost all the various non-cement business CEMEX had acquired. In 1987, he hired Gelacio Iniguez to serve as Chief Information Officer (CIO). A powerful partnership developed between Zambrano, a CEO attuned to the strategic possibilities of information, and Iniguez, a CIO with a genuine understanding of business.
In order to maintain its financial position, CEMEX should expand its global business further and maintain it adequately. This process should strongly concentrate on the developing countries since their consumption is predicted to go up to 85% by 2020. This would properly take care of any possible competition in the market by other growing cement companies. CEMEX should also produce bulk and package cement depending with the demand so as to meet local preferences.