Lean Manufacturing in CEMEX’s Strategic Mix

04/18/2015 12:570 commentsViews: 110

An s+b Roundtable: This Mexican cement company redefined itself as a global solutions provider with the critical capabilities to match. See also “The Foundation of CEMEX’s Success—In Pictures.”

Participants were Jaime Elizondo,  Luis Farias, Luis Hernandez, Ignacio Madridejos,  Juan Pablo San Agustin, Karl Watson Jr.; moderated by Thomas A. Stewart.

Consider the challenges of selling cement and concrete. These are the most widely used building materials in the world. They are ancient (dating back to at least 3,000 B.C., they form the literal foundation of civilization), energy-efficient, durable, versatile, and inexpensive. Three tons of concrete are poured each year for every person on earth. In most places, the business of providing these materials is capital-intensive and cyclical. Cement is bulky and is delivered to construction sites in giant bags. Concrete must be used soon after it is mixed, because of the way it hardens.

For all these reasons, concrete and cement are generally seen as commodities. The company that can provide them at the lowest price in any particular location would seem to have an unbeatable edge. Yet since the early 1990s, the Mexican company CEMEX, whose primary businesses are cement and concrete, has pursued a strategy of differentiation. It defines itself as a provider of solutions for builders and local governments, particularly in emerging economies and for those seeking environmental sustainability. As part of this evolution, CEMEX rebounded from a near bankruptcy during the 2008 economic crisis to regain its position as a leading company in the global construction materials industry.

This roundtable with CEMEX senior executives recounts how the company used its distinctive capabilities — and developed some new ones — to bring an international business strategy to life. (See “CEMEX’s Coherence Profile”.) CEMEX’s global expansion represented a 180-degree turn for a company whose very name is an abbreviation of Cementos Mexicanos. Founded in 1906, the company did business nearly exclusively in its home country until the early 1980s; even then, it moved past the national boundaries very tentatively. But in the early 1990s, when the company’s leaders saw that the North American Free Trade Agreement (NAFTA) would be signed in some form (it became law in 1994), the vulnerabilities of the company’s position became evident. If CEMEX stood still, it would be up against competitors with greater scale and more access to capital markets. There was no choice but to build new capabilities — both to defend its home turf and to grow abroad.

Under Lorenzo Zambrano — who took the helm as CEO in 1985 and remained in office until his death in May 2014 at age 70 — CEMEX embraced information technology and inorganic growth. Zambrano’s successor as CEO, Fernando A. Gonzalez, was previously the firm’s executive vice president of finance and administration, and its CFO. Building on its long track record in lean operations (“ruthless operating efficiency” is a catchphrase within the company) and its pride in being one of the most successful companies from an emerging market, CEMEX developed a high level of customer responsiveness. It delivers cement within 20 minutes of receiving an order in many locales. Its international business strategy enabled CEMEX to grow rapidly during the 1990s and early 2000s, when it became one of the biggest cement companies in the world.

It did this while maintaining, as New York University and IESE professor Pankaj Ghemawat has noted, consistently high profitability levels. (In 2014, the company reported US$2.7 billion EBITDA on revenues of $15.7 billion.) CEMEX’s growing global presence allowed it to raise capital at low rates and to gain leverage through its overseas presence and relationships. As it moved more aggressively into mergers and acquisitions — first in Mexico, then Spain, then Latin America, and then more broadly — its leaders discovered the leverage of postmerger integration. Incoming companies were inducted into the CEMEX Way (the company’s name for its distinctive practices), and in parallel CEMEX took unusual pains to capture and make use of acquired companies’ knowledge. (See “CEMEX: An Emerging Market Multinational,” by Pankaj Ghemawat, s+b, Apr. 13, 2015.)

In the 2000s, to take full advantage of its emerging global nature, CEMEX entered new businesses in ready-mix concrete and aggregates — materials whose supply chain and financial dynamics were very different from those of cement. CEMEX also developed a sophisticated trading arm that has protected it against much of the volatility that threatens cyclical commodity businesses. At the same time, to evolve into a more premium business, CEMEX began providing guidance in construction methods — not just to individuals and private-sector customers such as building companies, but also to municipalities and national governments. Over time, CEMEX’s leaders developed a capability for promoting environmental sustainability: decreasing the company’s own fuel use, removing or mitigating pollutants in materials, and looking for ways its products and services could lead to sustainable practices for all the industries CEMEX serves.

CEMEX was hit hard during the financial crisis. It lost major revenues overnight when the global construction industry imploded, and it suffered from having paid $14 billion to acquire the Australia-headquartered materials company Rinker Group just before the crisis struck. During 2008 and 2009, the company staved off bankruptcy through a series of major cuts and refinancing efforts. CEMEX recovered only when the economy in its markets began to rebound. By 2012, the distinctive capabilities it had been developing — in sustainability and in providing services to governments and business customers — were inherent to the company’s identity.

In this roundtable discussion, six CEMEX leaders, all interviewed at company headquarters in Monterrey, Mexico, talk about the company’s capabilities system, how it developed, and the value that it has provided.

M&A and Operational Efficiency: 1992–2000

Jaime Elizondo: I joined CEMEX in 1985, shortly before Lorenzo Zambrano became our chief executive officer. Mexico was basically our sole market in those days, and we were the biggest cement company in the country. I remember that trucks used to line up outside our plants to get cement, and it wasn’t unusual for them to wait for several days to pick up an order.

When Mr. Zambrano took office, we initiated a lot of changes to reduce cost and improve our processes and our quality. Then we started buying up cement companies throughout Mexico.

This all happened right before NAFTA, which opened up Mexico [to global competition]. Mr. Zambrano recognized NAFTA for the huge strategic threat it was. There was a real chance a larger global company would come into the market and underprice us.

Juan Pablo San Agustin: In 1992, two years before NAFTA went into effect, we made our first international acquisitions, buying two cement companies in Spain. At the time, the biggest cement companies were concentrated in Europe. We reasoned that we could achieve some balance by being on their home turf.

In the early 1990s, Mexico had very high inflation. The peso crisis had hit, and Mexican companies had a hard time accessing the financial markets. Because we had such a high cost of capital, the only way to keep on growing through M&A was to extract a lot of value quickly.

Elizondo: We became quite adept at that. We would do an acquisition, optimize it, take value out of it, and then go do another one. Having that speed and efficiency allowed us to be an acquirer as opposed to being one of the companies that got acquired.

San Agustin: To get good at postmerger integration [PMI], we did a lot of postmortems. After each transaction, we would ask ourselves, “What was successful? Where did we fail?” That helped us figure out what to replicate and what not to replicate. Early on, for instance, we realized we should use the same team of people, from planning, accounting, IT, and operations, for each acquisition. PMI became second nature to them.

An acquisition is inherently very motivating. There’s this feeling of “let’s prove it to ourselves, our competitors, and the whole world that we can really extract more value out of those assets than the former owners.” But you typically need the people of the acquired company to behave differently, and they don’t do that automatically the day an acquisition goes through. You have to train them. With most acquisitions, we found that for at least the first two years, we needed to have 20 or 25 CEMEX people working in different parts of the acquired company, making sure the new people understood our systems.

This intensive collaboration is one of the key ingredients of a successful integration. The first three months are key. That’s when you have your best chance — and I mean this in the most positive sense — of getting into people’s heads. That’s your window to make them realize they should change how they think.

The CEMEX Way Emerges: 2000–2005

San Agustin: By 1999, having done acquisitions in Asia, Latin America, Europe, and the U.S., we had become very decentralized. That was making us less efficient. Mr. Zambrano said, basically, that going forward, CEMEX would have company-wide common processes for basic activities. These included the closing of the books, accounts payable, and most technology-related activities. We could then transfer people without their having to learn entirely new systems. And our common technology platform would make us more productive.

Luis Hernandez: The CEMEX Way, which we developed to address all this, was a collaborative effort. It was all about finding what worked best and then enforcing those standards.

San Agustin: Enforcing is really the right word. A good example is the emphasis we put on closing the books on the first or second day of every month. A lot of managers initially wondered why it was so important to do this. They thought nothing would be lost if they did their closings on the seventh or eighth day. But we believed that having that information readily available would increase the likelihood that managers would make the right decisions. And the practice had a very high-level overseer: Mr. Zambrano himself, into whose email inbox all of these reports flowed. This was not subject to negotiation.

Hernandez: At the same time, the CEMEX Way has always been retrofitted to include the best practices of companies we acquired. We would identify people in their field operations who had exceptionally smart approaches to doing things. The role of an acquisitions leader included incorporating those practices back into the CEMEX Way. That was the beginning of recognition on CEMEX’s part of the importance of global collaboration and knowledge sharing.

Solutions and Service: 2001–present

Elizondo: Until the 1990s, we offered a single product: cement. Thanks to our operational efficiency and to the discipline we were starting to drive with the CEMEX Way, we still had some headroom. But [any] product has a disadvantage in that a customer can find a substitute for it. A solution, by contrast, cannot be that easily replaced. So we started to develop offerings that more closely resembled solutions.

Ignacio Madridejos: Patrimonio Hoy, which we started in Mexico in 1998, was one of our first moves in this direction. It was a program we set up to help low-income families overcome the obstacles that made it difficult for them to build their homes. We provided them with access to building materials such as cement, concrete blocks, and steel; we also provided access to credit through microfinance; and we offered technical and architectural guidance. This was a way for us to grow the pie and create more value for CEMEX at the same time that we were doing something beneficial for society.

Elizondo: Construrama, our retail distribution brand, was another solution-oriented approach. When we introduced it in 2001, about 70 percent of CEMEX’s bagged cement sales in Mexico went through individual distributors. With other competitors coming into the country, we had to do something to strengthen our distribution channel. In addition to bagged cement, we sold them rebar [steel reinforcing bars used to frame concrete structures] and other products. We set up Construrama as a franchise, and then helped the distributors with their business practices. Although the initial goal of Construrama was to hold on to the loyalty of our distributors, in the end it became a vehicle for providing them with solutions to their problems.

Hernandez: In developed markets [such as France and the U.S.], our opportunities to differentiate CEMEX relied more on product innovation. For example, we introduced Insularis in 2012: It is a ready-mix brand that improves the energy efficiency of buildings. Another example is Fortium ICF, a concrete product that is especially useful in putting up vertical walls.

In developing markets [such as Mexico, South America, and the Caribbean], we have a bigger opportunity. Our capabilities can help us orchestrate infrastructural offerings in a way that others cannot. For example, you might have a municipality with good tax revenue, but [leaders] don’t know how to structure a project, get the permits, or make a good decision about where to put in a road, a bridge, or a public housing project. If we can help orchestrate all this, then we can also provide value beyond supplying any of the main products.

Elizondo: We redefined our vision for CEMEX Mexico. We would create innovative solutions for the construction industry that improve the well-being of the people. We began to say we want a country with the kind of infrastructure that makes it competitive: highways, ports, airports, anything that reduces the costs of transport and production. We had a lot of experience transporting materials over long distances in trucks, railroads, and ships, so we knew the problems of having poor infrastructure, and we had years of experience helping to build ready-mix concrete roads. We knew that, compared with building asphalt roads, the initial investment was almost the same and the cost of maintenance was much lower.

For CEMEX to play that kind of role, the company needed new capabilities. We needed a new kind of executive, connected with the environment, who understood the real needs of any given locality. We changed old habits; for instance, in the past our people were not prepared to interact with our communities or with the media. We had become an efficient company with an inward-looking culture. But our operational guys realized that they needed to be able to talk to the media, and to local communities and their leaders. The operational guys had to recognize that it wasn’t enough to lower costs; they also had to connect with local people and address their concerns — for example, about the dust generated by trucks picking up materials. The sales guys had to learn not to wait for people to come in with orders; if markets were soft, they had to go out and propose solutions to problems that had not yet been brought to public attention. “We don’t just mend holes in your street — we can prevent those holes from recurring for the next 30 years.”

Partly it’s a matter of how we talk about these things with customers. We’re not just selling cement or ready-mix; we’re helping you build a street. We’re helping you build a home. We aren’t selling a product to you; we’re working with you on a solution.

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