Cemex Company’s Strategic Analysis

Introduction

Cemex opened doors of operations in 1906 with its headquarters based at Monterrey in Mexico. From 1985 onwards Lorenzo Zambrano took over the family business as the CEO having joined the company in 1968. With a wealth of accumulated experience from long years of service in various positions in the company, he has steered on the business to become a global cement manufacturing giant to reckon with. Due to its heavy reliance on the homebuilders for a long time, it laid very little emphasis on branding. However the need for branding set in later with the launch of aggressive campaigns to promote the company brand in Mexico through the placement of the Cemex brand on its products and items ranging from cement bags, delivery trucks, and soccer stadiums (Cemex Cement Company, 2008 para.1).

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Internal analysis

Cemex Company has grown tremendously since the early 1990s through a series of aggressive acquisitions from a local manufacturer of cement in Mexico to become the third-largest cement company in the world only behind Lafarge and Holcim. The company boasts of unrivaled expertise in branding cement for individual consumers, handling complex distribution and delivery logistics, and building efficient technological infrastructure. It is all evident in its integration of information technology in its ready mix and cement business. The company has also demonstrated accumulated experience at the integration of acquired companies across the world in its core business.

In a cost-cutting measure to cut the cost of Information technology, the company developed a global standardization program commonly referred to as the CEMEX Way for $200 million in 2000. In addition, the program was necessitated by the desire to leverage the company’s knowledge of business processes across the diverse business locations around the world. The core aim was to document the best business practices to share them across the organization globally. The result was an annual saving of a whopping $120 million in addition to expeditious integration of acquired firms and increased efficiency in operations. With the acquisition of Tolteca Company, Cemex became the 2nd largest cement firm in Mexico. This was aimed at repositioning itself in the market amidst building competition as a result of new entrants in the Mexican market. One of its latest acquisitions was Southdown of the USA which helped it boost its image in the market. This was followed by further international acquisitions in Europe at a time when global consolidation in the cement industry was rising.

As a result of long experience of developing its own Information Technology systems, its IT experts developed competency in integrating IT platforms. This prompted the company to diversify into IT by setting up Cemtec to provide in-house IT services. The company would also offer consultancy services to other companies in a bid to utilize its large unutilized capacity in terms of personnel and to increase the revenue base. The IT group has played a huge role in integrating the best management practices with the organizational framework across the globe.

External Analysis

Cemex operates within a stiff globally competitive arena full of challenges emanating from among others the current global recession and the surging energy prices as a result of escalating fuel prices. Energy cost continues to be one of the major components of variable cost in cement production and Cemex is not an exception. The spiraling fuel prices combined with escalating global demand have conspired to push the prices upwards increasing the operation cost of companies. This has had the effect of precipitating the revenues of companies. Its major competitors are mainly Lafarge from France and Holcim from Switzerland. These are large multinationals with several holdings across the globe hence posing serious competition to Cemex. While Cemex concentrated its marketing and expansion in emerging Latin markets due to cultural proximity, these companies had established a solid base in the developed world and were making impressive roads in the emerging markets.

One of the most challenging tasks for Cemex was its entry into the Philippines market due to a lack of control of distribution channels by distributors. This forced the company to develop its distribution channels to optimize revenue at a minimum cost rate. The success to which this was achieved has helped a model platform over which other distribution channels were built in similar environments. The global business environment in the cement industry today is full of competition arising from emerging companies and established multinationals that have waged a take over the campaign. This has given rise to an urgent desire to develop an aggressive promotional campaign through product branding and advertising in various media that is growing to near combatant levels. Firms are now spending fortunes in these campaigns as they try to outdo each other and endear themselves to the consumers (Hau & David, 2005 para.6).

The market is also still struggling to recover from the adverse effects of the global recession which has drawn down sales to catastrophic levels. This has continued to draw down revenue as firms have been forced to cut down the output too much the dwindling consumers demand. On the same note, undercapitalized companies the world over are either closing shop or being taken over by industrial giants to save them from imminent bankruptcy.

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SWOT Analysis

Strength

The greatest strength of Cemex lies in its ability to integrate information technology with the best management practices within its organizational framework. This has enabled the company to enhance the fast and efficient transfer of information between its holdings across various regions of the globe. The result was enormous savings in IT cost and a significant drop in the cost of administration. In addition, it has enabled the company to achieve a high integration rate of its acquired units along with standardization of managing practices and quality across its holdings.

CEMEX also has a strong distribution network for building materials that operate under retail brand Construrama that has facilitated the efficient transfer of building materials from its production center to the end-users. This kind of efficiency has placed it ahead of its competitors. Distribution costs have greatly been reduced in the process boosting the earnings of the company. In addition, the strong capital base of the company has served to cement the standing of the company in the market besides offering it a strong launchpad for further expansion (Freedonia Group Inc., 2008 para.4).

Weakness

Despite the expansionary moves undertaken, Cemex continues to rely heavily on the Latin market with about 68% of its global sales coming from the Latin market. This means that the company is yet to fully shed its cultural proximity orientation to system proximity which casts doubt on the effectiveness of the implementation of the system proximity approach. The company is yet to do enough to tap into emerging markets of Brazil, India Russia, and China which indicate higher prospects as a result of their rapid growth.

Opportunities

Massive opportunities still lie ahead in the largely untapped markets of South America. The emerging markets of Venezuela, Panama, the Dominican Republic, and Colombia present an opportunity for the company to dig deeper into the markets and earn more revenues. With a large demand for infrastructure relative to the population in these nations, there can never be better news. Furthermore, its cultural proximity in these nations gives it higher leverage over its competitors who are still struggling to make inroads into the new markets.

Threats

The major threat to the company lies in the current recession which has hurt the global aggregate demand. Many countries have resulted in huge cuts in infrastructural expenditure while the growth in the construction industry has drifted south. This has forced industries to reduce their output meaning a reduction in revenue. This threatens to cripple the company’s operations while causing a huge slump in revenue. The rapid expansionary strategy could also pose a challenge to the financial position of the company and also cause bottlenecks in management. The buying off spree could spark off a wave of loss-making if not carefully approached.

Porter’s 5 forces analysis

Power of supplies

High: Cemex has established a very comprehensive supply chain that is proving to be quite efficient in supply.

Power of buyer

Medium: The current economic crisis has crippled the buyers’ power of consumers to dangerous levels. The government infrastructural demand continues to buoy the demand though.

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The threat of new entrants

High: The competition for the share of the cement market continues to be stiff particularly between the large multinationals

Competitive rivalry

High: Increased aggressiveness in marketing has led to an increase in the rivalry between the market players as they seek to protect their traditional domains.

Threat of substitutes

Low: The nature of cement as a key component in construction has eliminated any serious threats of substitutes

Strategic Challenges

In the light of the current economic recession, Cemex Company ought to consider the likely impact of the recession on its expansionary strategy and the possible mitigation measures available to contain the effects. The spiraling effects of the global recession are already taking a heavy toll on the total revenue of the company owing to the sharp decline in consumer demand. These calls for urgent mitigating measures to arrest the drastic fall in revenue which if not checked might lead to the closure of some factories reversing the gains that have been made so far. Cost-cutting measures must be integrated into the business operations to avert further loss in revenues. The firm may have to cut down production to reduce the piling inventory in its warehouses thus reducing the cost of storage. This excess inventory places a heavy premium on the firm, especially during this recession.

On the other hand, the management might be forced to go back to the drawing board and assess the viability of any further expansions. Many companies are already reeling under the effects of the financial crisis while others are filing for bankruptcy. Buy-offs at this state might result in the takeover of companies already deep in debts thus increasing the company debts which would place a huge liability on the company.

Strategic Alternatives

As it considers it’s a strategic alternative, Cemex will have to bear in mind its marked success in the integration of IT in its management possesses which gave it a head start in business information. With an annual savings of $120 million in annual savings, this seems a formidable strategy for the company in its future endeavors. Of worth noting is the speed at which they have been able to integrate acquired firms in its system. Cemex seems to have found a winning formula that will buoy it over the next decades. Its strong presence in the market has also helped in boosting the product image and helped it to rise from the shadows to become the third-largest cement company in the world. With its presence in 50 countries and recording a $2.11 billion profit in 2006, the company strategies seem to have largely succeeded.

Maintain the current strategy

The current operations strategy seems to have worked perfectly to the advantage of the company. The aggressive integration of information technology into the system and rapid technological inventions have ensured the company remains ahead in global competitiveness besides assuring it affirm place in standardization of quality in products and services. The flow of transfer of the best management practices has been facilitated by the Cemex way program whose implementation has been quite successful.

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The current strategy however poses a risk of inhibiting innovations as a result of the standardization of systems.

Standardization has a counterproductive effect of discouraging innovations by acting as a disincentive to new initiatives especially in the realm of management. This could hamper the development of new products and in the process inhibit future expansions.

Venture into the emerging markets

The emerging markets of India, Russia, Brazil, and China present a renewed opportunity for the company to expand. The bullish in these economies has seen a dramatic rise in appetite for cement in the construction industry. Their growth in demand for cement has been registering a consistent high of 7% with India alone representing a demand of 600 million tones of cement in 2006. Although competition is stiff in these markets Cemex could use its financial clout in the market to launch an attack in these markets as a result of its higher leverage. Cemex has been able to implement a production to distribution chain which has been supplemented by cross-border scale economies in the fields of IT, trading, and technological advancement as Ghemawat (2003 para. 9) observes.

The approach however presents a potential risk as unchecked expansion could dilute the capital of the company weakening its financial position. Increased acquisitions could also trigger a wave of consolidation exercises among its competitors which could push the company out of the specific market. Huge market expansions also come with an increase in administration costs which dilutes the profit margins of the firm by increasing the operation cost. Worth mentioning is that the gap in cultural proximity which Cemex has heavily relied on for a long time could pose a huge challenge in penetration into these markets.

Marketing promotion

The increased level of competition in the international market has necessitated the company to embark on aggressive marketing promotions to enhance its brand name and increase brand awareness. Current branding and repackaging exercises have so far shown generous results. Joann (2009 para.1, 2), points out that innovation in packaging can transform a product from a commodity-driven product to a premium product category. Current expansionary strategies ought to be backed with aggressive marketing to optimize their benefits. The cost-cutting framework should be integrated into the process to act as a guide to minimizing cost while ensuring benefits are maximized. However, any marketing strategy ought to be informed by aggressive market research to attain the intended results. This is because the different market is unique in terms of cultural diversity, management practices, and regulatory framework. This is to means that not all marketing techniques can be replicated in all nations. So they have to be tailor-made for each specific market.

Marketing campaigns run the risk of not being effective if not directed to the target market. They can also lead to the wastefulness of resources when they fail to succeed or when the right training is not administered to sales personnel. Sometimes marketing can trigger combative competition in the market-leading to the business rivalry which can seriously harm the business.

Pursue product diversification

Product diversification of the firm especially with the launch of Cemtec Company and the new venture to the manufacturing of construction machinery has helped the company to spread its risks besides broadening its new revenue base. Further, the move has also created an opportunity for the company to utilize its accumulated experience and expertise in information technology innovations. Cemex has had a huge highly skilled workforce in IT whose capacity was not fully utilized that is now being harnessed to earn additional revenue and to support the company’s infrastructure.

Product diversification on its part could divert the attention of the company from its core line of production thus damaging the image of the company. The resultant effect could be a stream of loss-making giving its competitors a leeway to make their inroads.

Recommendations: Pursue alternative 3

During these periods of biting recession and stiff completion from Lafarge and Enron among others, part of the marketing efforts should be dedicated to improving the customer care centers. Customer care is one of the most powerful tools of customer retention and also attracting new ones, Cemex ought to embark on enhancing customer service to ensure quick response to customer’s requests and inquiries. This will move customer satisfaction to another level and also increase flexibility in the delivery of service. Sales staff should be trained in public relations to treat customers professionally. This will amount to increased sales volumes and customer loyalty through establishing the center for quality service with a difference.

Aggressive advertising and sales promotion using billboards, banners, and media houses will come in handy to complement the company’s re-branding efforts and also to boost the sales volumes and enhance brand awareness. This will ensure that Cemex stamps its authority and reclaims its niche in the market as a market leader. As I said earlier, these efforts will have to be guided by cost-minimizing framework that will be ensuring that the accruing benefits are optimized. These promotions will call for concerted efforts by the management and staff to coordinate their operations to ensure tangible results are realized.

Works Cited

Cemex Cement Company. About us, 2008. Web.

Freedonia Group Inc. Global cement demand to grow 4.7% annually through 2012, 2008. Web.

Ghemawat, Pankaj. Globalization: The Strategy of Differences, 2003. Web.

Hines, Joann. Staying ahead of the curve, 2009. Web.

Lee, Hau and Hoyt, David, W. CEMEX: Transforming a Basic Industry Company, 2005.

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