INTEGRATIVE CASE STUDY: GLOBALISATION “THE CEMEX WAY”

BACKGROUND
When one wants to globalize a company, especially when it is from a developing country
like Mexico, you really need to apply more advanced management techniques to do
things better. We have seen many cement companies that use their capital to acquire
other companies but without making the effort to have a common culture or common
processes, they get stagnant.
—Lorenzo Zambrano, Chairman and CEO CEMEX

On June 7, 2007 Mexico-based CEMEX won a majority stake in Australia’s Rinker Group.
The $15.3 billion takeover, which came on top of the major acquisition in 2005 of the
RMC Corporation then the world’s largest ready-mix concrete company and the single
largest purchaser of cement made CEMEX one of the world’s largest supplier of
building materials. This growth also rewarded CEMEX’s shareholders handsomely
through 2007, though its share price had fallen precipitously in 2008 in response to the
global downturn and credit crisis coupled with the substantial financial leverage that
had accompanied the Rinker acquisition.

CEMEX’s success over the 15 years from its first international acquisition in 1992 to the
Rinker acquisition in 2007 was not only noteworthy for a company based in an emerging
economy, but also in an industry where the emergence of a multinational from an
emerging economy (EMNE) as a global leader could not be explained by cost arbitrage;
given cement’s low value to weight ratio little product moves across national boundaries.

Much of CEMEX’s success could be attributed to how it looked at acquisitions, and the
post-merger integration (PMI) process that ensued, as an opportunity to drive change, and
as a result, continuously evolve as a corporation. . In addition, CEMEX was known as
an innovator, particularly in operations and marketing, and the CEMEX Way
encouraged innovation, particularly if it could be applied throughout the firm. For
CEMEX, the resulting innovation and integration process was an ongoing effort as it
recognized the value of “continuous improvement.”

The development of CEMEX’s growing international footprint and the associated

learning process could be divided into four stages: Laying the Groundwork for
Internationalization, Stepping Out, Growing Up, and Stepping Up. (See Table 1.) This
case details how CEMEX has exploited its core competencies, initially generated at
home, and enhanced these with learnings from new countries, to begin the cycle again.

Table 1: CEMEX Internationalization

Timeline

Year Stage Key Events Key Steps in

Internationalization
Laying the
Groundwork

1982 Mexican crash

1985 Zambrano named CEO
1989 Consolidates Mexican market

1989 iti
Anti-dumping penalties imposed
on exports to U.S.
Stepping
Out
1992 Spain
1994 Venezuela, Panama
1995 Mexican recession Dominican Republic

Growing Up
1996 Colombia
1996 Death of CFO PMI applied to Mexico

1997- Philippines, Indonesia, Egypt,

1999 Chile, Costa Rica

1999 NYSE Listing

Stepping Up
2000 Southdown US
2005 RMC (UK- based global ready-

2007 i ) (Australian/US based

Rinker
global concrete, aggregates)

LAYING THE GROUNDWORK FOR INTERNATIONALIZATION

In the 25 years leading up to the Rinker deal, CEMEX had evolved from a small, privately-
owned, cement-focused Mexican company of 6,500 employees and $275 million in revenue
to a publicly- traded, global leader of 65,000 employees with a presence in 50 countries and
$21.7 billion in annual revenue in 2007.

Well before its first significant step toward international expansion in 1992, CEMEX had
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. It also
had mastered the art of acquisition and integration within Mexico, having grown though
acquisitions over the years. Between 1987 and 1989 alone, the company spent $1 billion in
order to solidify its position at home.

When the current CEO, Lorenzo Zambrano, assumed this post in 1985, Mexico had already
begun the process of opening up its economy, culminating with its entry into NAFTA. The
1982 crash undercut the state-led nationally-focused model that had been predominant
in Mexico over the years, and Mexico began the process of entering GATT, the
precursor of the WTO. Recognizing that these events would significantly change the
Mexican cement industry from a national to a global game, Zambrano began preparing the
firm for a global fight.

The first step would involve divestitures from non-related businesses and the disposal of
non-core assets. CEMEX also began “exploring” opportunities in foreign markets
through exports, which required a fairly aggressive program of building or buying
terminal facilities in other markets. Finally, the company began laying the groundwork for
global expansion by investing in a satellite communication system, CEMEXNET, in order to
avoid Mexico’s erratic, insufficient and expensive phone service, and allow all of CEMEX’s
11 cement factories in Mexico to communicate in a more coordinated and fluid way. Along
with the communication system, an Executive Information System was implemented in 1990.
All managers were required to input manufacturing data—including production, sales and
administration, inventory and delivery— that could be viewed by other managers. The
system enabled CEO Zambrano to conduct “virtual inspections” of CEMEX’s operations
including the operating performance of individual factories from his laptop computer.

STEPPING OUT
In 1989, CEMEX completed a major step in consolidating its position in the Mexican cement
market by acquiring Mexican cement producer Tolteca, making CEMEX the second largest
Mexican cement producer and putting it on the Top 10 list of world cement producers. At
the time of the acquisition, CEMEX was facing mounting competition in Mexico. Just three
months before the deal with Tolteca was finalized, Swiss-based Holderbank (Holcim), which
held 49% of Mexico’s third largest cement producer Apasco (19% market share), announced
its intention to increase its cement capacity by 2 million tons. This, along with easing foreign
investment regulations that would allow Holderbank to acquire a majority stake in Apasco,
threatened CEMEX’s position in Mexico. At the time, CEMEX accounted for only 33% of the
Mexican market while 91% of its sales were domestic.

In addition to these mounting threats in its home market, CEMEX was confronted
with trade sanctions in the United States, its largest market outside of Mexico. Exports to
the U.S. market began in the early 1970s, but by the late 1980s, as the U.S. economy and
construction industry were experiencing a downturn, the U.S. International Trade
Commission slapped CEMEX with a 58% countervailing duty on exports from Mexico to the
United States, later reduced to 31%.

In 1992, CEMEX 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. The primary motivation for entering Spain was a strategic
response to Holcim’s growing market share in Mexico. As Hector Medina, CEMEX
Executive VP of Planning and Finance, explained, “Major European competitors had a
very strong position in Spain and the market had become important for them.”

A further important reason for the acquisition was that Spain during this time was an
investment- grade country, having just entered the European Monetary Union, while
domestic interest rates in Mexico were hovering at 40%, and Mexican issuers faced a country
risk premium of at least 6% for offshore dollar financing. Operating in Spain enabled CEMEX
to tap this lower cost of capital not only to finance the acquisition of Valenciana and Sanson,
but also to fund its growth elsewhere at affordable rates. While this benefit could have been
obtained in any EU country, Spain offered considerable opportunities for growth and
was relatively affordable. In addition, the linguistic and cultural ties between the two countries
made it a sensible strategic move.

In order to pay off the debt taken on to fund the acquisition, CEMEX set ambitious targets
for cost recovery. However, it soon discovered that by introducing its current Mexican-based
best practice to the Spanish operation, it was able to reduce costs and increase plant
efficiency to a much greater extent, with annual savings/benefits of $120 million and an
increase in operating margins from 7% to 24%.
Thus, while the primary motive for the Spanish acquisition was to respond to a competitive
European entry in its home market, a major source of value resulting from the acquisition
was the improvement in operating results due to the transfer of best practice from a
supposedly less advanced country to a supposedly more advanced one.

Further, although it had acquired and integrated many firms within Mexico, this acquisition,
because of its size and the fact that it was in a foreign country, forced CEMEX to formalize
and codify its Post Merger Integration (PMI) process. CEMEX also enhanced its
capabilities through direct learning from Spain. Toward the end of the 1990s, CEMEX
found that there were few acquisition targets that met its criteria of market
growth/attractiveness and “closeness” to CEMEX in terms of institutional stability and culture
at a reasonable price, and began to consider diversification into other activities, among other
things

ACCELERATING INTERNATIONALIZATION AND CONSOLIDATING THE CEMEX WAY

CEMEX’s move into Spain was followed soon after with acquisitions in Venezuela, Colombia,
and the Caribbean in the mid-1990s, and the Philippines, and Indonesia in the late
1990s. These acquisitions, by and large, could be seen as exploiting CEMEX’s core
capabilities, which now combined learnings from the company’s operations in Mexico and
Spain.

The PMI process also underwent a significant change during this period. 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. As a result of the difficult integration
process that ensued, CEMEX learned that alongside transferring best practices that had
been standardized throughout the company, it needed to make a concerted effort to learn
best practices from acquired companies, implementing them when appropriate. This process
became known as the CEMEX Way.

The CEMEX Way, also known as internal benchmarking, was the core set of best business
practices with which CEMEX conducted 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.

As part of the integration phase of the PMI, the CEMEX Way process involved the dispatch
of a number of multinational standardization teams made up of experts in specific
functional areas (Planning Finance, IT, HR), 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. Those processes were then benchmarked against internal and external
practices. Processes that were deemed “superior” (typically two to three per
standardization group or 15-30 new practices per acquisition) became enterprise standards
and, therefore, a part of the CEMEX Way. As one industry observer noted, CEMEX’s
strategy sent an important message of, “We are overriding your business processes to get
you quickly on board, but within the year we are likely to take some part of your process,
adapt it to the CEMEX system and roll it out across operations in [multiple] countries.”
By some estimates, 70% of CEMEX’s practices had been adopted from previous
acquisitions. 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.

A key feature of the PMI process was the strong reliance that CEMEX placed on
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.

PMI teams were formed ad-hoc for each acquisition. Functional experts in each area
(finance, production, logistics, etc) were selected from CEMEX operations around the world.
These managers were then relieved from their day-to-day responsibilities and sent, for
periods varying from a few weeks to several months, to the country /ies where the newly
acquired company operated.

Because these managers were the ones who did at home what they were teaching newly
acquired firm’s managers, they were the best teachers as well as the most likely CEMEX
employees to identify which of the standard practices of the acquired firm might make a
positive contribution if adapted and integrated into the CEMEX Way. On the other hand,
because they were seen as the best and the brightest within CEMEX, these managers had
the legitimacy to propose and advocate for changes in the firm’s operation standards in a
way that no other manager could. Hence, PMI team members were low enough in the
organization that they were in a unique position to identify and evaluate different ways of
doing things. At the same time, however, these managers were high enough in the
organization that they could effectively ‘sell’ the value of changing a particular practice to
corporate level managers.

Drawing key people from multiple countries to form these teams represented a significant
challenge for what CEMEX referred to as ‘legacy operations.’ Since these positions were not
covered with new hires and lowering performance was not in the realm of possibilities,
ongoing operations had to find ways to do the same work with less people and uncover the
capabilities of those that remained.

A significant step in consolidating the CEMEX Way and making “One CEMEX” a global
reality occurred as the result of the tragic death in 1996 of CEMEX’s CFO Gustavo
Caballero. 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. When Garza took charge of the
Mexican operations, he decided to “PMI Mexico,” to apply the PMI process to Mexico as
if it had just been acquired. Roughly 40 people broken down into 10 functional teams spent
between two and three months dedicated to improving the Mexican operation. 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.

Improvements resulting from the CEMEX Way were not limited to operational processes.
During the 1990s, CEMEX also developed a branded cement strategy in Mexico that
addressed the specific needs of customers for bag cement. While bulk cement accounted
for roughly 80% of CEMEX’s cement sales in developed countries, bagged cement
represented the same percentage in developing countries like Mexico, reflected the fact that
many households built their own houses. These customers were willing to pay a premium
for known quality and convenient distribution, and CEMEX steadily introduced value-added
features for these customers.
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.

STEPPING UP
Toward the end of the 1990s, CEMEX found that there were few acquisition targets that
met its criteria of market growth/attractiveness and “closeness” to CEMEX in terms of
institutional stability and culture at a reasonable price, and began to consider diversification
into other activities, among other things. However, in order to “shake up” its strategic
thinking, 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. One important resulting change was to redefine large markets, such as the
United States, into regions. Once this was done, the United States, which CEMEX
planners had viewed as a slow growing market with little fit with CEMEX, was transformed
into a set of regions, some with growth and other characteristics more aligned with
the rapidly growing markets CEMEX was used to. 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. With this reframing, other targets were identified,
most importantly RMC, a UK-based, ready-mix concrete global leader.

On March 1, 2005, CEMEX finalized its $5.8 billion acquisition of U.K.-based RMC.
This acquisition, which surprised many in the industry who assumed that RMC would be
acquired by a European firm, was CEMEX’s first acquisition of a diversified multinational.

To prevail, CEMEX had to pay a 39% premium,and the financial markets did not
respond favorably. CEMEX's share price dropped 10% 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.

The acquisition of RMC significantly changed CEMEX’s business landscape. The deal
gave the company a much wider geographic presence in developed and developing
countries alike, most notably France, Germany, and a number of Eastern European
countries. Analysts predicted that as a percent of product revenue, cement would fall
from 72% to 54% and aggregates and ready-mix concrete would nearly double from 23%
to 42%. Meanwhile, revenue from CEMEX’s Mexican operations would fall from 36% prior
to the deal to just 17%.

Financially, RMC was suffering. The company recorded a net income loss of over $200
million in 2003, and was trading at six times EBITDA, compared to industry average of 8.5
to 9 times. RMC profit margin of 3.6% was far below the ready-mix concrete average 6% to
8%.

Culturally, RMC was the polar opposite of CEMEX. RMC was a highly decentralized
company with significant differences across countries in business model, organizational
structure, operating processes, and corporate culture. CEMEX, in contrast, brought the
CEMEX Way and a single operating/engineering culture that connected more readily at the
plant and operation level than RMC.

And yet, despite all of RMC’s challenges, CEMEX was able to work its PMI “magic” in a very
short period of time. Within one year, CEMEX had delivered more than the $200 million in
the synergy savings it promised the market and it expected to produce more than $380
million of savings in 2007. 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 and thus
at least some analysts questioned whether CEMEX would be able to work the same magic
once again.

Source: Adapted from Lessard, D.R., Reavis, C. 2016. CEMEX: Globalisation “The CEMEX
Way”. Online:
https://mitsloan.mit.edu/LearningEdge/strategy/CEMEXGlobalization/Pages/default.aspx