Cemex and Strategic Challenges of Change: Are Any Lessons Learned?

Rasim Huseynov

Managing Editor of Seamless Trade and International Trade Consultant at Tevolution Ltd

Strategic Change Management

21 August 2020

Contents 

1.    Executive Summary

2.    Introduction                                                                                                   

3.    In Pursuit of Survival Reaching Path to Growth                                                                                                                                        

3.1.   In Search for Appropriate Model of Growth                                                                                                   

4.    Challenges of Globalisation and Cultural Transformation                                                                                                                                    

4.1.   Laying Grounds for Cultural Evolution                                                                                                 

5. ‘Cemex Way’ and Challenges of Evolving Change                                                                                                                                         

 5.1   Creating Capabilities for Weathering a Perfect Storm                                                                                                                                                   6.      Conclusion                                                                                                                  

7.      References                                                                                                                                   

1. Executive Summary

CEMEX is a good example of a successful company, having come from the humble beginnings of local Mexican business, becoming one of the leading pioneering enterprises in the globalisation of the world. How did a company from the developing world that had to deal with a bulky product that was costly to transport manage to become a leading global player in the industry?

Analysis of CEMEX’s almost three decades of global existence indicates that CEMEX applied a successful strategy for meeting the global challenges of its expansion, managed its growth skilfully by establishing unified cultural and information systems and approaches, accounted for risks related to its global expansion and managed to survive mitigating setbacks that threatened its existence. The company’s strategy adapted to its changing size and structure every time but three key principles always remained as a foundation whilst adapting to these new changes. Those three pillars were the main determinants of the company’s global success. Skilful use of leadership, culture and innovation in every aspect of its strategy was, and still is, the company’s main priority. This was not without its challenges. Risky decision making and not enough scrutiny on a corporate level had a detrimental negative effect on the whole business. It caused a loss of the company’s investment grade and for over a decade the company is trying as a matter of priority to regain their position of investment grade business. CEMEX is managing to turn this around and through optimising their portfolio and reducing their debt, it is on track to return to the status of an investment grade business. 

2. Introduction

Looking at almost three decades of CEMEX’s history, we get an interesting insight into the complexities of the choices and outcomes on the path to CEMEX’s global success. A careful look at how it became more successful than its competitors and why it managed to overcome the challenges of change and achieving higher profitability than its rivals makes the study of CEMEX a very valuable source for business management theory. In my analysis, I will look at CEMEX’s case through various management theories. I will apply Ansoff’s matrix and Ghemawat’s ‘AAA’ global strategy framework trying to shed more light on theoretical aspects of CEMEX’s path to growth and will analyse CEMEX’s approach to change by cross-referencing it with the Kaleidoscope framework and Forcefield analysis theories. I will also critically evaluate how its approaches to culture helped CEMEX successfully manage its acquisitions with a look at Edgar Schein’s theory of organisational culture and Ghemawat’s CAGE theory. How did CEMEX manage to achieve their desired level of growth and what were their setbacks? What did it do better than its rivals in keeping control of its global business and expanding it in an environment of persistent change? What were the shortcomings in its strategy and what caused its failures? I will attempt to answer all these questions in my essay.

3. In Pursuit of Survival Reaching Path to Growth

3.1 In Search for Appropriate Model of Growth

Ansoff’s Matrix is a corporate strategy framework which was created by an American scientist of Russian origin in 1957 for analysing the opportunities of growth for companies. According to Ansoff’s Matrix, companies can grow either by a) increasing their market share in an existing market with an existing product, or in other words, consolidating; b) modifying and/or extending its product or introducing new products; c) moving to a new market and/or d) diversifying its activities to new areas and becoming a conglomerate (Ansoff,1988). Each of these moves is associated with challenges and complexities at the level of risk and return, which need to be taken in consideration, as the return on investment and profitability are the main tasks of a business.

In analysing applicability of a matrix to the case of CEMEX, we can observe that it opted to grow first on its home market. Also, this first and less risky move, such as growing market share from selling the same product to the same market, notably brings consolidation and this is exactly what CEMEX did before stepping to international markets. It increased its market share and it consolidated its position but took the time to improve its service to clients through a better and faster service.

From analysing how the cement industry worked, we understand that in order to compete with rivals, CEMEX had to survive through growth. CEMEX is creating new products i.e. bagged cement. It is also introducing a new product called ‘timed delivery’ which it will extend beyond Mexican borders as it will grow. CEMEX also learned to grow through acquisition and what it entailed. Financial capabilities are not the only requirement for growth through acquisition. It needs to have a workforce and expertise ready to adapt to the new size and keep or adjust the business model and management systems in accordance with the new size and scope.

CEMEX needs to acquire, innovate and diversify to reach its goals of profitability. It manages to step into retailing, and cross-referencing with Ansoff’s Matrix, it diversifies to new market segments inside its geographical market. It did gain valuable information from consumers and increased its market share through vertical integration. It started acting more like a consultant advising local authorities and consumers providing design and consultancy services. This was all incremental to CEMEX’s business and here we can say it moved into the second and third elements of Ansoff’s Matrix through new products and expanding to new segments of the markets. These new products have been created by CEMEX through modification and innovation without the cost associated with the developing of a novel product. CEMEX expanded to new areas of growth in Mexico such as retail but managed to keep risk associated with it low through involvement with wholesalers as franchisees (Stewart, 2015).

CEMEX goes further in its conglomerate diversification in 1992 by creating its own in-house information technology company, Neoris (formerly CEMTEC), which spun off CEMEX in 2000 and is currently one of the world’s leading digital transformation companies. Also, in 2013, it becomes a strategic partner of CEMEX (Alper, 2013).

Those moves to diversify outside of core business gave CEMEX competitive advantage which allowed higher profitability compared to their peers. More than half of Neoris customers come from outside of CEMEX and the operation became very profitable. CEMEX grouped this business with Arkio that was another start-up and distributor of building material products to companies in emerging markets (Ghemawat and Matthews, 2004). 

The global expansion has taken CEMEX to Spain where it acquired two companies and invested in ports’ infrastructure gaining a logistical competitive advantage. In Spain, CEMEX increased the firm’s profits from 7% to 24% during the first two years of its acquisitions (Ghemawat, 2007). Investment in ports infrastructure can be classed as conglomerate diversification which is seen by investors as riskier than growth. But the lack of a particular service required by CEMEX in Spain, together with the competitive advantage the new logistics system brought, allowed CEMEX to create incremental synergies and further profitability. CEMEX was more profitable than its competitors Lafarge and Holcim with an operating margin of almost 12% in 2007 (Ghemawat, 2007).

Acquisitions of RMC increased revenue of CEMEX and at its peak CEMEX’s gross revenue reached almost 23.5 billion US$ in 2007 but it has declined since then gradually to approximately 14 billion US$ in 2019 (Macrotrends.net, 2020). This was CEMEX’s first step into Europe outside of Spain. Ansoff’s Matrix analytics identified non-related conglomerates as risky and so clarification is needed. European RMC (Ready-Mixed Concrete) markets and US operations (main market for Australian Rinker) have large element of ready-mix concrete which is a different product requiring different handling. This, as well as the diversified character of a RMC have affected CEMEX and its profitability through the fall of share prices factored it as a ‘conglomerate discount’, not showing confidence towards the move of CEMEX to these new markets particularly after the challenges of integration of RMC and the takeover of Rinker (Macrotrends.net, 2020). From 2000 to 2015 the company made a net loss and whilst gross operating margin were never below 27% since 2005, the high cost of debt and other operational expenses reduced profitability of the company significantly. Between 2016 and 2019, CEMEX’s net operating margin fluctuated between 8 and 14.5% with the lowest in 2019 and with net profits between approx. 0.5% and 8.5%, standing at 2.52% in 2019 (Macrotrends.net, 2020). Despite the increase in turnover which was still over 14 billion US$, in 2019 CEMEX’s profitability suffered substantially. The major argument point of CEMEX was the high EBITDA but after all the deductions of cost, taxes and debts the result is obviously worse than before the acquisition of RMC and Rinker.

Ansoff’s Matrix is a very valuable tool for analysing and planning growth but not without its limitations. Whilst it is giving good opportunity to analyse potential moves, it is only partially suitable for modern types of technological internationalisations where companies can move very fast by moving past traditional stages and with lesser risk.  It could not have taken these modern trends in consideration as it was created in 1957. It is not covering the whole cycle of growth as growth also can be achieved from scaling down and divestment and diversifying more productive segments of business. The role and risk of companies with large industrial assets has also been affected with the latest trends placing them in a higher risk bracket.

The global expansion as in the case of CEMEX is more complex than just international expansion and requires the consideration of cost implications for high coordination of dispersed activities and is very well researched by Ghemawat in his ‘AAA’ Global Strategy Framework and helping to plan growth of market share and of value creation. CEMEX used in full all three of ‘AAA’ to increase revenue from adaptation through successfully adopting its model on diverse geographical territories, aggregating through standardizing processes and economies of scale and scope as well as using arbitrage through risk reduction and use of country differences in knowledge sharing and global business optimisations. As Ghemawat rightly notes, the cement in its pricing in different parts of the world reflect local energy and transportation costs and what percentage of it bought in bulk. Through Ghemawats’s framework, we will be able to explain CEMEX’s profitability through arbitrage by improving corporate bargaining power and with the use of local knowledge it managed to monetize globally (Ghemawat, 2007). This explains why CEMEX became highly profitable by exposing itself to the risk of non-related conglomeration but taking into account synergies of potential moves.

4. Challenges of Globalisation and Cultural Transformation

4.1 Laying Grounds for Cultural Evolution

One of the key elements in successful integration of CEMEX’s acquisitions was the company’s organisational culture. The company’s culture was coming from the very top, from Stanford educated Lorenzo Zambrano whose progressive views and embracing of innovation and change created the right ground for creating incremental capabilities enabling CEMEX successfully operating its diverse global workforce. Although Zambrano was a visionary and major force behind the change, his authority and risky aggressive acquisitions policy weighed heavily on the company putting it at risk and caused decades of fighting for survival. He did not accept publicly his acquisition of Rinker as a mistake and in his last interview in May 2014 he just blamed his financing strategy on transaction funding through debt rather than through capital (Estandia, 2014). Zambrano as the paternalist visionary leader left a significant legacy on the culture of CEMEX. However, he created a robust structure able to sustain significant market volatility and its own strategic mistake and CEMEX demonstrating this by returning to an investment grade business through cost saving, debt reduction, divestment and optimisation of its assets and resources (Business wire, 2019).  

What is actually the culture of CEMEX? How did it bind employees through such diverse geographically, culturally and economically diverse regions? How did it manage not only to integrate them but to get a hold of its acquired subsidiaries through periods of crisis? Has it changed since? In order to understand CEMEX’s culture I would like to apply Edward Schein’s Organisational Culture model (Schein, 2004). We will look at CEMEX’s organisational structure through the prism of Schein’s four layers. As correctly concluded by (Johnson et al, 2017) organisational culture underpins many other branches of strategic management such as strategic capabilities, managing strategic change, leadership and management style as well as culture and experience.

My analysis of CEMEX’s culture indicates that culture was one of the critical factors in the global success of CEMEX. The “CEMEX Way” became an expression of vision, culture and stamp of approval and responsibility for every action taken by CEMEX. Short but eloquent - “CEMEX Way” became a concentrated cultural motto appealing to, binding and motivating its workforce across the borders. Gallo maintains that short stories are most appealing and motivating (Gallo, 2016). 

Edgar Schein on his four layers of organisational culture allows us to have a critical view on real cultural driving forces. First of four - values can be assessed through analysis of values declared by the company. A quick look at them can raise questions about the consistency of declared values and real outcomes. For example, Cemex always declared the importance of delivering value for shareholders but its aggressive take over strategy in fact eroded profits of its shareholders and it paid first the dividends of US$150 million after many years of no payment in order to convince shareholders in their declared commitment to shareholder value (Business Wire, 2019).  CEMEX declares its commitment to support local communities but this equally can get questioned through the apparent underpayment by CEMEX of local taxes coming into light after it declared its losses in 2009 (Harrup, 2014).

Beliefs are the second layer in Schein’s organisational cultures and can be discerned from how an organisation speaks about solving problems and the issues it faces. It can help us to have more insight on the style of leadership or other cultural beliefs. A brief look at how managers speak about strategy in CEMEX shows us a paternalistic character of organisational culture in CEMEX. All important things are coming from the very top of the organisation; from the CEO. Referring to how the ‘CEMEX WAY’ started with Juan Pablo San Agustin, who is the executive vice president of strategic planning and new business development, in his interview referred that Mr. Zambrano basically said that from now on, CEMEX would have company-wide common processes for its basic activities. These include accounts and most of technological activities (Stewart, 2015.)

Whilst the above relates equally to leadership style, which we are going to give a better look in the next chapter, this culture of innovation and technological integration with pioneering of most modern and sophisticated achievements in information technology had a very positive imprint on CEMEX’s behaviour, the third layer of Schein’s model . This, from my point of view will give us the answer to CEMEX’s resilience and efficiency even in critical situations. The way CEMEX encouraged innovation and entrepreneurship throughout the organisation, implementing ‘CEMEX WAY’ behaviour and language is important for understanding success in its strategy of integration of its acquisitions. Right behaviour encouraged through a democratic approach of taking the best results in one location and implementing it in all other without relevance of geography or hierarchy of organisation. ‘CEMEX WAY’ was a very skilful and smart strategic move to use discourse to connect global and business strategy.  Commenting on post-merger integration executive vice president of CEMEX San Augustin stressed that when we acquire a company, we listen first and second step we want to learn from acquired companies, and teaching them came only third (Stewart, 2015). This stresses a democratic undertone of a robust and centralized structure while allowing operational flexibility in order to respond to local market challenges.  I find that CEMEX’s culture has more similarities with the (Johnsons et al, 2017) discourse lens. Cemex’s strategy of using discourse in creating binding and legitimising dialogue with employees turned into its global strategy. The element of innovation and legitimacy in the case of CEMEX is playing a more dominant role than rationality and from my point of view is closest to its strategic model.

Finally, the fourth and central key to Edgar Schein’s layer relates to assumptions taken for granted. Those assumptions are mainly positive and many of them equally in harmony with the company’s declared principles. One is, however, that everything the CEO does or says will give always a positive outcome and become everyone’s conviction keeping important decisions away from scrutiny.

Edgar Schein’s theory is a very valuable theory helping us to analyse organisational cultures and their influence on all aspects of strategy.

Selecting by CEMEX its international moves carefully at the beginning of formulating its corporate strategy was an integral part of its cultural strategy and its success. Stepping into Spain less formally than in South American cultural relationships helped it from one hand to get closer and to better understand European business culture and from another hand consolidated its position within the sphere of Hispanic influence as well as having access to finance.  Ghemawat’s CAGE theory will explain very well that the distance between Latin American territories and Spain was shorter and hence more culturally suitable for Cemex than the more ‘distant’ Europe or US(Ghemawat, 2001). To what extent did it play a role reflecting on the company’s overall global performance? One can argue that, staying in its zone of cultural influence in Spanish speaking regions and south of US would save it from a fall in share prices and the threat of bankruptcy and helped it to stabilise, keeping the high level of profitability.

CEMEX’s cultural strength was a major part of its global success as well as cultural weakness being a source of CEMEX’s failure. Not visible to stakeholders but implying, the authority of Zambrano heavily weighed on the company. Excessive risk-taking on the corporate level was not scrutinised and resulted in the company’s heavy financial losses.

It takes leadership to accept one’s own mistakes and necessity of change. Leadership inspired by culture apparently is the main factor and determinant of CEMEX’s success and survival.  Without it, the company would have inevitably failed many times. In the next chapter, I would like to look at the influence of culture on leadership and how it helped or hindered CEMEX’s efficiency in meeting the challenges of change.

 

5. ‘Cemex Way’ and Challenges of Evolving Change

5.1 Creating Capabilities for Weathering a Perfect Storm

In order to understand CEMEX’s approach to change we need to look at the organisational context of CEMEX. Lorenzo Zambrano, CEMEX’s CEO, is the main driving force behind the change and he is a real visionary who can feel and anticipate ways the economy and politics will be moving globally. He is the top manager who can tick all the boxes of (Ulrich et al, 1999) attribute to best top managers such as being visionary of future strategy, makes sure everyone committed to strategy and becomes a person symbolizing CEMEX to the degree that commentators expressed concerns on future of CEMEX in absence of Zambrano (Estandia, 2014). Zambrano leaves behind a capable and robust business structure and he was a transactional leader as much as he was a transformational leader.  Zambrano had a constant discourse with the company and stakeholders in his approach to change management. He put change, growth and expansion and constant improvement in direct link with survival. In his interview to Boston Consulting Group he states that CEMEX’s global expansion was nothing but strategy of survival in a situation with a potential takeover after the NAFTA free trade agreement went into force on 1st of January 1994 (BCG.com, 2012). All-important proposals were coming from the top and as in the words of executive vice president for Strategy in an interview, information technology introduction and the ‘CEMEX Way’ were not subject to debate (Stewart, 2015).

We can say that CEMEX’s approach to change was predetermined by anticipated and real changes on the one hand as well as through adaptation to both changing roles and changing organisational structure from another. Diversification from one risk made it exposed to other kinds of risk and gaining advantage created associated responsibilities. As a private limited company, CEMEX could not raise money on capital markets like its rivals but the moment they became publicly listed they had to meet requirements for listed companies and became more susceptible to the market’s perception of its moves and values of its shares. Entering European markets created a portfolio of countries with two speed growth such as emerging or mature economies (BCG.com, 2012). Diversification from country risks brought them some other challenges. The stakeholder model for the global corporate and additional scrutiny also was a growing factor that needed to be taken in consideration.

CEMEX is organisation which has a much centralised structure with elements of flexibility granted to subsidiaries to enable them timely respond to local challenges. As managers stated this was particularly important especially after taking on board a large chunk of Ready-Mix Concrete which was subject to a large amount of variations in process and distribution compared to more standardized cement (Stewart, 2015). CEMEX managed this change well, succeeding to integrate earlier dispersed companies of RMC but it did come at financial cost. In a previous chapter, I noted these non-conglomerate diversification strategies carrying risks which CEMEX ignored or was not aware off. The result of these financial implications were erosions of profits by CEMEX and the global financial crisis made the situation worse and with acquisitions of Rinker put the company on the brink of bankruptcy. As the company grew, Mr. Zambrano never introduced the types of organizational changes that can help act as a system of checks and balances such as the appointment of an independent chairman to act as a counterbalance in the boardroom. Additionally, CEMEX’s policies on top managers pay-oversight and transparency was far lagging behind internationally recognized best practices. (Flannery, 2011). 

I would like to look at the actual behaviour of CEMEX and try to follow it from time of Zambrano becoming CEO and divide it into three periods. The first period was associated with the Mexican crisis and until 2005, second is the period after acquisitions of RMC and Rinker and third the period after the departure of Lorenzo Zambrano in 2014 until the current time.

I would like to look at the actual behaviour of CEMEX and try to follow it from time of Zambrano becoming CEO and divide it into three periods. The first period was associated with the Mexican crisis and until 2005, second is the period after acquisitions of RMC and Rinker and third the period after the departure of Lorenzo Zambrano in 2014 until the current time.

I would like to look at the above events through the prism of change kaleidoscope framework and apply it to Forcefield analysis to demonstrate how and when it affected leadership style and at what speed and to what degree. Balogun’s and Hope-Haileys’s kaleidoscope looks at how various contexts can help supporting or resisting change and Forcefield analysis approaches it in comparing forces in the company depending on variations in preparedness and capabilities (Johnson et al, 2017). Both frameworks complement each other and I would like to look if CEMEX’s change in responses can be identified through the prism of these frameworks. Balogun’s and Hope-Hailey’s kaleidoscope looks at the time factor, meaning urgency for change as well as scope, diversity, resources, managerial capabilities, powers behind the change and readiness of employees to change.

CEMEX built capabilities for change and innovation right from the beginning of Zambrano’s leadership. In responding to environmental challenges and rivals starting from the Mexican crisis, he consolidated his business in Mexico first and then built technological and human resource capacity by training personnel to integrate acquired firms. He prepared the company for the challenges of change and reduced the time needed to integrate firms after the acquisition accelerating CEMEX’s growth. Zambrano is the person behind the change and he had the support of members of his team being stakeholders in his agenda to keep the company away from predatory moves of rivals.

From his time stepping in as CEO Zambrano built the company’s organisational culture around leadership, innovation and constant improvement transforming the organisation’s capability and adaptiveness to change. This resulted in higher than industry profits and efficient use of resources with management information for streamlined decision making accessible through the global supply chain in real time. Forcefield analysis with high capabilities and high readiness will put CEMEX in the Participation and Collaboration bracket. Change after the Mexican Crisis, however severe it was, was managed skilfully by CEMEX. This incremental management of change from 1992 to 2005 fits into evolution and adaptation through transformation and realignment of Balogun’s and Hope-Hailey’s kaleidoscope.

The second challenge after the takeover of Rinker’s diversified business demonstrated that CEMEX had built the capacity for managing change and that it could absorb large organisations through information and cultural systems. Acquisition of Rinker which coincided with the global financial crisis put CEMEX under enormous pressure. This can be associated with a big bang or revolutionary change in business which would trigger reconstruction or turnaround according Balogun’s and Hope-Hailey’s kaleidoscope. The diverse base of CEMEX’s business allowed it to sustain this crisis but inevitable losses put the company in a weaker position than its competitors as it was traded with higher levels of debt and hence was getting lower returns despite higher operational profit. The powerful position of Zambrano allowed him to avoid the revolution scenario of Balogun’s and Hope-Hailey’s revolution model. 

This was not accepted by Zambrano and only after his unexpected death; CEMEX embarked on a new strategy of returning to investment grade business through selling assets and paying dividends to shareholders in order to regain the confidence of shareholders and return to investment grade business (Reuters, 2014).

CEMEX announced the sale of CEMEX’s Spain white cement division operations and closed its sale to Turkey’s Çimsa (Globalcement.com, 2019) and it will use proceeds for paying an imposed tax penalty, balancing its books and paying dividends to shareholders. It also continues the program of its divestment by selling parts of its operation in the UK (Businesswire.com, 2020) and in the US (Bloomberg.com, 2019). This puts CEMEX’s strategy model officially to the reconstruction and turnaround mode of Balogun’s and Hope-Hailey’s strategic change type. This strategic turn was not declared officially by Zambrano but it was inevitable anticipating the scale of losses and challenges facing the company. The company demonstrates readiness for change and using its capabilities and cross referencing with Forcefield analysis goes in the perceived evolutionary way through collaboration and participation.

5. Conclusion

CEMEX managed to create a culture of leadership and innovation placing themselves alongside the leading construction companies in the world. Environmental changes and strategic decisions resulted in adverse effects on the company’s financial standing. CEMEX built capabilities allowing the company to sustain and adapt to a new environment. Excessive risk taking and lack of scrutiny in a global takeover strategy affected CEMEX’s credit standing. Its current strategy is concentrated on returning to investment grade status and optimising its loss making operations. CEMEX is on its way to achieve its targets and regaining the confidence of its shareholders. 

 

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