In May 2000, CEMEX was preparing to expand through acquisitions in Asia, Africa and the Middle East. What kind of global giant do you think Lorenzo Zambrano wanted the firm to become? Using module theory and evidence from the CEMEX case study, critically evaluate his chances of success.
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Lorenzo Zambrano’s bid to dominate the global market in cement manufacturing, distribution and overall profitability is the main driving force in expanding overseas through Foreign Direct Investment. As he notes, CEMEX is looking forward to control at least 25 percent of the global market or better still maintain the global leadership in cement production and marketing (Bartlett, Ghoshal & Beamish, 2008).
In fact, the main pushing force behind this desire can be attributed to cut-throat competition that has prevailed in the international manufacturing and marketing of cement. Market rivals such as Hoderbank and Lafarge are indeed the main challenge to CEMEX as the latter seeks to lead while others follow.
In order to beat this growing competition both for domestic and foreign markets, CEMEX is shrewd in its management programs in the expansion process. The chances for success are very tricky and unless the company develops a blended approach in its expansion bid, the future may as well be bleak. Nonetheless, good management of its affairs as already demonstrated in its past records is likely to maneuver CEMEX to market leadership.
For instance, it has changed quite a number of its managerial aspects as it seeks to expand its operations in overseas markets. Earlier on, the management of CEMEX noted that the earnings of the company had reduced significantly due to geographical diversification. Hence, between the periods of 1994 to 1997, the cash flow in terms of standard deviation had reduced to a mean of about 7 percent down from 9.5 percent in the domestic market.
In addition, CEMEX has also gone through the ever volatile and fluctuating currency exchange rates in host countries as was the case with Spain. Through its highly capable management, CEMEX folded the possession of its assets that did not belong to Mexico and thereafter financed all the newly acquired business. Such kind of response during economic peril is indeed necessary to sustain the operations of a firm engaging in foreign investment.
Moreover, CEMEX still has higher chances of succeeding in its foreign operations owing to the fact the overseas locations definitely provide a healthy ground for marketing its products. According to market seeking theory in Foreign Direct Investment, a foreign market may be more appealing to a firm than the domestic one.
In particular, these may be company products that are either not available at the target market or a superior substitutes to the existing products. Besides, the foreign market can also attract consumers from the adjacent countries, thereby widening the marketing portfolio further (Bartlett, Ghoshal & Beamish, 2008). For this reason, CEMEX has a chance of attracting not just the marketing opportunities from the host country but also from the adjacent locations.
Nonetheless, this form of Foreign Direct Investment is underpinned by one main challenge in the sense that the marketing points being targeted in the foreign country may not be compatible with the location where FDI is to be undertaken (Ghemawat, 2005). In any case, both direct and indirect can be used to carry out FDI.
In the first scenario, the host country is used as the ground for exploiting the available market. This characteristic way of exploiting the host country be seeking other adjacent marketing opportunities can also be classified as export-platform Foreign Direct Investment.
When seeking foreign markets through acquisitions, CEMEX will have to put in mind two important considerations. Firstly, the prevailing economic and political factor that may affect the process of exporting goods and services from the host country especially in the case of indirect marketing is important. Secondly, the level of appropriateness in the production process is also paramount.
CEMEX will also have the chance of firmly establishing its operations in the host countries when its cement products are of the desired high quality and competes favourably with the existing products. In any case, the firm will be able to enhance better methods of production. This can be explained from the fact the prevalence of competition among various firms producing similar products will be heightened. Hence, each firm will endeavour to produce the best in a bid to capture and maintain market leadership.
Nonetheless, fierce competition can also jeopardize a favourable marketing environment for CEMEX when local competitors crowd up for a single market. This will especially be inevitable if a larger share of the market is dominated by the foreign affiliates. Fortunate enough, CEMEX does not operate alongside its foreign affiliates in the same country and therefore, this will provide a better opportunity for the firm to compete fairly.
Empirical based research has conclusively established that the desire to seek resources is one of the driving motives why a firm would engage itself in Foreign Direct Investment (Ghemawat, 2005). A company may be prompted to secure its investment abroad since the domestic ground is either too costly or lacks the relevant factors of production. It is vital to note that skilled and unskilled labour or advances in technology may markedly escalate the cost of production at the domestic level therefore leading to low returns.
On the other hand, advances in technology or managerial capabilities may not be accounted for when seeking to invest abroad since such resources can be accessed readily at home though at a higher cost. Hence, assets that are non market in nature are of utmost importance since it is impossible to transfer them through transactions. For instance, CEMEX may not be in a position to import high skilled and affordable labour to the domestic market owing to economic and political barriers at hand.
Although, the firm is seeking for ways and means of becoming a global leader in cement manufacturing and marketing, this initiative may be hampered by both local and international barriers to trade as well as government policies and cultural values in some regions. This is evident in the case of Egypt when CEMEX has to schedule its operations alongside prayer breaks due to the Islam religious practices.
As CEO of CEMEX, Lorenzo Zambrano ‘plans for volatility’ (p.241). Identify and assess the main environmental risks confronting him in the late 1990s, explaining which module theories and frameworks you have found most useful to support this analysis.
After CEMEX has fully established itself as a market leader in Mexico, the company has decided to invest in overseas economies. However, this decision to expand its operations does not come without risks and challenges to the business environment.
Firstly, Lorenzo Zambrano opted to invest in the southern United States. Nonetheless, the US economy is not performing well since it is experiencing a serious downturn. In particular, the construction industry is not doing well either. This becomes a major environmental challenge for the Chief Executive Officer of CEMEX. To make matters worse, the US manufactures joined hands to protest against dumping of cheap goods from Mexico and consequently, they file a petition in court to stop the same.
As the US producers demand protection from their government, CEMEX is faced with a hurdle of going through local trade barriers. The countervailing duty of 58 percent imposed by United States International Trade Commission is meant to prohibit any import trade that may jeopardize local producers. Although the duty has been reduced to about 31 percent, the overseas environment is not conducive at all for CEMEX.
In light of international trade and foreign direct investment, trade and tariff barriers can indeed cause a major headache for firms investing in a foreign country (Ghemawat & Hout, 2008). At a macro level like in the case of CEMEX, there are helpful tools that can be used to understand the environmental risks associated with expansion abroad.
For instance, the PESTEL can assist in the process of identifying differences that exist along national boundaries. These differences may range from imposed trade barriers and tarrifs to customs or prevailing economic conditions. Hence, CEMEX under the leadership of Zambrano should have applied this theoretical approach before investing in United States.
Other components that can be analyzed using this tool include the political and socio-cultural differences of the host country, the legal aspects affecting international trade as well as the general environmental factors. According to CAGE framework by Ghemawat (2005), the geographic, cultural, administrative as well as economic factors prevailing in the targeted host country are worth considering before finally settling for an expansion plan in the desired foreign country.
Through empirical research and analysis, the most suitable country can be chosen for investment. For instance, a macro business trend like CEMEX that is continually expanding can make use of both CAGE and PESTEL tools to assess the link between the already existing locations and new geographical points where a form is wishing to diversify its operations (Ghemawat, 2005).
In addition, the industry and market forces such as demand, supply, recession or general economic downturn can be identified and evaluated using the Porter’s Diamond model.
Other expansion ventures in foreign locations have also been marred with challenges. For instance, the after operating for a short while, CEMEX found out that the Egyptian was not one of the best due to its fragmented nature. The company managed to secure a market share of only 17 percent below its target mark of at least 25 percent. Managing the regulatory context of the Egyptian market was also cumbersome.
Although CEMEX might have recorded impressive growth in some of its foreign acquisitions, the isolated cases of failure, for instance where the firm had to relocate or stop its operations altogether can be avoided by limiting the avenues through acquisitions fail (Ghemawat, 2005).
For instance, well documented research has concluded that acquisitions have a very high rate of failure. In some cases, the expected growth in returns may not be realized at all. In order to avoid the possible failures in acquisitions, CEMEX should always endeavor to conduct sufficient research both for the host country and the prevailing conditions that may hider or promote overseas expansion.
Secondly, the CEMEX management should establish in advance whether there is cultural compatibility between the host country and the cement manufacturing traditions. Lack of this form of compatibility like in the case of the Egypt acquisition may lead to definite failure. In addition, communication plays a very important part in transacting business.
This is indeed one of the pitfalls CEMEX had to go through while investing abroad. Although the firm uses English as the language of communication, there were some instances when there was communication breakdown since the spoken language in host country is not English.
Towards the end of 1997 and before the close of that decade, CEMEX acquired two Filipino cement manufacturing companies namely APO and Rizal. However, the country went through the earliest phases of macroeconomic pressures that swept East Asia towards the close of 1990s.
In spite of these inevitable shortcomings in global acquisitions by CEMEX, the firm can still take advantage of the existing marketing opportunities by practicing competitive advantage. This basically means the ability to meet the needs and concerns of consumers by delivering competitive services compared to competitors.
The building industry which is also the sole buyer of cement and its products will be mainly interested in both performance or service delivery as well as the price of the commodity. As mentioned earlier, CEMEX attempted to avail cheap cement from Mexico to United States in a bid to gain competitive advantage. However, this move was counteracted by the local producers in US who argued that the domestic industry was being economically injured by cheap cement from Mexico.
Nonetheless, CEMEX can counter such a move by making sure that its competitive advantage edge is based on effective and efficient management of the available resources so that the cost of overheads is reduced (Ghemawat & Hout, 2008). In addition, the CEMEX management should establish an effective response mechanism for all queries emanating from buyers.
Critically assess the view that CEMEX had a distinctive capability in the management of information on the late 1990s. What were the main issues and options facing the firm in May 2000, as it tried to sustain and develop its resources for the future?
From a personal perspective, Zambrano embraced and emphasized the use of Information Technology at CEMEX. Although Mexico had a weak Information and Communication Technology infrastructure in the 1980s when Zambrano was taking over as the Chief Executive Officer of the firm, the latter did not only insisted on the importance of ICT, he also directed huge spending and investment on ICT infrastructure to an extent that it overshadowed the country’s poorly established telecom facility (Bartlett, Ghoshal & Beamish, 2008).
Although Zambrano acknowledged the fact the use of ICT in boosting the production and marketing of cement would be more pronounced as Mexico opens up, he did not relent on this exercise arguing that it was important to invest heavily in ICT.
To begin with, the firm set up a satellite communication disk that would be used to connect the various affiliate firms within Mexico with lots of ease.
Before the start of 1990s, the firm had already established its own private network through which all data and voice calls in and out of company would be channeled. This system was also used to link operation in Spain acquisitions. In a bid to complete the ICT needs of the company, Cemtec was established which eased down the process of installing hardware as well as software development. By 1999, CEMEX was already spending about one percent of its net sales on the development of ICT.
In fact, the market rivals for CEMEX company were reportedly unable to match up the standards of ICT investment by the company although there were making every effort to boost their ICT standards. This is the reason why CEMEX was considered to have a distinctive prowess in the management of its ICT services towards the end of 1990s.
The use of ICT by the company transformed operations in a number of ways. For instance, the speed of delivery at the site which stood at 20 minutes only was phenomenon of CEMEX and it earned the company a reputation that could not be matched by any of its close competitors. In fact, CEMEX was branded the architect of ‘digital business design’.
During the same period, the suppliers and distributors of CEMEX products were also linked through the international network, commonly known as the internet.
As a result of ICT development, Zambrano and his management team could access information easily and readily and make relevant decisions expeditiously. For example, it was possible to get access of sales data on a daily basis based on the geographical location as well as the product line.
Moreover, CEMEX employees were also taken through capacity building and training programs on ICT so that they could be able to understand, interpret and manage data effectively. This was also in line with the company’s desire to overhaul the old communication system and adopt a new one(Bartlett, Ghoshal & Beamish, 2008).
In order to train its employee effectively, a private TV channel making use of the CEMEX satellite dish was set up. Besides, the company developed a Master of Business Administration (MBA) program that could be learnt on a virtual environment. The course content was made possible through the collaboration of the firm and Monterrey Tech.
In May 2000, the company had already accumulated a sum of 1.175 billion dollars aimed at investing in foreign acquisitions. The most important factor under consideration was choice of the most profitable location where foreign investment could be entrusted.
Although China was considered to be a fertile ground for investment due to its large population, the key limiting factor was that most of China’s cement production is carried out in small scale holdings (about 75 percent) (Bartlett, Ghoshal & Beamish, 2008). Hence, the absence of adequate commercial production of cement would prove to be economically unsustainable for CEMEX. Worse still, the company also realized that only the emerging markets in African and Asia could support the six major market rivals.
Therefore, the firm opted to go ahead with its global acquisitions in the upcoming markets. However, the expansion process was to be done with due care based on past experiences so as to minimize the chances of failure. There were various stages that were to be followed to the letter before global acquisitions could be carried out especially in distant markets.
Firstly, CEMEX reiterated the relevance of opportunity identification before embarking on investment business. The company had to devise screening tools that could exhaustively identify the available opportunities even as it explored far locations.
One single most important consideration before investing in a foreign country was its population size. As expected, it was supposed to be large in order to increase the marketing base. In addition, the host country was expected to be characterized with low current consumption scale (Bartlett, Ghoshal & Beamish, 2008).
The second factor to be considered by CEMEX was due diligence. This process is aimed at carrying out a critical examination of the company to be acquired in the host country. Usually, a team or groups of people familiar with the process are assigned a company to examine.
Last but not least, CEMEX had to reorient its management strategies as it expanded on a global scale. The management style has to be adjusted accordingly in order to be compatible with the needs and requirements of the host country.
Bartlett, C.A., Ghoshal, S. & Beamish, P.W. (2008). Transnational Management: Text, Cases, and Readings in Cross-Border Management. Fifth edition. New York and London: McGraw-Hill/Irwin
Ghemawat, P. & Hout, T. (2008). Tomorrow’s Global Giants Not the Usual Suspects, Harvard Business Review, 86(11): 80-88.
Ghemawat, P. (2005). Regional Strategies for Global Leadership, Harvard Business Review, 83(12), 98-108.