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Jeff Bezos said he would sell anything but cement, the toughest business on earth. Here’s how Cemex, the world’s third-largest cement manufacturer, became a digital trendsetter despite a horrendous Old Economy legacy
Cemex is perhaps the most unlikely of today’s digital innovators. Its roots are in a single cement plant founded in Hidalgo, Mexico, in 1906. today, Cemex manufactures and distributes cement in 30 countries, maintains commercial relations in about 60 more, and, with revenues of over $4.8 billion (1999), is the world’s third-largest cement manufacturer. It shares first place with Petrobras of Brazil and YPF of Argentina on the list of the most respected companies in Central and South America, and is the only Central American Company to win a place in the world rankings. Cemex’s business performance has been extremely impressive. What makes the Cemex story extraordinary, however, is the highly unpromising nature of the industry in which Cemex operates. A definition of the characteristics of the toughest business on earth might include: an assetintensive commodity business with low profit margins, low rates of growth, and unpredictable demand whipsawed by changes in economic conditions, interest rates, and government policies. Throw in customers who are always changing their orders and are driven by uncontrollable factors such as weather, work stoppages and traffic jams, and the result is a pretty good recipe for a business to avoid at all costs. No wonder Amazon.com’s famously-ambitious president, Jeff Bezos, has been quoted as saying he’d like to position his company to sell anything – except cement. Yet, Cemex has produced some of the most remarkable financial result of any Central or South American company. If the cement business can be transformed through Digital Business Design, ANY business can be. Cemex became a digital innovator and one of the world’s most remarkable companies – because it had the courage to recognize its customers’ realities and then remake its own business design to do something about them – even while operating in the toughest business on earth. Cemex Business Issues Lorenzo Zambrano, a grandson of Cemex’s founder and a Stanford MBA, became CEO of Cemex in 1985. an insightful man, he saw clearly the basic strategic and economic problems of the business. First among these was the endemic, seemingly intractable issue of unforecastable demand – a huge problem for Cemex’s customers and, by extension, for Cemex. But there was also a series of challenges peculiar to the Mexican cement industry of the mid-1980s: • Mexico had begun lowering its trade barriers, such as high tariffs, which had formerly blocked foreign competition and investment. This was good news for the Mexican economy in general, but not so good for specific Mexican producers that had enjoyed a nearmonopoly of their home markets. Competing firms in the cement business, including the largest foreign multinationals, had begun to consolidate and to become more efficient. They were exerting significant price pressure on Cemex. The high volatility of the Mexican economic and financial systems was still in creasing. Interest rates, the value of the peso, and the demand for building products were more unpredictable than ever. International cement makers, especially the low-cost Asian producers, had begun to look to Mexico for expansion opportunities.
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When you are looking for solutions to your business issues. was efficiently management tracked to worldwide destinations. at opportune times. Instead of addressing your business issues with a blank slate and relying solely on your own creative genius. don’t survey only your competitors. a CIO with a genuine understanding of business. a Wharton MBA who today is of ten hailed as a “cyber-visionary. learning from. Who Else Has Solved Your Problem? There’s a natural human tendency we call strategic sloth – the reluctance to tackle big problems that were insurmountable in the past. almost all of the various non Cement Business Cemex had acquired. Exxon and Houston 911 – had largely solved the same core problem. scheduling and rerouting oil shipments. and adapting. which was at the mercy of ocean weather. petrochemicals plants. he hired Gelacio Iniguez. step back and generalize the largest business issues you face. at a reasonable cost. • Using Memphis as a shipping hub. (This type of teamwork has become characteristic of many of today’s most successful digital businesses). incomplete information. stop yourself. that’ll never work in our industry”). In those cities. if they could successfully solve their first and greatest business challenge – unforecastable demand – solutions to the other key business issues would begin to fall into place. Exxon had developed the world’s most advanced systems for tracking. and Iniquez. the text that would appear in the “excuses” section of the CEO letter in the annual report was predictable. The company Zambrano tool over had become overly diversified.Cemex had complicated its own problems through a loss of strategic focus. Survey the business landscape for practices and methods that are worth studying. Under the circumstances. political and military unrest. and Houston. Then. Sometimes. the tendency can be your best ally. If you find yourself responding to new ideas with a protest (“Oh. in 1987. especially in a situation where an end run may be more effective than a frontal assault.” to serve as Chief Information Officer (CIO). Texas. Besides its core cement manufacturing business. By choosing not to learn from sources outside the familiar margins. Instead of getting locked into your industry’s peculiarities. and changing market conditions. He preferred to change the game. He started by selling. Cemex sent observers to each organization. • • Page 2 of 5 . it owned hotels. A quest for answers led Cemex to Memphis. ask who else has faced and solved analogous challenges. The Houston 911 emergency dispatch system had figured out how to co-ordinate hundreds of ambulances and fire and police vehicles in response to unpredictable. It achieved a previously unheard-of degree of speed and reliability for the delivery of packages to millions of destinations around the world. or inaccurate addresses were among the system’s daily challenges. you are condemning your organization to the trap of the hopelessly neurotic: repeating the same actions while hoping for different results. This issue was at the heart of Cemex’s difficulties. A powerful partnership developed between Zambrano. three organizations – Federal Express. Its global fleet of tankers. What other companies have effaced similar issues? How have they tackled them? Are pieces of a solution visible anywhere else on the business map? Zambrano and Iniguez sensed that. City traffic. But Zambrano didn’t relish the idea of writing an excuses letter. mining companies and other industrial holdings. Federal Express (whose customers never provide forecasts of demand) had built and international business. Tennessee. often lifethreatening problems. a CEO attuned to the strategic possibilities of information. The best answers may come from companies in other industries and other markets that don’t appear on your competitive radar screen but should appear on your “best business models” radar screens.
Cemex now uses 35% fewer trucks than were required under the old. This target is achieved with a reliability of over 98%. The core issue Cemex faced was how to create a system for more reliable information flow and instantaneous transmission among customers. responding to. Some even phoned him to say. and redirect deliveries from one customer to another if last-minute changes were made. the company’s top leadership was ready for change. for example. As a result. The terminal incorporated a Global Positioning Satellite (GPS) system like the one used by captains of ocean-going vessels. This bit engine enabled electronic connections among all 11 of Cemex’s Mexican cement production facilities. Cemex has reduced the three-hour delivery window to 20 minutes. and accurate decision making was facilitated. ships and employees – bits in place of atoms. direction and speed of every vehicle. Generating and implementing a purchase order. An important benefit of the establishment of CEMEXNET was the gradual automation of the company’s back-office functions. Communicating online was a way of symbolizing his determination that Cemex would become a digital organization. At most companies. The dissemination of financial and other information was streamlined. Fortunately for Cemex. a satellite system for communications. at all times. In the process. Out competitive advantage was lowcost labor. or be left behind. The dispatchers in Monterre now knew the location. non-digital system. Gelacio Iniguez recalls: When I started to work for the company in 1987. it takes days. we should develop and integrate a solution that would allow us to respond to market changes and move very quickly. and Cemex enjoys large savings in fuel. with a lot of flexibility. Cemex began to invest in big engines that would connect the entire company in an efficient network. Cemex could quickly dispatch the right truck to pick up and deliver a particular grade of cement. That’s exactly what Cemex did. There are fewer lost orders because the phone systems aren’t tied up. it became the only digital company in the cement industry – and one of the world’s great digital innovators.All three model organizations had one thing in common: They had developed systems for quickly and accurately capturing. Bu Zambrano said we didn’t want to compete on that basis. they were able to substitute management of information for deployment of costly assets such as trucks. the cement plants. Our management style was very traditional. Rather than operating independently – and often in ignorance of the supply-and-demand situations at the other plants – the separate facilities would now be coordinated from a central clearing house. Instead. “ Lorenzo. rather than appendages of a particular plant” (Computerworld). and the delivery vehicles. A computer terminal was installed in every delivery truck. Over the next five years. Using ideas borrowed from the three models and from other organizations. we didn’t have a workable IT Platform or a strong company culture. why are you wasting time typing on a computer keyboard? You have a secretary to send memos for you!” Zambrano knew what he was doing. equipment maintenance and payroll costs. it began to design and implement its own solution to the fundamental problem of unforecastable demand. can be done in less than two hours using CEMEXNET. many Cemex executives were startled when they began receiving emails direct from CEO Lorenzo Zambrano. Fewer trucks mean less inventory in transit and fewer drivers to keep happy and productive. as well as its own research on the latest information technology. Page 3 of 5 . reroute the truck when the chaotic traffic conditions of Mexico City or Guadalajara delayed delivery. and a goal of 10 minutes is in sight. The transition to digital wasn’t painless. and sharing information about their customers needs. With trucks now “independent agents within a network of plants. A small illustration: Gelacio Iniguez recalls how in the early 1990s. One piece of the solution was put in place during the years 1987 to 1989: CEMEXNET. This gesture by the CEO let everyone in the company know that it was time to rewire their habits.
rubber. Astute brand management. • Swatch. telephones. Cemex’s Huichapan plant outside Mexico City was in a town with only 20 phone lines. • Bang & Olufsen. Cemex has taken an asset – intensive. An Innovative Business Design The Cemex operation illustrates in microcosm many of the features of a smart business model for today. Whether your business is headquartered in Frankfurt. The shift from scale to smart business design as the dominant factor in business success opened the door to opportunity for companies in every area of the developed and developing worlds. Of the hundreds of commodity-based assetintensive companies in the world – from such industries as steel. one-seventh that of the US). a small market. It is located in the middle of nowhere. a manufacturer of high-end stereos. when CEMEXNET was being built. Cemex enjoyed no special advantages in terms of talent base or hi-tech infrastructure. low-efficiency business and enhanced its profitability by adding a brilliantly integrated layer of information technology – a bits factory designed to complement and support the atoms factory. it has the capability to perform at a world-class level. Finland. can worry less about late deliveries. The formerly insoluble conundrum of unforecastable demand has been largely solved. a fashion apparel retailer from Spain (population: 40 million. oil and so on – it is one of the first to shift from conventional to Digital Business Design. with a market of five million people (less than the population of Brooklyn and Queens) leads the world in digital telephone handsets and infrastructure equipment. Boston and any other locale that radiates an intense sensitivity to smart business design or digital opportunity. and avoid the huge cost s (idle workers. and other consumer electronics goods is based in Denmark (population: five million). anyone can play. Today’s world-class business located “anywhere” include the following: • Nokia. mining.The ‘Anywhere’ Leaders Cemex stands out as an extraordinary anomaly. In 1988. so long as the quality of its thinking is world-class. has an unparalleled supply network that allows it to react to fashion trends within 15 days. televisions. Rolex watches. or Little Rocks is increasingly irrelevant. sugar. a watch maker located in Switzerland (population: seven million). Even if a company has a remote location. The unique value proposition Cemex offers its customers consists of rapid response and reliability. Seattle. a deep understanding of customer needs. this supplier for European audiophiles brilliantly repositioned itself into a marketer of luxury goods for the same consumers who buy Gucci handbags. and Moet & Chandon champagne. transformed a moribund craft-based industry into a fast-moving fashion business by creating an entirely new market for cool. Fairbanks. chemicals. colorful watches worn as clothing accessories and collected like caps or T-shirts. Bits know no borders. The customers needs less advance planning. timber. The shift to Digital Business Design leaves that door open even for businesses that arrive late. from Espoo. And it is not located near San Francisco. The impact on profitability was remarkable. In today’s business world. • Zara. and smart business design are Nokia’s recipe. During the 1990s. close to nothing but the US border and the Gulf of Mexico. aluminum. Yet Cemex won its industry’s race to devise and implement a Digital Business Design. for example) that accumulate when deliveries are late. The unique value proposition to the talent includes an infrastructure with a digital design that provides leverage to workers and decision makers at all levels. A Cemex executive can download data on the inventory levels in a specific plan in Colombia or Spain from an office in San Antonio or Page 4 of 5 . Beijing. and /or an obscure economy.
In 1998. there’s a 60% chance that a colleague has already solved it. A crucial element of the Cemex acquisition and turnaround programme is the provision of high-level training to all employees at the new subsidiary – not just in technical skills but in the basics of business management. a manager in Panama ca post a question on Monday afternoon and get answers by Tuesday morning from counterparts in Madrid and Manila. In fact. The focus on training is a key part of the value proposition that Cemex offers to its employees. An understanding of the entire Cemex system is being driven downward and outward to every corner of the organization. Classes are offered at remote Cemex locations through the company’s own satellite learning system. The Cemex communications network provides 24-hour access to the organization’s best thinking anywhere in the world. With its Digital Business Design. Thanks to CEMEXNET and Cemex’s Internet-based communications culture. for individuals and for the organization as a whole is a standing commitment. The generation of knowledge is not occurring exclusively at the senior management level. Cemex launched a unique programme designed to educate all its blue-collar workers to the high-school graduation level. The Cemex system provides tremendous information leverage to the talent working in the company.a hotel room in Malaysia – an illustration of the near-perfect information transparency thate digital business demands and enables. Cemex has developed a more sophisticated system for generating knowledge velocity than many professional services firms. Page 5 of 5 . the company is capable of renewing and replicating itself repeatedly because a high level of intelligence and knowledge is disseminated throughout the organization’s talent base. Any time a brand-new problem arises. with certification by the Mexican government. Upgrading of skills. finance and information science.
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