Cemex Case Study Analysis
Political factors:
- restriction and regulation of imports, exports and trade tariffs decide whether a company can compete globally: eg. GATT agreement in 1989, Mexico-open marketplace, enabled Cemex to expand globally.
- governments may decide to nationalize or privatize the cement production; eg. Venezuela nationalized cement production.
- political stability of a country will highly affect the performance of the industry Economic factors any firm in the industry is highly dependent on the economic performance of country/countries it operates in ( changes in expandable income, performance of firms within the country are affected).
- emerging economies provide great opportunities for growth in the industry; expanding infrastructure.
- fluctuating exchange rates also impact performance
- rising costs of production and capital affect a firm’s competitiveness
Social factors: Demographics: can affect things such as the size of the labour force, the demand for housing, etc. all of which have an impact on the cement industry.
Technological factors: The technology used in the production of cement is constantly evolving; innovations can impact cost and quality of products. -Innovations in technology of information systems have an impact on costs of distribution and provide added value for the consumers.
Porter’s Five Forces
The key determinant of a firm’s profitability is the attractiveness of the industry it operates in; 5 forces model assumes that industry attractiveness and the firm’s competitive position within the industry are influenced by 5 forces:
- Entrance of new competitors: Barriers to entry are relatively high: High capital costs (capital requirements) + . Low efficiency industry: the minimum efficiency level is aprox. 1 mil. tons a year + . High transportation costs and logistics + – the benefits of generating economies of scale would be very high in the industry . low product differentiation within the industry – -make global cement production fragmented, the four largest producers account for only 23% of overall demand e. the technology used in the production of cement is constantly changing; high R&D costs +. ccess to distribution channels depends highly on the location of plants and resources; plants need to have competitive location + – if plants are near water distribution channels, the costs are significantly diminished
- Bargaining power of buyers: Cement is very much considered a commodity or consumer product, variation depending on geographical region; buyer concentration is relatively low, therefore buyer power is also lower. + b. Due to low supplier concentration and low product differentiation, buyer switching costs are relatively low and consumers are more price sensitive, which adds to the bargaining power of the buyers. the higher the bargaining power of the buyers/consumers, the lower the profitability of the industry) . Cement purchases tend to require a substantial amount of buyers’ income, therefore the performance of the industry is highly dependent on the economic welfare of the buyers and the performance of the economy in general.
- Bargaining power of the supplier: Low concentration of suppliers means that suppliers have relatively low bargaining power . Low concentration of buyers means that buyer bargaining power is relatively low +
- Rivalry . Generally, supplier concentration in the industry is low; however, if you look at integrated cement production, suppliers are concentrated (aprox. 1500, out of which 4 are main global players). In terms of global players, rivalry is high.
- Threat of substitutes . Given the fact that cement is necessary for the construction industry and the development of infrastructure all over the world, it is unlikely that it will be substituted in the near future. Opportunities – huge growth potential in Mexico, due to demographics, attractive market characteristics and expected infrastructure development.
Growth potential in all developing countries. – significant savings and less cash flow volatility as a result of cost synergies resulted from acquisitions such as RMC, Valenciana, Sanson and Southdown. Long-term growth markets: Cemex’s strategy is primarily focused on markets with highpotential for long-term expansion such as the US and Eastern Europe. Cemex – Ready Mix USA joint venture: Cemex has the opportunity to consolidate its presence in the Southeastern region of the US through Ready Mix USA’s local management team and focus on customers Threats cement production is a very cyclical industry; highly depends on the economic performance of the country – increased competition from global players both on a national and global level.- Political instability: political instability in certain countries could have a negative impact on Cemex’s local operations. Venezuelan nationalization: on April 3, 2008, the Venezuelan Government announced the nationalization of the local cement industry, aiming to take full operative control of cement producers in Venezuela through the acquisition of a participation within a range from 60% to 100% if required.
On August 18, 2008, PDVSA, the state-owned Venezuelan oil monopoly, took operational control of Cemex Venezuela’s facilities. Higher exposure to the US market: as a result of the acquisition of Rinker, Cemex has strongly raised its exposition in the battered US building market. Competition against major players: Cemex competes in its main markets with other world-class players such as Holcim and Lafarge.Rising costs of basic inputs: increments in the price of energy (primarily electricity andnatural gas) have a direct negative impact on output and distribution costs.
However,Cemex has implemented an alternative fuel program in order to improve its capacity toabsorb this type of fluctuations.Risks associated to RMC integration: the incorporation of the RMC Group is the first integration of an international player into the structure of Cemex, which has to simultaneously coordinate new operations on a global scale mainly focused on ready-mix and aggregates, whereas cement has traditionally been Cemex’s core product. Global recession: in an international recessionary environment Cemex’s sales will be negatively impacted in its key markets
Internal Analysis
Core Competencies: Production of cement is its core competency, but also good in the production of ready-mix concrete and aggregates. -Its ability to brand these products is a valuable asset and a sustained competitive advantage. Existing strategies and objectives Porter Four Generic Aquisition vs. Greenfield.
Cemex chose to enter foreign markets through acquisition rather than starting up greenfiled operation. The rationale behind this was that this strategy is cost effective and time saving. The estimated cost of acquisition for a cement multinational is much lower than building a new plant. Production and distribution systems are already in place and they are also acquiring the local management know-how which is both time efficient and cost effective way of entering a new market. Competitive Profile: how does the company match up against its competitors.
