CEMEX

Innovation in Housing for the Poor

AGENDA

CEMEX: Innovation in housing for the poor CEMEX discussion as course summary Solving the big problems

IS GLOBALIZATION GOOD FOR THE POOR?

Management expert C. K. Prahalad

(Deceased April 16, 2010)

CONDITIONS FOR SERVING THE POOR

Move from focus on high gross margins to Return on Capital Employed (ROCE), achieving capital efficiency

Very low capital needs, focused distribution and technology investments, very large volumes at low margins

Prerequisite = TRUST, MNE’s and BOP Consumers have traditionally not trusted each other.

Innovation Imperative: BoP markets are hot-beds of commercial and technological experimentation

CEMEX AND PATRIMONIO HOY“Much more than a home”

Innovation in Housing for the Poor

HOW DOES CEMEX SERVE THE POOR?(ANDERSON AND BILLOU, PRAHALAD)

Affordability Credit Savings and Payment plans

Acceptability Build trust Distribute or store Modularize construction

Availability Deliver when needed Community networks

Awareness promoters

CEMEX AS COURSE REVIEW

I. The Innovation

II. Innovation Process

III. The Organization

IV. The Market Space

V. The Environment

VI. Performance

I. The Innovation:Patrimonio Hoy

Patrimonio Hoy, “savings/property today”, enabling very poor people to pay for services and building materials to upgrade their homes.

Does it fit the definition of innovation? Action – design, invention, development… Outcome – product, process, system … Purpose – customer and company value

TYPE OF INNOVATION

Radical or disruptive? Replace existing products, services, or processes.

Incremental? Improvements of an existing product or process design.

FORMAL VERSUS INFORMALATTRIBUTES FORMAL SEGMENT INFORMAL SEGMENT

Sales Higher revenue per customer

Low revenue per customer

Payments Financing generally not required

Financing is important

Demand Depends on economy More or less steady

Price sensitivity Driven by bargaining power Convenience-driven (credit, delivery, etc)

Brand equity Recognized and trusted Should build trust to deliver as promised

Growth Slow Very high potential

Customer location Usually located in places of easy access

Mostly located in remote areas

Relationships Stops at the distributor level Requires close ties with end customers

WHAT IS INNOVATIVE? Doblin’s Typology

Category Type Description of type Patrimony Hoy Example

Finance 1Business model

How you make money Small sales, incremental payments, fee for service, contract based on project not sales order, volume-based discounts

Non-traditional consumers (women and very-poor)

2Networks and alliances

How you join forces with other companies for mutual benefit

Relationships with community, suppliers and distributors

Process 3Enabling process

How you support the company's core processes and workers

Program design: cells, enrollment, socios, promoters

Credit payment cycle

4Core processes

How you create and add value to your offerings

Separate organization (Patrimony Hoy), Modularization of materials, materials distribution and delivery (storage option)

Offering 5Product performance

How you design your core offerings

Cement is the same

Offer other raw materials

6Product system

How you link and/or provide a platform for multiple products.

Consultants

Networks

Supplier sell to Cemex

Distributors exclusive contract

7Service

How you provide value to customers and consumers beyond and around your products

Credit access, technical advice, architect visits, storage, customer service

Delivery 8Channel

How you get your offerings to market

Community outreach

Distributors and storage options

9Brand

How you communicate your offerings

Word of mouth

Promoters

Socios

10Customer experience

How your customers feel when they interact with your company and its offerings

Pride of ownership

Build social capital

Build Trust

II. Innovation Process

Sources of Ideas

III. THE ORGANIZATION

Innovation Strategy? Complete solutions provider at low cost Creating competitive advantage through

Continued innovation High level of commitment to customer service and satisfaction Proven post merger integration expertise Digital evolution: efficient production, distribution, and delivery

processes through sophisticated information systems Ability to identify high-growth market opportunities in developing

economies

Innovation Value Chain

Idea generation: Market research conducted by management and consulting team Tested in Guadalajara 3 month study raised challenges of financing, lack of expertise and

storage

Conversion Design Patrimony Hoy Develop credit system Design and negotiate supply and distribution systems

Diffusion Teams in selected communities

Is there a culture of innovation?

Heavy investment in IT to boost productivity and efficiency

Strategic focus on innovation Intense Motivation Skills and Competence Supportive Infrastructure

Resources contributed to market testing Leadership committed through strategy Formal processes implemented

IV.THE MARKET SPACERED OR BLUE OCEAN STRATEGY? Promoters: build social capital, earn money Socios and Partners: access to credit, good quality

product, shorter construction time, technical support, skilled labor, excellent service, storage space, accelerated payment options, reduce construction cost, training options, build social capital

Suppliers: steady demand, consistent revenue stream, zero-risk debt collection

Distributors: steady demand

V. THE ENVIRONMENT

National Culture: Why does this work in Mexico? Patriarchy, relationship oriented, pre-existing

saving behavior through tandas, role of women in entrepreneurship and saving, poor housing

What are the values & beliefs that support Patrimonio Hoy?

ECONOMIC CONDITIONS

Economic volatility, distrust 1990’s move to open market Increased competition

INDUSTRY CONDITIONS

Not a lot of innovation or change in concrete Drop in formal market sales Informal market potential of do-it-

yourself’ers

VI. Measuring ROInn©

Against objectives Financial Metrics Non Financial Metrics

1. Does it meet the objectives? Generate business that represents competitive

advantages Represent an accessible option for poor families looking

for a better quality life through households by offering good-quality cement and raw material at reasonable and frozen-prices

Offer access to credit not available to poor otherwise Position CEMEX as a responsible corporate citizen that

is committed to society Build social capital

AGAINST OBJECTIVES

FINANCIAL METRICS

2. Does it add value, now and in the future? New market Increased revenue

3. Does it pay for itself? Positive cash flow

NON TANGIBLE BENEFITS

4. Does it lead to competitive advantage? New channel for selling cement and materials Other innovations such as Construmex Consumer commitment Enhanced supplier/distributor relations Employee pride and commitment

SOLVING THE BIG PROBLEMS

Based on HBR’s list of audacious ideas for solving the world’s problems (Shiller et al), what does it take to successfully conceive and implement innovations that solve big messy problems?

Poverty and affordable housing is a big messy problem..

What does it take to solve big messy problems? A real problem A viable solution A champion/leader Network of committed partners A plan for reducing risk and maximizing

information (learning) …

Resources: money, people/competencies, space, materials, access to information, technology

A value model/business plan Marketing Reviews & committed problem solvers Complex thinking, diverse capabilities