Hi, everyone, and welcome back. In this session, we'll discuss the Cemex case. Now this case examines a common channels problem, which is how to go to market when no channels exist. In other words, the channel captain has to create a channel of distribution from scratch. Now, I used to think that this case was a very good stylistic case to teach these channel principles from, and after teaching it for years, I actually had the opportunity to visit Mexico, and I got to see first hand what the living conditions are actually like. So I saw the houses that families lived in, and I want to share with you some pictures of what I saw and experienced. Here is an example of one of the home that I visited. The wall of this building looks relatively benign. But what I want you to notice is what's happening up here around the roof. So take a look there. There it's looking a little bit rough. Let's look at another picture. This is a picture of the inside of that building. And as you can see here, the walls are looking fairly rough and again the ceiling looks like it needs some work as well. Here's some more walls on the inside of the building, and again you can see that the building materials look a bit rough. Here's the kitchen that the family uses, and you can see on the right is the door to the single bathroom that is there. Let me show you some more about this property. This is the storage shed on the property. And as you can see, it's made up of a mishmash of pieces of wood, pieces of sheet metal and anything else that could have been accumulated on this property. Here's the side of that storage building, and again you see that it's just a mishmash of various materials. This is the hen house on the property where the family keeps its chickens. This is one of the little kids running around on the property, and there are many of these adorable little kids running around all over. This is the neighbor's house, so this is the view from the house that I visited. And as you can see, the neighbor's house is also a mishmash of different pieces of building materials, mostly unmatched but put together and managing to stand as a single structure. Now, most Mexicans have to build and create their materials themselves. So here you see a picture of some of the bricks for the sighting of the house that were created. Here you can see this woman is showing a member of our group how these bricks are made, block by block. The bricks are then stored, oftentimes with black plastic placed over them like this. And here you can see the woman has unveiled the black plastic so that you can see how those bricks are stored underneath. And in this case, they've done a pretty good job and have managed to keep those dry from the wind and the rain. Now, the Mexican people hold to a concept more widely known as patrimony, and it refers to the legacy or the inheritance that one generation passes down to another. Families do not move around often, so the idea is that you would pass along your house to your children and so on. For most people, this meant that you would need to expand the structure of your house over the course of your life, one room at a time. Now, most families cannot afford to build a room all at once. And for those of you who are familiar with building construction, you understand that there are many different types of materials and tools needed just to put together one room. Families may not afford to have all of these pieces in place at one time, so they often need to store the supplies, as you saw in these pictures. This family makes and then stores the bricks that will be used for the walls. If you've ever been to a less developed country or tried to understand the problems the consumers face from their point of view, I hope that these pictures began to give you some sense of the magnitude of the problem that's Cemex faced in this case. Now let's take a step back and consider the 6000 foot view of this case. This is the view of the firm, which is Cemex. They were facing a market in which economic growth was stagnant and declining. They had just received news that Home Depot was targeting the Mexican market and would enter soon. In fact, it's not unusual for major firms such as Wal-Mart to make major investments in logistics and distribution centers in less developed countries in order to advance their business agenda. At the time of the case, Cemex was the third largest cement producer in the world, and it remains a world leader today. At that time, Cemex had the equivalent of five billion in US Dollars in sales, 1.6 billion and EBITDA and a 52% market share in Mexico. And up to the time of the case, it had sold entirely to large contractors, wholesalers and dealers or, in other words, business customers. But as competition heated up, they realized that bad cement to end uses was much more profitable than the cement sold to the construction market. So what Cemex needs is to create a new channel to reach a market that they have never done business before, and they really know very little about in terms of their needs and preferences. So as a channel strategist, they must build a channel from scratch, and this is really new and different. It means that they need some imagination and some assumptions. They will have to develop the what-if scenarios and work through the possibilities of how they might accomplish this. The good news for Cemex, as well as you and I, is that all of our frameworks that we have discussed thus far can come to bear on this problem. And this is how the case will be solved. As with all channel solutions, the goal should be to create end user value for the consumer who needs to add a new room to their house. In the case of Cemex, we can also view this problem as one that many social businesses face, and by this I mean a business model that has as its goal to solve a social problem. This is like the Cola life case. We wanted to solve a problem for low income consumers that is self sustaining, and that means that it must generate fair returns for the firms that are involved. The opportunity here is massive. Let's think about what the value proposition looked like for consumers at the time of the case. When we think about what consumers paid to build a room, we can imagine that some portion of that went to Cemex as profits. And another portion went to the dealers and the intermediaries who helped to move the products along to the end customers. However, as you saw from the pictures, a lot of the materials were simply wasted, perhaps from improper storage or from dealer practices. And all in all, the costs of building for consumers was extraordinarily high. So what we need is a system that would eliminate all these excess costs to the customer that came in the form of waste, inflation and other non productive costs. Now we already know that the customer's willingness to pay is high. But if we could devise a solution that would help them reach a finished room faster with less waste, we could also, in the process, maybe build some self esteem and establish some hope. And that part is priceless. So from a channel perspective, this may mean a solution in which Cemex, who has deep pockets, may need to take on more of the costs. And the dealer who really isn't adding much value even now, should perhaps take even less. As we've said in our discussion on channel functions, many channel captains have the need to get their channel members to agree to do more for less, and that may need to be what happens here. And what you see here is that if we could contain the cost to just these two aspects of putting up a house, then we could potentially create all of this incredible new value for customers. So if we could get the channel to then transform this past waste and inflation into new value by helping the consumer put their room up faster with less waste, then we can help to build self esteem and hope. So how should the channel strategist tackle this problem? We already know the answer. The first thing we need is to understand the consumer. What are the channel benefits that they desire? Which one is the most important? Because we know that we may not be able to provide all of them. And this is the demand side of the channel problem. On the supply side, we need to determine what channel functions are required in order to create the necessary channel benefits. So here in this case, we will need both the channel benefit audit as well as the function analysis, and fortunately, you know how to do both.
