Innovation in Housing for the Poor 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) IS GLOBALIZATION GOOD FOR THE POOR?

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 http://www.ftpress.com/promotions/promotion.aspx?promo=138011 http://www.ftpress.com/index.aspx iberdrow@bentley.edu j…n Whartonsp.com Code: CKamid7506 CEMEX and patrimonio Hoy “Much more than a home”

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 The Innovation Innovation Process The Organization The Market Space The Environment Performance

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 INFORMAL ATTRIBUTES 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 1 Business 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) 2 Networks and alliances How you join forces with other companies for mutual benefit Relationships with community, suppliers and distributors Process 3 Enabling process How you support the company's core processes and workers Program design: cells, enrollment, socios, promoters Credit payment cycle 4 Core processes How you create and add value to your offerings Separate organization (Patrimony Hoy), Modularization of materials, materials distribution and delivery (storage option)

Offering 5 Product performance How you design your core offerings Cement is the same Offer other raw materials 6 Product system How you link and/or provide a platform for multiple products. Consultants Networks Supplier sell to Cemex Distributors exclusive contract 7 Service How you provide value to customers and consumers beyond and around your products Credit access, technical advice, architect visits, storage, customer service

Delivery 8 Channel How you get your offerings to market Community outreach Distributors and storage options 9 Brand How you communicate your offerings Word of mouth Promoters Socios 10 Customer experience How your customers feel when they interact with your company and its offerings Pride of ownership Build social capital Build Trust

Innovation Process

Sources of Ideas

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

THE MARKET SPACE RED 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

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

Measuring ROInn© Against objectives Financial Metrics Non Financial Metrics

AGAINST OBJECTIVES 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

FINANCIAL METRICS Does it add value, now and in the future? New market Increased revenue Does it pay for itself? Positive cash flow

NON TANGIBLE BENEFITS 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