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The best-performing cement companies blend structural moves with effective commercial practices.
It’s no secret that cement companies continually struggle to generate returns on invested capital (ROIC) greater than their cost of capital. (See “The cement industry at a turning point,” on McKinsey.com, December 2015.) That chronic underperformance stems in part from structural factors such as large fixed costs and fluctuations in supply and demand. However, many companies also have trouble creating and executing a coherent commercial strategy,1 a substantial issue because, in many cases, it is one of the biggest nonstructural contributors to value creation.
The best-performing cement companies succeed by blending structural moves, such as changes in asset footprints or supply chains, with effective commercial practices based on a deep understanding of market dynamics. One large cement company in a key Asian country applied this approach to attain price and margin leadership in an important micromarket. It implemented rigorous cost controls and developed a long-term marketing campaign to build brand recognition with major customers. It also invested to expand bulk cement-production capacity well ahead of its rivals when analysis revealed that a growing wave of infrastructure projects would stimulate strong market growth.
How to build a program for profits
A structured approach to developing a commercial strategy and the discipline to follow through on it separate the winners from the also-rans.
A structured approach to commercial strategy and the discipline to follow through separate winners from also-rans.
At the highest level, it’s about mapping out the structure of the markets a company serves in order to identify value-creating opportunities, and then deploying practices to capture them. Our experience has taught us that the best performance results from companies executing along five dimensions:
1. Know what’s really happening in the market
The CEO should begin by acquiring comprehensive market intelligence (within the bounds of the law, of course) and developing a clear view of the micromarkets the company competes in as well as its own position within them. The ultimate objective is to determine the best possible price and volume-placement approach for each micromarket. The model of each micromarket should be based on a combination of data, such as a granular forecast of demand by segment and of changes in supply; a profound understanding of each micromarket’s pricing regime and potential transition points; and a reasonably accurate estimate of competitors’ manufacturing costs, their landed costs, and their financial objectives and priorities. This analysis provides a detailed picture of market dynamics and pinpoints opportunities to create value.
- Because of the cost and complexity of cement logistics, there is no single global cement market but rather numerous micromarkets, the great majority of which are located within approximately 200 km of a cement plant. Some micromarkets are even smaller; competitors within them tend to have stable demand patterns and competitive positions.