The Challenge of Marketing Cement

Reflections on Generic Strategies, De-Commoditization and Differentiation

Masters Thesis for obtaining the academic degree

Master of Business Administration (MBA)

of Danube University Krems Department for Management and Economics Danube Business School

Submitted by

Dipl.-Ing. Gnter Woltron

1. Advisor: Colin Egan BA, MBA

2. Advisor: Helga Wannerer MA

Vienna, June 19th, 2012

Affirmation

I, Dipl.-Ing. Gnter Woltron Born in Leoben/Austria

declare,

1.

that I composed my Masters Thesis independently, have not used other references than stipulated and have not used any illegitimate support.

2.

that I have not presented my Masters Thesis in any form or part of an exam neither domestically nor abroad.

3.

that I, if the work is executed on behalf of my company, obtained agreement from my employer regarding title, form and content of my Masters Thesis.

Vienna, June 19th, 2012 . location, date

Abstract
The main goal of this masters thesis is to provide a profound insight into cement marketing on a strategic level, representing a sector specific contribution in the field of commodity marketing. Prevailing strategy and marketing related characteristics of the industry, focusing on mature markets, are identified. The cement sector of the European Union serves as an example in this perspective. Emerging developments and challenges are reflected. Michael E. Porters seminal work on strategy is utilized as a theoretical basis in order to shed some light on the topics defined. The corresponding concepts and their transferability to and applicability in the cement industry are investigated. A special focus is put on the generic competitive strategies as defined by Porter. The feasibility of these strategies for cement companies active in mature markets is investigated.

Acknowledgements
First of all, I would like to express my gratitude to all those who gave me the possibility to complete this thesis especially to the members of the Danube University Krems Department for Management and Economics.

I owe my deepest gratitude to my supervisor Colin Egan BA, MBA who inspired me with his enthusiastic approach towards marketing. His stimulating suggestions and competent inputs made a major valuable contribution to this masters thesis. My thanks additionally go to Mrs. Helga Wannerer MA for the structural supervision.

I would like to give my special thanks to my wife Eva, whose patient love enabled me to complete this work.

Thanks to my entire family for providing support whenever its needed.

Table of Contents
Executive Summary ...................................................................................................... 1 1 2
2.1 2.2 2.3 2.4

Introduction ............................................................................................................ 4 Problem, Starting Point & Objectives.................................................................. 8

Main Problem .................................................................................................................. 8 Motivation for this Masters Thesis ................................................................................ 8 Starting Point ................................................................................................................... 9 Objectives & Hypothesis ................................................................................................. 9

3
3.1 3.2

Methodology ......................................................................................................... 11
The Research Model ...................................................................................................... 11 Selected methodological Comments ............................................................................. 16

4
4.1 4.2 4.3

Literature Review................................................................................................. 21
Definition of Commodities............................................................................................ 21 Commoditization and De-Commoditization ................................................................. 23 Porters Generic Competitive Strategies ....................................................................... 24
4.3.1 4.3.2 4.3.3 Overall Cost Leadership .................................................................................................................. 25 Differentiation ................................................................................................................................. 25 Focus ............................................................................................................................................... 26

4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11

Competitive Advantage ................................................................................................. 27 The Value Chain ............................................................................................................ 28 Cost Advantage ............................................................................................................. 30 Differentiation Advantage ............................................................................................. 32 Buyer value ................................................................................................................... 33 Differentiation Strategy ................................................................................................. 36 Competitive Scope ........................................................................................................ 38 Segmentation & Focus .................................................................................................. 39

5
5.1 5.2 5.3

Industry Analysis ................................................................................................. 46

Introduction to Cement.................................................................................................. 46 The Global Cement Industry ......................................................................................... 48 The Cement Industry of the European Union ............................................................... 51
5.3.1 5.3.2 The European Cement Industry Company Overview................................................................... 54 The European Cement Industry Environmental Analysis ............................................................ 57 The Political Environment ...................................................................................................... 57 The Economic Environment.................................................................................................... 59 The Sociological Environment................................................................................................ 60 The Technological Environment ............................................................................................. 60

5.3.2.1 5.3.2.2 5.3.2.3 5.3.2.4 5.3.3

The European Cement Industry Structural Analysis .................................................................... 62 Force 1 Threat of Entry ....................................................................................................... 64 Force 2 Intensity of Rivalry among existing Competitors ................................................... 67 Force 3 Pressure from Substitute Products ......................................................................... 68 Force 4 Bargaining Power of Buyers .................................................................................. 69 Force 5 Bargaining Power of Suppliers .............................................................................. 70

5.3.3.1 5.3.3.2 5.3.3.3 5.3.3.4 5.3.3.5 5.3.4 5.3.5

Summary of the Structural Industry Analysis ................................................................................. 72 Consequences From Structural Analysis to Competitive Strategy ............................................... 75

6
6.1

Assessment of Competitive Strategies for the Cement Industry ..................... 77

The Foundations of Cost Advantage in the Cement Business ...................................... 77
6.1.1 6.1.2 Cost Drivers in the Cement Business .............................................................................................. 77 Cement Business Cost Structure Example Austria....................................................................... 79

6.2

The Foundations of Differentiation Advantage in the Cement Business ...................... 80

6.2.1 6.2.2 Preamble Differentiation and De-Commoditization in the Cement Sector .................................. 80 The Cement Industry Value System ................................................................................................ 81 Cement and derived Products................................................................................................. 81 The Utilization of Cement ....................................................................................................... 83 The Cement Producers Value System .................................................................................... 85 Product related Decision-making in the Construction Sector ................................................ 90 Consequences for the Cement Producer................................................................................. 92

6.2.2.1 6.2.2.2 6.2.2.3 6.2.2.4 6.2.2.5 6.2.3

Segmentation in the Cement Business ............................................................................................ 93 Preamble ................................................................................................................................ 93 Industry Segmentation Variables............................................................................................ 94 From Segmentation to Competitive Strategy .......................................................................... 97

6.2.3.1 6.2.3.2 6.2.3.3 6.2.4

Customer Value & Value Propositions in the Cement Business ..................................................... 99 Approaches towards Buyer Value .......................................................................................... 99

6.2.4.1

6.2.4.2 6.2.4.3 6.2.4.4 6.2.5

Determining the Real Buyer & Shaping a Value Proposition .............................................. 103 The Cement Value Proposition Feasibility Check ................................................................ 105 General Approaches towards Customer Satisfaction, Loyalty and Retention ...................... 107

Summary ....................................................................................................................................... 108

6.3

Generic Competitive Strategies in the Cement Business ............................................ 110

6.3.1 6.3.2 6.3.3 Overall Cost Leadership Strategies ............................................................................................... 110 Focus Strategies ............................................................................................................................ 115 Differentiation Strategies .............................................................................................................. 117

6.4

The Case Study Differentiation Strategies in a mature Cement Market .................. 117
6.4.1 6.4.2 Introduction ................................................................................................................................... 117 Selected Cement Sector specific Differentiation Approaches ....................................................... 120 Introduction & Case Definition ............................................................................................ 120 Assessment of the primary Differentiation Potential ............................................................ 122 General Aspects of a Differentiation Approach based on a Product Range of Common

6.4.2.1 6.4.2.2 6.4.2.3

Cements/Technologies ........................................................................................................................... 128 6.4.2.4 General Aspects of a Differentiation Approach based on a Product Range of other than

Common Cements/Technologies ............................................................................................................ 130 6.4.2.5 6.4.3 The Issue of Innovation ........................................................................................................ 134

Selected Elements of a Marketing Strategy as Part of a Differentiation Strategy ......................... 143 The Product .......................................................................................................................... 143 The Service Component ........................................................................................................ 146 The Brand ............................................................................................................................. 149 The Customer Relationship .................................................................................................. 151 The Issue of Pricing .............................................................................................................. 155 Other Elements of the Marketing Strategy ........................................................................... 158

6.4.3.1 6.4.3.2 6.4.3.3 6.4.3.4 6.4.3.5 6.4.3.6 6.4.4 6.4.5 6.4.6

Comments on the Cost of Differentiation ..................................................................................... 161 General Comments on Sustainability, Pitfalls and Risks .............................................................. 162 Case Study Summary .................................................................................................................... 164

7
7.1 7.2

Summarizing Conclusions and Recommendations ......................................... 172

Answers to the Research Questions stated .................................................................. 172 Porters Generic Competitive Strategies Solutions for the Competitive Challenges in

mature Cement Markets? ....................................................................................................... 176

8
8.1 8.2

Limitations and Next Steps ............................................................................... 180

Limitations .................................................................................................................. 180 Next Steps ................................................................................................................... 181

8.3 8.4

Outlook 1 Implications for an Industry in the Maturity Stage ................................. 182 Outlook 2 The Issues of Co-operation & Integration ............................................... 184

References .................................................................................................................. 185

Index of Illustrations
Figure 1: The Research Onion ................................................................................................. 11 Figure 2: The Process of Deduction ......................................................................................... 12 Figure 3: Three Generic Strategies ........................................................................................... 27 Figure 4: The Generic Value Chain ......................................................................................... 29 Figure 5: Stages of Manufacturing and Application of Cement .............................................. 47 Figure 6: World Cement Production 2000 - 2010 .................................................................... 49 Figure 7: World Cement Production ........................................................................................ 49 Figure 8: Cement Production in CEMBUREAU and EU 27 Countries .................................. 52 Figure 9: Dynamics in CEMBUREAU Cement Consumption ................................................ 53 Figure 10: CEMBUREAU Trade 1997 2010 ........................................................................ 53 Figure 11: Cement Production Capacities of selected Companies active in the European Union (2010/2011) ................................................................................................................... 55 Figure 12: Production Capacity Share of the major six Cement Companies active in the European Union (2010/2011) ................................................................................................... 56 Figure 13: Forces Driving Industry Competition ..................................................................... 63 Figure 14: Five Forces Framework of the European Cement Industry .................................... 72 Figure 15: Five Forces Framework of the European Cement Industry Outlook ................... 74 Figure 16: Distribution of Cement Tonnage shipped in Germany in the Year 2010 relating to its final Utilization in Construction .......................................................................................... 84 Figure 17: Distribution of Cement Tonnage shipped in Germany in the Year 2010 relating to its primary Utilization .............................................................................................................. 84 Figure 18: The Cement Producers Downstream Value System .............................................. 87 Figure 19: The Cement Producers Upstream Value System .................................................. 89 Figure 20 : Construction Process related Decision Point of Structural Material Choices in various Countries...................................................................................................................... 91 Figure 21: Influence of different Practitioners on the Material Choice ................................... 92 Figure 22: Factors influencing Decisions around the Material Choice .................................. 102 Figure 23: The Value Proposition Feasibility Check ............................................................. 105 Figure 24: The Customer Value Hierarchy Model ................................................................. 107 Figure 25: Model highlighting Product Core and Product Shells .......................................... 118 Figure 26: Modified Core-Satellite Model ............................................................................. 119

Figure 27: Case 1 Core-Satellite Model of a Differentiation Approach based on a Product Range of Common Cements/Technologies indicating Elements feasible to be utilized as Instruments for Differentiation............................................................................................... 128 Figure 28: Case 2 Core-Satellite Model of a Differentiation Approach based on a Product Range of other than common Cements/Technologies indicating Elements feasible to be utilized as Instruments for Differentiation ............................................................................. 130

Index of Tables
Table 1: Documentary Key Sources used in this Masters Thesis ........................................... 15 Table 2: Examples of Core and Add-on Benefits .................................................................. 100 Table 3: De-Commoditization/Differentiation Potentials of the two Case Study Approaches defined .................................................................................................................................... 124 Table 4: Case Study Differentiation Approaches and Drivers of Uniqueness ....................... 127 Table 5: Sustainability related Barriers to and Enablers of Innovation in the Cement Sector139 Table 6: Basic Characteristics of different Types of Exchange ............................................. 152 Table 7: Likely Customer Preference of different Exchange Styles depending on Framework Conditions .............................................................................................................................. 152 Table 8: Basic Characteristics of the Case Study Differentiation Approaches ...................... 164 Table 9: Case Study Summary Assessment of Innovation related Characteristics ............. 166 Table 10: Case Study Summary Assessment of Product Management related Characteristics ................................................................................................................................................ 167 Table 11: Case Study Summary Assessment of Service Management related Characteristics ................................................................................................................................................ 168 Table 12: Case Study Summary Assessment of Brand Management related Characteristics ................................................................................................................................................ 169 Table 13: Case Study Summary Assessment of Customer Relationship Management related Characteristics ........................................................................................................................ 170 Table 14: Case Study Summary Assessment of Pricing related Characteristics................. 171 Table 15: Potentials of different Generic Competitive Strategies .......................................... 178

Executive Summary
The main challenge emerging for anybody interested in cement marketing is the low availability of sector specific basic literature. This situation is to a certain extent shared with other commodity-like products. Commodity marketing is a topic not treated extensively in the current research landscape. The main goal of this masters thesis therefore is to provide a profound insight into cement marketing mainly on a strategic level. Focusing on mature markets, prevailing strategy and marketing related characteristics of the industry are identified. The cement sector of the European Union serves as an example in this perspective. The seminal work on strategy, provided by Professor Michael E. Porter of Harvard Business School, is utilized as a theoretical cornerstone of the research discourse. Based on a comprehensive archival research, the thesis is capitalizing on a multitude of literature sources in order to ensure a holistic analysis of the topic. The corresponding theoretic concepts and their transferability to and applicability in the cement sector are investigated. A special focus is put on the generic competitive strategies as defined by Porter1. Reflecting the overall objectives highlighted, the following formalized research questions are deduced. Which of the Michael Porters generic competitive strategies2 or elements of them can be regarded as feasible options for a cement company active in a mature industry environment like the European Union? Is there a feasible differentation strategy for a cement company active in a mature industry environment like the European Union which is likely to lead to a sustainable competitive advantage? What are the implications of pursuing a differentiation strategy for marketing strategy and management in the cement sector? The problems identified are investigated utilizing qualitative research methods. Based on pragmatic and hermeneutic-interpretivistic principles, a mainly deductive approach is testing theory for the industrial scope defined. The masters thesis is primarily capitalizing on the research strategies of archival research and a hypothetic case study. Summarizing the

1 2

cf. Porter 2004a: 34 ff cf. ibid.: 34 ff

corresponding assessment, the following findings related to competitive strategies3 can be highlighted. Pursuing an overall cost leadership strategy is identified to represent a viable strategy choice for companies active in a mature cement market. This conclusion remains valid and only valid as long as the prevailing industry structure and the characteristic economics of the sector are not altered remarkably. It has to be re-assessed as soon as relevant technological change is emerging. Focus strategies exhibit only a moderate overall potential for cement companies active in a mature market. The options available for and incentives involved in tailoring the cement sector specific value chains to selected segments are limited. The compromises broad-scoped cement producers are facing are insignificant. The feasibility of pursuing differentiation strategies within a mature cement market can basically be supported. Nevertheless, effective differentiation represents a challenging task in a mainly commoditized industrial environment. In the course of a hypothetic case study, distinct differentiation approaches are investigated from a marketing perspective. The corresponding consequences for marketing strategy and management are identified to be far reaching. The incentives in place are remarkable, but the risk and uncertainties involved are considerable too. Especially concerning all non-cost centered strategies the risk of a stuck in the middle situation, as described by Porter4, has to be stressed. Any sustained strategy approach might exhibit the potential to be successful - a vaguely defined combination of intrinsically different strategy approaches most likely will not. Rather recent developments imply a remarkable change agenda for the cement sector especially in mature markets. Issues relating to sustainable construction (Green Building) and industrial ecology increasingly gain in importance. Emission trading schemes put pressure on products incurring a high level of emissions like carbon dioxide (CO2). Fuel and energy prices hike from one all time high to the other impacting the cost base of energy intensive products like cement. Stakeholders and end-users of construction projects become more demanding. Additional dimensions of customer value are emerging. In the context of a structural analysis of the European Union cement sector current and likely future influences and their impact on competition and industry structure are
3 4

cf. Porter 2004a: 34 ff cf. ibid.: 41

investigated. In competitive terms the following findings based on an analysis of the competitive forces in place as proposed by Porter5 can be highlighted. The threat of new entrants is rather low and fundamental changes of this situation in the near future are unlikely. The bargaining power of suppliers is rather high and there is no indication that this situation will change remarkably. The bargaining power of buyers is estimated to be on a medium level and there are some indications that it will increase. The threat of substitutes is on a low level but there are some indications that this might change at least in certain segments. The competitive rivalry among existing firms is estimated to be on a medium level and anticipating future stagnant industry growth rates a tendency towards increasing intrasectoral rivalry can be assumed. This diagnosis underlines the remarkable challenges the sector is facing. Structural changes of the cement industry and the industry-environment have to be reflected in adapted strategy approaches to be developed as well as new strategy approaches will impact the industry structure and environment. Michael Porters generic competitive strategies6 are investigated concerning their potential contribution in this perspective. It can be stated that there is no distinct generic competitive strategy which is able to meet all the challenges identified by nature. The feasibility of a strategy to be pursued by a company is depending on many factors of the specific micro- and macro-environment, the competitive setting, as well as on the appropriateness for the implementing firm. The excellent strategic work of Michael Porter offers a comprehensive framework for strategic analysis within the cement sector. A multitude of elements identified by Porter are reflected in the business reality of the cement industry. As a consequence, it can be assumed that the principles remain valid and can be successfully applied in order to adjust to future developments in the sector. The principal contribution of the masters thesis is the application of marketing and strategic management concepts, frameworks and tools to a sector previously dominated by management research from the production and operations literature.

5 6

cf. Porter 2004a: 36 ibid.: 34 ff

1 Introduction
The construction industry in the European Union is contributing approximately 10 % to the overall gross domestic product and represents the largest industrial employer within the Union.7 One of the main industrial sectors on the supply side of the construction sector is the cement industry. Cement is commonly regarded as a basic commodity and therefore very rarely in the focus of marketing related research. This situation may be reasonable for a material which was basically invented nearly 200 years ago and remained unchanged in its principle characteristics until today. Marketing so far did not discover the world of the plain grey powder which played a major role in the global economic development of the last centuries. Rather recent developments imply a remarkable change agenda for the cement sector. Issues like sustainable construction (Green Building) and industrial ecology increasingly gain in importance. Emission trading schemes put pressure on products incurring a high level of emissions like carbon dioxide (CO2). Fuel and energy prices hike from one all time high to the other remarkably impacting the cost base of energy intensive products like cement. Stakeholders and end-users of construction projects become more demanding. Additional dimensions of customer value are emerging. Referring to marketing strategy, it is likely that an isolated focus on standardized technical performance and price will not be able any more to satisfy cement customers and endusers expectations if not today so in the near future. So far the dominating position of common cement and the related concrete as a building material seems undisputed. Nevertheless a certain dynamic is emerging. A multitude of different intrasectoral product developments nearly all of them currently in development or pre-market phases of the product life cycle is covering the landscape of international research like mushrooms. It cannot be accurately predicted if or which of these innovative products might exhibit the potential to become a full-scale challenger to common cement in the future. But independently from this question, one thing is for sure: Any intention to introduce related product innovations to the market implies that sector specific approach towards marketing is reconsidered. In order to prepare for future challenges the industry will be facing, this masters thesis aims at providing a profound insight into cement marketing on a mainly strategic level inter alia

cf. FIEC - European Construction Industry Federation: <www.fiec.eu>, online, 28 Oct. 2011

based on a reflection on the strategy framework provided by Michael Porter. Subsequently, the industry related applicability of concepts like the generic competitive strategies8 are investigated.

cf. Porter 2004a: 34 ff

Roadmap to this Masters Thesis

Chapter 1: Introduction Introduction to the topic & statements on the underlying intentions Chapter 2: Problem, Starting Point & Objectives Description of the problem, presentation of the starting point and the primary objectives Definition of the research questions & formulation of the hypothesis Chapter 3: Methodology Description and justification of the methodologies utilised and their limitations Chapter 4: Literature Review Comprehensive analysis of key research contributions and concepts utilised Detailed introduction to the work of Michael Porter Chapter 5: Industry Analysis Introduction to cement and the global as well as European cement industry Macro-environmental and structural analysis of the cement sector of the European Union as an example of a mature cement market Identification of key strategic challenges for cement companies active in mature industry environments focusing on the European Union Chapter 6: Assessment of Competitive Strategies for the Cement Industry Analysis of sector specific sources of competitive advantage reflection on and development of industry specific approaches, concepts and tools Assessment of Michael Porters generic competitive strategies9 relating to their transferability to and applicability in the cement sector Case study on differentiation strategies in a mature cement market

cf. Porter 2004a: 34 ff

Chapter 7: Summarizing Conclusions and Recommendations Answers to the research questions stated Evaluation of the generic competitive strategies (Porter, 2004a, p. 34) relating to their potential to address the strategic challenges identified Final comment Chapter 8: Limitations and Next Steps Scope related limitations of the masters thesis Proposal for next steps & outlook including some food for thought

Following the introductory notes in chapter 1, in the next chapter 2 the motivation of this masters thesis, the research problem and the starting point are presented. Furthermore, the objectives are defined and corresponding research questions deduced. The methodologies applied and the underlying reasons for the choice are outlined in chapter 3. The literature review part in chapter 4 provides a comprehensive overview of the key research contributions and concepts utilised. Subsequently, the industry analysis in chapter 5 should focusing on the European Union as an example of a mature market provide the starting point to compare and explain the elements prevailing in business practice with the theoretical concepts investigated. In chapter 6 elements of the generally accepted strategy framework provided by Michael Porter are reflected and interpreted relating to their transferability to and applicability in the cement sector in mature markets. An additional focus is put on the feasibility of differentiation strategies in the cement industry. Utilizing the methodology of a theoretic case study two differentiation approaches and their impact on marketing strategy are investigated. The first approach describes a general differentiation concept leaving the primary product core dimension of common cement undifferentiated. The second approach additionally assumes the commercialization of an alternative to common cement. The resulting conclusions are summarized in chapter 7. This chapter furthermore provides answers to the research questions formulated as well as an assessment of the generic competitive strategies10 relating to their potential to meet the strategic challenges of cement companies active in mature markets. A final note on limitations and a brief outlook including some food for thought in chapter 8 complete the considerations of this masters thesis.

10

cf. Porter 2004a: 34 ff

2 Problem, Starting Point & Objectives

2.1 Main Problem
The main problem or challenge emerging for anybody interested in marketing cement is the low availability of sector specific basic literature. There is a lack of frameworks, concepts and tools directly applicable for the industry. This situation is to a certain extent shared with other commodity-like products. In general, commodity marketing is a topic not treated extensively in the current research landscape.

2.2 Motivation for this Masters Thesis

The cement sector in mature markets like the European Union may be regarded as a structural-stable, commodity-like industry operating under defined predictive competitive and industry-structural conditions. To a certain extent this impression has been true for a long time. Nevertheless, recent developments triggered by external as well as internal forces put pressure towards change on the industry. Facing these challenges, strategy and marketing related issues increasingly move into the center of interest. Structural changes of the cement industry and the industry environment have to be reflected in adapted strategy approaches to be developed, as well as new strategy approaches will impact the industry structure and environment. Especially topics like technological change, innovation and differentiation, their potential contribution towards a sustainable competitive advantage and the corresponding risks involved can be highlighted in this perspective. It might soon be the case that the interest in sector specific marketing issues will increase remarkably. The lack of formalized sector specific basic marketing frameworks, concepts and tools is increasingly becoming uncomfortable.

2.3 Starting Point

Professor Michael Porters books Competitive Strategy Techniques for Analyzing Industries and Competitors11 published for the first time in 1980 and Competitive Advantage Creating and Sustaining Superior Performance12 published for the first time in 1985 have frequently been listed under the most influential business books of the last decades. In order to start with a basic approach towards marketing strategy the generally accepted concepts formulated by Porter and their transferability to and applicability in the cement sector are investigated within this masters thesis. Porters seminal work represents the focal cornerstone other directly related and unrelated concepts are grouped around in order to shed some light on the topic defined. Based on a comprehensive archival research this thesis is additionally capitalizing on a multitude of renowned literature sources in order to ensure a holistic analysis of the research topic.

2.4 Objectives & Hypothesis

In the light of the above findings, this masters thesis aims at reducing the blind spot of industry specific marketing research. The main goal of this masters thesis therefore is to provide a profound insight into cement marketing mainly on a strategic level. The proven strategy framework of Michael Porter should be applied and tested in a new arena. Prevailing structural characteristics of the sector within a mature industrial framework are analyzed utilizing the example of the European Union. Likely future challenges for the industry are identified. The applicability and transferability of generally accepted strategy and marketing related frameworks, concepts and tools are investigated. The corresponding elements are partly adapted and enhanced in order to reflect the sector specific requirements. The findings might at least partly be transferable to other sectors marketing base materials within a complex business-to-business framework. Reflecting the overall objectives highlighted, the following formalized research questions are deduced.

11 12

cf. Porter 2004a cf. Porter 2004b

Research Question 1 Which of the Michael Porters generic competitive strategies13 or elements of them can be regarded as feasible options for a cement company active in a mature industry environment like the European Union?

Research Question 2

Is there a feasible differentation strategy for a cement company active in a mature industry environment like the European Union which is likely to lead to a sustainable competitive advantage?

Research Question 3

What are the implications of pursuing a differentiation strategy for marketing strategy and management in the cement sector?

Hypothesis

Michael Porters work represents a viable basis for strategic analysis in the cement industry. Industry characteristics and prevailing business practices in the cement sector of mature markets, like the European Union common market, can be explained by the corresponding theories postulated. As a consequence, the feasibility to utilize Michael Porters frameworks, concepts and tools, in order to investigate different strategic scenarios, is provided.

13

cf. Porter 2004a: 34 ff

10

3 Methodology
The research approach utilized in this masters thesis is strongly influenced by hermeneuticphenomenological principles14. Hence, an interpretivistic character is dominating. Strategy and marketing related frameworks, concepts and tools of the prevailing research literature are interpreted relating to their transferability and applicability within the industrial scope defined.

3.1 The Research Model

Saunders et al. developed the illustrative model of a research onion as a layered methodological approach towards research.15 The following statements are directly related to the corresponding elements of the model proposed.

Figure 1: The Research Onion16

14 15

cf. Bryman/Bell 2007: 19 ff cf. Saunders et al. 2009: 106 ff 16 as ibid.: 108 adapted by the author

11

Research Philosophy

The outer layer of the onion describes the philosophic framework the research is embedded to. Pragmatism is seen as appropriate in the case that the research questions formulated themselves are identified as determinants of the research philosophy.17 Pragmatism allows the utilization of an increased level of philosophical flexibility and variability in order to shape a solution oriented approach. This masters thesis can be seen to be based on a pragmatic research philosophy with a strong influence of the interpretative element. The tendency towards interpretivism is attributable to a prevailing subjective component as well as to the qualitative character of the research.

Research Approach

The dominant nature of the research is deductive. Deductive approaches inter alia comprise the element of testing a theory.18 Bryman & Bell illustrate the process of deduction as presented in the following Figure 2.

Figure 2: The Process of Deduction19

17 18

cf. Saunders et al. 2009: 109 ibid.: 124 f 19 as Bryman/Bell 2007: 11

12

Within the framework of this masters thesis generally accepted theories of Michael Porter are tested referring to their transferability and applicability within the industrial scope defined. A corresponding hypothesis is formulated. The research questions are defined in a way to cover key segments of the theories investigated. Sector specific characteristics of the prevailing business practice are identified and subsequently analyzed utilizing the corresponding theoretical strategy background. The appropriateness of the different frameworks, concepts and tools is assessed in the course of their industry specific appliance. If necessary, possible and feasible adaptations or enhancements are made. Particular attention is paid to the emergence of contradictions or ambiguities. As a final outcome, the hypothesis drawn up should either be supported or rejected. Apart from this deductive core-element, the research approach applied furthermore comprises inductive elements. The rather qualitative approach and the subjective component related to the capitalization on the authors sectoral expertise can be mentioned in this perspective. The researcher is therefore recognized as a part of the research process.20

The Authors Professional Background and Expertise A brief Resume

This masters thesis is strongly influenced by the authors professional background and expertise. Based on a technical masters degree in ceramics/natural resources he entered the cement industry in the field of process engineering employed with one of the multinational industry majors. Subsequently, the first years of professional practice have been characterized by acquiring extensive product and process related expertise in the field of cement from the grass-roots on. After changing the industrial sector to plant engineering, the cement industry still remained his professional focus. In the role of a head of process engineering his company supplied innovative and customized plant engineering solutions to the international cement producing community. Based on intense co-operation with a multitude of cement companies on an international level, this position enabled him to considerably enhance his sectoral knowledge and expertise. In this phase, the authors primary field of activities shifted from technical to more marketing and sales related realms. As a consequential next step of personal development, he took over a business development position in the field of innovative cement and concrete solutions. The corresponding expertise is reflected by the membership in national as well as international professional associations and several contributions in

20

cf. Saunders et al. 2009: 91

13

recognized industry journals. The authors professional background therefore can be characterized as multifaceted covering relevant issues of the cement business from production to marketing.

Research Strategy

The two main formal research strategies utilized within this masters thesis are Archival Research and Case Study.

Archival Research represents the dominant strategy applied. As a consequence of this approach, this masters thesis is based on a on a large amount of relevant literature which is reflected capitalizing on the authors sector specific business expertise. Recognized research literature and reliable official industry studies/data represent the corresponding basis. Hence, the analysis and reflection of literature is not limited to the literature review part but can rather be found throughout this thesis. The following archival research related subject areas are identified.

Strategy Concepts, Industry Analysis Frameworks, Company Business Model Constructs Commodities and Commodity Marketing Business-to-business Marketing Cement Industry Data

14

Referring to these subject areas the following documentary key sources have primarily been used.

Subject Area Strategy Concepts, Industry Analysis Tools

Title Competitive Strategy Techniques for Analyzing Industries and Competitors

Author Porter, M.E.

Year 1980 (2004)

Comment Providing the fundamental strategy concepts to be tested within the research work, additional source of concepts relating to industry analyses

Strategy Concepts, Company Business Model Constructs Commodities & Commodity Marketing

Competitive Advantage Creating and Sustaining Superior Advantage Commodity Marketing: Grundlagen Besonderheiten Erfahrungen

Porter, M.E.

1985 (2005)

Providing the fundamental strategy concepts to be tested within the research work

Enke, M. Geigenmller, A. Leischnig, A.

2011

Utilized as a primary source relating to approaches towards commodities and commodity marketing

Business-to-Business Marketing

Business Marketing Management: B2B

Hutt, M.D. Speh, T.W.

2010

Bridges the gap between strategy concepts and business marketing management practice; documentary key source for the case study

Cement Industry Data

Numerous Sources

Numerous

A multitude of different sources was utilized in order to provide a comprehensive insight to the industry

Table 1: Documentary Key Sources used in this Masters Thesis The low availability of up-to-date commodity marketing related research literature is accentuated by the utilization of a main documentary source which is currently only available in German.

A case study approach is utilized in order to investigate issues related to differentiation within the industrial scope defined. The framework conditions specified for the case study limit the complexity involved. The case study can be regarded as an instrument in order to test the theoretic principles for two hypothetic business cases. The formulation of the case study is qualitative and hypothetic. The related research is exploratory relying on secondary sources. 15

Choices & Data Collection

This masters thesis is based on qualitative research methods. Quantitative methods are not directly applied. Nevertheless, a certain quantitative input is originating from a number of secondary literature sources. To a certain extent the authors expertise can be regarded as the main primary data source utilized. This masters thesis furthermore capitalizes on primary research by including corresponding literature sources. Secondary sources still represent the dominating element of data collection.

Time Horizons

The time horizon of this masters thesis by majority is cross-sectional. The statements and findings are relating to the prevailing situation in the early 2010s. A historical analysis of the sector is not within the scope.

3.2 Selected methodological Comments

Comments on Quantitative Research

This masters thesis is focusing on qualitative research. Quantitative research based on analytical methods would certainly be very useful to substantiate and further investigate the findings. This is especially the case as deductive research is frequently associated with quantitative approaches. The author abstained from this approach for several reasons. First of all, the utilization of quantitative methods is by nature limited by the case that the author is employed in the industry investigated. The defined goal of this masters thesis basically is to provide an insight and overview of strategy and marketing related concepts relevant for the industrial scope defined. Providing an overview undermines intentions to go into quantitative depth. Instead of presenting quantitative results, this masters thesis rather provides indications of direction for further related, qualitative as well as quantitative, research.

16

Comments on the Literature Review

The literature review is focusing on the seminal work of Michael Porter. The corresponding strategy concepts, frameworks and constructs are utilized as a starting point to subsequently dig deeper into more marketing related realms. In order to reflect the original work, direct quotation is used extensively especially at this stage. A personal choice of other concepts is included in the literature review part in order to enrich the theoretic basis especially regarding the subject area of commodities. Marketing research literature is directly reflected in the chapters 6 and 7. As already stated, sector specific marketing research literature unfortunately is rather limited. This problem is tackled by utilizing recognized general marketing related concepts focusing on those developed for business-to-business environments. As a consequence of the approach, this masters thesis is capitalizing on a comprehensive literature base comprising a multitude of primary, secondary and tertiary sources. A comprehensive literature review covering all especially marketing related issues addressed would go beyond the scope of this masters thesis.

Comments on the Industry Analysis

The industry analysis is focusing on the cement industry of the European Union as an example for a mature market. The analytical approach is concentrating on the industry level and not deepened towards a company level perspective for several reasons. The goal defined inter alia is to reflect marketing related strategies for a mature industrial sector characterized by rather stagnant cement production volume growth rates. The inherently different dynamics in markets of different maturity justify an isolated analysis. The common European market features some typical characteristics of maturity like a high level of regulation and an increasing focus on environmental issues or sustainability. These characteristics implicate important and interesting developments influencing and shaping the competitive environment and the overall industry structure. Therefore, the feasibility of a specific marketing strategy is strongly depending on the maturity state of an industry.21 Although the basic legal and regulative framework is homogeneous for the overall European market, a considerable number of heterogeneities complicates a common method of approach.

21

cf. Porter 2004a: 239 ff

17

The industry analysis of the geographic area defined is therefore confronted with a number of limitations. Especially the following issues can be highlighted.

Different Levels of Integration

The level of integration of cement companies active within the European Union is inherently different. Many of them are integrated backwards and/or forwards into aggregates, concrete, plasters, and lime or screed business. Due to these circumstances, official company reporting is frequently not consistently delimited between the industrial subsectors. A direct comparison of different companies is therefore hindered. There is the risk that the significance of an industry analysis is eroded by diffusively captured industry boundaries.

Different geographic Consolidation of Reporting

The globally active industry majors utilize different geographic consolidations of their business activities. The geographically structured reporting of the cement activities of different companies is not congruent and does commonly not correspond to the geographic dimensions of the European Union. In some cases of international companies the European cement activities are related to the geographic definition of Europe therefore including major cement producing countries like Russia or Turkey. From the strategic point of view a frequently identified geographic segment covering the overall Mediterranean region, including parts of Western Asia and Northern Africa, is also reasonable due to the competitive interdependence. Thus, a meaningful comparison based on official company reporting data involves a high level of complexity. Privately owned companies in the European Union do generally not exhibit the level of reporting of their globally active, publicly listed competitors. The company specific data availability is therefore limited in this perspective.

18

Different geographic References of the official statistical Data of the European Communities

The development of the European Communities is characterized by a continuous expansion in terms of member states over the last decades. As a consequence, the official statistical office of the European Union Eurostat utilizes different geographic reference areas for its industrial statistics. In 2012 the European Union is composed of 27 member states of which 17 belong to the Euro-zone. Historical statistical data is for example referring to 15 (EU-15 until 2004) or 25 (EU-25 until 2006) member states. This development represents an impediment for a long term statistical review of the sector if it should be representative for the overall market prevailing in 2012. The changes of geographic reference furthermore coincide with the global economic problems and uncertainties of time period from 2007 on, leading to additional difficulties concerning interpretation.

Different Stages of Development and Maturity

The single member countries of the European Union exhibit inherent different levels of overall economic development. This inhomogeneity leads to different dynamics in the related regional cement markets. Even if the overall cement market of the European Union can be regarded as mature, this conclusion cannot be drawn for specific geographic sub-markets.

Comments on the Chapters Assessment of Competitive Strategies for the Cement Industry and Summarizing Conclusions and Recommendations

The chapters "Assessment of Competitive Strategies for the Cement Industry and Summarizing Conclusions and Recommendations inter alia aim at identifying analogies between the theoretical concepts highlighted and the industry structure identified as well as the business practices of companies active in the cement sector. The focus is put on mature industry environments utilizing the example of the European Union. In a first step, the specific characteristics as well as the applicability and feasibility of different concepts and tools specifically those relating to competitive advantage and competitive strategies are reflected for the industry scope defined. In a second step, a hypothetic case study investigating two sub-cases relating to differentiation in the cement industry is introduced. This approach should provide insight 19

into the basic sector-specific characteristics referring to the issue of differentiation and highlight the corresponding implications on marketing strategy. As the first step is focusing on a more theoretic approach the second step tries to transfer a hypothetic practical problem into marketing management practices. The differentiation policy choices and their interaction with marketing strategy as well as their impact on managerial marketing practice should be investigated. It has to be stressed that the focus of the case study is put on marketing related issues and does not reflect the overall impact on competition and industry structure in detail. Due to the constraints already highlighted, the findings are not supported by quantitative data except that those data is available in the prevailing literature base.

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4 Literature Review
4.1 Definition of Commodities
The following definitions and statements are focusing on marketing related approaches towards the concept of commodities. It has to be noted that despite some consensus there is a number of at least partly conflicting views to be found in the prevailing research literature especially complicating the creation of a feasible classification scheme for commodities. Subsequently, some basic definitions selected from a multitude available are highlighted. Within a paper examining the role of services as a differentiating factor in the marketing of commodity chemicals Robinson et al. draw up the following definition: Commodity products can be seen as being a non-differentiated industrial product defined as follows: Manufactured to a standard or fixed specification, bought in response to basic and essential needs, and used in markets where purchasing decisions are governed by rational factors.22 Summarizing different concepts, Enke at al. analogously state that commodities are products and services which are apart from the price increasingly perceived as mainly undifferentiated and exchangeable independent from the objective available level of distinct performance attributes.23 Within the strategy framework of Porter24 the reduction to the differentiating factor price is noted for some not explicitly defined industries of bulk commodities which lack the opportunities for focus or differentiation. Porter formulated very aptly that in that ultimate form its solely a cost game25. The dominance of price based competition in the field of commodities is accentuated throughout the prevailing research literature.26 An ultimate conclusion indicating a complete opposite view was drawn up by Levitt in the year 1980: One thing is certain: there is no such thing as a commodity or, at least, from a competitive point of view, there need not be. Everything is differentiable, and, in fact, usually is differentiated.27

22 23

Robinson et al. 2002: 151 cf. Enke et al. 2011: 6 ff - translation by the author 24 cf. Porter 2004a 25 ibid.: 43 26 inter alia cf. Dost/Wilken 2011 translation by the author 27 Levitt 1980: 88

21

The definitions highlighted point out the wide range of perspectives prevailing. Summarizing the different statements, it can be concluded that a product/service is likely to be perceived as a commodity the more it features the following attributes: standardized, homogeneous, undifferentiated and traded in price dominated markets. Especially the perceptive dimension of this assessment has to be stressed. As a consequence, the conclusion can be drawn up that commodities, for whatever reason, are lacking the product related potential for differentiation to a large degree. In order to simplify the textual presentation the term product(s) is subsequently used basically encompassing both services and products. The commodity state of a specific product might therefore be located somewhere on a continuum between being a pure commodity and being a perfectly differentiated product. The position within this continuum can furthermore not be regarded as stationary but is likely to be exposed to a certain dynamic encompassing tendencies towards commoditization and decommoditization.28 Despite some indications that cement is strongly affected by commoditization, the direct notation as commodity is avoided in the context of this masters thesis. First of all, cement is a manufactured, pre-processed material and not a classical raw material. Secondly, utilizing the notion of a commodity creates a trap of perception which is not useful for an unbiased approach towards marketing strategy. Cement represents a classical entering good29 which becomes part of finished product later on. Hence, the term product is subsequently used for cement. Despite this diagnosis, many strategy and marketing related concepts focusing on commodities can still be regarded as appropriate for the cement case.

28 29

cf. Enke et al. 2011: 6 ff - translation by the author cf. Hutt/Speh 2010: 23

22

4.2 Commoditization and De-Commoditization

A useful process oriented approach is presented by Enke et al. who define the phenomena of commoditization and de-commoditization as analogously follows:30

Commoditization is explained as a process affecting products and services in which course they obtain the status of a commodity. The process can be characterized by an increasing customer perception of homogeneity and exchangeability albeit objective attributes of differentiation may be available. As a consequence of commoditization the level of differentiation is decreased. De-commoditization is explained as a process in which course customers perceive a product or service as differentiated and/or unique in the face of competitors offers.

Reflecting on these findings, it can be concluded that differentiation represents a natural antagonist to commoditization. Thus, from a process oriented perspective, the terms decommoditization and differentiation can be used synonymously. Based on a comprehensive literature research Enke et al. identified three differentiation approaches31 representing potential starting points towards de-commoditization.

Differentiation by superior performance Differentiation by superior customer relations Differentiation by superior costs and prices

Especially concerning differentiation based on superior performance the opportunities to follow a product core related strategy is by definition limited in the case of pure commodities. Considerable potential may be available in fields like product related services or branding.32 Feasible value added services can comprise elements like information-, brokerage-, consulting-, development-, design-, logistic-, technical, support-,training-, or general aftersales-services.33 The prominent role of the different links between the sellers and the customers value chains can be highlighted in this context. Furthermore, the customer

30 31

cf. Enke et al. 2011: 9 f translation by the author cf. ibid.: 16 ff translation by the author 32 cf. ibid.: 18 translation by the author 33 cf. ibid.: 18 translation by the author

23

relationship is identified as an element potentially contributing towards differentiation. Enke et al. highlight this option relating to commodities including building products.34 The approaches presented by Enke et al.35 can essentially be regarded as adapted arrangements and interpretations of elements identified by Porter.36 Porter characterizes the concept of differentiation by [] creating something that is perceived industrywide as being unique37. It can clearly be stated that this classical concept again underlines the perceptive dimension of differentiation and its inherent opposition to commoditization. Differentiation is explained as a strategic approach embedded in a set of so called generic competitive strategies38 of universal relevance.

4.3 Porters Generic Competitive Strategies39

The marketing related definitions of commodities indicate a strong correlation between the state of a product of being a commodity and its (potential) degree of differentiation. Porter identifies three potentially successful internally consistent generic competitive strategies40:

Overall cost leadership Differentiation Focus

These strategies represent approaches which should enable a company to cope successfully with the prevailing and future competitive forces (see also chapter 5.3.3), to outperform competitors and to finally realize superior profitability.41 Porter claims that the strategies can be used in combination, but restricts that there are limitations concerning the effectiveness to implement more than a single strategy in parallel.

34 35

cf. Enke et al. 2011: 20 - translation by the author cf. ibid.: 16 ff translation by the author 36 cf. Porter 2004a: 37 f 37 ibid.: 37 38 cf. ibid.: 34 39 cf. ibid.: 34 ff 40 cf. ibid.: 34 ff 41 cf. ibid.: 34

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4.3.1 Overall Cost Leadership

The primary goal of this generic strategy is to reach the overall cost leadership in an industry. As a consequence, the main focus has to be put on cost and cost control. The strategy exhibits the potential to create relative advantages for a company referring to all five competitive forces as defined by Porter:42 Being still in the position to earn profits in the case that rivalry has already eroded the competitors profitability (related competitive force: intrasectoral rivalry). Powerful buyers will only be able to bargain prices down to the level of the next cost efficient competitor (related competitive force: bargaining power of buyers). Increased possibility to cope with powerful suppliers (related competitive force: bargaining power of suppliers). Factors creating a low cost position usually represent powerful entry barriers (related competitive force: threat of entry). Improved ability to cope with substitutional pressure (related competitive force: threat of substitutes).

Porter names some specific advantages beneficial to obtain the desired cost position like a high relative market share or favorable access to raw materials.43

4.3.2 Differentiation
Porter notes that a differentiation strategy is based on creating something that [] is perceived industrywide as being unique.44 There are identified many feasible elements beneficial to promote differentiation. Design or brand image Technology Features Customer services Other dimensions
42 43

cf. Porter 2004a: 36 cf. ibid.: 36 44 ibid.: 37

25

A differentiated company should ideally follow a multi-dimensional differentiation strategy45 encompassing several dimensions. The term differentiated company underlines that differentiation must primarily not be seen as a product oriented approach. The concept of differentiation furthermore cannot be regarded to be independent from the cost position, which nevertheless does not represent the focus of this approach. Porter acknowledges that differentiation commonly includes a trade-off with a low cost position.46 Concerning the competitive forces a differentiation strategy might yield the following advantages:47

Brand loyalty leads to lower customer price sensitivity and therefore an insulation against competitive rivalry. (related competitive forces: intrasectoral rivalry, bargaining power of buyers). Increased margins (beneficial relating to all competitive forces). Uniqueness related entry barriers (related competitive force: threat of entry). Lower buyer bargaining power due to a lack of alternatives (related competitive force: bargaining power of buyers). Better position towards substitutes (related competitive force: threat of substitutes).

4.3.3 Focus
Focus strategies as defined by Porter48 can be related to different variables (geographic markets, customer segments, product line segments,) and thus exhibit a close relation to the topic of segmentation. These strategies imply to concentrate the business activities on a particular target which should be served in an excellent way. This goal should be achieved by realizing lower cost and/or differentiation, creating two focused sub-strategies. A feasible target selection can for example encompass segments of low substitutability or weak competition. Utilizing the variables Competitive Scope (broad/narrow) and Competitive Advantage (cost/differentiation) a basic two dimensional matrix comprising the three generic strategy options can be formulated:49

45 46

cf. Porter 2004a: 37 cf. ibid.: 38 47 cf. ibid.: 37 f 48 cf. ibid.: 35 ff 49 cf. Porter 2004b: 12

26

Figure 3: Three Generic Strategies50 Porter entitles approaches which are not indicating a clear tendency towards one of the generic strategies as stuck in the middle and characterizes them as an extremely poor situation of almost guaranteed low profitability.51 It is furthermore outlined that companys resources are rarely suited to successfully pursue all of the generic strategies identified. It is diagnosed that above average returns in sectors characterized by intense competition the steel industry is provided as an example can only be realized by focus or differentiation.52 The appropriate strategy for a company should moreover be best suited to the firms strengths and least replicable by the competitors.53

4.4 Competitive Advantage

The three generic strategies outlined above should enable the firm to create a competitive advantage. Gaining competitive advantage represents a primary objective to succeed in competitive markets. Porter outlines that competitive advantage [] grows fundamentally

50 51

as Porter 2004b: 12 Porter 2004a: 41 52 cf. ibid.: 43 53 ibid.: 44

27

out of the value a firm is able to create for its buyers and that, [] potential sources of competitive advantage are everywhere in a firm.54 A coherent marketing driven definition of competitive advantage can be formulated as follows: An advantage over competitors gained by offering greater customer value, either through lower prices or by providing more benefits that justify higher prices.55 Highlighting the financial perspective a feasible basic definition is provided by Grant: When two or more firms compete within the same market, one firm possesses a competitive advantage over its rivals when it earns (or has the potential to earn) a persistently higher rate of profit.56 The interesting conclusion drawn that competitive advantage is a phenomenon of disequilibrium induced by change relates to the notion that in the long run differences in profitability tend to be eliminated by the forces of competition.57 Thus, the concept of competitive advantage can be enhanced by the factor time characterizing competitive advantage as a constantly moving target58.

4.5 The Value Chain59

Delivering customer value can be regarded as a key source of the competitive advantage a company might possess. In competitive terms Porter defines value as the amount buyers are willing to pay for what a firm provides them60. The goal of the generic strategies can inter alia be described as creating value for buyers that exceeds the costs of doing so61. Creating value for buyers can be realized [] when a firm creates competitive advantage for its buyer lowers its buyers cost or raises its buyers performance.62 The additional value created is divided between the firm and its buyers according to the prevailing competitive setting.63 A clear indication of being successful therefore is the reward of a price premium and its reflection in a firms margin64.

54 55

Porter 2004b: XXII Kotler/Armstrong 2010: 234 56 Grant 2010: 211 57 cf. ibid.: 211 58 Stalk 1988: 41 f 59 cf. Porter 2004b: 33 ff 60 ibid.: 38 61 ibid.: 38 62 ibid.: 53 63 cf. ibid.: 53 64 ibid.: 53

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Porter introduces the concept of the value chain as an activity centered analytical tool which subdivides a firm into discrete activities.65 Every single activity represents a possible source of cost or differentiation advantage. Every firm is embedded in a value system build-up of the value chains of the firm itself, the suppliers (upstream value), the channels (downstream value) and the buyers (customer value) as well as the competitors value chains.66 Commonly downstream value is also used in literature as a term summarizing all downstream value elements including the customer value. A comprehensive understanding of the different value chains involved and their structures represents a prerequisite for all value based strategic considerations. Figure 4 illustrates the generic value chain67 activities). and its elements (value

Figure 4: The Generic Value Chain68 Each of the value activities primary and support activities shown in Figure 4 may be vital sources of competitive advantage depending on the industry. Differences in the value chains between competitors determine their relative competitive advantages.69 The analysis of a companys value chain can be regarded as a crucial step in order to diagnose the value creation dynamics relevant for successfully competing in a specific industry. It has to be stressed that all upstream and downstream value chains are of relevance to get a holistic view of the value system a firm is embedded to.

65 66

cf. Porter 2004b: 33 ff cf. ibid.: 34 67 cf. ibid.: 37 68 as ibid.: 37 69 cf. ibid.: 40

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4.6 Cost Advantage70

Cost advantage represents one of the two competitive advantages a firm may possess.71 The cost proximity to competitors is of general importance also in the case of a firm pursuing a differentiation strategy. Porter states that, Unless the resulting price premium exceeds the cost of differentiating, a differentiator will fail to achieve superior performance.72 highlighting the relevance of elements like costs, cost control as well as pricing in any strategic setting. Once the value chain of a company is identified, the single activities provide valuable insight into cost structure which is influenced by so called cost drivers73 representing structural causes of the costs of an activity performed. Analyzing the cost behavior of the single value activities the overall cost performance can be assessed. Not only absolute cost levels but especially the cost position relative to the competitors is of major importance. Porter lists ten major cost drivers.74 Cost driver analysis constitutes a crucial element of an overall cost analysis. Therefore, it is important to identify cost drivers and their relationship with the costs of the value activities performed.75 Procurement has strategic significance in almost every industry76, and purchasing costs frequently represent remarkable proportion of total cost. The cost behavior of purchased inputs is depending on the cost drivers involved and the bargaining relationship developed out of the industrys structural characteristics.77 Thus, procurement practices have a major impact on the cost position across all value activities.78 Porter defines cost dynamic as the way absolute and relative cost of a value activity change over time independent from the strategy and presents a number of common sources of cost dynamics.79 The understanding and provision of cost dynamics is a powerful instrument for improving the future cost position.

70 71

cf. Porter 2004b: 62 ff cf. ibid.: 62 72 ibid.: 62 73 ibid.: 63 74 cf. ibid.: 70 ff 75 cf. ibid.: 84 76 ibid.: 88 77 cf. ibid.: 91 78 cf. ibid.: 106 f 79 cf. ibid.: 95

30

According to Porter, A firm has a cost advantage if its cumulative cost of performing all value activities is lower than competitors cost.80 Protection of a firms cost advantage over time can be attained if the specific sources cannot be replicated or imitated by competitors leading to a sustainable cost advantage81. Cost advantage represents a source of superior performance as long as trade-offs with buyer value delivered do not compromise profitability. Analysis of the own value chain, value activities and cost drivers involved and their relative position versus the competitors provide powerful tools for assessing a possible cost advantage. Actions to gain cost advantage comprise the control of cost drivers and/or a reconfiguration of the value chain.82 Cost leadership is commonly based on multiple sources within the value chain.83 Cost reductions therefore should consequently be pursued in activities that do not influence differentiation and with caution be pursued in activities contributing towards differentiation.84 Porter provides a comprehensive list of approaches to control cost drivers in order to gain cost advantage.85 Steps in reconfiguring the value chain might exhibit the potential to impact the relative cost position to a remarkable extent. The search of creative options to do things differently in order to identify a new value chain is highlighted.86 If remarkable fractions of channel or downstream related costs for the buyer can be identified, the reconfiguration of the value chain may be associated with significant cost reduction potentials.87 Comprehensive approaches towards realizing this kind of downstream efficiency might even include feasible steps of forward integration.88 Cost advantage achieved through focus [] rests on using focus to control cost drivers, reconfiguring the value chain, or both.89 Concentrating activities to a well-chosen segment of the industry can have an important impact on the cost position implied by the corresponding adaptations of the value chain to serve the target segment.

80 81

Porter 2004b: 97 ibid.: 97 82 cf. ibid.: 99 83 cf. ibid.: 99 84 cf. ibid.: 99 85 cf. ibid.: 100 ff 86 cf. ibid.: 110 87 cf. ibid.: 110 88 cf. ibid.: 111 89 ibid.: 111

31

Referring to the sustainability of a cost advantage Porter lists a number of potential sources:90

Entry barriers or mobility barriers that prevent competitors from imitating the sources of the cost advantage Control of selected cost drivers with a certain tendency to be more sustainable (e.g. scale, interrelationships, linkages, proprietary learning, policy choices to create proprietary product or process technology,) Issues relating to timing, location and integration (these issues are identified to be especially hard to imitate) Creation of a new or reconfigured value chain

Finally, Porter notes a number of common pitfalls in cost leadership strategies which are not reflected in detail at this point.91

4.7 Differentiation Advantage92

According to Porter, differentiation advantage represents the second competitive advantage, beside cost advantage, a company may be able to realize.93 The level of differentiation achievable is a distinctive element of industry structure.94 Sources of differentiation may arise in parallel to the sources of cost advantage anywhere in the value chain.95 Again, questions of strategic sustainability and the costs associated with differentiation as differentiation is usually costly are crucial. Uniqueness is the key term characterizing the concept of differentiation. Differentiation allows a company to [] command a premium price, to sell more of its products at a given price, or to gain equivalent benefits such as greater buyer loyalty during cyclical or seasonal downturns96. In correspondence with Porter, the terms premium price or price premium subsequently indicate all kind of benefits related to differentiation. If the cost of differentiation can be kept beyond the price premium realized, profitability will be improved.

90 91

cf. Porter 2004b: 112 ff cf. ibid,: 115 ff 92 cf. ibid.: 119 ff 93 cf. ibid.: 119 94 cf. ibid.: 119 95 cf. ibid.: 119 96 ibid.: 120

32

Sources of uniqueness are to be discovered again throughout the value chain of a firm.97 The scope (breadth of activities) of a company as well as downstream activities (including channels) may also contribute towards differentiation.98 Porter provides an overview of the principal drivers of uniqueness listed in terms of their prominence.99 Depending on the industry, the relevance of the drivers identified varies. Furthermore, the strategic sustainability provided can be inherently different.100 Cost control of differentiating activities is crucial in order to realize the desired performance. As a consequence, value activities providing uniqueness and their related costs have to be accurately assessed and monitored. Porter outlines: At the same time as uniqueness often raises cost by affecting the cost drivers, the cost drivers determine how costly differentiation will be.101 and, If a firm has been aggressively reducing its cost, therefore, attempts to achieve uniqueness usually raise cost.102

4.8 Buyer value103

It seems self-evident, when Porter claims that, Uniqueness does not lead to differentiation unless it is valuable to the buyer.104 Analysis of the buyers value chains should enable discovering sources of value for the buyer. The two main mechanisms identified to create buyer value and to command a price premium are:105

Lowering buyer cost Raising buyer performance

The two factors cumulate in the ability of a firm to [...] create competitive advantage for its buyer in ways besides selling to them at a lower price.106 Buyer value is not essentially linked to monetary values directly influencing profitability but may comprise other additional

97 98

cf. Porter 2004b: 120 ff cf. ibid.: 121 99 cf. ibid.: 124 ff 100 cf. ibid.: 127 101 ibid.: 128 102 ibid.: 130 103 cf. ibid.: 130 ff 104 ibid.: 130 105 cf. ibid.: 131 106 ibid.: 131

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goals.107 The connections (links) between a suppliers and buyers value chain represent the sources of value creation. Differentiation is therefore based on uniqueness in the links between the companies.108 The value of being unique in a value activity is its direct and indirect impact on the buyers cost or performance. A firms overall level of differentiation is the cumulative value to the buyer of the uniqueness throughout its value chain. This cumulative value can be calculated and provides the upper limit of the price premium the firm can command relative to its competitors.109 Lowering buyer cost represents a potential basis for differentiation which can be realized in many different ways.110 It has to be stressed that it is not only the product characteristic which may contribute towards lower buyer cost but potentially any value activity involved. Again, detailed knowledge and sound analysis of the buyers value chains are of major importance. Understanding the needs of the buyer is the key point of intentions to raise its performance. To elaborate on this point, in business-to-business environments the needs of the buyers buyer are of relevance in order to create differentiation for the buyer.111 Noneconomic goals like image or prestige might again play a vital role in this perspective.112 An interesting solution based definition of customer value is provided by Levitt: A customer attaches value to a product in proportion to its perceived ability to help solve his problems or meet his needs. All else is derivative.113 Buyer Perception of Value114

Assessing and understanding the value provided, and therefore the perceptive dimension of a value proposition, is essential. Based on the assumption of an incomplete buyer knowledge Porter introduces the term signals of value115 to embrace factors that buyers use to infer the value a firm creates116. Adequate signals of value are judged as relevant needs in virtually every industry117. The importance has especially to be stressed if the [] impact on buyer

107 108

cf. Porter 2004b: 132 cf. ibid.: 134 109 ibid.: 134 110 cf. ibid.: 135 111 cf. ibid.: 137 112 cf. ibid.: 137 113 Levitt 1980: 84 114 cf. Porter 2004b: 138 ff 115 ibid.: 139 116 ibid.: 139 117 ibid.: 139

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cost or performance is subjective, indirect or hard to quantify118 or [] when many buyers are first-time buyers, buyers are unsophisticated, or repurchase is infrequent119. A realized price premium represents the combined result of a successful value delivery and positive value perception by the buyer as, Buyers will not pay for value that they do not perceive.120 Porter adds that in the long run the actual impact on buyer value (buyer cost, buyer performance) determines the upper limit of a price premium and that signaling only temporarily leads to a price premium exceeding the true value.121 Buyer Value and the Real Buyer122 Buyer Purchase Criteria123

Identifying the real buyer (decision maker) as well as relevant buyer purchase criteria (attributes of a company creating value for the buyer) represent crucial points. Porter defines two types of criteria:124

Use criteria represent purchase criteria relating to the creation of buyer value by either lowering buyer cost or raising buyer performance. They originate from the different links between the value chains and might comprise intangible factors like style, prestige, perceived status, and brand connotation125. Signaling criteria represent purchase criteria that, [] stem from signals of value, or means used by the buyer to infer or judge what a suppliers actual value is.126 Signaling criteria work at the perception level. Porter lists typical signaling criteria like: reputation or image, cumulative advertising, appearance of the product, packaging and labels, appearance and size of facilities, time in business, installed base, customer list, market share, price (where price connotes quality), parent company identity or visibility to top management of the buying firm.127

118 119

Porter 2004b: 139 ibid.: 139 120 ibid.: 139 121 cf. ibid.: 139 f 122 cf. ibid.: 140 123 cf. ibid.: 141 f 124 cf. ibid.: 142 125 ibid.: 143 126 ibid.: 142 127 cf. ibid.: 144

35

The interdependence of the two types of criteria and their mutual necessity is obvious. Porter stresses that, [...] only use criteria represent true sources of buyer value. Buyers do not pay for signal value per se.128 It might be formulated in the way that use criteria represent the basis for true buyer value whereas signaling criteria are utilized in order to realize the maximum proportion of a potential price premium. A feasible approach129 therefore starts with identifying use criteria subdivided in factors lowering buyer cost and factors increasing buyer performance first, as suitable signals of value may be deductible. Building on that, the value of meeting the use criteria and the cost to do so in order to determine the cost of differentiation should be evaluated. Subsequently, feasible signaling criteria and again their cost as part of the cost of differentiation should be defined. In the ideal case, the approach leads to a detailed ranked list of criteria, their quantified contribution towards buyer value as well as of the cost involved. Differentiation that leads to lower buyer cost is judged as more persuasive
130

in regard of realizing a price premium. The same is valid for

differentiation with a readily measurable connection to buyer value131. The definition and analysis of buyer value features a close relation to the subject area of segmentation.

4.9 Differentiation Strategy132

Differentiation stems from uniquely creating buyer value.133 The core principle cumulates around meeting the purchase criteria (use and signaling criteria) in a unique way by value activities and there linkages between the firms and the buyers value chain. A firms overall level of differentiation is the cumulative value it creates for buyers in meeting all purchase criteria.134 Superior performance can be realized if [] the value perceived by the buyer exceeds the cost of differentiation.135 Levitt provides the following related statement focusing on customer expectations: The generic product can be sold only if the customer's wider expectations are met. Different means may be employed to meet those expectations. Hence differentiation follows expectation.136

128 129

Porter 2004b: 142 cf. ibid.: 146 ff 130 cf. ibid.: 149 131 ibid.: 149 132 cf. ibid.: 150 ff 133 ibid.: 150 134 ibid.: 150 135 ibid.: 153 136 Levitt 1980: 87

36

According to Porter the concept of differentiation can be put into practice in two ways:137

Become unique in performing existing value activities Reconfigure the value change in a way enhancing uniqueness The corresponding approaches may include:138

Enhance the sources of uniqueness: Proliferate the sources of differentiation in the value chain. Make actual product use consistent with intended use Employ signals of value to reinforce differentiation on use criteria Employ information bundled with the product to facilitate both use and signaling Make the cost of differentiation an advantage Exploit all sources of differentiation that are not costly (e.g. better coordination internally or with suppliers and channels, change the mix of product features, reduce product defects,) Minimize the cost of differentiation by controlling cost drivers, particularly the cost of signaling Emphasize forms of differentiation where the firm has a sustainable cost advantage in differentiating Reduce cost in activities that do not affect buyer value Change the rules to create uniqueness Shift the decision maker to make a firms uniqueness more valuable Discover unrecognized purchase criteria Pre-emptively respond to changing buyer or channel circumstance Reconfigure the value chain to be unique in entirely new ways; e.g. A new distribution channel or selling approach Forward integration to take over buyer functions or eliminate the channels Backward integration to control more determinants of product quality Adoption of an entirely new process technology

137 138

Porter 2004b: 153 ibid.: 154 ff

37

Sustainability of differentiation advantage is based on continuously perceived value and the lack of imitation.139 Mobility barriers preventing replication by competitors are of major importance in this perspective. A number of general sources of sustainability in regard to differentiation is provided by Porter:140 The firms sources of uniqueness involve barriers (e.g. proprietary learning, linkages, interrelationships, first-mover advantage, specific signaling criteria). The firm has a cost advantage in differentiating. The sources of differentiation are multiple. A firm creates switching costs at the same time if differentiates. Finally the following common pitfalls in differentiation are identified:141 Uniqueness that is not valuable Too much (unnecessary) differentiation Too big a price premium Focus on the product instead of the whole value chain (fail to exploit opportunities to differentiate in other parts of the value chain) Failure to recognize buyer segments

4.10 Competitive Scope142

Competitive scope encompasses a broader economic approach. Porter defines the following four dimensions of scope affecting the value chain:143 Segment scope (the product varieties produced and customers served) Vertical scope (the extent to which activities are performed in-house instead of by independent firms) Geographic scope (the range of regions, countries or group of countries in which a firm competes with a coordinated strategy) Industry scope (The range of related industries in which the firm competes with a coordinated strategy)
139 140

cf. Porter 2004b: 158 cf. ibid.: 159 141 cf. ibid.: 160 142 cf. ibid.: 53 ff 143 cf. ibid.: 53 f

38

The segment scope constitutes the basis for the competitive advantage of focusing. The possibility of coalitions technology licenses, supply agreements, marketing agreements, and joint ventures with independent firms to achieve benefits of broader scope without performing the related value activities internally is noted.144 A key shaping factor for the value chains to be found in an industry is represented by the industry structure which again can be regarded as a collective reflection of the value chains prevailing in a sector.

4.11 Segmentation & Focus

Porter is presenting an approach on industry segmentation which [] is the division of an industry into subunits for purposes of developing competitive strategy. Industry segmentation for competitive strategy must be broader than the familiar notion of market segmentation, though encompassing it.145 Industry segmentation therefore can be regarded as valuable in order to provide structure and clearness for any strategy or marketing related approach. In this context, the significance of prevailing intrasectoral heterogeneities like differences in the five competitive forces, differing value chains or different structural attractiveness of the different segments as a basis for segmentation is highlighted.146 Industry segmentation should help a firm two answer the following two questions:147

Where in the industry to compete? - The answer to this question defines the competitive scope of a firm. In what segments will focus strategies be sustainable because barriers can be built between segments? - The answer to this question is representing the basis for assessing the feasibility of a focus strategy.

Porter amends that market segmentation is mainly concerned [] with identifying differences in buyer needs and purchasing behavior, allowing a firm to serve segments that match its capabilities with distinct marketing programs.148 Kotler & Armstrong define market segmentation as follows: Dividing a market into distinct groups of buyers who have different needs, characteristics, or behaviours, and who might require separate products or
144 145

cf. Porter 2004b: 57 ibid.: 231 146 cf. ibid.: 231 147 ibid.: 232 148 cf. ibid.: 231

39

marketing programs.149 Market segmentation represents a preceding analytical step to subsequently define which customers to serve (target marketing) and how to serve them (developing a value proposition).150 The importance of market segmentation as a first step of crafting a marketing strategy is also highlighted by Hutt & Speh.151 Dickson & Ginter explicitly investigate the interrelations between market segmentation and product differentiation and inter alia support the feasibility of product differentiation used in combination with market segmentation.152 Structural Bases for Industry Segmentation153

Porter notes that, Differences in structural attractiveness and in requirements for competitive advantage among an industrys products and buyers create industry segments.154 The alteration of one or more of the five competitive forces is seen as a precondition to create industry segments making them accessible to structural analysis methods on a segment level.155 The segments can be characterized by [] differences in buyer behaviour as well as differences in the economics of supplying different products or buyers.156 Value chain analysis may be utilized to identify feasible segments to be targeted based on different segment related requirements for competitive advantage. These differences justify the definition of own industry segments if157

they affect the drivers of cost or uniqueness in the firms value chain. ...they change the required configuration of the firms value chain. they imply differences in the buyers value chain.

An industry segment is always a combination of a product variety (or varieties) and some group of buyers who purchase it158, which leads to the conclusion that there is a theoretic multitude of possible segments which should be assessed referring to their importance and

149 150

Kotler/Armstrong 2010: 73 cf. ibid.: 32 151 cf. Hutt/Speh 2010: 123 ff 152 cf. Dickson/Ginter 1987: 9 153 cf. Porter 2004b: 234 ff 154 ibid.: 234 155 cf. ibid.: 234 156 ibid.: 234 157 ibid.: 234 158 ibid.: 235

40

relevance. A corresponding basic concept for business market segmentation is for example presented by Hutt & Speh.159 Segmentation Variables160 & Industry Segmentation Matrixes161

Porter proposes a basic set of industry segmentation variables to be either used in a separated or combined way in order to categorize differences among buyers and producers:162

Product variety leading to product segments Buyer type leading to buyer segments Geographic buyer location leading to geographic segments Channel (immediate buyer) leading to channel segments

A segmentation matrix basically represents a graphic illustration of categorized segmentation variables along two or more dimensions. It is stressed that, Only those variables with a truly significant impact on the sources of competitive advantage or industry structure should be isolated for strategic analysis.163 This choice may subsequently be extended for marketing or operation analysis.164 From Segmentation to Competitive Strategy165 Based on a feasible segmentation the next strategic questions can be tackled:166

Where in the industry a firm should compete (defining the segment scope) How its strategy should reflect this segmentation

159 160

cf. Hutt/Speh 2010: 125 ff cf. Porter 2004b: 237 ff 161 cf. ibid.: 249 ff 162 cf. ibid.: 237 ff 163 ibid.: 249 164 cf. ibid.: 249 165 cf. ibid.: 255 ff 166 ibid.: 255

41

Assessing the Segment Attractiveness167 Porter defines the attractiveness of a segment as, [] a function of its structural attractiveness, its size and growth, and the match between a firms capabilities and the segments needs.168

Structural Attractiveness Porter identifies five forces shaping competition.169 The corresponding 5-forces-framework provides a powerful and widely used tool for structural industry analysis. Basically, these five competitive forces at the segment level determine the attractiveness of a segment170 and provide additional input to the decision where to compete171.
o

Force 1: Threat of entry (originating either from firms serving other segments as well as from firms of currently another industrial scope)

o o

Force 2: Rivalry in a segment (including focused and/or broad scoped companies) Force 3: Threat of substitutes (originating either from products in the industry or outside the industry)

Force 4: Bargaining power of buyers (tend to be more segment specific, but crosssegmental correlations may exist)

Force 5: Bargaining power of suppliers (tend to be more segment specific, but crosssegmental correlations may exist)

It is underlined that, [] the structural analysis of a segment is usually influenced heavily by conditions in other segments, more so than the structural analysis of an industry is affected by other industries.172

Segment Size and Growth

Segment size and growth and their strategic implications are key decision parameters in order to define where to compete.

167 168

cf. Porter 2004b: 256 ff ibid.: 256 169 cf. Porter 2004a: 4 170 cf. Porter 2004b: 256 171 cf. ibid.: 257 172 ibid.: 256

42

The Companys Position

The attractiveness of a segment has always to be assessed reflecting the firms specific resources and capabilities which might be better suited to be successful in some segments than in others.173 The corresponding determination of a potential relative competitive advantage in a segment is crucial.174

Segment Interrelationships

Porter denotes opportunities in segments characterized by the possibility that [] activities in the value chain can be shared in competing in them as segment interrelationships175. Thus, Strongly related segments are those where the shared value activities represent a significant fraction of total cost or have an important impact on differentiation.176 Interrelationships provide valuable additional criteria for the definition of a companys segment scope. The importance of interrelationships can especially be highlighted if177

benefits of sharing value activities exceed the cost of sharing. cost of a value activity is subject to significant economies of scale or learning (and therefore sharing across segments may yield a cost advantage). sharing allows a firm to improve the pattern of capacity utilization. sharing activities across segments increases differentiation in the value activity or lowers the cost of differentiation.

Factors exhibiting the potential to offset interrelationship benefits might for example be identified in the cost of coordination, compromise, and inflexibility in jointly serving segments with shared activities.178 In the case of interrelationships between distinct segments all pro and cons to compete in the related segments have to be identified and evaluated. The analysis of interrelationships between segments can be facilitated by the analysis of the competitors activities based on an industry segmentation matrix defined.179

173 174

cf. Porter 2004b: 257 cf. ibid.: 257 175 ibid.: 258 176 ibid.: 258 177 cf. ibid.: 258 178 ibid.: 259 179 cf. ibid.: 262

43

Segment Interrelationships and broadly-targeted Strategies180

Porter defines: Interrelationships among segments provide the strategic logic for broadlytargeted strategies that encompass multiple segments if they lead to a net competitive advantage.181 Referring to the breadth of the segment scope the following remarks may be added:182 Usually competing in all industry segments is not promising as [] benefits of sharing value activities are nearly always outweighed in some segments by the cost of compromise.183 Commonly not all segments identified can be characterized as structurally attractive. Occupying some unattractive segments may prevent a competitor from establishing beachheads.184 The Choice of Focus185 Focus strategies rest on differences among segments, either differences in the firms optimal value chain or differences in the buyers value chain that lead to differing purchase criteria.186 For a focusing company, the goal is to develop cost leadership or differentiation based competitive advantage in a single or a few specified segments.187 The second option might especially be feasible if strong interrelationships between the segments are prevailing or the segments are overlapping.188 The relative competitive advantage to a certain extent rests on the advantage created by the compromises broad-targeted companies are facing.189 New segments represent viable goals for a focus strategy if the segment characteristics provide the feasibility for tailoring the value chain at acceptable cost involved.190

180 181

cf. Porter 2004b: 263 f ibid.: 263 182 cf. ibid.: 263 183 ibid.: 263 184 ibid.: 263 185 cf. ibid.: 264 ff 186 ibid.: 264 187 cf. ibid.: 264 188 cf. ibid.: 264 189 cf. ibid.: 264 190 cf. ibid.: 266

44

Porter identifies four characteristics which make a new segment attractive for a focus strategy:191 Tailoring of the value chain gets less costly (e.g. by falling economies of scale). Segment growth enables a firm to overcome the fixed cost of serving it. Scale thresholds can be overcome by the exploitations of interrelationships with other industries. Scale thresholds can be overcome by serving a segment on global level (pursuing geographic interrelationships). The sustainability of a focus strategy is not outlined in detail at this stage but can be seen to be determined by the following three factors:192 Sustainability against broadly-targeted competitors Sustainability against imitators Sustainability against segment substitution

191 192

cf. Porter 2004b.: 266 cf. ibid.: 266 ff

45

5 Industry Analysis
5.1 Introduction to Cement
Cement is one of the most widely used products in our economy and a central pillar of the industrial development of the last centuries. A basic technical definition of the product cement provided by Locher states: Cement is a hydraulic binder [] which, after mixing with water, sets and hardens independently as a result of chemical reactions with the mixing water and, after hardening, it retains its strength and stability even under water. The most important area of application is therefore the production of mortar and concrete, i.e. the bonding of natural or artificial aggregates to form a strong building material.193 The global importance of cement is well described in a statement issued by the World Business Council for Sustainable Development (WBCSD): The cement industry plays a major role in meeting society's needs for housing and infrastructure. Cement, the glue that holds concrete together, is a key ingredient of economic development. Concrete becomes our offices, factories, homes, schools, hospitals and roads, as well as our underground water and drainage pipes, bricks and blocks, and the mortar that bonds them together. None of these things could be built without cement. There is currently no other material that can replace cement or concrete in terms of effectiveness, price and performance for most purposes.194 Even if cement, due to its long history, might be regarded as a mature product, this generalizing widely held view has to be treated with caution as technological change can be erratic.195

Manufacturing of Cement

In order to gain an insight into the industry, it is beneficial to have a brief look at the production process of cement. The single steps in cement manufacturing are illustrated in Figure 5.196 The industry boundary is commonly defined with the cement leaving the production plant. The primary raw materials (limestone, clay,) of the cement production are
193 194

Locher 2005: 17 World Business Council for Sustainable Development (WBCSD) Cement Sustainability Initiative (CSI) <http://www.wbcsdcement.org/index.php/about-cement>, online, 12 Nov. 2011 195 cf. Porter 2004b: 180 196 cf. Battelle 2002a: 6

46

commonly recovered in close vicinity to the production facility. The materials are dried, mixed and ground together to form the so called raw meal which is utilized to produce cement clinker in a high energy consuming burning process. Clinker represents an intermediate product for cement production. The clinker is used together with different additives, as indicated in Figure 5, to produce the final product cement by means of a grinding process. Cement is stored and subsequently shipped in bulk or bagged form. Feasible means of transport can be trucks, railways or ships. The important role of logistics for the sector is well described by the United Kingdom Environment Agency: Historically, cement works have been built on deposits of limestone or chalk and clay or shale to minimize the transport of heavy raw materials. Other raw materials, such as mineral additives and fuel, tend to be transported from greater distances. The proximity to cement markets also affects the location of new sites, as it typically becomes uneconomic for cement to travel more than 200 miles from the plant to the point of use.197 The phenomenon outlined is mainly rooted in the rather low unit price of cement. The low value-to-weight ratio leads to ostensive comparisons with other industrial goods: In comparison with other minerals, it is 4 times cheaper than glass or steel and some twelve times cheaper than paper.198

Figure 5: Stages of Manufacturing and Application of Cement199

The production of common cement is by nature associated with gaseous emissions like carbon dioxide (CO2). These emissions are mainly originating from the chemical reactions of the carbonatic components in the clinker burning process denominated as process emissions caused by the so called de-carbonation reaction of the limestone as well as from the utilization of different fuels. The World Business Council for Sustainable Development (WBCSD) Cement Sustainability Initiative (CSI) points out: Cement production causes
197 198

Environment Agency 2005: 3 Wagner/Vassilopoulos 2002: n.p.n. 199 as cf. Battelle 2002a: 6 adaptation by the author

47

approximately 5% of global man-made CO2 emissions. Ca. 50% of emissions are process emissions that happen during clinker production, 40% come from the burning of the fuels to heat the cement kiln, and ca. 10% come from electricity use and transportation.200 Product specific CO2 emissions which are generally strongly varying depending on the cement type produced and many other technical framework conditions can reach values up to 0.99 kilogram CO2 per kilogram of cement.201

5.2 The Global Cement Industry

The world cement production in the year 2010 was estimated to be on a level of 3.3 billion tons.202 Figure 6 provides a geographic breakdown of the global cement production covering the time period 2000 2010.203 The graphic visualizes the regionally specific development of production volumes. An overall production increase in developing/emerging economies (Asia, Africa, CIS (Commonwealth of Independent States)) and a merely stagnant development in mature markets (America, CEMBUREAU region, EU 27, Oceania) can be noted. The pie chart given in Figure 7 presents an overview of the main cement producing countries.204 It can be stated that driven by strong economic development the Chinese cement sector already took the world lead with a sectoral production share of 56.1% in 2010. The production data highlighted for the European Cement Association (CEMBUREAU) region currently covers the cement industry of the European Union (EU 27) except Slovakia, Cyprus and Malta and including the non-European Union members Norway, Switzerland and Turkey. A stagnating trend of cement production and consumption in developed regions can be assumed to continue over the next decades.205

World Business Council for Sustainable Development Cement Sustainability Initiative: <http://www.wbcsdcement.org/index.php/key-issues/climate-protection>, online, 26 Oct. 2011 201 cf. Battelle 2002a: C-13 202 CEMBUREAU: <http://www.cembureau.be/about-cement/key-facts-figures>, online, 03 Jan. 2012 203 ibid.: 03 Jan. 2012 204 ibid.: 03 Jan. 2012 205 cf. Szab et al.: 35 f

200

48

Figure 6: World Cement Production 2000 - 2010206

Figure 7: World Cement Production207

206 207

as CEMBUREAU: <http://www.cembureau.be/about-cement/key-facts-figures>, online, 03 Jan. 2012 as ibid.: 03 Jan. 2012

49

The basic more or less globally valid economics of cement consumption are aptly described by a statement of the Battelle report: Cement consumption varies considerably across countries and time periods. As evidenced by historical and geographical trends, cement consumption is closely tied to economic growth. Countries with robust economic growth consume more cement as demand for building construction and infrastructure development flourishes. In the short term, economic booms and recessions determine the magnitude of increases or reductions in country-specific cement use. In the long-term, however, growth in cement consumption as a function of economic performance levels off as service industries absorb an increasing percentage of economic growth in mature economies. Total cement consumption in China and in Post-WWII [sic!] Western Europe increased markedly as economic growth fueled [sic!] cement demand for building and public works construction.208 As a consequence, the cement business can be characterized as cyclical typically 5 to 10 year cycles can be identified with a close correlation to private as well as public investments in construction activities.209

208 209

Battelle 2002a: C-5 cf. Wagner/Vassilopoulos 2002: n.p.n.

50

5.3 The Cement Industry of the European Union

In the following chapters the notation European is relating to the geographic area of the European Union and is not referring to the geographic definition of Europe. Some basic characteristics of the cement industry of the European Union are outlined in a sector report of the European Commission: The cement industry is highly concentrated, with the five biggest companies holding about 60% of the EU market share. Consolidation is high, and many of the companies are multinationals. Most of the companies are vertically integrated upstream as they quarry their own raw material and process it up to the final product, as well as downstream into concrete. Capacity utilization in 2006 was estimated at 86% in EU15, and slightly lower at 83% in EU27. There is thought to be no over-capacity in the industry. Since 1990, the Commission has approved eight mergers, none subject to remedies. The Commission so far found one cartel case in which fines were imposed in 1994 on all European producers and their national and European associations. The total amount of fines was reduced by the Court of First Instance in 2000 from 248 million to 140 million. Further cartels have been sanctioned or are investigated by national competition authorities, e.g. in Germany, where five companies were fined 660 million in 2003 (in 2009, the Higher Court in Dsseldorf reduced the fine by 26 half). In November 2008 the Commission started investigation a further alleged cartel in the European cement industry.210 Having a closer look on the European cement production of the last decade as indicated in fFigure 8211 the implied overall cyclical development can be recognized. Referring to this figure it has to be noted that the difference between EU 27 and CEMBUREAU region production is mainly caused by the non-European Union country Turkey which is a member of the CEMBUREAU region and exhibits a remarkable cement production capacity. The sharp downturn in production from 2007 on is to a great extent attributable to the consequences of the late 2000s financial crisis underlining the close correlation with the overall economic development. Figure 10212 illustrates that imports did not counterbalance the lower production rates in the region. The corresponding cement import volumes have been consistently lower than the export volumes. Thus, a real stagnation in cement consumption can be stated for the region at least for the last decade. In consistency with this conclusion, the

210 211

Commission of the European Communities 2009: 25 CEMBUREAU: <http://www.cembureau.be/about-cement/key-facts-figures>, online, 03 Jan. 2012 212 ibid., 03 Jan. 2012

51

cement consumption growth rates of the last decade as indicated in Figure 9213 are negative for almost all developed European countries. Positive growth rates can only be found in countries exhibiting an increased overall economic growth dynamic (e.g. Turkey, Central Eastern Europe).

Figure 8: Cement Production in CEMBUREAU and EU 27 Countries214

213 214

CEMBUREAU: <http://www.cembureau.be/about-cement/key-facts-figures>, online, 03 Jan. 2012 as ibid.: 03 Jan. 2012

52

Figure 9: Dynamics in CEMBUREAU Cement Consumption215

Figure 10: CEMBUREAU Trade 1997 2010216

215 216

as CEMBUREAU: <http://www.cembureau.be/about-cement/key-facts-figures>, online, 03 Jan. 2012 as ibid.: 03 Jan. 2012

53

The topics related to climate change, global warming and CO2 affect the cement industry in general and the European Union cement sector particularly. The European Commission states: The cement industry is one of the big industrial CO2 emitters worldwide and contributes 5% to total emissions. Since [global] cement production is increasing, it is expected that this trend will continue in the coming years. In this context, the cement industry needs to define actions to reduce CO2 emissions and thus make its contribution to the fight against climate change.217 As a political measure the European Emission Trading Scheme (ETS) and related instruments have been introduced in order to enforce the reduction of CO2 emission. In the Emissions Trading Scheme, at the end of 2009, the European cement industry was officially recognized as a sector vulnerable to carbon leakage.218 A significant impact of the ETS on the economics of cement production in the European Union can be regarded as inevitable. The European Cement Association CEMBUREAU states that, [] when vulnerability to carbon leakage is reviewed in 2014, it may prove more difficult to maintain that our production cost has increased by more than 30% of the GVA [Gross Value Added] as a result of the CO2 cost if the CO2 price on the ETS market remains where it is today.219 The cement sector will be impacted directly and indirectly (e.g. electricity cost trends) by these developments. Apart from the additional cost of compliance the uncertainty involved represents a factor strongly influencing the future outlook.

5.3.1 The European Cement Industry Company Overview

The cement sector of the European Union in the year 2009 was made up of 149 companies, with 359 plants in operation.220 In order to shed some light on cement producing companies active in the European Union the following Figure 11 provides an overview of the cement production capacities installed in the 27 countries of the European Union (EU27).

217 218

Commission of the European Communities 2009: 26 f cf. Cembureau 2011: 2 219 ibid.: 3 220 cf. Commission of the European Communities 2009: 28

54

COMPANY

Lafarge Production Capacity in Million tons

Heidelberg Cement Production Capacity in Million tons

Italcementi/ Cemex Buzzi Unicem/ Others Ciments Francais Dyckerhoff Production Production Production Production Production Capacity in Capacity in Capacity in Capacity in Capacity in Million tons Million tons Million tons Million tons Million tons 4,2 0,6 1,3 1,6 0,0 2,6 0,0 1,4 4,6 26,9 7,5 1,6 5,2 24,3 0,0 1,4 0,0 0,0 0,0 6,3 11,1 0,0 1,4 0,9 24,5 0,0 1,0 128,3 38,8

Holcim

Total Production Capacity in Million tons 6,2 8,7 6,2 1,6 6,1 2,6 0,8 1,4 26,4 60,0 18,3 5,9 5,7 55,0 1,2 1,4 1,4 0,0 1,1 21,7 11,1 13,7 3,9 1,5 51,0 3,0 14,9 330,7 100,0

COUNTRY Austria Belgium Bulgaria Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Romania Slovakia Slovenia Spain Sweden United Kingdom TOTAL EU27 Capacity Share [%]

2,0 3,0 2,8 2,4 1,3 2,3 2,5 0,3 1,1

1,2

2,2 0,8

9,5 3,4 9,8 0,5

12,7 2,4

5,7 4,4 1,9 5,1

6,6 4,9 1,0 7,7

14,8 1,2

10,8

1,4 1,1 5,6 3,1 6,1 2,5 5,0 3,0 6,0 39,9 12,1 3,7 11,0 2,8 23,2 7,0

5,2 4,5 0,6 6,8 5,1 48,6 14,7

3,0

1,6

37,2 11,3

30,9 9,3

22,6 6,8

Figure 11: Cement Production Capacities of selected Companies active in the European Union (2010/2011)

Comments:

The dominance of multinational groups and the considerable level of consolidation in the sector are well reflected in the data provided in Figure 11. It can furthermore be identified that the six major cement groups active in the European Union (EU 27) are controlling over 60% of the production capacities in place (see also Figure 12). The approach to highlight production capacities installed was chosen due to the strongly fluctuating production figures attributable to the consequences of late 2000s financial crisis. Production capacities indirectly influenced by minority shareholding are not assigned to the non-controlling companies. Especially concerning the overall cement production capacities in a country, it has to be noted that the availability of reliable data is partly low. The level of accuracy is inter alia 55

limited by the methodology of capacity rating and the evaluation of active/inactive capacity. As a consequence, deviations to other industry statistics might occur without justifying a valid objection. The data highlighted in Figure 11 & Figure 12 is mainly obtained from company internet homepages as well as from the internet resources of the official national cement industry associations. As a supplementary data source the CemNet Global Database221 is utilized.

Figure 12: Production Capacity Share of the major six Cement Companies active in the European Union (2010/2011)222

221 222

cf. CemNet Global Database: <www.cemnet.com/gcr>, online, 10 Dec. 2011 figure developed by the author

56

5.3.2 The European Cement Industry Environmental Analysis

In order to shed some light on prevailing and future trends relevant for the industry, the wellknown PEST-framework, as inter alia proposed by Grant223, is utilized. The framework classifies environmental influences relevant for an industry by source, introducing four categories of factors: political (P), economic (E), social (S) and technological (T). In the following chapter macro environmental external influences, especially affecting the cement sector of the European Union in a significant way today and in the near future, are identified. To a certain degree, the parameters highlighted exhibit a general relevance for mature cement sectors. It has to be noted that the following chapter presents a subjective selection of influencing factors of major current and likely future impact substantiated by the different studies cited. Detailed background information is presented only in limited form in order to comply with the scope defined for this masters thesis. This is especially the case for the issues related to climate change or sustainable construction. Nevertheless, the corresponding developments are likely to influence the industry structure over the next decades in a remarkable way. There is a multitude of literature available, trying to identify and quantify potential related impacts on different industrial sectors. Due to the dynamics involved, especially quantitative analysis of these possible future scenarios can be regarded as challenging.

5.3.2.1 The Political Environment

The European Union can basically be described as a region of stable political conditions albeit recent developments are illustrating the general uncertainty involved in political and economic developments. Within the European Union, the production and marketing of cement is subjected to a high level of legal regulation especially in environmental, product related (building codes, standardization,) as well as in health and safety related fields.224 Cost of compliance with regulations specifically with environmental regulations as exemplarily noted by the European Commission225 can be significant.

223 224

cf. Grant 2009: 64 cf. Commission of the European Communities 2009: 26 ff 225 cf. ibid.: 24

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Climate change and the political/economic developments involved are considered to have a significant impact on the cement industry of the European Union. The introduction of a trading scheme for carbon dioxide emissions is a clear indication in this direction. Effects with remarkable regional differences in current and future impact226 can for example be expected in the field of production cost structure and in third party competition with countries of different competitive settings.227 The risks involved range from lower sectoral investments up to plant relocations. In this perspective, the European Commission notes: Investments in carbon-constrained Europe have fallen away dramatically.228 The developments relating to climate change as well as the uncertainties and risks involved are considerable and exhibit the potential to fundamentally change the economics and structure of the sector even in a disruptive manner. Due to the dynamic of the corresponding processes, it is challenging if not to say impossible to accurately quantify future impacts and their strategic implications. An extensive analysis of the topic identifying threats involved and opportunities arising is for example provided by Atoche-Kong et al.229 In the paper scenario planning techniques are applied in order to deal with the complexity of the issue. The general strategic relevance of issues related to climate change is also highlighted in an article by Porter & Reinhardt.230 The topic of industrial ecology encompassing subject areas like the sustainable utilization of natural resources and material life cycle approaches is likely to gain politically driven influence.231 Public support systems for Green Building or Green Public Procurement are part of the on-going trend towards sustainable construction. To a large extent the developments in this subject field in parallel to the issues related to climate change might be characterized by the following attributes: strong potential impact, highly dynamic and heterogeneous development, increased levels of uncertainty and risk involved. Last but not least, the role of the public sector as a major, especially indirect, customer of the cement industry must not be forgotten. Therefore, political decisions affecting the economic development in general and public investments particularly are shaping forces for the overall development of cement demand.

226 227

cf. Battelle 2002a: C-20 cf. Commission of the European Communities 2009: 26 ff 228 ibid.: 27 229 cf. Atoche-Kong et al. 2010 230 cf. Porter/Reinhardt 2007 231 cf. Battelle 2002a: C-20 ff

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5.3.2.2 The Economic Environment

Cement consumption is mainly driven by the overall economic growth and the building activities involved. The demand for cement can therefore be characterized as cyclical as already highlighted.232 The material specific low value-to-weight ratio leads to a high relevance of costs of transportation for the sector. This phenomenon promotes the formation of rather local/regional markets characterized by (spatial) oligopolistic structures.233 As any industry, the cement sector is affected by the economic instabilities in Europe prevailing in 2012. In 2009 the European Commission already identified the following factors of major relevance: [] higher costs of capital and reduced access to credit, difficulties in planning access to capital, significantly reduced demand from the construction sector on which the EU cement industry is totally dependent and where demand has fallen in most Member States. Although there are differences between Member States, depending on the maturity of the market, a significant decrease or a slow-down in activity has been recorded.234 Even if industry concentration of the European cement sector is already on a high level, there may still be potential in this perspective as indicated by the Battelle Report: The industry has been consolidating over the past decade, although there still are many hundreds of cement firms. The industry is becoming more concentrated as acquisitions, mergers and joint ventures occur on a regular basis.235 Cement production is based on highly energy and raw material intensive processes. Energy consumption and the related costs are of major importance for the industry. Thermal energy (fuels) and electricity demand account for roughly 15% each of the total manufacturing costs of cement.236 A general increase in input related costs and especially increased levels of cost fluctuation can be identified.237 Labor productivity significantly increased over the last decades leaving the sector characterized by a low labour intensity especially in mature markets.238

232 233

cf. Commission of the European Communities 2009: 9 cf. Dumez/Jeunemaitre 2000, Johnson/Parkman 1983 234 Commission of the European Communities 2009: 28 235 Battelle 2002a: C-8 236 cf. ibid.: C-12 237 cf. ibid.: 9 ff 238 cf. ibid.: C-9

59

It can be summarized that the volatility of many economic variables relevant for the cement industry is increasing. This development is strongly affecting the economics of the European cement sector.

5.3.2.3 The Sociological Environment

Referring to a multitude of sociological aspects which are of relevance for the cement sector the following may be highlighted:

The cement industrys global reach places it in a wide variety of socio-economic settings and it must adjust appropriately to each.239 This statement underlines the immanent local character and the localization needs of the sector. The industry creates a high level of direct and indirect employment in local areas.240 The industry has become much more conscious of its image and promotes the significance of its contribution to society.241 Stakeholder demands are increasing. Stakeholders increasingly are expressing their views and taking political action.242 External communication and transparency might therefore gain in importance. Customer needs are changing. The demand for products that meet specific customer needs e.g. environmentally preferable products is increasing. The European Commission recognizes the development of new products, some with a very positive environmental impact,243 as an opportunity for the industry.

5.3.2.4 The Technological Environment

The technological development of the cement industry features some interesting aspects. There are provisos as for example stated by the European Commission that, The cement production process is at a mature stage and no further revolutionary technical

239 240

Battelle 2002a: C-21 cf. Commission of the European Communities 2009: 23 241 cf. ibid.: 24 242 cf. Battelle 2002a: 9 ff 243 cf. Commission of the European Communities 2009: 24

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developments are likely in the short term.244 In addition to that, the same document describes the production technologies of the cement sector as the best possible245 in terms of environmental performance. The processes of adaption in the fields of climate change, industrial ecology and sustainability as well as the related regulatory framework can be seen as strong drivers of further technological developments. Especially referring to the proven product technologies, cement is frequently regarded as a mature material246, even if the risk involved in this perception was already noted. The quality and durability requirements for cement derived building products are high, as for example the concrete building structures created are expected to feature service lifetimes up to 100 years and beyond.247 Thus, customers of the cement industry can in many cases be characterized by a partly comprehensible conservatism. This conservative attitude towards innovation inter alia leads to the phenomenon that new ideas have to prove their advantages before they obtain acceptance and credibility.248 Innovation might furthermore be slowed down by a high degree of standardization and regulation. The topic of innovation in the cement sector is outlined in chapter 6.4.2.5. It can be summarized that external factors like climate change and change in customer expectations are likely to create an atmosphere more open towards innovation in the future. It can be assumed that market opportunities for cement-based products still exist.249 Even if as already stated above no major technological developments may be expected in the short term, there are many upcoming process and product innovations. Many of them are currently in an early stage of the innovation life-cycle. It is so far not clear which or if any of them will exert the potential to influence the sector in a remarkable way, but technology scouting should be regarded as crucial for the upcoming periods.

244 245

Commission of the European Communities 2009: 25 cf. ibid.: 23 246 Battelle 2002a: C-4 247 cf. Cowi 2011: 4 248 cf. MacLeod et al. 1998 249 cf. Commission of the European Communities 2009: 24

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5.3.3 The European Cement Industry Structural Analysis

Michael Porter provides an integrated framework on industry analysis.250 The following structural analysis is based on these concepts. Limitations in analytical depth are made in order to conform to the scope defined for this masters thesis. The analysis is mainly based on officially published industry data and especially focuses on the specific characteristics of mature cement markets at industry level. The goal should be to develop a basic understanding of the cement sectors industrial environment and the competitive forces in place with an emphasis on the European Union market.

Remark on Industry Evolution

Michael Porters approach towards industry evolution strongly relates to the concept of the product life cycle, identifying four distinct stages an industry might pass through: introduction, growth, maturity and decline.251 Reflecting the growth rate of industry sales as an indicator for the stage an industry is exposed to, the corresponding stagnant development of cement sales within the European market leaves the sector characterized as mature as already diagnosed. Porter provides a comprehensive list of life cycle related industry characteristics.252 A maturity diagnosis drawn for the cement sector of the European Union can for example be underlined by the conformity especially with the following characteristics:

Mass market Repeat buying Standardization Price Competition Cyclicality

In the case of cement, a transition from industry maturity to decline is strongly hindered by the prevailing low substitutability of the product.

250 251

cf. Porter 2004a cf. ibid.: 156 ff 252 cf. ibid.: 159 ff

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Structural Analysis 5-forces Analysis In 1979 Michael Porter published his first article on competitive forces shaping strategy.253 The corresponding industry analysis framework represents an epoch making contribution in the fields of competition theory and strategy. In a later article it is stated: Yet competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products. The extended rivalry that results from all five forces defines an industrys structure and shapes the nature of competitive interaction within an industry.254 The corresponding industry analysis framework frequently referred to as 5-forces-framework255 as illustrated in Figure 13 therefore offers a well-defined starting point for the structural analysis.

Figure 13: Forces Driving Industry Competition256

According to Porter, the level of competition and directly related to that the profitability of an industry are determined by different structural elements.257 These elements can be analyzed by means of the prevailing competitive forces. In the following section, a five level scale is
253 254

cf. Porter 1979 Porter 2008: 79 255 cf. Porter 2004a: 4 256 as ibid.: 4 257 cf. ibid.: 5 ff

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utilized in order to classify structural elements relevant for the competitive forces in the sector:

(++) (+) (+/-) (-) (--)

Structural element strongly intensifying competition Structural element moderately intensifying competition No remarkable effect on competition in a distinct direction Structural element moderately dampening competition Structural element strongly dampening competition

A comprehensive analysis of the cement sectors basic economic characteristics including issues related to competition, regulation and globalization is for example provided by Dumez & Jeunemaitre.258 The cement industry is sometimes most likely due to its specific economics utilized as a case example for describing basic principles of competition theory. Rather recently these concepts have been widened by game-theoretic approaches.259

5.3.3.1 Force 1 Threat of Entry260

Barriers to entry can have their foundation in the following industry characteristics:

Economies of Scale (--)

A strong influence of economies of scale represents a characteristic factor and a major entry barrier in the cement sector.261 Significant elements can for example be identified in the strongly scale sensitive labor intensity of production262 or the general scale sensitivity of the production processes263.

258 259

cf. Dumez/Jeunemaitre 2000 cf. d'Aspremont et al. 2000 260 cf. Porter 2004a: 5 ff 261 cf. Wagner/Vassilopoulos 2000: n.p.n. 262 cf. Commission of the European Communities 2009: 27 263 cf. Newmark 2009: 350 ff, Norman 1979

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Product Differentiation (+)

Especially within the European cement market a high level of product related standardization and regulation is prevailing. Product differentiation is therefore limited and can be regarded as a rather challenging topic.264 In general, the influence of brand loyalty can be assumed to be modest or at least geographically limited. The topic of differentiation in the cement sector is analyzed in depth in chapter 6 of this masters thesis.

Capital Requirements (--)

The industry can be characterized as highly capital intensive. Especially the equipment related capital requirements in the field of cement production are considerable. Investment costs for a production plant are in the range of a three years turnover.265

Switching Costs (++)

Due to the already outlined high level of product and product application related standardization within the European market, switching costs for buyers can in most cases be regarded as rather low.

Access to Distribution Channels (+)

Distribution of cement can be executed utilizing different channels. In Europe as typical for mature markets the majority of cement is shipped in bulk form.266 There is basically no limitation to supply the product directly from the production plant to the customer processing it. This direct sales approach undermines the development of distribution channels which might contribute towards the formation of entry barriers. This situation can be different in specific cases if the logistics sector exhibits bargaining power as well as in the case of bagged cement. For mature markets the overall situation is in an exemplary way well reflected by the data of a study investigating the twelve Austrian cement production sites.267 Referring to this study, in the year 2007 building material trade companies held a share of only 14% of the
264 265

cf. Wagner/Vassilopoulos 2000: n.p.n. cf. Commission of the European Communities 2009: 24, Szab, et al. 2003: 15 266 cf. Wagner/Vassilopoulos 2000: n.p.n. 267 cf. Baaske et al. 2009 translation by the author

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overall external turnover of the companies analyzed. The direct cement related figure can be regarded as even lower as the study also included other value added products apart from cement.

Cost Disadvantages Independent of Scale (--)

In the cement business, there are certain advantages attributable to the firms already active in the market. One of them is the production site specific favorable access to raw materials concerning quality, quantity and transport distance. Furthermore, there are advantages created by the vicinity to relevant delivery and supplier markets. As cost of transportation play a major role for the bulk material cement268 , these geographic advantages go hand in hand with a cost advantage. The factors might constitute crucial market entry barriers. To a certain extent this phenomenon can be interpreted as a first mover advantage related to location favoring firms which are early in the market. The know-how and position gained in the course of long-term business activities as well as the advantages related to learning and experience acquired represent further factors raising the entry barrier.

Government Policy (--)

As already outlined, the cement business is strongly influenced by government policy. Regulation affects entry related issues like access to raw materials (e.g. mining permits), environmental compliance (e.g. environmental impact assessments) or general operating licenses. As cement production always involves a certain level of environmental impact (emissions, traffic,...) an entry to the industry may also be hindered by public resistance towards new installations.

Summarizing the factors outlined above, it can be stated that possible new market entrants are likely to face strong entry barriers. Therefore, the threat of entry, especially in a stagnant mature market, seems rather low. In unsaturated markets specific governmental policies might be introduced to facilitate new entries mainly in order to avoid overall economic drawbacks. For mature markets it can additionally be assumed that retaliating reactions of existing

268

cf. Newmark 2009: 350 ff

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competitors might be rather fierce especially as the following factors identified by Porter apply:269 Great commitment to the sector due to an in many cases long history in the industry Illiquid assets featuring an industry specific utilization profile Slow industry growth (especially valid for the mature European market as already identified)

Assessment of the Force Threat of Entry: Currently: Low Trend: Stable

As long as the main entry barrier related structural elements identified (capital requirements, economies of scale, government policies,) are not undermined by for instance technological change, there is no indication that the threat of entry will increase in the near future. Furthermore, the overall attractiveness of the sector currently does not foster new entries.

5.3.3.2 Force 2 Intensity of Rivalry among existing Competitors270 The intensity of rivalry within an existing industry is depending on many factors.271 Some of them accountable for intensifying intra-sectoral rivalry especially apply to the cement industry in general and to the European cement sector specifically. A stagnant sectoral growth (++) limits the possibility for volume expansion. Additional market share can only be accessed by reducing the rivals market shares or by the means of mergers and acquisitions. In this perspective, geographic expansion represents a viable instrument to generate growth which additionally yields the advantage of market risk mitigation. Once a certain production capacity is installed, the relative high fixed costs involved (+) in cement production force all competitors to operate on low free capacities. As characteristic especially for standardized products, rivalry cannot easily be mitigated by differentiation or the creation of switching costs (+). Additionally, prevailing high exit barriers (++) like specialized assets tend to promote rivalry. The majority of investment costs in a plant site can be regarded as location specific sunk costs.272

269 270

cf. Porter 2004a: 14 cf. Porter 2004a: 17 ff 271 ibid.: 17 ff 272 cf. Johnson/Parkman 1983: 431

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Some factors diminishing the intensity of rivalry273 can be highlighted for the cement industry. Due to the strong influence of the factor location on the cost structure, local cost leadership (--) might lead to local dominance (--) of a single or a few producers. As put aptly by Porter: [] leader or leaders can impose discipline as well as play a coordinative role in the industry through devices as cost leadership.274 It can be noticed that market relevant cost leadership in the cement industry is not only based on operational excellence but strongly depending on the factor location leading to the formation of spatial oligopolies. These economies related to location can in certain cases be dominated by economies of scale and/or capacity utilization, especially if there is unused capacity available. Such development was noticed by the European Commission concerning the topic of third country imports.275 Factors like different regional competitive settings and lower cost of transportation are supposed to play a major role in this perspective. Basically, the European cement industry is composed by a mixture of multinational, national and local producers. The mix of companies and business strategies enables the development of a multitude of area-specific competitive settings. Summarizing and weighing up the different influencing factors it can be assumed that with remarkable local differences the overall intrasectoral rivalry is currently on a medium level.

Assessment of the Force Intensity of Rivalry among existing Competitors: Currently: Medium Trend: Increasing

Driven by the low sectoral growth, it can be assumed that the intensity of rivalry within the sector will rather increase.

5.3.3.3 Force 3 Pressure from Substitute Products276

As already highlighted, cement represents a basic ingredient to economic growth. The large scale substitutability of cement with other materials is mainly due to technical and cost reasons rather low (-) leading to the conclusion that demand is inelastic (-)277. Price levels exert only a limited influence on overall demand in the short term. There are some indications
273 274

cf. Porter 2004a: 17 ff Porter 2004a: 18 275 cf. Commission of the European Communities 2009: 29 276 cf. Porter 2004a: 23 f 277 cf. Wagner/Vassilopoulos 2000: n.p.n.

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that pressure from substitute products tends to increase. Some concerns regarding the emergence of substitutes to concrete representing the case of downstream substitution278 in specific segments have for example been raised by sector executives.279 In the specific case that product innovations substituting cement are not conforming to prevailing standards and building codes, substantial time and investments have to be taken into account for product testing and approvals creating a notable barrier towards substitution.

Assessment of the Force Pressure from Substitute Products: Currently: Low Trend: Increasing

5.3.3.4 Force 4 Bargaining Power of Buyers280

Commonly the buyers community of cement is less concentrated (-) than the producers community.281 The relatively large production volumes of a single cement plant are sold to a considerable number of customers. Furthermore, the number of possible competitive suppliers in a specific region is frequently limited (-) due the distinct economies related to location. Albeit this fact, bargaining power of buyers is strengthened by the high degree of product standardization (+) in the sector and the often negligible switching costs (+) involved. In the case that the quality attributes of a product like cement are largely defined by standards or norms, the commodity state is augmented. The corresponding cement markets can frequently be characterized by a high level of transparency for the demand side (+).282 This situation incurs a remarkable incentive to play different producers off against each other. Due to the cyclical development of demand and the economics involved (+), price pressure in specific local customer segments can be high. Backward integration moves of customers into the cement business do not seem to be a major factor so far. Due to the low overall level of substitutability (--) of cement, the overall bargaining power of buyers is reduced remarkably. Customer bargaining power can furthermore be regarded as highly specific to local markets. Nevertheless, a general trend towards increasing customer bargaining power can be assumed in the course of changing customer needs and increasing stakeholder demands.
278 279

cf. Porter 2004b: 277 cf. Battelle 2002b: 9 280 cf. Porter 2004a: 24 ff 281 cf. Connor 2003: 8 282 cf. Sebastian et al.: 175 translation by the author

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Assessment of the Force Bargaining power of Buyers: Currently: Medium Trend: Increasing

5.3.3.5 Force 5 Bargaining Power of Suppliers283

In most cases the primary raw materials resources (limestone, clay,) are directly controlled (--) and extracted by the cement companies.284 The strategic risk to base the production on outside supply of these base materials might be too high. A major proportion of production cost of the cement industry is attributable to the purchase of electric and thermal energy (fuels). The bargaining power of both energy related supplier groups can be regarded as rather high (++). In order to alleviate the pressure from rising and/or fluctuating energy costs remarkable, mainly process innovation (-) related, trends can be identified: A strong focus on energy efficient production285 A trend towards the utilization of so called secondary/alternative frequently waste derived fuels or renewable energy sources and the need for increased plant fuel flexibility286 The (beginning) trend to at least partially insource the electric power generation287

The markets for secondary fuels are frequently of local character. Energy costs currently represent roughly 30-40% of the industry total costs and the increased utilization of alternative raw materials and fuels is for some time identified as an opportunity.288 The cost incentives to enforce related developments are and will be massive over the coming years.289 Nevertheless, as some degree of direct correlation between the particular energy cost elements, independent from the source, can be assumed, there is only a limited ability of cement companies to mitigate the pressure from rising energy costs in a sustainable way (+). Especially in mature markets, labor costs can be stringent and occupational health and safety as well as worker protection are on a high level (+). The corresponding elements of
283 284

cf. Porter 2004a: 27 ff cf. Commission of the European Communities 2009: 23 285 cf. IEA International Energy Agency 2009: 5 286 cf. Commission of the European Communities 2009: 23 287 cf. Harder 2011 288 cf. Commission of the European Communities 2009: 23 ff 289 cf. Cembureau 2011: 31

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bargaining power are counterbalanced by an increasing manpower related productivity and a low labor intensity of the sector (-)290. The factor Government as identified by Porter as a force of industry competition291 is able to exert significant influence on an industrial sector by acting as buyer and/or supplier. Government may for example be interpreted as a supplier of legal compliance by the means of approvals and permits. Once identified as supplier, the factor Government represents a competitive force of remarkable bargaining power (++).

Assessment of the Force Bargaining Power of Suppliers: Currently High Trend: Stable

290 291

cf. Commission of the European Communities 2009: 27 cf. Porter 2004a: 28 f

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5.3.4 Summary of the Structural Industry Analysis

For the cement industry of the European Union the five forces292 shaping competition can currently be assessed as follows:

The threat of new entrants is rather low. The bargaining power of suppliers is rather high. The bargaining power of buyers is estimated to be on a medium level. The threat of substitutes is on a low level. The competitive rivalry among existing firms is estimated to be on a medium level.

In the cement sector especially the forces relating to bargaining power and intrasectoral competitive rivalry can be of inherently local or regional character. The following Figure 14 summarizes the findings of the structural analysis and its influence on the competitive forces in the European cement sector:

Figure 14: Five Forces Framework of the European Cement Industry293

292 293

cf. Porter 2004a: 4 figure developed by the author

72

The European Cement Industry Structural Analysis Outlook

In the context of the analysis conducted, current and likely future structural characteristics and their effects on the competitive setting are analyzed. Enhancing this current five forces framework of the European Union cement sector as presented in Figure 14 by the developments identified the following conclusions can be drawn.

The threat of new entrants is rather low and fundamental changes of this situation in the near future are unlikely. The bargaining power of suppliers is rather high and there is no indication that this situation will change remarkably. The bargaining power of buyers is estimated to be on a medium level and there are some indications that it will increase. The threat of substitutes is on a low level but there are some indications that this might change at least in certain segments. The competitive rivalry among existing firms is estimated to be on a medium level and anticipating future stagnant industry growth rates a tendency towards increasing intra-sectoral rivalry can be assumed.

These issues highlighted represent an outlook on the strategic challenges the sector might be facing. The statements are summarized and illustrated in the following Figure 15.

73

Figure 15: Five Forces Framework of the European Cement Industry Outlook294

294

figure developed by the author

74

5.3.5 Consequences From Structural Analysis to Competitive Strategy

Michael Porter states: Once the forces affecting competition in an industry and their underlying causes have been diagnosed, the firm is in the position to identify its strengths and weaknesses relative to the industry.295 As a consequence, an effective competitive strategy should [] create a defendable position against the five forces by utilizing the following approaches:296

Positioning the firm (so that its capabilities provide the best defense against the existing array of competitive forces) Influence the balance of forces Anticipating shifts in the factors

A major outcome of the structural analysis performed is that the competitive conditions in the European cement industry are likely to change in some fields in the future. These developments exhibit the potential to affect the sector significantly. The following six main challenges formulated in competitive terms can be derived for cement firms active in the European Union:

Developing strategies taking into account the industry specific characteristics related to a low threat of entry Developing strategies capable to meet the challenges related to the high and increasing supplier bargaining power Developing strategies capable to manage the risk related to substitution Developing strategies capable to meet the challenges related to increasing buyer bargaining power Developing corresponding strategies additionally reflecting the local/regional character of the industry Developing corresponding strategies additionally incurring positive or at least acceptable impacts on competition, industry attractiveness and structure

295 296

Porter 2004a: 29 f cf. ibid.: 29 f

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The question arises if and to which degree the generic competitive strategies formulated by Porter297 are capable to meet the strategic challenges stated above. It was already outlined that overall cost leadership is able to improve the relative competitive position vis-a-vis the competitors, but it remains questionable if this strategy represents a viable approach to meet all future challenges. As a consequence, beside the frequently dominating strategy approach of cost leadership, the strategic alternatives of focus and differentiation are investigated within the following chapters.

297

cf. Porter 2004a: 34 ff

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6 Assessment of Competitive Strategies for the Cement Industry

The following chapter investigates the basic characteristics of competitive advantage in the cement sector. Furthermore, the generic competitive strategies as defined by Porter298 are analyzed referring to their transferability to and applicability in the cement industry especially focusing on mature markets.

6.1 The Foundations of Cost Advantage in the Cement Business

Porter identifies cost advantage as one of the two competitive advantages a firm may possess.299 In the hypothetic case that a product or an industry would lack all potentials for differentiation, cost advantage would therefore represent the only remaining potential source of competitive advantage. As already outlined, even in the case of a differentiated company cost control and the relative cost position in the competitive business environment are of major importance. As a precondition for any cost related consideration, the following chapter sheds some light on the most relevant cost drivers in the cement industry.

6.1.1 Cost Drivers in the Cement Business

Analyzing the ten major cost drivers as presented by Porter300, the following can be highlighted due to their specific significance. The diagnosis focuses on mature cement sectors featuring the structural characteristics identified in chapter 5 of this masters thesis.

Economies of Scale

The distinct high importance of economies of scale as a cost driver has already been noted in the industry analysis chapter of this masters thesis.

298 299

cf. Porter 2004a: 34 ff cf. Porter 2004b: 62 ff 300 cf. ibid.: 70 ff

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Pattern of Capacity Utilization

Due to the high capital requirements and therefore fixed cost base for state of the art cement production plants, capacity utilization represents an important cost driver. Both long-term cyclical demand driven by economic cycles and local patterns of demand as well as seasonal demand especially important for countries exposed to seasonally different weather conditions are of relevance in this perspective.

Policy Choices Company specific policy choices301 represent major cost drivers for the cement industry. The following examples can be highlighted: product scope and characteristics, technology applied, level of marketing and technology development, raw materials and energy sources utilized, human resource policies and many others more.

Location

The dominating role of the cost driver location especially affecting costs related to logistics has already been noted in the industry analysis part of this masters thesis. Specific exemplary regional data can be found in a study focusing on the twelve Austrian cement production sites and their regional economic significance.302 Within the scope of this study, the following characteristics concerning transports of inputs and products are noted:

80% of the input materials apart from fuels are originating within a transport distance of only 62 kilometers from the plant location. 80% of the products are sold within a transport distance of 183 kilometers from the plant location. It has to be mentioned that the study includes also other products apart from cement which might be less severely exposed to economies related to transport distance. The mean transport distance for the whole product range produced at a plant site was calculated to be in range of 101 kilometers.

301 302

cf. Porter 2004b: 80 ff cf. Baaske et al. 2009 translation by the author

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Institutional Factors Institutional factors have significant impact on the cement companies cost base. In chapter 5 the major relevance of issues related to the emission of greenhouse gases and the European emission trading scheme for carbon dioxide has been briefly touched. The corresponding legislative framework imposes additional cost drivers on the sector. Developments in these fields can be characterized by a high level of uncertainty involved. Integration Many cement companies are integrated backwards into raw material extraction and mining as well as forwards into aggregates, ready-mix concrete, and precast concrete production as well as into the mortars, screeds and plasters business.

6.1.2 Cement Business Cost Structure Example Austria

Analyzing the results of the already highlighted study relating to the Austrian cement industry303, the following distribution of cost can be illustrated, providing an example of a single local market within the European Union in the year 2007. Cost allocation: material & external service costs (48 %), personnel costs (18%), depreciations (7%), other operating expenses (22%), interests and related expenses (5%). In the year 2007 purchased inputs (material supplied, external services and other operating expenses) represented roughly 70% of total costs. The most important single positions within this cost group have been: power supply (25%), mineral raw materials utilized (18%), goods and materials employed (33%) and logistics (13 %). The importance of the procurement function is underlined by these figures. It has to be stressed that the figures outlined cannot be regarded as representative for the overall European cement sector. Furthermore, it has to be limited that the study cited included other value added products apart from cement. Nevertheless, it provides a punctual insight into the sector specific cost structure. For the overall European cement industry, energy related costs represent roughly 30-40% of the total costs304 highlighting the energy intensity of the industry.

303 304

cf. Baaske et al.: 2009 translation and calculation by the author cf. Commission of the European Communities 2009: 23 ff

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6.2 The Foundations of Differentiation Advantage in the Cement Business

6.2.1 Preamble Differentiation and De-Commoditization in the Cement Sector
Discovering sources and potentials for differentiation and checking their feasibility represents the foundation for a differentiation strategy. In the ideal case, a realized differentiation advantage leads to a sustainable competitive advantage providing the basis for superior profitability. Referring to chapter 4.3, it can be concluded that successful differentiation goes hand in hand with a de-commoditization no matter on which drivers of uniqueness differentiation is based. The significance of different drivers of uniqueness for the cement sector is diagnosed in the course of the case study presented in chapter 6.4. The process related terms differentiation and de-commoditization have already been identified to be used in a synonymous way. It has to be stressed that commoditization is not only affecting products but can rather be regarded as a phenomenon affecting whole industrial sectors. The primary question is not if uniqueness valuable for the customer is based on unique product attributes or on unique business activities. Either approaches, or in an ideal case a combination of them, might exhibit the potential to lead to success. The frequently occurring misconception that only products can be differentiated has to be avoided. This unjustified presumption would undermine a holistic view and create unsubstantiated limitations for industries strongly affected by commoditization. Nevertheless, differentiation based on unique product attributes can be regarded as a more fundamental and comprehensive approach as it is outlined in chapter 6.4. According to Ryan & Holmes, it is important to understand the impacts of commoditization on a particular business and to define a response to the question if commoditization should be avoided or embraced.305 The threats and opportunities arising have to be understood first. It has to be underlined that commoditization at least to a certain degree represents a policy choice and is the responsibility of the specific industrial sector. Commoditization is not an inevitable faith!

305

cf. Ryan/Holmes 2009

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Ryan & Holmes in basic correspondence to the concepts of Porter identify two broad thrusts to a possible response: focus on cost and efficiency or focus on value creation.306 The issues relating to customer or buyer value therefore have to be investigated if the second approach moves into the focus.

6.2.2 The Cement Industry Value System

Differentiation advantage in the cement sector is rooted in the creation and feasible distribution of value. Especially the value distribution is an issue to put emphasis on in the multi stage business which transforms cement into durable building structures. Porters approach towards value creation307 is subsequently utilized in order to analyses the value system a cement producer is embedded to. The following approach is not focusing on company specific configurations of the value chain or the related value activities. These steps are necessary for a comprehensive analysis on company level but would go beyond the scope of this masters thesis. As a consequence, the considerations of this chapter are focusing on elements featuring a general applicability within the scope defined. The analyses carried out in this chapter aims at developing a comprehensive sectoral model of the overall value system identifying stakeholder and decision-maker groups of the upstream (suppliers) and downstream (channels, customers, end-users) value system. The corresponding findings are crucial for value related considerations in the sector.

6.2.2.1 Cement and derived Products

Based on the introductive comments in chapter 5.1, the insight into cement and derived products has to be enhanced within this chapter in order to get a more comprehensive view of the industry. The business of cement companies is usually based on the production and marketing of cement. Apart from this, frequently other materials like ground limestone or so called cementitious materials are produced utilizing the same production facilities. Many cement companies are furthermore integrated forwards into value added derived products like mortars, plasters or screeds as well as into the aggregate or concrete business. In order to characterize the sector, a view issues related to the European cement market as an example

306 307

cf. Ryan/Holmes 2009 cf. Porter 2004b: 33 ff

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of a mature market have to be noted. The example case of the European Union can be regarded as characteristic for mature markets featuring a high level of regulation.

The legal Basis for Marketing Building Products within the European Union

As long as the intended use is in the field of construction the so called Construction Products Regulation (CPR)308 represents the binding legal framework for marketing corresponding products within the European Union. The regulation defines basic requirements for construction works which have obligatory to be fulfilled.309 It has to be stressed that the compliance with this regulation does not necessarily imply that corresponding products can be used throughout the market without any further assessment or approval.

The Standardization Basis for Cement and related Products within the European Union

Within the European market common cements are standardized within the scope of the European Standard EN 197-1 reflecting the ambition to create a material related standard for cements [] for use in any plain and reinforced concrete and which are familiar in most countries in Western Europe because they have been produced and used in these countries for many years.310 Within the scope of this standard, compositions and specifications as well as conformity criteria for common cements are defined. The document additional notes the existence of a multitude of regional cements which historically have been developed due to different raw material availability, local climatic conditions or specific architectural requirements to be standardized on national level. Furthermore, special cements are defined as products with additional or special properties which may be subjected to European standardization. Based on the statements highlighted above, the following classification scheme and notations for cements are deduced and further on used throughout this masters thesis.

308 309

Regulation (EU) No. 305/2011 cf. ibid.: Annex 1 310 CEN - European Committee for Standardisation 2011: 3

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Cements mainly used for construction purposes: Common Cements conforming to the European Standard EN 197-1 Special Cements conforming to a European Standard Regional Cements conforming to a National Standard Non-standardized Cements

Cements mainly used for non-construction purposes not within the scope of this masters thesis

It has to be stressed that all conclusions drawn in this chapter are directly related to the product cement. For all product categories based on cement or products produced utilizing cement as a component additional European as well as national standards, building codes or regulations, especially regulating the application of the products, might be in place. Other derived products produced by cement companies are not reflected within this masters thesis. The basic mechanisms relating to standardization and regulation can nevertheless be regarded as largely comparable. The dominating importance of standardized common cements for the overall European cement market can be illustrated utilizing the example of Germany. In the timeframe between 2001 and 2010 the market share of standardized common cements shipped by members of the German Association of Cement Producers Verein Deutscher Zementwerke e.V. (VDZ) can be calculated to be in a range of 99%.311 Similar results have been identified in earlier studies on an overall European level.312

6.2.2.2 The Utilization of Cement

An exemplary allocation of the cement produced according to its intended field of application can be provided again utilizing the example of Germany representing one of the biggest cement consumers within the European Union.313 Referring to press information of the

own calculation based on data of the of the German Association of Cement Producers available at <http://www.vdzement.de/1353.html>, online, 28 Nov. 2011 translation by the author 312 cf. Wagner/Vassilopoulos 2000: n.p.n. 313 cf. Cembureau 2011: 15

311

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German Association of Cement Producers314 the following distributions (Figure 16 & Figure 17) can be noted for cement marketed in Germany in the year 2010.

Figure 16: Distribution of Cement Tonnage shipped in Germany in the Year 2010 relating to its final Utilization in Construction315

Figure 17: Distribution of Cement Tonnage shipped in Germany in the Year 2010 relating to its primary Utilization316

314 315

cf. Bundesverband der Deutschen Zementindustrie (BDZ) 2011 translation by the author as ibid. translation by the author 316 as ibid. translation by the author

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It can be assumed that in Figure 16 and Figure 17 all major fields of cement consumption which can qualitatively be regarded as representative for the overall European cement market are identified. It has to be noted that the relative proportions of cement utilization may vary as a function of the overall economic environment, national/regional market specifics and other influencing factors. Nevertheless, the qualitative significance of the data can be regarded as representative. As a consequence, the use of cement as a binder in concrete is noted as the dominating field of application. The stakeholder groups involved in the business fields identified are subsequently included in the analysis of the value system. All corresponding conclusions drawn again focus on cements used for construction purposes. Cements with an intended use mainly outside the construction industry are of little relevance for this masters thesis and are not subject to further considerations.

6.2.2.3 The Cement Producers Value System

Due to the defined focus on cement used for construction purposes, the necessity to shed some light on the directly related construction value system arises. Referring again to the example of Germany, a comprehensive analysis of the construction value chain and its economic relevance is provided by the German Institut der Deutschen Wirtschaft Kln Consult GmbH for the German Federal Office for Building and Regional Planning.317 The analysis identifies four fields of activities within the ideal-typical construction value chain:318

Design, Consulting and Permitting Financing Construction Activity Operations (Maintenance)

317 318

cf. Institut der Deutschen Wirtschaft Kln Consult GmbH 2008 translation by the author ibid.: 12 translation by the author

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The following corresponding groups of stakeholders are involved:319

Construction companies Consultancy companies (Planning,) Companies from other sectors Final consumers (end users)

Besides qualitatively identifying stakeholder groups, an analysis of the interrelations over the different activities of the process chain would be necessary to get a comprehensive picture of the construction value chain. There is number of models relating to the construction value system recognizing interrelations and the contractual relations between the stakeholder groups.320 Further valuable information can be derived from research literature focusing on the construction supply chain.321 For the cement sector, the following two graphic illustrations (Figure 18 & Figure 19) of the value system identifying the main stakeholder groups during the different phases of the construction process are derived. The figures presented illustrate the downstream value system and the upstream value system a cement producer is embedded to. This overall value system can be regarded as a basis for all value based considerations in the sector. It has to be noted that the illustrations represent a cement-centered view of the construction value system and might therefore deviate from similar illustration from other sources.

319 320

cf. Institut der Deutschen Wirtschaft Kln Consult GmbH 2008 translation by the author cf. Cheah/Chew 2000, Macomber 1989, Macomber 2001 321 cf. Dainty et al. 2001, O'Brian et al. 2002, Vrijhoef/Koskela 2000

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The Cement Producers Downstream Value System

Figure 18: The Cement Producers Downstream Value System322 Comments

The illustration is basically tracing the way of the product cement during its transition from its primary state as a product leaving a cement plant until its final utilization in the building structure. The stakeholder groups involved are indicated with separate value chain symbols. For every group of stakeholders a single value chain symbol is used independently from the fact how many distinctive stakeholding entities might be present in a specific case. Only stakeholder groups featuring a dedicated value chain have been included. There are two product related transformative spheres defined in Figure 18. The first transformative sphere encompasses the transition from the product cement to an intermediate building product ready to be used on the building side (concrete,). The

322

figure developed by the author

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second transformative sphere relates to the transition of the building product from its intermediate to its final state as part of the building structure. Members of the first transformative sphere are usually representing the direct customers of the cement producer. The groups illustrated have already been identified in Figure 17. The situation might be different if sales channels are employed or the corresponding entities of the first transformative sphere are integrated into the cement producers business. Members of the second transformative sphere have been identified utilizing different sources.323 It has to be amended that the interrelations and contractual relations between the stakeholders have not been included in the illustrations for two reasons. First of all, the interrelations are subject to change over the different stages of the building process. Secondly, the complexity involved would lead to problems concerning a meaningful graphical illustration. The stakeholder group of Subcontractors may involve several consecutive groups of subcontractors or higher classes of subcontracting. Other suppliers, Producers of Supplements and Producers of Substitutes as well as Competitors are included in Figure 18 in order to reflect the value system approach of Porter324 and their important role within the corresponding competitive framework325. Supplementation or substitution of cement in the second transformative sphere commonly takes place in an indirect way affecting the intermediate products of the first transformative sphere. The stakeholder group Other Suppliers includes companies supplying logistic services which are of general importance for the transport intensive sector. It has to be stressed that not all the stakeholder groups indicated in Figure 18 have to be present in a specific case. Furthermore, there may be case specific additional stakeholder groups present. Another case not indicated is the possible overlapping of two or more stakeholder groups (e.g. a ready-mix concrete producer and a sub-contractor). In the field of do-it-yourself (DIY) applications of cement even both transformative spheres and the end-user may merge to a single entity.
cf.: Baaske et al. 2009, Cheah/Chew 2005, Institut der Deutschen Wirtschaft Kln Consult GmbH 2008 translation by the author 324 cf. Porter 2004a: 34 325 cf. ibid.: 5 ff
323

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Encompassing an even broader approach, certain stakeholder groups, as for example code inspectors, government officials, non-profit organizations or industry trade organizations326, may additionally be included in the model presented. Civil engineering activities are mainly relating to public sector construction and the corresponding specific stakeholders involved. Finally, it has to be remarked that the value system theoretically includes steps after the use of the building structure (demolition, recycling,). This approach is increasingly of importance in the course of life cycle related considerations but is not included in the model presented in order to limit the complexity involved.

The Cement Producers Upstream Value System:

Figure 19: The Cement Producers Upstream Value System327

326 327

cf. Hoffman/Henn 2008 figure developed by the author

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Comments:

Referring to the upstream value system as highlighted in Figure 19, the same general conclusions are valid as for the downstream value system. The upstream value system is not illustrated in detail compared to the downstream value system. The level of complexity chosen represents the minimum in order to serve as an illustrative example. The stakeholder groups of the supply sphere are qualitatively identified according their relative importance related to operating costs utilizing the example of the Austrian cement sector.328

6.2.2.4 Product related Decision-making in the Construction Sector

The complex value system identified features characteristic patterns of decision-making concerning construction material choices which have been investigated in a joint study of the professional service firm Arup and the World Business Council for Sustainable Development (WBCSD).329 Based on qualitative personal interviews and a quantitative online survey, influencing factors related to material choices in the course of sustainable construction have been identified. The holistic approach of the study design, surveying representatives of the stakeholder groups investors, clients, architects, engineers, contractors/constructors and others more, can be highlighted. Some remarkable findings of the study with regard to the decision making process for structural building materials like concrete are illustrated in the following Figure 20.

328 329

cf. Baaske et al. 2009 translation by the author cf. Arup/WBCSD 2012

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Figure 20 : Construction Process related Decision Point of Structural Material Choices in various Countries330

The decision-making characteristics identified can be regarded as strongly country specific underlining the feasibility of localized business approaches in the sector. Without going into details of the study, Figure 20 suggests the prevalence of an extended decision-making model over the different phases of the construction process. This important diagnosis should find its reflection in the marketing approach of a cement producer as soon as a value based approach is considered. The results basically substantiate the value system model developed in chapter 6.2.2.3, especially if the level of influence of various stakeholder groups on the material choice as indicated in the following Figure 21 is taken into account. The figure furthermore underlines the multifaceted and complex challenge of identifying the decision makers in the building material buying process.

330

as Arup/WBCSD 2012: 5

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Figure 21: Influence of different Practitioners on the Material Choice331

It can be summarized that different relevant stakeholder groups have to be regarded in different stages of the construction process as soon as marketing cement should be more than providing a basic standardized commodity.

6.2.2.5 Consequences for the Cement Producer

The cement business represents a typical case of a business market, as the direct customers are by majority commercial enterprises. Cement demand can therefore be classified as a derived demand332 driven by the ultimate demand created by construction activities. The cement industry is imbedded to a sector specific complex value system. The value system outlined provides crucial information relating to the creation and distribution of value by the cement producer. Providing customer value represents a precondition to gain competitive advantage. This chapter identified groups of stakeholders to be regarded in order to answer the question which kind of value can/should/has to be provided to which stake holding group. Reflecting the complex structure of the cement value system, it can be anticipated that providing value to the direct customer represented by the stakeholder groups of the first transformative sphere is beneficial but most likely not enough in order to reach a sustainable competitive advantage. None of the stakeholders identified must be forgotten in the course of cement marketing related considerations. Product choice decision making in the sector is complex and represents a remarkable challenge for marketing cement.
331 332

as Arup/WBCSD 2012: 7 cf. Hutt/Speh 2012: 13

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It additionally has to be noted, that the direct customers identified in the first transformative sphere are mainly operating continuously but are serving a mainly project-based business. This characteristic has to be taken into account for any marketing strategy to be developed. The complexity of the construction value system, especially concerning the contractual relationships and differing motivations in place, is very well albeit in a rather extreme form pointed out by Macomber: Virtually everyone in the construction supply chain works on contracts where the incentive is to maximize their gain at the expense of others.333 The role of competing interests in the typically temporary organizational structures within construction processes has for example been highlighted by Hoffman & Henn.334 This specific characteristic is not reflected within this masters thesis but has far reaching implications for decision making processes and business marketing in the sector in general.

6.2.3 Segmentation in the Cement Business

6.2.3.1 Preamble

The cement value system identified can be seen as a viable basis to subsequently develop segmentation approaches for the industry. The following chapter presents a rather general approach towards segmentation in the cement sector. Analyzing prevailing literature and referring to conclusions of the analyses performed, feasible segmentation variables are identified. Industry segmentation matrixes may be deductible for company specific cases. Michael Porter notes: The industry segmentation matrix should contain potential segments and not just segments that are currently occupied.335 Identifying potential segments represents a key element of strategic work. Nevertheless, the feasibility of targeting a segment has always to be assessed reflecting the company specific context. As a consequence, the focus of this chapter is not on identifying specific potential segments but more on identifying segmentation variables of general relevance. Again the focus is put on mature markets. The resulting conclusions can easily be enriched utilizing additional variables deemed to be useful for specific company/sector/market related cases.

333 334

Macomber 2003: 8 cf. Hoffman/Henn 2008 335 Porter 2004b: 254

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6.2.3.2 Industry Segmentation Variables

The starting point towards segmentation in the cement industry is based on the principles of industry segmentation for competitive strategy as outlined by Porter.336 Industry segmentation in the cement sector may rely on the following four main segmentation variables:337

Product Varieties

The product varieties identified in chapter 6.2.2.1 represent all potential categories of cements for construction purposes to be produced referring to their position within the regulative framework. This variable is especially important due to its impact on issues like market access, market acceptance or time-to-market. Product performance constitutes a valuable segmentation variable, especially if an outperformance to standardized performance can be achieved. Performance may relate to both transformative spheres defined and/or the end-user. Therefore, it should encompass elements like ease of use, performance beneficial for a specific stakeholder group, environmental performance, health and safety performance or general performance related to sustainability. The optional introduction of a service component including logistics services would add a certain level of complexity to the array of product varieties, as the comprehensive way is to include service stand-alone as well as bundled with the specific product variety.338 Concerning the topic of packaging the industry specific distinction between bulk cement and bagged cement is useful to be kept. In price driven markets the introduction of price categories might be feasible in specific cases.

Buyer Segments

The buyer industry commonly members of the first transformative sphere as identified in chapter 6.2.2.3 represents a useful segmentation variable as especially many physical properties of the cement to be marketed are most likely influencing the value activities during the first transformation phase of the product. Furthermore, the configurations of the value chains of buyers in the different transformative sectors exhibit considerable differences. Members of the second transformative sphere as well as the final field of application and

336 337

cf. Porter 2004b: 231 ff cf. ibid.: 238 338 cf. ibid.: 239

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the end-users would justify distinct segmentation variables if value creation for these stakeholder groups is identified as a potential source of competitive advantage. Within one of the few papers referring to the topic of segmentation in the cement sector Jacques339 inter alia identified customer purchasing behavior as a segmentation variable relevant for the industry. The distinctions drawn based on comprehensive data analysis of the multinational building materials group Lafarge introduced the following three categories of the segmentation related to customer behavior: price driven, relationship driven and performance driven. The variable of technological sophistication340 is likely to be of value especially in order to assess the segment attractiveness with regard to a service or an innovative product offer.

Channel Segments

As already outlined in chapter 5 especially for the dominating product variety bulk cement direct sales represents the most relevant sales approach for the cement industry in Europe and in other mature markets. Nevertheless, all existing and potential channels have at least to be pre-assessed and included in the segmentation analysis in order to gain a comprehensive overview.

Geographic Segments

Porter notes the example of building insulation material in order to highlight an industry case featuring a specific importance of location and transport distance due to a low value-to-weight ratio of the products.341 The corresponding approach supports the feasibility of a segmentation based on geographic variables. The same conclusion can be drawn for cement. Geographic segmentation is of major importance for the cement industry due to three mechanisms in place:

339 340

cf. Jacques 2007 cf. Jacques 2007, Porter 2004b: 242 341 cf. Porter 2004b: 234

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The specific regional/national/international legislative and regulative framework in place The specific regional/national/international cultural, architectural and constructional characteristics The specific economics related to location especially costs of transportation rooted in the low value-to-weight ratio of the product

Following these conclusions, the introduction of feasible categories relating to geographic segmentation variables is inevitable. In the case of the cement sector, the competitive forces are exerting their influence to a considerable extent on a local or regional level. As a consequence, it can be concluded that geographic segmentation variables are even of dominating importance. This statement reflects the local/regional character of the sector and the strong influence of the factor plant location. Geographic segmentation may be useful to reduce the complexity of segmentation if it is related to a specific production site. On the other hand, this distinct approach avoids the development of a general segmentation matrix covering several production sites or a certain region. For companies operating a number of production plants a special problem arises. It is most likely difficult to develop a general segmentation model that exhibits the same level of quality for the all plant sites. As a general approach referring to the segmentation variable geographic location one or several categories of transport distance from production site to the place of use would represent valuable categories of this segmentation variable. Especially if regulative differences in product utilization are prevailing, a country or regional level approach might be feasible. The economics related to location have to be treated with particular attention in the assessment of a segments attractiveness in order to avoid distorting effects and misleading results. Even if the segmentation variables identified within this chapter are of general importance, their relative weight and strategic significance are largely different depending on the specific case. Michael Porter stresses that, [] only those variables with a truly significant impact on the sources of competitive advantage or industry structure should be isolated for strategic analysis.342 It might be concluded that for the cement sector the tool of segmentation can only be utilized comprehensively including a localized perspective. Therefore, the next step of segmentation the formation of an industry segmentation matrix343 is not explicated as the corresponding matrix of acceptable complexity can be regarded as strongly location specific.
342 343

cf. Porter 2004b: 249 cf. ibid.: 248 ff

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6.2.3.3 From Segmentation to Competitive Strategy As already outlined, two key questions arise from segmentation:344

Where within the industry a company should compete (defining the segment scope) How should strategy reflect the segmentation

The importance of segmentation in business-to-business environments is also highlighted by Hutt & Speh who state that, [] market segmentation provides a basic unit of analysis for marketing planning and control.345

Assessing the Segments Attractiveness

Based on the segmentation approach proposed, the attractiveness of the segments identified can be assessed especially in order to answer the first question drawn up. Porter identifies the following variables influencing the overall attractiveness of a segment:346

Structural attractiveness as a function of the five competitive forces at segment level Segment size and growth rate Match between the companys capabilities and the segments needs

From a marketing perspective an attractive segment should additionally feature the following characteristics:347

Measurability (relating to the degree information on the particular buyer characteristics exists and can be obtained) Accessibility (relating to the firms ability to focus marketing efforts on the segment) Substantiality (relating to size and profitability of the segment) Responsiveness (relating to the degree to which segments respond differently to different elements of the marketing mix)

344 345

cf. Porter 2004b: 255 Hutt/Speh 2010: 126 346 cf. Porter 2004b: 256 347 cf. Hutt/Speh: 125

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Assessing the potential revenues and costs and therefore the potential profitability of serving a particular segment represents another key decision criterion.348 According to Porter, a feasible choice of segments to compete in is additionally depending on the prevalence of interrelations between the segments. Interrelations are strong where, [] the shared value activities represent a significant fraction of total cost or have an important impact on differentiation.349 The corresponding importance is especially identified if, [] the benefits of sharing value activities exceed the cost of sharing.350

As a consequence of the findings in this chapter, the following strategy definition approach largely corresponding to the industry segmentation concept proposed by Porter351 might be feasible:

Identify and define relevant segmentation variables related to product varieties, buyer types, channels and geographic buyer location. Assess the significance of these variables especially reflecting the issues of production site and buyer location. Build meaningful categories of the relevant segmentation variables. Identify correlations between the segmentation variables and build meaningful combinations. Develop a feasible industry segmentation matrix. Monitor the developments in the fields of product, process and marketing innovation and assess their influence on segmentation Assess the segments attractiveness for a focus strategy. Define the segment scope of the company. Choose a strategy reflecting the findings of the segmentation process in order to gain competitive advantage.

Segmentation represents a useful analytical tool for the cement producer. This statement remains valid even if a cement company finally decides to follow a broad scoped strategy. Segmentation deepens the understanding of the market and yields a multitude of benefits for strategy and marketing decision making.
348 349

cf. Hutt/Speh: 136 Porter 2004b: 258 350 ibid.: 258 351 cf. ibid.: 255

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6.2.4 Customer Value & Value Propositions in the Cement Business

Analyzing customer value creation and developing a promising or even unique value proposition represent remarkable strategic challenges for any company. Analytical methods reinforced by a deep understanding of the customers business, characteristics, attitude and culture are a viable basis to gain insight into customer value. The important role of customer relationships has to be highlighted in this perspective. The ideal final outcome should be a value proposition uniquely satisfying customer needs/expectations and its reflection in a sustainable profitability for the company.

6.2.4.1 Approaches towards Buyer Value

Porter outlines that uniqueness leads to differentiation if it is valuable to the buyer by lowering the buyers cost and/or raising its performance. Thus, the development of a dedicated value proposition for instance on the level of the customer segments chosen to be targeted is essential. Research literature identifies the development of a segment specific value proposition as a viable option for cement companies.352 Hutt & Speh note that a value proposition may include:353

Points of parity (certain value elements are the same as the next-best option) Points of difference (the value elements that make the suppliers offering either superior of inferior to the next-best alternative)

Hutt & Speh define customer value as the outcome of the customers assessment of benefits received subdivided in core benefits and add-on benefits and sacrifices made like the purchase price, acquisition costs and operations costs.354 Insightful conclusion related to customer value in business-to-business relationships can be found in a study conducted by Menon et al.355 Within this study the importance of add-on benefits referring to buyer value is accentuated due to the conclusion that qualified suppliers

352 353

cf. Jacques 2007, Homburg et al. 2011:44 cf. Hutt/Speh 2010: 107 354 cf. ibid.: 216 355 cf. Menon et al. 2005

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usually perform well on core benefits. Other relevant value elements diagnosed are the prominent role of trust as well as the contribution towards a reduction of the customers cost. Add-on benefits are therefore regarded as viable differentiators. Some general examples of core and add-on benefits based on the work of Menon et al.356 are pointed out by Hutt & Speh357 and can be found in the following Table 2.

Core Benefits (basic requirements which have to be met) Specific level of product quality and performance Expected level of pre- and post-sales service Trust-based relationship

Add-on Benefits (especially contributing towards differentiation; attractor attributes in the buyerseller relationship) Joint working relations Supplier flexibility Willingness to accommodate customers unique business needs Commitment (desire to make the relationship work)

Table 2: Examples of Core and Add-on Benefits358

Based on a survey among purchasing managers, Eggert et al. investigate the phenomenon of value creation in collaborative buyer-seller relationships over the relationship life cycle.359 They find out that core benefits namely product quality and delivery performance exhibit only a moderate potential for value creation in business relationships. Customer value is therefore primarily driven by service support and personal interaction. Partly contradictory to these findings, a relation between product quality and customer value is described by Hutt & Speh.360 Quality standards are therefore in many cases customer set prerequisites for purchasing. Conformance to standards can to a certain extent be regarded as a quality seal of approval valuable to the buyer. Woodruff is highlighting the perceptive component of customer value not only limited to direct customers but in a general sense encompassing end use consumers, industrial customers and intermediate customers drawing the following definition: Customer value is a customers perceived preference for and evaluation of those product attributes, attribute

356 357

cf. Menon et al. 2005 cf. Hutt/Speh 2010: 360 358 ibid.: 360 adapted by the author 359 cf. Eggert et al 2005 360 cf. Hutt/Speh 2010: 215 ff

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performances, and consequences arising from use that facilitate (or block) achieving the customers goals and purposes in use situations.361 The relevance of customer perception is also underlined by the concept of signaling value outlined by Porter.362 Approaches concerning the measurement and monitoring of customer value are for example proposed by Woodruff363 further reflected by Parasuraman364. A comprehensive approach towards the phenomenon of Value for the Customer is provided by Woodall365 identifying the substantial literature base available and complexity involved in this issue. The paper includes an assessment of benefits received and sacrifices made in regard to their influence on the buying decision. Research literature basically substantiates the diagnosis of Porter that many links between the value chains involved might contribute towards value creation.366

Sector specific Examples of relevant Value Elements

The already highlighted study jointly provided by the professional service firm Arup and the World Business Council for Sustainable Development (WBCSD)367 inter alia identifies criteria relevant for material choices within the course of sustainable construction. First of all, it has to be noted that the prevailing price dominance in structural building material markets is substantiated by the statement that within a number of factors influencing a material choice cost remains the overarching priority368. Further decision criteria identified are highlighted in the following Figure 22.

361 362

Woodruff 1997: 152 cf. Porter 2004b: 139 363 cf. Woodruff 1997 364 cf. Parasuraman 1997 365 cf. Woodall 2003 366 cf. Porter 2004b: 134 367 cf. Arup/WBCSD 2012 368 cf. ibid.: 6

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Figure 22: Factors influencing Decisions around the Material Choice369 Referring to Figure 22, it can be stated that beside cost the hard facts (technical performance, project development, material supply) take a prominent position. Soft facts including a perceptive component like past experience, personal knowledge or team opinion rank at medium levels. Factors relating to material sustainability can be identified but are still to be found further down the priority list370. Comprehensive questionnaire based interviews covering building construction, concrete product manufacturers and resellers within the South African cement sector are utilized in a survey conducted by van Rensburg & van Niekerk who identify based on customer perception different levels of importance attached to different value attributes.371 As a consequence, value differentiation is discovered to represent a feasible strategic option for the sector. The following key drivers of value, listed in order of importance, are identified within the course of this study: product offering, ordering, administration, image, distribution and relationship management. Technical support and representation (effective visits by a sales representative) rank at lower levels. A list construction sector related relevant benefits, to be regarded in the course of innovation, is presented by Glass et al.:372

369 370

as Arup/WBCSD 2012: 7 ibid.: 11 371 cf. van Rensburg/van Niekerk 2010 372 cf. Glass et al. 2001

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Cost benefits, savings and efficiencies Faster construction and building delivery Simplify construction processes, improve control and productivity, optimize both material and human resources, and produce more improved products and efficient buildings Maintain/improve levels of quality (where quality means greater predictability, consistency and longer life span) Allow fair and effective competitiveness for construction companies

6.2.4.2 Determining the Real Buyer & Shaping a Value Proposition

The value system a cement producer is embedded to is highly interdependent. Therefore, it has to be stressed that an integrated approach towards value creation has to take into account stakeholder groups beyond the direct buyer. It is mandatory to investigate the implications for the other members of the value system identified in Figure 18. Neglecting this point could either lead to overlooking possible sources of value or lead to the development of a value proposition compromising the value expectations of other key influentials apart from the direct buyer. Commonly, the members of the first transformative sphere as indicated in Figure 18 represent as long as they are not integrated in into the cement producers entities the direct buyers of cement. Sales channels distributors or dealers might be in place. Basically, all stakeholder groups appearing in Figure 18 are able to directly or indirectly influence a cement buying decision to a certain extent at a certain stage of the construction process. As a consequence, it is necessary to identify the key buying influentials decision makers who have the power in the buying process as defined by Hutt & Speh.373 Direct customers of the first transformative sphere are mainly operating rather continuously but are serving a mainly project-based business. As soon as the corresponding stakeholder groups are included into the considerations, the value creation model additionally has to reflect the process oriented downstream business characteristics. A comprehensive approach to develop a value proposition would therefore comprise an analysis of the value chains and the possibilities to create value for each stakeholder group in the different stages of the construction process. The value system identified is most likely reflected in the organizational buying process and the related buying behavior of the direct customer. A feasible

373

cf. Hutt/Speh 2010: 11

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comprehensive approach based on Porter374 and enriched with single elements identified within this chapter may encompass the following steps more or less valid for any company supplying the construction sector:

Identify the stakeholders within the construction value system as well as their importance related to making the buying decision. Identify the value chains in place and develop a value proposition by analyzing how the elements proposed affect buyer/stakeholder cost and buyer/stakeholder performance qualitatively and quantitatively. Analyze how this value proposition meets the relevant buyer purchase criteria for each relevant stakeholder group based on an assessment of sacrifices made, core and add-on benefits received. Discover possible interactions, trade-offs and reasons for exclusions (No-Gos). Assess the competitive position and quality of the value proposition on stakeholder level including analyses of points of parity and points of difference as well as the overall impact on competition. Evaluate the level of uniqueness reached. Check the strategic sustainability of the value proposition. Develop feasible signals of value in order to meet the signaling criteria identified. Assess costs and risks involved as well as the potential profitability to be realized. Implementation: Shape a business marketing strategy in order to effectively and efficiently implement the value proposition.

The relevance of identifying the value system and performing a segmentation analysis, to be utilized as an analytical basis within the approach presented, is obvious and consequential.

374

cf. Porter 2004b: 146

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6.2.4.3 The Cement Value Proposition Feasibility Check

The feasibility of a value proposition has to be evaluated on different levels. Any value proposition developed should endure the feasibility check presented in Figure 23. The tool represents a basis for decision-making in developing value propositions.

Figure 23: The Value Proposition Feasibility Check375 The process outlined in Figure 23 has to be performed for each single relevant stakeholder group within the value system identified. Including all stakeholders of relevance should enable to discover possible trade-offs for specific members of the value system. The tool investigates the value proposition on four levels. Only a positive assessment on all levels can prove the overall feasibility of a value proposition.

375

figure developed by the author

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Stakeholder Value Level

Within the stakeholder value level the principles of value creation for single stakeholder groups are investigated. The analysis diagnoses benefits and sacrifices involved including their classification and quantification. It is assessed if the value proposition creates a feasible set of benefits meeting the purchase criteria and if sacrifices made are at an acceptable level. The value creation quality is examined at this level.

Competitive Level

The competitive level assessment investigates points of parity and points of differences to the competitors offers. The level of uniqueness realized is diagnosed. It is furthermore assessed if the value proposition leads to a feasible and sustainable competitive position by additionally reflecting the overall competitive environment. Additionally, the impact on the forces shaping competition has to be considered. The competitive quality of the value proposition is examined at this level.

Signaling Level

The signaling level assessment discovers and defines feasible elements meeting the signal criteria identified as an integrated part of the value proposition. Additionally, the cost involved in signaling has to be evaluated.

Cost, Risk and Profitability Assessment Level

The decision to proceed has to be based on a comprehensive summarizing analysis of cost and risk involved as well as of the potential gains in profitability and performance to be realized.

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6.2.4.4 General Approaches towards Customer Satisfaction, Loyalty and Retention

As a consequence of the lack of a comprehensive cement industry specific marketing literature base, some general concepts of customer satisfaction, loyalty and retention are briefly reflected at this stage. These issues are closely linked to the topic of customer value and are of major relevance in any business. Especially due to the strongly locally or regionally bond business activities of cement producing companies a consequence of the remarkable influence of the sector specific economics related to location , long-standing business relations and a rather loyal customer base are phenomena frequently occurring in the sector. According to Lam et al., customer satisfaction fulfills a mediating function in the relationship between customer value and customer loyalty.376 Hence, customer satisfaction and customer loyalty can be regarded to be closely linked to each other. Analyzing the relations between product attributes, customer value and customer satisfaction leads to the following Customer Value Hierarchy Model proposed by Woodruff.377

Figure 24: The Customer Value Hierarchy Model378 Customer satisfaction can for example be based on the following elements identified by Bowman & Narayandas379 and reflected by Hutt & Speh380:

376 377

cf. Lam et al. 2004: 307 f cf. Woodruff 1997: 142 378 as ibid.: 142 379 cf. Bowman/Narayandas 2004 380 cf. Hutt/Speh 2010: 110

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The responsiveness of the supplier in meeting the firms needs Product quality A broad product line Delivery reliability Knowledgeable sales and service personnel

Kano et al. classify requirements for offerings necessary to obtain customer satisfaction in the following way:381

Must-be Quality Elements (basic requirements regarded as self-evident even without being explicitly claimed) exhibit a low potential to act as source of customer satisfaction One-Dimensional Quality Elements (explicitly claimed by customers) non-conformance leads to dissatisfaction, conformance only to moderate satisfaction Attractive Quality Elements (not expected by customers) delight the customers and exhibit a disproportionate potential for customers satisfaction.

Customer retention represents a key issue not only in the cement business. It is a common notion that the cost of serving a loyal long-term customer may be far beyond the cost associated with successfully attracting a new customer.382

6.2.5 Summary
Discovering, analyzing and finally providing customer value are key elements in order to reach a differentiation based competitive advantage. Unfortunately, there is only little literature available engaging the topic of customer value in the cement sector especially in a quantitative way. In practice, considerable effort has to be put on discovering feasible elements of customer value utilizing the whole range of market research methods as well as the valuable company specific know-how of local/regional markets and customers. Special emphasis has to be put on the distribution of value between the groups of stakeholders involved. Value creation exceeding the competitors offers paves to way to command a price premium383 and to realize sustainable profitability. The development of a value proposition

381 382

cf. Kano et al. 1984 cf. Hutt/Speh 2010: 111, Reicheld 2001 383 cf. Porter 2004b: 134

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represents the crucial step after the basic structure of the corresponding value system has been investigated and a promising scope has been defined in the course of a segmentation analysis. It finally has to be noted that the three steps presented value system analysis, segmentation and value proposition development are highly interdependent. An integrated approach including all three elements therefore seems feasible.

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6.3 Generic Competitive Strategies in the Cement Business

Based on the findings related to competitive advantage, the feasibility and applicability of the generic competitive strategies as defined by Porter384 for the cement sector are subsequently investigated. The emphasis is put on mature markets utilizing the example of the European Union cement industry. The prevailing structural characteristics of the sector, as identified in chapter 5, are taken as a basis for the conclusions drawn in this chapter. As long as not stated differently, the statements relate to the production and marketing of common cement as defined in chapter 6.2.2.1.

6.3.1 Overall Cost Leadership Strategies

An overall cost leadership yields benefits regarding all five competitive forces defined by Porter.385 This conclusion remains valid independently from the industrys structure and the level of change it is exposed to. But can overall cost leadership be regarded as a viable strategy to meet the upcoming challenges of the sector? Sheth denotes that commodity markets represent a competitive structure likely to emerge in industries characterized by homogeneity of technologies and markets.386 The driving forces identified are therefore cost efficiency and economies of scale. Corresponding strategies arising in commodity sectors put a strong focus on price competition, mergers and acquisitions and market share protection. Focusing on cost advantage hence represents a practicable strategic option if competition is based on price representing a widespread phenomenon in commodity-like businesses. The cement industry can be characterized as strongly cost and price focused as already diagnosed. The commodity state of a product should not be seen as axiomatic but rather as a reflection of a deliberately chosen business strategy in a sector.387 The corresponding policy choices nurture the commoditization of an industry and again promote price based competition indirectly.388 From these conclusions the existence of a self-reinforcing cycle can be hypothesized

384 385

cf. Porter 2004a: 34 cf. ibid.: 36 386 cf. Sheth 1985: 4 ff 387 cf. Wiedmann/Ludewig 2011: 83 translation by the author 388 cf. Leischnig/Geigenmller 2011: 118 translation by the author

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The high Potential Option: Controlling Cost Drivers

The structural characteristics of the cement sector provide strong incentives to pursue an overall cost leadership strategy. Especially cost leadership on a local or regional level is of competitive relevance as cost advantages quickly diminish with increasing transport distances of the products. Three cost drivers are identified to currently exert a dominating influence in the industry: location, capacity utilization and economies of scale. As a consequence of the economics involved, the tendency towards the formation of spatial oligopolistic structures is frequent. Especially for the mature European cement market, the threat of entry was already identified to be rather low. The prevailing geographic setting concerning locations of production sites and capacities installed in a region can be regarded as rather stable once a certain level of consolidation is reached. The impact of institutional factors tends to be similar for competitors active in close vicinity. Therefore, members of the sector are subjected to rather stable or at least predictive influences of the related cost drivers especially relative to their regional competitors. The ownership of production sites at the right locations referring to the availability of raw materials as well as to the distance to relevant buyer markets represents the main lever to efficiently control the corresponding frequently dominating cost drivers. The term right location also relates to the intrinsic inevitable trade-off to be made between the choice of an optimum scale and the choice of an optimum location for a plant site. Once a production capacity is in place, there is a strong incentive to fill free capacity due to the cost advantages to be gained. Factors like the high fixed cost base of the industry have to be noted in this perspective. Product homogeneity, standardization and a production technology which is subject to general industry know-how cultivate the regional harmonization of the cement product offers of competing companies. As a side effect, the coherent tendency to fill free capacity undermines the formation of dedicated focus strategies. Especially for companies owning several production sites, a high level of standardization represents a viable basis to further capitalize on economies of scale. Once in the position to efficiently control the cost drivers of location and capacity utilization, strong emphasis might be put on economies of scale to realize additional cost advantages. Thus, keeping cement in the commodity state especially seems to represent a viable strategic option for companies controlling major market shares. The conclusions drawn have important strategic implications. Controlling the relevant cost drivers in the way described is likely to lead to a sustainable competitive cost advantage vis-a111

vis the competitors valid in a specific geographic area. A local overall cost leadership is born. Especially for companies operating several production sites, capitalizing on economies of scale yields further cost advantages. Multi local overall cost leadership might be realized. The competitive positions outlined can be regarded as rather stable equilibriums as long as major shifts of the competitive forces for example driven by technological change do not occur. Other options apart from cost strategies might not be considered as long as the statusquo is regarded as a safe haven.

The low Potential Option: Reconfiguration of the Value Chain

Besides controlling cost drivers, Porter identifies a number of value chain reconfiguration options featuring the potential to contribute towards cost advantage:389

A different production process Differences in automation Direct sales instead of indirect sales A new distribution channel A new raw material (or energy source) Major differences in forward or backward vertical integration Shifting a location New advertising media Vertical integration

Analyzing the specifics of a mature cement sector, many of the options listed above fall short in providing a sustainable relative cost advantage which cannot easily be imitated or replicated as there are entry or mobility barriers in place. The technology to produce common cement is to a large degree subject to general industry know-how. Production technologies are commonly supplied by a community of plant engineering and technology companies serving all market members. Furthermore, seminal technological developments related to common cement are not expected on the short term as already outlined in the industry analysis chapter of this masters thesis.

389

cf. Porter 2004b: 70 ff

112

Basically, there is no limitation to focus on direct sales and to eliminate sales channels in order to absorb the channel value at least for the majority of the product sold in bulk form. The potential attainable benefit from introducing new channels can be regarded as rather limited. New raw materials or energy sources represent a feasible option to gain competitive advantage only if neglecting the issue of permitting three specific preconditions are fulfilled. Firstly, they have to be available at an acceptable quantity, price and quality level. Secondly, they as long as common cements are produced have to conform to the prevailing standards and/or support the technologies and permits in place. Thirdly, the access of competitors to the corresponding raw materials or energy sources has to be limited in order to constitute a sustainable competitive advantage. Shifting production locations would involve remarkable investments and is subject to local raw material availability and the difficult topic of permitting. Due to the location specific sunk costs390, this ultimate step might only represent a viable option in very specific cases or if major structural impacts are emerging. A relevant effect of advertising can at least be questioned as long as differentiation is not identified as an option or opportunity and as long as markets are inherently price dominated. Hence, the potential contribution of value chain reconfiguration steps towards cost advantage can be regarded as rather limited. From the remaining options the issues related to vertical forward and/or backward integration can be highlighted as potentially promising. Furthermore, a close relation between the cost drivers integration and capacity utilization can be noted.

Summary

Summarizing the findings of this chapter, it can be stated that especially the relevance of the cost drivers economies of scale, location, capacity utilization and integration can be accentuated for a price dominated mature cement market. The effective control of these drivers represents a sustainable source of competitive cost advantage.391 The potential to gain significant relative cost advantage vis-a-vis the competitors is furthermore strongly subjected to regional factors.

390 391

cf. Johnson/Parkman 1983: 431 cf. Porter 2004b: 112 ff

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Due to the cement specific low value-to-weight ratio, any cost advantage gained quickly erodes if the competitors transports distance to supply the product is lower. Vice versa any cost advantage basically enables to serve markets of higher distance. As a consequence, the size of the market to be potentially served is increasing. Hence, gaining overall cost leadership is of relevance and frequently the dominating strategy choice in the cement sector. The prevailing economics facilitate the formation of spatial oligopolic structures. It has to be limited that the conclusions drawn are only valid as long as common cements are produced utilizing more or less standardized technology. Technological change or fundamental changes in the cost dynamics exhibit the potential to affect the overall industry structure remarkably.392 Overall cost leadership might not be a feasible strategy choice any more under these hypothetic conditions. From the risk assessment related to cost leadership strategies as presented by Porter especially the following elements may be of relevance for the cement sector:393

Failing to attain or sustain the strategy Erosion of the strategic advantage gained with industry evolution Technology change (nullifying past investments or learning) Inability to see required product or marketing change because of attention placed on cost Cost inflation

Reflecting on the findings of the industry analysis, it can be noted that cost leadership strategies in the sector might increasingly be at risk due to on-going developments affecting the industry structure. Certain requirements towards product change inter alia reflecting the increasing demand for sustainable products as well as cost inflation can be noticed. Due to a lack of technologies able to bear the corresponding developments, viable universal large-scale solutions for the sector are so far not available. Any technological change likely to influence the prevailing industry patterns has to be carefully monitored and its influence on the sector assessed. Once barriers relating to technological change will be overcome, after-effects can even be expected to occur land-sliding. Hence, it appears questionable if cost centered strategies alone will be able to sustain the profitability of cement producers in mature markets in the future. A shift from a focus on cost towards value creation seems at least worth to be considered.
392 393

cf. Porter 2004b: 95 ff cf. Porter 2004a: 44 ff

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6.3.2 Focus Strategies

According to Porter, the competitive advantage to be attained by a focused company is described as follows: By optimizing its value chain for only one or a few segments, the focuser achieves cost leadership or differentiation in its segment or segments compared to more broadly-targeted firms that must compromise.394 The feasibility of the approach is substantiated if barriers between segments can be built.395 Referring to the cement sector, the following relevant characteristics can be highlighted. Standardized common cements dominate the market as outlined in chapter 6.2.2.1. The value activities to be performed are largely similar, if not to say identical, between the different types of common cements. As a consequence, the cost of sharing value activities is remarkable low. The value activities involved are largely scale sensitive. The costs relating to coordination, compromise and inflexibility can be assumed to be marginal. For the cement case, many segments can be regarded as strongly interrelated as the majority of the value activities is shared. Thus, the cost of sharing activities can be regarded as minimal.396 Economies of scale and patterns of capacity utilization favor the choice of a broad scope as a basis for a net competitive advantage. Based on these conclusions drawn, it can be deduced that especially the level of compromise of a broadly-targeted cement producer to serve multiple segments is rather low under the prevailing structural framework. Economies of scale, capacity utilization issues and the incentives related to the exploitation of other interrelationships between the segments are most likely dominating. Summarizing these effects and taking into account the limited potentials in tailoring the value chain to a specific segment, the incentives in place to follow a focus strategy are rather decent. Adhering to the prevailing product standards for common cements additionally limits the possibilities of pursuing a focus strategy based on product differentiation. Hence, the formation of effective barriers between segments is difficult under the prevailing framework conditions. The realization of a focus strategy based sustainable competitive advantage seems questionable. It

394 395

Porter 2004b: 264 cf. ibid.: 232 396 cf. ibid.: 258

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has to be limited again that the conclusions drawn are only valid for common cements produced under the prevailing structural industry framework. These findings give good reasons for the dominating phenomenon that cement producers are commonly following a broadly-targeted strategy. The net competitive advantage397 created by economies of scale and capacity utilization outweighs the possible drawbacks of the broad scope. As a consequence, cement companies are frequently full product scope suppliers in a particular geographic segment. Within a certain distance of supply, the strategic decision making process is reduced to answering the question how to serve all market segments available. Focus strategies might represent a feasible option for cement derived products or for innovative products apart from common cement. Moreover, the feasibility of a focus approach should be reassessed if important technological developments emerge or in the course of a differentiation strategy. The topics related to co-operation and integration as well as the assessment of the segments attractiveness should be mentioned again in this perspective. An interesting concept, featuring an intrinsic interrelation to the issue of focus, to be considered for the cement sector might be customization. Basically, leaving the path of standardization is only likely to pay off if customer expectations are fulfilled in a different and better way. The feasibility of customization and the positioning in the continuum between pure customization and pure standardization has to be well considered in this case. Especially approaches close to the concept of mass customization398 might represent feasible options for the industry. Mass customization, in principle, should combine the ability to provide customized products at high volumes with a low cost position by utilizing flexible processes. The attendance of customers to collaborate can be regarded as crucial in this perspective. Mass customization exhibits a lower level of flexibility and a limited number of customized product attributes. The feasibility of a differentiation focus strategy may therefore be given in specific cases. Finally, it has to be kept in mind that customization only contributes towards superior profitability if a price premium can be realized.399 For the industry the feasibility of a focus strategy could generally be hindered by not being able to effectively implement the approach. Referring to the concepts of Porter, there is the intrinsic strategic stuck in the middle400 risk if a broad scoped cement producer aims at additionally developing a focus approach while adhering to the cost focused production of common cement.

397 398

Porter 2004b: 263 cf. Davis 1989, Pine II 1992 399 cf. Porter 2004b: 53 400 Porter 2004a: 41

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6.3.3 Differentiation Strategies

[] if firms in this sector wish to break out of the commodity trap of blind allegiance to cost leadership as a generic strategy, then they must seek methods of differentiation.401

Once a cement producer chooses to consider other strategy options apart from cost centered approaches the issue of differentiation moves to the fore. According to Porter, differentiation represents the second possible source of competitive advantage and superior profitability.402 The issue of differentiation in the cement sector is investigated in the course of the following hypothetic case study focusing on mature markets.

6.4 The Case Study Differentiation Strategies in a mature Cement Market

6.4.1 Introduction
Based on the general findings relating to the value system, the issue of segmentation and the topic of value creation, these elements can now be combined in order to shape a differentiation strategy appropriate for the cement sector. The case study included in this chapter emphasizes on the evaluation of specific impacts of two hypothetic differentiation approaches on selected elements relevant for a business marketing strategy in practice. Based on the results, the general feasibility of differentiation approaches in the sector should be assessed. Porter highlights the multi-dimensional character of differentiation.403 It has to be stressed again at this point that differentiation is not a product-focused but rather a company-focused approach. These conclusions, as well as the likely trade-off with a low cost position404, have to be kept in mind. The concept of the value chain is proposed as an analytical tool to investigate the principles of value creation and subsequently deduct differentiation approaches.405 The tools presented in chapter 6.2 may be used in a similar way. A detailed value chain analyses can easily be integrated in the approach presented. A different, more
401 402

Robinson et al. 2002: 149 cf. Porter 2004b: 119 403 cf. Porter 2004a: 37 404 cf. ibid.: 38 405 cf. ibid.: 120 ff

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marketing-centered approach to discover viable sources of differentiation is presented by Homburg et al. in the context of commodity differentiation.406 In order to define viable instruments for a differentiation approach based on elements outside the product core, the utilization of a shell-model as illustrated in Figure 25 is proposed.

Figure 25: Model highlighting Product Core and Product Shells407

The shell model presented offers a useful overview of different dimensions a differentiation approach may capitalize on. It might be criticized that the illustration is misleading referring to the impression that elements of the outer shell cannot be utilized in the course of differentiation without utilizing elements of the inner shells. Therefore, the graphic illustration of the model is modified towards a core-satellite model as presented in Figure 26.

406 407

cf. Homburg et al.: 37 translation by the author as Homburg et al. 2011: 372 adapted and translated by the author

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Figure 26: Modified Core-Satellite Model408 Figure 26 indicates that differentiation approaches may include different elements of the satellite sphere in order to create a feasible value proposition. In contrast to the concepts of Porter, the model presented is more limited to the marketing aspects of differentiation. Porter developed a much broader approach towards differentiation, possibly including a larger set of elements of the strategic arsenal. The case study subsequently defined sets boundaries eliminating many strategy options in order to control the complexity involved. As a consequence, the focus is put on marketing strategy and the model presented in Figure 26 is utilized. It has to be noted again at this stage that, especially in a price dominated commodity-like sector, shifting from a cost/price centered approach towards a concept of differentiation might entail the risk to end up stuck in the middle which is criticized as a rather poor strategic position.409

408 409

as cf. Homburg et al. 2011: 37 adapted and translated by the author cf. Porter 2004a: 41

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6.4.2 Selected Cement Sector specific Differentiation Approaches

6.4.2.1 Introduction & Case Definition

By providing something unique, a company differentiates itself from the competitors. As already diagnosed, uniqueness can lead to a number of benefits for a supplier. As the sources of uniqueness might be numerous and potentially to be found throughout the value chain410, some kind of categorization and limitation seems useful in order to control the complexity of this issue for the following case study. In this chapter, two distinctive differentiation approaches are defined und subsequently investigated in depth. Referring to the core-satellite model presented, differentiation may be pursued in a mainly product centered way if the products/technologies offered are perceived as unique by the customers or in a more general business activity related way if the perception of uniqueness is rooted in the companys business activities. The following two principle approaches representing the sub-cases of the case study are defined:

Case/Approach 1: Differentiation Approach based on a Product Range of Common Cements/Technologies

Case/Approach 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies

Basically, case 1 describes a differentiation approach potentially including all elements highlighted in the core-satellite model except the product core. Case 2 additionally includes a differentiation of the product core dimension. The double term Cements/Technologies should underline the mutual complementary character of the physical product and the related technologies. As a consequence, the terms product/s and technologies are subsequently used rather synonymously.

410

cf. Porter 2004b: 119

120

Boundary Conditions & Limitations of the Case Study This case study is focusing on marketing strategy and management related implications of the two differentiation approaches defined for cement companies already active in a mature cement market. As consequence of the findings in chapter 6.2.2.1, these companies are defined to be broad scoped producers of common cements. There is no distinction or reflection of a specific company background or structure. In order to control the complexity involved, the vertical scope is assumed as fixed and potential steps towards integration are not investigated. Especially referring to the issue of change, further limitations have to be made. The overall basic economics of the cement industry like the importance of economies of scale or location as well as the macro-environment are assumed to be stable within the course of this case study. The status quo of the industry structure, as identified in chapter 5 for the European Union, is taken as a basis for the corresponding considerations. In principle, the level of differentiation achievable represents a distinctive element of industry structure.411 Due to the high levels of complexity and uncertainty involved, possible change affecting the overall industry structure cannot be reflected within the scope of this masters thesis. For the same reason, upcoming macro-environmental developments (e.g. global warming) are not analyzed even if their relevance for the sector is significant. For the first case, the product policy focuses on the prevailing technological status-quo. Albeit there is a certain room to manoeuvre within the standardization framework for common cements, it can be assumed that the corresponding product attribute related contribution towards sustainable differentiation is insignificant. As a consequence, product attribute based differentiation is defined as not applicable for case 1. Case 2 is assuming a technological development most likely disruptive character. Basically, the development of a at least partly substituting alternative to common cement is hypothesized. Although especially this case exhibits a close relation to a scenario affecting the industry structure, corresponding impacts are not investigated in detail. The erratic change related potential of unknown future technological developments limits the feasibility of a simple case study to be utilized in estimating the corresponding overall impacts comprehensively. Nevertheless, the following analysis will provide a sound level of indications and directions which marketing related opportunities, challenges, threats and risks might emerge. Due to the ongoing efforts to develop alternatives to common cement, this subcase is of remarkable interest.
411

cf. Porter 2004b: 119

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6.4.2.2 Assessment of the primary Differentiation Potential

Prior to a detailed analysis of the two case study scenarios, the general potentials of the approaches to contribute towards differentiation are investigated within this chapter. Potentials to contribute towards De-Commoditization The analogy between the two process related terms differentiation and de-commoditization was already highlighted in chapter 4 of this masters thesis. Summarizing prevailing research literature, Enke et al. identify mainly product related determinants influencing the general tendencies towards commoditization and de-commoditization and state corresponding postulates.412 Reflecting on these findings, the two strategic differentiation approaches of the case study are subsequently analyzed according to their potential to contribute towards decommoditization. It can be deduced that a contribution towards de-commoditization implicates a corresponding contribution towards differentiation. Group 1: Performance-related Determinants413 Increased maturity of a product or service leads to increased degrees of commoditization. Decreased product or service related uncertainty (in the sense of the risk involved for the customer) leads to increased degrees of commoditization. Decreased product or service related complexity leads to increased degrees of commoditization. As already outlined in chapter 5 of this masters thesis, common cement can be regarded as a rather mature material. Due to the long term experience available and the proven product technology the level of uncertainty involved is low. The technologies involved are subject to general industry know-how and the corresponding complexity involved can be regarded to be on a moderate level. Other than common cements are by definition featuring a lower maturity, involve higher levels of uncertainty/risk and are therefore subjected to an increased level of product related complexity. As a matter of fact, they most likely do not or only to certain extent conform to the standardization and regulative framework in place.

412 413

cf. Enke et al. 2011: 11 ff translation by the author cf. ibid.: 12 translation be the author

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Due to the factors outlined, especially common cements are likely to be affected by commoditization. New product developments positioned outside the standardization framework in place basically exhibit an increased potential to contribute towards differentiation. Group 2: Customer-related Determinants414 Increased customer experience with products or services leads to increased degrees of commoditization. Repeat buying may lead to an inflation of customer expectations. An increase of customer expectations correlates with increased degrees of commoditization. Basically, the same conclusions as drawn for performance-related factors are valid for customer-related factors. Cement customers are in many cases sophisticated users and repeatbuying is dominating leading to a commoditization of common cements. Once products not corresponding to the group of common cements enter the market, customer experience is strongly depleted and the expectations from customer side have to be redefined. Product innovations in the field of cement, which are not positioned within the standardization framework in place, are likely to diminish customer experience. Corresponding developments may enable lower levels of commoditization and contribute towards differentiation respectively. Group 3: Industry-related Determinants415 Increased standardization leads to increased degrees of commoditization. Increased levels of imitation (imitation strategies) lead to increased degrees of commoditization. As already outlined, standardization in the field of cement especially referring to common cements is on a high level specifically in mature markets like the European Union. Due to the common product know-how, corresponding technological developments can rather easily be imitated leading to a higher degree of commoditization. New developments apart from common cement feature a lower level of standardization and may offer the potential to build up valuable proprietary know-how or other barriers towards imitation and low cost learning.

414 415

cf. Enke et al. 2011: 13 translation by the author cf. ibid.: 14 translation by the author

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Thus, product developments which will act outside a prevailing standardization framework exhibit an increased differentiation potential. Group 4: Market-related Determinants416 Lower competitive intensity leads to higher degrees of commoditization Increased levels of market turbulence lead to higher degrees of commoditization It was already stated that the competitive intensity in the cement sector is of rather local/regional nature. General market-related conclusions are therefore difficult to be drawn. Especially recent developments, highlighted in the industry analysis part of this masters thesis, feature the potential to contribute towards an increased level of market turbulence and competitive rivalry. Market-related factors might favor the development of an environment offering more opportunities for de-commoditization. Summarizing the findings of the analyses based on postulates presented by Enke et al. 417 , the relative differences between the two differentiation approaches defined with regard to their de-commoditization/differentiation potential can be highlighted as follows.

Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies Group 1: Performancerelated Determinants Group 2: Customerrelated Determinants Group 3: Industryrelated Determinants Group 4: Marketrelated Determinants Low potential to contribute towards de-commoditization/differentiation Low potential to contribute towards de-commoditization/differentiation Low potential to contribute towards de-commoditization/differentiation Medium potential to contribute towards de-commoditization/differentiation

Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies High potential to contribute towards de-commoditization/differentiation High potential to contribute towards de-commoditization/differentiation High potential to contribute towards de-commoditization/differentiation Medium potential to contribute towards de-commoditization/differentiation

Table 3: De-Commoditization/Differentiation Potentials of the two Case Study Approaches defined418

416 417

cf. Enke et al. 2011: 14 f translation by the author cf. ibid.:11 ff translation by the author 418 cf. ibid.:11 ff translation by the author

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Drivers of Uniqueness419 Porter discovers a considerable number of drivers of uniqueness420 which are reflected for the two case study differentiation approaches defined. In the following Table 4, the two case study scenarios are compared relating to their potential to capitalize on distinct drivers of uniqueness. Selected drivers of relevance are highlighted and briefly commented. There are defined three categories with regard to the potential of the case study approaches to facilitate the creation of uniqueness and therefore enhance differentiation:

Category 1: Driver exhibits a remarkable potential/relevance for uniqueness (1) Category 2: Driver exhibits a general potential/relevance for uniqueness (2) Category 3: Driver exhibits a low potential/relevance for uniqueness (3)

The potential/relevance identified is indicated in brackets () for the two differentiation approaches defined.

Drivers of Uniqueness

Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies

Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies

Policy Choices Limited number of products of Product Performance Features largely defined composition and performance, low level of proprietary know-how to be achieved, low level of product customization potential (3) Service offer represents an important potential driver of uniqueness (1) Common technologies available to the overall industrial sector, lower level of proprietary know-how (3) High potential number of different products of potentially unique composition and performance, creation of proprietary knowhow enabled, higher product customization potential (1) Service offer represents an important potential driver of uniqueness (1)

Service provided

Technology employed

Possibility to employ completely new proprietary products/technologies (1)

419 420

cf. Porter 2004b: 124 ff cf. ibid.: 124 ff

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Drivers of Uniqueness

Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies

Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies Higher degrees of freedom with considerable potential to contribute towards uniqueness (1)

Type and Quality of Inputs

Largely determined by prevailing standards (3)

Marketing related Policies Procedures, Control Activities, Information Management Linkages within the Value chain with Suppliers Channels

Of general relevance (2)

Of general relevance (2)

Of general relevance (2)

Of general relevance (2)

Of general relevance (2)

Of general relevance (2)

Of general relevance (2) Of general relevance (2)

Of general relevance (2) Of general relevance (2) Of high relevance (e.g. first/late mover advantages) (1)

Timing

Of general relevance (2)

General high relevance in the sector, Location referring to the limitations drawn for the case study location is assumed as fixed (2) Interrelationships Of general relevance (2) The dominating overall industry Learning and Spillover learning tends to inhibit the formation of sustainable proprietary know-how (3) Integration Scale Of general relevance (2) Of general relevance (2)

General high relevance in the sector, referring to the limitations drawn for the case study location is assumed as fixed (2)

Of general relevance (2)

Formation of proprietary know-how and learning enabled (1)

Of general relevance (2) Of general relevance (2)

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Drivers of Uniqueness

Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies Of general relevance (2)

Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies Of general relevance (2)

Institutional Factors

Table 4: Case Study Differentiation Approaches and Drivers of Uniqueness421

Summary

It can be noted that the two approaches presented within this case study exhibit a distinctively different primary potential to contribute towards differentiation. Summarizing the findings of this chapter, it can be deduced that the corresponding potential is remarkable higher in the case that differentiation is (additionally) based on a product range of other than common cements/technologies. Both analytical concepts utilized namely the findings of Enke et al.422 and Michael Porters drivers of uniqueness423 yield consistent results in this perspective.

421 422

cf. Porter 2004b: 124 ff cf. Enke et al. 2011: 11 ff translation by the author 423 cf. Porter 2004b: 124 ff

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6.4.2.3 General Aspects of a Differentiation Approach based on a Product Range of Common Cements/Technologies

Referring to the core-satellite model as presented in Figure 26, the differentiation approach of case 1 may capitalize on all instruments of the satellite sphere explicitly excluding differentiation affecting the product core. The other instruments available are indicated in Figure 27. Due to the basic product attributes of cement, product enrichment can be put into practice only to a limited extent.

Figure 27: Case 1 Core-Satellite Model of a Differentiation Approach based on a Product Range of Common Cements/Technologies indicating Elements feasible to be utilized as Instruments for Differentiation424

In chapter 6.2.1 it is noted that standardized common cements are dominating the market. Common cements and their utilization are subject to a substantial degree of regulation and standardization on different levels. Grant notices that, [] standardization of physical attributes of a product and convergence of consumer preferences constraints, but does not eliminate, opportunities for meaningful and profitable differentiation.425 Narayandas refers to this challenging topic and notes: Also, industrial commodities (think of cement, for instance,
424 425

as cf. Homburg et al. 2011: 37 adapted and translated by the author Grant 2010: 333

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or soda ash) arent easily differentiated by their features.426 The advantage to be gained by adhering to an approach based on standardization is put aptly by Byong-Duk et al.: Unless consumer tastes are heterogeneous and reasonably predictable, standardization on the strategic attribute will pay off because Firms [sic!] try to capture those heterogeneities across the entire market. On the other hand, decreasing degree of strategic differentiation may lead to a lower level of consumer satisfaction because the discrepancy between what they desire and what they obtain becomes larger.427 As a consequence, it can be stated that standardization must not be demonized albeit it intrinsically counteracts specific intentions towards differentiation. There is a number of considerable especially cost, efficiency and risk related benefits relevant for a company and the entire industry going along with industry standards. Especially from the overall economic point of view, standardization can be regarded as highly valuable. Nevertheless, an overall economic view is not within the focus of this masters thesis. The focus is strictly put on the competition related company perspective. Summarizing these conclusions, it has to be well considered if standardization should be embraced or condemned. Case 1 can be regarded as the more general differentiation approach which may be suited for any cement producer operating, and deciding to operate further on, close to the product technological status quo. The approach follows a conclusion drawn by Levitt: In short, the offered product is differentiated, though the generic product is identical.428 The basic feasibility of a corresponding differentiation strategy is supported by Porter who states that, [] even if the physical product is a commodity, other activities can often lead to substantial differentiation.429 In a nutshell, it can be summarized that reasonable differentiation approaches are available in the cement sector even if the product core remains undifferentiated. Hence, superior differentiation based performance in producing and marketing common cement is feasible.

426 427

Narayandas 2010: 132 Byong-Duk et al. 1992: 500 428 Levitt 1980: 83 429 Porter 204b: 121

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6.4.2.4 General Aspects of a Differentiation Approach based on a Product Range of other than Common Cements/Technologies

For the second differentiation approach defined all instruments of the core-satellite model, including the product core, may be utilized as indicated in Figure 28.

Figure 28: Case 2 Core-Satellite Model of a Differentiation Approach based on a Product Range of other than common Cements/Technologies indicating Elements feasible to be utilized as Instruments for Differentiation430

The second case to be investigated includes the deep-going product policy choice to leave the well-trodden paths of standardized common cement which leads to a multitude of strategy and marketing related implications as subsequently shown. It has to be noted that the definitions specified for this approach encompass the development of new products and/or technologies. The topic of innovation especially product innovation moves to the fore. Hence, differentiation can additionally be based on unique product/technology attributes creating superior downstream value. The issues related to the value system, segmentation and value propositions are of increased significance in this perspective. Inter alia, the goal has to be to

430

as cf. Homburg et al. 2010: 37 adapted and translated by the author

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identify segments which are open towards or benefit from innovation in terms lower cost or higher performance. A general higher differentiation potential additionally based on unique physical attributes of the product has already been noted. An approach exclusively focusing on similarities across the markets in the cement sector is for example criticized by Ghemawat.431 Arbitrage the exploitation of differences might therefore represent an opportunity to gain competitive advantage neglected by multinational cement companies. This conclusion is supported by the findings relating to country specific decision-making behavior highlighted in chapter 6.2.2.4. Reflecting on these statements, the paradigm to exclusively focus on standardization and economies of scale/location might be questioned. Product differentiation in the cement sector is nevertheless identified as a challenging topic.432 Again the issues of standardization and regulation have to be well considered in this perspective. After all, the standardization framework in place creates the channels of product dissemination. Products positioned outside the standardization framework are likely to face challenges in market entrance and penetration. Leaving the well-trodden paths of common cements may exhibit a trade-off with market accessibility. Additionally, considerable time and cost are involved in overcoming the regulative, habitual and psychological barriers in place. Possible impacts on industry structure and competition have to be assessed. The decision making process involved is subjected to a high level of complexity and uncertainty. Nevertheless, the potential incentives might be considerable. The second case study approach defined leads to the creation at least to certain degree in a certain segment of application of an alternative or substitute to common cement. Additional value provided should induce the customer to switch. In addition to that, meeting specific customer requirements eliminates incentives involved in switching back to the original product choice later on. In the ideal case, the differentiation approach developed additionally reduces the threat of substitution of cement containing derived products or even enables to substitute other extra-sectoral products. The case defined therefore hypothesizes a technological development able to influence the competitive forces as well as the overall industry structure. Albeit it was already stated that a technology substituting common cement at large and global scale may not be available in the short term, the scenario is of practical interest. It has to be stressed again that technological change can be erratic. Once technological change should enable to overcome the barriers in place, a number of important questions will arise. The opportunities, challenges, threats and
431 432

cf. Ghemawat 2003 cf. Wagner/Vassilopoulos 2000: n.p.n.

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risks involved are investigated from a marketing perspective within this case study. In order to deepen the understanding, some basic thoughts on the issue of substitution are added at this point.

The Issue of Substitution

The level of substitutability of a product is depending on the degree an alternative is able to perform the same generic function or functions as the basis of comparison.433 In the case of a direct substitution the same functions in the same buyer value activities are performed.434 Direct substitution of common cement therefore can be realized by an alternative product acting as a binder in concrete, screeds, mortars, etc. Referring to case 2 of the case study, a direct and intrasectoral substitution of common cement is assumed. The scope of functions of a substitute might potentially cover a wider or narrower range. Interesting issues to be noted are the extended potential ways of substitution as listed by Porter.435

A usage rate of zero (substitution by non-use) A lower usage rate A utilization of pre-used, recycled or reconditioned products An internalization of the function realized by backward integration

In business-to-business environments, the derived demand might be lowered if the buyers products (concrete, screeds, mortars, etc.) face substitution (downstream substitution436). There are identified three factors influencing the threat of substitution:437

The relative value/price of a substitute compared to an industrys product The cost of switching to the substitute The buyers propensity to switch

433 434

cf. Porter 2004b: 274 cf. ibid.: 275 435 cf. ibid.: 276 f 436 ibid.: 277 437 cf. ibid.: 278

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Regarding the case of cement, the value/price ratio can be seen as a strong argument for the product. Cement a proven product can basically be purchased at an acceptable price and quality on global scale. Any differentiation approach offering an alternative therefore has to consider the elements listed above. In substitution scenarios especially the indirect costs438 imposed to the overall downstream value system have to be regarded, as the corresponding value activities involved are commonly tailored to the use of the standardized products. Furthermore, the switching costs entailed have to be assessed. Cespedes notes that the total cost in use for the customer including acquisition costs, possession costs and usage costs and not only the purchasing price has to be considered.439 This is especially of major importance if the technology introduced involves other and/or additional steps in the value activities within the first and second transformative sphere. Offering substitutes must always take into consideration the overall impact on the industry. An increase or decrease of overall industry demand might be implied.440 Referring to substitution and its influence on industry structure, Porter draws the following significant conclusion: Thus the substitute must be analysed as a new industry, not merely as a change in product. The substitute industry can be more or less attractive structurally than the industry it replaces, a fact that has important implications for strategy towards a substitute.441 Once the strategic decision to offer a substitute to common cement is made, the following elements should be considered as parts of an overall strategy:442 Targeting early switchers Improve the firms offering in areas with the highest relative value-to-price impacts Reduce or subsidize switching costs Invest in signaling Use tapered forward integration or induce backward integration to create a pull-through Ensure multiple sources and/or adequate capacity Promote improvements in complementary products or infrastructure Price to balance capturing relative value-to-price against creating barriers Conceive of new functions to widen a substitutes market Harvest if competitive position in the substitute is not sustainable
438 439

cf. Porter 2004b: 280 f cf. Cespedes 1994 440 cf. Porter 2004b: 296 f 441 ibid.: 297 442 cf. ibid.: 207 ff

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Referring to the issue of integration Porter outlines: Tapered integration is most effective where the end user faces few, if any, costs of switching to a substitute, while intermediate buyers face significant switching costs.443 This situation may occur in the cement case regarded. Especially large scale buyers are likely to be reluctant to single-sourcing a problem that frequently arises in innovation related technological leadership. Finally it is noted: A substitution process is partly under the control of a firm and partly a function of the industry as whole.444 A number of feasible and relevant industry wide activities useful to promote or prevent substitution445 has to be taken into account in this perspective.

6.4.2.5 The Issue of Innovation

Innovation in design, construction, and real estate has to date been limited to nibbles around the margins.446

Especially in the product focused world of the cement business, there is the risk of the misleading perception that innovation is limited to product innovation. A comprehensive approach towards technological change should consider all business activities and processes involved or even the overall business model. Referring to Porter, all elements of the value chain are of relevance.447 As a consequence, technological change is able to contribute to any generic strategy chosen.448 Nevertheless, the topic is covered at this stage due to its important role in the course of the differentiation approaches defined.

443 444

Porter 2004b: 309 ibid.: 312 445 cf. ibid.: 312 446 Macomber 2003: 7 447 cf. Porter 2004b: 165 448 cf. ibid.: 177

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Michael Porters View on Technology and Competitive Advantage

Porter describes technological change as a principal driver of competition able to change industry structures or to create new industries.449 Technological change might act as an equalizer eroding existing competitive advantages.450 The corresponding implications exhibit the potential to impact the overall industry attractiveness.451 As technological developments are able to influence the cost drivers as well as the drivers of uniqueness, there is an inherent link with the relative cost position and differentiation of a firm.452 Technological change represents an independent driver if technology employed is identified as a policy choice.453 Porter proposes a test to analyse if technological change should be embraced.454 Under the following framework conditions a sustainable competitive advantage can be realized:

The technological change itself lowers cost or enhances differentiation and the firms technological lead is sustainable. The technological change shifts cost or uniqueness drivers in favour of a firm. Pioneering the technological change translates into a first-mover advantage besides those inherent in the technology itself. The technological change improves overall industry structure.

Innovation in the Cement Sector

Innovation in the cement sector should consider the risks and benefits of various alternatives, including the risks and benefits of not innovating.455 Innovation in the course of a differentiation strategy is more likely to concentrate on the two primary goals of customer value creation: reducing customers cost and/or increasing customers performance. An indirect correlation between innovation and commoditization is identified and put aptly by Nolley as follows: The role of innovation and commoditization is an evolving tension between the seller and the buyer, and is characterized by a power shift. In innovation, the seller has higher bargaining power, indicated by the willingness of the customer to accept

449 450

cf. Porter 2004b: 164 cf. ibid.: 164 451 cf. ibid.: 172 452 cf. ibid.: 169 453 cf. ibid.: 170 454 cf. ibid.: 171 f 455 cf. Battelle 2002b: V

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very high risk and high price premium. The seller provides, and the buyer gets, product features, sellers promise, and hope of implementing beneficial change in their business. Over time, the buyer gains more power, requests less risk, and the seller reduces risk in exchange for higher sales volume to sustain its businesses. This causes the seller to change and the buyer to change successively until risk has been eliminated and the product is fully commoditized. At this point, the buyer gets, and the seller provides, reliability, delivery and price to sustain its businesses.456 Reflecting on these conclusions of Nolley, the importance of innovation in the course of differentiation can be underlined. The context of the overall value system as identified in chapter 6.2.2.3 is of relevance, if innovation should lead to superior profitability. Basically, innovation in the construction sector can be initiated and driven by technology-push or customer-pull.457 Macomber refers to disruptive business models as a source of innovation in the construction industry. Referring to the topic of green building, there is an increasing customer-pull towards the development of more sustainable practices and products in the sector. The United States Environmental Protection Agency provides the following definition of the concept of Green Building: Green building is the practice of creating structures and using processes that are environmentally responsible and resource-efficient throughout a building's life-cycle from siting to design, construction, operation, maintenance, renovation and deconstruction. This practice expands and complements the classical building design concerns of economy, utility, durability, and comfort. Green building is also known as sustainable or high performance building.458 As already identified, the cement technologies in place are able to support the corresponding requirements only to a limited extent. As consequence, there is strong driving force towards sustainability related innovation in the sector.

Nolley 2005: 10 cf. Macomber 2003 458 U.S. Environmental Protection Agency: <http://www.epa.gov/greenbuilding/pubs/about.htm>, online, 28 Apr. 2012
457

456

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The Topics of Risk and Risk Aversion in the Cement and Construction Sector

The sub-study 7 of the Battelle report reflects on the general attitude towards innovation and change in the cement sector in a comprehensive way: A number of impediments hold the cement industry back from making radical changes. Cement production is very capital intensive, and the long time period required to recoup investments leads to a conservative attitude toward change and a desire to continue to pursue markets for traditional (Portland) cement. In addition, customers are wary of changes in the cement they trust and are accustomed to using. Standards and building codes have been developed over the years to prevent untested innovations from adversely affecting safety of building and other structures, but they can also provide an impediment to introducing innovations. A strong interest in increasing sustainability can (and has, in some cases) overcome such impediments. As consumers of cement and concrete become more aware of sustainability issues, market forces may provide additional pressures for change. For instance, specifications may increasingly call for blended cement products that have been approved under new standards.459 The risks and costs involved in innovation can be considerable.460 The innovation related risk for suppliers as well as for buyers and stakeholders has to be carefully assessed and managed. Nolley states that, [] large firms often seek to reduce the risk and thus become commodity sellers.461 This statement represents an important diagnosis, as especially the cement sector is strongly influenced by multinational companies. It provides an additional explanation for the prevailing dominance of cost centered strategies in the sector, as the only source of competitive advantage left if differentiation and the intrinsic risk involved should be avoided. There are strong indications that the cement industry462, as well as the construction industry, are rather averse to risk and tend to resist change. Furthermore, the risk perceived by executives of the cement sector with regard to disruptive developments altering the industry structure is described as rather low463 further limiting the intentions to move out of the commodity comfort zone. In its seminal book on innovation464, Professor Clayton Christensen of Harvard Business School concludes that well-managed companies [] often fail because the very management practices that have allowed them to become industry
459 460

Battelle 2002b: VI cf. Hutt/Speh 2010: 233 461 Nolley 2005: 10 462 cf. Battelle 2002b: 9 463 cf. ibid.: 9 464 cf. Christensen 1997

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leaders often also make it extremely difficult for them to develop the disruptive technologies that ultimately steal away their markets.465 The role of innovation in the course of sustainability is investigated by the sub-study 7 of the Battelle report.466 Within this report, the situation of the cement sector relating to innovation is well described utilizing the following cumulated citation of Markides: Established players already occupy a certain strategic position and may have difficulty escaping their mental models of who their customers really are and what they should be offering those customers. ... [Also], established competitors already have a business position to take care of. If they are to strategically innovate, they may have to manage their existing position while simultaneously moving into a new strategic position no easy task The obstacles to innovation grow even more formidable when a companys existing position is quite profitable and successful. [S]uccess [sic!] is almost always accompanied by numerous negative side effects, such as complacency, self-satisfaction, managerial over confidence, and even arrogance For a company even to begin to search for new strategic positions, let alone discover them, it must first overcome these barriers.467 In order to provide a construction industry specific case, it can exemplary be noted that the transfer of innovations from the reinforced concrete building sector to construction industry is discovered to suffer from a lack of take up.468 Certain levels of tardiness as well as conservative and traditional attitudes are identified as powerful barriers towards innovation.469 Standards and building codes are inter alia listed by the sub-study 7 of the Battelle report as possible barriers towards innovation.470 But there are at least some indications for developments noted by the report which driven by a strong desire to change aim towards accelerating and systemizing mechanisms to introduce innovative products/technologies to the market. Related to the issue of sustainability, some relevant barriers to and enablers of innovation in the cement/construction sector are outlined in the following Table 5.471

465 466

Christensen 1997: 231 cf. Battelle 2002b 467 Markides 2000 as cited by Battelle 2002b: 9 468 cf. Glass et al. 2001 469 cf. ibid.: 8 470 cf. Battelle 2002b: 10 471 cf. ibid.: 9 ff

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Barriers/Impediments to Innovation Capital intensity facilitates a conservative attitude towards change and a preference for well-proven products and technologies Customers are vary of changes to the traditional well-proven and trusted products they are accustomed to Barriers evolving in the field of standardization and building codes

Enablers of Innovation Innovations can reduce operating costs or lead to higher-margin products, i.e., they can add to profitability or competitiveness The companies think that innovations aimed at environmental and societal innovations are the right thing to do In some locations where resources are quite limited, cement companies are motivated to innovate to compensate for that scarcity of resources Some innovations were driven by regulatory/legal pressures

Table 5: Sustainability related Barriers to and Enablers of Innovation in the Cement Sector472

Summary

The topic of innovation always has to been seen in the light of the benefits to be realized for a company or industry. Innovation must not been pursued as an end in itself. Successful innovation yields benefits for the innovating company and/or the overall sector. The first case might lead to a competitive advantage, the second case to an increase in industry attractiveness. Particularly, the special case that an innovation based gain in competitive advantage involves an erosion of industry attractiveness has to be treated with care. The focus of the case study is nevertheless put on the corresponding competitive component as developments affecting the industry structure are by definition not reflected in detail. Teece points out that, [] innovating firms often fail to obtain significant economic returns from innovation, while customers, imitators and other industry participants benefit.473 A central question revolves around an appropriability regime rooted in the feasibility of specific legal instruments and/or the nature of the technology. There is always the risk that followers/imitators outperform the innovator. Especially the advantages of standardization
472 473

cf. Battelle 2002b Teece 1986: 285

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and the trade-offs with the protection from imitation have to be considered in this perspective. In the same light the issues of integration and licensing have to be assessed. Teece identifies a number of complementary assets representing preconditions to successfully commercialize an innovation.474 The question if technological leadership or followership should be preferred has to be accurately assessed on a case to case basis.

Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies Contributions of and Implications for the Issue of Innovation

The adherence to a product range of common cements does by no means make innovation ineffective or undesirable. The innovation related potential to contribute towards differentiation can still be regarded as remarkable. Apart from substantial product innovations, all other opportunities especially with regard to process or marketing are still open in this case. Minor product adaptations are possible, as long as the products and technologies are still conforming to the prevailing standardization framework. The magnitude of change involved should by tendency be lower and more likely on the level of incremental improvements/adaptations. Hence, the innovation related requirements for a firm are by tendency lower too. The corresponding risk seems manageable. Compared to case 2, there is the opportunity to additionally capitalize on leaner and more cost efficient company structures.

Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies Contributions of and Implications for the Issue of Innovation

Product/technology innovation represents the primary driver of this differentiation approach. The potential contribution towards differentiation is remarkable and far reaching. Developing an alternative or substitute to common cement would require new core products and most likely processes/technologies imposing a considerable level of change even featuring the characteristics and complexity of a breakthrough project.475 Referring to technological evolution, Porter draws an interesting conclusion which can directly be related to the cement
474 475

cf. Teece 1986: 289 cf. Wheelwright/Clark 1992

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sector: In industries with undifferentiated products (e.g., minerals, many chemicals), the sequence of product innovations culminating in a dominant design does not take place at all or takes place very quickly.476 Especially the desired range of application for the innovative products has to be considered as the benchmark common cement is utilized in multitude of derived products and applications. Following this conclusion, it has early to be defined if new products should act as full scale substitutes or occupy a certain market niche. Findings of a segmentation analysis performed are valuable in this perspective. Particularly referring to the magnitude of change involved by the approach defined, it may be necessary to identify and attract early adopters or lead users of the new products/technologies. Customer relationship management is challenged by dealing with the market specific groups of customers featuring different attitudes towards innovation (groups like innovators, early adopters, pragmatists, conservatives and laggards as for example identified by Moore477). The implementation of the approach therefore has to be based on a high level of interfunctional working relationships as well as long-term commitment referring to resources and strategy.478 The development of new cements is likely to lead to a new product family at least in the first transformative sphere. Special emphasis has to be put on the impact of the strategy approach on competition. Introducing new cements apart from common cements might represent a disruptive experience to the market as the new products as soon as there are introduced successfully are likely to threaten or at least are perceived to threaten the competitors market positions. This is of even higher relevance in stagnant mature markets in which the sales growth of an innovative product has more or less to be based on a sales decline of the other proven products. Porter outlines that, [] a firm cannot set technology strategy without considering the structural impacts.479 As commonly proprietary know-how is created along with the innovation development outlined, approaches of technology dissemination have to be considered. Participation in markets outside of an economic feasible transport distance might represent a profitable opportunity. Due to the cement specific low value-to-weight ratio, the feasibility to serve distant markets directly is most likely limited. Thus, other options of market entry like licensing, contracting or joint ventures should be investigated. The additional revenue stream from dissemination activities can be substantial. Concerning the issue of licensing it is suggested to proceed with caution: If technology is a source of competitive advantage, a firm
476 477

Porter 2004b: 194 cf. Moore 1995 478 cf. Hutt/Speh 2010: 240 479 Porter 2004b: 172

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must treat licensing other firms as a risky step that should be taken only under special conditions.480 It has to be added that the market entry options mentioned commonly involve challenges concerning relationship management and competition. Multinational companies, operating a number of production sites, are in the lucky situation to serve larger markets directly by activating their overall production base. As an additional benefit, technology dissemination exhibits the potential to lower the cost base involved by capitalizing on scale economies. This may encompass fields like research and development, marketing and production, scale related learning, and permitting or customer related issues like training. In the case of an international dissemination strategy, a balance between local adaptation a multidomestic strategy and global optimization has to be found.481 A feasible balance is likely to be different for every distinct company and technology. Therefore, a strong influence on competition can be expected as the incentives for following a global or a multidomestic strategy might be inherently different depending on the company background.482 The close interrelation between the topics of innovation and integration should at least be mentioned at this stage. It has to be stressed that a company choosing the differentiation approach defined is at least partly leaving the strategic position to be a commodity seller. The incentives in place might be considerable but the costs, challenges and risks involved are considerable too.

480 481

Porter 2004b: 191 cf. Thomas et al. 2007 482 cf. Hutt/Speh 2010: 197 ff

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6.4.3 Selected Elements of a Marketing Strategy as Part of a Differentiation Strategy

Hutt & Speh outline that the policy choice of offering standardized or customized manufactured materials is strongly influencing the choice of the marketing strategy.483 For the first option, especially personal selling and customer relationship management can be regarded as crucial. For the second option, elements like a competitive price, reliable delivery or supporting service may be more important. In the following chapter selected elements of a marketing strategy are investigated in order to analyse how they are impacted by the policy choices made. The two cases defined, namely

Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies

are investigated for companies active in a mature market/industry reflecting on the characteristics identified for the European Union. Feasible elements of a differentiation strategy are analyzed from a marketing perspective. The instruments available already have been identified in chapter 6.4.2 utilizing a core-satellite model.

6.4.3.1 The Product To the potential buyer, a product is a complex cluster of value satisfactions.484

Product strategy and management should reflect the findings associated with segmentation and the segments to be targeted. The related findings and the corresponding policy choices should determine the direction of the product policy.485 Product policy encompasses product line related elements like: proprietary products, custom-build products, custom-designed products and industrial services.486 In congruence with general strategic approaches, the

483 484

cf. Hutt/Speh 2010: 26 cf. Levitt 1980: 84 485 Hutt/Speh 2010: 209 486 cf. Shapiro 1977 as cited by Hutt/Speh 2010:221

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product strategy includes the factor of positioning products in a particular market comprising the goal to attain a strong competitive position for the product.487

Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies Contributions of and Implications for Product Management

Adhering to a product line composed of standardized common cements keeps the requirements for an effective and efficient product management on a manageable level. Basically, the corresponding case specific primary policy choices are limited to the decision which products out of the standardized product range should be produced. The product specifications concerning composition and performance are largely predetermined and the product core remains undifferentiated. Hence, product customization and product enrichment are only possible to a very limited extent. The broadly available general industry know-how can be capitalized enabling efficient operations. Product related risks can be regarded as low. Differentiation potential might be available in creating a distinctive product environment including elements like design in logistics and packaging. The potential of a service offer to contribute towards differentiation has to be investigated as it could represent a valuable driver of uniqueness. Offering service components should be considered if corresponding opportunities are identified and the approach is embraced by the customer community.

Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies Contributions of and Implications for Product Management

Case 2 provides the opportunity to offer unique products. The differentiation approach therefore focuses on the product core additionally including elements like product enrichment and customization. The overall differentiation potential might be considerable as already identified in chapter 6.4.2.2. The contributions of and implications for product management are considerable and multifaceted within this scenario. Challenges are especially occurring in the field of permitting as prevailing standards and building codes might not be supported by innovative products. Considerable investment and

487

Hutt/Speh 2010: 221

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time can be involved in overpassing these barriers in place. The topics related to market access and market penetration have to be accurately assessed. Another challenging issue is the evaluation and definition of the competitive position of new products vis-a-vis the own and the competitors traditional offer. Due to the sector specific economies in place, it seems unlikely that a company offering a new innovative product line drops the production of common cements. Therefore, innovations have most likely to be positioned in the market in parallel with the existing product line. Inter alia, the cannibalization of the own product line in place has to be avoided in this case. Furthermore, the approach incurs other far-reaching strategic consequences. There is the inherent risk to end up stuck in the middle488 between being a most likely cost-driven producer of common cements or an innovative differentiated producer of value added alternatives. As stated by Porter, it is most likely very difficult to effectively fulfill both roles in parallel.489 Many strategic decisions to be made might imply a confrontation between the two inherently different approaches in place. Especially product management will be affected by this unpleasant situation. For case 2, the basic necessity of an adequate risk assessment has to be stressed. Cement based building products are frequently exposed to long lifetimes and in many cases have to guarantee the structural integrity of building structures. Product and application safety have to be ensured. The prevalence of building codes, permitting regimes and standards is to certain extent attributable to this topic. The multitude of cement derived products further contributes towards the complexity of this issue. Many of the corresponding aspects have to be covered prior to an official permitting phase of a new technology. The corresponding investments occur in advance to and continuously after the market entry and can have a significant impact on the profitability of a development project. The service component of the offer has to be strengthened in case 2 as the know-how of the downstream value system might be offset by products deviating from prevailing practices and standards. An extended service offer may additionally contribute towards differentiation in this case.

488 489

cf. Porter 2004a: 41 cf. ibid.: 34

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6.4.3.2 The Service Component

When a customer no longer needs help, he gains the flexibility to shop for things he values more - such as price.490

Services may play a vital role as part of a differentiation strategy in business-to-business environments and especially in the case of commodities or products affected by commoditization. Service and support are for example identified as a viable basis for differentiation of commodity-like products by McKenna491 and in the context of relationship management within commodity related sectors by Robinson et al.492 A corresponding scopeextended business model might, under certain circumstances, exhibit a growth potential especially in stagnant or mature industries.493 Special emphasis has to be put on the customers attitude towards the service offer. The perception of the, at least partly, intangible service offer and the service quality are crucial.494 It may be more difficult for customers to evaluate services than products.495 There is the risk that service is perceived as of lower value in a mainly product focused environment. As a first analytical step, customers should be evaluated referring to their attitude and their preference of exchange stiles. Segmentation analysis should provide a sound basis in this perspective. The potential contribution towards profitability of a service component has to be carefully assessed. In the case of a positive feasibility assessment, a dedicated marketing approach has to be developed reflecting the findings of segmentation and target marketing analysis. A comprehensive service offering should comprise definitions concerning the marketing mix related policies of pricing, promotion and distribution.496 Corresponding service packages can be defined.497 Bundling products and services might represent a feasible option especially in order to control the high fix costs involved in employing a comprehensive business model. Feasible bundling approaches potentially encompass options like flexible, multibenefit or one-stop bundling.498 As far as channels are involved, their possible role has to be investigated and defined. Due to the intrinsic influence on customer retention and loyalty

490 491

Levitt 1980: 87 cf. McKenna 1991: 178 f 492 cf. Robinson et al. 2001 493 cf. Hutt/Speh 2010: 262 494 cf. ibid.: 264 f 495 cf. ibid.: 268 496 cf. ibid. 271 ff. 497 cf. ibid.: 273 498 cf. Shankar et al. 2009

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as well as on long-term profitability, feasible service elements have to be identified, measured and carefully monitored.499 The role of quality management in the course of a service offering is well formulated by the quite simple strategic advice of Hutt & Speh: underpromise and overdeliver500. A comprehensive and successfully implemented service offering yields additional benefits related to branding as the physical presence of service personnel is likely to create or strengthen perceptive bonds501 with the products offered. Services are therefore identified to be able to add considerably towards a differentiation approach especially in the anonymous world of commodity-like products. Following the approach outlined definitely imposes remarkable challenges on an organization as the required level of service demand502 and especially the peak demand are hard to be predicted. For an industry generally subjected to cyclical long-term and seasonal demand fluctuations, this issue is of even greater importance. Special emphasis has to be put on the resources/capacities needed and the cost involved. Pricing might be utilized to actively align the demand to the capacities available.

Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies Contributions of and Implications for the Service Component

Including service elements might contribute towards the perceptive movement of a commoditized core-product towards differentiation. The decision to develop a service offer has to be strongly based on the findings if this offer is appreciated by the customers under the framework conditions defined for this case. The corresponding marketing and profitability related feasibility has to be pre-assessed. Due to the homogenous and exchangeable product offer and the long-term repeat buying experience, customers may feature a high level of sophistication undermining the feasibility of the approach. Referring to Levitt, customers will not have the impression to need help.503 Furthermore, a service offer enables to create a price premium only if it is not regarded as a core benefit by the customers. Pricing of services offered might therefore be an important and

499 500

cf. Hutt/Speh 2010: 269 ibid.: 268 501 cf. Wiedmann/Ludewig 2011: 89 translation by the author 502 cf. Hutt/Speh 2010: 266 503 cf. Levitt 1980: 87

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challenging issue in the cement sector. It is at least questionable if bundling approaches represent a feasible option as long as the customers exhibit comprehensive long-time experience with the existing product line in place.

Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies Contributions of and Implications for the Service Component

As soon as the product related experience is offset, customers will more likely value a service component offered. The case outlined involves the creation of entirely new customer product experiences which have to be actively managed and closely monitored in order to secure the success of this approach. The use of customer relationship tools is feasible in order to identify and offset distortions between customer expectations and customer experience.504 If the policy choice of this differentiation approach is triggered by the intention to develop and provide specific customer related solutions most likely originating from a segmentation analysis performed the solution centered approach has to be put into the focus and has to be sustained. In the ideal case this sub-approach leads to a high level of customer satisfaction and loyalty. Providing customer solutions going well beyond selling a product is highlighted by Sawhney for the Mexican rooted multinational cement producer Cemex.505 Sawhney outlines that possible benefits namely revenue growth, differentiation and customer retention have to be balanced with the risks involved namely competence risk and margin risk. Switching from products to solutions additionally involves considerable challenges with regard to the fundamental changes going along with the transformation of a product focused business into a service focused business.506 Higher levels of integration and transparency are required. In case 2, the necessity might arise that the market introduction of innovative products has to be accompanied by service offers free of charge in order to reduce customer switching costs. Once service is offered free of charge, it will be very challenging to introduce adequate pricing regimes later on.

504 505

cf. Hutt/Speh 2010: 260 cf. Sawhney 2006 506 cf. Ryan/Holmes 2009

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6.4.3.3 The Brand

Brand equity is a set of brand assets and liabilities linked to a brand, its name, and symbol that add to or subtract from the value provided by a product or service and/or to that firms customers.507

In commodity-like sectors brands might be of relevance for the customer if they yield specific benefits in the fields of information efficiency, reduction of perceived risks and image (e.g. transfer of reputation in the course of ingredient branding).508 Successful branding contributes towards the creation of a psychological bond and provides information related to the orientation in the course of the buying process simplifying the customers decision making process. Subsequently, it facilitates customer retention and reduces the attractiveness of switching.509 The creation of brand relevance is therefore associated with different benefits like an increased brand loyalty and the willingness to pay a price premium.510 According to Porter, brand loyalty might lower customer price sensitivity.511 Brand equity represents a valuable intangible asset of a company and should be handled with care. Creating brand equity can be regarded as a key objective of brand management. In general, commodities can be characterized by low customer involvement which makes the creation of brand awareness a challenging task. Commonly, new association patterns have to be created512 and a considerable quantity of information has to be successfully transferred in order to enable successful commodity branding. For the strongly locally or regionally anchored cement business there is the likelihood that the corresponding local origin exhibits image value for specific customer segments. This country of origin effect in a commodity setting is for example noted by Wiedmann & Ludewig.513 Basically, a viable branding strategy may be chosen between the following options:514

Product Branding (differentiation is aspired by the creation of a brand identity and brand image at the level of single products)

507 508

Aaker 1991: 15 cf. Wiedmann/Ludewig 2011: 457 translation by the author 509 cf. Billen/Raff 2011: 295 f translation by the author 510 cf. Leischnig/Geigenmller 2011: 124 ff translation by the author 511 cf. Porter 2004a: 37 f 512 cf. Wiedmann/Ludewig 2011: 89 translation by the author 513 cf. ibid.: 85 translation by the author 514 cf. ibid.: 99 translation by the author

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Product Line Branding (branding approach encompasses the extended product line including services) Corporate Branding (branding approach is focusing on the identity of the company) There is some indication that corporate branding might feature a higher significance in commodity related settings.515

Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies Contributions of and Implications for the Brand Management

Successful branding is able to contribute towards differentiation even if the core product is undifferentiated. Due to the commonly long-standing business activities and customer relationships of many regionally rooted producers, especially corporate branding seems to represent a viable option in the cement industry. For the same reason, the country of origin effect516 might be of relevance. A corresponding branding concept may be extended by product line branding further contributing towards differentiation from the competitors offers.

Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies Contributions of and Implications for the Brand Management

Based on the assumption that an innovative product range offers specific additional benefits for the customer, it is likely that customer involvement and general brand awareness can be created more effectively by an approach leaving the ground of standardized common cements. To a certain extent this has to be the case, as new product attributes may generally require a higher level of involvement. Innovative products exhibit the potential to differentiate from the competitors offers more effectively if the specific product attributes can be linked to a new brand. Hence, product branding seems to be a more feasible approach for case 2. Capitalizing on a country of origin effect represents an additional opportunity also in this case. Successful innovative products, embraced by the customer, exhibit the potential to contribute towards corporate branding/image in a positive way thus increasing brand equity.
515 516

cf. Leischnig/Geigenmller 2011: 124 translation by the author cf. Wiedmann/Ludewig 2011: 85 translation by the author

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In the case of common cements, the products are frequently regarded as a commodity characterized by the attributes uniform, homogeneous and exchangeable and are subject to a framework of formal and informal standardization. They are generally valued as being proven. Innovation is always associated with certain dimensions of risk. In the case of innovative products, a strong focus has to be put on quality management and on delivering the value proposition from early on. In the likely case of certain customer risk averseness see also chapter 6.4.2.5 concerning this issue successful branding might be able to alleviate the customers risk perception. Vice versa, the risk has to be adequately managed in order to avoid negative impacts on brand equity. This brand related responsibility reaches beyond the legal responsibility of the producer and may encompass stakeholder groups not featuring a direct business relation. In this perspective, topics like user certification programmes for members of the first and/or second transformative sphere as well as issues like co-operation or integration have to be considered. In summary, the approach defined can be characterized by general high brand relevance, the ability to create brand awareness and the potential to considerably contribute towards brand equity.

6.4.3.4 The Customer Relationship In fact, each segment effectively consists of one customer.517

The customer relation or in a wider perspective the relations to stakeholders identified in Figure 18 represent core elements in the context of differentiation. A deepened understanding of the buyer-seller relationship is essential in order to develop and successfully deliver a value proposition. Hutt & Speh underline: The ability of an organization to create and maintain profitable relationships with these most valuable customers is a durable basis of competitive advantage.518 In a more comprehensive approach based on a high degree of relationship management capabilities the joint development and implementation of innovation strategies with alliance partners might even lead to a collaborative advantage519. The various types of buyer-seller relationships can be seen to be positioned on a continuum between the two endpoints of a distant anonymous transactional exchange and a close collaborative
517 518

Narayandas 2005: 132 Hutt/Speh 2010: 92 519 cf. Kanter 1994

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exchange.520 Some general characteristics of different exchange types and their likely customer preference depending on the framework conditions are indicated in the following two tables.

Type of Exchange

Characteristics

Type of Relationship (Goals) Distant, Anonymous (attracting & acquiring customers) Value added (keeping customers)

Transactional Exchange

Timely exchange of basic products for highly competitive market prices frequent in commodity markets

Value added Exchanges (focus shifts from attracting customers to keeping customers) Collaborative Exchanges (mutual commitments in expectation of long-run profits)

Exchange including operational linkages and a higher level of information exchange

Exchange including a high level of informational, social and operational linkages including mutual commitments

Collaborative (gaining collaborative advantage)

Table 6: Basic Characteristics of different Types of Exchange521

Framework Conditions regarding

Transactional Exchange likely to be preferred by customers in the following cases Many alternatives Stable Low Low Low Limited

Collaborative Exchange likely to be preferred by customers in the following cases Few Alternatives Volatile High High High Extensive

Availability of Alternatives Supply Market Dynamics Importance of Purchase Complexity of Exchange Information Exchange Operational Linkages

Table 7: Likely Customer Preference of different Exchange Styles depending on Framework Conditions522

520 521

cf. Hutt/Speh 2010: 92 ff cf. ibid.: 92 ff adapted by the author 522 cf. ibid.: 92 ff adapted by the author

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Referring to the two case study approaches defined, it can be deduced that a preference of transactional exchanges dominates in case 1, whereas case 2 facilitates the development of more collaborative exchange types. Customer retention and loyalty are crucial issues especially for the long-term business approach of the cement sector. Creating customer satisfaction and establishing reputation play major roles in this perspective.523 Reputation is likely to be based on past experiences with the company and its products. Especially for this case study, the customers experiences gained in the course of a differentiation process are crucial.524 The customer relationships play a fundamental role in this perspective.

Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies Contributions of and Implications for Customer

Relationship Management

Staying on the track of common cements/technologies basically enables to freely position within the continuum between transactional and collaborative exchanges types as long as the prevailing customer preference is reflected. It can be assumed that customer preferences are more on the transactional side as long as the likely commodity state of the product scope is not altered remarkably. In order to differentiate from competitors, the goal to form at least value added customer relationships and implement corresponding relationship-building strategies can be feasible. It has to be noted that sudden changes in the desired exchange style might be perceived as baseless and therefore be eyed with skepticism by the customer if they are exclusively originating from the suppliers side. This is especially the case for long-time business relations. Sure instinct represents a general valuable competence in this perspective.

Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies Contributions of and Implications for Customer

Relationship Management

In contrast to case 1, the offer of other than common cements/technologies goes along with the imperative to develop more value added or even collaborative customer relations. The corresponding approaches might be appreciated or at least accepted by customers, as more or
523 524

cf. Billen/Raff 2011: 295 translation by the author cf. Shapiro 1977

153

less all indications highlighted in the third column of Table 7 apply. It has to be noted that implementing a product range apart from common cement is likely to offset not only the product know-how and sophistication of the direct buyers (members of the first transformative sphere). Furthermore, the know-how of the whole downstream value system, as identified in Figure 18, is depleted. As a consequence, the demand for information exchange, professional training, technical support, customer visits and control activities increases remarkably. The implementation of a dedicated supportive service offer, in the course of the likely intensification of the customer relations, seems feasible. The potential of case 2 to contribute towards differentiation is remarkable, but the requirements in the field of customer relationship management are considerable too. Especially the ratio of value/profitability created to cost has to be regarded again in this perspective. Due to the complexity involved, topics like bundling of products and services, strategic alliances525 or even forward integration might represent feasible options. The concept of a value network526 including suppliers, strategic alliance partners and coalitions should at least be mentioned in this context. Value creation in business-to-business environments must be seen as a dynamic process as the specific needs may change over time. The greatest potential to create value is given in the early stage of the relationship life cycle as the need for personal interaction and service support is generally higher in this phase.527 Therefore, the differentiation approach of case 2 exhibits the potential to set an existing relationship back to an earlier stage of the life cycle. Billen & Raff illustrate the interesting example of environmental friendliness to explain the reduction of exchangeability on the level of information for the case of commodities by increasing the net benefit.528 Due to the low level of differentiation, customers basically exhibit a high level of confidence in assessing the product performance of commodities. Adding the criterion of environmental friendliness reduces the reliability of this assessment. Estimation uncertainty commonly constrains the purchase decision. Subsequently, the evolving uncertainty has to be successfully reduced and the trust based relationship to be strengthened. The incentives as well as the risk involved in this approach are obvious. The example provides an impression of challenges for customer relationship management arising in the context of differentiation.

525 526

cf. Hutt/Speh 2010: 112 ff. cf. ibid.: 164 527 cf. Eggert et al. 2005 528 cf. Billen/Raff 2011: 294 translation by the author

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6.4.3.5 The Issue of Pricing

If effective product development, promotion and distribution sow the seeds of business success, effective pricing is the harvest.529

The goals of pricing can be categorized into the principle objective and collateral goals (e.g. achieving a targeted return of investment, achieving a market-share goal, meeting competition).530 Therefore, pricing at least to a certain degree represents a policy choice. The basic economics of the cement business suggest a certain level of inelasticity of demand. Partly, this might be attributable to the minimal impact on overall construction cost of which cement related cost is estimated to be in range of 1%.531 Even if the general validity of this number can be questioned, it well accentuates the relative low direct impact on cost. Hutt & Speh highlight that demand tends to be inelastic, if the product has an insignificant effect on the cost of the end user.532 In this case, the customers emphasis is likely to be shifted towards issues like quality and reliability of delivery. Despite these findings, the characteristics of demand may nevertheless vary throughout different segments in terms of volume, price sensitivity and hence potential for profitability.533 Price sensitivity of customers inter alia has the tendency to increase if534

the relative performance and prices of alternatives can easily be assessed. price comparisons can easily and accurately be performed. no or low switching costs are prevailing.

From a pricing perspective, the overall goal of the differentiation approaches outlined can be formulated as creating a differentiation value exceeding the commodity value which is additionally reflected in a price premium for the company. Hutt & Speh draw the following definition: Commodity value, then, is the value that a customer assigns to product features that resemble those of the competitors offerings. By contrast, differentiation value is the value associated with the product features that are unique and different from competitors.535

529 530

Nagle 1987: 1 cf. Hutt/Speh 2010: 362 531 cf. Wagner/Vassilopoulos: n.p.n. 532 cf. ibid.: 367 533 cf. Hutt/Speh 2010: 363 534 cf. ibid. 367 list adapted and enhanced by the author 535 Hutt/Speh 2010: 364

155

Depending on the customer context, Sebastian et al. propose the following basic pricing approaches relating to commodities:536

Standard (continuous) business: differentiated pricing Project business: price bundling (distinct package combinations including products and services) Small customers: utilization of price-lists Distributor/Retailer: functional pricing (pricing considers the additional functions fulfilled by the channel partner like logistics, service, product presence etc.)

The basic feasibility of these concepts to be utilized in the cement business can be supported. The high product price related significance of freight cost plays an important role in the field of cement pricing. Assuming a perfectly homogeneous product and therefore most likely competition on price basis, the competitive price for a specific customer is strongly influenced by the relative transport distances for the next nearest competitors.537 In the cement sector, price management and terms of delivery have to strongly reflect the factor location. Sebastian et al. note that in commodity sectors a certain responsibility in terms of pricing competence and predictable behavior, including a long-term perspective, can be attributed to the local price/market leader.538 The market leader might exercise a certain level of coordinative influence and absorbing power referring to short-term market fluctuations. Effective and legally compliant signaling of a comprehensible pricing policy can be included in this informal function.

Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies Contributions of and Implications for Pricing

It can be assumed that for standardized common cement the principles of pricing feature a strong correlation to other markets for commodity-like products of a low value-to-weight ratio. A detailed analysis of the price formation in these typical commodity markets is not within the scope of this masters thesis.

536 537

cf. Sebastian et al.: 2011: 180 translation by the author cf. ibid.: 179 translation by the author 538 cf. ibid.: 180 translation by the author

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Referring to common cement, the homogeneous and standardized product offer leads to a high level of price transparency for the customer. Due to the inherent transparency of quality attributes, under-pricing might not lead to a skeptic perception of a product quality to receive.539 Under-pricing rather contributes towards the formation of a commodity-segment of a distinct reference price level. Therefore, price cutting exhibits the hazard potential to end up in a downward spiral difficult to be overcome.540 This phenomenon, inter alia, creates incentives related to illegal price fixing. Cartelization was repeatedly identified to be an issue in the sector.541

Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies Contributions of and Implications for Pricing

Innovative products exhibit the potential to provide specific benefits for direct customers, stakeholders in the first transformative sphere as well as beyond this sphere. If it can be managed to shift the customer focus from price towards value, specific opportunities related to pricing may arise. The demand for cement was already identified to be rather inelastic. This inelasticity basically an outcome of the competitive forces in place can amongst others be further facilitated by offering additional product value to the customer. A corresponding value concept has to encompass not only the direct customer (member of the first transformative sphere) but also members of the second transformative sphere as well as end-users. The value creation and distribution have to be analyzed first in order to develop a corresponding value based pricing concept. As a possible outcome, realizing a price premium (over-pricing) can be enabled. The value proposition feasibility check presented in chapter 6.2.4.3 should provide a sound analytical basis for this approach. It is most likely not possible for the innovating firm to absorb all the additional value created by the differentiation approach presented. Michael Porter notes that, The price of a substitute must share some of the value created with the buyer in order to give the buyer an inducement to switch.542 Depending on the price elasticity and other characteristics of segments targeted, corresponding approaches of pricing innovations might range from skimming (high initial price) to penetration (low

cf. Dost/Wilken 2011: 144 - translation by the author cf. Wiedmann/Ludewig 2011: 84 translation by the author 541 cf. Commission of the European Communities 2009: 25 the phenomenon can be regarded to be of general relevance and not to be limited to a specific geographic region 542 Porter 2004b: 309
540

539

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initial price).543 Despite all benefits related to value pricing, implementing a corresponding concept in a mainly commoditized industry environment can be regarded as rather challenging.

6.4.3.6 Other Elements of the Marketing Strategy

Elements of marketing strategy quoted in this chapter as well exhibit a considerable level of general importance. The main reason for not being highlighted explicitly is the limited scope of this masters thesis. As a consequence, only some selected comments are added at this point. The elements are furthermore not analyzed in detail referring to the implications with the case study scenarios defined. It might be generalized that the corresponding requirements are higher if a differentiation approach based on a product range of other than common cements/technologies is pursued.

Sales Management

Sales people represent the interface to the customer and have to implement the pricing and sales conditions as well as a part of the overall communication policy.544 Customer and market know-how of a company and therefore the execution quality of marketing tools is commonly strongly linked to the ability of the sales department to attain and process the related data. Moreover, sales departments play a leading role in the context of customer relationship management. Narayandas states: Managing individual customers is tough, but it has become an imperative in business markets today.545 A survey, conducted under members of sales departments, led to the proposal to base differentiation approaches in commodity marketing on branding, excellent terms of delivery and long standing relationships.546 Referring to all these and many other elements of marketing strategy and management, the effective and efficient contribution of the sales staff is crucial. The important function to be fulfilled by sales management in the course of a differentiation strategy is consequential.

543 544

cf. Porter 2004b: 372 cf. Homburg et al. 2011: 46 translation by the author 545 Narayandas 2005: 132 546 cf. Schpe/Enke 2011: 335 translation by the author

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Managing Channels

A direct sales approach is frequently dominating the cement sector of mature markets. This is especially the case for bulk cement. In many cases, the employment of channel functions, like inventory and storage, is subjected to substantial cost not providing value to a corresponding extent in return. In some cases, long distance supply by economic means of transport, like ships or trains, can lead to the feasibility of local storage and distribution in order to serve a specific geographic market. Channels are particularly established for bagged cement if they enable to bridge the logistic gap to the customer. Hutt & Speh outline that a direct sales approach is feasible for highly customized solutions, large customers, and complex products547. The complexity involved in market introduction of innovative cements favors the direct sales approach especially if expertise or specific application knowledge is required. Therefore, a corresponding differentiation approach is likely to be set up on direct sales at least for an introduction phase in order to facilitate the intended use and to avoid risks involved in dealing products indirectly. Due to the higher perceived risk in utilizing an innovative product, a direct sales approach is furthermore likely to be the customers preferred choice. This requirement should be reflected by the producer in the course of an adequate risk perception mitigation strategy. The direct personal involvement of the producer can be regarded as necessary, or at least valuable, in this perspective. The related personnel attendance can also be seen as an opportunity to strengthen the customer relationship and to gain in brand recognition as already outlined. Referring to the marketing of technologies by licensing or contracting, channels potentially play another important role. Local representatives featuring know-how of the local competitive and market conditions can be useful to successfully market a new technology.

Issues relating to E-Commerce

The internet and related technologies are offering a wide spectrum of opportunities in the case of business-to-business markets. The role of electronic media and the internet for internal as well as external communication is evident. Especially in the case of the introduction of innovative products/technologies, the demand for comprehensive, relevant as well as segment/stakeholder specific up-to-date information is considerable. This conclusion is

547

Hutt/Speh 2010: 283

159

referring to direct customers as well as to all other members of the cement industry value system identified. Information technology and e-commerce represent valuable instruments of modern businessto-business marketing. All related potentials should be exploited independently from the strategy approach chosen. The increasing importance of e-commerce for the cement sector for example utilized as a powerful tool in the field of customer relationship management is diagnosed by Gibbert et al.548 Porter acknowledges the ability of the internet as a tool able to support or damage a companys strategic position.549 Porter & Millar note the ability of new information technology to affect industry structures, to support cost and differentiation strategies and to spawn new businesses all three factors influencing competition.550

Promotion and Advertising

In product-focused commoditized industrial sectors promotion and advertising face the challenging task to create awareness. The overall communication strategy plays a vital role especially regarding the differentiation approaches investigated within the case study defined. As already identified, not only the direct customer but rather a multitude of stakeholders is directly or indirectly influencing the cement buying decision. Therefore, the value proposition has to be communicated effectively to the relevant stakeholder groups as already noted in chapter 6.2.4.3. The buyer perception of value551 plays a crucial role especially if innovative products are introduced and if more distant members of the value system are of relevance within the purchasing decision making process. In these cases, the perception of value has to be managed more actively as situations unfamiliar to the cement sector like first-time buying, reduction of buyer know-how or uncertainty in product assessment might arise. Due to the already diagnosed high level of risk aversion in the construction sector, promotion approaches including demonstration objects or operational testing may represent viable options especially for the case 2 defined. Porter outlines that, The role of signaling in substitution is often as more important than its role in differentiation.552 This statement inter alia refers to the uncertainty involved in assessing the value of an innovative product in

548 549

cf. Gibbert et al. 2002: 464 ff cf. Porter 2001 550 cf. Porter/Millar 1985 551 cf. Porter 2004b: 138 552 ibid.: 280

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comparison to a proven product. Finally, a conclusion drawn by Porter can be underlined in this perspective: Buyers will not pay for value that they do not perceive.553

6.4.4 Comments on the Cost of Differentiation

Besides all potential opportunities and benefits related to differentiation, the corresponding cost must not be forgotten. According to Porter, a differentiation strategy yields superior performance if, [] the value perceived by the buyer exceeds the cost of differentiation.554 Hence, the cost involved has to be accurately assessed and monitored. The trade-off of the differentiation approaches presented especially of case 2 with a low cost position555 is obvious. Identifying the costs and risks involved in the approaches presented is definitely a difficult and challenging, but nevertheless crucial, part of strategic planning. The corresponding considerations should already be included in the value proposition feasibility check proposed in chapter 6.2.4.3. Implementation of any differentiation approach has to be accompanied by a feasible level of cost control. Basically, the steps in strategic cost analysis and control as proposed by Porter556 represent viable options for both differentiation approaches investigated:

Identify the appropriate value chain and assign costs and assets to it. Diagnose the cost drivers of each value activity and how they interact. Identify competitor value chains, and determine the relative cost of competitors and the sources of cost differences. Develop a strategy to lower relative cost position through controlling cost drivers and reconfiguring the value chain and/or downstream value. Ensure that cost reduction efforts do not erode differentiation and/or make a conscious choice to do so. Test the cost reduction strategy for sustainability.

553 554

Porter 2004b: 139 ibid.: 153 555 cf. Porter 2004a: 38 556 cf. Porter 2004b: 118 ff

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6.4.5 General Comments on Sustainability, Pitfalls and Risks

Finalizing the findings of the case study, some selected statements of Michael Porter relating to differentiation are briefly reflected at this point. According to Porter, the sustainability of differentiation advantage is based on continued perceived value and the lack of imitation.557 Mobility barriers to competitors are of major importance in this perspective. The following general sources of sustainability in differentiation are identified:558

The firms sources of uniqueness involve barriers (e.g. proprietary learning, linkages, interrelationships, first-mover advantage, specific signaling criteria). The firm has a cost advantage in differentiating. The sources of differentiation are multiple. A firm creates switching costs at the same time it differentiates.

Referring to the findings of the case study, it can be summarized that both approaches presented potentially include multiple sources of uniqueness. A successfully implemented differentiation approach based on other than common cement/technologies is likely to exhibit an increased level of sustainability as relevant barriers might be involved. Exemplarily, the issues related to proprietary learning and know-how, the creation of switching costs and a potential first mover advantage can be highlighted in this perspective. Due to the lack of a number of potential barriers towards imitation, the corresponding sustainability of a differentiation approach based on common cements/technologies can be regarded as remarkably lower. The following common pitfalls and risks in differentiation559 can be underlined as being critical for any differentiation approach and should serve as general strategic food for thought:

Failing to attain or sustain the strategy Erosion of the strategic advantage gained with industry evolution Imitation narrows perceived differentiation

557 558

cf. Porter 2004b: 158 cf. ibid.: 159 559 cf. Porter 2004a: 44 ff, Porter 2004b: 160

162

Uniqueness that is not valuable Differentiating factors do not meet buyers needs (any more) Too much (unnecessary) differentiation Too big a price premium too high cost differential for the differentiated firm relative to the low-cost competitors to keep up brand loyalty Focus on the product instead of the whole value chain (fail to exploit opportunities to differentiate in other parts of the value chain) Failure to recognize buyer segments

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6.4.6 Case Study Summary

The following Table 8 summarizes the basic characteristics of the two differentiation approaches identified within the course of this case study.

Case 1: Differentiation Subject Area Approach based on a Product Range of Common Cements/Technologies

Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies Limited to cement companies

General Applicability

All cement companies

featuring considerable product innovation related capabilities

Overall Differentiation Potential Potential Sustainability of the Differentiation Advantage Potential Sources of Uniqueness Potential to contribute towards superior Profitability

Medium Low to Medium Multiple Medium product related standardization

Considerable High Multiple High product technological change, innovation and general differentiation Considerable High Considerable Medium to High High Intrinsic risk to be stuck in the middle561 if the strategy is not accurately implemented

Approach is capitalizing on

and differentiation in non-product core related fields

Appropriability Requirements Resource Intensity Expected Impact on Competition Expected Impact on Industry structure Overall risk level

Low to Medium Medium Low to Medium Low Low to Medium Intrinsic risk to be stuck in the

Comment

middle

560

if the strategy is not

accurately implemented

Table 8: Basic Characteristics of the Case Study Differentiation Approaches

560 561

Porter 2004a: 41 ibid.: 41

164

Both case study differentiation approaches investigated imply significant impacts on a corresponding marketing strategy. In order to briefly summarize the characteristics relevant for selected elements of a marketing strategy, the following tables are derived. It has to be noted that the sequence of the elements highlighted does represent a qualitative ranking. Furthermore, some characteristics are been identified to be of relevance for several elements of a marketing strategy. As a consequence, double entries may occur.

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Case Study Summary Assessment of Characteristics related to Innovation Strengths & Opportunities
Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies Capitalization on standardization, general industry developments and know-how Lower innovation related risk involved Lower level of innovation related change to be managed No product regulation related barriers in place Lower level of resource requirements related to product innovation Possible late mover advantages No negative impact of customer risk averseness (proven products) Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies Creation of product innovation related competitive advantage enabled Price premium more easily to be attained based on product attributes directly influencing customer value Creation of product related proprietary know-how enabled Merchandizing of proprietary knowhow may create additional income streams Possible first mover advantages High level of sustainability of a competitive advantage realized Lower levels of price sensitivity and switching propensity attainable Creation of switching costs enabled Possible positive impacts on competition and industry structure

Weaknesses, Challenges & Threats

Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies No product innovation related competitive advantage to be attained No product attribute related price premium to be realized No product related proprietary know-how to be attained Possible late mover disadvantages Lower level of sustainability of the differentiation advantage created No creation of switching costs Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies Loss of benefits related to standardization Higher innovation related risk involved Magnitude and complexity of change involved Product regulation related barriers in place Possible trade-off between proprietarity and market access Barriers towards innovation in place Considerable resource and capability requirements Complex appropriability regime necessary to commercialize product innovations Learning curve has to be attained without overall industry contribution Possible first mover disadvantages Overall sector specific risk averseness Development of a sustainable competitive advantage impeded (e.g. by imitation) Creation of barriers towards imitation might be difficult Possible negative impacts on competition and industry structure Sector specific risk averseness difficult to be overcome

Table 9: Case Study Summary Assessment of Innovation related Characteristics 166

Case Study Summary Assessment of Product Management related Characteristics Strengths & Opportunities
Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies Capitalization on standardization, general industry developments and know-how Lower product management related requirements Cost efficiency Low complexity involved Low product related risk involved Creation of a distinct product environment Service offer can be included/strengthened if identified as a feasible option Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies Unique product offer Product customization & enrichment enabled Considerable product related potential to contribute towards differentiation Service offer has to be included/strengthened Potential to create a monopolistic product position

Weaknesses, Challenges & Threats

Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies No significant contribution towards differentiation by the core product No product related uniqueness available Limited potential for product customization or enrichment Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies Loss of benefits related to standardization High product management related requirements High cost intensity High complexity involved Higher product related risk involved Challenges concerning market access and market penetration Challenges in positioning the products on the market Possible trade-offs with existing product line Draw-backs of a monopolistic product position (e.g. issues related to singlesourcing)

Table 10: Case Study Summary Assessment of Product Management related Characteristics 167

Case Study Summary Assessment of Service Management related Characteristics Strengths & Opportunities
Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies Service component might enhance differentiation Increased physical presence might yield additional brand related benefits Potential to create superior customer satisfaction and loyalty Growth potential in a stagnant industry Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies Service component might enhance differentiation Increased physical presence might yield additional brand related benefits Potential to create superior customer satisfaction and loyalty Growth potential in a stagnant industry Service might be regarded as valuable by the customers as the customers experience level with innovative products is low Solution based marketing enabled Price premium might be created by reasonable bundling of products and services

Weaknesses, Challenges & Threats

Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies High level of service capacity needed High level of fixed costs involved Service demand - especially peak demand - difficult to be predicted and managed Risk involved in the transformation from a product focused business towards a more service oriented business Failing to attain a service related price premium Service component might not be regarded as valuable as high level of customer sophistication is prevailing (Customers do not need help.) Service offer might be regarded as a core benefit Low feasibility of bundling Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies High level of service capacity needed High level of fixed costs involved Service demand especially peak demand - difficult to be predicted and managed Risk involved in the transformation from a product focused business towards a more service oriented business Service free of charge might be necessary in order to reduce customers switching costs Failing to attain a service related price premium

Table 11: Case Study Summary Assessment of Service Management related Characteristics 168

Case Study Summary Assessment of Brand Management related Characteristics Strengths & Opportunities
Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies General branding related potential to contribute towards differentiation Capitalization on a country of origin effect562 Potential to contribute towards brand equity and corporate image Lower levels of price sensitivity and switching propensity Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies Increased branding related potential to contribute towards differentiation Capitalization on a country of origin effect
563

Weaknesses, Challenges & Threats

Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies Low potential to create brand awareness Creation of customer involvement represents a challenge Creation of new perceptive bonds difficult Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies Customer involvement has to be created effectively Possible conflicts and trade-offs with the brand connotation in place Risk of brand equity related compromises or negative spillover effects

Increased potential to contribute towards brand equity and corporate image Lower levels of price sensitivity and switching propensity Positioning as innovation leader Increased potential to create brand awareness Due to new product attributes, an increased customer involvement can be attained New positive customer experiences can be created New product attribute related psychological bonds can be established Successful branding might reduce the customers perceived risk

Table 12: Case Study Summary Assessment of Brand Management related Characteristics
562 563

cf. Wiedmann/Ludewig 2011: 85 translation by the author cf. ibid.: 85 translation by the author

169

Case Study Summary Assessment of Customer Relationship Management related Characteristics Strengths & Opportunities
Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies Customer relationship management represents a core element of any differentiation approach Capitalization on prevailing customer relationships Benefits related to value added or collaborative exchange Low customer relationship related risk involved Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies Customer relationship management represents a core element of any differentiation approach Capitalization on prevailing customer relationships New customer relationships might evolve Benefits related to value added or collaborative exchange More collaborative practices might be valued by the customers New positive customer experiences can be created Mature customer relationships might be set back in the life cycle creating opportunities to reshape the relationships

Weaknesses, Challenges & Threats

Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies Possible changes of the transaction style might be regarded as baseless and therefore eyed with skepticism Customers might adhere to transactional change Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies A more value added or collaborative exchange is needed and has to be implemented and managed effectively Risk to existing relationships and reputation especially if expected value proposition is not delivered

Table 13: Case Study Summary Assessment of Customer Relationship Management related Characteristics 170

Case Study Summary Assessment of Pricing related Characteristics Strengths & Opportunities
Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies Effective differentiation enables to lower customer price sensitivity and creates opportunities related to pricing Simplicity of pricing approaches Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies Effective differentiation enables to lower customer price sensitivity and creates opportunities related to pricing Value pricing enabled Over-pricing enabled

Weaknesses, Challenges & Threats

Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies No positive effect on customer price sensitivity attained Pricing basically on commodity value might persist Risk of under-pricing still present Danger of a price cutting spiral still present Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies More complex pricing approaches needed Value creation systematics of the downstream value system have to be known in order to enable value pricing Value pricing might not be accepted in a mainly commoditized industry environment Pricing related trade-offs with existing product line Absorption of value-based price premium by the customers

Table 14: Case Study Summary Assessment of Pricing related Characteristics 171

7 Summarizing Conclusions and Recommendations

7.1 Answers to the Research Questions stated
The following summarizing conclusions should answer Research Question 1 of this masters thesis: Which of the Michael Porters generic competitive strategies564 or elements of them can be regarded as feasible options for a cement company active in a mature industry environment like the European Union?

The Feasibility of an Overall Cost Leadership Strategy in the Cement Sector

Referring to the competitive and structural characteristics of the cement sector in mature markets like the European Union, pursuing an overall cost leadership strategy represents a viable choice. Especially the relevance of the cost drivers economies of scale, location, capacity utilization and integration can be accentuated in this perspective. The effective control of these cost drivers constitutes a sustainable source of competitive cost advantage.565 The diagnosis is furthermore substantiated by the prevailing dominance of the factor price in the corresponding frequently commoditized building material markets. The potential to gain significant relative cost advantage vis-a-vis the competitors can be seen to be strongly subjected to regional factors. It has to be limited that these findings are referring to the almost exclusively prevailing production and marketing of common cements by the means of more or less standardized technology. Furthermore, these conclusions drawn remain valid and only valid as long as the industry structures identified and the economics of the sector are not altered remarkably. They have to be re-assessed as soon as relevant technological change is emerging.

564 565

cf. Porter 2004a: 34 ff cf. Porter 2004b: 112 ff

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The Feasibility of Focus Strategies in the Cement Sector

Focus strategies exhibit only a moderate overall potential for cement companies active in a mature market. The corresponding firms are currently almost exclusively broad-scoped producers focusing on the production and marketing of standardized common cements. The options available for and incentives involved in tailoring the cement sector specific value chains to selected segments are limited. Economies of scale, capacity utilization issues and the incentives related to the exploitation of other interrelationships between the segments are most likely exerting dominant influence limiting the intentions to pursue a focus strategy. The compromises broad scoped cement producers are facing are insignificant. Adhering to the prevailing industry standards of common cements yields a number of benefits but remarkably restrains the feasibility of and incentives related to segment specific business approaches. Focus strategies may represent a more feasible choice for cement derived/containing products or for the special case that innovative, value added products are developed in the course of a differentiation strategy (Differentiation Focus Strategy566).

The Feasibility of Differentiation Strategies in the Cement Sector

The feasibility of differentiation approaches - under the framework conditions defined for the case study and reflecting on the industry structure identitfied - can basically be supported. The related second and third research question are answered in detail in the course of the following analysis of the case study outlined in chapter 6.4.2.

Research Question 2 Is there a feasible differentation strategy for a cement company active in a mature industry environment like the European Union which is likely to lead to a sustainable competitive advantage? Research Question 3

What are the implications of pursuing a differentiation strategy for marketing strategy and management in the cement sector?
566

cf. Porter 2004b: 12

173

Summarizing the findings of this masters thesis, the following conclusions can be drawn.

In the cement sector, differentiation strategies can basically be regarded as a viable option for companies active in mature markets. Nevertheless, effective and especially profitable differentiation represents a challenging task in a strongly commoditized industry environment. Both differentiation approaches presented in the course of the case study exhibit the potential to provide relevant levels of uniqueness. Furthermore, the creation of a differentiation strategy related competitive advantage leading to superior performance seems possible in both cases. Case 1 of the case study differentiation based on a product range of common cements/technologies is defined as a general, business activity centered differentiation approach. The case specific potential to create uniqueness relevant for the customer can be regarded as significant but also as remarkably lower compared to the case 2 presented. The overall potential of the approach to constitute a competitive advantage leading to superior profitability is therefore identified to be moderate. The resource/capability requirements as well as the complexity and risk involved are on a medium level. The attainable level of strategic sustainability is limited. An effective formation of barriers towards imitation and the creation of switching costs seem problematic. The complexity of the approach specific change agenda to be covered is considerable but manageable. Summarizing the conclusions drawn, case 1 can be regarded as a medium potential medium risk approach. Case 2 of the case study differentiation based on a product range of other than common cements/technologies represents a comprehensive differentiation approach including attribute based differentiation of the product core. The potentials to create uniqueness relevant for the customer are therefore considerable. Due to the enhanced feasibility to effectively create barriers towards imitation and the increased likelihood to involve switching costs, the potential degree of strategic sustainability is high. Summarizing these conclusions, the approach presented basically exhibits a remarkable potential to contribute towards a sustainable differentiation advantage. The resources/capabilities required as well as the risk/uncertainty involved can be regarded as considerable. Development and execution of the strategy has to be based on a high level of innovation and change management capability of the implementing firm. The availability of a substantial appropriability regime and the power of endurance in 174

sustaining the strategy can be seen as indispensable preconditions. There is the increased likelihood that the approach leads to the requirement of developing a distinct new business model. The incentives in place might therefore be higher for companies able to capitalize on scale economies, to spread the remarkable cost and mitigate the considerable risk involved effectively. Comprehensive assessments of benefits, cost and risk involved as well as a realistic assessment of proprietary resources and capabilities are an absolute must. The possible impacts on industry structure and competition have to be accurately analyzed and managed. Summarizing the conclusions drawn, case 2 can be regarded as a high potential high risk approach. Any comprehensive differentiation strategy pursued leads to a multitude of implications for marketing strategy and management. The corresponding issues are analyzed in chapter 6.4 and summarized in chapter 6.4.6 of this masters thesis. There is an additional important precondition especially related to successfully implementing any differentiation approach in the cement industry which was not explicitly highlighted so far but which should be added at this point. It seems unlikely that differentiation approaches yield success without overcoming the prevailing commodity mind-set in the sector. This considerable change of perception has not only to encompass the cement producer itself but furthermore has to be effectively promoted and implemented throughout the value system the implementing firm is embedded to. An important topic especially but not exclusively relating to the issue of differentiation in the cement sector is the risk of a stuck in the middle567 situation. Once leaving the well-trodden paths of commodity-thinking, it can be challenging for a company accustomed to think in costs to start thinking in value. It might be too easy to fall back into old patterns of thought and behavior. Any sustained strategy approach might exhibit the potential to be successful - a vaguely defined combination of two intrinsically different strategy approaches most likely will not. It finally has to be noted that any differentiation strategy pursued exerts impacts on competition and industry structure. Due to limitations in scope, the corresponding implications have only been slightly touched. Nevertheless, the overarching importance of this issue has to be stressed. .

567

cf. Porter 2004a: 41

175

Hypothesis

Michael Porters work represents a viable basis for strategic analysis in the cement industry. Industry characteristics and prevailing business practices in the cement sector of mature markets, like the European Union common market, can be explained by the corresponding theories postulated. As a consequence, the feasibility to utilize Michael Porters frameworks, concepts and tools, in order to investigate different strategic scenarios, is provided.

The hypothesis drawn up can be supported. The work of Michael Porter offers a comprehensive framework for strategic analysis within the cement sector. A multitude of elements identified by Porter are reflected in the business reality of the cement industry. Theory was successfully tested related to its applicability and transferability especially focusing on the generic competitive strategies.568 As a consequence, it can be assumed that the principles remain valid and can be successfully applied in order to adjust to future challenges and developments in the industry.

7.2 Porters Generic Competitive Strategies Solutions for the Competitive Challenges in mature Cement Markets?
In the industry analysis of chapter 5, a number of competitive challenges formulated in competitive terms referring to Porter for companies active in the mature market of the European Union has been identified.

Developing strategies taking into account the industry specific characteristics related to a low threat of entry Developing strategies capable to meet the challenges related to the high and increasing supplier bargaining power Developing strategies capable to manage the risk related to substitution Developing strategies capable to meet the challenges related to increasing buyer bargaining power

568

cf. Porter 2004a: 34

176

Developing corresponding strategies additionally reflecting the local/regional character of the industry Developing corresponding strategies additionally incurring positive or at least acceptable impacts on competition, industry attractiveness and structure

The following Table 15 briefly summarizes tendencies, if and to which extend the strategy approaches investigated might be able to provide the potential to meet these challenges identified.

177

Potentials of different Generic Competitive Strategies569 to meet the Challenges identified for a Cement Company active in a Mature Market
Competitive Challenge identified (in competitive Terms referring to Porter) Overall Cost Leadership Strategies Focus Strategies (Product Scope of Common Cements) Differentiation Strategies Case 1: Differentiation Approach based on a Product Range of Common Cements/Technologies Case 2: Differentiation Approach based on a Product Range of other than Common Cements/Technologies

Keeping the Threat of Entry low Controlling the Bargaining Power of Suppliers

Should remain low No improvement

Should remain low No improvement

Should remain low No improvement

It depends

It depends

Reducing the Threat of Substitutes (especially of Substitutes originating outside the Sector) Controlling the Bargaining Power of Customers
Low Medium Medium Medium Medium

Increased Potential

Good potential

Increased Potential

Impact on Competition, Industry Attractiveness and Structure

Neutral

It depends Neutral

It depends

Table 15: Potentials of different Generic Competitive Strategies570

569 570

cf. Porter 2004a: 34 cf. ibid.: 34

178

First of all, it can be stated that there is no distinct generic competitive strategy571 able to meet all the challenges identified by nature. The feasibility of a strategy approach to be pursued by a company is depending on many factors of the specific micro- and macro-environment and the competitive setting. The appropriate strategy for a company should furthermore be best suited to the firms strengths and least replicable by the competitors.572 For a more detailed analysis the knowledge of a multitude of additional case specific parameters would be necessary. The rating It depends is mainly attributable to the unpredictable characteristics and impacts of upcoming or future technological change. Concerning this issue, it can at least be assumed that the structural change induced by forces like technological change could lead to temporary disequilibria which exhibit certain potentials to gain competitive advantage in the sector.573 Even though the characteristics of future change are unknown, the following general test proposed by Porter574 indicates framework conditions under which a sustainable competitive advantage is realized.

The technological change itself lowers cost or enhances differentiation and the firms technological lead is sustainable. The technological change shifts cost or uniqueness drivers in favour of a firm. Pioneering the technological change translates into a first-mover advantage besides those inherent in the technology itself. The technological change improves overall industry structure.

The elements highlighted above especially have to be considered if a strategy to be pursued is capitalizing on technological change. The test may as well be conducted in an inverse way if the erosive impact of emerging technological change on an existing competitive advantage or on general industry attractiveness should be tested.

571 572

cf. Porter 2004a: 34 cf. ibid.: 44 573 cf. Grant 2010: 211 574 cf. Porter 2004b: 171 f

179

8 Limitations and Next Steps

8.1 Limitations
A masters thesis which tries to cover wide-scoped topics in the fields of strategy and marketing is, needless to say, exposed to a number of limitations. The intention to provide a rather broad overview compromises the feasibility to go into details. A couple of corresponding limitations has already been noted in several chapters of this masters thesis. The strategic work of Michael Porter was chosen as a starting point and is therefore strongly reflected. The multitude of general strategy concepts, frameworks and tools available in the prevailing research literature enforces a limitation in order to control the complexity involved in the research conducted. The goal of this thesis inter alia is to highlight strategic marketing related issues of general importance with an additional focus on mature cement markets. Thus, characteristics of other specific markets, like for example emerging markets, are not reflected. Distinctive structural company settings for instance the characteristics of local or multinational firms and their influence on marketing strategy have only been slightly touched. Furthermore, it would of course be desirable to additionally shed some light on the findings obtained from a quantitative point of view. Due to the limitations in scope, an issue of immense importance has to a large degree been neglected: The topic of the companys distinct capabilities and resources. Relevant literature focusing on the resource-based theory which might be utilized as a starting point in this perspective is for example provided by Peteraf575 or Wernerfelt576.

575 576

cf. Peteraf 1993 cf. Wernerfelt 1984

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8.2 Next Steps

Basically, feasible next steps can be classified into two main categories.

Category 1: Research agendas relating to the findings of this masters thesis

This masters thesis presents a multitude of qualitative findings. Many of them would justify further related research. Qualitative and especially quantitative approaches appear appropriate in order to investigate specific elements and aspects identified in depth. In this perspective, some exemplary subject-areas of general interest could be:

A more detailed analysis of value chain related issues An emphasis on the relevance and dynamics of cost drivers or drivers of uniqueness in the industry A detailed analysis of technological change and competitive advantage in the sector The buyer behavior dynamics in the field of cement procurement The issue of value creation in the sector utilizing a quantitative approach Etcetera

Category 2: Research agendas relating to the scope of this masters thesis

The seminal work of Michael Porter offers a multitude of starting points for further research. Some examples in this perspective could be:

The issue of interrelationships The issues of co-operation and integration A detailed analysis of the role of complementary/substitute products The issue of diversification Specific strategic implications for an industry in the maturity stage Etcetera

As a food-for-thought, two more brief introductory chapters, addressing some of these issues not highlighted in the main part of this masters thesis, are briefly outlined thereafter. 181

8.3 Outlook 1 Implications for an Industry in the Maturity Stage

The cement sector of the European Union is identified as a mature industry. Enhancing the findings related to competitive advantage and strategies, corresponding implications of industry maturity might be investigated in depth in the course of further research. The corresponding findings may be of major interest for the sector. This chapter should provide a brief introduction to this issue. Some of the elements presented below have already been reflected or touched in different chapters of this masters thesis. According to Porter, an industry transition to maturity can inter alia be characterized by the following developments:577 Slowing growth means more competition for market share Increasing sales to experienced repeat buyers Competition often shifts toward greater emphasis on costs and services Capacity addition bears the risk of overcapacity New product and applications are harder to come by (risk and costs involved in product change increase) International competition increases (often accompanied by product standardization and emphasis on cost) Industry profits might be affected negatively Dealers margins fall, but their power increases In the maturity stage of an industry, special emphasis should be put on the importance of cost analysis578 and financial consciousness579. Process innovations in order to facilitate lowcost manufacturing are likely to gain in importance. An increasing scope of purchases can appear alongside the desire to increase incremental sales to existing customers by supplying peripheral equipment and services or product line enhancements.580 It is noted that the acquisition of cheap assets like distressed companies or liquidated assets available in the maturity phase may contribute towards creation of a low-cost position or an improvement of

577 578

cf. Porter 2004a: 239 ff cf. ibid.: 241 579 cf. ibid.: 243 580 cf. ibid.: 243

182

margins.581 Buyer selection is noted as a viable strategy in the sense of identifying and possible lock-in buyers with limited bargaining power or limited will to exert bargaining power.582 Evolution stage related changes of the cost curves have to be obeyed.583 International competition may play a more important role in the maturity phase. For the cement case, this phenomenon is strongly dampened by the sector specific economics. Porter identifies the following common strategic pitfalls for industries in transition to maturity:584 Inaccurate company self-perceptions and perception of the industry Caught in the middle The cash trap (inability to recoup investments by future cash flows) Giving up market share too easily in favour of short-run profits Resentment and irrational reaction to price competition (we will not compete on price) Resentment and irrational reaction to changes in industry practices (they are hurting the industry) Clinging to higher quality as an excuse for not meeting aggressive pricing and marketing moves of competitors Overhanging excess capacity (utilization of excess capacity in a way undermining the firms strategy) Porter lists common organizational implications for industries in the maturity stage:585 Adaption in the field of control and motivational systems More attention to costs, customer service and true marketing (as opposed to selling) Less creativity and more attention to detail and pragmatism Tighter budgeting, stricter control and new performance based incentive systems More co-ordination across functions Scaled down expectations for financial performance More discipline from the organization Scaled-down expectations for advancement More attention on the human dimension Recentralization (in order to facilitate control and co-ordination)

581 582

cf. Porter 2004a: 245 cf. ibid.: 245 583 cf. ibid.: 245 584 cf. ibid.: 247 ff 585 cf. ibid.: 249 ff

183

8.4 Outlook 2 The Issues of Co-operation & Integration

The issues of co-operation and especially integration play an important role in the cement industry. As already outlined, cement producers are frequently integrated forwards as well as backwards. Especially concerning the issue of differentiation, intensifying co-operation and integration might represent viable or even inevitable options. Unfortunately, there is only little literature on the cement sector specific implications of these strategic approaches especially in the course of a differentiation strategy available. Vertical integration in the specific case between cement and concrete business is for example comprehensively investigated in a paper of Hortasu & Syverson.586 Inter alia, they discover that no significant foreclosure effects are occurring in the course of integration. Generalizing results are nevertheless difficult to be obtained, and vertical integration seems subjected to many different considerations. In the case of a forward integration towards readymix concrete production, it might be easier to rely on an acquisition approach in order to avoid the loss of important relationship ties of the locally rooted concrete producers.587 The basic suitability of forward integration, in order to improve the ability to differentiate, is noted by Porter in course of his strategic analysis of vertical integration.588 In a wider perspective of the issue of co-operation, especially referring to the topics of innovation and differentiation, concepts like collaborative advantage589 or even co-opetition590 should at least be briefly mentioned at this point. The economic aspects related to spatial competition and vertical integration in the cement/concrete sector are discussed controversially within the prevailing research literature.591

586 587

cf. Hortasu/Syverson 2007 cf. Syverson 2008 588 cf. Porter 2004a: 315 589 cf. Kanter 1994 590 cf. Brandenburger/Nalebuff 1996 591 cf. Johnson/Parkman 1983, Johnson/Parkman 1987, McBride 1983

184

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