1.1.

1 Global Building Materials Industry

The building materials market includes all manufacturers of cement, aggregates, sand, gravel, concrete and bricks and generated total revenues of $539.3 billion in 2009. Overall, the cement and brick production are seen as the most lucrative markets. As depicted in Figure 1, brick sales accounted for $150.3 billion of the total market revenues, equivalent to a share of 27.9% of the Building Materials Industry. According to the analysis conducted by Datamonitor, the cement segment contributed revenues of $147.2 billion in 2009, which is equivalent to a market share of 27.3%. These two revenue favorable segments are closely followed by aggregates and sand & gravel with revenues of $139.6 billion and $93.8 billion respectively.

Figure 1: Market segmentation in 2009 Source: Datamonitor (see Industry Profile of Global Construction Materials, March 2010, p. 8)

The Building Materials Industry showed attractive growth rates over the last five years, which is illustrated by a compound annual growth rate (CAGR) of 5.0% from 2005-2009. This growth was mainly driven by strong construction activities and continuous industrialization due to the growing population, increasing urbanization and the need for further infrastructure in regions such as China and India. Growth in the building industry is closely connected to construction activities. The financial crisis had enormous negative impacts on the activities in the Building Materials Industry, especially in developed markets. Without the necessary financial support, many construction projects are simply not feasible. The economic imbalance is reflected by the poor growth rate in the Building Materials Industry of 1.8% in 2009, shown in Table 1. Although the production and consumption of building materials fell sharply in 2009, the first half of 2010 already showed a surge in production again. These recent growth figures can be attributed to the strong rebound in demand for construction activities in emerging markets, the short-term effects of government stimulus packages as well as the restocking of inventories1. If we believe in the report of Global Industry Analysts Inc. (January 2011, p. 1), growth in the world market for building materials recovers to reach $706.7 billion by the year 2015 (+31%).
Year 2005 2006 2007 2008 2009 CAGR 05-09 Market value in billion $ 444.1 470.2 502.8 529.7 539.3 Growth 5.9% 6.9% 5.4% 1.8% 5.0%

Table 1: Market value/growth rate of the Building Materials Industry from 2005-2009 Source: Datamonitor (see Industry Profile of Global Construction Materials, March 2010, p. 9)

Business Monitor International Ltd (2011). Algeria Infrastructure Report Q1 2011 Building Materials.

Since Holcim Ltd has its business activities mainly in the cement and aggregate segment, the following sequence will deal more precisely on these markets. According to J.P. Morgan (see Europe Equity Research, 19. May 2010, p. 8) the cement market is seen as the most attractive one due to high operating margins and high returns on invested capital. However, not all cement markets across the globe are equally attractive. Over the long run, cement consumption tends to be bigger and the supply much more attractive in emerging markets than in developed countries. This has to do with a clear link between the growth domestic product (GDP) and the cement consumption. As GDP per head increases above $3000, cement consumption increases substantially. Once the GDP per head exceeds $25000, a cap in terms of volume consumed per capita will be reached. From then on, the demand shifts away from construction and expansion to repair and maintenance, where much smaller volumes of cement are needed. Besides, the largest 20 cement-consuming nations consumed 76% of all cement consumed globally in 2008. By far the largest consumer was China, consuming 45%, followed by India, USA and Russia with 5.9%, 3.1% and 2.0%, respectively2. Between 1985 and 2008, the global cement consumption enhanced by 6.6% every year, mainly as a result of the emergent markets in Asia. Whereas Asia consumed 35% of the total cement production in 1985, this figure had almost doubled to 67.5% in 2008. In contrast, Western Europe and North America showed significant declines in terms of cement consumption from 23.5% to 7.9% and from 12.1% to 3.8% in the same period. Figure 2 shows the cement consumption CAGR by region from 1985-2008 and emphasizes the attractiveness of emergent markets, such as Asia, Africa, Eastern Europe, Middle East and Latin America, depicting growth rates of more than 3.5%. In the wake of the financial crisis, the consumption of cement has been reduced. Due to the ongoing production of cement, the excess supply resulted in lower prices and consequently reduced sales revenue for companies.

Figure 2: Cement consumption - CAGR by region from 1985-2008 Source: J.P. Morgan (see Europe Equity Research, 19. May 2010, p. 40)

In contrast to the cement market, the aggregate market focuses on more mature markets since the demand for aggregates increases in-line with a markets development and maturity. According to Heidelberg Cement, infrastructure projects use more than 10 times as much of aggregates that residential projects require which emphasizes the intention of the big players to participate and invest in more mature markets in terms of aggregates. Additionally, it is also less risky to be active in mature markets since regulations, environmental and labor standards are much more regulated. By now, aggregates are mainly attractive where it is a scarce resource. This is the case for the US, the UK and Australia since regional laws often restrict new quarry development. It is therefore not surprising that Asia-Pacific, North America and Western Europe accounted for 82% of the total world aggregates
2

J.P. Morgan (05/2010). Europe Equity Research European Building Materials.

demand in 20073. Also, the costs of transporting aggregates double the required sales price if it is trucked 20 miles rather than used next to the quarry4. Hence, proximity to the market has a favorable effect on prices and thus often provides a competitive advantage. Nevertheless, over the long run emerging markets are seen as the most attractive markets in terms of aggregates supply since those markets are on the path from emerging to more developed markets due to what the numbers of infrastructure projects will be growing. Consequently, it is favorable for companies to seek and secure long term and attractively priced quarries in emerging markets.

1.1.2 PESTEL Analysis

Nowadays, many factors in the macro-environment have an effect on the overall managerial behavior. The PESTEL analysis is a framework helping to identify macroeconomic factors that may affect the whole industry, a certain market or the company. It is a useful tool to understand factors that may have an influence on the industry growth or decline, attractiveness and the direction of a company5. The acronym PESTEL stands for six different categories - political, economic, socio-cultural, technological, environmental and legal future. The findings of Table 2 will be explained in more detail in the following sequence. External Factor
Political

Findings
Governmental stimulus programs Globalization State capitalism Low interest rates Growing fear of inflation in emerging markets Strong Swiss France Recovering GDP rates Improvement of global poverty level Ongoing urbanization Low social governmental spending Multi-functional materials Improvements in terms of waste recycle/reduction techniques Enhancement of durability performance High carbon dioxide emission Greater demand of cement than emissions are falling Emerging market growth Internationalization of Business Growing awareness of greenhouse gases Innumerable/different laws in emerging countries

Effect on industry
Favorable Favorable Compounding Favorable Compounding Compounding Favorable Favorable Favorable Compounding Favorable Favorable Favorable Compounding Compounding Compounding Compounding Compounding Compounding

Economic

Socio-Cultural

Technological

Environmental

Legal

Table 2: PESTEL analysis of Holcim Ltd at a glance Source: Own design

3 4

J.P. Morgan (05/2010). Europe Equity Research European Building Materials. J.P. Morgan (05/2010). Europe Equity Research European Building Materials. 5 Hollensen, S. (2004). Global Marketing - A Decision-oriented Approach (Fourth Edition), p. 247

1.1.2.1 Political Future

Political future refers to governmental policies, actions and positions and to the degree of intervention in the economy. Such governmental interventions may have significant effects on the cost structure, revenues and the market behavior of companies within an industry. The political influence had proven to be positive with regards to the governmental stimulus programs in the wake of the financial crisis and provided a needed boost for the tumbling building materials sector. According to J.P. Morgan (see Europe Equity Research, 19. May 2010, p. 36) these packages were certainly of a large enough scale in many countries to have a significant impact on the economy. Whereas in developed markets infrastructure projects accounted for approximately 15% of the stimulus packages, developing markets infrastructure projects accounted for roughly 50%. The detailed information on global stimulus packages can be examined in Appendix 1. There is an ongoing trend towards further globalization in the industry, though, political factors are and will continue to affect the industry. Especially in emerging markets, where a lot of construction activities are at work and where the overall prosperity is increasing, building and infrastructure projects are increasing. However, it has to be stated that BRIC-states (Brazil, Russia, India and China) are not following the western liberal model for self-development but instead are using the so-called state capitalism, where a system of economic management gives a prominent role to the state6. This shows that governments in such countries have higher and sometimes unpredictable influences putting a certain pressure on the Building Materials Industry and especially on foreign companies. Such unpredictable political situations have to be taken into account especially in terms of expansions.

1.1.2.2 Economic Future

Economic development is influenced by factors such as interest rates, economic growth measured by real GDP, inflation and exchange rates. Changes of such parameters can have major impacts on a firm's strategy. It is to be noted that the overall health of the global economy and the level of demand for building materials are directly connected. Nevertheless, developed regions like North America and Europe bear the brunt of the slowdown while developing countries, given their relatively higher national savings at both the government and household levels, witnessed a relatively cushioned impact7. The monetary policy in most mature economies is expected to remain supportive by continuing their current, low interest rate strategy. However, while most countries now approach growth potential again, these governmental supporting activities have to be reviewed on a constant basis. This can be explained by the fact that strong investor appetite might cause upside risks to emerging market. However, when talking about the price level, the International Monetary Fund forecasts stable inflation rates in most countries but companies should remain alert toward emerging markets. While inflation rates in developed markets are below consensus, they are above in most emerging markets8. Furthermore, there is much discussion about exchange rates. Since the start of the financial crisis, the Swiss Franc appreciated substantially against the Euro and Dollar. Despite the best efforts in research of
6 7

Office of National Intelligence, US Government (11/2008). Global Trends 2025 A transformed World. Global Industry Analysts (01/2011). Manufacturing & Construction Report - World Building Materials Market to Reach US$706.7. Goldman Sachs Global Economics (12/2010). Global Economics Weekly. Issue Nr. 10/43.

economists, there is no evidence that exchange rate volatility does have significant impacts on international trade volumes9, which is clearly in favor of the highly diversified business activities of Holcim Ltd. However, the strong Swiss Franc poses translation exposures which arise when financial statements of foreign subsidiaries must be restated in the parents reporting to prepare consolidated financial statements10. Finally and referring to Goldman Sachs analysts view (see Commodities and Strategy Research, December 2010, p. 1) the outlook in terms of the global GDP looks relatively optimistic. According to their statements, the combination of recurrent growth signs, especially in emerging markets, along with moderate inflation rates reflects significant spare capacity at a global level. Having had a negative GDP of -0.6% in 2009, which in turn was followed by an increase of 4.9% in 2010, Goldman Sachs expects real global GDP to rise by 4.6% in 2011 and by 4.8% in 2012 and implies a positive economic future with regards to the Building Materials Industry. The most attractive growth potentials are to be found in the BRIC states with GDP growth forecasts between 4.3% and 9.5% in 2012.

1.1.2.3 Socio-Cultural Future

Changes in social trends may have an impact on the demand of a companys product. The social future is thus determined by health, safety and the overall quality of life. If one looks at the global poverty level published by the United Nations (see Report on the World Social Situation 2010) clear signs of improvements can be discovered. Whereas in 1981 1.9 billion people were living with less than $1.25 a day, this figure was reduced to 1.4 billion people in 2005. Additionally, the proportion of people living in extreme poverty was down by half to 26% in 2005. Obviously, such great enhancements of poverty levels in countries are largely connected to growth levels and market attractiveness. Countries or regions that have experienced strong growth during the last two decades have managed to reduce poverty levels, particularly in urban areas. Thus, it is not surprising that countries such as India, China and East Asia have contributed to this success story in a positive way. Yet, there are also countries in the world that could not manage to reduce the poverty level such as Sub-Saharan Africa, Latin America, the Middle East, Northern Africa as well as Central Asia11, having their roots in the primary sector. Nevertheless, due to the ongoing growth and economic upswing in many poor regions, more and more people are moving into urban areas. Whereas 42.5% of the world population had been living in urban regions in 1989, approximately 50% are living near cities in 2009. Looking at China as the most populous country, this trend is expected to continue: The urban population will be growing to 850 million in 2015 (430 million in 2001) and the number of cities with over 100000 people will reach the level of over 1000 by the year 2015 (630 in 2001)12. Despite the good future prospects especially in emerging markets for the Building Materials Industry, it has also to be stated that the report on the world social situation in 2010 shows that in several developing countries the level of social spendings remained below levels attained in the 1970s. This is characterized by deteriorated infrastructures in areas such as health and education. Since improvements
9

Eiteman, D. K., Stonehill, A., & Moffet, M. H. (2010). Multinational Business Finance Eiteman, D. K., Stonehill, A., & Moffet, M. H. (2010). Multinational Business Finance, p. 344 United Nations (2010). Rethinking Poverty - Report on the World Social Situation 2010. http://www.worldbank.org/

10 11 12

in health are positively connected to the economic development, public health services should be a key aspect of governments. Since no governmental efforts have been undertaken in this respect, there are no construction projects to be undertaken and thus impose a negative impact for the Building Materials Industry.

1.1.2.4 Technological Future

Technological factors include innovation from research and development, advances in automation, and the rate of technological advances. New technologies can reduce costs or lead to further innovation due to improved quality aspects or new products. By looking at the Building Materials Industry one can see that the majority of materials such as cement and bricks cannot be differentiated effectively. However, the production costs remain high for a majority of construction materials, especially for cement, due to the high energy requirement to produce the high-volume product. Thus, the Building Materials Industry is subject to pressure from environmental organizations to improve processes in order to reduce the dioxide emissions in the production process. Consequently, the industry made great efforts to test and use new material combinations as substitutes for conventional raw materials. Since the Construction Materials Industry is highly cost competitive, manufacturers are engaged in developing multi-functional materials and seek for efficient waste recycle and reduction techniques13. The latter is extremely important for companies within the Building Materials Industry, where several million tons of alternate fuels and raw materials are needed. In terms of product innovation, companies gear to enhance the durability performance of the products which reduces the maintenance and repair costs of construction works. Industry leaders thus state that even slight alterations in the production process will entail largescale measures to reduce the environmental footprint and costs. Nevertheless, further research approaches need to be undertaken in order to optimize the commercial viability of new substitutes, in order not to lose reputation or even market shares in this volume and cost competitive industry14.

1.1.2.5 Environmental Future

Environmental factors include issues such as the level of pollution created by the product and recycling considerations as well as possible environmental legislative changes. Especially cement producers like to point out that their product is the most widely used material after water; unfortunately, it is also one of the most polluting ones. As well as for the heating-process and the chemical reaction of the production process, large amounts of carbon dioxide exhaust gases are produced which in turn negatively contributes to the global warming. The industry players themselves admit that the cement-production accounts for approximately 5% of the worlds emissions of greenhouse gases. This is twice the amount attributed to aviation. Consequently, the biggest players within the industry have all pledged to cut the emissions for each ton of cement they produce. Holcim Ltd could already reduce the emissions per ton by 16% in 2006 compared to 199015. Even though environmental standards and energy-efficient ratings have an influence on the choice of the products, the emission reductions have their limits. Firstly, cement-producers have been continually improving the carbon dioxide blow out for over a century not
13 14 15

GALE CENAGAGE Learning (11/2010). Strategic Developments in Construction Materials Industry. GALE CENAGAGE Learning (11/2010). Strategic Developments in Construction Materials Industry. The Economist (12/2007). Concrete Proposals Needed.

leaving large scope for further reductions and secondly, firms do not see ways to alter the basic chemistry of cement. The difficulty of the environmental issue is compounded by the fact that the demand for cement is growing faster than the emissions per ton are falling. This obviously leads to an overall increase in emissions. Bearing in mind that the building industry is to a large extent present in emerging markets such as India and China, the environmental aspect will become a serious issue in the future. By now, China is the third largest consumer of coal and oil in the world. Due to the fact that much of the production and the equipment for the production of building materials is both inefficient and highly polluting, China is unfortunately the second largest causer of greenhouse gas emissions16.

1.1.2.6 Legal Future

Legal factors are related to the legal environment in which a company operates. It can be argued that there are huge difficulties when companies of the Building Materials Industry are moving outside their own national playground since every country has its own planning laws, building materials laws, and building regulations and poses a real challenge for multinational companies. Thus, many cross-border building projects are carried out as joint ventures until the company has acquired the necessary knowledge and experience in the new jurisdictions of the corresponding market/region17. Furthermore, legal factors are gaining on importance due to the fact of the growing awareness and sensitivity towards greenhouse gases. Especially in developed economies, for example the European Union, governments restrict emissions from cement factories and further jurisdictions are likely to follow suit18. More than that in countries such as Australia, US and the UK, laws often restrict new quarry development which clearly complicates the market entry/enlargement. As for emerging countries and especially for China, such restrictions respectively requirements in terms of environmental matters are not the greatest worry for building materials companies. However, companies may face several legal obstacles as a result of innumerable laws, which are constantly newly enacted, and because many contractual obligations are not followed as agreed upon. The effects of such risks, which arise in the normal course of business, are not foreseeable but have to be taken into account somehow in the valuation of a project.

1.1.3 Porters Five Forces

An industry is seen as a group of firms producing products that are close substitutes. In the course of competition, these firms influence one another19. The Five Forces of Competition, introduced by Michael Porter in 1980, is used to analyze the competitive structure of an industry. According to Porter, the state of competition depends upon five competitive forces. Those are competitors, suppliers, buyers, substitutes and new entrants. Together, they determine the long-run profit potential of an industry and shall be used to define the position of Holcim Ltd20. The particular points of Table 3 will be explained in more detail in the following sequence.

16 17 18 19 20

http://www.worldbank.org/ http://www.qfinance.com/sector-profiles/construction-and-building-materials The Economist (12/2007). Concrete Proposals. Hitt, M., Ireland, D., Hoskisson, R. (2005). Strategic Management: Competitiveness and Globalization, p. 52 Hollensen, S. (2004). Global Marketing - A Decision-oriented Approach (Fourth Edition), p. 102

Competitive Force

Findings
High sunk costs Special logistical handling required High volume production industry R&D/knowledge intense industry Cyclical industry Low product diversification Necessary proximity to markets Energy intense industry Special machinery needed Special logistical handling required A lot of small buyers Low switching costs Cement/aggregates basic material for Building Materials Industry Legal regulations Substitutes to costly/no expertise

Overall threat

New entrants

Low

Rivalry

High

Bargaining power of suppliers Bargaining power of buyers

High Low-medium

Substitutes

Low

Table 3: The Five Forces of Competition of Holcim Ltd at a glance Source: Own design

1.1.3.1 Threat of New Entrants

When examining the Building Materials Industry more closely, one can elaborate that it is an energy and capital intensive industry, especially when setting up or acquiring new production plants. These high sunk costs cannot be recovered if the firm would close down or exit the market and thus act as a barrier to entry for competitors. Besides, since cement-products are heavy and moisture-sensitive, it requires a special and extremely expensive logistical handling. Consequently, market leaders organizational structure is decentralized and subsidies are maintained all over the world in order to reduce transportation costs and to encounter the necessary proximity to the market. Needless to say that a company needs to have a sound capital base in order to gain access to quarries and to pursue an expansion strategy. Furthermore, Holcim Ltd as one of the big industry players is able to make use of economies of scale as entry barriers, where the cost of manufacturing each unit declines when the quantity during a given period increases21. Especially in terms of costs, it is uneconomical to produce cement products in low volumes. According to the magazine International Cement Review (November 2008), it is estimated that a 5 million tons cement plant can produce cement at a much lower cost (around $25/tonne) than a smaller one ($43/tonne). Since the Building Materials Industry has a cyclical nature, the recent economic downturn along with the reduction in growth rates might discourage new entrants as well. Lastly, the Building Materials Industry is under a constant pressure to reduce carbon dioxide emissions due to what cost and knowledge intense R&D efforts are vital.

1.1.3.2 Rivalry among Competing Firms

Companies within the Building Materials Industry are exposed to cyclical, seasonal and sometimes unpredictable economic conditions as experienced over the last four years. In addition, the products and strategic orientation of market players are similar to each other, since they have little opportunities for significant diversifications. Consequently, competitors must compete for market revenues based on
21

Hitt, M., Ireland, D., Hoskisson, R. (2005). Strategic Management: Competitiveness and Globalization, p. 54

prices22. This also explains partially the ongoing R&D activities within the industry in search of high quality and eco-efficient products due to which production costs might be reduced. The economic slowdown over the last four years has contributed negatively to this price war situation as well and even intensified the rivalry in the market. Besides, when a company enters a market by acquisitions of quarries respectively manufacturing facilities, sunk costs are high. Since the production of cement is done in large volumes, companies may be confronted with an overproduction problematic. As a result, prices in the markets would be falling and rivalry increases even more. As has been mentioned before, the global cement consumption in Asia accounted for 67.5% in 2008 and the twenty largest cement consuming nations consumed the 76% of cement. This has also a great impact on the rivalry between competing firms since proximity to the market is central. As a result, prices for quarries and factory locations in the top 20 locations get increasingly competitive. According to J.P. Morgan (see Europe Equity Research, 19. May 2010, p. 38), this concentration is even expected to continue and will have further impacts on pricing trends.

1.1.3.3 Bargaining Power of Suppliers

The vertical downstream implementation of quarries and plants in foreign countries is vital in order to reduce supplier power, since stone materials are key in order to produce Holcim Ltds products. Furthermore, the production and the supply of building materials such as cement and aggregate is energy intensive. Consequently, key suppliers to that industry are companies providing fuels such as oil, gas and coal. As for the building materials market, this fuel markets are mostly dominated by a small number of large scale and highly vertically integrated companies23 with the necessary financial and negotiation strength, which clearly increases the supplier power. Furthermore, suppliers of quarrying machineries are important to the industry as well. Since the market for such machineries is highly specialized, the number of suppliers is rather low. Consequently, their supplier power can be seen as enhanced due to their unique selling position. Lastly, the products provided by Holcim Ltd are heavy and often moisture-sensitive and require special treatment in terms of transportation. Special treatment usually enhances the supplier power, which can also be applied for the transport industry. Holcim Ltd is aware of these facts and precautions were taken in order to reduce the dependency of suppliers. Generally, the vital raw materials are sourced from their own quarries. As an economy becomes more mature, vertical integration assumes greater importance for Holcim Ltd. Because of the high degree of regulation, securing guaranteed reserves of raw materials is of major strategic importance (see annual report 2010, p. 22). Besides, energy costs also depressed the cement margin of Holcim Ltd in 2010. Therefore, the company strives for renewable energy sources and innovative and economically viable techniques as long-term solutions in order to efficiently use available energy resources. On the one hand, such innovations reduce the environmental footprint of the processes and products and on the other hand lead to an increased productivity and lower costs in the manufacturing process (see annual report 2010, p. 31). Lastly, Holcim Ltd founded a Holcim-Trading section. Among others, one purpose is to be as much independent as possible towards transportation of
22 23

Datamonitor (03/2010). Global Construction Materials. Reference Code: 0199-2030, p. 12 Datamonitor (03/2010). Global Construction Materials. Reference Code: 0199-2030, p. 13

goods. Therefore, this section manages a fleet of cement ships and floating terminals and is able to provide even customized services to their business partners24.

1.1.3.4 Bargaining Power of Buyers

Mainly, products are sold to traders, wholesalers or directly to general contractors, mason self-builder and civil engineering contractors, showing that buyers of building materials are highly fragmented. Thus, companies such as Holcim Ltd can sell their products to a large number of relatively small buyers, which leads to a low buyer power25. Buyer power is further reduced due to the fact that building materials such as cement, ready-mix concrete and aggregates are key basic materials for the construction industry. However, the analysis of Datamonitor shows (see Industry Profile of Global Construction Materials, March 2010, p. 13) that the product quality and price are the major indicators for the prospective buyer who is prone to switch to new solutions as long as price and quality of the product are competitive. This indicates that the overall brand loyalty within the Building Materials Industry can be seen as rather low. However, since there are many small buyers, this impact will be leveled out.

1.1.3.5 Threat of Substitute Products

Cement and aggregates are seen as the basic materials for the construction industry where emergent markets offer attractive and high growth prospects. Nevertheless, as markets mature customer needs will broaden and some products of Holcim Ltd may be substituted with other materials such as plastics, glass, steel, wood and others. However, it is in the interest of companies such as Holcim Ltd that certain construction projects have to follow clear building regulations and often require specified materials such as cement or aggregates. Hence, theoretical substitutes may be too costly, time-consuming or difficult to use in practice26.

1.1.4 Competitor Analysis

Following the Five Forces Model of Porter, a competitor analysis of the leading competitors within the industry is conducted. CRH plc and Lafarge S.A. are the largest competitors for Holcim Ltd in terms of revenue and thus will be analyzed regarding their objectives, their available resources, their performance in the past and their current products and services27.

1.1.4.1 Objectives
In terms of the strategic direction, Lafarge S.A. and Holcim Ltd have great similarities. Both companies are seeking growth opportunities in emerging markets such as India and China and are accelerating innovation in order to meet the need for more sustainable construction methods and to increase competitive advantages through R&D activities.

24 25 26 27

www.holcim-trading.com Lipczynski, J., Wilson, J., Goddard, J. (2009). Industrial organization, p. 18 Datamonitor (03/2010). Global Construction Materials. Reference Code: 0199-2030, p. 13 Lynch R. (2006). Corporate Strategy (Fourth Edition), p. 103

Lafarge S.A. is a French company with its headquarters in Paris and was founded in 1833. The group is present in 78 countries all over the world (in contrast to Holcim Ltd not in Australia) and orients the development of its businesses towards fast-growing markets. Starting in the 1990s, Lafarge S.A. established solid positions in emerging markets through a combination of acquisitions and organic growth. By now, more than 60% of Lafarge's workforce is employed in Asia, Africa, Central and Eastern Europe, the Mediterranean Basin, the Middle East and Latin America. The company invests heavily in these markets28. In order to meet the quality requirements placed on products, Lafarge S.A. also stresses the importance of people development and the endeavor to reduce costs in order to remain competitive among the big players within the industry. CRH plc is an Irish Company with its headquarters in Dublin and is formed through the merger of Cement Ltd and Roadstone Ltd in 1970. As opposed to Holcim Ltd and Lafarge S.A., CRH plc focuses its business on the European and the American market and is present in 35 countries. It is CRHs strategic intention to be an international leader in building materials delivering by sticking to the core business in the industry (cement & aggregates) and by investing at home. The company therefore follows the principle of being the low cost market leader in their markets. 85% of CRH plcs revenue is derived from developed nations in Europe and North America. Even though the focus lies on developed markets, CRH plc started to develop overseas by an acquisition of 26% shares of a Northeastern Chinese plant and a 50% stake of an Indian company in order to create platforms for future growth. In 2009, 15% of the companys revenues are derived from such markets29.

1.1.4.2 Products
As for the strategic direction, Lafarge S.A. and Holcim Ltd have a similar portfolio structure with a clear focus on cement and aggregates. For both companies, there is a clear focus on cement and aggregates contributing roughly 70% to the net sales revenue. In contrast to the Swiss based company, the French competitor also provides gypsum as a product. Holcim Ltd and Lafarge S.A. also differ considerably when looking at the markets sales.

Figure 3: Sales by regions of Holcim Ltd and Lafarge S.A. Source: Own design

Whereas both companies show equal sales efforts compared to its total sales in Europe and North America, Lafarage has a stronger focus on the African & Middle East market with approximately 25.5%
28 29

www.lafarge.com www.crh.com/

sales revenue as compared to 5.5% of Holcim Ltd. However, Holcim Ltd shows a stronger focal point on Latin America and Asian markets, with a 10% higher sales-focus for both countries. When analyzing the products of CRH plc it is noticeable that it is a much more diversified portfolio as opposed to the other two companies. As well as cement, aggregates and concrete products, CRH plc also provides asphalt, lime, clay, building products, construction accessories and produces glass and fencing products. The most striking difference, though, is that the Irish based company runs professional builders merchants and so-called Do-It-Yourself stores. Totally, the company operates roughly 900 stores in Europe and America. However, a meaningful comparison in terms of the main products with the other two competitors is not portrayable, due to the fact that there are no sales revenue by products disclosed by CRH plc in the annual report. The report merely shows that 51% of the revenues are generated in Europe (incorporating revenues generated in India and China). 24% of these revenues are obtained from the section Europe Materials (cement, aggregates, ready mixed products, asphalt and lime), Europe Products (concrete, clay and building products) contributes 16% to the group revenues, and finally 11% are obtained from Europe distribution (builders merchants and Do-It-Yourself). The remaining 49% revenue stake is generated in America. America Materials (Aggregates, asphalt, ready mixed concrete) accounts for 37% of the revenues, Americas Products for 10% (architectural products, glass, precast) and American Distribution (national and regional markets) contributes 2% to the overall sales revenue of the company. Overall, the product analyses shows the clear global focus towards the key basic materials such as cement and aggregates in terms of Holcim Ltd and Lafarge S.A., whereas CRH plc focuses on several and clearly different footholds with a strategic focus on the European and American market.

1.1.4.3 Resources
The scale and size of the companys resources is an important indicator of its competitive advantage. Generally, it can be stated that the Building Materials Industry is a human capital intense industry and ongoing employee-training is vital in order to achieve the necessary quality standards. As for the three companies, large numbers of employees can be recognized even though all show a cutback in the wake of the economic turnaround since 2007. At that time, Holcim Ltd showed the slightest reduction in workforce by only 9.5% compared to CRH plc by 14.7% and Lafarge by even 18.1%. All three companies employ around 80000 personnel in 2009.
Personnel CRH plc Lafarge S.A. Holcim Ltd 2010 n.a. 75'677 80'310 2009 79'822 77'994 81'498 2008 93'572 83'438 86'713 2007 92'033 77'721 89'364 2006 93'572 92'446 88'783

Table 4: Head counts of CRH plc, Lafarge S.A. and Holcim Ltd Source: Own design

Proximity to the markets is a clear advantage in the Building Materials Industry since transportation costs can be reduced and an immediate implementation of customer needs is possible. Furthermore, and as a result of vertical downstream implementation of quarries and plants in foreign countries, supplier power can be reduced. Therefore, the number of sites shows the activity and presence of a

company within a certain market. Yet, the expressiveness of the number of sites is limited since all three companies are following their own strategy with a different global approach on the one hand and different products focus on the other. Especially for aggregates concrete products, more plants are required. Bearing that in mind, the numbers have to be interpreted with caution. Nevertheless, it gives an idea of the overall company presence within the Building Materials Industry. As such, CRH plc shows by far the biggest presence within the market with roughly 3700 plants and stores. Holcim Ltd follows the Irish company with approximately 2200 factories, 2050 of which are used to produce aggregates and concrete products. Lastly, Lafarge S.A. shows the least presence within the industry maintaining 1960 plants, 1720 of which are used to produce aggregates and concrete products. In terms of resources, the capital base, the equity portion as well as the equity ratio are important figures emphasizing the size and independence of a company. Generally, it is assumed that a high equity ratio is in favor of the financial stability30. Hence, the higher the yield risk of a company, the higher the equity portion should be.
CRH plc Holcim Ltd Lafarge S.A. Total assets Total equity 21'461 10'411 35'407 16'897 42'494 18'224 Equity ratio 48.51% 47.72% 42.89%

Figures of 2010 in million

Table 5: Comparison of the capital base of CRH plc, Lafarge S.A. and Holcim Ltd Source: Annual reports of companies in 2010

As depicted in Table 5, Lafarge S.A. can be seen as the largest company with the most resources at its disposal. Besides, if we look at the past five years, the company even increased its assets base by roughly 43%, a clear indicator of its growth strategy. Holcim Ltd and CRH plc also showed an overall increase of its total assets by 28% respectively 17% over the past five years. Looking at the shareholders total equity, all companies show figures between 42% and 49% in 2010. CRH plc can be seen as the least dependent company showing an equity ratio of 48.51%, albeit with the smallest amount of equity in absolute terms with roughly 10.5 billion Euros.

1.1.4.4 Past Record of Performance

As stated by Richard Lynch (see Corporate Strategy, p. 103), past records of performance may be a poor indicator for future events. However, those figures are easily to perceive in annual reports and show the general situation of the company. Looking at the performance figures of the main competitors within the Building Materials Industry, the economic dependence of the companies sales is clearly expressed. All three companies showed rising sales figures for five years until 2007 but subsequently suffered decline in sales as a result of the slowdown of the construction activities. By 2010, Holcim Ltd and Lafarge S.A. were able to return to sales levels which were a little bit higher than in 2006. In contrast, CRH plc still suffers from ongoing drop in sales. Nevertheless, CRH plc can be identified as the overall predominant company in terms of sales revenue with its peak at 20922 million EUR in 2007.

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Looking at the operating profit margins, Holcim Ltd and Lafarge S.A. consistently depicted two-digit figures displaying operating profit margins between 18.57% (2007) and 12.10% (2010) respectively 18.67% (2007) and 13.41% (2010). Even though CRH plc has the highest sales revenue, the company was only able to generate operating profit margins between 9.97% (2007) and 4.06%. These low operating margins might be caused by the strategic direction towards the more competitive and developed markets Europe and America, in order to be the low cost market leader by investing at home31. Furthermore, the company focuses on much more products at the same time and therefore loses cost advantages due to smaller production volumes. Lastly, earning-per-share (EPS) figures show a similar result as the operating profit margins. All companies showed its highest figure in 2007. Analyzing the earnings per share figures of 2010, it is striking that their value is roughly a quarter of what it used to be in 2007 for all three companies. That clearly shows the helplessness towards such unpredictable economic conditions as faced recently. Besides, it is noticeable again that Lafarge S.A. shows the best EPS-results of 10.37 (2007) and 2.89 (2010) closely followed by Holcim Ltd with values of 9.01 (2007) and 2.67 (2010), whereas CRH plc shows significantly worse values of 2.37 (2007) and 0.61 (2010). Nevertheless, earning-per-share figures need to be taken with a pinch of salt. This with respect to so-called EPS games, in which corporations try to meet short-term EPS targets at almost any cost, for the fear of missing analysts expectations32.

1.2

Internal Analysis

In the following section, the internal values and principles of Holcim Ltd will be discussed in more detail. In addition, the product and customer base as well as the associated value chain are portrayed.

1.2.1 Product Portfolio

After having analyzed the external situation of the industry, one has to take a closer look at the internal environment of Holcim Ltd. For the Swiss based company, the focus clearly lies on the production and distribution of cement and aggregates since they are key basic materials for the construction industry and show high operating margins. Overall, the company has three well established product lines Cement; Aggregates; Other construction materials and services in order to provide all markets and customers with the necessary goods in order to remain one of the worlds leading companies in the Building Materials Industry. Cement Cement comprises clinker, cement and other cementitious materials and consists of limestone and clay that are heated to approximately 1450 degrees Celsius. The cement powder then acts as binding material when mixed with water, sand and gravel or crushed stone to make concrete. By adding different quantities of core elements, one is able to modify the properties of the cement and to produce a wide choice of customized solutions for special applications, for example Portland Cement, White

31 32

www.crh.com Koller, T., Goedhart, M., & David, W. (2005). Valuation Measuring and Managing the Value of Companies, p. 76

Cement or Oilwell Cement. However, the cement production is extremely resource and energy intensive, since raw materials have to be secured and removed from quarries where significant investments in terms of plants and machineries have to be made. Thus, Holcim Ltd constantly strives to improve eco-efficiency from the manufacture of the product to lower costs and to reduce environmental pollution. Due to growing prosperity in emerging markets, cement production shows attractive growth prospects.

Aggregates Aggregates include crushed stone, gravel and sand where the production process centers on quarrying and sorting the raw material. This product is mainly used in the manufacturing of ready-mix concrete, concrete products and asphalt, as well as for road building and railway track beds. Like the production of cement, the one of aggregate requires significant capital investments for a significant amount of time. However, scarcity in certain Western European and North American markets leads to attractive margins33. Other construction materials and services This section provides products such as ready-mix concrete and concrete products, asphalt, construction and paving, trading and other products and services. In order to be able to provide the requested mixture by the customers, materials from section Cement and Aggregates are needed. Concrete is the second most consumed commodity by volume after water since it is an energy-efficient building material. One cubic meter consists of approximately 300 kilograms of cement, 150 liters of water and 2 tones of aggregates. Asphalt is a construction material used primarily for road paving. Due the fact that the market of these products tends to be fiercely price competitive, they show the lowest operation margin34. Summing up, Holcim Ltds declared strategy is to build up and expand cement production in emerging markets. In maturing economies, vertical integration becomes more significant in order not to be dependent on stone material suppliers. Furthermore, Holcim Ltd aims to establish ready-mix concrete businesses in major urban centers. Lastly, as markets mature and customer needs broaden products such as aggregates, asphalt and concrete are required and need to be supplied within short delivery times. As Anthony W. Miles stated (see The Boston Consulting Group on Strategy, 1986, p. 265) the portfolio concept asserts that one of the primary responsibilities of the chief executive is to make decisive investment choices for the benefit of shareholders. To make choices there must be alternatives. Hence, when talking about the product portfolio it is important to look at it with respect to market growth, respectively to market shares, in order to analyze the balance of the product portfolio. For Holcim Ltds product, this will be done on the basis of the Boston Consulting Group model (BCG), in which the market
33 34

J.P. Morgan (05/2010). Europe Equity Research European Building Materials, p. 8 J.P. Morgan (05/2010). Europe Equity Research European Building Materials, p. 64

growth is used as a picture of how attractive the market is and in which the relative market share describes how large the market share of Holcim Ltd is relative to its biggest competitor. Depending on these two measurements, the different products are inserted in one of four quadrants of the matrix35: Star (Cash neutral), Cash Cow (Cash generator), Problem child (Cash user), Dog (Cash neutral). The size of the bubbles indicates the amount of revenues generated.

Figure 4: BCG portfolio of Holcim Ltds product sections in 2010 Source: Own design

The cement section is categorized as cash cow because of its high relative market share. Holcim Ltd, as one of the market leaders in the cement industry, roughly sold 136.7 million tons cement which is 1.1 times the quantity of the second largest competitor. Furthermore, sales could be increased by 3.6%. This increase is the result of additional sales in group regions Asia Pacific, North America and AfricaMiddle-East. Bearing in mind the high barriers of entry and the growing demand for cement in emergent markets, further growth prospects are to be exploited following the economic downturn. Thus, further mergers respectively acquisitions of strategically important quarries/manufactories will be important in the future. Looking at the aggregate section, the market growth rate of roughly 10.1% to 157.9 million tons is striking in 2010. This growth is due to significant gains in Latin America but also due to the consolidation of Holcim Australia into the group. This quantity equals a relative market share of about 0.7 times the amount of the market leader. According to the BCG model, the aggregate section is categorized as the problem child (definition: it might be difficult to generate substantial cash). However, looking at the EBITDA-margin of 12% compared to the total group revenues, it can be stated that this section is clearly adding value to the company. Furthermore, the fact that more and more emerging countries develop towards maturing economies and thus invest more in infrastructure projects will further increase the demand of aggregates as mentioned in Chapter 1.1.1 (Global Building Materials Industry). Besides, the high barriers of entry act as natural obstacles in what way substantial cash will also be generated in the future. Finally, the section other construction materials and services depicts a market growth rate of approximately 6% in 2010. Especially ready-mix concrete increased its quantities sold by 9.8% to 45.9 million cubic meters. The strongest growth rates are to be identified in maturing/developed markets such as Australia, North and Latin America, Canada, Mexico and Chile. By contrast, the volume of asphalt
35

Lynch R. (2006). Corporate Strategy (Fourth Edition), p. 131

declined by 3.6% to 10.6 million tones. This equals a relative market share of about 0.6 times the quantity of the market leader. Consequently, the last section is rated at the edge of problem child and dog. According to the BCG-model definition, this section requires considerable investments but with little chance to get a major profit earner and may absorb cash in order to hold the position. In contrast to the other two sections, this section is not protected by high barriers of entry and consequently markets tend to be fiercely price competitive. Due to concretes limited setting time economies of scale do not lead to significant advantages indicating the importance of proximity to markets36. Overall, the third section is only able to generate approximately 5% of the groups operating profit and rather acts as section of strategic importance to get closer to the end-consumer as it is said by Holcim Ltd.

1.2.2 Value Chain

The value chain concept of Michael Porter illustrates the physical and technological activities that a company performs in order to generate value for their shareholders. The value chain by Porter is divided into two types. Whereas primary activities describe the physical creation of the product, support activities provide the necessary assistance for the primary activities to take place37. Hence, a value chain analysis seeks to determine opportunities within the companys operations, where value for customers can be enhanced and costs can be lowered in order to maximize the margin. As for Holcim Ltd, the key objective is the creation of value with great importance to sustainable development at an economic, ecological and social level. The illustration of Holcim Ltds value chain can be examined in Appendix 2. Looking at the primary activities (production, marketing, sales/ service) of Holcim Ltd, it is striking that the production-facilities are decentralized to the corresponding market locations. As such, the company has the necessary proximity to the market and is able to cut logistical costs. However, Holcim Ltd anticipated the economic slowdown at an early stage and responded to the financial crisis by closure of plants in the US and Europe due to the lack of profitability. In terms of marketing activities, Holcim Ltd made great efforts to acquire new company sites in emerging markets such as India and China. The aim of the acquisition was to correspond directly to the specific market needs and addresses diverging customer requirements on the ground. Each region conducts its own and specific marketing efforts which is seen as a clear advantage and value adding by the management. Lastly, an important advantage has been gained in terms of sales and service activities. By creating the Holcim Trading section, Holcim Ltd turned out to be a worldwide leader in the trading of cementitious products and provides exporting and importing services to third parties and to Holcim group companies. Like that the company is able to offer qualified trading services such as the design and construction of import and export terminals, the handling of construction building materials as well as consulting services in logistics and engineering and offers customized solutions according to customer needs. As aforesaid, each primary activity needs the necessary assistance by support activities in order to be able to create value. Thus, Holcim Ltd aims to attract the best staff by offering attractive and challenging jobs. Prospective managers and experts need to be educated continually and extensively to prepare for
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J.P. Morgan (05/2010). Europe Equity Research European Building Materials, p. 9 Hitt, M., Ireland, D., Hoskisson, R. (2005). Strategic Management: Competitiveness and Globalization, p. 88

future responsibilities. Regular training at all levels is a continuous process and ensures that employees develop their potential in the best possible way (see annual report 2010, p. 21). A further competitive advantage is seen with regards to R&D projects. Holcim Ltd strives to enhance benefits to customers through innovative and sustainable system solutions. Innovation efforts in the field of process technology are aimed at improving cost management due to greater energy efficiency, more efficient use of fuels and other resources. The focus is on renewable energy sources as long-term solutions to reduce CO2 emissions which clearly strengthen the competitiveness and creates added value for customers (see annual report 2010, p. 32). In order to be able to strengthen the position in the market, Holcim Ltd started a close collaboration with leading Swiss research institutes (Paul Scherrer and the Swiss Federal Institute of Technology). The aim of this collaboration is to perform long-term oriented research in terms of concentrated solar energy in the cement manufacturing process in order to reduce the emission and to conserve natural resources. In terms of the companys infrastructure, a great deal of effort has been made to reduce fixed costs which resulted in an impressive reduction of CHF 1.2 billion since 2009 (annual report 2010, p. 20). Those maintenance improvements and the resulting cost reduction will have a positive impact on Holcim Ltds future performance. Lastly, Holcim Ltd is aware that it has to coordinate service and support functions more closely in order to maximize the shareholders value. Trends and changes in customer needs in the Building Materials Industry have to be identified at an earlier stage and advantages of scale in procurement have to be exploited more effectively (see annual report 2010, p. 21). As a result, Holcim Ltd strives to establish a knowledge sharing platform with access for all shareholders in order to be able to exchange knowledge and experiences immediately which helps to improve products and services38.

1.2.3 Internal Success Factors

To analyze the internal environment, the 7-S framework established by McKinsey in the early 1980s is applied. The framework can be regarded as the roots from which the firms different activities come from39. The purpose of the model is to show the interrelationship between different aspects of the corporate strategy since the effectiveness of an organization lies in the interaction of several factors. According to Lynch (see Corporate Strategy, 2006, pp. 791) the framework has no obvious starting point since all seven elements are equally important and are interconnected. A distinction has to be made with regards to hard elements such as strategy, structure and systems and soft elements such as the style, skills, staff and shared values within a company. Due to the fact that hard facts are more tangible and definite, they gain greater attention. The critical aspect of the 7-S framework is the relationship and interaction between the elements.

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Gibbert, M., Leibold, M. Probst, G. (2002). Five styles of Customer Knowledge Management, and how smart companies put them into action. Hollensen, S. (2004). Global Marketing - A Decision-oriented Approach (Fourth Edition), p. 21

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1.2.3.1 Shared Values

Shared Values are superordinate goals and are the core values of the company that are evidenced in the corporate culture and the general work ethic40. Holcim Ltds vision is to provide foundations for society's future. The superior objective for all branches is to create value under adherence of sustainable development at an economic, ecological and social level (see annual report 2010, p. 26). Following this intention, Holcim Ltd strives to secure the companys long-term success and continuity. Holcim Ltds mission is to be the world's most respected, reliable and attractive partner in the Building Materials Industry and to create value for their entire stakeholders. Since the manufacture of cement requires substantial amounts of energy, an efficient and environmental friendly handling of natural resources is a cornerstone of the business policy. Due to this business philosophy, Holcim Ltd is a forerunner in the use of new, environmentally sound technologies in the production process and is a leading user of alternative fuels and raw materials (see annual report 2010, p. 41). In addition, the company shows a great commitment towards the communities where the plants are located and is taking social responsibility in order to be a wellrespected employer. Finally, the management of Holcim Ltd established a motto that has to be followed in all group companies to be able to keep up with the pace of growth of Holcim Ltd in recent years: Strength.Performance.Passion. Strength stands for being a solid partner based on the integrity of the people, the global leadership and competence. Performance stands for delivering on their promises to each other and to their stakeholders, and for providing the best solutions for their customers. Passion stands for embodying dedication and commitment and caring about everything Holcim Ltd does.

1.2.3.2 Strategy
Strategy is the route the company has chosen to maintain and build competitive advantage over the competition41. The world population is constantly growing and is expected to reach 9 billion people in 205042, equivalent to an increase of 50%. Therefore, the Building Materials Industry is likely to profit from this development as well, since a lot of new infrastructure and real estate projects are to come. A clear strategic orientation in the long run is therefore vital for Holcim Ltd. As stated in the annual report 2010, Holcim Ltds paramount objective is to secure its share of future global growth and thus bases its strategy on three central pillars Focusing on the core business; Geographic diversification; Local management but global standards. In short and explained in more detail below, Holcim Ltd follows a global differentiation strategy, whereby market shares should be gained through acquisitions respectively strategic alliances, and where the local management has to take responsibility for their actions following standardized major corporate processes.
40 41 42

Watermann, R. (1982). In Search of Excellence Lessons from Americas Best-Run Companies. Watermann, R. (1982). In Search of Excellence Lessons from Americas Best-Run Companies. www.syngenta.com

The first strategic statement Focusing on core business will be analyzed using the Three Generic Strategies model of Michael Porter. As a result, one is able to define Holcim Ltds relative position within the industry. According to Porter, the fundamental basis of above-average performance in the long run is to achieve competitive advantage. On the one hand, it might be achieved through cost leadership, where a company sets out to become the low-cost producer in its industry. On the other hand, competitive advantage can be achieved through a differentiation of the products, where a company seeks to be unique in its industry which is honored by buyers43. Furthermore, the competitive scope looks at the size and composition of the market a company is targeting.
Competitive Advantage Lower Cost Broad Target Narrow Target 1. Cost Leadership Differentiation 2. Differentiation

Competitive Scope

3A. Cost Focus

3B. Differentiation Focus

Figure 5: Three Generic Strategies of Michael Porter Source: Lynch R. (2006). Corporate Strategy (Fourth Edition)

Holcim Ltd is seen as one of the worlds leading provider of building materials. Cement and aggregates are clearly high-quality products being innovation and application driven and requiring capital-intensive production processes. With ~67% net sales arising from cement and aggregates, Holcim Ltd clearly focuses on these two core businesses in more than 70 countries worldwide. As such, this line of business addresses a broad target group where quality and innovation management are prevalent attributes with respect to the production processes as explained in chapter 1.2.2 (Value Chain). This expresses the intention of Holcim Ltd to follow a differentiation strategy with regards to cement and aggregate products. While cement and aggregates are the basis of the business, other products such as ready-mix concrete, concrete, mortar or asphalt bring Holcim Ltd closer to the end-consumer. Since this product line is much smaller and not as revenue important as the other two products, in can be inferred that it addresses much less customers and its competitive scope is narrow targeted. According to Porter, this differentiation focus strategy occurs, when the organization focuses on a specific market place and develops its competitive advantage by offering products especially developed for that44. This statement can be backed up by the one of Holcim Ltd that concrete mixtures often need to be adjusted with regard to different countries due to different climatic conditions. Even though this product line is gaining on importance as a result of the growing population, it is for now classified as a strategy of differentiation focus. Analyzing the second strategic statement Geographic diversification the product/market growth matrix originated by Ansoff will be applied. This model implies that the attempt of a company to grow

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Wit, B., Meyer, R. (2004). Strategy Process, Content, Context (third edition). Lynch R. (2006). Corporate Strategy (Fourth Edition), pp. 791

depends on whether it provides new or existing products in new or existing markets. According to Ansoff, the following four growth strategies are portrayable:

Market penetration: The focus lies on selling of existing products into existing markets Market development: The company seeks to sell its existing products into new markets Product development: The company aims to introduce new products into existing markets Diversification: The company provides new products in new markets
Holcim Ltd is one of the most globally active companies within the Building Materials Industry. The broad-based presence makes a major contribution toward stabilizing earnings by evening out cyclical fluctuations in individual markets. Quoting the annual report 2010 of Holcim Ltd, the following statements can be drawn in terms of the market strategy:

Emerging markets: Focus on building up and expanding cement production. Maturing economies: Vertical integration becomes more significant. Besides, Holcim follows the aim of establishing ready-mix concrete businesses in major urban centers. Developed markets: The range of products is even more diversified in those markets and includes aggregates, asphalt and concrete products. Because of the high degree of regulation in industrialized nations, it is strategically important to have high-grade, secure raw material reserves.
According to these statements, Holcim Ltd clearly follows a strategy of growth by introducing existing products in either existing or new markets. Since developed markets show high competition and diversification towards existing products, a market penetration strategy has to be followed. In order to be able to profit from local know-how and experience in mature markets, Holcim Ltd acquires competitors such as Aggregate Industries in the UK or Cemex Australia. Furthermore, the Swiss based company also strongly intends to enter new but very attractive emergent markets by entering strategic alliances with for example Gujarat Ambuja Cements in India or Huaxin Cement Co. Ltd in China. Such alliances can be interpreted as a market development strategy. Lastly, Holcim Ltd aims to gain competitive advantages through differentiated product offerings by launching products such as Holcim Optimo or CEMROC. The company adopts a strategy to invest in R&D of new products/processes. Such a product development is a clear sign towards performance improvement and CO2 emission reduction. The SWOT analysis depicted in Figure 6 will summarize the strengths and weaknesses coupled with the opportunities and threats from the internal and external analysis conducted in this chapter. Whereas

the former two points focus on the internal organization, the latter points focus on the external organization45.

Figure 6: SWOT analysis of Holcim Ltd Source: Own design

Strength Holcim Ltd follows a strategy of diversification on three products in emerging, maturing and developed markets and focuses mainly on cement and aggregates. They are seen as key building materials for the industry and show high operating margins even though those products reveal a capital, knowledge and R&D intense nature. Furthermore, Holcim Ltd constantly develops new products/mixtures with higher durability, sustainability and an improved ecological balance sheet in order to meet the growing expectations from shareholders towards greenhouse gas reduction. Finally and due to Holcim Trading, the company is logistically independent in what way transportation costs for the moisture-sensitive and heavy products can be reduced, which in turn reduces the supplier power. Weakness Due to the fact that cement and aggregates are high-volume production products, Holcim Ltd has build up high capacities of those products. In the wake of the financial crisis, prices suffered a drop due to the declining demand of construction building materials which in turn led to large excess capacities in the industry. As a result, Holcim Ltd was urged to close down plants and introduced an austerity program in order to reduce operating costs. Furthermore, the company is still focusing on other construction materials and services such as ready-mix concretes and asphalt, even though the competition in this area is much higher. As such, margins are clearly lower as opposed to the cement and aggregates industry. However, those products are necessary in order to be closer to the end-consumer. This is clearly important when markets mature and customer needs broaden and seeking for more specific products. Opportunity Bearing in mind that the world population is to grow by 3 billion people within the next 40 years, the potential for expansion of the Building Materials Industry is enormous. Especially BRIC states are expected to experience a significant population growth. Due to the sound global strategic position of Holcim Ltd and its intact capital structure, the company is in a good position to continue its expansion
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Lynch R. (2006). Corporate Strategy (Fourth Edition), pp. 450

strategy in order to acquire the necessary market/regional knowledge of its competitor. Furthermore, partnerships with other companies within the industry are conceivable as well. Such expansion strategies are clearly gaining on importance for both sides (buyer/seller and in terms of a partnership) as seen in chapter 1.1.3.1 (Threat of New Entrants), in which the positive effect of economies of scales is described. Lastly, efficient and environmental friendly handling of natural resources is a cornerstone within the Building Materials Industry. Finding a mixture/production process, in which carbon dioxin emission is significantly reduced, will lead to a first mover advantage within the industry. Besides, less emissions will also go along with less energy costs with regards to the production process and is clearly in favor of the companys overall cost structure. Threat As mentioned in the PESTEL model, the Building Materials Industry is highly exposed to energy providing companies (coal, fuel, gas) due to fact that the production process requires a lot of energy. Consequently, growing prices would lead to higher production costs and would affect customers badly. Additionally, the demand for cement is growing faster than the emissions per ton are falling posing a clear threat to the environment. This situation could lead to production restriction in the future what would have impacts on sales revenue of companies. Furthermore, even higher efforts and spending in terms of R&D have to be undertaken to improve products. Being highly active in emerging markets also bears the threat of unknown and unpredictable governmental actions and policies. Hence, production capacities might be reduced or employees might be largely influenced by the governments what would have negative impacts on the production process and revenues. Lastly, as explained in chapter 1.1.1 (Global Building Materials Industry), there is a clear link between GDP of a country and the consumption of cement and aggregate products. In terms of an economic slowdown this would lead to a reduction in sales revenue again.

Historical Performance Analysis

The historical performance analysis is based on ideas from Koller et al. (see Valuation, 2005, pp. 159) and is divided into seven subchapters. The results are based on the published figures of the annual consolidated financial statements of Holcim Ltd. The reports are in accordance with the International Financial Reporting Standards (IFRS). The detailed calculations of each subchapter can be examined in Appendix 4.

2.1

Revenue Growth

Revenue growth within a company is directly tied to long-term growth in cash flow. As such, analyzing historical revenue growth is vital to assess the potential for growth going forward. Figure 7 depicts Holcim Ltds net sales from 2001-2010 and reveals that the highest revenue has been generated in 2007 with more than CHF 27 billion. Even though the economy slid into a recession as a result of the dotcom bubble burst in 200046, Holcim Ltd experienced just slight revenue decreases and was even able to more than double revenues from 2003 to 2007. However, in the wake of the financial crisis and the resulting credit crunch, Holcim Ltd suffered from fewer orders and declining prices in the Building Materials
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Industry. After reporting reduced revenue figures two times in a row, the companys revenue increased to CHF 21.6 billion in 2010 again.

Figure 7: Net Sales of Holcim Ltd from 2001-2010 (in million CHF) Source: Own design

However, the year-to-year revenue growth can sometimes be misleading and has to be analyzed in more detail. Referring to Holcim Ltd, the three main factors influencing the changes in revenues are to be found in products sold, in the company structure (acquisition/divestitures) and in currency translation effects. The development of each factor is shown in Table 6, highlighting the strongest results in green and the weakest ones in red.
Products Change in structure Currency translation effects Total change in Net Sales 2001 1.2% 2.7% -3.0% 0.8% 2002 -0.8% 2.9% -6.8% -4.6% 2003 2.1% 0.4% -5.6% -3.2% 2004 7.2% 0.8% -3.1% 4.9% 2005 10.1% 28.3% 1.4% 39.8% 2006 8.9% 19.5% 1.3% 29.8% 2007 8.1% 3.2% 1.6% 12.9% 2008 4.3% -1.1% -10.2% -7.0% 2009 -10.0% 0.8% -6.8% -16.0% 2010 -2.1% 5.4% -0.9% 2.5% CAGR '01-'10 2.9% 6.3% -3.2% 6.0%

Table 6: Changes in Net Sales of Holcim Ltd from 2001-2010 Source: Own design

As described in the Error! Reference source not found., the Building Materials Industry is dependent on economic trends and thus suffers in post crisis periods. This is shown in terms of declining net sales of products in the year 2002 as well as 2009 and 2010. Nevertheless, over the past 10 years the company depicts a compound annual growth rate (CAGR) of 2.9%, which is higher than the compounded inflation rate of 1.09%47 over the last 10 years in Switzerland. Nevertheless, due to the economic exposure, global diversification is one of the key strategic goals of Holcim Ltd. As such, the adopted merger and acquisition (M&A) path is necessary in order to gain knowledge from competitors on the one hand, and on the other hand, to achieve an increase in net sales due to new market shares. This approach can be considered as positive when looking at the increased net sales figures up to 28.3% and a CAGR of 6.3% since 2001. Lastly and less satisfactory is a CAGR of -3.2% in terms of currency translation effects. These revenue reductions are the result of the translation of foreign operations into the group reporting. It is striking that especially in post crisis years, as after the dotcom bubble (2003/2004) and the financial crisis (2008/2009), the strong Swiss France poses a severe handicap. Nevertheless, with regard to the overall changes in net sales, a positive CAGR of 6.0% can be identified since 2001. The ongoing M&A

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Calculated according to numbers on http://www.indexmundi.com/g/g.aspx?c=sz&v=71&l=de

activities can also be deduced when looking at the geographical revenue spread in Error! Reference source not found..