Pr oduct Number 000

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From the Department of
LEADI NG I N THOUGHT AND ACTI ON
C
CORPORATE STRATEGY AND INTERNATIONAL BUSINESS CORPORATE STRATEGY AND INTERNATIONAL BUSINESS


ASE STUDY SERI ES E STUDY SERI ES

[= [=



















This report was written by Ajit Sharma, This report was written by Ajit Sharma,
Sharmilee Mohan and Sidharth Singh under
the supervision of Professor C.K.Prahalad.
The reports are intended to be catalysts for
discussion and are not intended to illustrate
effective or ineffective Strategies.

Copyright, The University of Michigan
Business School, 2003

CFMFX: Innovation in Housing
or the Poor
CFMFX is a multinational cement manuacturing companv out o
Meico. It is the largest cement manuacturer in Meico, the second
largest in the USA and third-largest cement companv in the world.
1he companv has operations in our continents and has recorded
global revenues o 36.| billion in !00! with a gross margin o ||.J/.
THE INNOVATION. . .
CEMEX leads the paradigm shift of companies profitably providing
housing for the poor, the Tier 4 population, instead of governments
or not-for-profit organizations.

CFMFX manuactures and sells raw cement, readv-mi concrete,
aggregates, and clinker (used to make cement) under dierent brand
names. As the largest cement companv in Meico, CFMFX operated in
a highlv protected legal environment with little competition until the
J0s. It competed mainlv on price and controlled 6/ o the market
share in Meico. However, during the J0s, the legal barriers in
Meico broke down, paving the wav or international competition.
CFMFX ound itsel operating in a highlv competitive open
environment.
Starting in J87, under the leadership o Mr. Loren.o Zambrano,
CFMFX eperienced eplosive growth, mainlv through acquisitions
and global epansion. 1odav, the companv has !! cement and readv
mi plants in Meico, 60 in the U.S., 8 in Spain, | in Vene.uela, our
in Indonesia and our in Fgvpt.
In the new competitive arena and under a new leadership,
CFMFX undamentallv changed its wavs o conducting business.
1he companv`s strategv emphasi.ed improving proitabilitv
through eicient operations. 1he companv also shited rom
selling products to selling complete solutions. With this new
strategv, CFMFX has established a verv strong brand and has
managed to translate it to etraordinarv proits rom a
commoditv-driven business.

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According to CFMFX, the ollowing are the sources o its competitive advantage, manv o which
have been widelv acknowledged in the business circles.

Continued innovation
High level o commitment to customer service and satisaction
Proven post-merger integration epertise
Digital evolution - eicient production, distribution and deliverv processes through sophisticated
inormation svstems
Abilitv to identiv high-growth market opportunities in developing economies.
CEMEX - MEXICO
CFMFX has J cement plants and !!0 readv-mi plants spread throughout Meico. 1he companv sells
cement to two main customer segments: the inormal or sel-construction segment and the ormal
construction segment. 1he ormal segment consists o traditional large-scale customers, middle- and
upper-income individuals, whereas the inormal segment consists o the do-it-voursel homebuilders and
low-income customers.
1he companv has invested considerablv in inormation technologv over the vears to boost
productivitv and manage its operations more eicientlv. CFMFX takes pride in its operations and was
recentlv the winner o the CIO-J00 rom IDG's CIO maga.ine.
1
1he companv has gained a signiicant
competitive cost advantage over its competitors bv setting up an ecellent distribution inrastructure and
centrali.ed computeri.ed deliverv network where everv movement o everv truck is monitored real-
time, thus enabling on-time deliverv o cement and readv-mi to its customers. 1he operation in
Guadala;ara boasts a 7.6!/ on-time deliverv o cement.
Patrimonio Hoy
Patrimonio Hov` is Savings/Propertv todav.` In J8, CFMFX launched an innovative eperiment
called Patrimonio Hov that enables verv poor people to pav or services and building materials and
upgrade their homes. 1his program blends the pursuit o proit and social responsiveness at CFMFX. 1he
kev ob;ectives o the program are:

J. Generate business that represents competitive advantages.
!. Represent an accessible option or poor amilies looking or a better qualitv o lie through
households bv oering good-qualitv cement and raw material at reasonable and ro.en prices (i.e.,
no price changes relecting time and inlation).
!. Access to credit (bv providing materials in advance) not available to the poor otherwise.
|. Position CFMFX as a responsible corporate citi.en that is committed to the societv.
. Build social capital.

During the Meican economic crisis in J|-J, CFMFX eperienced a big drop in domestic sales. Sales
in the ormal segment dropped bv as much as 0/ whereas sales in the inormal /sel-construction

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segment dropped bv onlv J0/ to !0/.
2
1he companv reali.ed the high level o dependencv on the ormal
segment let it verv vulnerable to the business cvcle swings in Meico.
According to an estimate made bv CFMFX, the do-it-voursel segment accounted or almost |0/
o cement consumption in Meico and has a market potential o 300-600 million annuallv. Reali.ing
the potential in this segment, CFMFX epanded its presence in the retail channel bv setting up !,0!0
kiosks or Construramas` to establish closer relationships with the inormal segment. At the same time,
CFMFX was looking or business opportunities to distinguish itsel in the industrv and establish a
competitive advantage. 1he companv also was keen to develop corporate citi.enship and become a more
sociallv responsive companv.
CFMFX as a irm was known or identiving potential opportunities and turning them into
proitable ventures. Reali.ing huge potential in the do-it-voursel segment, the companv embarked on a
new venture to capture that untapped segment. 1his laid the oundation or Patrimonio Hov.
1he companv reali.ed the kev dierence between the ormal segment and the inormal segment
was in the average revenue per customer. 1hough ewer big-ticket customers could generate most o the
companv`s revenues, the situation is reversed or low-income customers (Iigure J). It is estimated that
60/ o the population in Meico earns less than 3 per dav. CFMFX learned that bv converting the
low-income population (that orms a ma;oritv) into customers, the steadv revenues rom this segment
could be verv impressive.
1he management team headed bv Irancisco Gar.a Zambrano and a consulting team rom
Business Design Associates perormed in-depth market research to gain a good understanding o this
low-income market in Meico. 1he research was an eve-opening eperience (1able A) or the CFMFX
management rom a business and social perspective. Pro;ect Patrimonio Hov` was conceived.
Beore actuallv entering the market with this program, CFMFX had to overcome a ew
undamental and critical challenges that were speciic to the low-income market. Iirst, CFMFX had to
build trust and convince the poor thev will indeed be able to build a house with CFMFX. Second,
CFMFX had to make the poor understand that credit was not a stumbling block or the poor as part o
Patrimonio Hov. 1he team had to work with a dierent mindset that did not include sale o cement as
the sole ob;ective o the program.

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Revenue per
customer
Inormal
customers
Iormal customers
Revenue per customer
Iigure J


Table A
ATTRIBUTES FORMAL SEGMENT INFORMAL SEGMENT
Sales Higher revenue per customer Low revenue per customer
Pavments Iinancing generallv not required Iinancing is important
Demand Depends on economv More or less steadv demand
Price sensitivitv Driven bv bargaining power Convenience-driven (such as credit,
deliverv, etc.)
Brand equitv Recogni.ed trusted Should build trust to deliver as
promised
Growth Slow growth Verv high potential or growth
Customer location Usuallv located in places o easv
access
Mostlv located in remote areas
Relationships Stops at the distributor-level Requires close ties with end customers

Mexican Society
1he Meican societv, like manv other societies in developing countries, possesses certain characteristics
speciic to that societv.

p~: Low-income amilies in Meico (and in manv other parts o developing and under-developed
countries) adopt a dierent savings method than the traditional methods o middle and upper-income
amilies. Since low-income amilies don`t receive regular pavchecks and don`t receive anv government
subsidies or grants, thev don`t have access to banks and credit. Within a communitv, neighbors, amilies
and riends get together and orm tandas` or pools.` 1he members o the tanda` pool in monev as and
when` thev receive pavchecks and i thev have anv monev let to save. Once a week (or at some
predetermined interval), one o the members can bid or the pool bv deep discounting or can win the pool


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through a lotterv. 1vpicallv this pool is used or unanticipated amilv emergencies, education and
sometimes or housing. 1he onlv actor that enorces discipline in the tanda svstem is the social capital -
the trust, reputation and participation in the communitv.
But the tanda svstem was not nearlv as eective or housing. Fven beore monev ound its wav to
such pools, amilies (usuallv the men) spent it on various other non-primarv activities - drinking,
partving, etc. Also, there were too manv members in pools, and it was diicult to manage and enorce
discipline. People oten backed out o the pools and this led to a lot o problems.

t=~=W Women are the kev drivers o savings in amilies. In the Meican societv
(and most other societies), women are verv entrepreneurial in nature, and thev verv activelv participate in
the tanda svstem. Regardless o whether thev are housemakers, working or small-business owners, thev
are responsible or anv savings in the amilv. Research conducted bv the Patrimonio Hov team revealed
that 70/ o those women who were saving, were saving monev in the tanda svstem to construct homes or
their amilies.
1he men in the societv considered their ;ob done i thev brought in their pavcheck at the end o the
dav. 1he women actuallv manage epenses with the limited allowance` that thev receive per dav rom
the men. 1hev have to ind verv creative wavs to allocate monev rom the allowance as savings to build
a house, spend on children`s education, etc.

eW 1he poorest people in the citv live in settlements made o raw cinder blocks, and in worse cases
cardboard and corrugated sheet metal (Appendi A). Most houses have one or two rooms per amilv, and
the si.e o a amilv ranges rom 6 to J0. 1he homes are over-crowded and this has its own set o social
problems, including riction within the amilv and children taking to the streets.
INITIAL MARKET RESEARCH
Guadalajara, Mexico
A research team o eight people selected Guadala;ara in the province o Jalisco as the irst citv to
implement the program. Guadala;ara has been considered a traditional test market in Meico or manv
reasons. Iirst, the social/economic proile o low-income communities was verv representative o most o
the populated areas in Meico. Over 0/ o the population live in homes that hug a network o pitted,
unpaved roads in unplanned settlements surrounding the citv and blending into the countrvside. Second,
CFMFX was graduallv losing its stronghold in the second-largest citv in Meico. Nearlv all the houses
appear to be under construction (Appendi A). 1he third verv subtle reason was that the construction
methods in Guadala;ara were dierent rom that o other places. 1raditionallv, or everv J00 pesos spent
on construction raw materials, ! pesos were spent on cement. In Guadala;ara, the southwestern region o
Meico, onlv !! pesos were spent on cement. Instead, clav and limestone was used in the construction o
houses. So CFMFX had to ind new opportunities or growth in Guadala;ara.

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Eye-openers
1he team conducted a three-month studv based on various demographic actors - social, religious,
political and inancial. 1he studv also analv.ed the various construction practices and methods, brand
perception and image o various cement brands.
1he team reali.ed that inancing was the oremost and most diicult challenge to overcome or
low-income customers. Unless the poor obtain access to credit, it would be diicult to sell the idea o
constructing a complete house in the near uture. 1he second challenge was that most amilies
emploved local semi-skilled or unskilled masons who built rooms without anv planning. 1he lack o
technical epertise resulted in a lot o raw material waste. Oten the masons did not order the right
amount o material, and amilies didn`t have a sae place to store the ecess raw materials. 1hev had to
leave the material outside their houses to the mercv o nature and thet.
1he team identiied three kevs areas o improvement/change or CFMFX beore launching
Patrimonio Hov:

J. Identiv wavs to provide access to credit or the poor beore selling cement.
!. Improve the brand perception o CFMFX as a sociallv responsive companv to earn trust in the
people, especiallv the poor.
!. Change/improve distribution methods and construction practices to make it cost-eective or
CFMFX, its distributors and the low-income customers.
Savings (tanda) Credit System
CFMFX modiied the eisting tanda svstem within the Meican communities and called it Patrimonio
Hov. In this svstem, poor people not onlv save their monev, but also obtain access to credit based on their
savings and pavment discipline - a new model that moved awav rom a savings-onlv or a credit-onlv
svstem to a savings-credit svstem. Bv introducing the savings-credit svstem, Patrimonio Hov mav have
revolutioni.ed the idea o savings bv changing the basic spending pattern o the poor in Meico.
Distribution Network
In the traditional distribution network and supplv-chain model, bargaining power and market dominance
plaved a kev role in the determination o prices and selection o distributors. 1he distributors primarilv
cared about prices and discounts. 1he industrv was driven bv price wars. However, the new model took a
verv dierent approach. Not all the traditional distributors were part o Patrimonio Hov. In act, a new
methodologv was adopted to select distributors or this program. Certain prerequisites` were established
or distributors and re-sellers:

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Good understanding and appreciation o the new business model
Fcellent deliverv capabilities with trucks to deliver to the local neighborhoods with not-so-
accessible roads and inrastructure (Appendi B)
Capacitv or storage o raw material inventorv
Fclusive relationship with CFMFX

Nearlv J/J0th o the distributors qualiied under the rigorous selection process. Ior eample, in the Mesa
Colorada neighborhood in Guadala;ara, o the !0-odd distributors that sold CFMFX, J0 distributors sold
onlv CFMFX products: among the J0, three to our distributors were selected to participate in the pro;ect.
Patrimonio Hoy Program Design:
1. Identification of offices/cells:
A special research team set out to eplore neighborhoods in and around the citv o Guadala;ara to identiv
high-growth opportunities. In a broad sense, the team identiied potential pockets or cells based on
income, construction progress, housing development, concentration o poor people, distributor network
and population growth.
1he team identiied target communities where the average amilv (-6 people) that earned around
0 to J0 pesos (US3 to 3J approimatelv) per dav. 1he target population or Patrimonio Hov is not
the absolute bottom o the economic pvramid, wherein the average per-capita income is less than 3 per
dav.
2. Cell setup:
Once a neighborhood was identiied, Patrimonio Hov set up a cell or that neighborhood. A tvpical cell is
set up to target a customer si.e o ,000 or a communitv with a population o 0,000 - J00,000 (or !0,000
amilies). 1here are one to our emplovees per cell - a general manager or chie, an engineer, a technical
advisor or an architect, supplies manager and a customer service representative/administrative clerk.
1he chie works in identiving promoters` within the communitv who would go door to door
selling the new savings-credit idea to the poor. 1he supplv manager works closelv with corporate
CFMFX in the negotiation o prices or raw materials, interacts with the distributors or the deliverv
and monitors the qualitv o suppliers and distributors in terms o deliverv time, customer treatment,
qualitv o materials, etc.
3. Customer enrol ment: l
Recogni.ing the ineiciencies inherent in the original tanda svstem, Patrimonio Hov has strict rules and
standards or the program.


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pL~W Socios are the actual customers who enroll in Patrimonio Hov. 1he socios get together
and orm a group, restricted to three people. 1he reason or such a small group si.e is that it is easier to
enorce pavment discipline in a smaller group, and the group tends to orm stronger relationships to help
each other out during an emergencv.

mW Promoters plav a kev role as ambassadors or Patrimonio Hov. Ninetv-eight percent o the
promoters are women. 1hev work on a commission basis that is dependent on the number o socios thev
help enroll and on the duration o the stav o the socio within the program.
4. Savings credit payment cycle: -
Savings and credit are the kev drivers or the business model o Patrimonio Hov. 1he enrollment o a
socio ensures a consistent and steadv source o revenue in the pipeline (or ` number o weeks) or
Patrimonio Hov and the distributors. 1he predictabilitv o revenue has huge implications across the value
chain rom the suppliers to the end-customers.
When a socio group is ormed, the group goes to the nearest cell and completes an application. 1his
application is completelv inormational (Appendi C) and does not require anv credit historv or
collateral. Also, the prices o raw materials are ro.en` throughout the pavment period. 1he onlv
requirement is a commitment rom each socio in the group to pav J!0 pesos per week or a deinite
period o time (at least 70 weeks).
Ater enrollment, each socio in the group sets up an appointment with the technical
advisor/architect (or a low ee) or an interview. 1hrough an interactive process, the technical advisor
helps the socio decide:

1vpes and quantities o the needed materials or the irst room
What the net room will be in his/her home, its placement in the current lavout
1he sequence o the ollowing rooms to be constructed in the uture

1he personal visits o architects make the socios eel like important customers, and have helped
Patrimonio Hov build trust among the socios.
Fach socio in the three-member group takes a turn everv month to collect monev rom the other
two members and remits a weeklv pavment o !60 pesos (J!0 pesos per head). Ior everv J!0 pesos a
partner pavs per week, Patrimonio Hov charges J pesos as membership ee per socio.
Phase 1 (First 10 weeks)
Fach socio pavs J0 pesos (J!0 pesos net o J pesos) or the irst ive weeks, totaling 0 pesos. At the end o the
th week, Patrimonio Hov makes its irst deliverv o raw materials or construction worth J,00 pesos (equivalent
o pavment or J0 weeks). Bv advancing ive weeks worth o raw materials, Patrimonio Hov is eectivelv
etending credit to its customers. 1he etension o credit bv delivering raw material to partners in advance helps
Patrimonio Hov establish credibilitv with the socios bv proving that it had lived up to its promise o delivering
raw materials. 1his phase also serves as a pilot to test the commitment o the socios.

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Phase 2 (11-70 weeks)
I socios stav committed bevond the irst phase, thev gain rom the program even more. During the
subsequent phases, socios receive raw materials worth J0 weeks at the end o the second week, i.e.,
advance worth eight weeks. 1hev receive raw materials worth J0 weeks at the end o the J!th week.
Deliveries are made during the weeks o J!, !!, !!, |!, ! and 6!.
5. Distribution and delivery:
CFMFX oers socios two choices o deliverv: receive deliverv right awav or immediate construction or
receive a deliverv voucher now that can be echanged or raw material deliverv at a later time when thev
are readv to start construction. However, thev will never receive cash in hand unlike the original tanda
svstem wherein pool members could receive cash.
I the partners choose to receive their raw material, Patrimonio Hov coordinates with its
distributors to arrange or deliverv o the material. I partners choose to receive deliverv vouchers or
deliverv at a later date, the inventorv is stored at the distributors` warehouses.
Interviews with socios revealed the irst deliverv made ater ;ust ive weeks o pavment and
consistent on-time deliverv plaved a big role in earning the trust o the partners. 1he supplv managers
also plav a role o an audit manager ensuring the distributors deliver good-qualitv materials on time and
provide good service to the socios.
Value Analysis
CFMFX was quick to reali.e it had to position itsel as a complete solutions-provider at low cost and not
as a cement seller competing on prices, to tap into the huge low-income market. It also reali.ed i it tried
to sell ;ust cement, it wouldn`t take too long or competitors to enter the arena. Hence, the companv`s
strategv or the low-income market is to:

Position itsel as a companv committed to the societv bv oering housing at a low cost to the poor
and enabling a better qualitv o lie.
Sell cement and other raw materials as a package such as pacquet tolteca.` (1olteca is a CFMFX
brand o cement sold in Guadala;ara.)
Oer value-added services such as credit access, technical advice, architect visits, storage space or
raw material and customer service.

Patrimonio Hov had to oer a strong value proposition or customers to overcome their resignation to lie
as the ignored population segment, and also change certain undamental and cultural spending (on non-
basic events such as parties, drinking, bars, etc.) patterns. It also had to ensure its suppliers and distributors
were enthusiastic about the new business model.

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Value to Promoters
Promoters are the ambassadors o Patrimonio Hov who identiv prospective customers, sell the idea o
savings-credit to them and motivate them to enroll in the program. Hence, it is important that thev are
verv enterprising and have active ties with the local communitv.
1he reason or promoters to participate in the program is two-old: 1hev do it or a social cause to
build social capital (According to Patrimonio Hovs General Manager, `Social capital is verv important
or people with little economic capital.`) and also earn monev. Patrimonio Hov rewards their eorts on
a commission basis (points svstem). A promoter earns |8 points (J point J peso or 0.J USD) or everv
enrolled socio or whom she is responsible. 1o ensure she brings in committed socios, the svstem
rewards her with more depending on the commitment o the socio to the program. On the !0th week o
the socio, she gets !! points, and rom the !0th week on, she gets one point per week per socio. Ior
eample, i a socio is enrolled in the program or 70 weeks, the promoter who is responsible or the
socio`s enrollment earns J!0 points (|8+!!+|0).
1he svstem implicitlv encourages promoters to bring as manv committed socios as possible. Manv
promoters are socios themselves. At the end o the 70-week period, the promoters can convert the
accumulated points on a one-to-one ratio to receive either cash or raw material (i the promoters are
socios themselves).
Patrimonio Hov oers initial training to promoters and thev start with target enrollment in the
range o 80-0 (per cell) socios per calendar period (!8 davs). 1vpicallv, each cell has 8- promoters.
Value to socios/partners
1he biggest challenge or Patrimonio Hov is to build trust with the people. 1he poor people are resigned
to the act thev will not be able to build a house in less than two to three vears. 1vpicallv, it takes J6 vears
or a amilv to build a our-room house and an average o our vears ;ust to complete a room.
1o allure the customers, Patrimonio Hov oers the ollowing proposition:

Oer access to credit bv providing materials in advance.
Oer good-qualitv cement and raw material rom a trusted national brand at reasonable and
ro.en prices (i.e., no price changes relecting time and inlation) up to 70 weeks.
Build a tvpical room in J. vears (rom our vears).
Provide technical support and service such as architect visits, technical advice.
Provide skilled masons or construction or a reasonable ee bv opening a school or masonrv training.
Provide ecellent customer service and good treatment.
Provide storage space or raw material and reduce wastage.
Oer accelerated pavment options or ambitious and aspiring customers.
Oer similar programs or schools (Patrimonio Hov Fscolar) and other inrastructure such as
pavements (Calle Digna) or amilies and neighborhoods.
Reduce cost o construction bv reducing waste, oering technical training or sel-construction.
Oer training to socios interested in masonrv.
Build social capital.

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Patrimonio Hov helps the poor build homes that mav have been a distant dream otherwise. Bv oering
such value-added services, Patrimonio Hov has been successul in earning the trust o the socios. 1he
General Manager o Patrimonio Hov claims the reduction in costs or the socios are as high as !0/, and
the reduction in time translates as high as 60/-70/.
Value to suppliers
CFMFX is the largest cement manuacturing companv in Meico and, bv virtue o its si.e, has signiicant
bargaining power over its suppliers and distributors. Patrimonio Hov collaborates with CFMFX in
negotiating prices o raw material such as bricks, steel, clav, limestone, etc. with suppliers (Appendi D).
1he companv eerts collective bargaining power over its suppliers bv negotiating on three kev actors:
generating a steadv demand or materials, creating a consistent revenue stream and ensuring .ero-risk
collection o monev.
According to Patrimonio Hovs General Manager, the suppliers are verv happv to supplv materials
to Patrimonio Hov because o the steadv demand or their materials and the quick growth in sales (as
high as !0/ annuallv) in locations o operations o Patrimonio Hov.
Value to distributors
1raditionallv, the companv has pushed` its products and services through the distribution channels, and
hence it was a verv price-driven market. Distributors operated on a J/ average margin rom sale o
building materials.
However, in the new business model, Patrimonio Hov manages the distributor relationships on its
own. 1hough it works with the eisting CFMFX distributor network, the margins in the new channel
are slightlv dierent. Distributor margin on sale o building materials sometimes drops to J!/. But the
slight drop in margins is more than oset bv a steadv demand or cement and other high-margin raw
materials such as sand and gravel where the margin could be as high as |/. Patrimonio Hov has
eectivelv created a pull or cement, and CFMFX on the supplv side pushes it, enabling the push-pull`
strategv or cement sales. Patrimonio Hov has seen a verv enthusiastic response rom distributors who
are willing to participate in this program.
Operating model of Patrimonio Hoy:
1he ob;ective o Patrimonio Hov is to not onlv serve a social cause, but also make it a proitable sel-
sustainable business. Patrimonio Hov also recogni.es that volume is verv important or it to be a success,
and hence has based its revenues on a per-transaction basis. 1hese revenues are in addition to the sale o
cement bv Ceme.

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Revenues
1he revenue streams are:

Membership ee o J!./ per socio per pavment o J!0 pesos
Intermediation ee in the orm o a 7/ margin rom distributors
Costs
1he average initial investment per tvpical cell is |00,000 pesos. 1he operational cost per cell including
salaries is around 8,000 pesos per month. An average cell needs approimatelv 700 enrolled socios
(Fhibit J) to break even on operations. According to Patrimonio Hovs General Manager, the program
generates approimatelv J!,000 pesos in cash lows rom operations. 1he goal o this program is to
operate as a standalone break-even unit, since the initial ob;ective is to increase customer awareness,
change consumer behavior and establish a competitive position in the market.
Marketing
1he traditional methods o marketing communication, advertising and promotion are not eective in this
operating model. Patrimonio Hov reali.ed earlv on that mass media advertising through television,
newspapers, etc. will not convev a personali.ed message and will not help build trust among the low-
income people.
1he Meican people believe in leaving something behind or the net generation. Mostlv, the
amilies believe in leaving immovable propertv/wealth or their sons and daughters. 1hat, in Spanish is
called Patrimonio.` 1he program Patrimonio Hov` tries to convev the message bv motivating the
public to Save todav.` In addition, the idea o being part o a amilv or a group, with a clear set o
values, beneits, etc., is overlv important in the Meican societv. Patrimonio Hov convevs this message in
its marketing communications and encourages socios to enroll with Patrimonio Hov.

`=~W=Among the poor, the best wav to establish ties with the local communities is
through personal interaction. Perhaps this eplains the signiicance o the role o promoters or
Patrimonio Hov. 1he promoters go door to door in the neighborhood communities and talk about the
beneits o the program. Patrimonio Hov provides literature and pamphlets that contain relevant
inormation, and provides preliminarv training or the promoters. 1he main ob;ective is to generate
interest in the communitv. 1he sales oicers and promoters periodicallv hold meetings and public
gatherings to educate the customers. One can ind messages and contact inormation painted on the walls
o neighborhoods as bills/graiti (Appendi F).


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t==W Word o mouth is the single-most-important broadcast mechanism that has proved to be
successul in the epansion o the program. People in the neighborhoods tend to have verv close-knit ties
within the communitv that again relects the importance o social capital. Anvthing good or bad spreads
verv eectivelv through the word-o-mouth` channel, which is oten under-estimated or ignored.

mW Patrimonio Hov has adopted the CFMFX wav` to conduct proitable business. 1hough
Patrimonio Hov tries to oer cost-eective solutions to customers, it does not oer low-price or lower-
qualitv products and services. 1he companv has been reasonablv successul in convincing distributors o
the same and has avoided a price war. In act, CFMFX sells its cement at a slightlv higher price than that
o its competitors. 1he socios are aware o this. Interviews with socios reveal that the higher price charged
bv CFMFX is more than oset bv the value-added services that Patrimonio Hov oers to the socios.
Patrimonio Hov negotiates a volume-based discount o up to 7/ rom its distributors. 1he salarv
structure o the supplv manager is based on how well he manages to negotiate discounts with the
suppliers and distributors. 1o ensure the materials, including cement, are reasonablv priced, Patrimonio
Hov conducts a market studv that publishes prices o competitors, and calculates an average price or
each calendar month. 1he socios who sign up in a particular month en;ov the same prices through the
70-week pavment cvcle. Ior eample, i the price o a ton o cement is J00 pesos when a socio signs up,
Patrimonio Hov commits to sell cement at J00 pesos or the rest o 70 weeks. Bv oering this ro.en
price commitment, Patrimonio Hov is able to charge a slight premium over its competitors. Fach cell
maintains its own list o prices.

mW Patrimonio Hoy offers small-scale promotional events such as fee-waiver for the first
installment or a couple of installments for new enrollees, a raffle event wherein a socio receives a
room essentially for free, free back-to-school items for new enrollees. Some promotions have
included seasonal offers such as vacation getaways and Christmas offers. However, these promotions
are new, and Patrimonio Hoy doesnt have enough data to verify if promotions are a good way to
increase enrollment.
Risk Management
Conducting business with the low-income population with no regular stream o pavchecks seems riskier
than the traditional lending models. Patrimonio Hov claims the risks are reallv low. According to the
General Manager o Patrimonio Hov, the deault rate so ar has been an impressivelv low 0.|/. 1he
huge rate o success can be attributed to three important actors: group commitment, social capital and
penaltv ee structure.
When a group o three socios walk into a cell and complete an application, the onlv commitment
thev are epected to make is the regular pavment o !60 pesos per week per group on time. I or anv
reason one o the team members doesn`t turn in his/her pavment portion on time, the group as a whole
will pav a late ee o an additional 0/ (60 pesos) per late socio. Not onlv is there a late-ee penaltv, but
also the deliverv or the entire group is delaved bv one week. 1his also is recorded as a black mark, and
the group will have problems later i thev decide to applv or a new credit.

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I one o the members deaults or some reason, news simplv spreads bv word o mouth and he is
more or less ostraci.ed rom the whole process. He/she will lose credibilitv and will have problems
inding a group later.
Strategic Importance of Patrimonio Hoy to CEMEX
Ater three vears o operations, Patrimonio Hov has !6,000 customers and over 3J0 million in credit. It
operates through | cells in !! cities across J states in Meico. 1he customer base is growing at J,00-
J,600 per month.
It mav be too earlv to use inancial proits as a measure o success. As a standalone operation,
Patrimonio Hov might not be generating as high a margin as corporate CFMFX is through sale o
cement. But the pro;ect has strategic implications or CFMFX. According to the General Manager o
Patrimonio Hov, the operation is generating positive cash lows rom operations o one million pesos
per month as o April !00!.
But the more important and critical actor is that Patrimonio Hov has successullv created an
entirelv new channel or selling cement and other construction materials. Patrimonio Hov has helped
CFMFX triple its cement sales in places where the operations o Patrimonio Hov are set up. 1his has
increased rom !,!00 pounds o materials consumed once everv our vears per amilv, on average, to the
same amount being consumed in J6 months.
Sustainable Growth Strategy and Innovation
Bv oering a complete and comprehensive solution or housing, Patrimonio Hov has made it diicult or
consumers to let go o this opportunitv, and has undamentallv changed consumer behavior, even i on a
small scale. Patrimonio Hov is trving to ind wavs to keep the growth sustainable. It has introduced
various innovations around Patrimonio Hov - Patrimonio Hov Fscolar, Patrimonio Hov 1e Impulsa,
Patrimonio Hov Calle Digna.
Patrimonio Hov Fscolar (School) is a variation o the original program in that it helps improve
inrastructure o the local schools. Iour percent o the membership pavment o socios is allocated
toward improvement o school acilities.
1e Impulsa is an accelerated version o the original program where raw materials are delivered to
customers earlier. 1he materials are delivered in three installments - weeks 6, J| and !! in !0-!0-|0/.
Bv the !!
nd
week, J00/ deliverv is promised to the socios, though thev make their usual weeklv
pavments until the 70
th
week. 1his program is available to returning socios who have established
credibilitv bv making regular pavments on time the irst time thev enrolled in the program.
Calle Digna (Worthv Street`) was created in response to the request o socios who wanted to move
on rom building their homes to improving inrastructure in their neighborhood. 1his is a classical
eample o how Patrimonio Hov has changed the consumer outlook and how it has changed them rom
people in despair to people with hope. 1his pro;ect brings the people even closer to work together or
the cause o their communities.
Patrimonio Hov has partnered with the Meican government to work on public inrastructure
pro;ects. Manv pro;ects the local government hasn`t been able to implement because o various reasons
have been implemented bv collaborating with Patrimonio Hov. While the local government provides

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drainage acilities, Patrimonio Hov provides the materials or paving the streets. 1he pavment structure
is slightlv dierent. 1he weeklv pavments are J0 pesos or ` number o weeks, depending on each
amilv. Patrimonio Hov provides readv-mi or raw materials starting on the J8th week o the pavment
cvcle.
Challenges
1hough customer enrollment is increasing at a rapid pace, customer retention is a huge problem or
Patrimonio Hov, not because o poor qualitv o products and services, but bv virtue o the nature o the
business. Ater a room is done, the probabilitv o returning customers to build another room is not J00/.
Manv take a break rom the rigors o pavment. 1he biggest challenge or Patrimonio Hov is to retain
those customers or a longer period o time and motivate them to return or additional rooms or other
epansions.
In manv cases, the socios cannot aord weeklv pavments or raw materials and mason ee or
construction at the same time. So thev irst buv raw materials over 70 weeks, build houses later and then
mav return to save or the net room. 1o acilitate the continuitv o the socios with the program,
Patrimonio Hov has established masonrv training acilities or sel-construction` where socios can
obtain technical training to build homes on their own. 1he socios not onlv get to build their own homes,
but also gain a new competencv.
Key Learnings from Patrimonio Hoy for CEMEX
Patrimonio Hov has helped CFMFX gain a good understanding o the low-income population. It has
helped CFMFX clear the misconception it originallv had about the poor, and reali.e thev could indeed
orm a good and proitable segment o the market. CFMFX also learned the traditional methods o
operation would not work. However, it remains to be seen i CFMFX can provide housing or the poor to
serve a social cause, and at the same time remain proitable in the long run bv epanding this program
globallv.
Leveraging this Learning through Construmex
Having successullv launched Patrimonio Hov in Meico, Ceme turned to another possibilitv. It was
obvious that a large number o Meican immigrants lived and worked in the USA. 1hev sent remittances
home everv week. 1hese remittances were o the order o 3 J0 billion. Although the si.e o the average
remittance transer is miniscule - 3!00 to 3!00 - in the world o international inance, the cumulative sums
were signiicant. Iurther, an estimated J0/ o these unds were intended to build additions to homes o
the members o the amilv o the immigrants.
CFMFX saw an opportunitv to capture a share o the remittance market to Meico. 1his would
urther its business o helping the poor build good qualitv houses.

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Evolution of the Business Idea:
CFMFX knew a signiicant portion (Appro. J0/) o remittances to Meico is used or construction o
houses. Most o these people remit monev using traditional monev transer companies like Western
Union. 1his process is raught with ineiciencies:

1he monev transer irms (oligopolv) charge high lat ees or transerring monev.
1he echange rate oered is less than the market rate.
Relatives back home could spend a signiicant portion o remittance, meant or building the house,
or other purposes.
1here is a risk o thet when collecting monev rom counters o monev transer agencies in Meico.

CFMFX identiied the need or an easier and cheaper wav to help the Diaspora build houses back in
Meico. A subsidiarv, Construme, was ormed to serve this need. Iollowing a small-scale market
research, Construme set up its irst eperimental oice in Los Angeles in Julv !00J. 1he signiicant
Meican population o Los Angeles made it the natural choice or trving out this Business model.
The Business Model:
In short, Construme allows Meicans living in the U.S. to send their monev directlv to cement
distributors in Meico. Distributors receive the order and the monev, and deliver cement and other
building materials to the site o the person`s uture home or business.
Broadlv, there are two tvpes o customers:

Individuals remitting monev or building their homes in Meico.
Home 1own Associations (H1As) remitting monev or public service pro;ects in their hometowns
in Meico.
Construmex USA
1he epress purpose o Construme is to channel as large a share o the remittance lows to CFMFX as
possible. It is not a proit center and has little revenues. Hence the primarv activities o Construme center
around generating customer awareness, customer education, building trust in the Meican communitv,
spreading through word o mouth and working with H1As to capture a share o the H1A remittances.
Not surprisinglv, 60/ o Construme`s budget is dedicated to marketing.
Construme oices tvpicallv have one to two sales representatives. 1hese sales representatives are
multi unctional in that thev:

Answer customer queries.
Are trained Meican architects and consult the customer about the architecture and plan o the
house.

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Fstimate building material requirements based on the house plan.
Help customers do price comparisons and choose the best distributors.
Register customers in the Construme database.
Dolex USA
Dole is the monev-transerring agencv, which transmits the monev rom the customer to the
Construme account in Monterrev, Meico. 1he monev is transerred in dollars, and there is no echange
o currencv. Construme is still trving to deine the perect business model according to GM Luis Fnrique
Martine.. However, it has tried out two variants until now:

J. Construme sales oice has a Dole counter within it. When a customer comes into this sales oice,
he has the option to remit monev through Dole or to send building materials through Construme
|e.g., Broadwav oice, Linwood Oice, Iresno Oice, Santa Ana oice{.
!. Construme sets up a simple kiosk eplaining the value proposition in a Dole sales oice. 1he
customer has the option to send building materials through Construme instead o remitting cash,
e.g., the Huntington Park oice{.

Dole started its U.S. operations in J8 and is still a verv voung plaver in the monev transer business.
Dole has 600 sales oices in the U.S., and Construme wants to scale up its operations bv using this
eisting network. Construme will trv out the second model in Chicago where Dole has around !
counters. 1here will be one Construme sales oice to answer anv questions and provide consultation.
1he lean cost structure in the later model is obviouslv verv appealing or an organi.ation that has no
revenues and controlling costs is critical, since that is the onlv variable that is under its control.
Construmex Mexico
1he Construme oice in Meico does the ollowing:

Selects distributors or the Construme program.
Receives monev rom Dole and processes the accounting o the monev transerred.
1ransers the order to distributors.
Veriies deliverv o material to beneiciarv.
Releases monev to the distributor.
Construmex Distributors in Mexico
According to the general manager o Construme, the qualitv o service provided in the U.S. as well as
Meico is critical or generating trust and acceptance. Because o this, Construme careullv selects
distributors or its program. 1he dierent criteria applied are (J) accuracv o materials delivered, (!)
adhering to the ive-dav deliverv guarantee and (!) prompt service Until now, J,600 o the 6,000-CFMFX

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distributors are part o the Construme program. 1hev cover all states o Meico ecept 1i;uana. 1hese
distributors are tvpicallv known to the beneiciaries and hence help in building trust with the clientele.
1hev are happv to work with Construme since this means more business or it.
International Growth
In !00!, a team rom CFMFX Philippines, visited LA to studv the operations o the Construme
program. 1here is strong interest in CFMFX Philippines to replicate this model. 1his has great potential
since thev send much more monev than Meicans back home.
Endnotes

J
http://www!cio.com/ino/releases/08J0!J!_release.html
!
www.vision.com - Media Coverage !00!: Fnabling the poor to build housing: Pursuing proit and social development together.