Course title:

Strategy and Competitive Advantage

Title of the assignment:

HeidelbergCement AG analysis and strategic options for the next

three years

Submitted by: Adam Kecskemeti

Matriculation Number 1410573002

Cohort: IML15

Lecturer: Prof. (FH) Dr. Hanno Pöschl MSc, MBA

Institution: Lauder Business School

Hofzeile 18-20
1190 Wien
Austria

Vienna, 09.03.2017
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Table of Contents

1 Introdcution ......................................................................... Error! Bookmark not defined.

2 Main factors that influence the company’s performance .............................................4
2.1 Political .......................................................................................................................4
2.2 Economic ....................................................................................................................5
2.3 Socio-Cultural .............................................................................................................7
2.4 Technological ..............................................................................................................8
2.5 Environmental .............................................................................................................9
2.6 Legal ...........................................................................................................................9
3 The competitive strategy ................................................................................................11
4 Company activities and competences ............................................................................12
5 Company activities and competences ............................................................................14
5.1 Strengths ...................................................................................................................14
5.2 Weaknesses ...............................................................................................................15
5.3 Opportunities.............................................................................................................15
5.4 Threats.......................................................................................................................15
6 Weighted competitor strength assessment....................................................................16
6.1 Supply chain..............................................................................................................16
6.2 Cost efficiency ..........................................................................................................16
6.3 Research and Development.......................................................................................17
6.4 Sustainability.............................................................................................................17
6.5 Global presence .........................................................................................................17
6.6 Conclusion of scores .................................................................................................18
7 Probable problems in the near future ...........................................................................19
8 Assessment of problems and general strategic direction.............................................20
9 References ........................................................................................................................23

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1 Introduction

HeidelbergCement (or HC) is a building construction materials manufacturer from

Heidelberg, Germany. The main activities of the group are the production and distribution of
aggregates and cements. Ready-mixed concrete, concrete elements and products are also pat
of the company’s downstream activities along other products and services related to the
industry. The company has operations in over 60 nations around the world, all over Europe,
Africa, North America, and the Asia Pacific regions. The four main business line operated by
the firm are: aggregates, ready-mixed concrete/asphalt, cement, and service-joint ventures.
Their portfolio on their cement segment includes products like quality cement, special,
targeted characteristic cement, geotechnical building materials and binders used in residential
construction and civil engineering. HC also produces 100% clinker consistency composite
cement, where a ratio of clinker is supplemented by alternative and reclaimed raw materials,
varying between limestone, ash and ground rubber.
The aggregate line of HC is producing raw materials for asphalt and concrete production.
They produce natural stone aggregates, including sand, stone chippings and crushed stones,
and gravel. These are mainly used as fillers, bases for road construction, ballast for railways,
decoration, and many others.
At the ready-mixed concrete/asphalt line they engage in downstream, vertically integrated
activities, producing asphalt, concrete or RMC. Major construction projects, road tunnels,
bridges, offices and government buildings, universities and metro stations are the main
destinations where these are used, among their precast concrete products, stairs, structural and
decorating components and ceilings. Their asphalt lines mostly supply the construction of
roads, walkways, racetracks and parking lots.
Their service cooperation and miscellaneous business activities are trading and building lesser
priority products such as limestone and lime products (Marketline, 2015, p. 18-20).

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2 Main factors that influence the company’s performance

For a company to develop a good understanding of the market and decide on future strategies
it is crucial to consider the external macro-environmental forces that might affect the business
itself, the market or the entire industry it operates in. The PESTLE analysis gives an overview
of the political, environmental, socio-cultural, technological, legal and environmental factors
of the industry that might affect growth or fall, general attractiveness and the strategical
direction of the company (Ryf, 2011, p.8-13).
The table here provides an overview over the relevant factors followed by details below.

-Governmental infrastructure funding

programs
Political -Globalization nationalization, ban on capital
transfer, terrorism, war and riots.
- Governmental regulations

- Interest rates low

Economic
-Inflation, GDP, exchange rates

-Poverty levels dropping

Socio-Cultural -Urbanization
-Social government spending usually low

-New building materials

-Waste recycling/reduction technologies
Technological improve
- 3D printing
- A.I. and robotics advancing

-Carbon dioxide emissions high

Environmental
-Emerging market growth

- Business globalization
Legal - Growing awareness of global warming
-Discrepancies in law in emerging countries
Table 1.

2.1 Political
The construction industry is covering all parts of the world. Different locations and
domestic conditions might influence operation, e.g. trough nationalization, ban on capital

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transfer, terrorism, war and riots. With a predicted GDP decline of over 12 % the conflict in
Ukraine has hurt the economy considerably and with it the construction activity. Meanwhile
Russia could evade economic downturn trough infrastructural programs of the government.
(HeidelbergCement, 2015, p.65)
In the Middle East the is the risk of bottlenecks in production due to acts of war which can
lead to higher energy prices. (HeidelbergCement, 2015, p.132)
State Programs for development of infrastructure play a crucial role in the industry.
In December 2015 the American Congress introduced the FAST Act (Fixing America’s
Surface Transportation Act) for financing the transportation infrastructure in the next 5 years
with a volume of 305 billion US$ (HeidelbergCement, 2015, p.67).
Some countries might impose governmental regulations, e.g. cement pricing in Togo. Further
governmental intervention may occur in production control trough short-term
decommissioning orders, e.g. as happened in China (HeidelbergCement, 2015, p.132).

2.2 Economic
The main factors having an impact on the economic development are interest rates,
energy and commodity prices and the economic growth measured by inflation, exchange rates
and the GDP. Changes in these dimensions can influence the company’s strategy
considerably. Currency fluctuations influence turnover and results (HeidelbergCement, 2015,
p.126). Volatile energy and commodity prices and costs (especially oil) have a big impact on
the economic momentum as economy takes a downturn a low oil price (HeidelbergCement,
2015, p.132). A higher consumer confidence, higher buying power results in more income
from tax for the state and communities, which in the end has a positive effect on the
construction activities in these areas.
Generally, there is an economic upswing in construction sector and the demand for
construction materials, as well as good development in residential housing and infrastructure
projects (HeidelbergCement, 2015, p.55).
In Africa, there is a young, fast growing population, solid economic growth, progressing
urbanization and therefore a demand for infrastructural measures, therefore demand for
construction and cement (HeidelbergCement, 2015, p.56).
In the US the financial crisis of 2008 lead to a high surplus in houses and flats and therefore a
high price drop. Since 2013 the US market recovered considerably. Number of sales, new

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constructions and the house process have risen. Further improvement depends on the
development of interest rates (HeidelbergCement, 2015, p.68).
The worldwide demand for construction material is both opportunity and risk and depends on
several factors, as the rise in population and the higher need of living space, economic
growth, higher industrialization as well as the higher demand for infrastructure. The demand
for construction materials can be divided into residential housing, commercial and public
construction. Demand in residential housing depends on factors like access to beneficial
loans, development of the house pricing, and the available household income, which then
again is influenced by parameters like unemployment rate or inflation. The development of
these factors and the demand in the sector is subject to country specific risks and
uncertainties. Essential for demand in commercial construction is the capacity of production
facilities, office- and storage areas, which is dependent on the general order situation in
domestic and foreign markets. Investments into infrastructure, like streets, railways, airports,
waterways are part of public construction. The demand here depends on budget situation of
the countries and the implementation of specific infrastructure funding programs
(HeidelbergCement, 2015, p.113).
Strategic risks for companies are especially risks in the development of markets in terms of
demand, pricing and intensity of competition. Besides that, there is the risk of acquisitions
and investments, substitution of products as well as political risks, as mentioned above
(HeidelbergCement, 2015, p.128).
In some countries, there is the risk of cutbacks of state subsidies for electricity, oil and gas
prices. Shortage of fuel subsidies leads to higher transport costs of raw and finished products.
Countermeasure and result is a higher sales price.
In Asia there is a risk if rising cost of living, having a negative impact on the income available
for building plans and with it a negative impact on investments in public housing.

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Figure 1

2.3 Socio-Cultural
Ever-changing social trends have an influence on the demand of a company. Social
development is measured by health, safety, and the general quality of life. Looking upon the
global poverty report published by the UN (United Nations, 2016) slight improvements can be
observed. While in 1981 1.9 billion individuals had less than $1.25 in a day, in 2005 it was
1.4 billion. In addition to that, in 2005 the number of people coming from extreme poverty
was halved to 26% in 2005. Big advancements in poverty levels can be attributed to growth
levels and the attractiveness of markets. Areas and regions that underwent a high growth
during the last 20 years could reduce poverty levels, especially in urban areas. Countries like
India, China and East Asia have made a considerable contribution to this positive
development. However, Africa, Latin America, the Middle East and Central Asia (United
Nations, 2010) were not able to reduce poverty levels, considering them having their origins
in the primary sector. Nonetheless, growth and economic upswing continues in many poor
areas, and many people move into cities and urban areas. (United Nations, 2016)

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According to the United Nations, (United Nations, 2014, p. 10-13), urbanization as a trend
will continue to grow until the 2020s, when the decreasing rate of ruralisation will provide
further opportunities for companies heavily positioned in urban markets.
Although the outlook into future for emerging markets in the Construction Material Industry
is positive, it can also be observed that the world social situation in 2010 showed that
different developing countries kept the level of social spending below levels achieved in the
70ies.
This can be attributed to decreased infrastructures in the fields as health and education. The
economic development is responsible for improvements in health and public health is a major
focus point for governments. As none efforts have been made by governments in this field, no
construction programs are available, having therefore a negative effect on the Construction
Materials Industry.

2.4 Technological
Factors of the technological environment that influence HeidelbergCement are innovative
solutions from R&D of the market, the widespread usage and advancements in automation
technology and deep-learning A.I., and the speed of changes in technology. New technologies
are potential to further reduce costs, create new innovations or improve qualities of existing
and new products. By taking a gander at the industry, it is obvious to see that the majority of
products, such as cement, bricks or asphalt cannot be differentiated very effectively.
Production costs are high for the majority of these construction materials, and because of its
high energy requirement, cement is victim to this, especially at high-volumes. The industry is
highly pressurized from organizations protecting the environment to innovate and improve
processes until dioxide emissions are reduced as much as it can in the processes. Players in
the market thrive to test and use new combinations and solutions to substitute raw materials
and lower emissions. Since the industry is highly price sensitive and competitive, multi-
functional materials are being developed to reach more efficient waste recycling and
reduction techniques (Gale, 2010). Since there are tons of alternate fuels and materials are
needed, reduction of waste and reclaiming the used materials is very important in the industry.
New product innovations are directed towards durability, to lower maintenance and repair
costs and lifetime of products. Due to the interconnected nature of the business, the smallest
changes in the upstream of the supply chain can have enormous effects on the company, so
finding subsidiary products is not an easy task, and requires many years of research.
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2.5 Environmental
Environmental considerations are potentially changing legislations in that field and levels of
pollution. Cement producers eagerly point out that their product is used the most after water,
however, having also highest pollution impacts. Also, the heating process and the use of
chemicals in the production process contributes to global warming trough high amounts of
carbon dioxide exhaust gases, double the amount arising from aviation.
No other single industry contributes more to the global CO2 levels (5% alone) than cement
manufacturing. This ubiquitous material is the primary component of concrete, which is literal
building block of everything around us. It is the second most consumed substance after water,
and is growing 2.5% annually, expected to rise to 3.7-4.4 billion tons by 2050, from 2.55b
tons in 2006 (Rubenstein, 2012)
The reduction of emissions has a limit, despite strong environmental legislations, standards
and energy-efficient ratings that contribute to the customer’s choice of product. Over a
century, cement manufacturer constantly enhanced the carbon dioxide emissions and there is
barely room for further reductions and improvements. Another issue is that there have not
been any developments on the basic chemistry of cement. A challenge is that demand for
cement is rising faster than emissions per ton are decreasing, giving rise to overall emissions.
Considering that the construction industry is widely resent in emerging markets like China
and India, the environment is growing into a serious aspect. Today, China is consuming the
most coal and oil in the world. Because the production and materials used are highly polluting
and inefficient, the country is also responsible for the highest greenhouse gas emissions in the
world.

2.6 Legal
The legal environment is the factors of law the company operates in. Because every country
has their own laws and regulation frameworks for planning, building and construction,
moving outside of a country of operation can prove immensely challenging to any
multinational company. Hence, many company’s extensions to cross-border markets are done
by joint ventures, to allow some buffer before the acquisition or entry for the company to
familiarize themselves with the knowledge and experience needed for the region (Qfinance,
2011). Environmental pollution due to greenhouse gases is also part of the legal framework,
growing awareness and reactivity of the topic requires elevated attention from the industry

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members. In developed countries with strong economies, like the EU or US, cement
emissions are restricted by the government, and more and more, stricter regulations are
coming as the situation of global warming grows direr every day (The Economist, 2007).
Countries like Australia, UK and US have laws restricting the utilization of the natural
environment, laws limiting quarry development, which is clear to see how much of a problem
that is. Emerging countries and China have much looser regulations and are sometimes the
biggest contributors to limitable damage to the environment.
Companies face legal obstacles and challenges all the time, as a direct result of countless laws
which are newly introduced, and for missing contractual obligations. These problems are
usually not foreseeable or measureable, but needs to be taken into account.

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3 The competitive strategy

The construction industry relies on using heavily standardized products, materials and
methods, so there is not much room for classic differentiation strategies. Since
HeidelbergCement is one of the biggest firms in the industry, both size, market coverage and
location wise, strategies focusing on a narrow target, niche markets are also not viable. The
way HeidelbergCement keeps ahead and above of everybody else is being the most cost
effective, having consistent focus on their cost cutting programs, and continuously improving
operational performance at production sites. They engage in exhaustive internal and external
benchmarking to optimize processes and identify optimization potentials so they can be the
cost leaders of the industry year after year. When investing, through innovative engineering
and having established relationships with the best low-cost suppliers on the market, they can
keep their costs as low as possible (Strategy and Targets, HeidelbergCement Group, 2017).

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4 Company activities and competences

HeidelbergCement, with the recent acquisition of Italcementi, is the number one producer of
aggregates (natural and crushed), number two in cement and number three in ready-mixed
concretes and asphalt in the world. With their cca. 130 million tonnes of cement capacity
around the globe, their core activity and focus is the production and distribution of cements
and aggregate materials. They complement these with other activities on the downstream such
as asphalt and concrete production. In addition, the company also has worldwide maritime
trading services of coal and cement (HeidelbergCement schließt Erwerb von 45%-Anteil an
Italcementi ab, HeidelbergCement Group, 2017).
According to Dr. Bernd Schleife, CEO of HeidelbergCement, their core competencies are
acquisition and integration. Let’s examine HeidelbergCement under the light of these two.
The German company acquired six major, and numerous smaller firms since it’s foundation in
1874, which might not sound special, but if we inspect the acquisitions individually, we will
see why this is a core competence of HeidelbergCement (Schleife, 2016, p. 20):
- First expansion abroad 1986 acquisition of French cement company Vicat Cement
(Schaller, 2016)
- North American expansion in 1977 began by purchasing Lehigh Cement ("USA,
HeidelbergCement Group", 2016)
- 1993 expansion in Europe by acquiring part of SA Cimenteries CBR in Belgium (Grant,
2000) _

- Multinational, Northern European and African firm Scancem acquisition in 1999 (Facts
and Figures 2016 - HeidelbergCement, 2016, p.3)
- Indocement in Indonesia acquired in 2001 (Facts and Figures 2016 - HeidelbergCement,
2016, p.3)
- Acquisition of UK firm Hanson - making HeidelbergCement the lead aggregate producer
(Facts and Figures 2016 - HeidelbergCement, 2016, p.3) _

- 2006, India, Mysore cement, entering and covering the Indian cement market
(HeidelbergCement takes control of Mysore Cements, 2006)

- And latest in 2016, the acquisition of 45% of Italcementi propelling HeidelbergCement to

the leading position it is at as of 2017 (Facts and Figures 2016 - HeidelbergCement, 2016,
p.3)
Currently the enlarged group has its foothold in 60 countries employing over 60,000 people at
3000 construction sites, supplied by it’s 1700 ready-mix concrete production sites which
infuse the inputs of its 156 cement plants and over 600 aggregate quarries (Facts and Figures
2016 - HeidelbergCement, 2016, p.2).
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Their other core competence, integration, is somewhat forced from their high levels of
acquisition. If any firm acquires any other foreign firm, it is going to have minor or major
problems with making different cultures work together. At the level of acquisitions that
HeidelbergCement is doing, this could pose a serious threat to the company as a whole.
Instead of being a challenge, an eliminable problem, HeidelbergCement turned integration
into their strength - they had no other choice, really, if they wanted to continue being the best
in the industry. They have an extensive integration management system in place, here are a
few examples on how they tackled this problem:

- Monthly board updates and dedicated board members responsible for integration
management

- Integrated management offices on three levels (group, area, country) which steer overall
processes, consisting of staff from both the mother company, HeidelbergCement, and the
newly acquired firm

- Communication is key, the CEO regularly emails the company’s top management, while a
monthly integration newsletter is sent out to the broader organization, and customized
“Day-1 Packages” help the integration of new acquisitions

- A dedicated synergy tracking team is in place to leverage online tools for planning and
tracking synergies, supported by an aggressive bonus scheme

Regular employee surveys are conducted as “pulse checks” to monitor the social health of
workers all across the board (Schleife, 2016 p.19-21).
From their core competences comes their distinctive competence, which makes them stand
out in the industry, and lets them be the best on the market. The strategy of cost leadership
requires good, established, tried out relationships with suppliers of machinery, raw materials,
equipment and services. It needs downstream and upstream integrations, basically you need to
produce your own materials to make sure it’s the cheapest available. And HeidelbergCement
excels in this, whenever they need a certain input from outside their firm, if it’s cheaper on the
long run, they just acquire a company serving that need, creating one of the most cost
effective supply chains in the industry. Process engineering, intensive benchmarking and cost-
efficient solutions enable HeidelbergCement to be where they are today. Which is most
everywhere.

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5 Company activities and competences

Strengths
• more than 60,000 employees
• operations in over 60 countries
• over a century of experience
• continuous process
engineering
Internal • wide portfolio of products
complementing each other
• wide range of established
suppliers
• high levels of synergy support
Weaknesses
• intense competition in all
markets, resulting in a low
market share growth
• little to no presence in Arabic,
African and South American
countries
• hidden, undiscovered cost
factors
• discovered cost factors
• market pressure in Indonesia and
Africa
• IT risks

Opportunities
• high brand value enables HC
to have a large scope for
mergers and acquisitions
• untapped market expansions
External • vertical integration (synergy)
Threats
• currency inflations
• political power plays and
election results
• global trend of anti-globalization
• alternative building materials
• fluctuation in raw material
prices
• strong competition snatching
markets
• regulatory framework changes

Table 2.

5.1 Strengths
One of HeidelbergCements’ strengths is their successful strategy of targeted investments in
emerging and competing markets, but what made them the industry leader is their continuous
process and cost engineering. Their Continuous Improvement Program (CIP), started in 2014,
is a systematic approach to generate, evaluate and carry out suggestions from employees at
their plants all around the world. Project LEO is aimed at simplifying the logistics processes
they have between their aggregate, cement and ready-mixed concrete lines. The two projects’
savings potential is close to 300 million euros (Marketline, 2015). They have an unmatched
capacity in cement, aggregates and ready-mixed concrete/asphalt, with locations covering the
majority of the worlds markets. With locations in 60 countries on 5 continents, they have an
optimal reach and presence to capitalize on the upcoming trend of urbanization. Their

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synergetic, 1 plus 1 equals 3 vertically integrated business model, with a de-centralized

management, well-oiled integration system, and flexible and quick changes to market all
contribute to the strength of the company.

5.2 Weaknesses
In all markets where HeidelbergCement is present, competition is strong. The biggest players
(LafargeHolcim, Cemex, CRH) compete to get the biggest deals and secure emerging
markets, and in secondary markets, such as South America, Middle-East and Africa, the
opposition is even stronger. Pressure from the market in Ghana and Tanzania comes from the
increased competition, and the company is also underperforming in the Indonesian market.

5.3 Opportunities
The strong brand name of HeidelbergCement makes it easy for the company to find
companies for mergers and acquisitions, which they will need to utilize if they want to expand
to underrepresented regions. Continuation of the M&A strategy to grow and capture market
share and create synergies within the companies’ supply chain seem to be the outlying
opportunities to such a corporation, along with internal cost cutting and structure engineering.
(Schleife, 2016)(Marketline, 2015).

5.4 Threats
Since HC’s supply chain and operations are on a global scale, fluctuations in currency
exchange rates and inflations will always pose a threat to cost and operations. Recent years’
changing political landscape, Brexit, Trump, rising political nationalism, growing trend of
anti-globalization can pose a threat to HeidelbergCement just as much as undeveloped
regulatory frameworks and changes in the legal environment in countries of operation. Raw
material and construction material prices are also affected by emerging technologies and
changing designs in urbanized construction.

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6 Weighted competitor strength assessment

According to size, market reach, financial value and similarity of services, the three main
competitors of HeidelbergCement are LafargeHolcim Ltd. and CRH Plc. These three giants of
the building material industry compete with each other both in acquisitions and market reach
all around the world. Let’s examine them by 5 key success factors in the industry:

HeidelbergCement LafargeHolcim
AG Limited CRH PLC.

Measures Weight Rating Score Rating Score Rating Score

Supply chain 20 8 160 8 160 9 180

Cost efficiency 25 9 225 9 225 7 175

Research and
Development 20 8 160 10 200 8 160

Sustainability 15 8 120 9 135 7 105

Global presence 20 7 140 9 180 6 120

Total: 100 805 900 740

Table 3.

6.1 Supply chain

All three of these companies have high focus and high levels of vertical integration creating
synergies all over their supply chain. CRH received the highest score thanks to their unique
vertical integration system covering more levels than competitors. LafargeHolcim also holds
vertical integration as one of their key success factors, and HeidelbergCement has a long
success history of their excellent integration model which allows them to have one of the best
working vertically integrated business structure. (Morris, 2010)(Standard & Poor’s,
2016)(HeidelbergCement AG., 2015)

6.2 Cost efficiency

As LafargeHolcim states it in their 2016 annual report, "Cost excellence is in the DNA of our
organization and is essential to success in our industry.“ (LafargeHolcim, 2016, p. 23) In this
light, we can see why both LafargeHolcim and HeidelbergCement keep cost leadership as
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their main strategic focus and positioning strategy. HC has an extensive program of constant
process engineering to cut costs, and competence centers to drive company-wide efficiency
projects. They focus on cost improvements and saving costs on suppliers by acquisitions and
synergizing vertical integrations (Schleife, 2016, p.11). LafargeHolcim cuts costs through fuel
flexibility, optimizing current assets, and creating synergies within the company through
acquisitions and expansions (LafargeHolcim, 2016, p.22-26). CRH on the other hand uses a
different, diversification-based strategy by widening the range of offered products and having
a better geographical diversity than the competitors (Morris, 2010).

6.3 Research and Development

Comparing the annual reports of HeidelbergCement and HRC, we can see that most of their
research and development strategies are similar, focusing on making existing processes,
products better (HeidelbergCement AG, 2015)(CRH PLC, 2017). However, LafargeHolcim
with their largest research center in the industry take pride in the development of various new
materials, inventions and patents for the construction industry, becoming a technological
pioneer of the field (LafargeHolcim, 2016 pp. 22-28, 46-48).

6.4 Sustainability
Through their innovations, LafargeHolcim makes sure they are ready for the future when the
market will demand the new, innovative, more environmentally friendly solutions for
construction purposes. With the creation of cheap, locally produceable building materials,
they are building a strong presence in emerging markets and third world countries
(LafargeHolcim, 2016, p.46-48). HeidelbergCements sustainability plan is focusing on the
reduction of the current environmental footprint by cutting emissions and controlling/reducing
the damage the company is doing to the environment. Their upcoming updated sustainability
strategy will revise their plans for the future setting targets to achieve by 2030.
(HeidelbergCement AG, 2016, p.97-98)

6.5 Global presence

By a simple comparison of the three companies’ operating locations we see that
LafargeHolcim has a presence in the most countries (80) and markets, followed by
HeidelbergCement with its 60 locations. Although CRH has only half as many, 31 countries’
markets covered, their score is higher than expected because these markets are mainly
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uncovered by the competition. (CRH Worldwide operations, 2017)(Where we operate,

2017)(Schleife, 2016, p.3)

6.6 Conclusion of scores

In order to raise above its competitors, HeidelbergCement needs to focus more on product
development in research and development, and on the possibilities of entering new
geographical locations. If HC does not turn their focus on the research of new technologies, or
does not acquire a company with this focus, it can lose its competitive advantage given by
process and production engineering. The new emerging markets are crucial to capture and
establish early, before the competition becomes too strong and the price of entry rises too
high.

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7 Probable problems in the near future

The biggest problems HeidelbergCement is facing in the next 3 years is split into two groups:
external and internal problems. Current external problems are the strong market competition
and the lack or low level of presence in Africa, Middle-East and South America, future
external problems are risk of substitute technologies from competitors, energy and raw
material price volatility and mostly political risks (laws, regulations, new environmental
policies). Current internal problems are IT risks and uncertainties related to acquisitions and
governance.

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8 Assessment of problems and general strategic direction

By eliminating cost factors through internal benchmarking and extensive process/cost
engineering, HeidelbergCement can stay ahead of competitors and compensate for fuel,
energy and raw material price volatility.

Capturing market share and entering new markets was always the strategy of HC, and by
continuing it, they can reach rising markets such as Africa, Middle-East and South America,
and increase their presence in existing markets. With the recent acquisition of Italcementi
(Schaller, 2016) for example, they strengthened their position in 22 markets, and increased
synergies, and cut costs by closing redundant sites (Schleife, 2016 p.15)

Research and development has so far been mostly used to better coordinate and raise cost
efficiency of existing processes. Their LEO programme works on optimizing the logistics to
raise efficiency and reduce costs by better utilizing their resources. Projects Aggregates CI
and CIP in aggregates and cement, aim to increase profit margins by improving operational
and commercial processes (HeidelbergCement AG, 2015, p.139). However, these are crucial
for keeping costs low and profits high, they don’t necessarily secure the firms position in the
future, when newer, cheaper, locally available building materials will grow in demand. The
competitors are already developing materials to satisfy the need of the markets in developing
countries, where long-range transportation and industry-level productions are not viable or
possible (LafargeHolcim, 2016, p. 69).

HeidelbergCement is a red ocean company, in a highly competitive, price sensitive market,

where becoming blue ocean by value innovating might be promising, but shouldn’t be the
focus in a highly standardized industry. It should be a long term aim, through investing into
research and development to develop the building materials to satisfy the future markets
needs, and by acquisitions to strengthen and grow the reach of the company on the market and
possibly reach out of the industry by creating business lines in the construction market to
reach to customers directly.

If we examine HeidelbergCement according to the five generic strategies of Ramamurti,

(Ramamurti, 2008 p.33-34) we can determine to which strategy should it follow and to what
extent.

The strategy of natural-resource and vertical integration can bring benefits by securing mines
and quarries necessary for the creation of building materials supplied by HC, which would cut

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costs by diversifying even further on the upstream operations. On the downstream, forward
integration level, it could increase profits by getting closer to the customer and directly
providing engineering and construction services. These could be viable options, and HC
already excels in backwards integration, but a cash cow company like this has other better
suitable strategies for growth. HeidelbergCement is a true global consolidator, and should
continue on the internationalization path of acquisitions to capture more market share and
expand their presence around the globe. Their long-term presence makes the company strong
against late-movers in the industry because of high entry fees to the market, and their high
cash flows and established process and production excellence makes them very attractive to
the price-sensitive customers of the growing construction industry. Both vertical integration,
to further cut costs and internalize suppliers and horizontal integration, to capture new
markets and take market share from competitors is required for HeidelbergCement to grow.

A short evaluation of the three main growth strategies makes it clear that the strategy of
mergers and acquisitions is the best possible path for HeidelbergCement.

Organic growth strategies improve the knowledge base of the company through involvement
in a new technology or market, giving knowledge advantage, that will not need to be bought
as a service or alliance. The strategy also helps spreading investment as time goes by,
reducing risks and making adjustments to the strategy easier to change. Since there are no
availability constraints, the company would not be concerned about the availability of suitable
merger partners and potential alliances. Organic development needs no acquisition target for
entering or growing on a market. Because of its strategic independence, an organic growth
firm does not need to make compromises for alliances, and eliminates the difficulties posed
by integration, leading to less cultural clashes.

It has drawbacks as well of course. Internally developing capabilities is slow, risky and
expensive, none of the things a company in highly competitive industry as HC’s is can afford
for itself.

Companies can also engage in sharing resources and/or activities to reach a common goal, by
a joint strategy, without acquisitions or mergers. Strategic alliances are a popular growth
strategy, large corporations manage around 30 alliances at one given time. They allow rapid
extension and require less commitment than the other forms of expansion. Sharing resources
is usually the key motivator behind an alliance, but other synergetic reasons could exist. Four
main types of it are scale, access, collusive and complementary alliances.

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Scale helps companies reach necessary scale. Access alliances are used to gain access to
established markets or to raw materials. Complementary alliances are combining value
networks of complementary resources and skills, so both partners are strengthened by the
alliance. Collusive alliances are secret, in order to increase market power, reducing
competition in the market and leading to price extraction and lower supplier prices. These
cartels are strictly regulated against.

The strategy of mergers and acquisitions help by extending businesses in geography, markets
and products, and helps build synergies through vertical and horizontal integration. Through
consolidation, HC can reduce market competition and increase efficiency by sharing
resources and bargaining power with suppliers. Acquiring emerging new technologies instead
of researching them also cuts significant costs and can provide a competitive advantage to the
firm. M&A is also very fast, allowing quick reactions to market demand changes and
competition. There are financial advantages too, such as transferable profits or tax losses,
saving on interest payments by combining balance sheets and asset stripping (Duncan, 2007).

Mergers and acquisitions strategy is the most suitable for HeidelbergCement to grow their
global presence, market reach and tackle any problems the future might pose. With a
continued M&A strategy, with the well-established integration systems, HeidelbergCement
can become even more profitable, capturing arising opportunities of urbanization and
emerging markets and resistant to arising problems in the future.

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