Section I The Market at the Bottom of the Pyramid

CEMEX: Innovation in Housing for the Poor
CEMEX is a multinational cement manufacturing company operating out of Mexico. It is the largest cement manufacturer in Mexico, the second largest in the United States, and the third largest in the world. The company has operations on four continents and recorded global revenues of $6.54 billion in 2002 with a gross margin of 44.1 percent.

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. CEMEX manufactures and sells raw cement, ready-mix concrete, aggregates, and clinker (used to make cement) under different brand names. As the largest cement company in Mexico, CEMEX operated in a highly protected legal environment with little competition until the 1990s. It competed mainly on price and controlled 65 percent of the market share in Mexico. However, during the 1990s, the legal barriers in Mexico broke down, paving the way for international competition. CEMEX found itself operating in a highly competitive open environment. Starting in 1987, under the leadership of Mr. Lorenzo Zambrano, CEMEX experienced explosive growth, mainly through acquisitions and global expansion. Today, the company has 235 cement and ready-mix plants in Mexico, 60 in the United States, 85 in Spain, 45 in Venezuela, 4 in Indonesia, and 4 in Egypt. In the new competitive arena and under new leadership, CEMEX fundamentally changed its ways of conducting business. The company’s strategy

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emphasized improving profitability through efficient operations. The company also shifted from selling products to selling complete solutions. With this new strategy, CEMEX has established a very strong brand and has managed to translate it into extraordinary profits from a commodity-driven business. According to CEMEX, the following are the sources of its competitive advantage, many of which have been widely acknowledged in business circles:
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Continued innovation High level of commitment to customer service and satisfaction Proven postmerger integration expertise Digital evolution: efficient production, distribution, and delivery processes through sophisticated information systems Ability to identify high-growth market opportunities in developing economies

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CEMEX: Mexico
CEMEX has 15 cement plants and 220 ready-mix plants spread throughout Mexico. The company sells cement to two main customer segments: the informal or self-construction segment and the formal construction segment. The formal segment consists of traditional large-scale customers, middle- and upperincome individuals, whereas the informal segment consists of the do-it-yourself homebuilders and low-income customers. The company has invested considerably in information technology (IT) over the years to boost productivity and manage its operations more efficiently. CEMEX takes pride in its operations and was recently the winner of the CIO100 from IDG’s CIO magazine.1 The company has gained a significant competitive cost advantage over its competitors by setting up an excellent distribution infrastructure and centralized, computerized delivery network in which every movement of every truck is monitored in real time, enabling ontime delivery of cement and ready-mix to customers. The operation in Guadalajara boasts a 97.63-percent on-time delivery of cement.

Patrimonio Hoy
Patrimonio Hoy means “savings/property today.” In 1998, CEMEX launched an innovative experiment called Patrimonio Hoy that enables very poor people to pay for services and building materials to upgrade their homes. This program

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blends the pursuit of profit and social responsiveness at CEMEX. The key objectives of the program are as follows:
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Generate business that represents competitive advantages Represent an accessible option for poor families looking for a better quality of life through households by offering good-quality cement and raw material at reasonable and frozen prices (i.e., no price changes reflecting time and inflation) Offer access to credit (by providing materials in advance) not available to the poor otherwise Position CEMEX as a responsible corporate citizen that is committed to society Build social capital

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During the Mexican economic crisis in 1994–1995, CEMEX experienced a significant drop in domestic sales. Sales in the formal segment dropped by as much as 50 percent, but sales in the informal and self-construction segment dropped by only 10 percent to 20 percent.2 The company realized that its high level of dependency on the formal segment left it very vulnerable to business cycle swings in Mexico. According to an estimate by CEMEX, the do-it-yourself segment accounted for almost 40 percent of cement consumption in Mexico and has a market potential of $500 to $600 million annually. Realizing the potential in this segment, CEMEX expanded its presence in the retail channel by setting up 2,020 kiosks or construramas to establish closer relationships with the informal segment. At the same time, CEMEX was looking for business opportunities to distinguish itself in the industry and establish a competitive advantage. The company also was keen to develop corporate citizenship and become a more socially responsive company. CEMEX as a firm was known for identifying potential opportunities and turning them into profitable ventures. Realizing the huge potential in the doit-yourself segment, the company embarked on a new venture to capture that untapped segment. This laid the foundation for Patrimonio Hoy. The company realized the key difference between the formal segment and the informal segment was in the average revenue per customer. Whereas fewer bigticket customers could generate most of the company’s revenues, the situation is reversed for low-income customers (see Figure 1). It is estimated that 60 percent of the population in Mexico earns less than $5 per day. CEMEX learned that by converting the low-income population (which forms a majority) into customers, the steady revenues from this segment could be very impressive.

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Formal customers

Informal customers

Revenue per customer

Figure 1 Customer/Revenue Contribution models

The management team headed by Francisco Garza Zambrano and a consulting team from Business Design Associates performed in-depth market research to gain a good understanding of this low-income market in Mexico. The research was an eye-opening experience (see Table 1) for the CEMEX management from a business and social perspective. Project Patrimonio Hoy was conceived. Before actually entering the market with this program, CEMEX had to overcome a few fundamental and critical challenges that were specific to the low-income market. First, CEMEX had to build trust and convince the poor they would indeed be able to build a house with CEMEX. Second, CEMEX had to make the poor understand that credit was not a stumbling block for the poor as part of Patrimonio Hoy. The team had to work with a different mindset that did not include sale of cement as the sole objective of the program.

Mexican Society
Mexican society, like many other societies in developing countries, possesses certain characteristics specific to that society.

Savings
Low-income families in Mexico (and in many other parts of developing and underdeveloped countries) follow a different savings method from that of middle- and upper-income families. Because low-income families don’t receive regular paychecks and don’t receive any government subsidies or grants, they don’t have access to banks and credit. Within a community, neighbors, families,

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Table 1 Comparison of Formal and Informal Market Segments Attributes Sales Payments Demand Price sensitivity Brand equity Growth Customer location Relationships Formal Segment Higher revenue per customer Financing generally not required Depends on economy Driven by bargaining power Recognized and trusted Informal Segment Low revenue per customer Financing is important More or less steady demand Convenience-driven (such as credit, delivery, etc.) Should build trust to deliver as promised Very high potential for growth Mostly located in remote areas

Slow growth Usually located in places of easy access Stops at the distributor level Requires close ties with end customers

and friends get together and form tandas or “pools.” The members of the tanda pool in money as and when they receive paychecks and if they have any money left to save. Once a week (or at some predetermined interval), one of the members can bid for the pool by deep discounting or can win the pool through a lottery. Typically this pool is used for unanticipated family emergencies, education, and sometimes housing. The only factor that enforces discipline in the tanda system is the social capital—the trust, reputation, and participation in the community. However, the tanda system was not nearly as effective for housing. Even before money found its way to such pools, families (usually the men) spent it on various other non-primary activities—drinking, partying, and so on. Also, there were too many members in pools, and it was difficult to manage and enforce discipline. People often backed out of the pools and this led to many problems.

Women and Entrepreneurism
Women are the key drivers of savings in families. In Mexican society (and most other societies), women are very entrepreneurial in nature, and they very actively participate in the tanda system. Regardless of whether they are homemakers, working women, or small-business owners, they are responsible for any savings in the family. Research conducted by the Patrimonio Hoy team revealed that 70 percent of those women who were saving were saving money in the tanda system to construct homes for their families.

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The men in the society considered their job done if they brought in their paycheck at the end of the day. The women actually manage expenses with the limited “allowance” that they receive per day from the men. They have to find very creative ways to allocate money from the allowance as savings to build a house, spend on their children’s education, and so on.

Housing
The poorest people in the city live in settlements made of raw cinder blocks, and in worse cases cardboard and corrugated sheet metal. Most houses have one or two rooms per family, and the size of a family ranges from 6 to 10. The homes are overcrowded and this causes its own set of social problems, including friction within the family and children taking to the streets.

Initial Market Research: Guadalajara, Mexico
A research team of eight people selected Guadalajara in the province of Jalisco as the first city to implement the program. Guadalajara has been considered a traditional test market in Mexico for many reasons. First, the social and economic profile of low-income communities was very representative of most of the populated areas in Mexico. Over 50 percent of the population lives in homes that hug a network of pitted, unpaved roads in unplanned settlements surrounding the city and blending into the countryside. Second, CEMEX was gradually losing its stronghold in the second-largest city in Mexico. Nearly all the houses appear to be under construction. The third very subtle reason was that the construction methods in Guadalajara were different from that of other places. Traditionally, for every 100 pesos spent on construction raw materials, 52 pesos were spent on cement. In Guadalajara, the southwestern region of Mexico, only 22 pesos were spent on cement. Instead, clay and limestone were used in the construction of houses. CEMEX thus had to find new opportunities for growth in Guadalajara.

Market Eye-Openers
The team conducted a three-month study based on various demographic factors—social, religious, political, and financial. The study also analyzed the various construction practices and methods, brand perception, and image of various cement brands. The team realized that financing was the most important and most difficult challenge to overcome for low-income customers. Unless the poor obtain access

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to credit, it would be difficult to sell the idea of constructing a complete house in the near future. The second challenge was that most families employed local semiskilled or unskilled masons who built rooms without any planning. The lack of technical expertise resulted in a lot of raw material waste. Often the masons did not order the right amount of material, and families didn’t have a safe place to store the excess raw materials. They had to leave the material outside their houses at the mercy of nature and theft. The team identified three keys areas of improvement and change for CEMEX before launching Patrimonio Hoy:
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Identify innovative ways to provide access to credit for the poor Improve the brand perception of CEMEX as a socially responsive company to earn trust among the people, especially the poor Change and improve distribution methods and construction practices to make it cost-effective for CEMEX, its distributors, and the low-income customers

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Patrimonio Hoy: Program Design
Identification of Offices or Cells
A special research team set out to explore neighborhoods in and around the city of Guadalajara to identify high-growth opportunities. In a broad sense, the team identified potential pockets or cells based on income, construction progress, housing development, concentration of poor people, distributor network, and population growth. The team identified target communities where the average family (5–6 people) earned around 50 to 150 pesos (US$5 to $15 approximately) per day. The target population for Patrimonio Hoy is not the absolute bottom of the economic pyramid, wherein the average per-capita income is less than $5 per day.

Cell Setup
Once a neighborhood was identified, Patrimonio Hoy set up a cell for that neighborhood. A typical cell is set up to target a customer group of 5,000 or a community with a population of between 50,000 and 100,000 (or 20,000 families). There are one to five employees per cell: a general manager or chief, an engineer, a technical advisor or an architect, a supplies manager, and a customer service representative or administrative clerk.

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The chief works in identifying “promoters” within the community who go door-to-door selling the new savings–credit idea to the poor. The supply manager works closely with corporate CEMEX in the negotiation of prices for raw materials, interacts with the distributors for the delivery, and monitors the quality of suppliers and distributors in terms of delivery time, customer treatment, quality of materials, and so on.

Customer Enrollment
Recognizing the inefficiencies inherent in the original tanda system, Patrimonio Hoy has strict rules and standards for the program.

Socios or Partners
Socios are the actual customers who enroll in Patrimonio Hoy. The socios get together and form a group, restricted to three people. The reason for such a small group size is that it is easier to enforce payment discipline in a smaller group, and the group tends to form stronger relationships to help each other out during an emergency.

Promoters
Promoters play a key role as ambassadors for Patrimonio Hoy. Ninety-eight percent of the promoters are women. They work on a commission basis that is dependent on the number of socios they help enroll and on the duration of the stay of the socio within the program.

Savings—Credit Payment Cycle
CEMEX made improvements to the existing tanda system by offering a combination of savings and credit. In this system, poor people not only save their money, but also obtain access to credit based on their savings and payment discipline—a new model that moved away from a savings-only or a credit-only system to a savings-credit system. By introducing the savings-credit system, Patrimonio Hoy might have revolutionized the idea of savings by changing the basic spending pattern of the poor in Mexico. The enrollment of a socio ensures a consistent and steady source of revenue in the pipeline (for x number of weeks) for Patrimonio Hoy and the distributors. The predictability of revenue has huge implications across the value chain from the suppliers to the end customers. When a socio group is formed, the group goes to the nearest cell and completes an application. This application is completely informational and does not require any credit history or collateral. Also, the prices of raw materials are “frozen” throughout the payment period. The only requirement is a

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commitment from each socio in the group to pay 120 pesos per week for a definite period of time (at least 70 weeks). After enrollment, each socio in the group sets up an appointment with the technical advisor or architect (for a low fee) for an interview. Through an interactive process, the technical advisor helps the socio decide the following:
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Types and quantities of the needed materials for the first room What the next room will be in his or her home and its placement in the current layout The sequence of the following rooms to be constructed in the future

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The personal visits of architects make the socios feel like important customers, and have helped Patrimonio Hoy build trust among the socios. Each socio in the three-member group takes a turn every month to collect money from the other two members and remits a weekly payment of 360 pesos (120 pesos per head). For every 120 pesos a partner pays per week, Patrimonio Hoy charges 15 pesos as a membership fee per socio.

Phase 1 (First 10 Weeks)
Each socio pays 105 pesos (120 pesos net of 15 pesos) for the first five weeks, totaling 505 pesos. At the end of the fifth week, Patrimonio Hoy makes its first delivery of raw materials for construction worth 1,050 pesos (equivalent of payment for 10 weeks). By advancing five weeks worth of raw materials, Patrimonio Hoy is effectively extending credit to its customers. The extension of credit by delivering raw material to partners in advance helps Patrimonio Hoy establish credibility with the socios by proving that it has lived up to its promise of delivering raw materials. This phase also serves as a pilot to test the commitment of the socios.

Phase 2 (11–70 Weeks)
If socios stay committed beyond the first phase, they gain from the program even more. During the subsequent phases, socios receive raw materials worth 10 weeks at the end of the second week; that is, advance worth eight weeks. They receive raw materials worth 10 weeks at the end of the 12th week. Deliveries are made during Weeks 12, 22, 32, 42, 52, and 62.

Material Distribution and Delivery
CEMEX offers socios two choices of delivery: receive delivery right away for immediate construction or receive a delivery voucher now that can be exchanged for raw material delivery at a later time when they are ready to start

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construction. However, they will never receive cash in hand, unlike the original tanda system wherein pool members could receive cash. If the partners choose to receive their raw material, Patrimonio Hoy coordinates with its distributors to arrange for delivery of the material. If partners choose to receive delivery vouchers for delivery at a later date, the inventory is stored at the distributors’ warehouses. Interviews with socios revealed that the first delivery made after just five weeks of payment and consistent on-time delivery played a large role in earning the trust of the partners. The supply managers also play the role of an audit manager, ensuring that the distributors deliver good-quality materials on time and provide good service to the socios.

Value Analysis
CEMEX was quick to realize it had to position itself as a complete solutions provider at low cost and not as a cement seller competing on prices, in order to tap into the huge low-income market. It also realized if it tried to sell just cement, it wouldn’t take too long for competitors to enter the arena. Hence, the company’s strategy for the low-income market was to do the following:
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Position itself as a company committed to society by offering housing at a low cost to the poor and enabling a better quality of life. Sell cement and other raw materials as a package such as pacquet tolteca. (Tolteca is a CEMEX brand of cement sold in Guadalajara.) Offer value-added services such as credit access, technical advice, architect visits, storage space for raw material, and customer service.

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Patrimonio Hoy had to offer a strong value proposition for customers to overcome their resignation to life as the ignored population segment, and also change certain fundamental and cultural spending (on nonbasic events such as parties, drinking, bars, etc.) patterns. It also had to ensure that its suppliers and distributors were enthusiastic about the new business model.

Value to Promoters
Promoters are the ambassadors of Patrimonio Hoy who identify prospective customers, sell the idea of savings–credit to them, and motivate them to enroll in the program. Hence, it is important that they are very enterprising and have active ties with the local community. The reason for promoters to participate in the program is twofold: They do it for a social cause to build social capital (According to Patrimonio Hoy’s general manager, “Social capital is very important for people with little economic

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capital.”) and also to earn money. Patrimonio Hoy rewards their efforts on a commission basis (points system). A promoter earns 48 points (1 point = 1 peso or in U. S. $0.10) for every enrolled socio for whom she is responsible. To ensure that she brings in committed socios, the system rewards her with more, depending on the commitment of the socio to the program. On the 30th week of the socio, she gets 32 points, and from the 30th week on, she gets one point per week per socio. For example, if a socio is enrolled in the program for 70 weeks, the promoter who is responsible for the socio’s enrollment earns 120 points (48 + 32 + 40). The system implicitly encourages promoters to bring in as many committed socios as possible. Many promoters are socios themselves. At the end of the 70week period, the promoters can convert the accumulated points on a one-to-one ratio to receive either cash or raw material (if the promoters are socios themselves). Patrimonio Hoy offers initial training to promoters and they start with a target enrollment in the range of 80 to 90 (per cell) socios per calendar period (28 days). Typically, each cell has eight or nine promoters.

Value to Socios and Partners
The biggest challenge for Patrimonio Hoy is to build trust with the people. The poor people are resigned to the fact they will not be able to build a house in less than two to three years. Typically, it takes 16 years for a family to build a four-room house and an average of four years just to complete one room. To lure the customers, Patrimonio Hoy offers the following proposition:
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Offer access to credit by providing materials in advance Offer good-quality cement and raw material from a trusted national brand at reasonable and frozen prices (i.e., no price changes reflecting time and inflation) up to 70 weeks Build a typical room in 1.5 years (instead of four years) Provide technical support and service such as architect visits and technical advice Provide skilled masons for construction for a reasonable fee by opening a school for masonry training Provide excellent customer service and good treatment Provide storage space for raw material and reduce waste Offer accelerated payment options for ambitious and aspiring customers Offer similar programs for schools (Patrimonio Hoy Escolar) and other infrastructure such as pavements (Calle Digna) for families and neighborhoods

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Reduce cost of construction by reducing waste and offering technical training for self-construction. Offer training to socios interested in masonry Build social capital

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Patrimonio Hoy helps the poor build homes that might have been a distant dream otherwise. By offering such value-added services, Patrimonio Hoy has been successful in earning the trust of the socios. The general manager of Patrimonio Hoy claims the reduction in costs for the socios are as high as 30 percent, and the reduction in time reaches as high as 60 to 70 percent.

Value to Suppliers
CEMEX is the largest cement manufacturing company in Mexico and, by virtue of its size, it has significant bargaining power with its suppliers and distributors. Patrimonio Hoy collaborates with CEMEX in negotiating prices of raw material such as bricks, steel, clay, limestone, and so on, with suppliers. The company exerts collective bargaining power over its suppliers by negotiating on three key factors: generating a steady demand for materials, creating a consistent revenue stream, and ensuring zero-risk collection of money. According to Patrimonio Hoy’s general manager, the suppliers are very happy to supply materials to Patrimonio Hoy because of the steady demand for their materials and the quick growth in sales (as high as 30 percent annually) in locations of operations of Patrimonio Hoy.

Value to Distributors
Traditionally, the company has “pushed” its products and services through the distribution channels, and hence it was a very price-driven market. Distributors operated on a 15-percent average margin from the sale of building materials. However, in the new business model, Patrimonio Hoy manages the distributor relationships on its own. Although it works with the existing CEMEX distributor network, the margins in the new channel are slightly different. Distributor margin on the sale of building materials sometimes drops to 12 percent. However, the slight drop in margins is more than offset by a steady demand for cement and other high-margin raw materials such as sand and gravel where the margin could be as high as 45 percent. Patrimonio Hoy has effectively created a pull for cement, and CEMEX on the supply side pushes it, enabling the push–pull strategy for cement sales. Patrimonio Hoy has seen a very enthusiastic response from distributors who are willing to participate in this program.

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Operating Model of Patrimonio Hoy
The objective of Patrimonio Hoy is not only to serve a social cause, but also make it a profitable, self-sustainable business. Patrimonio Hoy also recognizes that volume is very important for it to be a success, and hence has based its revenues on a per-transaction basis. These revenues are in addition to the sale of cement by CEMEX.

Revenues
The revenue streams are as follows:
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Membership fee of 12.5 percent per socio per payment of 120 pesos Intermediation fee in the form of a 7-percent margin from distributors

Costs
The average initial investment per typical cell is 400,000 pesos. The operational cost per cell, including salaries, is around 85,000 pesos per month. An average cell needs approximately 700 enrolled socios to break even on operations. According to Patrimonio Hoy’s general manager, the program generates approximately 2,000,000 pesos in cash flows from operations. The goal of this program is to operate as a standalone, break-even unit, because the initial objective is to increase customer awareness, change consumer behavior, and establish a competitive position in the market.

Marketing
The traditional methods of marketing communication, advertising, and promotion are not effective in this operating model. Patrimonio Hoy realized early on that mass media advertising through television, newspapers, and other outlets would not convey a personalized message and would not help build trust among the low-income people. The Mexican people believe in leaving something behind for the next generation. Mostly, the families believe in leaving immovable property or wealth for their sons and daughters. That, in Spanish, is called patrimonio. The Patrimonio Hoy program tries to convey the message by motivating the public to “save today.” In addition, the idea of being part of a family or a group, with a clear set of values, benefits, and so on, is extremely important in Mexican society. Patrimonio Hoy conveys this message in its marketing communications and encourages socios to enroll with Patrimonio Hoy.

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Community Outreach
Among the poor, the best way to establish ties with the local communities is through personal interaction. Perhaps this explains the significance of the role of promoters for Patrimonio Hoy. The promoters go door to door in the neighborhood communities and talk about the benefits of the program. Patrimonio Hoy provides literature and pamphlets that contain relevant information, and provides preliminary training for the promoters. The main objective is to generate interest in the community. The sales officers and promoters periodically hold meetings and public gatherings to educate the customers. One can find messages and contact information painted on the walls of neighborhoods as bills or graffiti.

Word of Mouth
Word of mouth is the single most important broadcast mechanism that has proved to be successful in the expansion of the program. People in the neighborhoods tend to have very close-knit ties within the community that again reflect the importance of social capital. Anything good or bad spreads very effectively through the word-of-mouth channel, which is often underestimated or ignored.

Pricing
Patrimonio Hoy has adopted “the CEMEX way” to conduct profitable business. Although Patrimonio Hoy tries to offer cost-effective solutions to customers, it does not offer low-price or lower quality products and services. The company has been reasonably successful in convincing distributors of the same and has avoided a price war. In fact, CEMEX sells its cement at a slightly higher price than that of its competitors. The socios are aware of this. Interviews with socios reveal that the higher price charged by CEMEX is more than offset by the value-added services that Patrimonio Hoy offers to the socios. Patrimonio Hoy negotiates a volume-based discount of up to 7 percent from its distributors. The salary structure of the supply manager is based on how well he manages to negotiate discounts with the suppliers and distributors. To ensure that the materials, including cement, are reasonably priced, Patrimonio Hoy conducts a market study that publishes prices of competitors and calculates an average price for each calendar month. The socios who sign up in a particular month enjoy the same prices through the 70-week payment cycle. For example, if the price of a ton of cement is 100 pesos when a socio signs up, Patrimonio Hoy commits to sell cement at 100 pesos for the rest of the 70-week period. By offering this price commitment, Patrimonio Hoy is able to charge a slight premium over its competitors. Each cell maintains its own list of prices.

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Promotion
Patrimonio Hoy offers small-scale promotional events such as fee waiver for the first installment or a few installments for new enrollees, a raffle event wherein a socio receives a room essentially for free, and 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 doesn’t have enough data to verify if promotions are a good way to increase enrollment.

Distribution
In the traditional distribution network and supply-chain model, bargaining power and market dominance had played a key role in the determination of prices and selection of distributors. The distributors primarily cared about prices and discounts. The industry was driven by price wars. However, the new model takes a very different approach. Not all the traditional distributors are part of Patrimonio Hoy. In fact, a new strategy is adopted for establishing a distribution model that would work for the program. Certain prerequisites are established for distributors and resellers to be part of the program:
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Good understanding and appreciation of the new business model Excellent delivery capabilities with trucks to deliver to the local neighborhoods with not-so-accessible roads and infrastructure Capacity for storage of raw material inventory Exclusive relationship with CEMEX

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When the program originally started, only one-tenth of the distributors qualified under the rigorous selection process. For example, in the Mesa Colorada neighborhood in Guadalajara, of the 30 or so distributors that sold CEMEX products, 10 distributors were exclusive CEMEX distributors; among those 10 distributors, only 3 to 4 distributors were selected to participate in the project because of the capabilities.

Risk Management
Conducting business with the low-income population with no regular stream of paychecks seems riskier than the traditional lending models. Patrimonio Hoy claims the risks are actually low. According to the general manager of Patrimonio Hoy, the default rate so far has been an impressively low 0.45

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percent. The huge rate of success can be attributed to three important factors: group commitment, social capital, and the penalty fee structure. When a group of three socios walks into a cell and completes an application, the only commitment they are expected to make is the regular payment of 360 pesos per week per group on time. If for any reason one of the team members doesn’t turn in his or her payment portion on time, the group as a whole will pay a late fee of an additional 50 percent (60 pesos) per late socio. Not only is there a late-fee penalty, but the delivery for the entire group is delayed by one week as well. This also is recorded as a black mark, and the group members will have problems later if they decide to apply for a new credit. If one of the members defaults for some reason, news simply spreads by word of mouth and he or she is more or less ostracized from the whole process. He or she will lose credibility and will have problems finding a group later.

Strategic Importance of Patrimonio Hoy to CEMEX
After three years of operations, Patrimonio Hoy has 36,000 customers and over $10 million in credit. It operates through 49 cells in 23 cities across 19 states in Mexico. The customer base is growing at a rate of 1,500 to 1,600 per month. It might be too early to use financial profits as a measure of success. As a standalone operation, Patrimonio Hoy might not be generating as high a margin as corporate CEMEX is through sale of cement. However, the project has strategic implications for CEMEX. According to the general manager of Patrimonio Hoy, the operation is generating positive cash flows from operations of 2 million pesos per month as of February 2004. However, the more important and critical factor is that Patrimonio Hoy has successfully created an entirely new channel for selling cement and other construction materials. Patrimonio Hoy has helped CEMEX triple its cement sales in places where the operations of Patrimonio Hoy are set up. This has increased from 2,300 pounds of materials consumed once every four years per family, on average, to the same amount being consumed in 16 months.

Sustainable Growth Strategy and Innovation
By offering a complete and comprehensive solution for housing, Patrimonio Hoy has made it difficult for consumers to let go of this opportunity, and has fundamentally changed consumer behavior, even if on a small scale. Patrimonio Hoy is trying to find ways to keep the growth sustainable. It has introduced various innovations around Patrimonio Hoy: Patrimonio Hoy Escolar, Patrimonio Hoy Te Impulsa, and Patrimonio Hoy Calle Digna.

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Patrimonio Hoy Escolar (School) is a variation of the original program in that it helps improve infrastructure of the local schools. Four percent of the membership payment of socios is allocated toward improvement of school facilities. Te Impulsa is an accelerated version of the original program where raw materials are delivered to customers earlier. The materials are delivered in three installments—in Weeks 6 (30 percent), 14 (30 percent), and 22 (40 percent). By the 22nd week, 100 percent delivery is promised to the socios, although they make their usual weekly payments until the 70th week. This program is available to returning socios who have established credibility by making regular payments on time the first time they enrolled in the program. Calle Digna (“Worthy Street”) was created in response to the request of socios who wanted to move on from building their homes to improving infrastructure in their neighborhood. This is a classical example of how Patrimonio Hoy has changed the consumer outlook and how it has changed customers from people in despair to people with hope. This project brings people even closer to work together for the cause of their communities. Patrimonio Hoy has partnered with the Mexican government to work on public infrastructure projects, many of which the local government hasn’t been able to implement for various reasons. The local government provides drainage facilities, and Patrimonio Hoy provides the materials for paving the streets. The payment structure is slightly different. The weekly payments are 150 pesos for x number of weeks, depending on each family. Patrimonio Hoy provides readymix or raw materials starting on the 18th week of the payment cycle.

Challenges
Although customer enrollment is increasing at a rapid pace, customer retention is a huge problem for Patrimonio Hoy, not because of poor quality of products and services, but by virtue of the nature of the business. After a room is done, the probability of customers returning to build another room is not 100 percent. Many take a break from the rigors of payment. The biggest challenge for Patrimonio Hoy is to retain those customers for a longer period of time and motivate them to return for additional rooms or other expansions. In many cases, the socios cannot afford weekly payments for raw materials and mason fee for construction at the same time, so they first buy raw materials over 70 weeks, build houses later, and then might return to save for the next room. To facilitate the continuity of the socios with the program, Patrimonio Hoy has established masonry training facilities for self-construction where socios can obtain technical training to build homes on their own. The socios not only get to build their own homes, but also gain a new competency.

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Key Lessons from Patrimonio Hoy to CEMEX
Patrimonio Hoy has helped CEMEX gain a good understanding of the lowincome population. It has helped CEMEX clear the misconception it originally had about the poor, and realize they could indeed form a good and profitable segment of the market. CEMEX also learned that traditional methods of operation would not work. However, it remains to be seen if CEMEX can provide housing for the poor to serve a social cause, and at the same time remain profitable in the long run by expanding this program globally.

Leveraging This Learning Through Contrumex
Having successfully launched Patrimonio Hoy in Mexico, CEMEX turned to another possibility. It was common knowledge that a large number of Mexican immigrants lived and worked in the United States. They sent remittances home every week. These total remittances were on the order of $10 billion. Although the size of the average remittance transfer was miniscule ($200–$300) in the world of international finance, the cumulative sums were significant. Further, an estimated 10 percent of these funds were intended to build additions to homes of the family members of the immigrants. CEMEX saw an opportunity to capture a share of the remittance market to Mexico. This would further its business of helping the poor build good-quality houses.

Evolution of the Business Idea
CEMEX knew a significant portion (about 10 percent) of remittances to Mexico are used for construction of houses. Most of the Diaspora remit money using traditional money transfer companies like Western Union. This process is fraught with inefficiencies:
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The money transfer firms (oligopoly) charge high flat fees for transferring money. The exchange rate offered is less than the market rate. Relatives back home could spend a significant portion of the remittance meant for building the house for other purposes. There is a risk of theft when collecting money from money transfer agencies in Mexico.

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CEMEX identified the need for an easier and cheaper way to help the Diaspora build houses back in Mexico. A subsidiary, Construmex, was formed to serve this need. Following a small-scale market research effort, Construmex set up its first experimental office in Los Angeles in July 2001. The significant Mexican population of Los Angeles made it the natural choice for trying out this business model.

The Business Model
In short, Construmex allows Mexicans living in the United States to send their money directly to cement distributors in Mexico. Distributors receive the order and the money, and deliver cement and other building materials to the site of the person’s future home or business (see Figure 2). Broadly, there are two types of customers:
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Individuals remitting money for building their homes in Mexico. Home town associations (HTAs) remitting money for public service projects in their home towns in Mexico.

Construmex USA
The express purpose of Construmex is to channel as large a share of the remittance flows to CEMEX as possible. It is not a profit center and has little revenue. Hence the primary activities of Construmex center around generating customer awareness, offering customer education, building trust in the Mexican community, spreading through word of mouth, and working with HTAs to capture a share of the HTA remittances. Not surprisingly, 60 percent of Construmex’s budget is dedicated to marketing. Construmex offices typically have one or two sales representatives. These sales representatives are multifunctional in that they do the following:
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Answer customer queries. Consult the customer about the architecture and plan of the house (they are trained Mexican architects). Estimate building material requirements based on the house plan. Help customers do price comparisons and choose the best distributors. Register customers in the Construmex database.

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Construmex Promotion in U.S.

Mexican immigrant

Construmex sales representative 2. Inquiries 3. Consultation 4. Estimate of materials 7. Receipt 8. Confirmed order + terms of agreement

Building plan development (3D Home Architect) Building material estimation (Excel Templates)

1. Customer awareness

5. Estimate + money ($) 6. Receipt • • • • Construmex Standalone PC Customer registration Distributor price comparison Estimate creation Order creation

Dole representative 9.2. Money transfer ($) 9.3. Call up beneficiary with key number 9.1. Customer order Cemex Intranet

Construmex Monterrey 9.4. Customer order

14. Proof of 15. Release money to receipt distributor (pesos) $

10. Order key number 11. Confirmed delivery date/time 13. Proof of receipt Beneficiary Distributor in Mexico

Distributor bank

12. Delivery Work site

Building materials Loading of building material

Distributor truck

Figure 2 Construmex business model: Flow of money, materials, and information

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Dolex USA
Dolex is the money-transferring agency that transmits the money from the customer to the Construmex account in Monterrey, Mexico. The money is transferred in dollars, and there is no exchange of currency. Construmex is still trying to define the perfect business model, according to General Manager Luis Enrique Martinez. However, it has tried two variants to this point:

1. The Construmex sales office has a Dolex counter within it. When a customer comes into this sales office, he or she has the option to remit money through Dolex or to send building materials through Construmex (e.g., Broadway office, Linwood Office, Fresno Office, Santa Ana office). 2. Construmex sets up a simple kiosk explaining the value proposition in a Dolex sales office. The customer has the option to send building materials through Construmex instead of remitting cash (e.g., the Huntington Park office).
Dolex started its U.S. operations in 1998 and is still a very young player in the money transfer business. Dolex has 600 sales offices in the United States, and Construmex wants to scale up its operations by using this existing network. Construmex will try out the second model in Chicago where Dolex has about 25 counters. There will be one Construmex sales office to answer any questions and provide consultation. The lean cost structure in the later model is obviously very appealing for an organization that has no revenues, so controlling costs is critical, because that is the only variable that is under the company’s control.

Construmex Mexico
The Construmex office in Mexico does the following:
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Selects distributors for the Construmex program. Receives money from Dolex and processes the accounting of the money transferred. Transfers the order to distributors. Verifies delivery of material to the beneficiary. Releases money to the distributor.

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Construmex Distributors in Mexico
According to the general manager of Construmex, the quality of service provided in the United States as well as Mexico is critical for generating trust and acceptance. Because of this, Construmex carefully selects distributors for its program. The different criteria applied are (a) accuracy of materials delivered, (b) adhering to the five-day delivery guarantee, and (c) prompt service. Now 1,600 of the 6,000 CEMEX distributors are part of the Construmex program. They cover all states of Mexico except Tijuana. These distributors are typically known to the beneficiaries and hence help in building trust with the clientele. They are happy to work with Construmex because this means more business for them.

International Growth
In 2002, a team from CEMEX Philippines visited Los Angeles to study the operations of the Construmex program. There is strong interest in CEMEX Philippines in replicating this model. This has great potential because Filipinos send much more money home than do Mexicans.

Endnotes
1. http://www2cio.com/info/releases/08150212_release.html. 2. www.vision.com: Media Coverage 2002: Enabling the poor to build housing:
Pursuing profit and social development together.
This report was written by Ajit Sharma, Sharmilee Mohan, and Sidharth Singh under the supervision of Professor C. K. Prahalad. The report is intended to be a catalyst for discussion and is not intended to illustrate effective or ineffective strategies.