Strategy

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Strategy

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Four articles in this webpage:

1-Strategy-Saving the company

2-Sell the company

3-One investment too many

4-Setting up a PU systems house

Strategy-Saving the company.

Introduction
According to the Oxford dictionary, strategy is defined as the art of planning operations in war. Therefore, strategy is a military term. Its root is 'stratos', with the accent on the "o", which means army, in Greek. Furthermore, Stratigos, again in Greek, is the leader of the army or in military terminology, the general. However, the term strategy is applied whenever a plan is being designed to lead to a desired outcome. No doubt, that the outcome to be satisfactory must aim at a success.
The chess player can choose after every move his opponent makes, from a repertory of thousands of strategies. He can also improvise. So does, in turn, his opponent. The result of the game can be a victory, a defeat or a draw. Whereas, victory is the primary aim, defeat has to be avoided at all costs even in favour of a draw.
The same holds for team games where the manager establishes a strategy, which is put into practice by the players in the field.
Games repeat themselves and the outcomes may shift from victory to defeat. If, in the medium term, losses keep on accumulating the professional chess player drops in the rankings and his income is reduced, whereas the manager, introduces first structural changes to improve his team's performance. He is sacked if his strategies do not bring tangible results. The board of a company or the top executives of any of its divisions, have also recourse to strategies in order to improve their business performance. Investors do not accept defeats neither do they regard draws as viable alternatives. The role of the top management is to come up with relevant strategies becomes even more difficult when the company faces situations of poor growth and the prospects of some of its businesses are bleak. A difference between the business strategy of a company and the game strategy of the chess player or the team manager is that company executives bear, primarily on their shoulders the welfare of the company's employees.
In this article we are putting forward a concise list of strategies the leadership of a company can have recourse to in case the company has to avoid bankruptcy or recourse to the well known Chapter 11.
In such stressful situations the leaders in charge are confronted with the most unyielding enemy. This enemy is time. In other words, strategies must be designed and applied quickly, efficiently and successfully.
The management's short term main aims are, increasing sales and cutting costs.

Strategies concerning personnel
Below we enumerate a number of ingredients which may be included to strategies concerning the management of the company's personnel. The ideal situation however is to implement such approaches to the efficient running of the business rather than using them only in moments of crisis.
1-Promote energetic, sociable and competent individuals to leadership positions.
Areas of the company which seem to lag behind in performance need leaders able to deal with stressful situations in addition to being actively involved in front line activities. The same individuals should be able to create an agreeable working environment despite the difficult business environment.
2-Reduce the number of managerial levels
Keep the organisation as flat as possible in order to reduce administrative levels and involve as many people as possible in active business assignments.
3-Shift personnel from support to active roles and, vice versa if the situation requires it.
4-Introduce motivation programmes as well as a bonus system
5-Reduce costs
-Suppress unnecessary tasks such as frequent travelling for supervisory assignments.
-Stop projects, which are neither essential nor business oriented. Long term research projects can be carried out in cooperation with universities.
6-Personnel reduction
Laying off personnel is a hard decision to take. Unfortunately it proves to be the most efficient in the short term since it saves money in a very short period of time. An alternative would be to reduce the salaries of all the employees starting with the most highly paid ones.
-Early retirement accompanied by a generous severence pay, to persons who cannot offer substantial and competitive services anymore.
-Instead of sacking personnel, find for them openings at customers' companies, universities, colleges or consultancies.
-Allow them to chose between a high severence pay or the services of outplacement consultancies committed to helping them in finding good jobs.
-Encourage them to start up their own businesses.

Organisational and structural changes
1-Business units as well as their departments should operate as independent profit and loss entities.
This strategy will help to localise non profitable operations as well as smaller units within them and, assess as obectively as possible, the reasons which lead to losses.
2-Make sure that all representative offices operate at maximum profitability with a minimum of personnel.
3-In extremis non profitable trade operations should be transferred to independent agencies, whereas loss making manufacturing operations should be idled or sold.

Prices and costs
1-Squeeze down prices of suppliers and service providers such as transport of materials and handling costs.
2-If possible increase prices of your company's products. Review all costs causing the reduction of profit margins
3-Review interests on bank loans, insurance premiums, office rents and car leases.
4-Use new computer technologies to reduce telephone costs, whilst keeping effective communication alight ie. videophone, webcam
5-Ensure easy raw material supply and invest down the supply chain.
Even if some decisions seem harsh one should remember that they are aimed at saving the company and essentially the jobs of its employees.

Investments
1-Concentrate on businesses through which the company has a leading position in the global market. Businesses, which lag behind in innovation and profitability, can be sold and the cash used to better use. Being number one in the market must become the ultimate aim of a company.
2-Freeze ongoing, long term investments.
3-Promote dynamically short term projects with a high probability of commercial success.

Conclusion
Even if some flexibility, dictated by the situation, is to be included as far as the nature of the ingredients of the strategy is concerned the big picture must not be lost from sight:"The company must return to profitability and as many jobs as possible must be saved".

Sell the company.

General Electric Plastics (GEP) is on sale. Once the darling of the company's top management it has now fallen out of favour.
For several years GEP has been among GE's profit record breakers. However, during the last few years GEP did not live up to the GE's board expectations in terms of profitability therefore it has been decided to put it under the hammer. The rising costs of aromatics have squeezed the margins down, it is said. Fortunately not all companies whose activities rely on petrochemicals follow the same example.
Management reshuffles and lay offs have failed to compensate for the losses. It is difficult to imagine how the sacking of 100 senior managers will save a company since the sum of their salaries hardly exceeds the remuneration of two or three members of the board.
Most probably several of those who have been sacked have in turn fired some of their subordinates and now they are caught like seated ducks. More of a blood letting exercise rather than a serious attempt to rescue the company. To save a company the lay offs must amount by the thousands and whole departments must be idled.
However not long ago european ventures in silicones were hailed as the business successes of managers who sold vision to their bosses. New polycarbonate plants were inaugurated in Spain. The compounders LNP have been acquired. In short debt was accumulating. However, GEP's investments in the Far East were moving at a pace which did not reflect the fast race for globalisation. Whereas GEP's competitors had seen the potential of the Far Easterm market, and consolidated their European businesses, GEP established ventures with leading Japanese companies. Doing things differently did not pay off this time. In short GEP missed the boat as far as investments in sizeable production units in the emerging Far Eastern markets, were concerned. Many strategic reasons can be attributed to the failures. However the leaders responsible for those poor decisions, hardly pay for their mistakes. It seems everything is relegated to somebody else. GEP's recent attempts to make up for the lost ground by investing, even late, in China has been put on halt.

It is not the first time that the prices of petrochemicals hit the profitability of companies and lead to their sale. Some companies are better prepared than others to face downturns in the global economy and confront the consequences of rising raw materials costs. During the early nineteen eighties, Upjohn Polymer disappeared from the map. Upjohn, was basically a pharmaceuticals company. The polyurethanes division neither had the right management nor the will to rescue itself. Dow bought it and integrated it in its polyurethanes business.

ICI (Imperial Chemical Industries) was completely decimated in the early nineteen nineties. A few months before the hatchets were unburied the polyurethanes business unit was investing in plant expansions.
Most of ICI's businesses were sold and new ones have been bought. The chairman however was generous to himself. Amidst the turmoil he increased his salary. Even now, that ICI looks an entirely different company, with the imperial tag always on it, some of the business acquired a decade ago are being sold. Plans about new acquisitions as well as rumours of selling the whole, collapsed imperium, to another company, appear in the press.

Few chief executives are of Bill Gates' calibre. The Microsoft empire turns around Gates' technological skills. Fortunately, many like him, perhaps of much smaller span, exist around the world. GE exists thanks to the genius of Thomas Edison who hardly benefited fully from the financial gains his work flooded the company with, because of the sharks who surrounded him. The inventor of GE's Lexan was a very nice and approachable scientist. He had the, non expensive, honour of being known by GE's chairman whose lifetime personal achievement was the writing of books about his experiences in industry. Other chief executives are excellent in finding cash to purchase and run companies others have set up. Some of those ventures have better fates than others. The successful executive has little interest in keeping the company if a profitable offer is made for its acquisition. A major differences between those, so called entrepreneurs and the executive who increases his own salary is that the former make much more money for themselves.(March 2007)

One investment too many

There is no doubt that industrial conglomerates involved in the manufacture of intermediates survive, very often, on the entrepreneurship of much smaller companies involved in the conversion of those intermediates into products useful to the consumer.
In other words, no consumer will ever think of purchasing one kilo of polycarbonate granules whether compounded or not. A kitchen mixer with a polycarbonate bowl is much more useful to him.
Even if the marketing department of the conglomerate cooperates with its customer in the design of the end product and the development of the grade of material to be used in its moulding, it is the producer of the end product himself who finally takes the decision to go ahead with the investment. He also takes the risk involved in the business endeavour.
In our article we shall not refer to processors who are involved in moulding services for third parties, such as OEM's who produce plastic parts for large companies involved in the automotive, electrical or consumer electronics industries.
The business plans and projections of the polymer producers depend on the success of the companies which convert their plastics or rubbers granules to useful products. In turn the success of the whole line of businesses is a direct function of the consumer taste and purchasing power.
Many business oriented members of conglomerates realise the risk involved when their customers take decisions concerning investments in new products, let aside investments regarding the expansion of their companies. In case of failure, their company, their livelihood as well as that of their employees is at stake. They experience the business environment with much more apprehension and scepticism than their suppliers' CEO's who as any other high level employee, will cash their salary at the end of the month and, in extremis, if things go totally wrong, will leave the company with a golden hand shake.
Recent events regarding large conglomerates have confirmed, once again, that CEO's are interested first in using their companies' deep pockets to put their vision into practice and therefore invest in new businesses in order to impress their bosses and their company's investors. As soon as the numbers on the balance sheets are close to embarassing levels, then comes the time to set aside grand ideas and start saving money. In other words bells ring to announce that cost cutting time has arrived.
In such situations, the easiest way of doing so is to shut business units and eventually get rid of people.
Several sources have recently announced the news concerning a division of a large conglomerate which is suppressing close to 2000 jobs in order to reach its required level of EBIT (Earnings Before Interests and Taxes). A production unit which was operational for years has been shut and about 150 employees of another production entity will lose their jobs. In the first place it is difficult to understand how decisions have been taken in the past to overcrowd, so heavily, production units. Secondly, one can hardly comment positively, on the fact that people have to be disposed off in order to implement, beforehand, the speculative vision of a CEO.
Small company owners who are in a much tougher position than employee CEO's would think twice before implementing their ambitious vision. They know that if their investments turn sour their will be no golden hand shake for them neither for their employees.(November 2007)

Setting up a PU systems house

The issue of an isocyanates or (and) polyols producer setting up a systems house in a country other than the one where his polymer chemicals are manufactured is not debatable, it is measurable.
It is clear that this particular producer has the advantage of low transport costs until the midway distance, between him and his closest competitor is reached…..provided a potential customer exists there.
The closer the manufacturer moves to competitor's territory the more expensive its systems and products become.
More analytically, the distance between the producer and a potential high volume polyurethane customer or user in competition's territory is the one that counts.
Suppose an isocyanate/polyol producer, the sole production site of whom is in Northern Europe plans to set up a technical services laboratory in Japan, for example, where the level of polyurethanes technology is very high. This particular european producer stands very few chances of success, unless, he introduces in the japanese market products based on a novel technology which offer to a potential customer an added value which is not obtainable from local suppliers.
Furthermore the demand for the new system should be high enough to justify the investment in a local organisation and eventually a systems house.
In the long term, new products can be introduced and relationships can be built for the commercialisation of standard products.
From a profit margin point of view the foreign system house won't be better off from any independent systems house. It will be less competitive than a local producer of isocyanates and polyols, even he receives his system ready from Europe at a price limited to the production costs only.
What is really debatable is whether the mother company will be ready to go through this profit eroding exercise unless a long term and economically sustainable strategy demands so.
In other words, selling the same products in Europe where the profit margins will be devoid from the burden of high transport costs will be more attractive to any business manager.
The position of the systems house, in question, is similar to that of any local systems house set up by a local entrepreneur. The advantage of the latter is that he purchase all his raw materials from the japanese market, whereas the foreign implant will have to rely, as mentioned above, on the premium offered, to some products, by the european mother company. He cannot operate entirely independently
The situation is different if the systems house is set up in a country where no isocyanates/polyols producer is available. However, even in this case, producers, of raw materials and systems, who are closer to key customers have a cost advantage, unless the systems house produces outstanding products, offers superior services and if it sales force has exceptional relationships with those customers.
To summarise the above, the strategy to enter a sophisticated market should involve the steps enumerated below
1-Establish contacts with the local industry with a competent sales force.
2-Sell products manufactured in the site of the mother company.
3-Set up a technical services laboratory.
4-Set up a systems production unit.
5-Set up an isocyanate production unit.
Of course one can start from the last item, by acquiring an existing isocyanate producer, if this is feasible.
The construction of a production unit will certainly be necessary if the market promesses tremendous growth, existing production units will be unable to cope with.
A much simpler, more efficient and less costly long term exercise is the acquisition of an already available systems house, with an established experience in the market.
The approach should reflect the importance of the local market. Hoping to conquer a developed market like Japan with a couple of salesmen and a few engineers is a recipe for failure even if the enthusiasm is available.
The question to ask relates to the advantages of setting a systems house locally instead of operating only through a local sales force and shipping materials directly from the manufacturing site.
Well, the presence, at least, of a technical service laboratory and its related facilities, shows the commitment of the company towards the market. This inspires confidence to any potential customer.
The availability of a systems production unit in addition to the laboratory, allows the purchase of systems components, except the ones the mother company manufactures, from local producers. This may reduce production costs.
Ideally, no systems house or laboratory would have been required if the products fitted perfectly the production of customers without the need of extensive technical support and if the shipment of materials was timed to perfection. This strategy puts the commitment of the company to the local industry in doubt. However it can be applied to countries where the size of the market is small and its prospects of developing appreciably are remote.
(Article written in July 2011)

The articles have been written by Dr Demosthenes Kyriacos, President & CEO, GEM-Chem.
E-mail: dk@GEM-Chem.net, phone: +32-2-7710649
D.Kyriacos has worked at Upjohn, GE and ICI in international TS, Sales and Marketing.
He holds a B.Sc.(Distinction, Honours, University award of Chemistry) from Alexandria, a M.Sc.course,
(ICI scholarship award) in Polymer Technology and, a Ph.D. from Loughborough (UK).
D. Kyriacos is the founder of DK Business Group and GEM-Chem.

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