Strategic Management for the Plastics Industry

Strategic Management for the Plastics Industry Roger F. Jones

Endorsed by

CRC PR E S S Boca Raton London New York Washington, D.C.

TX68837_frame_ FM Page ii Friday, November 1, 2002 6:47 AM

Library of Congress Cataloging-in-Publication Data Jones, Roger F. Strategic management for the plastics industry / Roger F. Jones. p. cm. Includes bibliographical references and index. ISBN 1-56676-883-7 (alk. paper) 1. Plastics industry and trade—Management. I. Title. HD9661.A2 J664 2002 668.4'068—dc21

2002073734 CIP

This book contains information obtained from authentic and highly regarded sources. Reprinted material is quoted with permission, and sources are indicated. A wide variety of references are listed. Reasonable efforts have been made to publish reliable data and information, but the author and the publisher cannot assume responsibility for the validity of all materials or for the consequences of their use. Neither this book nor any part may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, microfilming, and recording, or by any information storage or retrieval system, without prior permission in writing from the publisher. The consent of CRC Press LLC does not extend to copying for general distribution, for promotion, for creating new works, or for resale. Specific permission must be obtained in writing from CRC Press LLC for such copying. Direct all inquiries to CRC Press LLC, 2000 N.W. Corporate Blvd., Boca Raton, Florida 33431. Trademark Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation, without intent to infringe.

Visit the CRC Press LLC Web site at www.crcpress.com © 2003 by CRC Press LLC No claim to original U.S. Government works International Standard Book Number 1-56676-883-7 Library of Congress Card Number 2002073734 Printed in the United States of America 1 2 3 4 5 6 7 8 9 0 Printed on acid-free paper

TX68837_frame_ FM Page iii Friday, November 1, 2002 6:47 AM

Dedication

This book is dedicated to the Avisun R&D management team of the 1960s — Earl Honeycutt, John Houseman, and George Mays in memoriam and Charles Heyd — the finest group of managers I have ever known.

iii

TX68837_frame_ FM Page iv Friday, November 1, 2002 6:47 AM

TX68837_frame_ FM Page v Friday, November 1, 2002 6:47 AM

Foreward

The Society of Plastics Engineers is pleased to sponsor Strategic Management for the Plastics Industry by Roger Jones, As Roger Jones points out in this book, the various types of companies that comprise the plastics industry are indeed diverse, both in size and corporate cultures. There is a vast difference between a machinery maker and the processor who uses the machinery—there is also a huge difference beetween the giant polymer manufacturer and the small company that compounds the material or provides color match services. While there can be no "one size fits all" management structure that covers the entire industry, this book provides a unique overview of successful management techniques based on years of experience within the plastics industry. The book also analyses and explains how and why business elements within the industry differ, and proposes practical, effective ways to deal with the most common problems that face managers in each segment. Anyone who is either struggling to manage a plastics company in today’s globally competitive environment, or who aspires to move up into a management position should find this timely plastics industry-specific book invaluable. By studying and learning from successful, and unsuccessful, management techniques and experiences gleaned from the past and present, we can all reap the "benefit of someone else’s tuition bill" to quote Roger. Many in our industry come from backgrounds of science and engineering but, to be truly successful today, equally proficient management skills are required to achieve corporate goals for growth and profitability, at the same time satisfying the needs of all the stakeholders—stockholders, employees, customers, vendors and the community. SPE, through its Technical Volumes Committee, has long sponsored books on various aspects of plastics. Its involvement has ranged from identification of needed volumes and recruitment of authors to peer review and approval and publication of new books.

v

TX68837_frame_ FM Page vi Friday, November 1, 2002 6:47 AM

vi

Strategic Management for the Plastics Industry

Technical competence pervades all SPE activities, not only in the publication of books but also in other areas, such as sponsorship of technical conferences and educational programs. Michael R. Cappelletti Executive Director Society of Plastics Engineers Technical Volumes Committee: Vaman Kulkarni, Chairperson Isobel Wayrick, Reviewer GR Technical Services, Inc.

TX68837_frame_ FM Page vii Friday, November 1, 2002 6:47 AM

Preface

This book is written for a broad audience in the plastics industry, including aspiring professionals who wish to become managers, managers already in place who wish to round out their skills, consultants to the industry, and university students and faculty in plastics engineering and polymer chemistry departments. It is meant to be applicable to managing companies throughout the wide range of sizes that comprise this industry. In the book, I use the term manager rather than executive because I believe the word is more inclusive. I define managers as including department heads as well as company officers (whom I consider to be executives). Additionally, managers direct other managers, while supervisors direct individual workers and professionals. The term management refers to the management group as directed by and including the senior executives and chief executive officer (CEO). Most of the material presented here is directed toward management, but some is still applicable to first-level supervision, though this is not the intended audience. A number of general management topics are discussed within the overall context of management in the plastics industry. The reader who will benefit most has at least some passing familiarity with supervising others. For purposes of this book, the term plastics industry is defined as referring to the development, manufacture, compounding, and distribution of plastics materials and their processing or fabrication into items. Polymer processing machinery, additives, and other suppliers to the industry are described in somewhat less detail due to the enormous variety of firms comprising this field and the fact that their involvement in plastics is frequently as divisions or business units of corporations whose main business is not plastics. This structure was a necessary compromise in order to keep the book from being overly broad and within the limits of my own knowledge. The material presented is based on my experience, extensive research, and interviews with managers throughout the industry. A bibliography is included that lists some of my favorite management books and a number of my own publications that

vii

TX68837_frame_ FM Page viii Friday, November 1, 2002 6:47 AM

viii

Strategic Management for the Plastics Industry

provide more extensive background information for some of the topics that appear in this book. I recognize that the plastics industry is in the midst of dramatic and painful changes due to the impact of increasingly globalized competition as well as an unusually strong, simultaneous slowing of the world economy. While these factors are speeding up the rate of change, they do not overturn the fundamental principles of how to manage successfully in the plastics industry. In general, I have tried to describe typical situations while noting some of the more interesting and important exceptions. For some of the more egregious management errors noted, the names of the companies involved are omitted but the incidents were real. The case histories are based on interviews with senior executives in the respective companies who were willing to be interviewed and illustrate some examples of successful management in the industry. Roger F. Jones Broomall, PA

TX68837_frame_ FM Page ix Friday, November 1, 2002 6:47 AM

Acknowledgments

I wish to acknowledge the help of many people who inspired my thinking, gave generously of their time, and helped me in uncounted ways to write this book. Without this help, I would not have been able to complete the work and it certainly would be far less comprehensive and thoughtful. Among them (in no particular order) are Joe Eckenrode (Technomic Publishing), whose initial encouragement to undertake the work was critical; Peter Drucker (Claremont University), whose books showed me how to be a professional manager and who has been kind enough to permit me to quote from his work; the many people who agreed to be interviewed and share their experiences and opinions, including Jun Aranami and Yuzo Nishiguchi (Asahi Kasei), Volker Trautz (BASF/Basell), Brian Jones (Nypro), Robert Schulz (LNP), George Duncan (Certified Thermoplastics), Troy Eubank (Modified Plastics). I owe much to two who are deceased: John Bickford (LNP), who promoted me to my first general management position and taught me a great deal about general management; and my father, Franklin D. Jones (Amchem), whose inspiration and example led me to become a scientist and a businessman. I owe special thanks to Peter Lantos (The Target Group), Ken Dargis (retired from Montell), and Ken Hammond (retired from DuPont), industry friends who reviewed my manuscript and whose comments resulted in important additions to my work. A great many other friends, associates, and former superiors helped to shape and influence my understanding of what it takes to be a successful manager; I regret that I cannot begin to list their names — the roster would fill a separate book. Last, but not least, I wish to thank my dear wife, Caryl, who ensured that I had the necessary personal space and time in my home office to write this book.

ix

TX68837_frame_ FM Page x Friday, November 1, 2002 6:47 AM

TX68837_frame_ FM Page xi Friday, November 1, 2002 6:47 AM

About the Author Roger Franklin Jones’ 40-plus year career in the plastics industry has covered a broad range of business and management functions as well as types of companies. He began with polymer producers, in technical positions in manufacturing and process development at DuPont (nylon intermediates) and ARCO Chemical (LDPE formulations), then product development and marketing at Avisun (polypropylene resin, film, and fiber), a joint venture of American Viscose and Sun Oil that was eventually sold to Amoco Chemicals. He next joined LNP Engineering Plastics, a small but rapidly growing independent compounder, and moved up through marketing and international operations management positions to COO, where he directed the rescue of the firm from incipient bankruptcy and then its dramatic growth into the largest independent proprietary compounder in the world. After Beatrice Foods Co. acquired LNP, he was double-hatted as LNP president and group executive in Beatrice’s Chemicals Division with responsibility for LNP and two other companies: Dri-Print Foils (decorating foils) and Thoro System Products (specialty construction materials). He next joined a leveraged buyout consortium as managing partner to acquire ailing Inolex Chemical Company, a manufacturer of plasticizers and urethane polyols, from American Can Company; he became its chairman and president. After restoring the company to profitability, he sold his interests in Inolex and was appointed managing director, BASF Corporation Engineering Plastics, to direct a grassroots business start-up that included acetal, nylon 6, PBT production facilities, a compounding plant, and a technical service center. He was also the first BASF executive to apply cutting-edge computer technology to obtain management information that went beyond simple accounting and sales reports. From BASF, he founded Franklin Polymers, Inc., an engineering and specialty plastics distribution and marketing/management consulting firm; he sold its xi

TX68837_frame_ FM Page xii Friday, November 1, 2002 6:47 AM

xii

Strategic Management for the Plastics Industry

distribution business in 2000 and transferred the consulting business to another start-up company, Franklin International, LLC, where he is its president. Mr. Jones received a B.Sc. with Honors in Chemistry and Honorable Mention in English Literature from Haverford College. At the graduate level, he studied business administration at the University of Pennsylvania’s Wharton School. He has also completed language studies in German, French, Spanish, and Portuguese. Mr. Jones is a widely published authority on plastics and related topics. Both in the U.S. and overseas, he is the author of over 80 articles and papers, inventor of record for 20 patents, and is the principal author and editor of Hanser’s A Guide to Short Fiber Reinforced Plastics (1998). He was a consulting editor for Technomic Publishing and now for CRC Press. His honors include the Honor Scroll of the American Institute of Chemists and election as a Fellow of the Society of Plastics Engineers (SPE). An Emeritus Member of the SPE, he has served in a number of section, division, and national positions; he is currently serving as chairman of SPE’s Marketing and Management Division board of directors. He is an Emeritus Member of Sigma Xi (the scientific research society) and the American Chemical Society. He is a Life Fellow of the American Institute of Chemists (past offices include National Secretary, National Board Vice Chairman, Pennsylvania Institute President, Philadelphia Chapter Chairman). He has been a guest lecturer at the Universities of Delaware, Toronto, Wisconsin, and Winona State (Minnesota), The Packaging Institute, and the Plastics Institutes of England and Australia. Soon after college graduation, he served as an officer in the United States Navy on active duty for three years at the end of the Korean War. He continued a professional and management career in the Naval Reserve for an additional 30 years, retiring with the rank of captain. In the course of his naval service, he received two Navy Commendation Medals, a Letter of Commendation from the Secretary of the Navy, and a Meritorious Service Award from the Commander, Naval Security Group. He was selected to command naval reserve units five times and to serve on admirals’ staffs twice. He holds a Certificate in Foreign Relations from the National War College and completed senior officer courses at the Defense Intelligence School and the National Security Agency. Mr. Jones captained his college fencing team, was a member of U.S. National Teams participating in two World Fencing Championships, and an alternate on the 1956 Olympic Team. He won numerous collegiate and U.S. amateur fencing titles, and he gained management experience as chairman of the Philadelphia and Western New York divisions, vice president of the U.S. Fencing Association, and Chairman of the National Rules Committee. For many years he was tournament director of the Middle Atlantic Collegiate Fencing Association. Mr. Jones is married to Caryl Jeanne Reisgen Jones. They have three adult children and eight grandchildren. Mr. Jones’ father, Franklin D. Jones, ScD (Hon), was a chemical engineer who pioneered the discovery and development of plant hormones in the 1930s and 1940s.

TX68837_frame_ FM Page xiii Friday, November 1, 2002 6:47 AM

xiii

Contents

1

Introduction ..................................................................................... 1 1.1 Why a Management Book for the Plastics Industry? ............. 1 1.2 Management as a Career .......................................................... 3 1.3 Six Things Management Must Do ............................................ 7 1.3.1 Organize the Business to Meet Market and Customer Needs...................................................... 8 1.3.2 Recognize and Manage Change .................................... 8 1.3.3 Develop Company Goals and Get Everyone Onboard with the Plan ................................................ 10 1.3.4 Continuously Appraise Performance and Provide Feedback ....................................................................... 11 1.3.5 Lead by Example.......................................................... 12 1.3.6 Ensure That the Business Is Increasingly Profitable .. 13

2

Foundations of the Industry’s Segments ................................. 17 2.1 Polymer Manufacturing ........................................................... 17 2.1.1 Technology.................................................................... 18 2.1.2 Scale and Integration ................................................... 19 2.1.3 Routes to Market .......................................................... 20 2.1.3.1 Direct Sales ..................................................... 20 2.1.3.2 Distributors ...................................................... 21 2.1.3.3 E-Commerce .................................................... 21 2.2 Compounding: Key Factors .................................................... 22 2.2.1 Technology.................................................................... 22 2.2.2 Supplier Relationships .................................................. 23 2.2.3 Geographic Dispersion for Customer Focus .............. 24 2.2.4 A Place for E-Commerce? ............................................ 24 2.3 Distribution: Key Factors......................................................... 24 2.3.1 Customer Relationships ................................................ 25 2.3.2 Supplier Relationships .................................................. 26 2.3.3 Geographic Dispersion................................................. 27 2.3.4 Effects of E-Commerce................................................. 27 2.4 Processing: Key Factors .......................................................... 28 2.4.1 Technology.................................................................... 28 2.4.2 Customer Relationships ................................................ 28

TX68837_frame_ FM Page xiv Friday, November 1, 2002 6:47 AM

xiv

Strategic Management for the Plastics Industry

2.5 Equipment, Additives, and Other........................................... 29 2.5.1 Technology.................................................................... 29 2.5.2 Critical Mass .................................................................. 30 2.5.3 Customer Relationships ................................................ 31 3

Technologies and Markets Shape How a Business Is Run... 33 3.1 Technologies ............................................................................ 33 3.1.1 Materials ........................................................................ 33 3.1.1.1 Commodity and Semi-Commodity Materials........................................................... 34 3.1.1.2 High-Performance and Unique Materials ..... 37 3.1.1.3 Support Requirements .................................... 39 3.1.2 Processing Equipment .................................................. 39 3.1.2.1 Equipment Types: Opportunities or Limitations? ................................................. 39 3.1.2.2 Full-Service vs. Specialist ............................... 40 3.1.3 Patents, Trade Secrets, and Licensing......................... 40 3.1.4 Regulatory and Environmental Issues......................... 41 3.2 Markets ..................................................................................... 42 3.2.1 Packaging ...................................................................... 44 3.2.2 Construction .................................................................. 45 3.2.3 Automotive .................................................................... 46 3.2.4 Electrical/Electronic ...................................................... 47 3.2.5 Consumer Goods.......................................................... 49 3.2.6 Industrial Components and Semi-Finished Shapes.... 50 3.2.7 Other.............................................................................. 50

4

Company Culture and Organization ......................................... 53 4.1 Size Matters — It Is Intertwined with Culture...................... 54 4.1.1 Entrepreneurial Culture ................................................ 55 4.1.2 Managerial Culture ....................................................... 56 4.1.3 Commodity Culture ...................................................... 57 4.1.4 Technology Culture ...................................................... 58 4.1.5 Nationality/Ethnic Culture............................................ 59 4.2 Tailoring Organizational Form to Business Needs ............... 60 4.2.1 Organizing by Function ............................................... 60 4.2.2 Organizing by Product................................................. 61 4.2.3 Organizing by Market .................................................. 62 4.2.4 Organizing by Geography ........................................... 63 4.2.5 Hybrid Organizations ................................................... 64 4.3 Management Styles .................................................................. 64 4.4 Board of Directors ................................................................... 66

5

Managing for Success ................................................................... 69 5.1 Planning for Success ............................................................... 69

TX68837_frame_ FM Page xv Friday, November 1, 2002 6:47 AM

xv

5.2 Managing and Integrating Functions...................................... 71 5.2.1 Research and Development......................................... 73 5.2.2 Sales and Marketing ..................................................... 74 5.2.3 Manufacturing ............................................................... 76 5.2.4 Administration ............................................................... 78 5.3 Managing Costs........................................................................ 79 6

Staffing for Success ....................................................................... 81 6.1 Recruiting.................................................................................. 81 6.1.1 Education....................................................................... 83 6.1.2 Experience..................................................................... 84 6.1.3 Personality Traits .......................................................... 85 6.1.4 References ..................................................................... 86 6.1.5 Employment Agreements ............................................. 86 6.2 Training..................................................................................... 88 6.2.1 Job Enrichment and Rotation ...................................... 88 6.2.2 Continuing Education................................................... 89 6.3 Compensation and Reviews.................................................... 90 6.4 Promotions ............................................................................... 92 6.5 Firing and Personnel Layoffs .................................................. 93 6.6 Using Temporary and Other Non-Employee Personnel ...... 96 6.7 Retention .................................................................................. 97 6.8 Plant and Laboratory Non-Professional Personnel ............... 97 6.8.1 Unions ........................................................................... 98

7

Tools for Management ............................................................... 101 7.1 Analyzing Your Business....................................................... 101 7.1.1 Current Relative Profitability...................................... 102 7.1.2 Relative Profitability Potential.................................... 104 7.1.3 Assigning Resources ................................................... 106 7.2 Benchmarks for Allocation of Costs .................................... 107 7.2.1 Polymer Manufacturing .............................................. 107 7.2.2 Compounder ............................................................... 108 7.2.3 Distributor ................................................................... 109 7.2.4 Processor ..................................................................... 110 7.2.5 Machinery Manufacturer ............................................ 110 7.3 Measuring Your Results......................................................... 111 7.3.1 Achievements vs. Planned Goals .............................. 111 7.3.2 Financial Statements and Stock Valuation ................ 111 7.3.3 Customer Satisfaction ................................................. 112 7.3.4 Competitive Rankings and Analyses ......................... 113

8

The Role of Acquisitions, Joint Ventures, and Divestitures ........................................................................... 115 8.1 Access to Markets .................................................................. 116

TX68837_frame_ FM Page xvi Friday, November 1, 2002 6:47 AM

8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9

9

Access to Technology............................................................ 117 Manufacturing Capacity......................................................... 117 Vertical Sector Acquisition .................................................... 118 Successfully Integrating Acquisitions into Existing Operations........................................................ 118 When and How Not to Acquire........................................... 119 Acquisitions vs. Joint Ventures ............................................. 122 Divestitures............................................................................. 123 The Challenges of Being Acquired ...................................... 124 8.9.1 Selling Your Company ............................................... 124 8.9.2 Surprise! Your Company Has Been Sold.................. 125

Case Studies .................................................................................. 127 9.1 Polymer Manufacturing ......................................................... 127 9.1.1 BASF: Using Breadth of Product Line and Manufacturing Integration .................................. 128 9.1.1.1 History of BASF ............................................ 128 9.1.1.2 The Effect of Verbund (Integration) on Product Line ............................................ 130 9.1.2 Asahi Kasei: Targeted Technology............................ 131 9.1.3 Victrex Plc: A One Product Company...................... 132 9.2 Compounding ........................................................................ 132 9.2.1 LNP Engineering Plastics: Global Compounding..... 134 9.2.1.1 LNP’s History................................................. 134 9.2.1.2 LNP’s Business Strategy: Focus on Customer Needs...................................... 135 9.2.1.3 Manufacturing Expansions ........................... 135 9.2.1.4 Regional Management, Globally Coordinated................................................... 136 9.2.1.5 Patented Technology for Marketing Strength.......................................................... 136 9.2.2 Modified Plastics: Regional Compounding............... 138 9.2.2.1 Using a Time Zone against Larger Competitors ................................................... 138 9.3 Distribution............................................................................. 139 9.3.1 Polymerland: Integrated Distribution ........................ 139 9.3.1.2 Using the Internet......................................... 140 9.4 Processing............................................................................... 140 9.4.1 Nypro: Fewer Customers Equal More Sales............. 140 9.4.1.1 How a Small Molder Became a Big One... 141 9.4.2 Certified Thermoplastics: Niche Processing ............. 142 9.5 Equipment .............................................................................. 143 9.5.1 Husky Corporation: Molding Systems ...................... 143 9.6 Common Threads .................................................................. 144

TX68837_frame_ FM Page xvii Friday, November 1, 2002 6:47 AM

xvii

10 Summary ....................................................................................... 145 Bibliography......................................................................................... 147 Index ...................................................................................................... 149

TX68837_frame_c01*.book Page 1 Saturday, August 17, 2002 9:29 AM

Chapter 1

Introduction 1.1 Why a Management Book for the Plastics Industry? A great many excellent books on management are written from a general standpoint but none appear to deal with the specific conditions of the plastics industry. The plastics industry became a major part of the world economy during the last half of the 20th century. In the United States, it is the fourth largest sector of the national economy. Although the extensive industry restructuring that began in the 1990s led some to believe that plastics finally had become a mature business, this is not an accurate characterization. No industry that normally grows at multiples of the gross domestic product (GDP) and finds new uses virtually every day meets the classic economic definition of maturity, which is something that has reached market saturation. Nevertheless, the plastics industry is being affected by the globalization of competition and the unusually deep, prolonged, simultaneous worldwide economic slowing that began in 2000, but these are conditions affecting nearly all manufacturing industries. Continuing fluctuations in feedstock costs and deflationary pressures on selling prices of materials are putting heavy strains on profit margins, in addition to the characteristic cyclicality that has been the bane of both the chemical and oil industries for many decades. Indeed, the plastics industry is no longer a specialty business overall, and some segments have become commodities. In fact, restructuring is being driven by the transition of a number of former specialty segments into semi-commodities. Management of each of these types of segments and the transitions between them presents a number of challenges that differ significantly, as well as differing from those found in truly mature materials industries that grow at the GDP rate or less. This book tries to highlight these differences and how to deal with them effectively. Other plastics industry management issues that differ importantly from more general treatments of management topics include the foundations of industry segments, the way product and 1

TX68837_frame_c01*.book Page 2 Saturday, August 17, 2002 9:29 AM

2

Strategic Management for the Plastics Industry

process technology defines the business one is in, organization and staffing, and the effective use of patents and trade secrets. Some more general management issues are also included to present the plastics concerns in a seamless matrix, as well as to indicate my point of reference. Management is as much an art as it is a science. Although one can and does measure just how successful the management of an enterprise has been via financial analysis, the building blocks of the management process that produces these results are human relationships, which cannot be reliably quantified. Even so, a number of management principles can be applied with a reasonable expectation of results. One may discover these principles and when to apply them through trial and error, or learn from the experience and insight of others. The book will endeavor to explain which management techniques generally work and which do not, based on the observations and experiences of many managers in the plastics industry. While most of these techniques are essentially timeless, the impact of such relatively recent advances as globalization, the Internet, and information management is incorporated into the picture. The emphasis is on the practical and the applied, rather than the theoretical. Benjamin Franklin wrote in Poor Richard’s Almanac, “Experience keeps a dear school, but fools will learn in no other.” To add to that thought, the most expensive mistakes are those made by senior executives. This book will try to point out how to avoid making more egregious errors without becoming paranoid about making mistakes. It is surprising but readily observed that some specific errors seem to be repeated over and over again in the plastics industry, mainly in the areas of acquisitions, but also in transitions from one type or size of business to another. It would seem that most of these seeming oversights stem either from ignorance or from oversized management ego. The most common or outstanding lapses will be analyzed in sufficient detail so that you, the reader, can have the benefit of someone else’s tuition bill. However, this exercise is not conducted for the purpose of holding anyone up to ridicule, because everyone makes mistakes in life. The author’s expectation is that you learn from your mistakes as well as those made by others and do not repeat those mistakes blindly. As George Santayana told us, “Those who cannot remember the past are condemned to repeat it.” The plastics industry is founded on the bedrock of science and engineering. Those who work in this industry are, by and large, scientists and engineers who have learned the enormous value of the scientific method and to apply it to all aspects of their work. The scientific method calls for the thorough testing of a hypothesis both to prove and to disprove it before communicating the findings to colleagues for comment and criticism. Indeed, a hypothesis cannot be considered proven until other scientists and engineers have been able to duplicate those same results through independent testing. The objective, in all cases, is to establish an explanation of a finding and also the limits of the understanding of those findings. The scientific method can and should be applied in management wherever feasible, recognizing, of course, that the human factor will introduce variables that cannot be controlled. Therefore, results may be reproducible, say, only 70 times in 100 tries, but never 99 out

TX68837_frame_c01*.book Page 3 Saturday, August 17, 2002 9:29 AM

Introduction

3

of 100. It is critical to distinguish between assumptions based on anecdotal data and the results of scientifically designed experiments to ensure that controls have been used, that the number of data points is statistically meaningful, and that the results can be duplicated. This approach applies to lessons learned from experience, most certainly. Anecdotal experience can be very misleading and must be verified insofar as possible. Too often, a faddish management or personnel technique has been adopted because a single or a few prior uses of it appear to have yielded positive results. Wishful thinking is no substitute for the scientific method, under any circumstances. I have made it a point to apply these principles as much as possible before recommending management tools based on my own experience and that of others.

1.2 Management as a Career A professional (e.g., an engineer or scientist) should be certain that he or she (these pronouns will be alternated as the book proceeds to avoid cumbersome reading) really wants to become a manager before taking the plunge; doing so means quite a change in one’s work life. First of all, unless you really enjoy working with other people, do not even think about a career in management. All of your results will be accomplished by others, whom you must train, motivate, and evaluate. If this is unappealing, then you will neither enjoy being a manager nor will you be a very effective one. Managers delegate tasks to others rather than doing those tasks themselves. This frequently means learning to live with work done to less perfect standards than if one had done the work personally. It also means that you may need to give credit to subordinates for your own ideas, in order to motivate them. Second, being a manager means a major shift in the nature of one’s work. Most professionals take satisfaction in seeing a number of individual projects through to completion, whereas a manager’s job is continuous for the most part, with few defined starts and finishes other than those set by the arbitrary dates of a fiscal year. Third, being a manager will demand a personal commitment of much more than 40 hours per week, especially in start-up or work-out (on the verge of or in bankruptcy) situations. You will often be obliged to travel regularly, perhaps two to three days a week, and to catch up on your reading on nights and weekends. However, under normal conditions, it has been my own experience, as well as that of many others, that something is wrong with the approach of managers who consistently work more than 60 to 80 hours per week or fail to take regular vacations. Their problem likely results from one or more of the following:  Doing their subordinates’ tasks for them (micromanaging)  Immersing themselves so deeply in details that they have trouble seeing the overall picture of their company and the future direction charted  Failing to prioritize their objectives by making every task of equal importance

TX68837_frame_c01*.book Page 4 Saturday, August 17, 2002 9:29 AM

4

Strategic Management for the Plastics Industry

 Failing to limit their list of objectives to those that are critical to success and can be done only by the manager  Seeking out and accommodating every point of view or splitting the difference between them, rather than deciding on a single course of action and carrying it out  Not being competent to handle the work  A combination of the above

A manager also needs to maintain a healthy family life, as well as make time for community involvement. For most people, their families are the most important focus of their lives. It is virtually a cliché that someone on his deathbed is unlikely to bemoan not spending enough time in the office! As in most things in life, moderation and balance are the keys to success. Community involvement has at least two dimensions. The first is personal and what most people think of: charitable, religious, or other service-oriented activities. This is something in which we all should participate, in some measure, as responsible members of our communities. It is part of the balance in life just mentioned. The second dimension is business related and most certainly not to be taken as a casual add-on: acting as a community liaison. Companies in the chemicals and plastics industries are under constant fire from environmentalist and other activist groups, many of whom are simply anti-business. Fortunately, most of the materials used in the industry are of low toxicity — which, of course, does not relieve management of its obligation to operate a safe workplace. It is essential that management be a positive, visible factor in community relations and the concerns of its citizens. Remember that a number of your employees are also likely to be members of the community. You owe them the opportunity to feel proud of where they work and what they do. A proactive approach to community relations will establish a reservoir of credibility and goodwill that will help your business to grow, not to mention coping with activists’ attacks over the issue du jour. Most importantly, it is the right thing to do; the surrounding residential community should know if any hazards to their well-being could result from an accident or improper operation at your plant and how you will handle such a situation, and they should have a first-hand opportunity to assess your credibility in regard to your assurance that you will take the proper steps immediately under such circumstances. Needless to say, you must ensure that the means exist to deal with emergencies, and that they will be utilized. In the minds of members of the communities, emergencies can even include the emission of unpleasant (not necessarily toxic) odors. More than one company has tried to pass off an occasional stink as just something that should be accepted as the price of living near a plastics plant and then been set upon by regulatory authorities and attacked in lawsuits as a result of management’s apparently cavalier, arrogant attitude. On the other hand, if activists employ bad science and attempt to play on the fears and ignorance of the community about what the company does and its potential for endangerment of the community, management must be willing to stand up and objectively rebut any misinformation,

TX68837_frame_c01*.book Page 5 Saturday, August 17, 2002 9:29 AM

Introduction

5

point by point, without responding to personal attacks in kind. The community may yet believe those attacks if management has not previously demonstrated and communicated the nature of its business and the precautions taken (such as full compliance with all applicable government regulations, Responsible Care standards, and ISO 14000 environmental standards or putting into place functioning community liaison committees) to ensure safe and communityfriendly operations. Losing money is not the only way to be put out of business. Depending on economic cycles, your employer, and your personal goals and achievements, you might expect to move into first-level management (past supervision) perhaps 5 to 7 years after entering the industry. Further moves up the ladder may come at intervals less subject to prediction and may require going outside your current firm. The best opportunities are often with relatively new companies, particularly ones that have a new technology. These situations, however, also have the most risk. The best time to take such risks is before you have worked more than 10 to 12 years in the industry, particularly if you do not see any opportunities where you are to move up in the near future. Later in life than that, it can be more difficult to find the position you want or to recover from a choice that does not work out. If you are not getting exposure to different functions within the company at a managerial level, discuss the situation with your supervisor. If the company cannot or will not find such opportunities for you, this is another reason to change employers. When I first moved from middle to senior management, the company was in a financial crisis and a major change in company direction had to be made immediately or the company would fail. A number of managers get their start under somewhat similar circumstances — another manager has made a mess and it is yours to clean up now! You may or may not get a lot of help and be offered a bewildering (and likely conflicting) array of solutions, but ultimately it will be up to you and you alone to decide how to solve the problem. If you succeed, the credit will, and should be, shared by you and your team. If you fail, be prepared to accept the major share of the blame alone. This may not seem completely fair, but it is the nature of being a senior manager and you had best be prepared to accept such judgments if this is to be your chosen career. It is also wise to view a career in management as a series of stepping stones. No one should ever contemplate that his current position in management or with a company will last a lifetime. Not only are the days of lifetime employment gone forever, but other good reasons exist too. Professor William Meldrum, my college chemistry advisor, once told me that “a good chemist changes fields every ten years,” and I have found that to be a maxim of great value in the course of my career, as well as from observing the careers of others. After ten years in a particular discipline or position, learning genuinely new things becomes increasingly infrequent, as does making more and greater contributions. When one becomes stale, it is time to move on. Change can refresh, purge, and renew those who embrace it. It sweeps away those who resist it. Always seek out new and greater challenges to meet, no matter what your age or status.

TX68837_frame_c01*.book Page 6 Saturday, August 17, 2002 9:29 AM

6

Strategic Management for the Plastics Industry

A successful career as a manager can and should bring financial rewards, but it will be a glass half empty if you do not find satisfaction in something more than money. You can find great satisfaction in bringing a team together, challenging it to achieve high goals, and seeing it reach them. My greatest sense of accomplishment as a manager has come far more from helping many different people to succeed and find fulfillment in their jobs while creating thousands of satisfied users of my company’s products and services, than from any financial rewards (although, to be sure, I never turned any of these down). While one presumably could do this in any industry, the plastics industry has such a broad and diversified involvement in the economy that there is never a chance to be bored by the same old thing, day after day. Very little in the world of plastics is not new and exciting, all the time. Being a chief executive officer (CEO), however, should never turn into an ego trip. CEOs who make themselves the story of a company are dangerous to the well-being of the company. Have you seen such a CEO buy a company jet in which to travel, although the company’s sites are in locations served by scheduled airlines? Has such a CEO installed an opulent office with costly artwork? The primary interests of these CEOs have diverged from those of the company and their subordinates. Beware when the boss’ face is on the cover of one or more business magazines; the team approach has been lost when the boss is taking credit for what the team has done. The best CEOs are not interested in promoting themselves but in promoting the company and the team. The best CEOs do not spend money on their own gratification but on what helps the company and the team succeed. The worst types of CEOs usually have a pattern of using people, in the unpleasant sense of the word — that is, taking credit for the success of others and passing off blame for their own failures. If you find yourself working for one, get your résumé ready — you will need it sooner rather than later. Many plastics companies are small, entrepreneurial firms where the founder hopes to see his children work for the firm and eventually manage it. This is a natural ambition, and the children of such founders have a potentially wonderful opportunity presented to them. However — and this is a big qualification — the emotional fit among parent and children must be such that all will be comfortable working with one other. Will the siblings get along or will there be resentment if the family talent turns out not to have been spread equally? How much independence is the parent willing to allow the children to make their own decisions? In my observations, these problems are greatly exacerbated if the children go right to work for dad or mom directly out of school. The best way to reduce these natural frictions is for the children to go to work for another firm, where they can gain experience away from the parent and develop self-confidence in the process. It is difficult for children to mature and acquire a sound sense of their own self-worth and competence without some career experience in the world apart from their parents. Once they have this, and it should take a period of perhaps 5 to 10 years, they ought to be able to move into the family business and begin making a contribution right from the start. The other employees, as well as the parent, will respect them more for having “earned their spurs” elsewhere first. One

TX68837_frame_c01*.book Page 7 Saturday, August 17, 2002 9:29 AM

Introduction

7

may often observe that the second generations are usually successful in carrying on family businesses but the third generations are less apt to show interest and more prone to sell it. One myth about successful managers deserves mentioning, if for no other reason than to refute it. It may be best known from Leo Durocher’s famous line: “Nice guys finish last.” This is really just a variation of the fiction that managers get more results through fear and intimidation than by being “nice.” Frankly, this is nonsense. While it is true that fear and intimidation will work (for a short while), it is also true that both subordinates and managers will burn out quickly in such a work environment. This philosophy might be a holdover from a medieval army command mentality that forcing the troops to storm the battlements was best achieved by making the foot soldiers understand that their chances of survival, however slim, would be better by attacking the enemy than being shot or stabbed from behind by their own officers. The record shows that there are plenty of nice guys who finish first (because they are good managers). The usual mixture of human personalities found in management positions ensures that both kinds will be present. Managers who cannot focus on the long term are not thinking of the best interests of their companies, stockholders, employees, customers, or even suppliers.

1.3 Six Things Management Must Do A great many opinions are offered at business schools and by industry executives about the proper functions of management. My observation on this critical subject is that management must execute six primary responsibilities in order for a business to succeed: 1. Management must organize the business to meet market and customer needs. 2. Management must recognize and manage change. 3. Management must develop company goals and get everyone onboard with the plan. 4. Management must continuously appraise subordinate performance and provide positive feedback while not micromanaging those same personnel. 5. Management must lead by example while demonstrating the highest levels of honesty and integrity. 6. Management must ensure that the business is increasingly profitable. This means taking the necessary steps to be certain that sales are made at profitable prices, new products are always under development, customers are served, costs are controlled, and all assets are fully and gainfully employed. While this may sound laughably obvious, it is absolutely astonishing how many businesses fail because management allows itself to be distracted by other considerations, such as increasing market share without concern for profitability, being a technology pioneer regardless of cost, or building an overly large staff during upswings in the business cycle (which must be cut back during the downswings).

Let’s examine these guiding principles in more detail.

TX68837_frame_c01*.book Page 8 Saturday, August 17, 2002 9:29 AM

8

Strategic Management for the Plastics Industry

1.3.1 Organize the Business to Meet Market and Customer Needs No business can exist without meeting market and customer needs. And, by the way, the difference between a market and a customer is that a market is made up of a number of customers with similar needs. Supposedly, monopolies can ignore markets and customers without being hurt. Even a genuine monopoly (which, as Peter Drucker says, “is as mythical a beast as a unicorn, save for politically enforced, that is, governmental, monopolies”) would sooner or later find its offerings supplanted by less expensive, more effective alternatives from others. The idea of heaven on Earth for some managers would be to sell out the capacity of their plant to a single customer and then play golf for the rest of the year. Sorry, but that is one dream that will never come true. Even if it did, it would likely be followed by hell on Earth as soon as the customer’s business declined or a competitor took away the business or a myriad of other things happened, all just because the supplier did not want to deal with reality. What is that reality? It is that a good manager must be a bit paranoid, for all of those reasons just cited above. A manager would be grossly derelict if he permitted the company’s well-being to depend on a single customer or market segment. At the same time (notice how balance keeps coming up) it is essential that the company’s business be balanced and not so highly diversified as to lack any real focus. Focusing on a limited number of market segments is highly desirable because this leads to an in-depth knowledge of these segments. This knowledge, in turn, allows more effective business planning with accompanying productivity gains that improve profitability. You need to organize your business around the concept of delivering what the customer needs (not necessarily wants), where and when the customer needs it, at a cost that will allow you to price competitively but show better than average profitability. The business must also be organized to replace customers who fall by the wayside and to gain new ones in the same or related markets. The company must be organized so that its various functions work together to determine what customers want, make or get those items, deliver them on a timely basis, and have money left over after collecting and paying bills. The company must be staffed by competent, motivated professionals who operate as a team, that are led — not bossed — by management to be customer focused. The worst error management can make is to become so engrossed in the process of managing that it mistakes the process itself for results. Results are achieved only when customers buy your products at a profit to you.

1.3.2 Recognize and Manage Change No business ever operated without encountering change. No business is ever protected from change. Change takes many forms. It can be internal, as a result of transition from an entrepreneurial business culture to a managerial one, the effects of growth or contraction, or the impact of an acquisition or divestiture, to name but a few causes. Change can also be due to external

TX68837_frame_c01*.book Page 9 Saturday, August 17, 2002 9:29 AM

Introduction

9

factors, such as the emergence or disappearance of competition, certain markets or customers, new technologies, government regulation, or environmental concerns. Management must be ever alert to recognize and adapt the enterprise to such change. This involves being both proactive and reactive, depending on the situation. Temporary changes, such as the ups and downs of industry economic cycles, must be incorporated into your business plans as soon as they become apparent. Management must be alert for early signs and make adjustments as needed. More basic change requires a more basic response. What are the warning signs of major change? Some are obvious, such as those mentioned above: the emergence or disappearance of competition, markets, technologies, etc. These are not difficult to notice but require some investigation to analyze how and why the changes are taking place. One should never operate on the basis of assumptions, because important changes in the direction your business is headed may be missed if the changes are dismissed as accidents or of no consequence for your business. A company is more likely than not to be caught by surprise if its marketing efforts are insufficiently focused. It is a company’s market focus that provides enough understanding of trends within one or more market segments to help management foresee when and what changes are likely to come about and to understand them when they do.  Did a new competitor come into being because someone has discovered new technology or are you not covering the market adequately?  Did a competitor disappear because it was undercapitalized or is the market itself shrinking?  How will a new technology affect your business and why did your company not come up with it first?  Are new environmental regulations the result of something stemming from industry-wide problems, your problems, or weak community relations on your company’s part?  Have your customers stopped using your product because they are buying from a competitor, have they removed your product from their design, or they cannot compete against other firms, or is the end-use market your customer supplies in decline?  Have new customers or markets appeared because you were lucky or because you worked to develop them, and are you prepared to supply them?

Many forms of change are gradual and therefore not obvious. These are usually internal, such as the effects of growth (or the lack of it) on the company culture. One should be regularly looking for telltale signs that they are reaching the point that they require action. In the case of growth effects, the signs can include declining sales, excessive late product shipments, low employee morale and high turnover, quality problems, infighting, and turf wars between company departments. Management must deal promptly with these problems before they damage the company, attacking underlying causes as well as dealing with the symptoms.

TX68837_frame_c01*.book Page 10 Saturday, August 17, 2002 9:29 AM

10

Strategic Management for the Plastics Industry

Often, reorganization is called for and possibly a redefinition of the company’s mission. All of these situations also involve the five other responsibilities of management. Management must be alert to distinguish between genuine changes in the business and those that appear to be happening because everyone “knows” that they are taking place. It is not unique in the long history of business to find people swept up by fancied and imagined changes that required specified actions, and the problem is particularly alive and well today. When it seems that every company around you is restructuring, it takes courage to recognize and state boldly that your company may not need to do so. Do not get caught up in fads. By the time a technique becomes a fad, its principal usefulness (usually nothing more than shock value) is likely to have passed. The hype surrounding the advent of e-commerce is a good case in point. E-commerce was introduced a few years ago as something every company must embrace or go out of business. This quickly proved to be false, but a number of people were caught up in the hype and lost a lot of money before discovering that it was a concept long ahead of its time. People in business cannot afford to ignore reality in favor of their fantasies for long. Reality seems to have a way of catching up much more quickly with businesses than it does with some other endeavors.

1.3.3 Develop Company Goals and Get Everyone Onboard with the Plan Developing company goals and a business plan is an exercise in leadership. Top management must determine just what business the company is in; this cannot be delegated. The definition of the company’s business then becomes the target of the company’s goals, but goals do not have to be defined solely by top management. To the contrary, it is critical to success to get the input of subordinates and to use this input wherever one can when developing goals. It is the responsibility of management to exercise its judgment as to how much of this input to use, not just to put together an anthology of every idea submitted by subordinates. Management must remember that it has the final responsibility for goal setting. Why? Because it is impossible to accommodate every subordinate’s ideas in one set of simple, practical goals critical to the company’s growth and health. Companies are financial organizations, not social ones; they are not democracies. H.B. Swope said it best: “I cannot give you the formula for success, but I can give you the formula for failure, which is: try to please everybody.” Goals are the “what” and business plans are the “how.” The input from subordinates should be much more substantive in developing plans than goals. Good management delegates authority to execute plans to the lowest appropriate level (bottom-up planning), and it is appropriate that the people who will actually do this are the ones who have the most input about how it will be accomplished. Once goals and plans are in place, then regular progress

TX68837_frame_c01*.book Page 11 Saturday, August 17, 2002 9:29 AM

Introduction

11

reviews (e.g., monthly) are essential. More detail on business plans is contained in Chapter 5. The goal setting and planning of subordinates are often best when done from the bottom up within the framework established by management, including “stretch goals”. People who have some say in the development of their goals and plans, will usually accept them far more readily than if they were imposed from above. When someone cannot or will not accept reasonable goals and plans, then it is time for that person to move on to another company. Life is too short for anyone to continue to work in a place where they are unhappy and creating dissension. That goes for management, too. If you are fundamentally unhappy with your own situation, then you cannot do your job properly and need to make a career change. Remember that most people respond to what they perceive to be their own self-interests. There is nothing immoral or shameful in this; it is a normal fact of life. If people do not look after their own interests, it is unlikely that anyone else will. You must show them that working as members of a team toward common goals is indeed in their self-interest.

1.3.4 Continuously Appraise Performance and Provide Feedback A leading cause of many small business failures is the inability of the boss to delegate authority to subordinates (e.g., micromanagement). It goes on in larger businesses too, but the sheer inertia of bigger firms makes it easier for this defect to be masked for awhile before it has overtly damaged the business. Micromanagment is usually a sign that a manager is in over his head or has such a strong compulsion to control every aspect of a job that he is unsuited to the position he is in. A manager is paid to supervise subordinates’ work, never to do it for them. Requiring periodic progress reviews tends to cut down on the perceived need for micromanagement. Also, managers at all levels need to accept that there is commonly more than one “right” way to reach objectives. Note that one can delegate authority, but only share responsibility, in the sense that the boss is ultimately responsible for everything below his level and within his department in an organization. If something goes wrong, a boss must hold her immediate subordinates responsible to her for their actions, but he cannot attempt to hide behind those same subordinates if his boss is unhappy with what happened. A boss should accept responsibility for the error and then fix it properly and promptly. How does a manager delegate authority? First, you have to establish an understanding with each of your subordinates about the meaning and scope of policies, both yours and those of the company. Then set broad limits within those policies (and within your own authority limits) for your subordinates to take action without necessarily getting your permission first. Nevertheless, delegating means entrusting, not abdicating. You must keep informed as to how the subordinates are carrying out their duties and what results they are obtaining. The least intrusive way is via weekly verbal reports — a well-run

TX68837_frame_c01*.book Page 12 Saturday, August 17, 2002 9:29 AM

12

Strategic Management for the Plastics Industry

meeting that lasts less than an hour is a good way to supplement regular informal brief conversations — plus brief monthly written reports. An electronic office database can be useful in keeping track of what is happening within the company. Help your subordinates to develop a sense of when policy guidance is insufficient and to come to you for help, but otherwise to handle matters on their own while keeping you informed. Learn to coach your subordinates, not to bark out orders. Direct orders are necessary on the battlefield when lives depend on immediate, unquestioning obedience, but they are appropriate only under rare circumstances in a business setting. Positive feedback is an essential part of the process. Make sure you tell subordinates when they are doing things right (use a “did this well/do this differently” approach when giving feedback). Provide such feedback whenever subordinates give you reports on something substantive that they did. An occasional error is a necessary part of gaining experience, so lighten up when this happens. Do not knowingly let a subordinate make a major mistake, of course, and do not allow subordinates to keep making even minor errors without sitting down with them to identify the reasons and then developing actions plan to fix the problems. This is more than a matter of simple fairness; it is essential to effective personnel utilization. If an individual cannot make the necessary adjustments to meet the assigned goals and the company standards for the job, then a clear, written plan must be put in place, with the employee’s participation, that not only identifies what has to be done and when, but also makes it clear that failure to execute on a timely basis will lead to employment termination. There is absolutely no excuse for the sudden termination recommendation of employees with years of satisfactory performance reviews in their records. When this happens, management itself has a serious performance problem. If the managers involved have caused such a situation to happen by being previously unwilling to talk to subordinates about performance problems, then the managers themselves have created the situation and cannot be held blameless.

1.3.5 Lead by Example One thing the U.S. military teaches that is also true in business is that the boss must lead by example. The boss can never hide behind a “do as I say, not as I do” philosophy. Any boss who tries this will immediately and irretrievably lose all credibility and respect among the subordinates. As described earlier, the boss must always accept responsibility for the actions of subordinates; this is an act of loyalty that should and will earn the respect and loyalty of every subordinate worth their salt. Respect cannot be commanded or even deserved. It can only be earned. Furthermore, managers must also back up their own management. If a manager is disloyal to his own boss, it will not be long before that manager’s subordinates lose their loyalty to him. There would have to be some extraordinary reasons for you to continue working for someone whom you do not trust.

TX68837_frame_c01*.book Page 13 Saturday, August 17, 2002 9:29 AM

Introduction

13

Why this emphasis on loyalty? Because trust is based on loyalty. Any organization that lacks trust is doomed to failure, because no one in it can ever be sure what the motivations of others are or the accuracy of the information they are receiving. Loyalty is insufficient by itself, however. Managers have to demonstrate every day that their lives are ordered by a strong sense of right and wrong, that their personal integrity cannot be compromised, and that they are invariably honest in their dealings with everyone with whom they come in contact. Management cannot run a sound business by conducting affairs to stay just within the law or by always taking full advantage of everyone over whom one has power. The need for loyalty and trust also demands that you remove those people from your organization who cannot be trusted. Furthermore, managers must also demonstrate consistent professional competency; people easily see through bluster masquerading as knowledge. Some readers will say to themselves that this sounds like a level of perfection that does not exist in the real world. Not true. You would not accept an occasional shortage in your paycheck, would you? Subordinates are entitled to expect the same kind of consistency. Yes, some bad apples can be found in every barrel, but they cannot and should not be used to define all the rest of the apples. One of the most transcendent elements of human society is to aspire to ideals that may not be attainable 100% of the time but nonetheless are very much worth striving for 100% of the time. True character is shown best when times are difficult and integrity matters most, not when times are easy.

1.3.6 Ensure That the Business Is Increasingly Profitable Do not ever apologize for making a profit in your business and wanting to make a bigger one — that is your job. Even Samuel Gompers, the 19th-century American labor leader, said that the worst thing that could happen to an American worker would be for the company that employed him to lose money. One of the more annoying things about socialists and other anti-capitalists is their constant characterization of profit as something evil. They depict private business ownership as akin to organized crime, as though employees, suppliers, and customers have been forced to do business with companies at the point of a gun. These critics never describe profits as normal or acceptable, but always as obscene or excessive. One is led to believe, then, that businesses should be run at breakeven (which is like balancing on the edge of a knife) or, even better, at a loss. As the wreckage of the former Soviet Union and Eastern European countries testifies, the idea that businesses should not be concerned about profits and losses cannot work for any length of time without a great deal of economic and social damage. Sooner rather than later, payrolls and vendors’ bills have to be met. Even nonprofit companies must make take in more money than they pay out, to survive; this is called a surplus rather than a profit, but there is no real difference.

TX68837_frame_c01*.book Page 14 Saturday, August 17, 2002 9:29 AM

14

Strategic Management for the Plastics Industry

In a free society, profitable companies pay their employees well, sustain a number of vendors, satisfy a number of customers, fulfill stockholders’ investment objectives, and pay (actually collect) taxes to local, state, and federal governments. Companies that are unprofitable and cannot meet their bills are usually sold (often in pieces) or liquidated. In any event, a great many people lose their jobs in addition to the manager, and the stockholders’ investments suffer. This is the ultimate test of management. If you cannot run your company to make money, you will not get to run your company for very long. Are there no exceptions to this rule? Remember those Internet companies that were seemingly worth vast sums to the stock market if their sales continually rose, even if they lost money (as in “cash burn”)? As we have seen, those companies found out that when their promise of finding earnings in those sales revenues was not realized quickly, their stock crashed and they were acquired or liquidated. The long-term value in e-commerce or any new concept can look very appealing as long as the actual results are still veiled in the mists of the future. However, the plastics industry is not the Internet! The stock market, banks, and even venture capitalists hold our industry to a demanding standard: it is absolutely unacceptable to lose money for any length of time. To the contrary, companies in our industry are expected to show rising earnings and improving returns on investment, with only grudging acceptance at best of any diminishment in this progression during economic downturns. Indeed, one of the major reasons that the stocks of chemical and plastics companies do not command higher levels of valuation in the stock market is that these industries have a long, sad history of boom-and-bust cycles. Today’s management always has the opportunity to break with this well-earned stereotype, but it must choose to do so. Sales growth or maintenance is important — no company can maintain profitability based on cost control alone if sales are falling. But sales must be profitable sales and management must be prepared for the downside of a business cycle as well as the upside. One hopes that industry managers do not fit Talleyrand’s description of the Bourbons: “They have learned nothing and forgotten nothing (Ils n’ont rien appris, ni rien oublié).” Ever hear the old joke “we lose money on every unit sold but make it up on volume”? It never ceases to amaze me how many managers think they can sell products at less than full cost as long as they recover out-of-pocket costs and make a contribution to overhead. In the oil industry, this is called selling incremental barrels. The big hole in this idea is that all those customers who are paying full price are bound to discover eventually that they too can buy the same product for less. Soon the company will find that it is now selling mostly incremental barrels instead of standard ones and losing money on most of its sales. Price alone is always a miserably unimaginative choice for an inducement to place an order. Management must ensure that any program to increase sales does not rely on offering the lowest price, because it runs a strong risk of violating the basic rule of not making a loss. Successful selling depends on bringing value to the customer that goes beyond price.

TX68837_frame_c01*.book Page 15 Saturday, August 17, 2002 9:29 AM

Introduction

15

This and the earlier comments in this vein will be dealt with in more detail later in this book. If your company loses money for a month, with no foreseen reason for it, you should establish the cause and correct the situation as soon as possible. If your company loses money for a quarter, then you had better rediagnose the problem and fix it immediately, because you are unlikely to have the luxury of another quarter of losses. Your boss will probably decide that you are not up to handling the issue and replace you. Now this is certainly not to say that no holds are barred where profits are concerned. Running a business is just like living your life — you must respect the law and deal ethically with your vendors, customers, employees, and stockholders. Managers who break the law usually wind up in court, and managers who treat others unethically quickly get a reputation that harms their business and their own careers. It may take a while, but people who are always testing the limits will find them, although usually not until it is too late. Being really profitable, in the top 10% of your field, requires that you establish a leadership position in your line of business. A leader provides products or services that customers recognize as being superior to those offered by others in terms of value, and being willing to pay for them as such. This does not necessarily mean that your company must be the biggest in the industry or even in each product line. Sometimes being second or even third will allow you to concentrate on some specific area, such as a particular end use or a class of customer, where you can fully differentiate your offerings. Being a leader means that you always have new, high-profit potential products moving through the pipeline that will supplant the old ones when they become lower profit commodities. It means constantly looking for ways to increase the value of your company to its customers, in terms of service as well as products. It means finding ways to differentiate your company from your competition, both direct and indirect. Only when your company is a leader can it increase profitability on an ongoing basis. A number of scandals have surfaced recently over an old problem: certain publicly held companies have declared bankruptcy after years of reporting constantly increasing earnings. How could this be? It turns out that they used questionable, if not fraudulent, accounting practices to hide losses or report loans as sales revenues. It is an act of pure hubris for a CEO to promote the company’s stock by manipulating earnings in such a fashion that the company appears to be always headed up in a smooth line. The plastics industry does have cycles and it is simply not possible for a company to report earnings increases every quarter or every year without some sleight-of-hand being involved, even if it is legal. An honest and forthright presentation of financial and operational facts, warts and all, is a far more sustainable policy that will lead to the creation of respect and credibility among stock analysts and the investing public. When earnings weaken, as they surely will at some point, the company’s stock will be much less affected if investors have come to expect some normal variations or that the company tends to understate rather than overstate projected earnings.

TX68837_frame_c01*.book Page 16 Saturday, August 17, 2002 9:29 AM

TX68837_frame_c01*.book Page 17 Saturday, August 17, 2002 9:29 AM

Chapter 2

Foundations of the Industry’s Segments The key factors that form the foundations of each major industry segment must be identified as critically affecting the future success of the business. While some segments have one or more factors that coincide with those of other segments, each segment has at least one factor that differs from another segment’s factor in some way. These factors must always be at the base of strategic planning and business operations or the company will lose its focus and begin to drift. This is not a matter of concentrating on the customer; rather, it is understanding just which elemental factors the company must rely upon in the process of satisfying customer needs.

2.1 Polymer Manufacturing Polymer manufacturing is a sector of the chemical and petrochemical industries as a consequence of historical development as well as the need for vertical integration. Virtually every polymer producer is a division of a larger chemical or petrochemical company. Polymer manufacturing therefore must be analyzed from the standpoint of these larger industries. When we speak of upstream and downstream, we are using oil and chemical industry terminology that defines basic feedstocks as the source, with production moving downstream like a river. It follows, then, that if one is looking from a point along the river toward the source, one is looking upstream. The production of polymers is a chemical process, unlike most downstream polymer processing steps, which are physical operations. Polymer manufacturing is the most capital-intensive segment of the plastics industry, because the producer must often make monomer(s) as well as polymerize, so that the minimum plant scale is typically

17

TX68837_frame_c01*.book Page 18 Saturday, August 17, 2002 9:29 AM

18

Strategic Management for the Plastics Industry

several orders of magnitude larger than for downstream processing. All of these conditions must be considered in order to understand how to manage a polymer manufacturing business, or just to understand how one’s suppliers operate their businesses.

2.1.1 Technology The most important factor in being successful in polymer manufacturing is, unsurprisingly, technology. Without state-of-the-art technology (including equipment) to produce high-performance materials with consistent properties at competitive costs, no polymer manufacturer can remain in business for long. Let’s restate these three critical elements of technology: 1. High performance 2. Consistent properties 3. Competitive costs

Every one of these legs of the polymer manufacturer’s stool is critical; without each of them, the stool collapses. Management must ensure that the company’s technology is at least competitive or better, either through internal research and development or through licensing, or a combination of both. Technology advancements include both product and process development. New products are vital to the growth of a company, but process improvement can make any product more profitable or enable it to compete against lower cost materials in new end uses, or both. Process improvement is also needed to meet environmental mandates to reduce total waste generation as well as to reduce the toxicity of waste generated. Process improvement may even offer ways to modify the qualities of old products sufficiently to make them significantly different from those made with the standard process technology. Single-site (e.g., metallocene) catalysts are an excellent illustration of this point. Polyolefins made with these catalysts can be tailored to specific end-use requirements that will lead to increased market demand. Patents are a vital part of polymer manufacturing technology. Not only do they provide protection for costly research and development, but they also offer a source of income from licensing, as well as a quid pro quo to obtain access to others’ patented technology via cross-licensing. Unfortunately, owners of valuable patents must expect that at some point it is likely they will be involved in litigation to protect their intellectual property. This is more common in the U.S. than in other countries, owing to the differences in legal systems. The first polypropylene patents were litigated for a period of more than 20 years before a final resolution was forthcoming. The winning party, Phillips Petroleum, won many millions of dollars in royalties as a result. The subject of patents and other intellectual property is examined in more detail in the next chapter.

TX68837_frame_c01*.book Page 19 Saturday, August 17, 2002 9:29 AM

Foundations of the Industry’s Segments

19

2.1.2 Scale and Integration One of the items mentioned earlier as a critical component of technology was competitive costs. However, technology is not the only way to achieve competitive costs; plant scale and integration also directly affect expenses incurred in manufacturing. Commodity polymers in particular must be produced in plants large enough to minimize overhead costs. Integrated, onsite monomer-to-polymer production is essential to minimizing costs by eliminating the expense of carrying duplicative inventories and of transporting materials between sites. Integrated production helps to assure control over critical quality and cost issues, as well as to avoid supply interruptions. Finally, integrated production enables the producer to make a profit on each step of the process, on a smaller investment than if each step was freestanding. In fact, it is not economically possible to buy some monomers on the open market, polymerize them, and then be able to sell the resulting polymer at an acceptable profit. Logistics costs and currency exchange considerations also make it desirable to build integrated plants in various regions of the world in order to be able to supply customers profitably wherever they are located. Polymer producers in the United States commonly rely on monomers derived from natural gas, particularly those making polyolefins, although nylons, polycarbonate, polysulfones, and polyphenylene sulfide are all dependent on benzene derived from crude oil. In most other countries, crude oil is the principal source of all monomers. There are risks to integrated production, however. One risk is that a production outage in one stage will shut down all stages. The way around this, naturally, is to have backup inventories at critical stages of production. A second risk is process obsolescence, which can be avoided by the company maintaining its technology edge in each stage in the process, not just the one that brought it into the business in the first place (e.g., polymerization). This means a bigger research and development effort that pays off with continued process cost improvements as well as acting as a defensive shield against competition. A third risk is the bigger investment in an integrated plant vs. the smaller investment in a non-integrated facility. The decision to put more investment at risk must be at least partially justifiable by relatively low probabilities of major changes in technology or shifts in the marketplace that will make the investment, or a major part of it, obsolete. Some examples of the desirable scale for some polymers can be gleaned from press announcements of new facilities. In 2001, new high-density polyethylene plants were being announced to have capacities of 340K metric tons (MT)/year, while plants with capacities of 115K MT/year were being closed as uneconomic. The ideal has evidently not yet been found for polypropylene (see BASF/Basell comments in Chapter 9). Others have said that consolidation of the major polyolefin producers is likely to continue until only a few giants are left in the world.

TX68837_frame_c01*.book Page 20 Saturday, August 17, 2002 9:29 AM

20

Strategic Management for the Plastics Industry

In addition to large, economical plants, polymer producers also need to have a critical mass in terms of sufficiently broad product lines. Particularly in engineering and high-performance polymers, a single material only very rarely makes for a viable business. An examination of successful producers suggests that three polymers appear to be the minimum for critical mass, but even that number may be edging up. Exceptions to this rule of thumb for product line breadth can be found, but they are very few in number. One of them worth noting, polyetheretherketone (PEEK) producer Victrex PLC, is described in Chapter 9.

2.1.3 Routes to Market Traditionally, polymer producers have utilized direct sales, distributors, and brokers as routes to the marketplace. E-commerce is a relatively new and increasingly important channel that will impact these latter two routes. Producers must use all of these routes to satisfy a diversified customer base.

2.1.3.1 Direct Sales Direct sales have the advantage of building and maintaining a manufacturerto-customer relationship that has minimal “noise” or signal loss in communications. Direct sales representatives can be used to build large accounts over a period of time, something that is more difficult when using other routes to market. Direct sales relationships with customers are the strongest and the most reliable because the manufacturer is in direct control of the relationship without being filtered through third parties. Also, more individuals become involved through a direct sales business relationship than is the case with, say, through a distributor; this helps to ensure that normal personnel turnover will not suddenly end contacts on each side. Additionally, changes in the marketplace are detected more rapidly and dealt with more effectively when working directly with customers. Many polymer producers today use experienced technical personnel as account managers (the term sales representative is usually applied to junior personnel), who are able to deal effectively with problems on their own as well as knowing where and to whom approach in the company for assistance. In line with the drive to minimize costs, such relatively expensive personnel are used to call on only the company’s largest customers. Smaller customers are handed off to distributors. The dividing line for who will handle a customer varies with the degree of commoditization of the material. For example, a polyethylene processor that buys 3000 MT/yr might be a house account, with smaller users being referred to a distributor, while a nylon processor who buys 450 MT/year may qualify as a house account. Other attributes that affect the decision on whether or not to designate a customer as a house account could include a new line of business or sales potential where the company has otherwise only achieved second-supplier status. Account managers seldom

TX68837_frame_c01*.book Page 21 Saturday, August 17, 2002 9:29 AM

Foundations of the Industry’s Segments

21

have pricing authority but business managers would generally give their opinions great weight in making their decisions. Differential pricing within an industry can cause legal and business problems so that final authority on prices must reside with one manager.

2.1.3.2 Distributors Distributors and brokers have the distinct advantage of not being a fixed cost. They also present a convenient and rapid way to move inventory off the books and into the marketplace, to be sold to the myriad of small processors that are very difficult for a manufacturer’s direct sales force to handle on a cost-effective basis. Most polymer manufacturers have turned over all lessthan-truckload or even less-than-carload buying accounts to distributors. Producers do this not only because it is more economical, but also because they can instantly access a much larger number of potential customers through this channel than directly, and margins may be actually higher than those on direct sales. The disadvantage of using distributors is that knowledge of the marketplace is more difficult to obtain and less complete.

2.1.3.3 E-Commerce E-commerce is a form of order processing that replaces an inside sales assistant using a telephone or fax with a computer. It does not replace outside sales people. The computer is accessed by customers directly, modem-to-modem (also called private network), or via the Internet. Using a computer does not completely eliminate the need for inside sales by any means, but it does reduce the number of personnel required, and it is more accurate. A computer can also receive, compile, and analyze far more information than would normally be the case with a telephone sale. While most e-commerce users work through private networks, use of the Internet enables companies with different information systems to work with each other without the necessity of adopting common systems. Affordable software is now becoming available that will also permit previously incompatible systems to link together via private networks without the security risks inherent in using the Internet. In effect, e-commerce is a logical extension of supply-chain management, which, in turn, is a part of enterprise resource planning (ERP). At present, only the largest polymer processors have the capability to use (and demand) the ecommerce route to their suppliers, but this will gradually change, as smaller companies begin to utilize ERP programs that are user friendlier and less expensive. A major drawback to the use of e-commerce is the potential for hackers to enter a company’s system surreptitiously and steal, disrupt, or destroy data and programs. While data security programs are being upgraded daily, no system can be considered completely safe indefinitely. There will be an ongoing war between hackers and information technology security teams for a long time to come.

TX68837_frame_c01*.book Page 22 Saturday, August 17, 2002 9:29 AM

22

Strategic Management for the Plastics Industry

2.2 Compounding: Key Factors Production of polymer is only one step toward creating a useful finished part. Almost always, polymers require modification of their properties by incorporating reinforcements, stabilizers, fillers, colorants, and other additives to be successfully used in more demanding applications. Compounded materials are usually tailored to specific applications, and their production tends to be made in relatively short runs. Although virtually all polymer manufacturers compound their polymers to some extent, they have seldom made highly specialized products in the past. Custom compounders make these latter materials. Custom compounding, as a business, was first developed in North America by entrepreneurs; it was years later before polymer producers began making filled and reinforced versions of their own resins as well. In Europe and Asia, compounding has been an integral part of the business of polymer producers almost from the beginning, but independent companies eventually have entered the market. One can even observe part-time compounders in some Asian and European countries that run only on a periodic basis to satisfy a few local customers. While this latter phenomenon is unlikely to become a widespread pattern, it does seem to represent the ultimate in providing customers with just-in-time shipments of specific compounds at the lowest possible direct cost. Over the years, a few large processors have tried compounding in-house to make compounds for themselves on a captive basis. Most dropped the idea after realizing that integration required duplicating most of what a compounder does but without the same business base to pay for it. The principal captive compounder today is Delphi, the General Motors automotive parts spinoff company, which makes very large volumes of a few polybutylene terephthalate (PBT) compounds.

2.2.1 Technology As in polymer manufacturing, technology is a key factor to success in compounding. In particular, formulation technology is critical to finding and holding customers. Compounders must be willing to develop and manufacture special grades in the smaller volumes that polymer producers cannot or will not undertake. Customers for special grades usually want them for one of two reasons (often both): 1. Replace a more expensive material (e.g., a flame-retardant polystyrene to replace an engineering plastic) or use a recycled product to replace a prime one. 2. Provide a particular, even unique, combination of properties (e.g., low friction and electromagnetic shielding or a specific stiffness–toughness combination).

Process technology is also important, and this usually involves the use of twin-screw extruders in addition to single-screw extruders. While it is difficult

TX68837_frame_c01*.book Page 23 Saturday, August 17, 2002 9:29 AM

Foundations of the Industry’s Segments

23

to beat the economics of single-screw compounding (a new twin-screw extruder costs more than four times as much as a new single-screw extruder), a number of compounds require the additional dispersion that is much better achieved in a twin-screw extruder. Much of compounding technology, particularly processing, is in the public domain. In other words, the technology is widely known in the industry and is the subject of published information, so that it cannot be considered patentable or in the nature of a trade secret. However, unlikely or unusual combinations of public domain technologies can be deemed to be trade secrets. If this is the case, then a company can designate those portions of its technology that qualify as trade secrets and take the necessary precautions to treat it as such. This includes restricting access to the technology to a limited number of employees (no outsiders allowed!), having those employees sign secrecy agreements, and reminding those employees at least annually that the technology is a trade secret and the intellectual property of the company. Many compounders use the trade secret route to protect themselves against employees leaving and using what they have learned by either joining a competitor or setting up their own competing company. A few companies (see Chapter 9) have patented their technology. While patents have the advantage of being simpler to enforce in court than trade secrets, they do have the disadvantage of transferring everything disclosed into the public domain after their term has expired. Therefore, embarking on a patent program requires an ongoing effort to continuously develop and patent improvements on the basic technology, so as to maintain at least some form of ongoing protection.

2.2.2 Supplier Relationships While supplier relationships may not seem to be critical to some small compounders, they are actually very important in achieving significant, sustained, and profitable growth. The largest single cost of doing business as a compounder is raw materials. Therefore, a close working relationship with one or more polymer manufacturers is key to obtaining a secure, long-term supply of consistent-quality materials at an attractive price. Think of it this way: for the most part, the market determines the price at which one can sell products; therefore, a major factor in profitability is how well costs are controlled, particularly the largest one — materials. Polycarbonate is a good example of the need for a long-term working relationship. It has been in tight supply several times during the past decade, with a simultaneous run-up in prices; at least one secure source of polycarbonate at a fixed cost is absolutely essential to any compounder with a steady business based on this polymer. Supplier relationships do not necessarily compromise the independence of a non-integrated compounder. While such a compounder may have a favored source for each base polymer, the compounder still has the option of offering a compound based on any polymer, which is not the case for a polymer producer. In principle, a compounder might be biased toward recommending

TX68837_frame_c01*.book Page 24 Saturday, August 17, 2002 9:29 AM

24

Strategic Management for the Plastics Industry

compounds based on those polymers where it makes the most money, but in practice this is very rare. The compounder is much more concerned with supplying a material that meets the customer’s needs at the best overall cost than trying to push a product that may not perform as well, albeit more profitable. The danger of losing the business altogether by promoting a secondbest product is too great.

2.2.3 Geographic Dispersion for Customer Focus While most compounders start out with one location that serves customers in the contiguous geographic region, eventually they find that growth will require another manufacturing facility, located closer to distant customers. This is because just-in-time (no stock) customers cannot wait for shipments overnight and sometimes not even for more than half a day. The very largest compounders also find they must follow their customers all over the world and build regional plants to serve these needs. The saying about politics that “it’s all local” applies equally to serving customers. While some major customers may buy globally, all of their plant sites must be served locally. Once overseas plants are established, some technical capability must follow, to qualify raw material sources, handle technical service needs, and handle simpler new product development requests. This is how new, local customers are gained, in addition to serving the local plants of established global customers.

2.2.4 A Place for E-Commerce? While e-commerce has not yet shown its full utility for the hallmark of compounders, namely small users and specialty materials, it may yet have a place in this segment. Software that permits customers to participate in the fine-tuning of product properties is now emerging that will enable Internetsavvy processors and original equipment manufacturers (OEMs) to work directly with the compounder’s development personnel. The resulting product properties may then be turned into a formulation and scheduled for production via the compounder’s internal computer network. All of this will likely take a number of years to materialize on any significant scale, but the possibilities are quite interesting. This is quite apart, of course, from e-commerce order processing for established formulations.

2.3 Distribution: Key Factors Distribution is an important route to market; almost all small processors buy their materials from distributors because of the substantial minimum order size requirements of polymer producers. Distributors smooth out disruptions of the supply chain by stocking various grades of materials, enabling small processors to minimize their own inventories and polymer producers to

TX68837_frame_c01*.book Page 25 Saturday, August 17, 2002 9:29 AM

Foundations of the Industry’s Segments

25

maintain long production runs. Brokers are a small subset of the distribution business; they usually buy and resell surplus stocks and non-prime-quality materials rather than representing one or more specific manufacturers and stocking their products. Brokers sometimes do not even take title to the goods sold, instead receiving a commission from the party requesting the transaction.

2.3.1 Customer Relationships Most distributors start out in business with several key customers, people who the founder knows well enough to be assured that they will buy the products in such quantities, prices, and degree of ordering regularity as to ensure a profitable business. A sound customer base is an absolutely fundamental requirement for any distributor. As noted below, a relationship with polymer manufacturers and/or compounders will also add to the customer base. One difference here, however, is that these customers are loyal primarily to the manufacturer/compounder, rather than the distributor. Should the supplier relationship end, these customers will usually switch to another source of the supplier’s products. Therefore, the wise distributor will try to build a business relationship with these customers that are “on loan” from the supplier, so that they remain loyal for at least some of their purchases even if the supplier decides that the distributor does not fit in their business model any longer. The old “80/20 rule” seems to apply overall to plastics industry buyers; that is, 80% of product sales are purchased by 20% of the customers and vice versa. The rule is modified a bit when it comes to the human need for trust when dealing with another vs. the need for finding a bargain. Here we find that perhaps 70% of purchases are made predominantly on the basis of reliability, service, and delivery, and 30% are made predominantly on the basis of price. That 70% is where a distributor’s important earnings are made. A distributor earns a customer’s trust by delivering the right material on time every time, delivering paperwork such as invoices, material safety data sheets (MSDSs), and certificates of analysis that is accurate and timely every time, and reacting to inquiries and problems immediately and helpfully. On occasion, this kind of reliability has enough added value to a customer to be worth paying a price premium or at least giving the distributor the lion’s share of business that is multiple-sourced. Old-fashioned “schmoozing” (entertaining the customer) may help cement a personal relationship, but without the foundation of reliability it can be very easily overturned by a competitor. Distributors need to know what else their customers buy and, if feasible, find a way to offer these additional products. This does not mean mindlessly expanding the product line, but rather looking for opportunities to carry related products that can be profitably sold to existing as well as new customers. For example, if the customer is already buying brand X nylon 6 but also uses brand Y polycarbonate, the distributor should try to establish a supply position in brand Y. The cost of selling and shipping two products to a customer is virtually the same as selling and shipping one product, so the additional

TX68837_frame_c01*.book Page 26 Saturday, August 17, 2002 9:29 AM

26

Strategic Management for the Plastics Industry

profitability is obvious. Purge compounds, used to speed up transitions between different colors or materials in a molding machine or extruder, are a favorite add-on for distributors looking for ways to increase sales to existing customers. Restructuring at polymer producers has led to cutbacks in technical service for customers. Distributors must be prepared to take up the slack and provide this support, usually in the form of helping to solve processing problems. Technical service personnel do not have to be salaried employees, sitting around waiting for calls for help. Many good consultants in this field can be brought in on a case-by-case basis as needed. Consultants paid a retainer are often willing to make themselves available on short notice to handle emergency problems. Some common technical problems can be handled via an automated telephone troubleshooting system or a fax-back system.

2.3.2 Supplier Relationships A distributor without one or more regular supplier relationships is more properly described as a broker. Supplier relationships are critical to continuity and security of supply, customer referrals, and operating profit margins. A distributor may start out with a number of customers; but to grow on a sustained basis, a relationship with one or more suppliers is essential. In the ideal supplier relationship, the distributor serves as a marketing and logistics extension of the polymer producer or compounder. Most polymer producers will refer all less-than-truckload customers to their distributors. Suppliers provide product literature and training to distributor technical personnel so they can provide product information and technical service to small customers. Most importantly, suppliers provide a discount on purchases that can constitutes most, if not all, of the gross profit for a distributor. The ideal supplier relationship is to be the exclusive distributor in a given market, geographic or otherwise (the broader, the better, of course). The next best is to be one of very few. For example, during the 1990s, Shell licensed just three North American compounders to make and distribute its Kraton™ thermoplastic elastomer (TPE) compounds, which was very nearly as good as being an exclusive arrangement. A written agreement is preferred to an oral agreement and is a requirement when the relationship has restrictions. Nonexclusive distribution agreements are the least desirable, but they are often necessary to round out a product distribution line; it is common practice to make oral non-exclusive agreements. Commodity polymer distributors will typically repackage bulk resins for customers who do not need to buy full railcar quantities. The distributor receives railcar shipments from the polymer producer and either puts the polymer into bulk trucks or into silos, where the polymer can be repackaged in bags or boxes. This is an important function in the supply chain for small and medium-sized processors. The distributor not only provides the desired packaging, but also ensures continuity of supply at stable prices. Some commodity polymer distributors even delegate less-than-truckload business to subdistributors of their own.

TX68837_frame_c01*.book Page 27 Saturday, August 17, 2002 9:29 AM

Foundations of the Industry’s Segments

27

2.3.3 Geographic Dispersion Distributors typically grow from local businesses to regional ones. A few have grown to be national or even international in coverage. It is difficult to grow solely in a local area for long; therefore, geographic diversification of customers becomes important to the continued growth of the business. Another significant reason for geographic diversification is that some local areas tend to be dependent for their commercial well-being on specific large industries or companies. For example, Detroit is heavily dependent on the automotive industry; Seattle, on aerospace (Boeing); San Jose (Silicon Valley), on electronics. It is a rare industry that does not have some down moments over the years. If the distributor’s home market is one of these cities, then it should be doing its best to diversify its business base by developing customers in other localities. Suppliers — and customers — are more favorably disposed to work with distributors that have broad geographic representation than those that are only active in a few areas, and such representation is usually a requirement for processors with multiple plant locations. This should never be a problem for a distributor, as it is not necessary to own a number of warehouses. Many perfectly adequate public warehouses can be very effectively and economically utilized on an as-needed basis, without the need to own substantial real estate assets. It is generally not a good idea, however, to allow a customer to hold stocks and pay for product as used. Accounting and payment issues almost always result from such arrangements and will sour the relationship.

2.3.4 Effects of E-Commerce Business-to-business (B2B) e-commerce may yet have a significant impact on distribution, but the effects to date have been minimal. Nevertheless, it would appear that two possible adverse considerations are emerging: 1. Buyers may find that surplus stocks of commodity resins can be purchased less expensively via Internet auctions than through distributors or brokers. Although logistics, product quality, and credit issues may make this route more the exception than the rule, the Internet may at least broaden the number of suppliers that buyers can utilize. 2. Manufacturers may find that they can sell small quantities at better net prices directly to customers via the Internet than through distributors. They also find that e-commerce provides valuable market information that is often unavailable through a distributor. The drawbacks to this route are that the manufacturer will have to carry larger inventories and accept the higher credit risks that often go with small companies, functions now handled by distributors and compounders.

Both of these effects are unlikely to disturb the 70% of customers who buy based on reliability rather than price, as mentioned earlier (at least for now),

TX68837_frame_c01*.book Page 28 Saturday, August 17, 2002 9:29 AM

28

Strategic Management for the Plastics Industry

but they may cause the 30% who do buy on price to bypass their traditional distributor or broker.

2.4 Processing: Key Factors Processors cover a wide range, from tiny, garage shops to billion-dollar multinational companies and from custom parts producers to OEM-captive operations. They include specialists in different types of processing, in particular classes of materials, specific types of parts or industries, etc. Some just pass plastic through a machine, and some also make molds; others also decorate parts and assemble them. Some have become complete contract manufacturers, with an emphasis on plastics. However, several key factors apply to all of these diversified entities.

2.4.1 Technology The foundation of any processor is technology. A selected process or a series of processing steps is used to transform polymers or compounds into functional parts or even completed objects. Processes include injection molding, extrusion, blow molding, rotomolding, thermoforming, compression molding, and some variations/combinations of the preceding. Processors must have at least basic competence in the technology of the processes used or they will not stay in business. Many processors do more than make parts out of polymers and compounds. Their technology base often also extends to product design, mold or die design and construction, and secondary processing (e.g., assembly, decorating, electroplating). These additional capabilities are important elements of broadening their customer base and improving profitability. These should never be just “me-too” efforts, but should be every bit as cutting edge and high quality as the basic processing equipment. Even something as simple as using the proper type of resin dryer is critical in making quality parts from hygroscopic polymers. Automation is another aspect of being a leader; just knowing what to automate and doing it can be critical to product quality and reproducibility as well as keeping manufacturing costs down. Mold design and construction should be of particular interest to a processor, because a poorly designed or fabricated tool will cause many production problems. It is better to have complete control over these aspects of a job than to spend hours trying to fix someone else’s mistakes.

2.4.2 Customer Relationships Competition is fierce among processors because there are so many. A close working relationship with your customers is essential to survival, let alone profitability. Processors may have one customer or many. For example, a captive operation produces for its parent company. Proprietary molders make

TX68837_frame_c01*.book Page 29 Saturday, August 17, 2002 9:29 AM

Foundations of the Industry’s Segments

29

products for a variety of customers. Custom processors may only work for one customer, but the vast majority have a large number. The geographic proximity of processors to their customers is often the single, most critical consideration for customers who practice kanban, the Japanese word for justin-time inventory management. Some processors are even located in a customer’s manufacturing park, bringing the time for just-in-time deliveries down to hours instead of days. However, just as polymer manufacturers, compounders, and distributors must, processors also must diversify their customer base to assure that their future is not irrevocably tied to the fate of a single account, however great that account may be. Some captive operations have entered the custom processing business to utilize otherwise idle machine time and improve their internal profitability. Processors are also finding that they need to offer more than just machine time in order to keep their customers happy as well as to increase business. Adding additional services is not just a route to improved profitability; it can also mean survival. As described elsewhere, some processors have gone so far as to characterize themselves as contract manufacturers, offering design, production, stocking, and shipping. While many smaller processors sell through independent sales representatives, the larger, faster growing, and more profitable ones have their own direct sales force. While independent sales reps offer the protection of reduced overhead during downturns, they rarely know a company’s particular capabilities as well as a full-time employee would. This kind of knowledge should translate into more business and more profitable business at that. Reps also generally handle several product lines, and processors will find that they are competing for a share of the reps’ time. For this reason, many processors have a sales manager who is responsible not only for direct sales to the most important customers, but also for supporting and guiding the rep organization.

2.5 Equipment, Additives, and Other Firms that offer equipment, additives, and the like to the industry are important components. But, while a number of relatively small, specialized companies do exist, many are typically units of much larger companies that are mainly concerned with non-plastic markets. As warned in the preface, the variety of products, companies, and interests under this heading preclude other than limited commentary.

2.5.1 Technology It may seem repetitious, but technology once more is the reason why these firms exist. The need to process materials more efficiently, to endow compounds with enhanced properties, to measure those properties accurately and reproducibly, among other things, is what drives the business of this group of companies. The plastics industry could not exist without these vital technologies. These technologies are also constantly evolving and those who do

TX68837_frame_c01*.book Page 30 Saturday, August 17, 2002 9:29 AM

30

Strategic Management for the Plastics Industry

not keep up with the pace of improvements are likely find themselves in trouble by offering an obsolete product line.

2.5.2 Critical Mass One may observe that these segments of the industry are subject to the same cost pressures as the others. Smaller companies are acquired by larger ones in order to achieve the minimum size necessary to compete on a broad scale, both from a standpoint of product line as well as global presence. The application of their products to markets well diversified beyond plastics helps to spread overhead over a much larger sales base and offset some of the industry economic cycles. Of course, these combined companies need to be large enough to support adequate research, administrative overhead, etc. Having at least one good high-volume product in the line does not hurt either. Consolidation is reshaping this industry sector. For example, Mannesmann AG acquired seven other equipment companies between 1989 and 1999: Berstorf, Billion, Demag Ergotek, Krauss Maffei, Netstal, Newbury, and Van Dorn. During the same period, Cincinnati Milacron (now simply Milacron) acquired six other companies: Autoinjectors, DME, Johnson Controls, Klocker Ferromatik, Uniloy, and Wear Technologies. Thus, 15 companies have become just two in the space of 10 years. As an example of how a company in this segment can achieve critical mass yet remain diversified, look at Crompton Corporation. Annual sales revenues in 2000 were $3B, the result of a major merger and a dozen smaller acquisitions over a period spanning 11 years. The company has four plastics industry divisions (with sales in 2000 shown in parentheses) that represent 70% of the overall business:  Crompton — petroleum, olefin, and styrenic additives, plus vinyl additives under the Witco brand ($1B)  OSi Specialties — silanes and specialty silicones ($485M)  Uniroyal Chemical — elastomers, rubber chemicals ($335M)  Davis-Standard — an extruder, blow molding, and downstream equipment supplier ($310M)  Other divisions — non-plastics industry specialty chemicals ($870M)

Crompton management says that the synergy between the various units’ technologies enhances growth and profitability. Crompton still has a lot to prove, however, and intends to install ERP in 2002 to be able to understand the financial demands and contributions of the extraordinarily large number of products it makes. Even its size and diversification did not save Crompton from losing money in 2001, and it is now divesting some product lines to pay down debt.

TX68837_frame_c01*.book Page 31 Saturday, August 17, 2002 9:29 AM

Foundations of the Industry’s Segments

31

2.5.3 Customer Relationships Yes, good relationships with customers are important for these industries too, especially equipment suppliers. When manufacturers expand or upgrade, the performance of the equipment previously purchased and the service received will mean as much or more as the price paid when it comes to the next purchase. This is often a matter of when, not if, so the supplier must keep the customer satisfied even when only one purchase has been made to date. Despite their specialized nature, these suppliers exist in highly competitive markets. Companies in this industry segment find that most of their products are sold in limited quantities and at relatively lengthy intervals. This would mean that direct sales must concentrate on the largest customers, with distributors handling smaller ones.

TX68837_frame_c01*.book Page 32 Saturday, August 17, 2002 9:29 AM

TX68837_frame_c01*.book Page 33 Saturday, August 17, 2002 9:29 AM

Chapter 3

Technologies and Markets Shape How a Business Is Run As mentioned earlier, the plastics industry is divided into product and market segments that strongly affect how companies will have to run their businesses. In a number of cases, the company’s original management did not consciously decide to be in certain lines of business, but the nature of company’s technology and their accompanying markets have put them there. Technology is a common thread connecting all of the different industry segments. You need to be aware of these powerful influences and take them into account when managing the business. Most of this discussion will be about thermoplastics. The reason is that available technical and market data on thermoset materials are much less specific than those available for thermoplastics and consequently not readily analyzed and compared. In addition, other than a few resins (notably polyurethanes), the thermoset sector of the plastics industry is largely mature and scarcely growing.

3.1 Technologies 3.1.1 Materials The technical characteristics of materials produced, compounded, or distributed by a company characterize and drive the form in which its business is conducted. The way to conduct a commodity business is very different from successfully operating a specialty business or even a semi-commodity business. A surprising number of commodity company managers seem eager to brush aside this principle when the occasion arises, with predictably unhappy consequences. 33

TX68837_frame_c01*.book Page 34 Saturday, August 17, 2002 9:29 AM

34

Strategic Management for the Plastics Industry

3.1.1.1 Commodity and Semi-Commodity Materials There is a good correlation between market price and sales volume, as shown in Figure 3.1. This figure depicts volumes in year 2000 of polypropylene (PP), polystyrene (PS), nylons (PAs), polycarbonate (PC), polyphenylene ether (PPE) blends, polyphenylene sulfide (PPS), liquid crystal polymers (LCPs), and polyetheretherketone (PEEK) vs. relative volumetric prices (using PP = 1.0). Higher prices correspond to less sales volume and vice versa. Of course, this is over a period of time, as market forces take a while to react to price changes. For purposes of this discussion, lower priced materials (under, say, $1.50/kg or $.68/lb.) are classed as commodities. Commodity resins are usually defined as including PP, PS, polyethylene (PE), polyvinyl chloride (PVC), and polyethylene terephthalate (PET). Semi-commodities are defined here as being more expensive than commodities and selling in smaller volumes, but otherwise having similar characteristics to commodities; this is discussed in more detail in the next paragraph. Many engineering plastics have become semicommodities and include acrylics (PMMA, both thermoset and thermoplastic), acrylonitrile-butadiene-styrene (ABS), styrene acrylonitrile (SAN), acetal (POM), polybutylene terephthalate (PBT), PPE blends, PA, and PC; as noted below, polytetrafluoroethylene (PTFE) also falls into this category. Many thermoset materials may also be classified as commodities or semi-commodities; in the former category would be phenolics, unsaturated polyesters, and aminos and, in the latter category, polyurethanes (PUR), alkyds, and epoxies. Polyurethanes are a unique series of products, with commodity grades for such end uses as foamed building insulation, semi-commodity grades for more sophisticated end uses such as automotive fascia and fenders, and even thermoplastic high performance grades (TPUs) for end uses that demand abrasion, impact, and ultraviolet resistance. Figure 3.2 shows volumes and revenues for the principal commodity polymers and engineering/semi-commodity polymers combined in year 2000. The unusual range of categories for polyurethanes accounts for why their volume/ revenue relationship stands out from other materials. What are the differences between commodities and semi-commodity materials? General-purpose grades of both types are largely interchangeable within specific families and grades; that is, most general-purpose 12-melt-flow homopolymer polypropylene or 9-melt-flow acetal copolymer grades can be molded and used in a part with few, if any, apparent differences. Correspondingly, this would not be true for PP copolymers vs. PP homopolymers, nor for acetal homopolymer vs. copolymer grades. Commodity polymer products compete with each other primarily on price (assuming that availability and service factors are largely equal). These first two factors hold true only up to a point with semi-commodities, depending on the volume and requirements of an application; as noted above, most manufacturers’ general-purpose products are interchangeable with those of others, but producers also make a number of specialized grades that do not have exact equivalents available from competitors. These latter products usually command price premiums over the general-purpose grades, and competitors may not always price

TX68837_frame_c01*.book Page 35 Saturday, August 17, 2002 9:29 AM

35

Figure 3.1 Relationship of price vs. volume.

10 1 1

10

100

10000

1000

Volume, MT/yr.

100000

Relative Volumetric Price, PP=1.0

100

Technologies and Markets Shape How a Business Is Run

TX68837_frame_c01*.book Page 36 Saturday, August 17, 2002 9:29 AM

36

Figure 3.2 Polymer volume and revenue, world 2000.

0

5

10

15

20

25

PP

LDPE/LLDPE

PVC

HDPE

PUR

PS

PET

ABS.

ETP

K MT M$

Strategic Management for the Plastics Industry

TX68837_frame_c01*.book Page 37 Saturday, August 17, 2002 9:29 AM

Technologies and Markets Shape How a Business Is Run

37

offsetting products similarly, depending on a number of factors (e.g., performance differences or targeted end uses). Finally, the physical volumes of commodities that are manufactured, transported, stored, and processed are entire orders of magnitude larger than the volumes in semi-commodities. What are the requirements for managing a business based on such materials? Management has to focus on cost control while finding ways to develop differentiated products. Cost control in the case of commodities usually means heavy emphasis on minimizing the number of grades produced and maximizing the length of production runs and size of orders; while desirable, such constraints are not essential for specialized products. Commodity producer research and development (R&D) must be carefully limited to serving the largest customers and markets. Commodity materials are, by definition, volume materials with easy transition between suppliers’ products and are highly price sensitive. Logistics play a critical role in cost and customer service. Bulk shipping is the rule for commodities and requires an investment in transport, storage, and strategic plant siting. These considerations are only occasionally found in semi-commodity materials. Even sales personnel are affected by these factors. Commodity sales representatives have to concentrate on the largest users and try to obtain longterm contracts. Semi-commodity sales representatives are more inclined to look for new applications or to try to qualify their companies as second sources for established and growing applications, with the emphasis more on unit and account profitability than on pure sales volume.

3.1.1.2 High-Performance and Unique Materials This group of materials may be classed as specialties, but with some differences among them. High-performance materials are usually the most expensive of all plastic materials but offer unusually high resistance to heat and chemical attack and high dimensional stability over a wide temperature range. This group includes polysulfones (PSU, PES, PPSU), polyetherketones (e.g., PEK, PAEK, PEEK), polyimides (e.g., PAI or PEI), PPS, LCP, melt-processable fluoropolymers (such as fluorinated ethylene-propylene [FEP] and others), thermoset alkyds, and silicones. Unlike commodity materials, high-performance products that are nominally the same can differ markedly from each other as to properties, processing characteristics, and price. For example, LCPs from DuPont, Ticona, Solvay, Eastman, and Unitika vary significantly from each other in several of the characteristics just mentioned. Because high-performance and unique materials are relatively expensive, they are sold in much smaller quantities than commodity materials; therefore, logistics and customer service are much less significant components in their cost. High-performance materials are packaged in bags, boxes, or sacks and are virtually never sold in bulk. Creating a business in these products requires a strong product and application development group to keep sales and earnings curves moving up smartly. Unfortunately, this is an area where many established commodity and

TX68837_frame_c01*.book Page 38 Saturday, August 17, 2002 9:29 AM

38

Strategic Management for the Plastics Industry

semi-commodity companies often fall short. When their R&D teams develop promising specialty materials, management is often unwilling to support product, application, and market development on a scale necessary for success because it seems excessively costly. This perception results from their experience in their existing commodity business but such experience is not really germane to the new business. The half-hearted effort, then, results in technological success but marketing failure. Property modification and enhancement through compounding is another arrow in the quiver when it comes to broadening unique product market opportunities. For example, adding fiber reinforcement dramatically increases the usefulness at high temperatures of such semi-crystalline polymers as nylons. This approach permits making materials with properties that are custom-tailored to specific applications, when standard grades do not quite do the job. This is a way to truly create value for customers and earn their loyalty in return. Needless to say, it is also more profitable. Few materials are truly unique. All plastic materials compete with each other and conventional materials at least to some degree; however, it is the combination of properties and cost that ultimately decides which material will be used in any given application. Even those protected by patents must compete with others that overlap at least some of their properties. For example, polymethylpentene-1 (PMP) is a relatively unique material. While its optical properties do overlap those of other transparent polymers, its combination of gas permeation, light transmission, and heat and chemical resistance set it apart from such others as PET, PC, or SAN. Its relatively high cost precludes it from taking over more than a small number of applications from the competing products, but this pricing structure must also be considered to have been a choice by the manufacturer to maximize profitability. Polytetrafluoroethylene (PTFE) is another relatively unique material, both from the standpoint of its properties and the fact that it is a notable exception to the price–volume relationship shown in Figure 3.1, selling in much greater volume than would be predicted by its price. Nevertheless, PTFE has become a semi-commodity within its range of applications, in the sense that little difference exists among standard grades supplied by the various competitors. PTFE has a remarkable combination of chemical inertness, lubricity, dielectric properties, and ignition and heat resistance that sets it apart from most other materials. However, it is not melt-processable, and PTFE processors virtually constitute a separate community of fabricators because of its special processing requirements (similar to sintered metal fabrication). Many parts made of PTFE are machined from stock shapes or cut from skived sheets, due to its processing limitations. PTFE melt-processable copolymers, such as fluorinated ethylenepropylene (FEP) and perfluoroxyalkoxy (PFA), offer much of the benefits of the homopolymer while widening its range of applications due to its ability to be molded or extruded. Pricing unique materials is a special challenge. One cannot ignore other materials that come close in properties, because too big a price differential may allow a competing product to gain a foothold at the low end of some applications or because of redesign. On the other hand, many applications

TX68837_frame_c01*.book Page 39 Saturday, August 17, 2002 9:29 AM

Technologies and Markets Shape How a Business Is Run

39

for unique materials are relatively price insensitive. As a rule, estimating what will bring the highest total gross profit is the most effective way to set pricing. A further consideration for unique product management is that continuing application development is essential to keep sales of these materials from falling to GDP growth rates when saturation of their initial markets is reached.

3.1.1.3 Support Requirements Each type of material requires different levels and types of support. For example, commodities require the least technical support, and high-performance materials require the most; however, commodities require more investment in logistics than do high-performance materials. The impact on the business is subtle; increased R&D support is a direct expense and normally runs between 2 and 5% of sales, whereas increased logistics support is likely to be in the form of additional investment in storage and transport, showing up in financial statements as depreciation spread over a number of years, a small fraction of a percent of sales. Yes, some companies do capitalize and depreciate their R&D, but this is not a preferred financial treatment in the plastics industry, unless the effort resulted in a patent.

3.1.2 Processing Equipment The businesses of processors are also affected by technology — in this case, the equipment they possess. Not only equipment types, but also the scale and range of integration come into play when considering the impact on the nature of the business models of processors. To a large extent, a processor’s equipment defines the business of that processor. A molder with 2500-ton clamp presses is more likely to be involved in business machine or automotive markets than in power tool markets, just as a molder with 75-ton clamp presses is more likely to be supplying electrical/ electronics than major appliance markets. A rotomolder is more likely to be involved in consumer products than in medical equipment markets, and a pipe extruder is virtually, by definition, supplying the construction market. As mentioned earlier, some processors specialize in types of materials processed, such as thermosets or polytetrafluoroethylene (PTFE). Again, this tends to define the markets served as well. Thermoset compression and transfer molders are likely to be focused on electrical/electronics and PTFE processors on chemical process equipment and some automotive components.

3.1.2.1 Equipment Types: Opportunities or Limitations? The answer to this question, of course, is both. Injection molders seldom compete with extruders, although blow molders may find they are competing with thermoformers or rotomolders. Equipment type and size also often mark processors as generalists or specialists; a range of machine sizes is more likely to be found in the plant of a large general custom molder, for example, than

TX68837_frame_c01*.book Page 40 Saturday, August 17, 2002 9:29 AM

40

Strategic Management for the Plastics Industry

in the shop of a small specialized molder. In the global marketplace, owning large equipment and making large parts can also contribute to a more secure business base; the cost of freight is likely to offset enough of any manufacturing cost advantages of overseas molders that the speed-of-delivery becomes a major plus factor.

3.1.2.2 Full-Service vs. Specialist As processors grow in size, they will usually come to a point where they find that their initial focus on a single process limits future growth and/or profitability. Often, a major customer who wants “one-stop shopping” forces this decision. The processor ignores such desires at the risk of losing all of that customer’s business. On the other hand, not every added service adds value; do not make the mistake of pricing some services below cost on the theory that you will earn more from additional overall business. That is not sound practice. For example, suppose a customer wants the molder to electroplate parts. This request should be analyzed as a make-or-buy situation: whichever course makes a more satisfactory return on investment will be the one to take. It should not be an automatic reaction to go out and buy electroplating equipment. Buying equipment that is only used to service one customer presents a risk that should be appraised carefully. If you can pay off the cost and make a profit within the life of the purchase contract offered by your customer, it may well make sense. But, if the process is unfamiliar to you, it may be more beneficial to contract out the service.

3.1.3 Patents, Trade Secrets, and Licensing As noted in the previous chapter, technology is generally a critical factor for competing successfully in the plastics industry. Technology comes in several varieties:  In the public domain, which means that it has been published in open literature and is free of any patent restrictions. Most basic manufacturing operations fall into this category, such as simple compounding and polymerization steps that follow well-known chemical engineering unit operations, as well as long-established processing methods. Most basic molding and extrusion processing technologies are in the public domain.  Patented, which means that the composition of matter or process or usage has been described in detail in a patent that has a finite life, after which the technology falls into the public domain. Only the owner of the patent can use the technology or grant others the right to use it. Anyone infringing a patent (using the technology it claims) without permission can be sued by the patent owner for damages, as well as being issued a “cease and desist” injunction from the court for immediate relief. Patent lawsuits are among the most expensive of civil cases to prosecute or defend, and the financial stakes must be high to justify the costs. Such lawsuits also require a substantial amount of time from company personnel for the preparation and implementation of the lawsuit. A number of current patents cover

TX68837_frame_c01*.book Page 41 Saturday, August 17, 2002 9:29 AM

Technologies and Markets Shape How a Business Is Run

41

materials, processes, and equipment in our industry. This is usually noted in the owners’ literature.  Trade secrets, meaning technology that is both unpublished and not generally known or practiced outside the company that uses it. The company that claims ownership of a trade secret must take steps to ensure that it remains proprietary by, for example, restricting access to the formulation or process area where the secret is used and requiring all employees to sign a secrecy agreement that they will not disclose or use the secret outside their employment with the company (see Chapter 6). The fact that a company is practicing a trade secret is seldom advertised.

Trade secrets and patents may be licensed to others and it often makes sense to do so. For the licensee, this route offers fast access to proven technology without the cost, risk, or delay of having to develop comparable technology. For the licenser, this route offers an additional source of financial return on the investment it made to develop the technology and, usually, access to any improvements made by the licensee. While it is true that by issuing one or more licenses the licenser may increase competition for itself, in some situations this can actually be advantageous. The reason is that many potential large customers for the patented or trade-secret-protected product may choose not to use a single-source material, out of concern for sufficient supplies or the monopoly power of the manufacturer to set artificially high prices, or both. The entry of a second supplier, even though under license to the first supplier, usually removes these concerns and causes the demand for the product to grow much more rapidly than would be the case with only one supplier. Second suppliers also usually develop new applications and markets faster than one, not only because they bring more assets to bear, but also because it makes better business sense to find opportunities where the initial supplier is not active. Finally, patent holders have to recognize that their monopoly has only a short life and they can gain more during the lifetime of the patent by licensing to create a strong duopoly that will make it more difficult for any others to enter the business after the patent has expired. Unfortunately, not many patent owners have been willing to observe and learn from the few who have either deliberately pursued limited licensing or found it the easiest exit from a lawsuit and then succeeded along the lines described. DuPont and Celanese chose this course after briefly contesting each other’s POW patents, and both prospered. Often, engineering firms or equipment suppliers will furnish technology packages as part of their products and services. “Turnkey” plant components and layouts are usually based on information in the public domain. Individual equipment items may be patented or trade secrets, but the buyer gets a license as part of the purchase.

3.1.4 Regulatory and Environmental Issues Most polymers, particularly such commodity materials as polyolefins and polyethylene terephthalate, are chemically inert and therefore relatively benign

TX68837_frame_c01*.book Page 42 Saturday, August 17, 2002 9:29 AM

42

Strategic Management for the Plastics Industry

from an environmental standpoint. But, because PP, PE, and PET are so widely used for food packaging, they can pose a litter problem. Management needs to foster recycling or incineration of these materials wherever it makes economic sense to do so. Furthermore, the economic picture must be addressed over the long term rather than just on the basis of short-term price fluctuations; otherwise, recycling firms have been and will be driven from the business if producers price virgin material below recyclate for any length of time. Polyvinyl chloride (PVC) has received particular opprobrium from some environmental groups, because the monomer, vinyl chloride, is a known human carcinogen, and partial incineration at low temperatures (admittedly a remote likelihood) of the polymer can lead to the formation of certain dioxins, which can cause dermatitis in humans and cancer in guinea pigs. Despite these attacks, it has been clearly demonstrated that PVC can be successfully recycled or incinerated, although PVC recycling has not benefited from anything approaching the level of municipal collection that PET and PE have. Engineering and high-performance plastics can be recycled but economics favor post-industrial rather than post-consumer sources, in order to have an identifiable and relatively clean waste stream of sufficient size. One such source, nylon fiber waste, is ideal for recycled nylon molding and extrusion compounds. Most processors recover sprues, runners, and scrap parts as part of their normal operations; if recycled material is not permitted to be used in making parts, then the “regrind” material can be sold to brokers or other processors, where it also ends up being recycled. Thermosetting materials can also be recycled in the form of filler for virgin compounds. This has been demonstrated for polyester and epoxy molding compounds; there would seem to be no scientific reason why others could not be recycled similarly as well. Many processors do not have the background in chemistry or chemical engineering to be knowledgeable about the dangers of toxic or dangerous fumes coming from hot or decomposing polymers. This information is readily available from suppliers, in simpler form than that contained in a Material Safety Data Sheet (MSDS), which tends to be quite technical and legalistic. In addition to technical support from materials suppliers, processors will find that membership in industry trade associations, such as The Society of the Plastics Industry, can be very helpful in identifying such problems and taking steps to deal with them.

3.2 Markets The enormous variety of end uses for plastics materials is what gives the industry its truly dynamic character. It also offers an exciting and defining challenge to find the optimum mix of markets and customers to pursue that fits with the products your company makes, the services it offers, and your financial goals. Many people who have worked in the plastics industry, but left it to pursue another career, return because they missed the seemingly endless variety of new applications and business opportunities.

TX68837_frame_c01*.book Page 43 Saturday, August 17, 2002 9:29 AM

43

Technologies and Markets Shape How a Business Is Run

Other 16%

Packaging 30%

E/E 10%

Automotive 16%

Construction 28%

Figure 3.3

Major markets by end use (volume).

While some companies have concentrated their efforts on just the larger end-use markets, many find it safer to spread their business over a number of application areas. As noted in the previous chapter, the type of products a company makes shapes its marketing efforts. Figure 3.3 illustrates the relative proportions of the different major market segments by physical volume. As noted elsewhere, packaging is the largest end use, followed by construction, automotive, and electrical/electronic (E/E). Figure 3.4 illustrates the proportions by the process used to convert polymers to parts. Extrusion is the most significant process, largely because most of the products sold in packaging and construction are extruded. Injection molding, the next most important process, is used for most complex parts. Blow molding is also heavily used for packaging products. “Other” refers largely to thermoset processes, such as compression and transfer molding, and reaction injection molding (RIM). Note that the categorization of a given application by a specific end-use market may seem somewhat arbitrary and is not always consistent within the industry. U.S. Department of Labor Standard Industry Classification (SIC) codes are seldom used by plastics industry market researchers because the categories tend to be too general. It is common practice to categorize an application by its most essential attributes. For example, an electrical connector in an automobile wiring harness is generally considered to be an automotive application, whereas electrical connectors that are used in a variety of end uses are

TX68837_frame_c01*.book Page 44 Saturday, August 17, 2002 9:29 AM

44

Strategic Management for the Plastics Industry

Other 9% Rotomolding 2%

Blow Molding 15% Extrusion 45%

Injection Molding 29%

Figure 3.4

Principal forms of processing (volume).

considered to be E/E applications. Wire insulation, however, is part of the wire and cable market, which in turn can either be considered as its own category or as a subset of the E/E market. The following market groupings are in line with those used by most industry analysts.

3.2.1 Packaging Packaging constitutes the single largest end use for plastic materials, primarily the commodity resins: polypropylene (PP), polyethylene (PE), polystyrene (PS), polyvinyl chloride (PVC), and polyethylene terephthalate (PET). Semicommodity nylon 6 (PA6) is an important exception, because film for food (mostly meat) packaging is a major market for this polymer. Packaging has become the major market for plastics because plastics offer better protection against spoilage and display products more attractively than do conventional materials. Plastics are also lighter weight than traditionally used paper, glass, and metal products and offer savings in freight costs (primarily fuel economy). Because these are incremental advantages, economics are a principal factor in choosing one material over another and thus tend to favor lower cost, commodity-type materials. Film and containers for consumer goods and food constitute the bulk of this market and are truly commodities, using commodity polymers. Postconsumer recycling is also an important consideration for PE- and PET-based packaging; some major end users and some government entities even specify recycled content. One of the attractive aspects of the packaging market is its relative resistance to economic cyclicality, at least in food packaging. People

TX68837_frame_c01*.book Page 45 Saturday, August 17, 2002 9:29 AM

Technologies and Markets Shape How a Business Is Run

45

have to eat, but the growth of convenience foods has been generally growing even faster than the rate of population increase. A number of specialty uses, such as industrial machinery and custom packaging, are much smaller in volume but offer better earnings potential to both the supplier and the user. These uses can range from made-to-order polystyrene foam protective moldings to injection-molded acrylic cases for small tools. Polymethylpentene-1 (PMP) has found some specialty food-packaging applications where its unusual combination of transparency, gas permeability, and heat and chemical resistance properties can sometimes offer greater value than the commodity polymers mentioned earlier. While the number of firms using polymers to produce packaging materials is substantial, the usage by each firm is usually so large that they have significant purchasing leverage. Polymer shipments are frequently made via bulk carrier, either rail or truck, to these large users; therefore, expertise in logistics is often critical to serving these customers. One must remember, however, that volume packaging applications will always seek to shift to the lowest priced materials that function satisfactorily. Packaging materials that come in contact with food require compliance with Food and Drug Administration (FDA) regulations and, in some cases, with U.S. Department of Agriculture (USDA) regulations as well. Processors utilizing such materials must ensure that the parts and films they make are free of dirt or other contaminants when they are manufactured and packed for shipment. As mentioned earlier, selling products for packaging usually requires a commodity approach to achieve significant, sustained, and profitable market share. R&D must be targeted very carefully to ensure that the company can recover the investment. Nevertheless, the relatively steady growth of packaging makes this a market that should be included in nearly every company’s business plans.

3.2.2 Construction Construction is a distinctly cyclical industry, and most applications are very much commodity in nature. Construction is the second largest end-use market for plastics. Most of the volume usage is processed by extrusion, such as for piping, conduit, wire insulation, siding, reservoir liners, erosion control netting, or architectural sheeting. Sometimes this category includes such agricultural end uses as irrigation pipe and fittings, mulch films, and fencing. As in packaging, plastics have displaced such traditional materials as wood, glass, and metal, based on improved performance and lower cost. Considering the volumes involved, the marketplace tends to favor commodities wherever possible. There are a number of regulatory hurdles to overcome in this market before one can participate fully. For material suppliers, the most prominent ones are the Underwriters Laboratories (UL) listings mentioned later in more detail, and the National Sanitation Foundation (NSF) listings that are required by most

TX68837_frame_c01*.book Page 46 Saturday, August 17, 2002 9:29 AM

46

Strategic Management for the Plastics Industry

building codes for materials used to handle both potable and waste water. For proprietary processors, parts must comply with applicable building codes, so that you must develop a knowledge base of these requirements in order to compete effectively. The scope of this knowledge base will have to include the building codes of major cities, such as New York, as well as regions, perhaps even other countries, depending on your targeted markets.

3.2.3 Automotive The automotive industry is the single largest end user for many engineering plastics, such as nylons (PAs), polycarbonate (PC), acetal (POM), or modified polyphenylene ether (PPE). It is also an important market for commodity polymers (e.g., PP, PE, and PVC). The automotive industry is unlike the packaging industry in that there are relatively few users, and these users are forcing their suppliers to consolidate by reducing the number from whom they will buy. Their purpose in doing this is to gain purchasing leverage, offering the prospect of greater sales revenue per supplier in return for lower prices. The sales revenue potential of the automotive industry is so large that many firms are attracted to it, but profitability is not only low but also under constant and heavy pressure from both customers and competitors which has forced vendor consolidation, cutting the number of automotive suppliers by more than two thirds in the past decade, according to an article in the December 2001 issue of Injection Molding. While the average sales revenue has risen tenfold during the same period, the top 20% of the suppliers earn double the earnings before interest and taxes (EBIT) percentage reported by the rest of the industry. Over the past 5 years, publicly held automotive suppliers as a whole have reported lower earnings, expressed either as EBIT or return on investment, than the consumer cyclical companies or the Standard & Poor’s 500. Clearly, this is a market where it is dangerous to be anything other than a leader. Automotive business is notoriously cyclical, and suppliers can easily find their orders canceled literally overnight if demand takes a downturn. Automotive business cycles not only include the ups and downs of the overall economy but also those of individual brands and models. Operating successfully in a cyclical industry requires companies to have considerable flexibility with respect to manufacturing capacity, such as outsourcing, and financial reserves, such as lines of credit. Nevertheless, some companies have prospered by learning how to cope with these problems successfully. In the past decade, General Motors, Ford, and DaimlerChrysler (the Big Three) have placed onerous demands on their suppliers to reduce prices by a fixed amount per year, even retroactively, or face the risk of being phased out as a supplier. This has prompted a number of suppliers to merge in order to reduce their costs. Some suppliers have defied these demands successfully, while others have either switched to supplying other automotive companies or have reduced (or even eliminated) their exposure to the entire industry. The Big Three acknowledge that their policies risk losing suppliers but they

TX68837_frame_c01*.book Page 47 Saturday, August 17, 2002 9:29 AM

Technologies and Markets Shape How a Business Is Run

47

are gambling that other suppliers will take the place of those who drop out. It is interesting to note that the Japanese automakers in North America, such as Honda, Toyota, Nissan, and Mazda, do not have this reputation and have been consistently taking market share away from the Big Three. Is there is a connection here? Could it be that the Japanese producers’ reputed superior product quality depends at least partly on a more cooperative, truly partnering relationship with their suppliers? Another characteristic of this market segment is long lead-times for new applications, seldom under 18 months and sometimes as long as 3 to 5 years. This aspect adds risk to involvement in automotive application development. The increased time to market allows competitors to learn what is going on and attempt to become involved, even if it is only last-minute bidding. The additional time also allows the end users to reconsider whether or not they will really commit to taking a project into production, particularly if styling is involved. The automotive market must be addressed as basically a commodity business, regardless of the materials being used. Some exceptions to this generalization can be found, of course, but they are exactly that — exceptions.

3.2.4 Electrical/Electronic At one time, this was everyone’s favorite end-use market, and it is the third largest overall. Applications range from tiny connectors to large housings, and, while commodity materials (mostly housings or wire and cable insulation) offer important volume, many opportunities can be found for the full range of engineering and high-performance polymers. In the past, a substantial number of customers using a wide variety of materials (many custom made) in significant quantities yielded good revenues with excellent profitability and high growth rates, but globalization has changed this forever, as industry consolidation is reducing the number of end users, and outsourcing of production has led to fewer actual manufacturers. All of this, in turn, has resulted in increasing competitive cost pressures keeping prices — and profits — down. In the past decade, E/E buyers have been shifting manufacturing out of the United States to lower cost countries, such as Mexico and Asia. Sometimes the polymer sales follow these shifts, but for single-site processors the business is gone indefinitely if not forever. Other significant, but temporary, problems in the E/E industry have resulted in product demand being “borrowed” from the future, resulting in overproduction to meet a temporary and overstimulated demand. The first problem stemmed from an overly pessimistic concern about the inability of computer systems to handle the Y2K problem. The problem itself turned out to be relatively minor, but many companies and individuals replaced their computer systems much earlier than they would have otherwise, thus borrowing from future demand. The second problem occurred as a result of the incredible hype about the Internet, which resulted in an immense overbuilding of wideband and computer facilities. Both of these runups are currently being digested

TX68837_frame_c01*.book Page 48 Saturday, August 17, 2002 9:29 AM

48

Strategic Management for the Plastics Industry

by the industry but it may be several more years before demand comes back to normal levels. Meanwhile, E/E manufacturers are under immense pressure to cut costs just to stay in business. Unlike the automotive industry, E/E is relying on contracting out manufacturing and product redesign, rather than pressuring suppliers to cut prices retroactively. An important aspect of the E/E market is the fast time-to-market (usually 6 months) demands of the industry and the relatively short product life cycles of perhaps 12 to 18 months. These considerations virtually preclude multiple sourcing of materials and parts other than the most basic of units, such as connectors. They also mean that suppliers must work with end users with new applications from the beginning (for which they will be rewarded with the business), but they will be unable to displace or even share business with an existing supplier except in the case of major quality or delivery failures. Cell phones come to mind as a good illustration of this type of application. Doing business in this market requires evaluation of every product development, both materials and parts, by R&D with a view toward UL requirements. This usually means that materials must be offered in flame-resistant formulations if they are not already inherently flame resistant. Regulatory requirements in several European countries can also mandate that flame resistance must be achieved without the use of halogenated components. A UL listing for flame resistance for a qualified product is relatively quick and inexpensive to get compared to another important UL requirement, the limiting temperature index (LTI), which specifies the maximum continuous use (operating) temperature for a material. An LTI will require 6 to 18 months to obtain. The expense of obtaining and maintaining these listings (there is an annual fee) demands that the market potential for each product be sufficient to justify them. Some sectors of the E/E market have been evolving toward becoming commodity businesses, but there are still a number of high-performance, attractive opportunities in specialty sectors. New product and application development has a good chance of resulting in significant, profitable business in this industry as performance requirements keep ratcheting up. A need exists for higher temperature resistance materials with processing characteristics suitable for use in thinner walled, smaller components, among other things. This is a challenge for everyone in the industry, from polymer manufacturers through processors. The largest subcategory of the E/E market, wire and cable, has a range of commodity, semi-commodity, and specialty applications. Actually, all E/E products, including wire and cable, eventually wind up in a number of other markets. This can make for confusing comparisons, depending on the definitions of the markets assigned to various end uses. It also requires caution when making growth projections to ensure that the eventual end uses are properly categorized. For example, the top four end uses for wire and cable are power transmission (power generation to user), communications, electronics (for example, CATV), and buildings. As is evident, these combine both consumer and industrial users in each subset. The materials range from polyolefins to fluoropolymers, with over two dozen firms supplying materials to an even greater number of proprietary processor-end users.

TX68837_frame_c01*.book Page 49 Saturday, August 17, 2002 9:29 AM

Technologies and Markets Shape How a Business Is Run

49

3.2.5 Consumer Goods Consumer goods include such items as household appliances, power tools, lawn and garden equipment, recreational goods, toys, furniture, etc. This market segment is extremely diversified, with a number of very profitable niche opportunities. The downside of business in consumer goods is that the product life cycles are often short, and most applications are price sensitive. Also, many of the end uses have seasonal patterns. While much of this market is not yet international, the trend is in this direction. Already, some American end users are purchasing in all three North American Free Trade Association (NAFTA) countries (United States, Canada, and Mexico) or overseas. Some processors and material suppliers have begun following these users to Europe and Asia in order to serve their customers more effectively than a local firm could. Major appliances, such as refrigerators, dishwashers, or clothes washers and dryers, have both commodity and semi-commodity aspects (as do a number of other consumer goods, even ones that do not consume such large quantities). Constant cost pressures have converted many applications to less expensive polymers. For example, parts originally made from nylon have been redesigned to use mineral-filled polypropylene instead. Still, there are applications where mechanical requirements (typically creep resistance and stiffness at elevated temperatures) dictate using higher performance materials. This market is one that favors materials suppliers with broad portfolios that can successfully follow the substitution of higher priced by lower priced and still lower priced materials. Possibly the best-known consumer goods company to pursue a plan to systematically skim the market for successively less expensive versions of a product was Polaroid Corporation. Polaroid would introduce a new instant camera line with extensive features that used high-end materials to ensure that nothing would fail in use and charge a handsome price that more than covered the added costs. When Polaroid calculated that sales growth for the new line was slowing, it would bring out a redesigned model made of less expensive materials and having less extensive features, introducing it as a simplified version of the first one. This could be repeated again and again as long as additional market growth appeared possible at lower prices and the older, more expensive models were still selling. Polaroid engineers would tell molders and material suppliers exactly what they were doing so that all could participate in this extraordinarily successful (for a time!) marketing concept. Consumers who wanted something exciting and new and could afford to pay top price would buy the first product introduction. Consumers who could not afford to be first in line could wait until the lower cost model came out. In effect, Polaroid created a marketing technique that depended on the wellestablished plastics industry phenomenon of migration over time from a higher priced to a lower priced and a still lower priced material. Alas, Polaroid finally ran out of ideas and recently has filed for bankruptcy. Consumer non-durables are defined as items expected to last less than 3 years and consist mostly of single-use, disposable items, such as single-use

TX68837_frame_c01*.book Page 50 Saturday, August 17, 2002 9:29 AM

50

Strategic Management for the Plastics Industry

cups, picnic tableware, and disposable diaper components, and specialty packaging (e.g., cosmetics cases). Cost is king, as one would expect in such commodity applications. Although synthetic fibers are not widely thought of as part of the plastics industry, they indeed are and they strongly affect the supply and prices for their base resins. The great majority of fibers are used for consumer goods, such as carpeting and clothing. When housing starts or consumer purchasing are going through the down part of their economic cycles, integrated polymer/ fiber producers have more capacity to divert to plastics sales, with the obvious effects mentioned earlier.

3.2.6 Industrial Components and Semi-Finished Shapes Industrial components are a bit of a catch-all, but this end use is mainly concerned with machinery parts, such as pump housings and impellers, conveyor links, or gears and bearings. This is an ideal market into which to sell; it is highly fragmented, has low competitive visibility and high value in use, and therefore has high profitability. Product life cycles are usually likely to be long. End users in this category are often local. The drawback is that volumes tend to be small. The materials used run the full range from commodities to specialties but tend mostly toward engineering and high-performance polymers. Semi-finished shapes are rod, tubing, and sheet, which are mechanically fabricated into other parts for mostly unidentified end uses. Often semifinished shapes are used to make prototype parts for evaluation or even small numbers of commercial parts. This is an important market in terms of size, but its growth rate is less than many others and it is very competitive. There has been considerable consolidation taking place in the last several years, so the remaining processors are able to exercise considerable pressure on suppliers’ prices. This is an unusual business segment because shape producers rarely have direct contact with end users, their route to market being almost entirely through stock shape distributors, a group separate from plastic material distributors.

3.2.7 Other We needed a category for “everything else” and this is it; nevertheless, a few components here are identifiable, and some of the larger ones include (1) medical and (2) aerospace and military. The medical market is not only more recession proof than food packaging, but it is also growing faster. Medical products are of two types, disposables and durable equipment. Disposables are commodity products (the emphasis is on cost) but reliability demands are much higher than for, say, housewares, and this makes profit margins better than in many other commodity markets. Many of the disposables are relatively high tech, such as catheters, blood bags, IV bags, etc. Medical durable equipment also offers the opportunity for

TX68837_frame_c01*.book Page 51 Saturday, August 17, 2002 9:29 AM

Technologies and Markets Shape How a Business Is Run

51

higher margin business, because components are likely to require special materials and short molding or extrusion runs; again, reliability demands are high but this also means that you may wish to review your exposure to product liability claims with your insurance carrier. Aerospace and military markets are among the most challenging markets for plastics. End users are highly fragmented, volumes range from small to medium, and application development typically has very a long timeline; however, product life cycles correspondingly also tend to be very long. These markets are kinder to material suppliers than processors. Once a material is approved, a supplier can look forward to a long run, perhaps even decades. If the material specification has been written around a particular product tightly enough, competitors are unlikely to be able to qualify their material as an alternate source. On the other hand, parts contracts are generally put up for bids annually, so that a processor must defend the business every year. Doing business with the U.S. Government also carries some obligation to maintain a product for reasons of national security.

TX68837_frame_c01*.book Page 52 Saturday, August 17, 2002 9:29 AM

TX68837_frame_c01*.book Page 53 Saturday, August 17, 2002 9:29 AM

Chapter 4

Company Culture and Organization Because the plastics industry is relatively young and growing rapidly (compared to industries based on such conventional materials as wood, metal, and glass), it has a very broad mixture of company cultures. And, as the companies of the industry grow in size or consolidate, following local customers to other parts of the country or the world, their business cultures are constantly changing. What is a business culture? It is the consensus of people within a company about how to react to stimulus, both internal and external. This consensus is influenced by many factors: senior management, employees, vendors, customers, the geographic location of the workplace, etc. Cultures are both inherited and developed over a period of time. Business cultures can take many forms, but we can simplify the analysis by looking just at the principal ones found in the industry and see what sets them apart from each other. No particular type of company culture is intrinsically right or wrong. They exist as a social phenomenon and must be viewed as such. Why do we care about culture? Because it imposes certain constraints on how a company is managed. Sometimes the company’s culture is appropriate to making a business grow profitably, sometimes not. One cannot manage a company successfully without a working understanding of its culture. Having assessed this, an executive may decide to either work within the existing culture or seek to change it. If management ignores the culture and its inherent constraints, then management is likely to have an uphill battle on its hands trying to get subordinates on board with its objectives and then reaching the desired performance goals. You should understand that changing a culture is a slow, difficult process, with a significant potential for failure. The biggest barrier to changing a company culture is often at or just below the top; the most senior managers frequently are the most resistant to change, not because 53

TX68837_frame_c01*.book Page 54 Saturday, August 17, 2002 9:29 AM

54

Strategic Management for the Plastics Industry

they are incapable of new thoughts, but because they fear an accompanying loss of authority, status, and compensation. These people must be brought on board at the onset or replaced. The usual way to change a culture is to revise the organizational structure and reassign key people to new responsibilities. The least risky but slowest route to successful culture change is to accomplish it through one subordinate group at a time, but never forget those pesky senior managers mentioned earlier. Even if you are satisfied with the culture and organization that is in place, you need to understand what makes it work so as to direct its functioning on an effective and efficient basis. This chapter deals with all of these considerations.

4.1 Size Matters — It Is Intertwined with Culture It is no surprise that communications and, consequently, management become more complex and difficult as the size of a company increases. Unfortunately, that is the good news. The bad news is that a number of people who function well in a small company often do not do as well in a large one and vice versa. Therefore, you must expect that some personnel friction will accompany rapid growth or shrinkage, which goes beyond just staying even with the pace of business. The inflection points at which the size of the company affects its organization and the personnel in it will vary according to the function of the group involved (e.g., manufacturing vs. research and development). As a rule of thumb, new companies first feel these growing pains when they reach professional staffing levels that require two layers of supervision below top management. The first addition of a geographically separate site (even in the same country) will also introduce some cultural friction. If the new location is in another time zone, so that communications are impeded, the friction is intensified. Company size strongly influences company culture and vice versa. Small companies are more like small towns or even extended families, where working relationships are often also social ones. There are few secrets in small companies! Because of simpler organizational structure and fewer personnel, small companies are usually able to make fast decisions and react quickly to changes in the marketplace. Small companies are generally strongly customer focused. When they are not, it is typically because they have a culture left over from a previously downsized, much larger company. When they reach the stage in their growth where these interrelationships do not function as well as before, then a culture change may begin to take place. Large companies are typically more focused on global strategies and cost control, with particular emphasis on manufacturing and logistics. They are often, but not always, commodity oriented in some measure. As a rule, they are more overall market or product focused than customer focused; one can see this diffusion accelerate as they turn over increasing numbers of customers to distributors in order to reduce costs. Large companies also tend to be more impersonal, with more formal relationships between people working in

TX68837_frame_c01*.book Page 55 Saturday, August 17, 2002 9:29 AM

Company Culture and Organization

55

different groups. Big company cultures can all too easily degenerate into bureaucratic, quasi-government cultures, where job security and turf matter more than company success. This must be guarded against, obviously. Frequent restructuring can produce this breakdown when the employees question management’s loyalty to them and decide they will survive best by hunkering down and trying to ride out the changes. In addition to being influenced by size, company cultures often reflect the dominant professional group (e.g., technology or manufacturing or sales) when the company came into being or went through a reduction in size. Cultures also reflect the characteristics of the ownership, whether they are a founding family, institutional investors, or foreign nationals. Because polymer production has been as a rule parented by basic chemical or petrochemical companies, polymer manufacturing is almost always associated with big-company, managerial, commodity, and, sometimes, technology cultures. Compounding, processing, and distribution, on the other hand, are most frequently found to have small-company, entrepreneurial cultures. We will examine in greater detail some of the more frequently encountered cultural varieties in the following paragraphs.

4.1.1 Entrepreneurial Culture Entrepreneurial companies are almost invariably small ones, where the founder (usually the owner) is the boss who is following his vision and is typically involved in every detail of the business. If you are that boss, then you can make your entrepreneurial company an exciting and enjoyable place to work, if you structure the work environment so that everyone feels a sense of mission, participation, and accomplishment as the business grows and prospers. If you attempt to micromanage every detail, however, all you will ensure is that you will work 80+ hours per week and that your subordinates will grow frustrated as they are prevented from having a chance to do anything of their own undertaking. You will also ensure a high personnel turnover. In the normal business world, entrepreneurships generally either succeed or fail within two years of start-up. Entrepreneurial companies are usually service and specialty products oriented, with the ability to tailor these offerings to the customers’ needs. Virtually all of the entrepreneurial companies within the scope of this book will be compounders, distributors, and processors. The capital requirements for polymer manufacturing are generally so large as to preclude entrepreneurial startups. While a few entrepreneurs have created polymer manufacturing companies, this was in the past and such situations no longer exist. A polymer manufacturing company that started out as an entrepreneurial culture will have shifted to managerial or commodity long ago. Possibly a management buyout of a small specialty polymer manufacturer might reintroduce an entrepreneurial culture, but it is more likely to be a management one. Interpersonal relationships in entrepreneurial companies are usually quite strong. This is not surprising, as almost everyone has been hired by the founder

TX68837_frame_c01*.book Page 56 Saturday, August 17, 2002 9:29 AM

56

Strategic Management for the Plastics Industry

and usually shares the founder’s sense of mission. The employees also usually exhibit a sense of loyalty to the founder and the company, that has given them the incentive to work harder (if not smarter). Entrepreneurial companies are also frequently family owned and managed. Although Andrew Carnegie thought that succeeding generations never measured up to the founder (“from shirtsleeves to shirtsleeves in three generations”), a number of small to medium-sized companies have flourished under family owner–managers, and even large companies, too, such as Huntsman Chemical (the Huntsman family). Perhaps the greatest strength found in such entrepreneurial companies is a continuing clear and consistent vision of the company’s purpose in business, in contrast to many large, publicly held corporations. As mentioned elsewhere, the chemical industry over the past decade has seen some of its largest firms decide to change their vision and become life-science companies, divesting their base businesses (such as plastics) and then realizing — too late — that they were not big enough to compete successfully against real life-sciences companies. The result has been the disappearance from the plastics scene of some of the industry’s oldest names, such as Hoechst and Monsanto. Another benefit is the assurance that the family has committed to continuing ownership of the company, thereby giving some measure of security to the employees. Of course, these decisions are subject to change when generational succession takes place. Jon Huntsman recently admitted that his family now wants him to take the company public, even though he went on record ten years previously as saying that “… commodity chemicals [are] no place for the investing public. The cycles are too deep, the basic factors governing business are 75–80% outside the control of managers, and investors don’t understand that these types of businesses have periods in their cycles when business is so weak, dividends can’t be paid. It’s OK if a commodity business is part of a much larger company, because the impact is lessened. But it’s far better that a commodity company be private. It can take the up cycles with the down.” Huntsman, a cancer survivor, noted that taking Huntsman Chemical public would be a consideration in the course of his estate planning, a problem that confronts every entrepreneur who wishes to keep the business “in the family” as much as possible.

4.1.2 Managerial Culture A managerial culture is frequently the successor to an entrepreneurial culture. By definition, the company’s founder is not trying to run everything as he or she would in a start-up. The focus is on growth and profitability, rather than becoming established and surviving. Management personnel view the company as part of their career, not as an extension of their personality, or at least they should do so. Sometimes, senior managers begin to think of the company as “theirs” and the company reverts to an entrepreneurial culture when it may not be appropriate to the situation. Interpersonal relationships and company loyalty are not as strong as in the entrepreneurial company. Some family-owned

TX68837_frame_c01*.book Page 57 Saturday, August 17, 2002 9:29 AM

Company Culture and Organization

57

businesses move into this category when the founder retires or dies, and the family wishes to retain ownership but employs non-family management to run things. Managerial cultures are the prevailing ones in publicly owned companies, and they are also usually present when a privately owned plastics industry company reaches $200 million or more in sales.

4.1.3 Commodity Culture Commodity cultures are usually found in large companies (well over $1 billion in sales), with the focus on manufacturing and cost control cited earlier. For our purposes, commodities may be conveniently defined as those polymers that are produced in high volumes, are sold at prices under $.60/lb ($1.32/ kg), and the properties of one producer’s product are essentially undifferentiated from those of another. Low prices mean that logistics and transaction costs are significant, and that operating profit margins are thin on an absolute basis — for example, $.01/lb ($.02/kg). For these reasons, commodity companies emphasize long, smooth production runs, a minimum number of grades, and tight control over costs. When effectively managed, these companies can be very profitable. Over the decades, their biggest problem has been to avoid following the business cycle by overbuilding capacity just before a dip in the economy. Commodity cultures tend to have flat, lean organizations. Interpersonal relationships and company loyalty are important to the successful operation of such businesses where so much depends on so few people. Unfortunately, many commodity companies may lack such loyalty if they have gone through a number of staff reductions to get where they are (usually in the course of mergers). Personnel stability over a period of several years can help restore some of that lost loyalty. To a degree, the commodity culture of the polyolefins industry sector stems from its roots, bulk petrochemicals. Oil and gas are mineral commodities and they shape the culture of the corporations that produce, refine, and transform them into petrochemicals. To a significant extent, oil and gas companies own polyolefin producers (usually through petrochemical subsidiaries or divisions), and the commodity culture they transmit through management control is unavoidable. Industry observers can see this in oil and gas company annual stockholder reports, where the tons of chemical products produced are reported right alongside the tons of oil and gas produced, as if they were all the same thing, regardless of the wide difference in selling prices and profitability between downstream chemicals and oil. The emphasis on physical throughput as all important is still unmistakable, although the rhetoric has been updated to show that management is now more focused on sales and earnings (but relative profitability is seldom mentioned). The effect of tax laws, including such esoteric concepts as depletion allowances, helps increase an integrated oil and gas company’s cash flow from the production of oil and gas. Considering the high initial cost of finding and developing oil and gas wells, it behooves the owners to maximize sustained production once the

TX68837_frame_c01*.book Page 58 Saturday, August 17, 2002 9:29 AM

58

Strategic Management for the Plastics Industry

wells come onstream. In turn, downstream activities, such as refining or chemicals manufacturing, almost become an exercise in trying to keep the oil and gas moving and the cash flow from being reduced. The economics of mineral commodities dictate that products be priced at a “market-clearing level” because it is usually more economic to keep product moving at whatever price it will command than to cut production or attempt to stockpile it. While this practice is perfectly logical in oil and gas, its application in polymer manufacturing is a significant contributor to the wide swings in commodity polymer pricing. Giving credit where it is due, the managers of energy companies in recent years have come to recognize the cultural difficulty in successfully running polymer operations within oil and petrochemical units and now usually put them into separate divisions or set up stand-alone subsidiaries or joint ventures. A weakness notable in many commodity company cultures is an inability to capitalize on the value of product differences where they exist. Instead, they view product improvements as a sales tool to gain market share by taking business away from a competitor at the same price being charged for a lower performing product, instead of trying to use the performance advantages to obtain some premium over the competing material. Granted, this is not easy to do, but the failure to even try makes it very difficult for commodity company to lift its profit margins above those of its competitors. Often this approach results in an inability to pay for research and development (R&D) above product maintenance levels. This weakness obviously works against the development of specialty products. If the management of a commodity culture company wishes to diversify into specialties, then it has to set up such a business as a relatively independent entity or risk almost certain failure. In some companies, this approach has been termed intrapreneuring. Semicommodity (engineering polymer) producers seem sufficiently aware of value pricing principles that they successfully develop profitable specialties on a regular basis.

4.1.4 Technology Culture Technology cultures flourish in R&D-oriented organizations, such as many start-up computer software and electronics companies. In larger companies, they are generally a subculture within an organization unless, as just mentioned, they are fused with the entrepreneurial culture in a high-tech start-up company. Some similarities exist between industrial technology cultures and academic science and engineering departments, where work is performed by teams of professionals rather than by individuals. Technology cultures are, by definition, more focused on scientific and engineering development than on manufacturing or marketing. In some businesses, this is not unremarkable, because these latter functions usually follow, rather than lead, the development of unique or dominant technology. Because technology cultures are often associated with entrepreneurial cultures, they are not often found in older, larger companies within the plastics industry.

TX68837_frame_c01*.book Page 59 Saturday, August 17, 2002 9:29 AM

Company Culture and Organization

59

This is not a common culture within the plastics industry, but it certainly does exist. Some European polymer producers exhibit at least some elements of this culture, and it may also be observed in a few processors, as well as in a few machinery, additive, and instrumentation companies.

4.1.5 Nationality/Ethnic Culture Without getting into the fever swamps of political correctness, suffice it to say that significant and important differences exist among the business cultures in various countries and ethnic groups. These are ignored at great risk to the success of the business. The differences center on what each culture values the most. The presence of a common language should not be mistaken for a common culture; it tends to mask rather than bridge differences. Perhaps the most common difference between American and many other national business cultures is the notion of timeliness and urgency. Americans put great store on being punctual at appointments and meetings, getting right down to business discussions as soon as introductions are performed, seeking to obtain immediate agreement on negotiating points, and implementing plans as expeditiously as possible. In many other cultures, punctuality has no particular virtue and is honored more in the breach than in the observance. These cultures put great store on building trust before undertaking anything. They want to get to know and understand a potential business associate in depth before talking about any substantive points. They are likely to find it offensive to be pushed into discussions, let alone agreements, before they feel they are ready to trust the other party. They also often wish to revisit plans several times before implementation. In other words, these cultures place greater value on building long-term relationships than they do on getting things done now. All of this may be very frustrating to Americans, but they need to develop the patience and understanding necessary to accommodate these views or give up trying to do business where these cultures prevail. Often, turbulent periods in the history of these regions underlie the reasons why their business cultures have evolved in this direction. For example, if laws with respect to property rights have not been consistently enforced in a locale, then it makes a great deal of sense to find out if you can trust someone before risking your money and your business dealing with them. The importance of trustworthy relationships in some cultures also carries over into the area of problem solving. Americans need to be especially careful when analyzing reasons for failure or inability to achieve goals with other nationals and to deal with them as sensitively and objectively as possible, even more so than when dealing with other Americans. If your customer, supplier, or employee from overseas thinks that you are engaged in a blamefixing exercise rather than finding a solution, then they will dig in their heels and resist cooperating. American lawsuits are derided and feared almost everywhere overseas, and other nationals are often suspicious that Americans will try to use the courts to gain what they cannot through discussions. Trust, like its twin, a good reputation, is difficult to build and easy to lose.

TX68837_frame_c01*.book Page 60 Saturday, August 17, 2002 9:29 AM

60

Strategic Management for the Plastics Industry

Another important difference between American and non-American business cultures is the concept of employment security as a social contract. While this notion is gradually eroding as global competition becomes more intense, in Europe, Japan, Latin America, and other areas, there are still strong social feelings that companies owe their employees lifetime job security. Note that business owners based in these same cultures by no means consider that they necessarily owe the same obligation to their American employees as they do to their society. Major problems can arise when American owners try to restructure companies that they own in such overseas cultures. Governments and unions will not be the only ones opposed to downsizing; company managers who are citizens of these countries are likely to be uncooperative as well. American business culture is both admired and deplored in many countries, sometimes by the same people. When people talk about finding a “third way” (e.g., between American economic freedom and socialist controlled economies), they often mean that they admire American economic results but do not want to change what they are doing to obtain those same results. Americans would be well advised to avoid making a practice of directly comparing American business methods to the local ones, unless they have an uncommon ability to do so very diplomatically. It is not difficult to win an argument but lose friends and business.

4.2 Tailoring Organizational Form to Business Needs One size does not fit all when it comes to organizational form. In fact, the overall strength of the individual professionals making up the organization is generally more critical to successful management than the organizational format itself, especially in small companies. Nevertheless, as companies grow in size and their business in complexity, it is sensible to take steps to ensure that the customer’s needs are indeed the focus of the organization rather than the process of the business itself. Functional or geographic organizations are the most common forms, but market or product organizations are also widely used. Some companies call the latter two forms business units.

4.2.1 Organizing by Function The traditional functional structure, shown in Figure 4.1, has department heads for manufacturing, R&D, sales and marketing, and administrative services all reporting to the chief executive officer (CEO). This is the simplest organizational form and the one used by most companies, especially small and mediumsized ones. It concentrates expertise in each of the units responsible for carrying out specific duties necessary for the business to operate on a daily basis as well as in the future. It does require, however, that the CEO ensure that coordination between the units is ongoing and working satisfactorily. In some companies, particularly those having an active acquisition program, the functional units report to a chief operating officer (COO), with the CEO being

TX68837_frame_c01*.book Page 61 Saturday, August 17, 2002 9:29 AM

61

Company Culture and Organization

President/CEO Administration

Manufacturing

Figure 4.1

Sales & Marketing

Research & Development

Functional organization.

more actively engaged in planning, acquisitions, etc. In effect, the COO is responsible for how the company is doing and the CEO for where the company is going. This structure certainly is not wrong or old fashioned, and it easily can serve the needs of many companies, whether they are large or small, multiproduct or single product, multimarket or single market. As companies grow in size, however, functional teams may become too inwardly focused on the “process” that they represent rather than on the combined results obtained, and this is the time to consider reorganizing management along one of the other structures described below. Another drawback to functional organizations is that major product lines or important markets will not be served adequately because they are buried among the rest of the product lines and markets served by the company.

4.2.2 Organizing by Product Many companies in the plastics industry have evolved from a functional structure to one organized by product, as they have grown larger in size and their product line has become more diversified. An illustration of this structure is shown in Figure 4.2. This type of organization can take several forms. A common version has divisions devoted to a single product or groups of President/CEO Administration

Manufacturing

Nylon

Sales/Marketing

Figure 4.2

Stryrenics

Technical

Product organization.

Sales/Marketing

Technical

TX68837_frame_c01*.book Page 62 Saturday, August 17, 2002 9:29 AM

62

Strategic Management for the Plastics Industry

products, with each division containing a functional organization. Another common form involves a centralized function for, say, manufacturing, with product units that incorporate R&D and sales and marketing. Product organization helps to rationalize manufacturing sites and to ensure global product standards and pricing policies. It also favors centralized R&D, which may then achieve the critical mass sufficient to make breakthrough technology advances, as compared to the only incremental improvements typical of smaller unit capabilities. Organization by product makes sense when the company has several, relatively large basic products that serve markets that have little overlap with each other. For example, if a company makes nylon and acrylic resins, or proprietary parts and custom parts, these products differ greatly in manufacturing and the markets into which they are sold. This would be a situation where it makes sense to have a division based on each product, with each division containing its own functional units. The principal disadvantages to organization by product are that (1) it inhibits the flexibility of local managers to react to competition, and (2) it is not particularly suitable for developing genuinely new products.

4.2.3 Organizing by Market If a company is to be truly market focused, then organizing by market is often the most effective tool to do so. Figure 4.3 depicts a company organized by market. This structure works best where the company has a number of products for which the end-use markets overlap each other, or when the number of customers is limited but their needs can be served by a number of products made by the company. Market units that are directed to the automotive and electronics industries are particularly common. The focal point of a market-organized company is on solving application problems at one company that can be applied to other companies in the same industry. This approach is particularly fruitful in such industries as electrical/electronic, where the emphasis is on participating in new applications that are likely to be small President/CEO

Administration

Manufacturing

Automotive

Sales/Marketing

Figure 4.3

Technical

Market organization.

Electronics

Sales/Marketing

Technical

TX68837_frame_c01*.book Page 63 Saturday, August 17, 2002 9:29 AM

63

Company Culture and Organization

volume individually but large volume in aggregate. As noted elsewhere, market focus also improves business planning and creates efficiencies in manufacturing and R&D that ultimately improve profitability. Market-focused companies are (or should be) customer-focused companies, especially if the market is made up of a small number of customers, such as the major automotive companies. The principal disadvantages of organization by market are that (1) it tends to shut out or overlook potential business in non-targeted markets for the company’s products, and (2) it tends to funnel technology, resources, and management time into defined markets, particularly automotive, which may not be as profitable as emerging or underemphasized ones, such as consumer goods.

4.2.4 Organizing by Geography Organizing by geographic areas is useful when speed of delivery is critical, such as for customers who demand just-in-time deliveries. It also speeds up decision making when there are multiple time zones between headquarters and the local plant. An example of this organizational form is shown in Figure 4.4. This organizational form, or some variation of it, is nearly essential for companies with multinational locations. While overall policy may be set at corporate headquarters, downward delegation to overseas sites must be adequate to handle business decisions locally, or the company will find itself always reacting to competitors rather than meeting them on at least even terms. Geographic organization delegates authority to the local managers for pricing flexibility and the ability to tailor products for local needs. A serious disadvantage of a geographic organization is that it may lead to different company units competing against each other, with attendant profit erosion as units fight over business that was yours to begin with. Other disadvantages are that it leads to a certain amount of duplication, particularly R&D, and that senior management will need to be involved in coordination to ensure that global (or even national) standards are being followed. President/CEO Administration

Figure 4.4

North

South

America

America

Geographic organization.

Europe

Asia

TX68837_frame_c01*.book Page 64 Saturday, August 17, 2002 9:29 AM

64

Strategic Management for the Plastics Industry

President/CEO

Administration

Manufacturing

Figure 4.5

Polyolefins

Automotive

Sales/Marketing

Sales/Marketing

Central R&D

Hybrid organization.

4.2.5 Hybrid Organizations One can have a hybrid organization, particularly in large companies, with different groups structured by function, product, market, geography, or even by a few large customers. Figure 4.5 illustrates a possible hybrid company organization. Hybrid organizations can avoid the weakness inherent in a onesize-fits-all approach, be it function, product, market, or geography oriented (there really is no single “best” way), and many companies do just this. Management should always look for the most efficient and effective structure that fits the nature of each principal line of business. Hybrids may be a management challenge to see that they work to the company’s best advantage, as they are unusual.

4.3 Management Styles Elsewhere, I have made the point that a command-and-control style of management is unsuitable for this and other industries that depend heavily on creative workers, particularly technical ones. Peter Drucker was one of the first academics to recognize this phenomenon, dubbing these types of individuals knowledge workers. It is not possible to command creativity in any function within the company, be it R&D, marketing and sales, manufacturing, or administration. Creative solutions to problems come from people sharing pertinent information from many sources. Creativity is greatly diminished if information is too compartmentalized and dissemination too limited. Committees and project teams are an important way to ensure that needed information is accessible to the parties that need it. Management, particularly senior management, needs to know what is going on within the company in order to execute their duties effectively. Holding weekly briefing meetings with immediate subordinates is the classical way of staying informed. Don’t fail to ask questions! This should be done without fail, because it is a very important way to build a management team relationship by developing an appreciation among the subordinates of what each one is doing and why. You can further improve on the quality of the information

TX68837_frame_c01*.book Page 65 Saturday, August 17, 2002 9:29 AM

Company Culture and Organization

65

that is shared this way and build morale by having subordinates bring individuals from the next level down in their organization to brief the meeting on what is going on in their sections. A different area should be represented at each meeting, if possible. Other ways to develop a better understanding of your organization’s workings include being an ex officio member of committees and attending meetings on an irregular, unannounced basis. Another excellent way is management by walking around — going out into the plant, the labs, and the offices of your company without prior notice, just to see and talk to lower level employees about their jobs. You might be surprised by what you learn this way when the information has not been filtered through layers of subordinates. It also helps raise employee morale a surprising amount to see the boss taking an interest in even entry-level employees and listening to their views on their work. Make sure that you inform their bosses of any potentially worthwhile suggestions you hear, and praise both parties for their interest. Be cautious about using the open-door policy, however. Depending on how it is utilized, it can be an effective safety valve, but it can also be a major waste of time and potentially damaging to organizational relationships. There is nothing wrong with making yourself available to meet with anyone from any level in the organization — up to a point. First of all, I do not recommend permitting individuals to invite themselves; they should go through their managers in a direct line to obtain an appointment (but their bosses should not be able to say no). While those managers do not necessarily have to be present during the visit, they should be at least involved in arranging the meeting or they will be resentful that they have been bypassed or not informed that their subordinate had been in to see you. Second, you will want to limit the number of such visits you are willing to accept over the course of a month or you may find that you do not have enough time to take care of your principal duties properly. Of course, a major exception to these limits is when someone wants to blow the whistle on a serious problem. For example, if illegal activities are going on that have been hidden from you, possibly by your subordinates, it is absolutely imperative that you keep a channel open whereby you can learn of these things before it is too late. Whistleblowers come in two varieties, which cannot be easily sorted out before they arrive on your doorstep: (1) those who make trouble for others because of personal enmity and/or have some psychological disorder that compels them to lie, and (2) those who genuinely care about working in an honest and ethical company and are willing to put their jobs and reputations in jeopardy in order to give you the opportunity to put things right. Either way, your door must be open to such complaints, but then you need to determine immediately but accurately which type of whistleblower is in front of you presenting serious complaints. Do not let the first type destroy the reputations of people who are innocent of the wrongdoing of which they have been accused. Do not let the wrongdoers destroy the reputations and careers of the second type who have trusted you to do the right thing. This may well require having your attorneys bring in experienced,

TX68837_frame_c01*.book Page 66 Saturday, August 17, 2002 9:29 AM

66

Strategic Management for the Plastics Industry

reputable private investigators to make this determination quickly. If you learn that the accusations are false, then you should dismiss the informer, but do so with care and legal counsel. You will have to be prepared to rebut any attempt to embarrass the company by the individual going to outside groups or the press. If, on the other hand, your investigators were to discover illegal activities going on (e.g., embezzlement, price-fixing, violations of environmental laws), then you would need to consult your attorneys about bringing in the authorities (e.g., the police, FBI, or EPA) to bring the criminals to justice without destroying your company and its reputation, if at all possible. Such matters cannot and should not be concealed from the authorities for any length of time, but it does make a genuine difference how and when they are informed. In any event, you must ensure that the whistleblower who first brought this to your attention does not suffer from having revealed that others have hurt the firm and you.

4.4 Board of Directors The corporation is essentially the only legal form used by most companies in the plastics industry. This is so because the limited exposure to legal liability is clearly superior to the unlimited exposure in other forms such as partnerships and sole proprietorships. The governance of corporations has a board of directors at its pinnacle. The board of directors has a management oversight function on behalf of the stockholders, who elect its members. Its principal interface is with the CEO, as well as the chief financial officer (CFO). The board is quite active in publicly held firms, typically meeting monthly. It selects corporate officers and sets their compensation, approves annual budgets and published financial statements, changes in the company’s principal lines of business, mergers, and acquisitions. In cases of mismanagement, the board can replace company officers, including the CEO. While it is not uncommon for directors to be handpicked friends or subordinates of the CEO, the current trend in industry is toward much more independent boards, even with a chairman who is not the CEO. The most desirable board members are current or retired CEOs of other companies. Boards sometimes also include an attorney with expertise in the industry. Less desirable, but occasionally observed, are board members who appear to have been selected for their political connections or their links to special-interest groups. Board members should also have at least some minimum stock ownership in the company, preferably before they are elected. The majority membership of most company boards today is moving towards outside directors (not company employees or retirees). Key committees, such as compensation and audit, must be composed exclusively of outside directors. It is an informal practice that board directors do not serve on more than three other company boards and that these companies cannot be competitors, customers, or suppliers of each other to any significant extent. A potential conflict of

TX68837_frame_c01*.book Page 67 Saturday, August 17, 2002 9:29 AM

Company Culture and Organization

67

interest exists if a director is also a paid consultant or otherwise renders services for pay to the company and this obviously should be avoided. Directors should be compensated in relation to the time that they are required to spend on company business. In many firms, this is dealt with by paying an annual retainer plus a fee for each meeting attended; some firms also offer stock options to directors. Board committee chairmen are usually paid an additional retainer. Board members should not receive pensions; after all, they are not employees. The point of the foregoing is not to instruct the management in publicly owned companies about how their board of directors functions. Rather, it is to provide some background on the real issue, which is the functioning of a board of directors in privately owned companies. Boards of privately held firms are often inactive, perhaps consisting only of the owner(s) and possibly some family members, and meet once a year, at least on paper, to satisfy legal requirements. This is a common mistake because it cuts off the CEO and any other owners from independent, fresh points of view of the company and its business. For what is a nominal cost, independent board members with experience in the industry can contribute significantly to strategic planning and overview of operations. A valuable purpose of a board of directors is to offer objective counsel and advice to the CEO that is often otherwise difficult to obtain. Companies with overseas operations may be relieved to know that most countries around the world generally follow the board of directors model described above, even if their elections are pro forma and only insiders serve as directors. In some, the CEO is called a managing director rather than a president. In virtually all cases, the CEO has a powerful influence on the board of her company. The corporate governance model used in the Federal Republic of Germany is an exception to the ones described above. Germany has required a singular form of stewardship for boards of publicly owned corporations through its “co-determination” law. At the top is the supervisory board (Aufsichsrat), which is the equivalent of the board of directors in other countries. The supervisory board is required to consist of 20 members, divided equally between representatives elected by shareholders and those elected by employees. The shareholder side usually consists of industry executives, banks (who are permitted to own stock in corporations, unlike in the United States), university professors, and heads of industry organizations, while the employees are represented by labor union officials. Each member has one vote. The supervisory board, in turn, elects members (executive directors) of the management board (Vorstand) who are responsible for running the company. The supervisory board also has the power to remove executive directors from office, but it is very rare for this power to be exercised. The management board has a chairman, whose position is one of primus inter pares, not CEO — in fact, the CEO does not exist as such. The chairman’s authority is limited in that he cannot dismiss any of the other executive directors; his powers are largely exercised by virtue of the respect given his position and views by the

TX68837_frame_c01*.book Page 68 Saturday, August 17, 2002 9:29 AM

68

Strategic Management for the Plastics Industry

other directors. Essentially, the management board is a legally mandated executive committee (in U.S. companies, the executive committee is an optional management group and is usually composed of the corporate officers or division heads). Each executive director is responsible for those business sectors assigned to him by the board but is often dependent on other directors for some elements of support, such as R&D, manufacturing, personnel, etc. The executive board as a whole develops budgets and sends them to the supervisory board for approval. This structure reflects the German cultural desire for labor to have meaningful input into corporate activities in exchange for a certain amount of labor peace. It also reflects a certain mistrust of concentrated power and results in a somewhat slower response to change than organizations with more comprehensive authority vested in a single individual.

TX68837_frame_c01*.book Page 69 Saturday, August 17, 2002 9:29 AM

Chapter 5

Managing for Success Chapter 1 broached the topic of setting goals and developing business plans. Part of drawing up and carrying out business plans is utilizing both the formal and informal elements of your organization and personnel. Integrating the functional efforts of different units is essential to achieving your goals.

5.1 Planning for Success Why do you really need a business plan? If you are running a small business, you may feel that a business plan is unnecessary. Sorry, that is the wrong answer. Every company needs a business plan to bring some focus to what it does and how to react to changes as they inevitably occur. Business plans do not need to be lengthy, nor should they be. The primary reason for conciseness is that it is impossible to forecast business conditions with great accuracy and certainty. Therefore, it is essential to have plans that briefly cover the range of likely possibilities, from high to low. This allows the company to be prepared for changes from original forecasts. The plastics industry has been subject to increasing volatility in demand during the past decade, and it is unlikely that this condition will improve in the future. Changes in demand are almost immediately felt by suppliers due to the increased use of supply-chain management techniques, which immediately transmit fluctuations systemwide. With inventory levels designed to be at low or even justin-time levels, a drop in, say, automobile sales, can translate almost instantaneously into a shutoff of parts requirements that is felt throughout the entire system, from processor to distributor to compounder to polymer producer. An upswing in demand will have the opposite effect — a sudden influx of orders for immediate delivery. It pays to have sufficient rapport with your

69

TX68837_frame_c01*.book Page 70 Saturday, August 17, 2002 9:29 AM

70

Strategic Management for the Plastics Industry

customers that you can come to some agreement with them to provide for some cushioning from such rapid changes. Demand volatility is only one source of deviation from forecast or target revenues. New product development can be thrown off track by unexpected difficulties in scale-up. Your customer can be acquired by another company that decides to scale back or even discontinue the line of business on which you were counting. An unexpected breakthrough at a customer may suddenly ramp up the demand for one of your products. You need to have at least considered what you might do should any of these events take place and require that you react on a timely basis. High–low contingency plans (keep them simple and not too detailed) will answer this need and allow you to move into action quickly. Plans are not merely a collection of objectives and considered tactics on how to reach them. They must include a list of the resources — human, financial, and hardware — required to execute them. As described in Chapter 7, you also need to assess how you will utilize those resources by their quality; the best must be assigned to the most productive projects. Business plans may differ according to their objectives and the time period covered, but the rest of the elements are essentially the same. I recommend that you develop a business plan that outlines what you want to do over the next 5 years, but with the principal emphasis and details on the next 12 months. Remember to quantify wherever possible. If you are a successful small businessman, eventually you are likely to grow to the point where you will need third-party investment in your company. Your business plan will be a strong talking point for you to show that you understand how to run a business on a well-considered and professional basis — important nonquantitative considerations for someone who is contemplating investing in your company. In fact, if you are seeking to get a bank loan or to sell your company, it will be essential for you to have a business plan with some documentation to show that you actually use it. Just what comprises a business plan? Here are the principal components:  Purpose (also called mission or vision) describes succinctly what comprises the company’s principal business and activities.  Business goals are a statement of what you wish to accomplish during the time period of the plan.  History and analysis include where the company has been, where it is now, and the choices as to where it will go in the future, as well as identifying the company’s principal strengths and weaknesses, opportunities, and threats and how you propose to deal with them.  Objectives are the intermediate milestones to be achieved on the way toward attaining your goals.  Projects and programs are specific details on the implementation of what you wish to accomplish. These may be in outline form and confined to key actions or activities.

TX68837_frame_c01*.book Page 71 Saturday, August 17, 2002 9:29 AM

Managing for Success

71

The sales and marketing element is the most critical part of the plan and everything else should flow from that. If the company is not generating income, then it should not be incurring expenses. You should also consider applying the old travel rule (“take half the clothes and twice the money you think you’ll need”) to sales and expense forecasts, at least to some degree. If your team is relatively inexperienced and the numbers therefore less reliable, shading sales forecasts down and expense forecasts up will give you some breathing room in the event that the forecasts are not as accurate as you would wish. Accompanying financial details need to be a fundamental part of your business plan, showing the amount and timing of expenses and income, cash flow, and, where appropriate, return on investment.

5.2 Managing and Integrating Functions In order to achieve sustained earnings growth, successful managers must learn to integrate the direction of functional groups, not centralize their direction (as is often and erroneously done). Centralized management puts all decisionmaking authority in one place; integrated management distributes decisionmaking authority to the lowest level capable of handling it but ensures that all decisions are coordinated toward achieving a set of common goals. As touched upon earlier, managers need to be aware that the majority of the key people they are directing are knowledge workers. Knowledge workers must be managed differently than others. Their contributions come from their own creativity, not from being directed or told how to develop something, be it technology or market strategies. This requires relying upon open sharing of information and decision making, not a command-and-control style of management. If functional groups do not closely intermesh and coordinate their activities, costs will rise, customers may be lost, and profitability will certainly suffer. Management must never allow empire building or turf wars to take place within or between functions. These kinds of negative activities are focused inward on personal objectives instead of outward on meeting customers’ needs and corporate goals. Management needs to take firm action to prevent them from starting and drastic action to stop them if somehow they have taken place. Make it clear to your subordinates that their appraisals — and their job security — depend on how they are contributing to company objectives, not on winning some sort of perceived internal competition. Individuals must treat each other with respect and courtesy. As Peter Drucker says, “Attack issues, not people.” If you find your time being spent resolving disputes over who is responsible for what, you need to address the more fundamental problem of why these arguments are breaking out. Much is made of General Electric’s use of internal competition to push growth faster (e.g., rival product marketing groups competing for the same business at the same customer), but this appears to be the exception to the rule because examples are lacking of other

TX68837_frame_c01*.book Page 72 Saturday, August 17, 2002 9:29 AM

72

Strategic Management for the Plastics Industry

companies that have been able to make this idea work successfully on a sustained basis. Even GE walked away from this approach after a few years, as the result could only be the cannibalization of business in hand rather than the creation of new business. The use of project teams and committees is central to integrated management. The input of each affected function is thus made part of the solution to dealing with problems and improving operations. Committees do much of the coordination of the various functional groups in a plastics industry company without requiring that senior management be directly involved. Standing committees are needed to handle matters that are routinely repetitive, such as raw materials qualification and purchasing. In the latter instance, research and development (R&D) can present the formulation characteristics of the materials under consideration; manufacturing, the processing characteristics; marketing, the customers’ preferences; and purchasing, cost and logistics considerations. Committee meetings, although despised and reviled, are really useful and necessary as interactive communications media within the company. Project teams are committees that have a specific, short-term purpose and disband once this purpose has been accomplished. They include members of different functional groups or different engineering disciplines. An example might include the development of a major new product for a large customer or even just putting together a logistics system that will coordinate the business requirements of the company’s largest customers. If the team works so well together that important synergy would be lost if it was disbanded, then restructure it as a committee. Otherwise, require that teams be broken up and the members reassigned when they have achieved their objectives. If the team is not achieving required milestones, reconsider its objectives and the resources assigned. A word of caution: create committees sparingly, keep their membership size limited (no more than six would be wise), insist that their meetings be short (preferably less than an hour), and have standing dates never more frequent than weekly. Poorly run committees are a terrible waste of valuable time and can damage morale. Well-run committees keep everyone in the loop, maximize efficiency, and minimize mistakes. The secret to successful meetings is for the chairman (an honorable word for both genders) to stick closely to an agenda that addresses only key issues, getting agreement on work assignment scope and milestones before adjournment, and handling issues with non-contributing members outside the committee meetings. Do not allow committee members to interrupt meetings by taking phone calls. The agenda should be sent to the participants with enough time to prepare properly; adequate preparation alone is a big step toward keeping meetings short and productive. Spread committee work around. It is good experience to rotate membership among different people in the same functional group, and it keeps the diversion from the group’s primary tasks to a minimum. It is a telling sign that “committee-itis” has set in if customers, suppliers, or other employees find they can virtually never reach people who are members of committees because they are always tied up in meetings.

TX68837_frame_c01*.book Page 73 Saturday, August 17, 2002 9:29 AM

Managing for Success

73

5.2.1 Research and Development Plastics industry research and development includes basic research into materials and processes, product/process development, application development, and technical service. Few companies other than the largest polymer producers can justify investing in basic research, and even this area is often supplemented by sponsoring research at universities. More than 95% of most industry R&D is in the nature of development and service to the company’s customers. The most successful companies find that at least 25% of their current sales come from products that did not exist 5 years ago. A strong R&D effort is fundamental to the success of any company in the polymer manufacturing, compounding, processing, or equipment/additives sectors of the industry. Only distribution has no real need for R&D. New products and processes are the lifeblood of sales and earnings growth in a competitive marketplace, but this cannot be taken to mean that R&D has carte blanche to do whatever catches its fancy. At least 90% of all R&D that looks promising in the laboratory should be vetted by marketing to confirm that a potential market exists and by manufacturing to ensure that it can be produced at acceptable quality and cost levels. That leaves 10% for creative R&D; that is, what else can we make, starting with what we already have? As a bad example, take the case where the R&D of a large commodity polymer producer developed a new engineering polymer that exhibited an excellent balance of properties. Without obtaining more than minimal market research or going through the full range of production scale-up steps, the company committed to a commercial-scale plant. The new product was sampled by customers and initial orders obtained. Then, some applications began to report field failures and several molders complained that the product showed variable lot-to-lot processing characteristics. Manufacturing found that the plant design would not allow the product specifications to be met at anticipated costs. After 18 months of trying to put out these fires (relatively unsuccessfully), management decided get out of the business by selling the plant and product line but found no takers at anything close to its cost. Eventually the plant was closed and the entire project written off, at a staggering cost in the range of nine figures. The manager in charge of the project was reassigned but lower level personnel were dismissed as part of the restructuring. Admittedly, this is an extreme case, but it happened to a company with seasoned management that evidently believed that developmental specialties were not that different from well-developed commodities. It is instructive to note that another commodity-based company was also trying to develop an equivalent product at this time but never invested in production facilities and was able to close down the project before it siphoned off so many investment dollars from other projects. One of the most difficult but critically important jobs a manager has in the plastics industry is to successfully integrate technology and marketing. Plastics materials, even commodities, cannot be sold like detergents. Potential and actual customers must know how to use them in order to gain the benefits of their features and pay for the value they confer on an application. The

TX68837_frame_c01*.book Page 74 Saturday, August 17, 2002 9:29 AM

74

Strategic Management for the Plastics Industry

speed and relative success of this learning process (e.g., time to market) can make or break the profitability and competitive advantage of a new product for a company. The most successful companies in the plastics industry combine their product development and marketing groups into teams. This ensures that the company’s technical resources are used to meet customer needs with the least amount of filtering in communications and time loss. Technical marketing (integrated R&D and marketing) includes characterizing products in terms of the properties used by design engineers for certain classes of applications. For example, short-term mechanical strength and stiffness values may serve to make initial material selections but are not accurate for predicting long-term performance. Marketing must assess which classes of applications offer sufficient business potential to justify the cost of obtaining such data as creep and fatigue resistance, with R&D providing the data. Marketing must also obtain customer feedback to let R&D know if the data are sufficient to allow the application to go forward or if the product requires modification. If the product must be modified, R&D will have to advise marketing about the feasibility and cost (this may require involving manufacturing), and marketing again will have to determine the market potential over a range of prices to arrive at a decision. Another area where R&D and marketing must cooperate closely is costreduction projects. When R&D has been tasked to reduce product formulation and process costs, the result may not be exactly the same product that has been approved by customers. Marketing should ensure that the customers are willing to accept a modified material without requalification — this is often an opening for competitors to have their products qualified at the same time. It is dangerous to regard cost-reduction programs as an entirely internal matter. Many companies also offer design services to qualified customers as part of their sales and marketing “package.” The services of computer-aided design (CAD) and computer-aided engineering (CAE) offer a benefit to large customers that may not be available from other competitors. They also provide some assurance that the application will be a successful one because design problems can be resolved before tooling is built. Although many firms prefer to maintain CAD/CAE services in-house, sometimes they can be contracted out successfully.

5.2.2 Sales and Marketing It has been said by some that marketing savvy seems to be in short supply in this industry while sales know-how seems to be in abundance; only a few companies seem to know how each works. Everyone knows what the term sales means: getting orders from specified customers. The meaning of marketing seems to be less well-defined. In my opinion, the problem is basically a lack of understanding of what marketing actually does, how to use it, and how to integrate marketing with sales. For one thing, let’s clear up one point now: marketing is not a series of advertising campaigns or a blitz of press

TX68837_frame_c01*.book Page 75 Saturday, August 17, 2002 9:29 AM

Managing for Success

75

releases, nor is it solely involved in developing new customers. Marketing is much more than this. Marketing responsibilities include the following:  Identify, analyze, and aggregate a series of individual similar customers and applications into markets. For example, a transparent polymer such as polycarbonate might be sold to customers for optical applications that might be further classified as consumer and automotive, opening up further potential uses.  Identify and project trends in markets to help the company anticipate and manage the coming changes. An example would be the commoditization of desktop computers, with attendant decline in growth rates and increased offshore sourcing.  Build recognition of the company’s products, services, and conduct of its business into respect and loyalty among its existing customers; then extend this recognition to potential new customers. The use of branding (promoting the reliability of your product vs. lesser known or even generic products) is not limited to consumer goods. DuPont’s Zytel® brand nylon and General Electric’s Lexan® brand polycarbonate are good cases in point. Both companies have worked hard to establish their brands as premier products through advertising, news releases, and trade shows. Both companies have found brand recognition a useful tool in building consumer products business by licensing customers to use their brand names in return for an exclusive supply position. These customers see a benefit in the form of the increased consumer acceptance of products made from a promoted and recognized brand such as Zytel or Lexan. While this technique may not necessarily win a pricing premium, it can often tip a customer’s choice between a branded product and an unknown one to the branded material, all other things being equal.  Collect, analyze, and transmit the information necessary for development of the company’s future business plans.  Develop an understanding of how the company is perceived by its customers, primarily in terms of strengths and weaknesses. Without customer satisfaction, a company cannot grow and prosper. It is an important responsibility of marketing to know how the market — customers — regards the company and recommend ways to improve this regard, as well as to build on the position that has been revealed.

Sales and marketing are complementary, not competing groups. No one seems to have a problem with knowing what sales people have to do, but sometimes they do seem to have a problem understanding how they have to do it. Sales work does not consist of a big entertainment budget. If purchasing agents were so easily seduced, their bosses would notice quickly that they were not doing their job of buying the best for the least. Good sales representatives will identify all of the important decision makers in each company and make sure that they communicate with them on a regular basis. It is not enough to know that the company is meeting the current needs of the customer. One must also know what their future needs will be: whether there will be more or less business to seek, what the customer’s financial situation and business goals are, etc.

TX68837_frame_c01*.book Page 76 Saturday, August 17, 2002 9:29 AM

76

Strategic Management for the Plastics Industry

An important aspect of sales is developing formal purchasing contracts with customers, both to establish enough stability at the account that development costs can be justified and to reduce opportunities for competitors to take away business. If a customer is only making spot buys, then you are in a weak position; this situation also suggests that knowledge of the customer’s needs is lacking. A purchase agreement should be of benefit to both parties — the buyer should receive a better price, based on total purchases and some security of supply, while the seller should receive some assurance of minimum volume and some security of continuing business. A purchase contract will be much stronger if the customer buys multiple products from you and the combined purchases count toward a rebate or discount. While a seller may wish to tie up all of the customer’s possible business, this is seldom wise on the part of the buyer. Attempts by a customer to demand retroactive discounts for past business as a condition for present and future business, as has happened in the automotive industry, are a sure sign of trouble. Such demands should be turned aside, because giving in to them will only invite more and greater demands. Customers who make such demands should be examined carefully to determine how business should be conducted with them in the future, if at all.

5.2.3 Manufacturing Manufacturing is all too often taken for granted, but its consistent, qualityconscious, timely, and cost-effective execution is crucial to the success of any non-service company in the industry. The leading firms of the industry have adopted Total Quality Management (TQM), Six Sigma, or other such techniques to ensure continuous improvement in consistent quality, which almost always also results in important cost savings. Manufacturing consists of processing raw materials into finished products; in many companies, purchasing is also part of manufacturing. Your suppliers of raw materials plus the logistics companies that transport and store these materials constitute your supply chain. You are only doing half the job if you are managing only your own production scheduling and not the rest of the supply chain. It is impossible to control costs and quality if you have not brought your suppliers on board as partners through regular consultation about your specifications, logistics, how to reduce and control costs, etc. These matters should never be imposed on suppliers but rather developed jointly with them. ISO 9000 certification for your company and your suppliers is an integral part of assuring globally consistent manufacturing quality, just as much as TQM or Six Sigma programs are. The industry journals are filled with information about software programs known as enterprise resource planning (ERP); possibly the best-known provider (but certainly not the only one) is SAP, a German software firm. These systems allow a company to employ a relational database globally that keeps track of all its purchases, inventory, manufacturing scheduling, and shipments. Supplier/customer-compatible ERP systems can effectively integrate the

TX68837_frame_c01*.book Page 77 Saturday, August 17, 2002 9:29 AM

Managing for Success

77

production processes of both, with significant potential savings and shortened lead times. Early ERP supply-chain systems were the forerunner of much of what is called e-commerce today. In addition, a properly enhanced ERP system enables management to analyze its return on investment in a variety of ways. The installation and training costs for these system are substantial (as much as $200 million for very large, globe-spanning companies) and have therefore been limited in use to date. The time required to train personnel in their usage normally varies with their familiarity with information technology (IT) systems; six months to a year is not unusual. Much less expensive installations (in the range of middle to low eight figures, including software, consulting assistance, and training) are becoming available and are being marketed as suitable for mid-size firms (down to $200 million in annual sales). One method for keeping these costs down and accelerating the system’s implementation is to use one of the standard templates offered by the software supplier and avoid customization unless your requirements are justifiably inflexible. Customization costs more, takes longer, and raises the risk of running into “bugs” down the road. All of these systems require annual maintenance, as would almost any asset. Still smaller, one-site systems are available for processors at costs that are in the low six figures. These smaller systems are focused on manufacturing and therefore may lack some of the sophistication of larger systems, but they are easier to install and use. They are a good way to become familiar with the concept of ERP instead of jumping in with an attendant much larger investment of time and money (and risk). The growing use of e-commerce is testimony to the efficiency of using either private networks or the Internet for exchanging order and inventory information between suppliers and customers. The technology involved is relatively new and the security of transactions is still being upgraded. Furthermore, installation costs are coming down as e-commerce gains acceptance. It appears that large corporations are either using it now or are in the process of converting to it, while smaller companies are still studying the feasibility and justification. The pressure to use e-commerce is primarily coming from large buyers; they want all of their suppliers to use e-commerce systems so as to trim costs uniformly. The rise in the use of e-commerce for supply-chain management (SCM) has come about almost simultaneously with another phenomenon of the 1990s: reducing the number of suppliers. Fewer suppliers usually mean more purchasing leverage in terms of lower prices and more services included in the price. If practiced correctly, SCM also offers lower transaction costs for both parties. Having fewer suppliers should lead to a closer relationship with the customer, a greater ability to provide more products and services than before, and joint participation in new developments. A reduced supplier base presents very distinct risks, however. The smaller supplier base can expose a company to delivery delays and product quality problems without the ability to turn immediately to another supplier to take up the slack. An underfinanced supplier could go out of business or be acquired by someone who wants to

TX68837_frame_c01*.book Page 78 Saturday, August 17, 2002 9:29 AM

78

Strategic Management for the Plastics Industry

change the customer base, without a qualified replacement being readily available. The ultimate reduced supplier base is to source from just one company. Perhaps the most serious drawback to this idea is the likelihood of being cut off from new products and technologies developed by suppliers with whom you no longer have a relationship. As an example, a parts division of one of Detroit’s Big Three automobile manufacturers had an exclusive supply contract with a major polymer producer. A European competitor of this polymer producer called on the parts division with a proposal to reveal a brand-new technology for making hollow parts by injection molding, in return for being accepted as a second source for material. The parts division refused, citing their exclusive contract and then asked their regular supplier to furnish the same technology to them. The domestic producer had no such technology and it took 18 months for them to come up with something similar. In the meantime, the European competitor had gone to another one of the Big Three and had their proposal accepted almost immediately. The estimated savings to the lucky Big Three company that took up the European proposal ran into millions of dollars and helped them to increase their market share. Thus, the exclusive supplier philosophy wound up costing many, many times any possible savings from purchasing leverage.

5.2.4 Administration Administration is a sort of afterthought for some, but it has an important impact on a company’s performance. Administration has a number of components:  Human resources (HR) must serve management’s needs to find, hire, and retain top-quality personnel. HR has to maintain current information on industry-wide compensation and benefit practices, as well as keep up with frequent regulatory changes in this area. HR also has to administer the performance review system to make sure that it is running on time and properly.  Finance must manage the company’s cash flow so that the company collects and disburses on a timely basis, at minimum net cost. This responsibility also includes maintaining lines of credit at banks and monitoring the stock and bond markets for suitable opportunities to raise money if the company is publicly held. Such activities must be conducted with the utmost integrity and transparency, as recent accounting scandals have demonstrated. It is not enough to be merely “legal.”  Management information must provide necessary data accurately and on a timely basis to every level of management that needs these data to perform their duties. At one time this was little more than an extension of the finance group. Today, it provides critical information to all functional groups, although accurate and timely financial data are still the most important portion.

TX68837_frame_c01*.book Page 79 Saturday, August 17, 2002 9:29 AM

Managing for Success

79

 Credit must correctly and continuously assess the ability of customers to pay fully and on time and communicate this information to management promptly. A few bad debts are an acceptable risk associated with aggressive selling, no bad debts indicate too cautious an approach, but many bad debts injure the company’s financial performance unnecessarily. Credit insurance is not that expensive and may present a reasonable option if management is uncomfortable with the level of risk they perceive in the credit-worthiness of their customer base.  Legal must ensure that the company’s contracts protect the company’s interests, particularly to offer some protection against lawsuits without merit. To obtain the best results from the company’s attorneys, tell them what you want to do and let them advise you on the best way to do it. Realize that anyone can sue anyone anytime for any reason in the United States (frivolous lawsuits are often allowed to proceed), but do not stand in fear of this possibility. Just as with credit decisions, some balancing of risk in legal matters is proper; otherwise, you will find yourself taking the perfectly safe legal position on everything (e.g., “No, we can’t do that; it’s too risky”). Legal is also in charge of hiring and supervising specialized counsel when more esoteric areas of the law are involved, such as antitrust and patents.

5.3 Managing Costs One of the most challenging jobs a manager has is containing costs. That old cliché about “doing more with less” seems to be very much in vogue today, whether business is growing, slowing, or stagnant. The press seems to run nothing but articles about plant closures and layoffs, and managers are under pressure to show that they, too, can make the tough decisions to cut staff and shutter manufacturing sites. The trouble is, these are not tough decisions; they are easy ones. Everyone else is doing it, so it becomes an easy way to avoid criticism by following the crowd. Yes, it can make sense to shut down (permanently) plants that cannot be economically modernized, particularly if the capacity is not being, or is not likely to be, profitably utilized. Yes, it can make sense to divest a part of your business that is marginally profitable and is not growing. Yes, it can make sense to restructure your organization to flatten the management pyramid, eliminate overlapping positions, and separate truly marginal performers. Yes, you can drop customers whose credit seems risky. The trick is to avoid overdoing all of these things; presumably you have been doing them all along during good times as a part of good management practice, so these problems ought not to exist during bad times. All too often, managers feel under pressure to conform to what others are doing rather than only doing what their circumstances require. A further caution about trying to achieve profitability solely by cutting costs is warranted. Cutting R&D is sacrificing the future for the present. Less R&D means fewer new products, which in turn leads to slower sales growth and lower long-term profitability. Cutting manufacturing capacity reduces the company’s ability to respond to unexpected market opportunities. Divesting

TX68837_frame_c01*.book Page 80 Saturday, August 17, 2002 9:29 AM

80

Strategic Management for the Plastics Industry

non-core but profitable businesses may cut cash flow, increase cyclicality, and close the window on unforeseen opportunities outside of traditional markets. Concentrating primarily on cost cutting to improve profitability is a defensive measure and invites offensive-minded, aggressive, growth-oriented competitors to test your willingness to protect your markets. Staff reductions, product line revisions, and business divestitures are discussed in more detail in Chapters 6, 7, and 8, respectively. One area for cost savings that is not always thought of in smaller companies is working capital reduction. If the business is reasonably profitable and generating good cash flow, management tends to overlook the amount of money that can be tied up in accounts receivable and inventories while faithfully writing checks for accounts payable within the standard 30 days. A good follow-up system for slow-paying customers is worthwhile, but it may prove easier to raise their prices by a percent or two than to dun them for payment if their credit is good but they insist on paying in 60 days. Some suppliers may be agreeable to extending your payment terms; it does not hurt to ask. The greatest savings, however, are likely to be found in your inventory. You need to establish standards for inventory turnover and then work on improving them. Can your vendors ship small quantities on short notice without necessarily penalizing you on price? Are you insisting that your customers accept up to 10% overruns on custom work? Do you dispose of slow-moving inventory on a regular basis to free up space and reclaim working capital? If you are able to reduce your working capital needs more or less permanently, this is cash freed up to invest in other needs or even to pay dividends to shareholders. Do not overlook the spare parts kept in maintenance; they are a form of inventory, too, even if written off when purchased. Make sure that spare parts are kept within reason and that you are not tying up space and funds by holding onto equipment and parts that are unlikely to be used in the near future or cannot be obtained quickly in an emergency. What else can you do improve performance if cost reduction is not the only answer? R. Mooney of Deloitte & Touche suggests finding a balance between profitability and growth, creating separate business structures for operations that have little in common, improving the use of manufacturing information technology to increase productivity, and being alert to protect key customers from the inroads of competitors.

TX68837_frame_c01*.book Page 81 Saturday, August 17, 2002 9:29 AM

Chapter 6

Staffing for Success It may be a cliché, but it is true that people are a company’s most important asset. Without the right people, the organization, physical plant, and products of a company cannot succeed. This chapter will deal with how to find, train, and retain the best people. The plastics industry has some special needs in this regard, which we shall see. Staffing is defined here as consisting of recruiting, training, evaluating, promoting, and firing personnel. The quality of the company’s personnel must be the best that management can find or management will have self-imposed difficulties accomplishing its plans. The discussion of staffing that follows is concerned with professional personnel; plant and laboratory non-salaried personnel are discussed later in less detail; discussion about clerical personnel is omitted as such staffing is essentially the same in any industry. Matters of compliance with government regulations are also not specific to the plastics industry and are therefore best learned from experts in this particular field.

6.1 Recruiting How do you find new employees? A number of ways are available, all of which you will likely want to use at one time or another:  Classified advertisements are the most commonly used method. Trade publications are the best media to use, although newspapers are useful for attracting applicants for non-salaried positions. Never use “blind” ads; people who are already employed will not respond to them in case their own employers are the advertiser. Describe your business and the position to be filled in sufficient detail so that you do not attract unqualified people.  Internet bulletin boards are another form of classified ads.

81

TX68837_frame_c01*.book Page 82 Saturday, August 17, 2002 9:29 AM

82

Strategic Management for the Plastics Industry

 Referrals from employees, suppliers, customers, friends are often the best source of people who will fit well with the organization. These individuals will want to work with others who have their same motivations.  Universities, technical, and vocational schools are another excellent source of people, but these will likely be recent graduates and therefore inexperienced, except for cooperative students (as discussed later in this chapter).  Employment and executive search agencies are an expensive option (the fee is usually 30% of the first year’s salary) but sometimes necessary to find just the right person to fill a particular job.

Recruiting is a tough job; the legal restrictions on prior employers’ disclosure of personnel data make it very difficult to obtain a meaningful evaluation of a candidate’s previous job performance. While written tests may be helpful for evaluating technical knowledge and writing skills, personality tests have questionable validity for assessing potential performance in a given position and thus may be subject to legal challenge. Recruiting, therefore, often comes down to evaluating a candidate’s experience and behavior during an interview. Because this process is too short to be more than merely an indication of whether or not an individual will become a contributing member of your management team, all new hires should be placed on probationary status for the first 6 to 12 months, subject to termination at will (where this is permitted by applicable state law). The objective for recruiting should always be to hire the best-qualified candidates available — usually those who have shown that they are quick to learn and willing to work hard — and never to sacrifice quality for availability. It is a shameful waste of time and money to hire questionable candidates merely to fill job openings as quickly as possible. To paraphrase an old saying, “Hire in haste, repent at leisure.” All offers of employment must be in writing, and the letter must state that the terms offered supersede any verbal understanding. This is not just being professional; it is protecting yourself and your company from misunderstandings. At the same time, do not count on any applicant who has been accepted as an employee until the day that person actually shows up for work. It is disquieting though true that a small but significant number of people who have accepted job offers (perhaps 5%) will never actually come to work for you and may never even notify you that they are not coming. It is also a matter of common courtesy, as well as business ethics, that every unsuccessful candidate who has been asked to submit a job application or who has been interviewed should be advised promptly of your decision in a courteous, business-like way. People who apply for work with your company on an unsolicited basis should receive the courtesy of a prompt reply that acknowledges receipt of their application and indicates whether or not you have any interest. Regrettably, a surprising number of would-be applicants, particularly those just out of college, do not take the time to evaluate whether or not a company would have use for their qualifications; for example, a distributor would not be seeking people for research and development (R&D). Do not take offense at this laziness and immediately discard the résumé; rather, respond politely and

TX68837_frame_c01*.book Page 83 Saturday, August 17, 2002 9:29 AM

Staffing for Success

83

point out, for example, that your company does not have such positions or it only hires people with certain experience. You have a responsibility for building both your company’s reputation and that of the industry as being a good place to work. One day that would-be researcher could find a job with another company and be in a position to decide whether or not to approve your products. Then there are “overqualified” applicants. These have become an urban legend — candidates who have more education and experience than a job requires but are rejected because they are overqualified and thought to be a risk to leave as soon as they find another job. Frankly, most employers would love to be presented with an overqualified employee, but they seem to be a rare breed, living mostly in letters to the editor of industry magazines, complaining that no one will hire them. As long as overqualified candidates would be willing to start out in a job that pays less than they might obtain in one that matches their qualifications more closely, the odds favor their being hired — and being promoted as soon as an appropriate opening comes up. Alas, it appears that the overqualified candidate is more likely to be someone whose personality traits are a problem, rather than someone who knows too much to hire. The following sections will explain what to look for in a prospective job candidate.

6.1.1 Education While I recognize that I am likely biased by my own education, an engineering degree or at least a degree in a hard science (e.g., chemistry or physics) is often an essential qualification for people seeking entry-level professional positions in the plastics industry. This is a technical business above all else, and anyone who cannot quickly understand the terminology and relationships between materials and processes is likely to be lost for too long to make a successful transition into being a contributing member of the team. At middle and senior management levels, some education in business administration will be increasingly useful, especially in the more capital-intensive segments of the plastics industry such as polymer manufacturing. A bachelor’s degree is often sufficient for most positions except in research, where a Ph.D. can be desirable, particularly for polymer chemistry. Nevertheless, a master’s degree may be very useful in manufacturing or plant engineering. A master’s degree in business administration can be valuable for general management as well as information management, sales and marketing. The quality and comprehensiveness of MBA studies vary widely, however. One needs to inquire closely about just what job candidates have studied and what they learned. While I am the happy beneficiary of maximum exposure to liberal arts courses (history, languages, literature, etc.) in college in addition to my scientific, engineering, and business administration education, it is usually not advisable to recruit liberal arts majors directly from college. Nevertheless, this educational background can be quite helpful for non-technical positions if

TX68837_frame_c01*.book Page 84 Saturday, August 17, 2002 9:29 AM

84

Strategic Management for the Plastics Industry

one finds a job candidate who has also had progressive and substantial experience in the plastics industry for, say, at least 5 years. Experience shows that one will be much more successful by training a newly minted engineer for positions in sales and marketing than by attempting to train a recent liberal arts graduate in the technical aspects of the company’s products for these positions. A number of universities and colleges have cooperative (co-op) programs, where engineering students spend three 6-month periods working in industry in between their four years of undergraduate study. Other schools offer summer intern programs that allow students to work in industry for shorter periods of time, but these are less effective. In my experience, graduates from co-op programs generally exhibit more understanding of what is expected of them and have a better grasp of how to use their education in the workplace than do graduates of non-cooperative programs. Should you choose to hire co-op students, then the institutions will ask you to do so on a regular basis, which is a reasonable request. The co-op period also gives you a chance to assess students as future possible permanent employees, without an obligation to hire them. The students also have a chance to determine whether or not this is the career opportunity that they want. All in all, this is a win–win situation. However good the graduates of coop programs are, it is most unwise to limit your recruiting to graduates of just a few institutions. Try to blend together graduates from a number of colleges and universities so as to avoid the possibility of cliques of alumni forming. Should this situation arise, just the appearance of favoritism that might accompany it can be devastating to morale. If it does indeed exist, then you will have closed off the opportunity to hire and keep motivated people who have fresh points of view and approaches to the company’s business.

6.1.2 Experience Education is, essentially, learning from other people’s accumulated knowledge and their experience from applying that knowledge. However, there is no substitute for tempering and validating lessons learned in college by the reality check one finds through one’s own experience. Therefore, given a choice between apparently equally educated candidates, one should usually favor the one with more experience than the other, especially if the experience was more extensive. Most engineers start out their careers in manufacturing or R&D, which are great places to gain an understanding of the basics of the plastics industry. At some point, however, they must also develop at least some experience in marketing or sales, because this is industry, after all, not academia or government. In fact, it would not be unfair to say that our industry has had more than its share of unsuccessful top managers who failed mainly because they had no significant successful prior experience in marketing and sales, despite a good track record in technical positions.

TX68837_frame_c01*.book Page 85 Saturday, August 17, 2002 9:29 AM

Staffing for Success

85

Take care to judge the relative quality of a candidate’s experience. For example, did the individual have 5 years of varied, broadening experience, or was it actually 5 years of the same experience repeated over and over again? One way to discover the value of the candidate’s experience is to ask for several examples of what that person has learned in the course of working in the industry. Many companies recruit directly from college, with the idea that they will “fill the pipeline” by replacing more experienced people as they leave or are promoted. Unfortunately, it is difficult to avoid high turnover with such recruits — perhaps 30% or more in the first 2 years of employment. Two leading reasons for this turnover are: 1. College graduates who have no prior significant employment experience frequently have unrealistic expectations of what it is like to work in industry. If they cannot bring their expectations in line with the reality of the work environment they are in, either they will quit in order to find some other environment more closely matching their expectations or their work quality and quantity will decline and they will adversely affect the morale of others. This is a good reason to hire co-op program graduates, who have 18 months of industry experience before they look for full-time positions. 2. Gauging the potential performance of college graduates without a work history is difficult. Gauging the quality of the education the candidate has received is also difficult, particularly if no one doing the recruiting has seen recent graduates of a particular institution in action. If, despite training and counseling, a college graduate does not show above-average performance during the probationary period, he should be terminated. If you are willing to accept average performance, then at least recruit someone with prior experience, as they will likely make fewer mistakes even if their output is not the highest.

6.1.3 Personality Traits With rare exceptions, it is critical to select team players for today’s integrated management of different talents to overcome problems. The exception may be a research genius that has just the right training and experience to come up with breakthrough technology for the company. “Lone wolf” personalities, particularly in sales, manufacturing, or administration, will cause real problems in reaching goals. Look for these traits by asking about the candidate’s previous work experiences and what they liked best and least, especially about their supervisors and colleagues. People who have trouble getting along or communicating with others are unlikely to act any differently if you choose to employ them. Occasionally, you will come into a position where you did not select your subordinates and you find that one or more of them do not meet these criteria. You certainly should attempt to work with these people to help them modify the way they work with others, but do not expect miracles to happen. You

TX68837_frame_c01*.book Page 86 Saturday, August 17, 2002 9:29 AM

86

Strategic Management for the Plastics Industry

are no more likely to see them change than are people who enter into marriage expecting to change their spouses. You will then have to decide whether their particular talents are so great as to require an exception or you should encourage them to make a career change. Potential employees should also have a minimum level of self-confidence, based on their experience with successfully overcoming obstacles and solving problems. Otherwise, they will be afraid to take even small risks and will almost certainly make poor supervisors because they will be reluctant to delegate authority. Self-confidence should not be confused with self-esteem, which may arise from a false sense of accomplishment. Questioning candidates about how they have handled problem-solving in the past should reveal whether or not their self-confidence is justified. Arrogance is a quality to be avoided entirely. Finally, consider these thoughts from former U.S. President Calvin Coolidge: “Nothing in this world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan ‘press on’ has solved and always will solve the problems of the human race.”

6.1.4 References By all means, ask for references. Yes, these references are going to be a selection of people who the applicant knows will speak favorably of him but you can still learn something. Always ask for specific examples of how the applicant carried out assigned tasks, staying away from meaningless generalizations. For example, do not ask, “How well does X get along with fellow employees?” Ask instead, “Can you tell me specifically how X handled situations with others who disagreed with her ideas?” If an applicant cannot furnish at least three references that are familiar with his work history, this by itself should be regarded as a caution sign. Do not overlook your own contacts at companies where the applicant worked or with whom he came in contact in the course of work (e.g., sales, purchasing, and engineering). Sometimes these sources will give you more useful information than you can obtain from anyone else. The least likely source of worthwhile evaluations of a candidate is likely to be Human Resources; the most useful source is likely to be your candidate’s former boss.

6.1.5 Employment Agreements Companies in the plastics industry often have need of protection from the loss of trade secrets walking out the door with departing employees. The industry also has a history of employees leaving firms to start up or join competitors. The best way to protect the company from such events is through an employment agreement. The agreement should include language to prevent use or

TX68837_frame_c01*.book Page 87 Saturday, August 17, 2002 9:29 AM

Staffing for Success

87

disclosure of your trade secrets to anyone who is not authorized by the company to have access to them, as well as barring the employee from competing with the company for a reasonable period of time (e.g., 12 to 18 months). The geographic area covered by the non-compete agreement must also be reasonable and appropriate to the employee’s job. For example, a salesman in New England could not normally be restricted from working for a competitor in California. If a former employee can document that the noncompete clause is keeping him from finding a job, despite good faith efforts to obtain one that fits his qualifications, then the agreement should provide for some financial compensation during the period. Non-compete agreements must be signed as a condition of employment before someone joins your firm; many courts consider that requiring an existing employee to sign an agreement as a condition of remaining employed is coercive and therefore unenforceable. Non-compete agreements are not enforceable in some states unless they are part of the acquisition of a business. Even then, courts in these states may severely limit the geographical area in which the non-compete agreement is enforceable. Obtaining legal relief from illegal use or disclosure of your trade secrets requires you to inform your employees as to what you consider to be secret and taking the necessary steps to prevent them from being learned by unauthorized personnel, such as:  Requiring escorts and visitors’ badges for non-employees entering the premises  Marking appropriate areas as off-limits to unauthorized personnel, possibly requiring a pass or key to enter such areas  Reminding employees periodically that the company does have trade secrets and that they are to be protected as such  Using coded names or symbols instead of conventional names or symbols for ingredients in secret formulations  Identifying confidential information as such

In regard to the last point, do not mark everything “confidential” or it will be obvious that this is a sham. Confidential information should also be locked up when it is not being used. Customer lists in particular cannot be considered confidential unless they would be difficult to assemble and you make a genuine effort to protect them. If you do not treat your secrets as confidential, a court will not do the job for you. Another element that should be in an employment agreement for technical personnel is language spelling out that the employee is being hired to invent and that no additional compensation is automatically due to that employee for producing successful inventions. You are not barred from rewarding your employee for a job well done, but you are not required to do so, either. There are some locations where the law provides otherwise (e.g., Germany) and inventors are legally entitled to a share of the royalties from any patented inventions they create, even while using company time, money, and facilities.

TX68837_frame_c01*.book Page 88 Saturday, August 17, 2002 9:29 AM

88

Strategic Management for the Plastics Industry

6.2 Training Hiring a new employee is a job only half done. New employees must be trained in the business and procedures of the company. Established employees also require training to ensure that they stay abreast of the technology of the industry and that they are prepared for promotion when the time comes. Training comes about through job experience as well as formal classroom instruction.

6.2.1 Job Enrichment and Rotation One way to add to a subordinate’s experience is to broaden the assigned duties. It is often a bitter joke that such job enrichment amounts merely to more work for the same compensation; do not make this mistake. If the position carries more responsibility than before, then it should certainly carry more compensation than before. Even if the assignment is truly a lateral move, offer some benefit, such as a new title or a better office, to encourage the individual to make the most of the opportunity. It is a good idea to transfer promising employees between functions at intervals of about 3 to 5 years. Employees whose experience is limited to just one area are not well qualified to move into positions where they must direct subordinates in other functions. A smart, hard-working engineer who has worked successfully several years each in manufacturing, R&D, and sales/marketing has taken important steps toward becoming promising upper-management material. Job rotation also helps keeps people from getting stale. While individuals vary as to how long they should remain in the same general type of position before they start to lose interest and enthusiasm, a maximum of 5 years is a good rule of thumb. In small companies that simply do not have enough positions to offer regular changes of assignment, the time frame may be lengthened to 10 years, but rarely more. In this, as in most other things, moderation is wise; time well spent in a position builds expertise, something that is just as desirable as a diversified background. A number of companies move people around geographically in the course of job rotation, even if similar positions are available at the same site. The reasoning is usually that these firms want the employee to be exposed to different local business conditions and that the change should be made as soon as an appropriate position is open, no matter where it is. Some suspect that the management in some of these companies is also trying to test an employee’s willingness to accept any assignment given. While an occasional move is normal, even desirable, in the course of a business career, constant geographic relocation is most certainly not good practice, nor should people be penalized if they refuse such moves. This is an age of dual-career families. If one partner is offered a job in a distant location but the other is unable or unwilling to follow, then a problem has been created that is going to adversely affect the performance of the individual involved. Even if the family has a single breadwinner, uprooting people can be traumatic, especially for children and particularly if it means leaving behind extended family members (e.g.,

TX68837_frame_c01*.book Page 89 Saturday, August 17, 2002 9:29 AM

Staffing for Success

89

grandparents, aunts and uncles). Furthermore, management should be encouraging the development of community ties, not disrupting them. As a policy, individuals should be able to make their own career decisions, not have them forced upon them, or the company will be creating significant long-term problems with employee loyalty and job performance. At any rate, the objective should be to salt the middle- and upper-management ranks with at least a few people who have experience in more than one environment, function, product, market, or discipline. The process is not inexpensive but is essential to avoid having a company of one-dimensional managers. Engineers and scientists have acquired something of a reputation as not possessing sufficient people skills to make good managers. While I believe this is a weak generalization, unfortunately it does have some basis in reality. Technical people are not inherently poor managers; it is just that their experience in managing others in the technical sphere is not necessarily applicable in other functions. Engineers and scientists have to supervise technicians very closely (micromanage), but micromanaging is a shortcoming that any supervisor can develop. It is at the next level of technical management that a limitation can develop, where managing is often more consultative than directive in nature — more hands-off than is generally needed in marketing or manufacturing. The single biggest limitation of engineers and scientists becoming successful senior managers is much more likely to result from a lack of experience in other functions, especially sales and marketing, rather than from a lack of people skills.

6.2.2 Continuing Education The constant evolution of technology requires that plastics engineers and polymer scientists continue to stay abreast of these developments by reading technical journals, attending conferences, and taking courses. Encourage employees to subscribe to professional and scientific journals, join technical societies and attend their conferences, as well as to take continuing education courses at local colleges and universities. The company should reimburse tuition charges as long as the employee earns a passing grade and should make reasonable accommodations for class time. While it is always a good idea to fill in any subject areas not taken during one’s previous education, the main objective should be to keep up with the latest changes in technology. Much can be said for taking a program that leads to an advanced degree. This ensures that the course of study is comprehensive and enhances the performance potential of the individual. A common mistake, however, is not to recognize the individual’s new status once the degree is attained. Employees who are not promoted or moved into suitable positions soon after earning advanced degrees are almost certain to leave. Membership in technical and scientific societies should go beyond just attending conferences and subscribing to journals. Your employees will benefit greatly from the opportunity to meet peers and experts. Serving on boards

TX68837_frame_c01*.book Page 90 Saturday, August 17, 2002 9:29 AM

90

Strategic Management for the Plastics Industry

and committees can improve their management skills as well. Learned societies depend on their members’ participation to function; it is an obligation of a professional to respond to this need. The company should also conduct in-house seminars and courses. This can be a very cost-effective way, for example, to improve planning methodology by using a common approach throughout the company. Also, when new information technology is adopted, it will be essential to put everyone through a course on how to utilize it. Some managers complain that if they pay to train people, then another company will hire them away. Think about that for a moment — do you really want people who no one else wants? Yes, there is always a risk that you will train someone and they will repay that investment by leaving. That risk must be balanced against the superior performance you will get out of trained people who do stay, or even out of the people who stay only for a while before they leave. This notion should not require much thought; training pays for itself many times over, even allowing for some attrition. If your company’s turnover is excessive, training is not causing it. Turnover and retention is discussed further later in this chapter.

6.3 Compensation and Reviews While some firms in the industry may still compensate their managerial and professional employees solely through straight salary, none comes to mind. Almost every professional above entry level today is compensated through a combination of salary and incentive. Bonuses should be the principal form of incentive and should be tied directly to performance, such as achieving certain individual and group results. Bonuses should account for 10 to 50% of total compensation, depending on the individual’s level in the company. Stock options or stock appreciation rights as a form of incentive have also been a heavy favorite, because they have the advantage of minimal impact on the company’s profit-and-loss statement (under current accounting standards) and give employees a genuine financial stake in the company’s fortunes. However, making publicly traded stock a major part of a compensation package can backfire because the market — or even just your stock — could take a nosedive for reasons unrelated to the company’s or individual’s performance, thereby dampening instead of improving incentive. Compensation plans should be based on national surveys because you are competing for professionals throughout the country. Regional cost-of-living differences sometimes may require adjustments, but these should be handled outside the basic salary and incentive compensation system. As we shall see later in this chapter, regional compensation surveys are applicable to nonprofessional employees. Salaries need to be appropriate for an ascending scale of position responsibilities. The salary structure should be updated at least annually to ensure that it is at least comparable to the company’s main competitors. At the top end of the scale, make provision for your best performing professionals to

TX68837_frame_c01*.book Page 91 Saturday, August 17, 2002 9:29 AM

Staffing for Success

91

win additional compensation without the necessity of becoming managers. Your best R&D scientists and sales people, for example, may only be marginal managers. Do not penalize them financially for staying in positions where they can contribute more than as managers. Salary reviews should be conducted annually and without fail. Companies that permit reviews to slip beyond the scheduled date are treating their employees unfairly and will pay a well-deserved price in low performance and high turnover. If the company is in serious financial trouble, then it may make sense to announce a moratorium on compensation changes for a specified period of time (which should not exceed one year). Even then, promotions should be considered for exception to such moratoriums. Based on my experience, I recommend using a compensation committee, which is not a standard practice in many companies. I have found that having more middle-management participation in setting compensation standards tends to reduce the us-vs.-them mentality so often found separating upper management and subordinates on compensation issues. It also helps make the process of allocating a fixed amount of money less arcane and more understandable to participating department heads, who then can represent the compensation process more accurately and fairly to their subordinates than otherwise may be the case. It is not usually productive to rank individuals company-wide, but you should insist that department heads do so within their groups. You simply must know who your best people are, for a great many reasons. If you wish to make your own combined rankings in private, do so, but you are inviting trouble if you try to get department heads to agree on whose top performer is better than anyone else’s. While it is common to do salary reviews on the employee’s hiring anniversary date, small companies may find it more useful to conduct their salary reviews all at once at the same time each year, generally the end of the fiscal year. When the number of reviews exceeds, say, 50 then this may no longer be practical. What is the benefit of simultaneous reviews? It is much easier to establish rankings by performance if everyone is reviewed at the same time. This, in turn, makes it easier and more equitable to allocate salary increases. One drawback of a common review date is that people will find it tempting to compare their increases, even if it is forbidden to disclose such information. When reviews are spread throughout the year, this is less of a factor. In any event, displeasure over compensation changes is one of the crosses that management has to bear. No matter how well you have done your job, there will be complaints, even from those who have been well treated (in your mind, if not theirs). As John Bickford once told me, “Don’t ever expect gratitude for giving someone a raise or a bonus. Enjoy it if you get it, but never expect it.” This is one of those areas where you must satisfy yourself that you have done the best and fairest job you could under the circumstances and should not be too concerned about what others think. Performance reviews form the foundation for compensation decisions. Insist that performance review systems be objective and reflect the degree of attainment of objectives that are set annually. Objectives must be quantified or their accomplishment becomes subjective and therefore a matter of debate.

TX68837_frame_c01*.book Page 92 Saturday, August 17, 2002 9:29 AM

92

Strategic Management for the Plastics Industry

Examine the distribution of results to be sure that the system genuinely reflects accomplishments. If the company is not meeting its objectives while almost all of its employees are, your system is obviously flawed. Be wary of grade inflation and insist on rankings (these may be subjective, but often they are the only way to distinguish among similar performers).

6.4 Promotions Next to making more money, almost every employee wants to be rewarded for good performance with a promotion, which is not really an appropriate reward for strong performance — money is. Furthermore, not every highperformance employee is necessarily promotable. The famous “Peter Principle” is ignored at great risk: people tend to be promoted to the level of their incompetence. The cardinal principle that must be at the forefront of your thinking is that you must promote based on your assessment of the individual’s potential capability to do the new job, and not as a reward for doing the current job well. This is not really all that difficult to do. When people are promoted to their level of incompetence, you have a lose–lose situation. You do not get the performance you expected and either those individuals will become miserable and quit, or you will wind up firing them. Thus, you will end up losing superior performers (at their previous levels). Generally, only in large companies with very resilient people, is it possible to transfer or demote those who do not work out back to their previous level and retain them. Some firms have a fast-track system for identifying and promoting people who have been identified early in their careers as having high potential. The idea is to move them up the ladder as quickly as possible, with typical assignments lasting only 18 to 24 months (“vice president by age 35!”). In my experience, and that of many other senior managers, this is a faulty idea with high-risk consequences, despite its persistence as a method for grooming senior managers. Among the drawbacks are the following:  People progress at different rates during their careers. Very, very few individuals can master every position into which they are put in the short periods of time that fast-track assignments usually require.  Proper management development must include the idea of seasoning, experiencing the ups and downs in a position that usually do not conform to any rigid time frame, especially short ones. In particular, the development of sufficient emotional maturity to be a successful general manager simply cannot be commanded to take place in an arbitrary time frame.  Employees are not so stupid that they cannot spot when someone is getting preferred treatment. This shortchanges both those who are on the fast track and those who are not, because the suspicion has been planted that the fast trackers have not earned their promotions on the same basis as everyone else. This can destroy good working relationships all around.  A common tendency is to hire new graduates of the best-known business schools and put them on the fast track, despite their lack of any industry experience. This is the least defensible application of the fast track and

TX68837_frame_c01*.book Page 93 Saturday, August 17, 2002 9:29 AM

Staffing for Success

93

actually has a less reasonable expectation of success than picking someone already employed by the company for this designation. If a master’s degree in business administration is deemed a necessary qualification for advancement, then management should provide for promising employees to obtain their MBA, either via a sabbatical or through part-time study.

One of the main justifications for fast-tracking managers has been that they bring new thinking to the upper ranks. Perhaps fresh thoughts are in order at some firms, but the process of bringing them into the company need not be so flawed. If fresh thinking is so badly needed, then it is better to hire promising managers from the outside who can bring fresh experience and a successful record, rather than simply bringing youth.

6.5 Firing and Personnel Layoffs Employees are generally fired for one of two reasons: (1) for “cause” because they have broken government laws or violated company rules or (2) for unsatisfactory performance. The first reason is atypical and most managers will not shrink from handling the situation. An employee who has done something seriously wrong, such as stealing, fighting, damaging property, or intentionally violating employment or environmental laws, should be suspended from work immediately while you verify the violation. Once the violation is confirmed, then the individual should be discharged at once and only allowed on the premises to remove personal possessions in the presence of security guards. A violation of government law should be reported to the proper authorities for their action; failure to do so could conceivably expose the company to obstruction of justice charges. Unsatisfactory performance should also be treated in a straightforward manner, although the urgency and concern for security are not necessarily the same. After completing the second (or third) unsatisfactory performance review, each of which has specified what the person being evaluated must do to achieve acceptable performance and the consequence of failing to do so, then it is time to require a career change, so to speak. Firing someone for other than “cause” is usually a very distasteful job for most managers because it is only human to feel sorry for the individual being terminated. Nevertheless, it is an extremely important job for several reasons. If your performance review system is to have any meaning and integrity at all, then satisfactory reviews must result in retention and successive unsatisfactory reviews must result in dismissal. This is fundamental to personnel management and to the credibility of your compensation system. People who cannot or will not contribute at an acceptable level are never happy in their jobs. This unhappiness infects others and pulls down their performance as well. It is vital to maintaining the morale of contributing employees that you dismiss chronically underperforming and disaffected employees.

TX68837_frame_c01*.book Page 94 Saturday, August 17, 2002 9:29 AM

94

Strategic Management for the Plastics Industry

It is ethically wrong to keep someone who cannot or will not execute work responsibilities on a satisfactory basis. It is a rare situation when such individuals can be transferred within the company to other positions that they can perform, because usually too much baggage is carried along to make this feasible. Assuming the situation is not one of those rare ones, then you must fire that person, explaining exactly why, and offer a reasonable financial severance package. You may wish to arrange for an outplacement service, depending on how likely the individual is to find another position within a short period of time. While it may sound facile to state that a manager is actually doing a non-performing employee a favor by forcing the career change, it is nevertheless true. A surprising number of such employees will actually express a sense of relief when required to leave their jobs. People often need the push to move on to another job because they resist change; sometimes they are in denial in regard to their failure to perform. Handled properly (e.g., with outplacement counseling), fired employees get a fresh chance to start over again and regain the self-confidence and self-esteem lost in their previous positions. A particularly repellent reason for dismissal of personnel was instituted during the brief tenure of a CEO of one of the automotive Big Three. It was similar to that used by Jack Welsh at General Electric, but it was far more draconian. It consisted of a mandatory distribution of managers into A, B, and C categories in predetermined percentages during the course of performance evaluations, with C category personnel to be denied bonuses. If they remained a C category after a second review, they were terminated. Never mind whether one or more of the groups of managers had been previously selected with care to include only top-level performers — off with their heads! This procedure earned the company a series of high-profile individual and class action age, gender, and race discrimination lawsuits, not to mention inflicting a major hit on morale. The company eventually settled these suits rather than let them drag out through trials with the attendant further bad publicity. As described elsewhere, no lasting good comes of setting employees against each other; the team cooperation required for successful business operation evaporates in a cloud of distrust and backstabbing. Furthermore, a system that deliberately stigmatizes an arbitrary percentage of the workforce is contemptible and has no place in any ethical company. Layoffs due to restructuring are a different matter than discharging unsatisfactory performers. As a matter of principle, layoffs should never be used to deal with a temporary contraction in the business cycle. If the company is in trouble because of overstaffing, then among the first to go should be the executives whose poor judgment created the situation. Every company should be run on a sufficiently lean basis to eliminate any “fat” that could be cut in down cycles, as mentioned in Chapter 5. Expansions should be based on improving productivity or outsourcing where feasible, not just mindlessly adding expendable bodies. Layoffs are a desperate measure and should be used only as a last-ditch, emergency solution to save the company and the remaining jobs. Morale will suffer severely from a layoff, and the reasons must be clearly and convincingly communicated to the surviving staff

TX68837_frame_c01*.book Page 95 Saturday, August 17, 2002 9:29 AM

Staffing for Success

95

or they will remain demoralized for a longer period than the company can really afford. Layoffs are not inexpensive, either; severance costs can easily exceed short-term cost savings. If layoffs cannot be avoided, then management must ensure that key personnel are not lost in the cutback. Across-the-board layoffs are a shabby and incompetent way to avoid dealing with the problem of who is to go — do not do it. Some companies have tried a “share the pain” approach by applying compensation cuts to all rather than laying off people. This may make sense if personnel compensation has been reasonably generous in the past and the cuts are not drastic. It may also have merit if the company’s staff is small and it is impractical to reduce the number of employees without a serious adverse impact on operations. The technique is more likely to work if the time interval that has to be bridged is less than a year, recovery seems highly probable, and the cuts are restored at the earliest opportunity. Employees who have been through such situations often have stronger positive feelings about the company and each other than do those in companies where layoffs were carried out. Of course, it is essential that everyone share in the cuts, especially the managers. This approach, however, has significant risk because your better performers are apt to leave for higher paying jobs if the cuts last for more than a few months. An alternative approach in the same vein of “share the pain” is to ask for volunteers to be laid off. The layoff period should be short, usually not more than 30 to 60 days. Volunteers should be guaranteed that they will be brought back, and that they will receive a significantly better severance package in the event that permanent layoffs prove necessary later, say, within one year. During the 1990s, a number of larger companies in the industry managed “downsizing” (e.g., layoffs) by offering enhanced early retirement packages to their older personnel, generally those over 50 years of age. Because anyone over the age of 45 is protected by federal employment anti-discrimination laws, this procedure could not be easily limited to weeding out the less productive employees; everyone in the same category had to have the same opportunity offered to them. As a result, a number of more desirable employees were lost along with the less desirable ones. In the opinion of a large number of outside observers, the mass early retirement of a generation of experienced, highly competent senior personnel was a bad bargain. The companies may have been able to reduce their annual compensation costs in the short term, but they paid a heavy price twice for this action, which more than canceled out any savings overall. The most obvious price was the cost of the retirement enhancements, which frequently required the companies to take writedowns against earnings, typically more than the amount of earnings for one or even two quarters. The less obvious price came about from operating mistakes that were likely to have been avoided if the more senior personnel had been on hand to perform or advise. Some companies realized this and actually rehired some of the retirees as consultants. Overall, it seems that this approach was unsound. Finally, perhaps the most important reason for not using dismissals to deal with temporary contractions in business is that you will need those trained

TX68837_frame_c01*.book Page 96 Saturday, August 17, 2002 9:29 AM

96

Strategic Management for the Plastics Industry

and experienced personnel to handle business when times improve. Remember how expensive and time-consuming it was to find, hire, and train new people? If you cut staff in a downturn, you will be faced with having to go through the same cycle of recruiting, hiring, and training all over again, only this time it will be more difficult to attract top people because you now have acquired the undesirable reputation of being quick to hire and even quicker to fire.

6.6 Using Temporary and Other Non-Employee Personnel By no means does every position in a company need to be filled by a fulltime employee. Many jobs can be performed by a part-time employee, temporary or contract worker, or consultant. Project work, such as market research, customer satisfaction surveys, and even some technical service (e.g., fielding telephone inquiries) can be successfully accomplished via this route. Also, it is often wise to use disinterested, outside parties to confirm critical data generated internally, such as the project work just mentioned. Do not use such people in jobs where you need to build up a permanent reservoir of experience within the company. Some company activities can be compartmented and contracted out, as one way to deal with the up cycles, yet not creating an oversupply of people to deal with when the business cycle turns down. Production can be contracted out; for example, polymer producers can contract out compounding, certain types of plant maintenance can be contracted out, trucking can be contracted out instead of or in addition to using the company’s own fleet, molding work or decorating can be farmed out to other molders, or outside payroll services can be used. The primary advantage of using temporary or part-time personnel is that they can be laid off instead of your permanent, full-time employees without all of the problems cited above. Do not be fooled by the stereotype that temporary personnel are necessarily less expensive than permanent ones, as professionals can command fairly high amounts of compensation. Do not begrudge them this because they are necessarily earmarking some of it for tiding them over between job assignments as well as providing for their retirement and health care, benefits that you are not providing directly. Consultants have acquired an uncertain reputation in some quarters, but this is an undeserved generalization. While consultants can be both good and bad, just as in any occupation, the bad ones tend to be weeded out quickly. In many instances, hiring a qualified consultant for a specific assignment is a much more sound move than handling the project internally. Consultants often can bring more expertise to bear on specific problems than exists in-house, which is particularly helpful with non-recurring issues. It has been my experience, both as an executive and as a consultant, that individual consultants can usually be found who have more specialized expertise applicable to the problem at hand, and cost less, than personnel found in large firms. Consultants should never be brought in to provide justification for a decision that management has

TX68837_frame_c01*.book Page 97 Saturday, August 17, 2002 9:29 AM

Staffing for Success

97

already made; this is a misuse. Sometimes, members of the board of directors can contribute as unpaid consultants based on their own knowledge and experience — unpaid, in the sense that they do not receive additional compensation beyond that which they receive for serving on the board. Retired personnel are sometimes interested in part-time or contract work. It makes sense to utilize retirees wherever feasible to do so, as their loyalty, experience, and past performance are known qualities. It is also a good morale booster, because it shows that management appreciates these people for their ability to continue to contribute, albeit on a reduced basis.

6.7 Retention Let’s return to the subject of retention — keeping people. Considering how much time, money, and trouble are required to find, hire, and train good, qualified people, it is amazing how few managers think regularly about how to keep those people. While it is true that no one is indispensable, it is foolish to ignore the need to keep people when it is really not all that difficult to do. Corporate loyalty in the days of downsizing and restructuring is not what it once was, but management can and should find ways to repair that damage. Why do people stay? The reasons are sprinkled throughout the preceding sections of this chapter, but the following list pulls them together:    

People experience career growth and see it continuing. People like their jobs; they find the work interesting and meaningful. People like their fellow employees and the team spirit. People think that management treats them fairly, and they have an opportunity to express their views and influence decisions.  People think their pay and benefits are fair. Believe it or not, this is not the first consideration, or even the second or third; it comes after others. Notice the use of the word fair, not higher than anywhere else. Now, this is certainly not an invitation to underpay people, but it does put things into perspective.

Although financial rewards are an essential part of recognition of a job well done, they are never the entire sum of it. Many ways are available to let everyone know that someone has done a particularly effective job: some extra time off, an award plaque, a reserved parking place with the person’s name on it, or special mention in front of colleagues during an appropriate meeting, to name just a few.

6.8 Plant and Laboratory Non-Professional Personnel To the casual eye, non-professional personnel (e.g., those lacking a bachelor’s degree or higher in a hard science or engineering) for manufacturing and the laboratory are interchangeable with those from any other line of work. This is a sadly mistaken concept. The potential for expensive spoilage or waste,

TX68837_frame_c01*.book Page 98 Saturday, August 17, 2002 9:29 AM

98

Strategic Management for the Plastics Industry

even for hazards to life and the environment, is significantly greater in the chemicals and plastics industry than in many others. It is essential that those entrusted with the operation of equipment and the disposal of materials are knowledgeable, highly responsible, and trustworthy. Plant and lab people in the chemical and plastics industries must be hired after a careful screening to ensure that only those who are particularly conscientious in following established operating procedures are hired. Furthermore, these attitudes must be fostered by training and supervisory reinforcement. Willful disobedience of these procedures or a negligent attitude cannot be tolerated and appropriate disciplinary procedures must be followed, including dismissal. Because plant and lab employees are expected to be a cut above other non-professionals, they should be paid more than average wage for parallel jobs in the area. Non-professional personnel tend to be less mobile than professionals, so compensation must be compared against the area or regional levels in the industry (effectively there are no national levels per se). You do not want to lose people for whom you have spent much time and money to find, hire, and train. Especially for lab positions, it pays to look for people with at least some education beyond high school. For example, an associate’s degree in chemical technology or a bachelor’s degree in biology is a good indication that an individual has the interests and training to be proficient in the lab, even though if the education does not bear directly on plastics. While a growing number of institutions are conferring two-year associate degrees in plastics technology, the number of graduates is still fairly limited; such individuals would be a find, of course.

6.8.1 Unions What should you do if a union tries to organize your non-professionals? The first question to ask is why? Unions almost always enter the picture as the result of poor employee relations, the handiwork of a poor supervisor or manger. Because you are presumably paying more than the average wage — although more money may be a union promise, money is seldom the primary reason for unrest — you should take a hard look at your supervisors and managers. If you can identify problems with the way they are treating the non-professionals, fix them immediately. This is the kind of problem you should always be looking for on a routine basis long before a union organizer shows up. Once a union finds enough support to call for an election, any steps you take may already be too late. While it is certainly possible to have a good, constructive relationship with a union, they almost always add cost to operations through inefficiencies (work rules), complaints (grievances), and strikes, among other things. It is quite common for one or more disgruntled employees to bring in union organizers, participate prominently in the campaign for recognition, and then resign within a few months after the union has been established.

TX68837_frame_c01*.book Page 99 Saturday, August 17, 2002 9:29 AM

Staffing for Success

99

Unions found their original justification in the harsh exploitation of labor by factory owner/managers following the Industrial Revolution in the 18th century, and came into being in the 19th century under the leadership of socialist reformers. Unions were able to organize workers to bargain for improved wages and working conditions that the workers were unable to attain individually. In the latter half of the 20th century, governments took over the regulation of working conditions, and the growing need for skilled and educated workers has bid up wages. Consequently, most industrial unions today have difficulty justifying the substantial dues they collect from their members. For this reason, union business agents often will act in a militant and confrontational manner during contract negotiations with management, to show that they are standing up for their members. If you find yourself in such a situation, do not take it personally. Once a union has been certified by the National Labor Relations Board as a bargaining agent, it is extraordinarily difficult for it to be decertified, and you can have no legal role in any such action whatsoever. Fortunately, unions have fallen into disfavor among manufacturing employees today — less than 8% of industrial workers are unionized, and these are mainly artifacts from the past at large companies. Unions win fewer than 50% of elections, but it is an expensive, time-consuming, and contentious process, even if you do win. This is one case where the proverbial ounce of prevention being worth a pound of cure is, oh, so very true.

TX68837_frame_c01*.book Page 100 Saturday, August 17, 2002 9:29 AM

TX68837_frame_c01*.book Page 101 Saturday, August 17, 2002 9:29 AM

Chapter 7

Tools for Management 7.1 Analyzing Your Business The first step toward gaining control over the direction and success of your business is to understand what actually constitutes your business through analyzing its components and how they contribute to or detract from the whole. These are both qualitative and quantitative analyses. Only then can one decide intelligently which areas to emphasize and which to de-emphasize or even to discontinue. Making such decisions imposes opportunity costs, of course, so that they must be informed and considered judgments, not intuitive ones; sometimes the correct decisions prove to be counterintuitive. The term opportunity cost means that pursuing one option will necessarily result in giving up the opportunity to pursue another, as no one has unlimited resources. As a consequence of deciding what are your best opportunities, you must also assign your best people resources to them, not necessarily the greatest amount of dollars or pieces of equipment. The process described in the following paragraphs does not constitute a complete approach but rather a basic test of what the application of your company’s resources is producing and what you might expect from reassigning them. Only after you have completed such an appraisal (and the competitive analysis described at the end of this chapter) can you undertake to create business plans. One school of thought suggests that if you are not number one or two in a particular line of business (in terms of sales) and have little likelihood of reaching either of these positions, then you should exit the business. Inherent in this philosophy is the idea that if your market position is large enough, high profitability will follow. There is some truth to this, but it is an oversimplification about achieving and increasing profitability. I do not accept this approach without qualification because I have seen a number of instances where being a market leader in sales did not lead to being the leader in profitability. Nevertheless, it is important to know if market share by product is increasing, holding steady, or declining. The first instance is good, the second may be acceptable, but the third is a danger signal and requires action. 101

TX68837_frame_c01*.book Page 102 Saturday, August 17, 2002 9:29 AM

102

Strategic Management for the Plastics Industry

Another area of concern is new product introductions. Too often, the seductive excitement of bringing out a series of new products leads to glossing over a more important consideration: Will they make money? The single most important thing to focus on when introducing a new product is to establish positive cash flow by the end of the first year. One might make a case for an exception to the one-year rule, but anything over a year is on shaky ground because the strength of the forecast is greatly reduced. This is a more important principle than just establishing sales volume. If a new product proves incapable of profitability despite all of the prior analyses, you need to detect this flaw early on, before you have pumped in large amounts of cash that are likely to be unrecoverable, and to cut your losses while you can.

7.1.1 Current Relative Profitability The quantitative business analysis begins with determining the relative sales revenues and corresponding profitabilities of the products and/or services that comprise your business. Peter Drucker, in his Managing for Results, recommends drawing up a table that lists the company’s products (or services; for purposes of this chapter, we will assume that the two are interchangeable) in terms of the following:  Product sales revenues, net of the cost of raw materials  Percentage those net revenues constitute of total net sales  The cost burden (more on how to determine this in a moment) of the product  Percentage of this burden of the company’s total costs  The net earnings (net sales revenues minus manufacturing and overhead costs) of the product  The percentage of the product earnings of total company earnings.  The contribution coefficient of the product (a value obtained by dividing its percentage of net earnings by its net sales revenues)

For this exercise, Drucker defines revenues and costs a little differently than many accountants do. First, note that he uses a value-added approach; in other words, sales revenues are stated net of raw material costs. Second, he allocates manufacturing cost and general overhead (sales, marketing, research and development — whatever is needed to develop, sell, and maintain a product) on the basis of time or transactions, not just on the basis of physical volume (tonnage). What might these factors be in the plastics industry? Here are a few examples:  For a polymer producer, compounder, or processor, manufacturing transaction costs might include the cost of manning, operating, and maintaining the equipment incidental to producing a single production order. This would include a production lot made either to fill several accumulated orders or for building inventory.

TX68837_frame_c01*.book Page 103 Saturday, August 17, 2002 9:29 AM

103

Tools for Management

 For a distributor, service transaction costs might include the time required by customer service to process an order, either from stock or specially ordered from the manufacturer.  For an equipment manufacturer, sales transaction costs might include the time spent preparing the average number of proposals required to obtain one order.

This definition of costs is likely to require some estimating on your behalf to get the correct numbers, but ultimately it will be more meaningful than conventional cost allocations based purely on volume. For a polymer producer or compounder, most of the costs associated with processing an order for 1 ton of material are not much different as those for an order of 20 tons. Drucker considers the cost of processing each of these orders as essentially equal, but conventional cost accounting is likely to make it appear that handling the larger physical volume order costs only a fraction of what it costs to handle the smaller order. When very small orders are involved, setup costs may be equal to or greater than running costs. Each method makes compromises, but Drucker’s approach forces you to examine costs from a fresh viewpoint and to learn something in the process. Table 7.1 illustrates this concept using a series of hypothetical product lines made by an injection molder (I do not mean to imply any subliminal messages about the names chosen for the product lines; these are purely arbitrary). The first seven column headings are self-explanatory, and it is instructive to see the profitabilities of various products relative to their cost burdens and sales revenues. The contribution coefficient in the eighth column is used to measure how much additional income a product may generate if its sales volume increases by replacing the sales volume(s) of another product or products. In our example, the product category with the highest contribution coefficient is industrial parts; assuming equal demand for all products, every dollar of cost and resources invested in increasing the sales of industrial parts will return more than twice as much profit than a dollar invested in boosting any of the other product lines. The lesson here is self-evident — put your resources

Table 7.1 Current Profitability Analysis Product

Automotive Housewares Electrical/ electronics (E/E) Industrial Medical Specialty packaging Recreation Construction Total a

Rounding.

Sales (M $)

% of Total

Costs (M $)

% of Total

Earnings (M $)

% of Total

Contribution Coefficient (%)

40 35 15

35 31 13

38 28 11

36 27 11

3 7 4

26 61 35

0.7 1.7 2.3

8 7 5 1.5 1.5 113.0

7 6 4 2 2 100

5 6.5 6 3 5 102.5

5 6 6 3 5 99a

3 0.5 –1 –1.5 –3.5 11.5

26 4 –9 –13 –30 100

3.3 0.6 –1.8 –8.7 –20.0

TX68837_frame_c01*.book Page 104 Saturday, August 17, 2002 9:29 AM

104

Strategic Management for the Plastics Industry

40000 35000 30000

Sales

25000 20000 15000 10000 5000 0 1

2

3

4

5

6

7

8

9

10

Time

Figure 7.1

Classic sales growth S curve.

to work increasing the revenues of the most profitable products. However, this is not the whole story; even some of the products losing money should be supported, as we will see later.

7.1.2 Relative Profitability Potential Next is a qualitative analysis of the products to categorize how they differ from each other with respect to future profitability. In effect, we are estimating where each product is located on the classic S-shaped curve of product sales growth (see Figure 7.1). We cannot really improve on Drucker’s terminology as we assign products into the following categories:  Today’s Breadwinner — A product in this category shows significant volume but its growth rate is slowing noticeably and perhaps is even flat. It is near the top of the S curve. Its contribution coefficient is average. Obviously you need to maintain this product as it is paying a lot of your bills, but it is now at the stage to be “milked” (i.e., minimum resources put in to maintain it). A stable market share for this product is probably acceptable.  Tomorrow’s Breadwinner — This type of product is already important but is just beginning to demonstrate its main growth. It is at the first inflection point of the S curve. Assuming it has become profitable, its contribution coefficient will normally be high. This product should be increasing its market share.  Yesterday’s Breadwinner — This product is marked by high sales volume but little to no growth and low profit. It is at the end of the S curve. Its contribution coefficient is low. While it may be defended as the product that “made this company”, it requires price cuts to keep it alive. This product should not just be milked but should be considered for sale or termination. This product’s market share may well be in decline.

TX68837_frame_c01*.book Page 105 Saturday, August 17, 2002 9:29 AM

Tools for Management

105

 Repair Job — This product has substantial volume and good growth potential (near the bottom to the middle of the S curve) but low profitability stemming from a single major defect, a problem that is clearly definable and readily corrected, such as positioning it in another market. Fix it or sell/terminate it.  Productive Specialties — These products have a distinct but limited market (relatively low growth) but high profitability and require only limited resources. These are keepers.  Unnecessary Specialties — These products have more variations than are really needed by the customer or which are sufficiently undifferentiated from others in that they cannot command a price premium. Eliminate these products either through consolidation into other products or by termination (by definition, they have essentially no value to someone else).  Developmental Products — These products are still in the introductory stage and appear to have good potential. The technology is cutting edge, but the economics are as yet unproven. Often such products do not receive adequate support because to do so would require drawing down support from one or more of management’s favorites (today’s or yesterday’s breadwinners) or an investment in management ego. Be careful about deciding to commit so much support that your developmental products will fail the test mentioned earlier of establishing positive cash flow after not more than one year.  Failures — These should be obvious, but, unlike Repair Jobs, they have more than one serious defect and may have the dangerous potential to become an investment in management ego (see the next category). Terminate as soon as possible.  Investments in Management Ego — This is a product that should be a success but is not; however, management is so convinced that it is the best in its class that it keeps pumping resources into the product. The poorer it does, the more management gives to it — a sort of death spiral that, in extreme cases, could actually suck an entire company into it. Most unfortunately, investments in management ego are a common phenomenon. Someone will have to tell management the cold facts. Fix or terminate, as promptly as possible.

This method of categorizing products and what to do with them is summarized in Table 7.2. Next, we apply them to our hypothetical product line, as shown in Table 7.3; a qualitative sales growth rate has been assigned to each product to help with identifying the categories into which the lines fall. We will find that some judgment calls will have to be made to fit the products into the slots, just as in real life.  Automotive has the attributes of a Yesterday’s Breadwinner and should be replaced with something else when the current model year purchasing contract expires.  Housewares, on the other hand, appear to be a Today’s Breadwinner and should be monitored for loss of growth and profitability.  Electrical/electronic (E/E) is a Tomorrow’s Breadwinner and is likely to produce even more revenues if supported strongly.

TX68837_frame_c01*.book Page 106 Saturday, August 17, 2002 9:29 AM

106

Strategic Management for the Plastics Industry

Table 7.2 Category Checklist Category

Today’s Breadwinner Tomorrow’s Breadwinner Yesterday’s Breadwinner Repair Jobs Productive Specialties Unnecessary Specialities Developmental Products Failures Investments in Management Ego

Sales Volume

Sales Growth

Contribution Coefficient

Action

High Medium High Low Low Low Low Low Low

Slowing Growing None Low Varies None Unknown None None

Medium High Low Low High Low Unknown Low Low

Monitor Support Milk or sell Fix or drop Milk Drop Support Drop Drop

 The Industrial line has the earmarks of a Productive Specialty. The application may not be price sensitive and a price increase could help profits without harming sales.  Medical is a Repair Job. The product should be repositioned in a new market, e.g., Instrumentation, and repriced as a Productive Specialty. If this fails, drop the product — only one fix-it attempt is allowed.  Specialty Packaging is a Developmental Product. Assuming the market analysis and projections are correct, it will be a winner and requires continued support. The lead times for approval in this market are longer than for many others, but this should be offset by greater profitability.  Recreation is a clear Failure. The customer has badly misjudged the market and admits it cannot support the original projected volume or pricing, but you cannot reduce costs. Drop this product now!  Construction looks like a monument to Management Ego. After a year and a series of price cuts, sales are stagnant to faltering, and costs cannot be reduced any further. Admit that this proprietary molded product is a failure and drop it before any more money is lost on it. Reassign resources to E/E and Specialty Packaging.

7.1.3 Assigning Resources Just what are these resources mentioned above that need to be assigned or reassigned? First of all, they are your people. You know who your best people are; that information comes from annual performance reviews and departmental rankings. Top sales and marketing and technical personnel can be directed to work on Tomorrow’s Breadwinners and Developmental Products, while mid- to lower-level personnel can support all the others. Second, of course, your resources are also financial. Which products should receive money for new equipment and expansion, working capital, marketing promotion? These are discretionary expenditures and you must apply them where they will bring the greatest return. Third, and perhaps somewhat less obvious, resources include your own time. You need to keep track of how your own time is spent and on what.

TX68837_frame_c01*.book Page 107 Saturday, August 17, 2002 9:29 AM

107

Tools for Management

Table 7.3 Profitability Potential Product

Sales Volume

Growth

Contribution Coefficient

Automotive

High

None

Low

Housewares

High

Growing

Medium

Electrical/ Electronics (E/E) Industrial

Medium

Growing

Medium

Low

Low

High

Medical Specialty Packaging Recreation Construction

Low Low

Low Unknown

Low Unknown

Low Low

None None

Low Low

Total

100

Category

Action

Yesterday’s Breadwinner Today’s Breadwinner Tomorrow’s Breadwinner

Replace

Productive Specialty Repair Job Developmental Product Failure Investment in Management Ego

Milk

Monitor Support

Fix Support Drop Drop

If you find that you are spending more time on putting out fires than on smoothing the way for your most successful products, then you may be misallocating your own most important resource. Much more useful information than just this topic can be found in Managing for Results, and I recommend the book for everyone with a serious interest in industrial management.

7.2 Benchmarks for Allocation of Costs A good way to judge how you are allocating costs is to rate your company against industry averages. Knowing how your competitors allocate resources would be even better, but this information is sufficiently sensitive that it is not often public knowledge. Averages can be misleading because actual numbers vary according to the type of company and its size, growth rate, products, and competitive pressures, so it is necessary to recognize that they are only indicators. Even publicly held companies provide very little specific information on their plastics operations, so most of the numbers in this section are in the nature of informed estimates. It would be even more revealing to show returns on invested capital, but this information is often more closely guarded than operation numbers. Nevertheless, let’s look at a few examples of what might constitute a typical, if not average, allocation of costs.

7.2.1 Polymer Manufacturing Stand-alone numbers for polymer manufacturers essentially do not exist, as almost all of these firms are part of large chemical or petrochemical companies,

TX68837_frame_c01*.book Page 108 Saturday, August 17, 2002 9:29 AM

108

Strategic Management for the Plastics Industry

which do not generally break down the financial performance of individual lines of business in their annual reports. If one were able to look inside a large company, however, then a typical integrated polymer manufacturing division, producing a semi-commodity during an expansion cycle of the economy, might have an expense breakdown that looks something like this (with costs expressed as a percent of sales): Raw materials Manufacturing Gross margin Administration Research and development (R&D) Sales and marketing Net before interest and taxes

34% 35 31 4 5 4 18

The relatively low manufacturing cost is typical when one is making long production runs of a limited number of products. This cost also includes depreciation (which may or may not accurately reflect the replacement cost of the facilities, depending on their age and inflation rates), and how current the plant’s level of technology is. Thus, management can be misled into believing that manufacturing costs are lower than those representative of the industry if their plant facility is old and nearing full depreciation. This blind spot, in turn, can lead to a strategy of cutting prices to raise market share. But, if the result of such a strategy was to lead to net earnings before interest and taxes (NEBIT) of, say, only 5%, then the company would likely be in serious trouble, even though it might appear, on paper, to be earning a respectable return on investment. In actuality, it would risking being unable to generate enough cash flow to finance growth, plant upgrades, or even adequate maintenance because it had not adequately addressed replacement costs. Most polymer producers demand a return on investment of 35 to 40% to justify new plants. It is unlikely that they actually realize this much on the average. Research and development costs are a bit higher than in other segments of the industry because polymer product and process development require scale-up steps that effectively are unnecessary in the other segments.

7.2.2 Compounder Compounders usually work on smaller gross margins than polymer manufacturers and therefore must have lower overhead expenses. A specialty compounder might have an expense breakdown such as this: Raw materials Manufacturing Gross margin Administration Research and development (R&D) Sales and marketing Net before interest and taxes

57% 18 25 3 2 5 15

TX68837_frame_c01*.book Page 109 Saturday, August 17, 2002 9:29 AM

109

Tools for Management

These data are also hypothetical, as no pure-play, publicly held specialty compounding companies exist. Some blurring between marketing and R&D costs in the area of application development may occur, as R&D mostly consists of fine-tuning products for custom applications. No meaningful current information on the typical return on invested capital is published, but values have been realized in the past 10 years as high as 35%. This depends a great deal on the age and nature of the compounder’s equipment. If the equipment is relatively old or purchased used or the extruders are mostly single-screw, then returns will be quite high. Conversely, if the equipment is new and mostly twin-screw extruders, then returns will be lower.

7.2.3 Distributor Distributors have a wide range of gross margins, depending on how they are compensated (resale vs. commission), the types of materials they handle, the industries they serve, and their size. In the example below, it is assumed that a small distributor buys engineering plastic resins from several manufacturers, stocks them for a predictable (but competitive), non-automotive clientele, and resells. Raw materials Warehousing and shipping Gross margin Administration Technical service Sales and marketing Net before interest and taxes

74% 6 20 3 1 6 10

Distributors specializing in small lots of commodity polymers, or “hand-offs” from their suppliers may show lower raw material costs and higher earnings on sales. With favorable credit lines from their suppliers, distributors that turn over their inventories in 30 to 60 days effectively do not have to even tie up cash in their stocks. Distributors can also show very high returns on invested capital (50% or more) if they do not own warehouses, silos, blending and packaging lines, trucks, etc. In line with this high return, however, is a high risk that inventory will not be salable at the price expected when it was purchased. While the polymer producers will sometimes provide technical support with respect to complaints about the performance of their materials, the distributor almost always has to provide the first aid when it comes to processing problems. This can often be addressed by using a consultant or having one of the lab technicians or sales representatives handle troubleshooting as a secondary responsibility.

TX68837_frame_c01*.book Page 110 Saturday, August 17, 2002 9:29 AM

110

Strategic Management for the Plastics Industry

7.2.4 Processor Processors’ expense allocations can vary even more widely than those of distributors, depending on their size and how fully integrated their operations are. The following example for an injection molder assumes smaller size and limited integration (e.g., mold maintenance but not mold building, assembly but not decorating). Raw materials Production Gross margin Administration Technical Sales and marketing Net before interest and taxes

35 47 18 3 2 5 8

This information is based on data collected by the Society of the Plastics Industry in 1999–2000 and presented in a paper by J. Mengel at the 2001 SPI Structural Plastics Conference. Again, return on investment information is not readily available or comparable, and the capitalization and nature of the business of processors vary widely (e.g., leased vs. owned equipment, proprietary vs. custom processing). It would not seem unreasonable to expect to achieve a target of 20 to 25% return on investment.

7.2.5 Machinery Manufacturer Machinery manufacturers are subject to the cyclical changes in demand for their products that are characteristic of the capital goods industry. Unfortunately, little breakdown of financial data is published for these companies, as their results are often not broken out separately from other businesses within the conglomerate. The example shown is for an injection molding machine producer in an average year, neither at the top of the cycle nor at the bottom. Manufacturing (including raw materials) Gross margin Sales, R&D, and administration Net before interest and taxes

80 20 15 5

Again, return on invested capital varies widely, but some published data indicate that the numbers are somewhat lower than some of those shown above, in the 10 to 15% range. A problem in estimating the average return is in deciding what constitutes a representative business cycle, from peak to trough.

TX68837_frame_c01*.book Page 111 Saturday, August 17, 2002 9:29 AM

Tools for Management

111

7.3 Measuring Your Results 7.3.1 Achievements vs. Planned Goals The most important tool for measuring results is the business plan. The plan is what the management team has been trying to fulfill all year long. If results vary by more than 10% from planned goals, examine the basis for setting those goals. You do not want to use a methodology that consistently sets unrealistic goals, either high or low, bearing in mind that stretch goals are targets that go beyond those that would be normally expected. Also, if business conditions have been unusually good or unusually harsh, you need to consider this influence on the achievement of results (or lack thereof). Business plans must have the built-in flexibility to deal with unforeseen economic circumstances. A new team should be getting the hang of setting realistic goals within two years. To avoid surprises, ensure that you review achievements vs. plan monthly, with more in-depth reviews on a quarterly basis. Make adjustments as needed when they arise, not at the end of the year. Keep extending the plan period projections as adjustments are made, so that when the next annual plan is put together, it already has a current baseline. Of course, making adjustments is not a substitute for finding out why the business is not hitting its targets and then fixing the problem, if at all possible. Adjustments come only after you have done all you can and find that the problem results from conditions that are well beyond your control and that you have no alternatives to offset the shortfall. Do not let your people off the hook if they are not achieving milestones and the reason looks to be more failure to perform than disappearance of business. Obviously, it is better to be slightly conservative than to be overly optimistic. It is human nature to favor those who usually report better results than expected than those who report poorer ones. If you observe someone who always reports results that are exactly on target, be suspicious because manipulation of data is the only sure way that this can happen.

7.3.2 Financial Statements and Stock Valuation The next set of tools are those that will be used by the board of directors, security analysts, and the investing public in deciding what kind of a job management is doing. Quarterly and year-end financial statements, as well as the nigh instantaneous judgment conferred by the stock market on the price of the stock (for a publicly held company), should be fairly straightforward in showing how the company is fairing over a period of time, usually year to year or over a period of three years. Because stock options are a typical part of executive compensation packages, the price of the company’s stock will be of more than passing interest to management. A depressed stock price is also an attraction for corporate raiders. If your company’s stock is trading at a multiple of earnings that is average or better for your industry segment, then all is well. However, if the stock is

TX68837_frame_c01*.book Page 112 Saturday, August 17, 2002 9:29 AM

112

Strategic Management for the Plastics Industry

trading below average, you need to address what is wrong with either the company’s performance or the analysts’ perceptions and take appropriate action. In the past decade, the stock market has been a harsh taskmaster, rewarding and punishing companies with dizzying swiftness, sometimes unjustly tarring good companies with the same brush as competitors who have published poor results. While this is a problem that is not completely in the hands of management, solid, consistent performance over a period of time will eventually be recognized and rewarded at some level of support for the stock in the marketplace. Unexpected dips in earnings or periodic writeoffs, on the other hand, will mark a company as weak or in decline and drop support levels to a minimum valuation. A continuing low stockprice may offer an opportunity to take the company private by a management-lead stock tender offer. Because most companies also finance their operations through bank loans, it is important to be aware that bankers also read the stock market reports. If your company’s stock has been swooning, expect a phone call from your banker asking for an explanation. If your cash flow is running below forecast, your banker could become concerned about your ability to service your debt.

7.3.3 Customer Satisfaction While you may achieve planned objectives, your financials look good, and your company’s stock price is soaring, if your customers are not satisfied then everything will come crashing down sooner than you think. Management needs to keep track of customer satisfaction, both formally and informally. How to do this? One way is to pay personal visits to major customers at least once a year. Talk frankly with them about whether or not your company is meeting their expectations and, if not, what can be done. This is not really anything more than what your account manager should be doing throughout the year, but your presence, as a senior manager, is reassuring to a customer that you do not take them for granted. Another, more comprehensive way to assess customer satisfaction, is to conduct formal benchmarking studies through questionnaires and telephone interviews. These latter studies are best done through outside, neutral parties (e.g., consultants or market research firms) who have the necessary experience in conducting such surveys in a non-intrusive way. Mailing out bland survey forms to customers is not an acceptable way to learn what your customers think of you; anyone with experience in this field knows how inadequate such techniques are. They are a waste of money and time and are more likely to irritate your customers than to allow them to genuinely communicate their concerns. Customer satisfaction measurement is one of the most overlooked yet important tools that management has. Unless you know what your customers think of your company, you are effectively navigating by dead reckoning. Simply being nice to customers is not enough; you must serve their needs (as well being recognized as doing so), providing value with your products

TX68837_frame_c01*.book Page 113 Saturday, August 17, 2002 9:29 AM

Tools for Management

113

and services that your competitors do not. This is an important technique for detecting changes coming, so that you are not blindsided. Customer surveys can also turn up additional important information about broader needs and problems (market intelligence) that you can use for directing R&D and strategic marketing projects. After all, your customers are experts on their business. You would be hard put to find a better, more credible source of information about the trends in their market.

7.3.4 Competitive Rankings and Analyses Every company should know how they compare with their competitors. After all, these are the people that are trying to take away the business you currently enjoy in the marketplace, and this is exactly what they will do if you misstep or lose your direction. Let’s be clear that this is not advocating industrial espionage, which, by definition, is unethical if not illegal. Business intelligence, on the other hand, comes from many open sources of information, which are not difficult to find if you know where to look. For example, a good deal of competitive information is freely available from competitors themselves in the form of product brochures, annual reports, press releases, scientific papers, trade show exhibits, and websites. Very often, news releases on new plants or expansions list the annual production capacity. For some reason, a number of companies seem compelled to disclose more information about themselves on their websites than in any of their other publications. Also, competitors’ customers and vendors are often willing to share information, and they are usually the most reliable sources of information when it comes to estimating market share. The difficulty comes about more in the analysis and interpretation of this substantial amount of information than in obtaining it. For this reason, I strongly recommend using an experienced, independent consultant to do competitive analyses, if they are anything more than financial comparisons (and they should be). The term independent is meant to exclude inhouse consultants because they cannot avoid some degree of bias in analyzing and interpreting the data. A consultant will first seek your agreement on defining just who really is your competition, perhaps more broadly than had previously occurred to you. If you are a nylon manufacturer, you may think of other nylon producers, possibly even producers of other engineering polymers, but would you not consider zinc, aluminum, and magnesium producers to be competitors too? If you are a compounder, are your friendly glass fiber suppliers not also competitors if they are offering dry blends? If you are a molder or an extruder, are metal diecasters and metal extrusion companies not competitors, as well as other molders or extruders? If you work with thermoplastics, how about those people who work with thermosets? It is important to look at your competitive environment on a broad basis, or you may be hit by one of those unforeseen changes mentioned in Chapter 1. You need some understanding of the strategy of these competitors so that you can both protect yourself and exploit their weaknesses. It is instructive to see how your indirect competitors

TX68837_frame_c01*.book Page 114 Saturday, August 17, 2002 9:29 AM

114

Strategic Management for the Plastics Industry

view their business, as well. Several times in the past, people in the plastics industry have been caught by surprise when trade associations representing glass, paper, or metal industries initiated a public relations campaign against plastics. It should come as no surprise, however; after all, just who is it that loses business when plastics displace other products in packaging, construction, and other end uses? Even construction unions have been an enemy of plastics when they have believed that converting from traditional materials to plastics may threaten their jobs and income. Next, your consultant will want your agreement on how the study will be structured. At the very least, you will want to know the size, growth trends, organization, market share (both overall and by individual markets), innovation record, and production and technical capacities of your principal competitors. Some of the information you want may simply not be available, such as production costs, but, as mentioned earlier, a great deal of information is available from essentially public sources. Talking to knowledgeable sources in the marketplace takes more time and costs more than just gleaning information from published data, but usually fills in missing details and (perhaps even more importantly) validates the published data. This is important because more than one company has thought that it can scare off potential competitors by inventing creative ways to announce production capacity increases that turn out to be only on paper. Your competitors’ management may also reveal their strategies in public forums, such as trade association meetings and building dedication ceremonies, not to mention documents filed with the Securities and Exchange Commission or other public agencies. Your consultant will locate all of this information, analyze and evaluate it, and then present it to you in a useful, intelligible form.

TX68837_frame_c01*.book Page 115 Saturday, August 17, 2002 9:29 AM

Chapter 8

The Role of Acquisitions, Joint Ventures, and Divestitures While every business tries to generate new technology, sales, and asset growth internally, there are limits as to how quickly or broadly this can be done. Acquisitions and joint ventures can achieve these goals more rapidly; however, it is important to be aware that acquisitions, in particular, invariably bring management problems with them. These problems are often serious; it has been said that over half of all acquisitions result in failure, in terms of meeting the original expectations. Joint ventures are often a good way to become acquainted with an unfamiliar business before diving in all the way and making an acquisition. One can acquire the other half of the joint venture later if it is succeeding, or divest it if it is not. Divestitures are usually seen as an opportunity to redeploy financial assets by selling off business units that no longer fit with company objectives, as well as acquisitions that fail to work out. Sometimes, divestitures are needed just to raise cash if the company is running heavy losses and cannot borrow enough to cover them. Acquisitions have played a prominent role in the evolution of the plastics industry. Many of these have been the result of the industry’s small business pioneers being consolidated as the founding entrepreneurs died or wished to retire without having a successor. Also, some medium-sized firms have found that they require certain economies of scale in order to survive the competition from larger firms attracted to the growth and earnings potential of the industry. Particularly for polymer manufacturers and processing equipment makers, an important reason for acquiring competitors or joint venturing is to reduce unit costs by spreading research and development (R&D), sales and marketing, 115

TX68837_frame_c01*.book Page 116 Saturday, August 17, 2002 9:29 AM

116

Strategic Management for the Plastics Industry

manufacturing, and administration over a larger revenue base. In times of slow or zero sales growth, and in the face of declining prices, consolidation is often the only way to improve profitability. In bad times, it may be the only way to survive at all. A significant number of companies available for acquisition are in financial trouble. Such firms may indeed offer a rare opportunity to acquire a fast and easy fix at low cost, or they may turn into quicksand and absorb far more personnel, time, and resources than originally contemplated to effect a turnaround. A bad acquisition has destroyed more than one company. These and other considerations are explored in the following sections, which are written primarily from the viewpoint of a would-be acquirer. The final section looks at matters briefly from the prospective of someone being acquired.

8.1 Access to Markets Probably the most common reason for acquiring another company or entering into a joint venture is to increase sales by broadening the existing market and customer base. While antitrust laws limit how far a company can go via this route, these restrictions usually only affect the activities of larger companies if the acquisition has the effect of reducing competition. Although the rules are somewhat elastic, one can usually count on attracting the interest of government antitrust attorneys if the combined companies will have an aggregate share of more than 10% in a readily definable and economically important market. Of course, everything depends on how broadly the specific “market” is defined. Most plastics industry acquisitions can demonstrate sufficient competition from other materials that they can easily pass this test. For example, nylon 6 competes successfully with nylon 66 for a great many applications, so a merger of two nylon 6 producers should be able to define their resulting position in a marketplace of both nylon 6 and 66, rather than just nylon 6 alone. Acquisitions that bring in one or more new, but related, product lines or open up a new market for an existing product line can make a great deal of sense. Economies of scale are achieved very quickly this way. For example, a specialized polycarbonate compounder that acquires a specialized nylon compounder who sells to the same customer base may find that costs are reduced by using combined plant facilities, a combined (possibly smaller overall) sales force, and, of course, a combined (and definitely smaller overall!) administration. A molder might acquire an extruder that is selling products to both existing mutual customers and to ones that the molder does not currently serve. This move would expand the molder’s equipment technology base and both solidify and expand its customer base. A favorite route to overseas markets is to acquire a local company; this is also a high-risk strategy and is often more prudently pursued via a joint venture. The local company provides customer contacts, knowledge of local conditions, and language abilities. The acquirer or joint venture partner provides technology and application knowledge and, often, a source of supply. Ideally, both should contribute capital and management personnel. Overseas

TX68837_frame_c01*.book Page 117 Saturday, August 17, 2002 9:29 AM

The Role of Acquisitions, Joint Ventures, and Divestitures

117

acquisitions require a great deal of patience and planning. Language barriers, differing business cultures and legal systems, and more stringent and pervasive government regulation are among the differences that one encounters compared to acquisitions in one’s own country.

8.2 Access to Technology Another important and sound reason for acquisitions or joint ventures is to gain access to technology, particularly if it is patented or not available under a reasonable license or if the target company is on the cutting edge of developing new technology. Sometimes this is a question of reaching sufficient critical mass of R&D assets and personnel to develop certain types of new technology. Other times this is a way to avoid committing internally to a line of high-risk R&D in order to discover certain types of new technology, although acquisitions are hardly risk free. Because few small companies in the plastics industry have important technology assets, these types of acquisitions, mergers, or joint ventures usually involve large firms and, therefore, large amounts of money. This in turn tends to tilt the table in favor of joint ventures as the most cost-effective way to obtain access to valuable technology. Access to technology does not have to come via acquisition or joint venture, however. A properly constructed licensing agreement can do much the same with much less risk and capital outlay, assuming that the technology owner is willing to grant a license. Some licenses involve grant back, whereby improvements are made available to the licenser, usually for an offsetting royalty. Cross-licensing can be another possibility where each party has patents or know-how that the other needs and are about of equal value to each party.

8.3 Manufacturing Capacity Companies aspiring to increase and diversify their manufacturing base on a national or international basis sometimes find that acquisition or joint venture is the quickest and least costly way to do so. Companies that are ISO 9000 certified are desirable targets, because integrating them into the parent company will be simpler than bringing in companies that have less well-defined manufacturing practices. In a manufacturing acquisition, the due-diligence phase should include a study to assure that the target’s production sites that duplicate the acquirer’s existing ones are serving customers in geographic areas that cannot be reached economically otherwise, or that the new sites are so much more efficient that closing some of your old ones is part of the value to be obtained through the acquisition. The most important asset is not the equipment, of course, but the personnel and their expertise and proficiency. Machinery can be purchased and installed far more easily than people can be hired, trained, and become members of an effective team. If the combined operation does not show projected savings

TX68837_frame_c01*.book Page 118 Saturday, August 17, 2002 9:29 AM

118

Strategic Management for the Plastics Industry

on overhead per unit of production capacity, then other, more highly compelling reasons whould have to justify going ahead with the acquisition.

8.4 Vertical Sector Acquisition For the most part, acquisitions and joint ventures have tended to remain within the respective sectors of the industry described in Chapter 2. In other words, most acquisitions in the industry are horizontal in that they combine similar companies. Nevertheless, vertical acquisitions are occasionally observed. In the past several years, polymer manufacturers have begun to show some interest in entering the compounding sector. General Electric Plastics formed its own custom compounding unit in the United States, acquired an Italian nylon compounder in the late 1990s, and acquired LNP Engineering Plastics in 2002. Dow Corning has recently acquired Multibase, a French compounder, also with a plant in the United States. These are interesting developments but it is too early to say whether or not this is a trend. After all, ICI acquired LNP at one time but used it more as a marketing organization to sell its polymers than as a specialty compound producer. Much will depend on how much independence General Electric and Dow Corning afford their compounding units. If these polymer manufacturers try to run these units as part of their regular business, this experiment will fail and will be recorded as another example of the inability of a large company culture to accept the fact that small company cultures are more successful in specialty businesses. So far, no great interest on the part of polymer companies to acquire distributors is evident. The two exceptions, BASF’s Ultra Plastics and General Electric Plastics’ Polymerland, are discussed in Chapter 9. While both of these acquisitions have been clearly successful, no one else has apparently seen fit to emulate them. To a very limited extent, some compounders distribute base polymers, but this is an internal business diversification and not the result of an acquisition. A few distributors have become compounders, but this, too, has not been the result of acquisition. In the past, processors have shown little interest in vertical integration backward into compounding, except for two groups: those specializing in fluoropolymers and automotive captive molders. Occasionally, acquisitions are advisable to secure a critical raw material supply. Victrex, a polymer manufacturer discussed in Chapter 9, became aware in 2001 that its future expansion plans might be limited by the availability of a critical monomer, so it acquired LaPorte, a small chemical company that makes the monomer.

8.5 Successfully Integrating Acquisitions into Existing Operations Unless the acquired company is intended to be a stand-alone, independent operation, integrating the acquisition quickly into the acquiring company is

TX68837_frame_c01*.book Page 119 Saturday, August 17, 2002 9:29 AM

The Role of Acquisitions, Joint Ventures, and Divestitures

119

absolutely critical to success. Plans have to be in place before the acquisition is made for quick integration to show any real results. Why integrate quickly? Among the reasons are the following:  Motivating and retaining key personnel are vital to the success of the acquisition. If you do not give these people good reason to believe that they will be valued and will find the same (if not more) satisfaction in their jobs, then they are likely to leave or move in circles if their direction or sense of importance has been lost in the course of completing the acquisition. People who leave will often join competitors or even start their own competing businesses. This will leave you worse off than if you had never made the acquisition.  Identifying and replacing problem personnel is another must. Doing so may take more time than motivating and retaining key personnel, but it is essential, particularly when acquiring a failing company. If this matter is not addressed immediately, the acquisition will continue to bleed — but now it is your money that is being lost. This may also entail pruning some weak product lines.  Acquisitions are never inexpensive. You need to make these assets start earning a return for you as quickly as possible. Transition time is dead time.  The planning process may reveal that the acquisition is not a proper one, that it really does not fit after all. Better to learn this and cancel the acquisition, rather than find out after it is too late. The cost of planning now will be much less than having to divest later.  It takes time and planning to integrate enterprise resource planning (ERP) and other information technology (IT) systems. This simply cannot be done effectively overnight. The longer the acquired company is out of your IT loop, the less effective will be your knowledge and management of the new company.

8.6 When and How Not to Acquire Knowing when not to undertake an acquisition is even more important than knowing when an acquisition is needed. Too many acquisitions are made for the wrong reasons, wasting huge amounts of money, time, and management focus that should have been spent on developing the business internally or finding another, more beneficial acquisition. Here are some of the more common wrong reasons for making an acquisition:  Eliminate a competitor. This is often illegal and is likely to involve the company in protracted litigation with federal or state governments. Litigation, especially antitrust litigation, is an enormous drain on management time and company funds that would have been better spent on improving the company internally. Moves such as this can also give a company a predatory reputation, which is not helpful in doing business. Furthermore, the existence of at least one competitor is actually a positive benefit; many potential users of your product are likely to be unwilling to expose themselves to the potential problems of depending on a single supply source.

TX68837_frame_c01*.book Page 120 Saturday, August 17, 2002 9:29 AM

120

Strategic Management for the Plastics Industry

 Show the industry how wealthy and powerful your company is. This calls into question why more attractive internal opportunities for more profitable growth have not been generated. C. Northcote Parkinson, in Parkinson’s Law, warns us that building corporate monuments is a sign of decline, not power. This is also a sign that the board of directors is not independent, but subservient to a CEO who has an oversized ego.  Diversify. This is quite possibly one of the most common and also the weakest of reasons for acquisition or merger. Only rarely does management know enough about unrelated businesses that it can effectively oversee the operations of an acquisition that has nothing in common with the main line of business. Learning how a new business operates after the acquisition is much too late. And, there is always the temptation for the acquirer to dictate how the business should be run, usually to the detriment of the acquired company. Furthermore, the stock market tends to punish the valuations of conglomerates that are not exceptionally well managed. Over the past half-century, virtually every company that has acquired other businesses in order to diversify has wound up divesting them later or been acquired itself and broken up. Still, this dismal track record does not seem to keep managers from acquiring unrelated businesses as a way to smooth the economic cycle or some other equally attractive delusion.  Acquire a bargain. The urge to buy a troubled company on the cheap with the premise that it can be turned around quickly is often a trap waiting for the unwary and inexperienced. Usually, it is very difficult to know from the outside what the real cause of trouble is or even if it can be fixed at all. The only certain thing is that troubled companies invariably soak up a great deal of management time that would otherwise go into improving your existing business. Obviously, exceptions to this rule can be found. If you know the company well and have a firm and appropriate idea as to how to fix it, you stand a good chance of acquiring a winner, but without this inside knowledge, a buyer is normally headed for trouble.

Almost as bad as making an acquisition for the wrong reasons is going about it the wrong way. This is a more subtle way to make an acquisition fail, but it seems to have an amazingly large number of eager practitioners. Because of the almost infinite variations on this theme, let’s just highlight a few of the real-life ones in the industry during the past 10 years. The names are not revealed to protect the guilty. Changing the business focus from the one that made the acquired company successful to something new is a favorite blunder by far. It is not unreasonable to call it a blunder because it virtually never succeeds. One cannot help but wonder why the acquisition was made in the first place. One of the more egregious examples is the case of a commodity producer that acquired an engineering plastics compounder for the purpose of making polyolefin compounds. The acquirer eventually divested the company when it came to realize that the equipment was unsuitable for the type of production it had envisaged. In the meantime, it had de-emphasized the engineering plastics business and lost many of the company’s customers for these products. The new acquirer of the company was already in the engineering plastics compounding business

TX68837_frame_c01*.book Page 121 Saturday, August 17, 2002 9:29 AM

The Role of Acquisitions, Joint Ventures, and Divestitures

121

and simply added this capacity and the remaining customers to its own — a far sounder acquisition. A variation of this blunder is to have the new acquisition report to a particularly ambitious and/or egotistical manager. Such a manager will never be able to resist the temptation to put his or her imprint on the new company, invariably changing the focus away from what made it successful to begin with. This may not be a bad plan if the acquired company requires a rescue from the verge of bankruptcy, but it is almost always a guaranteed plan for failure if the firm was a successful one. This scenario is particularly applicable if the acquiring company has a culture that demands that its managers show instant results when they take on new responsibilities. Replacing key managers in the acquired company with ones from the acquiring company is another blunder. Unless the acquired company was a business failure, this makes no sense at all. Human capital is almost always the most important asset in any acquisition. If management does not respect the staff of the acquired company, then why was it acquired? And, as noted earlier, those key managers have a way of winding up in competition with the acquired company, and now with a grudge, as well — not a pretty picture to contemplate and one that will hurt the acquisition in several ways. Noncompete agreements are not always upheld by the courts, so no foolproof way exists to keep key managers who have been dismissed from coming back to haunt you in the marketplace. If they are good, they will know where to hit you where it really hurts. Yet another mistake is to merge several acquisitions together by creating a brand-new top-management group while simultaneously reshuffling (or dismissing) the top management of the acquired companies. The new entity is expected not only to maintain sales and profitability of the acquired companies, but also to achieve higher revenue and earnings growth (synergy). This procedure does not appear to have any theory underlying it, but the lack of a reasonable rationale does not seem to keep people from trying it. A large plastics conglomerate tried this by buying up regional distributors and trying to form one large national distributor from the group, dismissing or losing a number of key personnel in the process. The product lines of the regional distributors did not complement each other and in some cases actually competed. This meant trying to persuade suppliers to agree to convert regional representations into national ones, a process that eventually had some success but only after a period of years. It also meant dropping or divesting some small but profitable representations that could not be converted. The net result was that the resulting mashed-together “super distributor” took years to equal the sum of the originally acquired parts. It is quite likely that the same net result could have been obtained at less cost and more quickly by acquiring one strong regional distributor and putting resources into internal growth and expansion. In another case, involving a parallel strategy, a conglomerate company decided to combine a number of acquired compounders with dissimilar product lines. A number of senior managers were dismissed and the rest moved from their original positions (and competencies) to new positions.

TX68837_frame_c01*.book Page 122 Saturday, August 17, 2002 9:29 AM

122

Strategic Management for the Plastics Industry

These “repotted” managers knew relatively little of the businesses or functions they now found themselves in, and (surprise!) the newly combined business suffered greatly. The net result was a disastrous financial failure of such proportions that the parent company eventually found it necessary to be acquired by another firm. The new owner had little choice but to dismantle most of acquired structure, largely by closing plants, because much of the original business had been lost by then. The saddest part of this story is that many people in previously successful companies lost their jobs through no fault of their own, while the incompetent executives who caused the debacle either bailed out before the results of their handiwork came to light or walked away with golden handshakes. The better way to handle such a consolidation process is to choose the largest and most successful acquisition as the flagship of the group and to have the other companies report to it. In time, the sales forces can be merged, as well as other duplicate groups. The process will take longer but will have a far greater chance of success. A particularly subtle way to cause an acquisition failure is to place the new company under a manager whose compensation depends on achieving certain goals that are not necessarily compatible with the business form of the acquired company. As an example, let’s say that an acquired distributor will report to a manager whose compensation is partly dependent on maintaining low working capital in those business units for whom he or she is responsible. Let’s also assume that the distributor’s business depends on maintaining high stock levels for just-in-time deliveries to certain key customers. Now we have a situation with conflicting interests — the reporting manager will likely want to see those high stock levels cut back but doing so will have the distributor risk running out of stock at critical moments. The way around this, of course, is to change the manager’s compensation goals, but all too often this comes up only after the problem occurs.

8.7 Acquisitions vs. Joint Ventures As noted earlier, a joint venture is sometimes a superior way to achieve certain ends compared to a complete acquisition. If it turns out that the joint venture was a mistake, it is often much easier and less costly to terminate it than it is to sell or liquidate an acquisition. Contrarily, a successful joint venture may offer an easier and less costly route to acquisition by buying out the partner’s interest, compared to finding a similar but independent business to acquire. Of course, a key — and normal — element of any joint venture agreement is an agreed-upon procedure for termination or formula for buying out the other partner. Very often, the least complicated procedure is to require that whatever offer is made by one partner, the other has the option of either buying from or selling to the first partner at that same price. Joint ventures are not without their disadvantages. Partnerships between widely dissimilar companies, in terms of size or interest, are seldom a wise choice. Relative dissimilar financial strengths and diverse interests tend to drive the partners apart rather than keep them together. The relationship between

TX68837_frame_c01*.book Page 123 Saturday, August 17, 2002 9:29 AM

The Role of Acquisitions, Joint Ventures, and Divestitures

123

a mouse and a hippopotamus is uneasy at best. The simplest ones are normally the most successful — for example, a manufacturing joint venture where the partners split the costs and the output and market the product independently of each other. Research and development joint ventures are also relatively simple but require a firm agreement on the partners’ goals and their contributions of personnel and funding, as well as the intellectual property rights that will stem from any results. The most complicated, and potentially contentious, joint ventures are those where one of the partners supplies raw materials or services to the collaboration on an ongoing basis; agreement on transfer pricing is usually difficult and subject to frequent demands for renegotiation. The success of merging two similar businesses together just to achieve greater size is likely to depend on the ability of the two parents to reach agreement in advance on which one will be the managing partner.

8.8 Divestitures Divestitures, the opposite of acquisitions, are thought to be necessary when an acquisition turns out to be worthless or unsuitable for the company’s use. For example, a polymer producer acquired a sheet manufacturer located in a large city. City building inspectors showed up shortly after the closing and threatened to cite the company for numerous building and fire code violations unless they were offered gifts, a practice that had evidently been going on for years but had not been detected during the due-diligence review. The union business agent also appeared and it became immediately apparent that he was also used to receiving gifts in exchange for steering labor contract negotiations in the company’s favor. The acquirer, of course, refused to continue these practices but was forced to shut down the plant. The acquisition agreement was then deemed to have been fraudulent, but by this time, the former owners had disappeared and the acquired company was eventually liquidated. The way to avoid such a disaster is to use an outside consulting firm to be responsible for the due-diligence phase to verify that the business is indeed what the owners represent it to be. The situation is less disastrous for the case of a joint venture that has not achieved the goals set for it by one of the partners. That partner may then wish to divest its interests, most likely selling to the other partner. Divestiture might be necessary when a relatively independent part of the company or its business has proven unable to show the required growth or profitability to keep up with the other parts. Mature product lines can fall into this category, particularly if they are relatively independent of other lines and are unable to support the company’s overhead costs. Other producers of the same product may have an interest in acquiring such a business, or sometimes the managers of this business segment may wish to buy it and run it as an independent company. This is a good way to free up capital for investment in more rewarding operations. A capital-intensive part of the company or its business could have unmet capital needs that cannot be handled internally. This assumes that the business

TX68837_frame_c01*.book Page 124 Saturday, August 17, 2002 9:29 AM

124

Strategic Management for the Plastics Industry

line is not a new, growing, and profitable one that might represent the future; otherwise, it would be better to divest lower growth lines in order to finance the more capital-intensive one. A strain on capital is also a situation that might well benefit from joint venturing rather than outright divestiture. Management could decide that the company must change its focus, and a part of the company no longer fits with the new direction or other parts of the business require the investment of cash that cannot be easily raised otherwise. If the part of the company to be divested is big enough, it may be spun off to the stockholders rather than sold. While this can be a legitimate basis for a divestiture, many cases of such a splitting off have been less than successful for both the parent and the spin-off, so that all the ramifications must be considered very carefully before making such a move. As mentioned elsewhere, several major chemical companies in the past decade decided they would focus on life sciences and sold or spun off their basic chemical operations. Neither parent nor stepchild company fared well afterward; it appears that they may well have been better off to have kept the chemical businesses and spun off their life science operations instead. Profitable, growing businesses are not easy to find or grow internally. If they are contributing to the overall company and are not demanding otherwise scarce high-level resources, why divest? They should be retained to provide cash flow for core and new businesses.

8.9 The Challenges of Being Acquired Being the “acquiree” rather than the acquirer offers special challenges. The two basic situations to consider are voluntary and involuntary. If you are seeking to be acquired, perhaps you are the owner of a small business and want to retire or pursue another career, or at least reduce your work hours and financial risk. Or, if you were not informed or consulted before someone acquired your company, you may need some guidelines about whether to stay or not.

8.9.1 Selling Your Company Selling your company, especially if you are the founder, almost invariably involves a lot of emotion. Emotion has a way of getting in the way of making decisions based on logic. You are likely to be better off if you employ a consultant to help you, someone you can trust to point out where your interests are best served without the coloration of sentiments. You should contract with the consultant to pay for their time, not the value of the transaction. This way, the consultant will not have a conflict of interest if you choose to subordinate financial considerations to other matters that are important to you, such as the continued employment of your staff or maintaining the facility in the existing community. Although the dollar values are fairly small, the number of acquisition transactions involving plastic processors is much greater than in any other

TX68837_frame_c01*.book Page 125 Saturday, August 17, 2002 9:29 AM

The Role of Acquisitions, Joint Ventures, and Divestitures

125

sector of our industry. This is because there are so many small processors, almost invariably owned by their entrepreneurial founders. Because the financial barriers to entry in processing are very low (equipment and a building can be leased rather than purchased), just about anyone can go into business as a processor; therefore, the primary assets of a processor are the firm’s customers and the expertise of the employees. You will need to assure any potential buyer that these assets are readily transferable if the firm is sold. Do not overlook the possibility that those employees may be just the ones to buy your business, possibly through an employee stock purchase program. You will need expert financial and legal assistance to do this, of course. Selling your company will be very time consuming. Make sure that you have delegated as much of your duties as possible (only to capable hands, of course) so that you will have this time. If you intend to retire, ensure that you have an effective successor in place who is ready to take over after you leave. Few potential buyers will have any interest in taking over a company where they have to provide managerial succession. If you intend to stay on, you must understand that you will no longer be the boss. The new owner will have the final say on how the business is run. Under most circumstances, it makes more sense for a company founder to plan on leaving after not more than 3 years, during which time you will facilitate the turnover of the business, particularly in regard to holding the hands of customers. Even this brief time may be too much if you find you are having trouble letting go. Your contract should provide for early release under such circumstances; you will undoubtedly be bound by a non-compete agreement, in any event.

8.9.2 Surprise! Your Company Has Been Sold Assume that you are the senior executive of a company and the owners have just informed you that the business will be sold. If the owners have invited you to participate in finding a buyer, you should seize this opportunity and make the most of it. You are the most likely person to make a compelling case for someone to acquire your company. By doing so, you will demonstrate that you are also the best person to run it, even under new ownership. You should also have a better idea than anyone else which other firms would provide a good fit with yours. You might even be able to put together a management buyout of the business, if you have an entrepreneurial bent. On the other hand, if the owners have not made you a part of this process, things may yet work out to your advantage, but you may wish to update your résumé. If the company has been acquired by someone who wants to diversify their holdings, all well and good — you may be in the driver’s seat. On the other hand, if the company has not been doing well, you may well be held responsible for this, even if no other manager would have been able to do better. Worse, if the industry is in consolidation and this has overtaken your firm, the probability is strong that you will be restructured out of your job. In these cases, the responsible thing to do is to cooperate in the process to

TX68837_frame_c01*.book Page 126 Saturday, August 17, 2002 9:29 AM

126

Strategic Management for the Plastics Industry

the extent you are permitted to do so, but you may wish to consider asking for a severance package in the event none currently exists (assuming you will not hasten your departure by being so bold). If you are not the senior executive, but someone a little lower down on the ladder, you have some thinking to do. Why was the company sold? If the reason was for consolidation, is your department one that could be easily replaced by an outside group? If you are in sales or manufacturing, you are likely to be asked to stay. Any other function is likely to experience restructuring and your job may or may not survive. In general, the higher your compensation, the more closely you will be looked at to determine whether or not you will be retained. If you do survive the cut, take a look at the new owner’s operations to see if it might offer you a chance to move up. Very often, those who are deemed worthy to remain in their positions are also those deemed to be highly promotable.

TX68837_frame_c01*.book Page 127 Saturday, August 17, 2002 9:29 AM

Chapter 9

Case Studies To help reduce some of the preceding ideas to practice, this chapter will explore how a few selected companies in the industry have been managed successfully. The selection of these firms was also based on my knowledge of the companies, the accessibility of their senior management, and their willingness to talk about their guiding principles. No claim is made that inclusion in this chapter constitutes an implied “best of category.” Furthermore, these profiles in some respects are a photograph at a moment in time and may not fairly represent the condition of the company at the time that you, the reader, take up this book. Not all of my comments or observations are authorized by the companies analyzed, so reasonable people may differ with some of my observations and conclusions.

9.1 Polymer Manufacturing The principal American polymer manufacturers are fairly well known. In engineering polymers, General Electric Plastics has the reputation of being especially strong in marketing and DuPont in research and development (R&D); Amoco and Phillips were at one time the polyolefin leaders but have since merged their businesses with others. Overseas manufacturers have learned to work in much smaller national markets while seeking to build their businesses in the surrounding regions. We will examine two such firms that are leaders in their regions and are now becoming truly global players. The third example is a genuine rarity among polymer producers — a one-product company.

127

TX68837_frame_c01*.book Page 128 Saturday, August 17, 2002 9:29 AM

128

Strategic Management for the Plastics Industry

9.1.1 BASF: Using Breadth of Product Line and Manufacturing Integration BASF undoubtedly has the broadest, most complete line of polymers in the world, although it is not the largest producer of any one of them. BASF makes commodity, semi-commodity, and high-performance polymers, a relatively unusual combination. It is also arguably the most fully integrated polymer manufacturer, making all of its own monomers via integrated processes back to basic chemical and petrochemical feedstocks. In fact, its slogan is the German word, Verbund, meaning “integration.” BASF has five large, integrated manufacturing sites, three in Europe (Ludwigshafen, Antwerp, and Schwarzheide) and two in the United States (Geismar and Freeport), but it is continuing to add to other sites with the goal of eventually bringing their integration levels up to those of the five largest. BASF has grown from being one of Germany’s top three chemical companies into one of the largest in the world, a global player. While it has not been immune to the industry’s economic cycles, its profitability has been consistently above average. Jürgen Strube, BASF’s chairman for the past two decades, broke tradition when he became the first non-scientist/engineer to reach the top job. An attorney by training, he has become a true businessman and must be credited with much of BASF’s success, despite the relative lack of authority wielded by German executive board chairmen (as noted in Chapter 4, they are not CEOs). He has had to deal with major transitions within BASF as the company has gone from being a regional player to a global player, the commoditization of its polyolefin products, and the withdrawal from downstream processing, to name just a few of the challenges. BASF employs a relatively complex organizational matrix arrangement. None of the nine executive directors has complete authority for the operating its polymer business. Geographic area management is divided among four directors, and the major European plant sites are the responsibility of two more. These organizations provide administration and manufacturing for polymers, as well as local sales, marketing, and technical service. One director does hold overall responsibility for the business direction of polystyrenes, performance (engineering) polymers, polyurethanes, and polymer research; the heads of the product departments direct global marketing. Figure 9.1 shows an abbreviated view of this organizational structure.

9.1.1.1 History of BASF BASF is one of the world’s older chemical companies, dating back to 1865. It has a proud history of discoveries; in the polymer area, its chemists are credited with the invention of nylon 6, expanded polystyrene, and acrylonitrilestyrene-acrylate (ASA), and its engineers with the gas-phase process for polypropylene, among other things. BASF has never had to face another German polymer producer with a directly competing product line. Bayer competes in nylon 6 and polyurethanes, and Hoechst did at one time in polyolefins, but that is about it. BASF’s Ludwigshafen chemicals complex, the largest single such site in the world, was destroyed during World War II. BASF

TX68837_frame_c01*.book Page 129 Saturday, August 17, 2002 9:29 AM

129

Case Studies

Executive Director Polystyrenes, Polyurethanes, Performance Polymers, Polymer R&D

Executive Director North America (NAFTA)

Executive Director Corp. Engineering Southeast Asia, East Asia

Executive Director Eastern Europe, Africa, West Asia

Executive Director Schwartzheide and Antwerp Plant Sites

Executive Director European Community

Executive Director Ludwigshafen Plant Site

Figure 9.1 Polymers.

BASF AG −− Responsibilities of Executive Directors for

rebuilt the site, became a major polymer producer in Germany, and next built polymer plants in Belgium and Spain. In the 1980s, BASF established a significant polymer presence in North America, then began setting up an important and growing polymer position in Asia (Japan, Korea, and China) during the 1990s. BASF’s emphasis on integration fits closely with its philosophy of making commodities profitably. When the profit goes out of a product, the company either divests it or closes it down. BASF has sought to improve profitability in polyolefins in recent years through consolidation (it bought ICI’s polypropylene and Hoechst’s polyethylene businesses) and joint venturing (BASF and Shell have pooled their polyolefins under the company name of Basell, with BASF as the managing partner). Shell’s contribution came from buying out Montedison, Shell’s partner in their Montell joint venture. Polyolefins are an example of commodities that are struggling with profitability. At least until recently, it appeared that BASF has had more success in polyethylene than in polypropylene. Basell Chairman Volker Trautz has said that the boom-and-bust pricing fluctuations that mark the polypropylene business have effectively destroyed all of the investment made in this polymer since its inception. Unfortunately, in the drive for profit improvement via consolidation (a commodity culture technique), BASF was unable to find a place for their highly specialized polypropylene product line, Hivalloy copolymers. Hivalloy was a promising specialty business, growing rapidly, when Basell was formed. BASF turned down offers to divest Hivalloy but within 18 months decided that it could not sustain this business within its culture and decided to close the operation altogether. In addition to polyolefins, BASF’s principal polymer products consist of the nylon family, including 6, 66, 610, and 6T, and the styrene family, including, PS, SAN, ABS, ASA, MABS, SB, polyurethanes, and PVC, as well as POM, PBT, sulfone polymers, and thermosetting polyesters. The only major thermoplastic polymer missing from its portfolio is polycarbonate. At one time it also

TX68837_frame_c01*.book Page 130 Saturday, August 17, 2002 9:29 AM

130

Strategic Management for the Plastics Industry

produced acrylic resins (via an acquisition) but divested this business as unprofitable in the late 1990s. The company has experimented with forward integration into the production of magnetic recording tapes (which it invented in the early 1930s) and automobile components, such as components and interior door panels. However, it found these businesses to be significantly less profitable than materials and also divested them in the 1990s. BASF has its own wholly owned distribution company, Ultra Plastics, in the United Kingdom and Ireland. It entered this business by acquiring a bankrupt independent distributor that had been representing BASF. Ultra Plastics is managed as an independent business and has turned out to be a financial and operational success for BASF. Because BASF’s product line is so broad, Ultra Plastics has found it unnecessary to offer other polymer producers’ materials. Despite this achievement, however, BASF has not yet found conditions to its liking in other regions where it might be able to duplicate the Ultra Plastics story.

9.1.1.2 The Effect of Verbund (Integration) on Product Line The verbund concept has a profound influence on the products BASF makes and its business philosophy. BASF’s R&D is targeted at identifying materials that can be made from the chemical intermediates it already produces; or, if an important product is needed for the marketplace but the monomers or polymers cannot be produced economically in-house, the company looks for partners. Examples include Rheinische Olefin Werke (ROW), a joint venture between BASF and Shell Oil to make ethylene and propylene via the cracking process; Basell, a joint venture with Shell to make and sell polypropylene and polyethylene, as mentioned earlier; and a joint manufacturing venture with General Electric Plastics to make polybutylene terephthalate (PBT). BASF’s entry into acetal copolymer was undertaken as a joint venture with Degussa in order to merge the technologies of the two companies to make a commercial product that was technically superior to others. Each partner had a manufacturing site at one of its plants (BASF in Ludwigshafen, Germany, and Degussa in Theodore, AL) and supplied raw materials. The other partner provided the top management for the site; BASF was designated as the exclusive sales agent. BASF bought out Degussa’s interests in the joint venture in 2000, following Degussa’s merger with Hüls. In 2002, BASF closed the plant at the Degussa site due to a decade of foreign producers flooding the U.S. market with products priced below the plant’s costs to produce them. BASF’s strongest product presence is nylon 6, in which it is highly integrated. The company makes caprolactam from cyclohexane and then nylon 6 polymer, mostly, but not always, at the same site. The polymer is then finished and either compounded or sold directly to processors, compounders, and fiber producers. BASF also makes its own nylon 6 fibers, to a significant extent via the direct-melt process, whereby the polymer is spun directly into fibers without any intermediate stage following the polymerization reactor.

TX68837_frame_c01*.book Page 131 Saturday, August 17, 2002 9:29 AM

Case Studies

131

9.1.2 Asahi Kasei: Targeted Technology Asahi Kasei is one of Japan’s largest chemical companies, and it has extended its manufacturing presence into North America, Europe, and Asia through joint ventures, acquisition, and “greenfield” plant construction. Asahi has been almost alone among Japanese polymer producers in going global instead of following the more typical pattern of limiting its activities to nearby Asia and the United States. Asahi has had to be nimble because it is much smaller than its larger European and American competitors, and it has had to face a large number of competitors in its home market. Several of those Japanese competitors have merged in the past few years and are now more formidable: Mitsubishi Engineering Plastics is the fusion of the engineering plastics businesses of Mitsubishi Chemical, Mitsubishi Petrochemical, and Mitsubishi Gas Chemical; Mitsui Chemicals is the survivor of a merger with Sumitomo Chemical. Like BASF, Asahi’s production sites were badly damaged during World War II but were rebuilt afterward. Unlike Germany, however, Japan protected its small chemical industry from imports for the first several decades after the war, but the large number of producers has meant keen competition within the home market. While Japanese consumer goods companies (e.g., electronics and automobiles) built a major presence in North America and Europe first through exports and then through local production, most Japanese chemical companies contented themselves with exporting and only in the past decade have begun building capacity outside Japan, mainly in Southeast Asia and China and often via joint ventures. While Asahi has been part of this movement, it has been more active outside Asia, compared to the others, as noted below. In the year 2000, Asahi acquired Thermofil, a U.S. compounder with a plant in Europe and has recently acquired a compounder in China. The company has relied heavily on new technology to strengthen its position in the plastics industry, developing its own process technologies for already existing polymers. Asahi developed its own acetal technology and is the only producer in the world to make both homopolymer and copolymer varieties, in addition to being DuPont’s only rival for homopolymer. Asahi is a late arrival to the polycarbonate producers’ club, but again has used its own non-phosgene-based technology to do so. Asahi was the second producer in the world to make polyphenylene ether (PPE), again by its own technology. The company has even developed its own methyl methacrylate monomer process and is building the largest such plant in the world, having already entered the relatively mature acrylic polymer market. Asahi has no bias against technology developed by others and has several joint ventures that pool the resources of Asahi with other market leaders (e.g., Dow in polystyrene and Wacker Chemie in silicones). Asahi is also a major styrenics and polyolefins producer, the latter now being part of a joint venture. A vertically integrated fiber producer, Asahi is a major factor in nylon 66 in Asia. Asahi’s integrated nylon 66 fiber business is certainly not unusual; every other nylon 66 polymer producer except BASF is integrated forward into fibers; BASF’s fiber business is based on nylon 6. BASF is also present

TX68837_frame_c01*.book Page 132 Saturday, August 17, 2002 9:29 AM

132

Strategic Management for the Plastics Industry

in the construction industry through its expanded polystyrene insulation. Asahi’s forward integration into fabricated housing, however, is unique and effectively gives it a laboratory in which to develop products for this large and growing market. Asahi employs a mixture of product and market organizational structures to run its business on a global basis, as shown in Figure 9.2. Like BASF, Asahi provides local support for businesses that are directed globally from the home country. Marketing and R&D are under the same executive for each polymer group, ensuring that the business is customer driven.

9.1.3 Victrex Plc: A One Product Company Victrex Plc, in the United Kingdom, only manufactures polyetheretherketone (PEEK) and was formed by a management buyout of the business from ICI in 1993. PEEK is virtually a unique material and was protected by primary patents until 2000. PEEK has a high price and is relatively difficult to process, so its uses are restricted to particularly demanding applications. Nevertheless, Victrex has reported that its business reached 2300 metric tons (MT) in 2001 with revenues of 72.1£ ($160 million), which suggests that its business has been growing around 20% annually during the past 3 years. Victrex also reported that it brought 150 new applications to market in 2001, showing how critical application development is for specialty products. Despite its small size and high overhead, Victrex’s profitability is quite remarkable. Its pretax return on sales was 31% in 2001, up from 27% during the prior two years. Although Victrex has been steadily expanding capacity in the past 5 years and has taken steps to further integrate manufacturing, its return on fixed assets was an amazing 67% in 2001, up from 52% in the two prior years. Victrex employs 185 people and maintains marketing offices in Germany and the United States. Marketing in Asia is conducted through a joint venture with Mitsui Chemicals of Japan. Victrex has not had the high-performance polymer marketplace entirely to itself during the period of its patent protection for PEEK. A number of other quite similar materials offer varying combinations of high mechanical properties and chemical resistance at high temperatures, although not in the same balance. Some similar materials are more difficult to fabricate. Victrex PEEK has been around for over 20 years and has become well known and well accepted during that period. Newcomers, even ones making virtually the same polymer, have an uphill battle to compete successfully against the bulwark of product specifications and performance history that Victrex has built up.

9.2 Compounding A great many compounders can be found around the world, but independent (non-integrated) compounding began in the United States in the 1950s. Here, we will look at the biggest and one of the smallest in the United States to see how they successfully fend off competition.

Figure 9.2 Asahi Kasei.

Presidents Overseas Subsidiaries Asia, U.S., Europe

Sr. Managing Director High Performance Polymers & Compounds Automotive, E/E Mktg. High Performance (PA, POM, PPE, PC) Technical Center

Sr. Managing Director Chemicals & Plastics

ABS, PS, PE, Acrylics, Elastomers Technical Center Manufacturing

President Asahi Kasei Corp.

Fibers & Textiles Construction & Housing Electronics Health Care

TX68837_frame_c01*.book Page 133 Saturday, August 17, 2002 9:29 AM

Case Studies

133

TX68837_frame_c01*.book Page 134 Saturday, August 17, 2002 9:29 AM

134

Strategic Management for the Plastics Industry

9.2.1 LNP Engineering Plastics: Global Compounding LNP was the largest independent (not owned by a polymer producer) compounder in the world until it was acquired by General Electric Plastics in 2002. Apart from General Electric, LNP has manufacturing sites in North and South America, Europe, and Asia. LNP has maintained successful and profitable growth despite being acquired and divested several times. A look at LNP’s history is useful in understanding how it has reached its pinnacle in the industry.

9.2.1.1 LNP’s History LNP (Liquid Nitrogen Processing) was originally a privately owned custom cryogenic grinding company when it started up in 1948. In 1961, it adapted its process to make polytetrafluoroethylene (PTFE) compounds, and 3 years later began extrusion-compounding a proprietary line of thermoplastic materials in Malvern, PA. In 1970, LNP integrated backward into making its own PTFE and nylon 66 polymers; unfortunately, the manufacturing scale was too small and the technology too dated for the plan to succeed, and the subsequent losses nearly bankrupted the company. After a change in senior management, it sold off its polymer plants and returned to its basic business focus: compounding. In 1976, LNP was acquired by Beatrice Foods Company and placed in the Chemicals Division. In 1985, Beatrice sold LNP to ICI, the British chemicals giant. ICI thought to eventually integrate LNP in North America into its existing polymer manufacturing business but later decided to exit the plastics industry altogether and sold LNP to a Japanese firm, Kawasaki Steel, in 1991. Each of these successive owners left an imprint on LNP. Beatrice changed management’s focus on sales and earnings growth to one oriented more toward growing profit margins and return on invested capital. ICI diverted LNP’s North American marketing and technical efforts away from its line of compounds and toward ICI’s line of polymers. When ICI divested LNP, it kept the fluoropolymer business and left LNP with just the thermoplastic compounds business. These moves first diffused LNP’s focus, then allowed it to refocus on its basic business once more. In Europe, ICI more or less left LNP’s operations alone, as ICI did not have the same need to emphasize polymer sales there as it did in North America. The result was that the European operation has retained much more of the entrepreneurial culture than has the parent company. Kawasaki brought ownership stability and patience, capital for expansion and acquisitions, and a return to relative business independence (Kawasaki’s only other plastics activity is thermoplastic sheet in Japan). In late 2001, Kawasaki, feeling Japan’s economic pinch and desiring to concentrate on steel, sold LNP to General Electric Plastics, which has announced that it will integrate its existing custom compounding units (which have sales revenues about twice those of LNP) into LNP and operate the resulting business as a separate entity within General Electric’s corporate structure. However, it is clear that LNP is no longer independent, as defined earlier. The rest of this story is still

TX68837_frame_c01*.book Page 135 Saturday, August 17, 2002 9:29 AM

Case Studies

135

unfolding, but General Electric’s history suggests that LNP’s business strategies will be changed far more radically than under any of the previous owners. This theory was reinforced when General Electric named one of its veteran senior executives as the new CEO of LNP, the first time that any owner has placed an outside manager at the top of LNP.

9.2.1.2 LNP’s Business Strategy: Focus on Customer Needs LNP’s primary success strategy has been to focus on customer needs. It faltered when it deviated from this strategy, such as the attempted backward integration step in 1970 and the fusion with ICI’s polymer business (1985–1991). It first began compounding customer-owned materials on a toll basis and then applied what it had learned about customer needs to make proprietary compounds. This approach has also led to making a large number of smallvolume, niche compounds that are often specific to a particular application. Over the years, LNP has noticed that its typical order size has stayed pretty much around 1 MT (2204 lb).

9.2.1.3 Manufacturing Expansions LNP first expanded by building a plant in Thorndale, PA, and converting the small Malvern plant into an extension of its R&D facilities. When LNP added a plant in California in 1964, it organized the new location virtually as a mirror image of the parent Pennsylvania company, with duplicate functional management groups. This structure, while useful for giving the new location a quick start, soon proved to be difficult to manage effectively; the various functional groups were later subordinated to those located at the home office. The next domestic manufacturing plant was built in Columbus, OH, in 1979 but, for purposes of order scheduling and logistics, was run as an adjunct facility of the Thorndale plant. In 2002, LNP announced that it was closing the California plant, a move prompted by the shift of regional customers’ manufacturing operations to Asia on a permanent basis. In 1998, K-LNP (LNP’s parent holding company, discussed later) acquired a polycarbonate recycling company, GHA Plastics (renamed RC Plastics), located in Houston, TX. While this move gave LNP control over the quantity and quality of recycled polycarbonate feedstocks for its other plants, RC Plastics is operated as a separate division because RC Plastics’ raw material sources, manufacturing technology, and retained external customer base differ significantly from those of the rest of LNP. Because of RC Plastics’ growing business, a move to a larger site was announced in 2000. LNP’s European site was first built in 1968 in Breda, the Netherlands. This site was chosen because DuPont, LNP’s primary PTFE supplier, had built a polymer plant in nearby Dordrecht and wanted compounds based on its Teflon® resins made close at hand. The facilities were outgrown in time and the plant was relocated not far away to Raamsdonksveer in 1976. The business was run as an independent company with the functional groups coordinating

TX68837_frame_c01*.book Page 136 Saturday, August 17, 2002 9:29 AM

136

Strategic Management for the Plastics Industry

their activities with the parent company groups; this organizational structure is still in place. In a complicated series of events, LNP wound up with ICI’s British long-glass compounding plant in 1991 and relocated it to LNP’s own plant in Thornaby-on-Tees, England, 4 years later. In 1996, LNP acquired Eurostar S.A., a French compounder with a plant near Paris, and merged its operations into LNP Europe. LNP formed a sales office in Singapore in 1992 to develop business in burgeoning Asian markets and then followed with plant construction in Malaysia in 1995 and two expansions since. While manufacturing and sales are run independently here, some technical and administrative services are being provided from the United States until the Asian company becomes large enough to support this overhead locally. In 1999, LNP acquired MIXCIM Indústria e Comércio Ltda., São Carlos, Brazil, as its first manufacturing presence in Latin America. LNP/MIXCIM is being run as an independent subsidiary, with sales and R&D located at the manufacturing site. In 2000, LNP announced formation of a marketing joint venture with Vetrotex America, the subsidiary of the French glass manufacturer, to sell long-glass concentrates to injection molders in the North American Free Trade Association (NAFTA) region. In 2001, LNP built a greenfield plant in San Luis Potosi, Mexico. This plant is managed within the NAFTA as part of LNP’s North American manufacturing operations. It can be seen that LNP has typically expanded at existing sites or greenfield facilities but recently has also added acquisition as a selective tool to solidify its supply base and broaden its market reach.

9.2.1.4 Regional Management, Globally Coordinated As LNP has grown overseas, it has not attempted to direct these sites from the home office. K-LNP was set up to provide a central holding company to administer operations around the world in 1995. Figure 9.3 shows LNP’s global structure under K-LNP. K-LNP’s board, consisting of the division heads plus K-LNP executives, meets quarterly to establish broad overall policy, review progress toward objectives, and consider whether any regional activities need to be extended on a global basis. Major customers are assigned to global account managers, who then coordinate meeting the customers’ worldwide needs, regardless of where the manager is located.

9.2.1.5 Patented Technology for Marketing Strength LNP is unique among compounders in that it has gone beyond the usual trade-secret approach to technology. It has sought patents on its technology and unhesitatingly enforced its patents against competitors, such as for longglass products, and it has sued Ticona, DSM, and RTP for patent infringement. Ticona settled by paying royalties and cross-licensing its own patents to LNP; DSM elected to exit the business altogether, because its small sales revenues in this product line did not justify either defending or settling the lawsuit. LNP

LNP Europe Raamsdonksveer, The Netherlands Plants also in UK, France

LNP Asia Pacific Seremban, Malaysia Sales Office in Singapore

LNP Japan Tokyo, Japan

RC Plastics Houston, TX, USA

Figure 9.3 LNP Engineering Plastics (prior to GE acquisition in March 2002).

LNP Americas Exton, PA, USA Plants in PA, IN and Mexico

K-LNP Exton, PA, USA LNP-MIXCIM Sao Carlos, Brazil

TX68837_frame_c01*.book Page 137 Saturday, August 17, 2002 9:29 AM

Case Studies

137

TX68837_frame_c01*.book Page 138 Saturday, August 17, 2002 9:29 AM

138

Strategic Management for the Plastics Industry

President

Figure 9.4

VP Finance

VP Operations

Sales Mgr.

Plant Mgr.

Lab Mgr.

Modified Plastics, Inc.

won most of its points vs. RTP but only won negligible damages and lost on one issue that has allowed RTP to remain in the business. Because the U.S. patents expire in 2002, the whole issue will be moot shortly. LNP has also sought licenses from polymer producers to manufacture compounds based on unique materials, such as Dow’s syndiotactic polystyrene, DuPont’s amorphous liquid crystal polymers (LCPs), and Shell Chemicals’ polyketone. These have not been exclusive agreements, but they protect LNP’s rights to develop patented compounds based on these materials in cooperation with the polymer producer, without fear of the results being shared with other compounders.

9.2.2 Modified Plastics: Regional Compounding Sometimes a niche market can be successfully defended against bigger, wealthier companies for an indefinite period of time. Modified Plastics in Anaheim, CA, is a good example. The relative geographic and time zone isolation of the American West Coast from the rest of the country makes it difficult to compete from outside the region against a skillful local firm. Former LNP employees founded Modified Plastics in 1977 as a toll compounder (the customer supplies the base resin). The founders also started a color compounding business, Color Science, co-located with Modified Plastics. The combined companies have grown steadily over the years, offering proprietary products in addition to toll compounding, and they sell throughout the 11 westernmost states plus western Canada and the maquiladores in the Mexican border states. With the closure of LNP’s California plant, Modified Plastics is now the largest compounder on the West Coast. Modified Plastics is organized along functional lines as shown in Figure 9.4.

9.2.2.1 Using a Time Zone against Larger Competitors Several larger companies based in the American East and Midwest have tried to move in on Modified Plastics’ turf but have failed. Each established or acquired a local compounding plant but then made the mistake of treating the plant as just another manufacturing site that ran on schedules set centrally.

TX68837_frame_c01*.book Page 139 Saturday, August 17, 2002 9:29 AM

Case Studies

139

Southern California’s plastics processors are larger in number but smaller in size than in any other region of the country. They require fast service (often one day), something that Modified Plastics does routinely and uses effectively as a competitive advantage. The geographic and time zone isolation of the West Coast makes it nearly impossible for companies in the American Midwest and East Coast to handle these requirements effectively from afar. Also, these firms have not been prepared to do business with a large number of smallvolume, niche products, preferring to run off large volumes of a few products that could then be shipped directly to volume users or stocked for smaller users. The problem with this thinking is that customers know from harsh experience that if they allow one supplier to cherry-pick their large-volume needs, they will have to pay a stiff premium to other suppliers for their smallvolume items, if they can get them at all. The net result is that the West Coast has remained largely a local market for plastic materials and parts. Because many of the West Coast types of end users (e.g., aerospace, computer printers, farm irrigation products) are not widely found elsewhere in the United States, this market has also taken on a self-contained character. Even LNP has finally given up and closed its California plant, which predated Modified Plastics’ establishment by a decade and a half. LNP gave as its reason the emigration of its customer base to Asia, but these were much larger, global customers that do not affect the smaller regional businesses that Modified Plastics serves. In effect, LNP conceded that it had lost its small customer base to Modified Plastics.

9.3 Distribution Distribution is another sector in which we find a great many competitors. Here, we will just feature one unique distributor, one that is owned by a polymer producer.

9.3.1 Polymerland: Integrated Distribution In 1985, General Electric Plastics acquired Borg Warner, one of the original acrylonitrile-butadiene-styrene (ABS) producers and a superb marketing company. Part of the package was a unique distribution operation, Plastics Service Centers. Borg Warner was the first and, at that time, the only polymer producer to own a distributor that handled both the parent’s products and also those made by other polymer producers. General Electric changed the name to Polymerland but then more or less ignored it, leaving it as an independent unit and adding General Electric products to the line. From the outside, it appeared that General Electric regarded Polymerland more as a training operation or an experiment than as a long-term holding, although they refused offers to sell it and stated that it was seen as an integral part of their plastics business. As time wore on, General Electric began integrating Polymerland

TX68837_frame_c01*.book Page 140 Saturday, August 17, 2002 9:29 AM

140

Strategic Management for the Plastics Industry

piece by piece into the parent organization, suggesting that complete assimilation would be Polymerland’s eventual fate. However, as time wore on, General Electric management came to see that integrated distribution via Polymerland had distinct value apart from its conventional polymer manufacturing business. Polymerland also expanded into Europe in the 1990s, where it acquired and assimilated an Italian nylon compounder.

9.3.1.2 Using the Internet In 1999, Polymerland initiated a concerted effort to convert its customer interface away from phone and fax to the Internet. At the end of 2000, Polymerland reported that it had successfully converted 20% of its sales volume to Internet transactions, but has since admitted that this only represents 5% of its customers. While Polymerland continues to push its e-commerce interface with customers via advertising, publicity, trade shows, and sales contacts, it now acknowledges that it will take a far longer time to make converts than originally thought. Polymerland is also promoting use of the Internet by customers for color selection. Not every customer will be able to do this, as it requires both hardware and software that are compatible with that of Polymerland so that colors will be reproduced accurately on both ends. Nevertheless, it is an imaginative method to cut down dramatically on the time required for color selection, a process that can consume several weeks under normal conditions.

9.4 Processing Over 12,000 processors are located in the United States (some say over 15,000), but we will look at just two, a large molder and a small extruder. Each has found a particular way to compete successfully.

9.4.1 Nypro: Fewer Customers Equal More Sales Little more than 20 years ago, Nypro was a small custom molder in New England. It was founded in 1955 and had been slowly growing in the fashion of many custom molders: a handful of repeat customers and many more onetime customers. The president at that time (now chairman), Gordon Lankton, was not satisfied with this situation and realized that the company must differentiate itself from its competitors or its existence would be continually at risk. In the course of seeking capital for rapid growth, Nypro instituted an employee stock-ownership plan (ESOP) that helped turn tax-sheltered earnings into equity for expansion and afforded every employee an owner’s interest in the company’s prosperity.

TX68837_frame_c01*.book Page 141 Saturday, August 17, 2002 9:29 AM

Case Studies

141

9.4.1.1 How a Small Molder Became a Big One The most counterintuitive move made by Nypro was to reduce its customer base. By dropping its smaller and one-time customers, Nypro was able to redeploy its assets, concentrating on upgrading value and adding additional business from the remaining larger customers. The selection process focused not just on size but also on customers whose end-use markets showed the most potential for profitable growth and who seemed likeliest to capitalize on this potential. These customers, in turn, led Nypro to follow them overseas and build molding plants nearby. Nypro has steadily added additional capabilities and services to its offerings so that it is far more than just another customer molder. In fact, Nypro was one of the first molders to characterize itself as a contract manufacturer. Nypro also looked for additional large potential customers in the selected end-use markets and succeeded in converting them to Nypro customers, with the same comprehensive approach. This has involved analyzing the customer’s problems to see if Nypro could offer a solution. For example, Motorola complained that the printed surfaces of its cell phones tended to wear to the point of being illegible. Nypro solved this problem by using preprinted polycarbonate labels that were insert-molded and fused into the polycarbonate phone body. Not only did Nypro solve the customer’s problem, but it also eliminated two manufacturing steps: pad printing (with attendant yield losses due to occasional mis-registration) and hard coating (the label is purchased with a hard coating already on it), with significant cost reductions. Nypro was then able to offer this design improvement to other cell phone makers, further enhancing its reputation in this market segment. Nypro has extended this same philosophy to bi-component molding, again a technology that improves product design while lowering manufacturing costs. Nypro’s marketing program, known as “Million Dollar Partnerships,” establishes relationships with large customers who buy more than $1 million annually from Nypro. Over the past 10 years, Nypro increased its base of such customers from 22 to 74, distributed nearly evenly among health care, electronics/telecommunications, consumer/industrial, and automotive markets. This diverse balance helps insulate Nypro from the more severe swings in the business cycle. Nypro has embraced electronic data management for quality control and improvement, color control, integrated design, and global business management. The latter is particularly critical in meeting globalized customer requirements, as over one third of Nypro’s business is now done overseas, effectively rising from almost nothing just 10 years ago. Nypro has an unusually high R&D effort for a molder (4% of sales) and uses the Six Sigma approach to continuous quality improvement. Nypro has a decentralized geographic management structure as shown in Figure 9.5, with regional vice presidents reporting to the current president/ CEO, Brian Jones. Coordination of global customers and markets is facilitated through several worldwide conferences held during the year. A global

TX68837_frame_c01*.book Page 142 Saturday, August 17, 2002 9:29 AM

142

Strategic Management for the Plastics Industry

President/CEO VP Finance/CFO

VP North America

Figure 9.5

VP South America

VP Europe

VP China

Nypro, Inc.

technology conference helps everyone stay abreast of the latest developments and share their experiences in the use of these techniques. Nypro uses two resourceful methods to train its managers:  Participation on their local plant’s board of directors (each plant is an incorporated entity), where they are exposed to the big picture of running a business and can carry this information back to their co-workers  Nypro’s Leadership Institute, a weeklong course designed and conducted by a local university for Nypro, where managers from around the world can come to sharpen their skills and get to know one another better

9.4.2 Certified Thermoplastics: Niche Processing Certified Thermoplastics (CTP) describes itself as making custom advanced extrusions of engineering thermoplastics. Unlike Modified Plastics, described earlier, this West Coast processor competes both nationally and internationally by concentrating on high-precision profile extrusions made from engineering and high-performance materials in small volumes. CTP has found that this approach has led it into highly technical applications for electrical/electronics, business machines, industrial machinery components, and non-automotive transportation (e.g., from mass transit to aerospace). A relatively small company, it was founded in 1978 by its current owner and president, George Duncan. It employs a functional organization, with key personnel often performing multiple jobs, as shown in Figure 9.6. CTP has succeeded in niche markets that other companies have either shunned or found too small to be profitable. How does CTP find gold where others find only gravel? First, it has gradually built a reputation for handling small but technically challenging work in materials that few other profile extruders understand. Second, CTP makes its own tooling, again capitalizing on experience that not many others have. Third, CTP handles post-extrusion fabricating and decorating steps that add value to the services they provide. Fourth, CTP offers to design parts, ensuring that there will not be any unforeseen production problems, as well as (once again) adding value to what they offer to the customer. Fifth, CTP filters its customer base by sticking to engineering plastics profiles and short runs (small

TX68837_frame_c01*.book Page 143 Saturday, August 17, 2002 9:29 AM

143

Case Studies

President (Sales) Accounting

Operations Manager

Plant Manager

Figure 9.6

Design and Technical Service

Certified Thermoplastics Co., Inc.

quantities) — in other words, by avoiding the temptation to take on larger jobs in commodity polymers, even if an existing customer requests it.

9.5 Equipment 9.5.1 Husky Corporation: Molding Systems Husky Corporation is not only an injection molding machine manufacturer but also bills itself as the world’s largest moldmaker. It is a large company (roughly $700 million in annual sales) but is actually only a small competitor in a huge worldwide injection molding machine market of an estimated $20 billion, shared by dozens of companies competing in every significant geographic region. How does a relatively small company survive in such an environment? Husky’s answer has been specialization to attain maximum penetration of targeted markets and integration to control quality and costs. Husky started out by making relatively small, high-productivity machines for thin-walled packaging containers, such as ice cream tubs and lids. Having established a strong presence in this market, it extended its line of machinery to making polyethylene terephthalate (PET) injection blow molding systems in 1978. Because such systems run steadily on the same material, they are ideally suited to incorporating hot runner molds, which Husky began designing, making, and supplying. These PET packaging machinery systems also utilize robots for handling parts; Husky then began designing, making, and supplying robots as yet another component of a complete, turnkey plant. Husky is headquartered in Ontario, Canada, but has added manufacturing sites in the United States (Vermont) and Europe (Luxembourg) and 18 technical centers throughout the industrialized world. The technical centers serve as sales and marketing sites where potential customers can see Husky’s equipment in action, even running their own molds. It is difficult to beat an actual demonstration of how one’s own tooling will run as an inducement to buy. The power of live demonstrations is an important reason why participation in trade shows is an integral part of Husky’s marketing plan. The equipment on display is usually sold during the show and shipped directly to the new owner.

TX68837_frame_c01*.book Page 144 Saturday, August 17, 2002 9:29 AM

144

Strategic Management for the Plastics Industry

9.6 Common Threads What are some of the more notable common threads that link these companies in their successful quest for profitable business?  Adaptability — All of these companies started with a basic idea for one or more products that were useful for certain end uses, but the idea did not end here. Each company was next able to broaden the applicability of the product to find additional end uses, either through product modification or through introducing the product to other users whose performance requirements were similar to the first end use.  Integration — Not every successful company has integrated manufacturing, but it is instructive to note how many do. Integration helps to contain costs and capture earnings that would otherwise go to suppliers. Integration also adds scale, an important consideration when the business is headed toward or has already taken on the commodity characteristics.  Dominant local presence or global emphasis — Small companies can succeed by being the best in a local area, but when they wish to grow beyond a certain point, they must eventually go global. A regional presence is only an intermediate stage to going global.  Focus closely on selected customer’s needs — When company management begins to concern itself more with internal matters than with external ones (customer needs), the company is on its way to tr ouble. All of the companies examined in this chapter are focused on selecting their customers, identifying their needs, and finding a profitable way to satisfy those needs.

TX68837_frame_c01*.book Page 145 Saturday, August 17, 2002 9:29 AM

Chapter 10

Summary What have we learned about the requirements of the plastics industry for successful management that differ from those for other industries?  The plastics industry is fundamentally based on technology that advances constantly and which shapes the industry’s markets and business models. Many other large industries, such as construction, are not nearly as dependent on technology.  The industry requires technically trained people to manage and run it, but in an open and shared-decision style rather than by command and control. Many other large industries do not require as many personnel with such training, nor do they need such an open management style to succeed.  The nature of the industry is for segments of it to be in frequent transition between different cultures of growth, size, and style. Prompt recognition of these changes and adapting to them is a top priority for management, because a mismatch of culture, style, and technology within a company will not produce successful results. Developing new applications and products requires an integrated technical marketing effort that is essential to success.  The average life cycle of a product varies from very long to quite short as one moves downstream from polymer production to finished parts. This would suggest that increased focus on product and application development would be required as one moves downstream, but in fact, research and development expenditures as a percent of sales are typically higher as one moves upstream. The companies that are exceptions to this rule are usually more profitable than other companies in their sector. While this characteristic is not peculiar to the plastics industry, it demonstrates that many plastics companies could improve their financial results by changing their business structure, emphasis, and culture, with respect to research and development and accompanying value pricing.

145

TX68837_frame_c01*.book Page 146 Saturday, August 17, 2002 9:29 AM

146

Strategic Management for the Plastics Industry

 Acquisitions, mergers, and joint ventures are constantly reshaping the plastics industry, but many of these activities, mainly acquisitions, do not turn out well. This is often because companies are acquired for the wrong reasons or their assimilation is executed badly, particularly with respect to acquired personnel. Acquisitions require considerable management time and need to be handled as part of a process that begins with a business plan and concludes only when the expected results are obtained. It is a foolish waste of resources to treat acquired personnel as disposable unless a contraction is an essential element to saving a business from bankruptcy and expansion is not likely in the near future.

Successful management in the plastics industry is not the result of luck or the personal accomplishments of the chief executive officer. It is the result of applying the analysis, logic, and creativity characteristic of the scientific method used to discover technology to the problems of organizing, planning, and executing business decisions, then inspiring others to carry them out.

TX68837_frame_c01*.book Page 147 Saturday, August 17, 2002 9:29 AM

Bibliography Axelrod, A., Patton on Leadership, Strategic Lessons for Corporate Warfare, Prentice Hall, Paramus, NJ, 1999. Drucker, P., Managing for Results, Harper & Row, New York, 1964. Drucker, P., The Effective Executive, Harper & Row, New York, 1966. Drucker, P., Innovation and Entrepreneurship, Harper & Row, New York, 1985. Drucker, P., The Essential Drucker, HarperCollins, New York, 2001. Jones, R., “Cultures in Collision: Foreign Ownership of U.S. Plastics Companies,” Society of Plastics Engineers Annual Technical Conference, Detroit, MI, May 1992. Jones, R., “Strategic Partnerships for the 21st Century,” Society of Plastics Engineers Annual Technical Conference, Indianapolis, IN, May 1996. Jones, R., “U.S. Independent Compounding – Past, Present, Future,” Plastics Engineering, May 1996 Jones, R., Guide to Short Fiber Reinforced Plastics, Hanser, Munich, 1998. Jones, R., “Polymethylpentene: Reinventing a Mature Product,” Society of Plastics Engineers Annual Technical Conference, New York, May 1999. Jones, R., “New Routes to Market in the 21st Century,” Plastics Engineering, August 2000. Parkinson, C., Parkinson’s Law, Riverside Press, Cambridge, MA,1957. Peters, T., In Search of Excellence, Warner Books, New York, 1982.

147

TX68837_frame_c01*.book Page 148 Saturday, August 17, 2002 9:29 AM

TX68837_frame_Index Page 149 Monday, August 26, 2002 6:56 AM

Index

A

B

Achievements, planned goals vs., 111 Acquisitions, joint ventures, and divestitures, 115–126 access to markets, 116–117 access to technology, 117 acquisitions vs. joint ventures, 122–123 challenges of being acquired, 124–126 company sold, 125–126 selling of company, 124–125 divestitures, 123–124 manufacturing capacity, 117–118 successfully integrating acquisitions into existing operations, 118–119 vertical sector acquisition, 118 when and how not to acquire, 119–122 Acrylonitrile-styrene-acrylate (ASA), 128 Aerospace markets, 51 Age discrimination lawsuits, 94 Ambition, 6 American lawsuits, 59 Amoco, 127 Anti-capitalists, 13 Anti-discrimination laws, 95 ASA, see Acrylonitrile-styrene-acrylate Asahi Kasei, 131, 132, 133 Asia, marketing in, 132 Asset, most important, 117 Aufsichsrat, 67 Authority, delegating, 11 Automotive business, suppliers, 46

Bankruptcy, 3, 49, 146 BASF, 118, 132 emphasis on integration, 129 as exclusive sales agent, 130 history of, 128 B2B e-commerce, see Business-tobusiness e-commerce Big Three automobile manufacturers, 46, 78, 94 Blind ads, 81 Blow molding, 28 Board of directors management oversight function of, 66 purpose of, 67 Boeing, 27 Bonuses, 90 Boom-and-bust cycles, 14 Bottom-up planning, 10 Brand names, 75 Business -to-business (B2B) e-commerce, 27 culture, 53, 60 divestitures, 80 focus, change of, 120, 124 goals, 70 operations, see Technologies and markets, business operation shaped by plan, principal components, 70 profitability of, 13 success of merging similar, 123 units, 60 149

TX68837_frame_Index Page 150 Monday, August 26, 2002 6:56 AM

150

Strategic Management for the Plastics Industry

C

Commodity cultures, 57, 58 polymers, 19, 34 producer research and development, 37 Communications, signal loss in, 20 Community liaison, 4 relations, proactive approach to, 4 Company(ies) acquisition of for wrong reasons, 146 boards, majority membership of, 66 capital-intensive part of, 123 goals, 10 publicly held, 111 recruiters, 85 selling of, 124 sold, 125, 126 stepchild, 124 urge to buy troubled, 120 Company culture and organization, 53–68 board of directors, 66–68 management styles, 64–66 size intertwined with culture, 54–60 commodity culture, 57–58 entrepreneurial culture, 55–56 managerial culture, 56–57 nationality/ethnic culture, 59–60 technology culture, 58–59 tailoring organizational form to business needs, 60–64 hybrid organizations, 64 organizing by function, 60–61 organizing by geography, 63 organizing by market, 62–63 organizing by product, 61–62 Compensation, 126 changes, displeasure over, 91 cuts, 95 goals, 122 plans, 90 Competition, globalization of, 1 Competitive rankings, 113 Competitor(s) elimination of, 119 growth-oriented, 80 management, strategies revealed by, 114 reason for acquiring, 115 using time zone against, 138

CAD, see Computer-aided design CAE, see Computer-aided engineering Capital human, 121 return on invested, 109 Career growth, 97 management as 3–7 Carnegie, Andrew, 56 Case studies, 127–144 common threads, 144 compounding, 132–139 modified plastics, 138–139 NP engineering plastics, 134–138 distribution, 139–140 equipment, 143 polymer manufacturing, 127–132 Asahi Kasei, 131–132 BASF, 128–130 Victrex Plc, 132 processing, 140–143 Certified Thermoplastics, 142–143 Nypro, 140–142 Cash burn, 14 CATV, 48 Cease and desist injunction, 40 Celanese, 41 Cell phones, 48, 141 CEO, see Chief executive officer Certified Thermoplastics (CTP), 142, 143 CFO, see Chief financial officer Change forms of, 8 managers resistant to, 53 warning signs of major, 9 Chief executive officer (CEO), 6, 60 advice offered to, 67 manipulation of earnings by, 15 money spent by, 6 worst types of, 6 Chief financial officer (CFO), 66 Chief operating officer (COO), 60 City building inspectors, 123 Classified advertisements, 81 Co-determination law, 67 College graduates, potential performance of, 85 Color Science, 138 Committee-itis, 72

TX68837_frame_Index Page 151 Monday, August 26, 2002 6:56 AM

151

Index

Compounders, 108 Compounding custom, 22 global, 134 regional, 138 Compression molding, 28 Computer-aided design (CAD), 74 Computer-aided engineering (CAE), 74 Confidential information, 87 Consolidation, of companies, 30 Consultants, 96, 114 Consumer goods, 49, 131 Continuing education, 89 Contract manufacturers, 29 COO, see Chief operating officer Corporate governance model, 67 Corporate loyalty, 97 Corporate monuments, 120 Cost(s) benchmark for allocation of, 107–110 compounder, 108–109 distributor, 109 machinery manufacturer, 110 polymer manufacturing, 107–108 processor, 110 definition of, 103 opportunity, 101 pressures, 49 sales transaction, 103 savings, 80 service transaction, 103 Credit decisions, 79 risky, 79 Crompton, 30 Cross-licensing, 18, 117 CTP, see Certified Thermoplastics Culture(s), see also Company culture and organization business, difference between American and non-American, 60 change, slowest route to successful, 54 commodity, 57, 58 entrepreneurial, 55 German, 68 management ignoring, 53 managerial, 56 quasi-government, 55 technology, 58 Currency exchange considerations, 19

Custom compounding, 22 Customer(s) best interests of, 7 competitors’, 113 dealing ethically with, 15 direct sales relationships with, 20 dropping of, 79 feedback, 74 -focused companies, 54, 63 just-in-time, 24 lists, 87 needs, 8, 17 on loan from supplier, 25 perception of company by, 75 relationships distribution, 25 processing, 28 satisfaction, 112 slow-paying, 80 surveys, 113

D DaimlerChrysler, 46 Davis-Standard, 30 Debts, 79 Decision-making authority, 71 Deloitte & Touche, 80 Delphi, 22 Demand volatility, 70 Developmental products, 105, 106 Differential pricing, 21 Dioxins, formation of, 42 Direct sales, 20 Discounts, retroactive, 76 Distributors, 109, 121 Divestitures, see Acquisitions, joint ventures, and divestures “Do as I say not as I do” philosophy, 12 Dow, 118, 131, 138 Downsizing, 95, 97 Downstream activities, 58 polymer processing steps, 17 processing, 18 Dual-career families, 88 Due-diligence review, 123 DuPont, 41, 127, 131

TX68837_frame_Index Page 152 Monday, August 26, 2002 6:56 AM

152 amorphous liquid crystal polymers, 138 Zytel nylon, 75

E Earnings before interest and taxes (ELIT), 46 manipulation of by CEO, 15 tax-sheltered, 140 EBIT, see Earnings before interest and taxes E-commerce business-to-business, 27 compounding and, 24 effects of, 27 introduction of, 10 long-term value of, 14 order processing, 21 pressure to use, 77 use of by polymer producers, 20 Economies of scale, 116 Educational background, 83 Embezzlement, 66 Employee(s) best interests of, 7 dealing ethically with, 15 entry-level, 65 morale, 9 overqualified, 83 potential, 86 stock-ownership plan (ESOP), 140 training of new, 88 Employment agreements, 86 lifetime, 5 offers of, 82 termination, 12 End-use market, favorite, 47 Engineering polymers, 113 Enterprise resource planning (ERP), 21, 76, 77, 119 Entrepreneurial culture, 55 Entrepreneurial founders, 125 Entry-level employees, 65 Environmental laws, violations of, 66 Equipment types, 39 ERP, see Enterprise resource planning Errors, repeated, 2

Strategic Management for the Plastics Industry

ESOP, see Employee stock-ownership plan European polymer producers, 59 Executive directors, 67 Executive search agencies, 82 Extrusion, 28

F Family-owned businesses, 56–57 Farm irrigation products, 139 Fax-back system, 26 FDA, see Food and Drug Administration Federal employment anti-discrimination laws, 95 Feedback, positive, 12 Feedstock costs, fluctuations in, 1 FEP, see Fluorinated ethylene-propylene Financial statements, 111 Flame-resistant formulations, 48 Fluorinated ethylene-propylene (FEP), 37, 38 Food and Drug Administration (FDA), 45 Food packaging, 44 Ford, 46 Frivolous lawsuits, 79 Functional organization, 61

G GDP, see Gross domestic product Gender discrimination lawsuits, 94 General Electric, 71, 94 corporate structure, 134 Lexan polycarbonate, 75 Polymerland, 118, 139 General Motors, 22, 46 Geographic area management, 128 Geographic organization, 63 Germany corporate governance model used in, 67 culture, 68 GHA Plastics, 135 Global compounding, 134 Global marketing, 128 Globe-spanning companies, 77

TX68837_frame_Index Page 153 Monday, August 26, 2002 6:56 AM

153

Index

Goal(s) setting, responsibility for, 10 stretch, 11 Golden handshakes, 122 Government law, violation of, 93 Grant back, licenses involving, 117 Greenfield plant, 136 Gross domestic product (GDP), 1

H Hoechst, 56 Homopolymer, DuPont rival for, 131 Honda, 47 HR, see Human resources Human capital, 121 Human resources (HR), 78 Husky Corporation, 143 Hybrid organization, 64 Hypothesis, testing of, 2

I Illegal activities, 65 Incompetence, people promoted to level of, 92 Industrial components, 50 Industrial Revolution, 99 Industry segments, foundations of, 17–31 compounding, 22–24 e-commerce, 24 geographic dispersion for customer focus, 24 supplier relationships, 23–24 technology, 22–23 distribution, 24–28 customer relationships, 25–26 effects of e-commerce, 27–28 geographic dispersion, 27 supplier relationships, 26 equipment, additives, and other, 29–31 critical mass, 30 customer relationships, 31 technology, 29–30 polymer manufacturing, 17–22 routes to market, 20–21 scale and integration, 19–20 technology, 18 processing, 28–29

customer relationships, 28–29 technology, 28 Inflation rates, 108 Information confidential, 87 return on investment, 110 technology (IT), 77, 119 In-house seminars, 90 Injection molding, 28 Integrated manufacturing, 144 Integrated production, risks to, 19 Internet, 21 bulletin boards, 81 companies, liquidated, 14 effort of Polymerland to convert customer interface to, 140 hype about, 47 promoting use of, 140 selling directly to customers via, 27 Interpersonal relationships, entrepreneurial company, 55 Intrapreneuring, 58 Inventory disposal of slow-moving, 80 levels, 69 management, just-in-time, 29 ISO 9000 certification, 76 ISO 14000 environmental standards, 5 IT, see Information technology

J Japanese consumer goods companies, 131 Job enrichment, 88 Joint ventures, see Acquisitions, joint ventures, and divestitures Just-in-time customers, 24 Just-in-time deliveries, 122 Just-in-time inventory management, 29

K Kanban, 29 Kawasaki, 134 Knowledge workers, 64, 71 Kraton thermoplastic elastomer compounds, 26

TX68837_frame_Index Page 154 Monday, August 26, 2002 6:56 AM

154

Strategic Management for the Plastics Industry

L

performance appraisal, 11–12 profitability, 13–15 styles, 64 supply-chain, 21 tools, see Tools for management Manager(s) compensation goals, 122 repotted, 122 Managerial culture, 56 Managing for success, 69–80 managing costs, 79–80 managing and integrating functions, 71–79 administration, 78–79 manufacturing, 76–78 research and development, 73–74 sales and marketing, 74–76 planning for success, 69–71 Mannesmann AG, companies acquired by, 30 Manufacturers contract, 29 overseas, 127 Manufacturing capacity, 117 expansions, 135 integrated, 144 polymer, 17 Market(s), see also Technologies and markets, business operation shaped by access, 116 aerospace, 51 -clearing level, products priced at, 58 end-use, favorite, 47 -focused companies, 63 intelligence, 113 major, 43 medical, 50 military, 51 organization, 62 -organized company, focal point of, 62 overseas, favorite route to, 116 packaging, 44 position, 101 research, 73, 112 segments, limited number of, 8 suppliers existing in highly competitive, 31 Marketing Asian, 132

Labor peace, 68 Lawsuits age discrimination, 94 American, 59 frivolous, 79 gender discrimination, 94 patent, 40 race discrimination, 94 Layoffs, due to restructuring, 94 LCPs, see Liquid crystal polymers Leadership by example, 12 Licenses, grant back, 117 Lifetime employment, 5 Limiting temperature index (LTI), 48 Liquid crystal polymers (LCPs), 34, 138 Liquid Nitrogen Processing (LNP), 134 business strategy, 135 Engineering Plastics, 118, 137 parent holding company, 135 LNP, see Liquid Nitrogen Processing Logistic costs, 19 Lone wolf personalities, 85 Loyalty corporate, 97 need for, 13 LTI, see Limiting temperature index

M Machinery manufacturers, 110 Make-or-buy situation, 40 Management competitors’, strategies revealed by, 114 ego, investments in, 105, 106 error, 8 geographic area, 128 guiding principles, 7 ignoring of culture, 53 information, 78 performance problem of, 12 positions, personalities found in, 7 responsibilities, 7–15 business organization, 8 change, 8–10 company goals, 10–11 leading by example, 12–13

TX68837_frame_Index Page 155 Monday, August 26, 2002 6:56 AM

155

Index

efforts, insufficiently focused, 9 global, 128 integration of technology and, 73 program, Nypro, 141 savvy, 74 strength, patented technology for, 136 technical, 74 Marketplace, detection of changes in, 20 Material safety data sheets (MSDSs), 25, 42 Mazda, 47 MBA studies, comprehensiveness of, 83 Medical market, recession proof, 50 Medieval army command mentality, 7 Metallocene catalysts, 18 Me-too efforts, 28 Micromanagement, 3, 11, 89 Military markets, 51 Million Dollar Partnerships, 141 Mitsubishi Engineering Plastics, 131 Mitsui Chemicals, 132 Model, corporate governance, 67 Modified Plastics, Inc., 138 Monomer-to-polymer production, 19 Monopolies, 8 Monsanto, 56 Morale, 94 Motorola, 141 MSDSs, see Material safety data sheets

Leadership Institute, 142 marketing program, 141

O Objectives, failures to prioritize, 3 OEMs, see Original equipment manufacturers One-stop shopping, 40 Opportunity cost, 101 Order processing, 21 Organization functional, 61 geographic, 63 hybrid, 64 lacking trust, 13 market, 62 need for loyalty, 13 product, 61 Original equipment manufacturers (OEMs), 24, 28 OSi Specialties, 30 Outplacement counseling, 94 Overqualified applicants, 83 Overseas manufacturers, 127 Overseas markets, favorite route to, 116 Overseas operations, companies with, 67 Ownership cultures reflecting characteristics of, 55 stability, 134

N

P

NAFTA, see North American Free Trade Association National Labor Relations Board, 99 National Sanitation Foundation (NSF), 45 NEBIT, see Net earnings before interest and taxes Net earnings, 102 Net earnings before interest and taxes (NEBIT), 108 Nissan, 47 Non-compete agreements, 87 Nonprofit companies, 13 North American Free Trade Association (NAFTA), 49, 136 NSF, see National Sanitation Foundation Nypro, 140

Packaging containers, thin-walled, 143 market, 44 specialty, 50, 103 Patent(s) holders, monopoly of, 41 lawsuits, 40 licensing of, 41 Payroll, 13 PBT, see Polybutylene terephthalate PC, see Polycarbonate PEEK, see Polyetheretherketone Perfluoroxyalkoxy (PFA), 38 Performance reviews, 91, 93 Personality(ies) lone wolf, 85

TX68837_frame_Index Page 156 Monday, August 26, 2002 6:56 AM

156

Strategic Management for the Plastics Industry

mixture of found in management positions, 7 traits, 85 Personnel junior, 20 non-professional, 98 replacement of problem, 119 temporary, 96 PET, see Polyethylene terephthalate Peter Principle, ignoring of, 92 Petrochemical subsidiaries, 57 PFA, see Perfluoroxyalkoxy Phillips, 127 Philosophy, “do as I say not as I do,” 12 Plant maintenance, contracted out, 96 Plastics industry, most capital-intensive segment of, 17 PMP, see Polymethylpentene-1 Polaroid Corporation, 49 Polybutylene terephthalate (PBT), 223, 130 Polycarbonate (PC), 23, 34, 46, 75 Polyetheretherketone (PEEK), 20, 34, 132 Polyethylene terephthalate (PET), 44, 143 Polymer(s) commodity, 19 manufacturing, 17, 107 producers direct sales used by, 20 European, 59 restructuring at, 26 products, commodity, 34 volume and revenue, 36 Polymerland, 139, 140 Polymethylpentene-1 (PMP), 38, 45 Polyolefins, 19, 57, 129 Polystyrene, flame-retardant, 22 Polytetrafluoroethylene (PTFE), 38, 39, 134 Polyurethanes (PUR), 34 Polyvinyl chloride (PVC), 42, 44 Press announcements, 19 Price -fixing, 66 relationship of volume vs., 35 Pricing differential, 21 value, 145 Private business ownership, 13 Privately held firms, boards of, 67

Private network, 21 Problem-solving, 86 Processing equipment, 39 principal forms of, 44 Product(s) average life cycle of, 145 category checklist, 106 developmental, 105 introductions, 102 line(s) effect of verbund on, 130 mature, 123 regional distributor, 121 revisions, 80 method of categorizing, 105 organization, 61 recognition, 75 sales revenue, 102 specifications, 73 Today’s Breadwinner, 104, 105, 106 Tomorrow’s Breadwinner, 104, 105, 106 Yesterday’s Breadwinner, 104, 105, 106 Production, contracted out, 96 Profit highest total gross, 39 margins, strains on, 1 Profitability analysis, current, 103 commodities struggling with, 129 improving, 63 major factor in, 23 potential, 104, 107 Project teams, short-term purpose of, 72 Promotions, 92 Proprietary processor-end users, 48 PTFE, see Polytetrafluoroethylene Public domain, 40 Publicly held company, 111 PUR, see Polyurethanes Purchase contract, 76 PVC, see Polyvinyl chloride

Q Quasi-government cultures, 55

TX68837_frame_Index Page 157 Monday, August 26, 2002 6:56 AM

Index

R Race discrimination lawsuits, 94 R&D, see Research and development Reaction injection modeling (RIM), 43 Recruiters, company, 85 Reducing unit costs by spreading, 115 Regional compounding, 138 Repotted managers, 122 Research and development (R&D), 37, 72, 127 carte blanche of, 73 commodity producer, 37 inability to pay for, 58 joint ventures, 123 product units incorporating sales and marketing and, 62 seeking people for, 82 Resources assigning of, 106 waste of, 146 Responsibility, sharing of, 11 Restructuring corporate loyalty in days of, 97 layoffs due to, 94 Retention, 97 Retroactive discounts, customer demand for, 76 Return on investment information, 110 Review data, drawback of common, 91 RIM, see Reaction injection modeling Rotomolder, 39

S Salary reviews, 91 structure, 90 Sales direct, 20 growth S curve, 104 profitable, 14 representative, 20, 37 transaction costs, 103 SAN, see Styrene acrylonitrile Scandals, 15 Schmoozing, 25 Scientific method creativity characteristic of, 146

157 value of, 2 wishful thinking and, 3 SCM, see Supply-chain management Self-confidence, 86 Self-worth, 6 Selling incremental barrels, 14 Semi-commodity(ies), 1 business, 33 companies, 38 sales representatives, 37 Service -oriented activities, 4 transaction costs, 103 Shared-decision style, 145 Share the pain approach, 95 Shell Oil, 130, 138 SIC codes, see U.S. Department of Labor Standard Industry Classification codes Silicon Valley, 27 Six Sigma, 76, 141 Socialists, 13 Spare parts, as form of inventory, 80 Specialty packaging, 50, 103 Speed-of-delivery, 40 Staffing for success, 81–99 compensation and reviews, 90–92 firing and personnel layoffs, 93–96 plant and laboratory non-professional personnel, 97–99 promotions, 92–93 recruiting, 81–87 education, 83–84 employment agreements, 86–87 experience, 84–85 personality traits, 85–86 references, 86 retention, 97 training, 88–90 continuing education, 89–90 job enrichment and rotation, 88–89 using temporary and other nonemployee personnel, 96–97 Stepchild company, 124 Stockholders best interests of, 7 dealing ethically with, 15 Stock market, 120 Stretch goals, 11 Style, shared-decision, 145 Styrene acrylonitrile (SAN), 34

TX68837_frame_Index Page 158 Monday, August 26, 2002 6:56 AM

158

Strategic Management for the Plastics Industry

Sumitomo Chemical, 131 Summary, 145–146 Super distributor, 121 Supplier customers on loan from, 25 relationships, 23, 26 Supply-chain management (SCM), 21, 77

Tools for management, 101–114 benchmarks for allocation of costs, 107–110 compounder, 108–109 distributor, 109 machinery manufacturer, 110 polymer manufacturing, 107–108 processor, 110 business analysis, 101–107 assigning resources, 106–107 current relative profitability, 102–104 relative profitability potential, 104–106 measuring results, 111–114 achievements vs. planned goals, 111 competitive rankings and analyses, 113–114 customer satisfaction, 112–113 financial statements and stock valuation, 111–112 Total Quality Management (TQM), 76 Toyota, 47 TPE compounds, see Thermoplastic elastomer (TPE) compounds TPUs, see Thermoplastic high performance grades TQM, see Total Quality Management Trade associations, 114 secret, 23, 41 Troubleshooting system, automated telephone, 26 Trucking, contracted out, 96 Trustworthy relationships, importance of, 59 Tuition reimbursement, 89 Turnover, reasons for, 85

T Tax-sheltered earnings, 140 Team spirit, 97 Technical marketing, 74 Technologies and markets, business operation shaped by, 33–51 markets, 42–51 automotive, 46–47 construction, 45–46 consumer goods, 49–50 electrical/electronic, 47–48 industrial components and semifinished shapes, 50 other, 50–51 packaging, 44–45 technologies, 33–42 materials, 33–39 patents, trade secrets, and licensing, 40–41 processing equipment, 39–40 regulatory and environmental issues, 41–42 Technology access to, 117 constant evolution of, 89 critical elements of, 18 cultures, 58 integration of marketing and, 73 patented, 136 Teflon, 135 Temporary personnel, stereotype, 96 Thermoforming, 28 Thermoplastic(s), 33 elastomer (TPE) compounds, 26 high performance grades (TPUs), 34 Thermosetting materials, recycling of, 42 Thin-walled packaging containers, 143 Timeliness, 59 Today’s Breadwinner, 104, 105, 106 Tomorrow’s Breadwinner, 104, 105, 106

U UL, see Underwriters Laboratories Underwriters Laboratories (UL), 45 Unions, 98, 99 Uniroyal Chemical, 30 Universities, cooperative programs, 84 Urgency, 59 USDA, see U.S. Department of Agriculture

TX68837_frame_Index Page 159 Monday, August 26, 2002 6:56 AM

159

Index

U.S. Department of Agriculture (USDA), 45 U.S. Department of Labor Standard Industry Classification (SIC) codes, 43 U.S. Government, doing business with, 51 Us-vs.-them mentality, 91

Vertical sector acquisitions, 118 Victrex, 118, 132 Vision, 70 Vorstand, 67

W Wacker Chemie, 131 Whistleblowers, 65

V Value pricing, 145 Vendors competitors’, 113 dealing ethically with, 15 Verbund, 130

Y Yesterday’s Breadwinner, 104, 105, 106 Y2K problem, 47

TX68837_frame_Index Page 160 Monday, August 26, 2002 6:56 AM