- An EU Draft White Paper has been issued which proposes to impose more stringent regulations on the industry in an attempt to create a non–toxic environment by preventing dangerous chemicals entering the market. It is a very controversial proposal in which the industry is opposed to because of its impractibility. (Keynote – The Chemical Industry, 2001)
- The Climate Change Levy has been introduced supposedly to protect the environment but is generally regarded by the industry as an additional tax. (Keynote – The Chemical Industry 2001)
Porters Five Forces.
This analysis examines the forces that influence an organisation, including suppliers, buyers and new entrants to the market. The objective of Porters study is to use it to develop the competitive advantage of the organisation to enable it to defeat its rival companies. (Lynch, 2000)
Appendix 2 shows the forces that influence the speciality chemical industry.
In terms of the chemical industry the bargaining power of suppliers is moderate to low. Suppliers are the organisations that provide the raw materials needed in order to make the final good. The main reasons for low bargaining power include that there are suppliers available to the company from multiple suppliers from all over the world; there is little possibility of the suppliers integrating forward (when an organisation acquires the activities of its outputs. Lynch, 2000) as they are generally small companies. Barriers to entry into the chemical industry include high set up costs and high levels of investment; it is likely such small companies could afford this when large key players are struggling with these costs.
The bargaining power of buyers (buyers being the customers of the organisation) is moderate also; this could be due to an overcrowded market. Products are specialised and therefore are unlikely to be easily replaced by substitutes. Buyers switching to an alternative supplier would incur high costs, and also run the risk of failure if the alternative product does not meet their needs. The threat of backward integration is unlikely. This when the buyer takes over the role of the organisation. (Lynch, 2000)
Entry barriers to new companies are high, thus making the threat of new entrants low. New entrants may be attracted to the market because of the high profit margins. As mentioned before the market is already overcrowded and very competitive. Threat of new entries is low due to economies of scale, high initial fixed costs and investments, brand loyalty of customers. Relationships between suppliers and companies that are already formed are also considered a barrier to entry. Branding and consumer knowledge will also make it harder for new entrants to succeed – they may have to spend more or simply wait longer to become established.
The threat of substitutes is high. Substitutes generally do not replace existing products but introduce new technology or reduce the costs of producing the same product. (Lynch, 2000) Threat is high, but can be overcome as due to high R&D investments within the industry, a product that is coming to the end of the life-cycle will have been replaced by a new and improved product. Close relationships between customers and company’s exist so problems with products are likely to be discussed so see if alternative products can be used so that replacement products from alternative companies do not have to be used – brand loyalty. By providing an extra aspect such as after sales may also prevent switching.
Competitive rivalry is relatively high. This is because there are many players within the market, roughly the same size. When one competitor decides to gain share rivalry increases significantly, however in the chemical industry, smaller competitors can be stopped in gaining competitive advantage by the larger dominant firms. Slow market growth means that sales must be found somewhere – more often than not, this is from competitors, thus increasing rivalry. Industries such as the chemical can not add small increments of capacity and therefore has to build new plants. Companies may then fill extra capacity by reducing prices. (Lynch, 2000). Finally barriers for exit are high also such as high redundancy costs and the cost of closing plants.
Overall, the bargaining power of suppliers is moderate/low as is that of buyers, although both are vital to the success of the company, and hold a relative amount of power. The threat of new entrants into the industry is low, this is mainly due to an already overcrowded market, and initial high costs. Substitutes and competitive rivalry within the industry is high, it is therefore important that companies maintain good relationships with all their customers whilst offering products that are differentiated, value added and that irreplaceable.
COMPANY ANALYSIS
Value Chain Analysis
Developed by Michael Porter, Value Chain Analysis is a ‘systematic way of studying the direct and support activities undertaken by a firm’ (Thompson, 1990.) It identifies where the value is added in an organisation an links the process with the main functional parts of the organisation. It is used for developing competitive advantage because such chains are unique to an organisation. (Lynch, 2000)
Primary Activities
Inbound Logistics
Inbound logistics is concerned with issues such as suppliers, storage and distribution within the company. ICI rely on a small number of suppliers for raw materials, mainly from the agricultural and chemical sectors, and also from the mining sector. Materials are generally available from multiple suppliers, however, if any of these suppliers were to raise prices or unable to meet demand, the Group might not be able to find a replacement supplier, therefore would be forced to pay the higher price. This in turn may result in increased prices for finished goods. It is group policy to use all raw materials efficiently, and any transfer of products internally is done so at external market prices. ICI is also committed to working with suppliers to minimise impact on the environmental.
A recently restructured and redesigned e-supply chain has meant that ICI negotiate contracts globally through use of the Internet.
Operations
Operations are concerned with issues affecting the production area. The Group currently owns over 200 manufacturing sites (Annual Report 2001). They are however, committed to reducing costs throughout the whole organisation therefore there has been closures of loss making stores, and surplus manufacturing sites. The group is also trying to be more energy efficient per tonne of production. (They are aiming to reduce this.)
A Product Stewardship Program has been developed which has effect on impact of production. The program has outlined product regulatory requirements, societal pressures, reduces the risk of harm to people and the environment
The groups SHE strategy is concerned with the safety, health and the environment of its people and products. Some aims of the programme include reducing workplace injuries by 50% ().
Outbound Logistics
Outbound logistics are how the final products are distributed to the customers. Product Stewardship Program ICI provides the relevant information to enable correct usage and disposal of products. The successful use of the Internet in the Paint division has meant that National Starch has now introduced it. As well as lowering costs for the Group, it enhances customer service levels. The Group is committed to focussing on major customers (a customer orientated supplier) which has resulted in a strengthened product pipeline with global companies.
Marketing and Sales
Marketing and sales analyse customers wants and needs and how products are brought to the attention of consumers. Products are sold through an extensive network of subsidiaries, associates and distributors. Quest, National Starch and Performance Specialities are sold mainly by direct sales forces, distributors and alliances. Paints are sold through a range of distribution channels including independent retailers and stores, and the Groups own retail premises. Coatings for cans in the food and beverage sector are supplied directly to the manufacturer. Regional and Industrial businesses market their products directly or through independent merchants, wholesalers and distributors.
There a high degree of competition in the marketing of products world wide so it is likely that the main communication methods used by the company are personal selling by sales force, trade associations and shows, direct marketing and advertising in business publications and in horizontal and vertical publications. (Hutt, 2000)
Support Activities
Procurement
ICI has controlled access to online catalogues of their approved suppliers. With terms and conditions already pre-agreed, ICI’s buyers can easily log on and make any necessary purchases in real -time, whether they are in the UK or overseas. The US Paint division use a program called Aspen Buy to automate the procurement process and source raw materials via the Internet for its US operations. ‘For the first time in the chemicals industry, this Internet-based procurement solution goes beyond basic online transactions to include the important collaborative business process, vendor managed inventory (VMI). VMI will enable ICI Paints to work in partnership with its key suppliers to achieve maximum efficiency in the supply chain.’ ()
Human Resource Management
The company’s vision is based upon inspiring and developing outstanding people and is therefore committed to equal opportunities and cultural diversity. A Company Code of Business Conduct was launched in 2000, and states that company policy is to ‘treat individuals in all aspects of employment solely on the basis of ability irrespective of race, religion, colour, age, disability, gender, sexual orientation or martial status.’ The company also strongly believes that knowledgeable and well informed employees are essential to its success and there should be channels of communication and opportunities for consultation and dialogue on issues that affect business performance and employees working lives. (Annual Report, 2001)
ICI has introduced a human resources information system (HRIS) programme aimed at significantly improving people processes. The HRIS programme is closely aligned with ICI's business improvement plans for overall HR processes. It is not centred on administrative HR metrics but is core to ICI's forward thinking in HR to deliver real improvement in the key HR process areas such as Performance Management, Learning and Education and Reward Management. In particular the competency management programme will guarantee effective management of all ICI businesses and ensure career development for every one of its employees. Management level support has been crucial to the success of the project. Widespread support and funding from HR Directors within ICI's international businesses have been instrumental in seeing this project towards its ultimate conclusion -- a global roll-out of PeopleSoft HRMS. ()
Technological Development
Each of the four business units is responsible for its own R&D resources and for driving innovation to meet the needs of its consumers. R&D teams are complemented by a central R&D resource that aims to provide world class capabilities that are more common to most businesses. The Groups distributed technology network draws on expertise across the company allowing new products and processes to be developed more rapidly.
The groups prime technology areas include biosciences, chemistry and catalysts and materials. They are committed to innovation with lower environmental impact, as this is a key aspect of sustaining competitive advantage.
Core Competencies
- Innovation and new product development.
- The use of technology effectively throughout the whole organisation.
- The company’s commitment to sustainable development.
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Product Portfolio Analysis
The BCG Matrix is a means of analysing the balance of an organisations product portfolio. The factors defining products strategic placing in the market place is through relative market share and market growth rate. (Lynch, 2000)
The percentage of market growth and relative market share for each of ICI’s groups has been assumed through the Annual Report and Keynote figures available.
- Trading profit down from £75m in 2000, to £68m in 2001 (Annual Report 2001)
- Demand on the whole has remained strong
- Demand for products growing - 35% sales growth for the year (Annual Report 2001)
- 3.1% growth in the market ,(1999 – 2000) (Keynote – The Chemical Industry, 2001)
- Still have relatively low market share.
- Trading 12% behind 2000 figure (2000 - £245m, 2001 - £218)(Annual Report, 2001)
- Accounted for 29% of the groups sales (Table??), and is a global leader in a low growth market.
- Paint accounted for 35% of group sales (Table ??)
- Decline in market growth, but still market leader in many global markets
SWOT ANALYSIS
‘A SWOT analysis is the study of the strengths and weaknesses present internally in the organisation, coupled with the opportunities and threats that the organisation faces externally’ (Lynch 2000)
Key Points
- ICI is a name recognised throughout the world.
- A small number of suppliers are relied upon even though raw materials are generally widely available.
- In order to reduce costs, plants that were loosing the company money were closed, which resulted in inevitable job losses.
- The amount of debt the company is in has resulted in the threat of a credit down rating. The sale of Synetix and the rights issue will help reduce this risk.
- Funding shortfalls of the Groups pension scheme means that £30m contributions per year until 2006 are needed to cover these past shortfalls.
- ICI sold Teeside Gas Transportation Ltd and Teeside Power Ltd to Enron Teeside Operations Ltd. ICI received counter guarantees from Enron Corp for the guarantees it had given for certain contracts. Although the two companies still operate, Enron filled for bankruptcy in the US which means that ICI could be liable for guarantees worth an estimated £482m.
- There are opportunities in developing economies such as China, Latin America and India.
- The threat of war in Iraq and oil strikes in Venezuela has meant that the price of oil has increased, this is likely to have a knock on the price of raw materials.
- Tighter legislation such as the EU White Draft Paper, and the Climate Change Levy in the UK, and other laws throughout the world will end up seeing costs rising.
FINANCIAL ANALYSIS
Risk
Risk will be measured by the fundamental approach. This approach measures risk in terms of business risk, financial risk and total risk.
Business Risk
Business risk is the risk of the company not being able to cover fixed operating costs. The level of risk will vary depending on the industry. The chemical industry, being a capital intensive industry is likely to have business risk. Business risk is measured by Degree of Operating Leverage (DOL).
Financial Risk
Financial risk is the risk to the company of not being able to cover financial costs such as interest and lease payments. It also concerned with the way the company is funded. It stems from the use of debt, and the more debt used, the higher the financial risk. It is measured by Degree of Financial Leverage (DFL)
Total Risk
Total Risk is the risk to the shareholders that the company will be unable to cover both its operating and financial costs. It is measured by Degree of Total Leverage (DTL)
The key figure in measuring risk is 1. Leverage figures greater than one, indicate risk. Less than one signifies a lesser degree of risk (Appendix 3)
Table??
To summarise, 2000 saw an extremely high level of total risk to the business. As mentioned risk in the industry is expected to be high, however factors such as the major restructuring of the industry and the huge amounts of debt will have increased this figure. 2001 saw this figure dramatically cut. Reasons for this could be the completion of the restructuring, the divestment of holdings and an aim to cut costs.
Return
Performance analysis is used to maximise financial value of the business and as a result to maximise the wealth of shareholders. The two main criteria for performance analysis are operational efficiency – how effective day-to-day running of the company is, and financial efficiency – how the company is funded in the short and long term, and also how much debt and equity is used.
See Appendix 4 and 5 for 2000 and 2001 Dupont Analysis.
The above tables show that ICI’s performance in 2001 was worse than that in 2000. Debt increased, return on equity was down as was asset utilisation. 2002 should see improved figures due to the sale of Synetix and the rights issue.
Recent third quarter results show that the group is inline for ‘satisfactory’ full year results with £400m pre-tax profit compared to £205m same time last year. ()
Financial Ratios.
Stakeholder Analysis
Power/Interest Matrix
Level of Interest
Low High
High
Key
1 – Consumers 7 – Pressure Groups
2 – Employees 8 - Suppliers
3 – Shareholders 9 – Trade Unions
4 – Management / Directors 10 - Journalists
5 – Government 11- Distributors
6 – Financiers 12 – Society
‘The power/interest matrix provides valuable information on how to handle particular stakeholders and groups. It shows stakeholder power in terms of their ability to influence people and developments and also, to what extent the stakeholders will exert their power It can also indicate, if certain decisions will receive support or resistance, and which groups have to become included in the decision process. ‘
( )
Management/Directors are key players in the matrix as they hold the most the most powerful positions in the company; they make the decisions that effect everyone mentioned above. Employees are as important, they have a great deal of interest in the company for many reasons, job security being one of them. Individually employees have very little power, but when issues such as working conditions for example are an issue, together with the help from trade unions, their power increases dramatically.
Shareholders have a high level of interest in a company as they have invested money and are therefore looking for the company to perform to the best of its ability. They hold a relative amount of power. An example to illustrate this is the recent rights issue that the company issued. Without the support from shareholders, it is inevitable the amount of debt the company would be dramatically worse as would the company’s general performance.
The Government has a very high degree of power, yet is likely to have no major interest in the company as long as it is amongst other things, meeting legal requirements, paying taxes, and caring for the environment. Therefore it is important to keep them informed and satisfied of major corporate decisions.
Financiers such as banks will hold a relative amount of both power and interest. They have the power to stop future development if a loan is needed, and they will be interested in the company if they are owed money.
Finally it is important to keep journalists, pressure groups and society on the whole informed of company decisions as these groups all have the power to damage company reputation.
Current Strategies
Current strategies used by ICI today and in the past few years include:
Differentiation – products need to be innovative and unique from that of competitors in order to maintain competitive advantage.
- Economies of Scale – In a bid to drive down debt, costs at all levels have been cut.
- Withdrawal – The change to a speciality chemical business seen the withdrawal of many markets.
- Demerger – The Group decided to divest any businesses that were not consistent with speciality chemicals and products that add value in an aim to drive down debt.
- Product Development – Product development is vital to the company so that it can main competitive advantage by offering products that are differentiated from competitors.
Vision
To be the world leader in creating value driven by customer needs in its chosen markets.
As ICI has changed its strategy towards a profile of products that are designed to meet consumer needs, it must create value for money in order to make a profit. Shareholders are important, but they do not create sales therefore the vision should be directed at the people who matter most.
Mission
ICI will succeed by being number one in all our chosen markets. We will acquire unrivalled knowledge of our markets making us first choice for customers seeking innovative effects to add the vital touch to their products. The result will be greater benefit to our customers, higher return for shareholders and increased rewards for employees.
Goals
- Acquire unrivalled knowledge of our customers and markets though extensive research.
- Be proactive and seize opportunities rapidly, taking intelligent risks to bring superior products to the markets.
- Constantly improve operational efficiency by driving down costs to
- Develop long-term relationships with customers, innovating to meet their needs and to create best value.
- Invest in growth markets and leading market positions.
- Pursue synergies across the Group.
Objectives
- Sales growth of at least 8% per annum
- Organic growth of 10% per annum
- 3% growth from bolt on acquisitions
- Reduce debt by at least 10% per annum
See Appendix 6 for table of strategic options.
As ICI have only just restructured the company, it is too early to judge whether suggested strategies have been a success. An evaluation of strategic options has been conducted however; most of the options that are suitable are already in place.
The strategy that was ranked 1st is differentiation. ICI must continue to innovate and produce products that differentiate the company from the rest of the industry. Investment into R&D into finding out what customers want and need, and then developing solutions is one way to overcome this.
The next popular strategy is ICI’s current one. As already mentioned, it has not been in place long enough to measure successes. Product development is concerned with improving and developing new products. This strategy came in 3rd. Fourth place was acquisition. As mentioned in the original and the revised objectives, acquisition of small bolt on companies is planned. In doing this ICI can continue to grow and develop differentiated value adding products.
The final options were low-cost leadership and cost reduction. In an attempt to reduce costs with the aim to clear debt and increase profits, the Group must be cost efficient and take out costs at all levels. Being a low-cost leader is consistent with the vision to be the world leader.
Overall the majority of these strategies are already in place, but it is too early to judge their success. It is important that these options are reviewed regularly so that ICI can fulfil its aim to be world leader.
Strategy Implementation
ICI has a multidivisional structure.
Advantages of such a structure include focus on business areas, ease of functional co-ordination problems and the measurement of divisional performance. Disadvantages on the other hand include expensive duplication of functions, divisions may compete against each other and there may be problems with central services.
ICI must encourage innovation by taking the time to publicise and take pride in achievements, provide support for innovation ideas, improve communications to bring people closer together. Power should be distributed amongst each division, and delegated throughout.
ICI should be aware of employee’s resistance to change. They can overcome this by involving everyone, building support networks, through communication and discussion, by offering assistance and incentives and also by encouraging and supporting those involved in the process.
Finally in order to have a consistent strategy, it is essential that:
- The strategy chosen is the right one for competitive success.
- The organisational structure is correct
- All the systems throughout the organisation use the correct procedures.
- The company conducts business in the same way throughout.
- The people who do this need to be developed, challenged and encouraged.
- That all staff have the skills needed.
- And finally, that everyone in the business share the same vision, purpose and culture.
These seven factors combine make up The ‘Seven S Framework.’
The Balanced Scorecard is a type of implementation that is a way of understand and checking what the Group has to do. The four key principles of the Balanced Scorecard are:
- Translating the vision.
- Communicating and linking.
- Business planningFeedback and learning
Table ??
Source: David Liddle, 2002
Recommendations
Overall ICI has repositioned its business towards higher added value sectors, with recent emphasis placed on cost reduction, working capital improvements and future growth.
As these strategies have only just been introduced, it is too early to say whether or not they have been successful. Third quarter results are indicating satisfactory performance.
In order for ICI to be a world leader, it must concentrate on its core competencies:
- Innovation and new product development.
- The use of technology effectively throughout the whole organisation.
- The company’s commitment to sustainable development.
The use of strategic options such as cost focus, differentiation, product development and acquisition are vital in achieving this.
As this is a new venture for ICI, currently there is a lack of synergies between units, and there does not appear to be no parenting advantage at the moment. Therefore ICI should use and evaluate the strategic options outlined for the next few years, and if this proves to be unsuccessful, should reconsider its venture into the speciality chemical business and stick to its core business.
