1566768837

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Strategic Managementfor the Plastics Industry

Roger F. Jones

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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 2002668.4'068—dc21 2002073734

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iii

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.

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Foreward

The Society of Plastics Engineers is pleased to sponsor

Strategic Managementfor the Plastics Industry

by Roger Jones, As Roger Jones points out in thisbook, the various types of companies that comprise the plastics industry areindeed diverse, both in size and corporate cultures. There is a vast differencebetween a machinery maker and the processor who uses the machinery—thereis also a huge difference beetween the giant polymer manufacturer and thesmall company that compounds the material or provides color match services.While there can be no "one size fits all" management structure that coversthe entire industry, this book provides a unique overview of successfulmanagement techniques based on years of experience within the plasticsindustry. The book also analyses and explains how and why business elementswithin the industry differ, and proposes practical, effective ways to deal withthe most common problems that face managers in each segment.

Anyone who is either struggling to manage a plastics company in today’sglobally competitive environment, or who aspires to move up into a manage-ment position should find this timely plastics industry-specific book invaluable.By studying and learning from successful, and unsuccessful, managementtechniques and experiences gleaned from the past and present, we can allreap the "benefit of someone else’s tuition bill" to quote Roger.

Many in our industry come from backgrounds of science and engineeringbut, to be truly successful today, equally proficient management skills arerequired to achieve corporate goals for growth and profitability, at the sametime satisfying the needs of all the stakeholders—stockholders, employees,customers, vendors and the community.

SPE, through its Technical Volumes Committee, has long sponsored bookson various aspects of plastics. Its involvement has ranged from identificationof needed volumes and recruitment of authors to peer review and approvaland publication of new books.

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Strategic Management for the Plastics Industry

Technical competence pervades all SPE activities, not only in the publicationof books but also in other areas, such as sponsorship of technical conferencesand educational programs.

Michael R. Cappelletti

Executive Director Society of Plastics EngineersTechnical Volumes Committee:Vaman Kulkarni, ChairpersonIsobel Wayrick, ReviewerGR Technical Services, Inc.

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Preface

This book is written for a broad audience in the plastics industry, includingaspiring professionals who wish to become managers, managers already inplace who wish to round out their skills, consultants to the industry, anduniversity students and faculty in plastics engineering and polymer chemistrydepartments. It is meant to be applicable to managing companies throughoutthe wide range of sizes that comprise this industry. In the book, I use theterm

manager

rather than

executive

because I believe the word is moreinclusive. I define managers as including department heads as well as companyofficers (whom I consider to be executives). Additionally, managers directother managers, while supervisors direct individual workers and professionals.The term

management

refers to the management group as directed by andincluding the senior executives and chief executive officer (CEO). Most of thematerial presented here is directed toward management, but some is stillapplicable to first-level supervision, though this is not the intended audience.A number of general management topics are discussed within the overallcontext of management in the plastics industry. The reader who will benefitmost has at least some passing familiarity with supervising others.

For purposes of this book, the term

plastics industry

is defined as referringto the development, manufacture, compounding, and distribution of plasticsmaterials and their processing or fabrication into items. Polymer processingmachinery, additives, and other suppliers to the industry are described insomewhat less detail due to the enormous variety of firms comprising thisfield and the fact that their involvement in plastics is frequently as divisionsor business units of corporations whose main business is

not

plastics. Thisstructure was a necessary compromise in order to keep the book from beingoverly broad and within the limits of my own knowledge. The materialpresented is based on my experience, extensive research, and interviews withmanagers throughout the industry. A bibliography is included that lists someof my favorite management books and a number of my own publications that

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provide more extensive background information for some of the topics thatappear in this book.

I recognize that the plastics industry is in the midst of dramatic and painfulchanges due to the impact of increasingly globalized competition as well asan unusually strong, simultaneous slowing of the world economy. While thesefactors are speeding up the rate of change, they do not overturn the funda-mental principles of how to manage successfully in the plastics industry.

In general, I have tried to describe typical situations while noting some ofthe more interesting and important exceptions. For some of the more egregiousmanagement errors noted, the names of the companies involved are omittedbut the incidents were real. The case histories are based on interviews withsenior executives in the respective companies who were willing to be inter-viewed and illustrate some examples of successful management in the industry.

Roger F. Jones

Broomall, PA

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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 writethis book. Without this help, I would not have been able to complete thework and it certainly would be far less comprehensive and thoughtful. Amongthem (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 professionalmanager and who has been kind enough to permit me to quote from hiswork; the many people who agreed to be interviewed and share their expe-riences and opinions, including Jun Aranami and Yuzo Nishiguchi (AsahiKasei), 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 promotedme to my first general management position and taught me a great deal aboutgeneral management; and my father, Franklin D. Jones (Amchem), whoseinspiration and example led me to become a scientist

and

a businessman. Iowe special thanks to Peter Lantos (The Target Group), Ken Dargis (retiredfrom Montell), and Ken Hammond (retired from DuPont), industry friendswho reviewed my manuscript and whose comments resulted in importantadditions to my work. A great many other friends, associates, and formersuperiors helped to shape and influence my understanding of what it takesto 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 mydear wife, Caryl, who ensured that I had the necessary personal space andtime in my home office to write this book.

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About the Author

Roger Franklin Jones’ 40-plus year career in theplastics industry has covered a broad range of busi-ness and management functions as well as types ofcompanies. He began with polymer producers, intechnical positions in manufacturing and processdevelopment at DuPont (nylon intermediates) andARCO Chemical (LDPE formulations), then productdevelopment and marketing at Avisun (polypropy-lene resin, film, and fiber), a joint venture of Amer-ican Viscose and Sun Oil that was eventually soldto Amoco Chemicals.

He next joined LNP Engineering Plastics, a smallbut rapidly growing independent compounder, and moved up through mar-keting and international operations management positions to COO, where hedirected the rescue of the firm from incipient bankruptcy and then its dramaticgrowth into the largest independent proprietary compounder in the world.After Beatrice Foods Co. acquired LNP, he was double-hatted as LNP presidentand group executive in Beatrice’s Chemicals Division with responsibility forLNP and two other companies: Dri-Print Foils (decorating foils) and ThoroSystem Products (specialty construction materials). He next joined a leveragedbuyout consortium as managing partner to acquire ailing Inolex ChemicalCompany, a manufacturer of plasticizers and urethane polyols, from AmericanCan Company; he became its chairman and president. After restoring thecompany to profitability, he sold his interests in Inolex and was appointedmanaging director, BASF Corporation Engineering Plastics, to direct a grass-roots business start-up that included acetal, nylon 6, PBT production facilities,a compounding plant, and a technical service center. He was also the firstBASF executive to apply cutting-edge computer technology to obtain man-agement information that went beyond simple accounting and sales reports.From BASF, he founded Franklin Polymers, Inc., an engineering and specialtyplastics distribution and marketing/management consulting firm; he sold its

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distribution business in 2000 and transferred the consulting business to anotherstart-up company, Franklin International, LLC, where he is its president.

Mr. Jones received a B.Sc. with Honors in Chemistry and Honorable Mentionin English Literature from Haverford College. At the graduate level, he studiedbusiness administration at the University of Pennsylvania’s Wharton School.He has also completed language studies in German, French, Spanish, andPortuguese.

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 ofHanser’s

A Guide to Short Fiber Reinforced Plastics

(1998). He was a consultingeditor for Technomic Publishing and now for CRC Press. His honors includethe Honor Scroll of the American Institute of Chemists and election as a Fellowof 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 iscurrently serving as chairman of SPE’s Marketing and Management Divisionboard of directors. He is an Emeritus Member of Sigma Xi (the scientificresearch society) and the American Chemical Society. He is a Life Fellow ofthe American Institute of Chemists (past offices include National Secretary,National Board Vice Chairman, Pennsylvania Institute President, PhiladelphiaChapter Chairman). He has been a guest lecturer at the Universities ofDelaware, Toronto, Wisconsin, and Winona State (Minnesota), The PackagingInstitute, and the Plastics Institutes of England and Australia.

Soon after college graduation, he served as an officer in the United StatesNavy on active duty for three years at the end of the Korean War. He continueda professional and management career in the Naval Reserve for an additional30 years, retiring with the rank of captain. In the course of his naval service,he received two Navy Commendation Medals, a Letter of Commendationfrom the Secretary of the Navy, and a Meritorious Service Award from theCommander, Naval Security Group. He was selected to command navalreserve units five times and to serve on admirals’ staffs twice. He holds aCertificate in Foreign Relations from the National War College and completedsenior officer courses at the Defense Intelligence School and the NationalSecurity Agency.

Mr. Jones captained his college fencing team, was a member of U.S. NationalTeams participating in two World Fencing Championships, and an alternateon the 1956 Olympic Team. He won numerous collegiate and U.S. amateurfencing titles, and he gained management experience as chairman of thePhiladelphia and Western New York divisions, vice president of the U.S.Fencing Association, and Chairman of the National Rules Committee. For manyyears he was tournament director of the Middle Atlantic Collegiate FencingAssociation.

Mr. Jones is married to Caryl Jeanne Reisgen Jones. They have three adultchildren and eight grandchildren. Mr. Jones’ father, Franklin D. Jones, ScD(Hon), was a chemical engineer who pioneered the discovery and develop-ment of plant hormones in the 1930s and 1940s.

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Contents

1 Introduction

..................................................................................... 11.1 Why a Management Book for the Plastics Industry? ............. 11.2 Management as a Career .......................................................... 31.3 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 .................................... 81.3.3 Develop Company Goals and Get Everyone

Onboard with the Plan ................................................ 101.3.4 Continuously Appraise Performance and Provide

Feedback ....................................................................... 111.3.5 Lead by Example.......................................................... 121.3.6 Ensure That the Business Is Increasingly Profitable .. 13

2 Foundations of the Industry’s Segments

................................. 172.1 Polymer Manufacturing ........................................................... 17

2.1.1 Technology.................................................................... 182.1.2 Scale and Integration ................................................... 192.1.3 Routes to Market .......................................................... 20

2.1.3.1 Direct Sales ..................................................... 202.1.3.2 Distributors ...................................................... 212.1.3.3 E-Commerce .................................................... 21

2.2 Compounding: Key Factors .................................................... 222.2.1 Technology.................................................................... 222.2.2 Supplier Relationships.................................................. 232.2.3 Geographic Dispersion for Customer Focus .............. 242.2.4 A Place for E-Commerce? ............................................ 24

2.3 Distribution: Key Factors......................................................... 242.3.1 Customer Relationships................................................ 252.3.2 Supplier Relationships.................................................. 262.3.3 Geographic Dispersion................................................. 272.3.4 Effects of E-Commerce................................................. 27

2.4 Processing: Key Factors .......................................................... 282.4.1 Technology.................................................................... 282.4.2 Customer Relationships................................................ 28

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2.5 Equipment, Additives, and Other........................................... 292.5.1 Technology.................................................................... 292.5.2 Critical Mass .................................................................. 302.5.3 Customer Relationships................................................ 31

3 Technologies and Markets Shape How a Business Is Run

... 333.1 Technologies ............................................................................ 33

3.1.1 Materials ........................................................................ 333.1.1.1 Commodity and Semi-Commodity

Materials........................................................... 343.1.1.2 High-Performance and Unique Materials ..... 373.1.1.3 Support Requirements .................................... 39

3.1.2 Processing Equipment.................................................. 393.1.2.1 Equipment Types: Opportunities

or Limitations? ................................................. 393.1.2.2 Full-Service vs. Specialist ............................... 40

3.1.3 Patents, Trade Secrets, and Licensing......................... 403.1.4 Regulatory and Environmental Issues......................... 41

3.2 Markets ..................................................................................... 423.2.1 Packaging ...................................................................... 443.2.2 Construction .................................................................. 453.2.3 Automotive.................................................................... 463.2.4 Electrical/Electronic ...................................................... 473.2.5 Consumer Goods.......................................................... 493.2.6 Industrial Components and Semi-Finished Shapes.... 503.2.7 Other.............................................................................. 50

4 Company Culture and Organization

......................................... 534.1 Size Matters — It Is Intertwined with Culture...................... 54

4.1.1 Entrepreneurial Culture ................................................ 554.1.2 Managerial Culture ....................................................... 564.1.3 Commodity Culture ...................................................... 574.1.4 Technology Culture ...................................................... 584.1.5 Nationality/Ethnic Culture............................................ 59

4.2 Tailoring Organizational Form to Business Needs ............... 604.2.1 Organizing by Function ............................................... 604.2.2 Organizing by Product ................................................. 614.2.3 Organizing by Market .................................................. 624.2.4 Organizing by Geography ........................................... 634.2.5 Hybrid Organizations ................................................... 64

4.3 Management Styles .................................................................. 644.4 Board of Directors ................................................................... 66

5 Managing for Success

................................................................... 695.1 Planning for Success ............................................................... 69

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xv

5.2 Managing and Integrating Functions...................................... 715.2.1 Research and Development......................................... 735.2.2 Sales and Marketing ..................................................... 745.2.3 Manufacturing ............................................................... 765.2.4 Administration............................................................... 78

5.3 Managing Costs........................................................................ 79

6 Staffing for Success

....................................................................... 816.1 Recruiting.................................................................................. 81

6.1.1 Education....................................................................... 836.1.2 Experience..................................................................... 846.1.3 Personality Traits .......................................................... 856.1.4 References ..................................................................... 866.1.5 Employment Agreements ............................................. 86

6.2 Training..................................................................................... 886.2.1 Job Enrichment and Rotation ...................................... 886.2.2 Continuing Education................................................... 89

6.3 Compensation and Reviews.................................................... 906.4 Promotions ............................................................................... 926.5 Firing and Personnel Layoffs .................................................. 936.6 Using Temporary and Other Non-Employee Personnel ...... 966.7 Retention .................................................................................. 976.8 Plant and Laboratory Non-Professional Personnel ............... 97

6.8.1 Unions ........................................................................... 98

7 Tools for Management

............................................................... 1017.1 Analyzing Your Business....................................................... 101

7.1.1 Current Relative Profitability...................................... 1027.1.2 Relative Profitability Potential.................................... 1047.1.3 Assigning Resources ................................................... 106

7.2 Benchmarks for Allocation of Costs .................................... 1077.2.1 Polymer Manufacturing .............................................. 1077.2.2 Compounder ............................................................... 1087.2.3 Distributor ................................................................... 1097.2.4 Processor ..................................................................... 1107.2.5 Machinery Manufacturer ............................................ 110

7.3 Measuring Your Results......................................................... 1117.3.1 Achievements vs. Planned Goals .............................. 1117.3.2 Financial Statements and Stock Valuation ................ 1117.3.3 Customer Satisfaction ................................................. 1127.3.4 Competitive Rankings and Analyses ......................... 113

8 The Role of Acquisitions, Joint Ventures, and Divestitures

........................................................................... 1158.1 Access to Markets .................................................................. 116

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8.2 Access to Technology............................................................ 1178.3 Manufacturing Capacity......................................................... 1178.4 Vertical Sector Acquisition .................................................... 1188.5 Successfully Integrating Acquisitions

into Existing Operations........................................................ 1188.6 When and How Not to Acquire........................................... 1198.7 Acquisitions vs. Joint Ventures ............................................. 1228.8 Divestitures............................................................................. 1238.9 The Challenges of Being Acquired ...................................... 124

8.9.1 Selling Your Company ............................................... 1248.9.2 Surprise! Your Company Has Been Sold.................. 125

9 Case Studies

.................................................................................. 1279.1 Polymer Manufacturing ......................................................... 127

9.1.1 BASF: Using Breadth of Product Line and Manufacturing Integration .................................. 1289.1.1.1 History of BASF ............................................ 1289.1.1.2 The Effect of

Verbund

(Integration) on Product Line ............................................ 130

9.1.2 Asahi Kasei: Targeted Technology............................ 1319.1.3 Victrex Plc: A One Product Company...................... 132

9.2 Compounding ........................................................................ 1329.2.1 LNP Engineering Plastics: Global Compounding..... 134

9.2.1.1 LNP’s History................................................. 1349.2.1.2 LNP’s Business Strategy: Focus

on Customer Needs...................................... 1359.2.1.3 Manufacturing Expansions ........................... 1359.2.1.4 Regional Management, Globally

Coordinated................................................... 1369.2.1.5 Patented Technology for Marketing

Strength.......................................................... 1369.2.2 Modified Plastics: Regional Compounding............... 138

9.2.2.1 Using a Time Zone against Larger Competitors ................................................... 138

9.3 Distribution............................................................................. 1399.3.1 Polymerland: Integrated Distribution ........................ 139

9.3.1.2 Using the Internet......................................... 1409.4 Processing............................................................................... 140

9.4.1 Nypro: Fewer Customers Equal More Sales............. 1409.4.1.1 How a Small Molder Became a Big One... 141

9.4.2 Certified Thermoplastics: Niche Processing ............. 1429.5 Equipment .............................................................................. 143

9.5.1 Husky Corporation: Molding Systems ...................... 1439.6 Common Threads .................................................................. 144

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10 Summary

....................................................................................... 145

Bibliography

......................................................................................... 147

Index

...................................................................................................... 149

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1

Chapter 1

Introduction

1.1 Why a Management Book for the Plastics Industry?

A great many excellent books on management are written from a generalstandpoint but none appear to deal with the specific conditions of the plasticsindustry. The plastics industry became a major part of the world economyduring the last half of the 20th century. In the United States, it is the fourthlargest sector of the national economy. Although the extensive industry restruc-turing that began in the 1990s led some to believe that plastics finally hadbecome a mature business, this is not an accurate characterization. No industrythat normally grows at multiples of the gross domestic product (GDP) andfinds new uses virtually every day meets the classic economic definition ofmaturity, which is something that has reached market saturation. Nevertheless,the plastics industry

is

being affected by the globalization of competition andthe unusually deep, prolonged, simultaneous worldwide economic slowingthat began in 2000, but these are conditions affecting nearly all manufacturingindustries. Continuing fluctuations in feedstock costs and deflationary pressureson selling prices of materials are putting heavy strains on profit margins, inaddition to the characteristic cyclicality that has been the bane of both thechemical and oil industries for many decades.

Indeed, the plastics industry is no longer a specialty business overall, andsome segments have become commodities. In fact, restructuring is being drivenby the transition of a number of former specialty segments into semi-com-modities. Management of each of these types of segments and the transitionsbetween them presents a number of challenges that differ significantly, aswell as differing from those found in truly mature materials industries thatgrow at the GDP rate or less. This book tries to highlight these differencesand how to deal with them effectively. Other plastics industry managementissues that differ importantly from more general treatments of managementtopics include the foundations of industry segments, the way product and

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2


process technology defines the business one is in, organization and staffing,and the effective use of patents and trade secrets. Some more general man-agement issues are also included to present the plastics concerns in a seamlessmatrix, as well as to indicate my point of reference.

Management is as much an art as it is a science. Although one can anddoes measure just how successful the management of an enterprise has beenvia financial analysis, the building blocks of the management process thatproduces these results are human relationships, which cannot be reliablyquantified. Even so, a number of management principles can be applied witha reasonable expectation of results. One may discover these principles andwhen to apply them through trial and error, or learn from the experience andinsight of others. The book will endeavor to explain which managementtechniques generally work and which do not, based on the observations andexperiences of many managers in the plastics industry. While most of thesetechniques are essentially timeless, the impact of such relatively recentadvances as globalization, the Internet, and information management is incor-porated 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 adear school, but fools will learn in no other.” To add to that thought, themost expensive mistakes are those made by senior executives. This book willtry to point out how to avoid making more egregious errors without becomingparanoid about making mistakes. It is surprising but readily observed thatsome specific errors seem to be repeated over and over again in the plasticsindustry, mainly in the areas of acquisitions, but also in transitions from onetype or size of business to another. It would seem that most of these seemingoversights stem either from ignorance or from oversized management ego.The most common or outstanding lapses will be analyzed in sufficient detailso 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 anyoneup to ridicule, because everyone makes mistakes in life. The author’s expec-tation is that you

learn

from your mistakes as well as those made by othersand do not repeat those mistakes blindly. As George Santayana told us, “Thosewho 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 engineerswho have learned the enormous value of the scientific method and to applyit to all aspects of their work. The scientific method calls for the thoroughtesting of a hypothesis both to prove and to disprove it before communicatingthe findings to colleagues for comment and criticism. Indeed, a hypothesiscannot be considered proven until other scientists and engineers have beenable to duplicate those same results through independent testing. The objec-tive, in all cases, is to establish an explanation of a finding and also the limitsof the understanding of those findings. The scientific method can and shouldbe applied in management wherever feasible, recognizing, of course, that thehuman factor will introduce variables that cannot be controlled. Therefore,results may be reproducible, say, only 70 times in 100 tries, but never 99 out


Introduction

3

of 100. It is critical to distinguish between assumptions based on anecdotaldata and the results of scientifically designed experiments to ensure thatcontrols have been used, that the number of data points is statistically mean-ingful, and that the results can be duplicated. This approach applies to lessonslearned from experience, most certainly. Anecdotal experience can be verymisleading and must be verified insofar as possible. Too often, a faddishmanagement or personnel technique has been adopted because a single or afew prior uses of it appear to have yielded positive results. Wishful thinkingis no substitute for the scientific method, under any circumstances. I havemade it a point to apply these principles as much as possible before recom-mending 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 cumbersomereading) really wants to become a manager before taking the plunge; doingso means quite a change in one’s work life.

First of all, unless you really enjoy working with other people, do not eventhink about a career in management. All of your results will be accomplishedby 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 effectiveone. Managers delegate tasks to others rather than doing those tasks them-selves. This frequently means learning to live with work done to less perfectstandards than if one had done the work personally. It also means that youmay need to give credit to subordinates for your own ideas, in order tomotivate 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 projectsthrough to completion, whereas a manager’s job is continuous for the mostpart, with few defined starts and finishes other than those set by the arbitrarydates of a fiscal year.

Third, being a manager will demand a personal commitment of much morethan 40 hours per week, especially in start-up or work-out (on the verge ofor 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 nightsand weekends. However, under normal conditions, it has been my ownexperience, as well as that of many others, that something is wrong with theapproach of managers who consistently work more than 60 to 80 hours perweek or fail to take regular vacations. Their problem likely results from oneor more of the following:

�

Doing their subordinates’ tasks for them (micromanaging)

�

Immersing themselves so deeply in details that they have trouble seeingthe overall picture of their company and the future direction charted

�

Failing to prioritize their objectives by making every task of equal importance


4


�

Failing to limit their list of objectives to those that are critical to successand can be done only by the manager

�

Seeking out and accommodating every point of view or splitting thedifference between them, rather than deciding on a single course of actionand 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 maketime for community involvement. For most people, their families are the mostimportant focus of their lives. It is virtually a cliché that someone on hisdeathbed is unlikely to bemoan not spending enough time in the office! Asin most things in life, moderation and balance are the keys to success.

Community involvement has at least two dimensions. The first is personaland what most people think of: charitable, religious, or other service-orientedactivities. This is something in which we all should participate, in somemeasure, as responsible members of our communities. It is part of the balancein life just mentioned.

The second dimension is business related and most certainly not to betaken as a casual add-on: acting as a community liaison. Companies in thechemicals and plastics industries are under constant fire from environmentalistand other activist groups, many of whom are simply anti-business. Fortunately,most of the materials used in the industry are of low toxicity — which, ofcourse, does not relieve management of its obligation to operate a safeworkplace. It is essential that management be a positive, visible factor incommunity relations and the concerns of its citizens. Remember that a numberof your employees are also likely to be members of the community. You owethem the opportunity to feel proud of where they work and what they do.

A proactive approach to community relations will establish a reservoir ofcredibility and goodwill that will help your business to grow, not to mentioncoping with activists’ attacks over the issue

du jour

. Most importantly, it isthe

right

thing to do; the surrounding residential community should

know ifany hazards to their well-being could result from an accident or improperoperation at your plant and how you will handle such a situation, and theyshould have a first-hand opportunity to assess your credibility in regard toyour assurance that you

will

take the proper steps immediately under suchcircumstances. Needless to say, you must ensure that the means exist to dealwith emergencies, and that they will be utilized. In the minds of members ofthe communities, emergencies can even include the emission of unpleasant(not necessarily toxic) odors. More than one company has tried to pass offan occasional stink as just something that should be accepted as the price ofliving near a plastics plant and then been set upon by regulatory authoritiesand attacked in lawsuits as a result of management’s apparently cavalier,arrogant attitude. On the other hand, if activists employ bad science andattempt to play on the fears and ignorance of the community about what thecompany does and its potential for endangerment of the community, man-agement must be willing to stand up and objectively rebut any misinformation,


Introduction

5

point by point, without responding to personal attacks in kind. The communitymay yet believe those attacks if management has not previously demonstratedand communicated the nature of its business and the precautions taken (suchas full compliance with all applicable government regulations, ResponsibleCare standards, and ISO 14000 environmental standards or putting into placefunctioning community liaison committees) to ensure safe and community-friendly operations. Losing money is not the only way to be put out of business.

Depending on economic cycles, your employer, and your personal goalsand achievements, you might expect to move into first-level management (pastsupervision) perhaps 5 to 7 years after entering the industry. Further movesup the ladder may come at intervals less subject to prediction and may requiregoing outside your current firm. The best opportunities are often with relativelynew companies, particularly ones that have a new technology. These situations,however, also have the most risk. The best time to take such risks is beforeyou have worked more than 10 to 12 years in the industry, particularly if youdo 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 wantor to recover from a choice that does not work out. If you are not gettingexposure to different functions within the company at a managerial level,discuss the situation with your supervisor. If the company cannot or will notfind such opportunities for you, this is another reason to change employers.

When I first moved from middle to senior management, the company wasin a financial crisis and a major change in company direction had to be madeimmediately or the company would fail. A number of managers get their startunder somewhat similar circumstances — another manager has made a messand it is yours to clean up

now

! You may or may not get a lot of help andbe offered a bewildering (and likely conflicting) array of solutions, but ulti-mately 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. Thismay not seem completely fair, but it is the nature of being a senior managerand you had best be prepared to accept such judgments if this is to be yourchosen career.

It is also wise to view a career in management as a series of steppingstones. No one should ever contemplate that his current position in manage-ment or with a company will last a lifetime. Not only are the days of lifetimeemployment gone forever, but other good reasons exist too. Professor WilliamMeldrum, my college chemistry advisor, once told me that “a good chemistchanges fields every ten years,” and I have found that to be a maxim of greatvalue in the course of my career, as well as from observing the careers ofothers. After ten years in a particular discipline or position, learning genuinelynew things becomes increasingly infrequent, as does making more and greatercontributions. When one becomes stale, it is time to move on. Change canrefresh, purge, and renew those who embrace it. It sweeps away those whoresist it. Always seek out new and greater challenges to meet, no matter whatyour age or status.


6


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 somethingmore than money. You can find great satisfaction in bringing a team together,challenging it to achieve high goals, and seeing it reach them. My greatestsense of accomplishment as a manager has come far more from helping manydifferent people to succeed and find fulfillment in their jobs while creatingthousands of satisfied users of my company’s products and services, than fromany 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 hassuch a broad and diversified involvement in the economy that there is nevera chance to be bored by the same old thing, day after day. Very little in theworld 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 dangerousto the well-being of the company. Have you seen such a CEO buy a companyjet in which to travel, although the company’s sites are in locations servedby scheduled airlines? Has such a CEO installed an opulent office with costlyartwork? The primary interests of these CEOs have diverged from those ofthe company and their subordinates. Beware when the boss’ face is on thecover of one or more business magazines; the team approach has been lostwhen the boss is taking credit for what the team has done. The best CEOsare not interested in promoting themselves but in promoting the companyand the team. The best CEOs do not spend money on their own gratificationbut on what helps the company and the team succeed. The worst types ofCEOs usually have a pattern of using people, in the unpleasant sense of theword — that is, taking credit for the success of others and passing off blamefor their own failures. If you find yourself working for one, get your résuméready — you will need it sooner rather than later.

Many plastics companies are small, entrepreneurial firms where the founderhopes to see his children work for the firm and eventually manage it. This isa natural ambition, and the children of such founders have a potentiallywonderful opportunity presented to them. However — and this is a bigqualification — the emotional fit among parent and children must be suchthat all will be comfortable working with one other. Will the siblings get alongor will there be resentment if the family talent turns out not to have beenspread equally? How much independence is the parent willing to allow thechildren to make their own decisions? In my observations, these problems aregreatly exacerbated if the children go right to work for dad or mom directlyout of school. The best way to reduce these natural frictions is for the childrento go to work for another firm, where they can gain experience away fromthe parent and develop self-confidence in the process. It is difficult for childrento mature and acquire a sound sense of their own self-worth and competencewithout some career experience in the world apart from their parents. Oncethey have this, and it should take a period of perhaps 5 to 10 years, theyought to be able to move into the family business and begin making acontribution right from the start. The other employees, as well as the parent,will respect them more for having “earned their spurs” elsewhere first. One


Introduction

7

may often observe that the second generations are usually successful incarrying on family businesses but the third generations are less apt to showinterest and more prone to sell it.

One myth about successful managers deserves mentioning, if for no otherreason than to refute it. It may be best known from Leo Durocher’s famousline: “Nice guys finish last.” This is really just a variation of the fiction thatmanagers 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 willburn out quickly in such a work environment. This philosophy might be aholdover from a medieval army command mentality that forcing the troops tostorm the battlements was best achieved by making the foot soldiers understandthat their chances of survival, however slim, would be better by attacking theenemy than being shot or stabbed from behind by their own officers. Therecord shows that there are plenty of nice guys who finish first (because theyare good managers). The usual mixture of human personalities found inmanagement positions ensures that both kinds will be present. Managers whocannot focus on the long term are not thinking of the best interests of theircompanies, stockholders, employees, customers, or even suppliers.

1.3 Six Things Management Must Do

A great many opinions are offered at business schools and by industryexecutives about the proper functions of management. My observation on thiscritical subject is that management must execute six primary responsibilitiesin 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 atprofitable prices, new products are always under development, customersare served, costs are controlled, and all assets are fully and gainfullyemployed. While this may sound laughably obvious, it is absolutely aston-ishing how many businesses fail because management allows itself to bedistracted by other considerations, such as increasing market share withoutconcern for profitability, being a technology pioneer regardless of cost, orbuilding an overly large staff during upswings in the business cycle (whichmust be cut back during the downswings).

Let’s examine these guiding principles in more detail.


8


1.3.1 Organize the Business to Meet Market and Customer Needs

No business can exist without meeting market and customer needs. And, bythe way, the difference between a market and a customer is that a market ismade up of a number of customers with similar needs. Supposedly, monopoliescan ignore markets and customers without being hurt. Even a genuine monop-oly (which, as Peter Drucker says, “is as mythical a beast as a unicorn, savefor politically enforced, that is, governmental, monopolies”) would sooner orlater find its offerings supplanted by less expensive, more effective alternativesfrom others. The idea of heaven on Earth for some managers would be tosell out the capacity of their plant to a single customer and then play golf forthe 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 thecustomer’s business declined or a competitor took away the business or amyriad of other things happened, all just because the supplier did not wantto deal with reality. What is that reality? It is that a good manager must be abit paranoid, for all of those reasons just cited above. A manager would begrossly derelict if he permitted the company’s well-being to depend on asingle customer or market segment.

At the same time (notice how

balance

keeps coming up) it is essential thatthe company’s business be balanced and not so highly diversified as to lackany real focus. Focusing on a limited number of market segments is highlydesirable because this leads to an in-depth knowledge of these segments. Thisknowledge, in turn, allows more effective business planning with accompa-nying 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 customerneeds it, at a cost that will allow you to price competitively but show betterthan average profitability. The business must also be organized to replacecustomers who fall by the wayside and to gain new ones in the same orrelated markets. The company must be organized so that its various functionswork together to determine what customers want, make or get those items,deliver them on a timely basis, and have money left over after collecting andpaying bills. The company must be staffed by competent, motivated profes-sionals who operate as a team, that are led — not bossed — by managementto 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 areachieved 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 everprotected from change. Change takes many forms. It can be internal, as aresult of transition from an entrepreneurial business culture to a managerialone, the effects of growth or contraction, or the impact of an acquisition ordivestiture, to name but a few causes. Change can also be due to external


Introduction

9

factors, such as the emergence or disappearance of competition, certainmarkets or customers, new technologies, government regulation, or environ-mental concerns. Management must be ever alert to recognize and adapt theenterprise to such change. This involves being both proactive and reactive,depending on the situation.

Temporary changes, such as the ups and downs of industry economiccycles, must be incorporated into your business plans as soon as they becomeapparent. Management must be alert for early signs and make adjustments asneeded. More basic change requires a more basic response.

What are the warning signs of major change? Some are obvious, such asthose mentioned above: the emergence or disappearance of competition,markets, technologies, etc. These are not difficult to notice but require someinvestigation to analyze how and why the changes are taking place. Oneshould never operate on the basis of assumptions, because important changesin the direction your business is headed may be missed if the changes aredismissed as accidents or of no consequence for your business. A companyis more likely than not to be caught by surprise if its marketing efforts areinsufficiently focused. It is a company’s market focus that provides enoughunderstanding of trends within one or more market segments to help man-agement foresee when and what changes are likely to come about and tounderstand them when they do.

�

Did a new competitor come into being because someone has discoverednew technology or are you not covering the market adequately?

�

Did a competitor disappear because it was undercapitalized or is the marketitself shrinking?

�

How will a new technology affect your business and why did your companynot come up with it first?

�

Are new environmental regulations the result of something stemming fromindustry-wide problems, your problems, or weak community relations onyour company’s part?

�

Have your customers stopped using your product because they are buyingfrom a competitor, have they removed your product from their design, orthey cannot compete against other firms, or is the end-use market yourcustomer supplies in decline?

�

Have new customers or markets appeared because you were lucky orbecause you worked to develop them, and are you prepared to supply them?

Many forms of change are gradual and therefore not obvious. These are usuallyinternal, such as the effects of growth (or the lack of it) on the companyculture. One should be regularly looking for telltale signs that they are reachingthe point that they require action. In the case of growth effects, the signs caninclude declining sales, excessive late product shipments, low employeemorale and high turnover, quality problems, infighting, and turf wars betweencompany departments. Management must deal promptly with these problemsbefore they damage the company, attacking underlying causes as well asdealing with the symptoms.


10


Often, reorganization is called for and possibly a redefinition of the com-pany’s mission. All of these situations also involve the five other responsibilitiesof management.

Management must be alert to distinguish between genuine changes in thebusiness 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 tofind people swept up by fancied and imagined changes that required specifiedactions, and the problem is particularly alive and well today. When it seemsthat every company around you is restructuring, it takes courage to recognizeand state boldly that your company may not need to do so. Do not get caughtup 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 hypesurrounding the advent of e-commerce is a good case in point. E-commercewas introduced a few years ago as something every company must embraceor go out of business. This quickly proved to be false, but a number of peoplewere caught up in the hype and lost a lot of money before discovering thatit was a concept long ahead of its time. People in business cannot afford toignore reality in favor of their fantasies for long. Reality seems to have a wayof catching up much more quickly with businesses than it does with someother 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; thiscannot be delegated. The definition of the company’s business then becomesthe target of the company’s goals, but goals do not have to be defined solelyby top management. To the contrary, it is critical to success to get the inputof subordinates and to use this input wherever one can when developinggoals. It is the responsibility of management to exercise its judgment as tohow much of this input to use, not just to put together an anthology of everyidea submitted by subordinates. Management must remember that it has thefinal responsibility for goal setting. Why? Because it is impossible to accom-modate every subordinate’s ideas in one set of simple, practical goals criticalto the company’s growth and health. Companies are financial organizations,not social ones; they are not democracies. H.B. Swope said it best: “I cannotgive 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 fromsubordinates should be much more substantive in developing plans than goals.Good management delegates authority to execute plans to the lowest appro-priate level (bottom-up planning), and it is appropriate that the people whowill actually do this are the ones who have the most input about how it willbe accomplished. Once goals and plans are in place, then regular progress


Introduction

11

reviews (e.g., monthly) are essential. More detail on business plans is containedin Chapter 5.

The goal setting and planning of subordinates are often best when donefrom the bottom up within the framework established by management, includ-ing “stretch goals”. People who have some say in the development of theirgoals and plans, will usually accept them far more readily than if they wereimposed from above. When someone cannot or will not accept reasonablegoals 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 areunhappy and creating dissension. That goes for management, too. If you arefundamentally unhappy with your own situation, then you cannot do yourjob properly and need to make a career change.

Remember that most people respond to what they perceive to be theirown self-interests. There is nothing immoral or shameful in this; it is a normalfact of life. If people do not look after their own interests, it is unlikely thatanyone else will. You must show them that working as members of a teamtoward 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 todelegate authority to subordinates (e.g., micromanagement). It goes on inlarger businesses too, but the sheer inertia of bigger firms makes it easier forthis 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 hassuch a strong compulsion to control every aspect of a job that he is unsuitedto 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 downon the perceived need for micromanagement. Also, managers at all levelsneed to accept that there is commonly more than one “right” way to reachobjectives.

Note that one can delegate

authority

, but only share

responsibility

, in thesense that the boss is ultimately responsible for everything below his leveland within his department in an organization. If something goes wrong, aboss must hold her immediate subordinates responsible to her for their actions,but he cannot attempt to hide behind those same subordinates if his boss isunhappy with what happened. A boss should accept responsibility for theerror and then fix it properly and promptly.

How does a manager delegate authority? First, you have to establish anunderstanding with each of your subordinates about the meaning and scopeof policies, both yours and those of the company. Then set broad limits withinthose policies (and within your own authority limits) for your subordinatesto take action without necessarily getting your permission first. Nevertheless,delegating means entrusting, not abdicating

.

You must keep informed as tohow the subordinates are carrying out their duties and what results they areobtaining. The least intrusive way is via weekly verbal reports — a well-run


12


meeting that lasts less than an hour is a good way to supplement regularinformal brief conversations — plus brief monthly written reports. An electronicoffice database can be useful in keeping track of what is happening withinthe company. Help your subordinates to develop a sense of when policyguidance is insufficient and to come to you for help, but otherwise to handlematters on their own while keeping you informed. Learn to coach yoursubordinates, not to bark out orders. Direct orders are necessary on thebattlefield when lives depend on immediate, unquestioning obedience, butthey are appropriate only under rare circumstances in a business setting.

Positive feedback is an essential part of the process. Make sure you tellsubordinates when they are doing things right (use a “did this well/do thisdifferently” approach when giving feedback). Provide such feedback wheneversubordinates give you reports on something substantive that they did. Anoccasional error is a necessary part of gaining experience, so lighten up whenthis happens. Do not knowingly let a subordinate make a major mistake, ofcourse, and do not allow subordinates to keep making even minor errorswithout sitting down with them to identify the reasons and then developingactions 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 makethe necessary adjustments to meet the assigned goals and the companystandards for the job, then a clear, written plan must be put in place, withthe employee’s participation, that not only identifies what has to be done andwhen, but also makes it clear that failure to execute on a timely basis willlead to employment termination. There is absolutely no excuse for the suddentermination recommendation of employees with years of satisfactory perfor-mance reviews in their records. When this happens,

management

itself hasa serious performance problem

.

If the managers involved have caused sucha situation to happen by being previously unwilling to talk to subordinatesabout performance problems, then the managers themselves have created thesituation 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 theboss 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 andirretrievably lose all credibility and respect among the subordinates. Asdescribed earlier, the boss must always accept responsibility for the actionsof subordinates; this is an act of loyalty that should and will earn the respectand loyalty of every subordinate worth their salt. Respect cannot be com-manded or even deserved. It can only be earned. Furthermore, managers mustalso 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 tohim. There would have to be some extraordinary reasons for you to continueworking for someone whom you do not trust.


Introduction

13

Why this emphasis on loyalty? Because

trust

is based on loyalty. Anyorganization that lacks trust is doomed to failure, because no one in it canever be sure what the motivations of others are or the accuracy of theinformation they are receiving. Loyalty is insufficient by itself, however.Managers have to demonstrate every day that their lives are ordered by astrong sense of right and wrong, that their personal integrity cannot becompromised, and that they are invariably honest in their dealings witheveryone with whom they come in contact. Management cannot run a soundbusiness by conducting affairs to stay just within the law or by always takingfull advantage of everyone over whom one has power. The need for loyaltyand trust also demands that you remove those people from your organizationwho cannot be trusted. Furthermore, managers must also demonstrate con-sistent professional competency; people easily see through bluster masquer-ading as knowledge.

Some readers will say to themselves that this sounds like a level ofperfection that does not exist in the real world. Not true. You would notaccept an occasional shortage in your paycheck, would you? Subordinates areentitled to expect the same kind of consistency. Yes, some bad apples canbe found in every barrel, but they cannot and should not be used to defineall the rest of the apples. One of the most transcendent elements of humansociety is to aspire to ideals that may not be attainable 100% of the time butnonetheless are very much worth striving for 100% of the time. True characteris shown best when times are difficult and integrity matters most, not whentimes 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 tomake a bigger one — that is your job. Even Samuel Gompers, the 19th-centuryAmerican labor leader, said that the worst thing that could happen to anAmerican worker would be for the company that employed him to lose money.One of the more annoying things about socialists and other anti-capitalists istheir constant characterization of profit as something evil. They depict privatebusiness ownership as akin to organized crime, as though employees, sup-pliers, and customers have been forced to do business with companies at thepoint 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 businessesshould 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 andEastern European countries testifies, the idea that businesses should not beconcerned about profits and losses cannot work for any length of time withouta great deal of economic and social damage. Sooner rather than later, payrollsand vendors’ bills have to be met. Even nonprofit companies must make takein more money than they pay out, to survive; this is called a surplus ratherthan a profit, but there is no real difference.


14


In a free society, profitable companies pay their employees well, sustaina number of vendors, satisfy a number of customers, fulfill stockholders’investment objectives, and pay (actually collect) taxes to local, state, andfederal governments. Companies that are unprofitable and cannot meet theirbills are usually sold (often in pieces) or liquidated. In any event, a greatmany people lose their jobs in addition to the manager, and the stockholders’investments suffer. This is the ultimate test of management. If you cannot runyour company to make money, you will not get to run your company forvery long.

Are there no exceptions to this rule? Remember those Internet companiesthat were seemingly worth vast sums to the stock market if their salescontinually rose, even if they lost money (as in “cash burn”)? As we haveseen, those companies found out that when their promise of finding earningsin those sales revenues was not realized quickly, their stock crashed and theywere acquired or liquidated. The long-term value in e-commerce or any newconcept can look very appealing as long as the actual results are still veiledin 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 ademanding standard: it is absolutely unacceptable to lose money for any lengthof time. To the contrary, companies in our industry are expected to show

rising

earnings and improving returns on investment, with only grudgingacceptance at best of any diminishment in this progression during economicdownturns.

Indeed, one of the major reasons that the stocks of chemical and plasticscompanies do not command higher levels of valuation in the stock market isthat these industries have a long, sad history of boom-and-bust cycles. Today’smanagement always has the opportunity to break with this well-earned ste-reotype, but it must choose to do so. Sales growth or maintenance

is

important— no company can maintain profitability based on cost control alone if salesare falling. But sales must be

profitable

sales and management must beprepared for the downside of a business cycle as well as the upside. Onehopes that industry managers do not fit Talleyrand’s description of the Bour-bons: “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 theycan sell products at less than full cost as long as they recover out-of-pocketcosts 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 customerswho are paying full price are bound to discover eventually that they too canbuy the same product for less. Soon the company will find that it is nowselling mostly

incremental barrels instead of standard ones and losing moneyon most

of its sales. Price alone is always a miserably unimaginative choicefor an inducement to place an order. Management must ensure that anyprogram to increase sales does not rely on offering the lowest price, becauseit runs a strong risk of violating the basic rule of not making a loss. Successfulselling depends on bringing

value

to the customer that goes beyond price.


Introduction

15

This and the earlier comments in this vein will be dealt with in more detaillater in this book.

If your company loses money for a month, with no foreseen reason forit, 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 rediagnosethe problem and fix it immediately, because you are unlikely to have theluxury of another quarter of losses. Your boss will probably decide that youare not up to handling the issue and replace you.

Now this is certainly not to say that no holds are barred where profits areconcerned. Running a business is just like living your life — you must respectthe law and deal ethically with your vendors, customers, employees, andstockholders. Managers who break the law usually wind up in court, andmanagers who treat others unethically quickly get a reputation that harms theirbusiness and their own careers. It may take a while, but people who arealways 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 youestablish a leadership position in your line of business. A leader providesproducts or services that customers recognize as being superior to those offeredby others in terms of

value

, and being willing to pay for them as such. Thisdoes not necessarily mean that your company must be the biggest in theindustry or even in each product line. Sometimes being second or even thirdwill allow you to concentrate on some specific area, such as a particular enduse or a class of customer, where you can fully differentiate your offerings.Being a leader means that you always have new, high-profit potential productsmoving through the pipeline that will supplant the old ones when they becomelower profit commodities. It means constantly looking for ways to increasethe value of your company to its customers, in terms of service as well asproducts. It means finding ways to differentiate your company from yourcompetition, both direct and indirect. Only when your company is a leadercan it increase profitability on an ongoing basis.

A number of scandals have surfaced recently over an old problem: certainpublicly held companies have declared bankruptcy after years of reportingconstantly increasing earnings. How could this be? It turns out that they usedquestionable, if not fraudulent, accounting practices to hide losses or reportloans as sales revenues. It is an act of pure hubris for a CEO to promote thecompany’s stock by manipulating earnings in such a fashion that the companyappears to be always headed up in a smooth line. The plastics industry doeshave cycles and it is simply not possible for a company to report earningsincreases every quarter or every year without some sleight-of-hand beinginvolved, even if it is legal. An honest and forthright presentation of financialand operational facts, warts and all, is a far more sustainable policy that willlead to the creation of respect and credibility among stock analysts and theinvesting public. When earnings weaken, as they surely will at some point,the company’s stock will be much less affected if investors have come toexpect some normal variations or that the company tends to understate ratherthan overstate projected earnings.



17

Chapter 2

Foundations of the Industry’s

Segments

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

2.1 Polymer Manufacturing

Polymer manufacturing is a sector of the chemical and petrochemical industriesas a consequence of historical development as well as the need for verticalintegration. Virtually every polymer producer is a division of a larger chemicalor petrochemical company. Polymer manufacturing therefore must be analyzedfrom the standpoint of these larger industries. When we speak of

upstream

and

downstream

, we are using oil and chemical industry terminology thatdefines basic feedstocks as the source,

with production moving downstreamlike a river. It follows, then, that if one is looking from a point along the rivertoward the source, one is looking upstream. The production of polymers isa chemical process, unlike most downstream polymer processing steps, whichare physical operations. Polymer manufacturing is the most capital-intensivesegment of the plastics industry, because the producer must often makemonomer(s) as well as polymerize, so that the minimum plant scale is typically


18


several orders of magnitude larger than for downstream processing. All ofthese conditions must be considered in order to understand how to managea polymer manufacturing business, or just to understand how one’s suppliersoperate 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 (includingequipment) to produce high-performance materials with consistent propertiesat competitive costs, no polymer manufacturer can remain in business forlong. Let’s restate these three critical elements of technology:

1. High performance2. Consistent properties3. Competitive costs

Every one of these legs of the polymer manufacturer’s stool is critical; withouteach of them, the stool collapses. Management must ensure that the company’stechnology is at least competitive or better, either through internal researchand development or through licensing, or a combination of both. Technologyadvancements include both product and process development. New productsare vital to the growth of a company, but process improvement can makeany product more profitable or enable it to compete against lower costmaterials in new end uses, or both. Process improvement is also needed tomeet environmental mandates to reduce total waste generation as well as toreduce the toxicity of waste generated. Process improvement may even offerways to modify the qualities of old products sufficiently to make themsignificantly 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-userequirements that will lead to increased market demand.

Patents are a vital part of polymer manufacturing technology. Not only dothey provide protection for costly research and development, but they alsooffer a source of income from licensing, as well as a

quid pro quo

to obtainaccess to others’ patented technology via cross-licensing. Unfortunately, own-ers of valuable patents must expect that at some point it is likely they willbe involved in litigation to protect their intellectual property. This is morecommon in the U.S. than in other countries, owing to the differences in legalsystems. The first polypropylene patents were litigated for a period of morethan 20 years before a final resolution was forthcoming. The winning party,Phillips Petroleum, won many millions of dollars in royalties as a result. Thesubject of patents and other intellectual property is examined in more detailin the next chapter.


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 wascompetitive costs. However, technology is not the only way to achievecompetitive costs; plant scale and integration also directly affect expensesincurred in manufacturing. Commodity polymers in particular must beproduced in plants large enough to minimize overhead costs. Integrated, on-site monomer-to-polymer production is essential to minimizing costs by elim-inating the expense of carrying duplicative inventories and of transportingmaterials between sites. Integrated production helps to assure control overcritical quality and cost issues, as well as to avoid supply interruptions. Finally,integrated production enables the producer to make a profit on each step ofthe process, on a smaller investment than if each step was freestanding. Infact, it is not economically possible to buy some monomers on the openmarket, polymerize them, and then be able to sell the resulting polymer atan acceptable profit.

Logistics costs and currency exchange considerations also make it desirableto build integrated plants in various regions of the world in order to be ableto supply customers profitably wherever they are located. Polymer producersin the United States commonly rely on monomers derived from natural gas,particularly those making polyolefins, although nylons, polycarbonate, polysul-fones, and polyphenylene sulfide are all dependent on benzene derived fromcrude oil. In most other countries, crude oil is the principal source of allmonomers.

There are risks to integrated production, however. One risk is that aproduction outage in one stage will shut down all stages. The way aroundthis, naturally, is to have backup inventories at critical stages of production.A second risk is process obsolescence, which can be avoided by the companymaintaining its technology edge in each

stage in the process, not just the onethat brought it into the business in the first place (e.g., polymerization). Thismeans a bigger research and development effort that pays off with continuedprocess cost improvements as well as acting as a defensive shield againstcompetition. A third risk is the bigger investment in an integrated plant vs.the smaller investment in a non-integrated facility. The decision to put moreinvestment at risk must be at least partially justifiable by relatively lowprobabilities of major changes in technology or shifts in the marketplace thatwill make the investment, or a major part of it, obsolete.

Some examples of the desirable scale for some polymers can be gleanedfrom press announcements of new facilities. In 2001, new high-density poly-ethylene plants were being announced to have capacities of 340K metric tons(MT)/year, while plants with capacities of 115K MT/year were being closedas uneconomic. The ideal has evidently not yet been found for polypropylene(see BASF/Basell comments in Chapter 9). Others have said that consolidationof the major polyolefin producers is likely to continue until only a few giantsare left in the world.


20


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

2.1.3 Routes to Market

Traditionally, polymer producers have utilized direct sales, distributors, andbrokers as routes to the marketplace. E-commerce is a relatively new andincreasingly important channel that will impact these latter two routes. Pro-ducers 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 manufacturer-to-customer relationship that has minimal “noise” or signal loss in communi-cations. Direct sales representatives can be used to build large accounts overa period of time, something that is more difficult when using other routes tomarket. Direct sales relationships with customers are the strongest and themost reliable because the manufacturer is in direct control of the relationshipwithout being filtered through third parties. Also, more individuals becomeinvolved through a direct sales business relationship than is the case with,say, through a distributor; this helps to ensure that normal personnel turnoverwill not suddenly end contacts on each side. Additionally, changes in themarketplace are detected more rapidly and dealt with more effectively whenworking directly with customers.

Many polymer producers today use experienced technical personnel asaccount managers (the term

sales representative

is usually applied to juniorpersonnel), who are able to deal effectively with problems on their own aswell as knowing where and to whom approach in the company for assistance.In line with the drive to minimize costs, such relatively expensive personnelare used to call on only the company’s largest customers. Smaller customersare handed off to distributors. The dividing line for who will handle a customervaries with the degree of commoditization of the material. For example, apolyethylene processor that buys 3000 MT/yr might be a house account, withsmaller users being referred to a distributor, while a nylon processor whobuys 450 MT/year may qualify as a house account. Other attributes that affectthe decision on whether or not to designate a customer as a house accountcould include a new line of business or sales potential where the companyhas otherwise only achieved second-supplier status. Account managers seldom



21

have pricing authority but business managers would generally give theiropinions great weight in making their decisions. Differential pricing within anindustry can cause legal and business problems so that final authority onprices 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 thebooks and into the marketplace, to be sold to the myriad of small processorsthat are very difficult for a manufacturer’s direct sales force to handle on acost-effective basis. Most polymer manufacturers have turned over all less-than-truckload or even less-than-carload buying accounts to distributors. Pro-ducers do this not only because it is more economical, but also because theycan instantly access a much larger number of potential customers through thischannel than directly, and margins may be actually higher than those on directsales. The disadvantage of using distributors is that knowledge of the market-place 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 assistantusing a telephone or fax with a computer. It does

not

replace outside salespeople. The computer is accessed by customers directly, modem-to-modem(also called

private network

), or via the Internet. Using a computer does notcompletely eliminate the need for inside sales by any means, but it doesreduce the number of personnel required, and it is more accurate. A computercan also receive, compile, and analyze far more information than wouldnormally be the case with a telephone sale. While most e-commerce userswork through private networks, use of the Internet enables companies withdifferent information systems to work with each other without the necessityof adopting common systems. Affordable software is now becoming availablethat will also permit previously incompatible systems to link together viaprivate networks without the security risks inherent in using the Internet. Ineffect, e-commerce is a logical extension of supply-chain management, which,in turn, is a part of enterprise resource planning (ERP). At present, only thelargest polymer processors have the capability to use (and demand) the e-commerce route to their suppliers, but this will gradually change, as smallercompanies begin to utilize ERP programs that are user friendlier and lessexpensive.

A major drawback to the use of e-commerce is the potential for hackersto enter a company’s system surreptitiously and steal, disrupt, or destroy dataand programs. While data security programs are being upgraded daily, nosystem can be considered completely safe indefinitely. There will be anongoing war between hackers and information technology security teams fora long time to come.


22


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 incorpo-rating reinforcements, stabilizers, fillers, colorants, and other additives to besuccessfully used in more demanding applications. Compounded materials areusually tailored to specific applications, and their production tends to be madein relatively short runs. Although virtually all polymer manufacturers com-pound their polymers to some extent, they have seldom made highly special-ized products in the past. Custom compounders make these latter materials.Custom compounding, as a business, was first developed in North Americaby entrepreneurs; it was years later before polymer producers began makingfilled and reinforced versions of their own resins as well. In Europe and Asia,compounding has been an integral part of the business of polymer producersalmost from the beginning, but independent companies eventually haveentered the market. One can even observe part-time compounders in someAsian and European countries that run only on a periodic basis to satisfy afew local customers. While this latter phenomenon is unlikely to become awidespread pattern, it does seem to represent the ultimate in providingcustomers with just-in-time shipments of specific compounds at the lowestpossible direct cost.

Over the years, a few large processors have tried compounding in-houseto make compounds for themselves on a captive basis. Most dropped the ideaafter realizing that integration required duplicating most of what a compounderdoes but without the same business base to pay for it. The principal captivecompounder today is Delphi, the General Motors automotive parts spinoffcompany, 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 com-pounding. In particular, formulation technology is critical to finding andholding customers. Compounders must be willing to develop and manufacturespecial grades in the smaller volumes that polymer producers cannot or willnot undertake. Customers for special grades usually want them for one of tworeasons (often both):

1. Replace a more expensive material (e.g., a flame-retardant polystyrene toreplace an engineering plastic) or use a recycled product to replace aprime one.

2. Provide a particular, even unique, combination of properties (e.g., lowfriction and electromagnetic shielding or a specific stiffness–toughnesscombination).

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



23

to beat the economics of single-screw compounding (a new twin-screwextruder costs more than four times as much as a new single-screw extruder),a number of compounds require the additional dispersion that is much betterachieved in a twin-screw extruder.

Much of compounding technology, particularly processing, is in the publicdomain. In other words, the technology is widely known in the industry andis the subject of published information, so that it cannot be consideredpatentable or in the nature of a trade secret. However, unlikely or unusualcombinations of public domain technologies

can

be deemed to be tradesecrets. If this is the case, then a company can designate those portions ofits technology that qualify as trade secrets and take the necessary precautionsto treat it as such. This includes restricting access to the technology to a limitednumber of employees (no outsiders allowed!), having those employees signsecrecy agreements, and reminding those employees at least annually that thetechnology is a trade secret and the intellectual property of the company.

Many compounders use the trade secret route to protect themselves againstemployees leaving and using what they have learned by either joining acompetitor or setting up their own competing company. A few companies(see Chapter 9) have patented their technology. While patents have theadvantage of being simpler to enforce in court than trade secrets, they dohave the disadvantage of transferring everything disclosed into the publicdomain after their term has expired. Therefore, embarking on a patent programrequires an ongoing effort to continuously develop and patent improvementson the basic technology, so as to maintain at least some form of ongoingprotection.

2.2.2 Supplier Relationships

While supplier relationships may not seem to be critical to some smallcompounders, they are actually very important in achieving significant, sus-tained, and profitable growth. The largest single cost of doing business as acompounder is raw materials. Therefore, a close working relationship withone or more polymer manufacturers is key to obtaining a secure, long-termsupply of consistent-quality materials at an attractive price. Think of it thisway: for the most part, the market determines the price at which one can sellproducts; therefore, a major factor in profitability is how well costs arecontrolled, particularly the largest one — materials. Polycarbonate is a goodexample of the need for a long-term working relationship. It has been in tightsupply several times during the past decade, with a simultaneous run-up inprices; at least one secure source of polycarbonate at a fixed cost is absolutelyessential to any compounder with a steady business based on this polymer.

Supplier relationships do not necessarily compromise the independence ofa non-integrated compounder. While such a compounder may have a favoredsource for each base polymer, the compounder still has the option of offeringa compound based on any polymer, which is not the case for a polymerproducer. In principle, a compounder might be biased toward recommending


24


compounds based on those polymers where it makes the most money, butin practice this is very rare. The compounder is much more concerned withsupplying a material that meets the customer’s needs at the best overall costthan trying to push a product that may not perform as well, albeit moreprofitable. The danger of losing the business altogether by promoting a second-best product is too great.

2.2.3 Geographic Dispersion for Customer Focus

While most compounders start out with one location that serves customers inthe contiguous geographic region, eventually they find that growth will requireanother manufacturing facility, located closer to distant customers. This isbecause just-in-time (no stock) customers cannot wait for shipments overnightand sometimes not even for more than half a day. The very largest com-pounders also find they must follow their customers all over the world andbuild regional plants to serve these needs. The saying about politics that “it’sall local” applies equally to serving customers. While some major customersmay 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 handlesimpler new product development requests. This is how new, local customersare gained, in addition to serving the local plants of established globalcustomers.

2.2.4 A Place for E-Commerce?

While e-commerce has not yet shown its full utility for the hallmark ofcompounders, namely small users and specialty materials, it may yet have aplace in this segment. Software that permits customers to participate in thefine-tuning of product properties is now emerging that will enable Internet-savvy processors and original equipment manufacturers (OEMs) to workdirectly with the compounder’s development personnel. The resulting productproperties may then be turned into a formulation and scheduled for productionvia the compounder’s internal computer network. All of this will likely takea number of years to materialize on any significant scale, but the possibilitiesare quite interesting. This is quite apart, of course, from e-commerce orderprocessing for established formulations.

2.3 Distribution: Key Factors

Distribution is an important route to market; almost all small processors buytheir materials from distributors because of the substantial minimum order sizerequirements of polymer producers. Distributors smooth out disruptions ofthe supply chain by stocking various grades of materials, enabling smallprocessors to minimize their own inventories and polymer producers to



25

maintain long production runs. Brokers are a small subset of the distributionbusiness; they usually buy and resell surplus stocks and non-prime-qualitymaterials rather than representing one or more specific manufacturers andstocking their products. Brokers sometimes do not even take title to the goodssold, 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 whothe founder knows well enough to be assured that they will buy the productsin such quantities, prices, and degree of ordering regularity as to ensure aprofitable business. A sound customer base is an absolutely fundamentalrequirement for any distributor.

As noted below, a relationship with polymer manufacturers and/or com-pounders 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 cus-tomers will usually switch to another source of the supplier’s products.Therefore, the wise distributor will try to build a business relationship withthese customers that are “on loan” from the supplier, so that they remain loyalfor at least some of their purchases even if the supplier decides that thedistributor 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 viceversa. The rule is modified a bit when it comes to the human need for trustwhen dealing with another vs. the need for finding a bargain. Here we findthat perhaps 70% of purchases are made predominantly on the basis ofreliability, service, and delivery, and 30% are made predominantly on the basisof price. That 70% is where a distributor’s important earnings are made. Adistributor earns a customer’s trust by delivering the right material on timeevery 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 occa-sion, this kind of reliability has enough added value to a customer to be worthpaying a price premium or at least giving the distributor the lion’s share ofbusiness that is multiple-sourced. Old-fashioned “schmoozing” (entertainingthe customer) may help cement a personal relationship, but without thefoundation 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 mindlesslyexpanding the product line, but rather looking for opportunities to carry relatedproducts that can be profitably sold to existing as well as new customers. Forexample, if the customer is already buying brand X nylon 6 but also usesbrand Y polycarbonate, the distributor should try to establish a supply positionin brand Y. The cost of selling and shipping two products to a customer isvirtually the same as selling and shipping one product, so the additional


26


profitability is obvious. Purge compounds, used to speed up transitionsbetween different colors or materials in a molding machine or extruder, area favorite add-on for distributors looking for ways to increase sales to existingcustomers.

Restructuring at polymer producers has led to cutbacks in technical servicefor customers. Distributors must be prepared to take up the slack and providethis support, usually in the form of helping to solve processing problems.Technical service personnel do not have to be salaried employees, sittingaround waiting for calls for help. Many good consultants in this field can bebrought in on a case-by-case basis as needed. Consultants paid a retainerare often willing to make themselves available on short notice to handleemergency problems. Some common technical problems can be handled viaan automated telephone troubleshooting system or a fax-back system.

2.3.2 Supplier Relationships

A distributor without one or more regular supplier relationships is moreproperly described as a broker. Supplier relationships are critical to continuityand security of supply, customer referrals, and operating profit margins. Adistributor may start out with a number of customers; but to grow on asustained basis, a relationship with one or more suppliers is essential. In theideal supplier relationship, the distributor serves as a marketing and logisticsextension of the polymer producer or compounder. Most polymer producerswill refer all less-than-truckload customers to their distributors. Suppliersprovide product literature and training to distributor technical personnel sothey can provide product information and technical service to small customers.Most importantly, suppliers provide a discount on purchases that can consti-tutes most, if not all, of the gross profit for a distributor.

The ideal supplier relationship is to be the exclusive distributor in a givenmarket, geographic or otherwise (the broader, the better, of course). The nextbest is to be one of very few. For example, during the 1990s, Shell licensedjust three North American compounders to make and distribute its Kraton™thermoplastic elastomer (TPE) compounds, which was very nearly as good asbeing an exclusive arrangement. A written agreement is preferred to an oralagreement and is a requirement when the relationship has restrictions. Non-exclusive distribution agreements are the least desirable, but they are oftennecessary to round out a product distribution line; it is common practice tomake oral non-exclusive agreements.

Commodity polymer distributors will typically repackage bulk resins forcustomers who do not need to buy full railcar quantities. The distributorreceives railcar shipments from the polymer producer and either puts thepolymer into bulk trucks or into silos, where the polymer can be repackagedin bags or boxes. This is an important function in the supply chain for smalland medium-sized processors. The distributor not only provides the desiredpackaging, but also ensures continuity of supply at stable prices. Somecommodity polymer distributors even delegate less-than-truckload business tosubdistributors of their own.



27

2.3.3 Geographic Dispersion

Distributors typically grow from local businesses to regional ones. A few havegrown to be national or even international in coverage. It is difficult to growsolely in a local area for long; therefore, geographic diversification of customersbecomes important to the continued growth of the business.

Another significant reason for geographic diversification is that some localareas tend to be dependent for their commercial well-being on specific largeindustries or companies. For example, Detroit is heavily dependent on theautomotive industry; Seattle, on aerospace (Boeing); San Jose (Silicon Valley),on electronics. It is a rare industry that does not have some down momentsover the years. If the distributor’s home market is one of these cities, then itshould be doing its best to diversify its business base by developing customersin other localities.

Suppliers — and customers — are more favorably disposed to work withdistributors that have broad geographic representation than those that are onlyactive in a few areas, and such representation is usually a requirement forprocessors with multiple plant locations. This should never be a problem fora distributor, as it is not necessary to own a number of warehouses. Manyperfectly adequate public warehouses can be very effectively and economicallyutilized on an as-needed basis, without the need to own substantial real estateassets. It is generally not a good idea, however, to allow a customer to holdstocks and pay for product as used. Accounting and payment issues almostalways 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 ondistribution, but the effects to date have been minimal. Nevertheless, it wouldappear that two possible adverse considerations are emerging:

1. Buyers may find that surplus stocks of commodity resins can be purchasedless expensively via Internet auctions than through distributors or brokers.Although logistics, product quality, and credit issues may make this routemore the exception than the rule, the Internet may at least broaden thenumber of suppliers that buyers can utilize.

2. Manufacturers may find that they can sell small quantities at better netprices directly to customers via the Internet than through distributors. Theyalso find that e-commerce provides valuable market information that isoften unavailable through a distributor. The drawbacks to this route arethat the manufacturer will have to carry larger inventories and accept thehigher credit risks that often go with small companies, functions nowhandled by distributors and compounders.

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


28


but they may cause the 30% who do

buy on price to bypass their traditionaldistributor or broker.

2.4 Processing: Key Factors

Processors cover a wide range, from tiny, garage shops to billion-dollarmultinational companies and from custom parts producers to OEM-captiveoperations. They include specialists in different types of processing, in par-ticular classes of materials, specific types of parts or industries, etc. Some justpass plastic through a machine, and some also make molds; others alsodecorate parts and assemble them. Some have become complete contractmanufacturers, with an emphasis on plastics. However, several key factorsapply to all of these diversified entities.

2.4.1 Technology

The foundation of any processor is technology. A selected process or a seriesof processing steps is used to transform polymers or compounds into functionalparts or even completed objects. Processes include injection molding, extru-sion, blow molding, rotomolding, thermoforming, compression molding, andsome variations/combinations of the preceding. Processors must have at leastbasic competence in the technology of the processes used or they will notstay 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 diedesign and construction, and secondary processing (e.g., assembly, decorating,electroplating). These additional capabilities are important elements of broad-ening their customer base and improving profitability. These should never bejust “me-too” efforts, but should be every bit as cutting edge and high qualityas the basic processing equipment. Even something as simple as using theproper type of resin dryer is critical in making quality parts from hygroscopicpolymers. Automation is another aspect of being a leader; just knowing whatto automate and doing it can be critical to product quality and reproducibilityas well as keeping manufacturing costs down. Mold design and constructionshould be of particular interest to a processor, because a poorly designed orfabricated tool will cause many production problems. It is better to havecomplete control over these aspects of a job than to spend hours trying tofix someone else’s mistakes.


Competition is fierce among processors because there are so many. A closeworking relationship with your customers is essential to survival, let aloneprofitability. Processors may have one customer or many. For example, acaptive operation produces for its parent company. Proprietary molders make



29

products for a variety of customers. Custom processors may only work forone customer, but the vast majority have a large number. The geographicproximity of processors to their customers is often the single, most criticalconsideration for customers who practice

kanban

, the Japanese word for just-in-time inventory management. Some processors are even located in a cus-tomer’s manufacturing park, bringing the time for just-in-time deliveries downto hours instead of days. However, just as polymer manufacturers, compound-ers, and distributors must, processors also must diversify their customer baseto 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 enteredthe custom processing business to utilize otherwise idle machine time andimprove their internal profitability.

Processors are also finding that they need to offer more than just machinetime 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 canalso mean survival. As described elsewhere, some processors have gone sofar as to characterize themselves as

contract manufacturers

, offering design,production, stocking, and shipping.

While many smaller processors sell through independent sales representa-tives, the larger, faster growing, and more profitable ones have their owndirect sales force. While independent sales reps offer the protection of reducedoverhead during downturns, they rarely know a company’s particular capa-bilities as well as a full-time employee would. This kind of knowledge shouldtranslate into more business and more profitable business at that. Reps alsogenerally handle several product lines, and processors will find that they arecompeting for a share of the reps’ time. For this reason, many processorshave a sales manager who is responsible not only for direct sales to the mostimportant 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 importantcomponents. But, while a number of relatively small, specialized companiesdo exist, many are typically units of much larger companies that are mainlyconcerned with non-plastic markets. As warned in the preface, the variety ofproducts, companies, and interests under this heading preclude other thanlimited commentary.

2.5.1 Technology

It may seem repetitious, but technology once more is the reason why thesefirms exist. The need to process materials more efficiently, to endow com-pounds with enhanced properties, to measure those properties accurately andreproducibly, among other things, is what drives the business of this groupof companies. The plastics industry could not exist without these vital tech-nologies. These technologies are also constantly evolving and those who do


30


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

2.5.2 Critical Mass

One may observe that these segments of the industry are subject to the samecost pressures as the others. Smaller companies are acquired by larger onesin 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. Theapplication of their products to markets well diversified beyond plastics helpsto spread overhead over a much larger sales base and offset some of theindustry economic cycles. Of course, these combined companies need to belarge 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, MannesmannAG acquired seven other equipment companies between 1989 and 1999:Berstorf, Billion, Demag Ergotek, Krauss Maffei, Netstal, Newbury, and VanDorn. During the same period, Cincinnati Milacron (now simply Milacron)acquired six other companies: Autoinjectors, DME, Johnson Controls, KlockerFerromatik, Uniloy, and Wear Technologies. Thus, 15 companies have becomejust two in the space of 10 years.

As an example of how a company in this segment can achieve criticalmass yet remain diversified, look at Crompton Corporation. Annual salesrevenues in 2000 were $3B, the result of a major merger and a dozen smalleracquisitions over a period spanning 11 years. The company has four plasticsindustry divisions (with sales in 2000 shown in parentheses) that represent70% of the overall business:

�

Crompton — petroleum, olefin, and styrenic additives, plus vinyl additivesunder 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 equipmentsupplier ($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 toprove, however, and intends to install ERP in 2002 to be able to understandthe financial demands and contributions of the extraordinarily large numberof products it makes. Even its size and diversification did not save Cromptonfrom losing money in 2001, and it is now divesting some product lines to paydown debt.



31


Yes, good relationships with customers are important for these industries too,especially equipment suppliers. When manufacturers expand or upgrade, theperformance of the equipment previously purchased and the service receivedwill mean as much or more as the price paid when it comes to the nextpurchase. This is often a matter of

when

, not

if

, so the supplier must keepthe customer satisfied even when only one purchase has been made to date.Despite their specialized nature, these suppliers exist in highly competitivemarkets. Companies in this industry segment find that most of their productsare sold in limited quantities and at relatively lengthy intervals. This wouldmean that direct sales must concentrate on the largest customers, with dis-tributors handling smaller ones.



33

Chapter 3

Technologies and Markets

Shape How a Business Is Run

As mentioned earlier, the plastics industry is divided into product and marketsegments that strongly affect how companies will have to run their businesses.In a number of cases, the company’s original management did not consciouslydecide to be in certain lines of business, but the nature of company’s tech-nology and their accompanying markets have put them there. Technology isa common thread connecting all of the different industry segments. You needto be aware of these powerful influences and take them into account whenmanaging the business.

Most of this discussion will be about thermoplastics. The reason is thatavailable technical and market data on thermoset materials are much lessspecific than those available for thermoplastics and consequently not readilyanalyzed and compared. In addition, other than a few resins (notably poly-urethanes), the thermoset sector of the plastics industry is largely mature andscarcely growing.

3.1 Technologies

3.1.1 Materials

The technical characteristics of materials produced, compounded, or distrib-uted by a company characterize and drive the form in which its business isconducted. The way to conduct a commodity business is very different fromsuccessfully operating a specialty business or even a semi-commodity business.A surprising number of commodity company managers seem eager to brushaside this principle when the occasion arises, with predictably unhappyconsequences.


34


3.1.1.1 Commodity and Semi-Commodity Materials

There is a good correlation between market price and sales volume, as shownin 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 poly-etheretherketone (PEEK) vs. relative volumetric prices (using PP = 1.0). Higherprices correspond to less sales volume and vice versa. Of course, this is overa period of time, as market forces take a while to react to price changes. Forpurposes of this discussion, lower priced materials (under, say, $1.50/kg or$.68/lb.) are classed as commodities. Commodity resins are usually definedas including PP, PS, polyethylene (PE), polyvinyl chloride (PVC), and poly-ethylene terephthalate (PET). Semi-commodities are defined here as beingmore expensive than commodities and selling in smaller volumes, but other-wise having similar characteristics to commodities; this is discussed in moredetail in the next paragraph. Many engineering plastics have become semi-commodities 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 thermosetmaterials may also be classified as commodities or semi-commodities; in theformer category would be phenolics, unsaturated polyesters, and aminos and,in the latter category, polyurethanes (PUR), alkyds, and epoxies. Polyurethanesare a unique series of products, with commodity grades for such end uses asfoamed building insulation, semi-commodity grades for more sophisticatedend uses such as automotive fascia and fenders, and even thermoplastic highperformance grades (TPUs) for end uses that demand abrasion, impact, andultraviolet resistance.

Figure 3.2 shows volumes and revenues for the principal commodity poly-mers and engineering/semi-commodity polymers combined in year 2000. Theunusual 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 mate-rials?

General-purpose grades of both types are largely interchangeable withinspecific families and grades; that is, most general-purpose 12-melt-flowhomopolymer polypropylene or 9-melt-flow acetal copolymer grades can bemolded and used in a part with few, if any, apparent differences. Correspond-ingly, this would not be true for PP copolymers vs. PP homopolymers, norfor acetal homopolymer vs. copolymer grades. Commodity polymer productscompete with each other primarily on price (assuming that availability andservice factors are largely equal). These first two factors hold true only up toa point with semi-commodities, depending on the volume and requirementsof an application; as noted above, most manufacturers’ general-purpose prod-ucts are interchangeable with those of others, but producers also make anumber of specialized grades that do not have exact equivalents availablefrom competitors. These latter products usually command price premiumsover the general-purpose grades, and competitors may not always price


Technologies and Markets Shape How a Business Is Run

35

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37

offsetting products similarly, depending on a number of factors (e.g., perfor-mance differences or targeted end uses). Finally, the physical volumes ofcommodities that are manufactured, transported, stored, and processed areentire orders of magnitude larger than the volumes in semi-commodities.

What are the requirements for managing a business based on such mate-rials?

Management has to focus on cost control while finding ways to developdifferentiated products. Cost control in the case of commodities usually meansheavy emphasis on minimizing the number of grades produced and maximiz-ing the length of production runs and size of orders; while desirable, suchconstraints are not essential for specialized products. Commodity producerresearch and development (R&D) must be carefully limited to serving thelargest customers and markets. Commodity materials are, by definition, volumematerials with easy transition between suppliers’ products and are highly pricesensitive. Logistics play a critical role in cost and customer service. Bulkshipping is the rule for commodities and requires an investment in transport,storage, and strategic plant siting. These considerations are only occasionallyfound in semi-commodity materials.

Even sales personnel are affected by these factors. Commodity sales rep-resentatives have to concentrate on the largest users and try to obtain long-term contracts. Semi-commodity sales representatives are more inclined tolook for new applications or to try to qualify their companies as secondsources for established and growing applications, with the emphasis more onunit 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 differencesamong them. High-performance materials are usually the most expensive ofall plastic materials but offer unusually high resistance to heat and chemicalattack and high dimensional stability over a wide temperature range. Thisgroup includes polysulfones (PSU, PES, PPSU), polyetherketones (e.g., PEK,PAEK, PEEK), polyimides (e.g., PAI or PEI), PPS,

LCP, melt-processable fluo-ropolymers (such as fluorinated ethylene-propylene [FEP] and others), ther-moset alkyds, and silicones. Unlike commodity materials, high-performanceproducts that are nominally the same can differ markedly from each other asto properties, processing characteristics, and price. For example, LCPs fromDuPont, Ticona, Solvay, Eastman, and Unitika vary significantly from eachother in several of the characteristics just mentioned. Because high-perfor-mance and unique materials are relatively expensive, they are sold in muchsmaller quantities than commodity materials; therefore, logistics and customerservice are much less significant components in their

cost. High-performancematerials are packaged in bags, boxes, or sacks and are virtually never soldin bulk.

Creating a business in these products requires a strong product andapplication development group to keep sales and earnings curves moving upsmartly. Unfortunately, this is an area where many established commodity and


38


semi-commodity companies often fall short. When their R&D teams developpromising specialty materials, management is often unwilling to support prod-uct, application, and market development on a scale necessary for successbecause it seems excessively costly. This perception results from their expe-rience in their existing commodity business but such experience is not reallygermane to the new business. The half-hearted effort, then, results in tech-nological success but marketing failure. Property modification and enhance-ment through compounding is another arrow in the quiver when it comes tobroadening unique product market opportunities. For example, adding fiberreinforcement dramatically increases the usefulness at high temperatures ofsuch semi-crystalline polymers as nylons. This approach permits makingmaterials with properties that are custom-tailored to specific applications, whenstandard grades do not quite do the job. This is a way to truly create valuefor customers and earn their loyalty in return. Needless to say, it is also moreprofitable.

Few materials are truly unique. All plastic materials compete with eachother and conventional materials at least to some degree; however, it is thecombination of properties and cost that ultimately decides which material willbe used in any given application. Even those protected by patents mustcompete with others that overlap at least some of their properties. For example,polymethylpentene-1 (PMP) is a relatively unique material. While its opticalproperties do overlap those of other transparent polymers, its

combination

of gas permeation, light transmission, and heat and chemical resistance set itapart from such others as PET, PC, or SAN. Its relatively high cost precludesit from taking over more than a small number of applications from thecompeting products, but this pricing structure must also be considered to havebeen a choice by the manufacturer to maximize profitability.

Polytetrafluoroethylene (PTFE) is another relatively unique material, bothfrom the standpoint of its properties and the fact that it is a notable exceptionto the price–volume relationship shown in Figure 3.1, selling in much greatervolume than would be predicted by its price. Nevertheless, PTFE has becomea semi-commodity within its range of applications, in the sense that littledifference exists among standard grades supplied by the various competitors.PTFE has a remarkable combination of chemical inertness, lubricity, dielectricproperties, and ignition and heat resistance that sets it apart from most othermaterials. However, it is not melt-processable, and PTFE processors virtuallyconstitute a separate community of fabricators because of its special processingrequirements (similar to sintered metal fabrication). Many parts made of PTFEare machined from stock shapes or cut from skived sheets, due to its processinglimitations. PTFE melt-processable copolymers, such as fluorinated ethylene-propylene (FEP) and perfluoroxyalkoxy (PFA), offer much of the benefits ofthe homopolymer while widening its range of applications due to its abilityto be molded or extruded.

Pricing unique materials is a special challenge. One cannot ignore othermaterials that come close in properties, because too big a price differentialmay allow a competing product to gain a foothold at the low end of someapplications or because of redesign. On the other hand, many applications



39

for unique materials are relatively price insensitive. As a rule, estimating whatwill bring the highest total gross profit is the most effective way to set pricing.A further consideration for unique product management is that continuingapplication development is essential to keep sales of these materials fromfalling 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. Forexample, commodities require the least technical support, and high-perfor-mance materials require the most; however, commodities require more invest-ment in logistics than do high-performance materials. The impact on thebusiness is subtle; increased R&D support is a direct expense and normallyruns between 2 and 5% of sales, whereas increased logistics support is likelyto be in the form of additional investment in storage and transport, showingup in financial statements as depreciation spread over a number of years, asmall fraction of a percent of sales. Yes, some companies do capitalize anddepreciate their R&D, but this is not a preferred financial treatment in theplastics 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 scaleand range of integration come into play when considering the impact on thenature of the business models of processors.

To a large extent, a processor’s equipment defines the business of thatprocessor. A molder with 2500-ton clamp presses is more likely to be involvedin business machine or automotive markets than in power tool markets, justas 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 beinvolved in consumer products than in medical equipment markets, and apipe extruder is virtually, by definition, supplying the construction market.

As mentioned earlier, some processors specialize in types of materialsprocessed, such as thermosets or polytetrafluoroethylene (PTFE). Again, thistends to define the markets served as well. Thermoset compression and transfermolders are likely to be focused on electrical/electronics and PTFE processorson 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 seldomcompete with extruders, although blow molders may find they are competingwith thermoformers or rotomolders. Equipment type and size also often markprocessors as generalists or specialists; a range of machine sizes is more likelyto be found in the plant of a large general custom molder, for example, than


40


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

3.1.2.2 Full-Service vs. Specialist

As processors grow in size, they will usually come to a point where they findthat their initial focus on a single process limits future growth and/or profit-ability. Often, a major customer who wants “one-stop shopping” forces thisdecision. The processor ignores such desires at the risk of losing all of thatcustomer’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 theorythat you will earn more from additional overall business. That is not soundpractice. For example, suppose a customer wants the molder to electroplateparts. This request should be analyzed as a make-or-buy situation: whichevercourse makes a more satisfactory return on investment will be the one totake. It should not be an automatic reaction to go out and buy electroplatingequipment. Buying equipment that is only used to service one customerpresents a risk that should be appraised carefully. If you can pay off the costand make a profit within the life of the purchase contract offered by yourcustomer, it may well make sense. But, if the process is unfamiliar to you, itmay 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 forcompeting successfully in the plastics industry. Technology comes in severalvarieties:

�

In the public domain

, which means that it has been published in openliterature and is free of any patent restrictions. Most basic manufacturingoperations fall into this category, such as simple compounding and poly-merization steps that follow well-known chemical engineering unit oper-ations, as well as long-established processing methods. Most basic moldingand extrusion processing technologies are in the public domain.

�

Patented

, which means that the composition of matter or process or usagehas been described in detail in a patent that has a finite life, after whichthe technology falls into the public domain. Only the owner of the patentcan use the technology or grant others the right to use it. Anyone infringinga patent (using the technology it claims) without permission can be suedby the patent owner for damages, as well as being issued a “cease anddesist” injunction from the court for immediate relief. Patent lawsuits areamong the most expensive of civil cases to prosecute or defend, and thefinancial stakes must be high to justify the costs. Such lawsuits also requirea substantial amount of time from company personnel for the preparationand implementation of the lawsuit. A number of current patents cover



41

materials, processes, and equipment in our industry. This is usually notedin the owners’ literature.

�

Trade secrets

, meaning technology that is both unpublished and notgenerally known or practiced outside the company that uses it. Thecompany that claims ownership of a trade secret must take steps to ensurethat it remains proprietary by, for example, restricting access to the for-mulation or process area where the secret is used and requiring allemployees to sign a secrecy agreement that they will not disclose or usethe 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 makessense to do so. For the licensee, this route offers fast access to proventechnology without the cost, risk, or delay of having to develop comparabletechnology. For the licenser, this route offers an additional source of financialreturn on the investment it made to develop the technology and, usually,access to any improvements made by the licensee. While it is true that byissuing one or more licenses the licenser may increase competition for itself,in some situations this can actually be advantageous. The reason is that manypotential large customers for the patented or trade-secret-protected productmay choose not to use a single-source material, out of concern for sufficientsupplies or the monopoly power of the manufacturer to set artificially highprices, or both. The entry of a second supplier, even though under licenseto the first supplier, usually removes these concerns and causes the demandfor the product to grow much more rapidly than would be the case with onlyone supplier. Second suppliers also usually develop new applications andmarkets faster than one, not only because they bring more assets to bear, butalso because it makes better business sense to find opportunities where theinitial supplier is not active. Finally, patent holders have to recognize thattheir monopoly has only a short life and they can gain more during the lifetimeof the patent by licensing to create a strong duopoly that will make it moredifficult for any others to enter the business after the patent has expired.Unfortunately, not many patent owners have been willing to observe andlearn from the few who have either deliberately pursued limited licensing orfound it the easiest exit from a lawsuit and then succeeded along the linesdescribed. DuPont and Celanese chose this course after briefly contesting eachother’s POW patents, and both prospered.

Often, engineering firms or equipment suppliers will furnish technologypackages as part of their products and services. “Turnkey” plant componentsand layouts are usually based on information in the public domain. Individualequipment items may be patented or trade secrets, but the buyer gets a licenseas part of the purchase.

3.1.4 Regulatory and Environmental Issues

Most polymers, particularly such commodity materials as polyolefins andpolyethylene terephthalate, are chemically inert and therefore relatively benign


42


from an environmental standpoint. But, because PP, PE, and PET are so widelyused for food packaging, they can pose a litter problem. Management needsto foster recycling or incineration of these materials wherever it makes eco-nomic sense to do so. Furthermore, the economic picture must be addressedover 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 ifproducers price virgin material below recyclate for any length of time.

Polyvinyl chloride (PVC) has received particular opprobrium from someenvironmental groups, because the monomer, vinyl chloride, is a knownhuman carcinogen, and partial incineration at low temperatures (admittedly aremote likelihood) of the polymer can lead to the formation of certain dioxins,which can cause dermatitis in humans and cancer in guinea pigs. Despitethese attacks, it has been clearly demonstrated that PVC can be successfullyrecycled or incinerated, although PVC recycling has not benefited from any-thing approaching the level of municipal collection that PET and PE have.

Engineering and high-performance plastics can be recycled but economicsfavor post-industrial rather than post-consumer sources, in order to have anidentifiable and relatively clean waste stream of sufficient size. One suchsource, nylon fiber waste, is ideal for recycled nylon molding and extrusioncompounds. Most processors recover sprues, runners, and scrap parts as partof their normal operations; if recycled material is not permitted to be used inmaking parts, then the “regrind” material can be sold to brokers or otherprocessors, where it also ends up being recycled.

Thermosetting materials can also be recycled in the form of filler for virgincompounds. This has been demonstrated for polyester and epoxy moldingcompounds; there would seem to be no scientific reason why others couldnot be recycled similarly as well.

Many processors do not have the background in chemistry or chemicalengineering to be knowledgeable about the dangers of toxic or dangerousfumes coming from hot or decomposing polymers. This information is readilyavailable from suppliers, in simpler form than that contained in a MaterialSafety Data Sheet (MSDS), which tends to be quite technical and legalistic. Inaddition to technical support from materials suppliers, processors will findthat membership in industry trade associations, such as The Society of thePlastics Industry, can be very helpful in identifying such problems and takingsteps to deal with them.

3.2 Markets

The enormous variety of end uses for plastics materials is what gives theindustry its truly dynamic character. It also offers an exciting and definingchallenge to find the optimum mix of markets and customers to pursue thatfits with the products your company makes, the services it offers, and yourfinancial goals. Many people who have worked in the plastics industry, butleft it to pursue another career, return because they missed the seeminglyendless variety of new applications and business opportunities.



43

While some companies have concentrated their efforts on just the largerend-use markets, many find it safer to spread their business over a numberof application areas. As noted in the previous chapter, the type of productsa company makes shapes its marketing efforts. Figure 3.3 illustrates the relativeproportions of the different major market segments by physical volume. Asnoted elsewhere, packaging is the largest end use, followed by construction,automotive, and electrical/electronic (E/E). Figure 3.4 illustrates the propor-tions by the process used to convert polymers to parts. Extrusion is the mostsignificant process, largely because most of the products sold in packagingand construction are extruded. Injection molding, the next most importantprocess, is used for most complex parts. Blow molding is also heavily usedfor packaging products. “Other” refers largely to thermoset processes, such ascompression and transfer molding, and reaction injection molding (RIM).

Note that the categorization of a given application by a specific end-usemarket may seem somewhat arbitrary and is not always consistent within theindustry. U.S. Department of Labor Standard Industry Classification (SIC) codesare seldom used by plastics industry market researchers because the categoriestend to be too general. It is common practice to categorize an application byits most essential attributes. For example, an electrical connector in an auto-mobile wiring harness is generally considered to be an automotive application,whereas electrical connectors that are used in a variety of end uses are

Figure 3.3 Major markets by end use (volume).

Packaging30%

Construction28%

Automotive16%

E/E10%

Other16%


44


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

3.2.1 Packaging

Packaging constitutes the single largest end use for plastic materials, primarilythe commodity resins: polypropylene (PP), polyethylene (PE), polystyrene(PS), polyvinyl chloride (PVC), and polyethylene terephthalate (PET). Semi-commodity nylon 6 (PA6) is an important exception, because film for food(mostly meat) packaging is a major market for this polymer. Packaging hasbecome the major market for plastics because plastics offer better protectionagainst spoilage and display products more attractively than do conventionalmaterials. 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 factorin 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 ofthis market and are truly commodities, using commodity polymers. Post-consumer recycling is also an important consideration for PE- and PET-basedpackaging; some major end users and some government entities even specifyrecycled content. One of the attractive aspects of the packaging market is itsrelative resistance to economic cyclicality, at least in food packaging. People

Figure 3.4 Principal forms of processing (volume).

Extrusion45%

Injection Molding29%

Blow Molding15%

Rotomolding2%

Other9%



45

have to eat, but the growth of convenience foods has been generally growingeven faster than the rate of population increase.

A number of specialty uses, such as industrial machinery and custompackaging, are much smaller in volume but offer better earnings potential toboth the supplier and the user. These uses can range from made-to-orderpolystyrene foam protective moldings to injection-molded acrylic cases forsmall tools. Polymethylpentene-1 (PMP) has found some specialty food-pack-aging applications where its unusual combination of transparency, gas per-meability, and heat and chemical resistance properties can sometimes offergreater value than the commodity polymers mentioned earlier.

While the number of firms using polymers to produce packaging materialsis substantial, the usage by each firm is usually so large that they havesignificant purchasing leverage. Polymer shipments are frequently made viabulk carrier, either rail or truck, to these large users; therefore, expertise inlogistics is often critical to serving these customers. One must remember,however, that volume packaging applications will always seek to shift to thelowest priced materials that function satisfactorily.

Packaging materials that come in contact with food require compliancewith Food and Drug Administration (FDA) regulations and, in some cases,with U.S. Department of Agriculture (USDA) regulations as well. Processorsutilizing such materials must ensure that the parts and films they make arefree of dirt or other contaminants when they are manufactured and packedfor shipment.

As mentioned earlier, selling products for packaging usually requires acommodity approach to achieve significant, sustained, and profitable marketshare. R&D must be targeted very carefully to ensure that the company canrecover the investment. Nevertheless, the relatively steady growth of packagingmakes this a market that should be included in nearly every company’sbusiness plans.

3.2.2 Construction

Construction is a distinctly cyclical industry, and most applications are verymuch commodity in nature. Construction is the second largest end-use marketfor plastics. Most of the volume usage is processed by extrusion, such as forpiping, conduit, wire insulation, siding, reservoir liners, erosion control netting,or architectural sheeting. Sometimes this category includes such agriculturalend uses as irrigation pipe and fittings, mulch films, and fencing. As inpackaging, plastics have displaced such traditional materials as wood, glass,and metal, based on improved performance and lower cost. Considering thevolumes involved, the marketplace tends to favor commodities whereverpossible.

There are a number of regulatory hurdles to overcome in this market beforeone can participate fully. For material suppliers, the most prominent ones arethe Underwriters Laboratories (UL) listings mentioned later in more detail, andthe National Sanitation Foundation (NSF) listings that are required by most


46


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 orderto compete effectively. The scope of this knowledge base will have to includethe 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 engineeringplastics, such as nylons (PAs), polycarbonate (PC), acetal (POM), or modifiedpolyphenylene ether (PPE). It is also an important market for commoditypolymers (e.g., PP, PE, and PVC). The automotive industry is unlike thepackaging industry in that there are relatively few users, and these users areforcing their suppliers to consolidate by reducing the number from whomthey will buy. Their purpose in doing this is to gain purchasing leverage,offering the prospect of greater sales revenue per supplier in return for lowerprices. The sales revenue potential of the automotive industry is so large thatmany firms are attracted to it, but profitability is not only low but also underconstant and heavy pressure from both customers and competitors which hasforced vendor consolidation, cutting the number of automotive suppliers bymore than two thirds in the past decade, according to an article in theDecember 2001 issue of

Injection Molding.

While the average sales revenuehas risen tenfold during the same period, the top 20% of the suppliers earndouble the earnings before interest and taxes (EBIT) percentage reported bythe rest of the industry. Over the past 5 years, publicly held automotivesuppliers as a whole have reported lower earnings, expressed either as EBITor 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 anythingother than a leader.

Automotive business is notoriously cyclical, and suppliers can easily findtheir orders canceled literally overnight if demand takes a downturn. Auto-motive business cycles not only include the ups and downs of the overalleconomy but also those of individual brands and models. Operating success-fully in a cyclical industry requires companies to have considerable flexibilitywith respect to manufacturing capacity, such as outsourcing, and financialreserves, such as lines of credit. Nevertheless, some companies have prosperedby learning how to cope with these problems successfully.

In the past decade, General Motors, Ford, and DaimlerChrysler (the BigThree) have placed onerous demands on their suppliers to reduce prices bya fixed amount per year, even retroactively, or face the risk of being phasedout as a supplier. This has prompted a number of suppliers to merge in orderto reduce their costs. Some suppliers have defied these demands successfully,while others have either switched to supplying other automotive companiesor have reduced (or even eliminated) their exposure to the entire industry.The Big Three acknowledge that their policies risk losing suppliers but they



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, suchas Honda, Toyota, Nissan, and Mazda, do not have this reputation and havebeen consistently taking market share away from the Big Three. Is there is aconnection here? Could it be that the Japanese producers’ reputed superiorproduct quality depends at least partly on a more cooperative, truly partneringrelationship with their suppliers?

Another characteristic of this market segment is long lead-times for newapplications, 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 onand attempt to become involved, even if it is only last-minute bidding. Theadditional time also allows the end users to reconsider whether or not theywill really commit to taking a project into production, particularly if styling isinvolved.

The automotive market must be addressed as basically a commodity busi-ness, regardless of the materials being used. Some exceptions to this general-ization 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 thirdlargest 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 rangeof engineering and high-performance polymers. In the past, a substantialnumber of customers using a wide variety of materials (many custom made)in significant quantities yielded good revenues with excellent profitability andhigh growth rates, but globalization has changed this forever, as industryconsolidation is reducing the number of end users, and outsourcing of pro-duction has led to fewer actual manufacturers. All of this, in turn, has resultedin increasing competitive cost pressures keeping prices — and profits — down.In the past decade, E/E buyers have been shifting manufacturing out of theUnited States to lower cost countries, such as Mexico and Asia. Sometimesthe polymer sales follow these shifts, but for single-site processors the businessis gone indefinitely if not forever.

Other significant, but temporary, problems in the E/E industry have resultedin product demand being “borrowed” from the future, resulting in overpro-duction to meet a temporary and overstimulated demand. The first problemstemmed from an overly pessimistic concern about the inability of computersystems to handle the Y2K problem. The problem itself turned out to berelatively minor, but many companies and individuals replaced their computersystems much earlier than they would have otherwise, thus borrowing fromfuture demand. The second problem occurred as a result of the incrediblehype about the Internet, which resulted in an immense overbuilding of wide-band and computer facilities. Both of these runups are currently being digested


48


by the industry but it may be several more years before demand comes backto normal levels. Meanwhile, E/E manufacturers are under immense pressureto cut costs just to stay in business. Unlike the automotive industry, E/E isrelying on contracting out manufacturing and product redesign, rather thanpressuring suppliers to cut prices retroactively.

An important aspect of the E/E market is the fast time-to-market (usually6 months) demands of the industry and the relatively short product life cyclesof perhaps 12 to 18 months. These considerations virtually preclude multiplesourcing of materials and parts other than the most basic of units, such asconnectors. They also mean that suppliers must work with end users withnew applications from the beginning (for which they will be rewarded withthe business), but they will be unable to displace or even share business withan 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 devel-opment, both materials and parts, by R&D with a view toward UL requirements.This usually means that materials must be offered in flame-resistant formula-tions if they are not already inherently flame resistant. Regulatory requirementsin several European countries can also mandate that flame resistance must beachieved without the use of halogenated components. A UL listing for flameresistance for a qualified product is relatively quick and inexpensive to getcompared to another important UL requirement, the limiting temperature index(LTI), which specifies the maximum continuous use (operating) temperaturefor a material. An LTI will require 6 to 18 months to obtain. The expense ofobtaining and maintaining these listings (there is an annual fee) demands thatthe market potential for each product be sufficient to justify them.

Some sectors of the E/E market have been evolving toward becomingcommodity businesses, but there are still a number of high-performance,attractive opportunities in specialty sectors. New product and applicationdevelopment has a good chance of resulting in significant, profitable businessin this industry as performance requirements keep ratcheting up. A need existsfor higher temperature resistance materials with processing characteristicssuitable for use in thinner walled, smaller components, among other things.This is a challenge for everyone in the industry, from polymer manufacturersthrough processors.

The largest subcategory of the E/E market, wire and cable, has a range ofcommodity, semi-commodity, and specialty applications. Actually, all E/Eproducts, including wire and cable, eventually wind up in a number of othermarkets. This can make for confusing comparisons, depending on the defini-tions of the markets assigned to various end uses. It also requires cautionwhen making growth projections to ensure that the eventual end uses areproperly categorized. For example, the top four end uses for wire and cableare power transmission (power generation to user), communications, electron-ics (for example, CATV), and buildings. As is evident, these combine bothconsumer and industrial users in each subset. The materials range frompolyolefins to fluoropolymers, with over two dozen firms supplying materialsto an even greater number of proprietary processor-end users.



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. Thismarket segment is extremely diversified, with a number of very profitableniche opportunities. The downside of business in consumer goods is that theproduct life cycles are often short, and most applications are price sensitive.Also, many of the end uses have seasonal patterns. While much of this marketis not yet international, the trend is in this direction. Already, some Americanend users are purchasing in all three North American Free Trade Association(NAFTA) countries (United States, Canada, and Mexico) or overseas. Someprocessors and material suppliers have begun following these users to Europeand Asia in order to serve their customers more effectively than a local firmcould.

Major appliances, such as refrigerators, dishwashers, or clothes washersand dryers, have both commodity and semi-commodity aspects (as do anumber of other consumer goods, even ones that do not consume such largequantities). Constant cost pressures have converted many applications to lessexpensive polymers. For example, parts originally made from nylon have beenredesigned to use mineral-filled polypropylene instead. Still, there are appli-cations where mechanical requirements (typically creep resistance and stiffnessat elevated temperatures) dictate using higher performance materials. Thismarket is one that favors materials suppliers with broad portfolios that cansuccessfully follow the substitution of higher priced by lower priced and stilllower priced materials.

Possibly the best-known consumer goods company to pursue a plan tosystematically skim the market for successively less expensive versions of aproduct was Polaroid Corporation. Polaroid would introduce a new instantcamera line with extensive features that used high-end materials to ensurethat nothing would fail in use and charge a handsome price that more thancovered the added costs. When Polaroid calculated that sales growth for thenew line was slowing, it would bring out a redesigned model made of lessexpensive materials and having less extensive features, introducing it as asimplified version of the first one. This could be repeated again and again aslong as additional market growth appeared possible at lower prices and theolder, more expensive models were still selling. Polaroid engineers would tellmolders and material suppliers exactly what they were doing so that all couldparticipate in this extraordinarily successful (for a time!) marketing concept.Consumers who wanted something exciting and new and could afford to paytop price would buy the first product introduction. Consumers who could notafford to be first in line could wait until the lower cost model came out. Ineffect, Polaroid created a marketing technique that depended on the well-established plastics industry phenomenon of migration over time from a higherpriced to a lower priced and a still lower priced material. Alas, Polaroid finallyran out of ideas and recently has filed for bankruptcy.

Consumer non-durables are defined as items expected to last less than3 years and consist mostly of single-use, disposable items, such as single-use


50


cups, picnic tableware, and disposable diaper components, and specialtypackaging (e.g., cosmetics cases). Cost is king, as one would expect in suchcommodity applications.

Although synthetic fibers are not widely thought of as part of the plasticsindustry, they indeed are and they strongly affect the supply and prices fortheir base resins. The great majority of fibers are used for consumer goods,such as carpeting and clothing. When housing starts or consumer purchasingare going through the down part of their economic cycles, integrated polymer/fiber producers have more capacity to divert to plastics sales, with the obviouseffects 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 mainlyconcerned with machinery parts, such as pump housings and impellers,conveyor links, or gears and bearings. This is an ideal market into which tosell; it is highly fragmented, has low competitive visibility and high value inuse, and therefore has high profitability. Product life cycles are usually likelyto be long. End users in this category are often local. The drawback is thatvolumes tend to be small. The materials used run the full range from com-modities to specialties but tend mostly toward engineering and high-perfor-mance polymers.

Semi-finished shapes are rod, tubing, and sheet, which are mechanicallyfabricated into other parts for mostly unidentified end uses. Often semi-finished shapes are used to make prototype parts for evaluation or even smallnumbers 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. Therehas been considerable consolidation taking place in the last several years, sothe remaining processors are able to exercise considerable pressure on sup-pliers’ prices. This is an unusual business segment because shape producersrarely have direct contact with end users, their route to market being almostentirely through stock shape distributors, a group separate from plastic materialdistributors.

3.2.7 Other

We needed a category for “everything else” and this is it; nevertheless, afew 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, disposablesand durable equipment. Disposables are commodity products (the emphasisis 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, bloodbags, IV bags, etc.

Medical durable equipment also offers the opportunity for



51

higher margin business, because components are likely to require specialmaterials and short molding or extrusion runs; again, reliability demands arehigh but this also means that you may wish to review your exposure toproduct liability claims with your insurance carrier.

Aerospace and military markets are among the most challenging marketsfor plastics. End users are highly fragmented, volumes range from small tomedium, and application development typically has very a long timeline;however, product life cycles correspondingly also tend to be very long. Thesemarkets are kinder to material suppliers than processors. Once a material isapproved, a supplier can look forward to a long run, perhaps even decades.If the material specification has been written around a particular product tightlyenough, competitors are unlikely to be able to qualify their material as analternate source. On the other hand, parts contracts are generally put up forbids annually, so that a processor must defend the business every year. Doingbusiness with the U.S. Government also carries some obligation to maintaina product for reasons of national security.



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Chapter 4

Company Culture and

Organization

Because the plastics industry is relatively young and growing rapidly (com-pared to industries based on such conventional materials as wood, metal, andglass), it has a very broad mixture of company cultures. And, as the companiesof the industry grow in size or consolidate, following local customers to otherparts of the country or the world, their business cultures are constantlychanging.

What is a business culture? It is the consensus of people within a companyabout how to react to stimulus, both internal and external. This consensus isinfluenced by many factors: senior management, employees, vendors, custom-ers, the geographic location of the workplace, etc. Cultures are both inheritedand 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 foundin the industry and see what sets them apart from each other. No particulartype of company culture is intrinsically right or wrong. They exist as a socialphenomenon and must be viewed as such.

Why do we care about culture? Because it imposes certain constraints onhow a company is managed. Sometimes the company’s culture is appropriateto making a business grow profitably, sometimes not. One cannot manage acompany successfully without a working understanding of its culture. Havingassessed this, an executive may decide to either work within the existingculture or seek to change it. If management ignores the culture and its inherentconstraints, then management is likely to have an uphill battle on its handstrying to get subordinates on board with its objectives and then reaching thedesired performance goals. You should understand that changing a culture isa slow, difficult process, with a significant potential for failure. The biggestbarrier to changing a company culture is often at or just below the top; themost senior managers frequently are the most resistant to change, not because


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they are incapable of new thoughts, but because they fear an accompanyingloss of authority, status, and compensation. These people must be broughton board at the onset or replaced. The usual way to change a culture is torevise the organizational structure and reassign key people to new responsi-bilities. The least risky but slowest route to successful culture change is toaccomplish it through one subordinate group at a time, but never forget thosepesky 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 functioningon an effective and efficient basis. This chapter deals with all of theseconsiderations.

4.1 Size Matters — It Is Intertwined with Culture

It is no surprise that communications and, consequently, management becomemore 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 functionwell in a small company often do not do as well in a large one and viceversa. Therefore, you must expect that some personnel friction will accompanyrapid growth or shrinkage, which goes beyond just staying even with the paceof business. The inflection points at which the size of the company affects itsorganization and the personnel in it will vary according to the function of thegroup involved (e.g., manufacturing vs. research and development). As a ruleof thumb, new companies first feel these growing pains when they reachprofessional staffing levels that require two layers of supervision below topmanagement. The first addition of a geographically separate site (even in thesame country) will also introduce some cultural friction. If the new locationis in another time zone, so that communications are impeded, the friction isintensified.

Company size strongly influences company culture and vice versa. Smallcompanies are more like small towns or even extended families, whereworking relationships are often also social ones. There are few secrets in smallcompanies! Because of simpler organizational structure and fewer personnel,small companies are usually able to make fast decisions and react quickly tochanges in the marketplace. Small companies are generally strongly customerfocused. When they are not, it is typically because they have a culture leftover from a previously downsized, much larger company. When they reachthe stage in their growth where these interrelationships do not function aswell as before, then a culture change may begin to take place.

Large companies are typically more focused on global strategies and costcontrol, with particular emphasis on manufacturing and logistics. They areoften, but not always, commodity oriented in some measure. As a rule, theyare more overall market or product focused than customer focused; one cansee this diffusion accelerate as they turn over increasing numbers of customersto distributors in order to reduce costs. Large companies also tend to be moreimpersonal, with more formal relationships between people working in


Company Culture and Organization

55

different groups. Big company cultures can all too easily degenerate intobureaucratic, quasi-government cultures, where job security and turf mattermore than company success. This must be guarded against, obviously.Frequent restructuring can produce this breakdown when the employeesquestion management’s loyalty to them and decide they will survive best byhunkering down and trying to ride out the changes.

In addition to being influenced by size, company cultures often reflect thedominant professional group (e.g., technology or manufacturing or sales) whenthe company came into being or went through a reduction in size. Culturesalso reflect the characteristics of the ownership, whether they are a foundingfamily, institutional investors, or foreign nationals.

Because polymer production has been as a rule parented by basic chemicalor petrochemical companies, polymer manufacturing is almost always associ-ated with big-company, managerial, commodity, and, sometimes, technologycultures. Compounding, processing, and distribution, on the other hand, aremost frequently found to have small-company, entrepreneurial cultures. Wewill examine in greater detail some of the more frequently encountered culturalvarieties 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 typicallyinvolved in every detail of the business. If you are that boss, then you canmake your entrepreneurial company an exciting and enjoyable place to work,if you structure the work environment so that everyone feels a sense ofmission, participation, and accomplishment as the business grows and pros-pers. If you attempt to micromanage every detail, however, all you will ensureis that

you

will work 80+ hours per week and that your subordinates willgrow frustrated as they are prevented from having a chance to do anythingof their own undertaking. You will also ensure a high personnel turnover. Inthe normal business world, entrepreneurships generally either succeed or failwithin two years of start-up.

Entrepreneurial companies are usually service and specialty products ori-ented, with the ability to tailor these offerings to the customers’ needs. Virtuallyall of the entrepreneurial companies within the scope of this book will becompounders, distributors, and processors. The capital requirements for poly-mer manufacturing are generally so large as to preclude entrepreneurial start-ups. While a few entrepreneurs have created polymer manufacturingcompanies, this was in the past and such situations no longer exist. A polymermanufacturing company that started out as an entrepreneurial culture will haveshifted to managerial or commodity long ago. Possibly a management buyoutof a small specialty polymer manufacturer might reintroduce an entrepreneurialculture, but it is more likely to be a management one.

Interpersonal relationships in entrepreneurial companies are usually quitestrong. This is not surprising, as almost everyone has been hired by the founder


56


and usually shares the founder’s sense of mission. The employees also usuallyexhibit a sense of loyalty to the founder and the company, that has giventhem 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 mea-sured up to the founder (“from shirtsleeves to shirtsleeves in three genera-tions”), a number of small to medium-sized companies have flourished underfamily owner–managers, and even large companies, too, such as HuntsmanChemical (the Huntsman family). Perhaps the greatest strength found in suchentrepreneurial companies is a continuing clear and consistent vision of thecompany’s purpose in business, in contrast to many large, publicly heldcorporations. As mentioned elsewhere, the chemical industry over the pastdecade has seen some of its largest firms decide to change their vision andbecome life-science companies, divesting their base businesses (such as plas-tics) and then realizing — too late — that they were not big enough tocompete successfully against real life-sciences companies. The result has beenthe disappearance from the plastics scene of some of the industry’s oldestnames, such as Hoechst and Monsanto. Another benefit is the assurance thatthe family has committed to continuing ownership of the company, therebygiving some measure of security to the employees. Of course, these decisionsare subject to change when generational succession takes place. Jon Huntsmanrecently 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 aretoo deep, the basic factors governing business are 75–80% outside the controlof managers, and investors don’t understand that these types of businesseshave periods in their cycles when business is so weak, dividends can’t bepaid. 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 companybe private. It can take the up cycles with the down.” Huntsman, a cancersurvivor, noted that taking Huntsman Chemical public would be a consider-ation in the course of his estate planning, a problem that confronts everyentrepreneur who wishes to keep the business “in the family” as much aspossible.

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 orshe would in a start-up. The focus is on growth and profitability, rather thanbecoming established and surviving. Management personnel view the companyas 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 maynot be appropriate to the situation. Interpersonal relationships and companyloyalty are not as strong as in the entrepreneurial company. Some family-owned



57

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

4.1.3 Commodity Culture

Commodity cultures are usually found in large companies (well over $1 billionin sales), with the focus on manufacturing and cost control cited earlier. Forour purposes, commodities may be conveniently defined as those polymersthat 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 undifferen-tiated from those of another. Low prices mean that logistics and transactioncosts are significant, and that operating profit margins are thin on an absolutebasis — for example, $.01/lb ($.02/kg). For these reasons, commodity com-panies emphasize long, smooth production runs, a minimum number of grades,and tight control over costs. When effectively managed, these companies canbe very profitable. Over the decades, their biggest problem has been to avoidfollowing the business cycle by overbuilding capacity just before a dip in theeconomy.

Commodity cultures tend to have flat, lean organizations. Interpersonalrelationships and company loyalty are important to the successful operationof such businesses where so much depends on so few people. Unfortunately,many commodity companies may lack such loyalty if they have gone througha number of staff reductions to get where they are (usually in the course ofmergers). Personnel stability over a period of several years can help restoresome of that lost loyalty.

To a degree, the commodity culture of the polyolefins industry sector stemsfrom its roots, bulk petrochemicals. Oil and gas are mineral commodities andthey shape the culture of the corporations that produce, refine, and transformthem into petrochemicals. To a significant extent, oil and gas companies ownpolyolefin producers (usually through petrochemical subsidiaries or divisions),and the commodity culture they transmit through management control isunavoidable. Industry observers can see this in oil and gas company annualstockholder reports, where the tons of chemical products produced arereported right alongside the tons of oil and gas produced, as if they were allthe same thing, regardless of the wide difference in selling prices and profit-ability between downstream chemicals and oil. The emphasis on physicalthroughput as all important is still unmistakable, although the rhetoric hasbeen updated to show that management is now more focused on sales andearnings (but relative profitability is seldom mentioned). The effect of taxlaws, including such esoteric concepts as depletion allowances, helps increasean integrated oil and gas company’s cash flow from the production of oil andgas. Considering the high initial cost of finding and developing oil and gaswells, it behooves the owners to maximize sustained production once the


58


wells come onstream. In turn, downstream activities, such as refining orchemicals manufacturing, almost become an exercise in trying to keep the oiland gas moving and the cash flow from being reduced. The economics ofmineral commodities dictate that products be priced at a “market-clearinglevel” because it is usually more economic to keep product moving at whateverprice it will command than to cut production or attempt to stockpile it. Whilethis practice is perfectly logical in oil and gas, its application in polymermanufacturing is a significant contributor to the wide swings in commoditypolymer pricing. Giving credit where it is due, the managers of energycompanies in recent years have come to recognize the cultural difficulty insuccessfully running polymer operations within oil and petrochemical unitsand now usually put them into separate divisions or set up stand-alonesubsidiaries or joint ventures.

A weakness notable in many commodity company cultures is an inabilityto capitalize on the value of product differences where they exist. Instead,they view product improvements as a sales tool to gain market share by takingbusiness away from a competitor at the same price being charged for a lowerperforming product, instead of trying to use the performance advantages toobtain some

premium

over the competing material. Granted, this is not easyto do, but the failure to even try makes it very difficult for commodity companyto lift its profit margins above those of its competitors. Often this approachresults in an inability to pay for research and development (R&D) aboveproduct maintenance levels. This weakness obviously works against the devel-opment of specialty products. If the management of a commodity culturecompany wishes to diversify into specialties, then it has to set up such abusiness as a relatively independent entity or risk almost certain failure. Insome companies, this approach has been termed

intrapreneuring

. Semi-commodity (engineering polymer) producers seem sufficiently aware of valuepricing principles that they successfully develop profitable specialties on aregular basis.

4.1.4 Technology Culture

Technology cultures flourish in R&D-oriented organizations, such as manystart-up computer software and electronics companies. In larger companies,they are generally a subculture within an organization unless, as just men-tioned, they are fused with the entrepreneurial culture in a high-tech start-upcompany. Some similarities exist between industrial technology cultures andacademic science and engineering departments, where work is performed byteams of professionals rather than by individuals.

Technology cultures are, by definition, more focused on scientific andengineering development than on manufacturing or marketing. In some busi-nesses, this is not unremarkable, because these latter functions usually follow,rather than lead, the development of unique or dominant technology. Becausetechnology cultures are often associated with entrepreneurial cultures, theyare not often found in older, larger companies within the plastics industry.



59

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

4.1.5 Nationality/Ethnic Culture

Without getting into the fever swamps of political correctness, suffice it to saythat significant and important differences exist among the business culturesin various countries and ethnic groups. These are ignored at great risk to thesuccess of the business. The differences center on what each culture valuesthe most. The presence of a common language should not be mistaken fora common culture; it tends to mask rather than bridge differences.

Perhaps the most common difference between American and many othernational business cultures is the notion of timeliness and urgency. Americansput great store on being punctual at appointments and meetings, getting rightdown to business discussions as soon as introductions are performed, seekingto obtain immediate agreement on negotiating points, and implementing plansas expeditiously as possible. In many other cultures, punctuality has noparticular 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 indepth before talking about any substantive points. They are likely to find itoffensive to be pushed into discussions, let alone agreements, before theyfeel they are ready to trust the other party. They also often wish to revisitplans several times before implementation. In other words, these culturesplace greater value on building long-term relationships than they do on gettingthings done

now

. All of this may be very frustrating to Americans, but theyneed to develop the patience and understanding necessary to accommodatethese views or give up trying to do business where these cultures prevail.Often, turbulent periods in the history of these regions underlie the reasonswhy their business cultures have evolved in this direction. For example, iflaws with respect to property rights have not been consistently enforced in alocale, then it makes a great deal of sense to find out if you can trust someonebefore risking your money and your business dealing with them.

The importance of trustworthy relationships in some cultures also carriesover into the area of problem solving. Americans need to be especially carefulwhen analyzing reasons for failure or inability to achieve goals with othernationals 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 blame-fixing exercise rather than finding a solution, then they will dig in their heelsand resist cooperating. American lawsuits are derided and feared almosteverywhere overseas, and other nationals are often suspicious that Americanswill 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.


60


Another important difference between American and non-American busi-ness cultures is the concept of employment security as a social contract. Whilethis notion is gradually eroding as global competition becomes more intense,in Europe, Japan, Latin America, and other areas, there are still strong socialfeelings that companies owe their employees lifetime job security. Note thatbusiness owners based in these same cultures by no means consider thatthey necessarily owe the same obligation to their American employees asthey do to their society. Major problems can arise when American ownerstry to restructure companies that they own in such overseas cultures. Gov-ernments and unions will not be the only ones opposed to downsizing;company managers who are citizens of these countries are likely to beuncooperative 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 econo-mies), they often mean that they admire American economic results but donot want to change what they are doing to obtain those same results. Americanswould be well advised to avoid making a practice of directly comparingAmerican business methods to the local ones, unless they have an uncommonability to do so very diplomatically. It is not difficult to win an argument butlose 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, theoverall strength of the individual professionals making up the organization isgenerally more critical to successful management than the organizationalformat itself, especially in small companies. Nevertheless, as companies growin size and their business in complexity, it is sensible to take steps to ensurethat the customer’s needs are indeed the focus of the organization rather thanthe process of the business itself. Functional or geographic organizations arethe most common forms, but market or product organizations are also widelyused. 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 headsfor manufacturing, R&D, sales and marketing, and administrative services allreporting to the chief executive officer (CEO). This is the simplest organiza-tional form and the one used by most companies, especially small and medium-sized ones. It concentrates expertise in each of the units responsible forcarrying out specific duties necessary for the business to operate on a dailybasis as well as in the future. It does require, however, that the CEO ensurethat coordination between the units is ongoing and working satisfactorily. Insome companies, particularly those having an active acquisition program, thefunctional units report to a chief operating officer (COO), with the CEO being



61

more actively engaged in planning, acquisitions, etc. In effect, the COO isresponsible for

how

the company is doing and the CEO for

where

the companyis going.

This structure certainly is not wrong or old fashioned, and it easily canserve the needs of many companies, whether they are large or small, multi-product or single product, multimarket or single market. As companies growin 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 theother structures described below. Another drawback to functional organiza-tions is that major product lines or important markets will not be servedadequately because they are buried among the rest of the product lines andmarkets served by the company.

4.2.2 Organizing by Product

Many companies in the plastics industry have evolved from a functionalstructure to one organized by product, as they have grown larger in size andtheir product line has become more diversified. An illustration of this structureis shown in Figure 4.2. This type of organization can take several forms. Acommon version has divisions devoted to a single product or groups of

Figure 4.1 Functional organization.

Figure 4.2 Product organization.

Administration

Manufacturing Sales & MarketingResearch

&Development

President/CEO

Administration

Manufacturing

Sales/Marketing Technical

Nylon


Stryrenics

President/CEO


62


products, with each division containing a functional organization. Anothercommon form involves a centralized function for, say, manufacturing, withproduct units that incorporate R&D and sales and marketing. Product organi-zation helps to rationalize manufacturing sites and to ensure global productstandards and pricing policies. It also favors centralized R&D, which may thenachieve the critical mass sufficient to make breakthrough technology advances,as compared to the only incremental improvements typical of smaller unitcapabilities.

Organization by product makes sense when the company has several,relatively large basic products that serve markets that have little overlap witheach other. For example, if a company makes nylon and acrylic resins, orproprietary parts and custom parts, these products differ greatly in manufac-turing and the markets into which they are sold. This would be a situationwhere it makes sense to have a division based on each product, with eachdivision containing its own functional units. The principal disadvantages toorganization by product are that (1) it inhibits the flexibility of local managersto react to competition, and (2) it is not particularly suitable for developinggenuinely new products.

4.2.3 Organizing by Market

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

Figure 4.3 Market organization.

Administration

Manufacturing


Automotive


Electronics

President/CEO



63

volume individually but large volume in aggregate. As noted elsewhere, marketfocus also improves business planning and creates efficiencies in manufactur-ing 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 asthe major automotive companies. The principal disadvantages of organizationby market are that (1) it tends to shut out or overlook potential business innon-targeted markets for the company’s products, and (2) it tends to funneltechnology, resources, and management time into defined markets, particularlyautomotive, which may not be as profitable as emerging or underemphasizedones, 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 updecision making when there are multiple time zones between headquartersand the local plant. An example of this organizational form is shown inFigure 4.4.

This organizational form, or some variation of it, is nearly essential forcompanies with multinational locations. While overall policy may be set atcorporate headquarters, downward delegation to overseas sites must be ade-quate to handle business decisions locally, or the company will find itselfalways reacting to competitors rather than meeting them on at least eventerms. Geographic organization delegates authority to the local managers forpricing flexibility and the ability to tailor products for local needs.

A serious disadvantage of a geographic organization is that it may lead todifferent company units competing against each other, with attendant profiterosion as units fight over business that was yours to begin with. Otherdisadvantages are that it leads to a certain amount of duplication, particularlyR&D, and that senior management will need to be involved in coordinationto ensure that global (or even national) standards are being followed.

Figure 4.4 Geographic organization.

Administration

North

America

South

America

Europe Asia

President/CEO


64


4.2.5 Hybrid Organizations

One can have a hybrid organization, particularly in large companies, withdifferent groups structured by function, product, market, geography, or evenby a few large customers. Figure 4.5 illustrates a possible hybrid companyorganization. Hybrid organizations can avoid the weakness inherent in a one-size-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 structurethat fits the nature of each principal line of business. Hybrids may be amanagement 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 man-agement is unsuitable for this and other industries that depend heavily oncreative workers, particularly technical ones. Peter Drucker was one of thefirst academics to recognize this phenomenon, dubbing these types of indi-viduals

knowledge workers

. It is not possible to command creativity in anyfunction within the company, be it R&D, marketing and sales, manufacturing,or administration. Creative solutions to problems come from people sharingpertinent information from many sources. Creativity is greatly diminished ifinformation is too compartmentalized and dissemination too limited. Commit-tees and project teams are an important way to ensure that needed informationis accessible to the parties that need it.

Management, particularly senior management, needs to know what is goingon within the company in order to execute their duties effectively. Holdingweekly briefing meetings with immediate subordinates is the classical way ofstaying informed. Don’t fail to ask questions! This should be done withoutfail, because it is a very important way to build a management team relationshipby developing an appreciation among the subordinates of what each one isdoing and why. You can further improve on the quality of the information

Figure 4.5 Hybrid organization.

Administration

Manufacturing

Sales/Marketing

Polyolefins

Sales/Marketing

Automotive Central R&D

President/CEO



65

that is shared this way and build morale by having subordinates bring indi-viduals from the next level down in their organization to brief the meetingon what is going on in their sections. A different area should be representedat each meeting, if possible.

Other ways to develop a better understanding of your organization’sworkings include being an

ex officio

member of committees and attendingmeetings on an irregular, unannounced basis. Another excellent way is man-agement by walking around — going out into the plant, the labs, and theoffices of your company without prior notice, just to see and talk to lowerlevel employees about their jobs. You might be surprised by what you learnthis way when the information has not been filtered through layers of subor-dinates. It also helps raise employee morale a surprising amount to see theboss taking an interest in even entry-level employees and listening to theirviews on their work. Make sure that you inform their bosses of any potentiallyworthwhile suggestions you hear, and praise both parties for their interest.

Be cautious about using the open-door policy, however. Depending onhow it is utilized, it can be an effective safety valve, but it can also be a majorwaste of time and potentially damaging to organizational relationships. Thereis nothing wrong with making yourself available to meet with anyone fromany level in the organization — up to a point. First of all, I do not recommendpermitting individuals to invite themselves; they should go through theirmanagers in a direct line to obtain an appointment (but their bosses shouldnot be able to say no). While those managers do not necessarily have to bepresent during the visit, they should be at least involved in arranging themeeting or they will be resentful that they have been bypassed or not informedthat their subordinate had been in to see you. Second, you will want to limitthe number of such visits you are willing to accept over the course of a monthor you may find that you do not have enough time to take care of yourprincipal duties properly.

Of course, a major exception to these limits is when someone wants toblow the whistle on a serious problem. For example, if illegal activities aregoing on that have been hidden from you, possibly by your subordinates, itis absolutely imperative that you keep a channel open whereby you can learnof 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 havesome psychological disorder that compels them to lie, and (2) those whogenuinely care about working in an honest and ethical company and arewilling to put their jobs and reputations in jeopardy in order to give you theopportunity to put things right.

Either way, your door must be open to such complaints, but then youneed to determine immediately but accurately which type of whistlebloweris in front of you presenting serious complaints. Do not let the first typedestroy the reputations of people who are innocent of the wrongdoing ofwhich they have been accused. Do not let the wrongdoers destroy thereputations and careers of the second type who have trusted you to do theright thing. This may well require having your attorneys bring in experienced,


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reputable private investigators to make this determination quickly. If you learnthat the accusations are false, then you should dismiss the informer, but doso with care and legal counsel. You will have to be prepared to rebut anyattempt to embarrass the company by the individual going to outside groupsor the press.

If, on the other hand, your investigators were to discover illegal activitiesgoing 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 destroyingyour company and its reputation, if at all possible. Such matters cannot andshould not be concealed from the authorities for any length of time, but itdoes make a genuine difference how and when they are informed. In anyevent, you must ensure that the whistleblower who first brought this to yourattention does not suffer from having revealed that others have hurt the firmand you.

4.4 Board of Directors

The corporation is essentially the only legal form used by most companies inthe plastics industry. This is so because the limited exposure to legal liabilityis clearly superior to the unlimited exposure in other forms such as partnershipsand sole proprietorships. The governance of corporations has a board ofdirectors at its pinnacle. The board of directors has a management oversightfunction on behalf of the stockholders, who elect its members. Its principalinterface is with the CEO, as well as the chief financial officer (CFO). Theboard is quite active in publicly held firms, typically meeting monthly. It selectscorporate officers and sets their compensation, approves annual budgets andpublished financial statements, changes in the company’s principal lines ofbusiness, mergers, and acquisitions. In cases of mismanagement, the boardcan replace company officers, including the CEO.

While it is not uncommon for directors to be handpicked friends orsubordinates of the CEO, the current trend in industry is toward much moreindependent boards, even with a chairman who is not the CEO. The mostdesirable board members are current or retired CEOs of other companies.Boards sometimes also include an attorney with expertise in the industry. Lessdesirable, but occasionally observed, are board members who appear to havebeen selected for their political connections or their links to special-interestgroups. Board members should also have at least some minimum stockownership in the company, preferably before they are elected. The majoritymembership of most company boards today is moving towards outside direc-tors (not company employees or retirees). Key committees, such as compen-sation and audit, must be composed exclusively of outside directors. It is aninformal practice that board directors do not serve on more than three othercompany boards and that these companies cannot be competitors, customers,or suppliers of each other to any significant extent. A potential conflict of



67

interest exists if a director is also a paid consultant or otherwise rendersservices for pay to the company and this obviously should be avoided.

Directors should be compensated in relation to the time that they arerequired to spend on company business. In many firms, this is dealt with bypaying an annual retainer plus a fee for each meeting attended; some firmsalso offer stock options to directors. Board committee chairmen are usuallypaid an additional retainer. Board members should not receive pensions; afterall, they are not employees.

The point of the foregoing is not to instruct the management in publiclyowned companies about how their board of directors functions. Rather, it isto provide some background on the real issue, which is the functioning of aboard of directors in privately owned companies. Boards of privately heldfirms are often inactive, perhaps consisting only of the owner(s) and possiblysome family members, and meet once a year, at least on paper, to satisfy legalrequirements. This is a common mistake because it cuts off the CEO and anyother owners from independent, fresh points of view of the company and itsbusiness. For what is a nominal cost, independent board members withexperience in the industry can contribute significantly to strategic planningand overview of operations. A valuable purpose of a board of directors is tooffer objective counsel and advice to the CEO that is often otherwise difficultto obtain.

Companies with overseas operations may be relieved to know that mostcountries around the world generally follow the board of directors modeldescribed above, even if their elections are

pro forma

and only insiders serveas directors. In some, the CEO is called a managing director rather than apresident. In virtually all cases, the CEO has a powerful influence on theboard of her company.

The corporate governance model used in the Federal Republic of Germanyis an exception to the ones described above. Germany has required a singularform 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. Thesupervisory board is required to consist of 20 members, divided equallybetween representatives elected by shareholders and those elected by employ-ees. The shareholder side usually consists of industry executives, banks (whoare permitted to own stock in corporations, unlike in the United States),university professors, and heads of industry organizations, while the employeesare represented by labor union officials. Each member has one vote. Thesupervisory board, in turn, elects members (executive directors) of the man-agement board (

Vorstand

) who are responsible for running the company. Thesupervisory board also has the power to remove executive directors fromoffice, but it is very rare for this power to be exercised. The managementboard 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 limitedin that he cannot dismiss any of the other executive directors; his powers arelargely exercised by virtue of the respect given his position and views by the


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other directors. Essentially, the management board is a legally mandatedexecutive committee (in U.S. companies, the executive committee is anoptional management group and is usually composed of the corporate officersor division heads). Each executive director is responsible for those businesssectors assigned to him by the board but is often dependent on other directorsfor some elements of support, such as R&D, manufacturing, personnel, etc.The executive board as a whole develops budgets and sends them to thesupervisory board for approval. This structure reflects the German culturaldesire for labor to have meaningful input into corporate activities in exchangefor a certain amount of labor peace. It also reflects a certain mistrust ofconcentrated power and results in a somewhat slower response to changethan organizations with more comprehensive authority vested in a singleindividual.


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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 formaland informal elements of your organization and personnel. Integrating thefunctional 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 wronganswer.

Every

company needs a business plan to bring some focus to whatit does and how to react to changes as they inevitably occur. Business plansdo not need to be lengthy, nor should they be. The primary reason forconciseness is that it is

impossible to forecast business conditions with greataccuracy and certainty. Therefore, it is essential to have plans that brieflycover the range of likely possibilities, from high to low. This allows thecompany to be prepared for changes from original forecasts. The plasticsindustry has been subject to increasing volatility in demand during the pastdecade, and it is unlikely that this condition will improve in the future. Changesin demand are almost immediately felt by suppliers due to the increased useof supply-chain management techniques, which immediately transmit fluctu-ations systemwide. With inventory levels designed to be at low or even just-in-time levels, a drop in, say, automobile sales, can translate almost instanta-neously into a shutoff of parts requirements that is felt throughout the entiresystem, from processor to distributor to compounder to polymer producer.An upswing in demand will have the opposite effect — a sudden influx oforders for immediate delivery. It pays to have sufficient rapport with your


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customers that you can come to some agreement with them to provide forsome cushioning from such rapid changes.

Demand volatility is only one source of deviation from forecast or targetrevenues. New product development can be thrown off track by unexpecteddifficulties in scale-up. Your customer can be acquired by another companythat decides to scale back or even discontinue the line of business on whichyou were counting. An unexpected breakthrough at a customer may suddenlyramp up the demand for one of your products. You need to have at leastconsidered what you might do should any of these events take place andrequire that you react on a timely basis. High–low contingency plans (keepthem simple and not too detailed) will answer this need and allow you tomove into action quickly.

Plans are not merely a collection of objectives and considered tactics onhow to reach them. They must include a list of the resources — human,financial, and hardware — required to execute them. As described inChapter 7, you also need to assess how you will utilize those resources bytheir quality; the best must be assigned to the most productive projects.

Business plans may differ according to their objectives and the time periodcovered, but the rest of the elements are essentially the same. I recommendthat you develop a business plan that outlines what you want to do over thenext 5 years, but with the principal emphasis and details on the next 12months. Remember to quantify wherever possible. If you are a successfulsmall businessman, eventually you are likely to grow to the point where youwill need third-party investment in your company. Your business plan will bea strong talking point for you to show that you understand how to run abusiness on a well-considered and professional basis — important nonquan-titative considerations for someone who is contemplating investing in yourcompany. 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 documentationto 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 comprisesthe company’s principal business and activities.

�

Business goals

are a statement of what you wish to accomplish duringthe time period of the plan.

�

History and analysis

include where the company has been, where it isnow, and the choices as to where it will go in the future, as well asidentifying the company’s principal strengths and weaknesses, opportuni-ties, and threats and how you propose to deal with them.

�

Objectives

are the intermediate milestones to be achieved on the waytoward attaining your goals.

�

Projects and programs

are specific details on the implementation of whatyou wish to accomplish. These may be in outline form and confined tokey actions or activities.



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

5.2 Managing and Integrating Functions

In order to achieve sustained earnings growth, successful managers must learnto

integrate

the direction of functional groups, not

centralize

their direction(as is often and erroneously done). Centralized management puts all decision-making authority in one place; integrated management distributes decision-making authority to the lowest level capable of handling it but ensures thatall decisions are coordinated toward achieving a set of common goals.

As touched upon earlier, managers need to be aware that the majority ofthe key people they are directing are knowledge workers. Knowledge workersmust be managed differently than others. Their contributions come from theirown creativity, not from being directed or told how to develop something,be it technology or market strategies. This requires relying upon open sharingof information and decision making, not a command-and-control style ofmanagement.

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 placewithin or between functions. These kinds of negative activities are focusedinward on personal objectives instead of outward on meeting customers’ needsand corporate goals. Management needs to take firm action to prevent themfrom starting and drastic action to stop them if somehow they have takenplace. Make it clear to your subordinates that their appraisals — and their jobsecurity — depend on how they are contributing to company objectives, noton winning some sort of perceived internal competition. Individuals must treateach other with respect and courtesy. As Peter Drucker says, “Attack issues,not people.” If you find your time being spent resolving disputes over whois responsible for what, you need to address the more fundamental problemof why these arguments are breaking out. Much is made of General Electric’suse of internal competition to push growth faster (e.g., rival product marketinggroups competing for the same business at the same customer), but thisappears to be the exception to the rule because examples are lacking of other


72


companies that have been able to make this idea work successfully on asustained 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 thanthe creation of new business.

The use of project teams and committees is central to integrated manage-ment. The input of each affected function is thus made part of the solutionto dealing with problems and improving operations. Committees do much ofthe coordination of the various functional groups in a plastics industry com-pany without requiring that senior management be directly involved. Standingcommittees are needed to handle matters that are routinely repetitive, suchas raw materials qualification and purchasing. In the latter instance, researchand development (R&D) can present the formulation characteristics of thematerials under consideration; manufacturing, the processing characteristics;marketing, the customers’ preferences; and purchasing, cost and logisticsconsiderations.

Committee meetings, although despised and reviled, are reallyuseful and necessary as interactive communications media within the company.

Project teams are committees that have a specific, short-term purpose anddisband once this purpose has been accomplished. They include membersof different functional groups or different engineering disciplines. An examplemight include the development of a major new product for a large customeror even just putting together a logistics system that will coordinate the businessrequirements of the company’s largest customers. If the team works so welltogether that important synergy would be lost if it was disbanded, thenrestructure it as a committee. Otherwise, require that teams be broken upand the members reassigned when they have achieved their objectives. If theteam is not achieving required milestones, reconsider its objectives and theresources assigned.

A word of caution: create committees sparingly, keep their membershipsize limited (no more than six would be wise), insist that their meetings beshort (preferably less than an hour), and have standing dates never morefrequent than weekly. Poorly run committees are a terrible waste of valuabletime and can damage morale. Well-run committees keep everyone in theloop, maximize efficiency, and minimize mistakes. The secret to successfulmeetings is for the chairman (an honorable word for both genders) to stickclosely to an agenda that addresses only key issues, getting agreement onwork assignment scope and milestones before adjournment, and handlingissues with non-contributing members outside the committee meetings. Donot allow committee members to interrupt meetings by taking phone calls.The agenda should be sent to the participants with enough time to prepareproperly; adequate preparation alone is a big step toward keeping meetingsshort and productive. Spread committee work around. It is good experienceto rotate membership among different people in the same functional group,and it keeps the diversion from the group’s primary tasks to a minimum. Itis a telling sign that “committee-itis” has set in if customers, suppliers, orother employees find they can virtually never reach people who are membersof committees because they are always tied up in meetings.



73

5.2.1 Research and Development

Plastics industry research and development includes basic research into mate-rials and processes, product/process development, application development,and technical service. Few companies other than the largest polymer producerscan justify investing in basic research, and even this area is often supplementedby sponsoring research at universities. More than 95% of most industry R&Dis in the nature of development and service to the company’s customers. Themost successful companies find that at least 25% of their current sales comefrom products that did not exist 5 years ago. A strong R&D effort is fundamentalto the success of any company in the polymer manufacturing, compounding,processing, or equipment/additives sectors of the industry. Only distributionhas no real need for R&D. New products and processes are the lifeblood ofsales and earnings growth in a competitive marketplace, but this cannot betaken 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 bevetted by marketing to confirm that a potential market exists and by manu-facturing to ensure that it can be produced at acceptable quality and costlevels. 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 commoditypolymer producer developed a new engineering polymer that exhibited anexcellent balance of properties. Without obtaining more than minimal marketresearch or going through the full range of production scale-up steps, thecompany committed to a commercial-scale plant

.

The new product wassampled by customers and initial orders obtained. Then, some applicationsbegan to report field failures and several molders complained that the productshowed variable lot-to-lot processing characteristics. Manufacturing found thatthe plant design would not allow the product specifications to be met atanticipated costs. After 18 months of trying to put out these fires (relativelyunsuccessfully), management decided get out of the business by selling theplant 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 astaggering cost in the range of nine figures. The manager in charge of theproject was reassigned but lower level personnel were dismissed as part ofthe restructuring. Admittedly, this is an extreme case, but it happened to acompany with seasoned management that evidently believed that develop-mental specialties were not that different from well-developed commodities.It is instructive to note that another commodity-based company was also tryingto develop an equivalent product at this time but never invested in productionfacilities and was able to close down the project before it siphoned off somany investment dollars from other projects.

One of the most difficult but critically important jobs a manager has in theplastics industry is to successfully integrate technology and marketing. Plasticsmaterials, even commodities, cannot be sold like detergents. Potential andactual customers must know

how

to use them in order to gain the benefitsof their features and pay for the value they confer on an application. The


74


speed and relative success of this learning process (e.g., time to market) canmake or break the profitability and competitive advantage of a new productfor a company. The most successful companies in the plastics industrycombine their product development and marketing groups into teams. Thisensures that the company’s technical resources are used to meet customerneeds with the least amount of filtering in communications and time loss.

Technical marketing

(integrated R&D and marketing) includes character-izing products in terms of the properties used by design engineers for certainclasses of applications. For example, short-term mechanical strength andstiffness values may serve to make initial material selections but are notaccurate for predicting long-term performance. Marketing must assess whichclasses of applications offer sufficient business potential to justify the cost ofobtaining such data as creep and fatigue resistance, with R&D providing thedata. Marketing must also obtain customer feedback to let R&D know if thedata are sufficient to allow the application to go forward or if the productrequires modification. If the product must be modified, R&D will have toadvise marketing about the feasibility and cost (this may require involvingmanufacturing), and marketing again will have to determine the marketpotential over a range of prices to arrive at a decision.

Another area where R&D and marketing must cooperate closely is cost-reduction projects. When R&D has been tasked to reduce product formulationand process costs, the result may not be exactly the same product that hasbeen approved by customers. Marketing should ensure that the customers arewilling to accept a modified material without requalification — this is oftenan 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 partof their sales and marketing “package.” The services of computer-aided design(CAD) and computer-aided engineering (CAE) offer a benefit to large custom-ers that may not be available from other competitors. They also provide someassurance that the application will be a successful one because design prob-lems can be resolved before tooling is built. Although many firms prefer tomaintain CAD/CAE services in-house, sometimes they can be contracted outsuccessfully.

5.2.2 Sales and Marketing

It has been said by some that marketing savvy seems to be in short supplyin this industry while sales know-how seems to be in abundance; only a fewcompanies seem to know how each works. Everyone knows what the term

sales

means: getting orders from specified customers. The meaning of

mar-keting

seems to be less well-defined. In my opinion, the problem is basicallya lack of understanding of what marketing actually does, how to use it, andhow to integrate marketing with sales. For one thing, let’s clear up one pointnow: marketing is

not

a series of advertising campaigns or a blitz of press



75

releases, nor is it solely involved in developing new customers. Marketing ismuch more than this. Marketing responsibilities include the following:

�

Identify, analyze, and aggregate a series of individual similar customersand applications into markets. For example, a transparent polymer suchas polycarbonate might be sold to customers for optical applications thatmight be further classified as consumer and automotive, opening up furtherpotential uses.

�

Identify and project trends in markets to help the company anticipate andmanage the coming changes. An example would be the commoditizationof desktop computers, with attendant decline in growth rates and increasedoffshore sourcing.

�

Build recognition of the company’s products, services, and conduct of itsbusiness into respect and loyalty among its existing customers; then extendthis recognition to potential new customers. The use of

branding

(pro-moting the reliability of your product vs. lesser known or even genericproducts) is not limited to consumer goods. DuPont’s Zytel

®

brand nylonand General Electric’s Lexan

®

brand polycarbonate are good cases in point.Both companies have worked hard to establish their brands as premierproducts through advertising, news releases, and trade shows. Both com-panies have found brand recognition a useful tool in building consumerproducts business by licensing customers to use their brand names inreturn for an exclusive supply position. These customers see a benefit inthe form of the increased consumer acceptance of products made from apromoted and recognized brand such as Zytel or Lexan. While this tech-nique may not necessarily win a pricing premium, it can often tip acustomer’s choice between a branded product and an unknown one tothe branded material, all other things being equal.

�

Collect, analyze, and transmit the information necessary for developmentof the company’s future business plans.

�

Develop an understanding of how the company is perceived by its cus-tomers, primarily in terms of strengths and weaknesses. Without customersatisfaction, a company cannot grow and prosper. It is an importantresponsibility of marketing to know how the market — customers — regardsthe company and recommend ways to improve this regard, as well as tobuild 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 howthey 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 quicklythat they were not doing their job of buying the best for the least. Good salesrepresentatives will identify all of the important decision makers in eachcompany 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 ofthe customer. One must also know what their future needs will be: whetherthere will be more or less business to seek, what the customer’s financialsituation and business goals are, etc.


76


An important aspect of sales is developing formal purchasing contractswith customers, both to establish enough stability at the account that devel-opment costs can be justified and to reduce opportunities for competitors totake away business. If a customer is only making spot buys, then you are ina weak position; this situation also suggests that knowledge of the customer’sneeds is lacking. A purchase agreement should be of benefit to both parties— the buyer should receive a better price, based on total purchases and somesecurity of supply, while the seller should receive some assurance of minimumvolume and some security of continuing business. A purchase contract willbe much stronger if the customer buys multiple products from you and thecombined purchases count toward a rebate or discount. While a seller maywish to tie up all of the customer’s possible business, this is seldom wise onthe part of the buyer. Attempts by a customer to demand retroactive discountsfor past business as a condition for present and future business, as hashappened in the automotive industry, are a sure sign of trouble. Such demandsshould be turned aside, because giving in to them will only invite more andgreater demands. Customers who make such demands should be examinedcarefully to determine how business should be conducted with them in thefuture, if at all.

5.2.3 Manufacturing

Manufacturing is all too often taken for granted, but its consistent, quality-conscious, timely, and cost-effective execution is crucial to the success of anynon-service company in the industry. The leading firms of the industry haveadopted Total Quality Management (TQM), Six Sigma, or other such techniquesto ensure continuous improvement in consistent quality, which almost alwaysalso results in important cost savings.

Manufacturing consists of processing raw materials into finished products;in many companies, purchasing is also part of manufacturing. Your suppliersof raw materials plus the logistics companies that transport and store thesematerials constitute your supply chain. You are only doing half the job if youare managing only your own production scheduling and not the rest of thesupply chain. It is impossible to control costs and quality if you have notbrought your suppliers on board as partners through regular consultationabout your specifications, logistics, how to reduce and control costs, etc. Thesematters should never be imposed on suppliers but rather developed jointlywith them. ISO 9000 certification for your company and your suppliers is anintegral part of assuring globally consistent manufacturing quality, just as muchas TQM or Six Sigma programs are.

The industry journals are filled with information about software programsknown as enterprise resource planning (ERP); possibly the best-known pro-vider (but certainly not the only one) is SAP, a German software firm. Thesesystems allow a company to employ a relational database globally that keepstrack of all its purchases, inventory, manufacturing scheduling, and shipments.Supplier/customer-compatible ERP systems can effectively integrate the



77

production processes of both, with significant potential savings and shortenedlead times. Early ERP supply-chain systems were the forerunner of much ofwhat is called e-commerce today. In addition, a properly enhanced ERP systemenables management to analyze its return on investment in a variety of ways.

The installation and training costs for these system are substantial (as muchas $200 million for very large, globe-spanning companies) and have thereforebeen limited in use to date. The time required to train personnel in theirusage 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, consultingassistance, and training) are becoming available and are being marketed assuitable for mid-size firms (down to $200 million in annual sales). One methodfor keeping these costs down and accelerating the system’s implementationis to use one of the standard templates offered by the software supplier andavoid customization unless your requirements are justifiably inflexible. Cus-tomization costs more, takes longer, and raises the risk of running into “bugs”down the road. All of these systems require annual maintenance, as wouldalmost any asset.

Still smaller, one-site systems are available for processors at costs that arein the low six figures. These smaller systems are focused on manufacturingand therefore may lack some of the sophistication of larger systems, but theyare easier to install and use. They are a good way to become familiar withthe concept of ERP instead of jumping in with an attendant much largerinvestment of time and money (and risk).

The growing use of e-commerce is testimony to the efficiency of usingeither private networks or the Internet for exchanging order and inventoryinformation between suppliers and customers. The technology involved isrelatively new and the security of transactions is still being upgraded. Further-more, installation costs are coming down as e-commerce gains acceptance. Itappears that large corporations are either using it now or are in the processof converting to it, while smaller companies are still studying the feasibilityand justification. The pressure to use e-commerce is primarily coming fromlarge buyers; they want all of their suppliers to use e-commerce systems soas 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 pur-chasing leverage in terms of lower prices and more services included in theprice. If practiced correctly, SCM also offers lower transaction costs for bothparties. Having fewer suppliers should lead to a closer relationship with thecustomer, a greater ability to provide more products and services than before,and joint participation in new developments. A reduced supplier base presentsvery distinct risks, however. The smaller supplier base can expose a companyto delivery delays and product quality problems without the ability to turnimmediately to another supplier to take up the slack. An underfinancedsupplier could go out of business or be acquired by someone who wants to


78


change the customer base, without a qualified replacement being readilyavailable.

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 cutoff from new products and technologies developed by suppliers with whomyou no longer have a relationship. As an example, a parts division of one ofDetroit’s Big Three automobile manufacturers had an exclusive supply contractwith a major polymer producer. A European competitor of this polymerproducer called on the parts division with a proposal to reveal a brand-newtechnology for making hollow parts by injection molding, in return for beingaccepted as a second source for material. The parts division refused, citingtheir exclusive contract and then asked their regular supplier to furnish thesame technology to them. The domestic producer had no such technologyand it took 18 months for them to come up with something similar. In themeantime, the European competitor had gone to another one of the Big Threeand had their proposal accepted almost immediately. The estimated savingsto the lucky Big Three company that took up the European proposal ran intomillions of dollars and helped them to increase their market share. Thus, theexclusive supplier philosophy wound up costing many, many times anypossible savings from purchasing leverage.

5.2.4 Administration

Administration is a sort of afterthought for some, but it has an importantimpact on a company’s performance. Administration has a number ofcomponents:

�

Human resources

(HR) must serve management’s needs to find, hire, andretain top-quality personnel. HR has to maintain current information onindustry-wide compensation and benefit practices, as well as keep up withfrequent regulatory changes in this area. HR also has to administer theperformance review system to make sure that it is running on time andproperly.

�

Finance

must manage the company’s cash flow so that the companycollects and disburses on a timely basis, at minimum net cost. Thisresponsibility also includes maintaining lines of credit at banks and mon-itoring the stock and bond markets for suitable opportunities to raise moneyif the company is publicly held. Such activities must be conducted withthe utmost integrity and transparency, as recent accounting scandals havedemonstrated. It is not enough to be merely “legal.”

�

Management information

must provide necessary data accurately and ona timely basis to every level of management that needs these data toperform their duties. At one time this was little more than an extensionof the finance group. Today, it provides critical information to all functionalgroups, although accurate and timely financial data are still the mostimportant portion.



79

�

Credit

must correctly and continuously assess the ability of customers topay fully and on time and communicate this information to managementpromptly. A few bad debts are an acceptable risk associated with aggressiveselling, no bad debts indicate too cautious an approach, but many baddebts injure the company’s financial performance unnecessarily. Creditinsurance is not that expensive and may present a reasonable option ifmanagement is uncomfortable with the level of risk they perceive in thecredit-worthiness of their customer base.

�

Legal

must ensure that the company’s contracts protect the company’sinterests, particularly to offer some protection against lawsuits withoutmerit. To obtain the best results from the company’s attorneys, tell themwhat 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 UnitedStates (frivolous lawsuits are often allowed to proceed), but do not standin fear of this possibility. Just as with credit decisions, some balancing ofrisk in legal matters is proper; otherwise, you will find yourself taking theperfectly safe legal position on everything (e.g., “No, we can’t do that; it’stoo risky”). Legal is also in charge of hiring and supervising specializedcounsel when more esoteric areas of the law are involved, such as antitrustand patents.

5.3 Managing Costs

One of the most challenging jobs a manager has is containing costs. That oldcliché about “doing more with less” seems to be very much in vogue today,whether business is growing, slowing, or stagnant. The press seems to runnothing but articles about plant closures and layoffs, and managers are underpressure to show that they, too, can make the tough decisions to cut staffand 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 toavoid criticism by following the crowd. Yes, it can make sense to shut down(permanently) plants that cannot be economically modernized, particularly ifthe capacity is not being, or is not likely to be, profitably utilized. Yes, it canmake sense to divest a part of your business that is marginally profitable andis not growing. Yes, it can make sense to restructure your organization toflatten the management pyramid, eliminate overlapping positions, and separatetruly marginal performers. Yes, you can drop customers whose credit seemsrisky. The trick is to avoid overdoing all of these things; presumably you havebeen doing them all along during good times as a part of good managementpractice, 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 thanonly doing what their circumstances require.

A further caution about trying to achieve profitability solely by cuttingcosts is warranted. Cutting R&D is sacrificing the future for the present. LessR&D means fewer new products, which in turn leads to slower sales growthand lower long-term profitability. Cutting manufacturing capacity reduces thecompany’s ability to respond to unexpected market opportunities. Divesting


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non-core but profitable businesses may cut cash flow, increase cyclicality,and close the window on unforeseen opportunities outside of traditionalmarkets. Concentrating primarily on cost cutting to improve profitability is adefensive measure and invites offensive-minded, aggressive, growth-orientedcompetitors to test your willingness to protect your markets.

Staff reductions, product line revisions, and business divestitures are dis-cussed in more detail in Chapters 6, 7, and 8, respectively.

One area for cost savings that is not always thought of in smaller companiesis working capital reduction. If the business is reasonably profitable andgenerating good cash flow, management tends to overlook the amount ofmoney that can be tied up in accounts receivable and inventories whilefaithfully writing checks for accounts payable within the standard 30 days. Agood follow-up system for slow-paying customers is worthwhile, but it mayprove easier to raise their prices by a percent or two than to dun them forpayment if their credit is good but they insist on paying in 60 days. Somesuppliers may be agreeable to extending your payment terms; it does not hurtto ask. The greatest savings, however, are likely to be found in your inventory.You need to establish standards for inventory turnover and then work onimproving them. Can your vendors ship small quantities on short noticewithout necessarily penalizing you on price? Are you insisting that yourcustomers accept up to 10% overruns on custom work? Do you dispose ofslow-moving inventory on a regular basis to free up space and reclaim workingcapital? If you are able to reduce your working capital needs more or lesspermanently, this is cash freed up to invest in other needs or even to paydividends to shareholders. Do not overlook the spare parts kept in mainte-nance; 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 tyingup space and funds by holding onto equipment and parts that are unlikelyto 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 theonly answer? R. Mooney of Deloitte & Touche suggests finding a balancebetween profitability and growth, creating separate business structures foroperations that have little in common, improving the use of manufacturinginformation technology to increase productivity, and being alert to protect keycustomers from the inroads of competitors.


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Chapter 6

Staffing for Success

It may be a cliché, but it is true that people are a company’s most importantasset. Without the right people, the organization, physical plant, and productsof 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 inthis 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 mustbe the best that management can find or management will have self-imposeddifficulties accomplishing its plans. The discussion of staffing that follows isconcerned with professional personnel; plant and laboratory non-salariedpersonnel are discussed later in less detail; discussion about clerical personnelis omitted as such staffing is essentially the same in any industry. Matters ofcompliance with government regulations are also not specific to the plasticsindustry 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 ofwhich you will likely want to use at one time or another:

�

Classified advertisements

are the most commonly used method. Tradepublications are the best media to use, although newspapers are usefulfor attracting applicants for non-salaried positions. Never use “blind” ads;people who are already employed will not respond to them in case theirown employers are the advertiser. Describe your business and the positionto be filled in sufficient detail so that you do not attract unqualified people.

�

Internet bulletin boards

are another form of classified ads.


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�

Referrals from employees, suppliers, customers, friends

are often the bestsource of people who will fit well with the organization. These individualswill want to work with others who have their same motivations.

�

Universities, technical, and vocational schools

are another excellent sourceof people, but these will likely be recent graduates and therefore inexpe-rienced, except for cooperative students (as discussed later in this chapter).

�

Employment and executive search agencies

are an expensive option (thefee is usually 30% of the first year’s salary) but sometimes necessary tofind just the right person to fill a particular job.

Recruiting is a tough job; the legal restrictions on prior employers’ disclosureof personnel data make it very difficult to obtain a meaningful evaluation ofa candidate’s previous job performance. While written tests may be helpfulfor evaluating technical knowledge and writing skills, personality tests havequestionable validity for assessing potential performance in a given positionand thus may be subject to legal challenge. Recruiting, therefore, often comesdown to evaluating a candidate’s experience and behavior during an interview.Because this process is too short to be more than merely an indication ofwhether or not an individual will become a contributing member of yourmanagement team, all new hires should be placed on probationary status forthe first 6 to 12 months, subject to termination at will (where this is permittedby applicable state law). The objective for recruiting should always be to hirethe best-qualified candidates available — usually those who have shown thatthey are quick to learn and willing to work hard — and never to sacrificequality for availability. It is a shameful waste of time and money to hirequestionable candidates merely to fill job openings as quickly as possible. Toparaphrase an old saying, “Hire in haste, repent at leisure.”

All offers of employment must be in writing, and the letter must state thatthe terms offered supersede any verbal understanding. This is not just beingprofessional; it is protecting yourself and your company from misunderstand-ings. At the same time, do not count on any applicant who has been acceptedas an employee until the day that person actually shows up for work. It isdisquieting though true that a small but significant number of people whohave accepted job offers (perhaps 5%) will never actually come to work foryou and may never even notify you that they are not coming. It is also amatter of common courtesy, as well as business ethics, that every unsuccessfulcandidate who has been asked to submit a job application or who has beeninterviewed 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 oftheir application and indicates whether or not you have any interest. Regret-tably, a surprising number of would-be applicants, particularly those just outof college, do not take the time to evaluate whether or not a company wouldhave use for their qualifications; for example, a distributor would not beseeking people for research and development (R&D). Do not take offense atthis laziness and immediately discard the résumé; rather, respond politely and



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point out, for example, that your company does not have such positions orit only hires people with certain experience. You have a responsibility forbuilding both your company’s reputation and that of the industry as being agood place to work. One day that would-be researcher could find a job withanother company and be in a position to decide whether or not to approveyour products.

Then there are “overqualified” applicants. These have become an urbanlegend — candidates who have more education and experience than a jobrequires but are rejected because they are overqualified and thought to be arisk to leave as soon as they find another job. Frankly, most employers wouldlove to be presented with an overqualified employee, but they seem to be arare breed, living mostly in letters to the editor of industry magazines, com-plaining that no one will hire them. As long as overqualified candidates wouldbe willing to start out in a job that pays less than they might obtain in onethat 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 whosepersonality traits are a problem, rather than someone who knows too muchto hire. The following sections will explain what to look for in a prospectivejob candidate.

6.1.1 Education

While I recognize that I am likely biased by my own education, an engineeringdegree or at least a degree in a hard science (e.g., chemistry or physics) isoften an essential qualification for people seeking entry-level professionalpositions in the plastics industry. This is a technical business above all else,and anyone who cannot quickly understand the terminology and relationshipsbetween materials and processes is likely to be lost for too long to make asuccessful transition into being a contributing member of the team. At middleand senior management levels, some education in business administration willbe increasingly useful, especially in the more capital-intensive segments ofthe 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. Neverthe-less, a master’s degree may be very useful in manufacturing or plant engi-neering. A master’s degree in business administration can be valuable forgeneral 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 andwhat they learned.

While I am the happy beneficiary of maximum exposure to liberal artscourses (history, languages, literature, etc.) in college in addition to myscientific, engineering, and business administration education, it is usually notadvisable to recruit liberal arts majors directly from college. Nevertheless, thiseducational background can be quite helpful for non-technical positions if


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one finds a job candidate who has also had progressive and substantialexperience in the plastics industry for, say, at least 5 years. Experience showsthat one will be much more successful by training a newly minted engineerfor positions in sales and marketing than by attempting to train a recent liberalarts graduate in the technical aspects of the company’s products for thesepositions.

A number of universities and colleges have cooperative (co-op) programs,where engineering students spend three 6-month periods working in industryin between their four years of undergraduate study. Other schools offersummer intern programs that allow students to work in industry for shorterperiods of time, but these are less effective. In my experience, graduates fromco-op programs generally exhibit more understanding of what is expected ofthem and have a better grasp of how to use their education in the workplacethan do graduates of non-cooperative programs. Should you choose to hireco-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 toassess students as future possible permanent employees, without an obligationto hire them. The students also have a chance to determine whether or notthis is the career opportunity that they want. All in all, this is a win–winsituation.

However good the graduates of coop programs are, it is most unwise tolimit your recruiting to graduates of just a few institutions. Try to blend togethergraduates from a number of colleges and universities so as to avoid thepossibility of cliques of alumni forming. Should this situation arise, just theappearance 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 hireand keep motivated people who have fresh points of view and approachesto the company’s business.

6.1.2 Experience

Education is, essentially, learning from other people’s accumulated knowledgeand their experience from applying that knowledge. However, there is nosubstitute for tempering and validating lessons learned in college by the realitycheck one finds through one’s own experience. Therefore, given a choicebetween apparently equally educated candidates, one should usually favorthe one with more experience than the other, especially if the experience wasmore extensive. Most engineers start out their careers in manufacturing orR&D, which are great places to gain an understanding of the basics of theplastics industry. At some point, however, they must also develop at leastsome experience in marketing or sales, because this is industry, after all, notacademia or government. In fact, it would not be unfair to say that our industryhas had more than its share of unsuccessful top managers who failed mainlybecause they had no significant successful prior experience in marketing andsales, despite a good track record in technical positions.



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Take care to judge the relative quality of a candidate’s experience. Forexample, did the individual have 5 years of varied, broadening experience,or was it actually 5 years of the same experience repeated over and overagain? One way to discover the value of the candidate’s experience is to askfor several examples of what that person has learned in the course of workingin 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 arepromoted. Unfortunately, it is difficult to avoid high turnover with such recruits— perhaps 30% or more in the first 2 years of employment. Two leadingreasons for this turnover are:

1. College graduates who have no prior significant employment experiencefrequently have unrealistic expectations of what it is like to work inindustry. If they cannot bring their expectations in line with the reality ofthe work environment they are in, either they will quit in order to findsome other environment more closely matching their expectations or theirwork quality and quantity will decline and they will adversely affect themorale 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-timepositions.

2. Gauging the potential performance of college graduates without a workhistory is difficult. Gauging the quality of the education the candidate hasreceived is also difficult, particularly if no one doing the recruiting hasseen recent graduates of a particular institution in action. If, despite trainingand counseling, a college graduate does not show above-average perfor-mance during the probationary period, he should be terminated. If youare willing to accept average performance, then at least recruit someonewith prior experience, as they will likely make fewer mistakes even if theiroutput is not the highest.

6.1.3 Personality Traits

With rare exceptions, it is critical to select

team

players for today’s integratedmanagement of different talents to overcome problems. The exception maybe a research genius that has just the right training and experience to comeup with breakthrough technology for the company. “Lone wolf” personalities,particularly in sales, manufacturing, or administration, will cause real problemsin reaching goals. Look for these traits by asking about the candidate’s previouswork experiences and what they liked best and least, especially about theirsupervisors and colleagues. People who have trouble getting along or com-municating with others are unlikely to act any differently if you choose toemploy them.

Occasionally, you will come into a position where you did not select yoursubordinates 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 modifythe way they work with others, but do not expect miracles to happen. You


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are no more likely to see them change than are people who enter into marriageexpecting to change their spouses. You will then have to decide whether theirparticular talents are so great as to require an exception or you shouldencourage 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 solvingproblems. Otherwise, they will be afraid to take even small risks and willalmost certainly make poor supervisors because they will be reluctant todelegate authority. Self-confidence should not be confused with self-esteem,which may arise from a false sense of accomplishment. Questioning candidatesabout how they have handled problem-solving in the past should revealwhether or not their self-confidence is justified. Arrogance is a quality to beavoided 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 fullof educated derelicts. Persistence and determination alone are omnipotent.The slogan ‘press on’ has solved and always will solve the problems of thehuman race.”

6.1.4 References

By all means, ask for references. Yes, these references are going to be aselection of people who the applicant knows will speak favorably of him butyou can still learn something. Always ask for specific examples of how theapplicant carried out assigned tasks, staying away from meaningless general-izations. For example, do not ask, “How well does X get along with fellowemployees?” Ask instead, “Can you tell me specifically how X handled situa-tions with others who disagreed with her ideas?” If an applicant cannot furnishat least three references that are familiar with his work history, this by itselfshould be regarded as a caution sign.

Do not overlook your own contacts at companies where the applicantworked or with whom he came in contact in the course of work (e.g., sales,purchasing, and engineering). Sometimes these sources will give you moreuseful information than you can obtain from anyone else. The least likelysource of worthwhile evaluations of a candidate is likely to be HumanResources; 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 lossof trade secrets walking out the door with departing employees. The industryalso 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 employ-ment agreement. The agreement should include language to prevent use or



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disclosure of your trade secrets to anyone who is not authorized by thecompany to have access to them, as well as barring the employee fromcompeting with the company for a reasonable period of time (e.g., 12 to 18months). The geographic area covered by the non-compete agreement mustalso be reasonable and appropriate to the employee’s job. For example, asalesman in New England could not normally be restricted from working fora competitor in California. If a former employee can document that the non-compete clause is keeping him from finding a job, despite good faith effortsto obtain one that fits his qualifications, then the agreement should providefor 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 existingemployee to sign an agreement as a condition of remaining employed iscoercive and therefore unenforceable. Non-compete agreements are notenforceable 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 inwhich the non-compete agreement is enforceable.

Obtaining legal relief from illegal use or disclosure of your trade secretsrequires you to inform your employees as to what you consider to be secretand taking the necessary steps to prevent them from being learned byunauthorized personnel, such as:

�

Requiring escorts and visitors’ badges for non-employees entering thepremises

�

Marking appropriate areas as off-limits to unauthorized personnel, possiblyrequiring a pass or key to enter such areas

�

Reminding employees periodically that the company does have tradesecrets and that they are to be protected as such

�

Using coded names or symbols instead of conventional names or symbolsfor ingredients in secret formulations

�

Identifying confidential information as such

In regard to the last point, do not mark everything “confidential” or it will beobvious that this is a sham. Confidential information should also be lockedup when it is not being used. Customer lists in particular cannot be consideredconfidential unless they would be difficult to assemble and you make a genuineeffort to protect them. If you do not treat your secrets as confidential, a courtwill not do the job for you.

Another element that should be in an employment agreement for technicalpersonnel is language spelling out that the employee is being hired to inventand that no additional compensation is automatically due to that employeefor producing successful inventions. You are not barred from rewarding youremployee for a job well done, but you are not required to do so, either. Thereare some locations where the law provides otherwise (e.g., Germany) andinventors are legally entitled to a share of the royalties from any patentedinventions they create, even while using company time, money, and facilities.


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6.2 Training

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

6.2.1 Job Enrichment and Rotation

One way to add to a subordinate’s experience is to broaden the assignedduties. It is often a bitter joke that such job enrichment amounts merely tomore work for the same compensation; do not make this mistake. If theposition carries more responsibility than before, then it should certainly carrymore 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 theindividual to make the most of the opportunity. It is a good idea to transferpromising employees between functions at intervals of about 3 to 5 years.Employees whose experience is limited to just one area are not well qualifiedto move into positions where they must direct subordinates in other functions.A smart, hard-working engineer who has worked successfully several yearseach in manufacturing, R&D, and sales/marketing has taken important stepstoward becoming promising upper-management material.

Job rotation also helps keeps people from getting stale. While individualsvary as to how long they should remain in the same general type of positionbefore they start to lose interest and enthusiasm, a maximum of 5 years is agood rule of thumb. In small companies that simply do not have enoughpositions to offer regular changes of assignment, the time frame may belengthened to 10 years, but rarely more. In this, as in most other things,moderation is wise; time well spent in a position builds expertise, somethingthat is just as desirable as a diversified background.

A number of companies move people around geographically in the courseof job rotation, even if similar positions are available at the same site. Thereasoning is usually that these firms want the employee to be exposed todifferent local business conditions and that the change should be made assoon as an appropriate position is open, no matter where it is. Some suspectthat the management in some of these companies is also trying to test anemployee’s willingness to accept

any

assignment given. While an occasionalmove is normal, even desirable, in the course of a business career, constantgeographic relocation is most certainly not good practice, nor should peoplebe 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 orunwilling to follow, then a problem has been created that is going to adverselyaffect the performance of the individual involved. Even if the family has asingle breadwinner, uprooting people can be traumatic, especially for childrenand particularly if it means leaving behind extended family members (e.g.,



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grandparents, aunts and uncles). Furthermore, management should be encour-aging the development of community ties, not disrupting them. As a policy,individuals should be able to make their own career decisions, not have themforced upon them, or the company will be creating significant long-termproblems with employee loyalty and job performance.

At any rate, the objective should be to salt the middle- and upper-manage-ment ranks with at least a few people who have experience in more thanone environment, function, product, market, or discipline. The process is notinexpensive but is essential to avoid having a company of one-dimensionalmanagers.

Engineers and scientists have acquired something of a reputation as notpossessing sufficient people skills to make good managers. While I believethis is a weak generalization, unfortunately it does have some basis in reality.Technical people are not inherently poor managers; it is just that their expe-rience in managing others in the technical sphere is not necessarily applicablein other functions. Engineers and scientists have to supervise technicians veryclosely (micromanage), but micromanaging is a shortcoming that any super-visor can develop. It is at the next level of technical management that alimitation can develop, where managing is often more consultative thandirective in nature — more hands-off than is generally needed in marketingor manufacturing. The single biggest limitation of engineers and scientistsbecoming successful senior managers is much more likely to result from alack of experience in other functions, especially sales and marketing, ratherthan from a lack of people skills.

6.2.2 Continuing Education

The constant evolution of technology requires that plastics engineers andpolymer scientists continue to stay abreast of these developments by readingtechnical journals, attending conferences, and taking courses. Encourageemployees to subscribe to professional and scientific journals, join technicalsocieties and attend their conferences, as well as to take continuing educationcourses at local colleges and universities. The company should reimbursetuition charges as long as the employee earns a passing grade and shouldmake reasonable accommodations for class time. While it is always a goodidea 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 theperformance potential of the individual. A common mistake, however, is notto recognize the individual’s new status once the degree is attained. Employeeswho are not promoted or moved into suitable positions soon after earningadvanced degrees are almost certain to leave.

Membership in technical and scientific societies should go beyond justattending conferences and subscribing to journals. Your employees will benefitgreatly from the opportunity to meet peers and experts. Serving on boards


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and committees can improve their management skills as well. Learned societiesdepend on their members’ participation to function; it is an obligation of aprofessional to respond to this need.

The company should also conduct in-house seminars and courses. Thiscan be a very cost-effective way, for example, to improve planning method-ology by using a common approach throughout the company. Also, whennew information technology is adopted, it will be essential to put everyonethrough a course on how to utilize it.

Some managers complain that if they pay to train people, then anothercompany will hire them away. Think about that for a moment — do youreally want people who no one else wants? Yes, there is always a risk thatyou will train someone and they will repay that investment by leaving. Thatrisk must be balanced against the superior performance you will get out oftrained people who do stay, or even out of the people who stay only for awhile before they leave. This notion should not require much thought; trainingpays for itself many times over, even allowing for some attrition. If yourcompany’s turnover is excessive, training is not causing it. Turnover andretention is discussed further later in this chapter.

6.3 Compensation and Reviews

While some firms in the industry may still compensate their managerial andprofessional employees solely through straight salary, none comes to mind.Almost every professional above entry level today is compensated through acombination of salary and incentive. Bonuses should be the principal formof incentive and should be tied directly to performance, such as achievingcertain 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 alsobeen a heavy favorite, because they have the advantage of minimal impacton the company’s profit-and-loss statement (under current accounting stan-dards) and give employees a genuine financial stake in the company’s fortunes.However, making publicly traded stock a major part of a compensationpackage can backfire because the market — or even just your stock — couldtake a nosedive for reasons unrelated to the company’s or individual’s per-formance, thereby dampening instead of improving incentive.

Compensation plans should be based on national surveys because you arecompeting for professionals throughout the country. Regional cost-of-livingdifferences sometimes may require adjustments, but these should be handledoutside the basic salary and incentive compensation system. As we shall seelater in this chapter, regional compensation surveys are applicable to non-professional employees.

Salaries need to be appropriate for an ascending scale of position respon-sibilities. The salary structure should be updated at least annually to ensurethat it is at least comparable to the company’s main competitors. At the topend of the scale, make provision for your best performing professionals to



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win additional compensation without the necessity of becoming managers.Your best R&D scientists and sales people, for example, may only be marginalmanagers. Do not penalize them financially for staying in positions wherethey can contribute more than as managers.

Salary reviews should be conducted annually and without fail. Companiesthat permit reviews to slip beyond the scheduled date are treating theiremployees unfairly and will pay a well-deserved price in low performanceand high turnover. If the company is in serious financial trouble, then it maymake sense to announce a moratorium on compensation changes for aspecified 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 havingmore middle-management participation in setting compensation standardstends to reduce the us-vs.-them mentality so often found separating uppermanagement and subordinates on compensation issues. It also helps makethe process of allocating a fixed amount of money less arcane and moreunderstandable to participating department heads, who then can representthe compensation process more accurately and fairly to their subordinatesthan otherwise may be the case. It is not usually productive to rank individualscompany-wide, but you should insist that department heads do so within theirgroups. You simply must know who your best people are, for a great manyreasons. 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 onwhose top performer is better than anyone else’s.

While it is common to do salary reviews on the employee’s hiring anni-versary date, small companies may find it more useful to conduct their salaryreviews all at once at the same time each year, generally the end of the fiscalyear. When the number of reviews exceeds, say, 50 then this may no longerbe practical. What is the benefit of simultaneous reviews? It is much easier toestablish 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 temptingto 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 anyevent, displeasure over compensation changes is one of the crosses thatmanagement has to bear. No matter how well you have done your job, therewill be complaints, even from those who have been well treated (in yourmind, if not theirs). As John Bickford once told me, “Don’t ever expect gratitudefor giving someone a raise or a bonus. Enjoy it if you get it, but never expectit.” This is one of those areas where you must satisfy yourself that you havedone the best and fairest job you could under the circumstances and shouldnot be too concerned about what others think.

Performance reviews form the foundation for compensation decisions. Insistthat performance review systems be objective and reflect the degree ofattainment of objectives that are set annually. Objectives must be quantifiedor their accomplishment becomes subjective and therefore a matter of debate.


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

6.4 Promotions

Next to making more money, almost every employee wants to be rewardedfor good performance with a promotion, which is not really an appropriatereward for strong performance — money is. Furthermore, not every high-performance employee is necessarily promotable. The famous “Peter Principle”is ignored at great risk: people tend to be promoted to the level of theirincompetence. The cardinal principle that must be at the forefront of yourthinking is that you must promote based on your assessment of the individual’spotential capability to do the new job, and

not

as a reward for doing thecurrent job well. This is not really all that difficult to do.

When people are promoted to their level of incompetence, you have alose–lose situation. You do not get the performance you expected and eitherthose individuals will become miserable and quit, or you will wind up firingthem. Thus, you will end up losing superior performers (at their previouslevels). Generally, only in large companies with very resilient people, is itpossible to transfer or demote those who do not work out back to theirprevious level and retain them.

Some firms have a fast-track system for identifying and promoting peoplewho have been identified early in their careers as having high potential. Theidea is to move them up the ladder as quickly as possible, with typicalassignments lasting only 18 to 24 months (“vice president by age 35!”). In myexperience, and that of many other senior managers, this is a faulty idea withhigh-risk consequences, despite its persistence as a method for groomingsenior managers. Among the drawbacks are the following:

�

People progress at different rates during their careers. Very, very fewindividuals can master every position into which they are put in the shortperiods 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 conformto any rigid time frame, especially short ones. In particular, the developmentof sufficient emotional maturity to be a successful general manager simplycannot be commanded to take place in an arbitrary time frame.

�

Employees are not so stupid that they cannot spot when someone is gettingpreferred treatment. This shortchanges both those who are on the fasttrack and those who are not, because the suspicion has been planted thatthe fast trackers have not earned their promotions on the same basis aseveryone else. This can destroy good working relationships all around.

�

A common tendency is to hire new graduates of the best-known businessschools and put them on the fast track, despite their lack of any industryexperience. This is the least defensible application of the fast track and



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actually has a less reasonable expectation of success than picking someonealready employed by the company for this designation. If a master’s degreein business administration is deemed a necessary qualification for advance-ment, then management should provide for promising employees to obtaintheir MBA, either via a sabbatical or through part-time study.

One of the main justifications for fast-tracking managers has been that theybring new thinking to the upper ranks. Perhaps fresh thoughts are in orderat some firms, but the process of bringing them into the company need notbe so flawed. If fresh thinking is so badly needed, then it is better to hirepromising managers from the outside who can bring fresh experience and asuccessful record, rather than simply bringing youth.

6.5 Firing and Personnel Layoffs

Employees are generally fired for one of two reasons: (1) for “cause” becausethey have broken government laws or violated company rules or (2) forunsatisfactory performance. The first reason is atypical and most managerswill not shrink from handling the situation. An employee who has donesomething seriously wrong, such as stealing, fighting, damaging property, orintentionally violating employment or environmental laws, should be sus-pended from work immediately while you verify the violation. Once theviolation is confirmed, then the individual should be discharged at once andonly allowed on the premises to remove personal possessions in the presenceof security guards. A violation of government law should be reported to theproper authorities for their action; failure to do so could conceivably exposethe company to obstruction of justice charges.

Unsatisfactory performance should also be treated in a straightforwardmanner, although the urgency and concern for security are not necessarilythe same. After completing the second (or third) unsatisfactory performancereview, each of which has specified what the person being evaluated mustdo to achieve acceptable performance and the consequence of failing to doso, then it is time to require a career change, so to speak. Firing someonefor other than “cause” is usually a very distasteful job for most managersbecause 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 integrityat all, then satisfactory reviews must result in retention and successive unsat-isfactory reviews must result in dismissal. This is fundamental to personnelmanagement and to the credibility of your compensation system.

People who cannot or will not contribute at an acceptable level are neverhappy in their jobs. This unhappiness infects others and pulls down theirperformance as well. It is vital to maintaining the morale of contributingemployees that you dismiss chronically underperforming and disaffectedemployees.


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It is ethically wrong to keep someone who cannot or will not executework responsibilities on a satisfactory basis. It is a rare situation when suchindividuals can be transferred within the company to other positions that theycan perform, because usually too much baggage is carried along to make thisfeasible. Assuming the situation is not one of those rare ones, then you mustfire that person, explaining exactly why, and offer a reasonable financialseverance package. You may wish to arrange for an outplacement service,depending on how likely the individual is to find another position within ashort period of time. While it may sound facile to state that a manager isactually doing a non-performing employee a favor by forcing the careerchange, it is nevertheless true. A surprising number of such employees willactually express a sense of relief when required to leave their jobs. Peopleoften 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. Handledproperly (e.g., with outplacement counseling), fired employees get a freshchance to start over again and regain the self-confidence and self-esteem lostin their previous positions.

A particularly repellent reason for dismissal of personnel was institutedduring the brief tenure of a CEO of one of the automotive Big Three. It wassimilar to that used by Jack Welsh at General Electric, but it was far moredraconian. It consisted of a mandatory distribution of managers into A, B, andC categories in predetermined percentages during the course of performanceevaluations, with C category personnel to be denied bonuses. If they remaineda C category after a second review, they were terminated. Never mind whetherone or more of the groups of managers had been previously selected withcare to include only top-level performers — off with their heads! This proce-dure earned the company a series of high-profile individual and class actionage, gender, and race discrimination lawsuits, not to mention inflicting a majorhit on morale. The company eventually settled these suits rather than let themdrag out through trials with the attendant further bad publicity. As describedelsewhere, no lasting good comes of setting employees against each other;the team cooperation required for successful business operation evaporatesin a cloud of distrust and backstabbing. Furthermore, a system that deliberatelystigmatizes an arbitrary percentage of the workforce is contemptible and hasno place in any ethical company.

Layoffs due to restructuring are a different matter than discharging unsat-isfactory performers. As a matter of principle, layoffs should never be usedto deal with a temporary contraction in the business cycle. If the companyis in trouble because of overstaffing, then among the first to go should bethe executives whose poor judgment created the situation. Every companyshould be run on a sufficiently lean basis to eliminate any “fat” that couldbe cut in down cycles, as mentioned in Chapter 5. Expansions should bebased on improving productivity or outsourcing where feasible, not justmindlessly adding expendable bodies. Layoffs are a desperate measure andshould be used only as a last-ditch, emergency solution to save the companyand the remaining jobs. Morale will suffer severely from a layoff, and thereasons must be clearly and convincingly communicated to the surviving staff



95

or they will remain demoralized for a longer period than the company canreally afford. Layoffs are not inexpensive, either; severance costs can easilyexceed short-term cost savings. If layoffs cannot be avoided, then managementmust ensure that key personnel are not lost in the cutback. Across-the-boardlayoffs are a shabby and incompetent way to avoid dealing with the problemof who is to go — do not do it.

Some companies have tried a “share the pain” approach by applyingcompensation cuts to all rather than laying off people. This may make senseif personnel compensation has been reasonably generous in the past and thecuts are not drastic. It may also have merit if the company’s staff is small andit is impractical to reduce the number of employees without a serious adverseimpact on operations. The technique is more likely to work if the time intervalthat has to be bridged is less than a year, recovery seems highly probable,and the cuts are restored at the earliest opportunity. Employees who havebeen through such situations often have stronger positive feelings about thecompany and each other than do those in companies where layoffs werecarried out. Of course, it is essential that everyone share in the cuts, especiallythe managers. This approach, however, has significant risk because your betterperformers are apt to leave for higher paying jobs if the cuts last for morethan a few months.

An alternative approach in the same vein of “share the pain” is to ask forvolunteers to be laid off. The layoff period should be short, usually not morethan 30 to 60 days. Volunteers should be guaranteed that they will be broughtback, and that they will receive a significantly better severance package inthe 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 packagesto their older personnel, generally those over 50 years of age. Because anyoneover the age of 45 is protected by federal employment anti-discriminationlaws, this procedure could not be easily limited to weeding out the lessproductive employees; everyone in the same category had to have the sameopportunity offered to them. As a result, a number of more desirable employeeswere lost along with the less desirable ones. In the opinion of a large numberof outside observers, the mass early retirement of a generation of experienced,highly competent senior personnel was a bad bargain. The companies mayhave 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 canceledout any savings overall. The most obvious price was the cost of the retirementenhancements, which frequently required the companies to take writedownsagainst earnings, typically more than the amount of earnings for one or eventwo quarters. The less obvious price came about from operating mistakes thatwere likely to have been avoided if the more senior personnel had been onhand to perform or advise. Some companies realized this and actually rehiredsome of the retirees as consultants. Overall, it seems that this approach wasunsound.

Finally, perhaps the most important reason for not using dismissals to dealwith temporary contractions in business is that you will need those trained


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and experienced personnel to handle business when times improve. Remem-ber how expensive and time-consuming it was to find, hire, and train newpeople? If you cut staff in a downturn, you will be faced with having to gothrough the same cycle of recruiting, hiring, and training all over again, onlythis time it will be more difficult to attract top people because you now haveacquired the undesirable reputation of being quick to hire and even quickerto 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 full-time employee. Many jobs can be performed by a part-time employee,temporary or contract worker, or consultant. Project work, such as marketresearch, 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 criticaldata generated internally, such as the project work just mentioned. Do notuse such people in jobs where you need to build up a permanent reservoirof experience within the company.

Some company activities can be compartmented and contracted out, asone way to deal with the up cycles, yet not creating an oversupply of peopleto deal with when the business cycle turns down. Production can be contractedout; for example, polymer producers can contract out compounding, certaintypes of plant maintenance can be contracted out, trucking can be contractedout instead of or in addition to using the company’s own fleet, molding workor decorating can be farmed out to other molders, or outside payroll servicescan be used.

The primary advantage of using temporary or part-time personnel is thatthey can be laid off instead of your permanent, full-time employees withoutall of the problems cited above. Do not be fooled by the stereotype thattemporary personnel are necessarily less expensive than permanent ones, asprofessionals can command fairly high amounts of compensation. Do notbegrudge them this because they are necessarily earmarking some of it fortiding them over between job assignments as well as providing for theirretirement and health care, benefits that you are not providing directly.

Consultants have acquired an uncertain reputation in some quarters, but thisis 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. Inmany instances, hiring a qualified consultant for a specific assignment is a muchmore sound move than handling the project internally. Consultants often canbring more expertise to bear on specific problems than exists in-house, whichis particularly helpful with non-recurring issues. It has been my experience,both as an executive and as a consultant, that individual consultants can usuallybe found who have more specialized expertise applicable to the problem athand, and cost less, than personnel found in large firms. Consultants shouldnever be brought in to provide justification for a decision that management has



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already made; this is a misuse. Sometimes, members of the board of directorscan contribute as unpaid consultants based on their own knowledge andexperience — unpaid, in the sense that they do not receive additional com-pensation 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 moralebooster, because it shows that management appreciates these people for theirability to continue to contribute, albeit on a reduced basis.

6.7 Retention

Let’s return to the subject of retention — keeping people. Considering howmuch time, money, and trouble are required to find, hire, and train good,qualified people, it is amazing how few managers think regularly about howto keep those people. While it is true that no one is indispensable, it is foolishto 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 itonce was, but management can and should find ways to repair that damage.

Why do people stay? The reasons are sprinkled throughout the precedingsections 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 oppor-tunity to express their views and influence decisions.

�

People think their pay and benefits are fair. Believe it or not, this is notthe 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 thingsinto perspective.

Although financial rewards are an essential part of recognition of a job welldone, they are never the entire sum of it. Many ways are available to leteveryone know that someone has done a particularly effective job: some extratime off, an award plaque, a reserved parking place with the person’s nameon 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’sdegree or higher in a hard science or engineering) for manufacturing and thelaboratory are interchangeable with those from any other line of work. Thisis a sadly mistaken concept. The potential for expensive spoilage or waste,


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even for hazards to life and the environment, is significantly greater in thechemicals and plastics industry than in many others. It is essential that thoseentrusted with the operation of equipment and the disposal of materials areknowledgeable, highly responsible, and trustworthy.

Plant and lab people in the chemical and plastics industries must be hiredafter a careful screening to ensure that only those who are particularlyconscientious in following established operating procedures are hired. Fur-thermore, these attitudes must be fostered by training and supervisory rein-forcement. Willful disobedience of these procedures or a negligent attitudecannot be tolerated and appropriate disciplinary procedures must be followed,including dismissal.

Because plant and lab employees are expected to be a cut above othernon-professionals, they should be paid more than average wage for paralleljobs in the area. Non-professional personnel tend to be less mobile thanprofessionals, so compensation must be compared against the area or regionallevels in the industry (effectively there are no national levels per se). You donot want to lose people for whom you have spent much time and money tofind, hire, and train.

Especially for lab positions, it pays to look for people with at least someeducation beyond high school. For example, an associate’s degree in chemicaltechnology or a bachelor’s degree in biology is a good indication that anindividual has the interests and training to be proficient in the lab, even thoughif the education does not bear directly on plastics. While a growing numberof institutions are conferring two-year associate degrees in plastics technology,the number of graduates is still fairly limited; such individuals would be afind, of course.

6.8.1 Unions

What should you do if a union tries to organize your non-professionals? Thefirst question to ask is why? Unions almost always enter the picture as theresult of poor employee relations, the handiwork of a poor supervisor ormanger. Because you are presumably paying more than the average wage —although more money may be a union promise, money is seldom the primaryreason for unrest — you should take a hard look at your supervisors andmanagers. If you can identify problems with the way they are treating thenon-professionals, fix them immediately. This is the kind of problem youshould always be looking for on a routine basis long before a union organizershows up. Once a union finds enough support to call for an election, anysteps you take may already be too late.

While it is certainly possible to have a good, constructive relationship witha union, they almost always add cost to operations through inefficiencies(work rules), complaints (grievances), and strikes, among other things. It isquite common for one or more disgruntled employees to bring in unionorganizers, participate prominently in the campaign for recognition, and thenresign within a few months after the union has been established.



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Unions found their original justification in the harsh exploitation of laborby factory owner/managers following the Industrial Revolution in the 18thcentury, and came into being in the 19th century under the leadership ofsocialist reformers. Unions were able to organize workers to bargain forimproved wages and working conditions that the workers were unable toattain individually. In the latter half of the 20th century, governments tookover the regulation of working conditions, and the growing need for skilledand educated workers has bid up wages. Consequently, most industrial unionstoday have difficulty justifying the substantial dues they collect from theirmembers. For this reason, union business agents often will act in a militantand confrontational manner during contract negotiations with management,to show that they are standing up for their members. If you find yourself insuch a situation, do not take it personally.

Once a union has been certified by the National Labor Relations Board asa bargaining agent, it is extraordinarily difficult for it to be decertified, andyou can have no legal role in any such action whatsoever. Fortunately, unionshave fallen into disfavor among manufacturing employees today — less than8% of industrial workers are unionized, and these are mainly artifacts fromthe past at large companies. Unions win fewer than 50% of elections, but itis an expensive, time-consuming, and contentious process, even if you dowin. This is one case where the proverbial ounce of prevention being wortha pound of cure is, oh, so very true.



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Chapter 7

Tools for Management

7.1 Analyzing Your Business

The first step toward gaining control over the direction and success of yourbusiness is to understand what actually constitutes your business throughanalyzing its components and how they contribute to or detract from thewhole. These are both qualitative and quantitative analyses. Only then canone decide intelligently which areas to emphasize and which to de-emphasizeor even to discontinue. Making such decisions imposes opportunity costs, ofcourse, so that they must be informed and considered judgments, not intuitiveones; sometimes the correct decisions prove to be counterintuitive. The term

opportunity cost

means that pursuing one option will necessarily result ingiving up the opportunity to pursue another, as no one has unlimited resources.As a consequence of deciding what are your best opportunities, you mustalso assign your best people resources to them, not necessarily the greatestamount of dollars or pieces of equipment. The process described in thefollowing paragraphs does not constitute a complete approach but rather abasic test of what the application of your company’s resources is producingand what you might expect from reassigning them. Only after you havecompleted such an appraisal (and the competitive analysis described at theend of this chapter) can you undertake to create business plans.

One school of thought suggests that if you are not number one or two ina particular line of business (in terms of sales) and have little likelihood ofreaching either of these positions, then you should exit the business. Inherentin 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 oversim-plification about achieving and increasing profitability. I do not accept thisapproach without qualification because I have seen a number of instanceswhere being a market leader in sales did

not

lead to being the leader inprofitability. Nevertheless, it is important to know if market share by productis increasing, holding steady, or declining. The first instance is good, thesecond may be acceptable, but the third is a danger signal and requires action.


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Another area of concern is new product introductions. Too often, theseductive excitement of bringing out a series of new products leads to glossingover a more important consideration: Will they make money?

The single mostimportant thing to focus on when introducing a new product is to establishpositive cash flow by the end of the first year.

One might make a case for anexception to the one-year rule, but anything over a year is on shaky groundbecause the strength of the forecast is greatly reduced. This is a more importantprinciple than just establishing sales volume. If a new product proves incapableof profitability despite all of the prior analyses, you need to detect this flawearly on, before you have pumped in large amounts of cash that are likelyto 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 salesrevenues and corresponding profitabilities of the products and/or services thatcomprise your business. Peter Drucker, in his

Managing for Results

,

recom-mends drawing up a table that lists the company’s products (or services; forpurposes of this chapter, we will assume that the two are interchangeable) interms 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 theproduct

�

Percentage of this burden of the company’s total costs

�

The net earnings (net sales revenues minus manufacturing and overheadcosts) of the product

�

The percentage of the product earnings of total company earnings.

�

The contribution coefficient of the product (a value obtained by dividingits percentage of net earnings by its net sales revenues)

For this exercise, Drucker defines revenues and costs a little differentlythan

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 maintaina product) on the basis of

time

or

transactions

, not just on the basis of physicalvolume (tonnage). What might these factors be in the plastics industry? Hereare a few examples:

�

For a polymer producer, compounder, or processor, manufacturing trans-action costs might include the cost of manning, operating, and maintainingthe equipment incidental to producing a single production order. Thiswould include a production lot made either to fill several accumulatedorders or for building inventory.



103

�

For a distributor, service transaction costs might include the time requiredby customer service to process an order, either from stock or speciallyordered from the manufacturer.

�

For an equipment manufacturer, sales transaction costs might include thetime spent preparing the average number of proposals required to obtainone order.

This definition of costs is likely to require some estimating on your behalf toget the correct numbers, but ultimately it will be more meaningful thanconventional cost allocations based purely on volume. For a polymer produceror compounder, most of the costs associated with processing an order for 1ton of material are not much different as those for an order of 20 tons. Druckerconsiders the cost of processing each of these orders as essentially equal, butconventional cost accounting is likely to make it appear that handling thelarger physical volume order costs only a fraction of what it costs to handlethe smaller order. When very small orders are involved, setup costs may beequal to or greater than running costs. Each method makes compromises, butDrucker’s approach forces you to examine costs from a fresh viewpoint andto learn something in the process.

Table 7.1 illustrates this concept using a series of hypothetical product linesmade by an injection molder (I do not mean to imply any subliminal messagesabout the names chosen for the product lines; these are purely arbitrary). Thefirst seven column headings are self-explanatory, and it is instructive to seethe profitabilities of various products relative to their cost burdens and salesrevenues. The contribution coefficient in the eighth column is used to measurehow much additional income a product may generate if its sales volumeincreases by replacing the sales volume(s) of another product or products. Inour example, the product category with the highest contribution coefficientis industrial parts; assuming equal demand for all products, every dollar ofcost and resources invested in increasing the sales of industrial parts willreturn more than twice as much profit than a dollar invested in boosting anyof the other product lines. The lesson here is self-evident — put your resources

Table 7.1 Current Profitability Analysis

ProductSales(M $)

% of Total

Costs(M $)

% of Total

Earnings(M $)

% of Total

Contribution Coefficient (%)

Automotive 40 35 38 36 3 26 0.7Housewares 35 31 28 27 7 61 1.7Electrical/

electronics (E/E)15 13 11 11 4 35 2.3

Industrial 8 7 5 5 3 26 3.3Medical 7 6 6.5 6 0.5 4 0.6Specialty packaging 5 4 6 6 –1 –9 –1.8Recreation 1.5 2 3 3 –1.5 –13 –8.7Construction 1.5 2 5 5 –3.5 –30 –20.0Total 113.0 100 102.5 99

a

11.5 100

a

Rounding.


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

7.1.2 Relative Profitability Potential

Next is a qualitative analysis of the products to categorize how they differfrom each other with respect to future profitability. In effect, we are estimatingwhere each product is located on the classic S-shaped curve of product salesgrowth (see Figure 7.1). We cannot really improve on Drucker’s terminologyas we assign products into the following categories:

�

Today’s Breadwinner

— A product in this category shows significantvolume 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 yourbills, but it is now at the stage to be “milked” (i.e., minimum resourcesput in to maintain it). A stable market share for this product is probablyacceptable.

�

Tomorrow’s Breadwinner

— This type of product is already importantbut is just beginning to demonstrate its main growth. It is at the firstinflection point of the S curve. Assuming it has become profitable, itscontribution coefficient will normally be high. This product should beincreasing its market share.

�

Yesterday’s Breadwinner

— This product is marked by high sales volumebut little to no growth and low profit. It is at the end of the S curve. Itscontribution coefficient is low. While it may be defended as the productthat “made this company”, it requires price cuts to keep it alive. Thisproduct should not just be milked but should be considered for sale ortermination. This product’s market share may well be in decline.

Figure 7.1 Classic sales growth S curve.

0

5000

10000

15000

20000

25000

30000

35000

40000

1 4 7 9 10

Time

Sal

es

86532



105

�

Repair Job

— This product has substantial volume and good growthpotential (near the bottom to the middle of the S curve) but low profitabilitystemming from a single major defect, a problem that is clearly definableand readily corrected, such as positioning it in another market. Fix it orsell/terminate it.

�

Productive Specialties

— These products have a distinct but limited market(relatively low growth) but high profitability and require only limitedresources. These are keepers.

�

Unnecessary Specialties

— These products have more variations than arereally needed by the customer or which are sufficiently undifferentiatedfrom others in that they cannot command a price premium. Eliminate theseproducts 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 introductorystage and appear to have good potential. The technology is cutting edge,but the economics are as yet unproven. Often such products do not receiveadequate support because to do so would require drawing down supportfrom one or more of management’s favorites (today’s or yesterday’s bread-winners) or an investment in management ego. Be careful about decidingto commit so much support that your developmental products will fail thetest mentioned earlier of establishing positive cash flow after not morethan one year.

�

Failures

— These should be obvious, but, unlike Repair Jobs, they havemore than one serious defect and may have the dangerous potential tobecome an investment in management ego (see the next category). Ter-minate as soon as possible.

�

Investments in Management Ego

— This is a product that should be asuccess but is not; however, management is so convinced that it is thebest in its class that it keeps pumping resources into the product. Thepoorer it does, the more management gives to it — a sort of death spiralthat, in extreme cases, could actually suck an entire company into it. Mostunfortunately, investments in management ego are a common phenome-non. 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 sum-marized 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 toeach 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 productsinto the slots, just as in real life.

�

Automotive has the attributes of a Yesterday’s Breadwinner and should bereplaced with something else when the current model year purchasingcontract expires.

�

Housewares, on the other hand, appear to be a Today’s Breadwinner andshould be monitored for loss of growth and profitability.

�

Electrical/electronic (E/E) is a Tomorrow’s Breadwinner and is likely toproduce even more revenues if supported strongly.


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�

The Industrial line has the earmarks of a Productive Specialty. The appli-cation may not be price sensitive and a price increase could help profitswithout harming sales.

�

Medical is a Repair Job. The product should be repositioned in a newmarket, e.g., Instrumentation, and repriced as a Productive Specialty. Ifthis fails, drop the product — only one fix-it attempt is allowed.

�

Specialty Packaging is a Developmental Product. Assuming the marketanalysis and projections are correct, it will be a winner and requirescontinued support. The lead times for approval in this market are longerthan for many others, but this should be offset by greater profitability.

�

Recreation is a clear Failure. The customer has badly misjudged the marketand admits it cannot support the original projected volume or pricing, butyou cannot reduce costs. Drop this product now!

�

Construction looks like a monument to Management Ego. After a year anda series of price cuts, sales are stagnant to faltering, and costs cannot bereduced any further. Admit that this proprietary molded product is a failureand drop it before any more money is lost on it. Reassign resources toE/E and Specialty Packaging.

7.1.3 Assigning Resources

Just what are these resources mentioned above that need to be assigned orreassigned? First of all, they are your people. You know who your best peopleare; that information comes from annual performance reviews and depart-mental rankings. Top sales and marketing and technical personnel can bedirected to work on Tomorrow’s Breadwinners and Developmental Products,while mid- to lower-level personnel can support all the others. Second, ofcourse, your resources are also financial. Which products should receivemoney for new equipment and expansion, working capital, marketing pro-motion? These are discretionary expenditures and you must apply them wherethey will bring the greatest return.

Third, and perhaps somewhat less obvious, resources include your owntime. You need to keep track of how your own time is spent and on what.

Table 7.2 Category Checklist

CategorySales

VolumeSales

GrowthContribution Coefficient Action

Today’s Breadwinner High Slowing Medium MonitorTomorrow’s Breadwinner Medium Growing High SupportYesterday’s Breadwinner High None Low Milk or sellRepair Jobs Low Low Low Fix or dropProductive Specialties Low Varies High MilkUnnecessary Specialities Low None Low DropDevelopmental Products Low Unknown Unknown SupportFailures Low None Low DropInvestments in

Management EgoLow None Low Drop



107

If you find that you are spending more time on putting out fires than onsmoothing the way for your most successful products, then you may bemisallocating your own most important resource. Much more useful informationthan just this topic can be found in

Managing for Results,

and I recommendthe 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 companyagainst industry averages. Knowing how your competitors allocate resourceswould be even better, but this information is sufficiently sensitive that it isnot often public knowledge. Averages can be misleading because actualnumbers vary according to the type of company and its size, growth rate,products, and competitive pressures, so it is necessary to recognize that theyare only indicators. Even publicly held companies provide very little specificinformation on their plastics operations, so most of the numbers in this sectionare in the nature of informed estimates. It would be even more revealing toshow returns on invested capital, but this information is often more closelyguarded than operation numbers. Nevertheless, let’s look at a few examplesof 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, asalmost all of these firms are part of large chemical or petrochemical companies,

Table 7.3 Profitability Potential

ProductSales

Volume GrowthContribution Coefficient Category Action

Automotive High None Low Yesterday’s Breadwinner

Replace

Housewares High Growing Medium Today’s Breadwinner

Monitor

Electrical/Electronics (E/E)

Medium Growing Medium Tomorrow’s Breadwinner

Support

Industrial Low Low High Productive Specialty

Milk

Medical Low Low Low Repair Job FixSpecialty

PackagingLow Unknown Unknown Developmental

ProductSupport

Recreation Low None Low Failure DropConstruction Low None Low Investment in

Management Ego

Drop

Total 100


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which do not generally break down the financial performance of individuallines of business in their annual reports. If one were able to look inside alarge company, however, then a typical integrated polymer manufacturingdivision, producing a semi-commodity during an expansion cycle of theeconomy, might have an expense breakdown that looks something like this(with costs expressed as a percent of sales):

The relatively low manufacturing cost is typical when one is making longproduction runs of a limited number of products. This cost also includesdepreciation (which may or may not accurately reflect the replacement costof the facilities, depending on their age and inflation rates), and how currentthe plant’s level of technology is. Thus, management can be misled intobelieving that manufacturing costs are lower than those representative of theindustry if their plant facility is old and nearing full depreciation. This blindspot, 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 interestand taxes (NEBIT) of, say, only 5%, then the company would likely be inserious trouble, even though it might appear, on paper, to be earning arespectable return on investment. In actuality, it would risking being unableto generate enough cash flow to finance growth, plant upgrades, or evenadequate maintenance because it had not adequately addressed replacementcosts. 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 theaverage. Research and development costs are a bit higher than in othersegments of the industry because polymer product and process developmentrequire scale-up steps that effectively are unnecessary in the other segments.

7.2.2 Compounder

Compounders usually work on smaller gross margins than polymer manufac-turers and therefore must have lower overhead expenses. A specialty com-pounder might have an expense breakdown such as this:

Raw materials 34%Manufacturing 35Gross margin 31Administration 4Research and development (R&D) 5Sales and marketing 4Net before interest and taxes 18

Raw materials 57%Manufacturing 18Gross margin 25Administration 3Research and development (R&D) 2Sales and marketing 5Net before interest and taxes 15



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These data are also hypothetical, as no pure-play, publicly held specialtycompounding companies exist. Some blurring between marketing and R&Dcosts in the area of application development may occur, as R&D mostly consistsof fine-tuning products for custom applications.

No meaningful current information on the typical return on invested capitalis published, but values have been realized in the past 10 years as high as35%. This depends a great deal on the age and nature of the compounder’sequipment. If the equipment is relatively old or purchased used or theextruders are mostly single-screw, then returns will be quite high. Conversely,if the equipment is new and mostly twin-screw extruders, then returns willbe lower.

7.2.3 Distributor

Distributors have a wide range of gross margins, depending on how theyare compensated (resale vs. commission), the types of materials they handle,the industries they serve, and their size. In the example below, it is assumedthat a small distributor buys engineering plastic resins from several manufac-turers, stocks them for a predictable (but competitive), non-automotive cli-entele, and resells.

Distributors specializing in small lots of commodity polymers, or “hand-offs”from their suppliers may show lower raw material costs and higher earningson sales. With favorable credit lines from their suppliers, distributors that turnover their inventories in 30 to 60 days effectively do not have to even tie upcash in their stocks. Distributors can also show very high returns on investedcapital (50% or more) if they do not own warehouses, silos, blending andpackaging lines, trucks, etc. In line with this high return, however, is a highrisk that inventory will not be salable at the price expected when it waspurchased.

While the polymer producers will sometimes provide technical supportwith respect to complaints about the performance of their materials, thedistributor almost always has to provide the first aid when it comes toprocessing problems. This can often be addressed by using a consultant orhaving one of the lab technicians or sales representatives handle troubleshoot-ing as a secondary responsibility.

Raw materials 74%Warehousing and shipping 6Gross margin 20Administration 3Technical service 1Sales and marketing 6Net before interest and taxes 10


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7.2.4 Processor

Processors’ expense allocations can vary even more widely than those ofdistributors, depending on their size and how fully integrated their operationsare. The following example for an injection molder assumes smaller size andlimited integration (e.g., mold maintenance but not mold building, assemblybut not decorating).

This information is based on data collected by the Society of the PlasticsIndustry in 1999–2000 and presented in a paper by J. Mengel at the 2001 SPIStructural Plastics Conference.

Again, return on investment information is not readily available or com-parable, and the capitalization and nature of the business of processors varywidely (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 fortheir products that are characteristic of the capital goods industry. Unfortu-nately, little breakdown of financial data is published for these companies, astheir results are often not broken out separately from other businesses withinthe conglomerate. The example shown is for an injection molding machineproducer in an average year, neither at the top of the cycle nor at the bottom.

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

Raw materials 35Production 47Gross margin 18Administration 3Technical 2Sales and marketing 5Net before interest and taxes 8

Manufacturing (including raw materials) 80Gross margin 20Sales, R&D, and administration 15Net before interest and taxes 5



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7.3 Measuring Your Results

7.3.1 Achievements vs. Planned Goals

The most important tool for measuring results is the business plan. The planis what the management team has been trying to fulfill all year long. If resultsvary by more than 10% from planned goals, examine the basis for settingthose goals. You do not want to use a methodology that consistently setsunrealistic goals, either high or low, bearing in mind that stretch goals aretargets that go beyond those that would be normally expected. Also, if businessconditions have been unusually good or unusually harsh, you need to considerthis influence on the achievement of results (or lack thereof). Business plansmust have the built-in flexibility to deal with unforeseen economic circum-stances. A new team should be getting the hang of setting realistic goals withintwo years.

To avoid surprises, ensure that you review achievements vs. plan monthly,with more in-depth reviews on a quarterly basis. Make adjustments as neededwhen they arise, not at the end of the year. Keep extending the plan periodprojections as adjustments are made, so that when the next annual plan isput together, it already has a current baseline.

Of course, making adjustments is not a substitute for finding out why thebusiness 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 theproblem results from conditions that are well beyond your control and thatyou have no alternatives to offset the shortfall. Do not let your people offthe hook if they are not achieving milestones and the reason looks to bemore failure to perform than disappearance of business. Obviously, it is betterto be slightly conservative than to be overly optimistic. It is human nature tofavor those who usually report better results than expected than those whoreport poorer ones. If you observe someone who always reports results thatare exactly on target, be suspicious because manipulation of data is the onlysure 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 jobmanagement is doing. Quarterly and year-end financial statements, as well asthe nigh instantaneous judgment conferred by the stock market on the priceof the stock (for a publicly held company), should be fairly straightforwardin showing how the company is fairing over a period of time, usually yearto year or over a period of three years. Because stock options are a typicalpart of executive compensation packages, the price of the company’s stockwill be of more than passing interest to management. A depressed stock priceis also an attraction for corporate raiders.

If your company’s stock is trading at a multiple of earnings that is averageor better for your industry segment, then all is well. However, if the stock is


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trading below average, you need to address what is wrong with either thecompany’s performance or the analysts’ perceptions and take appropriateaction. In the past decade, the stock market has been a harsh taskmaster,rewarding and punishing companies with dizzying swiftness, sometimesunjustly tarring good companies with the same brush as competitors whohave published poor results. While this is a problem that is not completelyin the hands of management, solid, consistent performance over a period oftime will eventually be recognized and rewarded at some level of support forthe 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 dropsupport levels to a minimum valuation. A continuing low stockprice may offeran opportunity to take the company private by a management-lead stocktender 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 yourbanker 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, andyour company’s stock price is soaring, if your customers are not satisfied theneverything will come crashing down sooner than you think. Managementneeds 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 leastonce a year. Talk frankly with them about whether or not your company ismeeting their expectations and, if not, what can be done. This is not reallyanything more than what your account manager should be doing throughoutthe year, but your presence, as a senior manager, is reassuring to a customerthat you do not take them for granted.

Another, more comprehensive way to assess customer satisfaction, is toconduct formal benchmarking studies through questionnaires and telephoneinterviews. These latter studies are best done through outside, neutral parties(e.g., consultants or market research firms) who have the necessary experiencein conducting such surveys in a non-intrusive way. Mailing out bland surveyforms to customers is not an acceptable way to learn what your customersthink of you; anyone with experience in this field knows how inadequatesuch techniques are. They are a waste of money and time and are more likelyto irritate your customers than to allow them to genuinely communicate theirconcerns.

Customer satisfaction measurement is one of the most overlooked yetimportant tools that management has. Unless you know what your customersthink 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



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and services that your competitors do not. This is an important technique fordetecting changes coming, so that you are not blindsided.

Customer surveys can also turn up additional important information aboutbroader needs and problems (market intelligence) that you can use fordirecting R&D and strategic marketing projects. After all, your customers areexperts on their business. You would be hard put to find a better, morecredible 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. Afterall, these are the people that are trying to take away the business you currentlyenjoy in the marketplace, and this is exactly what they will do if you misstepor lose your direction. Let’s be clear that this is

not

advocating industrialespionage, which, by definition, is unethical if not illegal. Business intelligence,on the other hand, comes from many open sources of information, which arenot difficult to find if you know where to look. For example, a good deal ofcompetitive information is freely available from competitors themselves in theform of product brochures, annual reports, press releases, scientific papers,trade show exhibits, and websites. Very often, news releases on new plantsor expansions list the annual production capacity. For some reason, a numberof companies seem compelled to disclose more information about themselveson their websites than in any of their other publications. Also, competitors’customers and vendors are often willing to share information, and they areusually the most reliable sources of information when it comes to estimatingmarket share. The difficulty comes about more in the analysis and interpre-tation of this substantial amount of information than in obtaining it. For thisreason, I strongly recommend using an experienced, independent consultantto do competitive analyses, if they are anything more than financial compar-isons (and they should be). The term

independent

is meant to exclude in-house consultants because they cannot avoid some degree of bias in analyzingand interpreting the data.

A consultant will first seek your agreement on defining just who really isyour 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 notconsider zinc, aluminum, and magnesium producers to be competitors too?If you are a compounder, are your friendly glass fiber suppliers not alsocompetitors if they are offering dry blends? If you are a molder or an extruder,are metal diecasters and metal extrusion companies not competitors, as wellas other molders or extruders? If you work with thermoplastics, how aboutthose people who work with thermosets? It is important to look at yourcompetitive environment on a broad basis, or you may be hit by one of thoseunforeseen changes mentioned in Chapter 1. You need some understandingof the strategy of these competitors so that you can both protect yourself andexploit their weaknesses. It is instructive to see how your indirect competitors


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view their business, as well. Several times in the past, people in the plasticsindustry have been caught by surprise when trade associations representingglass, paper, or metal industries initiated a public relations campaign againstplastics. It should come as no surprise, however; after all, just who is it thatloses business when plastics displace other products in packaging, construc-tion, and other end uses? Even construction unions have been an enemy ofplastics when they have believed that converting from traditional materials toplastics may threaten their jobs and income.

Next, your consultant will want your agreement on how the study will bestructured. At the very least, you will want to know the size, growth trends,organization, market share (both overall and by individual markets), innovationrecord, and production and technical capacities of your principal competitors.Some of the information you want may simply not be available, such asproduction costs, but, as mentioned earlier, a great deal of information isavailable from essentially public sources. Talking to knowledgeable sourcesin the marketplace takes more time and costs more than just gleaning infor-mation from published data, but usually fills in missing details and (perhapseven more importantly) validates the published data. This is important becausemore than one company has thought that it can scare off potential competitorsby inventing creative ways to announce production capacity increases thatturn out to be only on paper. Your competitors’ management may also revealtheir strategies in public forums, such as trade association meetings andbuilding dedication ceremonies, not to mention documents filed with theSecurities and Exchange Commission or other public agencies. Your consultantwill locate all of this information, analyze and evaluate it, and then presentit to you in a useful, intelligible form.


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Chapter 8

The Role of Acquisitions, Joint Ventures, and

Divestitures

While every business tries to generate new technology, sales, and asset growthinternally, 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 bringmanagement problems with them. These problems are often serious; it hasbeen said that over half of all acquisitions result in failure, in terms of meetingthe original expectations.

Joint ventures are often a good way to become acquainted with anunfamiliar 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 toredeploy financial assets by selling off business units that no longer fit withcompany objectives, as well as acquisitions that fail to work out. Sometimes,divestitures are needed just to raise cash if the company is running heavylosses and cannot borrow enough to cover them.

Acquisitions have played a prominent role in the evolution of the plasticsindustry. Many of these have been the result of the industry’s small businesspioneers being consolidated as the founding entrepreneurs died or wished toretire without having a successor. Also, some medium-sized firms have foundthat they require certain economies of scale in order to survive the competitionfrom 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 reduceunit costs by spreading research and development (R&D), sales and marketing,


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manufacturing, and administration over a larger revenue base. In times ofslow or zero sales growth, and in the face of declining prices, consolidationis often the only way to improve profitability. In bad times, it may be theonly way to survive at all.

A significant number of companies available for acquisition are in financialtrouble. Such firms may indeed offer a rare opportunity to acquire a fast andeasy fix at low cost, or they may turn into quicksand and absorb far morepersonnel, time, and resources than originally contemplated to effect a turn-around. A bad acquisition has destroyed more than one company. These andother considerations are explored in the following sections, which are writtenprimarily from the viewpoint of a would-be acquirer. The final section looksat matters briefly from the prospective of someone being acquired.

8.1 Access to Markets

Probably the most common reason for acquiring another company or enteringinto a joint venture is to increase sales by broadening the existing market andcustomer base. While antitrust laws limit how far a company can go via thisroute, these restrictions usually only affect the activities of larger companiesif the acquisition has the effect of reducing competition. Although the rulesare somewhat elastic, one can usually count on attracting the interest ofgovernment antitrust attorneys if the combined companies will have an aggre-gate share of more than 10% in a readily definable and economically importantmarket. Of course, everything depends on how broadly the specific “market”is defined. Most plastics industry acquisitions can demonstrate sufficient com-petition 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 resultingposition 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 oropen up a new market for an existing product line can make a great deal ofsense. Economies of scale are achieved very quickly this way. For example,a specialized polycarbonate compounder that acquires a specialized nyloncompounder who sells to the same customer base may find that costs arereduced by using combined plant facilities, a combined (possibly smalleroverall) sales force, and, of course, a combined (and definitely smaller overall!)administration. A molder might acquire an extruder that is selling products toboth existing mutual customers and to ones that the molder does not currentlyserve. This move would expand the molder’s equipment technology base andboth solidify and expand its customer base.

A favorite route to overseas markets is to acquire a local company; this isalso a high-risk strategy and is often more prudently pursued via a jointventure. The local company provides customer contacts, knowledge of localconditions, and language abilities. The acquirer or joint venture partner pro-vides technology and application knowledge and, often, a source of supply.Ideally, both should contribute capital and management personnel. Overseas


The Role of Acquisitions, Joint Ventures, and Divestitures

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

8.2 Access to Technology

Another important and sound reason for acquisitions or joint ventures is togain access to technology, particularly if it is patented or not available undera reasonable license or if the target company is on the cutting edge ofdeveloping new technology. Sometimes this is a question of reaching sufficientcritical mass of R&D assets and personnel to develop certain types of newtechnology. Other times this is a way to avoid committing internally to a lineof high-risk R&D in order to discover certain types of new technology, althoughacquisitions are hardly risk free.

Because few small companies in the plastics industry have importanttechnology assets, these types of acquisitions, mergers, or joint ventures usuallyinvolve large firms and, therefore, large amounts of money. This in turn tendsto tilt the table in favor of joint ventures as the most cost-effective way toobtain 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 samewith much less risk and capital outlay, assuming that the technology owneris willing to grant a license. Some licenses involve

grant back

, wherebyimprovements are made available to the licenser, usually for an offsettingroyalty. Cross-licensing can be another possibility where each party has patentsor 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 anational or international basis sometimes find that acquisition or joint ventureis the quickest and least costly way to do so. Companies that are ISO 9000certified are desirable targets, because integrating them into the parent com-pany will be simpler than bringing in companies that have less well-definedmanufacturing practices. In a manufacturing acquisition, the due-diligencephase should include a study to assure that the target’s production sites thatduplicate the acquirer’s existing ones are serving customers in geographicareas that cannot be reached economically otherwise, or that the new sitesare so much more efficient that closing some of your old ones is part of thevalue to be obtained through the acquisition.

The most important asset is not the equipment, of course, but the personneland their expertise and proficiency. Machinery can be purchased and installedfar more easily than people can be hired, trained, and become members ofan effective team. If the combined operation does not show projected savings


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on overhead per unit of production capacity, then other, more highly com-pelling 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 withinthe respective sectors of the industry described in Chapter 2. In other words,most acquisitions in the industry are horizontal in that they combine similarcompanies. Nevertheless, vertical acquisitions are occasionally observed.

In the past several years, polymer manufacturers have begun to show someinterest in entering the compounding sector. General Electric Plastics formedits own custom compounding unit in the United States, acquired an Italiannylon compounder in the late 1990s, and acquired LNP Engineering Plasticsin 2002. Dow Corning has recently acquired Multibase, a French compounder,also with a plant in the United States. These are interesting developments butit is too early to say whether or not this is a trend. After all, ICI acquired LNPat one time but used it more as a marketing organization to sell its polymersthan as a specialty compound producer. Much will depend on how muchindependence General Electric and Dow Corning afford their compoundingunits. If these polymer manufacturers try to run these units as part of theirregular business, this experiment will fail and will be recorded as anotherexample of the inability of a large company culture to accept the fact thatsmall company cultures are more successful in specialty businesses.

So far, no great interest on the part of polymer companies to acquiredistributors is evident. The two exceptions, BASF’s Ultra Plastics and GeneralElectric Plastics’ Polymerland, are discussed in Chapter 9. While both of theseacquisitions have been clearly successful, no one else has apparently seen fitto emulate them. To a very limited extent, some compounders distribute basepolymers, but this is an internal business diversification and not the result ofan acquisition. A few distributors have become compounders, but this, too,has not been the result of acquisition. In the past, processors have shownlittle interest in vertical integration backward into compounding, except fortwo groups: those specializing in fluoropolymers and automotive captivemolders.

Occasionally, acquisitions are advisable to secure a critical raw materialsupply. Victrex, a polymer manufacturer discussed in Chapter 9, became awarein 2001 that its future expansion plans might be limited by the availability ofa critical monomer, so it acquired LaPorte, a small chemical company thatmakes the monomer.

8.5 Successfully Integrating Acquisitions into Existing Operations

Unless the acquired company is intended to be a stand-alone, independentoperation, integrating the acquisition quickly into the acquiring company is



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absolutely critical to success. Plans have to be in place before the acquisitionis 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 theacquisition. If you do not give these people good reason to believe thatthey will be valued and will find the same (if not more) satisfaction intheir jobs, then they are likely to leave or move in circles if their directionor sense of importance has been lost in the course of completing theacquisition. People who leave will often join competitors or even starttheir own competing businesses. This will leave you worse off than if youhad never made the acquisition.

�

Identifying and replacing problem personnel is another must. Doing somay take more time than motivating and retaining key personnel, but itis essential, particularly when acquiring a failing company. If this matteris not addressed immediately, the acquisition will continue to bleed — butnow it is

your

money that is being lost. This may also entail pruning someweak product lines.

�

Acquisitions are never inexpensive. You need to make these assets startearning 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 theacquisition, rather than find out after it is too late. The cost of planningnow 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 doneeffectively overnight. The longer the acquired company is out of your ITloop, the less effective will be your knowledge and management of thenew company.

8.6 When and How Not to Acquire

Knowing when not to undertake an acquisition is even more important thanknowing when an acquisition is needed. Too many acquisitions are made forthe wrong reasons, wasting huge amounts of money, time, and managementfocus that should have been spent on developing the business internally orfinding another, more beneficial acquisition. Here are some of the morecommon wrong reasons for making an acquisition:

�

Eliminate a competitor

. This is often illegal and is likely to involve thecompany in protracted litigation with federal or state governments. Litigation,especially antitrust litigation, is an enormous drain on management timeand company funds that would have been better spent on improving thecompany internally. Moves such as this can also give a company a predatoryreputation, which is not helpful in doing business. Furthermore, the exist-ence of at least one competitor is actually a positive benefit; many potentialusers of your product are likely to be unwilling to expose themselves tothe potential problems of depending on a single supply source.


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�

Show the industry how wealthy and powerful your company is

. This callsinto question why more attractive internal opportunities for more profitablegrowth have not been generated. C. Northcote Parkinson, in

Parkinson’sLaw

, 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 theweakest of reasons for acquisition or merger. Only rarely does managementknow enough about unrelated businesses that it can effectively overseethe operations of an acquisition that has nothing in common with the mainline of business. Learning how a new business operates after the acquisitionis much too late. And, there is always the temptation for the acquirer todictate how the business should be run, usually to the detriment of theacquired company. Furthermore, the stock market tends to punish thevaluations of conglomerates that are not exceptionally well managed. Overthe past half-century, virtually every company that has acquired otherbusinesses in order to diversify has wound up divesting them later or beenacquired itself and broken up. Still, this dismal track record does not seemto keep managers from acquiring unrelated businesses as a way to smooththe economic cycle or some other equally attractive delusion.

�

Acquire a bargain

. The urge to buy a troubled company on the cheapwith the premise that it can be turned around quickly is often a trapwaiting for the unwary and inexperienced. Usually, it is very difficult toknow from the outside what the real cause of trouble is or even if it canbe fixed at all. The only certain thing is that troubled companies invariablysoak up a great deal of management time that would otherwise go intoimproving your existing business. Obviously, exceptions to this rule canbe found. If you know the company well and have a firm and appropriateidea 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 goingabout it the wrong way. This is a more subtle way to make an acquisitionfail, 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 afew of the real-life ones in the industry during the past 10 years. The namesare not revealed to protect the guilty.

Changing the business focus from the one that made the acquired companysuccessful to something new

is a favorite blunder by far. It is not unreasonableto call it a blunder because it virtually never succeeds. One cannot help butwonder why the acquisition was made in the first place. One of the moreegregious examples is the case of a commodity producer that acquired anengineering plastics compounder for the purpose of making polyolefin com-pounds. The acquirer eventually divested the company when it came to realizethat the equipment was unsuitable for the type of production it had envisaged.In the meantime, it had de-emphasized the engineering plastics business andlost many of the company’s customers for these products. The new acquirerof the company was already in the engineering plastics compounding business



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and simply added this capacity and the remaining customers to its own — afar sounder acquisition.

A variation of this blunder is to

have the new acquisition report to aparticularly ambitious and/or egotistical manager

. Such a manager will neverbe 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 beginwith. This may not be a bad plan if the acquired company requires a rescuefrom the verge of bankruptcy, but it is almost always a guaranteed plan forfailure if the firm was a successful one. This scenario is particularly applicableif the acquiring company has a culture that demands that its managers showinstant results when they take on new responsibilities.

Replacing key managers in the acquired company with ones from theacquiring company

is another blunder. Unless the acquired company was abusiness failure, this makes no sense at all. Human capital is almost alwaysthe most important asset in any acquisition. If management does not respectthe staff of the acquired company, then why was it acquired? And, as notedearlier, those key managers have a way of winding up in competition withthe acquired company, and now with a grudge, as well — not a pretty pictureto contemplate and one that will hurt the acquisition in several ways. Non-compete agreements are not always upheld by the courts, so no foolproofway exists to keep key managers who have been dismissed from coming backto haunt you in the marketplace. If they are good, they will know where tohit you where it really hurts.

Yet another mistake is to

merge several acquisitions together by creating abrand-new top-management group while simultaneously reshuffling (or dis-missing) the top management of the acquired companies

. The new entity isexpected not only to maintain sales and profitability of the acquired companies,but also to achieve higher revenue and earnings growth (synergy). Thisprocedure does not appear to have any theory underlying it, but the lack ofa reasonable rationale does not seem to keep people from trying it. A largeplastics conglomerate tried this by buying up regional distributors and tryingto form one large national distributor from the group, dismissing or losing anumber of key personnel in the process. The product lines of the regionaldistributors did not complement each other and in some cases actually com-peted. This meant trying to persuade suppliers to agree to convert regionalrepresentations into national ones, a process that eventually had some successbut only after a period of years. It also meant dropping or divesting somesmall but profitable representations that could not be converted. The net resultwas that the resulting mashed-together “super distributor” took years to equalthe sum of the originally acquired parts. It is quite likely that the same netresult could have been obtained at less cost and more quickly by acquiringone strong regional distributor and putting resources into internal growth andexpansion.

In another case, involving a parallel strategy, a conglomerate companydecided to combine a number of acquired compounders with dissimilarproduct lines. A number of senior managers were dismissed and the restmoved from their original positions (and competencies) to new positions.


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These “repotted” managers knew relatively little of the businesses or functionsthey now found themselves in, and (surprise!) the newly combined businesssuffered greatly. The net result was a disastrous financial failure of suchproportions that the parent company eventually found it necessary to beacquired by another firm. The new owner had little choice but to dismantlemost of acquired structure, largely by closing plants, because much of theoriginal business had been lost by then. The saddest part of this story is thatmany people in previously successful companies lost their jobs through nofault of their own, while the incompetent executives who caused the debacleeither bailed out before the results of their handiwork came to light or walkedaway with golden handshakes. The better way to handle such a consolidationprocess is to choose the largest and most successful acquisition as the flagshipof the group and to have the other companies report to it. In time, the salesforces can be merged, as well as other duplicate groups. The process willtake longer but will have a far greater chance of success.

A particularly subtle way to cause an acquisition failure is to place thenew company under a manager whose compensation depends on achievingcertain goals that are not necessarily compatible with the business form ofthe acquired company. As an example, let’s say that an acquired distributorwill report to a manager whose compensation is partly dependent on main-taining low working capital in those business units for whom he or she isresponsible. Let’s also assume that the distributor’s business depends onmaintaining high stock levels for just-in-time deliveries to certain key custom-ers. Now we have a situation with conflicting interests — the reporting managerwill likely want to see those high stock levels cut back but doing so will havethe distributor risk running out of stock at critical moments. The way aroundthis, of course, is to change the manager’s compensation goals, but all toooften 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 certainends compared to a complete acquisition. If it turns out that the joint venturewas a mistake, it is often much easier and less costly to terminate it than itis to sell or liquidate an acquisition. Contrarily, a successful joint venture mayoffer an easier and less costly route to acquisition by buying out the partner’sinterest, compared to finding a similar but independent business to acquire.Of course, a key — and normal — element of any joint venture agreementis an agreed-upon procedure for termination or formula for buying out theother partner. Very often, the least complicated procedure is to require thatwhatever offer is made by one partner, the other has the option of eitherbuying from or selling to the first partner at that same price.

Joint ventures are not without their disadvantages. Partnerships betweenwidely dissimilar companies, in terms of size or interest, are seldom a wisechoice. Relative dissimilar financial strengths and diverse interests tend to drivethe partners apart rather than keep them together. The relationship between



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a mouse and a hippopotamus is uneasy at best. The simplest ones are normallythe most successful — for example, a manufacturing joint venture where thepartners split the costs and the output and market the product independentlyof each other. Research and development joint ventures are also relativelysimple but require a firm agreement on the partners’ goals and their contri-butions of personnel and funding, as well as the intellectual property rightsthat will stem from any results. The most complicated, and potentially con-tentious, joint ventures are those where one of the partners supplies rawmaterials or services to the collaboration on an ongoing basis; agreement ontransfer pricing is usually difficult and subject to frequent demands for rene-gotiation. The success of merging two similar businesses together just toachieve greater size is likely to depend on the ability of the two parents toreach agreement in advance on which one will be the managing partner.

8.8 Divestitures

Divestitures, the opposite of acquisitions, are thought to be necessary whenan acquisition turns out to be worthless or unsuitable for the company’s use.For example, a polymer producer acquired a sheet manufacturer located in alarge city. City building inspectors showed up shortly after the closing andthreatened to cite the company for numerous building and fire code violationsunless they were offered gifts, a practice that had evidently been going onfor years but had not been detected during the due-diligence review. Theunion business agent also appeared and it became immediately apparent thathe was also used to receiving gifts in exchange for steering labor contractnegotiations in the company’s favor. The acquirer, of course, refused tocontinue these practices but was forced to shut down the plant. The acquisitionagreement was then deemed to have been fraudulent, but by this time, theformer owners had disappeared and the acquired company was eventuallyliquidated. The way to avoid such a disaster is to use an outside consultingfirm to be responsible for the due-diligence phase to verify that the businessis indeed what the owners represent it to be.

The situation is less disastrous for the case of a joint venture that has notachieved the goals set for it by one of the partners. That partner may thenwish to divest its interests, most likely selling to the other partner.

Divestiture might be necessary when a relatively independent part of thecompany or its business has proven unable to show the required growth orprofitability to keep up with the other parts. Mature product lines can fall intothis category, particularly if they are relatively independent of other lines andare unable to support the company’s overhead costs. Other producers of thesame product may have an interest in acquiring such a business, or sometimesthe managers of this business segment may wish to buy it and run it as anindependent company. This is a good way to free up capital for investmentin more rewarding operations.

A capital-intensive part of the company or its business could have unmetcapital needs that cannot be handled internally. This assumes that the business


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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 financethe more capital-intensive one. A strain on capital is also a situation that mightwell benefit from joint venturing rather than outright divestiture.

Management could decide that the company must change its focus, and apart of the company no longer fits with the new direction or other parts ofthe business require the investment of cash that cannot be easily raisedotherwise. If the part of the company to be divested is big enough, it maybe spun off to the stockholders rather than sold. While this can be a legitimatebasis for a divestiture, many cases of such a splitting off have been less thansuccessful for both the parent and the spin-off, so that all the ramificationsmust be considered very carefully before making such a move. As mentionedelsewhere, several major chemical companies in the past decade decided theywould focus on life sciences and sold or spun off their basic chemicaloperations. Neither parent nor stepchild company fared well afterward; itappears that they may well have been better off to have kept the chemicalbusinesses and spun off their life science operations instead. Profitable, grow-ing businesses are not easy to find or grow internally. If they are contributingto the overall company and are not demanding otherwise scarce high-levelresources, why divest? They should be retained to provide cash flow for coreand new businesses.

8.9 The Challenges of Being Acquired

Being the “acquiree” rather than the acquirer offers special challenges. Thetwo basic situations to consider are voluntary and involuntary. If you areseeking to be acquired, perhaps you are the owner of a small business andwant to retire or pursue another career, or at least reduce your work hoursand financial risk. Or, if you were not informed or consulted before someoneacquired your company, you may need some guidelines about whether tostay or not.

8.9.1 Selling Your Company

Selling your company, especially if you are the founder, almost invariablyinvolves a lot of emotion. Emotion has a way of getting in the way of makingdecisions based on logic. You are likely to be better off if you employ aconsultant to help you, someone you can trust to point out where yourinterests are best served without the coloration of sentiments. You shouldcontract with the consultant to pay for their time, not the value of thetransaction. This way, the consultant will not have a conflict of interest if youchoose to subordinate financial considerations to other matters that are impor-tant to you, such as the continued employment of your staff or maintainingthe facility in the existing community.

Although the dollar values are fairly small, the number of acquisitiontransactions involving plastic processors is much greater than in any other



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sector of our industry. This is because there are so many small processors,almost invariably owned by their entrepreneurial founders. Because the finan-cial barriers to entry in processing are very low (equipment and a buildingcan be leased rather than purchased), just about anyone can go into businessas a processor; therefore, the primary assets of a processor are the firm’scustomers and the expertise of the employees. You will need to assure anypotential buyer that these assets are readily transferable if the firm is sold. Donot overlook the possibility that those employees may be just the ones to buyyour business, possibly through an employee stock purchase program. Youwill need expert financial and legal assistance to do this, of course.

Selling your company will be very time consuming. Make sure that youhave 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 thatyou have an effective successor in place who is ready to take over after youleave. Few potential buyers will have any interest in taking over a companywhere they have to provide managerial succession.

If you intend to stay on, you must understand that you will no longer bethe 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 toplan on leaving after not more than 3 years, during which time you willfacilitate the turnover of the business, particularly in regard to holding thehands of customers. Even this brief time may be too much if you find youare having trouble letting go. Your contract should provide for early releaseunder such circumstances; you will undoubtedly be bound by a non-competeagreement, 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 havejust informed you that the business will be sold. If the owners have invitedyou to participate in finding a buyer, you should seize this opportunity andmake the most of it. You are the most likely person to make a compellingcase for someone to acquire your company. By doing so, you will demonstratethat you are also the best person to run it, even under new ownership. Youshould also have a better idea than anyone else which other firms wouldprovide a good fit with yours. You might even be able to put together amanagement 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 yourrésumé. If the company has been acquired by someone who wants to diversifytheir holdings, all well and good — you may be in the driver’s seat. On theother hand, if the company has not been doing well, you may well be heldresponsible for this, even if no other manager would have been able to dobetter. Worse, if the industry is in consolidation and this has overtaken yourfirm, 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


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the extent you are permitted to do so, but you may wish to consider askingfor a severance package in the event none currently exists (assuming you willnot hasten your departure by being so bold).

If you are not the senior executive, but someone a little lower down onthe ladder, you have some thinking to do. Why was the company sold? If thereason was for consolidation, is your department one that could be easilyreplaced by an outside group? If you are in sales or manufacturing, you arelikely to be asked to stay. Any other function is likely to experience restruc-turing and your job may or may not survive. In general, the higher yourcompensation, the more closely you will be looked at to determine whetheror not you will be retained. If you do survive the cut, take a look at the newowner’s operations to see if it might offer you a chance to move up. Veryoften, those who are deemed worthy to remain in their positions are alsothose deemed to be highly promotable.


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Chapter 9

Case Studies

To help reduce some of the preceding ideas to practice, this chapter willexplore how a few selected companies in the industry have been managedsuccessfully. The selection of these firms was also based on my knowledgeof the companies, the accessibility of their senior management, and theirwillingness to talk about their guiding principles. No claim is made thatinclusion in this chapter constitutes an implied “best of category.” Furthermore,these profiles in some respects are a photograph at a moment in time andmay 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 areauthorized by the companies analyzed, so reasonable people may differ withsome of my observations and conclusions.

9.1 Polymer Manufacturing

The principal American polymer manufacturers are fairly well known. Inengineering polymers, General Electric Plastics has the reputation of beingespecially strong in marketing and DuPont in research and development(R&D); Amoco and Phillips were at one time the polyolefin leaders but havesince merged their businesses with others. Overseas manufacturers havelearned to work in much smaller national markets while seeking to build theirbusinesses in the surrounding regions. We will examine two such firms thatare leaders in their regions and are now becoming truly global players. Thethird example is a genuine rarity among polymer producers — a one-productcompany.


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9.1.1 BASF: Using Breadth of Product Line and Manufacturing Integration

BASF undoubtedly has the broadest, most complete line of polymers in theworld, although it is not the largest producer of any one of them. BASF makescommodity, semi-commodity, and high-performance polymers, a relativelyunusual combination. It is also arguably the most fully integrated polymermanufacturer, making all of its own monomers via integrated processes backto basic chemical and petrochemical feedstocks. In fact, its slogan is theGerman word,

Verbund

, meaning “integration.” BASF has five large, integratedmanufacturing sites, three in Europe (Ludwigshafen, Antwerp, and Schwarz-heide) and two in the United States (Geismar and Freeport), but it is continuingto add to other sites with the goal of eventually bringing their integrationlevels up to those of the five largest.

BASF has grown from being one of Germany’s top three chemical com-panies into one of the largest in the world, a global player. While it has notbeen immune to the industry’s economic cycles, its profitability has beenconsistently above average. Jürgen Strube, BASF’s chairman for the past twodecades, broke tradition when he became the first non-scientist/engineer toreach the top job. An attorney by training, he has become a true businessmanand must be credited with much of BASF’s success, despite the relative lackof authority wielded by German executive board chairmen (as noted inChapter 4, they are not CEOs). He has had to deal with major transitionswithin BASF as the company has gone from being a regional player to aglobal player, the commoditization of its polyolefin products, and the with-drawal 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 operatingits polymer business. Geographic area management is divided among fourdirectors, and the major European plant sites are the responsibility of twomore. These organizations provide administration and manufacturing for poly-mers, as well as local sales, marketing, and technical service. One directordoes 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 showsan 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 arecredited with the invention of nylon 6, expanded polystyrene, and acrylonitrile-styrene-acrylate (ASA), and its engineers with the gas-phase process forpolypropylene, among other things. BASF has never had to face anotherGerman polymer producer with a directly competing product line. Bayercompetes in nylon 6 and polyurethanes, and Hoechst did at one time inpolyolefins, but that is about it. BASF’s Ludwigshafen chemicals complex, thelargest single such site in the world, was destroyed during World War II. BASF


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rebuilt the site, became a major polymer producer in Germany, and next builtpolymer plants in Belgium and Spain. In the 1980s, BASF established asignificant polymer presence in North America, then began setting up animportant and growing polymer position in Asia (Japan, Korea, and China)during the 1990s.

BASF’s emphasis on integration fits closely with its philosophy of makingcommodities profitably. When the profit goes out of a product, the companyeither divests it or closes it down. BASF has sought to improve profitabilityin polyolefins in recent years through consolidation (it bought ICI’s polypro-pylene and Hoechst’s polyethylene businesses) and joint venturing (BASF andShell have pooled their polyolefins under the company name of Basell, withBASF as the managing partner). Shell’s contribution came from buying outMontedison, Shell’s partner in their Montell joint venture.

Polyolefins are an example of commodities that are struggling with prof-itability. At least until recently, it appeared that BASF has had more successin polyethylene than in polypropylene. Basell Chairman Volker Trautz hassaid that the boom-and-bust pricing fluctuations that mark the polypropylenebusiness have effectively destroyed all of the investment made in this polymersince its inception. Unfortunately, in the drive for profit improvement viaconsolidation (a commodity culture technique), BASF was unable to find aplace for their highly specialized polypropylene product line, Hivalloy copol-ymers. Hivalloy was a promising specialty business, growing rapidly, whenBasell was formed. BASF turned down offers to divest Hivalloy but within 18months decided that it could not sustain this business within its culture anddecided to close the operation altogether.

In addition to polyolefins, BASF’s principal polymer products consist ofthe 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 thermoplasticpolymer missing from its portfolio is polycarbonate. At one time it also

Figure 9.1 BASF AG

−−

Responsibilities of Executive Directors for Polymers.

Executive DirectorPolystyrenes, Polyurethanes,

Performance Polymers, Polymer R&D

Executive DirectorNorth America (NAFTA)

Executive DirectorCorp. Engineering

Southeast Asia, East Asia

Executive DirectorEastern Europe, Africa,

West Asia

Executive DirectorSchwartzheide and Antwerp

Plant Sites

Executive DirectorEuropean Community

Executive DirectorLudwigshafen

Plant Site


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produced acrylic resins (via an acquisition) but divested this business asunprofitable in the late 1990s.

The company has experimented with forward integration into the produc-tion of magnetic recording tapes (which it invented in the early 1930s) andautomobile components, such as components and interior door panels. How-ever, it found these businesses to be significantly less profitable than materialsand also divested them in the 1990s.

BASF has its own wholly owned distribution company, Ultra Plastics, inthe United Kingdom and Ireland. It entered this business by acquiring abankrupt independent distributor that had been representing BASF. UltraPlastics is managed as an independent business and has turned out to be afinancial and operational success for BASF. Because BASF’s product line is sobroad, Ultra Plastics has found it unnecessary to offer other polymer producers’materials. Despite this achievement, however, BASF has not yet found condi-tions to its liking in other regions where it might be able to duplicate theUltra 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 makesand its business philosophy. BASF’s R&D is targeted at identifying materialsthat can be made from the chemical intermediates it already produces; or, ifan important product is needed for the marketplace but the monomers orpolymers cannot be produced economically in-house, the company looks forpartners. Examples include Rheinische Olefin Werke (ROW), a joint venturebetween BASF and Shell Oil to make ethylene and propylene via the crackingprocess; Basell, a joint venture with Shell to make and sell polypropylene andpolyethylene, as mentioned earlier; and a joint manufacturing venture withGeneral Electric Plastics to make polybutylene terephthalate (PBT).

BASF’s entry into acetal copolymer was undertaken as a joint venture withDegussa in order to merge the technologies of the two companies to makea commercial product that was technically superior to others. Each partnerhad a manufacturing site at one of its plants (BASF in Ludwigshafen, Germany,and Degussa in Theodore, AL) and supplied raw materials. The other partnerprovided the top management for the site; BASF was designated as theexclusive sales agent. BASF bought out Degussa’s interests in the joint venturein 2000, following Degussa’s merger with Hüls. In 2002, BASF closed the plantat 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 inte-grated. The company makes caprolactam from cyclohexane and then nylon 6polymer, mostly, but not always, at the same site. The polymer is then finishedand either compounded or sold directly to processors, compounders, andfiber producers. BASF also makes its own nylon 6 fibers, to a significant extentvia the direct-melt process, whereby the polymer is spun directly into fiberswithout any intermediate stage following the polymerization reactor.


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9.1.2 Asahi Kasei: Targeted Technology

Asahi Kasei is one of Japan’s largest chemical companies, and it has extendedits manufacturing presence into North America, Europe, and Asia throughjoint ventures, acquisition, and “greenfield” plant construction. Asahi has beenalmost alone among Japanese polymer producers in going global instead offollowing the more typical pattern of limiting its activities to nearby Asia andthe United States. Asahi has had to be nimble because it is much smallerthan its larger European and American competitors, and it has had to face alarge number of competitors in its home market. Several of those Japanesecompetitors have merged in the past few years and are now more formidable:Mitsubishi Engineering Plastics is the fusion of the engineering plastics busi-nesses of Mitsubishi Chemical, Mitsubishi Petrochemical, and Mitsubishi GasChemical; Mitsui Chemicals is the survivor of a merger with SumitomoChemical.

Like BASF, Asahi’s production sites were badly damaged during World WarII but were rebuilt afterward. Unlike Germany, however, Japan protected itssmall chemical industry from imports for the first several decades after thewar, but the large number of producers has meant keen competition withinthe home market. While Japanese consumer goods companies (e.g., electronicsand automobiles) built a major presence in North America and Europe firstthrough exports and then through local production, most Japanese chemicalcompanies contented themselves with exporting and only in the past decadehave begun building capacity outside Japan, mainly in Southeast Asia andChina 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 plantin Europe and has recently acquired a compounder in China.

The company has relied heavily on new technology to strengthen itsposition in the plastics industry, developing its own process technologies foralready existing polymers. Asahi developed its own acetal technology and isthe only producer in the world to make both homopolymer and copolymervarieties, in addition to being DuPont’s only rival for homopolymer. Asahi isa late arrival to the polycarbonate producers’ club, but again has used its ownnon-phosgene-based technology to do so. Asahi was the second producer inthe world to make polyphenylene ether (PPE), again by its own technology.The company has even developed its own methyl methacrylate monomerprocess and is building the largest such plant in the world, having alreadyentered the relatively mature acrylic polymer market. Asahi has no bias againsttechnology developed by others and has several joint ventures that pool theresources of Asahi with other market leaders (e.g., Dow in polystyrene andWacker Chemie in silicones). Asahi is also a major styrenics and polyolefinsproducer, the latter now being part of a joint venture.

A vertically integrated fiber producer, Asahi is a major factor in nylon 66in Asia. Asahi’s integrated nylon 66 fiber business is certainly not unusual;every other nylon 66 polymer producer except BASF is integrated forwardinto fibers; BASF’s fiber business is based on nylon 6. BASF is also present


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in the construction industry through its expanded polystyrene insulation.Asahi’s forward integration into fabricated housing, however, is unique andeffectively gives it a laboratory in which to develop products for this largeand growing market.

Asahi employs a mixture of product and market organizational structuresto run its business on a global basis, as shown in Figure 9.2. Like BASF, Asahiprovides local support for businesses that are directed globally from the homecountry. Marketing and R&D are under the same executive for each polymergroup, 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 ICIin 1993. PEEK is virtually a unique material and was protected by primarypatents 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 2001with revenues of 72.1£ ($160 million), which suggests that its business hasbeen growing around 20% annually during the past 3 years. Victrex alsoreported that it brought 150 new applications to market in 2001, showing howcritical application development is for specialty products. Despite its smallsize and high overhead, Victrex’s profitability is quite remarkable. Its pretaxreturn 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 yearsand has taken steps to further integrate manufacturing, its return on fixedassets was an amazing 67% in 2001, up from 52% in the two prior years.Victrex employs 185 people and maintains marketing offices in Germany andthe United States. Marketing in Asia is conducted through a joint venture withMitsui Chemicals of Japan.

Victrex has not had the high-performance polymer marketplace entirely toitself during the period of its patent protection for PEEK. A number of otherquite similar materials offer varying combinations of high mechanical proper-ties and chemical resistance at high temperatures, although not in the samebalance. Some similar materials are more difficult to fabricate. Victrex PEEKhas been around for over 20 years and has become well known and wellaccepted during that period. Newcomers, even ones making virtually the samepolymer, have an uphill battle to compete successfully against the bulwark ofproduct 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 tosee how they successfully fend off competition.


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9.2.1 LNP Engineering Plastics: Global Compounding

LNP was the largest independent (not owned by a polymer producer) com-pounder in the world until it was acquired by General Electric Plastics in 2002.Apart from General Electric, LNP has manufacturing sites in North and SouthAmerica, Europe, and Asia. LNP has maintained successful and profitablegrowth despite being acquired and divested several times. A look at LNP’shistory is useful in understanding how it has reached its pinnacle in theindustry.

9.2.1.1 LNP’s History

LNP (Liquid Nitrogen Processing) was originally a privately owned customcryogenic grinding company when it started up in 1948. In 1961, it adaptedits process to make polytetrafluoroethylene (PTFE) compounds, and 3 yearslater began extrusion-compounding a proprietary line of thermoplastic mate-rials in Malvern, PA. In 1970, LNP integrated backward into making its ownPTFE and nylon 66 polymers; unfortunately, the manufacturing scale was toosmall and the technology too dated for the plan to succeed, and the subse-quent losses nearly bankrupted the company. After a change in seniormanagement, it sold off its polymer plants and returned to its basic businessfocus: compounding. In 1976, LNP was acquired by Beatrice Foods Companyand placed in the Chemicals Division. In 1985, Beatrice sold LNP to ICI, theBritish chemicals giant. ICI thought to eventually integrate LNP in NorthAmerica into its existing polymer manufacturing business but later decidedto 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 oneoriented more toward growing profit margins and return on invested capital.ICI diverted LNP’s North American marketing and technical efforts away fromits line of compounds and toward ICI’s line of polymers. When ICI divestedLNP, it kept the fluoropolymer business and left LNP with just the thermoplasticcompounds business. These moves first diffused LNP’s focus, then allowed itto refocus on its basic business once more. In Europe, ICI more or less leftLNP’s operations alone, as ICI did not have the same need to emphasizepolymer sales there as it did in North America. The result was that the Europeanoperation has retained much more of the entrepreneurial culture than has theparent company.

Kawasaki brought ownership stability and patience, capital for expansionand acquisitions, and a return to relative business independence (Kawasaki’sonly 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 integrateits existing custom compounding units (which have sales revenues about twicethose of LNP) into LNP and operate the resulting business as a separate entitywithin General Electric’s corporate structure. However, it is clear that LNP isno longer independent, as defined earlier. The rest of this story is still


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unfolding, but General Electric’s history suggests that LNP’s business strategieswill be changed far more radically than under any of the previous owners.This theory was reinforced when General Electric named one of its veteransenior executives as the new CEO of LNP, the first time that any owner hasplaced 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 falteredwhen it deviated from this strategy, such as the attempted backward integrationstep in 1970 and the fusion with ICI’s polymer business (1985–1991). It firstbegan compounding customer-owned materials on a toll basis and thenapplied what it had learned about customer needs to make proprietarycompounds. This approach has also led to making a large number of small-volume, niche compounds that are often specific to a particular application.Over the years, LNP has noticed that its typical order size has stayed prettymuch around 1 MT (2204 lb).

9.2.1.3 Manufacturing Expansions

LNP first expanded by building a plant in Thorndale, PA, and converting thesmall Malvern plant into an extension of its R&D facilities. When LNP addeda plant in California in 1964, it organized the new location virtually as a mirrorimage of the parent Pennsylvania company, with duplicate functional man-agement groups. This structure, while useful for giving the new location aquick start, soon proved to be difficult to manage effectively; the variousfunctional groups were later subordinated to those located at the home office.The next domestic manufacturing plant was built in Columbus, OH, in 1979but, for purposes of order scheduling and logistics, was run as an adjunctfacility of the Thorndale plant. In 2002, LNP announced that it was closingthe 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) acquireda polycarbonate recycling company, GHA Plastics (renamed RC Plastics),located in Houston, TX. While this move gave LNP control over the quantityand quality of recycled polycarbonate feedstocks for its other plants, RC Plasticsis operated as a separate division because RC Plastics’ raw material sources,manufacturing technology, and retained external customer base differ signif-icantly 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. Thissite was chosen because DuPont, LNP’s primary PTFE supplier, had built apolymer plant in nearby Dordrecht and wanted compounds based on itsTeflon

®

resins made close at hand. The facilities were outgrown in time andthe plant was relocated not far away to Raamsdonksveer in 1976. The businesswas run as an independent company with the functional groups coordinating


136


their activities with the parent company groups; this organizational structureis still in place. In a complicated series of events, LNP wound up with ICI’sBritish long-glass compounding plant in 1991 and relocated it to LNP’s ownplant in Thornaby-on-Tees, England, 4 years later. In 1996, LNP acquiredEurostar S.A., a French compounder with a plant near Paris, and merged itsoperations into LNP Europe.

LNP formed a sales office in Singapore in 1992 to develop business inburgeoning Asian markets and then followed with plant construction inMalaysia in 1995 and two expansions since. While manufacturing and salesare run independently here, some technical and administrative services arebeing provided from the United States until the Asian company becomes largeenough 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 isbeing run as an independent subsidiary, with sales and R&D located at themanufacturing site. In 2000, LNP announced formation of a marketing jointventure with Vetrotex America, the subsidiary of the French glass manufacturer,to sell long-glass concentrates to injection molders in the North American FreeTrade Association (NAFTA) region. In 2001, LNP built a greenfield plant inSan Luis Potosi, Mexico. This plant is managed within the NAFTA as part ofLNP’s North American manufacturing operations. It can be seen that LNP hastypically expanded at existing sites or greenfield facilities but recently has alsoadded acquisition as a selective tool to solidify its supply base and broadenits market reach.

9.2.1.4 Regional Management, Globally Coordinated

As LNP has grown overseas, it has not attempted to direct these sites fromthe home office. K-LNP was set up to provide a central holding company toadminister operations around the world in 1995. Figure 9.3 shows LNP’s globalstructure under K-LNP. K-LNP’s board, consisting of the division heads plusK-LNP executives, meets quarterly to establish broad overall policy, reviewprogress toward objectives, and consider whether any regional activities needto be extended on a global basis. Major customers are assigned to globalaccount managers, who then coordinate meeting the customers’ worldwideneeds, 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 usualtrade-secret approach to technology. It has sought patents on its technologyand unhesitatingly enforced its patents against competitors, such as for long-glass 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 revenuesin this product line did not justify either defending or settling the lawsuit. LNP


Case Studies

137

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138


won most of its points vs. RTP but only won negligible damages and lost onone 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 manufacturecompounds based on unique materials, such as Dow’s syndiotactic polysty-rene, DuPont’s amorphous liquid crystal polymers (LCPs), and Shell Chemicals’polyketone. These have not been exclusive agreements, but they protect LNP’srights to develop patented compounds based on these materials in cooperationwith the polymer producer, without fear of the results being shared with othercompounders.

9.2.2 Modified Plastics: Regional Compounding

Sometimes a niche market can be successfully defended against bigger, wealth-ier companies for an indefinite period of time. Modified Plastics in Anaheim,CA, is a good example. The relative geographic and time zone isolation ofthe American West Coast from the rest of the country makes it difficult tocompete from outside the region against a skillful local firm.

Former LNP employees founded Modified Plastics in 1977 as a toll com-pounder (the customer supplies the base resin). The founders also started acolor compounding business, Color Science, co-located with Modified Plastics.The combined companies have grown steadily over the years, offering pro-prietary products in addition to toll compounding, and they sell throughoutthe 11 westernmost states plus western Canada and the

maquiladores

in theMexican border states. With the closure of LNP’s California plant, ModifiedPlastics is now the largest compounder on the West Coast. Modified Plasticsis 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 triedto move in on Modified Plastics’ turf but have failed. Each established oracquired a local compounding plant but then made the mistake of treatingthe plant as just another manufacturing site that ran on schedules set centrally.

Figure 9.4 Modified Plastics, Inc.

VPFinance

Sales Mgr. Plant Mgr. Lab Mgr.

VPOperations

President


Case Studies

139

Southern California’s plastics processors are larger in number but smaller insize than in any other region of the country. They require fast service (oftenone day), something that Modified Plastics does routinely and uses effectivelyas a competitive advantage. The geographic and time zone isolation of theWest Coast makes it nearly impossible for companies in the American Midwestand East Coast to handle these requirements effectively from afar. Also, thesefirms have not been prepared to do business with a large number of small-volume, niche products, preferring to run off large volumes of a few productsthat could then be shipped directly to volume users or stocked for smallerusers. The problem with this thinking is that customers know from harshexperience that if they allow one supplier to cherry-pick their large-volumeneeds, they will have to pay a stiff premium to other suppliers for their small-volume items, if they can get them at all. The net result is that the West Coasthas remained largely a local market for plastic materials and parts. Becausemany 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, whichpredated Modified Plastics’ establishment by a decade and a half. LNP gaveas its reason the emigration of its customer base to Asia, but these were muchlarger, global customers that do not affect the smaller regional businesses thatModified Plastics serves. In effect, LNP conceded that it had lost its smallcustomer 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 apolymer producer.

9.3.1 Polymerland: Integrated Distribution

In 1985, General Electric Plastics acquired Borg Warner, one of the originalacrylonitrile-butadiene-styrene (ABS) producers and a superb marketing com-pany. Part of the package was a unique distribution operation, Plastics ServiceCenters. Borg Warner was the first and, at that time, the only polymer producerto own a distributor that handled both the parent’s products and also thosemade by other polymer producers. General Electric changed the name toPolymerland but then more or less ignored it, leaving it as an independentunit and adding General Electric products to the line. From the outside, itappeared that General Electric regarded Polymerland more as a trainingoperation or an experiment than as a long-term holding, although they refusedoffers to sell it and stated that it was seen as an integral part of their plasticsbusiness. As time wore on, General Electric began integrating Polymerland


140


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

9.3.1.2 Using the Internet

In 1999, Polymerland initiated a concerted effort to convert its customerinterface away from phone and fax to the Internet. At the end of 2000,Polymerland reported that it had successfully converted 20% of its sales volumeto Internet transactions, but has since admitted that this only represents 5%of its customers. While Polymerland continues to push its e-commerce interfacewith customers via advertising, publicity, trade shows, and sales contacts, itnow acknowledges that it will take a far longer time to make converts thanoriginally thought.

Polymerland is also promoting use of the Internet by customers for colorselection. Not every customer will be able to do this, as it requires bothhardware and software that are compatible with that of Polymerland sothat colors will be reproduced accurately on both ends. Nevertheless, it isan imaginative method to cut down dramatically on the time required forcolor selection, a process that can consume several weeks under normalconditions.

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 hasfound 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 NewEngland. It was founded in 1955 and had been slowly growing in the fashionof many custom molders: a handful of repeat customers and many more one-time customers. The president at that time (now chairman), Gordon Lankton,was not satisfied with this situation and realized that the company mustdifferentiate itself from its competitors or its existence would be continuallyat risk. In the course of seeking capital for rapid growth, Nypro instituted anemployee stock-ownership plan (ESOP) that helped turn tax-sheltered earningsinto equity for expansion and afforded every employee an owner’s interestin the company’s prosperity.


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 customerbase. By dropping its smaller and one-time customers, Nypro was able toredeploy its assets, concentrating on upgrading value and adding additionalbusiness from the remaining larger customers. The selection process focusednot just on size but also on customers whose end-use markets showed themost potential for profitable growth and who seemed likeliest to capitalizeon this potential. These customers, in turn, led Nypro to follow them overseasand build molding plants nearby. Nypro has steadily added additional capa-bilities and services to its offerings so that it is far more than just anothercustomer molder. In fact, Nypro was one of the first molders to characterizeitself as a contract manufacturer.

Nypro also looked for additional large potential customers in the selectedend-use markets and succeeded in converting them to Nypro customers, withthe same comprehensive approach. This has involved analyzing the customer’sproblems to see if Nypro could offer a solution. For example, Motorolacomplained that the printed surfaces of its cell phones tended to wear to thepoint of being illegible. Nypro solved this problem by using preprintedpolycarbonate labels that were insert-molded and fused into the polycarbonatephone body. Not only did Nypro solve the customer’s problem, but it alsoeliminated two manufacturing steps: pad printing (with attendant yield lossesdue to occasional mis-registration) and hard coating (the label is purchasedwith a hard coating already on it), with significant cost reductions. Nypro wasthen able to offer this design improvement to other cell phone makers, furtherenhancing its reputation in this market segment. Nypro has extended thissame philosophy to bi-component molding, again a technology that improvesproduct design while lowering manufacturing costs.

Nypro’s marketing program, known as “Million Dollar Partnerships,” estab-lishes relationships with large customers who buy more than $1 millionannually from Nypro. Over the past 10 years, Nypro increased its base of suchcustomers from 22 to 74, distributed nearly evenly among health care, elec-tronics/telecommunications, consumer/industrial, and automotive markets.This diverse balance helps insulate Nypro from the more severe swings in thebusiness cycle.

Nypro has embraced electronic data management for quality control andimprovement, color control, integrated design, and global business manage-ment. The latter is particularly critical in meeting globalized customer require-ments, as over one third of Nypro’s business is now done overseas, effectivelyrising from almost nothing just 10 years ago. Nypro has an unusually highR&D effort for a molder (4% of sales) and uses the Six Sigma approach tocontinuous quality improvement.

Nypro has a decentralized geographic management structure as shown inFigure 9.5, with regional vice presidents reporting to the current president/CEO, Brian Jones. Coordination of global customers and markets is facilitatedthrough several worldwide conferences held during the year. A global


142


technology conference helps everyone stay abreast of the latest developmentsand share their experiences in the use of these techniques. Nypro uses tworesourceful methods to train its managers:

�

Participation on their local plant’s board of directors (each plant is anincorporated entity), where they are exposed to the big picture of runninga business and can carry this information back to their co-workers

�

Nypro’s Leadership Institute, a weeklong course designed and conductedby a local university for Nypro, where managers from around the worldcan 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 advancedextrusions of engineering thermoplastics. Unlike Modified Plastics, describedearlier, this West Coast processor competes both nationally and internationallyby concentrating on high-precision profile extrusions made from engineeringand high-performance materials in small volumes. CTP has found that thisapproach has led it into highly technical applications for electrical/electronics,business machines, industrial machinery components, and non-automotivetransportation (e.g., from mass transit to aerospace). A relatively small com-pany, it was founded in 1978 by its current owner and president, GeorgeDuncan. It employs a functional organization, with key personnel oftenperforming multiple jobs, as shown in Figure 9.6. CTP has succeeded in nichemarkets that other companies have either shunned or found too small to beprofitable.

How does CTP find gold where others find only gravel? First, it has graduallybuilt a reputation for handling small but technically challenging work inmaterials that few other profile extruders understand. Second, CTP makes itsown tooling, again capitalizing on experience that not many others have.Third, CTP handles post-extrusion fabricating and decorating steps that addvalue to the services they provide. Fourth, CTP offers to design parts, ensuringthat there will not be any unforeseen production problems, as well as (onceagain) adding value to what they offer to the customer. Fifth, CTP filters itscustomer base by sticking to engineering plastics profiles and short runs (small

Figure 9.5 Nypro, Inc.

VPFinance/CFO

VPNorth America

VPSouth America

VPEurope

VPChina

President/CEO


Case Studies

143

quantities) — in other words, by avoiding the temptation to take on largerjobs 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 manufacturerbut 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 competitorin a huge worldwide injection molding machine market of an estimated $20billion, shared by dozens of companies competing in every significant geo-graphic region.

How does a relatively small company survive in such an environment?Husky’s answer has been specialization to attain maximum penetration oftargeted markets and integration to control quality and costs. Husky startedout by making relatively small, high-productivity machines for thin-walledpackaging containers, such as ice cream tubs and lids. Having established astrong presence in this market, it extended its line of machinery to makingpolyethylene terephthalate (PET) injection blow molding systems in 1978.Because such systems run steadily on the same material, they are ideally suitedto incorporating hot runner molds, which Husky began designing, making,and supplying. These PET packaging machinery systems also utilize robotsfor handling parts; Husky then began designing, making, and supplying robotsas yet another component of a complete, turnkey plant.

Husky is headquartered in Ontario, Canada, but has added manufacturingsites in the United States (Vermont) and Europe (Luxembourg) and 18 technicalcenters throughout the industrialized world. The technical centers serve as salesand marketing sites where potential customers can see Husky’s equipment inaction, even running their own molds. It is difficult to beat an actual demon-stration of how one’s own tooling will run as an inducement to buy. Thepower of live demonstrations is an important reason why participation in tradeshows is an integral part of Husky’s marketing plan. The equipment on displayis usually sold during the show and shipped directly to the new owner.

Figure 9.6 Certified Thermoplastics Co., Inc.

Accounting

Plant Manager Design and Technical Service

Operations Manager

President(Sales)


144


9.6 Common Threads

What are some of the more notable common threads that link these companiesin their successful quest for profitable business?

�

Adaptability

— All of these companies started with a basic idea for oneor more products that were useful for certain end uses, but the idea didnot end here. Each company was next able to broaden the applicabilityof the product to find additional end uses, either through product modi-fication or through introducing the product to other users whose perfor-mance 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 containcosts and capture earnings that would otherwise go to suppliers. Integrationalso adds scale, an important consideration when the business is headedtoward or has already taken on the commodity characteristics.

�

Dominant local presence or global emphasis

— Small companies cansucceed by being the best in a local area, but when they wish to growbeyond a certain point, they must eventually go global. A regional presenceis only an intermediate stage to going global.

�

Focus closely on selected customer’s needs

— When company managementbegins to concern itself more with internal matters than with external ones(customer needs), the company is on its way to trouble. All of thecompanies examined in this chapter are focused on selecting their cus-tomers, identifying their needs, and finding a profitable way to satisfythose needs.


145

Chapter 10

Summary

What have we learned about the requirements of the plastics industry forsuccessful management that differ from those for other industries?

�

The plastics industry is fundamentally based on technology that advancesconstantly and which shapes the industry’s markets and business models.Many other large industries, such as construction, are not nearly as depen-dent on technology.

�

The industry requires technically trained people to manage and run it, butin an open and shared-decision style rather than by command and control.Many other large industries do not require as many personnel with suchtraining, 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 transitionbetween different cultures of growth, size, and style. Prompt recognitionof these changes and adapting to them is a top priority for management,because a mismatch of culture, style, and technology within a companywill not produce successful results. Developing new applications andproducts requires an integrated technical marketing effort that is essentialto success.

�

The average life cycle of a product varies from very long to quite shortas one moves downstream from polymer production to finished parts. Thiswould suggest that increased focus on product and application develop-ment would be required as one moves downstream, but in fact, researchand development expenditures as a percent of sales are typically higheras one moves

upstream

. The companies that are exceptions to this ruleare usually more profitable than other companies in their sector. Whilethis characteristic is not peculiar to the plastics industry, it demonstratesthat many plastics companies could improve their financial results bychanging their business structure, emphasis, and culture, with respect toresearch and development and accompanying value pricing.


146


�

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

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


147

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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

,


Innovation and Entrepreneurship

,


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 1996Jones, 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.



149

Index

A

Achievements, planned goals vs., 111Acquisitions, joint ventures, and

divestitures, 115–126access to markets, 116–117access to technology, 117acquisitions vs. joint ventures, 122–123challenges of being acquired, 124–126

company sold, 125–126selling of company, 124–125

divestitures, 123–124manufacturing capacity, 117–118successfully integrating acquisitions

into existing operations, 118–119

vertical sector acquisition, 118when and how not to acquire, 119–122

Acrylonitrile-styrene-acrylate (ASA), 128Aerospace markets, 51Age discrimination lawsuits, 94Ambition, 6American lawsuits, 59Amoco, 127Anti-capitalists, 13Anti-discrimination laws, 95ASA,

see

Acrylonitrile-styrene-acrylateAsahi Kasei, 131, 132, 133Asia, marketing in, 132Asset, most important, 117

Aufsichsrat

, 67Authority, delegating, 11Automotive business, suppliers, 46

B

Bankruptcy, 3, 49, 146BASF, 118, 132

emphasis on integration, 129as exclusive sales agent, 130history of, 128

B2B e-commerce,

see

Business-to-business e-commerce

Big Three automobile manufacturers, 46, 78, 94

Blind ads, 81Blow molding, 28Board of directors

management oversight function of, 66purpose of, 67

Boeing, 27Bonuses, 90Boom-and-bust cycles, 14Bottom-up planning, 10Brand names, 75Business

-to-business (B2B) e-commerce, 27culture, 53, 60divestitures, 80focus, change of, 120, 124goals, 70operations,

see

Technologies and markets, business operation shaped by

plan, principal components, 70profitability of, 13success of merging similar, 123units, 60

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

150


C

CAD,

see

Computer-aided designCAE,

see

Computer-aided engineeringCapital

human, 121return on invested, 109

Careergrowth, 97management as 3–7

Carnegie, Andrew, 56Case studies, 127–144

common threads, 144compounding, 132–139

modified plastics, 138–139NP engineering plastics, 134–138

distribution, 139–140equipment, 143polymer manufacturing, 127–132

Asahi Kasei, 131–132BASF, 128–130Victrex Plc, 132

processing, 140–143Certified Thermoplastics, 142–143Nypro, 140–142

Cash burn, 14CATV, 48Cease and desist injunction, 40Celanese, 41Cell phones, 48, 141CEO,

see

Chief executive officerCertified Thermoplastics (CTP), 142, 143CFO,

see

Chief financial officerChange

forms of, 8managers resistant to, 53warning signs of major, 9

Chief executive officer (CEO), 6, 60advice offered to, 67manipulation of earnings by, 15money spent by, 6worst types of, 6

Chief financial officer (CFO), 66Chief operating officer (COO), 60City building inspectors, 123Classified advertisements, 81Co-determination law, 67College graduates, potential performance

of, 85Color Science, 138Committee-itis, 72

Commoditycultures, 57, 58polymers, 19, 34producer research and development,

37Communications, signal loss in, 20Community

liaison, 4relations, proactive approach to, 4

Company(ies)acquisition of for wrong reasons, 146boards, majority membership of, 66capital-intensive part of, 123goals, 10publicly held, 111recruiters, 85selling of, 124sold, 125, 126stepchild, 124urge to buy troubled, 120

Company culture and organization, 53–68

board of directors, 66–68management styles, 64–66size intertwined with culture, 54–60

commodity culture, 57–58entrepreneurial culture, 55–56managerial culture, 56–57nationality/ethnic culture, 59–60technology culture, 58–59

tailoring organizational form to business needs, 60–64

hybrid organizations, 64organizing by function, 60–61organizing by geography, 63organizing by market, 62–63organizing by product, 61–62

Compensation, 126changes, displeasure over, 91cuts, 95goals, 122plans, 90

Competition, globalization of, 1Competitive rankings, 113Competitor(s)

elimination of, 119growth-oriented, 80management, strategies revealed by,

114reason for acquiring, 115using time zone against, 138


Index

151

Compounders, 108Compounding

custom, 22global, 134regional, 138

Compression molding, 28Computer-aided design (CAD), 74Computer-aided engineering (CAE), 74Confidential information, 87Consolidation, of companies, 30Consultants, 96, 114Consumer goods, 49, 131Continuing education, 89Contract manufacturers, 29COO,

see

Chief operating officerCorporate governance model, 67Corporate loyalty, 97Corporate monuments, 120Cost(s)

benchmark for allocation of, 107–110compounder, 108–109distributor, 109machinery manufacturer, 110polymer manufacturing, 107–108processor, 110

definition of, 103opportunity, 101pressures, 49sales transaction, 103savings, 80service transaction, 103

Creditdecisions, 79risky, 79

Crompton, 30Cross-licensing, 18, 117CTP,

see

Certified ThermoplasticsCulture(s),

see also

Company culture and organization

business, difference between American and non-American, 60

change, slowest route to successful, 54commodity, 57, 58entrepreneurial, 55German, 68management ignoring, 53managerial, 56quasi-government, 55technology, 58

Currency exchange considerations, 19

Custom compounding, 22Customer(s)

best interests of, 7competitors’, 113dealing ethically with, 15direct sales relationships with, 20dropping of, 79feedback, 74-focused companies, 54, 63just-in-time, 24lists, 87needs, 8, 17on loan from supplier, 25perception of company by, 75relationships

distribution, 25processing, 28

satisfaction, 112slow-paying, 80surveys, 113

D

DaimlerChrysler, 46Davis-Standard, 30Debts, 79Decision-making authority, 71Deloitte & Touche, 80Delphi, 22Demand volatility, 70Developmental products, 105, 106Differential pricing, 21Dioxins, formation of, 42Direct sales, 20Discounts, retroactive, 76Distributors, 109, 121Divestitures,

see

Acquisitions, joint ventures, and divestures

“Do as I say not as I do” philosophy, 12Dow, 118, 131, 138Downsizing, 95, 97Downstream

activities, 58polymer processing steps, 17processing, 18

Dual-career families, 88Due-diligence review, 123DuPont, 41, 127, 131


152


amorphous liquid crystal polymers, 138

Zytel

nylon, 75

E

Earningsbefore interest and taxes (ELIT), 46manipulation of by CEO, 15tax-sheltered, 140

EBIT,

see

Earnings before interest and taxes

E-commercebusiness-to-business, 27compounding and, 24effects of, 27introduction of, 10long-term value of, 14order processing, 21pressure to use, 77use of by polymer producers, 20

Economies of scale, 116Educational background, 83Embezzlement, 66Employee(s)

best interests of, 7dealing ethically with, 15entry-level, 65morale, 9overqualified, 83potential, 86stock-ownership plan (ESOP), 140training of new, 88

Employmentagreements, 86lifetime, 5offers of, 82termination, 12

End-use market, favorite, 47Engineering polymers, 113Enterprise resource planning (ERP), 21,

76, 77, 119Entrepreneurial culture, 55Entrepreneurial founders, 125Entry-level employees, 65Environmental laws, violations of, 66Equipment types, 39ERP,

see

Enterprise resource planningErrors, repeated, 2

ESOP,

see

Employee stock-ownership plan

European polymer producers, 59Executive directors, 67Executive search agencies, 82Extrusion, 28

F

Family-owned businesses, 56–57Farm irrigation products, 139Fax-back system, 26FDA,

see

Food and Drug AdministrationFederal employment anti-discrimination

laws, 95Feedback, positive, 12Feedstock costs, fluctuations in, 1FEP,

see

Fluorinated ethylene-propyleneFinancial statements, 111Flame-resistant formulations, 48Fluorinated ethylene-propylene (FEP),

37, 38Food and Drug Administration (FDA), 45Food packaging, 44Ford, 46Frivolous lawsuits, 79Functional organization, 61

G

GDP,

see

Gross domestic productGender discrimination lawsuits, 94General Electric, 71, 94

corporate structure, 134Lexan

polycarbonate, 75Polymerland, 118, 139

General Motors, 22, 46Geographic area management, 128Geographic organization, 63Germany

corporate governance model used in, 67

culture, 68GHA Plastics, 135Global compounding, 134Global marketing, 128Globe-spanning companies, 77


Index

153

Goal(s)setting, responsibility for, 10stretch, 11

Golden handshakes, 122Government law, violation of, 93Grant back, licenses involving, 117Greenfield plant, 136Gross domestic product (GDP), 1

H

Hoechst, 56Homopolymer, DuPont rival for, 131Honda, 47HR,

see

Human resourcesHuman capital, 121Human resources (HR), 78Husky Corporation, 143Hybrid organization, 64Hypothesis, testing of, 2

I

Illegal activities, 65Incompetence, people promoted to level

of, 92Industrial components, 50Industrial Revolution, 99Industry segments, foundations of, 17–31

compounding, 22–24e-commerce, 24geographic dispersion for customer

focus, 24supplier relationships, 23–24technology, 22–23

distribution, 24–28customer relationships, 25–26effects of e-commerce, 27–28geographic dispersion, 27supplier relationships, 26

equipment, additives, and other, 29–31critical mass, 30customer relationships, 31technology, 29–30

polymer manufacturing, 17–22routes to market, 20–21scale and integration, 19–20technology, 18

processing, 28–29

customer relationships, 28–29technology, 28

Inflation rates, 108Information

confidential, 87return on investment, 110technology (IT), 77, 119

In-house seminars, 90Injection molding, 28Integrated manufacturing, 144Integrated production, risks to, 19Internet, 21

bulletin boards, 81companies, liquidated, 14effort of Polymerland to convert

customer interface to, 140hype about, 47promoting use of, 140selling directly to customers via, 27

Interpersonal relationships, entrepreneurial company, 55

Intrapreneuring, 58Inventory

disposal of slow-moving, 80levels, 69management, just-in-time, 29

ISO 9000 certification, 76ISO 14000 environmental standards, 5IT,

see

Information technology

J

Japanese consumer goods companies, 131

Job enrichment, 88Joint ventures,

see

Acquisitions, joint ventures, and divestitures

Just-in-time customers, 24Just-in-time deliveries, 122Just-in-time inventory management, 29

K

Kanban, 29Kawasaki, 134Knowledge workers, 64, 71Kraton

thermoplastic elastomer compounds, 26


154


L

Labor peace, 68Lawsuits

age discrimination, 94American, 59frivolous, 79gender discrimination, 94patent, 40race discrimination, 94

Layoffs, due to restructuring, 94LCPs,

see

Liquid crystal polymersLeadership by example, 12Licenses, grant back, 117Lifetime employment, 5Limiting temperature index (LTI), 48Liquid crystal polymers (LCPs), 34, 138Liquid Nitrogen Processing (LNP), 134

business strategy, 135Engineering Plastics, 118, 137parent holding company, 135

LNP,

see

Liquid Nitrogen ProcessingLogistic costs, 19Lone wolf personalities, 85Loyalty

corporate, 97need for, 13

LTI,

see

Limiting temperature index

M

Machinery manufacturers, 110Make-or-buy situation, 40Management

competitors’, strategies revealed by, 114

ego, investments in, 105, 106error, 8geographic area, 128guiding principles, 7ignoring of culture, 53information, 78performance problem of, 12positions, personalities found in, 7responsibilities, 7–15

business organization, 8change, 8–10company goals, 10–11leading by example, 12–13

performance appraisal, 11–12profitability, 13–15

styles, 64supply-chain, 21tools,

see

Tools for managementManager(s)

compensation goals, 122repotted, 122

Managerial culture, 56Managing for success, 69–80

managing costs, 79–80managing and integrating functions,

71–79administration, 78–79manufacturing, 76–78research and development, 73–74sales and marketing, 74–76

planning for success, 69–71Mannesmann AG, companies acquired

by, 30Manufacturers

contract, 29overseas, 127

Manufacturingcapacity, 117expansions, 135integrated, 144polymer, 17

Market(s),

see

also

Technologies and markets, business operation shaped by

access, 116aerospace, 51-clearing level, products priced at, 58end-use, favorite, 47-focused companies, 63intelligence, 113major, 43medical, 50military, 51organization, 62-organized company, focal point of, 62overseas, favorite route to, 116packaging, 44position, 101research, 73, 112segments, limited number of, 8suppliers existing in highly

competitive, 31Marketing

Asian, 132


Index

155

efforts, insufficiently focused, 9global, 128integration of technology and, 73program, Nypro, 141savvy, 74strength, patented technology for, 136technical, 74

Marketplace, detection of changes in, 20

Material safety data sheets (MSDSs), 25, 42

Mazda, 47MBA studies, comprehensiveness of, 83Medical market, recession proof, 50Medieval army command mentality, 7Metallocene catalysts, 18Me-too efforts, 28Micromanagement, 3, 11, 89Military markets, 51Million Dollar Partnerships, 141Mitsubishi Engineering Plastics, 131Mitsui Chemicals, 132Model, corporate governance, 67Modified Plastics, Inc., 138Monomer-to-polymer production, 19Monopolies, 8Monsanto, 56Morale, 94Motorola, 141MSDSs,

see

Material safety data sheets

N

NAFTA,

see

North American Free Trade Association

National Labor Relations Board, 99National Sanitation Foundation (NSF), 45NEBIT,

see

Net earnings before interest and taxes

Net earnings, 102Net earnings before interest and taxes

(NEBIT), 108Nissan, 47Non-compete agreements, 87Nonprofit companies, 13North American Free Trade Association

(NAFTA), 49, 136NSF,

see

National Sanitation FoundationNypro, 140

Leadership Institute, 142marketing program, 141

O

Objectives, failures to prioritize, 3OEMs,

see

Original equipment manufacturers

One-stop shopping, 40Opportunity cost, 101Order processing, 21Organization

functional, 61geographic, 63hybrid, 64lacking trust, 13market, 62need for loyalty, 13product, 61

Original equipment manufacturers (OEMs), 24, 28

OSi Specialties, 30Outplacement counseling, 94Overqualified applicants, 83Overseas manufacturers, 127Overseas markets, favorite route to, 116Overseas operations, companies with, 67Ownership

cultures reflecting characteristics of, 55stability, 134

P

Packagingcontainers, thin-walled, 143market, 44specialty, 50, 103

Patent(s)holders, monopoly of, 41lawsuits, 40licensing of, 41

Payroll, 13PBT,

see

Polybutylene terephthalatePC,

see

PolycarbonatePEEK,

see

PolyetheretherketonePerfluoroxyalkoxy (PFA), 38Performance reviews, 91, 93Personality(ies)

lone wolf, 85


156


mixture of found in management positions, 7

traits, 85Personnel

junior, 20non-professional, 98replacement of problem, 119temporary, 96

PET,

see

Polyethylene terephthalatePeter Principle, ignoring of, 92Petrochemical subsidiaries, 57PFA,

see

PerfluoroxyalkoxyPhillips, 127Philosophy, “do as I say not as I do,” 12Plant maintenance, contracted out, 96Plastics industry, most capital-intensive

segment of, 17PMP,

see

Polymethylpentene-1Polaroid Corporation, 49Polybutylene terephthalate (PBT), 223,

130Polycarbonate (PC), 23, 34, 46, 75Polyetheretherketone (PEEK), 20, 34,

132Polyethylene terephthalate (PET), 44, 143Polymer(s)

commodity, 19manufacturing, 17, 107producers

direct sales used by, 20European, 59restructuring at, 26

products, commodity, 34volume and revenue, 36

Polymerland, 139, 140Polymethylpentene-1 (PMP), 38, 45Polyolefins, 19, 57, 129Polystyrene, flame-retardant, 22Polytetrafluoroethylene (PTFE), 38, 39,

134Polyurethanes (PUR), 34Polyvinyl chloride (PVC), 42, 44Press announcements, 19Price

-fixing, 66relationship of volume vs., 35

Pricingdifferential, 21value, 145

Private business ownership, 13Privately held firms, boards of, 67

Private network, 21Problem-solving, 86Processing

equipment, 39principal forms of, 44

Product(s)average life cycle of, 145category checklist, 106developmental, 105introductions, 102line(s)

effect of

verbund

on, 130mature, 123regional distributor, 121revisions, 80

method of categorizing, 105organization, 61recognition, 75sales revenue, 102specifications, 73Today’s Breadwinner, 104, 105, 106Tomorrow’s Breadwinner, 104, 105,

106Yesterday’s Breadwinner, 104, 105, 106

Production, contracted out, 96Profit

highest total gross, 39margins, strains on, 1

Profitabilityanalysis, current, 103commodities struggling with, 129improving, 63major factor in, 23potential, 104, 107

Project teams, short-term purpose of, 72Promotions, 92Proprietary processor-end users, 48PTFE,

see

PolytetrafluoroethylenePublic domain, 40Publicly held company, 111PUR,

see

PolyurethanesPurchase contract, 76PVC,

see

Polyvinyl chloride

Q

Quasi-government cultures, 55


Index

157

R

Race discrimination lawsuits, 94R&D,

see

Research and developmentReaction injection modeling (RIM), 43Recruiters, company, 85Reducing unit costs by spreading, 115Regional compounding, 138Repotted managers, 122Research and development (R&D), 37,

72, 127carte blanche of, 73commodity producer, 37inability to pay for, 58joint ventures, 123product units incorporating sales and

marketing and, 62seeking people for, 82

Resourcesassigning of, 106waste of, 146

Responsibility, sharing of, 11Restructuring

corporate loyalty in days of, 97layoffs due to, 94

Retention, 97Retroactive discounts, customer demand

for, 76Return on investment information, 110Review data, drawback of common, 91RIM,

see

Reaction injection modelingRotomolder, 39

S

Salaryreviews, 91structure, 90

Salesdirect, 20growth S curve, 104profitable, 14representative, 20, 37transaction costs, 103

SAN,

see

Styrene acrylonitrileScandals, 15Schmoozing, 25Scientific method

creativity characteristic of, 146

value of, 2wishful thinking and, 3

SCM,

see

Supply-chain managementSelf-confidence, 86Self-worth, 6Selling incremental barrels, 14Semi-commodity(ies), 1

business, 33companies, 38sales representatives, 37

Service-oriented activities, 4transaction costs, 103

Shared-decision style, 145Share the pain approach, 95Shell Oil, 130, 138SIC codes,

see

U.S. Department of Labor Standard Industry Classification codes

Silicon Valley, 27Six Sigma, 76, 141Socialists, 13Spare parts, as form of inventory, 80Specialty packaging, 50, 103Speed-of-delivery, 40Staffing for success, 81–99

compensation and reviews, 90–92firing and personnel layoffs, 93–96plant and laboratory non-professional

personnel, 97–99promotions, 92–93recruiting, 81–87

education, 83–84employment agreements, 86–87experience, 84–85personality traits, 85–86references, 86

retention, 97training, 88–90

continuing education, 89–90job enrichment and rotation, 88–89

using temporary and other non-employee personnel, 96–97

Stepchild company, 124Stockholders

best interests of, 7dealing ethically with, 15

Stock market, 120Stretch goals, 11Style, shared-decision, 145Styrene acrylonitrile (SAN), 34


158


Sumitomo Chemical, 131Summary, 145–146Super distributor, 121Supplier

customers on loan from, 25relationships, 23, 26

Supply-chain management (SCM), 21, 77

T

Tax-sheltered earnings, 140Team spirit, 97Technical marketing, 74Technologies and markets, business

operation shaped by, 33–51markets, 42–51

automotive, 46–47construction, 45–46consumer goods, 49–50electrical/electronic, 47–48industrial components and semi-

finished shapes, 50other, 50–51packaging, 44–45

technologies, 33–42materials, 33–39patents, trade secrets, and licensing,

40–41processing equipment, 39–40regulatory and environmental

issues, 41–42Technology

access to, 117constant evolution of, 89critical elements of, 18cultures, 58integration of marketing and, 73patented, 136

Teflon

, 135Temporary personnel, stereotype, 96Thermoforming, 28Thermoplastic(s), 33

elastomer (TPE) compounds, 26high performance grades (TPUs), 34

Thermosetting materials, recycling of, 42Thin-walled packaging containers, 143Timeliness, 59Today’s Breadwinner, 104, 105, 106Tomorrow’s Breadwinner, 104, 105, 106

Tools for management, 101–114benchmarks for allocation of costs,

107–110compounder, 108–109distributor, 109machinery manufacturer, 110polymer manufacturing, 107–108processor, 110

business analysis, 101–107assigning resources, 106–107current relative profitability,

102–104relative profitability potential,

104–106measuring results, 111–114

achievements vs. planned goals, 111

competitive rankings and analyses, 113–114

customer satisfaction, 112–113financial statements and stock

valuation, 111–112Total Quality Management (TQM), 76Toyota, 47TPE compounds,

see

Thermoplastic elastomer (TPE) compounds

TPUs,

see

Thermoplastic high performance grades

TQM,

see

Total Quality ManagementTrade

associations, 114secret, 23, 41

Troubleshooting system, automated telephone, 26

Trucking, contracted out, 96Trustworthy relationships, importance of,

59Tuition reimbursement, 89Turnover, reasons for, 85

U

UL,

see

Underwriters LaboratoriesUnderwriters Laboratories (UL), 45Unions, 98, 99Uniroyal Chemical, 30Universities, cooperative programs, 84Urgency, 59USDA,

see

U.S. Department of Agriculture


Index

159

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

V

Value pricing, 145Vendors

competitors’, 113dealing ethically with, 15

Verbund

, 130

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

WWacker Chemie, 131Whistleblowers, 65

YYesterday’s Breadwinner, 104, 105, 106Y2K problem, 47



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