International Operations of the Worlds Leading Companies - Case Study Example

ICI GROUP: ANALYSIS OF INTERNATIONAL OPERATIONS Introduction ICI is one of the world's leading coatings, adhesives, starch and synthetic polymer businesses with products and ingredients developed for a wide range of markets. ICI is headquartered in the UK with manufacturing in 24 countries. ICI was formed in 1926 by the merger of four UK chemical companies: Brunner Mond, Nobel Industries, British Dyestuffs, and United Alkali. ICI is one of a small number of companies listed continuously on the leading UK stock index - originally the FT 30, currently FTSE 100 - since the 1930s (ICI Annual Report, 2006). Over the last few decades, ICI has been an acknowledged leader in diverse disciplines, including fundamental science, engineering, manufacturing and human resources. In 1993, ICI demerged its bioscience businesses to a publicly listed company, Zeneca Group PLC. 1997 saw ICI transforming from a regional manufacturer of bulk chemicals to a global specialty chemical and paints leader with the acquisition of Unilever's Speciality Chemicals businesses. Over the last decade, ICI has transformed its portfolio through a number of acquisitions and divestments worth more than 12 billion. Proceeds from divestments have helped ICI reduce its net debt and improve its balance sheet strength (ICI Annual Report, 2006). This paper evaluates the international operations of ICI and discusses how important international trade is for the ICI Group. Various analyses are conducted such as strategic, financial, SWOT, and risk to provide a deeper insight into the company's international operations. 2. Strategic Analysis ICI Board comprises of the Chairman, Chief Executive, 3 directors, and five non-executive directors. Collectively, the Board is responsible for the success of the company. Through the Chief Executive, the Board delegates to management the overall performance of the company through the setting of clear objectives, building long-term management capability and ensuring that the business is managed in conformity with the business principles. Core businesses of ICI comprise ICI Paints and the adhesives, specialty starches, specialty polymers and electronic materials operations of National Starch. These businesses serve diverse consumer and industrial markets through 40 strategic business units. These businesses are supported by Group functions that provide expertise in the disciplines of information technology, finance, human resources, operations, procurement, safety, security, and applied technology (ICI Annual Report, 2006). ICI Paints has some of the world's leading paint and decorative product brands. ICI makes products to prepare and care for many building materials, and provides coatings for cans and packages. It is headquartered in the UK and has operations in 25 countries (ICI Annual Report, 2006). National Starch markets a broad array of products to various sectors such as food, healthcare and construction. It has four divisions that are grouped around adhesives, specialty starches, specialty polymers and electronic materials. National Starch is headquartered in the United States, and has manufacturing and customer service centres in 39 countries (ICI Annual Report, 2006). ICI has a number of regional and industrial businesses, principal operations for which are located in Pakistan and Argentina. They include the manufacture of pure terephthalic acid, polyester, sulphur-related chemicals, wine chemicals and soda ash (ICI Annual Report, 2006). ICI is headquartered in the UK, with geographically diversified operations worldwide. Asia and Latin America account for 36% of sales, North America 33%, Europe 29%, and the rest of the world 2%. ICI's businesses have adopted a staffing policy whereby local nationals are typically hired. Total employee strength at ICI is 29, 130, of which 87% are located outside the UK. ICI Group has operations in more than 50 countries around the world. More than 60% of the Group's revenue comes from sectors which are believed to be non-cyclical in nature, such as food and beverages, decorative coatings, personal and household care products, and water treatment. However, ICI also deals in sectors that are considered cyclical, namely, electronics, construction, and automotive (ICI Annual Report, 2006). In the years up to 2003, a number of ICI's businesses underperformed due to which ICI pursued a strategy to create and capture additional value from three principal sources. These are: Differentiated resource allocation - ICI has invested in technology and marketing in those businesses where it believes sustainable competitive advantage can be created. Cost and capital effectiveness - ICI believes that through restructuring and bringing about positive changes in the organization, culture and behaviour, it can consistently improve and deliver strong results to its shareholders. This can be achieved through a positive change in cost and capital effectiveness. Strategy execution - by focusing on strategy execution, upgrading operational capabilities, and enhancing rewards for short to medium-term performance delivery, ICI can bring about a turnaround in performance so that past performance is not repeated. 2006 has been a good year for ICI in terms of strategic progress. There were several major strategic moves made during the year that will have a significant impact on ICI in future. In September 2006, ICI completed the sale of Uniqema, its oleochemicals and derivatives business, to Croda International Plc for 410 million. In November, ICI announced the proposed sale of Quest to Givaudan SA for 1.2 billion. Despite cost pressures, ICI businesses sustained their improved efficiency. Moreover, the Group improved return on capital employed despite facing increased burden from pension contributions and restructuring costs. Both ICI Paints and National Starch made good progress in the key developing economies of Asia which is evidenced by the 27% of the Group's total return. ICI's strategy for 2007 and onwards is to focus on three major areas of activity. These are: Accelerating profitable growth; Creating a culture of sustainable improvement; and Continuing to make substantial improvements to operational effectiveness. Alongside these objectives, ICI is improving its infrastructure and undertaking major program of enterprise resource planning development (ERP), initially within the Paints, Adhesives and Electronic Materials businesses. Furthermore, to improve the quality of commercial and strategic decision making, Finance and Human Resources are implementing organizational models that utilize shared service infrastructures for routine activities and leverage centres of excellence (taxation, treasury, etc) (ICI Annual Report, 2006). SWOT SWOT analysis is a tool for auditing an organization and its environment. It is the first stage of planning and helps marketers to focus on key issues (Porter, 1998). Every organization has its share of strengths, weaknesses, opportunities and threats. ICI group is no exception. This is evidenced in the following SWOT analysis: Strengths High level of brand recognition ICI Group enjoys brand recognition having set its base since over 75 years. It has become a choice of a large proportion of the UK population and also enjoys a healthy reputation in foreign countries. Extensive Distribution Network ICI sells its products through an extensive network of subsidiaries, associates, and distributors. This helps in increasing the sales revenue for the Group. Effective Communication and Consultation The Group has clear channels of communication and opportunities for dialogue on issues that affect employees' working lives. The Group is committed to effective communication and consultation because it believes that knowledgeable and well informed employees are critical to its success. Intellectual Property ICI protects its brands by having many patents and patent applications that serve to protect its technology and numerous trademark registrations. Competitive Advantage ICI derives substantial competitive advantage from proprietary business knowledge relating to formulae, products, processes, and technical know-how. Global Footprint ICI is a multinational organization with vested interests in more than 50 countries in the world. ICI's global footprint puts the company in a strong position in terms of revenue, and provides commercial advantages in securing the supply of essential materials. Weaknesses ICI has its share of weak areas which need to be looked after to ensure revenues do not experience a dip. Extracting Efficiencies in Emerging Markets Since ICI's operations are geographically diversified, it faces constant pressures in terms of maintaining efficiency in its operations. Opportunities Improved Procurement This has the opportunity to reduce the cost of raw materials and other services, whilst maximizing the security and sustainability of supply. Research & Development Continuous research and development can bring about technological advances in the company. Moreover, research and development can also contribute toward innovation in products and services offered by the Group. Threats Intensive competition from existing and new players Due to the variety and breadth of products and markets served, ICI encounters a wide range of competitors, from multinational companies to many small local and independent firms. Principal competitors of ICI Paints include Sherwin-Williams, BASF, and Nippon Paint. Significant regulatory pressure ICI Group having operations in more than 50 countries is continuously exposed to the threat of imposition of tariffs and trade barriers. Moreover, ICI is under significant regulatory pressure since the operating companies of the group are generally subject to regulation governing the operation of their business activities. Foreign exchange rate deterioration leading to losses from international operations ICI has its operations in many countries across the globe. This places it in a vulnerable situation with regards to fluctuations in national currencies. Exchange rate factors have the potential to decay the dollar value of turnover from international markets due to the strength of the dollar. 3. Financial Analysis a. Financial Highlights Revenue for the year 2006 was 4, 845 million, an increase of 5% over the prior year. On a comparable basis, sales were 6% ahead of 2005, however, the effects of foreign currency translation and acquisitions and divestments played a role in moving revenue figure southward. The surge in revenue came from both volume growth as well as increased selling prices in response to higher raw material costs. Sales growth for Paints was 5%, National Starch 8%, whilst sales for Regional and Industrial were 5% ahead on a comparable basis. In terms of regions, Asia grew 10%, Latin America 8%, and Europe 5% on a comparable basis. Sales for North America grew 4% despite difficult trading conditions for the Paints business. Decorative North America sales were impacted by a weaker housing market in the U.S. through the year. Decorative Asia sales were 16% higher than in 2005, with both volume growth as well as higher selling prices across the region. Growth was particularly strong in China, India, Pakistan and Vietnam (ICI Annual Report, 2006). Sales for Decorative Latin America grew 8% with volume growth evident in all key countries. Total profit before tax for the Group was 407 million, 8% ahead of 2005 when the profit figure stood at 377 million. Total assets of ICI Group for the year 2006 reduced from 4,865 million at end 2005 to 4,289 million at December 31, 2006. This decrease was principally due to the 494 million of assets disposed with Uniqema business as well as the effect of exchange rate movements. The net debt as at December 31, 2006, was 329 million which is 434 million lower than at the beginning of the year. The favourable movement in net debt came about from an increased cash inflow 301 million compared with 247 million in 2005. The return on capital employed saw a surge of 18.3% on the backdrop of higher trading profit for the year 2006 as well as continued focus on managing working capital. b. Stock Market Analysis ICI Group's ordinary shares are listed on the London Stock Exchange and the company's American Depository Receipts (ADRs) are listed on the New York Stock Exchange (NYSE). The share price of ICI has depicted a fluctuating trend in the last 5 years, ranging between 2.38 and 4.78. The earnings per share, which is profit divided by the number of issued shares (Emery, 1998), for the year 2006 were 31.6p, compared with 27.1p for 2005, a 17% increase. The cumulative shareholder return for the last five years has seen a major dip between 2002 and 2004 when the Group declared losses. This is evident in the graph below. Beta is a measure of the volatility, or systematic risk,of a security or a portfolio in comparison to the market as a whole. Beta of ICI, taken from its website, is 0.43 which means that every time the FTSE moves up, ICI stock will follow the market in the same direction, however, with lesser sensitivity. Beta < 1 is indicative of defensive shares. These shares will generally experience smaller than average gains in a rising market and smaller than average falls in a declining market. 4. Risk Analysis Every organization in its operations faces a number of risks that need to be analyzed. Like any other company, ICI Group is also exposed to a number of risks. These are: Political Risk The political arena has a huge influence upon the regulation of businesses, and the spending power of consumers. It is imperative that an organization considers certain political issues before beginning the marketing process as the entire marketing strategy of the organization is dependent upon the prevailing political environment in the country. These issues are: How stable is the political environment Will government policy influence laws that regulate or tax your business What is the government's policy on economy Are there any threats to the existing government ICI is incorporated in the United Kingdom, however, it enjoys a strong global presence. Having vested interests in over 50 countries poses political risk to the organization as a whole. It is critical for the ICI Group to have a sound understanding of the political scenario in all the countries that may have an impact on its aggregate revenue. Economic Risks The United Kingdom has an open economy and ranks among the fourth largest in the world. Properly managed fiscal and monetary policies have produced an expanding economy in the country with low inflation and strong government finances. ICI needs to conduct a thorough economic analysis. It is vital to consider the state of economy in the short- and long-terms. Issues such as interest rates, inflation, GDP, employment levels, etc. need to be encompassed in the strategic plan so that the strategies adopted encounter all such issues and ensure sustainability of competitive position. Current economic situation in the UK is favourable with low-to-moderate interest rates which signal a healthy economy. However, the economic situation in other countries of interest to ICI may not be favorable. Such situations may warrant a change in business strategies of the organization. Business Risk Any company must seek to understand the nature of its competitive environment if it is to be successful in achieving its objectives and in establishing appropriate strategies. It is important to analyze factors outside an industry that influence the nature of competition within it (Thurlby, 1998). ICI Group needs to have a thorough awareness of its competitors and their products. Business risk increases in those industries where there are lesser barriers to entry and therefore, more risk of new sellers entering the markets and introducing substitute products and services (Porter, 1998). Some of the Group's businesses are subject to cyclical fluctuations in the industries and economies in which they operate. Moreover, a significant deterioration in the Groups operating performance or the occurrence of material events leading to a weakening in cash flow may have an adverse impact on the financial condition of the company. Foreign Currency Risk Most of the ICI Group's net assets are denominated in currencies other than Sterling with the result that the Group's Sterling balance sheet can be significantly affected by adverse currency movements. To protect any unfavourable exchange rate movements, the Group has a policy to hedge this effect by borrowing in currencies other than Sterling. The Group does not hedge translation exposures other than by the passive use of currency borrowings (ICI Annual Report, 2006). Market Risk Under market risk, the most important consideration is prudent interest rate management. ICI Group's exposure to interest rate fluctuations on its borrowings is managed through the use of interest rate swaps and forward rate agreements (FRAs). The Group's target is to maintain interest cover above four times. ICI maintains its debt book principally in floating rates, however, it does make transitions to fixed rates should the interest cover fall below the target level. As at December 31, 2006, the Group's net debt was 329 million, principally sourced from bonds, medium-term notes, commercial paper, securitized receivables and bank debt (ICI Annual Report, 2006). Liquidity Risk Liquidity is of primary concern for any organization since it is important to ensure that there is sufficient cash flow to meet short-term obligations so that business viability is not questioned by creditors as well as other stakeholders. As at December 31, 2006, ICI had at its disposal $700 million of undrawn, committed borrowing facilities available to manage its liquidity. These facilities provide a cover for short-term funding as well as flexibility to meet future cash flows. Operational Risk The occurrence of major operational problems could have an adverse effect on the Group's financial condition. The Group's revenues are dependent on the continued operation of its various manufacturing facilities. ICI is exposed to operational risks such as equipment and systems failures, raw material supply disruptions, terrorist attacks, natural disasters, labour shortages, events leading to increased transportation costs, etc. Though ICI Group maintains insurance, some of these operational risks could result in losses and liabilities in excess of its insurance coverage. 5. Conclusion ICI Group produced a healthy turnover in 2006, ending the year with a 329 million profit. The Group declared earnings per share of 31.6p compared to a 27.1p for 2005. Though the balance sheet of ICI still shows a negative equity, a healthy turnover and profit is convincing of a turnaround for the shareholders. Analysis of the international operations of the company revealed that the geographic dispersion of the Group contributed to the revenue. Sales growth in Asia, (China, India, Pakistan, Vietnam) in particular, confirmed that international operations of ICI Group significantly contributed to the profit figure. ICI is expecting a further positive impact on the Group from the sale of Uniqema and Quest. It is anticipated that with the implementation of its new strategies of accelerating profit growth, differentiated resource allocation, and cost and capital effectiveness, ICI Group will add to revenue. Moreover, prudent expense and risk management will further boost profitability at ICI. WORKS CITED Cinnamon, Robert, and Brian Helweg-Larsen. How to Understand Business Finance. New Delhi: Kogan Page, 2006 Emery, G.W. (1998). Corporate Finance: Principles & Practice. Addison- Wesley, New York. Porter, M.(1998). Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York: Free Press. Thurlby, B (1998). Competitive Forces are also subject to Change, Management Decision, London. ICI Group (no date). Retrieved on April 30, 2007 from http://www.ici.com ICI Annual Report 2006. http://www.ici.com Read More