Ciba-Geigy and the Newport Investment - Case Study Example

THE CIBA – GEIGY CASE STUDY Essay Questions: Should Ciba-Geigy make the Newport investment? Which option? (answer 750 words) In my opinion, yes, Ciba – Geigy should make the Newport investment, using the third option: i.e., close the facility and move its production to its plant in Alabama or Louisiana. Introduction The market for pigments comprises of three major categories namely; HPP (High Performance Pigments), Classical pigments and dispersions, although the product existed in broad varieties and fetched anywhere between Sfr 5 to Sfr 6 per kilogram. At the time when, Mark Schutz, Ciba’s pigment division head, initiated a proposal to acquire the manufacturing plant in Newport, Delaware, Ciba was a world leader in organic pigments and a clear winner in the high performance pigment business with a total market share of 20%, in a Sfr. 6 billion market, which had an annual growth rate of 2% – 3%. The principle markets for this segment comprised of North America, Western Europe, South East and Japan. The industry consolidated, following the oil crisis in the 1970’s, and had become increasingly competitive with high entry and exit barriers requiring environmentally sound production techniques and high investment. But, Ciba, in spite of the adverse market conditions, on the strength of its innovative products had managed to achieve steady growth in its pigment business making pigments a strong performer within the industrial divisions. Some of the biggest customers of Ciba were in America and Japan, and during the year 1994, U.S. sales accounted for approximately 40% of its total sales for HPPs, besides, Ciba was the second largest employer in the state of Delaware, which added to the several strengths of the company and strengthened the argument in favor of investing in the Newport plant project. Justification: Option 3: Close the facility on the grounds that its existing condition made it an unacceptable risk, both ecologically and financially and b. Move production to Ciba’s plant in Alabama or Louisiana, where the infrastructure was roughly suited to the needs of the Pigments division. According to the portfolio planning initiative that took place in the year 1994, under the guidance and leadership of Verena Laanio, certain categories were designed and developed which aimed at serving three main functions: first, to serve as a resource allocation device, second, to manage the overall portfolio in terms of cash and growth; and third to provide management focus on the appropriate key success factors for each stage in the lifecycle. According to Ciba’s portfolio planning guidelines for core businesses, the Pigment’s division was responsible for increasing cash flows by about 50 million Swiss francs per annum, thus satisfying the company’s primary target. Secondly, Ciba’s pigment division head, Mark Schutz, assured the management of maintaining the required levels of 10% RONA, which at its very worst would dip to 6%, satisfying the second target set by the company. After the company’s reorganization, its businesses were divided into 33 segments which were further sorted into five categories; development, growth, pillar, core and niche according to which, the pigment segment fell under the core business category which included those businesses which had grown in size, had considerable percentage of market share, and competed in mature industries with hardly any scope for growth. The markets for the pigment segment were relatively mature with hardly any scope for further development, and such huge capital investment was not an economically feasible option, thereby limiting the scope of the first option. The second option that involved a limited capital investment of U.S.D 100 million, for reorganizing and modernizing production, addressing the current issue, is also not a viable option since the Newport site produced some pollutants in an already highly contaminated area, would require additional capital investment to the tune of $2 – 3 million annually, in material costs, to halt further contamination. Such huge investments to support the environmentally motivated upgrades would further, have to be compensated with a corresponding increase in prices of its products which would not be acceptable to Ciba’s clients. Also, Ciba, being the second largest employer in the state of Delaware attracted close scrutiny of the local government and failure to comply with the environmental standards posed high risk to the company and could attract severe penalties from the legal agencies. The third option, thus evolves as the best choice for the management as: It doesn’t require any huge capital investment, which is in sync with the company’s portfolio planning guidelines The company has a robust production facility in place which could be extended to the Newport plant segment, thus saving additional costs that would otherwise have to be incurred for relocating the plant to some other geographic location. The export duties, foreign trade regulations and other similar costs that would otherwise have to be incurred in case of export of goods would be saved if the production is retained in the same country. The company can take advantage of the immense pool of resources that it has in the form of human capital as well as an established database of clients and a robust network of suppliers and retailers in the United States. Essay 2 Questions: How does portfolio planning help or hinder the decision? (answer 750 words) The Ciba-Geigy company had grown profitably since its founding in the mid eighteenth century, by relying primarily on case by case discussions rather than formal guidelines to determine resource allocation among its multiple businesses. The company, having experienced severe setbacks following the oil crisis in the 1970’s launched a turnaround program to combat the challenges faced on account of excessive bureaucracy and inflexible operating procedures of a complex organization, through portfolio planning. Through the portfolio planning models the company aimed at improving the process of resource allocation and performance assessment. The main idea behind implementing such a model was to differentiate the company’s business by assigning different objectives and types of managers to each business segment and assign adequate powers / authority to those managers to adopt appropriate organizational structure to their respective business segments. Ciba, divided its business into 30 strategic business units which were further subdivided into five portfolio categories; development, growth, pillar, core and niche as shown in the following diagram. This detailed division of the business units helps the organizations to determine and ascertain the individual needs and requirements of each business segment and devise an appropriate plan for the appraisal of the units requiring major financial / strategic overhaul. Portfolio planning helps the organizations in making strategic decisions such as whether or not to invest in a proposed product / project, by analyzing its various aspects such as market potential, profitability, scope of growth, return on investments / net assets etc. The above diagram, for instance, facilitates smoother and efficient decision making by assisting the management in defining the core of the business / organization by establishing linkages between the products and processes and explaining how they add joint values to the business as a whole (Devinney, 1997. pp. 284). Portfolio Planning helps the business in taking appropriate decisions revolving around such strategic issues as diversification, acquisition or divestment. It also helps in business strategy formulation in accordance with the current market status, its levels of profitability, market share, scope of growth and overall competitive standing in the industry. Also sharing and managing resources becomes easier through the linkages established by careful planning and aligning of the company’s various business activities. As observed in the case of Ciba-Geigy, the management devised four categories wherein all the 30 strategic business units were aligned with definite corporate goals and predefined rates of returns. The categorization of businesses in accordance to the categories defined by the management, such as growth, development, pillar, core and niche, facilitates the management in speeding up the decision making process. (source: Prahalad, C.K and G. Hamel, The Core Competence of the Corporation, pp. 86) In 1990, when the company was being transformed by Heini Lippuner, the chairman of KL and COO of Ciba-Geigy, the entire attention of the group was focused on concentrating on the core competencies of the organization i.e., biology and chemistry, divesting those businesses that did not fit according to the planned strategy. “Cultivating core competence does not mean outspending rivals on R&D or getting businesses to become more vertically integrated” (Prahalad, C.K & G. Hamel, pp. 83.) On the contrary, the identification of the company’s core competencies helps it to gain access to a wide variety of markets that could be explored and exploited to gain financial mileage, increase customer database, gain widespread market recognition, improve the competitive standing in the industry and thereby increase its revenue flows and ultimately profitability. This could only be done through proper portfolio planning. Ciba-Geigy’s decision to venture into a core business (Pigment segment) is a wise decision, although according to popular management opinion, its main business is of chemicals, as the market for High Performance Pigments is huge and the company can leverage its strategic position to by acquiring the Newport plant. In a similar case, Canon could achieve an impressive world market share of 84% in the desktop laser printer segment in spite of a low brand share in the laser printer business. REFERENCES Davis, Jeremy and Timothy Devinney. 1997. Chapter 9: The Strategic Gains, Horizontal Integration and diversification pp.284, The Essence of Corporate Strategy. Prahalad, C.K, G. Hamel, 1990. “The Core Competence of the Corporation”. Harvard Business Review, 68: 79 – 91. Read More