Investor Chemical Industry Analysis - Case Study Example

Chemical Industry Analysis: Investor Report By YOU YOUR ACADEMIC ORGANIZATION HERE HERE Chemical Industry Analysis: Investor Report Introduction An influential business investor has requested an industry analysis in the highly competitive chemicals industry for the potential start-up venture of plastics manufacture for food packaging and compact disc production. Large-scale companies such as Dow Chemical and DuPont, leaders in a variety of coatings, finishings, and industrial chemical production, have been experiencing significant challenges in their respective marketplaces today due to a wide variety of internal and external reasons. However, competitor activities and consumer trends are two of the largest issues facing the chemical industry today which this analysis will address in significant detail. Industry Overview Dow Chemical Co. is currently reviewing its traditional chemicals and plastics organizations in an attempt to focus on activities which produce higher growth rates (Kingsbury & Campoy, 2008). As more and more chemical manufacturers flood the chemicals marketplace with a wider variety of products, businesses in this industry must focus on long-term strategy for growth in order to maintain competitive advantage. It is generally developing nations, such as India and countries in the Middle East, which are producing a higher volume of chemicals (where their infrastructures once denied such activities), flooding North American chemical producers with major competitive forces. One of the major difficulties in maintaining competitive edge involves an analysis of the political environment, as part of the STEEP model, by recognizing that various political forces create significant difficulty in maintaining budget guidelines. For instance, tax policies, international employment laws, and political stability (or lack thereof) will be widely different based on the economic and social development of the potential country of manufacturing origin. For instance, one chemical manufacturer operating in China may experience a relatively budget-conscious series of outcomes in relation to satisfying local governmental mandates for clean air quality. However, another chemical producer in the Middle East may experience tremendous governmental regulations regarding air safety and air cleanliness compliance, making these activities related to budget quite difficult to manage. Thus, a more aggressive internal posturing is necessary for the new investor-funded facility to ensure that all issues of local and regional compliance can be negotiated or addressed. Economic factors, in addition, greatly impact the success of competition in the chemical industry, especially related to local infrastructure and economic developments within emerging or developing nations. Countries such as China and India, two relatively flooded chemical markets, have begun their own manufacturing initiatives, most stemming from foreign direct investment on behalf of European or North American countries. This diminishes the strategic importance of these regions for developing the new plastics facility as attempting to compete in a saturated chemicals market is substantially difficult. Hence, under-developed regions which do not maintain costly labor expenditures is likely the appropriate marketplace in which to develop the new facility. Social factors, even in the chemicals industry, play a significant role in whether or not a particular region is viable for economic expansion in this industry. Changing consumer behaviors and shifting lifestyle needs have somewhat complicated the manufacturing and production activities of firms which operate in this industry in terms of creating an adequate supply and demand schedule. Fluctuating market conditions, created by shifting consumer demand schedules, have recently been plaguing companies operating in this industry sector. Technological factors, in virtually opposite accord, have created significant opportunities for companies in the chemical industry, from the inception of total, incorporated supply chain technologies designed to facilitate a lean and cost-effective production environment. Technologies such as SAP, when have been developed and re-developed to iron out technological discrepancies, are operating in a more upgradable version and are designed to incorporate all aspects of operations and final product delivery into a singular software package to boost production, delivery, forecasting, manufacturing and even purchasing and human relations. All elements of customer billing and accounting reconciliation, as well, exist within these sophisticated software systems. Companies such as DuPont Coatings, an automotive finishes supplier, have implemented SAP as a solution for the entire supply chain strategy at the firm, thus reducing costs exponentially in relation to labor and over-production. The aforementioned technological evaluation would tend to suggest that the existence of various technologies have greatly enhanced the competitive edge of companies operating in this industry sector, allowing for internal capabilities to be managed electronically (and remotely, by an end user requiring instant access to real-time inventory and production data). These software packages are widely available in the chemicals marketplaces and maintain the ability to provide a more streamlined and cost-effective production environment. It is widely important to this industry analysis, in addition, to identify that each time a renowned company releases a new and innovative chemical product on the consumer or B2B market, competitors instantly try to replicate this product (Kingsbury & Campoy). This tends to suggest that other competitors in this industry are closely monitoring the marketing and production activities of competition and are ready to capitalize on product improvements as an entity that is late to market with a similar or slightly modified new product. As such, it is recommended that the new manufacturing facility maintain a larger marketing division which can satisfy the demands of monitoring and adapting to competitor activities. Porter’s Five Forces Model The threat of substitute products, as previously identified in the STEEP analysis, is a major concern in this industry. As companies are maintaining a watchful eye regarding competitor activities and new product breakthroughs, tighter security and controls should be established in this new investor-funded facility to product branded products and trade secrets. This can be accomplished by generating secrecy agreements for chemical formulas and limiting access to privy information regarding the ingredients provided chemical products. The threat of new competitor entry is also prevalent in this chemical industry, as developing nations are beginning to become global competitors in this marketplace, with the inception of new infrastructure developments and economic growth in developing regions. Under-developed nations are providing incentives such as tax breaks or diminished tariff restrictions so as to assist in providing a more quality lifestyle for struggling consumers in these regions. Hence, this is a significant positive attribute for the chemicals marketplace in terms of potentially securing low cost or low-taxation facilities in countries willing to be supportive of foreign investment facilities. The intensity of competitive rivalry can be illustrated with the aforementioned scenario of jumping to create similar products when competitors have produced new and innovative chemical products. Hence, it should merely be recognized that competitive forces are both aggressive and somewhat unethical in terms of matching competitor products and should be constantly monitored for trends which could erode long-term growth or brand-building exercises from a marketing and sales perspective. It would be highly difficult to accurately suggest either discrepancies or positive attributes associated with the supply chain and supplier/facility buying power in the raw materials marketplace. Each company operating in the chemicals industry produces a uniquely branded product with a different consumer or business function, thus supply chain requirements in relation to raw product purchases will be continuously different for the new facility. One of the major issues is buyer price sensitivity, due to high competition that drives the market value of chemical compounds used in various finished products. Because competition drives down prices and provides buyers with a broader marketplace by which to purchase products, price sensitivity in this industry is high and must be adjusted or coordinated through negotiation or reputation-building (from a marketing angle). However, supply chain elements can be negotiated on an as-required basis to reduce costs and improve production efficiency overall. Further associated with environmental concerns and, at the same time, competitor activities, is a major push for an ecologically-friendly chemical industry. Large-scale chemical producers are feeling the pressures from consumer and governmental advocates alike to reduce harmful environmental emissions and toxins. Companies are capitalizing on these activities in relation to creating a positive consumer perception of corporate social responsibility as it pertains to environmental responsibility (ICIS, 2008). Dow Chemical, DuPont and Evonik Industries utilize television and print marketing to address their efforts at sustaining environmental improvement campaigns, thus building a sense of consumer trust and loyalty toward a particular brand; a difficult effort to undo once consumer perceptions have been altered. Thus, the new facility must maintain a division or responsible internal parties who are aware of environmental pressures and can work directly with advocacy groups to publicize the firm’s efforts at building an eco-friendly community and internal operating environment for the sake of future progeny. Evidence suggests that failure to do so can lead to increased consumer and governmental outrage, undercutting the firm’s brand image and public image as a responsible chemicals producer. Strategic Recommendations One of the world’s largest producers of household cleaning agents has recently witnessed an explosive growth in total profitability by understanding what drives consumer behaviors. One expert offers that innovation “is not drive by high expenditure in R&D, but by the company’s understanding of the buyer’s habits” (The Economist, 2008). This would suggest that a larger portion of the firm’s operating budget should be allocated toward marketing and promotion so as to build both a buyer profile for these products and to ensure that the firm is actually producing chemicals which will be widely accepted by the business or consumer market. These efforts might include aggressive brand-building or a shift toward public relations marketing, however these activities are largely modifiable and adaptable based on the unique needs of the new manufacturing facility. This would suggest the necessity of a large-sized sales and marketing division to ensure that consumer and business customer habits are understood and the firm is working toward innovative production efforts to satisfy these markets; who can easily choose from a variety of competitors if they do not feel a connection with the chemical producer. Additionally, it is recommended that the new manufacturing facility maintain a long-term focus in relation to securing higher volumes of sales revenues, and then stockpiling cash reserves to ride out any temporary shifts in the chemical marketplace. In the U.S. and Western Europe, today, there is a major slow-down in housing which is impacting countless chemical producers for coatings and similar products used in routine residential home construction. This was an unanticipated shift in consumer behaviors and market conditions, something that would be highly difficult to prepare for from a business perspective and is currently eroding long-term profitability for companies which produce products for construction industries. Hence, the company must be fully adaptable in creating alternative revenues generation strategies or enhancing the cash position of the firm to ride out temporary lows in the appropriate buyers’ market. Failure to do so will likely spell long-term trouble for the new facility if it is unable to create an economic contingency plan in the event of sales decreases or market trends. Conclusion Clearly, for innovative producers of chemical products, there is a viable business opportunity on this market, however in order to maintain growth or sustain operations in the short-term, understanding what drives the marketplace is crucial to the new firm’s longevity. As the new facility will be producing various consumer-oriented plastics and business chemicals, the company must understand what drives its expected consumer markets and provide innovative products which fit these needs. This will require an adaptive and proactive leadership mentality, starting at the top of the management/executive hierarchy, and passed down to middle layers of management to ensure that all workers are in-line with strategic objectives. Despite any drawbacks to the state of the current chemicals marketplace, there are definitely viable investment opportunities for individuals looking toward chemicals production as a means to create growth and economic security for the communities in which the new facility will operate. Maintaining a quality public image, understanding buyer behaviors, maintaining a low cost supply chain methodology, and giving off the perception of quality corporate social responsibility appear to be the primary success factors in this industry both long- and short-term. References Boone, L. & Kurtz, D. (2006). Contemporary Marketing. 12th ed. Thomson South-Western. Boone, L. & Kurtz, D. (2007). Contemporary Marketing. 13th ed. Thomson South-Western. ICIS Chemical Business. (2008). “Bust and Boom: Fortunes for the coatings market have diverged. The outlook is gloomy in the US and Western Europe, but demand is hot in the emerging economies”. 10 Feb 2008. 273(5): 20. Kingsbury, K. & Campoy, A. (2008). “Dow Chemical Reviews Businesses”. The Wall Street Journal. New York, NY. 26 Feb 2008: A.14. The Economist. (2008). “Business: Cleaning up; Consumer goods”. London. 16 Feb 2008. 386(8567): 76. Retrieved from ProQuest Database 26 Feb 2008. Read More