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Scaling the productivity of investment.

Change mocks rigid resource allocation. So what else is new? Strategic Management Process, a flexible strategy that converts changes into opportunities, might help.

The strategic allocation of both human and capital resources is an important element of a CEO's responsibility. Most companies develop strategies for the various segments of their operations and allocate resources based on the importance of the particular business units. Many times this allocation procedure is flawed: Business strategies can become obsolete before full implementation because of changing business conditions, including new competitors and new technology, that undermine their original assumptions. This pace of change has accelerated in the past decade as technology has improved information flow, and the emergence of a global economy has produced sophisticated competitors around the world. A company's ability to incorporate change into its strategic plan, to view change as an opportunity and not a roadblock, will play a decisive role in its success.

The questions become: How does a chief executive manage resource allocation effectively under these dynamic conditions, and how does one assign priorities? One solution may be Strategic Management Process (SMP), an approach pioneered four years ago by my company, Hoechst Celanese Corp., a diversified, decentralized concern with 38 business units selling products in the chemicals, fibers, advanced materials, and pharmaceuticals industries.

STRATEGIC CATEGORIES

In SMP, business units initially are categorized into four areas--invest, reinvest, cash, and exit, based on our expectations for each Strategic Business Unit (SBU).

The "invest" category comprises early life-cycle-stage businesses with products that demonstrate significant growth prospects. We invest to build market share, allowing more time for the SBU to show a payback on our investment or on cost-reduction measures. We replace outdated equipment and incorporate measures to address environmental, health, and safety issues into new facilities.

The "reinvest" category comprises businesses in segments where we want to maintain market share. These businesses are required to yield a quicker payback on investment and cost-reduction projects than those in the invest category.

Businesses in the "cash" area are farther along in the product life-cycle and don't warrant an investment to maintain market share. They must maximize cash flow by continuously reducing costs. We maintain existing equipment and demand that any investment in revenue-enhancing or cost-reduction initiatives deliver a quicker payback than businesses in either the invest or reinvest categories.

We assign a business to our "exit" category if it no longer fits the company's strategic framework or is incapable of achieving acceptable operating performance.

PERFORMANCE CRITERIA

Each business unit is measured against performance criteria for its particular category. Such criteria--which cover a multiyear time period to avoid short-term economic fluctuations--include market share, cash-cost position versus the competition, technological position versus the competition, and historic and projected Return on Capital Employed (ROCE).

Each performance measure is weighted and assigned points. Higher premiums are given to certain performance criteria in one category than to those in another. For instance, sustainable technology has a higher weighting in the invest category--and the point system reflects this. Based on its point performance, an SBU is judged to be "performing" or "underperforming".
TABLE 1
REINVEST PERFORMANCE INDEX

MEASURE MAX POINTS

ROCE-Historic 4
(2 prior years)

ROCE-Future 4
(2 future years)

Cash flow percent of capital employed 4
(2 prior years)

Cash flow percent of capital employed 4
(2 future years)

Cash cost versus competition 2

Market share 2

Technology positions versus competition 2

Total 22
Minimum performance target 15


Based on these performance criteria, approximately 35 percent of our business assets were determined to be "underperforming." If these SBUs were performing, they would generate $150 million in additional operating income. In 1992--a relatively weak year in the chemical industry--Hoechst Celanese Corp.'s operating income before FAS 106 charges was $421 million for a 13 percent ROCE. That additional income would have increased ROCE to 17 percent, close to our target of 18 percent.

REVIEW PROCESS

Each of our SBUs formulates a strategic business plan. The strategy must have at least one viable option that employs current, or less than current, resources. If the SBU is underperforming, its plan must aim for it to attain a performing status.

Information requirements are uniform for all business units. Each plan must describe such elements as: capital and human resources necessary for each alternative presented; external trends and forces at work (e.g., competitors, new entrants, new technology, regulatory and economic environment); the unit's position relative to competition, internal objectives, expectations, and key factors for success; and feasible strategic options, an analysis that recommends a particular one, and a formula for its implementation.

Each strategy also must contain financial information, including both historical sales growth and ROCE, and at least a five-year forecast of sales and ROCE. Strategies must identify potential impacts on other Hoechst Celanese business units, and coordinate with any subsidiaries of our German-based parent company, Hoechst AG, if necessary.

In addition, each plan must set benchmarks--in areas such as market penetration, qualification with key customers, financial performance, employment level, and cost position--which will be used to gauge success.

Before submitting the plan to the executive committee (the top five officers of the corporation), the SBU gives it to a strategy review team--a panel of peers that may include an outside consultant and/or an individual from another part of the worldwide Hoechst organization--to review the strategy. The team brings an outside perspective, offering comments and suggestions to the SBU head. The unit, however, retains sole ownership of its plan and full responsibility for the strategy it presents to the executive committee. The SBUs manage operational issues; the executive committee manages strategic issues.

Armed with 38 business strategies, which include requests to fund varying levels of capital and human resources, the executive committee sets the long-term vision and priorities for the company and determines how best to attain them. Guidelines for approval of capital projects vary according to the SBU's strategic category, with invest first, followed in descending order by reinvest, cash, and exit.

All performing SBU strategies are reviewed annually: A written summary of progress is weighed against milestones. Non-performing SBUs are reviewed annually with a presentation to the executive committee.

RESINS BUSINESS REBORN

We've demonstrated the fundamentals of the SMP, now let's look at it in action. In 1990, our polyethylene terephthalate (PET) resins business, which supplies resins to makers of plastic bottles, was classified as cash and was performing in that category requiring minimum resources. We were a distant third, trailing two larger competitors in an essentially incremental business. However, during the year, marketing conditions began to change dramatically. Polyester gradually became the plastic of choice for recycling. A large manufacturer of consumer packaging broached the possibility of Hoechst providing recycled resin for the manufacture of two-liter plastic bottles.

The maker wanted a "closed-loop recycled" bottle which, after being used, could be chemically recycled into virgin raw material to make another bottle. We had an advantage with this type of recycling. The U.S. Food and Drug Administration takes a tough stand on food packaging contents, and insists on a clean process to eliminate contamination. We had the technical know-how and the facilities to provide virgin resin from used PET bottles.

In August 1991, the resins business unit presented a strategy for reclassification from cash to invest based on this dramatic change in business conditions and its improved competitive position, and it was approved by the executive committee.

The capacity is now being doubled in the U.S. and Mexico with $100 million in new investment at existing sites. The business continues to "perform" in its new category even with this additional investment. The key to success was the recognition of the impact of recycling on the growth rates for PET and our technological advantage. The changing environment created an opportunity, and the SMP provided a process for implementation.

CATEGORY CHANGE

Here's another example. Our polyester film business was in the reinvest category in 1990. However, it was an underperforming asset, and because of prevailing market conditions, the unit could not develop a strategy that would enable the business to become a performing asset within three years.

The SBU revised its strategy, reclassifying the business from reinvest to cash, and pursuing a low-resource, cost-reduction strategy. More important, with this approach, TABULAR DATA OMITTED the SBU aimed to become a performing asset within three years. The strategy focused on product rationalization, reorganization, and rightsizing. It also recommended a possible joint venture/alliance to increase access to technology.

This came to pass in 1991, when a worldwide joint venture in polyester film was formed with Hoechst AG, and Diafoil Co. Ltd., which is part of Mitsubishi Kasei Corp.

A year later, the SBU met its first target. ROCE for the film business increased from 1 percent in 1990 to 19 percent in 1992. Also, employee morale and efficiency improved along with the business' performance.

EXIT DECISIONS

Sometimes no amount of restructuring or reclassifying can save a business. That leaves the CEO with the unwelcome task of deciding whether to get out of a business. Using the same guidelines throughout the company makes it easier for executives to make an objective decision.

In 1990, Hoechst's high-density polyethylene (HDPE) SBU was in the cash category. However, it was underperforming, and no strategy could be developed to bring it to performing status. The 1991 ROCE was 3 percent, and market share was only 3 percent. HDPE was not strategically linked to any other business in Hoechst Celanese, and it was the only HDPE competitor not backwardly integrated into ethylene.

In 1992, we sold the business to FINA Oil and Chemical Company.

DON'T FALL IN LOVE WITH YOUR BUSINESS

Why does the Strategic Management Process work for us? The process provides a clear understanding of what is required from all of our SBUs and sets up a discipline for making objective decisions on resource allocations. It also prevents the CEO from falling in love with a particular business and making an emotional decision.

Most companies today have fixed resources--capital and people--to support operations. There is never enough of either, and these resources always must be allocated wisely and with the greatest efficiency in order to achieve the highest payback.

The Strategic Management Process allows us to be flexible and to shift gears quickly. In the global marketplace, it is essential that companies develop their own process for managing change. Only then will they be able to view changes as opportunities for future success.

Ernest H. Drew is president and chief executive of Somerville, NJ-based Hoechst Celanese Corp., a $7 billion subsidiary of Hoechst AG of Germany. The company holds leading positions in chemicals, fibers, film, advanced materials and technologies, and the life sciences.
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Title Annotation:Strategy
Author:Drew, Ernest H.
Publication:Chief Executive (U.S.)
Date:Jul 1, 1993
Words:1777
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