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PORTERS FIVE FORCES
BARGAINING POWER OF SUPPLIES
The bargaining power of suppliers is medium to low. Clariant is a chemical manufacturing firm; they make chemicals used in different sectors like textiles, oil & gas, mining, dyeing etc. Clariant does not have a particular supplier for its raw materials. The Company buys raw material from different suppliers. The planning department is responsible for planning of the units of raw material to be purchased based on the market forecast. The procurement then takes prices from approved suppliers and then places an order to the supplier who gives the lowest deal on the purchase. The bargaining power of suppliers is low as there are many suppliers in the market and they cannot charge a high price otherwise they would lose business to their competitors.
Moderate No (-)
1) My inputs (materials, labor, supplies, services, etc) are standard rather than unique or differentiated. 2) I can switch between suppliers quickly and cheaply. 3) My suppliers would find it difficult to enter my business or my customers would find it difficult to perform my function in-house. 4) I can substitute inputs readily. 5) I have many potential suppliers. 6) My business is important to my suppliers. 7) My cost of purchases has no significant influence on my overall costs
BARGAINING POWER OF BUYERS
The bargaining power of buyers is high in the chemicals industry as the buyers have many choices from where they can purchase their products from. Clariant’s consumer markets include automobiles, candles, cosmetics, detergents, latex, stationery, as well as finishers for aluminum and leather. Clariant’s buyers are aware of the need for information and Clariant helps its customers through the technical service centre. But this does not undermine the fact that other local chemical industries are also major players in the market so similar products are available, and buyers do not really incur a switching cost when changing where to purchase from.
Yes (+) 1) Are there a large number of buyers relative to the number of firms in the business? 2) Do you have a large number of customers, each with relatively small purchases? 3) Does the customer face any significant costs in switching suppliers? 4) Does the buyer need a lot of important information? 5) Is the buyer aware of the need for additional information? 6) Is there anything that prevents your customer from taking your function in-house? 7) Your customers are not highly sensitive to price. 8) Your product is unique to some degree or has accepted branding? 9) Your customer's businesses are profitable. 10) You provide incentives to the decision makers.
RIVALRY AMONG THE COMPETITOR
Threat of competitors is high mainly because there are no major product differences and the fixed costs of the business are relatively lower to the total cost. Switching costs for buyers are insignificant and the competitors are diversified due to which rivalry is intense. Yes (+) 1. The industry is growing rapidly. (Not so rapidly due to Energy constraints) 2. The industry is not cyclical with √ √ √ √ No (-)
intermittent overcapacity. 3. The fixed costs of the business are relatively low portion of total costs. 4. There are significant product differences and brand identities between the √ √
competitors. 5. The competitors are diversified rather than specialized. 6. It would not be hard to get out of this business because there are no specialized skills and facilities or long-term contract commitments etc. 7. My customers would incur significant costs in switching to a competitor. 8. My product is complex and requires a detailed understanding on the part of my customer. 9. My competitors are all of approximately the same size as I am. √ √ √
THREATS OF SUBSTITUTES
Threat of substitutes is high mainly due to two reasons: there are a number of real substitutes available for customers and they are well aware about them and secondly there is no significant cost involved in switching from one product to another for the customers.
Yes (+) 1. Substitutes have performance limitations that do not completely offset their lowest price. Or, their performance is not justified by their higher price. 2. The customer will incur costs in switching to a substitute. 3. Your customer has no real substitute. 4. Your customer is not likely to substitute. √ √ √
THREATS OF NEW ENTRANTS
The threat of new entrants is high. Although the switching cost is low, it is a capital intensive industry and much capital and skill is required which decreases their chances to entry. Also assessing to distribution channels and required material and supplies is difficult which decreases the threat of new entrants.
Yes (+) 1. Do large firms have a cost or performance advantage in your segment of the industry? 2. Are there any proprietary product differences in your industry? 3. Are there any established brand identities in your industry? 4. Do your customers incur any significant costs in switching suppliers? 5. Is a lot of capital needed to enter your industry? 6. Is serviceable used equipment expensive? 7. Does the newcomer to your industry face difficulty in accessing distribution channels? 8. Does experience help you to continuously lower costs? 9. Does the newcomer have any problems in obtaining the necessary skilled people, materials or supplies? 10. Does your product or service have any proprietary features that give you lower costs? 11. Are there any licenses, insurance or qualifications that are difficult to obtain? 12. Can the newcomer expect strong retaliation on entering the market? √ √ √ √ √ √ √ √
INDUSTRY ATTRACTIVESNESS SUMMARY COMPONENTS Threat of new entrants Bargaining power of buyer Threat of substitutes Bargaining power of suppliers Intensity of rivalry among competitors Low High High
Medium to Low High
PEST ANALYSIS Political
Ongoing political issues in Pakistan causes many companies to close down its operations in Pakistan especially multi nationals so it is crucial to the suppliers as the decrease in firms in the industry would lead to a decline in their sales. The political instability in Pakistan has the whole industry in problems, government laws; increase in taxes on different industries directly affects buyers and what amount they would be willing to pay. Political instability in Pakistan is affecting every industry in every aspect. There are political barriers for new comers and also the laws and regulations are not enforced properly which allows competitors to indulge in practices of cutting down their prices by mal practices like under invoicing. The changes in the level of currency affect the price of products and its substitute. Political stability can also be said to be reasonable so that business survival is highly probable. These conditions may not apply in other countries such as China and Singapore where government control over businesses is high. Despite of some of the countries presenting favorable environment for business survival and growth, others present difficult conditions. Due to governance issues at government level, new entrants are posed a threat to enter in this capital intensive industry where the risk of survival is really high.
rising inflation and high interest rates in Pakistan have caused the prices of raw materials to increase, companies do not pay the high rates for materials and suppliers are forced to lower their profit margins The energy crises have made things critical for Textile Industry and thus making the same for Clariant as the textile companies are major buyers for Clariant chemicals. Low investment by foreign companies in Pakistan is lowering the competition among multinational companies. Inflation is also adversely effecting completion Factors such as deflation and inflation as well as government spending in different countries have ventured often influence business productivity and profitability. The economic impacts caused by the current economic crisis are being felt all over the world. Clariant has recorded decreased sales mostly due to lower lending rates by banks. Fluctuations in interest rates, exchange rates and money value greatly affect activities and operations and thus borrowing rate for companies is high due to which cost of investment is raised decreasing the threat of new entrants.
Social Industry trends keep changing, consumers are becoming more experienced and
learned they want more information about the products they are purchasing and bargain for better quality of chemicals.
Advancement in technology brings about change in better quality raw material, which the chemical companies demand from their suppliers, and hence it reduces the bargaining power to small extent. Rapid innovation in technology allows for better quality products to be produced, technological advancement is opted by all the competitors so this gives buyers a chance to involve themselves with those companies using high technology as they will have better products. Clariant believes Innovation is a key to success and works on innovation all year round to cope with these growing phenomena.
Most of the multinational companies in this industry have only the blending plants here in Pakistan which gives an edge to the companies that have both manufacturing and blending plants in Pakistan. Technical experts from outside Pakistan are not willing to travel to Pakistan. Technology in the modern world is advancing at an enormous pace. Innovative products are always being introduced using more advanced technology each day. Older technology is therefore getting outdated at a very high rate across all sectors in the economy. Aimed at outdoing competitors, many companies have turned to innovation, research and development which have brought about improved levels of technology. Technology in the modern world is advancing at an enormous pace. Due to the similar products and ways of preparing, few technological trends influence the industry which may be a barrier to entry the rate of technology advancement globally varies with each country that Technology has invested in as they vary in terms of resources available
External Factor Evaluation Matrix (EFE) EVALUATION OF EFE
The weighted score of the EFE matrix comes out to be 2.91 which show that Clariant can take advantage of the profitable opportunities that the market is offering, to overcome the threats posed by the environment. The highest weights in the opportunities part are given to the remaining 8 business units of Clariant Pakistan. Clariant has a total of 12 business units out of which local manufacturing is done only in 4. Clariant has a huge plant in Jamshooro where they can start manufacturing for other business units which could be a good opportunity for them to enhance their business in Pakistan and gain a wider market share. In is a bonus thing as the remaining multi-national competitors have only a blending plant; not a manufacturing plant. Another high weighted opportunity is the adoption of Lean Sigma Process which may be adopted by Clariant Pakistan for process improvement in order to cut cost and increase profit margins. There is lack of foreign investment in the country which may be taken positively as through this, Clariant which is a multi-national company gets room to grow. The major threat to the company is the increasing prices of raw material and competitors having low over head cost. This mainly increases their profit margins relative to Clariant. However, Clariant Pakistan can take advantage of the fact that it is based in a raw material rich country and increase its profit margins through exports. However, the energy crisis may raise the company’s prices. Apart from this, the political situations and the economic slump in the country are also causing threats to the company.
KEY EXTERNAL FACTORS Opportunities 1 2 3 4 5 Adoption of Lean Sigma Process Remaining 8 business units Competitors only have a blending plant Lack of foreign investment Based in a raw-material-rich country
0.15 0.2 0.12 0.08 0.1
4 4 3 3 3
0.6 0.8 0.36 0.24 0.3
Threats 1 2 3 4 5 Energy Crisis in the Country Economical Slump Competitors have low overhead cost Competitors increasing their marketing share Unstable political situation 0.05 0.07 0.08 0.06 0.09 1 3 2 1 1 2 0.15 0.14 0.08 0.06 0.18 2.91
Company and competitor analysis
KEY SUCCESS ACTORS FOR COMPETITIVE SUCCESS:
50000 MT capacity plant in Jamshooro for the manufacturing of Textile Auxiliaries. Clariant has a huge plant where they can start manufacturing for other BU which has proven to be a good opportunity to enhance the business in Pakistan. For Textile business Clariant is ahead of their competitor because of range of product it is offering. None of the competitor has full range of products for textile except Clariant. The Scientific Centre that Clariant has offer all testing facilities like Environmental testing which is not offered by any other company in Pakistan. The competitors don’t have a manufacturing plant for all products; they only have a blending plant and manufacturing plant for few products. Thus cannot compete on prices, quality and services with Clariant. Clariant has a lab which is continuously working to make substitute product which can compete with the competitor’s product. This is a year round activity in Clariant.
EVALUATION OF CPM:
Clariant market share for textile business is 28% while BASF is 8% and ICI is around 4%. Clariant has a highest market share then its two major competitive. The network of Clariant especially in the local industry is stronger which gives them an edge in the chemical industry locally and globally. The higher the market share of any firm provides them with a higher factor of consumer loyalty. The CPM tells us that Clariant has a bigger market share then the competitors in the market and it is constantly moving on a better pace. Clariant has a best service sector in aspect of transport and distribution locally due to its plant in Jamshooro, it’s easy and less costly for them to distribute to their customers nationwide as compared to other Multinational firms in Pakistan. Clariant is better with the financial position as they have the manufacturing and blending plant both resided locally which reduces their costs as compared to competitors such as BASF and ICI who just have the blending plant resided locally.
As the companies taken into consideration with Clariant are strong and direct competitors in the firm, there is a less variation in price but Clariant has an edge by manufacturing and blending both it is providing the products on a similar price to their competitors who just blend the product locally not manufacture
CRITICAL SUCCUSS FACTORS 1 Market Share 2 Financial Position 3 Consumer Loyalty 4 Price Competitiveness 5 Product Quality 6 Advertising 7 Sales and Distribution 8 Manufacturing 9 E-Commerce TOTAL
WEIGHT RATING TAS CLARIANT 0.6 4 4 3 3 4 2 3 4 2 0.8 0.18 0.21 0.6 0.04 0.3 0.4 0.3 3.43 RATING TAS BASF 3 3 2 2 3 2 2 2 2 0.3 0.6 0.12 0.14 0.3 0.04 0.2 0.2 0.3 2.2 RATING TAS ICI 2 2 2 2 3 2 2 2 2
0.15 0.20 0.06 0.07 0.15 0.02 0.1 0.1 0.15 1
0.3 0.4 0.12 0.14 0.45 0.04 0.2 0.2 0.3 2.15
Internal company value chain analysis
Core competencies are the capabilities that an organization possesses that are critical for the business to achieve a competitive advantage and cannot be easily imitated by its competitors. Clariant Pakistan aligns its relevant resources with the skill it has in order to achieve the core competency to remain in the market successfully. Clariant prides itself in catering to the needs of its customers in the best possible way. Clariant is ahead of their competitor because of wide range of product Clariant is offering. None of the competitor has full range of products for textile except Clariant which gives them an edge over all others. The Product Management for Business Further the State of Art Scientific Centre that Clariant has offers all testing facilities like Environmental testing
which is not offered by any other company in Pakistan. The Scientific Centre houses the testing, applications development and & Product Safety for Textiles, Leather, Paper and Emulsions business. It also contains the training centre for textile and leather industry where University students and
technicians from the industry are provided advance level of training. The scientific centre is equipped with most modern high tech and sophisticated equipment run by highly qualified staff focuses on what its customers demand and expect and how that can be provided to them in the most efficient and effective manner.
Textile manages the product and service portfolio throughout the whole lifecycle. Research and development is an
integral part of product management which ensures that its products and services meet future demands and foster future technologies. Clariant focuses on ecology and innovation.
VALUE CHAIN MANAGEMENT
Firm Infrastructure: 1. Professional Infrastructure 2. 4 Business Units 3. Strong Relationship with Suppliers Human Resource Management: 1. Committed Employees thus low turnover 2. Employees are offered international exposure 3. Adaptive and Professional Culture
1. Huge plant at Jamshooro 2. State of Art Scientific Centre 3. In time delivery with low cost
1. Approved procedures to contact suppliers 2. Recording in data base of distributors of Clariant
Inbound Logistics: 1. Efficient System 2. String link with customers and suppliers Operations:
Manufact uring at Jamshooro
Distribution & Outbound Logistics: 1. Fully loaded distributor 2. Accurate and responsive order processing
Sales & Marketing: 1. Highly trained sales force
Primary Activities and Cost
PRIMARY ACTIVITIES & COST
INBOUND LOGISTICS: Clariant has efficient system which links the company with their distributors and customers. OPERATIONS: Clariant manufactures at the local plant Jamshooro and distribute it all over to their customers minimizing their cost in the entire operation leading the firm to profits DISTRIBUTION AND OUTBOUND LOGISTICS: Clariant has accurate and responsive order processing procedures. The distributors are usually fully loaded but if there is a shortage Clariant delivers their distributors as the purchase orders are placed. SALES AND MARKETING: Clariant has a highly trained sales force. They carry out various awareness programs in which they visit different localities with their sales team
SUPPORT ACTIVITIES AND COST
FIRM INFRASTRUCTURE: Clariant has a professional and a strong infrastructure. Textile business has two business lines. Each business line has a business line manager Business line manager reports to BU Head who is also the CEO of the company. CEO is the person who is the head of the Clariant. The firm processes are made in such a way that it has helped the company to reduce its cost. Employee commitment has always been there. The culture is adaptive and professional. Clariant has a strong relationship with its suppliers. HUMAN RESOURCE MANAGEMENT: Clariant value their employees’ commitment. That’s why the employee turnover is low. Their employees are loyal to the company. The send their relevant employees to worldwide conferences in order to have international exposure and bring in changes to the organization according to the changes taking place in the world in aspect of technology, environment and the employee forces. TECHNOLOGICAL DEVELOPMENT: Clariant has invested massively in their local plant which is located at Jamshooro, Sindh which has tremendously helped them to reduce their transportation cost for the local customers and have provided a competitive edge in the market. The service facility provided by Clariant is the best amongst the competitors as they provide the best and the on time delivery process with low costs, and usually the overall price is a discounted price provided to their large customers usually in the textile sector of our country. TEPROCUREMENT
Clariant has systems and procedures installed through which they contact their local and foreign suppliers who are all approved. The distributors deal with the customers, the customers place orders to them and then distributors quote them with prices, eventually leading to the a purchase order by the customers and results in the delivery to customers in a given time period. This entire activity is recorded in the data base of the distributors of the Clariant worldwide.
STRATEGIC COST MANAGEMENT
Strategic Cost Management is essential part of Internal Audit of any organization. Clariant has high material and process cost which they plan to overcome through adapting the Lean Sigma Process. This would also help them improve their profit margins. Since its inception, it has maintained its position as the market leader due to constant technological innovation over the time. The company focuses on providing its customers with the latest technological developments worldwide, in the most cost-effective manner possible. Clariant has kept up to its promise of always providing its valued customers with more than they expect. Clariant emphasizes on creating personalized and value driven services. As a result, it hires the most highly paid and the most competent personnel in the Industry. Clariant has fixed a sufficient budget for marketing management (including research and development) which has proved to be very effective in the form of increased revenues and a stronger customer base. Clariant is constantly updating its processes with the aim of optimizing product properties, minimizing environmental impact and maximizing the cost effectiveness of production and application. They do not simply sell a single product to their customers; whenever possible they strive to be their partner by helping them select the best package according to their needs. This not only helps retain and enhance customer satisfaction but also helps them to manage their selling cost. Clariant focuses strongly on its technical expertise and global presence so that they can meet the needs of its customers and be close to them. The huge manufacturing plant at Jamshooro also has an independent Quality Control Laboratory assuring standardized input & output of Raw Materials & Finished Goods. The Site is equipped with technologically advanced and state-of-the art, specialized
testing equipment which makes sure no additional costs or expenses are incurred in the process. However, to manage its costs strategically well, Clariant needs to manage its high cost of production as competitors have a relatively low over head cost.
FINANCIAL RATIO ANALYSIS:
2007 2008 2009 2010 2011
Net Profit Margin (%) Gross Profit Margin (%) Debt to Equity Ratio Return on Equity Current Ratio Quick Ratio Earnings per share
8.07 23.19 0.33 43.89 1.51 0.92 21.29
7.34 25.52 0.26 38.45 1.61 0.95 19.00
7.61 23.40 0.15 37.15 1.66 1.09 21.46
7.43 24.32 0.18 39.24 1.72 1.12 22.09
7.86 24.53 0.16 40.17 1.74 1.13 22.47
Net Profit Margin (%) Gross Profit Margin (%) Debt to Equity Ratio Return on Equity Current Ratio Quick Ratio Earnings per share
7.02 23.18 0.51 21.71 1.7 1.05 18.39
7.66 24.19 0.22 39.78 1.65 1.04 21.26
Net profit margin - Clariant
8.2 8 7.8 7.6
Net Profit Margin (%)
7.4 7.2 7 6.8
Clariant Pakistan successfully maintained its profitability over the period of least 5 years above 7.3 with an average of 7.66. Net Profit Margin is mainly the ratio of net profit after taxes to the revenue earned and helps to indicate the company’s pr ofitability. For the Chemical Manufacturing Industry, the average net profit margin for the last 5 years is 7.02 and thus Clariant is doing well.
Gross Profit Margin - Clariant
26 25.5 25 24.5 24 23.5
Gross Profit Margin (%)
Gross Profit Margin showed an increase of over 2% in FY 08 and was a result of decreased proportion of cost of sales. However, there was a slight decrease in Gross Profit margin in the next year which can be accounted to increased cost of sales in FY 09. Thereafter, the Gross Profit Margin is increasing and has averaged to 24.19 which it has to improve so as to reach its optimal level.
Debt to Equity Ratio - Clariant
0.35 0.3 0.25 0.2 0.15 0.1 0.05 0
Debt to Equity Ratio
Debt to Equity Ratio is measure of company’s financial leverage indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. It is basically the company’s ability to borrow or repay money. For Clariant Pakistan in the last 5 years, debt to equity ratio has always been below 0.35 and has generally decreased over the year which is a positive sign. Clariant Pakistan does not need to borrow much to finance the company’s assets and finances majorly through its equity. However, the industry average has been 0.51 as compared to which Clariant’s is better. It should continue to work in the same manner at least in this regard.
Return on Equity - Clariant
38 36 34 32
Return on Equity (ROE) measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Return on Equity decreased from 44% to 38% in FY 08 and this decrease can be accounted to increased cost of sales in that particular year. The ratio further decreased to 37% in FY 09, however this time, the decrease was due to issuance of shares. Thereafter the ROE has been increasing at a good speed and thus the 5 year average is 39.78% which is much higher than the industry average of 21.71%. Thus Clariant Pakistan has been performing much better than its competitors and the industry as a whole.
Return on Equity
Current Ratio – Clariant
1.75 1.7 1.65 1.6 1.55 1.5 1.45 1.4 1.35
Since FY 07, Clariant Pakistan has shown an increasing trend in its current ratios. Current ratio is basically a company’s ability to meet its short term debt obligations. The higher the ratio the more liquid the company is and it could respond to its short term finances in a much better way. Throughout the 5 year period, the current ratio has remained fairly above 1 which indicates that the liquidity position of the company is quite stable. Clariant’s 5 year average is 1.65 which is in alignment with the industry average of 1.7 and thus a good sign for Clariant and its stakeholders.
Quick Ratio – Clariant
The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. It can also be observed that the Quick ratio was initially low at 0. 92 in FY 07 then increased reaching 1.09 in FY 09. It had been low due to an increase in short term borrowings. Liquidity position of the company has almost remained stable in the recent years with quick ratio maintaining an average of 1.08 reflecting good liquidity position. For the last 5 years, average quick ratio has been 1.04 which is just near to the industry average on 1.05. Clariant is doing just well according to the quick ratio.
Earnings per share - Clariant
20 19 18 17
Earnings per share
Earnings per share serve as an indicator of a company's profitability and for Clariant Pakistan; it has remained relatively stable in recent years. The Earnings per share made a great jump from FY 08 to FY 09 and then kept increasing at a gradual pace which seems fair enough. Clariant Pakistan’s average EPS for the past 5 years is 21.26 which are relatively better than the industry average of 18.39. It shows that Clariant’s profit allocated to each outstanding share of common stock is higher than that of the industry average.
INTERNAL FACTOR EVALUATION MATRIX (IFE)
WEIGHTED KEY INTERNAL FACTORS Strengths 1 2 3 4 5 Customer Loyalty High Return on Investment 50,000 Mt Capacity Plant in Jamshooro State of Art Scientific Centre Resources to offer full range of Products in Textile 6 7 8 Strong marketing base nation-wide Strong R&D centre in Frankfurt International Exports 0.09 0.07 0.11 3 4 4 0.27 0.28 0.44 0.08 0.07 0.16 0.13 0.1 3 3 4 4 4 0.24 0.21 0.64 0.52 0.4 WEIGHT RATING SCORE
Weaknesses 1 2 3 High cost Closed its Switzerland Plant Need for Process Improvement 0.08 0.05 0.06 1 1 2 2 0.08 0.1 0.12 3.3
EVALUATION OF IFE
Internal Factors Evaluation Matrix is mainly used as a strategic management tool for auditing and evaluating current business conditions and to visualize and prioritize the strengths and weaknesses in functional areas of a business. It focuses solely on the internal factors of an organization. The weighted score from the IFE comes out to be 3.3 which shows that the company has enormous strengthens to overcome its weaknesses. The matrix also provides a basis for identifying and evaluating relationships among the strengths and weaknesses of an organization. The highest weightage is given to the biggest strength that Clariant has, which is that is has 50,000 Mt Capacity Plant in Jamshooro. The site comprises of independently located Manufacturing Plants and Warehouses for Dyes, Chemicals, Binders/ Emulsion and Pigments dispersions including infra-structural set-up for provision of utilities, administration and Social services. This is a huge plant and an asset for Clariant. It is not only sufficient to be used for the current 4 business units for which the manufacturing is being done locally but also for the remaining 8 of Clariant if its manufacturing is shifted to Pakistan. Besides this it also has a State of Art Scientific Centre. This particular strength gives it a competitive advantage over its rivals as through this, they can excel technologically, bring in innovative and new products and can provide technical service to its customers. The centre houses the testing, applications development and & Product Safety for Textiles, Leather, Paper and Emulsions business. It also contains the training centre for textile and leather industry where University students and technicians from the industry are provided advance level of training. The scientific centre is equipped with most modern high tech and sophisticated equipment run by highly qualified staff.
Another major strength of Clariant Pakistan is that only Clariant offers a wide range of products and as for its textile segment, none of the competitors has full range of products for textile except Clariant. Furthermore, Clariant has a strong Research and Development Centre in Frankfurt where chemists work on new technology. The primary emphasis of its R&D effort is on product, application and process development, focusing on customer requirements and recognizing that success is determined not only by the products but also by the way they are produced. Due to these innovations they had also recently been awarded 2012 Innovation Awards organized by ICIS. Clariant Pakistan had a wide and strong nation-wide marketing base which helps them to cater a large segment of the market and to retain their customers. This in turn helps to add on to their customer loyalty and for attracting new customers. Despite the high cost of raw materials and the overall process, Clariant has been able to retain its customers and do well to keep pace with others. They have done this through shifting about 40% of its production to Pakistan and then exporting to all European countries which has increased its profit margins globally. The major weakness of Clariant is that it needs process improvement. In this fast moving world, with cut-throat competition it is a weakness of a company and it is working on to improve it.
The ability of a valuable cost-leadership competitive strategy to generate a sustained competitive advantage depends on that strategy being rare and costly to imitate.
Sources of cost advantage FOR CLARIANT:
Economies of scale
Economies of scale One of the most cited sources of cost advantage for a firm is its SIZE. There is a relationship between firm size measured in terms of volume of production - and costs measured in terms of average costs per unit of production. The optimal volume of production is reached when the average costs per unit of production is minimum. Sources of economies of scale: Volume of production and specialized machines:
Clariant has an advantage of high level of production, it is able to purchase and use specialized manufacturing tools that cannot be kept in operation in small companies. Volume of production and cost of plant and equipment: Clariant’s high volume of production allows building larger manufacturing operations. They are able to build lower per unit cost manufacturing operations and will have lower average costs of production. Volume of production and employees specialization: High volumes of production are also associated with high levels of employee specialization. However Clariant has the wells specializes and n motivated staff. Volume of production and overhead costs: As Clariant having the high productivity it can spread its overhead costs to all the functioning departments which apportion the total expenditure of the firm.
The learning curve
The learning-curve model attempts to relate the volume of production and coats over time. Economies of scale focus on the relationship between the volumes of production at a given point in time and average unit costs. The learning-curve focuses on the relationship between the cumulative volume of production and average unit costs.
Differential Low-Cost Access to Factors of Production Differential low-cost access to factors of production may create cost differences among firms producing similar products in an industry, however Clariant has the competitive advantage of manufacturing and blending their products wholly in Pakistan and proving their customers with a similar price of the products as the competitor, which enables Clariant to achieve differential low cost access to factors of production.
Technological Advantages Independent of Scale A possible source of cost advantage that Clariant has is its high-tech plant for manufacturing and for blending. Clariant has a well organizes software which manages their supply chain and links the firm with its distributers as all the sales are conducting by the distributers.
Clariant has the growing segment of textiles for the Pakistani industry; they provide their consumers with all they need in the textile segment at same prices as other chemical firm with on time delivery and the availability.
Low cost strategy works best for Clariant because:
The price competition of Clariant among rival sellers (BASF, ICI)is a dominant competitive force The industry's product is a standard, commodity-type item readily available from a variety of sellers There are not many ways to achieve product differentiation that have value to the buyer Most buyers use the product in the same ways and have much the same needs / requirements The buyers incur low switching costs in changing from one seller to another and are prone to shop for the best price The buyers are large and have significant bargaining power
Strategic analysis and recommendations
INTERNAL FACTORS EXTERNAL FACTORS
STRENGTHS (S) 1. Customer Loyalty 2. High Return on Investment 3. 50,000 Mt Capacity Plant in Jamshooro 4. State of Art Scientific Centre 5. Resources to offer full range of Products in Textile 6. Strong marketing base nation-wide 7. Strong R&D centre in Frankfurt 8. International Exports SO STRATEGIES
1. Use its huge plant capacity to
WEAKNESSES (W) 1 High cost 2 Closed its Switzerland Plant 3 Need for Process Improvement
1. 2. 3. 4.
1. Reduce its cost through the invest in the remaining 8 adoption of lean sigma Adoption of Lean Sigma Process business units (S2, O2) process (W1, O1) Remaining 8 business units 2. Take advantage of being 2. As the Switzerland plant Competitors only have a blending based in a raw material rich has been closed and there plant country to decrease the cost is a lack of foreign Lack of foreign investment of its exports and thus investment in Pakistan, Based in a raw-material-rich increase profits (S8, O5) Clariant being a multicountry 3. Use its R&D and state of art national company can scientific centre to adopt lean invest and increase its sigma process (S4, S7, O1) market share and profitability (W2, O4) ST STRATEGIES WT STRATEGIES
1. Energy Crisis in the Country 1. Use international exports 2. Economical Slump wisely and intensely to 3. Competitors have low overhead increase company’s market cost share (S8, T4) 4. Competitors increasing their 2. Use high plant capacity to marketing share produce more so as to reduce 5. Unstable political situation overhead cost per unit (S3, T3)
1. Cost should be reduced in order to cope up with competitors (W1, T4)
INDUSTRIAL AND CONSUMER SPECILAIATEIS
GRAND STRATEGY MATRIX
Grand strategy matrix helps in formulating alternative strategy for the firm. Here Clariant has been evaluated on two evaluation dimensions: competitive position and market or industry growth. A firm can be positioned in one of the Grand strategy m atrix’s four strategy quadrants. Clariant lies in to the first quadrant. The market growth is rapid and Clariant has strong competitive position among its competitors. The chemical industry is growing in Pakistan because chemicals are building blocks for products that meet our most fundamental needs for food, shelter and health, as well as products vital to the high technology world of computing, telecommunications and biotechnology. With increase in production of different products within the country and technological advances, the demand for different chemicals is increasing day by day, which contributes to the growth of chemical industry. Another other reason for the growth of this industry is that Pakistan is a developing country and is focusing on local production and manufacturing of goods locally. Chemicals also serve as an input for agricultural products and Pakistan is an agricultural country which also increases the demand for chemicals and fulfillment to this demand lets to the growth of chemical industry.
Rapid Market Growth
Strong Competitive Position
Weak Competitive Position
Slow Market Growth
Clariant also has strong competitive position among its competitors because it not only produces wide variety of chemicals for different industries but also has both manufacturing and blending plants here in Pakistan which gives Clariant an edge over its competitors. Clariant has highest market share as compare to its two main competitors: BASF and ICI. This high market share provides Clariant with high customer loyalty. In addition to this Clariant has an efficient distribution and transportation in Pakistan. Clariant lies in the first quadrant which shows that it is in an excellent strategic position. They should concentrate on their current market and products. Clariant can undertake strategies like market penetration, market development, product development etc. It can also adopt backward and forward integration because it has excessive resources. The firm is already diversified in many types of products like: Additives, Catalysis & Energy, and Functional Materials, Master batches etc. Forward and backward diversification could also help in decreasing the cost of raw materials. Strategy 1 – (Increase Investment to gain more Market Share) Recently Clariant has closed down its plant in Switzerland and there is a lack of foreign investment in Pakistan. Clariant being a financially strong and a Multi-national company should invest more in order to gain more Market share. Clariant can also use its huge capacity plant to invest in remaining 8 of its business. All in all Clariant should invest in product development through its strong financial position.
Strategy 2 – (Reduce Cost by adopting Lean Sigma Process) Lean Sigma Process which may be adopted by Clariant Pakistan for process improvement in order to cut cost and increase profit margins. This process seeks to improve the quality of process outputs by identifying and removing the causes of defects and minimizing variability in manufacturing and business processes. It uses a set of quality management methods, and creates a special infrastructure of people within the organization who are experts in these very complex methods. This process follows a defined sequence of steps and has quantified financial targets which may help improve the performance of Clariant as a whole.
Strategic leadership and implementation
A New Value Curve
Reduce - Cost Create - Process improvement - Cost cutting strategies
Eliminate - Fixed budgeting Raise - Technological developments - Capitalize on awareness of wide range of product offerings
The Reduce Tool in the ERRC framework shows the managers on how to reduce those factors which are well below the industry standards. They should be reduced to meet with competitors, and bring something new to the industry. The Reduce factors should be able to increase the standards of the industry at an overall. So the question lies with us that what we should state that would make Clariant’s standard rise in the face of the overall industry. As examined before in the red ocean strategy discussion above in the report we know very well that one of Clariant’s major weakness is that they have a high cost structure, overhead cost structure for that matter because it is a multinational company they have to transport its raw materials from their base country so the transportation is quite high which is the main reason why the costs are high, these costs need to be reduced. This can be possible when manufacturing and procurement of raw materials is done solely from Pakistan but keeping the standard of quality the same as before otherwise there will be a change in customer loyalty if the product does not remain the same quality wise. When the overhead cost structure will decrease then Clariant will be able to compete fully against their competitors as Clariant’s competitors are enjoying a greater profit margin than Clariant’s margin. To create is the tool in the ERRC framework which talks about creating those particular factors which are needed to be created in the industry which are unique to the industry and which have never been offered before hand by any other competitor player in the industry. Clariant is one of the major players in the industry and has many core competencies to its name. The uniqueness it offers is it is a multinational but it is still functioning well in the Pakistani environment when all other industries are leaving Pakistan due to its political instability and economic crisis.
The major weakness of Clariant is that it needs process improvement; if it creates process improvement then it can beat all its competitors as it is established well in the chemical industry in Pakistan. By process improvement we mean that Process improvement is an aspect of organizational development (OD) in which a series of actions are taken by a process owner to identify, analyze and improve existing business processes within an organization to meet new goals and objectives, such as increasing profits and performance, reducing costs and accelerating schedules. These actions often follow a specific methodology or strategy to encourage and ultimately create successful results. Process improvement may include the restructuring of company training programs to increase their effectiveness. Process improvement is also a method to introduce process changes to improve the quality of a product or service, to better match customer and consumer needs. Clariant has a strong Research and Development Centre in Frankfurt where chemists work on new technology which will able the processes to be achieved efficiently that is what Clariant needs to achieve. Clariant has to create cost cutting strategies as well to meet the competitor’s pressure on the industry profits. To gain an increased market share Clariant is well on its way as it has a consistent customer loyalty base even though their products are a little bit on the higher side compared to the competitors. In cutting down costs, Clariant has to focus on the high costs of raw materials and the overall production processes. The raise tool in the ERRC framework suggests what factors the company can use which will raise the company standards well above the industry average. The first factor that Clariant can use is they can capitalize and increase awareness on the wide product offering that the company provides its customers with. Clariant has an astoundingly wide variety of products and it needs to use its marketing efforts to increase this awareness in the industry amongst its customers to retain the customer loyalty and to rope in more customers. Technological developments at Clariant are as it is higher than the usual industry average. Clariant has a heads up on this because it is a multinational and they have a research and development facility, a science centre also and they have been recognized for their major innovations through awards from ICIS. This particular strength gives it a competitive advantage over its rivals as through this, they can excel technologically, bring in innovative and new products and can provide technical service to its customers. The centre houses the testing, applications development and & Product Safety for Textiles, Leather, Paper and Emulsions
business. It also contains the training centre for textile and leather industry where University students and technicians from the industry are provided advance level of training. The scientific centre is equipped with most modern high tech and sophisticated equipment run by highly qualified staff. Clariant has to use technological development as its undue advantage so as to increase its market share in the Pakistan chemical industry as the rest of the players in the industry do not have such a competitive edge on Clariant as they are local companies and cannot afford to have a large amount of their budget spent on technological development, and research.
The Clariant organizational structure comprises 11 Business Units, as well as Business Services, Group Technology Services, regional Service Centers, and Corporate Center, where key functions are centralized. The Executive Committee is responsible for the management of the Group. They have designed this structure keeping in mind the implementation of the strategy.
Following are the main resources that Clariant can utilize in order to implement the evaluated strategy. 1) They have a very strong transportation and distribution channel which enables them work more efficiently and if they implement lean sigma process this efficient distribution will further reduce their cost and will improve the process. 2) The value chain of Clariant is another resource that would allow them to implement lean sigma process efficiently. 3) Huge capacity of 50,000 Mt in Jamshooro is will also help in implementing this strategy 4) The strong R&D centre in Frankfurt will help in research about this new sigma lean process.
Culture at Clariant is democratic. They believe in employing their employees with power to implement decisions and to give their opinions in important matters of the organization. Clariant also emphasizes on providing training to their employees. Launched in 2006, the Clariant Academy is a dedicated center for training current and future Clariant leaders. The Academy plays a key role in fostering a sustainable culture of excellence, capability building, leadership development and best-practice sharing. The Academy consists of three 'schools' with courses and workshops aimed at developing skills for employees at different levels:
Leadership School: Develops strategic and 'soft' skills such as effective communications. Functional School: Develops know-how and behaviors to reach operational excellence in Clariant core processes, such as Value Based Selling. Change School: Implements strategic initiatives and provides an infrastructure for change management and continuous improvement. Lean Sigma is an example of these change processes.
With emerging new markets and customer base at international level Clariant foster a collaborative, culturally-sensitive worldwide production network. Their ability to succeed on a global scale hinges on nurturing a blend of local competence and international business experience.
They are like a cosmopolitan family with employees drawn from more than 90 nations. They aim to provide their managers with international experience to better equip them for leadership roles. High-level managers are required to work in at least two different regions in order to progress
CLARIANT A LEARNING ORGANIZATION:
TASK#1: INTELLIGENCE GATHERING TASK#2: LEARNING FROM OTHER COMPANIES TASK#3: LEARNING FROM PAST EXPERIENCES TASK 4# EXPERIMENTATION TASK 5# SYSTEMATIC PROBLEM SOLVING TASK 6# TRANSFERREING KNOWLEDGE
Clariant’s research and development department carries out a research regarding the monetary benefits and salaries provided to the employees of other multinational firms in the chemical industry in order to keep their employees motivated to work and provide them with the best possible benefits and environment within the organization to keep up their morale to work and to be loyal to the firm in every possible way. One, major learning from the past experiences that has taken place by Clariant is the shifting of its manufacturing plant to Pakistan instead of being in Switzerland. They worked out the cost before the decision was made giving minimized results which influenced them to make this decision as the cost ratio was very high before then their revenues. This decision has put Clariant in a better place then where and how it was before. Clariant has achieved higher market share and is growing instantly because of this particular decision. Clariant has been able to make great acquisitions due to its success which came from taking such decisions. Clariant had undergone an acquisition with a German firm known as SUD-CHEMIE. It is one of the best catalysts making firm worldwide. By acquiring leading positions in the fields of process catalysts and adsorbent agents, Clariant is expanding its portfolio with two fast-growing
business-units. Süd-Chemie also has a strong research and development organization focusing on market segments with significant growth potential. The Business Unit Catalysis & Energy is a leading provider of catalysts for chemical, petrochemical, polymer, refinery and automotive industries as well as materials for environmental markets and solutions for energy efficiency and energy storage. The merger has been implemented globally including Pakistan but the process of experimentation in Pakistan has recently began to find whether it should be implemented or not in the Pakistani chemical industry.
Hurdles for strategy
LIMITED RESOURCES. The greater the shift in strategy, the greater it is assumed are the resources needed to execute it. But many companies find resources in notoriously short supply
MOTIVATION. How do you motivate key players to move fast and tenaciously to carry out a break from the status quo? POLITICS. As one manager put it, “In our organization you get shot down before you stand up.”
CLARIANT’S NEW STRATEGY
Clariant has gone thru a long strategic change in the company globally. The strategic change is still ongoing. The broader objective was to increase the EBIT of the company to 17% in 2015 which was approx. 12% in 2010. And to move the company from lower quartile to top quartile globally. COGNITIVE HURDLES: The strategy was created by the Executive Committee after having long consultation and home work with different research and strategy formulating company. The strategy in reality work when employee believes on same. 1. 2. 3. 4. One of the major hurdles is reluctant to change Fear of losing jobs Vulnerability on future of company Reluctance to change the style of doing business.
Usually these hurdles are minimized with passage of time. The company has communicated the strategy openly to all employees, so that they should know what is going on. Also what each individual has to do to achieve the same. Normally in these circumstances only those people can continue with the company who can accept the strategically change, else they leave the company or go in to downstream. LIMITED RESOURCES: When you need to implement strategy you need resources. The resources are usually 1. Human Resources 2. Financial Resources Human resources means you should have people in the top management in all countries who should have strong believe in the strategy shift. Else you can never achieve the same. Financial resources are generated thru a specific process. This is also a part of strategy. Different means of financial resource generation could sell different plant which is not profitable, selling different businesses. MOTIVATION: There are people in every organization who can be motivated once you show them what companies need to do. Once they are convinced you can use them to motivate others. Also there are people who don’t want change; they are the one who usually have to leave the organization. Motivation depends on the people who are leading the organization. Motivation results when you communicate with people openly and let them know the need to strategic change. This might vary in same company from countries to countries. POLITICS: This happens when organizations weak and powers are not equally distributed and if the people are not accountable to someone. Further if the top management is convinced on the strategy then these are usually minimized. However still there might be few problem maker lower level managers who will de motivate people.
FAIR PROCESS ENGAGEMENT:
DISCUSS RESOURCE DEPLOYMENTS EARLY. Challenge business units about when they’ll need new resources to execute their strategy. By asking questions such as, “How fast can you deploy the new sales force?” and “How quickly will competitors respond?” And then they create more feasible forecasts and plans. IDENTIFY PRIORITIES. Delivering planned performance requires a few key actions taken at the right time, in the right way. They make strategic priorities explicit, so everyone knows what to focus on. CONTINUOUSLY MONITOR PERFORMANCE. They Track real-time results against their plan, resetting planning assumptions and reallocating resources as needed.
KEEP IT SIMPLE. Clariant avoids drawing-out descriptions of lofty goals. Instead, clearly describe what their company will and won’t do. CHALLENGE ASSUMPTIONS. It ensures that the assumptions underlying their long-term strategic plans reflect real market economics and organization’s actual performance relative to rivals’. SPEAK THE SAME LANGUAGE. Unit leaders and corporate strategy, marketing, and finance teams agree on a common framework for assessing performance.
DEVELOP EXECUTION ABILITY. No strategy can be better than the people who must implement it. They make selection and development of managers a priority. Fair process builds execution into strategy by creating people's buy-in up front. When fair process is exercised in the strategy making process, people trust that a level playing field exists. This inspires them to cooperate voluntarily in executing the resulting strategic decisions. Clariant uses the 7 strategies to transfer knowledge to their employees in order to achieve their challenges and goal set before implementing the strategies.