Dynamic resource allocation is associated with superior chemical performance

The global chemical industry continues to experience tremendous changes. In the past 20 years, due to the increasing use of shale gas as a cheap raw material, petrochemical production in North America has experienced a transition from low cost to high cost and then to low cost. At the same time, despite the squeeze on profitability, China has transformed from a bizarre curiosity into the world's largest chemical market. Several of the largest companies are actively restructuring, and major divestitures and mergers and acquisitions that affect the industry are in the news.

McKinsey's research in a series of industries has shown that in enterprises, capital and other resources are easier to flow to another business opportunity, shareholders' returns are higher in the medium and long term, and the risk of bankruptcy or acquirer is lower. A new study in the chemical industry confirms this conclusion: more active resource redistribution is associated with higher shareholder returns. It also shows that the difference in chemical properties is more significant.

In the field of chemicals, as in a broader sample across industries, companies are often slow to transfer resources between enterprises. In general, the distribution of capital expenditure in that year has been close to that of the previous year. But a more detailed observation will show that the levels of activity and results displayed by individual companies are quite different. We use the redistribution score to measure the resource movement of individual companies, which represents the proportion of resource movement among enterprises over the years (see sidebar, "how do we measure redistribution").

The results show that there is a significant correlation between more active resource redistribution and total shareholder income. From 1990 to 2013, the most dynamic one-third of companies reallocated their resources during this period, showing a 10.8% CAGR of TRS. In contrast, the proportion of low redistributors is 2.5%, including the bottom third. In these 23 years, the market value of a dynamic company will grow to six times that of a low dynamic company. Persistent redistributors also get higher shareholder returns than less persistent peers: in TRS, companies with more than 15 significant resource transfers (more than 5% of total capital expenditure allocation) far outnumber less active peers.

Companies with active redistributors are also more likely to remain independent: the survival rate of active redistributors is 30 percentage points higher than that of low redistributors.

The way chemical enterprises allocate resources varies with industry segmentation. In the field of petrochemical, high-volume plastics and other commercial chemicals, the key factors for success are low-cost raw materials, excellent operation and process R & D. Therefore, executives usually focus on these factors to organize strategy and resource allocation, and pay attention to the region of production and the value chain they participate in. For example, several major polyethylene companies organize their reporting departments by geography and value chain.

The most successful companies tend to build attractive positions in the chain where the cost curve is steep (e.g., ethylene production costs significantly change the entire industry globally), and regions based on raw material advantages may use their financial influence or process technology to obtain such advantaged raw materials.

In the field of specialty chemicals, the key factors for success are the choice of end market, the choice of products and the scope of value-added and differentiation. Professional companies are usually organized around these factors, focusing on the end market and product line.

For example, coating enterprises can organize around the market of construction, automobile and industry. Producers active in multiple areas of expertise organize around different components of their portfolios in a similar way.

Diversified chemical enterprises with larger scale integrate the investment portfolio of bulk commodities and special products, and balance more dimensions - geographical selection, value chain, end market, products and sources of differentiation.

In some market segments, the main performance drivers service level, cost structure and competition are regional. Examples include industrial gases, cement and other low value weight products such as sulfuric acid. In these areas, strategic decisions and resource allocation are usually regional.

Article source: https://article-realm.com/article/Finance/9420-Dynamic-resource-allocation-is-associated-with-superior-chemical-performance.html