Chemical companies utilize strategic control points

Using strategic control points

In the past brilliant period, it is not uncommon for chemical companies to keep their TSR at 30%, 40% or even more than 50% for a long time. This is no longer the case. Returns in the chemical industry have normalized: for all chemical companies, the average TSR in the last five years is about 5%. Nevertheless, the top 10 chemical companies performed much better, with an annual TSR of about 28%.

Looking more closely, we find that eight of the top 10 companies are located in developed economies, and only two are headquartered in Latin America. Top companies achieve their excellent TSR in one of four ways: through substantial revenue growth (for example, synthos, mexichem and LG Chem); through material based profit expansion (Westlake and sqm); through pricing based profit expansion (Croda); and through multiple improvements in valuation, through improved Macroeconomics (Sherwin Williams, Eastman, and W.R. grace).

A different analytical approach - looking at top companies over three different periods - suggests that chemical companies use two strategic control points. Either of these two strategies can make the market value of a chemical company far exceed the replacement value of its tangible assets - which is the clearest sign of the power of the company's business model.

First, the more common control point is the favorable acquisition of scarce physical assets. For example, mining assets are a strong source of advantage not only in the potash industry, but also in various businesses such as sulfur derivatives, fluorochemistry, tungsten carbide, lithium derivatives and brominated flame retardants. Among Boston Consulting Group's top companies, potash, K + s, Mexico, Israel chemicals and sqm all benefit from their unique scarce resources. Other asset based strategic control points include standard setting (Victrex peek polymer defined as its professional certification requirements for some aerospace and medical applications), brand (location Sherwin Williams carves out its own in the U.S. paint industry), easement (shatter foundation Industries Inc. provides low-cost raw materials) and scale (BASF Verbund (integrated) long-term use).

The second point of strategic control is to have superior business system. One example is Yikang's "customer circle" strategy, that is, the "global circle" strategy. The company's new products and services are mainly based on its understanding of customers, followed by the root cause of its sales of detergents and other health chemicals to institutions such as hotels. Other powerful business systems allow companies to control intellectual property (such as Victrex), do more innovative application development (Croda), or get new products to market faster (PIDILITE).

It's not always easy to grasp a strategic control point. If control is a scarce physical asset, another company may find it elsewhere, or adjust its position to compete for the asset. If a company's strategic control point is based on the advantages of the company's business system and the potential ability to make the system work, it is likely to be more defensive. But it will also be more difficult to establish it from the beginning.

However, it is clear that without one of the two basic points of strategic control, a company's ability to produce high TSR will be threatened. South Korea's chemical industry is an example. Until a few years ago, South Korea's chemical companies outperformed the market. One of their major advantages is the exchange rate advantage of the won, especially relative to the yen, which enhances the competitiveness of Korean chemical companies in the export market and strengthens the market position of Korean companies as their direct customers. Because Asia's exchange rates are not so favorable - and there is no real strategic control point - it is difficult for South Korean companies to achieve the level of TSR performance in the past.