Balancing Cohesion and Volatility in a Chemical Portfolio

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Large chemical companies are often the result of a series of mergers and acquisitions—deals that made sense at the time, but which now create a diverse portfolio of businesses. These collections can expose companies to greater risks of volatility, particularly in chemicals where dramatic changes in feedstock prices can alter competitive position, and where profit pools shift up and down the value chain over time.


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To manage these risks, chemicals executives need to remain clear on their strategic goals. Leaders periodically review their portfolios to balance the cohesion of their various businesses with their exposure to volatility. Bain research suggests this diligence pays off financially: Greater portfolio coherence at top chemical companies leads to lower margin volatility, stronger alignment of their businesses to a strategy and more effective sharing between businesses—all of which contribute to higher financial returns. For example, we found that commodity chemical companies that balanced volatility with coherence were able to grow earnings at twice the rate of the rest of the industry. Companies in this group delivered 2.5 to 4.5 times the total shareholder returns while seeing 30% lower margin volatility.

The first step in reviewing a portfolio and assessing the coherence of business units is to understand the broader organization’s central strategy. Chemical companies typically follow one of three well-known paths to success: low cost, differentiated products or exceptional service. Focusing the company around a common strategy sends a strong signal to markets and allows the organization to develop a specialized set of capabilities. But when portfolios pull in multiple directions, it’s harder to take the strengths that worked in one business and extend them to help their other businesses succeed. In some cases, companies may want to divest outlier businesses to sharpen their focus.

The second step is determining which capabilities and resources to share among business units. Chemicals executives know that not all sharing is equally valuable, and it’s most important to share the things that make you uniquely successful. Sharing the sources of advantage across business units—whether they are costs, capabilities or other resources—allows companies to extend their lead.

For example, in businesses pursuing a low-cost strategy, it is more valuable to share costs or common feedstock than to share customers. Westlake Chemical taps scale benefits through shared raw materials and highly integrated operations across its business units to achieve a low-cost position in multiple segments. The polyethylene and PVC businesses have common feedstocks, and the PVC business is highly integrated vertically. As a result, the company is able to extend its low-cost business structure into its acquisitions, keeping a sharp focus on costs as the top priority.

On the other hand, businesses pursuing innovation strategies to earn high value for their products will get far more out of sharing R&D capabilities, technology and go-to-market strategies than from sharing costs. One of the rationales for the Dow-DuPont merger is to realize benefits from shared customers to enhance relationships with decision makers and gain a deeper understanding of customer requirements. The improved R&D breadth also encourages the development of unique products to meet these customer needs.

Of course, it’s always possible to turn a virtue into a sin. Sharing makes sense when it helps achieve strategic goals, but it’s important not to create a heavy bureaucracy to pull it off.

Finally, executives need to recognize that common strategies and the pursuit of overlap and synergies can expose businesses to greater volatility. Two business units that rely on similar raw materials can share costs to create better economy on inputs, but both are exposed to the same cycles and volatility in that material market.

A well-balanced portfolio reduces volatility for the company as a whole. Businesses that decrease volatility may be valuable to retain, even if their strategic approach is different. Businesses that amplify risk must create enough value to justify their inclusion.

For businesses that are highly related to the core strategy but increase volatility, executives can do several things to manage the risks.

  • At the business unit level, they can build flexibility into supply contracts, diversifying geographic footprints or accessing different end markets.
  • They can also address volatility at the portfolio level, expanding into derivatives from a common intermediate product, vertically integrating to capture profit pools as they move across the value chain or divesting businesses that create disproportionate risk.
  • Finally, they can manage volatility through financial strategy, conserving cash for down markets, carefully managing debt covenants or share buybacks, or spreading capital expenditures across multiple periods.

Regular portfolio reviews reduce exposure to volatility and can uncover opportunities for synergies across business units. They shed light on where to invest or divest and can help focus acquisition strategy. Beyond M&A, these insights can also help executives set the right balance between the corporate center and business units, and thereby capture the benefits of the range of businesses.

Jason McLinn is a partner with Bain & Company in Chicago and leads Bain’s Chemicals practice in the Americas. Mark Porter is a partner in London and leads Bain’s Global Chemicals practice. David Schottland is a Bain principal in New York.