Video
In a changing chemicals market, mergers and acquisitions that seemed logical at the time may not be as beneficial for the company as they once seemed. David Schottland, a principal in Bain's Chemicals practice, explains that chemical companies that are trying to put together a coherent portfolio should focus on strategy-sharing and volatility when making important portfolio decisions.
Read the Bain Brief: In Chemicals, Great Strategy Beats Great Markets
Read the transcript below.
DAVID SCHOTTLAND: Large chemical companies are often the result of mergers and acquisitions over time. And deals that may have made sense at the time often change over time because sectors change, feedstock prices change, and market demands change, and a deal that was right and made sense in the past may not make sense when you look at it in the rear view mirror.
The best companies are trying to actually put together a coherent portfolio. So what do we mean when we say "coherent?" We're talking about strategy sharing and relatedness, making sure that the business units are sharing costs and customers, but also volatility and how the business units work with one another from an earnings volatility standpoint.
So any company starts with strategy. The best companies start with really looking at their strategy. You can be competing on low cost, you can be competing because you have differentiated products, you can be competing with exceptional service. What really works best is when you have business units that are actually pursuing the same strategy. The capabilities and the assets that are required to actually deliver those strategies, you want to be able to port those things from business unit to business unit and really build areas of strength.
On the other side is volatility. What you want to understand and do best is put together a portfolio of business units that actually decrease volatility for the company as a whole. Now, often, if you are getting business units that are highly related, you may also be amplifying the volatility. So there's no easy way to do this, and it's a trade-off. You may actually decide to keep a business unit that's not using the same strategy and is not as related because it dampens volatility for your company. The best companies are the ones that are thinking about this when they go into a potential merger or acquisition or are making other portfolio decisions. They are always looking with clear eyes at how that will affect the coherence of their portfolio, both the strategy sharing and the volatility.
Read the Bain Brief: In Chemicals, Great Strategy Beats Great Markets
First published in November 2017