Rh ne-Poulenc (A) and (B)
case analysis
I. INTRODUCTION
Rh ne-Poulenc (hereafter referred to as R-P), is a French chemical company that was formed in 1928, after the merger of two separate companies that were established in the nineteenth century: Soci t Chimiques des Usines du Rh ne, a Lyons based chemicals company and Etablissements Poulenc-Fr res, a Paris based company specializing in pharmaceuticals.
Since its inception, R-P has been involved in man-made fibers, pharmaceuticals, organic intermediates, and fertilizers. By the end of the 1930 s, R-P ranked among the largest French firms, with most of its business concentrated in Europe. R-P had $1.8 billion in sales in 1969, 53 percent of which were generated in France and the remainder from other European countries.
During the 1970 s, R-P s textile and fertilizer divisions were under attack by low-cost imports. In addition, they were adversely affected by higher petroleum costs. As a result, R-P began to shift its portfolio to chemicals and pharmaceuticals, which were less prone to the ups and downs that plagued cyclical industries.
In 1980, Francois Mitterand was elected president of France. His French socialist government started nationalizing several companies, among them, R-P. Because of the French governments intervention and reorganization program, R-P was able to divest itself of unprofitable units and in turn, gain several profitable product lines. As a result, R-P s portfolio and financial performance began to improve. In 1986, R-P began to expand its businesses in America.
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By the end of 1990, R-P had increased its presence in the U.S. mainly through acquisitions. The U.S. accounted for 20 percent of R-P s $15.48 billion in total revenues. This increased share of the U.S. market helped R-P rank among the largest principle chemical manufacturers in the world (7th).
II. INTERNAL STRENGTHS AND WEAKNESSES
Internal weakness
+ R-P was slow to recognize the importance of the chemical consumption market in the U.S. When it finally realized the opportunities that were available, R-P didn t possess the necessary financial resources to expand in the United States.
+ R-P was virtually unknown outside of France.
+ French managers lacked the experience and confidence to manage their U.S. operations.
+ R-P was very conservative in its efforts to increase its market share in the U.S. They chose to acquire established U.S. chemical companies to expand their presence in the U.S. market, thus they were faced with carrying a high burden of debt.
+ R-P was neither experienced in managing large manufacturing firms nor did they have the internal infrastructure in place to handle an acquisition three times its size.
+ R-PI had a formidable task in integrating the different systems of compensation, pension and benefits, and employee progression and succession that many of its plants had in place.
+ Transportation costs prohibited exporting some products to international markets; thus, they failed to exploit some economies of scale.
+ They had the added pressure of overcoming the negative reputation that UCAP obtained as a result of the Bhopal accident.
+ Philippe Desmarescaux, the Agrochemicals sector head, and Tom Dille, head of R-PI had an impersonal dotted line relationship.
+ There was growing discord among the French employees, who were becoming frustrated as the U.S. divisions would disregard the strategic plans they had been given and instead use their own methods.
Internal strength
+ R-P recognized the importance of hiring knowledgeable and skilled individuals who were respected in the chemical industry.
+ Philippe Desmarescaux was quick to explain his motives and plans for the future to his new R-PI employees. His intents were to express confidence, ensure a sense of continuity, and alleviate any concerns.
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+ R-PI values their employees. In order to promote a family environment, R-PI publishes a quarterly magazine, which highlights the contributions of each division. They also have a reward system in place, ranging from safety awards to offering scholarships for employees children.
+ R-P s activities are limited to five distinct chemical industries: Agrochemicals, Basic Chemicals, Specialty Chemicals, Films and Fibers, and Health.
+ Each of R-PI s division s work with sector headquarters to set strategic objectives and annual targets.
+ R-P is willing to sell any of its unprofitable U.S. operations in order to maximize its overall profitability.
+ R-P s agrochemical products can be sold worldwide; thus, they are able to realize economies from this division.
III Opportunities and Threats
-Opportunities
The first opportunity that Rhone-Poulenc has to address is the possibility of further expansion and acquisition. One place the company could look into is a possible expansion into the Japanese market. Japan makes up 14% or 36 million dollars of the chemical consumption sales in the world. This presents an opportunity to get into a new market if there is room. Potential is another huge opportunity for Rhone-Poulenc. The company has stated that it has the potential to have the United States account for 40% of it s annual sales. Even with all of the acquisitions the company still only attains 17% of sales from the US. Opportunity has also presented itself in a couple of the different sectors of business. The health sector has been a growing entity for the corporation. This continuous growth represents a chance to capitalize on an expanding market. Also, the agrochemicals sector represents less than 2% of sales for the company. This presents a opportunity that the company should look into. The company should decide whether this market is growing of shrinking. The company needs to decide whether to expand or divest, and focus more on the sectors that are earning higher sales.
Threats-
There are a few threats that face Rhone-Poulenc. The company seems to be lacking in a company identity. The different divisions don t seem to all be running on the same page. Most of the oversea employees don t seem to know anything about the parent company. There is also the threat of becoming to diversified. The company could get spread to thin and might not have the resources to continue to grow. Competition seems to be an important threat to the future of the company. Competition represents strong barriers to entry into certain markets. There are many companies that already have strong positions in both the U.S. and Europe. The company will have to contend with loyalty and brand name recognition. As Rhone-Poulenc continues to grow they will have to concern themselves with the lack of skills required to manage a large firm.
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IV Analysis
Rhone-Poulenc is in pretty good shape overall. The company waited a little to long to get into the American market, but now that they have joined they should strive to be a strong force. Rhone-Poulenc should make every effort to reach potential. As the company expands into markets it should continue to acquire help from local professionals to help make the transition smooth. The firm may be well served to hire some outside council on the management of large international companies. Rhone-Poulenc should endeavor to bring the company culture closer. The company magazine is a good start to giving this company an identity. People work better and harder for a company they like, so continued unity, and employee benefits will help make Rhone-Poulenc a top company. The firm needs to try and further expand and get into the Japanese market. The business needs to continue to grow and put focus into the sectors that are producing the largest profits and have the most potential. Rhone-Poulenc should look into the agrochemicals sector and make a decision. While only accounting for less than 2% of sales this portion of the business is not contributing enough to warrant expenses. The resources used for financing this sector may be better served in another aspect of business. Through research and development, acquisition, or advertisement, the company needs to acquire some brand recognition, which leads to loyalty.
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V. CORPORATE LEVEL STRATEGY
Rh ne-Poulenc, Inc.
R-PI s mission is to provide high-value products and services in the fields of chemistry and life science. Using their core skills and technologies worldwide, R-P expects to grow and succeed by building profitable business that will satisfy the evolving needs of their customers, challenge their employees, and establish themselves as a recognized and respected market leader.
An integral part of R-PI s global organization strategies involves leading its international affiliates in capitalizing on opportunities in the U.S. market, contributing unique U.S. capabilities to the R-P Group, and maximizing it s contributions to R-P s overall profitability.
One of R-P s goals is to rank among the world s top five leading companies in each of their businesses and each of their products. Another is the continued integration of recently acquired entities into the existing business organization and streamlining the firm s activities.
R-P is pursuing a global strategy. This allows them to ride down the experience-curve and realize location economies. They are realizing location economies since they have production facilities throughout the world. This is important since it is very expensive to ship bulk quantities of chemicals.
The company is using a matrix structure with four different divisions all directly reporting to the head-office in France.
They are vertically integrated backwards, since they are doing their own R&D, in order to develop new medicines and chemicals. They are also probably vertically integrated forward in some businesses where they sell the product in bulk quantities directly to the end user.
R-P has grown through acquisitions. They have pursued both related and unrelated diversification. They expanded their market in the existing products by acquiring Union Carbide Agrochemical Products and Stauffer Chemical. R-P went for unrelated diversification when they bought a large stake in Rorer, a pharmaceutical firm with foreign affiliates from Asia to Europe.
Through the acquisitions the company should realize economies of scope because they should be able to share some resources among these business units. Also the size of the company should make them realize economies of scale.
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VI. Business Level Strategy
R-P has four chemical divisions in the U.S., which are managed by its U.S. regional headquarters, Rh ne-Poulenc, Inc. (R-PI).
These four chemical divisions are: Agrochemical products, Basic Chemicals, Specialty Chemicals, and Health.
Agrochemical and Specialty Chemicals products don t allow for much differentiation because of the nature of the products. In these two industries, price is the most important factor used to maintain a competitive advantage.
In the Health business, which includes pharmaceuticals, the company will have to differentiate its products by developing their own medicines through R&D in order to build a competitive advantage. A unique product will also allow them to build brand loyalty that can be very valuable and profitable for many years to come.
R-P has most of its businesses in the growth stage of the life cycle. R-P has recognized this by investing resources to develop new sales and marketing competencies. The bargain power of customers is fairly high in several of the businesses the company operates in, especially in Agrochemical products where the customer often buys in big quantities and there is little product differentiation. Here it will be important to realize economies of scale and be able to enjoy cost-leadership in order to build a competitive advantage.
In the other industries, differentiation is the most important aspect since extensive R&D can lead to new innovations and products that can give the company patents that will ensure steady sales in the future. A very innovative company will also benefit from a lot of positive publicity that arises with a new innovation.
We are provided with little information on the actual business-strategy within the different businesses.
VII. CONTROL AND STRUCTURE
Brief Background
In order to become a major competitor in the global chemical industry, R-P understood that it needed to increase its presence in the U.S. in as short as time possible. Rather than spending large amounts of time and money building new subsidiaries in the U.S., R-P instead chose to use acquisitions as their strategy. Spending $7.9 billion, R-P acquired several U.S. companies in diverse chemical fields.
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Matrix Structure
Based in France, R-P is organized in a matrix structure. The U.S. division of R-P, known as Rh ne-Poulenc, Inc., (R-PI) maintains and oversees control of three chemical divisions in the U.S.: Agrochemicals, Basic Chemicals, and Specialty Chemicals. (The U.S. Health division reports directly to the Health sector headquarters in France.)
These three chemical divisions, along with the U.S. Health division (which isn’t controlled by R-PI) are also under the direction of their respective individual sector headquarters, which are based in France.
In turn, these four sector headquarters, along with the Films and Fibers sector, report directly to Jean-Rene Fourtou, the CEO of R-P in France.
Disadvantages of their Matrix Structure
One of the hurdles encountered with the R-P matrix structure is that the three U.S. chemical divisions have to report to two different department managers. This can create potential problems if employees receive conflicting directions from their two managers.
In addition to having to potentially cope with two different management styles, the U.S. chemical divisions have the potential hurdles of overcoming cultural differences.
Control
R-PI, along with the entire U.S. chemical divisions, has been fortunate in that they don’t have to deal with overcoming cultural differences.
Based on its past history of being unable to increase its market share in the U.S., R-P has recognized that in order to be a successful global competitor, it had to do things differently.
They decided to relinquish direct control of their individual international divisions to local individuals who were experienced and knowledgeable in the chemical industry.
For the most part, R-P has maintained a hands-off approach. The U.S. division, R-PI is largely autonomous. Other than requiring the three U.S. chemical divisions to receive strategic direction from their respective sector headquarters in France, the methods these three chemical divisions utilize to achieve these goals rests entirely upon R-PI.
R-PI is responsible for integrating the various chemical companies into one cohesive division. As long as R-PI achieves the objectives that R-P has set, they are given the freedom to accomplish these goals as they deem necessary.
Reward System
R-PI values the loyalty and commitment of its employees. As a reward, it offers safety awards and scholarships to employees children. It even promotes the contributions of each division my mentioning them in their in-house magazine.
Future
Now that R-P has fulfilled its goals of: diversifying into five distinct chemical industries, increasing its U.S. market share, and becoming a stronger global competitor, it wants to become a centralized unit with each sector headquarters in France having direct control over all respective international divisions. In order to accomplish this goal, R-P wants to eliminate regional divisions, such as, R-PI.
Advantage
The main advantage of R-P having direct control over its international divisions is that it will have a globally standardized method of fulfilling its strategic objectives. The second benefit is the cost savings achieved by eliminating international regional headquarters.
Disadvantage
By eliminating their international regional headquarters, R-P will effectively be destroying the entire framework they have built to increase their international presence, namely, relying upon the experience, knowledge and insights that their international regional division headquarters possess.
Based on their past history of failures, one has to question whether R-P’s French managerial methods of achieving strategic objectives will work in the U.S.
VIII. RECOMMENDATIONS
United States
The U.S. market has been responsible for an increasing percentage of R-P’s total revenues (13.3% in `89 to 20% in `91).
While this increase is admirable, it represents less than half of the total revenues that R-P research indicates is attainable.
Most of the U.S. revenues can be attributed to R-P’s recent acquisitions. Still, R-P is now in the position to realize the benefits of greater sales from these acquisitions if they manage them correctly.
The U.S. chemicals market is a lucrative one ($109 billion in ’77) and is three times as big as the next largest market, Japan ($36 billion in ’77).
R-P should direct more of its total budget to the U.S. to ensure that they remain competitive in this important market.
Which division?
Of its five sectors, the one sector that is thriving is the Health sector, while the other four remain stagnant. Whether through more acquisitions, strategic alliances or an increase in R&D, R-P should increase its presence in the lucrative U.S. health sector.
Control
It’s understandable that R-P wants more control of its international operations. Before taking any measures to eliminate their regional headquarters, R-P has to remind itself of its past failures of trying to capture a meaningful portion of the U.S. market. Then they need to remember how they overcame these past failures – by undertaking a decentralized management style and hiring the most qualified individuals to manage these U.S. chemical divisions.
R-P should stay with this style of hands-off management because it has proven to work successfully.
Acquisitions
Prior to embarking on their acquisitions buying spree, the U.S. market was responsible for a miniscule amount of R-P’s total revenues (3%).
With their acquisitions, the U.S. market became responsible for twenty percent of R-P’s total revenues.
R-P has done nothing directly to take credit for the increase in revenues that the U.S. market is responsible for. R-P has done nothing original, it hasn’t made any new discoveries nor has it created any innovative methods.
R-P should keep R-PI, leave it alone and instead concentrate on the functional activities back in France.
Germany
The top three chemical manufacturers in the world are German companies and they have a combined total of $90 billion in revenues (1990).
R-P has learned that in order to be a global competitor, they must have a presence in leading markets to gain or learn competencies. R-P should have some R&D facilities in Germany to learn or gain some insights as to how the Germans have managed to do so well.
Asia
In 1977, the total chemical consumption market in Japan was $36 billion. This amount is twice as large as the market in France and larger than the markets in West Germany and the UK. Yet, by 1991, the Asian market represented only $1.23 billion of R-P’s total revenues.
R-P should build, acquire or form strategic alliances in Japan in order to capture a larger portion of this lucrative market.
Overall
R-P should continue to expand its presence in international markets, especially the U.S. Specifically, they should concentrate on expanding their Health division.
R-P can afford to take risks in international markets. They have the comfort of having the leading market share in their own country (worth $3.8 billion in ’91) and more importantly, since R-P is a national institute of France, it has the financial backing of its government to support it through rough times.
* note: the rate of exchange of the French Franc in 1991 was .1984 cents to the U.S. dollar.
