The most appropriate strategic direction for Imperial Chemical Industries plc

The aim of this report is to recommend the most appropriate strategic direction for Imperial Chemical Industries plc (ICI) to follow in order to meet the challenges of the forthcoming decade. Analysis including Value-Chain, PESTE, and SWOT will be conducted as well as a financial analysis so that a future vision, mission, goals and objectives can be developed. Strategic options available to ICI will then be evaluated and recommendations will conclude the report.

Founded in 1926, ICI has recently undergone an 8bn re-engineering programme from being a heavy industrial chemical producer (capital based industry) to producing speciality chemicals. (knowledge based industry) (Pandya, 2002. )With nearly 40, 000 employee’s world-wide, ICI is a main player in the global market, and continues to dominate the UK market. ‘Products made by the company are the vital ingredients that add value to customers’ products and processes’ (Annual Report, 2001). The chemical industry within the UK has suffered many changes since the 1990s due to difficult market conditions worldwide.

As a result, sales, profitability and levels of investment all suffered. Being a capital intensive industry, the financial resources needed to invest in plant and machinery has meant that it is becoming increasingly difficult for new and existing companies. Competing in markets throughout the world means that ICI has to abide by laws and regulations of each country such as health and safety of employees, protection of the public, protection of the environment, storage, handling, transportation, treatment, and disposal of hazardous substances and waste.

Failure to do so could result in restrictions in operations, fines and sanctions, increases costs of compliance and reputation damage. (Annual Report 2001). An economic downturn that started in the USA in 2000 was more widespread than imagined, affecting Europe and Asia. Latin America faced economic turndown also which has resulted in political instability. Stock markets in retreat, declining interest rates, banking crisis in Japan, and the terrorist attacks of September 11th have all contributed to economic factors, not only affecting ICI, but the rest of the world too.

(Trotman, 2002)An EU Draft White Paper has been issued which proposes to impose more stringent regulations on the industry in an attempt to create a non-toxic environment by preventing dangerous chemicals entering the market. It is a very controversial proposal in which the industry is opposed to because of its impractibility. (Keynote – The Chemical Industry, 2001)This analysis examines the forces that influence an organisation, including suppliers, buyers and new entrants to the market. The objective of Porters study is to use it to develop the competitive advantage of the organisation to enable it to defeat its rival companies.

(Lynch, 2000) Appendix 2 shows the forces that influence the speciality chemical industry. In terms of the chemical industry the bargaining power of suppliers is moderate to low. Suppliers are the organisations that provide the raw materials needed in order to make the final good. The main reasons for low bargaining power include that there are suppliers available to the company from multiple suppliers from all over the world; there is little possibility of the suppliers integrating forward (when an organisation acquires the activities of its outputs.

Lynch, 2000) as they are generally small companies. Barriers to entry into the chemical industry include high set up costs and high levels of investment; it is likely such small companies could afford this when large key players are struggling with these costs. The bargaining power of buyers (buyers being the customers of the organisation) is moderate also; this could be due to an overcrowded market. Products are specialised and therefore are unlikely to be easily replaced by substitutes.

Buyers switching to an alternative supplier would incur high costs, and also run the risk of failure if the alternative product does not meet their needs. The threat of backward integration is unlikely. This when the buyer takes over the role of the organisation. (Lynch, 2000) Entry barriers to new companies are high, thus making the threat of new entrants low. New entrants may be attracted to the market because of the high profit margins. As mentioned before the market is already overcrowded and very competitive.

Threat of new entries is low due to economies of scale, high initial fixed costs and investments, brand loyalty of customers. Relationships between suppliers and companies that are already formed are also considered a barrier to entry. Branding and consumer knowledge will also make it harder for new entrants to succeed – they may have to spend more or simply wait longer to become established. The threat of substitutes is high. Substitutes generally do not replace existing products but introduce new technology or reduce the costs of producing the same product.

(Lynch, 2000) Threat is high, but can be overcome as due to high R&D investments within the industry, a product that is coming to the end of the life-cycle will have been replaced by a new and improved product. Close relationships between customers and company’s exist so problems with products are likely to be discussed so see if alternative products can be used so that replacement products from alternative companies do not have to be used – brand loyalty. By providing an extra aspect such as after sales may also prevent switching. Competitive rivalry is relatively high.

This is because there are many players within the market, roughly the same size. When one competitor decides to gain share rivalry increases significantly, however in the chemical industry, smaller competitors can be stopped in gaining competitive advantage by the larger dominant firms. Slow market growth means that sales must be found somewhere – more often than not, this is from competitors, thus increasing rivalry. Industries such as the chemical can not add small increments of capacity and therefore has to build new plants. Companies may then fill extra capacity by reducing prices. (Lynch, 2000).

Finally barriers for exit are high also such as high redundancy costs and the cost of closing plants. Overall, the bargaining power of suppliers is moderate/low as is that of buyers, although both are vital to the success of the company, and hold a relative amount of power. The threat of new entrants into the industry is low, this is mainly due to an already overcrowded market, and initial high costs. Substitutes and competitive rivalry within the industry is high, it is therefore important that companies maintain good relationships with all their customers whilst offering products that are differentiated, value added and that irreplaceable.