Dow Chemical and DuPont announced today their plans to merge before splitting into three companies, “consisting of agricultural chemicals, specialty products, and materials (including plastics)”, according to a New York Times article this morning. Dow Corning (currently 50% owned by Dow Chemical) will also become part of the new DowDuPont.
There are a number of rationalizations for this move, with equity analysts and the companies themselves preferring to focus us on their technology and business portfolios. For example, Jeffrey Stafford of Morningstar cited this move “would give Dow and DuPont the ability to choose the best products in their research pipeline and shutter the rest”.
This is essentially how things happen in much of the industrial world. Markets (including consumers, commodities, equities and currencies) compel executives to focus on managing their portfolios more than investing in improved operating capabilities that raise the value of existing businesses. The value of operating improvement investments is more difficult to prove on a spreadsheet than the $3 billion in cost synergies plus additional tax benefits identified in this deal. The cost savings are actually small in proportion to $93 billion, but the tax benefits are likely more compelling and the total sum can be counted in advance (and audited after the fact) more easily than complex operating upgrades. All of this makes multi-year supply chain operational transformations really difficult to justify, and even harder to complete.
I think this ‘combine and spin-off’ strategy has promise from a supply chain perspective for the following reason: These companies had grown too diverse to apply one-size fits all approaches to supply chain, but their size and complexity made it difficult to quickly develop and implement aligned and agile supply chain capabilities for each of their divisions.
The layers of decision making and pace of change in many Fortune 100 industrial manufacturers (not just in chemicals) is out of synch with dynamics in the marketplace. Our research in the past few years has found that moving past functional-excellence supply chain (stage 2 on our maturity model) is really difficult when finance applies traditional performance management practices heavily focused on cost and efficiency. Sustaining segmented capabilities is a challenge in this environment, because it introduces complexity and has a cost associated with it.
When WR Grace announced it would split into two companies earlier this year, my blog post stated that “the company is taking risk by reducing its portfolio diversification…in pursuit of higher P/E multiples” since “the two companies will (each) be smaller than $2 billion in revenue”. This won’t be a problem for the combined revenue of $93 billion at DowDuPont. There will be ample economies of scale out of which to birth three (or even more) distinct business entities, each with its own aligned supply chain operating organizations having aligned, technology-enabled processes and (more importantly) distinct cultures and operating behaviors to sustain them.
We are finding that focus is very important, and while segmentation can be designed elegantly on paper, sustaining it is a lot harder due to incentives (both measurable and subjective) and other aspects of the organizational culture. So I prefer to think of this as one large business and supply chain segmentation event that happens to have some large corporate legal features to it. The biggest risk would be that they don’t split into multiple entities fast enough.
I’d like to extend well-wishes to the organizations and people impacted by this change. Each of the companies had smart, dedicated people working very hard getting their process and technology foundations right. Hopefully their efforts can be taken forward and applied to the new configuration of businesses. And, yes, this is a good holiday gift for the legal and business services firms who will be helping them implement the transaction. Best holiday wishes to all.