Chem Co.

Our client, Chem Co., is a manufacturer of basic commodity chemicals, with a single-digit market share. It possesses no other competencies or capabilities other than as a chemicals manufacturer. It recently emerged from bankruptcy and has limited access to capital. The client has asked for our help to evaluate the sustainability of their business model and recommend some strategic alternatives to it.

Our client, Chem Co., is a manufacturer of basic commodity chemicals, with a single-digit market share. It possesses no other competencies or capabilities other than as a chemicals manufacturer. It recently emerged from bankruptcy and has limited access to capital. The client has asked for our help to evaluate the sustainability of their business model and recommend some strategic alternatives to it.

Question 1: Keeping in mind that the client will not be able to endure any net losses, can the client survive the bottom of the pricing cycle in 3 years? The candidate should be able to determine that the company will not survive the bottom of the pricing structure. Below is the math: Chemical X revenue: 100K * $100 = $10M Chemical Y revenue: 150K * $100 = $15M Total Revenue = $25M Variable costs: 100K * $95 = $9.5M Fixed costs: $20M Total costs: $29.5M Net income: -$4.5M Question 2: What could have been the underlying reasons for the client’s inability to survive the trough of the pricing curve a few years ago? This question is designed to assess a candidate’s understanding of profitability; she should break down the components of profitability and identify the underlying factors affecting the client. Revenue factors: • The trough of the pricing cycle is deeper (lower) than ever before • Production volume is lower than before, thus spreading fixed costs over fewer units. Cost Factors: • Variable costs have increased to a greater percentage of revenue than before • Fixed costs increased, perhaps due to outside issues (e.g., environmental issues), requiring more expensive equipment to produce the same volumes Question 3: Discuss the opportunity and risks associated with the two following options: 1. 2. Acquire/move into a counter-cyclical chemicals business Provide additional products/ services relevant to a key customer Option 1: • Opportunity: balance existing cyclical nature to allow for more even average pricing • Risks and limitations: finding a purely countercyclical business is unlikely. Entering a business fast enough to avoid bankruptcy in 3 years would require an acquisition in addition to organic efforts, straining managerial resources. Lastly, an acquisition would acquire capital, which would be difficult to obtain in the current financial situation. Option 2: • Opportunity: leverages existing relationships to enter related areas to augment core business • Risks and limitations: the organization has no existing skills in these areas. It would be difficult to evolve from a volume focus to a relationship/service focus. And lastly, the need to move quickly would require an acquisition, with similar financial challenges as in the other option. Question 4: If neither course of action is viable, what strategic options would you recommend to the client? This question is designed to test a candidate’s ability to develop strategic options with limited information. Strong potential answers would consider the following: • Sell the company • Liquidate plants and other fixed assets-essentially, perform a managed bankruptcy. • Perform some type of profitability analysis and identify plants/assets that could be shut down to reduce fixed costs sufficiently to avoid losses in 3 years.