BUSINESS
New CEO Joyce Looks To Carbide's Core Competencies For Future Growth A t certain times in Union Car/ % bide's tumultuous past, the J L J L person filing the corporations top spot has been in a less than enviable position. But, as Carbide President William H. Joyce, 59, assumes his role as chief executive officer, it seems likely that his reign will be marked by much more stability. It has been less than two months since Joyce succeeded Robert D. Kennedy, 62, in the position of CEO. And he is set to take on the mantle of chairman as well at year's end when Kennedy plans to retire. This changing of the guard is likely to be smooth for the company that is a $4.9 billion producer of chemicals and plastics. Joyce has been Kennedy's right-hand man for some time, playing a key role in the development of Carbide's future strategic direction. He has also been credited as the architect and leader of the company's successful $575 million cost-reduction program, which was completed on schedule at the end of 1994. That program resulted in a cut of about one-third of Carbide employees across a broad cross section of job functions and company locations, including its Danbury, Conn., headquarters. Today, the company has about 12,000 employees worldwide. In keeping with a goal of knocking out layers of management wherever possible, Joyce plans to set an example at the top. He will retain the responsibilities that come with all four of the titles he will eventually hold, rather than appoint a president and chief operating officer. A Carbide employee since graduating from college in 1957, Joyce brings a broad understanding of the company's operations to the CEO position. Starting as a product development engineer, he rose through the ranks to become, in 1977, director of planning, licensing, and financial control for what was then the newly created polyolefins division. During this period, he was responsible for developing the new Unipol polyethylene process, still Carbide's most prized technology. After a string of subséquent promotions, in 1992 Joyce became the corporation's executive vice president responsible for operations, and, a year later, he was elected president and chief operating officer. In an exclusive interview with C&EN's Houston bureau head, Susan Ainsworth, Joyce recently discussed how he plans to create a cost-conscious corporate culture and narrow Carbide's focus to those businesses in which it has a distinct competitive edge. While 12
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nurturing its cornerstone polyethylene and ethylene glycol businesses, Carbide is stepping up investment in a host of smaller, less cyclical businesses that prospered during the industry's latest downturn and also benefited from the improved U.S. economy. As Carbide's earnings performance continues at record pace, Joyce's biggest challenge may lie in preparing the company and its employees for what he sees as the next inevitable industry downturn. How do you plan to build on the strategy that Kennedy has carved out during his years as CEO and chairman? I don't plan on making any abrupt changes in the way we have been operating for the past three years. Just before we spun off Praxair (Carbide's former industrial gases business) in 1992, we began to look at our history to pick out our areas of strength and weakness. Because clearly, our earnings were not satisfactory. And without good earnings, you don't have enough cash flow to be reinvesting. So, we had neither good returns nor growth. It was a difficult position for both shareholders and Carbiders. Fortunately, that look at Carbide resulted in a big list of things we were doing that were very good. And, strange as it may sound, we were pleased to come up with a great big list of the things that we knew we were doing wrong. Basically, we found that what we were gaining via our exceptional technology base and strong market position was being offset by weaknesses in our infrastructure. So the objective, then, was very straightforward. We began to focus on those product lines where we had leadership. As a company that has won more technology awards than any of our competitors, we recognized the need to use that technology skill to build either product or process positions in the market. Equally important, we wanted to start working on our infrastructure, trying to get on par with the rest of the industry. How did Carbide management go about improving the company's infrastructure? We began to look for ways to streamline all of our work processes—the functions necessary to stay in business such as maintaining equipment and servicing customers. Teams
of employees in each of our businesses or plants were asked to choose one of these processes—the one most important to them—and develop the quickest, most efficient way to carry out that function. Whether it involved plant maintenance or writing an annual report, employees were now able to do the same thing they did before but using a lot less time, money, and resources. Work process is now a permanent part of the company's culture. In the end, we were able to do the things that we set out to do. And toward the end of last year and into this year as returns have come up, we've started to put more money back into growth in the business as we had planned. Was it a challenge to maintain morale and establish a lean-and-mean corporate culture while cutting a third of yourpayrott? We did not start out to do that. Our objective was to be more efficient, to do things better. And when we finished with that, we had more employees than we needed. Communication was very important. Management wanted all Carbiders to understand the problems we faced. We tried to bring a very clear message that return on capital is not just a measure for shareholders. The 8% return we averaged between 1980 and 1990 is just enough to tread water. In effect, in that environment, most of the money coming out of the business just goes back in to meet environmental and safety regulations and to update pieces of equipment. There's not enough left over for significant growth projects. And that is particularly problematic in our industry. Although prices cycle, over the long term, bottom-of-thetrough margins do not really increase over time. That's because the technology and costs of the best producers almost offset inflation. If you are going to be able to live in the bottom of the trough, you have no choice but to bring your costs down by increasing productivity. If there is no growth of the business, you must reduce the number of employees. As costs fall and return on capital moves up, cash flow improves. And you have enough cash left over for growth. Our most successful means of communication was through our employee forums. A couple of times a year, Carbide managers travel around to all of our major locations to sit down with groups of 15 to 25 people representing a cross section of our employees. The idea was to make the groups small enough so people could ask questions without being embarrassed. And we get very good, frank discussions going in which employees tell us what they think we are doing wrong. And I do think Carbiders now understand what we are trying to do, what their role is, and why maximizing return on capital makes as much sense for employees as for shareholders. To help encourage that kind of thinking, we did implement some programs like profit sharing. Do you believe there's a point at which a company can become too lean? Well, I think that it can. It's possible to cut so much that it doesn't have the reserves to handle emergencies. For example, what happens if a competitor comes out with a brand new product and you have to react? To address this concern, most companies will try to build a few extra people into the system. But, unfortunately, that
does not work. People really do have a need to stay busy, contrary to the popular wisdom that people are inherently lazy. And if you put extra people in the system, they will create work for other people in their attempt to stay busy. So, we have tried to create some internal consulting groups that give us isolated little reserves of people to fall back on if a business unit gets into trouble. Because the employees are in these consulting groups, they are not creating problems and doing work that is not useful to the customer. Another danger inherent in big downsizing programs is that companies often can get too lean at one level of their organization. There's a tendency for management to cut people that are farthest removed from them rather than the person sitting next to them. And if you look at results of downsizing programs in the past, the people who tended to leave were in the lower levels of the organization—the farthest removed. We've tried to do the reverse. We've tried to take the cuts from management and contractual services. And we cut 58% from corporate overhead. After the fact, we've tried to end up with as many or more salespeople calling on our customers or engineers at our plants, for instance. How has the cost-cutting program affected Carbide's R&D operations? For the moment, R&D would seem to be a very easy place to take people out because that's the tomorrow. But that would actually be dangerous in our case, since process and product technology is really our strength. Still, our R&D operations continue to undergo work process scrutiny. We want to do that efficiently as well. And there's a lot of money to be saved in R&D, particularly by avoiding projects that the organization really won't ever use. Most R&D organizations take on projects simply because certain technologies look intriguing; they get only part way, and then those technologies never get used. You really need to work on something with the ultimate aim of adding to the strength of the organization. Through our work process, called "R&D to ROC," we are looking very carefully at projects up front to ensure that they generate return on capital at the other end. Before we begin a project, we have to know how it fits into our
Carbide's low-pressure oxo facility for butanol production in Taft, La., is scheduled for completion by the end of 1995. JUNE 19, 1995 C&EN 13
BUSINESS
business and why we should be the one in the industry with that particular strength. A project is only worth carrying out if we have the organizational strength to take it to the marketplace. We don't want to cut our R&D spending as a whole, as many other chemical companies are currently doing. We just want to be more selective. In fact, our R&D expenditures are actually rising at the same time we are implementing our R&D to ROC work process. In addition to increased expenditures in R&D, where else does Carbide plan to invest now that the company's return on capital is higher? We are investing more in technology, but probably more striking is that we are putting a lot more money into growth projects than we have in the past. We are spending substantially more to support what we call our less cyclical products—low-pressure oxo process derivatives and a host of small specialty chemicals and polymers that most people overlook when they think of Carbide. Most people associate Carbide with ethylene glycol or polyethylene, but, taken together, our many small and less cyclical products represent an increasingly significant piece of our business. (For example, the less cyclical businesses accounted for 56% of volume and 75% of revenues in 1994.) And the less cyclical portion of our business has become increasingly attractive to us as we have trimmed costs from the system and found ways to make those products at less expense and with lower corporate overhead. As the people running those businesses make more money, they are becoming more enthusiastic about looking for new places to sell their products. For the period of 1995 through 1997, our capital spending plans are several times larger for these less cyclical businesses than for polyethylene, glycol, and ethylene combined. Taken together, weVe already added, or are in the process of adding, about a billion pounds of capacity in all of these less cyclical businesses. We also want to capitalize on our technology leadership positions in these businesses. Take the low-pressure oxo process, for example. With a world leadership position, a very
A company needs to work on R&D projects with the ultimate aim of adding strength to the organization.
good cost profile, and a dominant licensing position, we should be able to make more than butanol and the other products we have been making. And so we are looking at that technology to see how else we can apply it. We are also looking at our Unipol process—a very efficient, environmentally preferable process that uses very little energy—to see how we can harness it to produce other products. Is that the driving force behind Carbide's construction of the ethylene-propylene rubber plant at Seadrifl, Texas, by third-quarter 1996? Yes. We found that the capital investment needed to make rubber with our new process—a variation of our Unipol technology—is less than half that of competitors. And if you look at the operating costs, excluding the raw materials, they are less than half of the best competitors' costs as well. Another plus is that our process will be the first to produce ethylene-propylene rubber in granular form, which will be much easier and less expensive for customers to handle than the 50-lb block form in which the product is currently shipped. We've looked back over our shoulders at times when the rubber industry did not make much money and concluded that even in that climate the economics of our process would have been attractive. In addition to building the ethylene-propylene rubber plant, we are doing some pilotscale work on some other rubber products. It's a matter of using existing knowledge, skill centers, and pilot plants to make something different. How does Carbide plan to use the company's strong technology position to expand its ethylene glycol and polyethylene businesses? The obvious way to grow these businesses is by bringing our technologies into partnerships. WeVe done a lot of joint ventures simply because they are often preferable to building a new plant or buying an existing one. A partnership gives you the best of both worlds. You get a successful business, unencumbered by high investment costs. And each partner participates equally in the company's future gain. Don't joint ventures also serve as an entrée into highgrowth foreign markets? Yes, but that is less of a motivation for Carbide. A lot of companies want to be global for the sake of being global. And that's not our objective. Instead, our objective is to invest in businesses that we know well and in which we have some advantage. And when we go overseas, it's only because we see an opportunity to build a partnership or because a key raw material and an important customer are there. And even though we are not on the ground in a lot of places, we've always participated on a global scale. We ship many of our products, such as ethylene glycol and some of our specialty products, around the world from manufacturing sites in North America. We are really just pursuing customers as though there are no geographic boundaries. We continue to reach out to find customers to serve better than anybody else. Is Carbide planning to announce plans to build any major plants this year? Has the company considered jumping on
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Carbide is putting a lot more money into growth projects than it has in the past.
the ethylene expansion bandwagon, especially given that Carbide is such a large net buyer of the feedstock? We've been looking at it. But we want to be careful to stick to our fundamental strategy of investing only in those busi nesses where we have some competitive advantage. And we don't have a competitive advantage when it comes to producing ethylene. No producer does, really. It's the con struction firms that supply that technology. However, we may be able to incrementally expand our existing ethylene facilities at considerably less cost than building a grassroots plant, which in a sense, would give us the competitive ad vantage we are looking for. In addition, we are talking to other companies about tak ing a piece of the expansions they currently are working on. If those discussions are successful, then you'll see us make an investment in ethylene. And if we don't find a way to gain a competitive advantage through that kind of partner ship, then we will buy the ethylene. Loyalty to the company's core businesses and Carbide's cost-control program have clearly contributed to strong earnings over the lust two quarters. Substantial price in creases for polyethylene and ethylene glycol seem to have helped Will thesefactors continue to dictate earnings per formance for the remainder of 1995? It's true that our cyclical businesses such as polyethylene and glycol contributed significantly to the earnings im provement between the fourth quarter of 1994 and the first quarter of this year. But only 40% of those gains came from that part of our business. The other 60% of our gains came from our strong-performing, less cyclical businesses. Sales volumes for the less cyclical businesses were good, costs continued down, and some of the investments in these prod uct lines came onstream. And these businesses have been steady performers. Profit margins for our less cyclical busi nesses have steadily improved quarter by quarter every year since 1991. (Earnings from Carbide's less cyclical businesses grew from about $250 million in 1990 to $550 million in 1994.) Do you anticipate that 1995 will be a record earnings year for Carbide?
The consensus among analysts is that we'll earn about $1.1 billion before interest and taxes in 1995. Assuming they're right, we'll come up a little short of our record performance in 1989 when we earned a little over $1.2 billion before in terest and taxes. It all depends on how our downstream customers be have during the remainder of the year. Will they dump all their inventories and, therefore, cut demand? If so, we'll see a lot of downward movement in prices in the second half of the year. If they hang onto their inventories, then the supply-and-demand balance will remain fairly tight, and we will beat the current earnings estimate and achieve record earnings. Do you believe that another down cycle is inevitable for the industry? Yes, I think the industry will continue to cycle. Behavioral studies in decision-making show that people probably base 90% of a decision on today's environment. When the indus try is in the bottom of the business cycle trough, they look forward and they just say, "Gee, it's terrible forever." Even when someone projects that prices will cycle, they predict a nice gradual upturn in price. And it never happens that way. It just goes straight up. By the same token, when people are euphoric, as many in the chemical industry are today, they can't see prices com ing down as sharply as they actually do. Consequently, their investment decisions cause oversupply and feed the next down cycle. How does Carbide plan to protect itself during the next inevitable down cycle? Management is spending a lot of time talking to employees in an attempt to build a mind-set for the next downturn. We want our employees to evaluate every proposed expansion or investment to see how it looks under the conditions at the bottom of the trough, because we will have to live through those margins. As we set out to take cost out of our system, we set an objective to earn 8% at the bottom of the business cycle trough and 33% at the top of the cycle to give us an excel lent average return of 15%, which provides plenty of cash flow. And we seem to be on target. In the trough year of 1993, when we had cut costs significantly, we achieved a 7.8% return. In the first quarter of this year, our returns were about 36%, even though polyethylene and ethylene glycol margins were not at their peak. So it is very clear that we are going to make much more than planned at the top and meet our goal at the bottom. Frankly, we are pleased with where we are right now. We have clearly met our goals, running into a lot of surprises in the process. What were some of the surprises? They were good and bad. On the good side, in our effort to catch up with the rest of the industry, we actually moved ahead in some places. Another, less pleasant, surprise from my standpoint was finding out how much work is still left to do. It's kind of like picking the large stones out of a field. You go out and you do a lot of work and then you look back and find that there are still so many left to move. Π JUNE 19,1995 C&EN
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