By Tom Ambler, Senior Consultant
Strategic Planning Expert
Note: This article was previously published in Course and Direction in January 2006
View Commodity Industries in a Global Way
Commodity industries that are highly capital intensive, have cyclic markets and high transportation costs are particularly susceptible to price fluctuations caused by unexpected supply/demand imbalances. This price variability makes investment in additional capacity very dicey. The long-term result is product substitution and periods of over-building capacity once companies overcome their uncertainty about the duration of shortages, thus beginning another cycle of supply/demand imbalance.
A good example of this situation involves the cement industry, which historically has been an industry where plant capacity was localized to the market due to very high freight costs and general availability of raw materials. The simultaneously high demand in the Sunbelt and high demand in China has caused a significant shortage of cement. The results are 20% increases in pricing and significant stretch-outs in the construction schedules. The cement companies are not likely to remedy this shortage very quickly.
Strategy Tip: If your industry is cyclical and capital intensive, make sure you understand the global economic situation – not just the local situation. You may need econometric models describing the long-term relationships that drive demand as the basis for capacity expansion. You should also be aware that your industry may be ripe for consolidation among suppliers in order to make it a more attractive investment.
Making a Healthy Culture a Priority
Getting tangled in your own web of unethical practices has become almost epidemic. It appears to know no industry boundaries and often involves multiple players in a company, either in cahoots or acting independently within the same unhealthy culture.
An example of this is reported in the Wall Street Journal 9/8/03. Ahold, an international food marketing giant, has come under the gun of financial scrutiny as a result of improper accounting for vendor rebates by executives of one of its large U.S. divisions, U.S. Foodservice. This scandal forced a restatement of earnings amounting to close to $1 Billion, which has thrown the spotlight on the company’s heavy debt. Reducing this debt will require the unraveling of much of Ahold internationally, with massive spin-offs and radical changes in its future course.
Strategy Tip: A culture that places huge emphasis on short-term performance and global market share, without adequate concern for integrity at every level and in every circumstance, becomes a festering sore in an organization. It has the potential to become a burning fuse just waiting to set off a bomb with financial and human devastation many times greater than the cost of fixing the culture in the first place. A company that loses sight of its values is one that loses its value.
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© Copyright 2015 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution.
Tom Ambler is a Senior Consultant with Center for Simplified Strategic Planning, Inc. He can be reached by email at ambler@cssp.com