KENT CHEMICAL: ORGANIZING FOR INTERNATIONAL GROWTH

Introduction:

Kent was founded in 1917 as a rubber producer. The Fisher family, which founded the company, was the largest stockholder; and family members held a few key positions. The company is still headquartered in Kent, Ohio. In the 1940’s, Kent expanded into plastics and became one of the country’s largest producers and marketers of plastic additives and specialty chemicals. In 1953, Kent opened a research laboratory, and by 2007, Kent was a leading global specialty chemical company with revenues of $2.2 billion (See Exhibit 1). It held minority and majority stakes in more than two dozen businesses in the U.S. and overseas, employed 4,200 people including 1,200 off shore, operated thirty manufacturing facilities in 13 countries, and sold its products in almost 100 countries.

Kent sold a wide variety of products focusing on niche market needs in construction, electronics, medical products and consumer industries. They had six business divisions, three of which had significant international sales. In consumer products, they sold Grease B Gone, the leading degreaser in the U.S., and expanded into other specialty household products such as drain openers, rust removers, and surface cleaners. About one-third of this business’s $522 million sales were outside of the U.S.

In the 1950’s, Kent entered the fire protection business by acquiring a company that had developed fire retardant chemicals for apparel. It expanded fire retardants for electronics, building and transport industries, and developed a line of foams, chemicals, and gases. By 2008, the fire control segment was a fast growing and increasingly specialized field requiring big investments in R&D. Fire protection regulations varied by country so the chemicals Kent produced in its four plants around the world had to be adapted to local markets. Kent had $210 million in worldwide sales, 45% of which came from international markets.

In the 1960’s, Kent teamed up with a hospital supply company to develop plastics in the medical field such as plastic IV bags and they eventually became a leading supplier of plastics for medical applications. Kent’s line of medical products all were developed in the Ohio R&D labs and manufactured in California and The Netherlands. Overseas sales accounted for about 35% of their $625 million global revenue.

Context:

Kent’s overseas operations were seen as a source of incremental sales achieved through exports, licensing agreements, and minority joint ventures. In 1998, Ben Fisher, KCP’s newly appointed CEO, decided that a more strategic approach to global expansion would be his top priority. His goal was to remake Kent “from a U.S. company dabbling in international markets to one that develops, manufactures, and sells worldwide”. To achieve this goal of a globally integrated company, he appointed Luis Morales to head the international division.

This case studies the strategies Morales and others used to achieve this goal and examines why the strategies failed. It discusses the issues and problems Morales faced in trying to get the U.S. based divisions and managers to work together with the international subsidiaries in local markets around the world to form and carry out a uniform strategy for global expansion. It turned out to be a most difficult and unwieldy task. This case was written to examine why Kent’s global reorganization failed and to consider what approaches would work for international growth.

Question 1: What were the international market entry approaches pursued by Kent until Fisher took over as CEO?

Prior to Ben Fisher’s appointment, Kent’s approach to international markets was selling its product lines through exports, licensing agreements and minority joint ventures. It had acquired minority holdings in more than 15 offshore joint ventures. Historically, Kent had managed subsidiaries and joint venture managers in 22 countries with a “light touch”. Because Kent was a minority shareholder in many of these companies, its financial and operating control were often limited and the subsidiaries and JV’s enjoyed some autonomy. But there were strong informal links that provided the necessary financial and technical support and provided Kent great dividends.

a) Why did Kent pursue these options? Kent’s Consumer Products: Overseas, Kent’s product packaging, container sizes, aesthetics and active ingredients would vary from one country to the next. There were strong local and regional competitors in each offshore market and government regulations varied from country to country. By acquiring minority interests in subsidiaries and JV’s, Kent was able to give these overseas managers the autonomy they needed to sell the product line. These people had a better understanding of the local markets, competition and government regulation to manage the consumer product sales.

Kent’s Fire Protection Business:

Fire retardants were mature commodities, but the fire control segment was large and a rapidly growing and specialized field requiring big investments in R&D. Outside the U.S., fire retardants were produced by former Kent licensees with long histories in the industry. Price competition was intense and Kent needed to reduce its costs. Fire protection regulations varied country to country so the chemical agents Kent used had to be adapted to local markets. A few multinational customers accounted for most of Kent’s $210 million worldwide sales. 45% came from international markets. Kent was the number three worldwide competitor and faced pressure from local and global companies. Therefore, having overseas managers that had been understanding of local and diverse markets and varying government regulations was key.

Kent’s Medical Plastics:

In this field, Kent’s customers were essentially large global hospital supply and medical device companies which it worked with as partners to develop specialized plastics for targeted applications. Overseas sales accounted for 35% of its $625 million worldwide business. The medical products were developed in Kent’s Ohio R&D labs and manufactured in its plants in California and The Netherlands. Again, having local subsidiaries and JV managers that understood the local markets and regulations was critical in implementing sales worldwide.

b) What were the pros and cons of each option?

Historically regional directors had managed subsidiary and JV managers with a light touch and encouraged them to optimize their local positions. However, because Kent held minority positions in many of these companies, its financial and operating control was often limited. In addition, the “entrepreneurial independence of offshore entities was often complicated by long, competitive histories. This fact made it difficult for competing subsidiaries to cooperate and coordinate activities as oftentimes they were exporting into each other’s markets. The lack of control over subsidiaries and JV’s often created this competition and resulted in overlapping activities, duplicative operations and redundancy to local markets.

c) Why did Fisher want to make Kent a global company?

Ben Fisher wanted to remake Kent from a U.S. Company dabbling in international markets to one that develops, manufactures and sells worldwide. He felt Kent was too laid back in its approach to global expansion and was missing business opportunities all over the world.

Question 2: What were the problems facing Luis Morales as he began implementing Ben Fisher’s international expansion strategy?

To implement the global integration strategy, Mr. Morales, took the majority interests in Kent’s fifteen offshores J.V.’s and acquired other overseas companies to expand the global presence. Morales was the new head of Kent’s international division. Three regional directors, all located in Kent, Ohio, reported to him. His problems were many:

Strategic: A. The three regional directors, all in Kent, Ohio, were out of touch with the subsidiaries. B. Capitol allocation became more complex.

Structural/Systems: A. Entrepreneurial Independence of offshore entities with long competitive histories. B. Regional staff lacked market knowledge and detailed technical experience to counter subsidiaries strong pushback. C. Impacted new systems. D. Capitol allocation became more complex. E. Overseas subsidiaries long history of independence led managers to protect their own self interests. F. Frustration about links between geographic and products organization also existed in U.S. divisions. G. Regional organizations had difficulty coordinating issues with global implications.

Interpersonal: A. Entrepreneurial independence of offshore entities with long competitive histories. B. Subsidiaries felt that Kent set arbitrary financial targets that were out of touch with reality. C. U.S. colleagues went from consultants to being more critical and less collaborative. D. Parochial attitudes blocked technology transfer.

From the standpoint of strategy, the three regional directors, all located in Kent, Ohio, seemed to be out of touch with the subsidiaries and J.V.’s that they were charged with overseeing. The impact of new systems also created problems for Morales. As Kent acquired majority positions in the companies, corporate reporting systems were adding to allow operations to be controlled and financial reports to be consolidated. However, these changes caused great strains. Having the data often tempted staff to second guess local country managers. As Morales said “the subsidiaries felt that we set arbitrary financial targets that were out of touch with market realities. Despite our best intentions, I think the country managers were often right.”

In the realm of interpersonal issues, there were many. For example, many offshore entities had competed for years and regional directors had difficulty getting them to coordinate activities. They simply often refused. Another example was when the EMEA regional manager relocated his staff to Hamburg, to work more closely with local companies to avoid overlapping activities and duplicative operations. The countries subsidiaries pushed back and ran circles around the regional staff who lacked the market knowledge and technical experience to counter them. As previously stated, the country managers also resent the regional managers setting arbitrary financial goals that were out of touch with their markets.

Interpersonal relationships were also adversely affected by more structural requirements. For example, subsidiary’s now had to complete capital requests which were first reviewed by a regional manager, then by Morales, then sometimes at a corporate level. In the process, relations between subsidiaries and their U.S. technical contacts shifted. As one country manager stated “our U.S. colleagues used to consult with us on our projects, but once they were involved in funding decisions, they became more critical and less collaborative.” In short, with the more formal structure, the informal relationships that existed disappeared and there was a lack of good contacts with U.S. based technical managers that often worked so well.

Question 3: How would you evaluate the organizational changes he made in response to these problems? Why were they unsuccessful?

In 2006, Ben Fisher, announced a major reorganization. Angela Perri became president of U.S. businesses, and Peter Fisher, Ben’s thirty five year old son, was named vice chairman with responsibility for all corporate staffs and international operations. Under the new organization, the international division, became known as KENT CHEMICAL INTERNATIONAL (KCI), a separate legal entity and subsidiary of KCP. Morales hoped the reorganization would improve domestic/international relations. As overseas operations grew, Morales got stretched thin as KCI top level contact. The advice and support that used to flow freely to the front lines was now slowing, reluctant, and often with an invoice. Morales said “the regional directors should have provided the extra length with domestic divisions. But they never had the status or power of product division managers who were all KCP V.P.’s.” To address these problems, Morales in 2006, appointed three global business directors (GBD’s). They were each responsible for the three lines of business within KCI, and they were V.P. level positions reporting directly to Morales. Each GBD assembled a staff of three to six product or project managers. Unfortunately, the GBD’s failed miserably. In my view, they appeared to be just another layer of management that was no more effective than the regional directors. Like the regional directors, they lacked the clout, expertise, respect, and status to get things done. The subsidiaries viewed them as interlopers. Although, the medical plastics, GBD was appreciated because she provided useful worldwide business coordination, the consumer products GBD was a failure. “Subsidiaries felt he interfered with local issues where he had neither experience nor understanding.” The ENEA regional director felt the new structure just strained the existing organizations time and resources. “The GBD’s didn’t know what their role was, and as regional directors, we were not clear about how to work with them. So we ended up in a lot of meetings that took us away from important day to day matters.” Morales admitted that the GBS’s lacked credibility and power to get things done and failed to resolve conflicts. He blamed some of the domestic managers who just wanted to control the overseas businesses. Jack Davies, V.P. of fire protection, simply said “I don’t think there was a single V.P. in the domestic corporation who saw them as equals. In short, the GBD concept failed because they lacked power, credibly, knowledge, and status to be affective, and have illed to find roles that they apparently did not understand.

In 2007, it was clear the GBD concept was struggling. After long discussions with Morales on more effective ways to integrate KCI with KCP, Peter Fisher came up with the idea of world boards to support the GBD’s. The world boards were supposed to be planners, reviewers and communicators, not managers or controllers. A world board was formed for each of the companies worldwide businesses. The fire protection world board did well and met its objectives. But the other two boards did not fare so well. The medical plastics board rarely reached an agreement or decided on any action. The consumer products board met only twice and disbanded. They couldn’t even agree on what issues needed to be managed locally or globally. Morales felt the world boards failed because the country managers and regional directors distrusted the GBD’s and never accepted the concept. In addition, they felt threatened and saw it as a first step at dismantling regional organizations. Peter Fisher saw them as too large and unwieldy. There were to many self-interests and competing priorities. Peri felt that the domestic division would have been more supportive if they were consulted about the concept in the first place. In my opinion, the concept failed because it appeared to further support the ill-defined rolls of regional directors and GBD’s that had already proved to be unsuccessful and distrusted.

Question 4A: What do you think of Sterling Partners recommendation?

I do agree with their conclusion that one of the company’s main problems was that it had been imposing uniform organization solutions on a strategically diverse portfolio. Their analysis of the consumer product line business and strategic needs was sound as it suggested a business that should be predominately managed locally and regionally. The decision matrix tool was interesting. (See exhibit 4 prepared as a model for resource allocation decisions for the European fire protection business). However, I agree with the regional managers who felt that the recommendations were too complex.

Question 4B: What did Kent get for the 1.8 million dollar fee? Quite frankly, I don’t think they got much. Many of the problems had already been identified and Sterling didn’t seem to offer much in the way of concrete solutions. They offer really a long table discussion with the key business, geographic, and functional managers from each business and engaging them in discussions about decisions. Well, it seems to me that the company didn’t need to pay $1.8 million dollars to figure out that that approach might be useful.

Question 4C: What should Morales recommend and what should chairmen Ben Fisher decide? Frankly, I agree with the regional managers who argued that the company should just revert to the geographic structure that had allowed it to grow. I think that is what Morales should recommend and/or what Ben Fisher should decide. While I agree with acquiring majority interest in the overseas companies and acquiring new companies, I don’t think that necessarily means that Kent must therefore take away the autonomy of the oversea subsidiaries and interfere with their management decisions and control of their markets. It seems to me that KCI can grow globally by fostering and utilizing the expertise and experience of the subsidiaries and J.V. managers rather than feel over control and alienation.

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