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  • the_nervous_resistor the_nervous_resistor Jun 23, 2003 2:25 AM Flag

    More for slow_dow_n

    M_A_N;

    I have a couple cents to throw in for why the company got short-sighted. I think Rocket has part of the answer: profits now. But a point to consider is why the urgency?

    The answer, I think, had to do with the relatively higer profitability of other industries. Computer software, hardware, telecomm, financial services, ... all had higher profits and were more attractive to investors than basic chemicals. Why put your $ in DOW when Intel had better return? Well, Intel is just an applied chemistry company, founded by a chemist and a chemical engineer. Why didn't that, or a similar project, happen at Dow?

    Yes, the corporation had an R&D budget, but the research was focussed along existing business sectors and not new product areas. Management felt that R&D needed "focus." Everyone bitched about how those R&D guys were not "doing anything for Dow." And when the project was in a potential high growth industry, the chemistry end of it had to be linked to an existing Dow business.

    Well, R&D was forced to work within existing business lines in mature industries. R&D labs would drag out old projects from 15-20 years ago and try to beat some life into them. The presentations to corporate management from the business sectors were easier, because at least they could recognize the words. If they were ever presented with something really new, their eyes would just glaze over. What was a scream was that most of the power brokers really only knew power politics, not business. Even simple concepts like capacity utilization had no impact upon them, as long as they could spin the power in the project. (remember $20M and PBO?)

    Anyway, the shareholders should have expected corporate R&D to be looking for new businesses, ones that fit into the existing company culture and ones that did not. The latter part was the impossible sell. So, there was no way to get new ideas and new projects up into the company. In those days, if you stuck your head up with an idea, it was quickly taken off by local management.

    So, no legitimately new projects means no new businesses. And no growth. That fact probably hit the company in the face in the early 90's. That set up the "saving our way to profitability" years.

    Anyway, the chemical industry is mature. R&D within existing product lines is needed to stay with competition and to improve safety and industrial operations. But that does not produce higher market growth.

    OK, so that's more than 2 cents. But, I think the breakdown in R&D's purpose in the 1980's and early 1990's really has hurt the company. There were a lot of good scientists and engineers in the company at that time. A few are probably left, but not enough. And, what are they working on? More low-growth projects? It is in those labs that the growth in the company will be found.

    tnr

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    • Reasons for the predominance of short-term performance over long-term.

      Management theory from business schools in the 70s-80s stressed the importance of discounted cash flow analysis as a predictor of future stock values and discarded non-tangibles such as responsibility to employees, suppliers, and society at large.

      The birth of the Leveraged Buyout industry in the late 70s, especially when Wall Streeters found out how to use pension funds to take over companies. LBOs were conducted with a lot of debt supplied by banks and insurance companies. To pay interest charges on the debt less profitable divisions would be sold and other techniques to improve cash flow pursued. After a few years of belt-tightening the original investors could realize their gains by reselling the company to public investors through a stock offering. Long-term viability became less important.

      As LBOs became more frequent and hostile, they people conducting such efforts were termed �corporate raiders.� But their efforts pushed the concept of shareholder value onto managers who wished to retain control of their companies.

      Stock options became a larger portion of CEO pay by the mid-80s. The $1,000,000 level of executive pay was broached in the mid-1970s (although this figure represented the peak and not average CEO pay). By 1981, $10,000,000 was becoming more common, although usually with special circumstances. By the 1990s, $10,000,000 had become �normal�. The average CEO compensation of the top 500 publicly held companies in 1997 was $8.7 million, which was a 37.8% increase over 1996.

      The AFL-CIO indicates that in the period from 1980 to 1995, CEO pay increased 500%, corporate profits rose 145%, inflation raised price levels 85%, and factory wages rose 70%.

      Shift in equity ownership and management. (Peter Drucker, The Unseen Revolution) In 1965, 84% of equity was held by private investors who were mostly the wealthiest members in society. Now institutions control more than 60% of the stock market equity. Two items fueled this change�the invention of the mutual fund and the fact that after World War II pension funds became part of workers� standard compensation. Money managers for institutions tend to be young MBAs who buy and sell stocks at a moment�s notice depending on breaking news. Every fund manager watches quarterly financial performance religiously. As a result stock portfolios can turn over frequently in reaction to real or perceived news that may affect a company.

      In closing you had real market forces pushing the short-term view onto industry as the norm. Add to that the fact that any CEO who pursues a different path puts his job and pay at risk, and you don't have much incentive for executives to pursue a different strategy.

      • 1 Reply to man_at_dow
      • maDow, Im thinkin you are soundin more like that belle person evry day!!!!!!! But thats ok. Doint no why someone wants to be someone else tho. Some good points and some bad ones. WHAT ABOUT THE FRIGGIN COMPUTER!!!!!!!!and availability of informaton?????????JEEZUS!!!!!
        An what about the Nervis Resisters theery bout the comparason with other growt indistris??????

    • nervous

      What you describe is ass-kissing dressed up as R&D. It is short sighted and disgusting. Are the guys at the top so downright stupid that they can't understand what REAL R&D is all about, and if so, why are they running things (which they'll ultimately run into the ground)?

    • I get part of my salary paid by R&D and agree with the last $.02 worth of comments. What are these scientists do for Dow lately? Part of my job will be to "attempt" to affect change so we somehow begin to create and implement new ideas to make new money. I have been with Dow less than four years and am continually amazed at how these ideation sessions don't produce much. Do they get killed when reviewed by conservative and short-minded managers or what?

      I know for a fact that this is going on at Eastman Chemical and they are also seeking ways to make new money using R&D more effectively. The answer? Get some courage to make bold decisions and never look back. I think a lot of ideas get killed before they are given a chance to succeed. On the other hand, many R&D types were also working on two many ideas and, thankfully, that has changed. Focus on a good idea and go for it, I say.

 
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