Get insight into the eight golden industrial gas business rules that thrive success
You want to understand the principle rules for running a successful industrial gas company.
Here are the eight rules for success and generating a sustained 15% of Return on Capital Employed
Eight Rules for Successful Industrial Gas Companies
- “Stick to the knitting” – do not be lured into related businesses
- Better a big fish in a small pond – do not overextend into new business areas
- Set your corporate financial targets and stick to them at all times
- Manage the business for sustained profitable growth not boom and bust
- Make sure that you own or control your basic technology needs
- Recruit outsiders to senior positions to refresh the bloodline
- Reward and promote based on achievement not appearance
- Communicate regularly with all stakeholders and listen to their views
Rule 1 Stick to the Knitting
The first rule for success in the industrial gas business is to focus on the key competences needed for the business to the exclusion of all temptation to “diversify”. If you have spare cash with no obvious opportunities in the base business use it to improve the operational profitability of the business or at worst buy back you own stock. There are many examples of strange acquisitions that seemed a good idea at the time, but which were later divested. These side issue businesses use valuable management time and detract from the core business. Examples include fish farms (oxygen), advanced material companies (speciality gases), waste-to-energy (power, environmental image) and many others. The consequence of these diversions was almost always a non-recurring write-down in the results and a lot of awkward questions from the analysts. These activities also blur the market image of the company away from the industries basic strengths of robust growth in revenues and profit.
Rule 2 Choose a Niche and Exploit it
Most industrial gas companies, even the oldest, grew from a perceived niche opportunity. These may have been territorial, technical or commercial, but they formed the basis of the business. There comes a time when the management decide to expand the business in one or other direction, based on their view of the opportunity. The key rule in this expansion is that the company must become either the number one or a very close number two. Typical examples are territorial expansion, vertical integration and broadened commercial offerings, not excluding acquisitions. The best examples have seen companies withdraw from a business when they were making little headway and the worst has seen companies destroyed and eventually broken up by overextension. This does not mean limiting the company to one area of the industrial as business or region but fully evaluating any extension, including the exit strategy before charging in.
Rule 3 Clear Financial Targets
It is very easy for any company to override its financial targets usually based on establishing a franchise based on a region, a large customer or a “technology breakthrough”. The best performing companies in the Industrial Gas Business look at every deal with a clear “walk away” position. This approach may be criticised for a lack of strategic market view, but it works. The business is littered with examples of major investment for deals that should never have been made and which left the company with underloaded plants or facilities often on a fifteen year deal. Competitors will always upset the “franchise” by limiting profits on any growth through aggressive pricing. Several former companies have been subsumed by a competitor because of their lack of financial discipline.
Rule 4 Consistency
There is always a temptation to take a poor decision now for the sake of future profits and growth. The fact is that hockey sticks are better used in sport than in financial performance graphs. This does not mean that investment cannot have some degree of speculation but this risk should be reflected in the hurdle rate return on investment being increased. In the boom of the late 1990’s most of the majors made investments at a unsustainable level that caused severe problems in the early 2000’s recession. To be fair some stock markets are less attentive than others and this may allow greater freedom, but in the end trying to grab the boom often leads to the inevitable bust.
Rule 5 Own your Technology
The Industrial Gas Business is primarily a service industry based on good pricing and high reliability. When customers are asked what wold cause them to change suppliers, the first answer is reliability of supply, but they also admit that low price is the key to being invited to the discussion table. The industry improves its production and delivery costs by a few percent every year. In the past some very large companies have decided to get out of the technology development by buying from competitors on the basis that shopping around would give the best commercial deal. This had two effects; the supplier companies heard of more deals and they could control the capital or operating costs of the buyer company by adding profit or in fact could refuse to bid or supply as a competitive weapon. This applies to application technology as well as production and distribution technology. Many companies in this category have been acquired by their supplier.
Rule 6 New Blood
The Industrial Gas Industry likes to grow its Senior Management from within its existing staff. They have complex and sometimes arcane human resources systems that flag up people early in their career that have “Executive Potential”. This inevitably leads to benign nepotism disguised as mentoring and career development. It also results in a management structure that develops clones based on the “right corporate ethos”. It also means that rather like politicians they have little experience of the business world outside their own company and tend to perpetuate both good and bad business practices. Some companies have a risk averse ethos, some a technology focus and some a wheeling and dealing attitude, or just plain tricky.
The most noticeable historical fact is that companies that have recruited some senior managers from outside the Industry have generally done better than those that do not. The injection of fresh approaches rather than more of the same has tended to invigorate and discipline at the same time.
Rule 7 Effectiveness not Glamour
One of the key difficulties for management is to identify real contributions to the success of the company. Some employees, such as salespeople, have high visibility, generally dress well and are lucid. In most companies the move to executive management is based on commercial skills including those of selling their own image. The other source is often through the financial areas, such as Treasury or controllership, which spend a lot of time supporting senior management and gaining attention. Companies need to have a balance at executive level between those who understand the number and those who understand the nuts and bolts of the business. It really does have to be a balance, some suffer from too many engineer and others from too many accountants. There are examples of both types failing.
Rule 8 Communication
There are many stakeholders in any Industrial Gas Business and nothing is more likely to cause problems than failing to keep them informed. These include customers, suppliers, staff, investors and the community. The best make every effort to engage with all of their stakeholders through press releases, presentations, events and other mechanisms. The two most important are probably the website, including easy access to financial and other reports and key product information, and for customers identifiable account managers at a senior enough level to meet their customers’ needs. Communication should be targeted and tailored to the different stakeholders but should seek information as well as giving it. The best companies do this well and the worse probably limit real efforts to the investors and analysts.
Miss any group or take them for granted and your business will suffer.
