Opportunity at Crompton's Door

Robert L. Wood says he set a goal 10 years ago to become chief executive officer of a company before he was 50. He achieved that goal a year ago and a year ahead of schedule when he left Dow Chemical, where he was group vice president for thermosets and automotive, to become president and CEO of Crompton Corp.

The now-50-year-old Wood was a 27-year veteran of Dow and had been considered a candidate to head the largest U.S. chemical maker. But Dow's decision to move Andrew N. Liveris in line for that job closed one door for Wood and opened another for him at Crompton.

"Crompton seemed to be the perfect opportunity for me," Wood says. "There were a few other companies I was looking at. But given the business issues confronting Crompton at the time, coming here gave me the best opportunity to apply what I had learned. I thought there was a significant upside here if things were done differently. And as I looked at Crompton, I thought it would be a lot easier to double the price of a $5.00 stock than to do the same with a company whose stock traded at $40."

Among the major issues confronting Crompton a year ago were $750 million in long-term debt; high raw material prices and deteriorating selling prices; and antitrust investigations into the firm's rubber chemicals, ethylene-propylene rubber, and plastic additives businesses. Many of those problems still remain, but a year after he left Midland, Mich., to come to Middlebury, Conn., Wood is doing things differently by engineering a massive reorganization of the firm.

In Crompton, Wood saw a firm that had once been the darling of the chemical industry but stumbled after it acquired Witco in 1999 and hit a sour economy in 2000. For 10 years prior to 1999, under Vincent A. Calarco's leadership, "Crompton's annual return to shareholders grew at a 25% compounded annual rate, and the management team got lots of credit for that," Wood notes. But for the past five years, "the company has been struggling. The opportunity I saw was to take a different approach to how we did business."

In Wood, Crompton got an aggressive executive with a bachelor's degree in history from the University of Michigan. Starting as a chemical sales trainee at Dow, Wood filled a variety of sales, marketing, and human resources positions. He says he didn't find it difficult to compete for general management jobs with peers who had technical degrees. "You pick up what you need, and then you figure out how to use people and technology to answer questions that you can't answer," he says.

Before he even got to Crompton, Wood says he already had some answers to questions about what the company needed to do to thrive. Crompton had to become more agile, Wood says. "We had to be more focused on getting results. There were just a huge number of activities that we couldn't afford to support," such as technical service to customers who weren't paying for it.

AFTER HIS ARRIVAL, he assessed the businesses in which Crompton participated, and he concluded that the firm's core was in four areas that promised long-term opportunities for growth: crop protection, petroleum additives, urethane polymers, and plastic additives.

Wood calls crop protection "one of our best businesses. It is growing. It is healthy." And it has 25% operating profit margins. Another growing business, petroleum additives, has 20% operating margins, Wood says, as does urethane polymers. Plastics additives, currently a "poor performer," has good prospects, too, once it's back in shape. It is "where we have the greatest opportunity because that is where the value of our offerings is the most unrecognized."

Two other businesses are on the chopping block: refined oil products and the plastics extrusion equipment business known as Davis-Standard. "Refined products is a highly capital intensive business that is in areas where we don't have any particular strength. We'll look for a transaction there." It's a business that has been for sale since 2000.

Crompton acquired Davis-Standard in 1961 as the market for plastic products and the equipment to make them was booming. But today, Wood sees it as "a very cyclical business that has no connection to the rest of our portfolio." The business is breaking even on annual sales of $200 million. At the peak of the cycle in 1998, Davis-Standard had sales of about $350 million and generated operating profits of 15%. "Unfortunately, it wasn't disposed of at the last peak," Wood says.

The businesses remaining in Crompton's portfolio will be organized on "a functional basis," Wood says. In June 2004, Crompton hired a consultant to help the firm determine which jobs no longer supported its long-term goals. The exercise allowed Crompton to reduce employment by 540 people at the end of last year.

Wood says he did not want to cut jobs the old-fashioned way: announcing a certain number of cuts and then apportioning them proportionately among a number of businesses. "I felt very strongly that we needed to do it disproportionately based on what our needs were. I felt we needed to take more out of some areas than we would take out in others. That was the right thing to do."

Crompton centralized its research and development efforts in the restructuring exercise. "Historically, each business unit had their own R&D that wasn't coordinated and wasn't focused on the most promising technologies," Wood explains. "So we ended up spending effort, time, and money on technologies that for one business might be okay but, looked at in the context of the whole company, didn't have sufficient critical mass to make a difference."

Today, the firm's 300-strong technology unit has a chief technology officer, John A. Lacadie, who formerly headed research for the crop protection business. Under his direction, Crompton intends to focus on business development projects with the greatest impact on profits. "So if the plastics additives group has three really great projects and the crop protection group only has two, we don't have to fund five in crop protection and five in plastics additives because they have a certain R&D budget to spend," Wood says.

AMONG PROJECTS Crompton expects to pursue is work on organic-based polymer stabilizers, polymerization modification and control, and engine lubricants. To recapture business lost when tributyltin was banned for use in marine antifouling paint, Crompton is developing organometallics for use as reagents to create new active pharmaceutical ingredients.

The firm is also doing a lot of work on crop registration so it can move products registered for use in Latin America to the U.S. "We are betting on the best opportunities for the corporation as opposed to the best opportunities for petroleum additives, or ethylene-propylene rubber, or some other area," Wood says.

Before the reorganization, the only R&D cooperation among the business units "was through a technical board made up of the research directors of the different business units," Lacadie, 58, says. What Crompton has now is a technology organization divided into three units: centers of excellence, business support, and skill centers.

The centers of excellence focus on longer term research in areas such as organometallics and polymers with market potential in anywhere from three months to five years, Lacadie says. A new business development group within the centers of excellence looks at opportunities outside of traditional businesses.

The business support group deals with the "day-to-day urgent issues that have to do with customers, plants, or small incremental business needs," he says. "These technicians don't get involved with 'fixing' the product." The skills center undertakes analytical, process, and synthesis tasks in support of the other two units.

At one time, each business group had its own resident experts on synthesis, process development, and analytical matters, Lacadie says. But now "they all report directly to me and can work in business support or the centers of excellence."

Aside from the changes that the reorganization is bringing at Crompton, Wood says the firm is determined that none of the ethical lapses that troubled it over the past two years will reoccur. In May 2004, the firm settled criminal charges with U.S. and Canadian authorities for fixing rubber chemical prices and paid $57 million in fines.

The firm is also under investigation for fixing prices in ethylene-propylene rubber, plastic additives, nitrile rubber, and urethanes markets. However, it received conditional amnesty in these cases from U.S., Canadian, and European authorities because it came forward first and reported the violations to government regulators.

In addition to the criminal cases, customers have filed a number of civil suits to recover pricing overcharges. Crompton settled a plastic additives civil suit for $5 million, which Wood says "is a fair outcome and is manageable." Crompton will settle other suits if plaintiffs seek a "reasonable" settlement. But he vows "to fight like crazy people" if, in Crompton's view, plaintiffs are unreasonable. If possible, he wants to avoid trials because they can be unpredictable.

Ethical breaches "are just not acceptable," Wood says. People involved in fixing prices "were dealt with pretty severely." At least two former Crompton executives await sentencing on conspiracy charges tied to the price-fixing scandal. All employees now take mandatory courses on proper business conduct.

As it tries to put the price-fixing scandal behind it, appropriate product pricing remains an important concern at Crompton. In 2003, Crompton's energy and raw material costs rose by $63 million while selling prices dropped by $14 million, Wood says. In 2004, costs rose by $100 million and prices just about kept pace.

"We're not going to sell products at a loss," Wood declares. "It is far more important for us to make our margins than it is for us to sell volume." The right fix, he says, is "to behave like a specialty chemical company and not like a commodity company." For instance, rather than continue to sell certain rubber chemicals at a loss, Crompton shut down capacity in August and raised prices 60% on Flexzone antiozonants used to prevent rubber tire cracking.

"The company had slipped into a 'Woe is me, I can't control anything' mind-set," Wood says. Because Crompton's products "create value in our customers' operations, we ought to be able to capture more of that value," he maintains. Crompton can't afford to allow customers to "bully us into price decreases," especially when they have no legitimate competitive alternative.

The new feisty attitude is bringing some results. In the third quarter, Crompton had an operating profit of $54 million on sales of $640 million versus a profit of $28 million on sales of $560 million in the third quarter of 2003. In a recent report, debt analysts Michael Salshutz and Zhen Tao at financial services firm Deutsche Bank say Crompton is in a better position now to cover its obligations than it was a year ago. They voiced confidence in the firm as "the new management implements its plan."

Wood acknowledges that earnings "have to be more consistent." With discipline restored and a reorganization under way, Crompton and Wood envision a world of opportunities ahead.

Harry Kemker calls the reorganization process he helped put in place at Crompton a "turnkey organizational design and implementation process." It's an approach that the consultant, who is affiliated with Charles River Associates, has developed over 23 years and brought to a number of chemical, oil and gas, and process industry companies.

The program starts with an exhaustive examination of all work activity at a firm, with an eye toward discarding inefficient procedures and work that does not support the firm's strategic objective, Kemker says.

New job descriptions are created and then democracy comes into play as nominating committees cast secret ballots to fill the available positions. "Someone who runs a business doesn't select the people who work for him. That eliminates cronyism," Kemker says. However, managers one level above select the nominating committee for the next lower level. The committees can include secretaries and others unlikely to get a particular job.

David Godfrey, Crompton's vice president of human resources, says his office tabulated the votes to ensure the integrity of the process. "I've been through reorganizations before," says Godfrey, who spent 23 years at Millennium Chemicals before joining Crompton in 2002. "This process is unique. Since we had grown so much by acquisitions, we had lots of job duplications and processes that we needed to streamline."

Over the past decade, Crompton had absorbed Uniroyal Chemical, Witco, and smaller specialty chemical businesses like General Electric's plastic additives business.

"We really had an opportunity to design our organization from scratch," says John A. Lacadie, vice president and chief technology officer. He participated in the initial design of the firm's R&D organization and later was nominated by a committee and approved by Chief Executive Officer Robert L. Wood to head the technology group.

Wood says he is satisfied with the process, and especially some of the democratic elements. "People in organizations like ours do a much better job of managing up than they do managing down. Having secretaries participate in this process provided good insight into what people are really like. And in some cases they changed the outcome of who got selected for what position."

DESIGN FOR CHANGE
Democracy Was A Part Of Crompton's Reorganization

Harry Kemker calls the reorganization process he helped put in place at Crompton a "turnkey organizational design and implementation process." It's an approach that the consultant, who is affiliated with Charles River Associates, has developed over 23 years and brought to a number of chemical, oil and gas, and process industry companies.

The program starts with an exhaustive examination of all work activity at a firm, with an eye toward discarding inefficient procedures and work that does not support the firm's strategic objective, Kemker says.

New job descriptions are created and then democracy comes into play as nominating committees cast secret ballots to fill the available positions. "Someone who runs a business doesn't select the people who work for him. That eliminates cronyism," Kemker says. However, managers one level above select the nominating committee for the next lower level. The committees can include secretaries and others unlikely to get a particular job.

David Godfrey, Crompton's vice president of human resources, says his office tabulated the votes to ensure the integrity of the process. "I've been through reorganizations before," says Godfrey, who spent 23 years at Millennium Chemicals before joining Crompton in 2002. "This process is unique. Since we had grown so much by acquisitions, we had lots of job duplications and processes that we needed to streamline."

Over the past decade, Crompton had absorbed Uniroyal Chemical, Witco, and smaller specialty chemical businesses like General Electric's plastic additives business.

"We really had an opportunity to design our organization from scratch," says John A. Lacadie, vice president and chief technology officer. He participated in the initial design of the firm's R&D organization and later was nominated by a committee and approved by Chief Executive Officer Robert L. Wood to head the technology group.

Wood says he is satisfied with the process, and especially some of the democratic elements. "People in organizations like ours do a much better job of managing up than they do managing down. Having secretaries participate in this process provided good insight into what people are really like. And in some cases they changed the outcome of who got selected for what position."