Business Dynamics and Diversification Planning

7/29/2019 Business Dynamics and Diversification Planning

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SOCIETY FOR & ~ PREPRINTNUMBERMINING, METALLURGY, ANDEXPLORATION, INC.

P.O. BOX 625002 UTILETON. COLORADO 80162-5002

BUSINESS DYNAMICS AND DIVERSIFICATION PLANNING

F. AlsobrookAlsobrook & Company, Incorporated

Medford, New Jersey

For presentation at the SME Annual MeetingSal t Lake City, Utah - February 26-March 1, 1990

90-63

Permission is hereby given to publish with appropriate acknowledgments, excerpts orsummaries not to exceed one-fourth of the entire text of the paper. Permission to print inmore extended form subsequent to publication by the Society must be obtained from theExecutive Director of the Society for Mining, Metallurgy, and Exploration, Inc.

If and when this paper is published by the Society for Mining, Metallurgy, andExploration, Inc., it may embody certain changes made by agreement between theTechnical Publications Committee and the author, so that the form in which it appears is notnecessarily that in which it may be published later.These preprints are available for sale. Mail orders to PREPRINTS, Society for Mining,Metallurgy, and Exploration, Inc., P.O. Box 625002, Littleton, Colorado 80162-5002.

PREPRINT AVAILABILITY LIST IS PUBLISHED PERIODICALLY INMINING ENGINEERING


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Abstract. Industr ial minerals ar e receiving increased attention by metals, coal andother companies seeking to diversify andstabil ize earnings. Each industr ial mineral ha sa unique se t (and sub-sets) of business dynam-ics, however, and th e divers ity can present abewildering maze to the corporate planner.Shrugging off this complexisty and relying onserendipity fo r entry o p p o r ~ u n i t i e s oftenresul ts in unsuitable acquisi ' t ions. An effect ive al ternat ive used in exploration can also beapplied to strategic planning. By providingfocus and direction, this flexible methodologycan prevent wasting corporate resources onrandom pursuits and result in a quicker, moresat isfactory achievement of diversif icat iongoals.

INTRODUCTIONThe methodology described in this paper ismost often used by mining companies for priori t iz ing the i r exploration expenditures. I t canalso be used to fucus new product developmentefforts , to screen acquisition opportunities andto direct diversif icat ion programs. I t istherefore adaptable to projects keyed tointernal growth as well as those involvingexternal growth. I ts premise is that resul tswhich will meet th e company's long-rangeobjectives, in this case with regard to diversif ication by a c q u i s i t i ~ n s , are more l ikely to beachieved by means of a rat ional , analyticalapproach than by one that is haphazard. The

la t ter responds to whatever opportunity comes infrom th e outside, is largely passive in nature,and leads to a "mineral-of-the-month" mentali ty . The former sets a course of direction, ismore pro-active in nature, and should result inan overall more ef f ic ient us e of corporateresources.

METHODOLOGYThe f i r s ~ step in th e approach is a dis

p a s s i o n a ~ e assessment by an acquis it ive companyof i t s own culture, management style, strengthsand weaknesses, and business objectives. Without adequate at tent ion paid to th is phase, whiehshould include part icipat ion by th e CEO, th eeffectiveness of any strategic business plan canbe jeopardized. Such plans are occasionallyrevised to ref lect changed financial circumstance s and competitive influences, so a methodologyfor evaluating acquis it ion and diversif icat ionopportunities should be flexible enough toaccommodate these revisions.

Several excellent books have been writtenwhich describe the procedures used in th is f i r s tphase involving corporate self-assessment, sothey will not be dwelt upon here. Certainly thecompany will want to evaluate i t s strengths andweaknesses in terms of financial resources,technological sophist icat ion, r e ta i l vs. wholesale marketing, exporting, transportation, andparticular expertise or entrees into certainmarkets. I t will also need to establ ish i t sinvestment cr i ter ia for acquis it ion candidates,including the purchase price range, annual salesrevenue, annual gross prof i t or operatingincome, growth prospects, market share, and

1relat ive capital , marketing and technologicalintensity .

After this f i rs t phase is completed. th equestion of which industria l mineral businesses should be targeted fo r acquisitions willremain. Which sectors of the industry are m o s ~l ikely to sat isfy th e company's businessobjectives and investment criteria? Areproduction-driven commodities or marketingdriven specialt ies more compatible with i tsoperating s tyle and orientation? Will i t beinterested in businesses which commonly e n ~ a i lintegration downstream into manufacturing, whereth e capital investment is greater but operatingmargins can also be higher than for a mineralproducing operation only? In order to narrowth e f ield, a number of parameters can beselected and assigned weight values corresponding to th e company's perception of theircomparative importance to i t . A weighting scaleof 0.1 to 1.0 is suggested, divided into 0.1increments and with 1.0 assigned to parametersof the highest importance. Examples ofparameters that can be used are l is ted below.

Market SizeG r o ~ t h OutlookPricingSupply/DemandIndustry ConcentrationEnd Use DiversityCyclicalityDownstream IntegrationSubstitutionExport/Import

TransportationConstraintsEnvironmentalC o n s i d e r a ~ i o n sTechnologicalIntensityResourceAvailability

MarketingCapital IntensityThe s tructure and internal dynamics of eachindustr ial mineral business should then becharacterized and evaluated according to these

sixteen parameters and perhaps others. Thecomparative at tr ibutes and shortcomings of onemineral versus another can be represented bypoint values assigned to each parameter by th eresearcher. Fo r some parameters these pointvalues are easi ly arrived a t, such as fo r MarketSize; whereas for others considerable judgementis required, such as for Environmental Considerations. A point scale of 0 to 5 is suggested.although 0 to 4 can be equally effect ive.

The evaluation parameters selected will varyfrom one company to another, but the sixteenl is ted above will usually address adequately th ebusiness s tructure and dynamics of most indust r i a l minerals. The question then becomes "whatis desirable or undesirable under each of theseparameters?". In this regard th e discussionbelow is 'offered only as an i l lus tra t ion. Eachacquirer should address this question from i tsown perspective. One company might give a highpoint value to high technological intensi ty, fo rexample, reasoning that this characterist ic willrepresent a signif icant barrier to entry bywould-be competitors. Another firm might give alow point value to high technological intensi ty,especially i f the company is generally in low-tech businesses and views sophisticated, some-times proprietary technology as a signif icantobstacle to i ts own entry. The point valuestructure for each parameter can be tai lored toeach firm in terms of both th e value cutoffs


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tho do!inltlonn at to what fcaturoc arcc


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~ Degree of Diversity5 Extremely wide variety of applicat ions and a very large customerbase.4 Wide diversi ty, but one or more markets account for 10-25% of demand.3 Wide diversi ty, but one or more markets account for 25-50% of demand.2 110derate diversi ty, with one or moremarkets accounting for 25-50% of demand.1 Limited diversi ty, small customers,and one market respresents 50-75% ofdemand.o Very res tr ic ted, small customerbase, and one market represents >75%of demand.

7. Cyclicali ty - Businesses whose markets arerelatively immune even from cycles in th egeneral economy provide more stable salesrevenue and earnings from year to year. Thosewhose markets are highly cycl ical in terms offrequency and/or amplitude are less stable,especial ly where cycles have a profound ef fecton prices and are caused by circumstances beyondmanagement's control.~

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Degree of Cyclical i tySteady demand; >90% of the market isrelat ively immune from general eco-nomic cycles.Fairly steady demand; 75% of the market ischaracterized as cyclical .Volat i le boom-bust swings in demandfrom 90% or more of the market, witha major impact on prices; majorf luctuat ions in consumption fromyear to year.

8. Downstream Integrat ion - The premise hereis that the company desires to be a producer ofminerals , not a manufacturer of mineral-sourcedchemicals or other finished goods. Some businesses are commonly integrated downstream intofurther processing (e .g. , expanded perl i te , ex foliated vermiculite and l ime), and others areprimarily manufacturing in orientat ion but withupstream integrat ion into captive raw materia lproduction (e .g. , re frac tor ies and chemicals).

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Extent of Vert ical IntegrationNone; no consumers in major marketshave captive mineral operations.Minor; integrated consumers represent 60% of production iscaptive to manufac"'Curing firms.

9. Substitution - l1inerals that have u n i ~ u ephysical and/or chemical properties and therefore face l i t t l e competition from cost-effect ivesubst i tutes, whether natural or manufactured,are preferred to those which ca n easily be replaced by a variety of cost-effective al ternat ives. Minerals that are unlikely to berendered obsolete in major end uses due tochanges in th e technologies used by customersand by their customers are likewise more at-t ract ive, as are those which ar e seldom reclaimed and recycled and therefore face l i t t l ecompetition from secondary and by-productsources.

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Extent of SubstitutionMineral 's properties are unique;vir tua l ly no subst i tutes; secondarysources unimportant.Few competitive subst i tutes in usesthat account for >75% of demand.3 Few competitive subst i tutes in usesthat account for 50-75% of demand.2 Significant subst i tutes in uses thatrepresent 50-75% of demand.1 Significant subst i tutes in uses thatrepresent >75% of demand.o Wide variety of subst i tutes in a l lend uses; secondary sources important; major impact of technological change within consuming industr ies.

10 . Export/Import - Businesses for whichimports supply very l i t t l e of domestic demand,whether in the form of minerals or finishedgoods, are generally preferred, especially i fexports represent a signif icant percentage ofthe tota l output sold annually by US producers.Net Import Reliance

5 Exports s igni f icant and far exceedimports in any form; minimal t h r e a ~from import.4 Exports s igni f icant ; imports only offinished goods.

3 Exports significant, as are importsof minerals and finished goods.2 Exports insignif icant ; imports onlyof finished goods.1 Exports ins igni f icant , but s igni f icant imports of minera-ls andfinished goods.o Heavy dependence on imports, withwhich domestic sources are not compet i t ive on price and/or quality;essentially no exports.

11 . Transportation Constraints - Fo r th epurpose of this example, special ty, high-valueminerals whose marketing is relatively un res tr ic ted by t ransportat ion costs are preferredover high place-value minerals whose marketsare extremely delivered price sensi t ive and


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therefore largely local.

5Degree of Cost sensit iv itySpecialty products marketed in ternationally, unconstrained by freightcost.4 Markets sensitive to delivered pricebu t international because product is

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unique or scarce.Markets restricted nationally; essentially no international trade.Markets regional due to deliveredprice pressures.Markets regional due also to thewidespread availabil i ty of subst i tu tes.A high place-value commodity withonly local markets due to extremesensit iv ity to delivered price.12 . Environmental Considerations - Businesseswhich produce minerals that are themselves knownor suspected of being toxic have a higher riskof legal and financial exposure arising fromdisabi l i ty and product l iabi l i ty claims fi led byemployees and consumers. Companies whose oresand processed products contain accessory amounts

of such minerals ar e also exposed, even thoughtheir primary mineral poses no health risk .

5Degree of RiskMineral is nontoxic, and ore conta ins no toxic impurit ies; minimalrisk .4 Mineral is nontoxic; minor amountsof suspected toxic minerals in th eproduct; low risk .3 Mineral is nontoxic; major amountsof suspected toxic minerals in th eproduct; moderate r isk.2 Mineral is nontoxic; minor amountsof known toxic minerals in th eproduct; caution is advised.1 Mineral is nontoxic; major amountsof known toxic minerals in theproduct; controls are essential .o Mineral is a toxic health hazard,heavily regulated and under attackby environmental authorit ies; highrisk of legal exposure to productl iabi l i ty claims.

13. Technological Intensi ty - Businesseswhich have a high degree of technologicalcomplexity and whose technology is patent protected or otherwise highly proprietary are moredif f icu l t to enter. Companies that are in suchbusinesses, however, generally face less threatof competition, price structure erosion and:ndustry overcapacity caused by new greenfieldoperations.

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~ e g r e e of COmplexityTechnology is very complex andproprietary; a high level of R&D isrequired.Technology i s complex but not proprietary .Only moderate technological intens-

4i ty; modest level of R&D is re -quired.

2 Technology is relatively simple.1 Technology is simple and off- the-shelf; l i t t l e if any R&D is re -quired.0 Technology is very simple; entry iseasy; no R&D i s required.

14 . Resource Availability - The ideal situation here is a mineral fo r which there is onlyone commercial deposit containing huge reserves.In general, th e more widespread ar e large,economically minable deposits of a particularmineral, the greater th e likelihood that existing producers will lose market share. to newgreenfield ventures.

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CharacteristicsVery few, unique deposits (e.g. , (5 )but with large reserves.Few, unique deposits (e.g. , (5 ) bu twith smaller reserves.Five to 10 operations withmoderately large reserves clusteredgeographically.Ten to 20 operations with large reserves distr ibuted regionally.Twenty to 40 operations with v e ~ llarge reserves located in a t leas t25 s ta tes .Huge reserves a t >40 operations;widespread occurrences that areeasily accessible.

15 . Marketing - This parameter can encompassa variety of features--prevalence or rar i ty oflong-term supply contracts, direct vs . indirectsell ing and distribution, degree of marketingin tensity required, extent of technical and customer service required to support sales, and th eimportance of advertising and packaging (e.g. ,fo r re ta i l sales). Fo r th e purpose of thisexample, marketing in tensity and th e level oftechnical sales support required are considered,with high point values corr.esponding to mineralsfo r which both are low.

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Degree of Intensi tyMineral has unique properties andfaces l i t t l e competition from subs t i tu tes in major markets; m i n L ~ a lmarketing effort and l i t t le technical sales support required.Highly competitive industry, bu tmarketing in tensity is low becauseproduct is a bulk commodity and competi t ion is based on price, no t performance.Moderately competitive industry;moderate level of . marketing intensi ty and technical sales supportservices.Availability of subst i tutes necessi ta tes a strong marketing effor t ,but t.echnical service requirement isonly moderate.Highly competitive, marketing intensive industry with a high level oftechnical sales support and customer


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service required, because competit ion is based on performance.o Few =ommercial uses for th e minerala t present; major market developmenteffor t is required.16 . ~ a p i t a l Intensi ty - This parameterincludes in i t ia l capital investment as well as

replacement or maintenance capital and "new"capital , such as fo r new product l ines, requiredannually. Capital intensi ty can be interpretedtwo ways, howe,ver--a) th e to ta l dol lar amount ofinvestment required, or b) th e capital investment per ton of instal led, or nameplate, production capacity. Bulk commodity mineralsusually require very large tota l investments bu ta relat ively small amount of capital per to n ofcapacity. Specialty minerals require comparat ively smaller tota l investments that ar ehigher, however, in terms of annual productcapacity provided. The quali tat ive descript ivesused in this example attampt to take both interpretations into account. Quantitative descript ives are no t used, because capital projects canvary so widely in content that r igid measurements, such as $1 million to $5 million or$50-75 per to n of annual capacity, can be misleading.

Point Level of IntenSity5 Very low4 Low3 Low to moderate2 Moderate to high1 Higho Very high

CONCLUSIONThe methodology discussed above is verystraightforward but cal ls for a significantamount of information research and evaluation inorder for point values to be selected rea l is t ic-

al ly and without bias . Since some judgement isrequired, th e procedure is a t best semiquantitat ive; but attempts to remove th e judgementalelement by defining each point value in rigorousnumerical terms can impose constraints which re duce i t s effectiveness, f lexibi l i ty and/or ap plicabi l i ty and give only the i l lusion ofenhanced precision. This methodology also lendsi t se l f to computer programming for rapid updating and strategic planning under "what i f"scenarios. I ts f lexibi l i ty allows periodicmodification to ref lect changes in corporateguidelines and in the competitive environmentwithin individual mineral businesses. I f th esixteen parameters mentioned above do no tadequately cover your f i rm's circumstances,change them. I f the defini t ions of desirableand undesirable features under each parameter dono t coincide with your f i rm's thinking, changethem. The point is that , once installed, thisprocedure will help reduce th e bewilderment andindecision that s t i f le corporate growth and th erandom wild goose chases that waste corporateresources. I t will no t directly ident i fyspecif ic producers as at t ract ive acquisit iontargets , bu t i t will defini tely help focus anacquis i t ion program on those sectors of the industr ia l minerals industry in which acquisit ion

5candidates should be sought because of theirpotent ial fo r a good f i t with your firm.

A rather exhaustive study of 26 industr ia lminerals and mineral groupings and a brieferreview of 19 additional minerals were completedrecently by my firm fo r a client seekingdirect ion fo r entry into this industry. Theemphasis of that project was on specialtyminerals as broadly defined, not on commoditiessuch as potash, phosphate and sulfur. Theweight values assigned to th e evaluation parameters we used were established by that clientaccording to i t s own perspectives, so th eranking that resulted wil l no t be applicable toa l l companies interested in acquisition-baseddiversi f icat ion. With that caveat understood, Iwil l simply mention that among the ten highestranking industr ia l minerals fo r that firm'sat tent ion were wollastonite, diatomite, indust r i a l garnet, bal l clay, ful lers earth andlasca. The last-named material is high-purityquartz used primarily as th e nutrient in growingcultured quartz crystals. I t exemplifies th eneed to subdivide some mineral businesses intodist inct ly different segments in order no t tooverlook niches by being to o general in applyingthis methodology, because industr ia l si l ica sand'and gravel as a whole ranked fairly low in ou rstudy. Other niches that could rank disproport ionately high in at t ract iveness compared tothe i r industry as a whole include chemical gradebarite , low-arsenic fluorspar, organocladbentonite, pearlescent pigments, metallurgicalgrade si l ica materials and strategical ly locatedhigh-calcium limestone.

Fo r some firms th e methodology as describedabove wil l be sufficient . Fo r others i t canrepresent the skeleton upon which to flesh outfurther refinements, such as by subdividingcer tain mineral businesses into segments servingdistinctly different markets. This might no t bewarranted for feldspar, kyanite or bal l clay,but i t could prove revealing in terms of discovering opportunities in other businesseshaving much more diversif ied markets. In anyevent, the process can be beneficial to smalland large firms alike. To paraphrase a wellknown planner, "Plans are sometimes useless, bu tth e planning process i t se l f is indispensible".

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Business Dynamics and Diversification Planning