Disintegration Strategies In The Brazilian Polymer Industry

Università Luigi Bocconi Undergraduate School

CLEAM 2012-2013

Disintegration Strategies in the Brazilian Polymer Industry: Mazzaferro Group business case 

Stefano Mazzaferro

ID number: 1510783

Professor: Irene Dagnino

---

I would like to thank

my Family and Friends

who have supported me

through all these years

of growth and study

 

---

---

Table of contents

Abstract.........................................................................p.6

Theoretical foundations....................................................p.7

Section 1  Internal analysis: Mazzaferro Group....................p.11

                1.1 Historical milestones

                1.2 Corporate structure

1.3 Key economic and financial results

                1.4 Polymers business unit

                
Section 2  Environment overview: Brazil.............................p.21

                2.1 FX rates and materials

                2.2 Brazil cost

                

Section 3  Market analysis: polymers.................................p.23                       

3.1 Market definition

3.2 Market structure and trends

3.3 Competitors environment

3.4 Mazzaferro

3.5 Summary

Section 4  Strategy: Guidelines.........................................p.38

4.1 Main strategy shifts

                4.2 Joint venture scenario

                4.3 New suppliers of Caprolactam scenario

4.4 Spinoff scenario

                4.5 Further integration scenario

Section 5  Conclusions.....................................................p.46

                

References.....................................................................p.48

Abstract

The Brazilian economic environment has undergone profound change throughout the years, especially concerning some specific industry segments. This study is intended to investigate the structure and dynamics of the national Polymers industry and analyse both the basis of the crisis of Mazzaferro Group and main strategy shifts that have evolved, to overcome it. The main goal is to understand if the decision of disintegrating in 2012, by selling the Polymer BU to BASF was an effective measure.

To achieve that we will go through a conclusive case study. Starting from the analysis of the Company and its financial results, moving then to the Environment, Market and Competitors.

At the end, some solutions that were formulated to overcome the issues encountered, will provide a clear feedback over the decision taken in 2012.

Back in those days, the company’s board of directors had limited amount of time and resources to spend in a deep analysis and the most definitive and direct solution was preferred. Many different strategic decisions other than the extreme of selling the business were available. With the benefit of hindsight, we can go through all of them and rationally conclude which one was actually feasible.

Theoretical foundations

In the literature on vertical integration a lot of different approaches have been used to explain the development of integration or disintegration strategies. Among the Economic theories maybe the most used perspective is transaction cost economics (Williamson 1985). This model is based on the analysis of governance structure and its effects on transactions. The main point is that a transaction can be concluded in three different governance structures:

• Free Market: where each transaction is concluded with independent operators, through price equilibrium mechanisms.
• Full ownership: where transactions are concluded within the boundaries of a single company in a hierarchical form through formal governance mechanisms.
• Hybrid form: where both the above are mixed together.

This model allows dictating the most efficient of the above governance structure based solely on the level of transaction costs. Transaction costs are the expenses that have to be sustained in order to conclude any trade operation. Examples of transaction costs are related to negotiation, writing contracts, monitoring and selecting operators, managing information flows etc. The most efficient among the three governance structures above is simply the one with the lowest transaction costs assuming the same level of production. Previous studies have already suggested that transactions will be organized in-house only when the cost of this is lower than the transaction costs of using the market (Coase 1937). However some other elements of the transaction have to be taken into account in order to choose the proper governance structure, asset specificity, frequency and size, and uncertainty. The three possible governance structures can be achieved through distinct strategies extensively described in the literature, vertical integration and disintegration. The level of integration determines the transaction governance strategy, free market is achieved through full disintegration, full ownership through integration and the hybrid forms are the result of quasi-integration. This model puts a strong emphasis on transactions, however it doesn’t take into account all the aspects of a strategic decision such as, competitors, market trends, and business environment. By combining strategic management theories with transaction costs theory is possible to make a proper analysis of integration strategies. It becomes very important to deepen the definitions on the whole spectrum of integration structures.