For over three decades now, Descon Chemicals Limited has builtA Descons culture into what it is today – a place for creating and bringing ideas to life. Descons Chemical Business comprises of Descon Chemicals Limited, NIMIR Resins Limited, Descon Corporation Limited and Descon Oxychem Limited. From the manufacturing of a wide variety of chemicals to their trading, they provide a one-stop solution for all industrial chemical’s needs.3
The company’s chemical business has developed over the time frame of 30 year into a leading chemical solutions supplier in Pakistan and in foreign countries:
Descon Chemicals Limited manufactures and sells surface coating resins and polyesters for the paint industry, and optical brighteners and textile auxiliaries for the textile industry in Pakistan. The company offers textile auxiliaries for pre-treatment, dyeing, and finishing of textiles; unsaturated polyester and vinyl ester resins, such as resin products, gel-coats, and bonding pastes for composites applications; decorative and industrial coatings; and optical brighteners and fortified raisin for paper and board manufacturers. It also provides adhesives and graphic products; sells solvents and specialty chemicals to various industries, primarily paint and coating, plastics and PVC, rubber, adhesives, and foam; and exports hydrogen peroxide to Turkey, India, Sri Lanka, Bangladesh, South Africa, the United Arab Emirates, and Iran. The company’s products are used in textiles, pulp and paper, detergents, paints, electronics, packaging, and the food industry. Descon Chemicals Limited is headquartered in Lahore, Pakistan.4
With a total workforce of more than 600 employees and operating from Lahore, Pakistan, Descon offers a wide variety of around 200 pioneering products and services for marketplaces including “Coating & Emulsion, Paper and Packaging, Textile Auxiliaries, Printing Inks and Unsaturated Polyester”. 7
The range of chemicals comprises of a wide range of “Binders and Additives for the Paints & Coatings industry. In spotlight are Long Oil-based medium viscosity and low viscosity enamels with the highest quality in hardness, water resistance and durability for decorative paints”. Coatings & Emulsions contribute to almost half of the total annual turnover and thus forming the backbone of the company. 8
Hence coating and emulsion are the main stream lines contributing to the progress of the company and having the greatest share in the revenue.
Being one of Pakistan’s largest suppliers of unsaturated polyester and vinyl ester resins, Descon Chemicals deals with the widest manufacturing presence to produce a range of resin products, Gel-coats and bonding pastes for customers who manufacture complex products that range from sewerage pipes and bathtubs. It is a leader in technological development of new materials for advanced and conventional composites applications. 9
The company offers resin systems that exceed customer expectations of environmental compliance, properties of application and end use performance.
The textile business offers special chemicals for dying as well as for pre-treatment and finishing of textiles. The customer subdivisions include Knitwear, Woven, and Denim and Towel manufacturers. Strong focus is given on technical know-how and Descon is a leading producer of Optical Brightener and Fortified Rosen used widely by the leading Paper and Board manufacturers of Pakistan.10
Over the years, Descon Chemicals has been able to gain a competitive advantage and is the leading supplier of certain chemicals to textile and paper industry.
Most of the products, had their highest prices ever, and so to minimize risk, the company traded about the same revenue in the year.11
Over the past few years, the trading business has turn out to be a profitable segment for the company. Although, , there were external challenges faced like fluctuations in the market demand, volatility in pricing, and the availability of product, business ability to perform consistently has seemed challenging but still trading business readily coped with the external factors.
The paragraph explains current scenario of the chemical industry i.e. the market is concentrated with a large number of small private companies and continuous investment and technological advancement can only retain the business of any company.
“The chemical sector in Pakistan is made up of large multinationals, large to medium sized local companies and small companies, mostly in the unregistered sector. The market is highly fragmented with competition for specific products, instead of business lines. The companies are working in Niche products, and the competitive advantage is only maintained by investing resources and energy in innovation, and continuous improvement of a product line. Due to the general macroeconomic conditions in the country, and coupled with the energy shortages, the chemical sector has suffered a slowdown, which affected demand throughout 2011”.14
The chemical industry of Pakistan is classified into primary and secondary sector chemical industry. Primary sector industries comprise of natural gas, refineries, petrochemicals and mineral based projects that are large-scale, capital intensive industries. The secondary industries are less capital intensive and are grounded on comparatively high, medium or less sophisticated technologies. Their feed stocks are taken from primary sector industries and substitute sources of raw materials.15
Descon Chemicals tend to provide chemical products to the primary sector i.e. high capital incentive industry and this is relvant at understanding the needs and scale of its customers.
The major imports & exports of chemicals for plastics, rubber, fertilizers, medicines, soaps & detergents, and dyes & pigments have increased from 2002-03 to 2008-09.16
“Imports have increased from 768 Million US $ in 2002-03 to 5,166 Million US $ in 2008-09 and on the other hand our exports also showed an increase from 118 Million US $ in 2002-03 to 411 Million US $. Share of chemicals in our total imports is about 15% while its share in exports is about 2.3%. The total imports of plants and equipment used for the manufacture of chemicals contributes about 23% of overall imports of Pakistan. Collective share of these two categories i.e. plants/equipment and chemicals is about 38% of country’s overall imports and among major contributors of country’s imports.’17
Since Descon Chemicals also deals with the import business to manufacture its products it is important to understand the nature of the trading business with respect to the total imports and exports of both chemicals and machinery.
The diffusion model is reflected as the most suitable first step for development of the chemical sector, considering the current situation in Pakistan. One feature of this model is planned to enhance learning, training of the work force to improve technical standards and solve problems relating to energy and improvements in productivity in the chemical industry, through introducing “reverse engineering techniques” as a leading step of the development of a NIS. This is a familiar technique through which foreign technology can be acquired and adapted by importing capital equipment. This machinery and equipment designed and manufactured by the foreign engineering companies have modern technology. However; Pakistan has yet not developed this ability of producing high quality products through application of reverse engineering. Pakistan’s industrial infrastructure is limited and it is heavily dependent on foreign design and engineering companies for the commercialization of both its local and imported technologies. Hence there is a great need for the development and modernization of NIS through an integrated plan. For the past 3-5 years, the total chemicals market has been stagnant and is predominantly unorganized. The industry is fragmented with a great number of producers and outlets throughout Pakistan. The major producers of paint are three in Pakistan and these together meet 45% of the local demand. Out of the remaining 5% demand is met through imports and 50% is met by the unorganized sector which consists of over 400 units manufacturing paints and varnishes. The major three paint manufacturers are Berger Paints, ICI Pakistan and Buxly Paints which meet most of the local demand.18
The above data explains the environment in which Descon Chemicals is operating and discuss the three major customers of their main line of business i.e. Coating and Emulsion.
A series of action were carried to promote the chemical industry in future in order to strengthen the overall industry of Pakistan. The present status of Chemical Industry in Pakistan, analyzes the import structure, availability of raw materials and suitable locations for chemical plants. In the early phases of industrial development, the government of certain newly developed nations (NIC’s) for example of China, India, and Brazil, encouraged their local corporations to build joint ventures with engineering corporations located in other foreign countries, where local resources were simultaneously used “through a learning process in the technology transfer processes for the commercialization of technologies.” These countries are self-reliant and have been successful in developing their own industrial infrastructure for hardware and software. Hence to initiate these developed countries, Pakistan should focus on bringing similar improvements.19
Hence it is essential for Pakistan to develop its own capabilities and technological infrastructure in order to provide hardware and software services for the construction management and implementation of such chemical projects. To accomplish this, formation of engineering companies or by improving the capability of existing engineering is possible.
The commodity chemicals are those that are produced in larger and bulk quantities but have a lower value addition for example soda ash and fertilizers etc. The other type is specialty chemicals, though produced in smaller quantities but have a higher value addition for example pharmaceuticals, dyes & pigments, enzymes, etc. The development of the chemical industries through import substitution would minimize foreign exchange and facilitate the development and growth of small and medium enterprises, increase employment on a large scale and eventually cause poverty alleviation.20 Hence, Descon Chemicals should focus upon producing the chemicals instead of importing the chemicals in order to save the costs.
To define the capital structure of the listed firms in Pakistan’s chemical industry, unique attributes can be ascertained by thoroughly studying a specific industry’s capital structure. A firm can have varied debt and equity ratio to increase its market value and has an option to choose between three financing methods: issue shares, borrow or spend profits.21
Each Firm differs with respect to its capital structure requirements which have resulted in different theories of capital structure that explain the manner of the firms at choosing its debt financing may be the solitary option for the further growth and internally generated funds may not be enough for the growing firms.
Pricing has a significant effect on profits in the chemical industry and even now, mostly industry analysts depend on the competitive model which states capacity and demand together determine the price. In the later part of 1960’s, it was generally assumed that prices decreased due to an imbalance between capacity and demand which resulted in a struggle for market share. However, in 1973 and 1974, due to a certain incident it was believed that sharp increase in product pricing was due to underinvestment done earlier in the decade, along with gradually rising demand. Unit production costs in the chemical industry determine the pricing of the products. Under this interpretation, unit costs of production, hence selling prices, should rise about three per cent a year.22
Chemical industry analysts believe that low capacity utilization causes a decline in prices as the low cost producers will gain a subsequent struggle for market share that will be based on price-cutting. Another assumption made is that industries develop from a noncompetitive first stage to a competitive second stage and then in the third stage back to being noncompetitive. The first stage comprises of the development by a single producer of a new product where profit margins may be quite high in this stage. However, the second stage, either patent expires or they are licensed, or competitors advance in comparable technologies, and competition occurs. Upon the removal of barriers, the number of producers multiplies and pricing becomes disruptive. After an extended period of competition, profitability decreases to a level that many high-cost producers leave the field and make their way for the third stage. “At this point, through a consolidation of the supply structure, pricing becomes geared to the rate of return required to sustain a mature industry. The highest-cost survivor survives only at the sufferance of the leaders, who require its presence to retain the appearance, if not the reality, of competition. They will keep the rate of return low enough, however, to discourage more entrants”. 23
Taking in view of the above scenario, Descon Chemicals initially started from a noncompetitive stage and enjoying a period of monopoly after which due to new market entrants, it moved in the second stage facing more challenges of the contemporary world.
Managing technological innovation is a vital factor in process of continuous restructuring of industries. Costs occurred through process innovations can be reduced through developing effective technology which can result in company advancing into more attractive markets. Innovations in the chemicals industry can be separated into process and product innovations. Product innovation comprises of activities that begin with using basic knowledge and end with either advanced previously existing product or a new commercial product .The firm that first produces the commercial product is called the product innovator who is also the sole manufacturer of that particular product and attains monopoly from it. This monopoly invites the interest of other firms which then try to come in new economic sector. Such companies, through process innovation can enter new business. With the entrance of new economic agents into the business, this monopoly converts to oligopoly, hence giving rise to a competitive environment.24
“Process innovations can be divided into major and minor. Major innovations are fundamentally different from existing processes, involving different raw materials and/or radically different reaction conditions. Major innovations are more important to competitive advantage because they are more likely than minor innovations to make existing processes obsolete. However, the importance of minor innovations, including improvements due to the learning process, should not be underestimated. The rewards to a process innovator and the effects of its innovation on the industry depend on the extent that the new process is better than the old and on the degree of competition in the industry”.25
Technological innovation plays a vital role in the survival and growth of firms in chemicals industry. Innovation in the chemicals industry often derives from the exceptional knowledge coming from the basic research. Innovation in any form leads to monopoly that in initially attracts customers and later invites the interest of other firms which then try to come in new economic sector.
The products of chemicals industry are widely applied in numerous areas for example defense-related science, national economy, technology and peoples’ livelihood. Since the start of the 21st century, an accelerated growth was experienced by the chemical sector.
“The industrial added value is estimated to have contributed nearly1% to the national economy’s growth, while the industry grew at an annual average rate of 20% (State Council, 2009). At present, China is the second largest consumer and producer of petrochemical products in the world (CPCIA, 2010). In particular, China has joined the front ranks in terms of the amount of production of fertilizers, pesticides, oilproducts,ethylene,andsyntheticresin.Additionally,14 bases often-million ton petroleum refining;3ethylene production bases of million-ton;3 phosphate fertilizer production regions inYunnan,Guizhou,and Hubei provinces; and project for million-ton potash fertilizer production(CPCIA, 2009) were established in succession”.26
Chemical industry being the backbone of the national economy plays an important part in progressing towards the growth of related sectors and helping towards economic growth. The development in the chemical industry has a great impact on the consumption of electrical energy that has increased suddenly in the recent years.
“The annual power consumption increased by nearly 8% during the period 1994-2000 inspire of a slight decline in the late1990s.After that, the power consumption of this sector developed more rapidly. In the past 15years,electricity consumption of China’s chemical industry has shown a threefold increase and is expected to continuously grow.In2008, the total amount of electricity consumed by China’s chemical industry reached275.82 billion kWh, which is about three times the annual power generation of the Three Gorges Hydropower Station and corresponds to approximately 8% of China’s total electricity demand”. 27
The average age of the firms tends to increase with a higher level of technological source combination where experience and capabilities owned by older firms are important for determining technological investments. The firms mean size increases with a higher degree of arrangement of technological sources. In other words, the smaller firms, due to their limited resources are not able to invest on technological activities or in the initial years of establishment, the firms because of lack of sufficient information can hesitate in investing on various sources of technology probably. However over the years, with the firms gaining confidence, they willing explore different technological opportunities by multiple sourcing and rigorous research and development.
Technology sourcing in the chemical industry is various methods of obtaining capabilities which in the study are “in-house R&D efforts, import of embodied technology, and arms-length purchase of designs, drawings, and formulae”. After analysis of the sourcing it is revealed that the old, integrated firms having foreign presence are investing thoroughly on technological efforts as compared to their counterparts. Higher profitability is more important for those firms that have imported technology than for in-house R&D. Though combination of technological sources is preferred by larger firms, medium-sized firms have higher tendency to invest different technological activities.28
Market leaders in the chemical industry combine patents and secrecy to deter entry. Patents are certainly one of the instruments that companies use to capture charges occurred through innovation and play the role of protecting their technological investments.
“The increased importance of technology licensing is closely related to the emergence of a class of specialized process design and engineering firms that have played an important role in the development and diffusion of process innovations”. 29
Patents are associated in areas of technological innovation.
“The development of chemical engineering improved the usefulness of process patents, and encouraged patenting of processes”. The chemical industry’s history also describe the role of patents being much wider than just to exclude competitors and the way patents are used affects entrance opportunities, the industry structure, along with the rate of technological”.30
The Changes in market shares are directly proportional to purchasing decisions of the consumers, influenced by both economic and psychological factors. However, the marketing manager can take advantage of three main variables in order to change consumer-purchasing behavior. These variables include advertising expenditures price, physical product characteristics.31
Competition in any industry is expected to lower down the prices. The market share affects the price levels, which has a direct effect on the profitability, while profitability in return plays a role in changing the market share. A company can take advantage of the first mover advantages, the extensive marketing efforts, keeping a track of the number of competitors. Besides this market share is greatly determined by the level of competition available in the market along with the regulations of any country.
Pricing decisions play an important as there is a significant and immediate effect of price changes on shares and the level of profits and strong responses from both consumers and competitors.
Through price discounts a company can generates direct positive results in subsequent regular practice of introducing discounts. Price cutting allows the company to get to the preferred market share level sooner and provoke competitive reactions. The structural decrease in price has proven to be more profitable.32
Hence, Descon chemicals when performing its business activities and formulating strategies should take into view the above factors that are likely to affect the market share of the company.
The financial year 2011 was better than the previous years for the company, where it was able to achieve a Profit before tax of Rs. 1 million, against a loss of Rs. 30 million last year. The company had a turnover of Rs. 2,608million, against a turnover of Rs 2,384million in 2010 even with the volume decrease of 19,869 MTs as compared to Rs. 2,107 million or 10% over the last year. This was a result of increase in price of 20% over last year. The company faced a 21% increases in cost of sales which is the increase in raw material input cost passed directly on to the customers. Other increases seen were in the prices of electricity and gas. Therefore, gross profit margin has registered a slight decrease of 0.10 % in FY2011 as compared to last years, even though there was an increase of Rs, 6 million in gross profit. Due to an increase in the freight insurance, salaries & wages and fuel prices in the country, the distribution cost of experienced an increase of Rs. 9million or 12%. As a result of synergies, with sharing some departments, as part of merger with Nimir Chemicals, the company has been able to significantly reduce the administration expenses by Rs 17mln or 17%.
Other operating expenses saw an increase as a result of greater provisioning for the doubtful loans as well as stock which is due to some items turning obsolete in the wide product range. Other operating income mainly consists of: writing back of the liabilities, investment income from bank deposits, commission for indenting and insurance claims. There has been no variance in the finance costs comparative to last year, even though there was in increase in sales by 10%, and there was an increase in KIBOR rate in the current year. Having a stringent control on working capital, reduction in the trade debts and inventories, Descon Chemicals has been able to pay off Rs 174 million of both short term and long-term financing, improving the leverage ratios.
Due to the nature of the business, that is dependent on the condition of the economy, the company has faced numerous challenges over the years. There has been low demand due to the general problems like shortage of natural gas, electricity, and rise in the prices of raw materials, faced by majority of the customers.
The Financial Analysis was done on the basis of three-year comparison between the Financial Ratios including Profitability, Liquidity and leverage ratios. The data was extracted from the audited financial statements of Decson Chemicals Limited, Clariant Pakistan Limited and Nimir Chemicals.
The Gross Profit Margin ratio shows the Profit margin available after utilizing the direct expense incurred as the Cost of Selling their products.33 Descon Chemicals has a turnover of Rs. 2,608million, against a turnover of Rs 2,384million in 2010 even with the volume decrease of 19,869 MTs as compared to Rs. 2,107 million or 10% over the last year. This was a result of increase in price of 20% over last year. The company faced a 21% increases in cost of sales which is the increase in raw material input cost passed directly on to the customers. Other increases seen were in the prices of electricity and gas. Therefore, gross profit margin has registered a slight decrease of 0.10 % in FY2011 as compared to last years, even though there was an increase of Rs, 6 million in gross profit.
However Clariant Pakistan Ltd faced a slight increase in its gross profit margin (0.25) in the FY 2011, which can be accounted to a decreased cost of sales. “Though the growth in FY09 was only 9% as compared to 23% in FY08. This increase in net sales can be attributed to the overall growth in chemical industry resulting from increased demand mainly for fertilizer inputs, Chlor-Alkali, pesticides, plastic inputs for use in packing, auto, electronics, house hold items, cables, pipes and fittings etc, in addition to the high use of chemicals in the processing of textile, leather, and carpets. High demand of chemicals in various sub sectors of the economy reflects the high potential in the local manufacturing, value addition and formulation”34
Nimir Chemicals in comparison also experienced an increased gross profit margin due to a significant increase in the amount of sales from 0.07 to 0.10 over the last three years.
A sample size of 25 respondents was used for the questionnaire that was floated to the employees working in the procurement, operations and marketing department and that gave valuable and useful insights that would prove to be greatly helpful for this research. The questionnaire findings were further tabulated for analysis and interpretation of results.
Source: Author’s Findings
In this scenario the correspondents are asked about whether or not the economic situation of Pakistan has any impact on the state of the company’s affairs. Many felt that no their company’s assets and state of affairs were independent of one another and had no implications on them that were relating from the country’s financial crisis.
Next 8% were of the opinion that they were in disagreement with the majority of the correspondents and 44% were of the opinion that their country’s economic climate had in fact devastated the growth of their company, while 20% believed that it was not up to the country but up to them as a unit to function in these dire economic horizon on the front.
Source: Author’s Findings
Looking at the above graph one can conclude that yes new entrants have in fact affected the share of the company in the marked. A resounding 13 units are in the favor from the norm while a less impact has been made by those who believe that their company has not been quarantined by those who are new to the game or are relatively easy targets for them.
Source: Author’s Findings
What we observe here is that looking at the blue area of the pie chart one must observe that more than half of the correspondent’s i.e.56% was of the opinion that the company is in fact taking measures in overcoming any new entrants to the market.
A significantly less amount felt that only the company’s own interest were being followed by its team who were in no position what so ever to dictate their own terms in the market or to the liable consumers who might depend on them.
Source: Author’s Findings
Out of the total number of respondents, 44% felt that since the company was facing a state of decline in the net income then the loss in net was being caused by and could be tracked down to their competition levels increasing at the time.
Decline in Market Share has been deemed responsible by nearly a quarter of those interviewed i.e. 20%. Remaining i.e. 24% was of the opinion that the most important factor was their company’s increase in the cost of producing units.
Source: Author’s Findings
36% of the respondents were of the rationale that an increase in the cost of raw materials has seen an increase in the operating cost for their company.
A significant number i.e. 24% were also included with disagreement, while only less than 16%were neutral and had no standings in the matter.
Source: Author’s Findings
The company seems to be functioning below its peak as seen in the above diagratmic illustration. Almost half of the survey population said that the company was operating at A¾ th of its capacity, almost a quarter were of the opinion that the operation of the company was at half-of its normal lifecycle while a mere 1/10 th of those surveyed said that the operating capacity was half of its full potential.
Source: Author’s Findings
The above diagram brings to mind an old rule of economics that is that demand and supply are related to one another. If one increases then the other will decreases. 40% of the employees agreed that the increase in the price of the products has been a major contributing factor where as 12% disagreed to the above question. Almost 32% were of the opinion that price was a cause however there were other reasons to this increase aswell.
Source: Author’s Findings
This is a rather trick question as almost half of those interviewed said that yes they saw the market growing given its current path of motion. Only 20%strongly agreed to it while a third saw it as okay and acceptable.
A wide majority of those interviewed were of the opinion that in the current economic downturn facing the economy if we keep going like this then there will be some growth in the market share.
In difficult economic environment which has been persisted for several years, Descon Chemical Limited’s operating environment continues to change significantly. The challenges were compounded by the fact that there has been considerable volatility in the global environment, which have placed significant pressures on the input prices of raw materials. As the raw materials are commodity products, and at an all-time high, places consistent pressure on the company’s margins.
The chemical industry is also strongly facing, the effects of the financial crisis and the recession in the important markets of the world. Even so, “horror” scenarios are not appropriate. The marked increase in the oil price is also having a negative influence on the level of raw material costs and thus on the profitability of downstream industries. The reason why the situation is, nevertheless, critical is, unfortunately, due to the fact that, at the same time, volumes are clearly dropping and production is declining.A
Due to the current situation the chemical industry is feeling an increasing pressure on prices and must deal with a marked decrease in quantities. The increase in the number of service industries relative to construction, manufacturing textile, and various other major users of chemicals has negatively affected the growth of chemical shipments.
The problem exacerbated due flooding in September 2010, which substantially affected demand. It has been difficult for Descon Chemicals to maintain consistent volumes for its extensive product range due to problems confronted by their customers, because of shortages of natural gas, electricity, and rise in input prices. This has led to a dwindling of demand for the product and with an increase in cost as much as 33%. Even though, it is a business to business company, the changes in demand from the end consumer highly affect the sales.
Legislators either provide incentives, tax breaks to the companies or they impose regulations causing restrictions on business transactions. Descon Chemical being a publically listed firm responds differently to regulations imposed by the government as compared to the private firms that face a competitive advantage. These private companies are exempted from government regulations or they can subject them to different implementation requirements e.g. Descon Chemicals being a publically listed company with more stakeholders is liable to pay all sort of taxes and meet the requirements of the regulatory laws. As there is an increase in the expenses of the company and increase in cost of the production due to highly priced raw materials, there is a significant impact on the price of product. Comparatively, private firms are at an advantage since they tend to manipulate their position and manage to avoid taxes due to illegal practices. Such private companies also tend to avoid paying increased import duty on chemicals products either by illegal means i.e. bribing the assigned authorities at the time of import or by creating mutual agreements with the foreign companies to alter the amount on the invoice and show a lesser one as compared to the actual.
The main business line from where the company gets its major chunk of profit and forms almost half of the total turnover is coatings & Emulsions. Hence, tough conditions in this area would mean that recovery of the company will be not as swift. In the past decade Descon Chemicals has taken steps to enhance product development and innovation, with technical collaboration within and outside Pakistan, which had helped to optimize their resources and gain competitive advantage in their business of Coating &Emulsion. By 2009, Descon chemicals’ was the only supplier of coating & emulsion to ICI Pakistan, taking over NIMIR Resins in a very short time span in 2007. Nimir Resins due to its bureaucratic nature could not perform productively and it eventually tripled down.
For a long period, Descon Chemicals enjoyed leadership status in the market, however during the last five years; it has not only lost its leadership status but has also experienced intensive competition after establishment of Power Raisin. Descon Chemicals laid pressures on ICI Pakistan by raising prices of coating & emulsion chemicals or reducing availability of their product and took advantage of their monopolistic position. Initially, the sales increased due to the company being the sole provider of the product, flourishing nature of the economy, and growth in the construction sector.
As a result ICI Pakistan took measures to overcome this problem and heavily invested in the development of another chemical company named “Power Resin”. In a very short time span, Power Resins foreseeing a gap between demand and supply along with fluctuations in prices established itself to be able to compete readily with Descon Chemicals and was able to capture a greater market share of 51%, greater. This greatly affected the sales and thus the profitability of the company. These circumstances continue till date, resulting in condition so bleak that it looks difficult for Descon Chemicals to regain its position.
Hence, technological advancement along with entrance of new competitor both has put a lot of pressure, affecting the sales of the company.
The data below is a representation of the above scenario, explaining the decline in sales due to tough competition faced after new entrants and reasons that are discussed later
Although Descon Chemicals has experienced a large market share in many individual product segments of the chemical business, the prices and production policies have severely been constrained by potential and active entrants in the market. In many cases, these new entrants have various purchased activities that have been divested by the established chemical firms as the differences in environments and bundles of capabilities causes some activities to shrink and diminish in one firm and still expand and flourish in another.
Rising prices and availability of raw material is source of high concern for the employees. In 2008, the international prices of the chemicals were increasing e.g. a chemical called Trignostic D is priced at $1600 per ton with each container having a capacity of 24 tons. The procurement department of Descon Chemicals came up with a strategy to buy the raw material at bulk although there was ample stock in hand in the warehouses, thus 3 containers were purchased at $3200 per ton. Unfortunately within a month the price touched $3600 per ton and drastically fell to $1400 per ton. The competitors were at an advantage since they bought the raw material at $1400 per ton and thus as the cost of production was lower as compared to Descon Chemicals the products were sold at a much lesser price. Descon Chemicals faced heavy losses due to this of approximately Rs 200 million that eventually affected the performance of the company. The following digram is a representation of the above scenario:
Another reason of this increase in price of products is Pakistan recently facing serious problem of power shortage. This has a significant effect on the production process on frequent bases resulting in labor being idle, increase in not only the cost but also lower levels of production. This scenario also makes it difficult to fulfill demand on time. Hence, rising cost of production has a significant impact on the prices of products which has lately seemed less attractive for customers.
A major hindrance in the growth of the business of Descon Chemical Limited sets its roots by the clients not paying off their outstanding balance by the predetermined date, or failing to pay altogether. This has not only increased the total cost but has also been a factor adding to current workload. Even though before considering cash in advance, the company was aware of the clients’ payment history, however there were problems confronted by their customers, because of shortages of natural gas, electricity, and rise in input prices, economic downfall that exasperated the situation. Thus the whole cash conversion cycle is disturbed as credit collection from customers after the sales becomes problematic and suppliers also have to be paid for the purchase of inventory and raw materials either at the time of their purchase or after disbursing credit. Up to date Descon Chemical has not identified their target customers and consists of both smaller and large customers and when the prices of material are revised due to economic fluctuations, there is a major impact caused by the smaller cust
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