SOCC stratma paper

JOSE RIZAL UNIVERSITY GRADUATE SCHOOL iii

ACKNOWLEDGEMENT

Writing this Strategic Management Paper is not an easy task, as I already

expected it to be, considering that this paper is for the capstone subject in MBA.

I am tackling challenges from both my career and personal life which made

writing more difficult. I needed all the help I can get; and I did.

To this end, I would like to thank our Almighty God and Lord who have

heard all my prayers to aid me in the compilation of this paper. I believe that God

gave me the intelligence and willingness to complete this paper professionally

and intellectually. I prayed for it and He provided.

I thank my colleagues Jennifer Jomero, Grace Nacion, Marlon Fampula

and Melvar Benedicto for assisting me by giving vital insight about writing this

paper. They never disappointed me every time I needed their assistance. They

also helped me brainstorm an idea on how to compile my paper.

Invaluable was the contribution of my graduate school, Jose Rizal

University, to my paper as they provided materials and study aid for its

completion. Thank you graduate school, most especially to the graduate school

library.

There were also contributions from my officemates in Sakamoto Orient

Chemicals Corporation. Thank you guys!

JOSE RIZAL UNIVERSITY GRADUATE SCHOOL ivI am grateful for the considerations my bosses, Atty. Jaime Pascua and

Mr. Emmanuel Elpedes, had given me in my MBA endeavor. Although they

wouldn’t tell, I’m sure they considered my studies in assigning tasks to me.

And last, but certainly not the least, I thank my parents especially my

mother who supported me, financially and morally, in my graduate school

endeavor. This is for you, Mom and Dad!

I thank them all so much, that without them, this Strategic Management

paper surely would not have been completed.

I cannot repay them in equal terms but I do pray that our Almighty God

would provide the reward for all the help and assistance they gave me.

Thank you all!

JOSE RIZAL UNIVERSITY GRADUATE SCHOOL vTABLE OF CONTENTS

Page

Title Page....................................................................................................iApproval Sheet...........................................................................................iiAcknowledgement......................................................................................iiiTable of Contents........................................................................................vList of Tables..............................................................................................viiList of Figures...........................................................................................viiiExecutive Summary....................................................................................1

Chapters:

I Introduction...............................................................................................4

A. Company Background…………………………………….................…....….4B. Products and their respective application………………..............……......5C. Sales Revenue, Market and Profitability…………….................……….....6D. Corporate Governance and Social Responsibilities................................7

II Research Design and Methodology....................................................9

A. Research / Data Gathering Methods......................................................9B. Restrictions & Assumptions..................................................................10

III Vision and Mission............................................................................12

A. Current Vision and Mission Statements................................................12B. Analysis on Vision and Mission Statements..........................................12C. Proposed Vision and Mission Statements............................................14

IV Environmental Analysis.....................................................................15

A. General Environment............................................................................15B. Industry and Competitor Analysis..........................................................21C. Future Prospective................................................................................26D. Summary of Opportunities and Threats and EFE Matrix.......................28E. Competitor Analysis..............................................................................30

JOSE RIZAL UNIVERSITY GRADUATE SCHOOL viV Company Analysis.............................................................................34

A. Sales Trend...........................................................................................34B. Market Share........................................................................................34C. Present situation...................................................................................35D. Horizontal & Vertical Analysis...............................................................39E. Financial Ratios....................................................................................42F. Audit Checklists.....................................................................................44G. Summary of Strengths and Weaknesses..............................................44H. Internal Factor Evaluation Matrix..........................................................45

VI Strategy Formulation.........................................................................47

A. SWOT Matrix.........................................................................................47B. SPACE Matrix.......................................................................................49C. Boston Consulting Group Matrix...........................................................51D. Internal-External Matrix........................................................................52E. The Grand Matrix..................................................................................53F. Quantitative Strategic Planning Matrix for SOCC..................................54

VII . Strategic Objectives and Recommendation Strategies...................55

A. Strategic Objectives..............................................................................55B. Recommended Business Strategies.....................................................55C. Organization Strategies........................................................................56D. Financial Projections............................................................................58

VIII. Actions Plans and Departmental Programs.......................................62

IX Strategy Evaluation, Monitoring and Control.....................................64

A. Evaluation Method................................................................................64B. Key Metrics...........................................................................................65

ANNEX......................................................................................................68

BIBLIOGRAPHY........................................................................................78

CURRICULUM VITAE...............................................................................80

JOSE RIZAL UNIVERSITY GRADUATE SCHOOL viiLIST OF TABLES

Tables Page

1. 2009 Sales Revenue per country of destination.................................6

2. United States Federal Tax Rate 2010...............................................16

3. Summary of Audit Checklists.............................................................44

4. Action Plans......................................................................................62

5. Proposed Balanced Scorecard Format...............................................67

JOSE RIZAL UNIVERSITY GRADUATE SCHOOL viiiLIST OF FIGURES

Figure Page

1. External Factor Evaluation Matrix.........................................................30

2. Competitive Profile Matrix.....................................................................33

3. Historical Sales figures for the past 7 years..........................................34

4. Horizontal Analysis of Balance Sheet FY 2010.....................................39

5. Vertical Analysis of Profit & Loss Statement 2010................................42

6. Comparison of SOCC and Kao’s selected financial ratios.....................43

7. Internal Factor Evaluation Matrix..........................................................46

8. SWOT Matrix.......................................................................................48

9. SPACE Matrix......................................................................................50

10. BCG Matrix.........................................................................................51

11. IE Matrix.............................................................................................52

12. The Grand Matrix...............................................................................53

13. QSPM Matrix......................................................................................54

14. Projected Profit and Loss Statement, 2011 to 2013..........................58

15. Projected Cash Flow 2011 to 2013.....................................................60

16. Balanced Scorecard...........................................................................65

JOSE RIZAL UNIVERSITY GRADUATE SCHOOL 1EXECUTIVE SUMMARY

• Currently, Sakamoto Orient Chemicals Corporation’s export sales are

negotiated and maintained through its parent company – Sakamoto Yakuhin

Kogyo Company, Ltd. Any movement in sales will come from the parent

company.

• The company is a PEZA registered corporation that enjoys various

benefits of being so, such as, 5% gross income preferential tax rate and

exemption from import duties and taxes.

• The company’s production processes are ISO 9001:2008 certified and

chemicals produced are Halal and Kosher certified.

• The refined glycerin market is relatively small with global production of

around 2 billion pounds annually and a market value of $1 billion worldwide and

is expected to grow. Renewable fuel policy (mandates, tax incentives, and

subsidies) in developed nations ensures that biodiesel industries will continue to

expand well into the future. It is projected that biodiesel production will reach 8.2

billion gallons by 2020. This will contribute 5.9 billion pounds of crude glycerin,

meaning that the current production of glycerin will be nearly tripled by biodiesel

production alone.

• The market for glycerin is volatile and pricing is strongly dependent on

supply. Since glycerin is naturally produced primarily as a co-product of biodiesel

and soap manufacturing, supply is dependent on the demand for these primary

JOSE RIZAL UNIVERSITY GRADUATE SCHOOL 2products. The recent sharp rise in biodiesel production has driven crude

glycerine prices to plunge.

• Decline in world economy during 2008 and 2009 adversely impacted the

epoxy resins market in Asia-Pacific.

• The top end-uses of glycerin are found in the food processing, cosmetics,

oral care, and tobacco industries. These markets are mature and demand growth

is slow. At the same time, the rising standard of living in developing countries,

especially in China, provides the greatest opportunity for growth in the traditional

uses of glycerin.

• The global Epoxy Resins market will reach 1.93 million tons by 2015,

according to an independent market analyst.

• Glycerine refineries are mostly located in UK, USA and South East Asian

regions.

• Competition with two closely-related industry players, Kao Corporation

and Cocochem, is considered friendly. A cut-throat competition from their end is

unlikely.

• Local sales is considered low in comparison with export sales.

• Acquisition of a Good Management Practice (GMP) certification is

imperative to sell glycerine to local pharmaceutical companies.

• The company’s export and import activities causes the company to be

exposed to foreign currency exchange fluctuations. Hedging should be taken

into consideration to significantly mitigate its effects.

JOSE RIZAL UNIVERSITY GRADUATE SCHOOL 3• Although the company has a large outstanding loan balance, it still has an

available credit line for further loan availments. Capital expenditures, if

necessary, can be funded relatively easy.

• The company’s inventory turnover rate is low due to its present practice of

stocking-up on raw materials and finished goods with the belief that costs will rise

up eventually. But the truth is contrary to that.

• The results of the Comprehensive Strategy-Formulation Framework used

in this paper resulted in a need to implement a Market Penetration strategy.

• The ultimate strategy is to increase marketing efforts and achieve sales

growth for the coming years. This should be done by selling more to the market

currently served. Increase product awareness and emphasize the quality

standards of chemicals offered.

• The strategy is focused on increased sales effort but it entails

improvement of financial stability, maintenance of current ISO, Halal and Kosher

certification and product innovation.

• Improved profitability not only relies on increased sales but also on

efficient spending on overhead, selling and other administrative expenses.

JOSE RIZAL UNIVERSITY GRADUATE SCHOOL 4

CHAPTER I

INTRODUCTION

A. Company Background

Sakamoto Orient Chemicals Corporation (herein after referred to as

SOCC) is a joint venture partnership between Sakamoto Yakuhin Kogyo Co., Ltd.

(herein after referred to as SYKCL), and Tomen Corporation, both with principal

offices in Japan.

SOCC was established on December 15, 1988. Its main business is the

manufacture and export of Refined Glycerin (RG), Poly Glycerin (Poly-G) and

TBA Polymer products. The products are considered hard commodity.

At present, SOCC operates three (3) glycerin plants and one (1) TBA

Polymer plant.

With quality that compares with excellent standards, SOCC’s products are

continuously being distributed to different parts of the world. SOCC’s primary

customer is SYKCL. SOCC exports most of its glycerin and TBA polymers to

SYKCL and in turn, sells/exports them to various buyers at a mark-up.

SYKCL ships chemicals bought from SOCC to different countries such as,

China, Denmark, France, Hong Kong, South Korea, Malaysia, Taiwan, Thailand

and Vietnam.

At present, the company’s local sales are minimal in relation to exports,

but efforts are being increased to improve it.


Competitors are somewhat considered as “friendly rivals”. These other

sellers of glycerin are also SOCC’s suppliers of crude glycerin.

The company currently has some 127 regular employees working for it,

while about 10 to 15 people are contracted for manpower exigencies.

B. Products and their respective application

1. Refined Glycerin

It is a clear water-like viscous/hygroscopic liquid that is completely soluble

in water and has a sweet taste. Refined Glycerin is primarily used as additives

for food, pharmaceuticals and cosmetic products as raw material in the

production of paints (alkyd resin), as moisture retainer for tobacco production and

as lubricant. The raw material in the production of Refined Glycerin is Crude

Glycerin (CG), which is obtained initially from production of soap and fats splitting

(Hydrolysis) and now also from Biodiesel production (transesterification).

2. Polyglycerin

It is an odorless and viscous liquid that has four-hydroxyl group. The

product is used as moisturizer and viscosity modifier for personal care products,

perfume holding agent, surfactants, polyester, coatings, adhesive, and raw

material of organic and synthetic chemicals.

3. TBA Polymer

It is a brominated epoxy flame retardant, which was developed by SYKCL.

This product is used to interfere with combustion of the plastic material for

electrical and electronic equipment. For instance, TBA polymer is used for the


PBT resin (polybutylene terephthalate) manufacture, and is in turn used for

electronic parts such as in computers and mobile phones as connectors and

relay switches.

C. Sales Revenue, Market and Profitability

The Table 1 below shows the breakdown of exportations during the

company’s fiscal year 2008-2009.

Table 1. 2009 Sales Revenue per country of destination

Japan P 794,785,196.42 74.15%

China /Shanghai 42,529,408.21 3.97%

Hong Kong 35,655,749.50 3.33%

Korea 32,383,303.56 3.02%

Malaysia 75,027,521.87 7.00%

Taiwan 497,900.00 0.05%

Thailand 28,622,631.33 2.67%

Vietnam 1,417,201.17 0.13%

Denmark 25,718,408.01 2.40%

France 2,588,577.48 0.24%

Local 32,706,539.67 3.05%

TOTAL P 1,071,932,437.22 100%

Source: Summarized from the company’s audited sales.

Most export sales are to Japan followed by other Asian countries, such as

Malaysia, China, Korea and others. Exports to European countries are still

relatively low. Local sales are also significant although SOCC’s local customers


in 2009 only included Unilever (Unilever also produces glycerine in North

America), Kemwerke and Cocochem (also a local friendly competitor). There

were no export sales to the Americas to date.

The company just experienced a recovery from 2009 operation’s Net

Loss, which resulted from the global economic downturn. The company’s

chemicals are mostly used in end-user items that if their sales go down, the

demand of glycerine and epoxy resin directly follow.

D. Corporate Governance and Social Responsibilities

The company keeps in mind its stakeholders - customers, suppliers,

employees, community, environmentalists, government and stockholders, at all

times.

Buyers are assured of high quality products that meet their respective

specifications. A system of quality assurance is established to this end.

Processes are ISO 9001:2008 certified. The company acquired Kosher and

Halal certifications to assure certain demographic market that their requirements

are adhered to.

Prompt payments to suppliers are ensured to maintain good relationship

with them. Because of this practice, some suppliers give discounts or adequate

credit terms.

Employees are provided above industry average compensation package.

Their commitment and competence are recognized by the company and

rewarded accordingly. Some employees handling technical job are given special


trainings here or in Japan to further enable them to perform their functions well.

Length of service is also rewarded. Participation in various community program

is also within the company’s line of activities. Sponsorships and giving donations

during turbulent times are just some of the many generous acts done by the

company. It believes that an entity, whether natural or artificial, cannot be purely

separate from its community.

Maintenance of clean and safe environment will always remain a part of

the business. Waste produced by operations are disposed of as according to

rules implemented by the Department of Environment and Natural Resources

(DENR). A third party is contracted by the company to treat the wastes produced

(if necessary) before disposal. Aside from waste disposal, the company also

participates in tree planting around the Plant vicinity, which is also a requirement

by the DENR.

Necessary business permits and licenses (especially with regards to

production of glycerin, which is an ingredient in making explosives) are all

acquired by the company on a timely manner.

Taxes of all sorts are remitted by the company on time and with no

involvement of fraud.


CHAPTER II

RESEARCH DESIGN & METHODOLOGY

A. Research / Data Gathering Methods

Research methods were employed to gain understanding on what is the

present situation of and around the company in question. The objective of

research is to discern different internal aspects of the company and external

factors affecting it.

The writer’s current position as an Accounting Supervisor in SOCC gave

him an invaluable insight into the company’s background and prospective plans.

Interviews were made on company’s personnel to gain firsthand

information on company backgrounds.

Several company records, such as audited financial statements, are

acquired to determine the company’s financial standing.

The internet was widely used in this research. Independent studies about

glycerine and epoxy polymer were obtained through it. Websites of identified

competitors were browsed as well.

Government websites were visited to obtain information on several factors

affecting the company, such as Bangko Sentral’s website for information on

Monetary Policy and National Statistics Offices’ for data on inflation rates.

B. Restrictions & Assumptions


1. Assumption on competition

Major competitors identified are Kao Corporation (hereinafter referred to

as Kao) and United Coconut Chemicals (hereinafter referred to as Cocochem).

Kao is a Japanese chemical manufacturing corporation while Cocochem is a

PEZA registered domestic corporation.

Due to time and financial constraints, only the two mentioned major global

industry players are considered in this paper. The selection of these two is

based on their close similarity with SOCC’s operation, specifically in location and

organizational structure. The two are also suppliers of SOCC.

The largest competitor identified in the epoxy resin industry is 3M

Company; but the company is so diverse that its financial statements doesn’t

provide any basis of comparison with financial statements of SOCC. Therefore,

the financial background of 3M Company will not be used in this paper.

2. Assumption on substitute products

Since there aren’t any available information on substitute for epoxy resin

(a class where TBA Polymer is categorized), it is assumed that there is no

relevant substitute as of the moment that can significantly affect the industry of

epoxy resins.

3. Assumption on switching cost

Because glycerine is a commodity, it is assumed that switching from one

supplier of refined glycerine to another shall entail an insignificant cost. The

same goes for crude glycerine.


4. Assumption on Success Factors

Due to time constraints, only limited factors are identified. These factors

are assumed to be the most important to succeed in the industry.

5. Limitation on competitor information

Although revealing information are contained in competitors’ website, it is

not specific enough as to give exact details. Most competitors manufacture and

sell chemicals other than glycerine. Their annual financial statements are on a

consolidated format and don’t provide enough information particular to their

glycerine operations only.


CHAPTER III

VISION AND MISSION STATEMENTS

A. Current Vision and Mission Statements

1. Vision

“To be recognized as one of the top international leaders in the chemical

manufacturing industry.”

2. Mission

“To achieve consistent profitability by providing customers with chemical

products that meets their needs and expectations.”

B. Analysis on Vision and Mission Statements

1. Vision Statement

The company’s vision doesn’t state that they aim to be the number one in

the industry, although, it clearly states that they want to be among the best. It is

a clear and an unambiguous statement of what the company aspires to be in the

future. The vision gives the readers a visualization of a clear and bright future for

the company. The wordings used in the statement are engaging and there are

no jargons that may cause confusion.

I believe that the aspiration expressed in the statement is realistic,

considering the overall capacity of the mother company in Japan, SYKCL. Also,


the Vision Statement was able to present a criterion for long-term decision

making.

The statement, though, failed to connect to the general public on what is

the company’s relevance for existence.

2. Mission Statements

I don’t believe that the Mission Statement is effective because it lacks

many of the essential parts. It failed to unambiguously present what the

business of the company really is.

The customers are mentioned in the statement but it is ambiguous as to

who they are. There is also no mention as to where these customers are

located.

The Mission Statement is also silent if the company is concerned about its

employees and public image, notwithstanding the fact that it is.

It would also help if the statement provides a clear idea about the

company’s philosophy and what sets it apart from other companies, for the sake

of having a distinctive identity.

The statement was able to succeed in expressing on what products the

company is selling and that it is concerned about overall profitability. It could’ve

been better, though, if the technology used to produce their products is stated.

C. Proposed Vision and Mission Statements

1. Vision Statement


“To be recognized as one of the top international leaders in the chemical

manufacturing industry by providing high quality chemicals used in production of

top quality consumer products.”

2. Mission Statements

• To manufacture high quality chemicals using current processes that

are ISO compliant.

• To provide chemicals to local and international pharmaceutical

companies, manufacturers of personal care products and electronic equipments

that meets their distinctive specifications.

• To continuously benefit from global industry know-how and product

developments of Sakamoto Yakuhin Kogyo Co., Ltd.

• To maintain profitability by soundly anticipating any distress in the

industry.

• To hire only highly competent people with integrity, provide them

with opportunity for growth and reward them accordingly.

• To implement a management style that holds virtue, ethics and

integrity before profit.

• To play a vital role in betterment of society and environment by use

of only natural raw materials, implementation of proper waste management,

adherence to applicable rules of governing bodies, and participation in social

activities.


CHAPTER IV

ENVIRONMENTAL ANALYSIS

A. General Environment

1. Key Economic Factors

1.1. Inflation

Headline inflation rate in the country is used as a basis in determining

acceptable increase in costs of certain goods and services. Particularly for

SOCC, escalation clause for land rental, which is a significant part of overhead

expense, is based on inflation rate for the year. January 2010 registered

Headline inflation rate of 4.3% (year 2000 is the base year) while December

2010 registered a decrease to 3.0%.

1.2. Corporate Income Tax Rates

Governments of different countries impose different taxation levied on

corporate income. At present, the Philippine corporate tax rate for domestic

corporations is fixed at 30% of net taxable income.

Japan national corporate tax rate is 30% but only 22% is imposed on net

taxable income of below ¥8 million on condition that the total equity is less than

¥100 million. In addition to corporate tax (a national tax) there are two classes of


local tax paid by a Japanese corporation: Inhabitant Tax and Enterprise Tax.

These two classes of local tax significantly increase the rate of Japan corporate

tax, so that it may, in actual fact, reach 41%

The United States of America’s effective corporate tax rates imposed on

net taxable income are as follows:

United States Federal Tax Rate 2010

Taxable Income Tax Rate

0 to 50,000 15%

50,000 to 75,000 $7,500 + 25% of amount over 50,000

75,000 to 100,000 $13,750 + 34% of amount over 75,000

100,000 to 335,000 $22,250 + 39% of amount over 100,000

335,000 to 10 M $113,900 + 34% of amount over 335,000

10 M to 15 M $3,400,000 + 35% of amount over 10,000,000

However, SOCC is a PEZA registered corporation that enjoys a Gross

Income Tax rate of 5% in lieu of all other taxes (including VAT and import taxes).

1.3. Monetary Policy

Bangko Sentral ng Pilipinas’ monetary policy settings remain appropriate,

given the favorable inflation profile.

The BSP’s efforts to promote low and stable inflation are therefore

consistent with the maintenance of supportive conditions for domestic economic


growth amidst lingering uncertainties surrounding global economic growth

prospects.

1.4. Consumer Spending Behaviour

Consumer spending improved in the United States during 2010.

Businesses are ordering more computers and appliances, and consumers are

spending with more confidence. Consumers spent more for the fifth straight

month in November. U.S. businesses, sitting on nearly $2 trillion in cash, are

parting with a bit more of it. Companies increased their orders for long-lasting

manufactured products, excluding volatile transportation goods, by the sharpest

amount in eight months in November. Demand rose for computers, appliances

and heavy machinery.

1.5. World Oil Prices

Oil prices are increasing which has a direct effect on total cost of

production. During December 2010, prices rose above $91 a barrel — the

highest point in two years. Gas prices have also jumped.

1.6. Foreign Currency Exchange Fluctuations

Forecasting the Philippine Peso to US Dollar exchange rates will prove to

be difficult. The exchange rate is determined by several factors such as,

economy, monetary policy and, most importantly, by its supply and demand.

Although it can be fairly described that the Philippine Peso is gaining strength

against the US dollar as of late.


2. Key Social, Cultural, Demographic and Environmental Factors

2.1. Waste Management

Manufacturing Plants, including SOCC’s, produce waste as part of overall

production. In SOCC’s case, the wastes produced are Dewatered Sludge, Spent

Activated Carbon, Immobilized Waste, and Pitch Oil. These must be treated and

disposed of properly as part of compliance to various environmental laws. Waste

disposal is costly considering that waste management is an integral part of

operations.

2.2. Jews and Muslim Demographic Market

Jews and Muslims represent a large demographic market for consumer

products such as personal care and pharmaceutical products. Both groups have

their own laws with regards to food and pharmaceutical consumption.

Islamic law prohibits consumption of pork and all its products, animals

improperly slaughtered, alcoholic drinks including all forms of intoxicants,

carnivorous animals, birds of prey and any food contaminated with any of these

products. In the same manner, the Jewish law also prohibits certain food items.

Manufacturers of consumer goods with Halal (meaning lawful) and Kosher

(meaning fit) labels will only procure raw materials from companies with Halal

and Kosher certifications. These manufacturers include Procter and Gamble and

Unilever, among others. For Glycerine, as raw material for various consumer


goods, to be sold to these manufacturers, the products must be Halal and Kosher

certified.

2.3. Pharmaceutical requirement

Pharmaceutical companies in the Philippines requires from SOCC a

“Good Management Practice” (GMP) certification to ensure the cleanliness of

refined glycerines.

2.4. Industry growth of end-user products

The personal care industry had an excellent growth rate in all the major

markets of the world. Since the past few years, people have become more

conscious about their appearance and look, leading to a huge demand for these

products in the whole world. The women’s beauty industry is growing at rate of

approximately USD 202.254 billion every year where as the global market for

cosmetics alone USD 30.33 billion. The global personal care products industry is

growing at a very rapid pace.

3. Key Political, Governmental and Legal Factors

3.1 Regulation of Biodiesel Industry

Various laws and tax incentives have been issued by governments of

different nations that promote increased production of biodiesel. The global

increase in biodiesel production will determine the future of the glycerine

industry. Demand for biodiesel is projected to be 8 billion gallons by 2020. This


would result in 5.8 billion pounds of glycerine entering the market from biodiesel

production alone. The incredible quantity of glycerine causes a glut.

4. Key Competitor Factors

4.1. Identified relevant competitors

The competitors Kao and Cocochem are both similar with SOCC. On one

hand, Kao is a Japanese company engaged in chemical manufacturing and has

a subsidiary, Pilipinas Kao (hereinafter referred to as Pilkao). On the other hand,

SOCC is a Philippine domestic company that has SYKCL, a Japanese

corporation, as its mother company. Cocochem is also similar with SOCC

because both are PEZA registered and even has its plant facilities adjacent with

SOCC’s.

Pilipinas Kao is a SOCC’s major supplier of crude glycerine while

Cocochem leases land area to SOCC.

The identified major competitors are actually closely related with SOCC in

terms of business transaction. Therefore, the rivalry with them is not a vicious

one. Each manufacturer has its own existing market and there hasn’t been any

recent acquisition of market share from any of the three. Also, Pilkao and

Cocochem, like SOCC, are members of United Coconut Association of the

Philippines (UCAP).

4.2. Identified relevant substitute products

Substitutes for Glycerine are already out in the market. These

commodities are Sorbitol and Propylene Glycol.


Sorbitol has several end-uses similar to glycerine and often they are

included together in the same formulations. Sorbitol is produced with sugar from

corn starch or invert sugar as a feedstock. By category, the uses of sorbitol are:

• Toothpaste and cosmetics – 35%

• Processed food – 30%

• Pharmaceuticals – 7%

Sorbitol prices range between $0.27 and $0.40 per pound for

pharmaceutical grades.

Propylene glycol (PG) has industrial uses similar to glycerine. By

category, the uses of Propylene Glycol are:

• Unsaturated polyester resins – 27%

• Functional fluids (anti-freeze, de-icers) – 20%

• Cosmetics and food industry – 20%

• Miscellaneous (paints, coatings, tobacco processing) – 33%

Prices range between $0.60 and $0.68 per pound.

Substitutes are often used when they are priced cheaper than glycerine.

Although, the chronic oversupply of glycerine has prevented market attacks from

substitutes.

B. Industry and Competitor Analysis

B.1. Description of existing industry conditions:

B.1.1. Market Size


Although the market for glycerine is global, it is still small. But as long as

there’s market for personal care goods, cosmetics and pharmaceutical products,

there will be buyers of glycerine.

The market of epoxy resin is relatively larger at an estimated $15.8 billion

worth of demand during 2009.

B.1.2. Product Life Cycle

Glycerine is already on the maturity stage of its life. Competition within

the industry is already present. Product differentiation (in terms of chemical

specifications) are pervasive to encourage customer loyalty.

B.1.3. Scope of competitive rivalry

Competition is not as cut-throat as that of the automobile or electronics

industry. In fact, SOCC’s competitors are also its suppliers. Rivalry is

considered friendly in the segment that SOCC belongs to.

B.1.4. Significant industry players

There are a number of large companies competing in the industry. They

are mostly located in United States of America, United Kingdom, India, Malaysia,

Indonesia and Philippines. All of them are large multinational corporations and

most of them produce chemicals other than glycerine.

B.1.5. Pricing

Since the glycerine market is small on a global basis, there is little market

information, making it difficult to establish a world “spot” price for the product.

B.2. Porter’s Five-forces model


B.2.1. Force 1 - barriers to entry

Competing in local and global glycerine market would require economies

of scale to operate competitively in terms of cost.

There is an abundant supply of crude glycerine that resulted from

unprecedented increase in biodiesel production. The glut in crude glycerine

allows easy/cheap procurement of raw material for refined glycerine.

Several government policies are to be adhered to in production of

glycerine. Applicable Philippine environmental regulations are as follows:

• PD 984 – Pollution Control Law

• PD 1586 – Philippine Environmental Impact Statement System

• RA969 – Toxic Substances and Hazardous and Nuclear Waste control act

of 1990

• RA 8749 – Clean air act of 1999

• RA 9003 – Ecological and solid waste management act of 2000

• RA 9275 – clean water act of 2004

High quality is also required from glycerine refineries. Assurance of

quality would entail adherence to international standards.

Selling glycerine as raw materials would only require refining crude

glycerine obtained from by-products in hydrolysis or transesterification.


Large capital is usually required for establishment of a refining plant that

can provide economies of scale. Working capital is also needed for a back-office

that will process exportations, importations and processing of various business

and legal transactions.

shipping companies are usually available for local and export shipments.

B.2.2. Force 2 - Threat of Substitutes

There are several substitutes for glycerine depending on the end-use

industry. Usually substitutes are used if it provides cost advantage. But a glut in

crude glycerine prevents attacks from substitutes.

It is assumed that there are no substitute available for epoxy resin.

B.2.3. Force 3 - Bargaining power of buyers

There are about 1,500 uses for glycerine. It encompasses various

products manufactured by different companies. Buyers are not concentrated.

Buyers, like Procter and Gamble, have produced glycerine as by-product

of their soap production. Therefore, it is expected that most buyers are informed

of the glycerine market.

SOCC’s customers have been patronizing its products for a long time

now. This customer loyalty has allowed the sales of SOCC to grow over time.

It is known that some buyers preferred substitutes if priced lower.

SOCC’s glycerine is differentiated in a sense that it is from a vegetable oil

source, Kosher and Halal certified and adheres to individual specifications of its

customers.


There should be minimal switching cost if buyers of SOCC decides to

procure refined glycerine from others.

There are no threat of acquisition by existing buyers.

B.2.4. Force 4 - Bargaining power of suppliers

SOCC currently has various suppliers of crude glycerine. Sub-materials,

like activated carbon and hydrochloric acid, can also be purchased readily from a

number of sources. Suppliers are not concentrated.

Switching from one supplier to another will not significantly affect the

specifications of SOCC’s finished products.

The glut in crude glycerine forces suppliers to sell at a low price.

B.2.5. Force 5 - Rivalry among existing players

Among the most relevant competitors identified, Kao Corporation would be

considered the largest in size.

The glycerine industry growth is determined by the growth in sales of

products utilizing glycerine as input. At present, the personal care products and

pharmaceuticals industry are growing steadily.

The continuing increase in biodiesel production causes the glycerine

industry to operate at a surplus. There are more crude glycerine being produced

than being refined. Meaning, the supply of crude glycerine cannot be solely

acquired by a small number of large industry players.


Existing rivalry between SOCC, PKI and Cocochem are considered

friendly. PKI and Cocochem are also SOCC’s suppliers of crude glycerine and

other cost of production.

Five Forces Model Conclusion:

Force 1: Barriers to Entry – Minimal Threat

Force 2: Threats of Substitute – Moderate Threat

Force 3: Bargaining Power of Buyers – Moderate Threat

Force 4: Bargaining Power of Suppliers – Minimal Threat

Force 5: Rivalry among existing players – Minimal Threat

C. Future Prospective

1. Outlook on Glycerine and Epoxy resin Industry

The increase in the Asian standard of living and substitution for petroleum-

derived chemicals will lead to slight growth in the demand for glycerine; however,

the increase in demand will not be enough to keep up with the supply of crude

glycerine from biodiesel production. Japan and the United States, two historically

large consumers of glycerine, only have an annual growth rate of two percent for

glycerine consumption.

In order to add value to glycerine from biodiesel, new outlets need to be

found for the by-product. The supply of crude glycerine has reached crisis levels.

Many view glycerine as a waste product instead of a versatile by-product. Prices

for crude glycerine have bottomed out in both the US and European markets.


The best means to improve the glycerine glut will be innovations that add value

and create new, strong demand for glycerine.

2009 was a most difficult year for the epoxy industry. The global sales

declined to the level of 2005, and the market size shrank by nearly 20% in some

regional markets. However the industry has regained strong confidence as

demand from overall downstream markets rebounds rapidly, particularly from

composite, automobile, aircraft/aerospace and E&E markets.

Positive growth is projected in epoxy industry thanks to the strong signals

of recovery overall, particularly in the U.S. and Germany. The market will reach

US$17.7 billion by 2012 and increase to US$21.35 billion by 2015 in the forecast,

following the annual growth rate of 3.5-4% in near future and more thereafter.

Strongest demand is expected from epoxy composite market and epoxy

adhesive market.

Asia-Pacific represents the largest as well as the fastest growing regional

market for epoxy resins worldwide.

2. Second Generation Biofuels

Dr. Ramon Gonzalez, a Chemical and Biomolecular Engineering professor

at Rice University, has identified a strain of E. coli which can convert glycerine to

ethanol in an anaerobic environment. The process yields ½ pound of ethanol for

every pound of refined glycerine. The other ½ pound can be used as a feedstock

for other industrial chemicals, thus adding even more value to the glycerine.

3. Livestock feed substitute


Another potential use of glycerine is corn replacement in cattle feed.

Several universities in the U.S. are researching the effectiveness of feeding

crude glycerine in beef feedlot and dairy cow operations. Other animal scientists

are investigating crude glycerine’s suitability as a corn substitute in swine and

poultry rations. The research has yielded very positive results so far, showing

that glycerine can be substituted for corn as an energy source with a 1:1 ratio.

The research indicates there is no sacrifice to milk, meat, or egg

production when crude glycerine is substituted for corn in livestock diets. This is

great news for the livestock and poultry industry which has been dealing with

high corn prices due to ethanol demand.

D. Summary of Opportunities and Threats and EFE Matrix

1. Opportunities

• Glut in crude glycerine inhibits market attack from substitutes

• Sales growth in products with glycerine requirements

• Competition between identified competitors are considered friendly

• Excess refined glycerine can be converted to ethanol which is highly

saleable

• Lower peso exchange rate against the dollar means lower purchase

amount

• Asia-Pacific is fastest growing regional market for epoxy resins

2. Threats


• Glut in crude glycerine

• Substitutes are preferred if priced lower

• GMP certification requirement of local pharmaceutical companies

• Most glycerine refineries are located in South East Asia, UK and USA

• Lower peso exchange rate against the dollar means lower sales amount

• Oil prices on world market is increasing

• There’s minimal switching cost for buyers of SOCC

3. External Factor Evaluation Matrix

This matrix summarizes the key external factors as opportunities and

threats surrounding an organization and each factors is given a weight on its

significance in the industry. Ratings are then given as to how the company

addresses these factors.


Figure 1. External Factor Evaluation Matrix

Key External Factors Weight

Opportunities Glut in crude glycerine inhibits market attack

from substitutesSales growth in products with glycerine

requirementsCompetition with identified competitors are

considered friendlyExcess refined glycerine can be converted to

ethanol which is highly saleableLower peso exchange rate against the dollar

means cheaper imported raw materialsAsia Pacific is the fastest growing regional

market for epoxy resins ThreatsGlut in crude glycerineSubstitutes are preferred if priced lowerGMP certification requirement of local

pharmaceutical companiesMost glycerine refineries are located in South

East Asia, UK and USALower peso exchange rate against the dollar

means lower sales amountIncreasing Oil prices in the world marketThere's minimal switching cost for buyers of

SOCC

SOCC’s 2.71 score indicates an average competitive position in the

industry.

E. Competitor Analysis

1. Key Success Factors.


Product Quality – better quality ensures manufacturers of different end-

user products the best components for their products

Quality Assurance – achievement of certifications, such as ISO, Kosher

and Halal certifications, shall attest to the quality of chemicals offered.

Organizational size – Larger assets may produce higher revenues, all

other things held constant.

Product Differentiation – Different manufacturers requires different

chemical specifications of glycerine.

Costs of production –Advantages in cost of production, such as in labor

and overhead, contributes to overall profit.

Distribution – selling expenses such as freight and insurance coverage

contributes to overall pricing advantage.

Financial Stability – Liquidity, financial leverage and exposure to foreign

currency exchange fluctuations determine a company’s capacity to withstand

financial instability in the world economy.

Production capacity & efficiency – “Economies of scale” proves to be

important in achieving a competitive advantage against competitors and acts as

deterrent against would be competitors.

Location – Cost of distribution, whether exporting or importing, is

determined heavily by where the refineries are located.

Customer – This includes customer loyalty, acquisition of new customers

and retention of existing ones. This ensures a company’s inflow of revenues.


Pricing – Price competitiveness may not only acquire a competitor’s

market share, it will also prevent customers from switching to substitutes.

Industry know-how – Expertise in the industry is imperative to success.

This includes ability to proactively counter any changes in the industry.

2. Existing competitors

Identified competitors are Kao and Cocochem. Kao is identified as a

relevant competitor because its operating style is similar to that of SYKCL. Kao

is a Japanese corporation similar to SYKCL. It also has a Philippine domestic

company called Pilipinas Kao which operates similarly like SOCC. Kao is

recognized as a major player in the global oleochemical industry.

Cocochem is also included as a relevant competitor because of its size

and location. Cocochem is a Philippine domestic corporation operating similarly

like SOCC. In fact, SOCC leases land for its production facilities in Bauan,

Batangas. Cocochem is recognized as a major player in the global oleochemical

industry, like Kao.

3. Competitive Profile Matrix

Unlike the External Factor Evaluation Matrix, this matrix not only considers

key external factors but internal factors as well. The matrix then compares the


profiles of significant companies. In addition, the factors presented in CPM are

those that are considered “key factors”.

Figure 2. Competitive Profile Matrix

The CPM concluded that SOCC is in an average position in the industry.

Still, the identified competitors’ position is better than SOCC’s. The reasons for


SOCC’s lower CPM score is due to low score in organizational size, cost of

production, financial stability and pricing.

CHAPTER V

COMPANY ANALYSIS


A. Sales Trend

Shown below is SOCC’s graph of consolidated historical sales from fiscal

year 2003 to 2009.

B. Market Share

According to an independent study, the current global production of

glycerine is estimated to be about 2 billion pounds and is valued at $1 billion.

SOCC’s fiscal year 2010 sales from its glycerine variants amounted to some

$22,101,665. Assuming the independent study is correct, SOCC’s global market

share amounts to approximately 2.21%.


The global demand on epoxy resin was estimated at roughly US$15.8

billion in 2009 while SOCC had some $6,152,095 sales in the same year. If the

demand in epoxy resin in 2009, as projected by an independent study, is correct

then SOCC’s market share is about 0.04% only of the global epoxy resin

industry.

C. Present situation

1. Exposure to foreign exchange fluctuations

The company’s outstanding loan amounted to some ¥1.6 billion as of

Fiscal Year ended September 30, 2010. This amount is significant because any

fluctuations in the foreign exchange market will effect a foreign exchange gain or

loss for the company.

Aside from large loan outstanding, the company has high volume of

exports and imports which are all denominated in either Japanese Yen or US

Dollar. Those transactions also effect foreign exchange gain or loss.

2. Local sales

Amount and quantity of local sales are miniscule in comparison to existing

export sales. It is only recent that the company hired a sales personnel to

actually market the company’s glycerine to local companies. No formal

marketing techniques or models are currently in place.

Pharmacies in the Philippines are stern with it comes to cleanliness of

glycerine. Pharmaceutical companies require a “Good Management Practice”


(GMP) certification before any sale is done. The company is currently pursuing

this certification since 2007.

The company is successful in selling its glycerine to Lamoiyan, although

only 1 metric ton is purchased monthly.

3. Product Quality

The company’s products are Kosher and Halal certified which makes it

acceptable to these two demographic market.

Although SOCC itself doesn’t have an R&D department, the output of

SYCKL’s R&D are shared to SOCC. Operating under a policy of fusing

production, marketing, and technology, and working closely with the company's

R&D laboratory devotes itself to providing technical support for existing products

and creating new materials.

SYCKL’s R&D department has a section called “The Development Group”

which engages in developing new applications for glycerine, compositional

analysis and the search for new businesses.

4. Production Facilities

The production processes involved are ISO 9001 certified, which serves

as mark of production excellence.


Most glycerine refiners are located and concentrated in UK, USA and

South East Asia. That makes the refinery of SOCC here in the Philippines

strategically established.

The abundance of coconut, which is a source of glycerine, here in the

Philippines makes the refinery’s location even more appealing.

SOCC’s current production capacity, however, is in no way competitive

with large industry players across the globe.

5. PEZA registrant

The has received registration from Philippine Economic Zone Authority

(PEZA) since March 11, 1999. The fiscal benefits enjoyed are as follows:

• Income Tax Holiday (ITH) or Exemption from Corporate Income Tax for

four or six years, extendible to a maximum of eight years;

• After the ITH period, the option to pay a special 5% tax on modified gross

income, in lieu of all national and local sales;

• Exemption from duties and taxes on imported capital equipment, spare

parts, supplies and raw materials;

• Tax credit on domestic capital equipment

• Exemption from wharfage dues and export taxes, imposts and fees;

• Additional deduction for incremental labor and training expenses.

6. Customer base

Current export sales are for customers who have been purchasing from

the company for an extended time. It is fair to say that customer loyalty has


already been established from these existing buyers. In actuality, these are

SYKCL’s customers. What actually happens is that SOCC sells to SYKCL then it

will sell to outsider buyers at a mark-up. Most of the time, the shipment goes

directly to the customer without passing through SYCKL’s hands. That practice

greatly saves a lot of freight charges.

SYCKL also purchase its glycerine and TBA Polymer requirements from

SOCC for its other production requirements.

7. Inventory Levels

The company has been stocking up on more inventories than what it is

able to sell. It believes that prices will soon go up and it’s better to stock up on

raw materials now while the prices are still low.

Such practice causes the inventory turnover to be slower than its

competitor – Kao.

8. Finance

Currently, the financial structure of the company is that it has P0.72 of

liability for every peso of assets.

Some ¥561 million loan was acquired to finance construction of additional

plants for expansion purposes. The company is anticipating the increase in

demand of glycerine and glycerine-based products in the near future.

Some ¥1.019 billion loan was acquired for working capital purposes. The

company is experiencing difficulties in meeting short term obligations. Its current


ratio is only P0.50 for every peso of short term payables and its quick-ratio is only

P0.70 for every peso of short term payables.

The company just recently acquired some ¥80 million loan to the finance

rehabilitation of seawall that surrounds its refinery.

The company has an existing credit line with Bank of Tokyo Mitsubishi,

which makes borrowing, for working capital or long-term capital expenditures,

trouble-free.

D. Horizontal & Vertical Analysis

The company’s Balance Sheet provides the financial standing of the

company as of the fiscal year ended 2010. It shall be one of two sources used in

computation of various financial ratios, the other being the Income Statement.

The Horizontal Analysis shall provide the increase or decrease in key

Balance Sheet Accounts. The analysis shall make it easier to note any

significant changes in the company’s financial structure.

Figure 4. Horizontal Analysis of Balance Sheet FY 2010

2010

ASSETS

CURRENT ASSETS :

Cash on Hand & in Bank 10,606,992 115,246,068

Accounts Receivables 43,090,510


PROPERTY, PLANT & EQUIPMENT:

Plant Cost 2,038,356,774

Construction in Progress -

Less Accumulated Depreciation (1,007,902,058)

Net Book Value 1,030,454,716

OTHER ASSETS:

Deposits 6,125,056

Investment in Stocks (PLDT) 27,500

Long Term Receivable 4,652,884

10,805,440

TOTAL ASSETS 1,429,967,404

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:Accounts Payable and Accrued Expenses 125,127,113

Income Tax Payable 5,367,198

Notes Payable - [ Working Capital ] 236,115,000 Notes Payable - [ Seawall Rehabilitation Project ] 10,494,000

Notes Payable - [ Working Capital ] 298,758,904

Notes Payable - [ DG-2 Project ] 41,976,000

Notes Payable - [ RG-2 Project ] 44,307,767 Notes Payable - [ TBA/RPG Project ] 15,741,000

777,886,982

LONG TERM LIABILITIES:

Pension Liability 29,219,744 Notes Payable - [ Seawall Rehabilitation Project ] 31,482,000

Notes Payable - [ DG-2 Project ] 125,928,000


STOCKHOLDERS' EQUITY:

Authorized - 8,826,000 sharesSubscribed and Fully Paid - 6,576,000 sharesCommon Shares - 5,736,000 shares @ P100.00 Par Value 573,600,000 Preferred Shares - 840,000 shares @ P5.00 Par Value 4,200,000 Additional Paid-in Capital in Excess of Par Value 79,861,250

Deposit for Future Stock Issuance -

Retained Earnings (Deficit) (258,673,272)

TOTAL STOCKHOLDERS' EQUITY 398,987,978

Notable is the company’s decrease in working capital loans. The

decrease is so significant that it causes the company’s current liquidity problems,

as indicated by the decrease in Cash on Hand and in Bank Account.

The level of inventory increased as the result of the company’s current

strategy to stock-up on raw materials and finished goods.

The Vertical Analysis of Income Statement shall provide the composition

of a company’s operations for the year, in terms of percentage. The analysis is

useful for identifying relationship between items in the same financial statement

by expressing all amounts as a percentage of Sales.


Figure 5. Vertical Analysis of Profit & Loss Statement 2010

Net Sales

Cost Of Goods Sold

Gross Profit

Operating Expenses

Income (Loss) From Operations

Interest & Others

Interest Expense

Interest Income/Others:

Interest Income On Savings & Time Deposits

Interest Income On Employees' LoansIncome (Loss) From Tba Trial Sale / Other

SourcesOther Income (Salt Sale, Scrap, Di Water

Sales)Sub-Total Other Income

Income (Loss) Before Foreign Exchange Gain & Tax

Foreign Exchange Gain (Loss)

Realized Foreign Exchange Gain(Loss)

Unrealized Foreign Exchange Gain(Loss)

Sub-Total Foreign Exchange Gain

The company’s high Cost of Goods sold ratio in relation to Sales is what’s

causing the low profitability. About 55% of the Cost of Goods is the cost of raw

materials.

E. Financial Ratios

Key financial ratios of SOCC are determined and compared with that of

the most significant competitor identified. Financial ratios are most relevant and

useful when compared with that of competitor’s or with industry standard.


Figure 6. Comparison of SOCC and Kao’s selected financial ratios

SOCC 2010 2009Return on Sales 0.47% -16%Profit Margin Ratio 10% 6%Operating Margin Ratio 2.39% -0.23%Fixed Assets Turnover 0.99 1.02 Return on Assets 0.34% -12%Return on Equity 1.21% -45%Current Ratio 0.50 0.57 Acid-test Ratio 0.07 0.27 Inventory Turnover 3.29 3.09 Average age of inventory 111 118 Debt Ratio 0.72 0.74 Debt-Equity Ratio 2.58 2.77

It is clear from the comparison that SOCC is far behind Kao in terms of

internal business process. Kao is far superior in terms of fixed asset utilization

and profitability. Kao also manages its inventory better than SOCC. One reason

for SOCC’s slow inventory turnover is due to management’s belief that costs of

raw materials may go up, hence the company is stocking-up on raw materials

while it’s relatively cheaper.

Another significant note from the ratio analysis is SOCC’s dilemma on

meeting currently maturing liabilities. The company only has a current ratio of


P0.50 of current assets for every peso of current liability. Due to this problem,

the company once in a while avail of bank loan from its approved credit line.

F. Audit Checklists

A set of audit check lists covering different internal aspects of the

company is accomplished to further discern company strengths and weaknesses.

The summary of checklists are shown below and the detailed checklists are

enclosed in the Annex.

Table 3. Summary of Audit Checklists

Satisfactory?

Management Audit Checklist

Basically, the company has unsatisfactory Marketing and R&D efforts. On

one hand, the company has no formal marketing department to begin with.

SYKCL handles all export sales of SOCC. It is SYKCL that closed the deals with

export customers. Without a marketing department, the company finds it difficult

to compete in the domestic market. On the other hand, SOCC is purely

dependent on SYKCL’s R&D department for any developments in glycerine and

epoxy resin products.


G. Summary of Strengths and Weaknesses

1. Strengths

• Production processes are ISO 9001 certified

• Products are Halal and Kosher certified

• Enjoys benefits of being PEZA registered

• Refinery is located in South East Asia

• Can easily acquire working capital / long-term loan

• R & D of SYKCL is top-notch and is shared to SOCC

• Has Established loyal customer base

2. Weaknesses

• Low inventory turnover of 3.29 times

• High Debt Ratio of P0.72 for every P1.00

• Return on Sales of only 0.47%

• Fixed Assets Turnover of 0.99 times compared to Kao’s 4.70

• Current Ratio of 0.50:1.00

• Lower production capacity in relation with large competitors

• No formal marketing department

H. Internal Factor Evaluation Matrix

The identified key internal factors are summarized and presented in the

IFE Matrix.


The weights given represent their relevance in the overall internal

business operations.

The ratings given indicates if the internal factor is a major or a minor one.

Figure 7, Internal Factor Evaluation Matrix

Key Internal Factors

Strengths Production processes are ISO 9001 certified Products are Halal and Kosher certified Enjoys benefits of being PEZA registered Refinery is located in South East Asia Can easily acquire working capital / long-term loan R & D of SYKCL is top-notch and is shared to SOCC Has established loyal customer base WeaknessesLow inventory turnover of 3.29 timesHigh Debt Ratio of P0.72 for every P1.00Return on Sales of only 0.47%Fixed Assets Turnover of 0.99 times compared to Kao’s 4.70Current Ratio of 0.50:1.00

SOCC’s score of 2.69 indicates that the company has an average internal

strength. The company garnered high points with regards to product quality but it

was partly mitigated by its financial troubles, especially in profitability and high

debt ratio.


CHAPTER VI

STRATEGY FORMULATION

Chapters IV and V comprised the Input stage of the “Comprehensive

Strategy-Formulation Framework”. To come up with the necessary strategies to

be employed, various analytical tools / matrices were developed during the

“Matching Stage”.

In this Matching Stage, the matrices utilized are the SWOT Matrix, SPACE

Matrix, Boston Consulting Group (BCG Matrix), Internal-External (IE) Matrix, the

Grand Matrix and the Quantitative Strategic Planning Matrix.

A. SWOT Matrix

The SWOT Matrix tries to find out how to address existing opportunities

and threats surrounding an organization with its present strengths and

weaknesses.

Each of the strategies presented in the said matrix are mutually exclusive

and doesn’t rely on achievement of the others for it to be feasible. Additionally,

the strategies are mere suggestions on what are possible actions to take and are

not imperative to be successful in the industry.


Figure 8. SWOT Matrix

Strengths1.) Production processes areISO 9001 certified2.) Products are Halal and Kosher Certified3.) Enjoys benefits of beingPEZA registered4.) Refinery is located in SouthEast Asia5.) Can easily acquire workingcapital / long-term loan6.) R & D of SYKCL is top-notch and is shared to SOCC7.) Has established loyalcustomer base

Opportunities1.) Glut in crude glycerineinhibits market attack from substitutes2.) Sales growth in productswith glycerine requirements3.) Competition with identified competitors are consideredfriendly4) Excess refined glycerine canbe converted to ethanol whichis highly saleable5.) Lower peso exchange rateagainst the dollar meanscheaper imported raw materials6.) Asia Pacific is the fastestgrowing regional market forflame retardantss

SO strategies1.) Improve sales efforts forJewish and Islam market (O2,S2)2.) Ask assistance fromSYKCL about convertingexcess refined glycerine toethanol (O4, S6)3.) Concentrate marketingefforts for TBA in Asia-Pacificregions (O6, S4)


Strengths1.) Production processes areISO 9001 certified2.) Products are Halal andKosher Certified3.) Enjoys benefits of beingPEZA registered4.) Refinery is located in SouthEast Asia5.) Can easily acquire workingcapital / long-term loan6.) R & D of SYKCL is top-notch and is shared to SOCC7.) Has established loyalcustomer base

Threats1.) Glut in crude glycerine2.) Substitutes are preferred ifpriced lower3.) GMP certificationrequirement of localpharmaceutical companies4.) Most glycerine refineries arelocated in South East Asia, UKand USA5.) Lower peso exchange rateagainst the dollar means lowersales amount6.) Increasing Oil prices in theworld market7.) There's minimal switching cost for buyers of SOCC

ST strategies1.) Consistently deliver rawmaterial requirements of loyalcustomers (T7, S7)2.) Compete with US glycerinerefineries & polymer producersin terms of lower distributioncosts (T4, S4)


B. SPACE Matrix

The matrix takes into account the company’s internal and external

strategic position. It’s basically a holistic approach to determine where a

company strategically stand in the midst of the industry.

The SPACE Matrix for SOCC resulted in recommendation of an

aggressive stance.

Figure 9. SPACE Matrix

Internal Strategic

Position External Strategic Position(1 to 6) Financial Strength (-6 to -1) Environmental Stability

6 Sales Revenue -2 Inflation rate

3 Profit Margin -1 Taxation

2 Return on Investment -1 Technological changes

2 Liquidity -1 Competitive pressures

2 Working Capital -1 Access to financing

3 Inventory turnover -2 Monetary policy

3 Long-term debt -3 Foreign exchange fluctuations

3.00 -1.57

Total Y axis score = 1.43

(-6 to -1) Competitive Advantage (1 to 6)

-1 Technology utilized 5 Industry growth

-1 Industry know-how 4 Number of competitors

-3 Production capacity 4 Competitors' performance

-1 Customer loyalty 6 Barriers to entry

-1 Product quality 5 Potential Profit


C. Boston Consulting Group Matrix

the Boston Consulting Group (BCG) Matrix is designed specifically

to enhance a multi-divisional firm’s efforts to formulate strategies. It graphically

portrays differences among divisions in terms of relative market share position

and industry growth.


Figure 10. BCG Matrix

The Glycerine and TBA Division of SOCC both appeared in Quadrant I

of the BCG Matrix. This means that both divisions have low global market share

but belong in a growing industry. Therefore, the cash generated in this quadrant

is low while the cash consumption needs are high.

The divisions under quadrant I are suggested to take Market

Penetration, Market Development, Product Development or Divestiture

strategies.


D. Internal-External Matrix

Using the EFE Matrix and IFE Matrix scores, the Inter-External (IE)

Matrix positions an organization in a nine-cell display. Cells I, II and IV means

strong position, cells III, V and VII means average position and cells VI, VIII and

IX means weak position.

Figure 11. IE Matrix

Both the EFE and IFE scores of SOCC suggested that it is in an

average position within the industry and against its competitors. The result, then,

of the IE Matrix placed SOCC in division V of the graph. “Hold and Maintain”

strategies are suggested for companies belonging in this division. Such,

strategies include Market Penetration and Product Development.


E. The Grand Matrix

Figure 12. The Grand Matrix

Both the Glycerine and TBA divisions are in a weak competitive position

against existing competitors but each respective industries are growing. To

make all matrices concur with the same result, the suggested strategies for

SOCC are Market Penetration, Product Development and Related Diversification.


CHAPTER VII

STRATEGIC OBJECTIVE AND RECOMMENDATION STRATEGIES

A. Strategic Objectives

• To continuously improve existing chemical products to be at par with

industry leaders in terms of quality.

• Develop new product variants to accommodate the different chemical

specifications of various customers.

• Maintain certifications in ISO 9001, Kosher and Halal by allocating funds

for Plant repairs and maintenance.

• To improve export sales by at least 5% per year in markets currently

served by acquiring competitors’ market share through increased product

awareness.

• To not only improve export sales but also compete aggressively within the

domestic market.

• Improve Net Income by at least 10% each year from preceding fiscal year.

B. Recommended Business Strategies

• Acquire the GMP certification required by Philippine Pharmaceutical

companies to be competitive locally.

• Allocate funds for capital expenditures on major repairs and maintenance

to maintain adherence to global standards.


• Receive research and development support from SYKCL to improve

existing chemicals and develop new ones.

• Search for new customers in the Asia Pacific region and stress out to

them the excellent quality of chemicals offered.

• Hedge foreign currency denominated transactions, where possible.

C. Organization Strategies

1. Logistics

Improve the current logistical practice of stocking up on raw materials.

Due to glut in crude glycerine, prices are expected to go down. Purchasing more

than what the company needs now would only tie-up working capital to idle

inventory. It will not only make manufacturing costs higher in the long run, it will

also cause liquidity problems.

Utilize ocean freight as much as possible and avoid selling through air

freight. The latter definitely costs more than the former.

2. Finance

Hedge all importation and exportation to significantly mitigate the

exposure to volatility of foreign exchange market.

Any further credit line availments, whether for short-term or long-term

lending, should be in local currency to avoid further exposure to foreign currency

exchange fluctuations.


Negotiate with suppliers for peso denominated crude glycerine purchases

when US Dollar is relatively stronger than Peso and, inversely, pay for the usual

dollar-denominated purchases when Peso is stronger than the Dollar.

3. Production

Ensure efficiency in overall production process. Production yield should

always meet the standard and if not, it should be reported and investigated.

Wastage should be monitored and corrected where discovered.

Quality controls should be tight. In no circumstances that a sub-standard

product shall be delivered to a customer. In case the undesired happen, the

chemicals should be returned with SOCC covering the entire cost of freight and

insurance.

Maintain adherence to international standards. Maintenance of ISO 9001

certification is imperative to success.

Efforts should be continued towards achievement of GMP certification.

4. Sales

Sales quotas should be established. These quotas will be based on target

increase in sales of 5% per year. The quota should be met on a monthly basis to

allow the production department to produce at the most efficient rate.

Export sales should be focused in the Asia Pacific region. This region is

closest to Philippines than any other region. Freight expense relative to these


sales destinations should prove to be lower than freight to farther regions.

Besides, the growing economy of China and other Asian countries is driving the

increase in demand of glycerine and epoxy resin.

Once the GMP certification is obtained, increase efforts to sell glycerine to

local pharmaceutical companies.

Start selling epoxy resin to electronics manufacturers in the country.

Negotiate for sales with FOB terms to avoid shouldering costly export

freight charges.

D. Financial Projections


Figure 14. Projected Profit and Loss Statement, 2011 to 2013

2011Sales 1,066,913,292 1,122,939,004

Total Materials Used 510,663,144 Direct Labor 17,236,894 Depreciation 112,628,135 Other Overhead Cost 248,321,483

Total Manufacturing Cost 888,849,657 In process - Beg 6,651,530 In process - End (3,494,017)

Cost of Goods Manufactured 892,007,171 Finished Goods - Beg 137,095,040

Interplant Transfers (61,443,604

)

Finished Goods - End (77,624,569

)Cost of Goods Sold 890,034,037

Gross Profit 176,879,254 Adminitrative & other expense 82,213,007 Income from Operations 94,666,247 Other Expenses:

Interest Expense (13,657,424)Foreign Exchange loss (3,000,000)

Sales are projected to increase by at least 5% year after year. This is

feasible considering the company’s historical sales figures.

Raw materials used is based on actual Fiscal Year 2010 weighted-

average raw material cost per unit produced. Based then on projected sales, the

raw materials required are derived.

The ending Finished Goods Inventory is equivalent to projected safety

stocks required, which is one month worth of projected sales. This safety stocks


is lower than what is currently held by the company. This low safety stocks

should be sufficient to cover the next month’s projected sales and at the same

time, release resources that are currently tied-up in idle inventory.

The in-process goods are based on Fiscal Year 2010’s ratio of in-process

goods to Total Manufacturing Cost, which is about 0.39%.

Depreciation is expected to be fixed throughout the projected years

because there’s no projected capital expenditures for the covered years.

Interest Expense is based on projected outstanding loan amount during

the projected years. The outstanding loan amount, in turn, is based on actual

schedule of loan payments, as mandated by the lending banks.

Foreign Exchange Losses are assumed to be conservative. The actual

foreign exchange fluctuations during fiscal year 2010 actually proved to be

beneficial.

Provision for income tax shall be based on the Gross Income Tax rate of

5% as it is the preferential tax rate enjoyed by PEZA registered corporations.

All other expenses shall be based on preceding years expense plus an

allowance of 1%.

The projected profit and loss statement reflect both expenses that incurs

cash outlay and those that doesn’t. To this end, a Projected Cash Flow

Statement is prepared to see future cash movements.


Figure 15. Projected Cash Flow 2011 to 2013

2011 2012

Beginning Cash Balance 10,606,992 49,012,538

Collection

from 2010 sales 43,090,510

from 2011 sales 960,221,962 106,691,329

from 2012 sales 1,010,645,104

from 2013 sales

Net cash inflow 1,003,312,473 1,117,336,433

Payments

from 2010 purchases (125,127,113)

from 2011 purchases (357,464,201) (153,198,943)

from 2012 purchases (414,260,731)

from 2013 purchases

Other Cash expenses (347,771,384) (375,262,680)

Loan Payment (112,519,606) (96,777,767)

Interest Expenses (13,657,424) (11,915,424)

Realized Forex Losses (3,000,000) (3,000,000)

The beginning cash balance of 2011 projection is based on actual 2010

year-end balance. Collections shall be 90% of sales made during a projected

year and the last 10% shall be collected on the next projected year. Payments for

raw materials purchases shall be 70% of raw materials purchases during a

projected year and the last 30% shall be collected on the next projected year.

Loan payments are based on actual loan payment schedule mandated by

the lending banks. In the same manner, interest expenses shall be based on the

projected outstanding loan balances.


Realized foreign exchange losses are projected to be fixed throughout the

projected years. Although this doesn’t entail a cash outlay, it reduces the amount

of foreign currency held by the company or increases the amount of loan

outstanding through restatements. This account is actually used as a buffer to

be conservative in Projected Profit and Loss Statement and in Projected Cash

Flow Statement.

Other expenses shall be for payment of labor, cash overhead expenses

and other administrative cash expenses.


CHAPTER VIII

ACTION PLANS AND DEPARTMENTAL PROGRAMS

The following action plans are in random order; but it is imperative that the

company takes these steps to counter present and prospective problems in the

chemical industry and address existing opportunities.

Table 4. Action Plans

Actions required Responsible department/s

Compute for the economic order quantity to release excess resources that are tied-up in idle inventory.

Production and Logistics

Implement strict adherence to industry yield standard.

Production – Quality Control Department

Maintain adherence to ISO standards and other certifications such as Halal and Kosher, by spending for necessary Plant improvement, repairs and maintenance.

Production – Quality andSystems and Finance Department

Budget and spend for necessary plant expenditures towards achievement of GMP certification.

Production – Quality andSystems and Finance Department

Prevent delays in delivery to avoid utilizing air freights.


Negotiate with suppliers for Logistics in collaboration


Pay for the usual dollar-denominated purchases when Peso is stronger than the Dollar

Logistics in collaboration with theFinance Department.

Hedge all import and export transactions.

Finance Department

Further borrowings should be Peso-denominated.

Senior Vice President – Treasuryin collaboration with Finance Department

Negotiate for sales with FOB terms to avoid shouldering costly export freight costs.

SYKCL marketing department in collaboration with SOCC Sales Department

Establish sales quotas that reflect projected sales and monitor its progress.


Focus export sales in Asia-Pacific region to take advantage of its growing economy.


Upon acquisition of GMP certification, increase efforts to sell glycerine to local

Sales Department


CHAPTER IX

STRATEGY EVALUATION, MONITORING AND CONTROL

A. Evaluation Method

To ensure that strategies developed are in place and implemented,

adhered to, and are delivering the expected results, a system of evaluation

monitoring and control must be established. The most common method of

performance monitoring is the Balanced Scorecard.

A Balanced Scorecard defines what management means by

"performance" and measures whether management is achieving desired results.

The Balanced Scorecard translates Mission and Vision Statements into a

comprehensive set of objectives and performance measures that can be

quantified and appraised. These measures typically include the following

categories of performance:

• Financial performance (revenues, earnings, return on capital, cash

flow);

• Customer value performance (market share, customer satisfaction

measures, customer loyalty);


• Internal business process performance (productivity rates, quality

measures, timeliness);

• Innovation performance (percent of revenue from new products,

employee suggestions, rate of improvement index);

• Employee performance (morale, knowledge, turnover, use of best

demonstrated practices)

The flow of how a balanced scorecard connects Vision and Strategy is

shown below .


Figure 16. Balanced Scorecard

B. Key Metrics

Proper evaluation, monitoring and controlling strategies would

entail an objective means of appraisal. Management shouldn’t base appraisals

on personal perception, otherwise, managers will have different opinions on the

progress of strategies implemented. The balanced scorecard shall provide the

system for objective appraisal.


The key metrics or criteria to be included in the balanced scorecard are:

Sales Growth, Target Net Profit Margin, Spending Efficiency, Product Quality,

Production Yield, Asset Utilization, Customer Loyalty, Market Share, Customer

Complains, Acquisition of New Customers, Employee Turnover, and Employee

Talent.

The Financial Category, which includes Sales Growth, Target Net Profit

Margin, and Spending Efficiency, is to address the key success factors Financial

Stability, Cost of Production and Production Efficiency.

The Internal Business Process Category, which includes Product Quality,

Production Yield and Asset Utilization, is to address the key success factors

Product Quality, Quality Assurance and Production Efficiency.

The Customer Category, which includes Customer Loyalty, Market Share,

Customer Complains and Acquisition of New Customers, is to address the key

success factor Customer.

The Learning and Growth Perspective Category, which includes Employee

Turnover and Employee Talent, is to address the key success factor Cost of

Production (Labor) and Industry Know-how.

The proposed Balanced Scorecard for periodic evaluation, monitoring and

control of proposed strategies are shown below:


Table 5. Proposed Balanced Scorecard Format

Category Metric

Financial

Sales Growth % of increaseNet Profit Margin % of SalesSpending % of variance

Internal Business Process

Product QualityNumber of defects

reportedProduction Yield % of inputAsset Utilization % capacity attained

Customer

Customer Loyalty Retention rateMarket Share % of global market

Complaintsnumber ofcomplaints

New Customersnumber of new

customers

Learning & Growth

Employee Turnover Length of serviceEmployee


ANNEX

Audit Checklist

Management Audit ChecklistDoes the firm use strategic-management concepts?Are the company objectives and goals measurable and well communicated?Do managers at all hierarchical levels plan effectively?Do managers delegate authority well?Is the organization's structure appropriate?Are job descriptions and job specifications clear?Is employee morale high?Are employee turnover and absenteeism low?Are organizational reward and control mechanisms effective? Marketing Audit ChecklistAre markets segmented effectively?Is the organization positioned well among competitors?Has the firm's market share been increasing?Are present channels of distribution reliable and cost-effective?Does the firm have an effective sales organization?Does the firm conduct market research?Are product quality and customer service good?Are the firm's products priced appropriately?Does the firm have an effective promotion strategy?Are marketing, planning and budgeting effective?Do the firm's marketing managers have adequate experience and training?

Finance / Accounting Audit ChecklistWhere is the firm financially strong and weak?Can the firm raise needed short-term capital?Can the firm raise needed long-term capital?Does the firm have sufficient working capital?


Production/Operations Audit ChecklistAre supplies of raw materials, parts, and subassemblies reliable and reasonable?Are facilities, equipment, machinery and offices in good condition?Are inventory-control policies and procedures effective?Are quality-control policies and procedures effective?Are facilities, resources, and markets strategically located?Does the firm have technological competencies? Research and Development Audit ChecklistDoes the firm have R&D facilities?Are R&D facilities adequate?If outside R&D firms are used, are they cost-effective?Are R&D resources allocated effectively?

Summary of Audit Checklists

Satisfactory?

Management Audit Checklist


Halal Product Certificate


Kosher Product Certificate


ISO 9001:2008 Certificate


2009 Sales Revenue per country of destination

Japan P 794,785,196.42

China /Shanghai 42,529,408.21

Hong Kong 35,655,749.50

Korea 32,383,303.56

Malaysia 75,027,521.87

Taiwan 497,900.00

Thailand 28,622,631.33

Vietnam 1,417,201.17

Denmark 25,718,408.01

France 2,588,577.48


United States Federal Tax Rate 2010

Taxable Income Tax Rate

0 to 50,000 15%

50,000 to 75,000 $7,500 + 25% of amount over 50,000

75,000 to 100,000 $13,750 + 34% of amount over 75,000

100,000 to 335,000 $22,250 + 39% of amount over 100,000

335,000 to 10 M $113,900 + 34% of amount over 335,000

10 M to 15 M $3,400,000 + 35% of amount over 10,000,000


Action Plans

Actions required Responsible department/s

Compute for the economic order quantity to release excess resources that are tied-up in idle inventory.


Implement strict adherence to industry yield standard.

Production – Quality Control Department

Maintain adherence to ISO standards and other certifications such as Halal and Kosher, by spending for necessary Plant improvement, repairs and maintenance.

Production – Quality and Systems and Finance Department

Budget and spend for necessary plant expenditures towards achievement of GMP certification.

Production – Quality and Systems and Finance Department

Prevent delays in delivery to avoid utilizing air freights.


Negotiate with suppliers for peso denominated crude glycerine purchases when US Dollar is relatively stronger than Peso.


Pay for the usual dollar-denominated purchases when Peso is stronger than the Dollar


Hedge all import and export transactions.

Finance Department

Further borrowings should be Peso-denominated.

Senior Vice President – Treasury in collaboration with Finance Department

Negotiate for sales with FOB SYKCL marketing


Establish sales quotas that reflect projected sales and monitor its progress.


Focus export sales in Asia-Pacific region to take advantage of its growing economy.


Upon acquisition of GMP certification, increase efforts to sell glycerine to local

Sales Department


Proposed Balanced Scorecard FormatCategory Metric

Financial Sales Growth % of increaseNet Profit Margin % of SalesSpending % of variance

Internal Business Process

Product QualityNumber of defects

reportedProduction Yield % of inputAsset Utilization % capacity attained

Customer

Customer Loyalty Retention rateMarket Share % of global marketComplaints number of complaints

New Customersnumber of new

customersLearning & Employee


BIBLIOGRAPHY

Published Documents:

Sakamoto Orient Chemicals Corporation, Audited Financial Statements, 2010

Unpublished Documents:

3M, Annual Report 2008

Kao, Annual Report 2010

Kao, Financial and Operating Review 2010

Sakamoto Orient Chemicals Corp., Employees’ Handbook, 2010

Independent Studies:

ABG, Inc., Glycerin Market Analysis, 2006

Jordan Economic and Commerce Bureau, Sorbitol Production Project, 2005

Bromine Science and Environmental Forum, Tetrabromobisphenol A, for Printed Wire Boards and ABS plastics, September 2010

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SOCC stratma paper

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