CASE: 3

IIBMS – DOW CHEMICAL

IIBMS – DOW CHEMICAL

A handful of major players, compete head-to-head around the world in the chemical industry. These companies are Dow Chemical and Du Pont of the United States, Great Britain’s ICI, and the German trio of BASF, Hoechst AG, and Bayer. The barriers to the free flow of chemical products between nations largely disappeared in the 1970s. This, along with the commodity nature of bulk chemicals and a severe recession in the early 1980s, ushered in a prolonged period of intense price competition. In such an environment, the company that wins the competitive race is the one with the lowest costs. Dow Chemical was long among the cost leaders.

For years Dow’s managers insisted that part of the credit belonged to its “matrix” organization. Dow’s organizational matrix had three interacting elements: functions (such as R&D, manufacturing, and marketing), businesses (like ethylene, plastics, and pharmaceuticals), and geography (for example, Spain, Germany, and Brazil). Managers’ job titles incorporated all three elements (plastics marketing manager for Spain), and most managers reported to at least two bosses. The plastics marketing manager in Spain might report to both the head of the worldwide plastics business and the head of the Spanish operations. The intent of the matrix was to make Dow operations responsive to both local market needs and corporate objectives. Thus the plastics business might be charged with minimizing Dow’s global plastics production costs, while the Spanish operation might determine how best to sell plastics in the Spanish market.

When Dow introduced this structure, the results were less than promising: Multiple reporting channels led to confusion and conflict. The many bosses created an unwieldy bureaucracy. The overlapping responsibilities resulted in turf battles and a lack of accountability. Area managers disagreed with managers overseeing business sectors about which plants should be built where. In short, the structure, didn’t work. Instead of abandoning the structure, however, Dow decided to see if it could made more flexible.

Dow’s decision to keep its matrix structure was prompted by its move into the pharmaceuticals business is very different from the bulk chemicals business. In bulk chemicals, the big returns come from achieving economies of scale in production. This dictates establishing large plants in key locations from which regional or global markets can be served. But in pharmaceuticals, regulatory and marketing requirements for drugs vary so much from country to country that local needs are far more important than reducing manufacturing costs through scale economies. A high degree of local responsiveness is essential. Dow realized its pharmaceutical business would never thrive if it were managed by the same priorities as its mainstream chemical operations.

Accordingly, instead of abandoning its matrix, Dow decided to make it more flexible to better accommodate the different businesses, each with its own priorities, within a single management system. A small team of senior executives at headquarters helped set the priorities for each type of business. After priorities were identified for each business sector, one of the three elements of the matrix—function, business, or geographic area—was given primary authority in decision making. Which element took the lead varied according to the type of decision and the market or location in which the company was competing. Such flexibility that all employees understand what was occurring in the rest of the matrix. Although this may seem confusing, for years Dow claimed this flexible system worked well and credited much of its success to the quality of the decisions it facilitated.

By the mid-1990s, however, Dow had refocused its business on the chemicals industry, divesting itself of its pharmaceutical activities where the company’s performance had been unsatisfactory. Reflecting the change in corporate strategy, in 1995 Dow decided to abandon its matrix structure in favor of a more streamlined structure based on global product divisions. The matrix structure was just too complex and costly to manage in the intense competitive environment of the time, particularly given the company’s renewed focus on its commodity chemicals where competitive advantage often went to the low-cost producer. As Dow’s then-CEO put it in a 1999 interview, “We were an organization that was matrixed and depended on teamwork, but there was no one in charge. When things went well, we didn’t know whom to reward; and when things went poorly, we didn’t know whom to blame. So we created a global divisional structure and cut out layers of management. There used to be eleven layers of management between me and the lowest-level employees; now there are five.

Questions

1. Why did Dow Chemical first adopt a matrix structure? What benefits did it hope to derive from this structure?
2. What problems emerged with this structure? How did Dow try to deal with them? In retrospect do you think those solutions were effective?
3. Why did Dow change its structure again in the mid-1990s? What was Dow trying to achieve this time? Do you think the current structure makes sense given the industry in which Dow operates and the strategy of the firm? Why?

IIBMS – DOW CHEMICAL

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