[PCT Executive Forum] What's Next For Dow?

Few chemical companies could sustain losing its flagship product as Dow AgroSciences did three years ago when, under enormous pressure from environmental lobbyists and the regulatory community, the company entered into an agreement with the EPA to voluntarily remove most uses of Dursban from the marketplace, resulting in a serious financial blow to the Indianapolis-based company, which has long been a leader in the pest control industry.

To the company’s credit, however, Dow AgroSciences began investing significant R&D dollars in a new technology, termite baits, that ultimately would result in a paradigm shift in the way many pest management professionals perform termite work. Today, Dow AgroSciences employs about 6,000 people in more than 50 countries, generating nearly $3 billion in annual revenues, and the Sentricon® Termite Colony Elimination System is protecting more than 1 million structures throughout the United States, including such historic sites as the White House, Statue of Liberty and Graceland.

In a pro-active attempt to address global changes in the chemical marketplace, Dow AgroSciences recently announced a corporate restructuring designed to place greater emphasis on its pest management business. The individual selected to lead Dow’s Global Pest Management Team is Elin D. Miller, a former association executive and California state regulator with deep roots in the chemical industry.

In addition to her duties as Vice-President of Global Pest Management at Dow, Miller serves as Vice-Chairman of Responsible Industry for a Sound Environment (RISE) and the President’s Cabinet of California Polytechnic University. Longtime colleague Lon Records, president of Target Specialty Products, describes Miller as a "can-do" person with strong interpersonal skills and analytical abilities. "In her role as Executive Director of the Western Agriculture Chemical Association, Elin always had a good grasp of the issues and was very politically astute," he said. "She has the ability to grasp complex issues, determine where the pressure points are, and then build consensus around a particular point of view, which is why she’s been so successful in her career."

PCT Publisher Dan Moreland recently sat down with Miller and Mark Neterer, National Sales Leader for Professional Pest Management, to discuss Dow AgroSciences’ past and future, which some say is in doubt due to persistent rumors about the possible sale of the company, rumors both Miller and Neterer deny.

Dan Moreland: With all of the consolidation that is occurring at the basic manufacturer level, PCOs are keenly interested in the future plans of key players serving the market, such as Dow AgroSciences. As the person charged with leading this business, can you give our readers some insights about the changes that are occurring at the company to address the challenges posed by a rapidly changing marketplace?

Elin Miller: We’ve been in the pest management business for more than 40 years with quite a legacy of industry support and commitment. Probably the biggest change to occur at our company in recent years has been the decision to restructure Dow AgroSciences from five global business units to three global business units – agricultural chemicals, biotechnology and pest management. Fortunately for this industry, pest management is one of those three global business units, which means we’re going to be able to focus our R&D efforts on the unique needs of this important market to provide innovative solutions and unmatched customer support.

Moreland: That’s a major structural change for a company the size of Dow AgroSciences. What factors prompted company management to go from five business units to three?

Miller: A desire to better meet the product needs of a diverse customer base was one of the motivating factors. We wanted to have a better understanding of all of our customers, including our pest control customers. Another driving force in the decision was the unique growth opportunities that we recognize in the specialty chemicals market due to the success of our unique business model for Sentricon compared to other areas of our business. Rather than having various specialty markets included in our agricultural operations, we decided to break them out so we could focus our energies more directly on both the agchem and specialty markets. This way, they both get the attention they deserve.

Moreland: Why are you so convinced significant growth opportunities exist in the pest management industry when the professional market only penetrates 17 to 20 percent of the consumer market? If end-users of your products can’t grow their businesses, how will you grow yours?

Miller: That’s why I’m optimistic. I think the current size of the structural pest control market versus what it could be is a key reason I feel good about this market. That very issue was talked about extensively at the NPMA Convention and is certainly the focus of the Professional Pest Management Alliance (PPMA), with which Mark Neterer of our staff plays an active role. There are some real growth opportunities in the pest management industry or we wouldn’t continue to invest in this area of our business.

For example, as a result of our introduction of the Sentricon Termite Colony Elimination System, customized business relationships, and aggressive consumer awareness efforts to increase consumer demand, we saw significant growth in the termite market. By creating a new product category, we helped grow the market nicely. I think the general pest control market offers the same potential if we as a company – and the industry as a whole – continue to innovate.

Mark Neterer: It’s also important to point out that growth is a relative term. The agchem market is currently in a down cycle, so as a business we’re looking at those markets that offer the best opportunity for growth, and structural pest control is certainly one of those markets. We think we can help expand the customer base that purchases professional pest management services.

Moreland: So you’re saying a depressed worldwide agrochemical market is actually good for the pest management industry? Isn’t that ironic given Dow AgroSciences’ agricultural chemical roots?

Miller: That’s not exactly true. We’re not happy about the downturn in the agchem market, but the reality is we’ve always had to prioritize the markets we’re involved in to determine where we’re going to invest our R&D dollars. Certainly, agchem is our largest, most significant market, but pest management is an important market as well, as illustrated by our decision to make it a freestanding business unit on a global basis. The agchem market will come back eventually, but even when it does we’ll continue to invest in the pest management industry.

Neterer: On the flip side, I think it’s important to realize that the pest management industry could find itself in a precarious situation if the agchem market doesn’t turn around at some point. As you know, the vast majority of new active ingredients and innovative technology have come out of the agricultural sector, so if there is a reduced emphasis on agricultural R&D you run the risk of fewer active ingredients being developed overall, which could hurt the pest control industry. Fortunately, in our case we’ve been investing in early-stage R&D efforts to identify active ingredients that have specific applications for the structural pest control industry. That is not necessarily the case with all manufacturers. On the one hand, the pest management industry offers great opportunity. On the other hand, I think it could find itself in a precarious position if more manufacturers don’t dedicate targeted R&D dollars to this market.

Moreland: Do you view the market consolidation that is occurring at the basic manufacturer level as a challenge or an opportunity for Dow AgroSciences?

Miller: I view it as an opportunity. Certainly, when any company goes through a merger or acquisition its people and resources are diverted somewhat, so there’s certainly an opportunity to gain market share. If you study history, two or three years after an acquisition a company usually loses market share. It can be a very significant loss in market share or a negligible loss in market share; it really depends on how well the integration goes. That’s why Dow is so emphatic about how we approach the merger process once we’ve purchased a property. We want to protect as much of the value of the company we’re purchasing as possible, so we’re very methodical in how we transition a company once it’s been purchased.

Moreland: As a result of mergers and acquisitions in the industry, do you expect some movement in the products being offered by manufacturers as they streamline portfolios or divest certain niche products?

Neterer: You’ll probably see some of that, but companies are going to be selective in what they add or delete from their product offerings. Dow AgroSciences would love to have a broader product portfolio and we’re working towards that goal, but we’re not going to go down that path simply to say we’re a full-line supplier. Any product acquisition will have to make good business sense for us as a company.

Moreland: Are you currently in an acquisition mode for new products?

Miller: We’re constantly looking for new products to add to our portfolio. The key is any new product must add value for our shareholders. If an opportunity presented itself, we certainly would consider a product acquisition.

Moreland: Do you see any of those new products moving over from Dow AgroSciences’ biotechnology sector?

Miller: I think the first biotechnology-based product that will be introduced to a specialty market will be in the turf and ornamental field. The pest control industry will at some point benefit from biotechnology research, but not in the foreseeable future.

Moreland: If, as you indicated previously, basic manufacturers view specialty markets like structural pest control as offering significant growth potential, do you see the number of companies entering this marketplace increasing or decreasing in the years ahead?

Miller: From my standpoint, I see the potential for a short-term increase in the number of companies entering the pest control marketplace. It offers a significant amount of opportunity, so a company would be foolish not to at least consider entering the marketplace. However, if you do not have an infrastructure in place or you do not have a history in the pest control market, you could be in for a surprise. It’s not as easy as it looks from the outside either from a regulatory, product stewardship or customer service perspective. I see the potential for the entry of some new players into the marketplace, but it’s not going to be easy for them.

Moreland: Dow AgroSciences has been one of the industry’s longtime players, yet it has undergone some dramatic changes in recent years to remain competitive in a highly competitive marketplace. The Dow AgroSciences of 2003 is very different from the Dow AgroSciences of 1993. Given all the changes that have occurred in the past decade, how do you think the company currently is perceived by the average pest management professional?

Neterer: The first thing I would point out is that I believe the industry recognizes that Dow AgroSciences is committed to product stewardship, whether it’s for Vikane, Dursban or Sentricon. The industry knows that Dow AgroSciences is a pioneer with a relentless focus on product development and environmental stewardship. I also believe Dow is perceived as a company that is committed to training. Throughout its history, because of Dow’s technical expertise and business management support, the pest control industry has turned to Dow for educational and training programs to grow its business. So, I think overall we’re perceived positively.

Is the industry’s perception of Dow AgroSciences good across the board? Unfortunately, the answer is no. Not everyone in the industry views product stewardship and training as essential. There is a segment of the industry that would rather simply purchase a product and be on their way. For those companies, we’re not perceived as positively as we would like, but we’re working at it.

Miller: To be very candid, in recent years we’ve focused our advertising efforts on increasing consumer demand, which has helped us grow the market for termite control services, but it’s a strategy that has hurt us in other ways. As a result, at times we’ve not communicated with our own customer base as effectively as we could. In the future, however, you’ll see a greater emphasis on Dow AgroSciences communicating more directly with the pest control industry. We’re not going shift away from consumer marketing, but there will be a better balance. You’ll see us communicating more aggressively in the pest control market in 2003 and beyond, and I believe that will enhance how we’re perceived by the marketplace.

Moreland: One of the issues that damaged your relationship with some in the industry is the controlled rollout and consumer marketing of the Sentricon Termite Colony Elimination System. Do you think the industry understood what you were trying to accomplish with such a strategy?

Neterer: There are so many companies in our industry that do not attend the NPMA Convention or are not involved in other ways at the state or national level that they likely didn’t have a full appreciation for our market strategy. All they saw was that Dow was suddenly going in a different direction with the unique business model of the Sentricon System, moving away from the traditional sales and marketing model. They didn’t understand that we were creating an entirely new product category (termite baits) and that posed some significant challenges for us. We chose to take our message directly to the consumer, but it didn’t mean we were ignoring the pest control industry. We just thought a controlled product rollout offered by Authorized Operators (AOs), supported by an aggressive consumer marketing effort to help create end-user demand, provided the best chance for a successful product launch and helped ensure performance success of the Sentricon System.

Moreland: Now that Sentricon is firmly established in the minds of consumers and pest management professionals alike, how do you plan to promote the product, as well as the company, in the future?

Miller: As it relates to Sentricon, we will continue to invest in our consumer marketing initiatives, but we’re going to be doing some things to raise the profile of Dow AgroSciences in the industry in the months ahead. First, we plan to raise our visibility through continued industry involvement in various trade association activities.

For instance, Mark Neterer serves on the Board of the Professional Pest Management Alliance and I’m Vice-Chairman of Responsible Industry For A Sound Environment (RISE). Mark and I, as well as other members of the Dow AgroSciences team, will continue to be involved in various industry leadership positions.

Second, while we will continue our focus on consumer advertising, we’ll have some presence in the industry trade publications.

Moreland: It sounds like Dow Agro-Sciences has some interesting plans for the industry, but can the company get to where it wants to be without an expanded general use portfolio, particularly a product to replace Dursban?

Neterer: While we are very pleased with where we are at right now with our Sentricon business and our Vikane business, we’re always interested in additional market opportunities. Our Sentricon business continues to grow nicely, but despite that growth we remain interested in expanding our product portfolio to provide pest management solutions as evidenced by our significant research efforts. However, it’s going to take some time. It won’t happen overnight.

Miller: We also have two major product introductions planned for 2003. First, we’re introducing noviflumuron, a fast-acting chitin synthesis inhibitor, as Recruit III and Recruit III AG termite baits for use with the Sentricon Termite Colony Elimination System.

Second, we’ll be introducing ProFume gas fumigant (sulfuryl fluoride), which controls a broad spectrum of stored product pests and other insects quickly and effectively. Both of these products illustrate Dow’s commitment to continuous innovation.

Moreland: You mentioned that Dow AgroSciences continues to grow its Sentricon business. That’s surprising given the influx of several new termite baits and the growing popularity of non-repellent termiticides. What accounts for the growth?

Miller: I would attribute it to continued expansion of the termite control product category.

Neterer: I also would attribute it to performance success. I think what the market realizes, and what the consumer is feeding back to us, is that Sentricon works. Our Authorized Operators are doing a fabulous job of strengthening their customer relationships and servicing their accounts. At the end of the day, the reason that Sentricon is successful is the technology is great and our Authorized Operators are servicing the product properly.

Moreland: One of the key advan-tages of baits is they are non-intrusive, meaning homeowners experience little or no disruption to their home when they’re installed around a property. With non-repellent termiticides offering such high levels of control, and some even suggesting that control could be achieved through perimeter treatments, is that a concern for Dow AgroSciences?

Neterer: We’re definitely keeping an eye on it. We’re concerned about it for a couple of different reasons. First, we’re concerned about it from an industry standpoint since there has been very little research on the effectiveness of perimeter termiticide applications. Second, human nature dictates that some people will take the path of least resistance to accomplish something, so we have a concern that pest management professionals may not be as diligent in managing the treatment process with perimeter termiticide applications as AOs are with Sentricon. At Dow AgroSciences, we’re very concerned about managing the integrity of our product offerings, so we’ll continue to support customers with our expertise and resources to help them implement proven pest management solutions.

Moreland: In terms of your interaction with PCOs, what type of feedback are you getting about Sentricon? Have you heard consistently what they like and dislike about the product, as well as any challenges they’ve encountered with the technology?

Neterer: Our AOs are not afraid to tell us what they think, both good and bad. Although we conducted a lot of research before introducing the product to the marketplace, we couldn’t predict everything our customers were going to encounter in the field. As time has passed, some things have popped up that we have needed to address, but we’re willing to invest what is necessary to address those problems and continue to innovate. If you look at today’s system, just from a technology standpoint, it is significantly different from the system we originally launched, so it continues to evolve.

Moreland: Initially, Sentricon was available only to a small portion of the pest control industry through a "controlled rollout" program. Since that time, additional PCOs have been added to your list of Authorized Operators. Do you see Sentricon being made available to the entire pest control industry any time soon?

Neterer: Our strategy is to continue on the track we’re on now. Do we ever see Sentricon as a product that would be available to the entire marketplace? Probably not. The reason for that is it requires a significant investment on our part to get an Authorized Operator up and running. We spend a lot of time with our AOs to make sure they’re getting the business and technical support they have come to expect from us. It requires a different resource level from a business standpoint. If you have 15,000 PMPs out there using Sentricon there is no way we could work with each one of them in such a close fashion. We have made a commitment to our Authorized Operators that we will provide a level of service that goes beyond simply the product offering. It goes into business-building concepts. We could never satisfy our customers’ needs if we made Sentricon available to the entire market.

Moreland: Dow AgroSciences currently has approximately 700 Authorized Operator companies throughout the United States. Is there a threshold level you would no longer consider adding any additional AOs?

Neterer: We’re more interested in ensuring that we have thorough market coverage across all those markets where termites are a problem. We want to make sure we have enough AOs to cover a particular geographic area properly. The day a customer cannot find an AO to provide him or her with service is the day there aren’t enough AOs out there. At this point and time, however, we feel we have the market covered.

Moreland: My understanding is that Terminix’s portion of the Sentricon business is growing dramatically as a result of ongoing industry consolidation and other factors. When Terminix purchases a company in a particular market area, does that open up additional opportunities for other independent firms to become Authorized Operators?

Neterer: It gets back to the question of market coverage. If we don’t feel the market is being covered satisfactorily, the answer is yes. If we feel there is sufficient market coverage, the answer is no. When one of our Authorized Operators sells to Terminix – or any other company for that matter – we go into that market and re-evaluate our market coverage on a case-by-case basis. We have added AOs in certain markets where we found we did not have good coverage, so we’re not opposed to adding companies to the Sentricon System family of businesses if we think it’s necessary. I also don’t necessarily agree with the premise of your question. I would suggest that the percentage of overall Sentricon System business that Terminix represents has remained relatively stable over the years. Many of the large regional firms that offer Sentricon, as well as numerous independents, have grown their market nicely, so the percentage change hasn’t been particularly dramatic. I wouldn’t want to leave the impression that Terminix’s growth has far exceeded the growth of the large regional and independent firms that are installing the Sentricon System.

Moreland: One of the challenges Dow AgroSciences has faced is rebuilding its relationship with former Dursban customers who weren’t selected as AOs for the Sentricon System. As you expand your product portfolio in the future to include general use insecticides, how do you plan to repair those relationships?

Neterer: It really depends on the product. If we introduce another product like Sentricon that is unique and requires a lot of education to be launched successfully, we may go down the same road as before. If, on the other hand, it’s a traditional compound with a traditional delivery system, we’ll try to earn their business back through offering a high-quality product backed up with excellent customer support, just as we do with all of our products. How we rolled out Sentricon was strictly a business decision, although it wasn’t an easy decision. We realized we had some very good friends who were not going to be selected as Authorized Operators and I had some very good personal friends who were not going to be AOs, but we needed to conduct a controlled rollout of Sentricon because we were introducing something completely new to the marketplace that required a paradigm shift on the part of the customer.

Miller: We are still friends with a large number of PMPs who are not Authorized Operators, but it definitely impacted a number of our relationships. Nonetheless, from a performance standpoint, from a consumer satisfaction standpoint, it was still the right thing to do. However, that may not be the case in our future product introductions.

Neterer: It’s also important to point out that we would not be investing our financial resources in PPMA and NPMA if we didn’t see ourselves as being partners with non-AOs as well.

Miller: I’d like to make one other point. The departure of chlorpyrifos (Dursban) at the same time we were growing our Sentricon business also negatively impacted our relationship with the market. The fact is, we would still be doing business with a lot of those customers (non-AOs) if Dursban were still on the market, so the timing of the loss of Dursban hurt us as well.

Moreland: Obviously, the loss of Dursban impacted Dow AgroSciences in a number of ways, both financially and psychologically. Can you describe the atmosphere at the company after you reached an agreement with EPA to voluntarily remove the product from the marketplace?

Miller: It was a big blow. You have to remember, there were a lot of people around here who had been involved with Dursban their entire careers. It was one of our core products, so the loss of Dursban had significant financial implications for the company. But it also forced us to think creatively to identify new market opportunities. We couldn’t rely on Dursban to pay the bills anymore. In a way, it opened us up to new possibilities as a company. Although it was tough at the time, I think it has reinvigorated the business.

Neterer: It was very emotional, but it is a tribute to the people we have in the field that they were able to recover from such a serious blow to the business. They took it as a challenge to grow our other businesses – Sentricon and Vikane – until we could fill our pipeline with new products.

Moreland: Can you describe, on a personal level, what it felt like the day EPA and Dow AgroSciences made their joint announcement regarding Dursban?

Miller: It was the worst day in my entire life, perhaps because I am a former regulator, so I felt like I understood the science fairly objectively. It was a tough time for Dow AgroSciences and the industry as a whole. You go through those times of adversity and you learn a lot, but eventually you have to pick yourself up and become more focused as a business, and that’s what we did.

Moreland: We’ve heard rumors that Dow AgroSciences itself might be on the block. Can you confirm or deny those rumors?

Miller: The rumors are hot and heavy right now, but we’re sticking to our strategy, which is funding ourselves to bring our expertise and innovation to the industry. At the moment, that plan does not include looking for another partner to purchase the business. However, should another partner present itself offering more value to our shareholders, the corporation is open to those opportunities. Since I have been in this business, if a company is not always looking at opportunities to bring value to its shareholders then they’re not doing their job. However, there’s nothing new or different happening with Dow AgroSciences that I’m aware of at this time.

Moreland: It must be challenging to mange your staff when there are so many acquisition rumors circulating.

Miller: Actually, we’ve had a whole lot less of those kinds of rumors in recent years than other companies. That’s why I think it’s important for our folks to focus on how to improve our own business rather than how we can achieve a critical mass to compete globally, which personally is an argument I do not buy. Certainly, a company needs sufficient financial resources to compete, but we’ve proven we can be innovative and still not spend large sums of money as evidenced by such recent product innovations as noviflumuron and ProFume. That’s why I’m so confident about our future. We’ve had a long history of success in the pest management industry and there’s no reason to believe that we won’t continue to have success in the future.