Developing Your People to Deal with Global Changes in the Chemical Industry
Global industry shifts cause chemical companies to reshape their portfolios and strategies
The chemical industry has been always been an important employer and a major driver of the world economy. It consists of several small industries that cover hundreds of segments. The industry applies three main business models to create value for its customers:
They explore or buy oil/gas and refine it into petrochemicals and other basic chemicals. Access to the raw materials is the critical success factor.
Besides refining oil and providing basic chemicals, they go one step further “downstream” in the value chain into the production of polymers. Some of them might also have “specialty” divisions.
These players buy intermediate products (i.e., basic chemicals or polymers) and process them into specialty products related to specific functionalities. Some of them are focused on a niche market. Others are more broad-based.
These business models are based on an in-depth analysis of the market trends in the chemical industry by ATKEARNEY.
Important Macro-Trends that Impact the Chemical Industry
Natural Resources and the Environment
Resource scarcity is the most important trend the chemical industry faces. Water scarcity, in particular, is an increasing threat. Not only are people suffering in many parts of the world from water shortages, but water needed by industrial processes is also running out. The chemical industry will need to re-design its processes to rely less on water for its own use, and will also be forced by society to take care that people in the areas where it operates are not deprived of water for their use. The need for sustainability will drive innovation.
Planning, Measuring and Managing “Sustainability”
Companies know they need to become more sustainable to be competitive. The business benefits have already been demonstrated. But how do you do it? To learn more about managing for sustainability, please click here.
Globalization is the second-biggest trend transforming the chemical industry. Cash-rich government funds and companies from Asia and the Middle East are investing in Western companies to acquire knowledge, brands, and market footholds. Result: The chemical industry is globalizing on a rapid scale and the dominance of established companies is being evened out by increasingly sophisticated “emerging market” companies. Everyone’s market will be open to foreign competition, on an increasing scale. And chemical companies have to be global to compete.
Major Shifts in Consumption Patterns
Rising prosperity in fast-growth and developing markets will continue to drive strong chemical sector growth. As demand shifts, companies must reposition their asset and product portfolios.
Geographic Shift. About 70% of consumer spending is concentrated in North America, Europe and Japan. In 10 years, 80% of the middle-income consumers will live outside of these economies.
Shift in End-User Choices. There is a clear polarization of consumption in the chemical industry. At one end is demand for basic, cheap chemicals, and at the other end demand for premium chemicals with special properties.
Chemical Players with Consumer Products
Changes in consumer markets will affect parts of the chemical industry—those with consumer products. To read about the latest developments, please click here.
Regulation will continue to influence the development of the chemical industry, on a regional and local basis. Activism increasingly influences regulation. A well-known example is Europe’s REACH (the Registration, Evaluation, Authorisation and Restriction of chemical substances) regulation. Companies are pressured to become more open and demonstrate strong environmental stewardship.
Population shifts will have major consequences. In mature markets, chemical industry workers are retiring, leaving companies without experienced managers to take over leadership roles. Fast-growth markets have high numbers of young people, but many of them need further training, education and development to work in the chemical industry. Nevertheless, the resource pool for technical skills will shift toward the fast-growing markets of Asia, and other emerging market countries.
Implications of Trends for the Chemical Business
ATKearney estimates that, over the next decade, the various players in the chemical industry will need to adopt different strategies to keep their businesses moving forward. Asset-driven players will probably have to restructure and shift operations closer to their growing markets. Specialty players may need to merge with each other and consolidate in order to stay competitive. And Integrated players may have to grow substantially to compete. They may also question the benefits of an integrated portfolio.
Asset-driven players: Manage the impact on your business
In petrochemicals, many of the largest asset-driven players are in the Middle East. These resource owners are using their financial and natural resources to become global petrochemical producers. They have access to significantly discounted oil and gas reserves. This gives them a competitive advantage. They are geographically closer to Asian customers than their Western competitors are. Middle Eastern producers will increase their capacity to produce petrochemicals and basic chemicals. Their challenges are to improve productivity and operational efficiency, and to develop the management and technical skills of their local workforce on a large scale. These realities will compound the weak asset position of the established major players in the oil and gas industry. According to industry experts, 86% of forecasted petrochemical capacity will be built in the Middle East and Asia in the next few years. As a result, we will see more Western producers seeking mergers, joint ventures, partnerships or alliances with them. Mature market companies may also have to consider “moving up the value chain” into polymers and/or specialty chemicals, and getting out of commodity chemicals.
Mergers, Acquisitions, Joint Ventures, Partnerships and Alliances
Critical success factors for Asset-driven players
- Access to low-cost feedstock
- Low-cost manufacture
- Globalization of supply chain capability
- Global sales and marketing capability
- Capital requirements to capture growth
Integrated Players: Work through separate divisions to find success in multiple market segments
Integrated players have a foot in each part of the chemicals market. That gives them three choices of where to play:
- Basic chemicals
Integrated players often choose 1 and 2, 2 and 3, or even 1, 2 and 3. Each part of the chemicals market requires a different strategy or customer value proposition. And that means that each one also needs a different business structure, organizational culture, customer relationship and processes for how they engage and reward their people.
Players in this market segment may have a Value-Priced Offer, a Premium Offer, a Custom-Made Solution—or all three residing in different divisions. They are caught between the asset-driven players and the pure specialty players. To realize their objectives, they will have to manage different customer value propositions in different ways.
Basic chemical plants, for example, focus on getting the greatest output from their assets. They need to be at the highest level of operational excellence. Commoditized products need efficient manufacturing sites that can produce large volumes at low costs. But specialty products are produced in smaller batches at different locations in order to meet customer needs in a flexible way.
Globalization of the supply chain capability will drive business development. Growth will be both organic growth and by expansion through mergers and acquisitions, joint ventures, partnerships and alliances. Both growth scenarios will require a high capability to fund investments quickly.
From a strategic operations point of view, integrated players need to make sure their basics business has access to cheap raw materials. At the same time, they need to get the most out of their polymer and specialty activities.
Some “basic” chemical companies have already become specialty players to make this move. For example, BASF acquired Ciba, Dow Chemical bought Rohm and Haas, and DSM went through a major portfolio transformation.
Critical success factors for Integrated players
The critical success factors here will be an increased importance of and attention to:
- Innovation life cycle
- Customer focus / customer centricity
- B2B value creation and value-based selling
Specialty Players: Go for Premium Offers and Custom-Made Solutions
Specialty players need to decide whether they have a Premium Offer or are developing Custom-Made Solutions. Their decision affects everything they do, from how they lead and manage, to the structure of the organization and how they reward their people.
For Specialty players, customer-centric innovation is about working with their customers to jointly develop new products or applications for a specific customer need. This requires teamwork across functions on both sides. It also requires a managerial approach that is different from Integrated players.
Success in delivering Custom-Made Solutions involves aligning all functions of the organization, from Finance and HR to Sales, Customer Service and Production, to support the customer relationship. This creates a higher level of business complexity that needs to be managed.
But some Specialty players probably cannot afford to increase their spending on innovation. The current crisis will accelerate the speed of consolidation in this sector. Financially stressed players will look for support. Cash rich players (mainly from the Middle East and Asia) will look for opportunities. Should Specialty producers follow the shift in demand and growth to emerging markets and invest in those regions of the world that are showing growth? Do they need to globalize and adapt their supply chain to their present and new customers?
Critical success factors for Specialty players
The critical success factors here will be an increased importance of and attention to:
- Customer focus / customer centricity
- Multifunctional account management capability
- Co-creation, co-innovation with customer
Integrated and Specialty Players: Component Marketing
When B2B companies produce and sell functional ingredients or components that end up in complex products several steps later along the value chain, they struggle to have the value-added of their component fully recognized by the end customer. In many cases, you cannot sell to your customer’s customer’s customer, so it is difficult to differentiate your component from that of competitors. It is also difficult to capture the full value-added of your component.
Example: In paints, the resin is the prime determinant of the performance of the paint. Some high-quality resins may make paint dry faster. The end benefit of the resin to a painter is that he can apply a second layer within hours rather than having to come back another day, which is more expensive. This benefit also reduces the “downtime” of the painted space, for the owner of the space e.g. a painted floor in a factory. The resin can clearly offer significant added value along the value chain. How can resin producers make these benefits known to the end customer and capture their fair share of the value? There are a few strategies that can have some effect:
Marketing to or educating the end customer
If a firm has a component with unique characteristics, it has more leverage than when there are comparable products available. A firm can try to increase the perceived value of its component by emphasizing the benefits directly to their customers’ customers. This creates a “pull” effect along the value chain. This can be done by marketing directly to customers, or educating them. Either way there is a price to pay in marketing and advertising costs. Social media is becoming a more and more effective tool for this. Sometimes there are legal or value chain barriers to this practice.
One way to claim the value that the component adds is to actually brand the ingredient. An Ingredient Brand is exactly what the name implies: an ingredient or component of a product that has its own brand identity. Intel, GoreTex, Dolby, TetraPak, Shimano, and Teflon have had success with this strategy.
Two or more companies may co-brand their products. Senseo, the European coffee maker that was co-branded by Douwe Egberts and Philips Electronics has brought value to both parties.
Companies can seek to engage in strategic partnerships with their direct customers and co-design innovative solutions based on their combined strengths in product technology and market access. Not all customers will agree to this. They can go even further and invite end users or end user groups to help them design new products whose performance is of high value to the end customer.
Get involved in the sales process
Perhaps the most effective route, but the most difficult to do, is to participate directly in the selling process to the end customer.
- Find where in the value chain the real buying decision is made – find out who the end customer is
- Find out what that customer really needs/is trying to achieve. What performance characteristics do they need?
- Select or design the component that best does the job
- Craft a strategy to influence the buying decision, including direct participation in the sales process
- Do all of the above without upsetting the other players in the chain
All Players: Develop your people to be able to implement your strategy
As the chemical industry becomes more global and more competitive, there will be changes for people in the company – people who have been used to a certain way of working for most of their careers. Helping people to adapt to these changes, to align themselves to a new strategy, and to implement the strategy and achieve the goals, requires extraordinary leadership at all levels of the company. Leaders will have to focus on the implementation of strategy as never before.
To be able to implement strategy and contribute to it, your managers need to understand what it means and how to think and act more strategically. They need to develop themselves to understand how the different parts of the business work together and how value is created. Many very capable chemists, engineers, technicians, or functional experts are lacking a formal business background. Developing their business knowledge and skills improves their decision-making and performance today, and develops the talent pipeline for the new leaders needed for tomorrow.
Critical success factors for All players
- Leadership for strategy implementation capability
- Talent pool of chemical professionals with excellent business skills
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Our Senior Associates can work with management teams or individual managers to address all of the people and change management challenges facing the Chemical Industry today. They draw on their years of experience in top managerial and leadership roles to help you solve problems and identify "what works" in different circumstances, countries and cultures. Above all, they have led their people through the challenges of developing new capabilities and working in a different way. They apply their expertise in a wide variety of services, including:
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